Registration No. 33-78812
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
POST-EFFECTIVE AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
under
the Securities Act of 1933
----------------------------------------------
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 Industrial Classification
incorporation or organization) Identification Number) Code Number)
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6604 West Broad Street
Richmond, VA 23230
(804) 281-6000
(Address and telephone number of Principal Executive Offices)
-----------------------------------
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SCOTT A. CURTIS
Vice President
Great Northern Insured Annuity Corporation
6604 West Broad Street
Richmond, Virginia 23230
804-281-6000
(Name, address and telephone number of agent for service)
</TABLE>
<PAGE>
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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<S> <C>
1. Forepart of the Registration Statement and Outside Front Cover Outside Front Cover Page
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 for Not Applicable
Securities Act Liabilities.
</TABLE>
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Corporate Office: 6604 West Broad Street
Richmond, VA 23230
(804) 281-6000
Variable Annuity Service Center: 300 Berwyn Park
Berwyn, PA 19312-0031
GNA VARIABLE INVESTMENT ACCOUNT
Group and Individual Deferred Variable Annuity and
Modified Guaranteed Annuity Contracts
Flexible Purchase Payments
Non-Participating
The Deferred Variable Annuity and Modified Guaranteed Annuity Contract described
in this Prospectus ("Contract") is designed to provide annuity payments in
connection with either nonqualified retirement plans or plans qualifying for
special income tax treatment under the Internal Revenue Code, such as individual
retirement accounts and annuities, pension and profit-sharing plans for
corporations and sole proprietorships/partnerships ("H.R. 10" and "Keogh"
plans), Tax-Sheltered annuities, and deferred compensation plans of state and
local governments and tax-exempt organizations.
The Company has ceased offering the Contract for sale, and it will no longer
accept new Participants under the outstanding group Contracts. Current
Participants may continue to make purchase payments subject to the limitations
described in this Prospectus.
The Contract provides for the accumulation of Certificate Values on a variable
and/or fixed basis and the payment of annuity benefits on a fixed basis. The
Contract offers up to sixteen investment options: six variable and ten fixed.
The variable portion of the Certificate Value will vary according to the
investment performance of the Sub-accounts of GNA Variable Investment Account
(the "Separate Account"). The Separate Account is a Separate Account established
by Great Northern Insured Annuity Corporation ("GNA" or the "Company").
The assets of each Sub-Account are invested in shares of GE Investments Funds,
Inc. (the "Fund"), a mutual fund having six investment portfolios available for
investment (the Income Fund, the Premier Growth Equity Fund, the Value Equity
Fund, the International Equity Fund, the U.S. Equity Fund, and the Money Market
Fund) (see the accompanying Prospectus of the Fund). Fixed Certificate Values
may be accumulated under Fixed Guarantee Periods for a specified number of years
ranging from one to ten.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. IT
CONTAINS INFORMATION ABOUT THE SEPARATE ACCOUNT AND THE VARIABLE PORTION OF THE
CONTRACT THAT A PROSPECTIVE PURCHASER SHOULD KNOW BEFORE INVESTING. IT SHOULD
BE ACCOMPANIED BY THE CURRENT PROSPECTUSES FOR THE FUNDS.
THESE SECURITIES ARE NOT DEPOSITS WITH, 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 AGENCY.
Additional information about the Contracts and Separate Account is contained in
a Statement of Additional Information, dated the same date as this Prospectus,
which has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. The Statement of Additional Information is
available without charge upon request by writing the Company's Variable Annuity
Service Center at the address on the cover of this Prospectus or telephoning
1-800-455-0870. The table of contents for the Statement of Additional
Information is included on page 41 of this Prospectus.
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, 1998
<PAGE>
TABLE OF CONTENTS
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Page Page
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DEFINITIONS ................................... Mortality and Expense Risk Charge..........................
Taxes......................................................
SUMMARY .......................................
FEE TABLE AND EXAMPLE.......................... FEDERAL TAX MATTERS...........................................
ACCUMULATION UNIT VALUES..................... Introduction...............................................
GNA's Tax Status...........................................
GENERAL INFORMATION............................ Tax Status of the Certificate..............................
Federal Tax Considerations.................................
Great Northern Insured Annuity Corporation.. Qualified Plans............................................
GNA Variable Investment Account ............
The Funds .................................. INVESTMENTS SUPPORTING THE FIXED
GUARANTEE PERIODS..........................................
DESCRIPTION OF THE CONTRACTS ..................
MORE INFORMATION ABOUT GNA....................................
ACCUMULATION PROVISIONS ....................... History and Business.......................................
Purchase Payments .......................... Selected Financial Data....................................
Variable Accumulation ......................
Fixed Accumulation ......................... Management's Discussion and Analysis of
Financial Condition and Results of
Operations...............................................
Transfers Among Investment Options ......... Investments...................................................
Special Transfer Services................... Competition...................................................
Withdrawals ................................ Government Regulation.........................................
Special Withdrawal Services ................ Year 2000.....................................................
Telephone Transactions ..................... New Accounting Standards......................................
Market Value Adjustment.....................
Death Benefit ..............................
ANNUITY PROVISIONS ............................ EXECUTIVE OFFICERS AND DIRECTORS..............................
General .................................... Executive Compensation.....................................
Annuity Date ...............................
Annuity Options.............................
Amount of Fixed Annuity Payments............ GENERAL MATTERS...............................................
Amount of Variable Annuity Payments ........
Transfers After Annuity Date ............... Performance Data...........................................
Death Benefit on or After Annuity Date...... Financial Statements.......................................
Restrictions Under the Texas Optional
OTHER CONTRACT PROVISIONS ..................... Retirement Program.......................................
Distribution of Contracts..................................
Proof of Age, Sex and Survival ............. Legal Proceedings..........................................
Misstatement of Age or Sex.................. Legal Matters..............................................
Ownership .................................. Experts....................................................
Beneficiary ................................ Registration Statements....................................
Notices and Elections.......................
Amendment of Contract and Certificates...... STATEMENT OF ADDITIONAL
Free Look Right............................. INFORMATION--Table of Contents.............................
Company Approval ...........................
CHARGES AND DEDUCTIONS APPENDIX A: State Premium Taxes...............................
Withdrawal Charges .........................
Administration Charges .....................
APPENDIX B: Examples of Market Value
Adjustments................................................
</TABLE>
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 Certificate Value, the Accumulation
Values for each Sub-account and the Fixed MGA Account Value. The statement will
not include financial statements.
<PAGE>
DEFINITIONS
Accumulation Unit--A unit of measure that is used to calculate the Accumulation
Value for each Variable Sub-account before the Annuity Date.
Accumulation Value--The number of Accumulation Units of a Variable Sub-account
credited to a Certificate multiplied by the Accumulation Unit value for that
Sub-Account.
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 designated is living. If there are joint
Annuitants, references herein shall mean the two Annuitants, the age of the
Annuitant shall refer to the age of the older Annuitant.
Annuity Date--The date on which annuity payments are to start.
Annuity Payment Option--The method selected by the Participant for annuity
payments made by the Company. If the Participant has not selected an Annuity
Payment Option, GNA will provide a Fixed Annuity with payments guaranteed for 10
years and for the lifetime of the Annuitant, if the Annuitant lives more than 10
years.
Beneficiary--The person to whom payment is to be made on the death of the
Participant (or other appropriate individual).
Certificate Anniversary*--Each anniversary of the Certificate Date.
Certificate Date*--The date on which a premium is credited by GNA for a
Participant as shown on the Certificate Schedule.
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.
Certificate Value*--The sum of the Accumulation Values for all Variable
Sub-accounts and the Fixed MGA Account Value.
Contract--The group or individual deferred variable annuity and modified
guaranteed annuity contract described in this Prospectus.
Fixed MGA Account Value--The sum of the values in Fixed Guarantee Periods.
Fixed Guarantee Period--An account maintained for a Participant corresponding to
a specified interest rate and Guarantee Period (from one to ten years) selected
by the Participant for each allocation to the Fixed MGA Account.
Fixed Annuity--An Annuity Payment Option with payments which are predetermined
and guaranteed as to dollar amount.
Funds--The mutual funds designated as eligible investments for the Separate
Account and the Contracts.
Guarantee Period--The period of years for which a rate of interest is guaranteed
to be credited to a Fixed Guarantee Period.
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 (the
"Code").
Notice--Information GNA has received and recorded at its Variable Annuity
Service Center which is written, signed and dated by the Participant and
acceptable by GNA in its sole discretion.
<PAGE>
Participant*--The person, persons or entity participating under the Contract to
whom a Certificate has been issued and who is entitled to the rights stated in
the Certificate.
Portfolios--The separate investment portfolios of the Funds designated as
eligible investments for the Separate Account and the Contracts.
Qualified Certificate*--A Certificate issued in connection with a Qualified
Plan.
Qualified Plan--A retirement plan that receives favorable tax treatment under
Section 401, 403, 408 or 457 of the Code.
Separate Account--A segregated account of the Company that is not commingled
with the Company's general assets and obligations.
Variable Sub-account(s)--One or more of the Variable Sub-accounts of the
Separate Account. Each Variable Sub-account is invested in shares of a different
Portfolio.
Valuation Date--Any date on which the New York Stock Exchange is open for
trading and the net asset value of a Portfolio is determined.
Valuation Period--Any period from one Valuation Date to the next, measured from
the time on each such date that the net asset value of a Portfolio is
determined.
Withdrawal Value--The amount available for a cash withdrawal, which is the
Certificate Value less any withdrawal charge, plus or minus any market value
adjustment, taxes or Certificate Maintenance Fee.
*In the case of individual Contracts, unless the context otherwise requires, the
words "Certificate," "Certificate Anniversary," "Certificate Date," "Certificate
Value," "Certificate Year," "Nonqualified Certificate" and "Qualified
Certificate" mean respectively "Contract," "Contract Anniversary," " Contract
Date," "Contract Value," "Contract Year," "Nonqualified Contract" and "Qualified
Contract" and the word "Participant" means "Owner."
SUMMARY
Variable Annuity Service Center--All communications concerning the Contracts and
Certificates should be addressed to the Company's Variable Annuity Service
Center at 300 Berwyn Park, Berwyn, PA 19312-0031.
The Contract--The Contract described in this Prospectus is a flexible purchase
payment group or individual deferred variable annuity and modified guaranteed
annuity contract. The group Contract may have been purchased by any employer,
entity or other organized group acceptable to GNA. Under a group Contract,
specific accounts are maintained for each Participant, and a Certificate was
issued to the Participant summarizing his or her rights and benefits under the
Contract. In states where the group Contract was not approved for sale and an
individual Contract was available, the individual Contract may have been
purchased by any person or entity acceptable to GNA.
Retirement Plans--The Contract may have been issued pursuant to either
Nonqualified Plans or Qualified Plans. (See "FEDERAL TAX
MATTERS--Qualified Plans.")
Purchase Payments--The minimum initial purchase payment for which a
Certificate may have been issued was $2000. Subsequent purchase payments
allocated to the Variable Sub-accounts must be at least $500 ($100 for
automatic payment plans). Subsequent purchase payments allocated to Fixed
Guarantee Periods must be at least $2000. Subsequent purchase payments may
be made at any time prior to the Annuity Date. (See "Accumulation
Provisions--Purchase Payments.")
Investment Options--On December 12, 1997, the Separate Account added the GE
Investments Funds, Inc. Income Fund, Premier Growth Equity Fund, Value Equity
Fund, International Equity Fund, U.S. Equity Fund and Money Market Fund as
available investment subdivisions. Also on December 12, 1997, the following
substitution of shares
<PAGE>
were carried out pursuant to an order issued by the Securities and Exchange
Commission:
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Before the Substitution After the Substitution
----------------------- ----------------------
<S><C>
Shares of Adjustable Rate Portfolio - -> Shares of Income Fund
GNA Variable Series Trust GE Investments Funds, Inc.
Shares of Government Portfolio - -> Shares of Income Fund
GNA Variable Series Trust GE Investments Funds, Inc.
Shares of Fixed Income Portfolio - -> Shares of Income Fund
Variable Investment Trust GE Investments Funds, Inc.
Shares of Growth Portfolio - -> Shares of Premier Growth Equity Fund
GNA Variable Series Trust GE Investments Funds, Inc.
Shares of Value Portfolio - -> Shares of Value Equity Fund
GNA Variable Series Trust GE Investments Funds, Inc.
Shares of International Equity Portfolio - -> Shares of International Equity Fund
Variable Investment Trust GE Investments Funds, Inc.
Shares of U.S. Equity Portfolio - -> Shares of U.S. Equity Fund -
Variable Investment Trust GE Investments Funds, Inc.
Shares of Money Market Portfolio - -> Shares of Money Market Fund
Variable Investment Trust GE Investments Funds, Inc.
</TABLE>
The effect of this share substitution was to replace certain portfolios of GNA
Variable Series Trust and Variable Investment Trust with those of GE Investments
Funds, Inc. as investment options under the Contracts.
Purchase payments may be allocated among the sixteen investment options
currently available under the Contract: six Variable Sub-accounts and ten
Fixed Guarantee Periods. The Variable Sub-accounts invest in shares of a
corresponding Portfolio: the Income Fund, the Premier Growth Equity Fund,
the Value Equity Fund, the International Equity Fund, the U.S. Equity Fund,
and the Money Market Fund of the GE Investments Funds, Inc. (see the
accompanying Prospectus of the Funds).
The portion of the Certificate Value based on the Variable Sub-accounts will
reflect the investment performance of the underlying Portfolios selected. (See
"GNA Variable Investment Account.")
Purchase payments of at least $2000 may also be allocated to Fixed Guarantee
Periods. GNA guarantees the principal value of purchase payments allocated to a
Fixed Guarantee Period and the rate of interest credited thereto for the term of
a selected Guarantee Period ranging from one to ten years. Certain withdrawals
from the Fixed Guarantee Periods will be subject to a market value adjustment.
(See "Accumulation Provisions--Market Value Adjustment.")
Transfers--Prior to the Annuity Date, amounts may be transferred among the
Variable Sub-accounts and the Fixed Guarantee Periods. A transfer from a Fixed
Guarantee Period may be made only once in each Certificate Year; transfers from
a Variable Sub-account in excess of six in any Certificate Year may be subject
to a $25 charge. The amount transferred must be at least $1000 or the
Participant's entire interest in the Variable Sub-account or Fixed Guarantee
Period if the value of such interest is less than $1500. No transfer may be made
if it would result in a remaining Accumulation Value or Fixed Guarantee Period
Value of less than $500. GNA reserves the right to terminate, suspend or modify
the transfer privileges at any time and without Notice. (See "Accumulation
Provisions--Transfers Among Investment Options.")
Withdrawals--Prior to the earlier of the Annuity Date or the death of any person
whose death causes the payment of a death benefit, the Participant may withdraw
all or a portion of the Certificate's Withdrawal Value. The Withdrawal Value is
the Certificate Value less any withdrawal charge, plus or minus any market value
adjustment, less any applicable taxes or certificate maintenance charge. The
minimum amount of any withdrawal is $1000. For any partial withdrawal, the
remaining Accumulation Value for each Variable Sub-account and the remaining
value of each Fixed Guarantee Period must be at least $500, and the remaining
Certificate Value must be at least $2000.
<PAGE>
The Participant may specify the Variable Sub-accounts or Fixed Guarantee Periods
from which a partial withdrawal is to be made. In the absence of a
specification, the partial withdrawal will be made from each Variable
Sub-account and Fixed Guarantee Period in the same proportion that the
Accumulation Value for each Variable Sub-account and the value of each Fixed
Guarantee Period bear to the Certificate Value. Fixed Guarantee Periods of the
same duration shall be considered together for withdrawal purposes and amounts
withdrawn shall be taken out on a first-in, first out basis. (See "Accumulation
Provisions--Withdrawals.")
Withdrawal Charge--A withdrawal charge and the certificate maintenance charge
may be imposed in connection with a withdrawal. The withdrawal charge is
computed as a percentage of the purchase payment deemed withdrawn, based on the
number of complete years since the purchase payment was made, ranging from 5%
for purchase payments made within two years of the withdrawal to 2% for purchase
payments made within five years of the withdrawal. No withdrawal charge will
apply to a withdrawal of purchase payments made five or more years prior to the
withdrawal. For purposes of computing the charge, amounts withdrawn will be
deemed to be purchase payments in the order made and thereafter any Certificate
Value in excess of purchase payments made. (See "CHARGES AND
DEDUCTIONS--Withdrawal Charges.") A withdrawal may be subject to a penalty tax.
(See "FEDERAL TAX MATTERS.")
Free Withdrawal Amount--Each Certificate Year the Participant may withdraw up to
10 percent of the Certificate Value at the time of withdrawal free of the
withdrawal charge. This free withdrawal privilege is available only on the first
withdrawal made during the Certificate Year. Amounts withdrawn from Fixed
Guarantee Periods as part of the free withdrawal are subject to the market value
adjustment. (See "CHARGES AND DEDUCTIONS--Withdrawal Charges.")
Market Value Adjustment--Whenever a withdrawal is made from a Fixed Guarantee
Period, or an amount is taken from a Fixed Guarantee Period to be applied to
effect an annuity, prior to the end of the Guarantee Period, a market value
adjustment will be made based on the amount withdrawn.
The market value adjustment GNA makes will depend on the remaining time in the
Guarantee Period of the Fixed Guarantee Period from which the amount is to be
taken and on the change in the guaranteed interest rates offered by us that has
occurred since establishment of the Fixed Guarantee Period.
Because of the market value adjustment provision of the Contract, you bear the
investment risk that the guaranteed interest rates GNA offers at the time you
make a withdrawal or start receiving annuity payments may be higher than the
guaranteed interest rate of the Fixed Guarantee Period from which the amount
withdrawn or annuitized is taken with the result that the amount available for
you to receive or to have applied to an annuity may be substantially reduced.
(See "Accumulation Provisions--Market Value Adjustment.")
Other Charges--Each year GNA will deduct a Certificate Maintenance Charge of
$40. GNA will waive the charge if at the time of the assessment the Certificate
Value is $40,000 or greater. GNA will also deduct from the assets of the
Separate Account a mortality and expense risk charge and an administration
charge at annual rates of 1.25% and .15%, respectively. (See "CHARGES AND
DEDUCTIONS.")
Death Benefit--If the Participant or a non-spouse Joint Participant dies prior
to the Annuity Date, GNA will pay to the Beneficiary the greater of the
Certificate Value or the minimum death benefit as of the Valuation Period in
which both due proof of death and a payment election are received by GNA. On the
effective date of the Certificate, the minimum death benefit is equal to the
initial purchase payment. For each subsequent purchase payment the minimum death
benefit is increased by the amount of the payment, and for each withdrawal the
minimum death benefit is decreased by the amount (net of withdrawal charges) of
the withdrawal. On each "Reset Date," if the then Certificate Value is greater
than the minimum death benefit, the minimum death benefit is reset to equal the
then Certificate Value. Reset Dates are the fifth Certificate Anniversary and
each Certificate Anniversary which is a five-year interval from the fifth
Certificate Anniversary.
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. If the Participant is a person but
is not the Annuitant, the Participant must select a new Annuitant, and if no
<PAGE>
Annuitant is selected within 30 days of the death of the Annuitant, the
Participant will become the Annuitant. No death benefit is payable on the death
of a spouse Joint Participant. 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". (See "Accumulation Provisions--Death Benefit" and "Annuity
Provisions--Death Benefit on or After Annuity Date."
Annuity Payments--Under the Contract, only Fixed Annuity Payment Options are
available. Periodic annuity payments will begin on the Annuity Date. The
Participant selects the Annuity Date, frequency of payment and annuity
payment option. GNA may from time to time make other Annuity Payment Options
available, including options on a variable basis. (See "Annuity Provisions.")
Free-Look Right--Within the number of days of receipt of a Certificate as
shown on the Certificate Schedule, the Participant may cancel the
Certificate by returning it to GNA. (See "Free Look Right" under "Other Contract
Provisions.")
FEE TABLE AND EXAMPLE
The following table and Example are designed to assist Contract holders and
Participants in understanding the various costs and expenses that Participants
bear directly and indirectly. The table reflects expenses of the Separate
Account and the underlying Portfolios. It does not reflect any market value
adjustment. In addition to the items listed in the following table, premium
taxes may be applicable to certain Certificates. The items listed under
"Participant Transaction Expenses" and "Separate Account Annual Expenses" are
more completely described in this Prospectus (see "CHARGES AND DEDUCTIONS"). The
items listed under "Portfolio Annual Expenses" are described in detail in the
accompanying Fund Prospectuses to which reference should be made.
<PAGE>
Participant Transaction Expenses
Deferred sales load (as percentage of purchase payments)
Number of Complete Years Withdrawal Charge
Since Purchase Payment Made Percentage
---------------------------- -------------------
0 5%
1 5%
2 4%
3 3%
4 2%
5+ 0%
Annual Contract Fee $40(1)
- -----------------
(1) The certificate maintenance charge is waived if at the time of assessment
the Certificate Value is $40,000 or more.
Separate Account Annual Expenses
(as a percentage of average account value)
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<CAPTION>
<S><C>
Mortality and expense risk fees...................................... 1.25%
Administration fee--asset based.................................... 0.15%
Total Separate Account Annual Expenses............... 1.40%
</TABLE>
Portfolio Annual Expenses
(as a percentage of Portfolio average net assets)
<TABLE>
<CAPTION>
Management Fees Other Expenses
(after fee waiver, (after reimbursement,
Portfolio as applicable) as applicable) Total Annual Expenses
- --------- -------------- -------------- ---------------------
<S><C>
Income Fund .42% .17% .59%
Premier Growth Equity Fund .03% .01% .04%
Value Equity Fund .37% .09% .46%
International Equity Fund .98% .36% 1.34%
U.S. Equity Fund .55% .25% .80%
Money Market Fund .20% .12% .32%
</TABLE>
- -----------------------
The purpose of these tables is to assist the Participant in understanding the
various costs and expenses that a Participant will bear, directly and
indirectly. Except as noted below, the Tables reflect charges and expenses of
the Separate Account as well as the underlying Portfolios for the most recent
fiscal year.
The annual expenses listed for all the Portfolios are net of certain
reimbursements and fee waivers by the Portfolios' investment advisers. GNA
cannot guarantee that the reimbursements will continue.
Absent reimbursements and fee waivers, the management fees and other expenses
during 1997 for the portfolios of GE Investments Funds, Inc. would have been
.76% for the Income Fund, .04% for the Premier Growth Equity Fund, .46% for the
Value Equity Fund, 1.43% for the International Equity Fund, .86% for the U.S.
Equity Fund, and .48% for the Money Market Fund.
<PAGE>
Example
A Participant would pay the following expenses on a $1,000 investment, assuming
5% annual return on assets and the charges and expenses reflected in the Fee
Table above, if the Participant:
<TABLE>
<CAPTION>
annuitized or did not surrender* his or her
surrendered* his or her Certificate at the end Certificate at the end of the applicable
of the applicable period: period:
--------------------------------------------- ----------------------------------------------
1 3 5 10 1 3 5 10
Portfolio Year Year Year Year Year Year Year Year
--------- ----- ---- ---- ---- ---- ---- ---- ----
<S> <C>
Income Fund $65.63 $99.85 $127.92 $237.72 $20.78 $64.21 $110.23 $237.72
Premier Growth Equity
Fund $60.06 $82.91 $99.36 $178.83 $15.24 $47.35 $81.74 $178.83
Value Equity Fund $64.33 $95.87 $121.24 $224.11 $19.48 $60.25 $103.57 $224.11
International Equity Fund $73.18 $122.48 $165.58 $312.62 $28.29 $86.75 $147.81 $312.62
U.S. Equity Fund $72.38 $120.09 $161.63 $304.92 $27.49 $84.37 $143.87 $304.92
Money Market Fund $62.91 $91.56 $114.00 $209.24 $18.07 $55.96 $96.34 $209.24
</TABLE>
* Surrender includes annuitization over a period of less than 5 years.
For purposes of presenting the foregoing Example, GNA has made certain
assumptions mandated by the Securities and Exchange Commission (the
"Commission"). GNA has assumed that there are no exchanges or other transactions
and that the "Other Expenses" line item under "Portfolio Annual Expenses" will
remain the same. Such assumptions, which are mandated by the Commission in an
attempt to provide prospective investors with standardized data with which to
compare various annuity contracts, do not take into account certain features of
the Contract and prospective changes in the size of the Portfolio which may
operate to change the expenses borne by Participants. Consequently, the amounts
listed in the Example above should not be considered a representation of past or
future expenses, and actual expenses borne by Participants may be greater or
lesser than those shown.
In addition, for purposes of calculating the values in the above Example, GNA
has translated the $40 certificate maintenance charge listed under "Annual
Contract Fee" to a 0.058% annual asset charge based on an average Certificate
Value of $44,740 with the additional assumption that the charge is waived on 35%
of all Certificates due to the waiver in place for Certificates with a
Certificate Value of $40,000 or greater. This estimate is based on sales
information from annuities issued under this prospectus.
ACCUMULATION UNIT VALUES
The Accumulation Unit Values and the number of Accumulation Units outstanding
for each Variable Sub-account for the periods shown are as follows:
<TABLE>
<CAPTION>
Sub-accounts: Sub-accounts:
Income 1997 International Equity 1997
<S> <C>
o December 12 Unit Value.. $10.00 o December 12 Unit Value.. $10.00
o December 31 Unit Value.... $9.98 o December 31 Unit Value.... $10.20
o December 31, Units........... 508,249 o December 31, Units........... 206,295
Premier Growth Equity U.S. Equity
o December 12 Unit Value.. $10.00 o December 12 Unit Value.. $10.00
o December 31 Unit Value.... $10.33 o December 31 Unit Value.... $10.23
o December 31, Units........... 943,827 o December 31, Units........... 1,156,869
Value Equity Money Market
o December 12 Unit Value.. $10.00 o December 12 Unit Value.. $10.00
o December 31 Unit Value.... $10.23 o December 31 Unit Value.... $10.02
o December 31, Units........... 991,032 o December 31, Units........... 128,751
</TABLE>
Each of the above-referenced Sub-accounts became available under the Contracts
on December 12, 1997, pursuant to the order of substitution issued by the
Securities and Exchange Commission described above. The number of units and unit
values for the Sub-accounts available prior to December 12, 1997, were as
follows:
<TABLE>
<CAPTION>
GNA Growth 1997 1996 1995
<S> <C>
o January 1 Unit Value.... $15.237 $13.154 $10.001*
o December 31 Unit Value.. $19.382** $15.237 $13.154
o December 31, Units...... 487,595.202632** 501,296.749795 221,675.041558
GNA Value
o January 1 Unit Value.... $15.182 $12.592 $10.001*
o December 31 Unit Value.. $20.368** $15.182 $12.592
o December 31, Units...... 487,120.754019** 479,779.462510 158,124.112269
GNA Government
o January 1 Unit Value.... $11.661 $11.441 $9.996*
o December 31 Unit Value.. $12.454** $11.661 $11.441
o December 31, Units...... 158,279.329415** 177,813.422659 120,998.166975
GNA Adjustable Rate
o January 1 Unit Value.... $11.447 $10.998 $10.001*
o December 31 Unit Value.. $11.915** $11.447 $10.998
o December 31, Units...... 39,783.063285** 43,229.833640 7,535.253952
GE International Equity
o January 1 Unit Value.... $13.292 $11.614 $10.001*
o December 31 Unit Value.. $13.683** $13.292 $11.614
o December 31, Units...... 151,818.927334** 149,104.691691 88,199.568780
GE U.S. Equity
o January 1 Unit Value.... $16.050 $13.369 $10.001*
o December 31 Unit Value.. $20.457** $16.050 $13.369
o December 31, Units...... 565,970.209618** 558,978.499416 128,448.286686
GE Fixed Income
o January 1 Unit Value.... $11.693 $11.526 $10.001*
o December 31 Unit Value.. $12.514** $11.693 $11.526
o December 31, Units...... 209,631.673106** 253,249.356565 81,369.894632
GE Money Market
o January 1 Unit Value.... $10.786 $10.429 $10.001*
o December 31 Unit Value.. $11.155** $10.786 $10.429
o December 31, Units...... 115,465.830459** 147,357.482064 237,634.647996
* As of commencement on January 3, 1995.
** As of December 12, the date of the substitution described above.
</TABLE>
The above summary is qualified in its entirety by the detailed information
appearing elsewhere in this Prospectus and Statement of Additional Information
and the accompanying Prospectuses and Statements of Additional Information for
the Funds, to which reference should be made. This Prospectus generally
describes only the variable aspects of the Contract, except where fixed aspects
are specifically mentioned.
GENERAL INFORMATION
Great Northern Insured Annuity Corporation
GNA is a stock life insurance company organized under the laws of the State of
Washington in 1980. It is a wholly-owned subsidiary of General Electric Capital
Assurance Company ("GE Capital Assurance"), which is indirectly a wholly-owned
subsidiary of General Electric Capital Corporation ("GE Capital"). GNA's
principal office is located at 6604 West Broad Street, Richmond, Virginia. GE
Capital, a New York corporation, is a diversified financial services company
whose subsidiaries consist of specialty insurance, equipment management and
consumer and commercial financing businesses. GE Capital's parent, General
Electric Company, founded more than 100 years ago by Thomas Edison, is the
world's largest manufacturer of jet engines, engineering plastics, medical
diagnostic equipment and large-size electric power generation equipment.
<PAGE>
GNA Variable Investment Account
The Company established the Separate Account in 1981 as a Separate Account under
Washington law. The income, gains and losses, whether or not realized, from
assets of the Separate Account are, in accordance with the Contracts, credited
to or charged against the Separate Account without regard to other income, gains
or losses of the Company. Nevertheless, all obligations arising under the
Contracts are general corporate obligations of the Company. Assets of the
Separate Account may not be charged with liabilities arising out of any other
business of the Company.
The Separate Account is registered with the Commission under the Investment
Company Act of 1940 ("1940 Act") as a unit investment trust. A unit investment
trust is a type of investment company which invests its assets in specified
securities, such as the shares of one or more investment companies. Registration
under the 1940 Act does not involve supervision by the Commission of the
management or investment policies or practices of the Separate Account.
There are currently six Variable Sub-accounts within the Separate Account
available under the Contracts: the Income Sub-account, the Premier Growth Equity
Sub-account, the Value Equity Sub-account, the International Equity Sub-account,
the U.S. Equity Sub-account, and the Money Market Sub-account. The Company
reserves the right to add other Sub-accounts, make available other Separate
Accounts established by GNA or an affiliated company, eliminate existing
Sub-accounts, combine Sub-accounts with other Sub-accounts or other Separate
Accounts or transfer assets in one Sub-account to another Sub-account or to
another Separate Account established by the Company or an affiliated company.
The Company will not eliminate existing Sub-accounts or combine Sub-accounts
without the prior approval of the appropriate state or federal regulatory
authorities. The Company reserves the right to deregister the Separate Account
under the 1940 Act, make any change required by the 1940 Act or operate the
Separate Account as a management investment company under the 1940 Act.
The Funds
The assets of each Variable Sub-account of the Separate Account are invested
in shares of a corresponding Portfolio: the Income Fund, the Premier Growth
Equity Fund, the Value Equity Fund, the International Equity Fund, the U.S.
Equity Fund and the Money Market Fund of the GE Investments Fund, Inc. GE
Investments Fund, Inc. is registered under the 1940 Act as an open-end
management investment company. Each of the Portfolios is diversified for
purposes of the 1940 Act.
The investment adviser of GE Investment Funds, Inc. is GE Investment Management
Incorporated, a wholly-owned subsidiary of General Electric Company.
The following is a brief description of each Portfolio:
<PAGE>
The Income Fund. The investment objective of the Income Fund is to provide
maximum income consistent with prudent investment management and preservation of
capital. It seeks to achieve this objective by investing primarily in
income-bearing debt securities and other income-bearing instruments.
The Premier Growth Equity Fund. The investment objective of the Premier Growth
Equity Fund is to provide long-term growth of capital as well as future (rather
than current) income. It seeks to achieve this objective by investing primarily
in growth-oriented equity securities.
The Value Equity Fund. The investment objective of the Value Equity Fund is to
provide long-term growth of capital. It seeks to achieve this objective by
investing primarily in common stock and other equity securities that are
undervalued by the market at the time of purchase and offer above-average
potential for capital growth.
The International Equity Fund. The investment objective of the International
Equity Fund is to provide long-term growth of capital. It seeks to achieve this
objective by investing primarily in foreign equity and equity-related
securities.
The U.S. Equity Fund. The investment objective of the U.S. Equity Fund is
to provide long-term growth of capital. It seeks to achieve this objective by
investing primarily in equity securities of U.S. companies.
The Money Market Fund. The investment objective of the Money Market Fund is to
provide the highest level of current income as is consistent with liquidity and
safety of principal. It seeks to achieve this objective by investing in various
types of good quality money market securities.
If shares of a Portfolio are no longer available for investment or in GNA's
judgment investment in a Portfolio becomes inappropriate to the purposes of the
Contract, GNA may eliminate the shares of the Portfolio and substitute shares of
another portfolio or another open-end registered investment company.
Substitution may be made with respect to both existing investments and the
investment of future purchase payments. However, no such substitution will be
made without Notice to the Contract holder and prior approval of the Commission
to the extent required by the 1940 Act.
GNA will vote shares of the Portfolios held in the Separate Account at meetings
of shareholders of the Portfolio in accordance with voting instructions received
from the persons having the voting interest under the Certificates. The number
of Portfolio shares for which voting instructions may be given will be
determined by GNA in the manner described below, not more than 90 days prior to
the meeting of the Portfolio. Fund proxy material will be distributed to each
person having the voting interest under the Certificate together with
appropriate forms for giving voting instructions. Portfolio shares held in the
Separate Account that are attributable to Contracts and as to which no timely
instructions are received will be voted by GNA in proportion to the instructions
received. Portfolio shares that are not attributable to Contracts will be voted
by GNA in its discretion.
<PAGE>
Prior to the Annuity Date, the person having the voting interest under a
Certificate is the Participant and the number of votes as to each Portfolio for
which voting instructions may be given is determined by dividing the
Certificate's Accumulation Value for the Variable Sub-account in which such
Portfolio shares are held by the net asset value per share of that Portfolio.
After the Annuity Date, the person having the voting interest under a
Certificate is the Annuitant and the number of votes as to each Portfolio for
which voting instructions may be given is determined by dividing the reserve for
the Annuity Payment Option allocated to the Variable Sub-account in which such
Portfolio shares are held by the net asset value per share of that Portfolio.
Generally, the number of votes tends to decrease as annuity payments progress
since the amount of reserves attributable to an Annuity Payment Option under a
Certificate will usually decrease after the commencement of annuity payments.
GNA reserves the right to make any changes in the voting rights described above
that may be permitted by the federal securities laws or regulations or
interpretations of these laws or regulations.
A full description of the Portfolios, including the investment objectives,
policies and restrictions of the Portfolios, is contained in the Prospectus for
the Fund which accompanies this Prospectus and should be read by a prospective
purchaser before investing.
DESCRIPTION OF THE CONTRACT
In most states the Contract described in 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 have been 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 have been
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 was not approved for
sale, an individual Contract may have been available.
The Company has ceased offering the Contract for sale, and it will no longer
accept new Participants under the outstanding group Contracts. Current
Participants may continue to make purchase payments subject to the limitations
described in this Prospectus.
The Contract may have been issued in connection with either Nonqualified Plans
or certain Qualified Plans. Qualified Plans include individual retirement
accounts and annuities, pension and profit-sharing plans for corporations and
sole proprietorships/partnerships ("H.R. 10" and "Keogh" plans), Tax-Sheltered
annuities, and deferred compensation plans of state and local governments and
tax-exempt organizations.
A person, or in the case of a group Contract an eligible member of a group to
which a Contract has been issued, may have become a Participant by completing an
application and forwarding payment of a purchase payment to us. The application
is subject to GNA's acceptance. GNA reserves the right to accept or reject any
Contract or Certificate application in its sole discretion. 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
purchase payment, 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, GNA reserves the right to terminate a Contract as to eligible members
of the group not accepted as Participants at the time of termination.
ACCUMULATION PROVISIONS
Purchase Payments
Purchase payments are paid to GNA at its Variable Annuity Service Center at the
address set forth on the application contained in this Prospectus. The minimum
initial purchase payment is $2000. Subsequent purchase payments may be made at
any time in amounts of at least $500, except that any portion of a purchase
payment to be allocated to a Fixed Guarantee Period must be $2000. GNA may
arrange by separate agreement for purchase payments as small as $100 to be
automatically withdrawn from a Participant's bank account on a periodic basis.
<PAGE>
Purchase payments are allocated among the Variable Sub-accounts and the Fixed
Guarantee Periods of the Fixed MGA Account in accordance with the percentages
designated by the Participant in the application. The Participant may change the
allocation of subsequent purchase payments at any time upon written Notice to
the Company or by telephone in accordance with the Company's telephone transfer
procedures. No more than eight Variable Sub-accounts and ten Fixed Guarantee
Periods may be selected for allocation at any one time. The minimum allocation
to a Fixed Guarantee Period is $2000. Any allocation to a Fixed Guarantee Period
which would result in a total Fixed MGA Account Value exceeding $500,000
requires GNA's prior approval.
Variable Accumulation
Accumulation Units. GNA will determine the Accumulation Value for each Variable
Sub-account to which the Participant allocates purchase payments. Purchase
payments and transfers to a Variable Sub-account are credited to the
Participant's Certificate in the form of Accumulation Units.
The number of Accumulation Units to be credited with respect to each Variable
Sub-account to which a purchase payment is allocated is determined by dividing
the net purchase payment allocated to that Variable Sub-account by the value of
the Accumulation Unit for that Variable Sub-account for the Valuation Period
during which the purchase payment is received at the Company's Variable Annuity
Service Center complete with all necessary information or, in the case of the
first purchase payment, pursuant to the procedures described below. The number
of Accumulation Units to be credited with respect to a Variable Sub-account to
which a transfer is made is determined by dividing the amount transferred to
that Variable Sub-account by the value of the Accumulation Unit for that
Variable Sub-account for the Valuation Period during which the amount is
transferred.
Initial purchase payments received by mail will usually be credited in the
Valuation Period during which the payment was received at GNA's Variable Annuity
Service Center, and in any event not later than two business days after receipt
of a properly completed application and all information necessary for processing
of the application. The applicant will be informed of any deficiencies in an
application if it cannot be processed and the purchase payment credited within
two business days after receipt. If the deficiencies are not remedied within
five business days, the purchase payment will be returned promptly to the
applicant, unless the applicant specifically consents to GNA's retaining the
purchase payment until all necessary information is received. Initial purchase
payments received by wire transfer from broker-dealers will be credited in the
Valuation Period during which received where such broker-dealers have made
special arrangements with GNA for the collection and forwarding of applications.
Value of Accumulation Units. The value of Accumulation Units for each Variable
Sub-account will vary from one Valuation Period to the next depending upon the
investment results of the Variable Sub-account. The value of an Accumulation
Unit for each Variable Sub-account was arbitrarily set at $10 for the first
Valuation Period under Certificates issued by GNA. The value of an Accumulation
Unit for any subsequent Valuation Period is determined by multiplying the value
of an Accumulation Unit for the immediately preceding Valuation Period by the
net investment factor for such Variable Sub-account (described below) for the
Valuation Period for which the value is being determined.
Net Investment Factor. The net investment factor is an index used to measure the
investment performance of a Variable Sub-account from one Valuation Period to
the next. The net investment factor for each Variable Sub-account for any
Valuation Period is determined by dividing (a) by (b) and subtracting (c) from
the result:
Where (a) is:
(1) the net asset value per share of a Portfolio share held in the Variable
Sub-account determined at the end of the current Valuation Period, plus
(2) the per share amount of any dividend or capital gain distributions made
by the Portfolio on shares held in the Variable Sub-account if the
"ex-dividend" date occurs during the current Valuation Period.
Where (b) is:
the net asset value per share of a Portfolio share held in the Variable
Sub-account determined as of the end of the immediately preceding Valuation
Period.
<PAGE>
Where (c) is:
a factor representing the charges deducted from the Variable Sub-account for
administration and mortality and expense risks. Such factor is equal on an
annual basis to 1.40%: (0.15% for administration and 1.25% for mortality and
expense risks).
The net investment factor may be greater or less than or equal to one;
therefore, the value of an Accumulation Unit may increase, decrease or remain
the same.
GNA reserves the right to adjust the foregoing formula to make provision for any
change in tax law that requires it to pay tax on capital gains in the Separate
Account or any charge that may be assessed against the Separate Account for
assessments of federal premium taxes or federal, state or local excise, profits
or income taxes measured by or attributable to its receipt of purchase payments.
Fixed Accumulation
Fixed Guarantee Periods. There are ten fixed investment options under the
Contract. Each Fixed Guarantee Period provides for the accumulation of value at
a fixed rate of interest for a Guarantee Period ranging from one to ten years.
The Participant selects the Guarantee Period for each purchase payment or
portion thereof allocated to the Fixed MGA Account. Not more than ten Fixed
Guarantee Periods may be selected for allocation at any one time. Generally, the
longer the Guarantee Period, the higher the interest rate will be, but this will
not always be the case.
A new Fixed Guarantee Period is established on each date that purchase payments
are allocated or values transferred to the Fixed MGA Account. Once a Certificate
Year, the Participant may transfer amounts from a Fixed Guarantee Period subject
to certain restrictions described below and a market value adjustment, if
applicable. In addition, the value of a Fixed Guarantee Period may be withdrawn,
subject to certain restrictions described below and any applicable market value
adjustment, withdrawal charge or certificate maintenance charge. Withdrawals may
be subject to a 10% penalty tax under the Code.
The fixed portion of a Participant's Certificate Value, sometimes referred to as
the Fixed MGA Account Value, is the sum of the values of each Fixed Guarantee
Period under the Certificate. The value of each Fixed Guarantee Period is equal
to the amount allocated or transferred to that Fixed Guarantee Period, plus
credited interest, less any taxes previously deducted, less the amount of any
certificate maintenance charge previously deducted, less any amounts previously
transferred or withdrawn from the Fixed Guarantee Period (including any transfer
or withdrawal charges arising from any previous transfer or withdrawal) and plus
or minus any market value adjustment arising from any previous transfer or
withdrawal.
A guaranteed interest rate is quoted for each Fixed Guarantee Period. Unless GNA
states otherwise, the guaranteed rate will be credited to the Fixed Guarantee
Period daily using a 365-day year. (No interest will be credited for February
29.) GNA's 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 it may acquire with
the purchase payments it receives under the Contracts. See "Investments
Supporting the Fixed Guarantee Periods". GNA will also consider other factors in
determining the guaranteed rates, including regulatory and tax requirements,
sales commissions and administrative expenses, general economic trends and
competitive factors. GNA management will make the final determination of the
guaranteed rates it declares. GNA cannot predict or guarantee the level of
future guaranteed rates.
At the end of a Guarantee Period, the Participant may select a new Fixed
Guarantee Period for the reinvestment of account values or may transfer such
values to a Variable Sub-account. Any such reinvestment or transfer will not be
treated as a transfer for purposes of the limits on the number of transfers that
are allowed. The minimum amount necessary to start a new Fixed Guarantee Period
is $2000.
GNA will notify the Participant of his or her right to make the selection at
least forty-five days prior to the end of the Guarantee Period. Interest rates
for reinvestments are guaranteed to be the same as the guaranteed interest rates
then being offered for new Certificates, but there is no guaranteed minimum
<PAGE>
interest rate. If no Notice is received prior to the end of the Guarantee
Period, the Fixed Guarantee Period Value will be transferred to the Money Market
Sub-account. A Participant may leave Notice on file giving instructions for the
reinvestment of all Fixed Guarantee Periods. If Notice is given to start a new
Guarantee Period with less than $2000, the amount will be reinvested in the
Money Market Sub-account.
Transfers Among Investment Options
Prior to the Annuity Date a Participant may transfer amounts among the available
investment options subject to the following. The minimum amount which can be
transferred from a Variable Sub-account or Fixed Guarantee Period is $1000 or
the entire value of the Participant's interest in that Variable Sub-account or
Fixed Guarantee Period if such interest is less than $1500. If after the
transfer the amount remaining in the Variable Sub-account or Fixed Guarantee
Period is less than $500, GNA will transfer the entire amount instead of the
requested amount. Any transfer from a Fixed Guarantee Period prior to the end of
its Guarantee Period may be subject to a market value adjustment. (See "Market
Value Adjustment" below.)
If a Participant makes more than six transfers in a Certificate Year from or
between Variable Sub-accounts, each additional transfer may be subject to a $25
charge to cover the administrative costs associated with the transfer. A
transfer from or between Fixed Guarantee Periods may be made only once in a
Certificate Year. If GNA should permit more than one such transfer, it reserves
the right to assess the $25 charge for that transfer. The transfer charge will
be deducted from the amount transferred if the entire amount of the
Participant's interest in the Variable Sub-account or Fixed Guarantee Period is
being transferred. Otherwise the charge will be deducted from the Variable
Sub-account or Fixed Guarantee Period from which the transfer is made. If a
transfer is made from more than one Variable Sub-account or Fixed Guarantee
Period, the transfer charge will be allocated among such Variable Sub-accounts
or Fixed Guarantee Periods in the same proportion as the allocation of the total
amount to be transferred, except that any transfer from Fixed Guarantee Periods
of the same duration shall be considered together for transfer purposes, and
amounts shall be transferred on a first-in, first-out basis.
Any transfer to a Fixed Guarantee Period initiates a new Fixed Guarantee Period.
A transfer that would result in there being more than ten Fixed Guarantee
Periods or eight Variable Sub-accounts will not be allowed. Any transfer that
would result in a total of more than $500,000 in all Fixed Guarantee Periods
requires the prior approval of GNA. GNA reserves the right to at any time and
without prior Notice to terminate, suspend or modify the transfer privilege. GNA
may also delay transfers from any Variable Sub-account in the circumstances
described below for the postponement of payment of withdrawals.
<PAGE>
Special Transfer Services
Dollar Cost Averaging
GNA administers a Dollar Cost Averaging ("DCA") program which enables a
Participant to pre-authorize a periodic exercise of certain of the transfer
rights described above. Participants entering into a DCA agreement instruct GNA
to transfer monthly or quarterly a predetermined dollar amount from any one
Variable Sub-account to any other Variable Sub-accounts (not to exceed five)
until the amount in the Variable Sub-account is exhausted or the Participant
cancels the program. The DCA program is generally suitable for Participants
making a substantial purchase payment to the Contract and who desire to control
the risk of investing at the top of a market cycle. The DCA program allows such
investments to be made in equal installments over time in an effort to reduce
such risk. The minimum amount that may be transferred is $1000 per transfer. To
initiate the program the Certificate Value based on the Variable Sub-account
from which the transfers are to be made must be sufficient to provide for
transfer payments for at least one year. Transfers pursuant to the program will
not be counted against the six free transfers allowed each Certificate Year.
Information concerning the program and its restrictions may be obtained from
GNA's Variable Annuity Service Center.
Automatic Asset Allocation
GNA provides an Automatic Asset Allocation service pursuant to which a
Participant specifies the portion of his or her total Sub-account Values to be
allocated among various Sub-accounts. Each quarter-year period GNA will send a
statement to the Participant indicating the specified allocations, the current
allocation of Sub-account Values and any reallocation of the current values to
conform them to the specified allocations. If no objection is made to GNA within
the prescribed time, GNA will reallocate current Sub-account Values so that they
will conform to the allocations previously specified by the Participant. The
Dollar Cost Averaging program and Systematic Withdrawal Plan will not be
available to Participants in the Automatic Asset Allocation service.
Withdrawals
Prior to the earlier of the Annuity Date or the death of any person whose death
causes payment of the death benefit, the Participant may withdraw all or a
portion of the Withdrawal Value of his or her Certificate upon Notice to GNA's
Variable Annuity Service Center. The Certificate's Withdrawal Value is the
Certificate Value less any withdrawal charge, plus or minus the market value
adjustment for amounts withdrawn from Fixed Guarantee Periods, less any
applicable taxes and less the certificate maintenance charge if a full
withdrawal is made on a date other than December 31. Withdrawals may have tax
consequences, including the possibility of being subject to a penalty tax. For
certain Qualified Certificates, exercise of the withdrawal right may require the
consent of the Participant's spouse under the Code and regulations promulgated
by the Treasury Department. Under Tax-Sheltered Annuities, withdrawals
attributable to contributions made pursuant to a salary reduction agreement may
be made only after the Participant reaches age 59 1/2 or in other limited
circumstances. (See "FEDERAL TAX MATTERS.") For full withdrawals, surrender of
the Certificate may be required.
In the case of a total withdrawal, GNA will pay the Withdrawal Value as of the
date of receipt of the request at its Variable Annuity Service Center, and the
Certificate will be canceled. In the case of a partial withdrawal, GNA will pay
the amount requested and withdraw an amount equal to the amount requested plus
the withdrawal charge, plus any applicable taxes, plus or minus any market value
adjustment. (See "CHARGES AND DEDUCTIONS.")
When making a partial withdrawal, the Participant should specify the Variable
Sub-accounts or Fixed Guarantee Periods from which the withdrawal is to be made.
The amount requested from a Variable Sub-account or Fixed Guarantee Period may
not exceed the value thereof minus any applicable withdrawal charge, minus any
applicable taxes, plus or minus any market value adjustment. If the Participant
does not specify the Variable Sub-account or Fixed Guarantee Period from which
the partial withdrawal is to be taken, the partial withdrawal will be made from
each Variable Sub-account and Fixed Guarantee Period in the same proportion that
the Accumulation Value for each Variable Sub-account and the value of each Fixed
Guarantee Period bear to the Certificate Value, except that Fixed Guarantee
Periods of the same duration shall be considered together for withdrawal
purposes, and amounts withdrawn shall be taken out on a first-in, first-out
basis.
<PAGE>
There is no limit on the frequency of partial withdrawals; however, the minimum
amount of any withdrawal is $1000. For any partial withdrawal, the remaining
Accumulation Value for each Variable Sub-account and the remaining value of each
Fixed Guarantee Period must be at least $500, and the remaining Certificate
Value must be at least $2000. If after the withdrawal (including the deduction
of any withdrawal charge and the application of any market value adjustment) the
remaining Accumulation Value for any Variable Sub-account or the remaining value
of any Fixed Guarantee Period from which the transfer is to be made is less than
$500, GNA will treat the partial withdrawal as a withdrawal of the entire amount
of the Participant's interest in the investment option. If a partial withdrawal
(including the deduction of any withdrawal charge and the application of any
market value adjustment) would reduce the Certificate Value to less than $2000,
GNA will treat the partial withdrawal as a request for a total withdrawal of the
Withdrawal Value.
The amount of any withdrawal from a Variable Sub-account will be paid promptly
and in any event within seven days of receipt of the request in proper form at
GNA's Variable Annuity Service Center, except that GNA reserves the right to
suspend or postpone payment of the amount for any period when: (1) the New York
Stock Exchange is closed (other than customary weekend and holiday closings),
(2) trading on the New York Stock Exchange is restricted, (3) an emergency
exists as a result of which disposal of securities held in the Separate Account
is not reasonably practicable or it is not reasonably practicable to determine
the value of the Separate Account's net assets, or (4) the Commission, by order,
so permits for the protection of security holders; provided that applicable
rules and regulations of the Commission shall govern as to whether the
conditions described in (2) and (3) exist.
The amount of any withdrawal from a Fixed Guarantee Period is subject to GNA's
right to suspend or postpone payment of the amount for up to six months from the
date it receives Notice at its Variable Annuity Service Center. If payment is
deferred pursuant to this right, GNA will pay interest as required by the law of
the Participant's state of residence at that time.
<PAGE>
Special Withdrawal Services
Systematic Withdrawal Plan
GNA administers a Systematic Withdrawal Plan ("SWP") which enables a Participant
to pre-authorize a periodic exercise of the withdrawal rights described above.
Participants entering into an SWP agreement may instruct GNA to withdraw a level
dollar amount from specified investment options on a monthly or quarterly basis,
provided the Certificate Value satisfies certain minimums and the dollar amount
of each withdrawal is at least $100. The total of SWP withdrawals in a
Certificate Year is limited generally to not more than 10% of the Certificate
Value at the beginning of each Certificate Year. If an unscheduled withdrawal is
made while participating in an SWP, such withdrawal will not be eligible for the
free withdrawal privilege. If the SWP is terminated, it may not be reinstated
until the next Certificate Anniversary pursuant to a new application. An SWP is
not available if one is participating in the Dollar Cost Averaging program, the
Automatic Asset Allocation service or if purchase payments are being
automatically deducted from a bank account on a periodic basis. SWP withdrawals
will be free of withdrawal charges, but if made from a Fixed Guarantee Period,
will be subject to a market value adjustment. SWP withdrawals may also be
subject to the 10% federal tax penalty on early withdrawals and to income tax.
(See "FEDERAL TAX MATTERS.") Participants interested in an SWP may elect to
participate in this program on their application or by separate application.
Participants may obtain a separate application and full information concerning
the program and its restrictions from their securities dealer or the Variable
Annuity Service Center.
Telephone Transactions
Participants are permitted to request transfers and withdrawals by telephone.
GNA will not be liable for following instructions communicated by telephone that
it reasonably believes to be genuine. To be permitted to request a transfer or
withdrawal by telephone, a Participant elects the option by executing an
appropriate authorization form provided by GNA upon request. GNA will employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine and may only be liable for any losses due to unauthorized or fraudulent
instructions where it fails to employ its procedures properly. Such procedures
include the following. Upon telephoning a request, Participants will be asked to
provide their account number, and if not available, their social security
number. For the Participant's and GNA's protection, all conversations with
Participants will be tape recorded. All telephone transactions will be followed
by a confirmation statement of the transaction.
Market Value Adjustment
Whenever a withdrawal is made from a Fixed Guarantee Period, or an amount is
taken from a Fixed Guarantee Period to be applied to effect an annuity, prior to
the end of the Guarantee Period, a market value adjustment will be made based on
the amount withdrawn. (See "Death Benefit" below.)
Because of the market value adjustment provision of the Contract, you bear the
investment risk that the guaranteed interest rates GNA offers at the time you
make a withdrawal or start receiving annuity payments may be higher than the
guaranteed interest rate of the Fixed Guarantee Period from which the amount
withdrawn or annuitized is taken with the result that the amount available for
you to receive or to have applied to an annuity may be substantially reduced.
The market value adjustment GNA makes will depend on the remaining time in the
Guarantee Period of the Fixed Guarantee Period from which the amount is to be
taken and on the change in the guaranteed interest rates offered by us that has
occurred since establishment of the Fixed Guarantee Period. 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 Fixed Guarantee Period, which rate is interpolated (on a
straight line basis) from the rates currently offered by GNA for Fixed Guarantee
Periods with Guarantee Periods closest to such period, to (2) the guaranteed
interest rate for the Fixed Guarantee Period. 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 will be provided by us. If negative, the amount deducted will be retained
by us for GNA's own benefit.
<PAGE>
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 Fixed Guarantee Period. If the remaining period of
time in the Fixed Guarantee Period is a whole number of years, GNA uses the
guaranteed interest rate currently offered by us for a Fixed Guarantee Period
equal to the number of remaining years. If the remaining period of time in the
Fixed Guarantee Period is not a whole number of years, GNA derives an interest
rate from the guaranteed interest rates currently offered for the Fixed
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 GNA uses 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 GNA 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.
The amount of the market value adjustment is determined from the following
formula:
A X [(1+B) n/365 ]
--- -1 ]
[(1+C) ]
where "A" is the total amount withdrawn from the Fixed Guarantee Period, "B" is
the guaranteed interest rate (expressed as a decimal) for the Fixed Guarantee
Period, "C" is the guaranteed interest rate that GNA is now offering for 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 GNA is now offering for
Guarantee Periods nearest "n"/365, and "n" is the remaining number of days in
the Guarantee Period of the Fixed Guarantee Period from which the amount
withdrawn or annuitized is taken.
For example, assume that a full withdrawal of the Variable Value of $10,000 is
made from a Fixed Guarantee Period 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. "C" is equal to
5.30%, the sum of 5.25% times .80 and 5.50% times .20. The
<PAGE>
market value adjustment is:
[(1.050) 5.20 ]
$10,000 X ----- -1 ] = $ -147.26
[(1.053) ]
Since this figure is a negative number and the withdrawal is a full withdrawal,
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 Fixed Guarantee Period 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
3.2 or 1.2, the market value adjustment would be -$90.88 or -$34.18,
respectively. Tables showing the impact of the market value adjustment and
withdrawal charge on hypothetical full withdrawals are set forth in Appendix B.
Death Benefit
If the Participant or a non-spouse Joint Participant dies prior to the Annuity
Date, GNA will pay to the Beneficiary the greater of the Certificate Value or
the minimum death benefit as of the Valuation Period in which both due proof of
death and a payment election are received by GNA. The minimum death benefit on
the effective date of the Certificate is equal to the initial purchase payment.
For each subsequent purchase payment the minimum death benefit is increased by
the amount of the payment, and for each withdrawal the minimum death benefit is
decreased by the amount (net of withdrawal charges) of the withdrawal. On each
"Reset Date," if the then Certificate Value is greater than the minimum death
benefit, the minimum death benefit is reset to equal the then Certificate Value.
Reset Dates are the fifth Certificate Anniversary and each Certificate
Anniversary which is a five-year interval from the fifth Certificate
Anniversary.
If the Participant is not an individual, 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. If the Participant is an individual
but is not the Annuitant, the Participant must select a new Annuitant, and if no
Annuitant is selected within 30 days of the death of the Annuitant, the
Participant will become the Annuitant. No death benefit is payable on the death
of a spouse Joint Participant.
Payment will be made in a lump sum unless an Annuity Payment 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
MATTERS--Federal Tax Considerations." The Beneficiary must receive the death
benefit within five years of the date of death. If an Annuity Payment 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 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.
Death benefits will be paid within seven days of receipt of due proof of death
and payment election at GNA's Variable Annuity Service Center, subject to
postponement under the same circumstances that payment of withdrawals may be
postponed. (See "Withdrawals" above.)
If GNA has not received the Beneficiary's election, it may pay the death benefit
in a single sum six (6) months after the date GNA receives 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.
<PAGE>
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 Contract Provisions".
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 GNA agrees. 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.
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 Certificate.
Annuity Date. The Participant may select the Annuity Date and an Annuity Payment
Option. If he or she does not do so, the Annuity Date will be the first or
fifteenth 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 Payment
Option will be a life annuity with a 10-year guarantee. (For Qualified
Contracts, the Annuity Date selected must be no later than April 1 of the first
calendar year following the later of (i) the calendar year in which the
Annuitant attains age 70 1/2 or (ii) the calendar year in which the Annuitant
retires.)
The Participant may change the Annuity Date or the Annuity Payment Option on
written Notice received at GNA's Variable Annuity Service Center at least 30
days prior to the current Annuity Date.
<PAGE>
Annuity Options
Annuity benefits are available under the Contract on a fixed basis. Any one of
the following Annuity Payment Options may be selected. GNA may make other
Annuity Payment Options, including variable Annuity Payment Options, available
from time to time. Treasury regulations may preclude the availability of certain
Annuity Payment Options in connection with certain Qualified Contracts.
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.
*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.
Amount of Fixed Annuity Payments
Determining Amount of Fixed Annuity Payments. The amount of Fixed Annuity
payments is determined by applying the Adjusted Certificate Value to the Fixed
Annuity payment tables contained in the Contract. The Adjusted Certificate Value
is the Certificate Value immediately preceding the Annuity Date, plus or minus
the market value adjustment applicable to Fixed Guarantee Periods which are not
at the end of their Guarantee Periods, less any applicable taxes and less any
pro-rata share of the certificate maintenance charge if the Annuity Date is not
December 31. The amount of each Fixed Annuity payment will remain constant.
Minimum Annuity Payments. Annuity payments will be made monthly unless you
choose less frequent payments. But if any payment would be less than $100 GNA
may change the frequency so payments are at least $100 each. If the Certificate
Value to be applied at the Annuity Date is less than $2,500, GNA may elect to
pay that amount in a lump sum. For tax consequences of a lump sum payment, see
"Annuity Payments" under "Federal Tax Considerations".
Annuity Tables. GNA's Fixed Annuity payment 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 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. If GNA is offering better payment rates
for similar annuities at the Annuity Date, such rates will be substituted for
the rates in the Fixed Annuity payment table.
Amount of Variable Annuity Payments
If GNA should agree to make annuity payments available on a variable basis, the
following shall apply:
Determination of Amount of the First Variable Annuity Payment. The first
variable annuity payment is determined by applying that portion of the Adjusted
Certificate Value used to purchase a variable annuity to the variable annuity
payment tables contained in the Contract. The tables are based on the 1983-a
Individual Annuity Valuation and reflect an assumed interest rate of 4% per
year.
Annuity Units and the Determination of Subsequent Variable Annuity Payments.
Variable annuity payments subsequent to the first will be based on the
investment performance of the Variable Sub-accounts selected. The amount of such
<PAGE>
subsequent payments is determined by dividing the amount of the first annuity
payment from each Variable Sub-account by the then current annuity unit value
for such Variable Sub-account to establish the number of annuity units which
will thereafter be used to determine payments. This number of annuity units for
each Variable Sub-account is then multiplied by the annuity unit value for that
Sub-account, and the resulting amounts for each Variable Sub-account are then
totaled to arrive at the amount of the payment to be made. The number of annuity
units remains constant during the annuity payment period, but the dollar amount
of the payments will vary.
The value of an annuity unit for each Variable Sub-account for any Valuation
Period is determined by multiplying the annuity unit value for the immediately
preceding Valuation Period by the net investment factor for that Variable
Sub-account for the Valuation Period for which the annuity unit value is being
calculated and by a factor to neutralize the assumed interest rate.
A 4% assumed interest rate is built into the annuity tables used to determine
the first variable annuity payment. A higher assumption would mean a larger
first annuity payment, but more slowly rising subsequent payments when actual
investment performance exceeds the assumed rate, and more rapidly falling
subsequent payments when actual investment performance is less than the assumed
rate. A lower assumption would have the opposite effect. If the actual net
investment performance is 4% annually, annuity payments will be level.
Transfers After Annuity Date. After the Annuity Date, the Annuitant, or such
other person that has been designated as payee with the agreement of GNA, may
transfer all or part of the investment upon which variable annuity payments are
based from one Variable Sub-account to another. All such transfers will be
subject to the restrictions described above for transfers during the period
prior to the Annuity Date. No transfers are allowed from amounts supporting
Fixed Annuity Payment Options. The result of a transfer between Variable
Sub-accounts will be such that the dollar amount of a variable annuity payment
made on the date of the transfer will be unaffected by the fact of the transfer.
No transfers are allowed to or from amounts supporting Fixed Annuity Payment
Options.
Death Benefit on or After Annuity Date
If annuity payments have been selected based on an Annuity Payment Option
providing for payments for a guaranteed period, and the Annuitant dies on or
after the Annuity Date, GNA will make the remaining guaranteed payments to the
Beneficiary. Such payments will be made as rapidly as under the method of
distribution being used as of the date of the Annuitant's death. If no
Beneficiary is living, GNA will commute any unpaid guaranteed payments to a
single sum (on the basis of the interest rate used in determining the payments)
and pay that single sum to the estate of the last to die of the Annuitant and
the Beneficiary.
OTHER CONTRACT PROVISIONS
Proof of Age, Sex and Survival. GNA may require satisfactory proof of the age,
sex or survival of any person on whose continued life any payment under a
Certificate 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. GNA will deduct any overpayments it has made as the result of the
misstatement from the next payments due, and it will charge interest on the
overpayment at the rate of 6% per year. GNA 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.
Ownership. The Participant is entitled to exercise all rights described in his
or her 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. The Participant may name a Joint Participant. A Participant and
spouse Joint Participant may exercise rights on behalf of the other, except for
changes of Participant or Joint Participant. A Participant and non-spouse Joint
Participant must exercise rights jointly. A Participant may change the
Participant by Notice to the Company. GNA may impose limits on the age of a new
Participant. Such change will take effect as of the date the Notice was signed,
except that GNA will not be liable for any payments made or actions taken prior
to its receipt of the Notice. Special restrictions apply to Qualified Contracts
and Certificates.
In the case of Nonqualified Contracts and Certificates, a Participant may make a
collateral assignment of his or her rights to a creditor as security for a debt
by Notice. The rights of an assignee have priority over the rights of a
Beneficiary. GNA assumes no liability for any payments made or actions taken
<PAGE>
before its receipt of the Notice, nor will it be responsible for the validity or
sufficiency of any assignment. There may be significant tax consequences
associated with an assignment, and a Participant should consult a competent tax
advisor before making any assignment.
In the case of Qualified Contracts and Certificates, the rights of a Participant
generally may not be assigned, pledged or transferred, and joint participation
in 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 by Notice prior to the
time a death benefit is payable. A Beneficiary may be named irrevocably, in
which case a change in Beneficiary can be made only with the Beneficiary's
consent.
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 any Beneficiary dies within 15 days after the death
which causes the payment of the death benefit and before GNA makes payment,
payment will be made as if that Beneficiary had died before the death which
causes the payment of the death benefit.
The Participant 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 Contracts or Certificates.
Notices and Elections. Unless otherwise agreed to by GNA, all Notices, changes
and choices available under a Certificate must be in writing, dated, signed by
the proper party, received at GNA's Variable Annuity Service Center and
acceptable to it in its sole discretion to be effective. When recorded by GNA,
Notices, changes and choices relating to beneficiaries will take effect as of
the date signed unless GNA has already acted in reliance on the prior status.
Amendment of Contract and Certificates. At any time GNA may amend the Contract
and the Certificates as required to conform to any applicable law, regulation or
ruling issued by a government agency.
Free Look Right. A Participant may cancel his or her Certificate within the time
period set forth on the Certificate Schedule following his or her receipt of the
Certificate by delivering or mailing it to GNA at its Variable Annuity Service
Center or to the agent through whom it was purchased. GNA will refund the
Certificate Value computed at the end of the Valuation Period during which the
Certificate was received by GNA, and the Certificate will be void as if it had
never been in force. In states where required, GNA will refund the purchase
payment rather than the Certificate Value. GNA reserves the right to allocate
all purchase payments allocated to a Variable Sub-account to the Money Market
Sub-account until the expiration of 7 days from the end of the free look period.
If GNA so allocates payments, it will refund the greater of purchase payments or
the Certificate Value. No transfers or partial withdrawals may be made during
the free look period. GNA reserves the right to reject an application from any
person who, in connection with a prior application, previously exercised his or
her free look right.
Company Approval. GNA reserves the right to accept or reject any Contract or
Certificate application at its sole discretion.
<PAGE>
CHARGES AND DEDUCTIONS
Charges and deductions under the Certificates are assessed against purchase
payments, Certificate Values or annuity payments. There are no deductions from
purchase payments, except for premium taxes in certain states. In addition,
there are deductions from and expenses paid out of the assets of the Portfolios
that are described in the accompanying Prospectuses of the Funds.
Withdrawal Charges
If a withdrawal is made from the Certificate before the Annuity Date, a
withdrawal charge (contingent deferred sales charge) may be assessed against
amounts withdrawn attributable to purchase payments that have been in the
Certificate less than five complete years. There is no withdrawal charge with
respect to earnings accumulated under the Certificate, certain free withdrawal
amounts described below or purchase payments that were made five years or more
before the withdrawal date. In no event may the total withdrawal charges exceed
5% of total purchase payments. The amount of the withdrawal charge and when it
is assessed is discussed below:
The amount of the withdrawal charge is calculated by multiplying the amount of
the purchase payment being liquidated by the applicable withdrawal charge
percentage obtained from the following table.
Number of Complete Years Since Purchase Withdrawal Charge
Payment Made Percentage
- --------------------------------------- -----------------
0 5%
1 5%
2 4%
3 3%
4 2%
5+ 0%
The total withdrawal charge will be the sum of the withdrawal charges for the
purchase payments being liquidated.
Each withdrawal from a Certificate is allocated, first, to the "free withdrawal
amount," second, to remaining purchase payments which have not been withdrawn
previously on a first-in first-out basis, and, third, to any remaining
Certificate Value.
On the first withdrawal in any Certificate Year, the Participant may withdraw
free of any withdrawal charge an amount equal to 10% of the Certificate Value at
the time of the withdrawal. The free withdrawal amount is non-cumulative and
does not apply to subsequent withdrawals in a Certificate Year. Any part of the
free withdrawal taken from a Fixed Guarantee Period will still be subject to a
market value adjustment.
The withdrawal charge is deducted from the Certificate Value remaining after the
Participant is paid the amount requested, except in the case of a complete
withdrawal when it is deducted from the amount otherwise payable. In the case of
a partial withdrawal, the amount requested from any Variable Sub-account or
Fixed Guarantee Period may not exceed the value of that account minus any
applicable withdrawal charge, minus any applicable taxes, and in the case of
withdrawals from a Fixed Guarantee Period, plus or minus the amount of the
market value adjustment. The withdrawal charge will be subtracted from the
Variable Sub-accounts and Fixed Guarantee Periods from which the withdrawal was
made in the same proportion that the amount withdrawn from each Variable
Sub-account or Fixed Guarantee Period bears to the total amount withdrawn,
except that Fixed Guarantee Periods of the same duration shall be considered
together for withdrawal purposes, and amounts withdrawn shall be taken out on a
first-in, first-out basis.
There is no withdrawal charge on distributions made as a result of the death of
the Participant or Annuitant, and no withdrawal charges are imposed on or after
the Annuity Date.
The amount collected from the withdrawal charge will be used to reimburse GNA
for the compensation paid to cover selling concessions to broker-dealers,
preparation of sales literature and other expenses related to sales activity.
<PAGE>
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 GNA 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 any increased amount
attributable to the positive market value adjustment. For examples of
calculation of the withdrawal charge, see Appendix B.
From time to time GNA 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 GNA's sales expenses. GNA will consider such factors as (a)
the size and type of group, (b) the amount of purchase payments expected to be
received, and/or (c) other transactions where sales expenses are reduced. In no
event will reduction or elimination of the withdrawal charge be permitted where
such reduction or elimination will be unfairly discriminatory to any person.
Example of Withdrawal Charge. The application of the withdrawal charge to the
Fixed MGA Account Value, and the interplay between the withdrawal charge and the
market value adjustment provisions, may be illustrated by the following example.
(It may be less if a free withdrawal amount 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 Fixed Guarantee Periods, one
with a Guarantee Period of ten years, the other with a Guarantee Period of seven
years, and each having a value of $5,000. Assume further that the Participant
directs that the partial withdrawal be taken from the Fixed Guarantee Period
having the ten-year Guarantee Period to the maximum extent possible and the
remainder taken from the Fixed Guarantee Period 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 less than two years have elapsed since the purchase
payments were made and that the withdrawal is deemed to be a withdrawal of
purchase payments and not investment gain, so that the applicable percentage
charge is 5% of the amount withdrawn. The net amount available to the
Participant from the Fixed Guarantee Period 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 Fixed Guarantee Period 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.
<PAGE>
Administration Charges
Certificate Maintenance Charge. Each year GNA will deduct a certificate
maintenance charge of $40 as partial compensation for the cost of providing all
administrative services attributable to the Contracts and Certificates and the
operations of the Separate Account and the Company in connection with the
Contracts and Certificates. GNA will waive the charge if at the time of the
assessment the Certificate Value is $40,000 or greater.
Prior to the Annuity Date, the certificate maintenance charge is deducted on
December 31 of each year, except for the first Certificate Year when a pro-rata
portion of the charge will be deducted on December 31. It is withdrawn from the
Participant's interest in each Variable Sub-account and Fixed Guarantee Period
in the same proportion that the Accumulation Value for each Variable Sub-account
and the value of each Fixed Guarantee Period bears to the Certificate Value. If
a full withdrawal of the Certificate's Withdrawal Value is made on a day other
than December 31, the $40 certificate maintenance charge will be deducted from
the amount paid. If the Annuity Date is not December 31, a pro-rata portion of
the charge is deducted on the Annuity Date.
The amount of the certificate maintenance charge may be reduced or eliminated
when sales of the Certificates are made to individuals, entities or groups of
individuals in such a manner that results in savings of administration expenses.
The entitlement to such a reduction or elimination of this charge will be
determined by GNA considering the size and type of group and other circumstances
which could result in reduced administrative expenses. In no event will
reduction or elimination of the certificate maintenance charge be permitted
where such reduction or elimination will be unfairly discriminatory to any
person.
Administration Charge. A daily charge at an annual rate of 0.15% of the average
daily value of each Variable Sub-account is deducted from each Variable
Sub-account to reimburse GNA for administrative expenses. This asset-based
administrative charge is not deducted from the Fixed MGA Account Value. The
charge will be reflected in the Certificate Value as a proportionate reduction
in the Accumulation Value for each Variable Sub-account. Because this
administrative charge is a percentage of assets rather than a flat amount,
larger Certificate Values will in effect pay a higher proportion of this charge
than smaller Certificate Values.
Even though administrative expenses may increase, GNA guarantees that it will
not increase the amount of the administration fees as to outstanding
Certificates.
Mortality and Expense Risk Charge
The mortality risk assumed by GNA is the risk that Annuitants may live for a
longer period of time than estimated. GNA assumes this mortality risk by virtue
of annuity rates incorporated into the Contract which cannot be changed as to
outstanding Certificates. This assures each Annuitant that his longevity will
not have an adverse effect on the amount of annuity payments. Also, GNA
guarantees that if the Annuitant dies before the maturity date, it will pay a
death benefit. (See "DEATH BENEFIT BEFORE ANNUITY DATE") The expense risk
assumed by GNA is the risk that the administration charges or withdrawal charge
may be insufficient to cover actual expenses.
To compensate it for assuming these risks, GNA deducts from each Variable
Sub-account a daily charge at an annual rate of 1.25% of the average daily value
of the Variable Sub-account. The mortality and expense risk charge is not
assessed against the Fixed MGA Account Value. The charge will be reflected in
the Certificate Value as a proportionate reduction in the Accumulation Value for
each Variable Sub-account. The rate of the mortality and expense risk charge
cannot be increased. If the charge is insufficient to cover the actual cost of
the mortality and expense risks undertaken, GNA will bear the loss. Conversely,
if the charge proves more than sufficient, the excess will be profit to GNA and
will be available for any proper corporate purpose including, among other
things, payment of distribution expenses.
Taxes
Any taxes, fees or assessments paid to a governmental entity relating to a
Certificate will be deducted from purchase payments or the Certificate Value.
GNA will determine when taxes have resulted from the investment experience of
the Separate Account, GNA's receipt of purchase payments or the commencement of
annuity payments. GNA may pay premium taxes when due and deduct that amount from
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the Certificate Value at a later date. The amount deducted will depend on the
premium tax assessed in the applicable state. State premium taxes currently
range from 0% to 3.5% depending on the jurisdiction and the tax status of the
Contract or Certificate and are subject to change by the legislature or other
authority. (See "APPENDIX A: State Premium Taxes.")
FEDERAL TAX MATTERS
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 under the Code, such as individual retirement accounts and annuities,
pension and profit-sharing plans for corporations and sole
proprietorships/partnerships ("H.R. 10" and "Keogh" plans), Tax-Sheltered
annuities, and deferred compensation plans of state and local governments and
tax-exempt organizations. The ultimate effect of federal income taxes on
Certificate Value, on annuity payments and on the economic benefit to the
Participant, Annuitant or Beneficiary depends on GNA's 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 GNA's
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. GNA MAKES NO
GUARANTEE REGARDING THE TAX STATUS OF ANY CONTRACT OR CERTIFICATE OR ANY
TRANSACTION INVOLVING THE CONTRACTS OR CERTIFICATES.
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GNA's Tax Status
GNA is taxed as a life insurance company under the Internal Revenue Code. It
owns all assets supporting its obligations under the Contracts, and any income
earned on those assets is considered GNA's income. Since the operations of the
Separate Account are a part of, and are taxed with, the operations of GNA, the
Separate Account is not separately taxed as a "regulated investment company"
under Subchapter M of the Code. Under existing federal income tax laws,
investment income and capital gains of the Separate Account are not taxed to the
extent they are applied to increase reserves under a Contract or Certificate.
Since, under the Contracts, investment income and realized capital gains of the
Separate Account are automatically applied to increase reserves, GNA does not
anticipate that it will incur any federal income tax liability attributable to
the Separate Account, and therefore it does not intend to make provision for any
such taxes. If GNA is taxed on investment income or capital gains of the
Separate Account, then it may impose a charge against the Separate Account in
order to make provision for such taxes.
Tax Status of the Certificates
In General. Under existing provisions of the Code, except as described below,
any increase in the Certificate Value is generally not taxable to the
Participant or Annuitant until received, either in the form of annuity payments,
as contemplated by the Contract, or in some other form of distribution. However,
this rule applies only if (1) the Participant is an individual, (2) the
investments of the Separate Account are "adequately diversified" in accordance
with applicable Treasury Department regulations, and (3) GNA, rather than the
Participant, is considered the owner of the assets of the Separate Account for
federal tax purposes.
Non-Natural Owner. As a general rule, income accruing on deferred annuity
contracts held by "non-natural persons" such as a corporation, trust or other
similar entity, as opposed to a natural person (i.e., an individual), must be
reported currently by the owner. The investment income on such contracts is
taxed as ordinary income that is received or accrued by the owner of the
contract during the taxable year. There are several exceptions to this general
rule for non-natural contract owners. First, contracts will generally be treated
as held by a natural person if the nominal owner is a trust or other entity
which holds the contract as an agent for a natural person. However, this special
exception will not apply in the case of any employer who is the nominal owner of
an annuity contract under a nonqualified deferred compensation arrangement for
its employees.
In addition, exceptions to the general rule for non-natural contract owners will
apply with respect to (1) contracts acquired by an estate of a decedent by
reason of the death of the decedent, (2) certain Qualified Contracts, (3)
contracts purchased by employers upon the termination of certain Qualified
Plans, (4) certain contracts used in connection with structured settlement
agreements, and (5) contracts purchased with a single premium when the annuity
starting date is no later than a year from purchase of the annuity and
substantially equal periodic payments are made, not less frequently than
annually, during the annuity period.
Diversification Requirements. For a contract other than a pension plan contract
to be treated as an annuity for federal income tax purposes, the investments of
the Separate Account that are allocable to the contract must be "adequately
diversified" in accordance with Treasury Regulations. The Secretary of the
Treasury has issued regulations which prescribe standards for determining
whether the investments of the Separate Account are "adequately diversified." If
the Separate Account failed to comply with these diversification standards, a
contract (other than a pension plan contract) would not be treated as an annuity
contract for federal income tax purposes and the contract owner would be taxable
currently on the excess of the contract value over the premiums paid for the
contract.
Although GNA does not control the investments of the Portfolios, it expects that
the Portfolios will comply with such regulations so that the Separate Account
will be considered "adequately diversified."
Ownership Treatment. In certain circumstances, variable annuity contract owners
may be considered the owners, for federal income tax purposes, of the assets of
the separate account used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includible in the
contract owners' gross income. The Internal Revenue Service (the "Service") has
stated in published rulings that a variable contract owner will be considered
the owner of separate account assets if the owner possesses incidents of
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ownership in those assets, such as the ability to exercise investment control
over the assets. In addition, in 1986 the Treasury Department announced, in
connection with the issuance of regulations concerning investment
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a separate account
may cause the investor, rather than the insurance company, to be treated as the
owner of the assets in the account." This announcement also stated that guidance
would be issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular sub-accounts [of a
separate account] without being treated as owners of the underlying assets." As
of the date of this Prospectus, no such guidance has been issued.
The ownership rights under the Contracts and Certificates are generally similar
to, but different in certain respects from, those described by the Service in
Revenue Rulings in which it was determined that contract owners were not owners
of separate account assets. For example, Participants have the choice of more
investment options to which to allocate purchase payments than were available in
such rulings. In addition, GNA does not know what standards will be set forth in
the regulations or rulings which the Treasury Department has stated it expects
to issue. GNA does not expect that variable annuity contract owners would be
considered the owners, for federal income tax purposes, of the assets of the
separate account used to support their contracts, but reserves the right to
modify the Contract and Certificates as necessary to attempt to prevent the
Participants from being considered owners of the assets of the Separate Account.
Death Benefits. Furthermore, in order to be treated as an annuity contract for
federal income tax purposes, Section 72(s) of the Code requires any Nonqualified
Contract to provide that (a) if any owner dies on or after the annuity
commencement date but prior to the time the entire interest in the contract 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 owner's death; and (b) if any owner dies prior to the Annuity Date the
entire interest in the Contract will be distributed within five years after the
date of the owner's death. These requirements will be considered satisfied as to
any portion of the owner'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 owner's death. The owner's "designated beneficiary" is the person
designated by the owner as a beneficiary and to whom ownership of the contract
passes by reason of death and must be a natural person. However, if the owner's
"designated beneficiary" is the surviving spouse of the owner, the contract may
be continued with the surviving spouse as the new owner.
The Nonqualified Contracts 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. GNA intends 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.
THE FOLLOWING DISCUSSION ASSUMES THAT THE CERTIFICATES WILL QUALIFY AS ANNUITY
CONTRACTS FOR FEDERAL INCOME TAX PURPOSES, THAT GNA WILL BE TREATED AS THE OWNER
OF SEPARATE ACCOUNT ASSETS, AND THAT PARTICIPANTS ARE NATURAL PERSONS
Federal Tax Considerations
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 purchase 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 Certificate 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
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Certificate 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
Payment Option elected under the Certificate, under Non-qualified Certificates
Section 72(b) generally provides that 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. With Tax-Sheltered Annuities, gross income does not
include the amount obtained by dividing the "investment in the contract" (as of
the Annuity Date) by (i) the number of aniticipated payments under the
Certificate, as determined under Section 72(d) of the Code, or (ii) the number
of monthly annuity payments in the case of a Certificate where the expected
return under the Certificate does not depend in whole or in part on the life
expectancy of one or more individuals. Where annuity payments are made under a
Qualified Certificate , the portion of each payment that is excluded from gross
income will generally be equal to the total amount of any investment in the
Certificate as of the Annuity Date, divided by the number of anticipated
payments, which are determined by reference to the age of the Annuitant. 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 or, under Qualified Certificates,
the total number of anticipated 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.
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 includible in the income of the recipient as follows: (1) if
distributed in a lump sum, they are taxed in the same manner as a full
withdrawal of the Certificate, as described above, or (2) if distributed under
an Annuity Payment 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 Certificate 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 transfer, assignment, or exchange of his or her interest under
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 GNA (or its 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, GNA is generally
required to withhold on distributions under certain Qualified Contracts or
Certificates.
Possible Tax Legislation. There
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is no way of knowing if legislation will be enacted by Congress at some future
time that will impact the taxation of tax-deferred annuities, 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 Certificates 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 GNA's 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 Certificates may be issued in connection with plans qualifying
for special tax treatment under the Code. 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 applicable law. Following are brief descriptions of the
various types of plans in connection with which GNA 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 Annuities and Individual Retirement Accounts. Section 408
of the Code permits eligible individuals to contribute to an individual
retirement program known as an Individual Retirement Annuity or Individual
Retirement Account (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
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.)
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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.
Corporate and Self-Employed ("H.R. 10" and "Keogh") Pension and Profit-Sharing
Plans. Sections 401(a) and 403(a) of the Code permit corporate employers to
establish various types of tax-favored retirement plans for employees. The
Self-Employed Individuals' Tax Retirement Act of 1962, as amended, commonly
referred to as "H.R. 10" or "Keogh," permits self-employed individuals also to
establish such tax-favored retirement plans for themselves and their employees.
These retirement plans may permit the purchase of the Contracts to accumulate
retirement savings under the plans. Adverse tax or other legal consequences to
the plan, to the Participant or to both may result if a Certificate is assigned
or transferred to any individual as a means to provide benefit payments, unless
the plan complies with all legal requirements applicable to such benefits prior
to transfer of the Certificate. Employers intending to use the Contract or
Certificates in connection with such plans should seek competent advice.
Deferred Compensation Plans of State and Local Governments and Tax-Exempt
Organizations. Section 457 of the Code permits employees of state and local
governments and tax-exempt organizations to defer a portion of their
compensation without paying current taxes. The employees must be participants in
an eligible deferred compensation plan. To the extent the Contracts or
Certificates are used in connection with an eligible plan in existence prior to
August 20, 1996, employees are considered general creditors of the employer and
the employer as owner of the Certificates has the sole right to the proceeds
under the Contract until December 31, 1998, or such earlier date as may be
established by plan amendment. Amounts deferred under a plan created on or after
August 20, 1996, however, must be held in trust, custodial account or annuity
contract for the exclusive benefit of plan participants and their beneficiaries.
Generally, with respect to purchase payments made after February 28, 1986, a
Contract or Certificate purchased by a state or local government or a tax-exempt
organization will not be treated as an annuity contract for federal income tax
purposes. Those who intend to use the Contracts or Certificates in connection
with such plans should seek competent advice.
INVESTMENTS SUPPORTING THE FIXED GUARANTEE PERIODS
GNA's 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 GNA's
General Account assets are available to meet its obligations under the
Contracts.
Purchase payments received under the Contracts and Certificates and allocated to
Fixed Guarantee Periods will be held in a "nonunitized" separate account
established by GNA 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 GNA's benefit. GNA reserves the right, subject to applicable state
law, to transfer all assets allocated to the separate account to its General
Account and to hold thereafter all assets supporting the Contract reserves and
other Contract liabilities in its General Account. Regardless of whether such
assets are held in a separate account or GNA's General Account, all benefits
available to Participants under the Contracts are guaranteed by GNA, and all of
its assets, except those assets GNA allocates to certain other separate accounts
it uses for other contracts, support those guarantees.
GNA intends to invest assets supporting the Contract reserves and other Contract
liabilities related to the Fixed Guarantee Periods, whether held in a separate
account or its 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. GNA 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.
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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 GNA's
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 assets supporting the Fixed Guarantee Periods, but use of such instruments
may enhance yield.
ALTHOUGH THE FOREGOING GENERALLY DESCRIBES GNA'S INVESTMENT STRATEGY FOR THE
ASSETS SUPPORTING GNA'S OBLIGATIONS UNDER THE FIXED PORTION OF THE CONTRACTS,
GNA IS 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 GNA ESTABLISHES BE DETERMINED BY THE PERFORMANCE OF THE
NONUNITIZED SEPARATE ACCOUNT. THE INVESTMENT STRATEGIES FOR ASSETS SUPPORTING
THE VARIABLE PORTION OF THE CONTRACTS ARE DESCRIBED IN THE ACCOMPANYING
PROSPECTUSES OF THE FUNDS
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.
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 (GE Capital Assurance). GE Capital Assurance, a Delaware life insurer,
is licensed in the District of Columbia, and all states except Maine and 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.
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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 1997, the Company issued $233 million
in deferred annuities. At December 31, 1997, deferred annuities comprised $5,064
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 1997, the Company issued $72.2 million in immediate
annuities. At December 31, 1997, immediate annuities comprised $760.1 million of
total liabilities for future annuity and contract benefits.
The Company leases office space in Seattle, Washington. The Company is
reimbursed by its subsidiaries and affiliates for rent based on direct and
indirect allocation methods.
Selected Financial Data
The following selected financial data should be read in conjunction with the
consolidated financial statements and notes thereto
<PAGE>
included in this Prospectus.
Selected Financial Data
(Dollars in millions)
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------------------------------------------
1997 1996 1995 1995 1994 1994 1993
--------------------------- -------------------------- ------------ ------------- ------------
Pro forma Pro forma
(unaudited) (unaudited)
(1) (1)
<S> <C>
Net investment income $ 475.3 $ 462.5 $ 444.5 $ 784.7 $ 391.6 $ 837.8 $ 579.8
Income before income taxes and
minority interest 106.8 76.0 39.1 62.0 70.6 107.7 57.0
Net income 71.3 51.1 26.7 26.3 44.0 47.5 34.1
Total assets 7,082.1 7,120.0 6,926.5 6,926.5 6,578.0 13,100.2 13,160.1
Shareholder's interest, excluding
net unrealized investment
gain/(loss) 754.2 682.9 631.7 631.7 607.3 794.2 754.0
Net unrealized investment
gain/(loss) 38.3 7.0 29.9 29.9 (166.7) (528.8) (16.3)
Total shareholder's interest 792.5 689.9 661.6 661.6 440.6 265.4 737.7
</TABLE>
(1) Unaudited pro forma results reflect the Reorganization as if it had
occurred at the beginning of the period.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, 1997 and 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.
1997 Compared to 1996
Net investment income increased $12.8 million to $475.3 million. This increase
is primarily attributable to purchase of higher yield securities, dividends from
other invested assets and an increase in average investments during the period.
Net realized investment gains (losses) - Net realized investment gains were
$19.7 million during 1997, compared to a $3.1 million in 1996. This change is
related to the Company's asset/liability risk management and varies with market
and economic conditions.
Premiums decreased $138.9 million to $61.1 million. This decrease is due to
lower sales of life contingent structured settlement product primarily related
to a shift in marketing focus to GE Capital Assurance products.
Interest credited on policyholder deposits decreased $1.8 million to $293.9
million primarily due to lower future annuity and contract benefit liabilities
during 1997.
Benefits and other changes in policy reserves decreased $133.2 million to $97.7
million. Change in policy reserves decreased largely due to a reduction in sales
of life contingent structured settlement products and reserved reduction
associated with the payout of benefits.
Commissions decreased $12.7 million to $14.7 million. This decrease is due to
continued shift in marketing focus to GE Capital Assurance products.
General expenses decreased $9.6 million to $26.9 million due to the Company's
continued shift in marketing focus to GE Capital Assurance products.
Amortization of intangibles decreased $1.3 million to $32.6 million. The Company
established goodwill and present value of future profits (PVFP) assets in
connection with GNA's acquisition. The decrease is primarily related to lower
PVFP amortization for the period ended December 31, 1997.
Change in deferred acquisition costs decreased $18.5 million to $8.2 million
primarily as a result of lower commissions.
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.
<PAGE>
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.
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.
Benefits and Other Changes 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 decreased $23.6 million to $33.9 million. The
decrease is primarily related to the fact that as a 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.
Change 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 as a result of 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.
<PAGE>
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, 1997, investments subject to certain call provisions totaled
$136.5 million; and mortgage-backed securities subject to prepayment risk
totaled $1,853.7 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, 1997,
approximately $73.7 million was available for dividend payments in 1998.
<PAGE>
Investments
The Company manages its investment portfolio to meet the diversification, credit
quality, yield and liquidity requirements of its policy liabilities by investing
primarily in fixed maturity instruments, including government and corporate
bonds, mortgage backed bonds, and mortgage loans on real estate. At December 31,
1997, the Company held $6.3 billion, or 94.5% of its investment portfolio, in
fixed maturity instruments and mortgage loans. The Company's investment
philosophy focuses on purchasing assets the durations of which approximate
policyholder obligations. To match some of its longer term policy liabilities,
the Company has followed a strategy of buying bonds with adequate call
protection. The Company also invests in policy loans, short-term securities and
other investments, which comprised the remaining 5.5% of its investment
portfolio at December 31, 1997.
The Company primarily purchases investment-grade (BBB-/Baa3 or above) bonds. At
December 31, 1997, $4,601.5 million, or 91.1%, of the fixed maturity securities
held by the Company were bonds rated by a rating agency (S&P or Moody's), or
were government/agency bonds. Fixed maturity securities of $455.4 million, or
8.9%, were comprised primarily of private placement bonds not rated by either
rating agency. At December 31, 1997, the Company held $40.0 million of bonds
rated below investment grade (excluding split-rated bonds). In addition, the
Company held $22.5 million of "not-rated" bonds which the Company believes are
below investment grade. Below investment grade bonds include those bonds
originally purchased as investment grade but subsequently downgraded in rating,
as well as bonds purchased as below investment grade. The Company holds this
small percentage of below investment grade bonds in order to enhance the yield
on its investment portfolio.
<PAGE>
Investments in mortgage-backed bonds include $1,417.2 million in collateralized
mortgage obligations (CMOs) and asset-backed securities and $396.5 million of
pass-through securities. These bonds are secured primarily by pools of
residential mortgages and generally carry high credit ratings. Approximately 62%
of the mortgage-backed bonds are backed by securities issued by Government
National Mortgage Association, Federal Home Loan Mortgage Corporation, or
Federal National Mortgage Association. In the aggregate, the mortgage-backed
bonds had an average rating of AAA/Aaa at December 31, 1997. Most CMO and
pass-through securities are subject to prepayment and extension risk (i.e.
principal can be received earlier or later than anticipated, based on the rate
of mortgage prepayments in the underlying residential mortgage pools).
The Company has classified all of its fixed maturity investments
available-for-sale. Such securities are carried on the consolidated balance
sheet at current fair values and marked to market quarterly. Changes in market
value, net of the effect on present value of future profits, deferred policy
acquisition costs and deferred income taxes, are recorded as unrealized
appreciation or depreciation directly in shareholder's interest and,
accordingly, have no effect on net income. At December 31, 1997, the amortized
cost basis of the Company's fixed maturity securities was $4,903.2 million,
representing net unrealized gains of $153.7 million.
The Company's mortgage loan portfolio consisted of 989 loans at December 31,
1997. The loans, which are originated 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. Commercial loans comprise the majority of the
portfolio, with $656.5 million (53.1%), $298.9 million (24.1%) and $185.1
million (14.9%) attributable to the retail, industrial and office sectors,
respectively. The remainder of the loans, $99.4 million (8.0%), are attributable
to the residential and other miscellaneous sectors. The mortgage loans are
secured by property throughout the U.S., with concentrations in the Pacific
region (44.0%) and the South Atlantic region (21.4%).
Other invested assets of $256.0 million at December 31, 1997 were comprised of
several types of assets. The Company has made investments in mutual funds
offered by the Company's mutual fund and variable annuity distribution channels
of $47.8 million in order to provide seed money for these funds. Pursuant to a
periodic review of its asset allocation strategy, the Company has also made
investments in limited partnerships ($81.9 million) and an investment in
affiliate ($126.3 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, 1997, the
Company has 279 employees. In addition, the Company has 42 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
1997 as a result of several banks internalizing sales forces.
A.M. Best assigned to GNA an A + (Superior) rating. Duff & Phelps reaffirmed the
Company's AA (Very High) rating, and Standard & Poor's 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
required financial statements and regulating the type and amounts of investments
permitted. The Company's books and accounts are subject to review by each
<PAGE>
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 $28.9 million at December 31, 1997
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.
Year 2000
Year 2000 compliance programs and information systems modifications have been
initiated in an attempt to ensure that these systems and key processes will
remain functional. This objective is expected to be achieved either by modifying
present systems using existing internal and external programming resources or by
installing new systems, including enterprise systems, and by monitoring supplier
and other third-party interfaces. While there can be no assurance that all such
modifications will be successful, management does not expect that either costs
of modifications or consequences of any unsuccessful modifications should have
material adverse effect on the Company's financial position, results of
operations or liquidity.
New Accounting Standards
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS No. 125 is required to be adopted by the Company in
1997, except for certain sections which were deferred in accordance with SFAS
127. The adoption of the applicable provisions of SFAS No. 125 in 1997 did not
have a material impact on the Company's consolidated financial statements and
management of the Company does not expect that adoption of the remaining
provisions of SFAS No. 125 will have a material impact on the Company's 1998
financial position, results of operations, or liquidity.
<PAGE>
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This
Statement establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Comprehensive income includes all changes in equity from nonowner sources;
investments by and distributions to owners are excluded. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The Company will
include this new reporting information in its 1998 consolidated financial
statements as required.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 is effective of disclosures
about segments of an enterprise and related information for periods beginning
after December 15, 1997. This Statement establishes standards for the way that
public business enterprises reporting information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Management has not
yet determined the impact, if any, of this Statement on the Company's future
disclosures.
In December 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-3, Accounting by Insurance and Other Enterprises
for Insurance-Related Assessments. This SOP provides guidance on accounting by
insurance and other enterprises for guaranty-fund and certain other insurance
related assessments. The SOP requires enterprises to recognize a liability for
assessments when (a) an assessment has been asserted or information available
prior to issuance of the financial statements indicates it is probable that an
assessment will be asserted, (b) the underlying cause of the asserted or
probable assessment has occurred on or before the date of the financial
statements, and (c) the amount of the loss can be reasonably estimated. This SOP
is effective for financial statements for fiscal years beginning after December
15, 1998 and will be reported in a manner similar to a cumulative effect of a
change in accounting principle in the initial year of adoption. Management of
the Company does not expect that this SOP will have a material impact on the
Company's financial position, results of operations, or liquidity.
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
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 1997. Senior
(46) Vice President and Chief Financial Officer of GNA from 1993 - 1996.
Stephen P. Joyce Director and Senior Vice President of GNA since 1995. Vice President, Business Development, GE
(42) Capital Corporation 1991- Current.
Charles A. Kaminski Director since 1994 and Senior Vice President of GNA since 1993.
(49)
<PAGE>
Victor C. Moses Director since 1994 and Senior Vice President of GNA since 1992. Chief Actuary of GNA since
(50) 1993.
Thomas W. Casey Senior Vice President and Chief Financial Officer of GNA since 1996. Vice President of GNA
(35) 1993-96.
Debora Dyer Horvath Senior Vice President and Chief Information Officer of GNA since 1995. Vice President of GNA
(43) 1993-95.
Leon E. Roday Senior Vice President and General Counsel of GE Capital Assurance since 1996 and GNA since 1998.
(44) Attorney - LeBoeuf, Lamb, Greene & MacRae L.L.P. 1982-96.
Deborah C. Towner Senior Vice President and Chief Mortgage Officer of GNA since 1997. Assistant Vice President of
(44) GNA 1985-97.
James D. Atkins Senior Vice President of GNA since 1997. Senior Vice President of Fist Colony Life Insurance
(40) Company since 1992.
Donald W. Britton Senior Vice President of GNA since 1997. President, First Colony Life Insurance Company since
(49) 1997. Executive Vice President, Marketing -First Colony Life Insurance Company 1992-97.
Frank D'Ambra Senior Vice President of GNA since 1997. Vice President of Canada Life Insurance Company
(44) from 1994-97. Assistant Vice President of Confederated Life Insurance Company
from 1990-94.
Frank T. Gencarelli Senior Vice President of GNA since 1997. Vice President, then Senior Vice President First Colony
(43) Life insurance Company since 1992.
John M. Howard Senior Vice President of GNA since 1997. Vice President of GNA 1993-97.
(31)
Andrew J. Larsen Senior Vice President of GNA since 1997. Director and executive Vice President of First Colony
(51) Life insurance Company since 1995. Vice President Fist Colony Life Insurance Company 1986-95.
Mark E. Schwarzmann Senior Vice President of GNA since 1997. Senior Vice President, Chief Operating Officer GE
(36) Capital - ResCom 1995-97. Managing Director, Business Development GE Capital Commercial Real
Estate Financing and Services 1994-95. Program General Manager, GE Power Generation 1993-94.
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 and Assistant Vice
(38) President of GNA 1989-1994.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position with GNA(1) and
Name (Age) Principal Occupation for Last Five Years
---------- ----------------------------------------
<S> <C>
Scott Curtis Vice President of GNA since 1996. Sales and Marketing Manager/Director of GNA 1990-96.
(35)
Stephen N. DeVos Vice President and Controller of GNA since 1996. Technical Adviser, GE Capital Corporation
(37) 1994-96. Manager, Coopers & Lybrand 1986-94.
Michael C. Knebel Vice President and Investment Officer of GNA since 1998. Vice President and Assistant Treasurer,
(55) SAFECO Corporation 1988-97.
Jeffrey I. Hugunin Treasurer of GNA since 1994. Vice President and Treasurer of Federal Home Life Insurance Company
(35) and it subsidiaries since 1992.
Laurence M. Richmond Vice President of GNA since 1986.
(50)
J. Michael Singleton Vice President of GNA since 1985.
(57)
William C. Shumate, Sr. Vice President of GNA since 1996. President of GE Capital Assignment Corporation since 1995 and
(49) Executive Vice President from 1993-1995.
Patricia C. Vaselakos Vice President of GNA since 1994. Program and Regional Marketing Director of GNA 1990-94.
(43)
</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.
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.
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table [From Susan Gaidos]
Annual Compensation
Name and Other Annual Long Term
Principal Position Year Salary Bonus Compensation(1) Compensation(2)
------------------ ------ -------------- --------- --------------- ---------------
<S> <C>
Geoffrey S. Stiff 1997 $44,905 $3,675 $11,837 -0-
President and Chief Executive 1996 53,718 31,700 9,384 -0-
Officer 1995 50,558 26,945 255 -0-
Charles A. Kiminski, Jr. 1997 28,728 17,000 287 -0-
Leon E. Roday 1997 23,891 7,025 91 -0-
Laurence M. Richmond 1997 36,103 20,000 11 5,000
Vice President 1996 71,092 26,975 58,308 10,375
1995 99,000 36,000 5,499 15,000
J. Michael Singleton 1997 75,912 39,000 -0- 12,500
Vice President 1996 104,813 37,100 44,149 17,500
1995 85,200 27,600 5,685 -0-
</TABLE>
(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.
GENERAL MATTERS
Performance Data
From time to time the Separate Account may publish advertisements containing
performance data relating to its Variable Sub-accounts. Performance data will
consist of total return quotations, which will always include quotations for
recent one year and, when applicable, five and ten year periods and, where less
<PAGE>
than five or ten years, for the period subsequent to the date each Variable
Sub-account first became available for investment. Such quotations for such
periods will be the average annual rates of return required for an initial
purchase payment of $1,000 to equal the actual Certificate Value attributable to
such purchase payment on the last day of the period, after reflection of all
charges. Performance figures used by the Separate Account are based on the
actual historical performance of its Variable Sub-accounts for specified
periods, and the figures are not intended to indicate future performance. More
detailed information on the computations is set forth in the Statement of
Additional Information.
Financial Statements
Financial statements of the Company are included in this Prospectus. Financial
statements of the Separate Account are included in the Statement of Additional
Information.
Restrictions Under the Texas Optional Retirement Program
Section 36.105 of the Texas Education Code permits Participants in the Texas
Optional Retirement Program ("ORP") to withdraw their interest in a variable
annuity contract issued under the ORP only upon (1) termination of employment in
the Texas public institutions of higher education, (2) retirement, or (3) death.
Accordingly, 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 the Certificate can be
terminated. The foregoing restrictions on withdrawal do not apply in the event a
Participant in the ORP transfers the Certificate Value to another contract or
another qualified custodian during the period of participation in the ORP.
Distribution of Contracts
GNA entered into an agreement with GNA Distributors, Inc. pursuant to which
GNA Distributors, Inc. acted as the principal underwriter of the Contracts and
used 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. arranged for distribution
of the Contracts and Certificates primarily by other broker-dealers
registered under the 1934 Act and members of the NASD, including Capital
Brokerage Corporation (formerly known as GNA Securities, Inc.). Sales of the
Contracts and Certificates were made by registered representatives of such
broker-dealers (or individuals not otherwise required to be registered) who
were also licensed insurance agents, either individually or through various
licensed insurance agencies. GNA or GNA Distributors, Inc. will pay a
commission up to a maximum of six and one-fourth percent (6.25%) of each
premium payment. In some instances there may also be paid a commission based
on reinvested premium and/or Certificate Value on a certain date. GNA
Distributors, Inc. and Capital Brokerage Corporation are wholly owned
subsidiaries of GNA Corporation.
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 GNA of which
the Company has any knowledge.
Legal Matters
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
The consolidated financial statements of Great Northern Insured Annuity
Corporation and subsidiaries as of December 31, 1997 and 1996, and for each of
the years in the three-year period ended December 31, 1997, have been included
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of such firm as experts in accounting and
auditing.
<PAGE>
The financial statements of GNA Variable Investment Account as of December 31,
1997, and for each of the years in the three-year period ended December 31,
1997, have been included in the Statement of Additional Information in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing therein, and upon the authority of such firm as
experts in accounting and auditing.
Registration Statements
Registration statements have 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 statements, their 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
statements.
STATEMENT OF ADDITIONAL INFORMATION
Table of Contents
Page
Performance Data................... 2
Services 4
Servicing Agent.............. 4
Principal Underwriter........ 4
Financial Statements............... 4
<PAGE>
APPENDIX A
State Premium Taxes
Premium taxes vary according to the state and are subject to change. In many
jurisdictions there is no tax at all. For current information, a tax adviser
should be consulted.
TAX RATE
QUALIFIED NONQUALIFIED
STATE Contracts Contracts
- ----- ----------- ---------
ALABAMA.............. 1.00% 1.00%
CALIFORNIA........... .50% 2.35%
DISTRICT OF
COLUMBIA.......... 2.25% 2.25%
KANSAS............... .00 2.00%
KENTUCKY............. 2.00% 2.00%
MAINE................ .00 2.00%
MISSISSIPPI.......... .00 2.00%
NEVADA............... .00 3.50%
NORTH
CAROLINA.......... .00 1.90%
PUERTO RICO.......... 1.00% 1.00%
SOUTH DAKOTA......... .00 1.25%
WEST VIRGINIA........ 1.00% 1.00%
WYOMING.............. .00 1.00%
<PAGE>
APPENDIX B
Examples of Market Value Adjustments
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 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.
Withdrawal charges shown are based on the withdrawal charge table set forth
under "Charges and Deductions--Withdrawal Charges" in the Prospectus. The
withdrawal charges shown also assume no partial withdrawals have been made, and
thus the 10% free partial withdrawal is available. 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 GNA 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 GNA uses may vary over the ten year period assumed in the table.
VARIABLE ANNUITY FIXED MGA ACCOUNT
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>
5% 3% 5% 7%
- --------------------- -------------------- ------------------- -----------------
End of Market Net Market Net Market Net
Certifi- Sub- Value With- Sub- Value With- Sub- Value With- Sub-
cate account Adjust- drawal account Adjust- drawal account Adjust- drawal account
Year Value ment Charge Value ment Charge Value ment Charge Value
---- ----- ---- ------ ----- ---- ------ ----- ---- ------ -----
<S> <C>
1 10,500 1,984 448 12,037 0 448 10,053 (1,640) 448 8,413
2 11,025 1,834 445 12,414 0 445 10,580 (1,545) 445 9,035
3 11,576 1,668 354 12,891 0 354 11,223 (1,432) 354 9,790
4 12,155 1,487 264 13,378 0 264 11,892 (1,301) 264 10,590
5 12,763 1,288 174 13,877 0 174 12,588 (1,149) 174 11,439
6 13,401 1,072 0 14,473 0 0 13,401 (974) 0 12,427
7 14,071 836 0 14,907 0 0 14,071 (774) 0 13,297
8 14,775 579 0 15,354 0 0 14,775 (547) 0 14,227
9 15,513 301 0 15,815 0 0 15,513 (290) 0 15,223
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:
<TABLE>
<S> <C>
(1) Market Value Adjustment Factor (MVAF) = (1 + Guaranteed Interest Rate) n/365 -1
----------------------------
1 + Current Interest Rate
</TABLE>
(2) Maximum Free Withdrawal Amount (MFW) = 10% of current Sub-account Value.
MFW is subject to MVA but not to withdrawal charge.
(3) Market Value Adjustment (MVA) = [(Sub-Account Value) x MVAF].
(4) Withdrawal Charge (WC) = [(Premium - MFW) x Withdrawal Charge Percent].
(5) Net Sub-Account Value = [(Sub-Account Value + MVA-WC)]
<PAGE>
FINANCIAL STATEMENTS
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Financial Statements:
Great Northern Insured Annuity Corporation and Subsidiaries
Independent Auditors'Report...............................................................
Consolidated Balance Sheets as of December 31, 1997 and 1996..............................
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995........................................................
Consolidated Statements of Shareholder's Interest for the
Years Ended December 31, 1997, 1996 and 1995 ...........................................
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 .................................................
Notes to Consolidated Financial Statements................................................
</TABLE>
<PAGE>
[KPMG PEAT MARWICK LETTERHEAD]
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, 1997 and 1996,
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,
1997. 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, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Richmond, Virginia
January 23, 1998
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(Dollar amounts in millions, except per share amounts)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Assets 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C>
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost of $4,903.2 in 1997
and $5,254.4 in 1996) $ 5,056.9 5,270.1
Mortgage loans, net of valuation allowance of $36.7 and $35.6
at December 31, 1997 and 1996, respectively 1,203.8 1,159.7
Real estate owned, net 4.1 -
Policy loans 3.3 3.3
Short-term investments 98.8 3.9
Other invested assets 256.0 161.7
- -------------------------------------------------------------------------------------------------------
Total investments 6,622.9 6,598.7
Cash 2.8 2.3
Accrued investment income 110.7 112.2
Deferred acquisition costs 97.7 129.6
Intangible assets 98.5 181.0
Deferred income taxes - 19.1
Other assets 109.6 44.4
Separate account assets 39.9 32.7
- --------------------------------------------------------------------------------------------------------
Total assets $ 7,082.1 7,120.0
========================================================================================================
Liabilities and Shareholder's Interest
- -------------------------------------------------------------------------------------------------------
Liabilities:
Future annuity and contract benefits $ 6,003.6 6,171.9
Other policyholder liabilities 18.7 48.1
Accounts payable and accrued expenses 215.1 177.4
Separate account liabilities 39.9 32.7
Deferred income tax liability 12.3 -
- -------------------------------------------------------------------------------------------------------
Total liabilities 6,289.6 6,430.1
- -------------------------------------------------------------------------------------------------------
Shareholder's interest:
Common stock, ($100 par value; 25,000 authorized, issued and
outstanding) 2.5 2.5
Additional paid-in capital 542.0 542.0
Net unrealized investment gains 38.3 7.0
Retained earnings 209.7 138.4
- -------------------------------------------------------------------------------------------------------
Total shareholder's interest 792.5 689.9
- -------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's interest $ 7,082.1 7,120.0
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1997 and 1996
(Dollar amounts in millions)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Revenues:
Net investment income $ 475.3 462.5 784.7
Net realized investment gains (losses) 19.7 3.1 (14.4)
Premiums 61.1 200.0 177.1
Policy fees and other income 8.3 8.1 16.7
- -------------------------------------------------------------------------------------------------------------------------------
Total revenues 564.4 673.7 964.1
- -------------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Interest credited 293.9 295.7 462.2
Benefits and other changes in policy reserves 97.7 230.9 311.2
Commissions 14.7 27.4 42.9
General expenses 26.9 36.5 71.2
Amortization of intangibles, net 32.6 33.9 57.5
Change in deferred acquisition costs, net (8.2) (26.7) (42.9)
- -------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 457.6 597.7 902.1
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 106.8 76.0 62.0
Provision for income taxes 35.5 24.9 24.5
- -------------------------------------------------------------------------------------------------------------------------------
Income before minority interest 71.3 51.1 37.5
Minority interest - - 11.2
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 71.3 51.1 26.3
===============================================================================================================================
</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, 1997, 1996 and 1995
(Dollar amounts in millions, except share amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized
Additional Investment Total
Paid-in Gains Retained Shareholder's
Shares Amount Capital (Losses) Earnings Interest
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balances at December 31, 1994 25,000 $ 2.5 719.4 (528.8) 72.3 265.4
Net income - - - - 26.3 26.3
Dividend of GE Capital Assurance - - (175.2) - (11.3) (186.5)
Purchase price adjustments - - (2.3) - - (2.3)
Net unrealized investment gains - - - 558.7 - 558.7
- ----------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 25,000 2.5 541.9 29.9 87.3 661.6
Net income - - - - 51.1 51.1
Purchase price adjustments - - 0.1 - - 0.1
Net unrealized investment losses - - - (22.9) - (22.9)
- ----------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 25,000 2.5 542.0 7.0 138.4 689.9
Net income - - - - 71.3 71.3
Net unrealized investment gains - - - 31.3 - 31.3
- ----------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 25,000 $ 2.5 542.0 38.3 209.7 792.5
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
(Dollar amounts in millions)
- --------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net income $ 71.3 51.1 26.3
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest - - 11.2
Increase in future policy benefits 355.3 496.7 636.7
Equity in earnings of GE Capital Life of New York (8.4) (7.6) (1.3)
Net realized investment gains (19.7) (3.1) 14.4
Amortization of investment premiums and discounts 9.9 27.7 61.4
Amortization of intangibles 32.6 33.9 57.5
Deferred income tax expense (benefit) 17.0 (10.4) 4.0
Change in certain assets and liabilities:
Decrease (increase) in:
Accrued investment income 1.5 (26.6) (6.5)
Deferred acquisition costs (8.2) (26.7) (42.9)
Other assets, net (66.1) (12.4) 12.6
Increase (decrease) in:
Other policy related balances (29.4) (25.5) (25.7)
Accounts payable and accrued expenses 37.7 73.3 24.1
- --------------------------------------------------------------------------------------------------------------
Total adjustments 322.2 519.3 745.5
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 393.5 570.4 771.8
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from investments in fixed maturities
and real estate 1,229.3 868.2 1,735.6
Principal collected on mortgage and policy loans 152.1 163.9 124.4
Purchases of fixed maturities (965.2) (1,199.5) (1,846.5)
Mortgage and policy loan originations (198.0) (42.3) (159.9)
Dividends received 7.2 7.5 7.1
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 225.4 (202.2) (139.3)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issue of investment contracts 263.9 415.6 810.3
Redemption and benefit payments on investment contracts (787.4) (807.6) (1,469.2)
Cash distributed in conjunction with dividend - - (31.5)
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (523.5) (392.0) (690.4)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 95.4 (23.8) (57.9)
===============================================================================================================
Cash and cash equivalents at beginning of year 6.2 30.0 87.9
===============================================================================================================
Cash and cash equivalents at end of year $ 101.6 6.2 30.0
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar amounts in millions)
==============================================================================
(1) Basis of Presentation, Principles of Consolidation and Summary of
Significant Accounting Policies
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 the reported amounts and related
disclosures. Actual results could differ from those estimates.
Principles of Consolidation
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).
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-
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(1) Continued
owned subsidiary of GNA Corporation. 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 share
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).
Products
The Company's operations are in one business segment, Wealth
Accumulation and Transfer. Wealth Accumulation and Transfer products
are investment vehicles and insurance contracts intended to increase
the policyholder's wealth, transfer wealth to beneficiaries or provide
a means for replacing the income of the insured in the event of
premature death. The Company's principal product lines under the Wealth
Accumulation and Transfer segment are deferred annuities (fixed and
variable) and immediate annuities.
The Company primarily sells its products through banks, thrifts and
other financial institutions.
Revenues
Investment income is recorded when earned. Investment gains and losses
are calculated on the basis of specific identification. Premiums on
short duration insurance contracts are reported as revenue over the
terms of the related insurance policies. In general, earned premiums
are calculated on a pro-rata basis or are recognized in proportion to
expected claims. Premiums on long-duration insurance products are
recognized as earned when
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(1) Continued
due or, in the case of life contingent immediate annuities, when the
contracts are issued. Premiums received under annuity contracts without
significant mortality risk and premiums received on universal life
products are not reported as revenues but as future annuity and
contract benefits. Other income consists primarily of surrender charges
on certain policies. Surrender charges are recognized as income when
the policy is surrendered.
Statements of Cash Flows
Certificates and other time deposits are classified as short-term
investments on the consolidated balance sheets and considered cash
equivalents in the consolidated statements of cash flows.
Investments
The Company has designated its fixed maturities (bonds, notes, and
redeemable preferred stock) as available-for-sale. The fair value for
fixed maturities is based on quoted market prices, where available. For
fixed maturities 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 credit quality,
call features and maturity of the investments, as applicable.
Changes in the market values of investments available-for-sale, net of
the effect on deferred policy acquisition costs, present value of
future profits and deferred federal income taxes, are reflected as
unrealized investment gains or losses in a separate component of
shareholder's interest and, accordingly, have no effect on net income.
Unrealized losses that are considered other than temporary are
recognized in earnings through an adjustment to the amortized cost
basis of the underlying securities.
Investment income on mortgage-backed securities is initially based upon
yield, cash flow and prepayment assumptions at the date of purchase.
Subsequent revisions in those assumptions are recorded using the
retrospective method, whereby the amortized cost of the securities is
adjusted to the amount that would have existed had the revised
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(1) Continued
assumptions been in place at the date of purchase. The adjustments to
amortized cost are recorded as a charge or credit to investment income.
The Company does not engage in derivatives trading, market-making or
other speculative activities. The Company requires all options to be
designated and accounted for as hedges of specific assets, liabilities
or committed transactions; resulting payments and receipts are
recognized contemporaneously with effects of hedged transactions. Any
instrument designated but ineffective as a hedge is marked to market
and recognized in operations immediately. A payment or receipt arising
from early termination of an effective hedge is accounted for as an
adjustment to the basis of the hedged transaction.
Mortgage and policy loans are stated at the unpaid principal balance of
such loans, net of allowances for estimated uncollectable amounts.
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.
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.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(1) Continued
Intangible Assets
Present Value of Future Profits - In conjunction with the acquisitions
of life insurance subsidiaries, a portion of the purchase price is
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), represents the
actuarially determined present value of the projected future cash flows
from the acquired policies.
Goodwill - Goodwill is amortized over its estimated period of benefit
on the straight-line method. No amortization period exceeds 25 years.
Goodwill in excess of associated expected operating cash flows is
considered to be impaired and is written down to fair value.
Federal Income Taxes
The Company is included with GE Capital Assurance in a life insurance
consolidated federal income tax return. 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.
Future Annuity and Contract Benefits
Future annuity and contract benefits consists of the liability for life
insurance policies and immediate and deferred annuity contracts.
Depending on the type of contract, these are calculated based upon
actuarial assumptions as to mortality, morbidity, interest, expense and
withdrawals, with experience adjustments for adverse deviation where
appropriate.
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 charges from
the variable mutual fund portfolios. The separate account assets are
carried at fair value and are equivalent to the liabilities that
represent the policyholders' equity in those assets.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(1) Continued
Reclassifications
Certain reclassifications may have been made to the prior year's
financial statements to conform to the current year's presentation.
These reclassifications have no effect on reported net income of
financial position.
(2) Investments
General
For the years ended December 31, the sources of investment income of
the Company were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Fixed maturities $ 369.6 353.0 662.9
Mortgage loans 97.8 102.8 122.3
GE Capital Life of New York equity method income 8.4 7.6 1.3
Other 3.4 2.4 4.9
- -------------------------------------------------------------------------------------------------------------
Gross investment income 479.2 465.8 791.4
Investment expenses (3.9) (3.3) (6.7)
- -------------------------------------------------------------------------------------------------------------
Net investment income $ 475.3 462.5 784.7
=============================================================================================================
</TABLE>
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
(2) Continued
For the years ended December 31, sales proceeds and gross realized
investment gains and losses resulting from the sales of investment
securities available-for-sale were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Sales proceeds $ 349.4 192.8 998.9
Gross realized investment:
Gains 24.1 8.1 16.6
Losses (4.4) (5.0) (31.0)
- ------------------------------------------------------------------------------------------------------------
Net realized investment gains (losses) $ 19.7 3.1 (14.4)
============================================================================================================
</TABLE>
The additional proceeds from investments presented in the statements of
cash flows result from principal collected on mortgage-backed
securities, maturities, calls and sinking payments.
Net unrealized gains and losses on investment securities classified as
available-for-sale are reduced by deferred income taxes and adjustments
to the present value of future profits and deferred acquisition costs
that would have resulted had such gains and losses been realized. Net
unrealized gains and losses on available-for-sale investment securities
reflected as a separate component of shareholder's interest are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Net unrealized gains on available-for-sale investment securities before
adjustments:
Fixed maturities $ 153.7 15.7
Other invested assets 3.5 5.4
- -----------------------------------------------------------------------------------------------------------
Sub-total 157.2 21.1
Adjustments to the present value of future profits and deferred
acquisition costs (100.1) (10.0)
Deferred income taxes (18.8) (4.1)
- -----------------------------------------------------------------------------------------------------------
Net unrealized gains on available-for-sale investment securities $ 38.3 7.0
===========================================================================================================
</TABLE>
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(2) Continued
At December 31, the amortized cost, gross unrealized gains and losses,
and fair values of the Company's fixed maturities available-for-sale
were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
1997 cost gains losses value
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Fixed maturities:
U.S. government and agency $ 78.5 10.8 - 89.3
Non-U.S. corporate 184.1 12.1 (0.9) 195.3
U.S. corporate 2,826.9 97.6 (5.9) 2,918.6
Mortgage-backed 1,813.7 48.7 (8.7) 1,853.7
- -------------------------------------------------------------------------------------------------------------
Total fixed maturities $ 4,903.2 169.2 (15.5) 5,056.9
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
1996 cost gains losses value
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Fixed maturities:
U.S. government and agency $ 144.5 9.9 (1.4) 153.0
Non-U.S. corporate 200.9 6.7 (1.5) 206.1
U.S. corporate 3,065.0 10.1 (28.0) 3,047.1
Mortgage-backed 1,844.0 36.5 (16.6) 1,863.9
- -------------------------------------------------------------------------------------------------------------
Total fixed maturities $ 5,254.4 63.2 (47.5) 5,270.1
==============================================================================================================
</TABLE>
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(2) Continued
The scheduled maturity distribution of the fixed maturities portfolio
at December 31 follows. Expected maturities may differ from scheduled
contractual maturities because issuers of securities may have the right
to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
1997
--------------------------
Amortized Fair
cost value
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Due in one year or less $ 396.4 398.5
Due one year through five years 1,475.0 1,501.7
Due five years through ten years 569.2 592.3
Due after ten years 648.9 710.7
- ----------------------------------------------------------------------------------------------------------
Subtotals 3,089.5 3,203.2
Mortgage-backed securities 1,813.7 1,853.7
- ----------------------------------------------------------------------------------------------------------
Totals $ 4,903.2 5,056.9
==========================================================================================================
</TABLE>
As required by law, the Company has investments on deposit with
governmental authorities and banks for the protection of policyholders
of $3.5 and $3.0 to December 31, 1997 and 1996, respectively.
At December 31, 1997, approximately 23.5% and 15.3% of the Company's
investment portfolio is comprised of securities issued by the
manufacturing and financial industries, respectively, the vast majority
of which are rated investment grade, and which are senior secured
bonds. No other industry group comprises more than 10% of the Company's
investment portfolio. 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.
At December 31, 1997, 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.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(2) Continued
The credit quality of the fixed maturity portfolio at December 31
follows. The categories are based on the higher of the ratings
published by Standard & Poors or Moody's.
<TABLE>
<CAPTION>
1997 1996
------------------------ ---------------------
Fair Fair
value Percent value Percent
- --------------------------------------------------------------------------------------------------------
<S> <C>
Agencies and treasuries $ 1,207.0 23.9% $ 1,400.5 26.6%
AAA/Aaa 612.3 12.1 476.7 9.0
AA/Aa 317.1 6.3 284.6 5.4
A/A 1,162.4 23.0 1,412.7 26.8
BBB/Baa 1,262.7 25.0 1,275.1 24.2
BB/Ba 36.9 0.7 40.7 0.8
B/B 3.1 0.1 - -
Not rated 455.4 8.9 379.8 7.2
- --------------------------------------------------------------------------------------------------------
Totals $ 5,056.9 100.0% $ 5,270.1 100.0%
- --------------------------------------------------------------------------------------------------------
</TABLE>
Bonds with ratings ranging from AAA/Aaa to BBB-/Baa3 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, 1997, there were no fixed maturities in default as to
principal and interest.
Mortgage Loans
At December 31, 1997 and 1996, the Company's mortgage loan portfolio
consisted of 989 and 1,044, 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.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
(2) Continued
At December 31, 1997 and 1996, respectively, the Company held $451.1
and $449.0 in mortgages secured by real estate in California,
comprising 36% and 38% of the respective total mortgage portfolio. For
the years ended December 31, 1997, 1996 and 1995, respectively, the
Company originated $79.7, $12.5 and $18.5 of mortgages secured by real
estate in California, which represent 40%, 29% and 13% of the
respective total origination's for those years.
"Impaired" loans are defined under generally accepted accounting
principles as loans for which it is probable that the lender will be
unable to collect all amounts due according to 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 the Company's commercial loans.
Under these principles, the Company has two types of "impaired" loans
as of December 31, 1997 and 1996: loans requiring allowances for losses
($0 and $1.7, respectively) and loans expected to be fully recoverable
because the carrying amount has been reduced previously through
charge-offs or deferral of income recognition ($6.1 and $12.6,
respectively). Allowance for losses on these loans as of December 31,
1997 and 1996 were $0 and $.8, respectively. Average investment in
impaired loans during 1997, 1996 and 1995 was $8.9, $15.6 and $11.3
respectively and interest income earned on these loans while they were
considered impaired was $.7, $.7 and $1.3, respectively.
The following table shows the activity in the allowance for losses
during the years ended December 31:
1997 1996 1995
- ------------------------------------------------------------------------
Balance at January 1 $ 35.6 35.3 32.0
Dividend of GE Capital Assurance - - (0.3)
Provision charged to operations 2.3 2.5 2.8
Amounts written off, net of recoveries (1.2) (2.2) 0.8
- ------------------------------------------------------------------------
Balance at December 31 $ 36.7 35.6 35.3
========================================================================
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(2) Continued
The write-offs represented .09%, 0.18% and 0.15% of average
mortgage loans outstanding during 1997, 1996 and 1995, respectively.
The allowance for losses on mortgage loans at December 31, 1997 and
1996 represented 3.0% and 3.1% of gross mortgage loans, respectively.
Investment in GE Capital Life of New York
A portion of other invested assets at December 31, 1997 and 1996
included $126.3 and $121.0, respectively, for the Company's 48%
investment in GE Capital Life of New York, accounted for under the
equity method. Investment income for 1997 and 1996 includes $8.4 and
$7.6 for equity in earnings of GE Capital Life of New York
respectively. 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:
1997 1996 1995
- --------------------------------------------------------------------------
Total revenue $ 164.4 163.3 102.0
Total expenses 135.4 137.6 84.1
- --------------------------------------------------------------------------
Income before income taxes 29.0 25.7 17.9
Provision for income taxes 11.5 9.8 8.4
- --------------------------------------------------------------------------
Net income $ 17.5 15.9 9.5
==========================================================================
Total investments $ 1,667.6 1,554.1 1,491.6
Other assets 139.9 154.9 100.1
- --------------------------------------------------------------------------
Total assets $ 1,807.5 1,709.0 1,591.7
==========================================================================
Total liabilities $ 1,547.2 1,459.8 1,334.9
Shareholder's interest 260.3 249.2 256.8
- --------------------------------------------------------------------------
Total liabilities and
shareholder's interest $ 1,807.5 1,709.0 1,591.7
- --------------------------------------------------------------------------
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(3) Deferred Acquisition Costs
Activity impacting deferred acquisition costs for the years ended
December 31, was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Unamortized balance at January 1 $ 133.2 106.5 90.2
Dividend of GE Capital Assurance - - (26.6)
Costs deferred 18.4 36.0 53.0
Amortization, net (10.2) (9.3) (10.1)
- -----------------------------------------------------------------------------------------------------------
Unamortized balance at December 31 141.4 133.2 106.5
Cumulative effect of net unrealized investment gains (43.7) (3.6) (17.7)
- -----------------------------------------------------------------------------------------------------------
Recorded balance $ 97.7 129.6 88.8
============================================================================================================
</TABLE>
(4) Intangible Assets
Present Value of Future Profits (PVFP)
The method used by the Company to value PVFP in connection with
acquisitions of life insurance entities 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 must earn in order to accept the inherent risks.
After PVFP is determined, the amount is amortized, net of accreted
interest in a manner similar to the amortization of deferred
acquisition cost. Interest accretes at rates credited to policyholders
on underlying contracts. As actual results vary from projected amounts,
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 balance. If such comparison indicates that the expected gross
profits will not be sufficient to recover PVFP, the difference is
charged to expense.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(4) Continued
The following table presents the activity in PVFP for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Unamortized balance at January 1 $ 155.1 187.5 313.9
Dividend of GE Capital Assurance - - (74.0)
Interest accrued at 5.2% in 1997, 5.4% in 1996 and 4.8% in 1995 7.1 10.0 15.4
Amortization (38.1) (42.4) (67.8)
- ----------------------------------------------------------------------------------------------------------
Unamortized balance at December 31 124.1 155.1 187.5
Cumulative effect of net unrealized investment gains (56.4) (6.4) (65.1)
- ----------------------------------------------------------------------------------------------------------
Recorded balance $ 67.7 148.7 122.4
===========================================================================================================
</TABLE>
The estimated percentage of the December 31, 1997 balance, before the
effect of unrealized investment gains or losses, to be amortized over
each of the next five years is as follows:
1998 20%
1999 16
2000 13
2001 11
2002 9
Goodwill
At December 31, 1997 and 1996, total unamortized goodwill was $29.7 and
$31.2, respectively, which is shown net of accumulated amortization of
$6.9 and $5.5, respectively. Goodwill amortization was $1.5, $1.5 and
$4.8 for the years ended December 31, 1997, 1996 and 1995,
respectively.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(5) Future Annuity and Contract Benefits
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 contracts are recognized by providing
a liability equal to the current account value of the policyholder's
contracts. Interest rates credited to investment contracts are
guaranteed for the initial policy term with renewal rates determined as
necessary by management. At December 31, 1997 and 1996, investment and
universal life contracts comprised $5,435.8 and $5,660.9, respectively.
Insurance Contracts
Insurance contracts are broadly defined to include contracts with
significant mortality and/or morbidity risk. The liability for future
benefits of insurance contracts is the present value of such benefits
based on mortality, morbidity, and other assumptions which were
appropriate at the time the policies were issued or acquired. These
assumptions are periodically evaluated for potential premium
deficiencies. At December 31, 1997 and 1996, insurance contracts
comprised $567.8 and $511.0, respectively.
Interest rate assumptions used in calculating the present value of
future annuity and contract benefits range from 5.8% to 9.9%.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(6) Income Taxes
The total provision for income taxes for the years ended December 31
consisted of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Current federal income tax provision $ 17.2 34.3 19.5
Deferred federal income tax provision (benefit) 17.3 (10.1) 3.9
- ------------------------------------------------------------------------------------------------------------
Subtotal federal provision 34.5 24.2 23.4
Current state income tax provision 1.3 1.0 1.0
Deferred state income tax provision (benefit) (0.3) (0.3) 0.1
- ------------------------------------------------------------------------------------------------------------
Subtotal state provision 1.0 0.7 1.1
- ------------------------------------------------------------------------------------------------------------
Total income tax provision $ 35.5 24.9 24.5
=============================================================================================================
</TABLE>
The reconciliation of the federal statutory tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<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 (2.8) (3.5) (0.7)
State income tax 0.6 0.6 1.2
Goodwill amortization 0.5 0.7 2.7
Other, net (0.1) - 1.3
- ----------------------------------------------------------------------------------------------------------
Effective rate 33.2% 32.8% 39.5%
===========================================================================================================
</TABLE>
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(6) Continued
The components of the net deferred income tax benefit at December 31
are as follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Future annuity and contract benefits $ 68.7 68.2
Guaranty association assessments 11.7 14.1
Mortgage loans and real estate owned - 6.2
Other 1.0 0.7
- -----------------------------------------------------------------------------------------------------------
Total deferred tax assets 81.4 89.2
- -----------------------------------------------------------------------------------------------------------
Liabilities:
Net unrealized gains on investment securities (18.8) (4.1)
Investments (3.1) (2.0)
Present value of future profits (35.7) (45.2)
Deferred acquisition costs (22.5) (16.4)
Other (13.6) (2.4)
- -----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (93.7) (70.1)
- -----------------------------------------------------------------------------------------------------------
Net deferred income tax benefit (liability) $ (12.3) 19.1
============================================================================================================
</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
implementation of tax planning strategies will generate sufficient
taxable income enabling the Company to realize remaining deferred tax
assets. Accordingly, no valuation allowance for deferred tax assets was
deemed necessary.
The Company paid $25.4, $50.4 and $1.7, for federal and state income
taxes during the years 1997, 1996 and 1995, respectively.
(7) Related Party Transactions
During the years ended December 31, 1997, 1996 and 1995, the Company
recognized $3.4, $3.4 and $1.6, respectively, from its affiliates,
Capital Brokerage Corporation (formerly known as GNA Securities, Inc.)
and GNA Distributors, Inc. for reimbursement of marketing,
administrative and general office expenses.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(7) Continued
During the years ended December 31, 1997, 1996 and 1995, the Company
received a dividend from GE Capital Life of New York of $7.2, $7.5 and
$7.1, respectively.
(8) Commitments and Contingencies
Mortgage Loan Commitments
As of December 31, 1997 and 1996, the Company was committed to fund
$94.8 and $27.7, respectively, in mortgage loans.
Guaranty Association Assessments
The Company's insurance subsidiaries are required by law to participate
in the guaranty associations of the various states in which they do
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 unrelated insurance companies which had
substantial amounts of annuity business in the process of liquidation
or rehabilitation. The Company's insurance subsidiaries paid
assessments of $5.4, $3.9 and $6.6 to various state guaranty
associations during the years 1997, 1996 and 1995, respectively. At
December 31, 1997 and 1996, accounts payable and accrued expenses
include $28.9 and $34.4, respectively, related to estimated future
assessments.
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
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
(9) Fair Value of Financial Instruments
On December 31, 1995, the Company adopted SFAS No. 119, Disclosures
About Derivative Financial Instruments and Fair Value of Financial
Instruments. This statement requires disclosures about the amounts,
nature and terms of derivative financial instruments and modifies
existing disclosure requirements for other financial instruments.
The Company has no derivative financial instruments as defined by SFAS
No. 119 at December 31, 1997, other than mortgage loan commitments of
$94.8.
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 valuation methodologies considered appropriate by
management. 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 fixed maturities, accrued investment income and certain
other invested assets. The carrying value of policy loans and
short-term investments approximates fair value at December 31, 1997 and
1996, respectively.
At December 31, the carrying amounts and fair values of the Company's
remaining financial instruments were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Financial Instruments amount value amount value
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Mortgage loans $ 1,203.8 1,268.6 1,159.7 1,171.2
Investment contracts $ 5,315.3 5,194.3 5,504.0 5,364.5
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(9) Continued
The fair value of mortgage loans is estimated by discounting the
estimated future cash flows using interest rates applicable to current
loan origination, 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.
(10) Restrictions on Dividends
Insurance companies are restricted by states as to the aggregate amount
of dividends they may pay to their parent in any consecutive twelve
month period without regulatory approval. Generally, dividends may be
paid out of earned surplus without approval with thirty days prior
written notice within certain limits. The limits are generally based on
10% of the prior year surplus (net of adjustments in some cases) and
prior year statutory income (net gain from operations, net income
adjusted for realized capital gains, or net investment income).
Dividends in excess of the prescribed limits or the company's earned
surplus are deemed extraordinary and require formal state insurance
commission approval. Based on statutory results as of December 31,
1997, the Company is able to pay $73.7 in dividends in 1998 without
obtaining regulatory approval.
(11) Supplementary Financial Data
The Company's insurance subsidiaries file financial statements with
state insurance regulatory authorities and the National Association of
Insurance Commissioners (NAIC) that are prepared on an accounting basis
prescribed by such authorities (statutory basis). Statutory accounting
practices differ from generally accepted accounting principles (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 allowed by state insurance authorities. The Company's
insurance subsidiaries have no significant permitted accounting
practices.
Combined statutory net income for the Company's insurance
subsidiaries for the years ended December 31, 1997, 1996 and 1995 was
$73.0, $65.4 and $76.7 , respectively. The
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
================================================================================
(11) Continued
combined statutory capital and surplus as of December 31, 1997
and 1996 was $496.5 and $411.2, 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
designated 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 operations, the Company periodically monitors
the RBC level of each of its insurance subsidiaries. At December 31,
1997 and 1996, each of the Company's insurance subsidiaries exceeded
the minimum required RBC levels.
<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:
<TABLE>
<CAPTION>
Amount
<S> <C>
Securities and Exchange Commission
Registration Fee $ 17,241
Printing and Engraving 156,500
Accounting fees and expenses 35,300
--------
Legal fees and expenses 50,600
--------
Total Expenses $259,641
</TABLE>
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.
Item 16. Financial Statements and Exhibits.
(a) Exhibits
<PAGE>
1.1 Underwriting Agreement between Great Northern Insured
Annuity Corporation and GNA Distributors, Inc. Incorporated
by reference to Exhibit (3)(i) to registration statement
under the Securities Act of 1933 of GNA Variable Investment
Account, File No. 33-78810, filed May 11, 1994.
3.1 Articles of Incorporation of Great Northern Insured
Annuity Corporation. Incorporated herein by reference to
Exhibit 3.1 to the registration statement under the
Securities Act of 1933 of Great Northern Insured Annuity
Corporation, File No. 33-62674, filed May 14, 1993.
3.2 By-laws of Great Northern Insured Annuity Corporation.
Incorporated herein by reference to Exhibit 3.2 to the
registration statement under the Securities Act of 1933 of
Great Northern Insured Annuity Corporation, File No.
33-62674, filed May 14, 1993.
4.1 Specimen Group Deferred Variable Annuity and Modified
Guaranteed Annuity Contract. Incorporated herein by
reference to Exhibit (4)(i) to the registration statement
on Form N-4 of GNA Variable Investment Account, File No.
33-78810, filed September 15, 1994.
4.2 Specimen Certificate under Group Deferred Variable
Annuity and Modified Guaranteed Annuity Contract.
Incorporated herein by reference to Exhibit (4)(ii) to the
registration statement on Form N- 4 of GNA Variable
Investment Account, File No. 33-78810, filed September 15,
1994.
4.3 Endorsements to Contracts or Certificates. Incorporated
herein by reference to Exhibit (4)(iii) to registration
statement on Form N-4 of GNA Variable Investment Account,
File No. 33-78810, filed May 11, 1994.
4.4 Application for Group Deferred Variable Annuity and
Modified Guaranteed Annuity Contract. Incorporated herein
by reference to Exhibit (5)(i) to registration statement on
Form N-4 of GNA Variable Investment Account, File No.
33-78810, filed May 11, 1994.
4.5 Application for Certificate under Group Deferred
Variable Annuity and Modified Guaranteed Annuity Contract.
Incorporated herein by reference to Exhibit (5)(ii) to
registration statement on Form N- 4 of GNA Variable
Investment Account, File No. 33-78810, filed May 11, 1994.
5. Opinion and Consent of J. Neil McMurdie, Esq., Associate
Counsel and Assistant Vice President.
10. Service Agreement between Great Northern Insured
Annuity Corporation and Delaware Valley Financial Services,
Inc. Incorporated herein by reference to Exhibit (8) to
registration statement on Form N-4 of GNA Variable
Investment Account, File No. 33-78810, filed September 15,
1994.
<PAGE>
24.1 Consent of KPMG Peat Marwick LLP.
27. Financial Data Schedule
(b) Financial Statement Schedules.
See Financial Statements in Prospectus.
Item 17. Undertakings.
(a) Rule 415 Offering.
Previously furnished.
(b) Indemnification.
Previously furnished.
<PAGE>
EXHIBITS
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
<S> <C>
1.1 Underwriting Agreement between Great Northern Incorporated herein by reference to Exhibit
Insured Annuity Corporation and GNA (3)(i) to registration statement under the
Distributors, Inc. Securities Act of 1933 of GNA Variable
Investment Account, File No. 33-78810 filed May
11, 1994.
3.1 Articles of Incorporation of Great Northern Incorporated herein by reference to Exhibit 3.1
Insured Annuity Corporation. to registration statement under the Securities
Act of 1933 of Great Northern Insured Annuity
Corporation, File No. 33-62674 filed May 14,
1993.
3.2 By-laws of Great Northern Insured Annuity Incorporated herein by reference to Exhibit 3.2
Corporation. to registration statement under the Securities
Act of 1933 of Great Northern Insured Annuity
Corporation, File No. 33-62674 filed May 14,
1993.
4.1 Specimen Group Deferred Variable Annuity and Incorporated herein by reference to Exhibit
Modified Guaranteed Annuity Contract. (4)(i) to registration statement on Form N-4 of
GNA Variable Investment Account, File No.
33-78810 filed September 15, 1994.
4.2 Specimen Certificate under Group Deferred Incorporated herein by reference to Exhibit
Variable Annuity and Modified Guaranteed Annuity (4)(iii) to registration statement on Form N-4
Contract. of GNA Variable Investment Account, File No.
33-78810 filed September 15, 1994.
4.3 Endorsements to Contracts or Certificates. Incorporated herein by reference to Exhibit
(4)(ii) to registration statement on Form N-4
of GNA Variable Investment Account, File No.
33-78810 filed May 11, 1994.
4.4 Application for Group Deferred Variable Annuity Incorporated herein by reference to Exhibit
and Modified Guaranteed Annuity Contract. (5)(i) to registration statement on Form N-4 of
GNA Variable Investment Account, File No.
33-78810 filed May 11, 1994.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
<S> <C>
4.5 Application for Certificate under Group Deferred Incorporated herein by reference to Exhibit
Variable Annuity and Modified Guaranteed Annuity (5)(ii) to registration statement on Form N-4
Contract. of GNA Variable Investment Account, File No.
33-78810 filed May 11, 1994.
5. Opinion and consent of J. Neil McMurdie, Esq.,
Associate Counsel and Assistant Vice President.
10. Service Agreement between Great Northern Insured Incorporated herein by reference to Exhibit (8)
Annuity Corporation and Delaware Valley to registration statement on Form N-4 of GNA
Financial Services, Inc. Variable Investment Account, File No. 33-78812
filed September 15, 1994.
24.1 Written consent of KPMG Peat Marwick LLP.
27. Financial Data Schedule
</TABLE>
EXHIBIT 5
Opinion and Consent of J. Neil McMurdie, Esq.
Associate Counsel and Assistant Vice President.
<PAGE>
April 12, 1998
Board of Directors
Great Northern Insured Annuity Corporation
6604 West Broad Street
Richmond, VA 23230
Re: GNA Variable Investment Account
Registration Statements on Form N-4 and S-1
File Nos. 33-78810 and 33-78812
Gentlemen:
I have acted as counsel to the Company in connection with the filing with the
Securities and Exchange Commission of Post-Effective Amendments No. 5 to the
above-referenced Registration Statements on Form N-4 and Form S-1 for the Group
and Individual Deferred Variable Annuity and Modified Guaranteed Annuity
Contracts (the "Contracts") to be issued by the Company and its separate
account, GNA Variable Investment Account. 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. Great Northern Insured Annuity Corporation is a duly organized,
validly existing stock life insurance company of the state of
Washington.
2. GNA Variable Investment Account is a separate investment account of
Great Northern Insured Annuity Corporation duly created and validly
existing pursuant to the Washington insurance laws and regulations
thereunder.
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 prospectuses contained in the Registration
Statements, and upon compliance with applicable law, such contracts
will be legally issued and binding obligations of the Company in
accordance with their terms.
4. The portion of the assets to be held in the GNA Variable Investment
Account equal to the reserves and other liabilities under contracts
participating therein is not chargeable with liabilities arising out
of any other business the Company may conduct.
I hereby consent to the use of this letter, or a copy hereof, as an exhibit to
the Registration Statements, and the reference to me under the caption "Legal
Matters" in the prospectuses contained in the registration statements.
Very truly yours,
J. Neil McMurdie
Associate Counsel
and Assistant Vice President
EXHIBIT 24.1
Written Consent of KPMG Peat Marwick LLP
Consent of Independent Auditors
The Board of Directors
Great Northern Insured Annuity Corporation:
We consent to the use of our reports for Great Northern Insured Annuity
Corporation included herein and GNA Variable Investment Account included in the
Statement of Additional Information incorporated herein by reference.
(post-effective amendment no. 5 to Form S-1 of registration no. 33-78812) and to
the references to our firm under the caption "Experts" in the prospectus.
KPMG Peat Marwick LLP
Richmond, Virginia
April 24, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GREAT NORTHERN INSURED ANNUITY CORPORATION FORM 10-K AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 5,056
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 1,204
<REAL-ESTATE> 0
<TOTAL-INVEST> 6,623
<CASH> 0
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 98
<TOTAL-ASSETS> 7,082
<POLICY-LOSSES> 6,004
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 19
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 3
<OTHER-SE> 790
<TOTAL-LIABILITY-AND-EQUITY> 7,082
61
<INVESTMENT-INCOME> 475
<INVESTMENT-GAINS> 20
<OTHER-INCOME> 8
<BENEFITS> 36
<UNDERWRITING-AMORTIZATION> (8)
<UNDERWRITING-OTHER> 42
<INCOME-PRETAX> 107
<INCOME-TAX> 36
<INCOME-CONTINUING> 71
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
