Registration No. 33-62674
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
POST-EFFECTIVE AMENDMENT NO. 6
TO
FORM S-1
REGISTRATION STATEMENT
under
the Securities Act of 1933
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Great Northern Insured Annuity Corporation
(Exact name of registrant as specified in its charter)
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Washington 91-1127115 6312
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer (Primary Standard Industrial
Identification Number) Classification Code Number)
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6604 West Broad Street
Richmond, Virginia 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, VA 23230
(804) 281-6000
(Name, address and telephone number of agent for service)
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GREAT NORTHERN INSURED ANNUITY CORPORATION
CROSS REFERENCE SHEET
Pursuant to Regulation S-K, Item 501(b)
Form S-1
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Item No. Form S-1 Caption Location in the Prospectus
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1. Forepart of the Registration Statement
and Outside Front Cover Page of Prospectus. Outside Front Cover Page
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
Securities Act Liabilities. Not Applicable
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<PAGE>
GREAT NORTHERN INSURED
ANNUITY CORPORATION
6604 West Broad Street
Richmond, VA 23230
(804) 281-6000
Group and Individual Modified
Guaranteed Annuity Contracts
with Guaranteed Interest Rates
for Periods of from One to Ten Years
The Contract described in this Prospectus is designed to provide annuity
payments in connection with retirement plans that do not qualify for special
federal income tax treatment under the Internal Revenue Code or certain plans
that qualify for special income tax treatment, such as Individual Retirement
Accounts or Annuities or Tax-Sheltered Annuities.
In most states the Contract offered by this Prospectus is a group
Contract. The group Contract may 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, however, continue to direct the reinvestment of
accumulated value at the end of any Guarantee Period subject to the limitations
described in this Prospectus.
The Contract permits Participants under the Contract to make
single premium payments to be accumulated at a guaranteed rate or rates of
interest depending upon the Guarantee Period or Periods selected by the
Participant. A certificate of participation was issued for each single premium.
Guarantee Periods range from one to ten years. At the end of any Guarantee
Period the accumulated value is reinvested for one or more new Guarantee Periods
at the current interest rates then offered by us.
A withdrawal made prior to the end of a Guarantee Period will be subject
to a market value adjustment, which could have the effect of either increasing
or decreasing the Participant's values, and may be subject to a withdrawal
charge. (See "Market Value Adjustment" and "Withdrawal Charge" under
"Description of the Contract.")
THESE SECURITIES ARE NOT DEPOSITS WITH, OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK OR ANY AFFILIATE THEREOF, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY.
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.
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TABLE OF CONTENTS
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Table of Contents....................................................................
Definitions
Summary of the Contract..............................................................
Great Northern Insured Annuity Corporation...........................................
Description of the Contracts ........................................................
General......................................................................
Premiums.....................................................................
Selecting the Guarantee Period...............................................
Sub-Account and Annuity Values...............................................
Sub-Account Transfers........................................................
Fixing Guaranteed Interest Rates.............................................
Withdrawals..................................................................
Market Value Adjustment......................................................
Withdrawal Charge............................................................
First Withdrawal During Certificate Year.....................................
Payment on Death.............................................................
Annuity Provisions...........................................................
Other Provisions.............................................................
Investments Supporting the Contracts.................................................
Distribution of the Contracts........................................................
Federal Income Taxes.................................................................
More Information About GNA...........................................................
History and Business.........................................................
Selected Financial Data......................................................
Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................
Reserves.....................................................................
Investments..................................................................
Competition..................................................................
Government Regulation........................................................
Year 2000 ...................................................................
New Accounting Standards ....................................................
Executive Officers and Directors.....................................................
Executive Compensation.......................................................
Legal Proceedings....................................................................
Legal Matters........................................................................
Experts
Registration Statement...............................................................
Appendix
Financial Statements.................................................................
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No person has been authorized to give any information or to make any
representation other than that contained in this Prospectus in connection with
the offer contained in this Prospectus and, if given or made, such information
or representation must not be relied upon as having been authorized. This
Prospectus does not constitute an offer of, or solicitation of an offer to
acquire, any Contracts or interests therein offered by this Prospectus in any
jurisdiction to anyone to whom it is unlawful to make such an offer or
solicitation in such jurisdiction.
Each participant will be furnished at least once each year prior to his
or her Annuity Date a statement showing his or her Annuity Value, Sub-Account
Values and current interest rates. The statement will not include financial
statements.
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DEFINITIONS
Annuity Value--The sum of all Sub-Account Values.
Annuitant--The person whose age determines the Annuity Date and upon
whose continuation of life annuity payments may depend. The Participant is the
Annuitant unless another person is named.
Annuity Date--The date on which annuity payments are to start.
Annuity--A series of predetermined periodic payments.
Beneficiary--The person to whom payment is to be made on the death of
the Participant (or other appropriate individual).
Certificate*--Under a group Contract, an individual certificate of
participation issued by GNA to each Participant as evidence of his or her rights
and benefits under the Contract.
Certificate Anniversary*--Each anniversary of the Effective Date.
Certificate Year*--The year starting on the Certificate date or a
Certificate Anniversary and ending on the day just prior to the next Certificate
Anniversary.
Contract--The group or individual contract described in this Prospectus.
Effective Date--The date on which a premium is credited by GNA as set
forth on the Certificate.
Guarantee Period--The period of years for which a rate of interest is
guaranteed to be credited to a Sub-Account.
Net Annuity Value--The sum of all Net Sub-Account Values.
Net Sub-Account Value--The Sub-Account Value after adjustment for any
current market value adjustment and withdrawal charge.
Nonqualified Certificate*--A Certificate issued in connection with a
Nonqualified Plan.
Nonqualified Plan--A retirement plan not eligible for favorable tax
treatment under Section 401, 403, 408 or 457 of the Internal Revenue Code.
Participant*--The individual participating under the Contract to whom a
Certificate has been issued.
Qualified Certificate*--A Certificate issued in connection with a
retirement plan that receives favorable tax treatment under Section 403(b) or
408 of the Internal Revenue Code.
Qualified Plan--A retirement plan that receives favorable tax treatment
under Section 401, 403, 408 or 457 of the Internal Revenue Code.
Sub-Account--An account maintained for a Participant corresponding to a
specified interest rate and Guarantee Period selected by the Participant.
Sub-Account Value--An amount equal to that part of a single premium
allocated by a Participant to a Sub-Account, or any reinvestment in a
Sub-Account, less any applicable premium tax previously deducted, plus credited
interest, and minus any prior withdrawals.
*In the case of an individual Contract, unless the context otherwise requires,
the words "Certificate," "Certificate Anniversary," "Certificate Year,"
"Nonqualified Certificate" and "Qualified Certificate" mean respectively
"Contract," "Contract Anniversary," "Contract Year," "Nonqualified Contract" and
"Qualified Contract," and the word "Participant" means "Owner."
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SUMMARY OF THE CONTRACT
"You" refers to the Participant under a group Contract and the Owner of
an individual Contract. The Participant is entitled (unless otherwise provided)
to exercise all rights summarized in a certificate of participation
("Certificate") issued under the group Contract. "We," "us," "GNA" or the
"Company" refers to Great Northern Insured Annuity Corporation.
The Contract
This Prospectus describes the Group and Individual Modified Guaranteed
Annuity Contract ("Contract") issued by GNA. The group Contract was designed for
purchase by any employer, entity or other organized group acceptable to us. The
group Contract is an allocated contract, which means that specific accounts are
maintained for each Participant. Under a group Contract, a Certificate was
issued to each 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 could have been
purchased by any person or entity acceptable to us.
The Contract may have been issued pursuant to nonqualified retirement
plans or plans qualifying for special tax treatment, such as Individual
Retirement Annuities or Accounts or Tax-Sheltered Annuities. Certificates may
have been issued to trustees of trusts established for other Qualified Plans.
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, however, continue to direct the reinvestment of accumulated
value at the end of any Guarantee Period subject to the limitations described in
this Prospectus.
The Sub-Accounts
One or more Sub-Accounts are maintained for each Participant. A
Sub-Account is established for each specified interest rate and Guarantee
Period. A Guarantee Period is the period of years for which a rate of interest
is guaranteed. Currently, you may select Guarantee Periods from one to ten
years. We may, at our discretion, offer additional Guarantee Periods.
At the end of a Guarantee Period, your Sub-Account Value for that
Guarantee Period will be transferred to one or more Sub-Accounts that you
specify, except that you may not select (i) a Sub-Account with a Guarantee
Period that would end after the Annuity Date and (ii) if you are, or a
non-spouse Joint Participant (or, if you are not a living person, any Annuitant)
is, age 87 or older, a Sub-Account with a Guarantee Period longer than 3 years.
If we receive no notice from you, the Sub-Account Value will be automatically
transferred to a Sub-Account with a one-year Guarantee Period, unless you have
previously elected either (i) to have the Sub-Account Value automatically
transferred to a Sub-Account with the longest Guarantee Period in which you have
Sub-Account Values currently invested or (ii) to have the Sub-Account Value
automatically transferred to a Sub-Account with the same Guarantee Period as the
Sub-Account from which the transfer is made, provided that in either case the
Guarantee Period ends before your Annuity Date.
Premiums
One Certificate will be issued for each single premium payment you make
under the Contract. The minimum single premium is $5,000. The minimum allocation
to a Sub-Account is $2,000.
Charges
We make no deductions from your single premium except for premium taxes
(where applicable). The only charge we make is a withdrawal charge in the event
you withdraw all or a portion of the Annuity Value during the first seven
Certificate Years. After the first Certificate Year, that part of the first
withdrawal you make during any Certificate Year that does not exceed the
interest credited during the previous Certificate Year to the Sub-Accounts from
which the withdrawal is to be made may be withdrawn free of any withdrawal
charge or market value adjustment (described below) unless you elect otherwise.
Where applicable, the withdrawal charge is a percent of the amount subject to
the withdrawal charge, which percent is dependent upon the Certificate Year
during which the withdrawal takes place. For withdrawals made during the first
Certificate Year, the applicable percent is 7%. Each year thereafter the
withdrawal charge reduces one percent, so that after the seventh Certificate
Year no withdrawal charge applies.
Premium taxes, if any, will be deducted at the Annuity Date unless
applicable state law requires that they be paid upon issuance of a Certificate.
(In those states, we may postpone deduction of the premium taxes until
withdrawal, surrender, death or annuitization.)
Market Value Adjustment
A market value adjustment is applied to any withdrawal made from a
Sub-Account prior to the end of its Guarantee Period. It will also be applied at
the Annuity Date with respect to any Sub-Account having a Guarantee Period not
ending on the Annuity Date unless (i) the combined market value adjustments of
all affected Sub-Accounts would reduce your Annuity Value and (ii) annuity
payments will be made for at least ten years or a life annuity option has been
chosen. The adjustment may be positive or negative.
Because of the market value adjustment provision of the Contract, you
bear the investment risk that the guaranteed interest rates we offer at the time
you make a withdrawal or start receiving annuity payments may be higher than the
guaranteed interest rate of the Sub-Account to which the market value adjustment
is applied with the result that the amount you receive may be substantially
reduced.
Annuity Payments
Annuity payments will start on the Annuity Date. You may select the
Annuity Date. If you do not select the Annuity Date, it will be the first day of
the calendar month immediately following the later of (i) the certificate
anniversary immediately after the Annuitant's 85th birthday or (ii) ten years
after the effective date of the Certificate. You may also select an annuity
payment option. If you do not, the annuity option will be a life annuity with a
10-year guarantee. You may change your selections at any time at least thirty
(30) days prior to the Annuity Date.
On the Annuity Date your Net Annuity Value (without assessment of a
withdrawal charge) is applied at our annuity rates to determine the amount of
each annuity payment. In determining the Net Annuity Value, a market value
adjustment may be applied. If your Net Annuity Value at the Annuity Date is less
than $2500, we may pay your Net Annuity Value in a lump sum in lieu of annuity
payments. For tax consequences of a lump sum payment, see "Federal Tax
Considerations". If any annuity payment would be less than $100, we may change
the frequency of payments to intervals that will result in payments of at least
$100.
Payment on Death
If the Participant or non-spouse Joint Participant dies prior to the
Annuity Date, we will pay to the beneficiary the greater of the Annuity Value or
the Net Annuity Value on the date of payment. In determining the Net Annuity
Value, no withdrawal charge will be deducted.
On the death of the Annuitant after the Annuity Date, any guaranteed
amounts remaining unpaid will be paid to the beneficiary pursuant to the same
method of distribution in force at the date of death.
Withdrawals
You may withdraw all or a portion of your Net Annuity Value prior to the
earlier of the Annuity Date or the death of any person whose death causes the
payment of a death benefit. For partial withdrawals, the Sub-Account Value of
each remaining Sub-Account, after adjustment for the withdrawal, must be at
least $1,000, and the remaining Annuity Value must be at least $2,500.
Withdrawals from Tax-Sheltered Annuities are restricted. (See "Qualified
Plans".) Withdrawals may be subject to a 10% penalty tax under the Internal
Revenue Code. (See "Federal Tax Considerations")
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Free Look Right
You may cancel your Certificate within the time period set forth thereon
following your receipt of the Certificate by returning or mailing it to us or
our agent along with a written cancellation request. We will refund your premium
from our home office within ten (10) days of our receipt of the Certificate, and
your rights under the Contract will be void from the beginning. We reserve the
right to reject an application from any person who, in connection with a prior
application, previously exercised his or her free look right.
GREAT NORTHERN INSURED ANNUITY CORPORATION
We are a stock life insurance company organized under the laws of the
State of Washington in 1980. We are a wholly owned subsidiary of GE Capital
Assurance Company ("GE Capital Assurance"), which is indirectly a wholly owned
subsidiary of General Electric Capital Corporation ("GE Capital"). Detailed
information concerning us is set forth below under the caption "More Information
About GNA."
All communications concerning the Contracts and Certificates should be
addressed to our third party administrator, TMI, at P.O. Box 80607 Lincoln,
Nebraska 68501-0607. TMI's toll free phone number is 888-466-5412.
DESCRIPTION OF THE CONTRACTS
General
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 Contract may have been issued in connection with either Nonqualified
Plans or certain Qualified Plans. Qualified Plans were limited to Individual
Retirement Annuities or Accounts and Tax-Sheltered Annuities, although interests
under Nonqualified Contracts may have been sold to trustees of trusts
established for other Qualified Plans. GNA issued a Tax Sheltered Annuity only
when the funds were directly transferred from an existing Tax Sheltered Annuity.
A person, or in the case of a group Contract an eligible member of a
group to which a Contract has been issued, may have become a Participant by
completing an application and forwarding payment of a single premium to us. The
application is subject to our acceptance. The rights and benefits of a
Participant under a Contract are summarized in a Certificate issued to the
Participant. Provisions of the Contract are controlling. All rights and benefits
of a Participant under a group Contract may be exercised without the consent of
the Contract holder. Provisions of any plan in connection with which a Contract
has been issued may restrict a person's eligibility to purchase or participate
under the Contract, the minimum or maximum amount of the single premium, and the
Participant's ability to exercise the rights and/or receive the benefits
provided under the Contract. In the case of a group Contract, we reserve the
right to terminate a Contract as to eligible members of the group not accepted
as Participants at the time of termination.
Premiums
One Certificate was issued for each single premium you paid under the
Contract. The effective date of your coverage is the date we received the
premium, except that any premium we received after 2:00 p.m. or on weekends may
have been credited on the following business day. The single premium must have
been at least $5,000. Your premium was allocated to one or more Sub-Accounts in
accordance with your selection. The minimum allocation to a Sub-Account is
$2,000. We will confirm our receipt of your payment and the Sub-Accounts
established for your payment.
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Selecting the Guarantee Period(s)
You may select the Guarantee Periods for your single premium or portion
thereof. We currently offer Guarantee Periods ranging from one to ten years. We
may, at our own discretion, offer additional Guarantee Periods. Generally, the
longer the Guarantee Period, the higher the interest rate will be, but this will
not always be the case. We will establish a Sub-Account corresponding to each
specified interest rate and Guarantee Period. Once you have made a selection, it
cannot be changed. You cannot transfer amounts from one Sub-Account to another
prior to the end of the Guarantee Period. You may, however, withdraw the value
of a Sub-Account subject to the restrictions described below and a market value
adjustment and a withdrawal charge. Withdrawals may be subject to a 10% penalty
tax under the Internal Revenue Code.
Sub-Account and Annuity Values
Your Annuity Value is the sum of all of your Sub-Account Values. Each
Sub-Account Value is equal to the amount you allocated to the Sub-Account
(either as part of your single premium or as part of the reinvestment of a
Sub-Account Value at the end of its Guarantee Period), less any applicable
premium tax previously deducted, plus interest credited at the guaranteed rate,
and minus any prior withdrawals. Premium taxes imposed by states and local
jurisdictions currently range from 0% to 3.5% depending on the tax treatment of
the Contract.
We quote a guaranteed interest rate for each Sub-Account. The guaranteed
interest rate will be credited to the Sub-Account daily beginning the date we
issue the Certificate. Interest will be credited on a daily basis, using a
365-day year. (No interest will be credited for February 29.)
Sub-Account Transfers
You may select one or more new Guarantee Periods for the transfer of a
Sub-Account Value at the end of a Guarantee Period. You may not select a
Guarantee Period that would end after the Annuity Date. In addition, once you
are, or a non-spouse Joint Participant (or, if you are not a living person, any
Annuitant) is, age 87 or older, you may not select a Guarantee Period longer
than three (3) years. We will notify you of your right to make the selection at
least thirty (30) days prior to the end of the Guarantee Period. Interest rates
for transfers are guaranteed to be the same as the initial guaranteed interest
rates offered for new Certificates, but there is no guaranteed minimum interest
rate. Prior to the end of the current Guarantee Period, you must advise us of
the new Sub-Accounts to which the Sub-Account Value is to be transferred. The
minimum transfer to any one Sub-Account is the lesser of $2,000 or the total
Sub-Account Value at the time of transfer. If timely instructions are not
received, we will transfer the Sub-Account Value to a Sub-Account with a
one-year Guarantee Period, unless you have elected the Maximum Selected
Guarantee Period Option or the Current Guarantee Period Option.
If the Maximum Selected Guarantee Period Option has been elected, we
will transfer the Sub-Account Value, absent instructions from you, to a
Sub-Account with the longest Guarantee Period in which you have Sub-Account
Values currently invested, provided the Guarantee Period ends before your
Annuity Date. The Maximum Selected Guarantee Period Option may be elected at any
time prior to the end of a Guarantee Period.
If the Current Guarantee Period Option has been elected, we will
reinvest the Sub-Account Value, absent instructions from you, for the same
Guarantee Period in which that Sub-Account is currently invested, provided the
Guarantee Period ends before your Annuity Date. The Current Guarantee Period
Option may be elected at any time prior to the end of a Guarantee Period.
Fixing Guaranteed Interest Rates
Our determination of the guaranteed interest rates for the different
Guarantee Periods will be influenced by, but not necessarily correspond to,
interest rates available on fixed income investments which we may acquire with
the premiums we receive under the Contracts. See "Investments Supporting the
Contracts". We will also consider other factors in determining the guaranteed
rates, including regulatory and tax requirements, sales commissions and
administrative expenses borne by us, general economic trends and competitive
factors. We may from time to time, at our sole discretion, declare bonus
interest rates for one or more Guarantee Periods. Any such bonus rate may have a
duration less than the Guarantee Period and will not be considered when
determining any market value adjustment. Our management will make the final
determination of the guaranteed rates we declare. We cannot predict or guarantee
the level of future guaranteed rates.
Withdrawals
You may withdraw all or a portion of your Net Annuity Value upon notice
to us received prior to the earlier of the Annuity Date or the death of any
person whose death causes the payment of a death benefit. The Net Annuity Value
is the sum of all Net Sub-Account Values, and a Net Sub-Account Value is the
Sub-Account Value after adjustment for any current market value adjustment and
withdrawal charge. Such values may reflect a deduction for any applicable
premium tax that may be payable. For a full withdrawal, we may require surrender
of your Certificate. Under Tax-Sheltered Annuities, withdrawals attributable to
contributions made pursuant to a salary reduction agreement may be made only
after you reach age 59 1/2 or in other limited circumstances. See "Qualified
Plans" under "Federal Income Taxes".
For partial withdrawals, the Net Sub-Account Value remaining after the
withdrawal must be at least $1,000, and the remaining Annuity Value must be at
least $2,500. Otherwise, the partial withdrawal will not be permitted. You must
specify the Sub-Accounts from which the withdrawal is to be made. Any market
value adjustment will be made to, and any withdrawal charge will be deducted
from, the amount withdrawn from each Sub-Account.
Market Value Adjustment
Whenever you make a withdrawal from a Sub-Account, other than one made
at the end of its Guarantee Period, a market value adjustment will be made based
on the amount withdrawn (excluding any free withdrawal amount as described
below).
A market value adjustment will also be made at the Annuity Date with
respect to any Sub-Account having a Guarantee Period not ending on the Annuity
Date unless the (i) the combined market value adjustments of all affected
Sub-Accounts would reduce your Annuity Value and (ii) annuity payments will be
made for at least ten years or a life annuity option has been chosen. Thus, if
at the Annuity Date a market value adjustment, when applied to all Sub-Accounts,
would increase your Annuity Value, it will be made with the result that the
amount of the annuity payments payable to you will be increased. If the market
value adjustment would reduce your Annuity Value, it will be made only if you
elect an annuity option providing for payments of less than ten years and not
involving a life contingency. Moreover, no negative market value adjustment is
made in the event of a death which triggers payment of a death benefit.
Because of the market value adjustment provision of the Contract, you
bear the investment risk that the guaranteed interest rates we offer at the time
you make a withdrawal or start receiving annuity payments may be higher than the
guaranteed interest rate of the Sub-Account to which the market value adjustment
is applied with the result that the amount you receive may be substantially
reduced.
The market value adjustment we make will depend on the remaining time in
the Guarantee Period of the Sub-Account from which the withdrawal is made or to
which the adjustment is being applied and on the change in the guaranteed
interest rates offered by us that has occurred since establishment of the
Sub-Account. The market value adjustment may be either positive or negative,
depending on the relationship of (1) the current guaranteed interest rate for a
period equal to the time remaining in the Sub-Account, which rate is
interpolated (on a straight line basis) from the rates currently offered by us
for Sub-Accounts with Guarantee Periods closest to such period, to (2) the
guaranteed interest rate for the Sub-Account. If the current guaranteed interest
rate of (1) above is lower than the guaranteed rate of (2), there will be a
positive market value adjustment; if (1) is higher than (2), there will be a
negative market value adjustment. If the adjustment is positive, the additional
amount added to your withdrawal will be provided by us. If negative, the amount
deducted from your withdrawal will be retained by us for our own benefit.
The amount of the market value adjustment is based on the relationship
of the guaranteed interest rates currently offered by us to the guaranteed
interest rate credited to the affected Sub-Account. If the remaining period of
time in the Guarantee Period is a whole number of years, we use the guaranteed
interest rate currently offered by us for a Guarantee Period equal to the number
of remaining years. If the remaining period of time in the Guarantee Period is
not a whole number of years, we derive an interest rate from the guaranteed
interest rates currently offered for the Guarantee Periods nearest the remaining
period of time. This derivation is by straight-line interpolation, except where
the remaining period of time is less than one year in which case we use the
current guaranteed rate for a Guarantee Period of one year. If, for example, the
remaining period is 5.20 years, the interpolated guaranteed interest rate we
will use is equal to the sum of four-fifths of the five year rate and one-fifth
of the six year rate. If the five year rate were 5.25% and the six year rate
were 5.50%, the interpolated rate would be 5.30%, 5.25% times .80 plus 5.50%
times .20.
The amount of the market value adjustment is determined from the
following formula:
A X [(1+B) n/365 ]
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1+C -1
where "A" is the total amount withdrawn from the Sub-Account (excluding any free
withdrawal amount), "B" is the guaranteed interest rate (expressed as a decimal)
for the Sub-Account, "C" is the guaranteed interest rate that we are now
offering for a Sub-Account with a Guarantee Period of a duration of years equal
to "n"/365 or that is interpolated for "n"/365 based on the guaranteed interest
rates we are now offering for Sub-Accounts nearest "n"/365, and "n" is the
remaining number of days in the Guarantee Period of the Sub-Account from which
the withdrawal is made or to which the adjustment is applied.
For example, assume that a full withdrawal of the Sub-Account Value of
$10,000 is made from a Sub-Account with 1,898 days (5.20 years) remaining in an
initial Guarantee Period of ten years and a guaranteed interest rate of 5%.
Assume also that the guaranteed interest rates currently offered for Guarantee
Periods of 5 and 6 years are 5.25% and 5.50%, respectively. Finally, assume that
no free withdrawal amount is available. "C" is equal to 5.30%, the sum of 5.25%
times .80 and 5.50% times .20. The market value adjustment, if applicable, is:
$10,000 X [( 1.050 5.20 ] = $ -147.26
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1.053 -1
Since this figure is a negative number, it is subtracted from the amount
withdrawn, resulting in a net payment (assuming no withdrawal charge) of
$9,852.74 ($10,000--$147.26). If "C" had been 4.70%, instead of 5.30%, the
market value adjustment would have been +$149.90, which would have been added to
the amount withdrawn, resulting in a net payment of $10,149.90.
The greater the difference in interest rates, the greater the effect of
the market value adjustment. If in the above example "C" had been 6%, 7% and 8%,
the market value adjustment would have been -$480.94, -$934.56 and -$1,362.64,
respectively. The market value adjustment is also affected by the remaining
period in the Guarantee Period of the Sub-Account from which the withdrawal is
made, which is "n" in the formula. Thus, if in the first example above (C =
5.30%) "n"/365 were 3.5 or 1.5, the market value adjustment would be -$99.36 or
- -$42.70, respectively. Tables showing the impact of the market value adjustment
and withdrawal charge on hypothetical full withdrawals are set forth in the
Appendix.
Withdrawal Charge
Except for certain free withdrawals described below, there is a
withdrawal charge if you make a withdrawal of all or any part of the Net Annuity
Value at any time during the first seven Certificate Years. The withdrawal
charge is equal to a percentage of the total amount withdrawn (excluding any
free withdrawal amount), depending upon the Certificate Year during which the
withdrawal takes place. For withdrawals made during the first Certificate Year,
the applicable percent is 7%. Each year thereafter the withdrawal charge reduces
one percent, so that after the seventh Certificate Year no withdrawal charge
applies. The withdrawal charge will be deducted from the total amount withdrawn
from each Sub-Account from which the withdrawal is made, excluding any free
withdrawal amount. Withdrawal charges do not apply to annuity payments or any
payment of the death benefit (See "Payment on Death" below), nor to the "First
Withdrawal" described in the following section ("First Withdrawal during
Certificate Year").
The withdrawal charge is computed without regard to the application of
any market value adjustment to the amount withdrawn, so that in the event of a
negative market value adjustment, the charge will be determined on the basis of
the full amount withdrawn, including the amount payable to us as a result of the
market value adjustment. Conversely, in the event of a positive market value
adjustment, the charge will not be assessed against the increased amount we pay
to the Participant because of the market value adjustment.
The application of the withdrawal charge may be illustrated by the
following example. (It may be less if a free withdrawal pursuant to the First
Withdrawal feature is available.) Assume a Participant wishes to make a partial
withdrawal that will result in a net payment to him or her of $6,000, such
withdrawal to be made from two Sub-Accounts, one with a Guarantee Period of ten
years, the other with a Guarantee Period of seven years, and each having a
Sub-Account Value of $5,000. Assume further that the Participant directs that
the partial withdrawal be taken from the Sub-Account having the ten-year
Guarantee Period to the maximum extent possible and the remainder taken from the
Sub-Account having the seven year Guarantee Period. Assume also that the market
value adjustment applied to the ten-year Guarantee Period operates to reduce its
value by 20% and that the adjustment applied to the seven-year Guarantee Period
operates to reduce its value by 15%. Finally, assume that the withdrawal is made
in the third Certificate Year, so that the applicable percentage charge is 5% of
the amount withdrawn. The net amount available to the Participant from the
Sub-Account with the ten-year Guarantee Period is $3,750, because of a negative
market value adjustment of $1,000 (20% of $5,000) and a withdrawal charge of
$250 (5% of $5,000). The remaining portion of the amount requested, $2,250, is
taken from the Sub-Account with the seven-year Guarantee Period, the amount
withdrawn being the amount necessary to generate a net payment of $2,250 after
application of the market value adjustment and the withdrawal charge. This
amount--$2,812.50 --is reduced by a negative market value adjustment of $421.88
(15% of $2,812.50) and a withdrawal charge of $140.62 (5% of $2,812.50) to
provide the net payment of $2,250.
From time to time we may agree in writing to reduce the amount of the
withdrawal charge, the period during which it applies, or both, when
Certificates are sold to individuals, entities or groups of individuals in a
manner that reduces our sales expenses. We would consider such factors as (a)
the size and type of group, (b) the amount of the single premium, and/or (c)
other transactions where sales expenses are reduced.
First Withdrawal During Certificate Year
After the first Certificate Year, a portion of your first withdrawal in
each Certificate Year might not be subject to a withdrawal charge or a market
value adjustment. The amount of that first withdrawal taken from a Sub-Account
will be free of a withdrawal charge or market value adjustment to the extent it
does not exceed the interest credited to that Sub-Account during the preceding
Certificate Year or the interest credited during such year to a Sub-Account
which matured and whose value was reinvested in that Sub-Account. (If only a
part of the value of the maturing Sub-Account is reinvested in the Sub-Account
from which the withdrawal was made, the interest credited during the Certificate
Year to the maturing Sub-Account for purposes of this provision will be deemed
to be that portion of the interest credited equal to the portion of the value of
the maturing Sub-Account reinvested in the Sub-Account.) The portion of the
withdrawal from the Sub-Account in excess of this interest amount will be
subject to a withdrawal charge and a market value adjustment. If it would be in
your interest to waive this feature (e.g., if a positive market value adjustment
would exceed the withdrawal charges), you may elect to have withdrawal charges
and a market value adjustment apply to the entire withdrawal. After the seventh
Certificate Year, when no withdrawal charge applies, this free withdrawal
provision will continue to be available so that you may avoid in part the impact
of a negative market value adjustment.
Payment on Death
If the Participant or a non-spouse Joint Participant dies prior to the
Annuity Date, we will pay to the beneficiary the greater of the Annuity Value or
the Net Annuity Value on the date of payment. In determining the Net Annuity
Value, no withdrawal charge will be deducted. Between the date of death and the
date of payment, we will continue to credit interest at the guaranteed rates. If
a Guarantee Period ends between the date of death and the date of payment, that
Sub-Account Value will be transferred to a Sub-Account with a one year Guarantee
Period. If the Participant is not a person, the death benefit described above
will be paid to the beneficiary if the Annuitant (or the first to die if Joint
Annuitants) dies prior to the Annuity Date. No death benefit is payable on the
death of a spouse Joint Participant.
Payment will be made in a lump sum unless an annuity option is chosen.
An Annuity Payment Option election must be chosen within 60 days of the date of
death. For tax consequences of a lump sum payment, see "Federal Tax
Considerations". The beneficiary must receive the death benefit within five
years of the date of death. If an annuity option is chosen, annuity payments
must begin within one year of the date of death, or such later date as the law
may allow, and the option must limit payments to a period not exceeding the
beneficiary's lifetime or life expectancy. If the beneficiary is the surviving
spouse of the deceased Participant, or of the deceased Annuitant if the
Participant is not a person, such beneficiary may choose to continue the
Certificate in force, in which event no death benefit will be paid. A spouse
Joint Participant and the surviving spouse where the Annuitant and Joint
Annuitant are spouses and the Participant is not a person are automatically
deemed to be the beneficiary regardless of any beneficiary designation.
If we have not received the beneficiary's election, we will pay the
death benefit in a single sum six (6) months after the date we receive due proof
of death. Prior to his or her death, a Participant may make elections regarding
payment options for the beneficiary which will be binding upon the beneficiary.
If the Annuitant dies after the Annuity Date, any guaranteed amounts
remaining unpaid will be paid to the beneficiary under the same method of
distribution in force at the date of death. If no beneficiary survives the
Annuitant, payment will be made to the Participant. For additional provisions
affecting payment of the death benefit, see "Beneficiary" under "Other
Provisions".
Annuity Provisions
General. Annuity payments will commence on the Annuity Date and will be
paid to the Annuitant unless the Participant asks that the payment be made to
another payee and we agree. The Participant is the Annuitant unless another
person designated as Annuitant is living. A Participant who is not a person must
name a living person as Annuitant.
The amount of monthly annuity payments will be determined by applying
the Net Annuity Value (without assessment of a withdrawal charge) at the Annuity
Date to the annuity option chosen using our current annuity rates. Those rates
are guaranteed to be no less favorable than the minimum guaranteed annuity rates
shown in the annuity tables contained in the Contract. The minimum guaranteed
rates assume an interest rate of 3% per year.
Any applicable premium taxes, if not previously paid, will be paid at the
Annuity Date. Premium taxes imposed by states and local jurisdictions currently
range from 0% to 3.5% depending on the tax treatment of the Contract.
In determining the Net Annuity Value, a market value adjustment will be
applied to any Sub-Account if the Annuity Date is prior to the end of the
Guarantee Period for that Sub-Account unless (1) the combined effect of the
market value adjustments applied to all affected Sub-Accounts would reduce the
Annuity Value and (2) annuity payments under the option selected will be made
for at least ten years or a life annuity option has been chosen.
Annuity Date and Annuity Options. You may select the Annuity Date and an
annuity option. If you do not do so, the Annuity Date will be the first day of
the calendar month immediately following the later of (i) the certificate
anniversary immediately after the Annuitant's 85th birthday or (ii) ten years
after the effective date of the Certificate, and the annuity option will be a
life annuity with a 10-year guarantee. (For Qualified Certificates, the Annuity
Date generally may not be later than April 1 of the year after the year in which
the Annuitant attains age 70 1/2.)
Change of Annuity Date or Annuity Option. You may change the Annuity Date
or the annuity option on written notice received at our home office at least 30
days prior to the current Annuity Date.
Annuity Options. You may select any one of the following annuity options
or any other option satisfactory to you and us. For Qualified Certificates,
certain restrictions may apply.
Payments for a Fixed Period: Payments will be made for the period chosen.
The period must be at least 10 years.
*Life Annuity: Payments will be made during the life of the Annuitant.
Payments will cease with the last payment due prior to the Annuitant's death.
Life Annuity With Payments for a Certain Period: Payments will be made
for the guaranteed period chosen (5, 10, 15 or 20 years) and as long thereafter
as the Annuitant lives.
Life Annuity with Guaranteed Return of Net Annuity Value: Payments will
be made until the sum of the annuity payments equals the Net Annuity Value
applied under this option and as long thereafter as the Annuitant lives.
*Joint and Survivor Life Annuity: Payments will be made during the
lifetimes of the Annuitant and a designated second person. Payments will
continue as long as either is living.
*THESE OPTIONS ARE LIFE ANNUITIES UNDER WHICH IT IS POSSIBLE FOR YOU TO
RECEIVE ONLY ONE ANNUITY PAYMENT IF THE ANNUITANT (OR THE ANNUITANT AND A
DESIGNATED SECOND PERSON) DIES AFTER THE FIRST PAYMENT, OR TO RECEIVE ONLY TWO
ANNUITY PAYMENTS IF THE ANNUITANT (OR THE ANNUITANT AND A DESIGNATED SECOND
PERSON) DIES AFTER THE SECOND PAYMENT, AND SO ON.
Minimum Annuity Payments. Annuity payments will be made monthly unless
you choose less frequent payments. But if any payment would be less than $100 we
may change the frequency so payments are at least $100 each. If the Net Annuity
Value to be applied at the Annuity Date is less than $2,500, we may elect to pay
that amount in a lump sum. For tax consequences of a lump sum payment, see
"Federal Tax Considerations".
Annuity Tables. Our annuity rates will be no less favorable than those
shown in the annuity tables contained in the Contract. Those tables show the
minimum guaranteed amount of each monthly payment for each $1,000 according to
the age and sex of the Annuitant at the Annuity Date. The tables are based on
the 1983 Table "a" for Individual Annuity Valuation (published by the Society of
Actuaries) with interest at 3%, except for Certificates issued in certain states
or in connection with certain employer-sponsored plans where sex-based tables
may not be used. In those circumstances the 1983 Table for females will be used
for all Annuitants.
Proof of Age, Sex and Survival. We may require satisfactory proof of the
age, sex or survival of any person on whose continued life any payment under
this Contract depends.
Misstatement of Age or Sex. If the age or sex of an Annuitant or Joint
Annuitant is misstated, annuity payments will be adjusted to reflect the correct
age and sex. We will deduct any overpayments we have made as the result of the
misstatement from the next payments due, and we will charge interest on the
overpayment at the rate of 6% per year. We will pay in full with the next
payment due any underpayment resulting from the misstatement together with
interest on the underpayment at the rate of 6% per year.
Other Provisions
Ownership. The Participant is entitled to exercise all rights reflected
in a Certificate unless otherwise provided or as may be restricted by the
provisions of any plan in connection with which the Contract or Certificate has
been issued. A Participant may name a Joint Participant. In the case of a group
Contract, the Joint Participant need not be an eligible member of the group to
which the Contract has been issued. Participants and spouse Joint Participants
may exercise rights on behalf of the other, except for changes of Participant or
Joint Participant. Participants and non-spouse Participants must exercise rights
jointly. A Participant may change the Participant by notice to the Company. Such
change will take effect as of the date the notice was signed, except that we
will not be liable for any payments made or actions taken prior to our receipt
of the notice. Special restrictions apply to Qualified Certificates, and joint
ownership of a Certificate is not permitted.
Beneficiary. The beneficiary is the person or persons named in the
Certificate application to whom payment is to be made upon the death of the
Participant (or other appropriate individual) or Annuitant. A spouse Joint
Participant and the surviving spouse where the Annuitant and Joint Annuitant are
spouses and the Participant is not a person are automatically deemed to be the
beneficiary regardless of any beneficiary designation. Unless a beneficiary has
been irrevocably designated, the beneficiary may be changed while the
Participant is alive. A beneficiary may be named irrevocably, in which case a
change in beneficiary can be made only with the beneficiary's consent.
The estate or heirs of a beneficiary who dies prior to the death which
causes the payment of a death benefit have no rights to any portion of the death
benefit. If no beneficiary survives a sole Participant, payment will be made to
the Participant's estate. If no beneficiary survives the Participant or
non-spouse Joint Participant, payment will be made to the surviving Participant
or Joint Participant. If any beneficiary dies within 15 days after the death
which causes the payment of the death benefit and before we make payment,
payment will be made as if that beneficiary had died before the death which
causes the payment of the death benefit. If the Participant and non-spouse Joint
Participant die within 15 days of each other and there are no surviving
beneficiaries, payment will be made in equal shares to the estates of the
Participant and Joint Participant.
You may designate both primary beneficiaries and contingent
beneficiaries. If there is more than one primary beneficiary entitled to a death
benefit, payment will be made to them in equal shares unless otherwise
designated. A contingent beneficiary is entitled to payment only if there are no
surviving primary beneficiaries. If there is more than one contingent
beneficiary entitled to a death benefit, payment will be made to them in equal
shares unless otherwise designated. If a surviving spouse Joint Participant, as
primary beneficiary, dies prior to receiving the entire death benefit, payment
will be made to any then surviving contingent beneficiary instead of to the
spouse Joint Participant's estate, unless the spouse Joint Participant has
designated otherwise.
Certain restrictions in the application of the foregoing provisions may
apply in the case of Qualified Certificates.
Assignment. Upon notice to us you may make a collateral assignment of
your rights under the Contract by transferring your Certificate to a creditor as
security for a debt. If the Contract is issued pursuant to a Qualified Plan,
your rights under the Contract may not be assigned, pledged or transferred,
unless permitted by law. A collateral assignment does not change ownership of
the Certificate. The rights of a collateral assignee have priority over the
rights of a beneficiary. There may be significant tax consequences associated
with an assignment, and you should consult a competent tax advisor before making
any assignment.
Notices and Elections. All notices, changes and choices you make under
the Contract must be in writing, dated, signed by the proper party, received at
our home office and acceptable to us in our sole discretion to be effective.
When recorded by us, notices, changes and choices relating to beneficiaries will
take effect as of the date signed unless we have already acted in reliance on
the prior status.
Amendment of Contract and Certificates. At any time we may amend the
Contract and the Certificates as required to conform to any applicable law,
regulation or ruling issued by a government agency.
Deferral of Payments. All sums payable by us are payable at our home
office. We may require return of a Certificate prior to making payment. We may
defer payments of partial or full withdrawals for up to 6 months.
Free Look Right. You may cancel your Certificate within the time period
set forth on your Certificate following your receipt of the Certificate by
returning or mailing it to us or our agent along with a written cancellation
request. We will refund your premium from our home office within ten (10) days
of our receipt of the Certificate, and your rights under the Contract will be
void from the beginning. We reserve the right to reject an application from any
person who, in connection with a prior application, previously exercised his or
her free look right.
Statement. We will furnish to you at least once each year prior to the
Annuity Date a statement showing your Annuity Value, Sub-Account Values and
current interest rates. The statement will not include our financial statements.
<PAGE>
INVESTMENTS SUPPORTING THE CONTRACTS
Our general account assets must be invested in accordance with
applicable state laws. These laws govern the nature and quality of investments
that may be made by life insurance companies and the percentage of their assets
that may be committed to any particular type of investment. In general, these
laws permit investments, within specified limits and subject to certain
qualifications, in federal, state, and municipal obligations, corporate bonds,
preferred stocks, real estate mortgages, real estate and certain other
investments. All of our general account assets are available to meet our
obligations under the Contracts.
Premiums received under the Contracts will be allocated to, and
accounted for in, a "nonunitized" separate account established by us under the
laws of Washington. A nonunitized separate account is a separate account in
which the contract owner or participant does not participate in the performance
of the assets through unit values or otherwise. Any favorable performance on the
assets held in the separate account accrues solely to our benefit. We reserve
the right to transfer all assets allocated to the separate account to our
general account and to hold thereafter all assets supporting the Contract
reserves and other Contract liabilities in our general account. Regardless of
whether such assets are held in a separate account or our general account, all
benefits available to Participants under the Contracts are guaranteed by us, and
all of our assets, except those assets we allocate to certain other separate
accounts we use for other contracts, support those guarantees.
We intend to invest assets supporting the Contract reserves and other
Contract liabilities, whether held in a separate account or our general account,
in securities that, in the aggregate, have characteristics, especially cash flow
patterns, reasonably related to the characteristics of the liabilities under the
Contract. We will primarily invest in investment-grade fixed income securities
including:
Securities issued by the United States Government or its
agencies or instrumentalities, which issues may or may not be guaranteed by the
United States Government.
Public and/or private placement corporate debt securities that
have an investment grade rating at the time of purchase, within the four
highest grades assigned by Moody's Investors Services, Inc. (Aaa, Aa, A
or Baa) or Standard & Poor's Corporation (AAA, AA, A or BBB).
Mortgage-backed securities collateralized by real estate
mortgage loans, or securities collateralized by other assets, that are
insured or guaranteed by the Federal Home Loan Mortgage Association, the
Federal National Mortgage Association or the Government National
Mortgage Association, or that have an investment grade at time of
purchase within the four highest ratings as described in the above
paragraph.
Commercial paper, cash or cash equivalents, and other short-term
investments having a maturity of less than one year that are considered
by our management to have investment quality comparable to securities
having the ratings stated above.
In addition, interest rate swaps, futures, options, rate caps and other
hedging instruments may be used solely for non-speculative hedging purposes.
Anticipated use of these financial instruments shall be limited to protecting
the value of the portfolio sales or purchases, but use of such instruments may
enhance yield.
ALTHOUGH THE FOREGOING GENERALLY DESCRIBES OUR INVESTMENT STRATEGY FOR
THE ASSETS SUPPORTING OUR OBLIGATIONS UNDER THE CONTRACTS, WE ARE NOT OBLIGATED
TO INVEST THOSE ASSETS ACCORDING TO ANY PARTICULAR STRATEGY EXCEPT AS MAY BE
REQUIRED BY STATE INSURANCE LAWS NOR WILL THE GUARANTEED INTEREST RATES WE
ESTABLISH BE DETERMINED BY THE PERFORMANCE OF THE NONUNITIZED SEPARATE ACCOUNT.
DISTRIBUTION OF THE CONTRACTS
We have entered into an agreement with GNA Distributors, Inc. pursuant to
which GNA Distributors, Inc. 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. We or GNA Distributors, Inc. paid a commission up to a
maximum of six percent (6%) of each premium payment. In some instances a portion
of the commission may have been based on reinvested premium and/or Annuity Value
on a certain date. GNA Distributors, Inc. and Capital Brokerage Corporation are
wholly owned subsidiaries of our indirect parent, GNA Corporation.
FEDERAL INCOME TAXES
Introduction
The Contracts are designed for use in connection with retirement plans
that do not qualify for special federal income tax treatment under the Internal
Revenue Code (the "Code") and also with plans that qualify for special income
tax treatment as Individual Retirement Accounts or Annuities or Tax-Sheltered
Annuities. The ultimate effect of federal income taxes on Annuity Value, on
annuity payments and on the economic benefit to the Participant, Annuitant or
beneficiary depends on our tax status, on the type of retirement plan for which
the Contract or Certificate is purchased and on the tax and employment status of
the individual concerned. The following discussion is general in nature and is
not intended as tax advice. Each person concerned should consult a competent tax
adviser. No attempt is made to consider any applicable state or other tax laws.
This discussion is based on our understanding of current federal income tax laws
as currently interpreted. No representation is made regarding the likelihood of
continuation of those laws or of the current interpretations by the Internal
Revenue Service. WE DO NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY
CONTRACT OR CERTIFICATE OR ANY TRANSACTION INVOLVING THE CONTRACTS OR
CERTIFICATES.
Our Tax Status
We are taxed as a life insurance company under the Internal Revenue Code.
We own all assets supporting our obligations under the Contracts, and any income
earned on those assets is considered our income.
Tax Status of the Certificate
We believe that the Certificate will be treated as an annuity contract
and that we will be treated as owning the assets supporting the Certificate for
federal income tax purposes. However, we reserve the right to modify the
Contract and Certificate as necessary to prevent the Contract holder or
Participant from being considered the owner of the assets supporting the
Certificate for federal tax purposes.
Furthermore, in order to be treated as an annuity contract for federal
income tax purposes, Section 72(s) of the Code requires any Nonqualified
Certificate to provide that (a) if any Participant dies on or after the annuity
commencement date but prior to the time the entire interest in the Certificate
has been distributed, the remaining portion of such interest will be distributed
at least as rapidly as under the method of distribution being used as of the
date of that Participant's death; and (b) if any Participant dies prior to the
annuity commencement date the entire interest in the Certificate will be
distributed within five years after the date of the Participant's death. These
requirements will be considered satisfied as to any portion of the Participant's
interest which is payable to or for the benefit of a "designated beneficiary"
and which is distributed over the life of such "designated beneficiary" or over
a period not extending beyond the life expectancy of the beneficiary, provided
that such distributions begin within one year of that Participant's death. The
Participant's "designated beneficiary" (referred to herein as the "Participant's
beneficiary") is the person designated by such Participant as a beneficiary and
to whom ownership of the Certificate passes by reason of death and must be a
natural person. However, if the Participant's "designated beneficiary" is the
surviving spouse of the Participant, the Certificate may be continued with the
surviving spouse as the new Participant.
The Nonqualified Contracts and Certificates contain provisions which are
intended to comply with the requirements of Section 72(s) of the Code, although
no regulations interpreting these requirements have yet been issued. We intend
to review such provisions and modify them if necessary to assure that they
comply with the requirements of Code Section 72(s) when clarified by regulation
or otherwise.
Other rules may apply to Contracts and Certificates issued in connection
with Qualified Plans.
THE FOLLOWING DISCUSSION ASSUMES THAT THE
CERTIFICATES WILL QUALIFY AS ANNUITY CONTRACTS FOR
FEDERAL INCOME TAX PURPOSES
Federal Tax Considerations
In General. Section 72 of the Code governs taxation of annuities in
general. We believe that a Participant who is a natural person generally is not
taxed on increases in the value of a Certificate until distribution occurs by
withdrawing all or part of the Annuity Value (e.g., partial withdrawals and
surrenders) or as annuity payments under the annuity option elected. For this
purpose, the assignment, pledge, or agreement to assign or pledge any portion of
the Annuity Value (and in the case of a Qualified Certificate, any portion of an
interest in the Qualified Plan) generally will be treated as a distribution. The
taxable portion of a distribution (in the form of a single sum payment or an
annuity) is taxable as ordinary income.
A participant in any annuity contract who is not a natural person
generally must include in income any increase in the excess of the contract's
account value over the "investment in the contract" (discussed below) during the
taxable year. There are some exceptions to this rule and a prospective
participant that is not a natural person may wish to discuss these with a
competent tax adviser.
The following discussion generally applies to Certificates whose
Participants are natural persons.
Withdrawals. In the case of a partial withdrawal or surrender under a
Qualified Certificate under Section 72(e) of the Code, a ratable portion of the
amount received is taxable, generally based on the ratio of the "investment in
the contract" to the Participant's total accrued benefit or balance under the
retirement plan. The "investment in the contract" generally equals the portion,
if any, of any premium payments paid by or on behalf of any individual under a
Certificate which was not excluded from the individual's gross income. For
Qualified Certificates, a Participant's "investment in the contract" can be
zero. Special tax rules may be available for certain distributions under
Qualified Certificates.
With respect to Nonqualified Certificates, partial withdrawals are
generally treated as taxable income to the extent that the Annuity Value
immediately before the withdrawal exceeds the "investment in the contract" at
that time. Although there is no definitive guidance on this subject, it appears
that the Annuity Value immediately before a partial withdrawal must be increased
by any positive market value adjustments that result from such a withdrawal.
In the case of a full withdrawal under a Nonqualified Certificate, under
section 72(e) amounts received are generally treated as taxable income to the
extent the net amount received exceeds the "investment in the contract" at that
time.
Annuity Payments. Although tax consequences may vary depending on the
annuity option elected under the Certificate, under Code Section 72(b),
generally gross income does not include that part of any amount received as an
annuity under an annuity contract that bears the same ratio to such amounts as
the investments in the contract bears to the expected return at the annuity
date. With Tax-Sheltered Annuities, gross income does not include the amount in
any monthly annuity payment which does not exceed the amount obtained by
dividing the "investment in the contract" (as of the Annuity Date) by (i) the
number of anticipated 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. 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, for Tax-Sheltered Annuities,
the total number of anticipated (or monthly) 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 includable in the income of the recipient as follows: (1) if
distributed in a lump sum, they are taxed in the same manner as a full
withdrawal of the Certificate, as described above, or (2) if distributed under
an annuity option, they are taxed in the same manner as annuity payments, as
described above.
Transfers, Assignments, or Exchanges of a Certificate. A transfer of
ownership of a Certificate; the designation of an Annuitant, Payee, or other
beneficiary who is not also the Participant; the selection of certain Annuity
Dates; or the exchange of a Certificate may result in certain tax consequences
to Participants that are not discussed herein. The assignment, pledge, or
agreement to assign or pledge any portion of the Annuity Value (and in the case
of a Qualified Certificate any portion of an interest in the Qualified Plan)
generally will be treated as a distribution. The taxable portion of a
distribution (in the form of a single sum payment or an annuity) is taxable as
ordinary income. A Participant contemplating any such transfer, assignment, or
exchange of a Certificate should contact a competent tax adviser with respect to
the potential tax effects of such a transaction.
Multiple Contracts. All Nonqualified annuity contracts entered into
after October 21, 1988 that are issued by us (or our affiliates) to the same
owner during any calendar year are treated as one annuity contract for purposes
of determining the amounts includable in gross income under Section 72(e) of the
Code. In addition, the Treasury Department has specific authority to issue
regulations that prevent the avoidance of section 72(e) through the serial
purchase of annuity contracts or otherwise. Congress has also indicated that the
Treasury Department may have authority to treat the combination purchase of an
immediate annuity contract and a separate deferred annuity contract as a single
annuity contract under its general authority to prescribe rules as may be
necessary to enforce the income tax laws.
Withholding. Pension and annuity distributions generally are subject to
withholding for the recipient's federal income tax liability at rates that vary
according to the type of distribution and the recipient's tax status.
Recipients, however, generally are provided the opportunity to elect not to have
tax withheld from distributions. As of January 1, 1993, we are generally
required to withhold on distributions under certain Qualified Contracts or
Certificates.
Possible Tax Legislation. There 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 Certificate is not exhaustive and
special rules are provided with respect to other tax situations not discussed in
this Prospectus. Further, the federal income tax consequences discussed herein
reflect our understanding of current law and the law, or its interpretation by
the Internal Revenue Service, may change. Federal estate and state and local
income, estate, inheritance, and other tax consequences of ownership or receipt
of distribution under a Contract or Certificate depend on the individual
circumstances of each Participant or recipient of the distribution. A competent
tax adviser should be consulted for further information.
Qualified Plans
The Contract or Certificate may be issued in connection with plans
qualifying for special tax treatment as Individual Retirement Accounts or
Annuities or Tax-Sheltered Annuities. The tax rules applicable to Participants
in such plans vary according to the type of plan and the terms and conditions of
the plan itself. Special favorable tax treatment may be available for certain
types of contributions and distributions. Adverse tax consequences may result
from contributions in excess of specified limits; distributions prior to age 59
1/2 (subject to certain exceptions); distributions that do not conform to
specified commencement and minimum distribution rules; aggregate distributions
in excess of a specified annual amount; and in other specified circumstances.
Therefore, no attempt is made to provide more than general information about the
use of the Contracts and Certificates with such plans. Participants, Annuitants
and Beneficiaries are cautioned that the rights of any person to any benefits
under plans may be subject to the terms and conditions of the plans themselves,
regardless of the terms and conditions of the Contract. Some retirement plans
are subject to distribution and other requirements that are not incorporated
into our Contract administration procedures. Owners, Participants and
Beneficiaries are responsible for determining that contributions, distributions
and other transactions with respect to the Contracts comply with applicable law.
Following are brief descriptions of the various types of plans in connection
with which we will issue a Contract or Certificate. When issued in connection
with such a plan, a Contract or Certificate will be amended as necessary to
conform to the requirements of the Code.
Individual Retirement Accounts and Individual Retirement Annuities.
Section 408 of the Internal Revenue Code permits eligible individuals to
contribute to an individual retirement program known as an Individual Retirement
Account or Individual Retirement Annuity (each hereinafter referred to as
"IRA"). IRAs are subject to limits on the amount that may be contributed, the
contributions that may be deducted from taxable income, the persons who may be
eligible and the time when distributions may commence. Also, distributions from
certain other types of plans qualifying for special tax treatment may be "rolled
over" on a tax-deferred basis into an IRA. Sales of the Contracts and
Certificates for use with IRAs may be subject to special disclosure requirements
of the Internal Revenue Service. Purchasers of the Contract or Certificates
thereunder for use with IRAs will be provided with supplemental information
required by the Internal Revenue Service or other appropriate agency. Such
purchasers will have the right to revoke their purchase within 7 days of the
earlier of the establishment of the IRA or their purchase. The Internal Revenue
Service has not reviewed the Contract for qualification as an IRA and has not
addressed in a ruling of general applicability whether a death benefit provision
such as the provision in the Contract comports with IRA qualification
requirements. Purchasers should seek competent advice as to the suitability of
the Contract and Certificates for use with IRAs.
Tax-Sheltered Annuities. Section 403(b) of the Code permits public
school employees and employees of certain types of religious, charitable,
educational and scientific organizations specified in section 501(c)(3) of the
Code to purchase annuity contracts and, subject to certain limitations, exclude
the amount of premiums from gross income for tax purposes. These annuity
contracts are commonly referred to as "Tax-Sheltered Annuities." Premiums
excluded from gross income will be subject to FICA taxes. Purchasers using the
Contracts or Certificates as Tax-Sheltered Annuities should seek competent
advice as to eligibility, limitations on permissible amounts of premiums and tax
consequences on distribution. Withdrawals under Tax-Sheltered Annuities which
are attributable to contributions made pursuant to salary reduction agreements
are prohibited unless made after the Participant attains age 59 1/2, upon the
Participant's separation of service, upon the Participant's death or disability,
or for an amount not greater than the total of such contributions in the case of
hardship. Effective January 1, 1993, distributions under Tax Sheltered Annuities
are generally subject to mandatory income tax withholding. (At the present time,
GNA will issue a Tax Sheltered Annuity only when the funds are directly
transferred from an existing Tax Sheltered Annuity.)
Restrictions under the Texas Optional Retirement Program. Under
applicable state law, participants in the Texas Optional Retirement Program
("ORP") may withdraw their interest in an annuity contact issued under the ORP
only upon (1) termination of employment in the Texas public institutions of
higher education, (2) retirement, or (3) death. A participant in the ORP (or the
participant's estate if the participant has died) will be required to obtain a
certificate of termination from the employer or a certificate of death before
distributions can be made.
MORE INFORMATION ABOUT GNA
History and Business
Great Northern Insured Annuity Corporation (GNA or the Company) was
incorporated as a stock life insurance company organized under the laws of the
State of Washington on June 4, 1980, and began writing business pursuant to
licensing on October 15, 1980. On June 30, 1983, The Weyerhaeuser Company
(Weyerhaeuser) acquired a controlling interest in GNA.
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.
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 included in this
Prospectus.
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Data
(Dollars in millions)
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.
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.
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.
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.
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.
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 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.
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
(48) 1997. Senior 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
(42) Development, GE Capital Corporation 1991- Current.
Charles A. Kaminski Director since 1994 and Senior Vice President of GNA since 1993.
(49)
Victor C. Moses Director since 1994 and Senior Vice President of GNA since 1992.
(50) Chief Actuary of GNA since 1993.
Thomas W. Casey Senior Vice President and Chief Financial Officer of GNA since 1996.
(35) Vice President of GNA 1993-96.
Debora Dyer Horvath Senior Vice President and Chief Information Officer of GNA since 1995.
(43) Vice President of GNA 1993-95.
Leon E. Roday Senior Vice President and General Counsel of GE Capital
(44) Assurance since 1996and GNA since 1998. Attorney - LeBoeuf, Lamb,
Greene & MacRae L.L.P. 1982-96.
Deborah C. Towner Senior Vice President and Chief Mortgage Officer of GNA since 1997.
(44) Assistant Vice President of GNA 1985-97.
James D. Atkins Senior Vice President of GNA since 1997. Senior Vice
(40) President of Fist Colony Life Insurance Company since 1992.
Donald W. Britton Senior Vice President of GNA since 1997. President, First
(49) Colony Life Insurance Company since 1997. Executive Vice President,
Marketing-First Colon Life Insurance Company 1992-97.
Frank D'Ambra Senior Vice President of GNA since 1997. Vice President of Canada Life Insurance
(44) Company from 1994-97. Assistant Vice President Confederated Life Insurance
Company from 1990-94.
Frank T. Gencarelli Senior Vice President of GNA since 1997. Vice President, then Senior
(43) Vice President First Colony 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
(51) President of First Colony 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
(36) Operating Officer GE 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
(38) and Assistant Vice President of GNA 1989-94.
<PAGE>
<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
(35) GNA 1990-96.
Stephen N. DeVos Vice President and Controller of GNA since 1996. Technical Adviser, GE
(37) Capital Corporation 1994-96. Manager, Coopers & Lybrand 1986-94.
Michael C. Knebel Vice President and Investment Officer of GNA since 1998. Vice
(55) President and Assistant Treasurer, SAFECO Corporation 1988-97.
Jeffrey I. Hugunin Treasurer of GNA since 1994. Vice President and Treasurer of
(35) Federal Home Life Insurance Company 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.
(49) President of GE Capital Assignment
Corporation since 1995 and Executive Vice President from 1993-1995.
Patricia C. Vaselakos Vice President of GNA since 1994. Program and Regional
(43) Marketing Director of GNA 1990-94.
</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.
Summary Compensation Table [From Susan Gaidos]
Annual Compensation
<TABLE>
<CAPTION>
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 Officer 1996 53,718 31,700 9,384 -0-
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.
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 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.
REGISTRATION STATEMENT
A registration statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933 as amended with respect to the
Contracts. This Prospectus does not contain all information set forth in the
registration statement, its amendments and exhibits, to all of which reference
is made for further information concerning us and the Contracts. Statements
contained in this Prospectus as to the content of the Contracts and other legal
instruments are summaries. For a complete statement of the terms thereof,
reference is made to the instruments as filed in the registration statement.
<PAGE>
APPENDIX
The table below is designed to show the impact of the market value
adjustment and withdrawal charge on a single premium of $10,000. It assumes the
premium is allocated to a Sub-Account with a 10-year Guarantee Period with a
guaranteed rate of interest of 5%. The figures for the 5% and 7% current rates
assume after the first Certificate Year the withdrawal of all of the prior
year's interest pursuant to the free withdrawal provision (see "First Withdrawal
During Certificate Year" above). However, the figures for the 3% current rate
assume that the free withdrawal option is not exercised (i.e., the free
withdrawal amount is zero), since in that instance it is to the advantage of the
Participant to have the surrender charge and market value adjustment apply to
the entire amount withdrawn.
The market value adjustments are based on interpolated current interest
rates (defined in the Contract as "C") of 3%, 5% and 7%. The Net Sub-Account
Values shown in the table are the maximum amounts available as cash withdrawals.
Although the withdrawal charge is a fixed percentage of the amount withdrawn,
since the free withdrawal feature affects the amount of the withdrawal subject
to withdrawal charges, the amount of the charge for withdrawals varies depending
upon whether the free withdrawal option is exercised. Values shown in the table
have been rounded to the nearest dollar, and therefore the figures under the Net
Sub-Account Value columns may not equal the sum of corresponding figures under
the Sub-Account Value, Market Value Adjustment and Withdrawal Charge columns.
The five percent guaranteed interest rate assumed in the table is used
for purposes of illustration only and should not be considered a representation
of the interest rate we will guarantee for 10-year Guarantee Periods. Further,
the three, five and seven percent interest rates on which the figures in the
table have been based should not be considered a prediction as to the extent the
current rates we use may vary over the ten year period assumed in the table.
Market Value Adjustments, Withdrawal Charges and Net Sub-Account
Values for a 10-year Sub-Account With a Guaranteed Interest Rate of 5% Based on
Interpolated Current Interest Rates of:
<TABLE>
<CAPTION>
End of Sub- Market 3% Net Sub- Market 5% Net Sub- Market 7% Net Sub-
Certificate Account Value Withdrawal Account Value Withdrawal Account Value Withdrawal Account
Year Value Adjustment Charge Value Adjustment Charge Value Adjustment Charge Value
---- ----- ---------- ---------- ----- ---------- ----------- ----- ---------- ---------- -----
<S> <C>
1 10,500 1,984 735 11,749 -0- 735 9,765 -1,640 735 8,125
2 11,025 1,834 662 12,197 -0- 632 10,394 -1,475 632 8,919
3 11,576 1,668 579 12,666 -0- 553 11,024 -1,367 553 9,656
4 12,155 1,487 486 13,156 -0- 464 11,691 -1,242 464 10,449
5 12,763 1,288 382 13,668 -0- 366 12,397 -1,097 366 11,300
6 13,401 1,072 268 14,204 -0- 256 13,145 -930 256 12,215
7 14,071 836 141 14,766 -0- 134 13,937 -739 134 13,197
8 14,775 579 -0- 15,354 -0- -0- 14,775 -522 -0- 14,252
9 15,513 301 -0- 15,815 -0- -0- 15,513 -277 -0- 15,236
10 16,289 -0- -0- 16,289 -0- -0- 16,289 -0- -0- 16,289
</TABLE>
The formulas used in determining the amounts shown in the above table
are as follows:
<TABLE>
<S> <C>
(1) Market Value Adjustment Factor (MVA) = (1 + Guaranteed Interest Rate) n/365 -1
----------------------------
1 + Current Interest Rate
(2) Maximum Free Withdrawal Amount (MFW) = Prior Year's Interest
(3) Net Sub-Account Value = [(Sub-Account Value-MFW) x (1 + MVA-Withdrawal
Charge Percent)] + MFW (4) Withdrawal Charge = (Sub-Account Value-MFW) x
Withdrawal Charge Percent (5) Market Value Adjustment = [(Sub-Account
Value-MFW) x MVA]
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Contents
<TABLE>
<S> <C>
Page
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>
INSERT CONSOLIDATED FINANCIAL STATEMENTS HERE
68310: GNAFIN.EDG Pages 1-18
[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:
Amount
------
NASD Fee $ 5,500
Securities and Exchange Commission
Registration Fee 17,241
Printing and Engraving 100,800
Accounting fees and expenses 106,750
Legal fees and expenses 41,600
================
Total Expenses $ 271,891
Item 14. Indemnification of Officers and Directors.
The registrant's By-Laws provide, inter alia, that any director,
officer or employee of the registrant may be indemnified by the registrant
against liability (including fines, penalties and amounts paid or incurred in
settlement of any action or in the satisfaction of a judgment except a judgment
in favor of the registrant) and reasonable expenses incurred by him or her in
connection with any action of whatever nature, whether civil, criminal,
administrative or investigative, in which her or she may be involved by reason
of his or her having been a director, officer or employee of the registrant. In
the case of an action brought by or in the right of the registrant, a person who
has been successful on the merits shall be indemnified as of right, no person
who has been adjudged to be liable for negligence or misconduct in the
performance of his or her duty to the registrant shall be indemnified, and any
other party shall be indemnified if the Board of Directors, acting by a quorum
consisting of directors not having an interest in the action, determines that
such person has not been guilty of negligence or misconduct in the performance
of his or her duty to the registrant. In the case of any other action, a person
who has been successful on the merits shall be indemnified as of right and any
other person shall be indemnified if the Board of Directors, acting by a quorum
consisting of directors not having an interest in the action, determines that
such person acted in good faith for a purpose which he or she reasonably
believed to be in the best interests of the registrant and, in any criminal
action or proceeding, that such person had no reasonable cause to believe that
his or her conduct was unlawful.
Item 15. Recent Sales of Unregistered Securities.
During the past three years the registrant has sold no securities
which were not registered pursuant to the Securities Act of 1933.
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
1.1 Form of Underwriting Agreement between Great
Northern Insured Annuity Corporation and GNA
Distributors, Inc. Previously filed as Exhibit 1.1
with pre-effective amendment No. 1 to Form S-1
filed on January 14, 1994.
3.1 Articles of Incorporation of Great
Northern Insured Annuity
Corporation. Previously filed as
Exhibit 3.1 to Form S-1 on May 14,
1993.
3.2 By-laws of Great Northern Insured
Annuity Corporation. Previously
filed as Exhibit 3.2 to Form S-1 on
May 14, 1993.
4.1 Group Modified Guaranteed Annuity
Contract. Previously filed as
Exhibit 4.1 to Form S-1 on May 14,
1993.
4.2 Addendum to Contract or Certificate
for Modified Guaranteed Annuity.
Previously filed as Exhibit 4.2 to
Form S-1 on May 14, 1993
4.3 Certificate of Participation.
Previously filed as Exhibit 4.3 to
Form S-1 on May 14, 1993.
4.4 Addendum to Modified Guaranteed
Annuity Certificate for 403(b)
Annuity. Previously filed as Exhibit
4.4 to Form S-1 on May 14, 1993.
4.5 Addendum to Modified Guaranteed
Annuity Certificate for Individual
Retirement Annuity. Previously filed
as Exhibit 4.5 to Form S-1 on
May 14, 1993.
5. Opinion and Consent of J. Neil
McMurdie, Esq., Associate Counsel
and Assistant Vice President.
24.1 Consent of KPMG Peat Marwick LLP.
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>
Page in Sequential
Numbering System
Where Exhibit
Exhibit No. Description Located
<S> <C>
1.1 Form of Underwriting Agreement Between Great Northern Insured Annuity Previously filed as
Corporation and GNA Distributors, Inc. Exhibit 1.1 with
Pre-effective
amendment No. 1 to
Form S-1 filed on
January 14, 1994.
3.1 Articles of Incorporation of Great Northern Insured Annuity Corporation. Previously filed as
Exhibit 3.1 to Form
S-1 on May 14,
1993.
3.2 By-Laws of Great Northern Insured Annuity Corporation. Previously filed as
Exhibit 3.2 to Form
S-1 on May 14,
1993.
4.1 Group Modified Guaranteed Annuity Contract. Previously filed as
Exhibit 4.1 to Form
S-1 on May 14,
1993.
4.2 Addendum to Contract or Certificate for Modified Guaranteed Annuity . Previously filed as
Exhibit 4.2 to Form
S-1 on May 14,
1993.
4.3 Certificate of Participation. Previously filed as
Exhibit 4.3 to Form
S-1 on May 14,
1993.
4.4 Addendum to Modified Guaranteed annuity Certificate for 403(b) Annuity. Previously filed as
Exhibit 4.4 to Form
S-1 on May 14,
1993.
4.5 Addendum to Modified Guaranteed Annuity Certificate for Individual Retirement Previously filed as
Exhibit 4.5 to Form
S-1 on May 14,
1993. Annuity.
5. Opinion and Consent of J. Neil McMurdie, Esq., Associate
Counsel and Assistant Vice President.
24.1 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: Post-Effective Amendment No. 6
Registration Statement on S-1; Registration No. 33-62674
Ladies and Gentlemen:
I have acted as counsel to Great Northern Insured Annuity Corporation
("Company") in connection with the filing with the Securities and Exchange
Commission of Post-Effective Amendment No. 6 to the above-referenced
Registration Statement on Form S-1 for the Group and Individual Modified
Guaranteed Annuity Contracts (the "Contracts") issued by the Company. I have
made such examination of the law and have examined such records and documents as
in my judgment are necessary or appropriate to enable me to render the following
opinion:
1. The Company is a duly organized, validly existing stock life
insurance company of the state of Washington.
2. The Company is authorized to issue Contracts in those states in
which it is admitted and granted authority by such states and
upon compliance with applicable local law.
3. All of the prescribed corporate procedures for the issuance of
the Contracts have been followed, and, when such Contracts are
issued in accordance with the prospectus contained in the
Registration Statement, and upon compliance with applicable law,
such Contracts will be legally issued and binding obligations of
the Company in accordance with their terms.
I hereby consent to the use of this letter, or a copy hereof, as an exhibit to
the Registration Statement, and the reference to me under the caption "Legal
Matters" in the prospectuses contained in the registration statement.
Very truly yours,
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 report for Great Northern Insured Annuity
Corporation included herein (post-effective amendment no. 6 to Form S-1 of
registration no. 33-62674) and to the reference 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>
