UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
-------------------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from to
---------------- ----------------
Commission file number 333-1173
----------------------------------
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
Colorado 84-0467907
- ----------------------------------- ---------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
8515 East Orchard Road, Greenwood Village, CO 80111
----------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
[303] 737-4128
----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----------------- -----------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of March 1, 2002, the aggregate market value of the registrant's voting stock
held by non-affiliates of the registrant was $0.
As of March 1, 2002, 7,032,000 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
NOTE: This Form 10-K is filed by the registrant only as a consequence of the
sale by the registrant of a market value adjusted annuity product.
PART I
ITEM 1. BUSINESS
A. ORGANIZATION AND CORPORATE STRUCTURE
Great-West Life & Annuity Insurance Company (the Company) is a stock
life insurance company originally organized in 1907. The Company is
domiciled in Colorado.
The Company is a wholly-owned subsidiary of GWL&A Financial Inc. (GWL&A
Financial), a Delaware holding company. The Company is indirectly owned
by Great-West Lifeco Inc. (Great-West Lifeco), a Canadian holding
company. Great-West Lifeco is a subsidiary of Power Financial
Corporation (Power Financial), a Canadian holding company with
substantial interests in the financial services industry. Power
Corporation of Canada (Power Corporation), a Canadian holding and
management company, has voting control of Power Financial. Mr. Paul
Desmarais, through a group of private holding companies that he
controls, has voting control of Power Corporation.
Shares of Great-West Lifeco, Power Financial, and Power Corporation are
traded publicly in Canada.
B. BUSINESS OF THE COMPANY
The Company is authorized to engage in the sale of life insurance,
accident and health insurance, and annuities. It is qualified to do
business in all states in the United States except New York, and in the
District of Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands.
The Company conducts business in New York through its subsidiary, First
Great-West Life & Annuity Insurance Company. The Company is also a
licensed reinsurer in the state of New York. Based on the latest
available December 31, 2000 data, the Company ranks 31st in terms of
admitted assets of all U.S. life insurance companies.
The Company operates in the following two business segments:
Employee Benefits - life, health and 401(k) products for group
clients
Financial Services - savings products for both public and non-profit
employers and individuals (including 401, 403(b),
408, and 457 plans), and life insurance products
for individuals and businesses.
The table that follows summarizes premiums and deposits for the years
indicated. For further consolidated financial information concerning
the Company, see Item 6 (Selected Financial Data), and Item 8
(Financial Statements and Supplementary Data).
For commentary on the information in the following table, see Item 7
(Management's Discussion and Analysis of Financial Condition and
Results of Operations).
[Millions]2001 2000 1999
---------------------------------------------- --------------- --------------- ----------------
Premium Income
Employee Benefits
Group life & health $ 1,034 $ 1,143 $ 991
--------------- ----------------
---------------
Total Employee Benefits 1,034 1,143 991
--------------- --------------- ----------------
Financial Services
Savings 9 7 14
Individual insurance 161 183 158
--------------- --------------- ----------------
Total Financial Services 170 190 172
--------------- ----------------
---------------
Total premium income $ 1,204 $ 1,333 $ 1,163
=============== =============== ================
Fee Income
Employee Benefits
Group life & health $ 713 $ 649 $ 454
401(k) 96 104 95
--------------- ----------------
---------------
Total Employee Benefits 809 753 549
--------------- --------------- ----------------
Financial Services
Savings 120 111 81
Individual insurance 18 8 5
--------------- ----------------
---------------
Total Financial Services 138 119 86
--------------- ----------------
---------------
Total fee income $ 947 $ 872 $ 635
=============== =============== ================
Deposits for investment-type
contracts
Employee Benefits $ 26 $ 27 $ 26
Financial Services 601 808 608
--------------- ----------------
---------------
Total investment-type deposits $ 627 $ 835 $ 634
=============== =============== ================
Deposits to Separate Accounts
Employee Benefits $ 1,806 $ 1,951 $ 1,745
Financial Services 1,434 1,154 838
--------------- ----------------
---------------
Total separate accounts deposits $ 3,240 $ 3,105 $ 2,583
=============== =============== ================
Self-funded equivalents -
Employee Benefits$ 5,721 $ 5,181 $ 2,979
=============== =============== ================
All information in the following table and other tables herein is derived from
information that has been prepared in conformity with accounting principles
generally accepted in the United States of America, unless otherwise indicated.
Investment-type contracts are contracts that include significant cash build-up
features, as discussed in FASB Statement No. 97.
Self-funded equivalents generally represent paid claims under minimum premium
and administrative services only contracts, which amounts approximate the
additional premiums that could have been earned under such contracts if they had
been written as traditional indemnity or HMO programs.
C. EMPLOYEE BENEFITS
1. Principal Products
The Employee Benefits segment of the Company provides a full range
of employee benefits products to more than 13,000 employers across
the United States. The Employee Benefits division is divided into
two units, one of which deals with employer groups of more than
five hundred employees and the other which deals with employer
groups of less than five hundred employees.
The Company offers customers a variety of health plan options to
help them maximize the value of their employee benefits package.
The Company's health care business is primarily self-funded,
whereby the employer assumes all or a significant portion of the
risk. For companies with better than average claims experience,
this can result in significant health care savings.
The Company offers employers a total benefits solution - an
integrated package of group life and disability insurance,
managed-care programs, 401(k) savings plans and flexible spending
accounts. Through integrated pricing, administration, funding, and
service, the Company helps employers provide cost-effective
benefits that will attract and retain quality employees, and at
the same time, helps employees reach their personal goals by
offering benefit choices, along with information needed to make
appropriate choices. Many customers also find this integrated
approach appealing because their benefit plans are administered
through a single company with linked systems that provide on-line
administration and account access, for enhanced efficiency and
simplified plan administration.
The Company offers disability insurance which is a type of health
insurance designed to compensate insured people for a portion of
the income they lose because of a disabling injury or illness.
Generally, benefits are in the form of monthly payments.
The Company offers a choice of managed care products including
Health Maintenance Organization (HMO) plans, which provide a high
degree of managed care, Point of Service (POS) plans that offer
more flexibility in provider choice than HMO plans, and Preferred
Provider Organization (PPO) plans.
Under HMO plans, health care for the member is coordinated by a
primary care physician who is responsible for managing all aspects
of the member's health care. HMO plans offer a broad scope of
benefits coverage including routine office visits and preventive
care, as well as lower premiums and low co-payments that minimize
out-of-pocket costs. There are no claims for a member to file when
services are received through a primary care physician.
POS plans also require that a member enroll with a primary care
physician who is responsible for coordinating the member's health
care. Similar to an HMO, members receive the highest benefit
coverage and the lowest out-of-pocket costs when they use their
primary care physician to coordinate their health care. In
contrast to an HMO, members can seek care outside of the primary
care physician's direction, at a reduced level of benefits. Some
benefits may not be covered outside the in-network POS plan.
PPO plans offer members a greater choice of physicians and
hospitals. Members do not need to enroll with a primary care
physician - they simply select a contracted PPO provider at the
time of the service to receive the highest level of benefits. If
members seek care outside of the PPO network, they receive a lower
level of benefits.
The One Health Plan HMO subsidiary organization administers
provider networks and provides medical management, member
services, and quality assurance for the other managed care
products of the Company, and New England Life Insurance Company
(New England). In addition to creating economies of scale, this
"pooling" of PPO, POS, and HMO membership benefits the Company by
improving its position in negotiating provider reimbursement
arrangements that lead to more competitive pricing.
The Company offers Internal Revenue Code Section 125 plans that
enable participants to set aside pre-tax dollars to pay for
non-reimbursement medical expenses and dependent care expenses.
This creates tax efficiencies for both the employer and its
employees.
The Company offers group life insurance. Sales of group life
insurance consist principally of renewable term coverage, the
amounts of which are usually linked to individual employee wage
levels. The following table shows group life insurance in force
prior to reinsurance ceded for the year indicated:
Years Ended December 31,
---------------------------------------------------------------------------
[Millions] 2001 2000 1999 1998 1997
----------------------- ------------ ----------- ----------- ----------- ------------
In force
end of year $ 66,539$ 96,311 $ 83,901 $ 84,121 $ 53,211
Includes $8,445, $18,397, $25,812, and $25,597 of in force group life insurance
obtained from the acquisition of Alta for the years ended December 31, 2001,
2000, 1999, and 1998, respectively. Also includes $14,659 and $18,408 for the
years ended December 31, 2001 and 2000, respectively, of in force group life
insurance obtained from the acquisition of General American. The 2001 figure was
influenced by a decline in total health care membership and the Company's
decision to discontinue certain group life insurance business obtained through
acquisitions.
The Company's 401(k) product is offered by way of a group fixed
and variable deferred annuity contract. The product provides a
variety of funding and distribution options for employer-approved
retirement plans that qualify under Internal Revenue Code Section
401(k).
The 401(k) product investment options includes guaranteed interest
rate options for various lengths of time, variable investment
options, or a self-directed brokerage option. For the guaranteed
interest rate option, the difference between the income earned on
investments in the Company's general account and the interest
credited to the participant's account balance flows through to
operating income.
Variable investment options utilize separate accounts to provide
participants with a vehicle to assume the investment risks. Assets
held under these options are invested, as designated by the
participant, in separate accounts that in turn invest in shares of
underlying funds managed by a subsidiary of the Company or by
selected external fund managers.
Of the total 401(k) assets under administration in 2001 and 2000,
96% were allocated to variable investment options.
The Company is compensated by the separate accounts for bearing
expense risks pertaining to the variable annuity contract and for
providing administrative services. For certain funds, a subsidiary
of the Company also receives fees for serving as an investment
advisor for those underlying funds that are managed by the
subsidiary.
Customer retention is a key factor for the profitability of the
Company's 401(k) product. The annuity contract imposes a charge
for termination during a designated period of time after the
contract's inception. The charge is determined in accordance with
a formula in the contract. Existing federal tax penalties on
distributions prior to age 59 1/2 provide an additional
disincentive to premature surrenders of account balances, but do
not impede rollovers to products of competitors.
The Company offers a rollover Individual Retirement Account that
allows individuals to move retirement funds from a 401(k) plan to
a qualified Individual Retirement Account.
In the following table the amount of 401(k) business in force is
measured by the total of individual account balances:
Year Ended Fixed Variable
December 31, Annuities Annuities
------------------- ------------------- --------------------
[millions] [millions]
1997 $ 328 $ 4,568
1998 299 5,770
1999 268 7,339
2000 248 6,614
2001 240 5,911
2. Method of Distribution
The Company distributes its products and services through field
sales staff of the Company located in 43 sales offices throughout
the United States. Each sales office works with insurance brokers,
agents, and consultants in their local market.
3. Competition
The employee benefits industry is highly competitive. The United
States health care industry continues to experience mergers and
consolidations. A number of larger carriers have dropped out of
the group health market entirely. Although there are still many
different carriers in the marketplace, it has become dominated by
an increasingly smaller number of carriers, including the Company.
The highly competitive marketplace creates pricing pressures that
encourage employers to seek competitive bids each year. Although
most employers are looking for affordably priced employee benefits
products, they also want to offer product choices because employee
needs differ. In many cases it is more cost-effective and
efficient for an employer to contract with a carrier such as the
Company that offers multiple product lines and centralized
administration.
In addition to price there are a number of other factors that
influence employer decision-making. These factors include; quality
of services; scope, cost-effectiveness and quality of provider
networks; product responsiveness to customers' needs;
cost-containment services; and effectiveness of marketing and
sales.
4. Reserves
For group whole life and term insurance products, policy reserve
liabilities are equal to the present value of future benefits and
expenses less the present value of future net premiums using best
estimate assumptions for interest, mortality, and expenses
(including margins for adverse deviation). For disability waiver
of premium and paid up group whole life contracts (included within
the group life family of products offered by the Company), the
policy reserves equal the present value of future benefits and
expenses using best estimate assumptions for interest, mortality,
and expenses (including margins for adverse deviation). For group
universal life (included within the group life family of products
offered by the Company), the policy reserves equal the accumulated
fund balance (that reflects cumulative deposits plus credited
interest less charges thereon). Reserves for long-term disability
products are established for lives currently in payment status, or
that are approved for payment but are in a waiting period, using
industry and Company morbidity factors, and interest rates based
on Company experience. In addition, reserves are held for claims
that have been incurred but not reported and for long term
disability claims that have been reported but not yet adjudicated.
For medical, dental, and vision insurance products, reserves
reflect the ultimate cost of claims including, on an estimated
basis, (i) claims that have been reported but not settled, and
(ii) claims that have been incurred but not reported. Claim
reserves are based upon factors derived from past experience.
Reserves also reflect retrospective experience rating that is done
on certain types of business.
Reserves for investment contracts (401(k) deferred annuities) are
equal to the participants' account balances.
Assumptions for mortality and morbidity experience are
periodically reviewed against published industry data and company
experience.
The above mentioned reserves are computed amounts that, with
additions from premiums and deposits to be received, and with
interest on such reserves, are expected to be sufficient to meet
the Company's policy obligations such as paying expected death or
retirement benefits or surrender requests and to generate profits.
5. Reinsurance
The Company seeks to limit its exposure on any single insured and
to recover a portion of benefits paid by ceding risks to other
insurance enterprises under excess coverage and co-insurance
contracts. The maximum amount of group life insurance retained on
any one life is $1.5 million. The maximum amount of group monthly
disability income benefit at risk on any one life is $6,000 per
month.
The Company has a marketing and administrative services
arrangement with New England. Under reinsurance agreements, New
England issues group life and health, and 401(k) products and then
immediately reinsures 50% of its group life and health business,
and nearly 100% of its guaranteed 401(k) business, with the
Company. Effective January 1, 2001, the Company renegotiated this
arrangement with New England, resulting in a shift of
responsibility from New England to the Company for marketing
operations.
D. FINANCIAL SERVICES
1. Principal Products
The Financial Services segment of the Company develops,
administers, and sells retirement savings and life insurance
products and services for individuals, and for employees of state
and local governments, hospitals, non-profit organizations, and
public school districts.
The Company's core retirement savings business is in the
public/non-profit pension market. The Company provides investment
products, and administrative and communication services, to
employees of state and local governments (Internal Revenue Code
Section 457 plans), as well as employees of hospitals, non-profit
organizations, and public school districts (Internal Revenue Code
Section 401, 403(b), 408, and 457 plans). The Company provides
pension plan administrative services through a subsidiary company,
Financial Administrative Services Corporation (FASCorp). The
Company provides marketing and communication services through
another subsidiary company, BenefitsCorp, Inc., and through
BenefitsCorp Equities, Inc., a broker-dealer subsidiary of
BenefitsCorp, Inc. (collectively, BenefitsCorp).
The Company's primary marketing emphasis in the public/non-profit
pension market is group fixed and variable annuity contracts for
defined contribution retirement savings plans. Defined
contribution plans provide for benefits based upon the value of
contributions to, and investment returns on, the individual's
account. This has been the fastest growing portion of the pension
marketplace in recent years.
The Company has a marketing agreement with Charles Schwab & Co.,
Inc. to sell individual fixed and variable qualified and
non-qualified deferred annuities. The fixed product is a Guarantee
Period Fund that was established as a non-unitized separate
account in which the owner does not participate in the performance
of the assets. The assets accrue solely to the benefit of the
Company and any gain or loss in the Guarantee Period Fund is borne
entirely by the Company. Guarantee period durations of one to ten
years are currently being offered by the Company. Distributions
from the amounts allocated to a Guarantee Period Fund more than
six months prior to the maturity date results in a market value
adjustment (MVA). The MVA reflects the relationship as of the time
of its calculation between the current U.S. Treasury Strip ask
side yield and the U.S. Treasury Strip ask side yield at the
inception of the contract.
The Company's variable annuity products offer several investment
options. The Company's variable annuity products provide the
opportunity for contractholders to assume the risks of, and
receive the benefits from, the investment of retirement assets.
The variable product assets are invested, as designated by the
participant, in separate accounts that in turn invest in shares of
underlying funds managed by a subsidiary of the Company or by
selected external fund managers.
Demand for investment diversification by customers and their
participants continued to grow during 2001. The Company continues
to expand the annuity products available through Maxim Series
Fund, Inc., a subsidiary of the Company that is an insurance
products mutual fund company and through arrangements with
external fund managers. The array of funds allows customers to
diversify their investments across a wide range of investment
products, including fixed income, stock, and international equity
fund offerings.
On a very limited basis, the Company offers single premium
annuities and guaranteed certificates that provide guarantees of
principal and interest with a fixed maturity date.
Customer retention is a key factor for the profitability of
individual annuity products. To encourage customer retention,
annuity contracts typically impose a surrender charge on
policyholder balances withdrawn for a period of time after the
contract's inception. The period of time and level of the charge
vary by product. Existing federal tax penalties on distributions
prior to age 59 1/2 provide an additional disincentive to
premature surrenders of annuity balances but do not impede
transfers of those balances to products of competitors.
Annuity products generate earnings from the investment spreads on
the guaranteed investment options and from the fees collected for
mortality and expense risks associated with the variable options.
The Company also receives fees for providing administrative
services to contractholders. A subsidiary of the Company receives
fees for serving as an investment advisor for underlying funds
that are managed by the subsidiary.
The Company's annuity products are supported by the general
account assets of the Company for guaranteed investment options,
and the separate account assets for the variable investment
options.
The amount of annuity products in force is measured by account
balances. The following table shows guaranteed investment contract
and group and individual annuity account balances for the years
indicated:
Guaranteed
Year ended Investment Fixed Variable
December 31, Contracts Annuities Annuities
----------------------- --------------------- --------------------- ---------------------
[millions] [millions] [millions]
1997 $ 409 $ 5,227 $ 3,172
1998 275 4,849 4,318
1999 105 4,592 4,935
2000 103 4,394 5,081
2001 89 4,385 5,304
In addition to providing administrative services to customers of
the Company's annuities, FASCorp also provides comprehensive third
party administrative and recordkeeping services for other
financial institutions and employer-sponsored retirement plans.
Assets under administration with FASCorp from public/non-profit
and third party administration customers totaled $28.1 billion at
December 31, 2001 and $24.3 billion at December 31, 2000.
Life insurance products in force include participating and
non-participating term life, whole life, and universal life.
Participating policyholders share in the financial results
(differences in experience of actual financial results versus
pricing expectations) of the participating business in the form of
dividends. Participating products are no longer actively marketed
by the Company but continued to produce renewal premium of $132.7
million, $152.3 million, and $146.5 million in 2001, 2000, and
1999, respectively. Participating dividends of $76.5 million,
$74.4 million, and $70.2 million were paid in 2001, 2000, and
1999, respectively. The provision for participating policyholder
earnings is reflected in liabilities in undistributed earnings on
participating policyholders in the consolidated balance sheets of
the Company. Participating policyholder earnings are not included
in the consolidated net income of the Company.
Term life provides coverage for a stated period and pays a death
benefit only if the insured dies within the period. Whole life
provides guaranteed death benefits and level premium payments for
the life of the insured. Universal life products include a cash
value component that is credited with interest at regular
intervals. The Company's earnings result from the difference
between the investment income and interest credited on customer
cash values and from differences between charges for mortality and
actual death claims. Universal life cash values are charged for
the cost of insurance coverage and for administrative expenses.
At December 31, 2001 and 2000, the Company had $3.9 billion and
$3.7 billion, respectively, of policy reserves on individual
insurance products sold to corporations to provide coverage on the
lives of certain employees, also known as Corporate-Owned Life
Insurance (COLI). Due to legislation enacted during 1996 that
phased out the interest deductions on COLI policy loans over a
two-year period ending 1998, COLI sales have ceased.
The Company has shifted its emphasis to the Business-Owned Life
Insurance (BOLI) market. BOLI was not affected by the 1996
legislation. These products are interest-sensitive whole life and
universal life policies that fund post-retirement benefits for
employees. At December 31, 2001, the Company had $1.7 billion of
fixed and $1.2 billion of separate account BOLI policy reserves
compared to $1.3 billion of fixed and $0.6 billion of separate
account reserves at December 31, 2000.
Sales of life insurance products typically have initial marketing
expenses which are deferred. Therefore, retention is an important
factor in profitability and is encouraged through product
features. For example, the Company's universal and whole life
insurance contracts typically impose a surrender charge on
policyholder balances withdrawn within the first ten years of the
contract's inception. The period of time and level of the charge
vary by product. In addition, more favorable credited rates may be
offered after policies have been in force for a period of time.
Certain of the Company's life insurance and group annuity products
allow policy owners to borrow against their policies. At December
31, 2001, approximately 7% (8% in 2000 and 5% in 1999) of
outstanding policy loans were on individual life policies that had
fixed interest rates ranging from 5.0% to 8.4%. The remaining 93%
of outstanding policy loans had variable interest rates averaging
6.14% at December 31, 2001. Investment income from policy loans
was $203.8 million, $191.5 million, and $167.8 million for the
years ended December 31, 2001, 2000, and 1999, respectively.
The following table summarizes individual life insurance in force
prior to reinsurance ceded for the years indicated:
Years Ended December 31,
---------------------------------------------------------------------------
[Millions] 2001 2000 1999 1998 1997
----------------------- ----------- ----------- ----------- ----------- ------------
In force
end of year $ 50,769 $ 46,631 $ 43,831 $ 42,966 $ 28,266
2. Method of Distribution
Financial Services primarily uses BenefitsCorp to distribute
pension products and to provide communication and enrollment
services to employers in the public/non-profit market. Pension
products are also distributed through independent marketing
agencies.
The Company distributes universal and joint survivor life and term
insurance, as well as individual fixed and variable qualified and
non-qualified deferred annuities, through Charles Schwab & Co.,
Inc. Individual life products are also sold through large banks
and through the Internet. BOLI products are currently marketed
through one broker, Clark/Bardes, Inc.
3. Competition
The life insurance, savings, and investments marketplace is highly
competitive. The Company's competitors include mutual fund
companies, insurance companies, banks, investment advisors, and
certain service and professional organizations. No one competitor
or small number of competitors is dominant. Competition focuses on
service, technology, cost, variety of investment options,
investment performance, product features, price, and financial
strength as indicated by ratings issued by nationally recognized
agencies. For more information on the Company's ratings, see Item
1(G) (Ratings).
4. Reserves
Reserves for universal life policies are equal to cumulative
deposits, less withdrawals and mortality and expense charges, plus
credited interest.
Reserves for all fixed individual life insurance contracts are
computed on the basis of assumed investment yield, mortality,
morbidity, and expenses (including a margin for adverse
deviation). These reserves are calculated as the present value of
future benefits (including dividends) and expenses less the
present value of future net premiums. The assumptions used in
calculating the reserves generally vary by plan, year of issue,
and policy duration.
For all life insurance contracts (including universal life
insurance), reserves are established for claims that have been
incurred but not reported based on factors derived from past
experience.
Reserves for limited payment contracts (immediate annuities) are
computed on the basis of assumed investment yield, mortality
(where payouts are contingent on survivorship) and expenses. These
assumptions generally vary by plan, year of issue, and policy
duration. Reserves for investment contracts (deferred annuities)
are equal to the participants' account balances.
The above mentioned reserves are computed amounts that, with
additions from premiums and deposits to be received, and with
interest on such reserves, are expected to be sufficient to meet
the Company's policy obligations (such as paying expected death or
retirement benefits or surrender requests) and to generate
profits.
5. Reinsurance
The Company seeks to limit its exposure to loss on any single
insured and to recover a portion of benefits paid by ceding risks
to other insurance enterprises under excess coverage and
co-insurance contracts. The Company retains a maximum of $1.5
million of coverage per individual life.
E. INVESTMENT OPERATIONS
The Company's investment division manages or administers the Company's
general and separate accounts in support of cash and liquidity
requirements of the Company's insurance and investment products. Total
investments at December 31, 2001, were $26.9 billion, comprised of
general account assets of $14.3 billion and separate account assets of
$12.6 billion. Total investments at December 31, 2000, were $26.1
billion, comprised of general account assets of $13.7 billion and
separate account assets of $12.4 billion.
The Company invests in a broad range of asset classes, primarily
domestic and international fixed maturities and mortgage loans. Fixed
maturity investments include public and privately placed corporate
bonds, government bonds, and redeemable preferred stocks. The Company
also invests in mortgage-backed securities and asset-backed securities.
The Company manages the characteristics of its investment assets, such
as liquidity, currency, yield, and duration, to reflect the underlying
characteristics of related insurance and policyholder liabilities that
vary among the Company's principal product lines. The Company observes
strict asset and liability matching guidelines that are designed to
ensure that the investment portfolio will appropriately meet the cash
flow and income requirements of its liabilities. In connection with its
investment strategy, the Company makes limited use of derivative
instruments in hedging applications to manage market risk. Derivative
instruments are not used for speculative purposes. For more information
on derivatives see Notes 1 and 7 to the consolidated financial
statements of the Company (the Consolidated Financial Statements) that
are included in Item 8 (Financial Statements and Supplementary Data).
The Company routinely monitors and evaluates the status of its
investments in light of current economic conditions, trends in capital
markets, and other factors. These other factors include investment
size, quality, concentration by industry and other diversification
considerations for fixed maturity investments.
The Company's fixed maturity investments constituted 70% of investment
assets as of December 31, 2001 compared to 69% in 2000. The Company
reduces credit risk for the portfolio as a whole by investing primarily
in investment-grade fixed maturities. As of December 31, 2001 and 2000,
98%, and 99%, respectively, of the bond portfolio carried an investment
grade rating.
The Company's mortgage portfolio constituted 4% and 6% of investment
assets as of December 31, 2001 and 2000, respectively. The Company's
mortgage investment policy emphasizes a broadly diversified portfolio
of commercial and industrial mortgages. Mortgage loans are subject to
underwriting criteria addressing loan-to-value ratios, debt service
coverage, cash flow, tenant quality, leasing, market, location, and
financial strength of borrower. Since 1986, the Company has reduced the
overall weighting of its mortgage portfolio with a greater emphasis in
bond investments.
At December 31, 2001, 21% of investment assets were invested in policy
loans, 3% were invested in short-term investments, 1% were invested in
stocks, and 1% were invested in real estate compared to 20%, 3%, 1%,
and 1%, respectively, in 2000.
The following table sets forth the distribution of invested assets,
cash and accrued investment income for the Company's general account as
of the end of the years indicated:
Carrying Value in
Millions 2001 2000 1999 1998 1997
--------------------------- ------------ ------------ ------------ ------------ ------------
Debt Securities:
U.S. Government
Securities and
Obligations of
U.S. Government
Agencies $ 3,075 $ 2,315 $ 1,859 $ 1,951 $ 2,091
Corporate bonds 7,013 7,055 7,078 7,117 6,544
Foreign
Governments 28 50 51 69 146
------------ ------------ ------------ ------------ ------------
Total 10,116 9,420 8,988 9,137 8,781
Common stock 73 95 69 49 39
Mortgage loans 613 843 975 1,133 1,236
Real estate 113 107 104 73 94
Policy loans 3,001 2,810 2,681 2,859 2,657
Short-term
investments 425 414 241 420 399
------------ ------------ ------------ ------------ ------------
Total investments $ 14,341 $ 13,689 $ 13,058 $ 13,671 $ 13,206
============ ============ ============ ============ ============
Cash $ 214 $ 154 $ 268 $ 176 $ 126
Accrued investment
income 131 139 138 158 166
The following table summarizes the Company's general account investment
results:
[Millions] Net Earned Net
Investment Investment
For the year: Income Income Rate
------------------------- ----------------- ----------------
2001 $ 941 7.10 %
2000 931 7.34 %
1999 876 6.96 %
1998 897 7.03 %
1997 882 7.21 %
1996 835 7.05 %
F. REGULATION
1. Insurance Regulation
The business of the Company is subject to comprehensive state and
federal regulation and supervision throughout the United States
that primarily provides safeguards for policyholders rather than
investors. The laws of the various state jurisdictions establish
supervisory agencies with broad administrative powers with respect
to such matters as admittance of assets, premium rating
methodology, policy forms, establishing reserve requirements and
solvency standards, maximum interest rates on life insurance
policy loans and minimum rates for accumulation of surrender
values, the type, amounts and valuation of investments permitted,
and HMO operations.
The Company's operations and accounts are subject to examination
by the Colorado Insurance Division and other regulators at
specified intervals. A financial examination by the Colorado
Insurance Division was completed in 1997 and covered the five-year
period ended December 31, 1995. This examination produced no
significant adverse findings regarding the Company. The latest
financial examination by the Colorado Insurance Division is in
progress and will cover the five-year period ended December 31,
2000.
The National Association of Insurance Commissioners (NAIC) has
adopted risk-based capital rules and other financial ratios for
life insurance companies. Based on the Company's December 31, 2001
statutory financial reports the Company has risk-based capital
well in excess of that required.
The NAIC has also adopted the Codification of Statutory Accounting
Principles (Codification). The Codification that is intended to
standardize accounting and reporting to state insurance
departments is effective January 1, 2001. However, statutory
accounting principles will continue to be established by
individual state laws and permitted practices. The Colorado
Division of Insurance required adoption of Codification with
certain modifications for the preparation of statutory financial
statements effective January 1, 2001 (see Note 13 to the
consolidated financial statements).
2. Insurance Holding Company Regulations
The Company and certain of its subsidiaries are subject to and
comply with insurance holding company regulations in the
applicable states. These regulations contain certain restrictions
and reporting requirements for transactions between affiliates
including the payments of dividends. They also regulate changes in
control of an insurance company.
3. Securities Laws
The Company is subject to various levels of regulation under
federal securities laws. The Company's broker-dealer subsidiaries
are regulated by the Securities and Exchange Commission (SEC) and
the National Association of Securities Dealers, Inc. The Company's
investment advisor subsidiary and transfer agent subsidiary are
regulated by the SEC. Certain of the Company's separate accounts,
mutual funds, and variable insurance and annuity products are
registered under the Investment Company Act of 1940 and the
Securities Act of 1933.
4. Guaranty Funds
Under insurance guaranty fund laws existing in all states,
insurers doing business in those states can be assessed (up to
prescribed limits) for certain obligations of insolvent insurance
companies. The Company has established a reserve of $3.4 million
as of December 31, 2001 to cover future assessments of known
insolvencies of other companies. The Company has historically
recovered more than half of the guaranty fund assessments through
statutorily permitted premium tax offsets. The Company has a
prepaid asset associated with guaranty fund assessments of $2.0
million at December 31, 2001.
5. Potential Legislation
United States legislative developments in various areas including
pension regulation, financial services regulation, and health care
legislation could significantly and adversely affect the Company
in the future. Congress continues to consider legislation relating
to health care reform and managed care issues (including patients'
rights, mental health parity and managed care or enterprise
liability). Congress is also considering changes to various
features of retirement plans such as the holding of company stock,
diversification rights, imposition of transaction restrictions,
expanded disclosure requirements and greater access to investment
advice for participants.
It is not possible to predict whether future legislation or
regulation adversely affecting the business of the Company will be
enacted and, if enacted, the extent to which such legislation or
regulation will have an effect on the Company and its competitors.
G. RATINGS
The Company is rated by a number of nationally recognized rating
agencies. The ratings represent the opinion of the rating agencies
regarding the financial strength of the Company and its ability to meet
ongoing obligations to policyholders.
Rating Agency Measurement Rating
------------------------------------- ----------------------------------------------------- ---------
A.M. Best Company, Inc. Financial strength, operating performance and A++(1)
market profile
Fitch, Inc. Financial strength AAA(2)
Moody's Investors Service Financial strength Aa2(3)
Standard & Poor's Corporation Financial strength AA+(4)
(1) Superior (highest rating out of six categories) (2) Exceptionally
Strong (highest rating out of twelve categories) (3) Excellent (second
highest rating out of nine categories) (4) Very strong (second highest
rating out of nine categories)
H. MISCELLANEOUS
No customer accounted for 10% or more of the Company's consolidated
revenues in 2001 or 2000. In addition, no segment of the Company's
business is dependent on a single customer or a few customers, the loss
of which would have a significant effect on the Company or any of its
business segments. The loss of business from any one, or a few,
independent brokers or agents would not have a material adverse effect
on the Company or any of its business segments.
The Company had approximately 8,200 employees at December 31, 2001.
ITEM 2. PROPERTIES
The Head Office of the Company consists of a 752,000 square foot
complex located in Greenwood Village, Colorado. The Company leases
sales and claims offices throughout the United States.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is a party or of which any of their property is
the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2001 to a vote of
security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. EQUITY SECURITY HOLDERS AND MARKET INFORMATION
There is no established public trading market for the Company's common
equity.
B. DIVIDENDS
In the two most recent fiscal years the Company has paid quarterly
dividends on its common shares. Dividends on common stock totaled
$187.6 million in 2001 and $134.1 million in 2000.
Under Colorado law the Company cannot, without the approval of the
Colorado Commissioner of Insurance, pay a dividend if as a result of
such payment, the total of all dividends paid in the preceding twelve
months, would exceed the greater of (i) 10% of the Company's statutory
surplus as regards policyholders as at the preceding December 31; or
(ii) the Company's statutory net gain from operations as at the
preceding December 31.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain financial data of the Company.
This summary has been derived in part from and should be read in
conjunction with the Company's Consolidated Financial Statements. Note
1 in the financial statements discusses the significant accounting
policies of the Company. Significant estimates are required to account
for policy reserves, allowances for credit losses, deferred policy
acquisition costs, and valuation of privately placed fixed maturities.
Actual results could differ from those estimates.
INCOME STATEMENT Years Ended December 31,
------------------------------------------------------------------------
DATA 2001 2000 1999 1998 1997
------------------------------- ----------- ----------- ------------ ----------- -----------
[millions]
Premium income $ 1,204 $ 1,333 $ 1,163 $ 995 $ 833
Fee income 947 872 635 516 420
Net investment income 941 931 876 897 882
Net realized investment
gains 47 28 1 38 10
----------- ----------- ------------ ----------- -----------
Total revenues 3,139 3,164 2,675 2,446 2,145
Policyholder benefits 1,696 1,746 1,582 1,462 1,385
Operating expenses 1,028 1,025 804 688 552
----------- ----------- ------------ ----------- -----------
Total benefits and
expenses excluding
special charges 2,724 2,771 2,386 2,150 1,937
Income tax expense 141 134 83 99 49
----------- ----------- ------------ ----------- -----------
Net income before
special charges 274 259 206 197 159
Special charges (net) 81
----------- ----------- ------------ ----------- -----------
Net income $ 193 $ 259 $ 206 $ 197 $ 159
=========== =========== ============ =========== ===========
Deposits for investment-
type contracts $ 627 $ 835 $ 634 $ 1,344 $ 658
Deposits to separate
accounts 3,240 3,105 2,583 2,208 2,145
Self-funded premium
equivalents 5,721 5,181 2,979 2,606 1,940
BALANCE SHEET Years Ended December 31,
------------------------------------------------------------------------
DATA 2001 2000 1999 1998 1997
------------------------------- ----------- ----------- ------------ ----------- -----------
[millions]
Investment assets $ 14,341 $ 13,689 $ 13,058 $ 13,671 $ 13,206
Separate account assets 12,585 12,381 12,820 10,100 7,847
Total assets 28,811 27,897 27,530 25,123 22,078
Total policy benefit
liabilities 12,931 12,825 12,341 12,583 11,706
Due to GWL 42 43 35 52 118
Due to GWL&A Financial 251 171 175
Total shareholder's
equity 1,470 1,427 1,167 1,199 1,186
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements. Forward-looking
statements are statements not based on historical information and that
relate to future operations, strategies, financial results, or other
developments. In particular, statements using verbs such as "expected",
"anticipate", "believe", or words of similar import generally involve
forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements that represent the
Company's beliefs concerning future or projected levels of sales of the
Company's products, investment spreads or yields, or the earnings or
profitability of the Company's activities. Forward-looking statements
are necessarily based upon estimates and assumptions that are
inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's
control and many of which, with respect to future business decisions,
are subject to change. These uncertainties and contingencies can affect
actual results and could cause actual results to differ materially from
those expressed in any forward-looking statements made by, or on behalf
of, the Company. Whether or not actual results differ materially from
forward-looking statements may depend on numerous foreseeable and
unforeseeable events or developments, some of which may be national in
scope, such as general economic conditions and interest rates, some of
which may be related to the insurance industry generally, such as
pricing competition, regulatory developments and industry
consolidation, and others of which may relate to the Company
specifically, such as credit, volatility, and other risks associated
with the Company's investment portfolio and other factors. Readers are
also directed to consider other matters, including any risks and
uncertainties, discussed in documents filed by the Company and certain
of its subsidiaries with the Securities and Exchange Commission.
Management's discussion and analysis of financial conditions and
results of operations of the Company for the three years ended December
31, 2001 follows. This management discussion and analysis should be
read in conjunction with the financial data contained in Item 6 and the
Company's Consolidated Financial Statements.
A. COMPANY RESULTS OF OPERATIONS
1. Consolidated Results
The Company's consolidated net income increased $33.4 million or
13% in 2001 when compared to 2000, before one-time charges of
$80.9 million and operating losses of $18.7 million, net of tax,
related to the Alta Health & Life Insurance Company (Alta)
business. Alta was acquired by the Company on July 8, 1998. During
2001 and 2000 the Alta business continued to be run as a
free-standing unit but was converted to the Company's systems and
accounting processes. This conversion program resulted in
significant issues related to pricing, underwriting, and
administration of the business. The Company has decided to
transition Alta business to other Company products. All Alta sales
and administration staff have become employees of the Company and
the underwriting functions will be conducted by the underwriting
staff of the Company.
The Employee Benefits segment contributed $28.9 million and the
Financial Services segment contributed $4.5 million to the growth
in net income. Of total consolidated net income in 2001 and 2000
(before one-time charges and operating losses of Alta), the
Employee Benefits segment contributed 56% and 53%, respectively,
while the Financial Services segment contributed 44% and 47%,
respectively.
In 2001, total revenues decreased $24.9 million or 0.8% to $3.1
billion when compared to 2000. The decline in revenues in 2001 was
comprised of decreased premium income of $128.9 million, increased
fee income of $75.6 million, increased net investment income of
$9.9 million and increased realized gains on investments of $18.5
million. In 2000 total revenues increased $488.6 million or 18% to
$3.2 billion when compared to 1999. The growth in revenues in 2000
was comprised of increased premium income of $169.4 million,
increased fee income of $236.5 million, increased net investment
income of $55.5 million and increased realized gains on
investments of $27.2 million.
The decreased premium income in 2001 was comprised of a decline in
Employee Benefits premium income and Financial Services premium
income of $108.1 million and $20.8 million, respectively. The
decline in premium income in the Employee Benefits segment
reflected a 18% decline in medical members from 3.2 million in
2000 to 2.6 million in 2001. The decline in premium income in the
Financial Services segment was primarily due to lapses in the
closed block of traditional life business. The increased premium
income in 2000 was comprised of growth in Employee Benefits
premium income and Financial Services premium income of $151.7
million and $17.7 million, respectively. The growth in premium
income in the Employee Benefits segment reflected $172.1 million
of premium income derived from the acquisition of the group life
and health business from General American in 2000. The growth in
premium income in the Financial Services segment was primarily due
to increased sales of the annuity products.
The increase in fee income in 2001 was comprised of Employee
Benefits fee income and Financial Services fee income of $57.2
million and $18.4 million, respectively. The 8% growth in Employee
Benefits fee income reflects a combination of an amendment to the
New England reinsurance contract, significant price increases in
the overall group health block of business, and fee increases from
service providers. The growth in Financial Services fee income in
2001 was primarily the result of new sales and the increase in
revenue from additional new participants in FASCorp. These
increases more than offset the decreased fees on variable funds
related to the weakness in the equity markets. The increase in fee
income in 2000 was comprised of Employee Benefits fee income and
Financial Services fee income of $203.7 million and $32.8 million,
respectively. The growth in Employee Benefits fee income reflected
$127.7 million of fee income derived from General American during
2000. The remaining increase was the result of new group health
sales and increased fees on 401(k) variable funds related to
growth in equity markets during the first part of 2000. The growth
in Financial Services fee income in 2000 was primarily due to new
sales and increased fees in variable funds.
Realized investment gains increased from $28.3 million in 2000 to
$46.8 million in 2001. Realized investment gains were $1.1 million
in 1999. The decrease in interest rates in 2001 and 2000
contributed to $32.1 million and $5.4 million of fixed maturity
gains, respectively. The increase in interest rates in 1999
contributed to $8.3 million of fixed maturity losses. The Company
experienced $22.2 million of fixed maturity credit losses in 2000.
Although the Company experienced stock gains in 2001, 2000 and
1999, 2000 stock gains were $20.3 million higher than 2001 and
$32.9 million higher than 1999. The Company also experienced
provisions for asset losses of $0, $8.9 and $7.0 million for 2001,
2000 and 1999, respectively.
Total benefits and expenses decreased $46.5 million or 2% in 2001
when compared to 2000. The decrease in 2001 was primarily in the
Employee Benefits segment reflecting lower claims associated with
a decrease in membership. The total benefits and expenses
increased $384.4 million or 16% in 2000, when compared to 1999.
The increase in 2000 was due to General American group life and
health business that resulted in an increase in benefits and
expenses of $296.6 million. Excluding General American, benefits
and expenses would have increased $87.8 million or 4% in 2000.
Income tax expense increased before special charges $7.1 million
or 5% in 2001 when compared to 2000. The increase reflects higher
pre-tax earnings in 2001. Income tax expense increased $50.8
million or 61% in 2000 when compared to 1999. This increase
reflects higher pre-tax earnings in 2000 and the impact of the
1999 release of contingent liabilities. See Note 11 to the
Consolidated Financial Statements for a discussion of the
Company's effective tax rates.
In evaluating its results of operations, the Company also
considers net changes in deposits received for investment-type
contracts, deposits to separate accounts, and self-funded
equivalents. Self-funded equivalents represent paid claims under
minimum premium and administrative services only contracts of
which amounts approximate the additional premiums that would have
been earned under such contracts if they had been written as
traditional indemnity or HMO programs.
Deposits for investment-type contracts decreased $208 million or
25% in 2001 when compared to 2000. Deposits for investment-type
contracts increased $201.4 million or 32% in 2000 when compared to
1999. The decrease in 2001 was primarily attributable to the
Financial Services segment, due to a drop in demand for fixed BOLI
contracts due to low interest rates. This was replaced by the BOLI
business moving to the separate account product (see below). The
increase in 2000 was primarily attributable to the Financial
Services segment, where the Company had experienced growth in
premium for fixed annuity products due to higher interest
crediting rates being offered to customers and the volatility in
the variable marketplace.
Deposits for separate accounts increased $135 million or 4% in
2001 when compared to 2000. This increase in 2001 is primarily due
to an increase in BOLI single premiums which was offset somewhat
by lower 401(k) deposits. Deposits for separate accounts increased
$522 million or 20% in 2000 when compared to 1999. This increase
in 2000 is primarily due to BOLI and 401(k) deposits that
increased from $200 million and $1.7 billion, respectively, in
1999 to $365 million and $2.0 billion, respectively, in 2000.
Self-funded premium equivalents increased $540 million or 10% in
2001 when compared to 2000. This increase was due to the General
American business ($307 million), Allmerica business ($166
million) and higher overall claims volume for the self-funded
business. Self-funded premium equivalents increased $2.2 billion
or 74% in 2000 when compared to 1999. The General American and
Allmerica acquisitions resulted in an increase of $1.7 billion for
2000.
2. Other Matters
Effective January 1, 2000, the Company co-insured the majority of
General American Life Insurance Company's (General American) group
life and health insurance business which primarily consists of
administrative services only and stop loss policies. The agreement
converted to an assumption reinsurance agreement January 1, 2001.
The Company assumed approximately $150 million of policy reserves
and miscellaneous liabilities in exchange for $150 million of cash
and miscellaneous assets from General American.
On October 6, 1999, the Company entered into a purchase and sale
agreement with Allmerica Financial Corporation (Allmerica) to
acquire via assumption reinsurance Allmerica's group life and
health insurance business on March 1, 2000. This business
primarily consists of administrative services only and stop loss
policies. The in-force business was immediately co-insured back to
Allmerica and then underwritten and retained by the Company upon
each policy renewal date.
B. EMPLOYEE BENEFITS RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Employee
Benefits segment:
Years Ended December 31,
---------------------------------------------------------
INCOME STATEMENT DATA 2001 2000 1999
--------------------------------------------- ----------------- ----------------- ----------------
[millions]
Premiums $ 1,034 $ 1,142 $ 990
Fee income 809 752 549
Net investment income 91 95 80
Net realized investment gains (losses) 18 (3) (1)
----------------- ----------------- ----------------
Total revenues 1,952 1,986 1,618
Policyholder benefits 867 923 789
Operating expenses 863 857 661
----------------- ----------------- ----------------
Total benefits and expenses
before special charges 1,730 1,780 1,450
Income tax expense 76 70 51
----------------- ----------------- ----------------
Net income excluding special charges 146 136 117
Special charges (net) 81
----------------- ----------------- ----------------
Net income $ 65 $ 136 $ 117
================= ================= ================
Deposits for investment-type
Contracts $ 26 $ 27 $ 26
Deposits to separate accounts 1,806 1,951 1,745
Self-funded premium equivalents 5,721 5,181 2,979
In the second quarter of 2001, the Company recorded a $127 million
special charge ($80.9 million, net of tax), related to Alta. The
principal components of the charge include a $46 million premium
deficiency reserve related to underpricing on the block of business, a
$29 million reserve for doubtful premium receivables, a $28 million
reserve for doubtful accident and health plan claim receivables, and a
$24 million decrease in goodwill and other.
Net income, excluding special charges of $80.9 million for Employee
Benefits after tax, increased 7% in 2001 and increased 15% in 2000. The
improvement in earnings in 2001 reflected favorable experience in
realized investment gains, expense gains associated with higher fee
income partially offset by a deterioration in morbidity (which
negatively impacted stop-loss coverages), decreases in premiums due to
membership declines, and increased bad debts due to the impact of the
economic slowdown. During 2001, the Employee Benefits segment
experienced increased medical costs and utilization trends which
contributed to the deterioration in morbidity experience. The
improvement in earnings in 2000 reflected favorable morbidity
experience in large case business, and the acquisition of General
American's group life and health business, which more than offset poor
mortality experience.
401(k) premiums and deposits for 2001 and 2000 decreased 7% and
increased 12%, respectively, as the result of lower than expected new
case sales in 2001 and higher recurring deposits from existing
customers and new sales in 2000. The number of contributing
participants decreased from 551,000 at December 31, 2000 to 546,000 at
December 31, 2001. Assets under administration (including third-party
administration) in 401(k) decreased 7% in 2001 to $7.6 billion and
decreased 5% from 1999 to 2000. The decrease in 2001 was primarily due
to the impact of lower U.S equity markets.
Equivalent premium revenue and fee income for group life and health
decreased 3% from 2000 levels as the result of a decline in membership.
From 1999 to 2000, equivalent premium revenue and fee income increased
23% as a result of increased sales and the Allmerica and General
American acquisitions.
1. Group Life and Health
The Employee Benefits segment experienced a net decrease of 1,232
group health care customers (employer groups) during 2001. There
was an 18% decrease in total health care membership from 3,158,900
at the end of 2000 to 2,587,900 at year-end 2001. POS and HMO
members decreased 30% from 718,400 in 2000 to 500,600 in 2001.
Much of the health care decline in 2001 can be attributed to
terminations resulting from aggressive pricing related to target
margins. The decline in membership was also, in part, due to
difficulties with the implementation of a systems enhancement,
which was resolved by the end of 2001; a decrease in the employee
base for existing group health care customers; and the general
decline in the economy.
There was a net increase of 107 group healthcare customers
(employer groups) during 2000. The Company experienced a 48%
increase in total health care membership from 2,130,300 at the end
of 1999 to 3,158,900 at year-end 2000. The General American and
Allmerica acquisitions added 1,099,500 medical members, offset by
a decrease of 70,900 in the remaining business. POS and HMO
members grew 31% from 549,900 in 1999 to 718,400 in 2000.
2. 401(k)
The number of new 401(k) case sales (employer groups), including
third-party administration business generated through the
Company's marketing and administration arrangement with New
England, decreased 39% to 598 in 2001 as compared to 973 in 2000,
an increase of 20% as compared to 811 in 1999. The 401(k) block of
business under administration totaled 6,900 employer groups and
546,000 individual participants in 2001, compared to 7,000
employer groups and 551,000 individual participants in 2000 and
6,400 employer groups and 501,000 individual participants in 1999.
During 2001, the in force block of 401(k) business declined
slightly with customer retention falling to 89.9% from 91.5% in
2000 reflecting the impact of health care terminations.
In addition to the Company's internally-managed funds, the Company
offers externally-managed funds from recognized mutual funds
companies such as AIM, Fidelity, Putnam, American Century,
Founders, and T. Rowe Price. This strategy, supported by
participant education efforts, is validated by the fact that 97%
of assets contributed in 2001 were allocated to variable funds.
To promote long-term asset retention, the Company enhanced a
number of products and services including prepackaged "lifestyle"
funds (The Profile Series), expense reductions for high-balance
accounts, a rollover IRA product, more effective enrollment
communications, one-on-one retirement planning assistance and
personal plan illustrations.
3. Outlook
To position itself for the future, the Employee Benefits segment
is focused on putting in place the products, strategies and
processes that will improve its competitive position in the
evolving managed care environment.
A focus on provider contracting continues to be essential to
ensuring strong morbidity results. Sales efforts will be
streamlined and concentrated on self-funded products. Continued
emphasis will be placed on expense economies and synergies to
ensure competitive administrative costs. Efficiency and customer
service will be improved through implementation of various system
initiatives and through process redesign.
The Company will continue to enhance its One Health Plan managed
care program with emphasis on medical claims management. In 2001,
the Company began converting to a three tier prescription drug
program that has different levels of co-payments. This conversion
will continue into 2002 and will help to reduce drug costs. The
Company will continue to develop its Internet based disease
management program for members with diabetes, asthma, coronary
heart disease and other chronic illnesses.
Online enrollment for life and health members was implemented in
2001. As a further enhancement to our Internet services, online
billing is scheduled for implementation in 2002 and will provide
our customers with improved service, as well as generate cost
savings to the Company.
C. FINANCIAL SERVICES RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Financial
Services segment:
Years Ended December 31,
---------------------------------------------------------
INCOME STATEMENT DATA 2001 2000 1999
--------------------------------------------- ----------------- ----------------- ----------------
[millions]
Premiums $ 170 $ 191 $ 173
Fee income 138 120 86
Net investment income 850 836 796
Net realized investment gains 29 31 2
----------------- ----------------- ----------------
Total revenues 1,187 1,178 1,057
Policyholder benefits 829 823 793
Operating expenses 165 168 143
----------------- ----------------- ----------------
Total benefits and expenses 994 991 936
----------------- ----------------- ----------------
Income from operations 193 187 121
Income tax expense 65 64 32
----------------- ----------------- ----------------
Net income $ 128 $ 123 $ 89
================= ================= ================
Deposits for investment-type
contracts $ 601 $ 808 $ 608
Deposits to separate accounts 1,434 1,154 838
During 2001, the Financial Services segment experienced continued
significant growth of participants in the public non-profit business
due to several large case sales, significant separate account sales due
to large case sales in the BOLI line of business, and strong
persistency in all lines of business.
Net income for Financial Services increased 4% in 2001 and increased
38% in 2000. The increase in earnings in 2001 reflected higher earnings
from an increase in investment margins, additional fee income from new
third-party administration cases, and improved mortality. This growth
in the fees was somewhat suppressed by the impact of the significant
decrease in the equity markets. The earnings in 2000 reflected strong
earnings from an increased asset base, an increase in investment
margins, and significant capital gains on fixed maturities.
1. Savings
Premiums increased $1.2 million or 16% from $7.3 million in 2000
to $8.5 million in 2001. Premiums decreased $7.0 million or 49%
from $14.3 million in 1999 to $7.3 million in 2000. The decrease
in 2000 was attributable to the continuing trend of policyholders
selecting variable annuity options (separate accounts) as opposed
to the more traditional fixed annuity products with life
contingencies. This trend changed in 2001 as the drop in the
equity markets increased the flow into the fixed products as
participants moved towards the more stable investments.
Fee income increased $8.6 million or 8% from $111.2 million in
2000 to $119.8 million in 2001. Fee income increased $29.9 million
or 37% from $81.3 million in 1999 to $111.2 million in 2000. The
growth in fee income in 2001 was the result of new sales and the
increase in revenue from additional new participants in FASCorp.
These increases more than offset the decreased fees on variable
funds related to the weakness in the equity markets. The growth in
fee income in 2000 was the result of new sales and increased fees
on variable funds related to significant growth in equity markets
during the first three-quarters of 2000.
Deposits for investment-type contracts decreased $207 million or
26% from $808 million in 2000 to $601 million in 2001. This
decrease was the result of lower demand for small BOLI fixed
business due to lower fixed interest rates. Deposits for
investment-type contracts increased $200 million or 30% from $608
million in 1999 to $808 million 2000. This significant increase
was the result of several large case sales in the fixed portfolio
products.
Deposits to separate accounts increased $280 million or 24% from
$1.1 billion in 2000 to $1.4 billion in 2001. Deposits to separate
accounts increased $316 million or 30% from $838 million in 1999
to $1.1 billion in 2000. The increases in 2001 and 2000 were
primarily from the sale of large BOLI single premium cases.
The Financial Services segment's core savings business is in the
public/non-profit pension market. The assets of the
public/non-profit business, including separate accounts but
excluding Guaranteed Investment Contracts (GIC), increased $300
million or 4% from $7.9 billion in 2000 to $8.2 billion in 2001.
The majority of this growth occurred in the stable value funds,
which resulted from large case sales, as new investments moved to
the more stable fixed separate accounts due to the instability in
the equity markets in 2001.
The Financial Services segment's savings business experienced
strong growth in 2001. The number of new participants in 2001 was
339,000 compared to 233,000 in 2000 and 214,100 in 1999, bringing
the total lives under administration to 1,268,549 in 2001 and
1,002,785 in 2000.
The Financial Services segment again experienced a very high
retention rate on public/non-profit contract renewals, renewing
nearly 100% of contracts that were eligible for renewal during the
year. Part of this customer loyalty comes from initiatives to
provide high-quality service while controlling expenses.
The Company continued to limit sales of GICs and to allow this
block of business to contract in response to the highly
competitive GIC market. As a result, in 2001, GIC assets decreased
13.4% from 2000 to $89.2 million. GIC assets decreased 1.7% in
2000 to $103.0 million.
Customer demand for investment diversification continued to grow
during 2001. New contributions to variable business represented
56% of the total premium equivalents in 2001 versus 51% in 2000.
The Company continues to expand the investment products available
through its in-house Maxim Series Fund, Inc. and Orchard Series
Fund, and through partnership arrangements with external fund
managers. Externally-managed funds offered to participants in 2001
included AIM, American Century, Ariel, Fidelity, Founders,
INVESCO, Janus, Loomis Sayles, Templeton, and T. Rowe Price.
Customer participation in guaranteed separate accounts increased,
as many customers prefer the security of fixed income securities
and separate account assets. Assets under management for
guaranteed separate account funds were $1,207.9 million in 2001
compared to $749.3 million in 2000 and $653.7 million in 1999.
FASCorp administered records for approximately 2,191,000
participants in 2001 versus 1,875,000 in 2000. FASCorp's fee
income was $72.4 million, $63.8 million, and $53.8 million for the
years ended December 31, 2001, 2000, and 1999, respectively.
2. Life Insurance
The Company continued its conservative approach to the design and
distribution of traditional life insurance products, while
focusing on customer retention and expense management.
Individual life insurance revenue premiums and deposits of $179.1
million in 2001 reflected a decrease of 6% over 2000 premiums and
deposits of $191.3 million. The decrease was primarily due to the
reduction of the traditional policies due to lapses. The term life
business marketed through banks and other financial institutions
has experienced significant growth over the past several years.
Policies sold were 37,480, 17,367 and 9,000 in the years 2001,
2000 and 1999.
In 1996, the U.S. Congress enacted legislation to phase out the
tax deductibility of interest on policy loans on COLI products.
Since then, renewal premiums and deposits for COLI products have
decreased to $83.1 million in 2001 from $84.1 million in 2000 and
$128.5 million in 1999 and the Company expects this decline to
continue. As a result of these legislative changes, the Company
has shifted its emphasis in new sales from COLI to the BOLI
market. This product provides long-term benefits for employees and
was not affected by the 1996 legislative changes. BOLI premiums
and deposits were $547.9 million during 2001 compared to $581.9
million in 2000 and $436.3 million in 1999. The Company continues
working closely with existing COLI customers to determine the
options available to them and is confident that the effect of the
legislative changes will not be material to the Company's
operations.
3. Outlook
Increased emphasis on the employee's need for retirement funds in
the maturing government pension market is expected to continue the
flow of deposits into the retirement accounts of existing
participants. Market pressures have led the government agencies to
introduce employer-matching plans that should also increase the
number of potential government employees who will be contributing
to retirement plans. Current market trends are to replace the
existing defined benefit plans with defined contribution plans and
this is expected to provide marketing opportunities in the future.
Continued management emphasis on the reduction of unit costs in
the FASCorp administration arena are designed to allow the Company
to remain competitive in the recordkeeping market. There was an
increase of 316,000 new lives under administration in FASCorp in
the year 2001, and growth is expected to continue in the future.
Individual annuities have experienced sales growth in the variable
market with the Schwab qualified and non-qualified annuities.
Sales are expected to increase, as the Schwab annuity is a very
competitively priced product that is distributed through a
well-known and respected broker.
Individual policy sales through banks are expected to increase in
the year 2002. Distribution channels are presently established in
five large banks and management plans to expand into additional
banks in 2002. BOLI sales are expected to continue to be strong in
the separate account market.
In 2002, the Financial Services division will assume
responsibility for the development and administration of the
Company's 401(k) product. The Employee Benefits division will
continue to provide sales and marketing support for the product.
D. INVESTMENT OPERATIONS
The Company's primary investment objective is to acquire assets with
duration and cash flow characteristics reflective of the Company's
liabilities, while meeting industry, size, issuer, and geographic
diversification standards. Formal liquidity and credit quality
parameters have also been established.
The Company follows rigorous procedures to control interest rate risk
and observes strict asset and liability matching guidelines. These
guidelines ensure that even under changing market conditions, the
Company's assets will meet the cash flow and income requirements of its
liabilities. Using dynamic modeling to analyze the effects of a wide
range of possible market changes upon investments and policyholder
benefits, the Company ensures that its investment portfolio is
appropriately structured to fulfill financial obligations to its
policyholders.
A summary of the Company's general account invested assets follows:
[Millions] 2001 2000
---------------------------------------------------------------- ----------------- -----------------
Fixed maturities, available-for-sale, at fair value $ 10,116 $ 9,420
Mortgage loans 613 843
Real estate and common stock 186 202
Short-term investments 425 414
Policy loans 3,001 2,810
----------------- -----------------
Total invested assets $ 14,341 $ 13,689
================= =================
1. Fixed Maturities
Fixed maturity investments include public and privately placed
corporate bonds, government bonds, and mortgage-backed and
asset-backed securities. The Company's strategy related to
mortgage-backed and asset-backed securities is to focus on those
with lower volatility and minimal credit risk. The Company does
not invest in higher risk collateralized mortgage obligations such
as interest-only and principal-only strips, and currently has no
plans to invest in such securities.
Private placement investments are generally less marketable than
publicly traded assets, yet they typically offer covenant
protection that allows the Company, if necessary, to take
appropriate action to protect its investment. The Company believes
that the cost of the additional monitoring and analysis required
by private placements is more than offset by their enhanced yield.
One of the Company's primary objectives is to ensure that its
fixed maturity portfolio is maintained at a high average quality,
so as to limit credit risk. If not externally rated, the
securities are rated by the Company on a basis intended to be
similar to that of the rating agencies.
During the fourth quarter of 2000, the Company transferred all
securities classified as held-to-maturity into the
available-for-sale category. See Item 8 (Financial Statements and
Supplementary Data), Note 7 for further discussion related to this
transfer.
The distribution of the fixed maturity portfolio by credit rating
is summarized as:
Credit Rating 2001 2000
----------------------------------------------------------- ----------------- -----------------
AAA 57.9% 53.5%
AA 9.2 10.2
A 14.2 16.2
BBB 16.4 19.0
BB and below (non-investment grade) 2.3 1.1
----------------- -----------------
TOTAL 100.0% 100.0%
================= =================
At December 31, 2001, the Company had nine bonds in default with a
carrying value of $71.1 million, compared to two bonds for $10.7
million for 2000.
2. Mortgage Loans
During 2001, the mortgage portfolio declined 27% to $613 million,
net of impairment reserves. The Company has not actively sought
new loan opportunities since 1989 and, as such, has experienced an
ongoing reduction in this portfolio's balance.
The Company follows a comprehensive approach to the management of
mortgage loans that includes ongoing analysis of key mortgage
characteristics such as debt service coverage, net collateral cash
flow, property condition, loan-to-value ratios, and market
conditions. Collateral valuations are performed for those
mortgages that after review are determined by management to
present possible risks and exposures. These valuations are then
incorporated into the determination of the Company's allowance for
credit losses.
The average balance of impaired loans decreased to $31.6 million
in 2001 compared with $39.3 million in 2000, and there were $10.6
million of foreclosures in 2001, compared to $2.0 in 2000. The low
levels of problematic mortgages relative to the Company's overall
balance sheet are due to the ongoing decrease in the size of the
mortgage portfolio, the Company's active loan management program
and overall strength in market conditions.
Occasionally, the Company elects to restructure certain loans if
the economic benefits to the Company are believed to be more
advantageous than those achieved by acquiring the collateral
through foreclosure. At December 31, 2001 and 2000, the Company's
loan portfolio included $56.3 million and $73.5 million,
respectively, of non-impaired restructured loans.
3. Derivatives
The Company uses certain derivatives, such as futures, options,
and SWAPS, for purposes of hedging interest rate and foreign
exchange risk. These derivatives, when taken alone, may subject
the Company to varying degrees of market and credit risk; however,
when used for hedging, these instruments typically reduce risk.
The Company controls the credit risk of its financial contracts
through credit approvals, limits, and monitoring procedures. The
Company has also developed controls within its operations to
ensure that only Board authorized transactions are executed. Note
1 to the Consolidated Financial Statements contains a summary of
the Company's outstanding financial hedging derivatives.
4. Outlook
A global economic slowdown was the theme of 2001. Policy makers,
both domestically and internationally, cut short rates through
2001 as growth slowed or contracted. A very moderate upturn in
U.S. economic growth is expected in the second half of 2002;
foreign economies are expected to lag a U.S. economic turnaround
by at least one quarter. Ultimately, very aggressive monetary and
fiscal policy should provide support for the U.S. economy.
In the U.S., the Federal Reserve Board cut short rates eleven
times over the course of the year, from 6.50% to the current rate
of 1.75%. Interest rates across the curve established lows in
early November and have been trading in a range since then. It is
likely that yields will decline again as inflation slows further
in the first part of the recovery, and then resume an upward bias.
The Company's investment portfolio is well positioned for a rising
interest rate environment pending economic recovery. The portfolio
is well diversified and comprised of high quality, relatively
stable assets. We have taken advantage of wide spreads across
asset classes, opportunistically adding exposure to investment
grade bonds appropriate for the expected economic and interest
rate environment as well as liability requirements. It is the
Company's philosophy and intent to maintain its proactive
portfolio management policies in an ongoing effort to ensure the
quality and performance of its investments.
E. LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that vary among
the principal product lines. Life insurance and pension plan reserves
are primarily long-term liabilities. Accident and health reserves,
including long-term disability, consist of both short-term and
long-term liabilities. Life insurance and pension plan reserve
requirements are usually stable and predictable, and are supported
primarily by long-term, fixed income investments. Accident and health
claim demands are stable and predictable but generally shorter term,
requiring greater liquidity.
Generally, the Company has met its operating requirements by
maintaining appropriate levels of liquidity in its investment portfolio
and utilizing positive cash flows from operations. Liquidity for the
Company has remained strong, as evidenced by significant amounts of
short-term investments and cash that totaled $638.4 million and $568.4
million as of December 31, 2001 and 2000, respectively.
Funds provided by premiums and fees, investment income and maturities
of investment assets are reasonably predictable and normally exceed
liquidity requirements for payment of claims, benefits, and expenses.
However, since the timing of available funds cannot always be matched
precisely to commitments, imbalances may arise when demands for funds
exceed those on hand. Also, a demand for funds may arise as a result of
the Company taking advantage of current investment opportunities. The
sources of the funds that may be required in such events include
retained earnings, and the issuance of commercial paper and equity
securities.
Capital resources provide protection for policyholders and financial
strength to support the underwriting of insurance risks, and allow for
continued business growth. The amount of capital resources that may be
needed is determined by the Company's senior management and Board of
Directors, as well as by regulatory requirements. The allocation of
resources to new long-term business commitments is designed to achieve
an attractive return, tempered by considerations of risk and the need
to support the Company's existing business.
The Company's financial strength provides the capacity and flexibility
to enable it to raise funds in the capital markets through the issuance
of commercial paper. The Company continues to be well capitalized, with
sufficient borrowing capacity to meet the anticipated needs of its
business. The Company had $97.0 million of commercial paper outstanding
at December 31, 2001 compared with $97.6 million at December 31, 2000.
The commercial paper has been given a rating of A-1+ by Standard &
Poors' Corporation and a rating of P-1 by Moody's Investors Services,
each being the highest rating available. In addition, the Company
issued a surplus note to GWL&A Financial in 1999. The surplus note
bears interest at 7.25% and is due June 30, 2048.
F. ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement
No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities - A Replacement of FASB Statement
No. 125" (SFAS No. 140), which revises the standards for accounting for
securitizations and other transfers of financial assets and collateral,
and requires certain disclosures. SFAS No. 140 was effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. Certain disclosure
requirements under SFAS No. 140 were effective December 15, 2000, and
these requirements have been incorporated in the Company's financial
statements. The adoption of SFAS No. 140 did not have a material effect
on the financial position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements" that provides guidance with respect to revenue recognition
issues and disclosures. As amended by SAB No. 101B, "Second Amendment:
Revenue Recognition in Financial Statements," the Company implemented
the provisions of SAB 101 during the fourth quarter of 2000. The
adoption of SAB No. 101 did not affect the Company's revenue
recognition practices.
Effective January 1, 2001, the Company adopted Financial Account
Standards Board (FASB) Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), as amended by FASB
Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." SFAS 138 requires all derivatives, whether
designated in hedging relationships or not, to be recorded on the
balance sheet at fair value. If the derivative is designated as a fair
value hedge, the changes in the fair value of the derivative and of the
hedged item attributable to the hedged risk are recognized in earnings.
If the derivative is designated as a cash flow hedge, the effective
portions of the changes in the fair value of the derivative are
recorded in accumulated other comprehensive income and are recognized
in the income statement when the hedged item affects earnings.
Ineffective portions of changes in the fair value of cash flow hedges
are recognized in earnings. The adoption of SFAS No. 133 resulted in an
approximate $1.0 million after-tax increase to accumulated other
comprehensive income, which has been included in the current year
change in other comprehensive income in the Statement of Stockholder's
Equity. This amount is not material to the Company's financial position
or results of operations.
Effective April 1, 2001, the Company adopted Emerging Issues Task Force
Issue No. 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interest in Securitized Financial
Assets" (EITF 99-20). This pronouncement requires investors in certain
asset-backed securities to record changes in their estimated yield on a
prospective basis and to apply specific evaluation methods to these
securities for an other-than-temporary decline in value. The adoption
of EITF 99-20 did not have a material impact on the Company's financial
position or results of operations.
On June 29, 2001 Statement of Financial Accounting Standards (SFAS)
FAS No.141, "Business Combinations" (SFAS No. 141) was approved by the
FASB. SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. The
Company implemented SFAS No. 141 on July 1, 2001. Adoption of the
Statement did not have a material impact on the Company's financial
position or results of operations.
On June 29, 2001, Statement No. 142, "Goodwill and Other Intangible
Assets" (SFAS No. 142) was approved by the FASB. SFAS No. 142 changes
the accounting for goodwill and certain other intangibles from an
amortization method to an impairment-only approach. Amortization of
goodwill, including goodwill recorded in past business combinations,
will cease upon adoption of this statement. The Company implemented
SFAS No. 142 on January 1, 2002 and, although it is still reviewing
the provisions of this Statement, management's preliminary assessment
is that the Statement will not have a material impact on the Company's
financial position or results of operations.
In August 2001, the FASB issued Statement No.144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No.144). SFAS No.144
supercedes current accounting guidance relating to impairment of
long-lived assets and provides a single accounting methodology for
long-lived assets to be disposed of, and also supercedes existing
guidance with respect to reporting the effects of the disposal of a
business. SFAS No.144 was adopted January 1, 2002 without a material
impact on the Company's financial position or results of operations.
In July 2001, the SEC released Staff Accounting Bulletin No. 102,
Selected Loan Loss Allowance Methodology and Documentation Issues (SAB
102). SAB 102 summarizes certain of the SEC's views on the development,
documentation and application of a systematic methodology for
determining allowances for loan and lease losses. Adoption of SAB 102
by the Company did not have a material impact on the Company's
financial position or results of operations.
See Note 1 to the Consolidated Financial Statements for additional
information regarding accounting pronouncements.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's assets are purchased to fund future benefit payments to
its policyholders and contractholders. The primary risk of these assets
is exposure to rising interest rates. The Company's exposure to foreign
currency exchange rate fluctuations is minimal as only nominal foreign
investments are held.
To manage interest rate risk, the Company invests in assets that are
suited to the products that it sells. For products with fixed and
highly predictable benefit payments such as certificate annuities and
payout annuities, the Company invests in fixed income assets with cash
flows that closely match the liability product cash flows. The Company
is then protected against interest rate changes, as any change in the
fair value of the assets will be offset by a similar change in the fair
value of the liabilities. For products with uncertain timing of benefit
payments such as portfolio annuities and life insurance, the Company
invests in fixed income assets with expected cash flows that are
earlier than the expected timing of the benefit payments. The Company
can then react to changing interest rates sooner as these assets mature
for reinvestment.
The Company also manages risk with interest rate derivatives such as
interest rate caps that would pay the Company investment income if
interest rates rise above the level specified in the cap. These
derivatives are only used to reduce risk and are not used for
speculative purposes.
To manage foreign currency exchange risk, the Company uses currency
SWAPS to convert foreign currency back to United States dollars. These
SWAPS are purchased each time a foreign currency denominated asset is
purchased.
The Company has estimated the possible effects of interest rate changes
at December 31, 2001. If interest rates increased by 100 basis points
(1%), the fair value of the fixed income assets would decrease by
approximately $364 million. This calculation uses projected asset cash
flows, discounted back to December 31, 2001. The cash flow projections
are shown in the table below. The table below shows cash flows rather
than expected maturity dates because many of the Company's assets have
substantial expected principal payments prior to the final maturity
date. The fair value shown in the table below was calculated using spot
discount interest rates that varied by the year in which the cash flows
were expected to be received. These spot rates in the benchmark
calculation ranged from 3.62% to 8.85%.
Projected Cash Flows by Calendar Year
[$ millions] There- Undiscounted Fair
2002 2003 2004 2005 2006 after Total Value
------- ------- ------- ------- ------- ------- -------------- ---------
Benchmark 2,066 2,026 1,800 1,590 1,271 3,986 12,740 10,239
Interest rates
up 1% 1,871 1,758 1,771 1,667 1,338 4,596 13,001 9,875
The Company administers separate account variable annuities for
retirement savings products. The Company collects a fee from each
account, and this fee is a percentage of the account balance. There is
a market risk of lost fee revenue to the Company if equity and bond
markets decline. If the equity and bond portfolios decline by 10%, the
Company's fee revenue would decline by approximately $13.0 million per
year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following are the Company's Consolidated Financial Statements for
the years ended December 31, 2001, 2000, and 1999 and the Independent
Auditor's Report thereon.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(A wholly-owned subsidiary of GWL&A Financial Inc.)
Consolidated Financial Statements for the Years Ended
December 31, 2001, 2000, and 1999 and
Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Great-West Life & Annuity Insurance Company:
We have audited the accompanying consolidated balance sheets of Great-West Life
& Annuity Insurance Company and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of income, stockholder's equity, and
cash flows for each of the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Great-West Life & Annuity Insurance
Company and subsidiaries as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
January 28, 2002
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
====================================================================================================================================
(Dollars in Thousands)
2001 2000
----------------------- ----------------------
ASSETS
INVESTMENTS:
Fixed maturities, available-for-sale, at fair value
(amortized cost $9,904,453 and $9,372,009) $ 10,116,175 $ 9,419,865
Common stock, at fair value (cost $74,107 and
$68,472) 73,344 95,036
Mortgage loans on real estate (net of allowances
of $57,654 and $61,242) 613,453 843,371
Real estate 112,681 106,690
Policy loans 3,000,441 2,809,973
Short-term investments, available-for-sale (cost
$427,398 and $414,382) 424,730 414,382
----------------------- ----------------------
Total Investments 14,340,824 13,689,317
OTHER ASSETS:
Cash 213,731 153,977
Reinsurance receivable
Related party 3,678 4,297
Other 278,674 229,671
Deferred policy acquisition costs 275,570 279,688
Investment income due and accrued 130,775 139,152
Amounts receivable related to uninsured accident
and health plan claims (net of allowances of
$53,431 and $34,700) 89,533 227,803
Premiums in course of collection (net of
allowances of $22,217 and $18,700) 99,811 190,987
Deferred income taxes 149,140 138,842
Other assets 644,774 462,515
SEPARATE ACCOUNT ASSETS 12,584,661 12,381,137
----------------------- ----------------------
TOTAL ASSETS $ 28,811,171 $ 27,897,386
======================= ======================
(Continued)
====================================================================================================================================
2001 2000
----------------- -----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves
Related party $ 532,374 $ 547,558
Other 11,679,122 11,497,442
Policy and contract claims 401,389 441,326
Policyholders' funds 242,916 266,235
Provision for policyholders' dividends 74,740 72,716
Undistributed earnings on participating business 163,086 165,754
GENERAL LIABILITIES:
Due to GWL 41,874 43,081
Due to GWL&A Financial 251,059 171,347
Repurchase agreements 250,889
Commercial paper 97,046 97,631
Other liabilities 1,021,541 785,730
SEPARATE ACCOUNT LIABILITIES 12,584,661 12,381,137
----------------- -----------------
Total Liabilities 27,340,697 26,469,957
----------------- -----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value, 50,000,000 shares authorized, 0 shares issued
and outstanding Common stock, $1 par value; 50,000,000 shares
authorized; 7,032,000 shares issued and outstanding 7,032 7,032
Additional paid-in capital 712,801 717,704
Accumulated other comprehensive income 76,507 33,672
Retained earnings 674,134 669,021
----------------- -----------------
Total Stockholder's Equity 1,470,474 1,427,429
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 28,811,171 $ 27,897,386
================= =================
See notes to consolidated financial statements. (Concluded)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
====================================================================================================================================
(Dollars in Thousands)
2001 2000 1999
---------------- ----------------- -----------------
REVENUES:
Premiums
Related party $ 18,144 $ 20,853 $ 23,233
Other (net of premiums ceded totaling
$82,028, $115,404, and $85,803) 1,185,495 1,311,713 1,139,950
Fee income 947,255 871,627 635,147
Net investment income (expense)
Related party (14,546) (14,517) (10,923)
Other 955,880 945,958 886,869
Net realized gains on investments 46,825 28,283 1,084
---------------- ----------------- -----------------
3,139,053 3,163,917 2,675,360
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
reinsurance recoveries totaling $40,144,
$62,803, and $80,681) 1,029,495 1,122,560 970,250
Increase in reserves 58,433 53,550 33,631
Interest paid or credited to contractholders 530,027 490,131 494,081
Provision for policyholders' share of earnings
on participating business 2,182 5,188 13,716
Dividends to policyholders 76,460 74,443 70,161
---------------- ----------------- -----------------
1,696,597 1,745,872 1,581,839
Commissions 197,099 204,444 173,405
Operating expenses (income):
Related party (1,043) (704) (768)
Other 794,731 775,885 593,575
Premium taxes 36,911 45,286 38,329
Special charges 127,040
---------------- ----------------- -----------------
2,851,335 2,770,783 2,386,380
INCOME BEFORE INCOME TAXES 287,718 393,134 288,980
PROVISION FOR INCOME TAXES:
Current 136,965 108,509 72,039
Deferred (41,993) 25,531 11,223
---------------- ----------------- -----------------
94,972 134,040 83,262
---------------- ----------------- -----------------
NET INCOME $ 192,746 $ 259,094 $ 205,718
================ ================= =================
See notes to consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------------------------------
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
====================================================================================================================================
(Dollars in Thousands)
Accumulated
Preferred Stock Common Stock Additional Other
--------------------- ------------------------ Paid-in Comprehensive Retained
Shares Amount Shares Amount Capital Income (Loss) Earnings Total
--------- --------- ------------- --------- --------- ------------- ---------- -------------
BALANCES, JANUARY 1, 1999 0 $ 0 7,032,000 $ 7,032 $699,556 $ 61,560 $ 430,411 $ 1,198,559
Net income 205,718 205,718
Other comprehensive loss (146,421) (146,421)
-------------
Total comprehensive income 59,297
-------------
Dividends (92,053) (92,053)
Income tax benefit on stock
compensation 760 760
--------- --------- ------------- --------- --------- ------------ ---------- -------------
BALANCES, DECEMBER 31, 1999 0 0 7,032,000 7,032 700,316 (84,861) 544,076 1,166,563
Net income 259,094 259,094
Other comprehensive income 118,533 118,533
-------------
Total comprehensive income 377,627
-------------
Dividends (134,149) (134,149)
Capital contributions -
Parent stock options 15,052 15,052
Income tax benefit on stock
compensation 2,336 2,336
--------- --------- ------------- --------- --------- ------------ ---------- -------------
BALANCES, DECEMBER 31, 2000 0 $ 0 7,032,000 $ 7,032 $717,704 $ 33,672 $ 669,021 $ 1,427,429
Net income 192,746 192,746
Other comprehensive income 42,835 42,835
-------------
Total comprehensive income 235,581
-------------
Dividends (187,633) (187,633)
Capital contributions adjustment -
Parent stock options (12,098) (12,098)
Income tax benefit on stock
compensation 7,195 7,195
--------- --------- ------------- --------- --------- ------------ ---------- -------------
BALANCES, DECEMBER 31, 2001 0 $ 0 7,032,000 $ 7,032 $712,801 $ 76,507 $ 674,134 $ 1,470,474
========= ========= ============= ========= ========= ============ ========== =============
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
====================================================================================================================================
(Dollars in Thousands)
2001 2000 1999
----------------- ----------------- -----------------
OPERATING ACTIVITIES:
Net income $ 192,746 $ 259,094 $ 205,718
Adjustments to reconcile net income to net
cash provided by operating activities:
Earnings allocated to participating
policyholders 2,182 5,188 13,716
Amortization of investments (82,955) (62,428) (22,514)
Net realized gains on investments (46,825) (28,283) (1,084)
Depreciation and amortization (including
goodwill impairment) 62,101 41,693 47,339
Deferred income taxes (41,993) 25,531 11,223
Stock compensation (adjustment) (12,098) 15,052
Changes in assets and liabilities, net of
effects from acquisitions:
Policy benefit liabilities 334,025 310,511 650,959
Reinsurance receivable (48,384) (35,368) 19,636
Receivables 196,805 (128,382) (37,482)
Other, net 44,232 (118,221) (136,476)
----------------- ----------------- -----------------
Net cash provided by operating activities 599,836 284,387 751,035
----------------- ----------------- -----------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to-maturity
Sales 8,571
Maturities and redemptions 323,728 520,511
Available-for-sale
Sales 5,201,692 1,460,672 3,176,802
Maturities and redemptions 1,244,547 887,420 822,606
Mortgage loans 224,810 139,671 165,104
Real estate 8,910 5,098
Common stock 38,331 61,889 18,116
Purchases of investments:
Fixed maturities
Held-to-maturity (100,524) (563,285)
Available-for-sale (6,878,213) (2,866,228) (4,019,465)
Mortgage loans (4,208) (2,720)
Real estate (3,124) (20,570) (41,482)
Common stock (27,777) (52,972) (19,698)
Acquisitions, net of cash acquired 82,214
----------------- ----------------- -----------------
Net cash provided by (used in)
investing activities $ (199,734) $ (71,427) $ 61,587
================= ================= =================
(Continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
====================================================================================================================================
(Dollars in Thousands)
2001 2000 1999
----------------- ----------------- -----------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (483,285) $ (220,167) $ (583,900)
Due to GWL (1,207) 7,102 (16,898)
Due to GWL&A Financial 81,473 3,665 175,035
Dividends paid (187,633) (134,149) (92,053)
Net commercial paper borrowings
(repayments) (585) 97,631 (39,731)
Net repurchase agreements borrowings
(repayments) 250,889 (80,579) (163,680)
----------------- ----------------- -----------------
Net cash used in financing activities (340,348) (326,497) (721,227)
----------------- ----------------- -----------------
NET INCREASE (DECREASE) IN CASH 59,754 (113,537) 91,395
CASH, BEGINNING OF YEAR 153,977 267,514 176,119
----------------- ----------------- -----------------
CASH, END OF YEAR $ 213,731 $ 153,977 $ 267,514
================= ================= =================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 59,895 $ 78,510 $ 76,150
Interest 17,529 21,060 14,125
Non-cash financing activity:
Effect of capital - Parent stock options (12,098) 15,052
See notes to consolidated financial statements. (Concluded)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(Amounts in Thousands, except Share Amounts)
================================================================================
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Great-West Life & Annuity Insurance Company (the Company)
is a wholly-owned subsidiary of GWL&A Financial Inc., a holding company
formed in 1998 (GWL&A Financial). The Company offers a wide range of life
insurance, health insurance, and retirement and investment products to
individuals, businesses, and other private and public organizations
throughout the United States.
On December 31, 2000, the Company and certain affiliated companies
completed a corporate reorganization. Prior to December 31, 2000, GWL&A
Financial was an indirect wholly-owned subsidiary of The Great-West Life
Assurance Company (GWL). Under the new structure, GWL&A Financial and GWL
each continue to be indirectly and directly, respectively, owned by
Great-West Lifeco Inc., a Canadian holding company (the Parent or
LifeCo), but GWL no longer holds an equity interest in the Company or
GWL&A Financial.
Basis of Presentation - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates are required to account for
policy reserves, allowances for credit losses, deferred policy
acquisition costs, and valuation of privately placed fixed maturities.
Actual results could differ from those estimates. The consolidated
financial statements include the accounts of the Company and its
subsidiaries. All material inter-company transactions and balances have
been eliminated in consolidation.
Certain reclassifications have been made to the 2000 and 1999 financial
statements to conform to the 2001 presentation. These changes in
classification had no effect on previously reported stockholder's equity
or net income.
Investments - Investments are reported as follows:
1. Management has classified its fixed maturities as available for
sale and carries them at fair value with the net unrealized gains
and losses reported as accumulated other comprehensive income
(loss) in stockholder's equity.
Premiums and discounts are recognized as a component of net
investment income using the effective interest method. Realized
gains and losses, and declines in value judged to be
other-than-temporary are included in net realized gains/(losses)
on investments.
2. Mortgage loans on real estate are carried at their unpaid balances
adjusted for any unamortized premiums or discounts and any
allowances for uncollectible accounts. Interest income is accrued
on the unpaid principal balance. Discounts and premiums are
amortized to net investment income using the effective interest
method. Accrual of interest is discontinued on any impaired loans
where collection of interest is doubtful.
The Company maintains an allowance for credit losses at a level
that, in management's opinion, is sufficient to absorb credit
losses on its impaired loans. Management's judgement is based on
past loss experience, current and projected economic conditions,
and extensive situational analysis of each individual loan. The
measurement of impaired loans is based on the fair value of the
collateral.
3. Real estate is carried at cost. The carrying value of real estate
is subject to periodic evaluation of recoverability.
4. Investments in common stock are carried at fair value.
5. Policy loans are carried at their unpaid balances.
6. Short-term investments include securities purchased with initial
maturities of one year or less and are carried at fair value. The
Company considers short-term investments to be available-for-sale.
7. Gains and losses realized on disposal of investments are
determined on a specific identification basis.
Cash - Cash includes only amounts in demand deposit accounts.
Internal Use Software - Capitalized internal use software development
costs of $44,914 and $35,409 are included in other assets at December 31,
2001, and 2000, respectively. The Company capitalized, net of
depreciation, $6,896, $17,309 and $18,099 of internal use software
development costs for the years ended December 31, 2001, 2000 and 1999,
respectively.
Deferred Policy Acquisition Costs - Policy acquisition costs, which
primarily consist of sales commissions and costs associated with the
Company's group sales representatives related to the production of new
business, have been deferred to the extent recoverable. These costs are
variable in nature and are dependent upon sales volume. Deferred costs
associated with the annuity products are being amortized over the life of
the contracts in proportion to the emergence of gross profits.
Retrospective adjustments of these amounts are made when the Company
revises its estimates of current or future gross profits. Deferred costs
associated with traditional life insurance are amortized over the premium
paying period of the related policies in proportion to premium revenues
recognized. Amortization of deferred policy acquisition costs totaled
$44,096, $36,834, and $43,512 in 2001, 2000, and 1999, respectively.
Separate Accounts - Separate account assets and related liabilities are
carried at fair value. The Company's separate accounts invest in shares
of Maxim Series Fund, Inc. and Orchard Series Fund, open-end management
investment companies which are affiliates of the Company, shares of other
non-affiliated mutual funds, and government and corporate bonds.
Investment income and realized capital gains and losses of the separate
accounts accrue directly to the contractholders and, therefore, are not
included in the Company's statements of income. Revenues to the Company
from the separate accounts consist of contract maintenance fees,
administrative fees, and mortality and expense risk charges.
Life Insurance and Annuity Reserves - Life insurance and annuity policy
reserves with life contingencies of $7,941,905 and $7,762,065 at December
31, 2001 and 2000, respectively, are computed on the basis of estimated
mortality, investment yield, withdrawals, future maintenance and
settlement expenses, and retrospective experience rating premium refunds.
Annuity contract reserves without life contingencies of $4,188,553 and
$4,189,716 at December 31, 2001 and 2000, respectively, are established
at the contractholder's account value.
Reinsurance - Policy reserves ceded to other insurance companies are
carried as a reinsurance receivable on the balance sheet. The cost of
reinsurance related to long-duration contracts is accounted for over the
life of the underlying reinsured policies using assumptions consistent
with those used to account for the underlying policies (see Note 5).
Policy and Contract Claims - Policy and contract claims include
provisions for reported life and health claims in process of settlement,
valued in accordance with the terms of the related policies and
contracts, as well as provisions for claims incurred and unreported based
primarily on prior experience of the Company.
Participating Fund Account - Participating life and annuity policy
reserves are $4,837,611 and $4,557,599 at December 31, 2001 and 2000,
respectively. Participating business approximates 25.8%, 28.6%, and 31.0%
of the Company's ordinary life insurance in force and 85.4%, 85.2%, and
94.0% of ordinary life insurance premium income for the years ended
December 31, 2001, 2000, and 1999, respectively.
The amount of dividends to be paid from undistributed earnings on
participating business is determined annually by the Board of Directors.
Earnings allocable to participating policyholders are consistent with
established Company practice.
The Company has established a Participating Policyholder Experience
Account (PPEA) for the benefit of all participating policyholders which
is included in the accompanying consolidated balance sheets. Earnings
associated with the operation of the PPEA are credited to the benefit of
all participating policyholders. In the event that the assets of the PPEA
are insufficient to provide contractually guaranteed benefits, the
Company must provide such benefits from its general assets.
The Company has also established a Participation Fund Account (PFA) for
the benefit of the participating policyholders previously transferred to
the Company from GWL under an assumption reinsurance transaction. The PFA
is part of the PPEA. Earnings derived from the operation of the PFA, net
of a management fee paid to the Company, accrue solely for the benefit of
the transferred participating policyholders.
Repurchase Agreements and Securities Lending - The Company enters into
repurchase agreements with third-party broker/dealers in which the
Company sells securities and agrees to repurchase substantially similar
securities at a specified date and price. Such agreements are accounted
for as collateralized borrowings. Interest expense on repurchase
agreements is recorded at the coupon interest rate on the underlying
securities. The repurchase fee is amortized over the term of the related
agreement and recognized as an adjustment to net investment income.
The Company receives collateral for lending securities that are held as
part of its investment portfolio. The company requires collateral in an
amount greater than or equal to 102% of the market value of domestic
securities loaned and 105% of foreign securities loaned. Such collateral
is used to replace the securities loaned in event of default by the
borrower. The Company's securitized lending transactions are accounted
for as collateralized borrowings.
Derivatives - The Company makes limited use of derivative financial
instruments to manage interest rate, market, and foreign exchange risk
associated with invested assets. Derivatives are not used for speculative
purposes. The Company controls the credit risk of its financial contracts
through credit approvals, limits, and monitoring procedures. As the
Company generally enters into derivative transactions only with high
quality institutions, no losses associated with non-performance on
derivative financial instruments have occurred or are expected to occur.
Derivative instruments typically used consist of interest rate swap
agreements, interest rate floors and caps, foreign currency exchange
contracts, options, and interest rate futures.
Interest rate swap agreements are used to convert the interest rate on
certain debt securities from a floating rate to a fixed rate or vice
versa, to convert from a fixed rate to a floating rate. Interest rate
floors and caps are interest rate protection instruments that require the
payment by a counter-party to the Company of an interest rate
differential only if interest rates fall or rise to certain levels. The
differential represents the difference between current interest rates and
an agreed upon rate, the strike rate, applied to a notional principal
amount. Foreign currency exchange contracts are used to hedge the foreign
exchange rate risk associated with bonds denominated in other than U.S.
dollars. Written call options are used in conjunction with interest rate
swap agreements to effectively convert convertible, fixed rate bonds to
non-convertible variable rate bonds as part of the Company's overall
asset/liability matching program. Purchased put options are used to
protect against significant drops in equity markets. Interest rate
futures are used to hedge the interest rate risks of forecasted
acquisitions of fixed rate fixed maturity investments.
Effective January 1, 2001, the Company adopted Financial Account
Standards Board (FASB) Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), as amended by FASB
Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." SFAS 138 requires all derivatives, whether
designated in hedging relationships or not, to be recorded on the balance
sheet at fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged
item attributable to the hedged risk are recognized in earnings. If the
derivative is designated as a cash flow hedge, the effective portions of
the changes in the fair value of the derivative are recorded in
accumulated other comprehensive income and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of
changes in the fair value of cash flow hedges are recognized in earnings.
The adoption of SFAS No. 133 resulted in an approximate $1,000 after-tax
increase to accumulated other comprehensive income, which has been
included in the current year change in other comprehensive income in the
Statement of Stockholder's Equity.
Hedge ineffectiveness of $907, determined in accordance with SFAS No.
133, was recorded as a decrease to net investment income for the year
ended December 31, 2001.
Derivative gains and losses included in accumulated other comprehensive
income (OCI) are reclassified into earnings at the time interest income
is recognized or interest receipts are received on bonds. Derivative
gains of $469 were reclassified to net investment income in 2001. The
Company estimates that $563 of net derivative gains included in OCI will
be reclassified into net investment income within the next twelve months.
Revenue Recognition - In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements (SAB No. 101)," which provides
guidance with respect to revenue recognition issues and disclosures. As
amended by SAB No. 101B, "Second Amendment: Revenue Recognition in
Financial Statements," the Company implemented the provisions of SAB No.
101 during the fourth quarter of 2000. The adoption of SAB No. 101 did
not affect the Company's revenue recognition practices.
Recognition of Premium and Fee Income and Benefits and Expenses - Life
insurance premiums are recognized when due. Annuity premiums with life
contingencies are recognized as received. Accident and health premiums
are earned on a monthly pro rata basis. Revenues for annuity and other
contracts without significant life contingencies consist of contract
charges for the cost of insurance, contract administration, and surrender
fees that have been assessed against the contract account balance during
the period and are recognized when earned. Fee income is derived
primarily from contracts for claim processing or other administrative
services related to uninsured business and from assets under management.
Fees from contracts for claim processing or other administrative services
are recorded as the services are provided. Fees from assets under
management, which consist of contract maintenance fees, administration
fees and mortality and expense risk charges, are recognized when due.
Benefits and expenses on policies with life contingencies are associated
with earned premiums so as to result in recognition of profits over the
life of the contracts. This association is accomplished by means of the
provision for future policy benefit reserves. The average crediting rate
on annuity products was approximately 6.1%, 6.2%, and 6.2% in 2001, 2000,
and 1999.
Income Taxes - Income taxes are recorded using the asset and liability
approach, which requires, among other provisions, the recognition of
deferred tax assets and liabilities for expected future tax consequences
of events that have been recognized in the Company's financial statements
or tax returns. In estimating future tax consequences, all expected
future events (other than the enactments or changes in the tax laws or
rules) is considered. Although realization is not assured, management
believes it is more likely than not that the deferred tax asset will be
realized.
Stock Options - The Company applies the intrinsic value measurement
approach under APB Opinion No. 25, "Accounting for Stock Issued to
Employees", to stock-based compensation awards to employees, as
interpreted by AIN-APB 25 as it relates to accounting for stock options
granted by the Parent to Company employees (see Note 14).
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - FASB has issued Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - A replacement of FASB Statement No. 125" (SFAS No. 140),
which revises the standards for accounting for securitizations and other
transfers of financial assets and collateral, and requires certain
disclosures. SFAS 140 was effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March
31, 2001. Certain disclosure requirements under SFAS No. 140 were
effective December 15, 2000, and these requirements have been
incorporated in the Company's financial statements. The adoption of SFAS
No. 140 did not have a significant effect on the financial position or
results of operations of the Company.
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interest in Securitized Financial Assets - Effective April 1,
2001, the Company adopted Emerging Issues Task Force Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interest in Securitized Financial Assets" (EITF 99-20). This
pronouncement requires investors in certain asset-backed securities to
record changes in their estimated yield on a prospective basis and to
apply specific evaluation methods to these securities for an
other-than-temporary decline in value. The adoption of EITF 99-20 did not
have a material impact on the Company's financial position or results of
operations.
Business Combinations - On June 29, 2001 Statement of Financial
Accounting Standards (SFAS) FAS No.141, "Business Combinations" (SFAS No.
141) was approved by the FASB. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated
after June 30, 2001. The Company implemented SFAS No. 141 on July 1,
2001. Adoption of the Statement did not have a material impact on the
Company's financial position or results of operations.
Goodwill and Other Intangible Assets - On June 29, 2001, SFAS No. 142,
"Goodwill and Other Intangible Assets" (SFAS No. 142) was approved by the
FASB. SFAS No. 142 changes the accounting for goodwill and certain other
intangibles from an amortization method to an impairment-only approach.
Amortization of goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of this statement. The Company
implemented SFAS No. 142 on January 1, 2002 and, although it is still
reviewing the provisions of this Statement, management's preliminary
assessment is that the Statement will not have a material impact on the
Company's financial position or results of operations.
Long Lived Assets - In August 2001, the FASB issued SFAS No.144
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
No.144). SFAS No.144 supercedes current accounting guidance relating to
impairment of long-lived assets and provides a single accounting
methodology for long-lived assets to be disposed of, and also supercedes
existing guidance with respect to reporting the effects of the disposal
of a business. SFAS No.144 was adopted January 1, 2002 without a material
impact on the Company's financial position or results of operations.
Selected Loan Loss Allowance Methodology - In July 2001, the SEC
released Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance
Methodology and Documentation Issues (SAB 102). SAB 102 summarizes
certain of the SEC's views on the development, documentation and
application of a systematic methodology for determining allowances for
loan and lease losses. Adoption of SAB 102 by the Company is not
expected to have a material impact on the Company's financial position
or results of operations.
2. ACQUISITIONS AND SPECIAL CHARGES
Effective January 1, 2000, the Company co-insured the majority of General
American Life Insurance Company's (General American) group life and
health insurance business which primarily consists of administrative
services only and stop loss policies. The agreement converted to an
assumption reinsurance agreement January 1, 2001. The Company assumed
approximately $150,000 of policy reserves and miscellaneous liabilities
in exchange for $150,000 of cash and miscellaneous assets from General
American.
Assuming the reinsurance agreement had been effective on January 1, 1999,
pro forma 1999 revenues would have been $2,973,247 and pro forma 1999 net
income would have been $199,782. The pro forma financial information is
not necessarily indicative of either the results of operations that would
have occurred had this agreement been effective on January 1, 1999, or of
future operations.
On October 6, 1999, the Company entered into a purchase and sale
agreement with Allmerica Financial Corporation (Allmerica) to acquire via
assumption reinsurance Allmerica's group life and health insurance
business on March 1, 2000. This business primarily consists of
administrative services only, and stop loss policies. The in-force
business was immediately co-insured back to Allmerica and then
underwritten and retained by the Company upon each policy renewal date.
The effect of this transaction was not material to the Company's results
of operations or financial position.
Alta Health & Life Insurance Company (Alta) was acquired by the Company
on July 8, 1998. During 1999 and 2000 the Alta business continued to be
run as a free-standing unit but was converted to the Company's system and
accounting processes. This conversion program resulted in significant
issues related to pricing, underwriting, and administration of the
business. The Company has decided to discontinue writing new Alta
business and all Alta customers will be moved to the Company's contracts
over time. All Alta sales and administration staff have become employees
of the Company and the underwriting functions are being conducted by the
underwriting staff of the Company. In the second quarter of 2001, the
Company recorded a $127 million special charge ($80.9 million, net of
tax), related to its decision to cease marketing the Alta products. The
principal components of the charge include $46 million from premium
deficiency reserves, $29 million from premium receivables, $28 million
from uninsured accident and health plan claim receivables and $24 million
from goodwill and other.
3. RELATED-PARTY TRANSACTIONS
The Company performs administrative services for the U.S. operations of
GWL. The following represents revenue from GWL for services provided
pursuant to these service agreements. The amounts recorded are based upon
management's best estimate of actual costs incurred and resources
expended based upon number of policies and/or certificates in force.
Years Ended December 31,
----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Investment management revenue $ 186 $ 120 $ 130
Administrative and underwriting revenue 1,043 704 768
At December 31, 2001 and 2000, due to GWL includes $16,536 and $17,743
due on demand and $25,338 and $25,338 of notes payable which bear
interest and mature on October 1, 2006. These notes may be prepaid in
whole or in part at any time without penalty; the issuer may not demand
payment before the maturity date. The amounts due on demand to GWL bear
interest at the public bond rate (6.0% and 7.0% at December 31, 2001 and
2000, respectively) while the note payable bears interest at 5.4%.
At December 31, 2001 and 2000, due to GWL&A Financial includes $76,024
and $(3,688) due on demand and $175,035 and $175,035 of subordinated
notes payable. The notes, which were issued in 1999 and used for general
corporate purposes, bear interest and mature on June 30, 2048. Payments
of principal and interest under this subordinated note shall be made only
with prior written approval of the Commissioner of Insurance of the State
of Colorado. Payments of principal and interest on this subordinated note
are payable only out of surplus funds of the Company and only at such
time as the financial condition of the Company is such that at the time
of payment of principal or interest, its statutory surplus after the
making of any such payment would exceed the greater of $1,500 or 1.25
times the company action level amount as required by the most recent risk
based capital calculations. The amounts due on demand to GWL&A Financial
bear interest at the public bond rate (6.0% and 7.0% at December 31, 2001
and 2000, respectively) while the note payable bears interest at 7.25%.
Interest expense attributable to these related party obligations was
$14,732, $14,637, and $11,053 for the years ended December 31, 2001,
2000, and 1999, respectively.
4. ALLOWANCES ON POLICYHOLDER RECEIVABLES
The Company maintains an allowance for credit losses at a level that, in
management's opinion, is sufficient to absorb credit losses on its
amounts receivable related to uninsured accident and health plan claims
and premiums in course of collection. Management's judgement is based on
past loss experience and current and projected economic conditions.
Allowances for amounts receivable related to uninsured accident and
health plan claims:
2001 2000 1999
-------------- --------------- ---------------
Balance, beginning of year $ 34,700 $ 31,200 $ 31,200
Provisions charged to operations 50,500 7,700 4,500
Amounts written off - net (31,769) (4,200) (4,500)
-------------- --------------- ---------------
Balance, end of year $ 53,431 $ 34,700 $ 31,200
============== =============== ===============
Allowances for premiums in course of collection:
2001 2000 1999
-------------- --------------- ---------------
Balance, beginning of year $ 18,700 $ 13,900 $ 13,900
Provisions charged to operations 29,642 14,500 2,500
Amounts written off - net (26,125) (9,700) (2,500)
-------------- --------------- ---------------
Balance, end of year $ 22,217 $ 18,700 $ 13,900
============== =============== ===============
5. REINSURANCE
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid
by ceding risks to other insurance enterprises under excess coverage and
co-insurance contracts. The Company retains a maximum of $1.5 million of
coverage per individual life.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to significant
losses from reinsurer insolvencies. At December 31, 2001 and 2000, the
reinsurance receivable had a carrying value of $282,352 and $233,968,
respectively.
The following schedule details life insurance in force and life and
accident/health premiums:
Assumed Percentage
Ceded Primarily of Amount
Gross Primarily to From Other Net Assumed
Amount GWL Companies Amount to Net
--------------- ---------------- ---------------- --------------- -------------
December 31, 2001:
Life insurance in force:
Individual $ 43,370,006 $ 8,330,282 $ 7,399,250 42,438,974 17.4%
Group 56,650,090 9,888,796 66,538,886 14.9%
--------------- ---------------- ---------------- ----------------
Total $ 100,020,096 $ 8,330,282 $ 17,288,046 $ 108,977,860
=============== ================ ================ ================
Premium Income:
Life insurance $ 384,688 $ 32,820 $ 37,442 $ 389,310 9.6%
Accident/health 830,970 49,001 42,750 824,719 5.2%
--------------- ---------------- ---------------- ----------------
Total $ 1,215,658 $ 81,821 $ 80,192 $ 1,214,029
=============== ================ ================ ================
Assumed Percentage
Ceded Primarily of Amount
Gross Primarily to From Other Net Assumed
Amount GWL Companies Amount to Net
--------------- ---------------- ---------------- --------------- -------------
December 31, 2000:
Life insurance in force:
Individual $ 39,067,268 $ 5,727,745 $ 7,563,302 $ 40,902,825 18.5%
Group 75,700,120 20,610,896 96,311,016 21.4%
--------------- ---------------- ---------------- ----------------
Total $ 114,767,388 $ 5,727,745 $ 28,174,198 $ 137,213,841
=============== ================ ================ ================
Premium Income:
Life insurance $ 349,097 $ 35,448 $ 88,994 $ 402,643 22.1%
Accident/health 827,044 79,705 175,294 922,633 19.0%
--------------- ---------------- ---------------- ----------------
Total $ 1,176,141 $ 115,153 $ 264,288 $ 1,325,276
=============== ================ ================ ================
December 31, 1999:
Life insurance in force:
Individual $ 35,362,934 $ 5,195,961 $ 8,467,877 $ 38,634,850 21.9%
Group 80,717,198 2,212,741 82,929,939 2.7%
--------------- ---------------- ---------------- ----------------
Total $ 116,080,132 $ 5,195,961 $ 10,680,618 $ 121,564,789
=============== ================ ================ ================
Premium Income:
Life insurance $ 306,101 $ 27,399 $ 46,715 $ 325,417 14.4%
Accident/health 801,755 58,247 79,753 823,261 9.7%
--------------- ---------------- ---------------- ----------------
Total $ 1,107,856 $ 85,646 $ 126,468 $ 1,148,678
=============== ================ ================ ================
6. NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Net investment income is summarized as follows:
Years Ended December 31,
----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Investment income:
Fixed maturities and short-term
Investments $ 693,573 $ 675,200 $ 635,601
Common stock 4,882 1,584 1,345
Mortgage loans on real estate 69,237 80,775 88,033
Real estate 22,335 22,068 19,618
Policy loans 204,198 191,320 167,109
Other 101 120 138
--------------- --------------- ---------------
994,326 971,067 911,844
Investment expenses, including interest on
amounts charged by the related parties
of $14,732, $14,637, and $11,053 52,992 39,626 35,898
--------------- --------------- ---------------
Net investment income $ 941,334 $ 931,441 $ 875,946
=============== =============== ===============
Net realized gains (losses) on investments are as follows:
Years Ended December 31,
----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Realized gains (losses):
Fixed maturities $ 32,116 $ (16,752) $ (8,321)
Common stock 13,052 33,411 463
Mortgage loans on real estate 1,657 2,207 1,429
Real estate 490 513
Provisions 8,927 7,000
--------------- --------------- ---------------
Net realized gains on investments $ 46,825 $ 28,283 $ 1,084
=============== =============== ===============
7. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 2001 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------ ------------ ------------ ------------ ------------
Available-for-Sale:
U.S. Government
Agencies $ 1,744,590 $ 45,585 $ 7,577 $ 1,782,598 $ 1,782,598
Collateralized mortgage
obligations 435,074 9,900 125 444,849 444,849
Public utilities 647,754 22,823 5,997 664,580 664,580
Corporate bonds 2,943,635 114,871 71,504 2,987,002 2,987,002
Foreign governments 26,466 1,824 28,290 28,290
State and municipalities 935,758 35,462 3,955 967,265 967,265
Direct mortgage pass-
through certificates 345,979 2,537 2,840 345,676 345,676
Mortgage-backed
Securities - other 97,136 7,020 104,156 104,156
Asset backed securities 2,728,061 76,187 12,489 2,791,759 2,791,759
------------ ------------ ------------ ------------ ------------
$ 9,904,453 $ 316,209 $ 104,487 $10,116,175 $10,116,175
============ ============ ============ ============ ============
Fixed maturities owned at December 31, 2000 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------ ------------ ------------ ------------ ------------
Available-for-Sale:
U.S.Government
Agencies $ 1,115,926 $ 14,528 $ 3,483 $ 1,126,971 $ 1,126,971
Collateralized mortgage
obligations 708,707 8,592 7,201 710,098 710,098
Public utilities 654,729 13,251 7,063 660,917 660,917
Corporate bonds 3,036,921 66,903 85,559 3,018,265 3,018,265
Foreign governments 49,505 1,019 376 50,148 50,148
State and municipalities 815,246 20,424 6,502 829,168 829,168
Direct mortgage pass-
through certificates 356,975 2,719 1,091 358,603 358,603
Mortgage-backed
Securities - other 100,786 5,401 363 105,824 105,824
Asset backed securities 2,533,214 46,602 19,945 2,559,871 2,559,871
------------ ------------ ------------ ------------ ------------
$ 9,372,009 $ 179,439 $ 131,583 $ 9,419,865 $ 9,419,865
============ ============ ============ ============ ============
The collateralized mortgage obligations consist primarily of sequential
and planned amortization classes with final stated maturities of two to
thirty years and average lives of less than one to fifteen years.
Prepayments on all mortgage-backed securities are monitored monthly and
amortization of the premium and/or the accretion of the discount
associated with the purchase of such securities is adjusted by such
prepayments.
See Note 9 for additional information on policies regarding estimated
fair value of fixed maturities.
The amortized cost and estimated fair value of fixed maturity investments
at December 31, 2001, by projected maturity, are shown below. Actual
maturities will likely differ from these projections because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Estimated
Cost Fair Value
---------------- ----------------
Due in one year or less $ 614,336 $ 627,259
Due after one year
through five years 2,481,589 2,579,308
Due after five years
through ten years 1,171,127 1,189,693
Due after ten years 848,427 838,494
Mortgage-backed
Securities 2,060,913 2,089,662
Asset-backed securities 2,728,061 2,791,759
---------------- ----------------
$ 9,904,453 $ 10,116,175
================ ================
Proceeds from sales of securities available-for-sale were $5,201,737,
$1,460,672, and $3,176,802 during 2001, 2000, and 1999, respectively. The
realized gains on such sales totaled $42,343, $8,015, and $10,080 for
2001, 2000, and 1999, respectively. The realized losses totaled $10,186,
$24,053, and $19,720 for 2001, 2000, and 1999, respectively. During the
years 2001, 2000, and 1999, held-to-maturity securities with amortized
cost of $0, $8,571, and $0 were sold due to credit deterioration with
insignificant gains and losses.
During the fourth quarter of 2000, the Company transferred all securities
classified as held-to-maturity into the available-for-sale category. The
Company recorded a $19,908 unrealized gain associated with this transfer
in other comprehensive income, net of tax.
At December 31, 2001 and 2000, pursuant to fully collateralized
securities lending arrangements, the Company had loaned $278,471 and
$208,702 of fixed maturities, respectively.
The Company engages in hedging activities to manage interest rate, market
and foreign exchange risk.
The following table summarizes the 2001 financial hedge instruments:
Notional Strike/Swap
December 31, 2001 Amount Rate Maturity
------------------------------- --------------- ------------------------------ --------------------
Interest Rate Caps $ 1,402,000 6.75% - 11.65% (CMT) 01/02 - 01/05
Interest Rate Swaps 365,018 3.13% - 7.32% 01/02- 12/06
Foreign Currency
Exchange Contracts 13,585 N/A 06/05 - 07/06
Options Calls 191,300 Various 01/02 - 01/06
Puts 131,000 Various 12/01 - 12/02
The following table summarizes the 2000 financial hedge instruments:
Notional Strike/Swap
December 31, 2000 Amount Rate Maturity
------------------------------- --------------- -------------------------------- --------------------
Interest Rate Futures $ 171,800 5.17% - 5.68% 3/01
Interest Rate Caps 1,562,000 7.64% - 11.82% (CMT) 6/00 - 12/06
Interest Rate Swaps 300,041 5.00% - 8.62% 1/01 - 12/06
Foreign Currency
Exchange Contracts 18,371 N/A 6/05 - 7/06
Options Calls 111,400 Various 5/01 - 11/05
CMT - Constant Maturity Treasury Rate
The Company has established specific investment guidelines designed to
emphasize a diversified and geographically dispersed portfolio of
mortgages collateralized by commercial and industrial properties located
in the United States. The Company's policy is to obtain collateral
sufficient to provide loan-to-value ratios of not greater than 75% at the
inception of the mortgages. At December 31, 2001, approximately 29% of
the Company's mortgage loans were collateralized by real estate located
in California.
The following is information with respect to impaired mortgage loans:
2001 2000
---------------- ----------------
Loans, net of related allowance for credit losses of
$13,018 and $12,777 $ 6,300 $ 9,116
Loans with no related allowance for credit losses 5,180 12,954
Average balance of impaired loans during the year 31,554 39,321
Interest income recognized (while impaired) 1,617 1,648
Interest income received and recorded (while impaired)
Using the cash basis method of recognition 1,744 1,632
As part of an active loan management policy and in the interest of
maximizing the future return of each individual loan, the Company may
from time to time modify the original terms of certain loans. These
restructured loans, all performing in accordance with their modified
terms, aggregated $56,258 and $73,518 at December 31, 2001 and 2000,
respectively.
The following table presents changes in the allowance for credit losses:
2001 2000 1999
--------------- --------------- ---------------
Balance, beginning of year $ 61,242 $ 77,416 $ 83,416
Provision for loan losses (8,927) (7,000)
Charge-offs (3,588) (7,247)
Recoveries 1,000
--------------- --------------- ---------------
Balance, end of year $ 57,654 $ 61,242 $ 77,416
=============== =============== ===============
8. COMMERCIAL PAPER
The Company has a commercial paper program that is partially supported by
a $50,000 standby letter-of-credit. At December 31, 2001, commercial
paper outstanding of $97,046 had a maturity of 4 days and an interest
rate of 2.55%. At December 31, 2000, commercial paper outstanding of
$97,631 had maturities ranging from 11 to 46 days and interest rates
ranging from 6.59% to 6.62%.
9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
December 31,
-----------------------------------------------------------------------
2001 2000
---------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- -------------- ---------------
ASSETS:
Fixed maturities and
short-term investments $ 10,540,905 $ 10,540,905 $ 9,834,247 $ 9,834,247
Mortgage loans on real
estate 613,453 624,102 843,371 856,848
Policy loans 3,000,441 3,000,441 2,809,973 2,809,973
Common stock 73,344 73,344 95,036 95,036
LIABILITIES:
Annuity contract reserves
without life contingencies 4,188,553 4,210,759 4,189,716 4,204,907
Policyholders' funds 242,916 242,916 266,235 266,235
Due to GWL 41,874 41,441 43,081 41,332
Due to GWL&A Financial 251,059 251,059 171,347 158,222
Commercial paper 97,046 97,046 97,631 97,631
Repurchase agreements 250,889 250,889
The estimated fair values of financial instruments have been determined
using available information and appropriate valuation methodologies.
However, considerable judgement is required to interpret market data to
develop estimates of fair value. Accordingly, the estimates presented are
not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
The estimated fair-value of fixed maturities and common stocks that are
publicly traded are obtained from an independent pricing service. To
determine fair value for fixed maturities not actively traded, the
Company utilizes discounted cash flows calculated at current market rates
on investments of similar quality and term. Fair values of derivatives of
$20,617 and $7,188 at December 31, 2001 and 2000, respectively,
consisting principally of interest rate swaps are included in fixed
maturities.
Mortgage loan fair value estimates generally are based on discounted cash
flows. A discount rate "matrix" is incorporated whereby the discount rate
used in valuing a specific mortgage generally corresponds to that
mortgage's remaining term and credit quality. The rates selected for
inclusion in the discount rate "matrix" reflect rates that the Company
would quote if placing loans representative in size and quality to those
currently in the portfolio.
Policy loans accrue interest generally at variable rates with no fixed
maturity dates and, therefore, estimated fair value approximates carrying
value.
The estimated fair value of annuity contract reserves without life
contingencies is estimated by discounting the cash flows to maturity of
the contracts, utilizing current crediting rates for similar products.
The estimated fair value of policyholders' funds is the same as the
carrying amount as the Company can change the crediting rates with 30
days notice.
The estimated fair value of due to GWL is based on discounted cash flows
at current market rates on high quality investments.
The fair value of due to GWL&A Financial reflects the last trading price
of the subordinated notes in the public market at December 31, 2001.
The carrying value of repurchase agreements and commercial paper is a
reasonable estimate of fair value due to the short-term nature of the
liabilities.
The estimated fair value of derivatives, primarily consisting of interest
rate swaps which are held for other than trading purposes, is the
estimated amount the Company would receive or pay to terminate the
agreement at each year-end, taking into consideration current interest
rates and other relevant factors. Included in the net asset position for
interest rates swaps are $33 and $1,858 of liabilities in 2001 and 2000,
respectively. Included in the net asset position for foreign currency
exchange contracts are $127 and $0 of liabilities in 2001 and 2000,
respectively.
10. EMPLOYEE BENEFIT PLANS
The following table summarizes changes for the years ended December 31,
2001, 2000, and 1999 in the benefit obligations and in plan assets for
the Company's defined benefit pension plan and post-retirement medical
plan. There is no additional minimum pension liability required to be
recognized.
Post-Retirement
Pension Benefits Medical Plan
---------------------------------- ---------------------------------
2001 2000 1999 2001 2000 1999
--------- --------- --------- --------- --------- --------
Change in benefit obligation
Benefit obligation at beginning $ 140,563 $ 126,130 $ 131,305 $ 33,018 $ 29,228 $ 19,944
of year
Service cost 8,093 7,062 7,853 3,331 2,305 2,186
Interest cost 9,718 9,475 8,359 3,303 2,167 1,652
Acquisition of new employees 4,155 7,823
Actuarial (gain) loss (2,640) 2,510 (22,363) 11,401 3,616
Prior service for former Alta
employees 2,471
Benefits paid (5,213) (4,614) (3,179) (1,015) (682) (641)
--------- --------- --------- --------- --------- --------
Benefit obligation at end of year $ 150,521 $ 140,563 $ 126,130 $ 57,861 $ 33,018 $ 29,228
--------- --------- --------- --------- --------- --------
Change in plan assets
Fair value of plan assets at
beginning of year $ 193,511 $ 192,093 $ 183,136 $ $ $
Actual return on plan assets (637) 6,032 12,055
Addition of former Alta employees
and other adjustments 81
Benefits paid (5,213) (4,614) (3,179)
--------- --------- --------- --------- --------- --------
Fair value of plan assets at end 187,661 193,511 192,093
of year
--------- --------- --------- --------- --------- --------
Funded (unfunded) status 37,140 52,948 65,963 (57,861) (33,018) (29,228)
Unrecognized net actuarial (gain) (1,499) (15,239) (30,161) 14,659 3,430 3,464
loss
Unrecognized prior service cost 2,533 3,073 3,614 9,326 2,148 2,310
Unrecognized net obligation or
(asset)
at transition (15,142) (16,655) (18,170) 12,120 12,928 13,736
--------- --------- --------- --------- --------- --------
Prepaid (accrued) benefit cost $ 23,032 $ 24,127 $ 21,246 $ (21,756) $ (14,512) $ (9,718)
========= ========= ========= ========= ========= ========
Components of net periodic
benefit cost
Service cost $ 8,093 $ 7,062 $ 7,853 $ 3,331 $ 2,305 $ 2,186
Interest cost 9,718 9,475 8,360 3,303 2,167 1,652
Expected return on plan assets (15,276) (17,567) (15,664)
Amortization of transition (1,514) (1,514) (1,514) 808 808 808
obligation
Amortization of unrecognized prior
service cost 541 541 541 645 162 162
Amortization of gain from earlier
periods (467) (879) (80) 172 34 38
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------- --------
Net periodic (benefit) cost $ 1,095 $ (2,882) $ (504) $ 8,259 $ 5,476 $ 4,846
========= ========= ========= ========= ========= ========
Weighted-average assumptions as
of December 31
Discount rate 7.25% 7.50% 7.50% 7.25% 7.50% 7.50%
Expected return on plan assets 8.00% 9.25% 8.50% 8.00% 9.25% 8.50%
Rate of compensation increase 4.00% 5.00% 5.00% 4.00% 5.00% 5.00%
The Company-sponsored post-retirement medical plan (medical plan)
provides health benefits to retired employees. The medical plan is
contributory and contains other cost sharing features, which may be
adjusted annually for the expected general inflation rate. The Company's
policy is to fund the cost of the medical plan benefits in amounts
determined at the discretion of management. The Company made no
contributions to this plan in 2001, 2000, or 1999.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the medical plan. For measurement purposes, a 7.5%
annual rate of increase in the per capita cost of covered health care
benefits was assumed. A one-percentage-point change in assumed health
care cost trend rates would have the following effects:
1-Percentage 1-Percentage
Point Point
Increase Decrease
-------------------- --------------------
Increase (decrease) on total of service and
interest cost on components $ 2,246 $ (1,465)
Increase (decrease) on post-retirement benefit 12,877 (9,914)
obligation
The Company sponsors a defined contribution 401(k) retirement plan which
provides eligible participants with the opportunity to defer up to 15% of
base compensation. The Company matches 50% of the first 5% of participant
pre-tax contributions. For employees hired after January 1, 1999, the
Company matches 50% of the first 8% of participant pre-tax contributions.
Company contributions for the years ended December 31, 2001, 2000, and
1999 totaled $7,773, $6,130, and $5,504, respectively.
The Company has a deferred compensation plan providing key executives
with the opportunity to participate in an unfunded, deferred compensation
program. Under the program, participants may defer base compensation and
bonuses, and earn interest on their deferred amounts. The program is not
qualified under Section 401 of the Internal Revenue Code. Participant
deferrals, which are reflected in other liabilities, are $20,033,
$19,264, and $17,367 for years ending December 31, 2001, 2000, and 1999,
respectively. The participant deferrals earn interest at 7.2% at December
31, 2001, based on the average ten-year composite government securities
rate plus 1.5%. The interest expense related to the plan for the years
ending December 31, 2001, 2000, and 1999 was $1,434, $1,358, and $1,231,
respectively.
The Company also provides a supplemental executive retirement plan to
certain key executives. This plan provides key executives with certain
benefits upon retirement, disability, or death based upon total
compensation. The Company has purchased individual life insurance
policies with respect to each employee covered by this plan. The Company
is the owner and beneficiary of the insurance contracts. The expense for
this plan for 2001, 2000, and 1999 was $2,726, $3,023, and $3,002,
respectively. The total liability of $20,881 and $18,794 as of December
31, 2001 and 2000 is included in other liabilities.
11. FEDERAL INCOME TAXES
The following is a reconciliation between the federal income tax rate and
the Company's effective income tax rate:
2001 2000 1999
------------ ------------ ------------
Federal tax rate 35.0 % 35.0 % 35.0 %
Change in tax rate resulting from:
Settlement of GWL tax exposures (5.9)
Investment income not subject
to federal tax (1.7) (0.9)
Other, net (0.3) (0.3)
------------ ------------ ------------
Total 33.0 % 34.1 % 28.8 %
============ ============ ============
The Company's income tax provision was favorably impacted in 1999 by the
release of contingent liabilities relating to taxes of the GWL's U.S.
branch associated with blocks of business that were transferred from
GWL's U.S. branch to the Company from 1989 to 1993; the Company had
agreed to the transfer of these tax liabilities as part of the transfer
of this business. The release recorded in 1999 reflected the resolution
of certain tax issues with the Internal Revenue Service (IRS), and
totaled $17,150; however, $8,900 of the release was attributable to
participating policyholders and therefore had no effect on the net income
of the Company since that amount was credited to the provision for
policyholders' share of earnings on participating business in the
accompanying 1999 statement of income.
Excluding the effect of the 1999 tax item discussed above, the effective
tax rate for 1999 was 35.2%.
Temporary differences of which give rise to the deferred tax assets and
liabilities as of December 31, 2001 and 2000 are as follows:
2001 2000
------------------------------- ------------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
------------- -------------- ------------- -------------
Policyholder reserves $ 157,703 $ $ 114,074 $
Deferred policy acquisition costs 47,101 48,543
Deferred acquisition cost
proxy tax 113,505 110,239
Investment assets 88,595 35,714
Allowance for uncollectibles 10,570
Net operating loss carryforwards 444 444
Other 2,614 103
------------- -------------- ------------- -------------
Subtotal 284,836 135,696 224,860 84,257
Valuation allowance (1,761)
------------- -------------- ------------- -------------
Total Deferred Taxes $ 284,836 $ 135,696 $ 223,099 $ 84,257
============= ============== ============= =============
Amounts included in investment assets above include $40,122 and $21,228
related to the unrealized gains on the Company's fixed maturities
available-for-sale at December 31, 2001 and 2000, respectively.
The Company will file a consolidated tax return for 2001. Losses incurred
by subsidiaries in prior years cannot be offset against operating income
of the Company. At December 31, 2001, the Company's subsidiaries had
approximately $1,269 of net operating loss carryforwards, expiring
through the year 2015. The tax benefit of subsidiaries' net operating
loss carryforwards are included in the deferred tax assets at December
31, 2001 and 2000, respectively.
The Company's valuation allowance was decreased in 2001, 2000, and 1999
by $1,761, $0, and $(17), respectively, as a result of the re-evaluation
by management of future estimated taxable income in its subsidiaries.
Under pre-1984 life insurance company income tax laws, a portion of life
insurance company gain from operations was not subject to current income
taxation but was accumulated, for tax purposes, in a memorandum account
designated as "policyholders' surplus account." The aggregate
accumulation in the account is $7,742 and the Company does not anticipate
any transactions, which would cause any part of the amount to become
taxable. Accordingly, no provision has been made for possible future
federal income taxes on this accumulation.
12. OTHER COMPREHENSIVE INCOME
Other comprehensive income for the year ended December 31, 2001 is
summarized as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
----------------- ---------------- -- -----------------
Unrealized gains on available-for-sale securities:
Net changes during the year related to cash
flow hedges $ 12,637 $ (4,423) $ 8,214
Unrealized holding gains (losses) arising
during the period 112,544 (39,397) 73,147
Less: reclassification adjustment for
(gains) losses realized in net income (15,912) 5,569 (10,343)
----------------- ---------------- -----------------
Net unrealized gains 109,269 (38,251) 71,018
Reserve and DAC adjustment (43,358) 15,175 (28,183)
----------------- ---------------- -----------------
Other comprehensive income $ 65,911 $ (23,076) $ 42,835
================= ================ =================
Other comprehensive income for the year ended December 31, 2000 is
summarized as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
----------------- ---------------- -----------------
Unrealized gains on available-for-sale
securities:
Unrealized holding gains (losses) arising
during the period $ 204,274 $ (71,495) $ 132,779
Less: reclassification adjustment for
(gains) losses realized in net income 9,436 (3,303) 6,133
----------------- ---------------- -----------------
Net unrealized gains 213,710 (74,798) 138,912
Reserve and DAC adjustment (31,352) 10,973 (20,379)
----------------- ---------------- -----------------
Other comprehensive income $ 182,358 $ (63,825) $ 118,533
================= ================ =================
Other comprehensive loss for the year ended December 31, 1999 is
summarized as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
----------------- ---------------- -----------------
Unrealized gains on available-for-sale
securities:
Unrealized holding gains (losses) arising
during the period $ (303,033) $ 106,061 $ (196,972)
Less: reclassification adjustment for
(gains) losses realized in net income (9,958) 3,485 (6,473)
----------------- ---------------- -----------------
Net unrealized gains (losses) (312,991) 109,546 (203,445)
Reserve and DAC adjustment 87,729 (30,705) 57,024
----------------- ---------------- -----------------
Other comprehensive loss $ (225,262) $ 78,841 $ (146,421)
================= ================ =================
13. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS, AND OTHER MATTERS
At December 31, 2001 and 2000, the Company has 1,500 authorized shares
each of Series A, Series B, Series C and Series D cumulative preferred
stock; and 2,000,000 authorized shares of non-cumulative preferred stock.
No dividends were paid on preferred stock in 2001, 2000, and 1999,
respectively. In addition, dividends of $187,633, $134,149, and $92,053
were paid on common stock in 2001, 2000, and 1999, respectively.
Dividends are paid as determined by the Board of Directors, subject to
restrictions as discussed below.
The Company's net income and capital and surplus, as determined in
accordance with statutory accounting principles and practices for
December 31 are as follows:
2001 2000 1999
---------------- ---------------- ---------------
(Unaudited)
Net income $ 266,398 $ 293,521 $ 253,123
Capital and surplus 1,200,372 1,083,718 1,004,745
In March 1998, the National Association of Insurance Commissioners
adopted the Codification of Statutory Accounting Principles
(Codification). The Codification, which is intended to standardize
accounting and reporting to state insurance departments, was effective
January 1, 2001. However, statutory accounting principles will continue
to be established by individual state laws and permitted practices. The
Colorado Division of Insurance required adoption of Codification with
certain modifications for the preparation of statutory financial
statements effective January 1, 2001. The adoption of Codification as
modified by the Colorado Division of Insurance increased statutory net
worth as of January 1, 2001, by approximately $105,760 [Unaudited]. (The
modifications adopted by the Colorado Division of Insurance had no effect
on statutory net worth).
The maximum amount of dividends which can be paid to stockholders by
insurance companies domiciled in the State of Colorado are subject to
restrictions relating to statutory surplus and statutory net gain from
operations. Statutory surplus and net gains from operations at December
31, 2001 were $1,200,372 and $272,138 [Unaudited], respectively. The
Company should be able to pay up to $272,138 [Unaudited] of dividends in
2002.
14. STOCK OPTIONS
The Parent has a stock option plan (the Lifeco plan) that provides for
the granting of options on common shares of Lifeco to certain officers
and employees of Lifeco and its subsidiaries, including the Company.
Options may be awarded with exercise prices of no less than the market
price on the date of the grant. Termination of employment prior to
vesting results in forfeiture of the options, unless otherwise determined
by a committee that administers the Lifeco plan. As of December 31, 2001,
2000, and 1999, stock available for award to Company employees under the
Lifeco plan aggregated 3,278,331, 4,808,047, and 885,150 shares.
The plan provides for the granting of options with varying terms and
vesting requirements. The majority of basic options under the plan vest
and become exercisable twenty percent per year commencing on the first
anniversary of the grant and expire ten years from the date of grant.
Other basic options vest and become exercisable one-third per year
commencing on various dates from December 31, 2000 to September 30, 2002
and expire ten years from the date of grant. Variable options granted to
Company employees totaling 278,000 and 1,832,000 in 1998 and 1997,
respectively, become exercisable, if certain cumulative financial targets
are attained by the end of 2001. If exercisable, the exercise period runs
from April 1, 2002 to June 26, 2007. During 2000, the Company determined
that it was probable that certain of these options would become
exercisable and, accordingly, accrued compensation expense of $15,052
with a corresponding credit to additional paid-in capital as prescribed
by AIN-APB 25. During 2001, the Company released $12,098 of this accrual
when certain financial targets were not attained.
Additional variable options granted in 1998, 2000, and 2001 totaling
380,000, 120,000, and 80,000 respectively, become exercisable if certain
sales or financial targets are attained. During 2001, 2000, and 1999,
7,750, 13,250, and 11,250 of these options vested and accordingly, the
Company recognized compensation expense of $48, $151, and $23,
respectively. If exercisable, the exercise period expires ten years from
the date of grant.
The following table summarizes the status of, and changes in, Lifeco
options granted to Company employees, which are outstanding and the
weighted-average exercise price (WAEP) for 2001, 2000, and 1999. As the
options granted relate to Canadian stock, the values, which are presented
in U.S. dollars, will fluctuate as a result of exchange rate
fluctuations:
2001 2000 1999
-------------------------- ------------------------- -------------------------
Options WAEP Options WAEP Options WAEP
------------- ---------- ------------ ---------- ----------- ----------
Outstanding, Jan. 1 7,675,551 $ 9.91 6,867,098 $ 9.20 6,744,824 $ 8.15
Granted 947,500 22.28 1,386,503 14.88 675,500 16.29
Exercised 1,463,588 5.89 451,300 7.74 234,476 5.69
Expired or
canceled 690,334 11.24 126,750 12.17 318,750 13.81
------------- ---------- ------------ ---------- ----------- ----------
Outstanding,
Dec. 31 6,469,129 $ 11.59 7,675,551 $ 9.91 6,867,098 $ 9.20
============= ========== ============ ========== =========== ==========
Options
exercisable
at year-end 2,673,460 $ 8.01 3,077,998 $ 7.11 2,503,998 $ 7.00
============= ========== ============ ========== =========== ==========
Weighted average
fair value of
options granted
during year $ 4.22 $ 4.38 $ 5.16
============= ============ ===========
The following table summarizes the range of exercise prices for
outstanding Lifeco common stock options granted to Company employees at
December 31, 2001:
Outstanding Exercisable
------------------------------------------------- ---------------------------------
Average Average
Exercise Average Exercise Exercise
Price Range Options Life Price Options Price
--------------------- ---------------- ------------ ------------- ---------------- -------------
$ 5.32 - 7.07 1,823,560 4.68 $ 5.42 1,803,560 $ 5.40
$10.19 - 16.90 3,775,569 6.73 $ 12.22 867,400 $ 13.40
$21.52 - 22.23 870,000 9.66 $ 21.77 2,500 $ 22.01
Of the exercisable Lifeco options, 2,623,960 relate to fixed option
grants and 49,500 relate to variable grants.
Power Financial Corporation (PFC), which is the parent corporation of
Lifeco, has a stock option plan (the PFC plan) that provides for the
granting of options for common shares of PFC to key employees of PFC and
its affiliates. Prior to the creation of the Lifeco plan in 1996, certain
officers of the Company participated in the PFC plan in Canada. Under the
PFC plan, options may be awarded with exercise price no less than the
market price on the date of the grant. Termination of employment prior to
vesting results in forfeiture of the options, unless otherwise determined
by a committee that administers the PFC plan. As of December 31, 2001,
2000, and 1999, stock available for award under the PFC plan aggregated
2,710,800, 2,790,800, and 4,340,800 shares.
Options granted to officers of the Company under the PFC plan become
exercisable twenty percent per year commencing on the date of the grant
and expire ten years from the date of grant.
The following table summarizes the status of, and changes in, PFC options
granted to Company officers, which remain outstanding and WAEP for 2001,
2000, and 1999. As the options granted relate to Canadian stock, the
values, which are presented in U.S. dollars, will fluctuate as a result
of exchange rate fluctuations:
2001 2000 1999
-------------------------- -------------------------- --------------------------
Options WAEP Options WAEP Options WAEP
------------- --------- ------------- --------- ------------- ----------
Outstanding, Jan.1, 70,000 $ 2.29 285,054 $ 3.23 355,054 $ 2.89
Exercised 215,054 3.30 70,000 2.28
------------- --------- ------------- --------- ------------- ----------
Outstanding, Dec 31, 70,000 $ 2.16 70,000 $ 2.29 285,054 $ 3.23
============= ========= ============= ========= ============= ==========
Options exercisable
at year-end 70,000 $ 2.16 70,000 $ 2.29 285,054 $ 3.23
============= ========= ============= ========= ============= ==========
As of December 31, 2001, the PFC options outstanding have an exercise
price of $2.16 and a weighted-average remaining contractual life of 1.36
years.
The Company accounts for stock-based compensation using the intrinsic
value method prescribed by APB 25 under which compensation expenses for
stock options are generally not recognized for stock option awards
granted at or above fair market value. Had compensation expense for the
Company's stock option plan been determined based upon fair value at the
grant dates for awards under the plan in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's net income would
have been reduced by $1,801, $1,686, and $1,039, in 2001, 2000, and 1999,
respectively. The fair value of each option grant was estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for those options granted in
2001, 2000, and 1999, respectively: dividend yields of 3.84%, 3.95%, and
3.63%, expected volatility of 20.1%, 30.1%, and 32.4%, risk-free interest
rates of 5.30%, 6.61%, and 6.65% and expected lives of 7.5 years.
15. SEGMENT INFORMATION
The Company has two reportable segments: Employee Benefits and Financial
Services. The Employee Benefits segment markets group life and health and
401(k) products to small and mid-sized corporate employers. The Financial
Services segment markets and administers savings products to public and
not-for-profit employers and individuals and offers life insurance
products to individuals and businesses. The Company's reportable segments
are strategic business units that offer different products and services.
They are managed separately as each segment has unique distribution
channels.
The accounting policies of the segments are the same as those described
in Note 1. The Company evaluates performance based on profit or loss from
operations after income taxes.
The Company's operations are not materially dependent on one or a few
customers, brokers or agents.
Summarized segment financial information for the year ended and as of
December 31 was as follows:
Year ended December 31, 2001
Operations: Employee Financial
Benefits Services Total
----------------- ----------------- -----------------
Revenue:
Premium income $ 1,033,983 $ 169,656 $ 1,203,639
Fee income 809,574 137,681 947,255
Net investment income 90,720 850,614 941,334
Realized investment gains 17,881 28,944 46,825
----------------- ----------------- -----------------
Total revenue 1,952,158 1,186,895 3,139,053
Benefits and Expenses:
Benefits 867,031 829,566 1,696,597
Operating expenses 863,021 164,677 1,027,698
----------------- ----------------- -----------------
Total benefits and expenses 1,730,052 994,243 2,724,295
Income taxes 75,962 65,150 141,112
----------------- ----------------- -----------------
Net income before special charges 146,144 127,502 273,646
Special charges (net) 80,900 80,900
----------------- ----------------- -----------------
Net income $ 65,244 $ 127,502 $ 192,746
================= ================= =================
Assets: Employee Financial
Benefits Services Total
----------------- ----------------- -----------------
Investment assets $ 1,497,077 $ 12,843,747 $ 14,340,824
Other assets 912,653 973,033 1,885,686
Separate account assets 5,854,652 6,730,009 12,584,661
----------------- ----------------- -----------------
Total assets $ 8,264,382 $ 20,546,789 $ 28,811,171
================= ================= =================
Year ended December 31, 2000
Operations: Employee Financial
Benefits Services Total
----------------- ----------------- -----------------
Revenue:
Premium income $ 1,142,136 $ 190,430 $ 1,332,566
Fee income 752,309 119,318 871,627
Net investment income 94,800 836,641 931,441
Realized investment gains (losses) (3,572) 31,855 28,283
----------------- ----------------- -----------------
Total revenue 1,985,673 1,178,244 3,163,917
Benefits and Expenses:
Benefits 922,925 822,947 1,745,872
Operating expenses 856,463 168,448 1,024,911
----------------- ----------------- -----------------
Total benefits and expenses 1,779,388 991,395 2,770,783
----------------- ----------------- -----------------
Net operating income before income taxes 206,285 186,849 393,134
Income taxes 70,197 63,843 134,040
----------------- ----------------- -----------------
Net income $ 136,088 $ 123,006 $ 259,094
================= ================= =================
Assets: Employee Financial
Benefits Services Total
----------------- ----------------- -----------------
Investment assets $ 1,438,650 $ 12,250,667 $ 13,689,317
Other assets 980,245 846,687 1,826,932
Separate account assets 6,537,095 5,844,042 12,381,137
----------------- ----------------- -----------------
Total assets $ 8,955,990 $ 18,941,396 $ 27,897,386
================= ================= =================
Year ended December 31, 1999
Operations: Employee Financial
Benefits Services Total
----------------- ----------------- -----------------
Revenue:
Premium income $ 990,449 $ 172,734 $ 1,163,183
Fee income 548,580 86,567 635,147
Net investment income 80,039 795,907 875,946
Realized investment gains (losses) (1,224) 2,308 1,084
----------------- ----------------- -----------------
Total revenue 1,617,844 1,057,516 2,675,360
Benefits and Expenses:
Benefits 789,084 792,755 1,581,839
Operating expenses 661,119 143,422 804,541
----------------- ----------------- -----------------
Total benefits and expenses 1,450,203 936,177 2,386,380
----------------- ----------------- -----------------
Net operating income before income taxes 167,641 121,339 288,980
Income taxes 51,003 32,259 83,262
----------------- ----------------- -----------------
Net income $ 116,638 $ 89,080 $ 205,718
================= ================= =================
The following table, which summarizes premium and fee income by segment,
represents supplemental information.
2001 2000 1999
----------------- ---------------- ----------------
Premium Income:
Employee Benefits
Group Life & Health $ 1,033,983 $ 1,142,136 $ 990,449
----------------- ---------------- ----------------
Total Employee Benefits 1,033,983 1,142,136 990,449
----------------- ---------------- ----------------
Financial Services
Savings 8,429 7,253 14,344
Individual Insurance 161,227 183,177 158,390
----------------- ---------------- ----------------
Total Financial Services 169,656 190,430 172,734
----------------- ---------------- ----------------
Total premium income $ 1,203,639 $ 1,332,566 $ 1,163,183
================= ================ ================
Fee Income:
Employee Benefits
Group Life & Health $ 713,296 $ 648,328 $ 454,071
(uninsured plans)
401(k) 96,278 103,981 94,509
----------------- ---------------- ----------------
Total Employee Benefits 809,574 752,309 548,580
----------------- ---------------- ----------------
Financial Services
Savings 119,793 111,201 81,331
Individual Insurance 17,888 8,117 5,236
----------------- ---------------- ----------------
Total Financial Services 137,681 119,318 86,567
----------------- ---------------- ----------------
Total fee income $ 947,255 $ 871,627 $ 635,147
================= ================ ================
16. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings, which arise in the
ordinary course of its business. In the opinion of management, after
consultation with counsel, the resolution of these proceedings should not
have a material adverse effect on its financial position or results of
operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In the two most recent fiscal years or any subsequent interim period,
there has been no change in the Company's independent accountants or
resulting disagreements on accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AN EXECUTIVE OFFICERS OF THE REGISTRANT
A. IDENTIFICATION OF DIRECTORS
Served as
Director Principal Occupation(s)
Director Age from: for last Five Years
------------------------------ ------- ------------- ----------------------------------------------
James Balog 73 1993 Company Director
James W. Burns, O.C. 72 1991 Chairman of the Boards of Great-West
Lifeco, Great-West Life, London
Insurance Group Inc. and London Life
Insurance Company; Deputy Chairman
Power Corporation
Orest T. Dackow 65 1991 Company Director since April 2000;
previously President and Chief
Executive Officer, Great-West Lifeco
Andre Desmarais 45 1997 President and Co-Chief Executive
Officer, Power Corporation; Deputy
Chairman, Power Financial
Paul Desmarais, Jr. 47 1991 Chairman and Co-Chief Executive
Officer, Power Corporation; Chairman,
Power Financial
Robert Gratton 58 1991 Chairman of the Board of the Company;
President and Chief Executive Officer,
Power Financial
Kevin P. Kavanagh 69 1986 Company Director; Chancellor, Brandon
University
William Mackness 63 1991 Company Director
William T. McCallum 59 1990 President and Chief Executive Officer of
the Company; Co-President and Chief
Executive Officer, Great-West Lifeco
Jerry E.A. Nickerson 65 1994 Chairman of the Board, H.B. Nickerson
& Sons Limited (a management and
holding company)
The Honourable 64 1991 Vice Chairman, Power Corporation;
P. Michael Pitfield, Member of the Senate of Canada
P.C., Q.C.
Michel Plessis-Belair, 59 1991 Vice Chairman and Chief Financial
F.C.A.Officer, Power Corporation; Executive
Vice President and Chief Financial
Officer, Power Financial
Brian E. Walsh 48 1995 Managing Partner, QVan Capital,
LLC (a merchant banking company)
since September 1997; previously
Partner Trinity L.P. (an investment
company)
Member of the Executive Committee
Member of the Investment and Credit Committee
Member of the Audit Committee
Also a director of Great-West Life
Mr. Andre Desmarais and Mr. Paul Desmarais, Jr. are brothers.
Unless otherwise indicated, all of the directors have been engaged for
not less than five years in their present principal occupations or in
another executive capacity with the companies or firms identified.
Directors are elected annually to serve until the following annual
meeting of shareholders.
The following is a list of directorships held by the directors of the
Company, on companies whose securities are traded publicly in the
United States or that are investment companies registered under the
Investment Company Act of 1940.
J. Balog Transatlantic Holdings, Inc.
Phoenix/Zweig Advisers LLC
Euclid Advisers LLC
W.T. McCallum Maxim Series Fund, Inc.
Orchard Series Fund
Variable Annuity Account A
B. IDENTIFICATION OF EXECUTIVE OFFICERS
Served as
Executive
Officer Principal Occupation(s)
Executive Officer Age from: for last Five Years
------------------------------ ------- ------------- ----------------------------------------------
William T. McCallum 59 1984 President and Chief Executive Officer
President and Chief of the Company; Co-President
Executive Officer and Chief Executive Officer,
Great-West Lifeco
Mitchell T.G. Graye 46 1997 Executive Vice President and Chief
Executive Vice Financial Officer of the Company
President and Chief
Financial Officer
Douglas L. Wooden 45 1991 Executive Vice President, Financial
Executive Vice Services of the Company
President,
Financial Services
John A. Brown 54 1992 Senior Vice President, BenefitsCorp
Senior Vice President, Healthcare Markets of the Company
BenefitsCorp
Healthcare Markets
Mark S. Corbett 42 2001 Senior Vice President,
Senior Vice President, Investments of the Company
Investments
John R. Gabbert 47 2001 Senior Vice President and Chief
Senior Vice President Information Officer, Employee Benefits
and Chief Information of the Company since April 2000;
Officer, previously Vice President, Information
Employee Benefits Technology, AT&T Broadband
Donna A. Goldin 54 1996 Executive Vice President and Chief
Executive Vice Operating Officer, One Benefits, Inc.
President and Chief
Operating Officer,
One Benefits, Inc.
Wayne T. Hoffmann 46 2001 Senior Vice President,
Senior Vice President, Investments of the Company
Investments
D. Craig Lennox 54 1984 Senior Vice President, General Counsel
Senior Vice President, and Secretary of the Company
General Counsel and
Secretary
Steve H. Miller 49 1997 Senior Vice President, Employee
Senior Vice President, Benefits Sales of the Company
Employee Benefits
Sales
Charles P. Nelson 41 1998 President, BenefitsCorp
President,
BenefitsCorp
Martin Rosenbaum 49 1997 Senior Vice President, Employee
Senior Vice President, Benefits Finance of the Company
Employee Benefits
Finance
Gregory E. Seller 48 1999 Senior Vice President,
Senior Vice President, BenefitsCorp Government Markets
BenefitsCorp of the Company
Government Markets
Robert K. Shaw 46 1998 Senior Vice President,
Senior Vice President, Individual Markets of the Company
Individual Markets
George D. Webb 58 1999 Senior Vice President of the Company
President, since July 1999; previously Principal,
Advised Assets William M. Mercer Investment
Group, Inc. Consulting Inc. (an investment
consulting company)
Warren J. Winer 55 2001 Senior Vice President, Employee
Senior Vice President, Benefits of the Company since January
Employee Benefits 2001; previously Executive Vice
President, General American Life
Insurance Company
Jay W. Wright 50 2001 Senior Vice President, Employee
Senior Vice President, Benefits of the Company
Employee Benefits since January 2001; previously Senior
Vice President, New England Financial
Unless otherwise indicated, all of the executive officers have been
engaged for not less than five years in their present principal
occupations or in another executive capacity with the companies or
firms identified.
The appointments of executive officers are confirmed annually.
ITEM 11. EXECUTIVE COMPENSATION
A. SUMMARY COMPENSATION TABLE
The following table sets out all compensation paid by the Company to
the individuals who were, at December 31, 2001, the Chief Executive
Officer and the other four most highly compensated executive officers
of the Company (collectively the Named Executive Officers) for the
three most recently completed financial statements.
------------------------------------ ------------ ------------- ------------------ ----------------------
Long-term
Annual Compensation Compensation
Awards
------------------------------------ ------------ ------------- ------------------ ----------------------
Name and Year Salary Bonus Options
Principal Position ($) ($) (#)
------------------------------------ ------------ ------------- ------------------ ----------------------
W.T. McCallum 2001 880,000 --- ---
President and Chief 2000 871,500 --- 450,001
Executive Officer 1999 834,659 680,000 100,000
------------------------------------ ------------ ------------- ------------------ ----------------------
D.L. Wooden 2001 525,000 393,750 ---
Executive Vice President 2000 475,000 356,250 200,001
Financial Services 1999 365,000 219,000
------------------------------------ ------------ ------------- ------------------ ----------------------
Charles P. Nelson 2001 300,000 150,000 60,000
President 2000 270,400 202,435 ---
BenefitsCorp 1999 257,500 135,386 ---
------------------------------------ ------------ ------------- ------------------ ----------------------
Warren J. Winer2001 325,000 121,875 65,000
Senior Vice President 2000 --- --- ---
Employee Benefits 1999 --- --- ---
------------------------------------ ------------ ------------- ------------------ ----------------------
M.T.G. Graye 2001 415,000 --- 40,000
Executive Vice President 2000 375,000 253,200 125,001
Chief Financial Officer 1999 315,000 189,000 ---
------------------------------------ ------------ ------------- ------------------ ----------------------
The options set out are options for common shares of Great-West Lifeco that are
granted by Great-West Lifeco pursuant to the Great-West Lifeco Stock Option Plan
(Lifeco Options). Lifeco Options become exercisable on specified dates and
expire ten years after the date of the grant.
Mr. Winer became an employee and senior officer of the Company effective January
1, 2001.
B. OPTIONS
The following table describes options granted to the Named Executive
Officers during the most recently completed fiscal year. All options
are Lifeco Options granted pursuant to the Great-West Lifeco Stock
Option Plan. Lifeco Options are issued with an exercise price in
Canadian dollars. Canadian dollar amounts have been translated to U.S.
dollars at a rate of 1/1.59.
OPTION GRANTS IN LAST FISCAL YEAR
--------------------- ------------- -------------- ------------ ----------------- -----------------------------
Potential realized value
at assumed annual rates
Individual Grants of stock price apprecia-
tion for option term
--------------------- ------------- -------------- ------------ ----------------- -----------------------------
Percentage
of total
options
granted to Exercise
Options employees or base
Granted in fiscal price Expiration 5% 10%
Name (#) year ($/share) date ($) ($)
--------------------- ------------- -------------- ------------ ----------------- ------------- ---------------
C.P. Nelson 60,000 4.41 21.56 Dec. 3, 2011 817,800 2,061,600
--------------------- ------------- -------------- ------------ ----------------- ------------- ---------------
W.J. Winer 65,000 4.77 22.05 Apr. 25, 2011 901,550 2,284,100
--------------------- ------------- -------------- ------------ ----------------- ------------- ---------------
M.T.G. Graye 40,000 2.94 22.05 Apr. 25,2011 554,800 1,405,600
--------------------- ------------- -------------- ------------ ----------------- ------------- ---------------
Prior to April 24, 1996, the Named Executive Officers participated in
the Power Financial Employee Share Option Plan pursuant to which
options to acquire common shares of Power Financial (PFC Options) were
granted. The following table describes all PFC Options exercised in
2001, and all unexercised PFC Options held as of December 31, 2001, by
the Named Executive Officers. PFC Options are issued with an exercise
price in Canadian dollars. Canadian dollar amounts have been translated
to U.S. dollars at a rate of 1/1.59.
AGGREGATED PFC OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
-------------------- ----------- ------------- ------------------------------ -----------------------------
Value of unexercised in-the-
Unexercised options at money options at fiscal
fiscal year-end year-end
(#) ($)
-------------------- ----------- ------------- ------------------------------ -----------------------------
Shares
acquired
on Value
exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($)
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
M.T.G. Graye 70,000 1,453,793
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
Commencing April 24, 1996, the Named Executive Officers began
participating in the Great-West Lifeco Stock Option Plan. The following
table describes all Lifeco Options exercised in 2001, and all
unexercised Lifeco Options held as of December 31, 2001, by the Named
Executive Officers. Lifeco Options are issued with an exercise price in
Canadian dollars. Canadian dollar amounts have been translated to U.S.
dollars at a rate of 1/1.59.
AGGREGATED LIFECO OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
-------------------- ----------- ------------- ------------------------------ -----------------------------
Value of unexercised in-the-
Unexercised options at money options at fiscal
fiscal year-end year-end
(#) ($)
-------------------- ----------- ------------- ------------------------------ -----------------------------
Shares
acquired
on Value
exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($)
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
W.T. McCallum 100,000 1,986,312 840,000 810,000 10,695,943 8,411,767
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
D.L. Wooden 200,000 3,144,466 --- 500,001 --- 4,921,860
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
C.P. Nelson 80,000 1,387,671 --- 180,000 --- 1,061,654
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
W.J. Winer --- --- --- 65,000 --- ---
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
M.T.G. Graye --- --- 142,800 322,201 2,239,194 2,668,335
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
C. PENSION PLAN TABLE
The following table sets out the pension benefits payable to the Named
Executive Officers.
PENSION PLAN TABLE
-------------------- --------------------------------------------------------------------------------------
Years of Service
--------------------------------------------------------------------------------------
Remuneration
($) 15 20 25 30 35
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
400,000 120,000 160,000 200,000 240,000 240,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
500,000 150,000 200,000 250,000 300,000 300,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
600,000 180,000 240,000 300,000 360,000 360,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
700,000 210,000 280,000 350,000 420,000 420,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
800,000 240,000 320,000 400,000 480,000 480,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
900,000 270,000 360,000 450,000 540,000 540,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
1,000,000 300,000 400,000 500,000 600,000 600,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
The Named Executive Officers have the following years of service, as of
December 31, 2001.
-------------------------------- --------------------------------
Name Years of Service
-------------------------------- --------------------------------
W.T. McCallum 36
-------------------------------- --------------------------------
-------------------------------- --------------------------------
D.L. Wooden 11
-------------------------------- --------------------------------
-------------------------------- --------------------------------
C.P. Nelson 18
-------------------------------- --------------------------------
-------------------------------- --------------------------------
W.J. Winer 1
-------------------------------- --------------------------------
-------------------------------- --------------------------------
M.T.G. Graye 8
-------------------------------- --------------------------------
W.T. McCallum is entitled, upon election, to receive the benefits
shown, with remuneration based on the average of the highest 36
consecutive months of compensation during the last 84 months of
employment. For M.T.G. Graye, C.P. Nelson, W.J. Winer and D.L. Wooden,
the benefits shown are payable upon the attainment of age 62, and
remuneration is the average of the highest 60 consecutive months of
compensation during the last 84 months of employment. Compensation
includes salary and bonuses prior to any deferrals. The normal form of
pension is a life only annuity. Other optional forms of pension payment
are available on an actuarially equivalent basis. The benefits listed
in the table are subject to deduction for social security and other
retirement benefits.
D. COMPENSATION OF DIRECTORS
For each director of the Company who is not also a director of
Great-West Life, the Company pays an annual fee of $22,500, and a
meeting fee of $1,500 for each meeting of the Board of Directors or a
committee thereof attended. For each director of the Company who is
also a director of Great-West Life, the Company pays a meeting fee of
$1,500 for each meeting of the Board of Directors, or a committee
thereof, attended that is not coincident with a Great-West Life
meeting. At their option, in lieu of cash payments, directors may
receive deferred share units under The Great-West Life Assurance
Company Deferred Share Unit Plan. In addition, all directors are
reimbursed for incidental expenses.
The above amounts are paid in the currency of the country of residence
of the director.
E. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Executive compensation is determined by the Company's Board of
Directors. W.T. McCallum, President and Chief Executive Officer of the
Company, is a member of the Board of Directors. Mr. McCallum
participated in executive compensation matters generally but was not
present when his own compensation was discussed or determined.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below is certain information, as of March 1, 2002, concerning
beneficial ownership of the voting securities of the Company by
entities and persons who beneficially own more than 5% of the voting
securities of the Company. The determinations of "beneficial ownership"
of voting securities are based upon Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the Exchange Act). This rule provides
that securities will be deemed to be "beneficially owned" where a
person has, either solely or in conjunction with others, (1) the power
to vote or to direct the voting of securities and/or the power to
dispose or to direct the disposition of, the securities or (2) the
right to acquire any such power within 60 days after the date such
"beneficial ownership" is determined.
(1) 100% of the Company's 7,032,000 outstanding common shares are
owned by GWL&A Financial Inc., 8515 East Orchard Road, Greenwood
Village, Colorado 80111.
(2) 100% of the outstanding common shares of GWL&A Financial Inc. are
owned by GWL&A Financial (Nova Scotia) Co., Suite 800, 1959 Upper
Water Street, Halifax, Nova Scotia, Canada B3J 2X2.
(3) 100% of the outstanding common shares of GWL&A Financial (Nova
Scotia) Co. are owned by GWL&A Financial (Canada) Inc., 100
Osborne Street North, Winnipeg, Manitoba, Canada R3C 3A5.
(4) 100% of the outstanding common shares of GWL&A Financial (Canada)
Inc. are owned by Great-West Lifeco Inc., 100 Osborne Street
North, Winnipeg, Manitoba, Canada R3C 3A5.
(5) 82.2% of the outstanding common shares of Great-West Lifeco Inc.
are controlled by Power Financial Corporation, 751 Victoria
Square, Montreal, Quebec, Canada H2Y 2J3, representing
approximately 65% of the voting rights attached to all outstanding
voting shares of Great-West Lifeco Inc.
(6) 67.5% of the outstanding common shares of Power Financial
Corporation are owned by 171263 Canada Inc., 751 Victoria Square,
Montreal, Quebec, Canada H2Y 2J3.
(7) 100% of the outstanding common shares of 171263 Canada Inc. are
owned by 2795957 Canada Inc., 751 Victoria Square, Montreal,
Quebec, Canada H2Y 2J3.
(8) 100% of the outstanding common shares of 2795957 Canada Inc. are
owned by Power Corporation of Canada, 751 Victoria Square,
Montreal, Quebec, Canada H2Y 2J3.
(9) Mr. Paul Desmarais, 751 Victoria Square, Montreal, Quebec, Canada
H2Y 2J3, through a group of private holding companies, which he
controls, has voting control of Power Corporation of Canada.
As a result of the chain of ownership described in paragraphs (1)
through (9) above, each of the entities and persons listed in
paragraphs (1) through (9) would be considered under Rule 13d-3 of the
Exchange Act to be a "beneficial owner" of 100% of the outstanding
voting securities of the Company.
B. SECURITY OWNERSHIP OF MANAGEMENT
The following table sets out the number of equity securities, and
exercisable options (including options that will become exercisable
within 60 days) for equity securities, of the Company or any of its
parents or subsidiaries, beneficially owned, as of December 31, 2001,
by (i) the directors of the Company; (ii) the Named Executive
Officers; and (iii) the directors and executive officers of the
Company as a group.
-------------------------- --------------------------- --------------------------- ------------------------
Great-West Lifeco Inc. Power Financial Power Corporation
Corporation of Canada
-------------------------- --------------------------- --------------------------- ------------------------
Directors
-------------------------- --------------------------- --------------------------- ------------------------
J. Balog
-------------------------- --------------------------- --------------------------- ------------------------
J.W. Burns 153,659 8,000 400,650
200,000 options
-------------------------- --------------------------- --------------------------- ------------------------
O.T. Dackow 79,973
200,000 options
-------------------------- --------------------------- --------------------------- ------------------------
A. Desmarais 51,659 21,600 142,333
2,554,000 options
-------------------------- --------------------------- --------------------------- ------------------------
P. Desmarais, Jr. 43,624 178,221
2,379,000 options
-------------------------- --------------------------- --------------------------- ------------------------
R. Gratton 331,846 310,000 10,460
6,780,000 options
-------------------------- --------------------------- --------------------------- ------------------------
K.P. Kavanagh 18,500
-------------------------- --------------------------- --------------------------- ------------------------
W. Mackness
-------------------------- --------------------------- --------------------------- ------------------------
W.T. McCallum 84,474 19,500
840,000 options
-------------------------- --------------------------- --------------------------- ------------------------
J.E. A. Nickerson 4,000 4,000
-------------------------- --------------------------- --------------------------- ------------------------
P.M. Pitfield 55,000 75,000 70,000
269,000 options
-------------------------- --------------------------- --------------------------- ------------------------
M. Plessis-Belair 20,000 3,000 18,836
484,500 options
-------------------------- --------------------------- --------------------------- ------------------------
B.E. Walsh 2,000
-------------------------- --------------------------- --------------------------- ------------------------
-------------------------- --------------------------- --------------------------- ------------------------
Great-West Lifeco Inc. Power Financial Power Corporation
Corporation of Canada
-------------------------- --------------------------- --------------------------- ------------------------
Named Executive
Officers
-------------------------- --------------------------- --------------------------- ------------------------
W.T. McCallum 84,474
840,000
-------------------------- --------------------------- --------------------------- ------------------------
D.L. Wooden 113,000
-------------------------- --------------------------- --------------------------- ------------------------
C.P. Nelson 62,000
-------------------------- --------------------------- --------------------------- ------------------------
W. J. Winer
-------------------------- --------------------------- --------------------------- ------------------------
M.T.G. Graye 50,000
142,800 optiions 70,000 options
-------------------------- --------------------------- --------------------------- ------------------------
-------------------------- --------------------------- --------------------------- ------------------------
Great-West Lifeco Inc. Power Financial Power Corporation
Corporation of Canada
-------------------------- --------------------------- --------------------------- ------------------------
Directors and
Executive Officers
as a Group
-------------------------- --------------------------- --------------------------- ------------------------
1,073,878 604,100 829,886
2,549,680 options 6,850,000 options 5,886,500 options
-------------------------- --------------------------- --------------------------- ------------------------
All holdings are common shares, or where indicated, exercisable options for
common shares, of Great-West Lifeco Inc.
All holdings are common shares, or where indicated, exercisable options for
common shares, of Power Financial Corporation.
All holdings are subordinate voting shares, or where indicated, exercisable
options for subordinate voting shares, of Power Corporation of Canada.
The number of common shares and exercisable options for common shares
of Power Financial Corporation held by R. Gratton represents 1.9% of
the total number of common shares and exercisable options for common
shares of Power Financial Corporation outstanding. The number of common
shares and exercisable options for common shares of Power Financial
Corporation held by the directors and executive officers as a group
represents 2.0% of the total number of common shares and exercisable
options for common shares of Power Financial Corporation outstanding.
The number of subordinate voting shares and exercisable options for
subordinate voting shares of Power Corporation of Canada held by A.
Desmarais represents 1.2% of the total number of subordinate voting
shares and exercisable options for subordinate voting shares of Power
Corporation of Canada outstanding. The number of subordinate voting
shares and exercisable options for subordinate voting shares of Power
Corporation of Canada held by the directors and executive officers as a
group represents 3.0% of the total number of subordinate voting shares
and exercisable options for subordinate voting shares of Power
Corporation of Canada outstanding.
None of the remaining holdings set out above exceeds 1% of the total
number of shares and exercisable options for shares of the class
outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The documents identified below are filed as a part of this report:
A. INDEX TO FINANCIAL STATEMENTS
Page
---------------
Independent Auditors' Report on Consolidated Financial Statements for
the Years Ended December 31, 2001, 2000, and
1999......................
Consolidated Balance Sheets as of December 31, 2001 and
2000.............
Consolidated Statements of Income for the Years Ended December 31,
2001, 2000, and
1999..................................................
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 2001, 2000,
1999........................................................
Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000, and
1999..................................................
Notes to Consolidated Financial Statements for the Years Ended December
31, 2001, 2000, and
1999..................................................
All schedules and separate financial statements of the Registrant are
omitted because they are not applicable, or not required, or because
the required information is included in the financial statements or
notes thereto.
B. INDEX TO EXHIBITS
Exhibit Number Title Page
------------------------ ----------------------------------------------------- --------------------
3(i) Articles of Redomestication of Great-West Life
& Annuity Insurance Company
Filed as Exhibit 3(i) to Registrant's Form
10-K for the year ended December 31,
1996 and incorporated herein by
reference.
3(ii) Bylaws of Great-West Life & Annuity
Insurance Company
Filed as Exhibit 3(ii) to Registrant's
Form 10-K for the year ended December
31, 1997 and incorporated herein by
reference.
10 Material Contracts
10.1 Description of Executive Officer Annual
Incentive Bonus Program
Filed as Exhibit 10.1 to Registrant's Form
10-K for the year ended December 31,
1997 and incorporated herein by
reference.
10.2 Great-West Lifeco Inc. Stock Option Plan
Filed as Exhibit 10.2 to Registrant's Form
10-K for the year ended December 31,
1997 and incorporated herein by
reference.
Description of amendment to the Great-West
Lifeco Inc. Stock Option Plan
10.3 Supplemental Executive Retirement Plan
Filed as Exhibit 10.3 to Registrant's Form
10-K for the year ended December 31,
1997 and incorporated herein by
reference.
Amendment No. 3 to Supplemental Executive
Retirement Plan.
Filed as Exhibit 10.3 to Registrant's Form
10-K for the year ended December 31,
2000 and incorporated herein by
reference.
10.4 Executive Deferred Compensation Plan
Filed as Exhibit 10.4 to Registrant's Form
10-K for the year ended December 31,
1997 and incorporated herein by
reference.
10.5 Deferred Share Unit Plan filed herewith.
21 Subsidiaries of Great-West Life & Annuity
Insurance Company
24 Directors' Powers of Attorney
Directors' Powers of Attorney filed as
Exhibit 24 to Registrant's Form 10-K for
the year ended December 31, 1996, and
Exhibit 24 to Registrant's Form 10-K for
the year ended December 31, 1997, and
incorporated herein by reference.
C. REPORTS ON FORM 8-K
A report on Form 8-K, dated October 31, 2001, was filed disclosing the
Company's third quarter results.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
By: /s/ William T. McCallum
----------------------------------------------------------
William T. McCallum, President and Chief Executive Officer
Date: March 28, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature and Title Date
------------------------------------------------------------------------------ ----------------------
/s/ William T. McCallum March 28, 2002
------------------------------------------------------------------------------
William T. McCallum
President and Chief Executive Officer and a Director
/s/ Mitchell T.G. Graye March 28, 2002
------------------------------------------------------------------------------
Mitchell T.G. Graye
Executive Vice President and Chief Financial Officer
/s/ Glen R. Derback March 28, 2002
------------------------------------------------------------------------------
Glen R. Derback
Vice President and Controller
/s/ James Balog * March 28, 2002
------------------------------------------------------------------------------
James Balog, Director
/s/ James W. Burns * March 28, 2002
------------------------------------------------------------------------------
James W. Burns, Director
/s/ Orest T. Dackow * March 28, 2002
------------------------------------------------------------------------------
Orest T. Dackow, Director
/s/ Andre Desmarais * March 28, 2002
------------------------------------------------------------------------------
Andre Desmarais, Director
/s/ Paul Desmarais, Jr. * March 28, 2002
------------------------------------------------------------------------------
Paul Desmarais, Jr., Director
/s/ Robert Gratton * March 28, 2002
------------------------------------------------------------------------------
Robert Gratton, Director
/s/ Kevin P. Kavanagh * March 28, 2002
------------------------------------------------------------------------------
Kevin P. Kavanagh, Director
/s/ William Mackness * March 28, 2002
------------------------------------------------------------------------------
William Mackness, Director
/s/ Jerry E.A. Nickerson * March 28, 2002
------------------------------------------------------------------------------
Jerry E.A. Nickerson, Director
/s/ P. Michael Pitfield * March 28, 2002
------------------------------------------------------------------------------
P. Michael Pitfield, Director
/s/ Michel Plessis-Belair * March 28, 2002
------------------------------------------------------------------------------
Michel Plessis-Belair, Director
/s/ Brian E. Walsh * March 28, 2002
------------------------------------------------------------------------------
Brian E. Walsh, Director
/s/ D. Craig Lennox March 28, 2002
------------------------------------------------------------------------------
D. Craig Lennox
* Attorney-in-fact pursuant to filed Power of Attorney
EXHIBIT 10.2
AMENDED GREAT-WEST LIFECO INC. STOCK OPTION PLAN
The Great-West Lifeco Inc. Stock Option Plan ("the Plan") was amended April 27,
2000. Paragraph 4.2 of the Plan was amended to reflect the increase in the
number of shares reserved for issuance under the Plan from 12,000,000 to
18,500,000.
EXHIBIT 10.5
DEFERRED SHARE UNIT PLAN FOR DESIGNATED U.S. RESIDENT DIRECTORS
OF THE GREAT-WEST LIFE ASSURANCE COMPANY,
LONDON LIFE INSURANCE COMPANY,
LONDON INSURANCE GROUP INC.,
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY AND
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
TABLE OF CONTENTS
Page
1. PREAMBLE AND DEFINITIONS.....................................................1
2. CONSTRUCTION AND INTERPRETATION..............................................2
3. ELIGIBILITY..................................................................3
4. DEFERRED SHARE UNIT GRANTS AND ACCOUNTS......................................3
5. REDEMPTION ON RETIREMENT OR DEATH............................................7
6. CURRENCY.....................................................................7
7. SHAREHOLDER RIGHTS...........................................................8
8. ADMINISTRATION...............................................................8
9. ASSIGNMENT...................................................................8
PREAMBLE AND DEFINITIONS
1.1 Title
The Plan herein described shall be called the "Deferred Share
Unit Plan for Designated U.S. Resident Directors of The
Great-West Life Assurance Company, London Life Insurance Company,
London Insurance Group Inc., Great-West Life & Annuity Insurance
Company" and First Great-West Life & Annuity Insurance Company
and is referred to herein as "the Plan".
1.2 Purpose of the Plan
The purpose of the Plan is to promote a greater alignment of
interests between Members and the shareholders of the
Corporations.
1.3 Definitions
1.3.1 "Annual Board Retainer" means the Canadian dollar
equivalent of the aggregate basic annual remuneration paid
by the Corporations to a Director in a financial year for
service on the Boards together with Board committee fees
and additional fees and retainers to committee chairs, but
excluding Attendance Fees.
1.3.2 "Affiliate" means any related or associated
corporation, or any corporation that is a member of a
group of corporations that do not deal at arm's length,
notwithstanding that they may not be related or associated
for purposes of the Income Tax Act (Canada).
1.3.3 "Attendance Fees" means the Canadian dollar equivalent
of the aggregate fees paid by the Corporations to a
Director in a financial year for attendance at meetings of
the Boards and their committees.
1.3.4 "Board" means the Board of Directors of any of the Corporations.
1.3.5 "Corporations" means The Great-West Life Assurance
Company, London Life Insurance Company, London Insurance
Group Inc., Great-West Life & Annuity Insurance Company
and First Great-West Life & Annuity Insurance Company and
any successor corporations whether by amalgamation, merger
or otherwise.
1.3.6 "Deferred Share Unit" means a share unit notionally
credited to a Member's Deferred Share Unit Account through
a bookkeeping entry, the value of which at the relevant
time shall be equal to the weighted average trading price
per Share on the Toronto Stock Exchange for the last five
Trading Days immediately before the date in issue.
1.3.7 "Deferred Share Unit Account" has the meaning ascribed thereto in
Article 4.9.
1.3.8 "Director" means a director of any of the Corporations
designated by the President and Chief Executive Officer of
any of the Corporations as eligible to participate in the
Plan, and who is resident in the United States.
1.3.9 "Member" means a Director who elects to participate in
the Plan in accordance with Article 4.
1.3.10 "Share" means a common share of Great-West Lifeco Inc.
and such other share as is added thereto or substituted
therefor as a result of amendments to the articles of
Great-West Lifeco Inc., a reorganization or otherwise.
1.3.11 "Trading Day" means any date on which the Toronto Stock
Exchange is open for the trading of Shares.
2. CONSTRUCTION AND INTERPRETATION
2.1 In the Plan, references to the masculine include the
feminine and reference to the singular shall include the plural
and vice versa, as the context shall require.
2.2 Unless otherwise stated herein, the Plan shall be governed by and
interpreted in accordance with the laws of Colorado and
applicable U.S. federal law.
2.3 If any provision of the Plan or part thereof is determined
to be void or unenforceable in whole or in part, such
determination shall not affect the validity or enforceability of
any other provision or part thereof.
2.4 Headings wherever used herein are for reference purposes
only and do not limit or extend the meaning of the provisions
herein contained.
2.5 The Corporations and the Members confirm their desire that
this document along with all other documents including all
notices relating hereto be written in the English language. La
Compagnie et les membres confirment leur volonte que ce document
de meme que tous les documents, y compris tout avis, s'y
rattachant soient rediges en anglais.
3. ELIGIBILITY
3.1 The Corporations are establishing the Plan for Directors,
beginning with the Corporations' first fiscal quarter of 2001.
3.2 Participation in the Plan by each Director is voluntary.
3.3 Nothing herein contained shall be deemed to give any person
the right to be retained as a Director or an employee of any of
the Corporations.
4. DEFERRED SHARE UNIT GRANTS AND ACCOUNTS
4.1 Each Director may, subject to the conditions stated herein,
elect in accordance with Section 4.2 to participate in the
Plan. If a Director so elects to participate he or she will be
entitled to receive:
(A) his or her Annual Board Retainer payable for the
subsequent calendar years as follows:
(a) entirely in cash;
(b) as to 1/2 in Deferred Share Units and the balance in cash; or
(c) entirely in Deferred Share Units; and
(B) his or her Attendance Fees payable for the subsequent
calendar years as follows:
(d) entirely in cash;
(e) as to 1/2 in Deferred Share Units and the balance in cash; or
(f) entirely in Deferred Share Units.
4.2 Each Director who elects to participate in the Plan must
file a notice of election in the form of Schedule A hereto (the
"Election Notice") with the Secretary of Great-West Life &
Annuity Insurance Company before the commencement of a calendar
year.
The election of a Director (who has not filed a notice to (i)
change his or her elected percentage in the form of Schedule B
hereto, or (ii) terminate the receipt of additional Deferred
Share Units in the form of Schedule C hereto) to participate in
the Plan shall be deemed to apply to all calendar years
subsequent to the filing of the Election Notice and such Director
will not be required to file another Election Notice.
4.3 The election made in accordance with section 4.2 shall
relate to the Annual Board Retainer and the Attendance Fees paid
with respect to any and all of the Corporations' calendar years
following the filing of the Election Notice.
4.4 Each Member may, once per calendar year, change his or her
elected percentage of the Annual Board Retainer and the
Attendance Fees to be paid in Deferred Share Units by filing with
the Secretary of Great-West Life & Annuity Insurance Company a
notice in the form of Schedule B hereto. Such Member's change
shall be effective with respect to the Annual Board Retainer and
the Attendance Fees payable for calendar years following that
election.
4.5 Each Member may, once per calendar year, terminate the
Member's participation in the Plan by filing with the Secretary
of Great-West Life & Annuity Insurance Company a notice electing
to terminate the receipt of additional Deferred Share Units in
the form of Schedule C hereto. Such Member's election shall be
effective with respect to the Annual Board Retainer and the
Attendance Fees payable for the calendar years following that
election.
Any Deferred Share Units granted under the Plan prior to the
election shall remain in the Plan and will be redeemable only in
accordance with the terms of the Plan.
A Member who has filed a notice in accordance with Schedule C may
elect to reinstate their acquisition of Deferred Share Units by
filing an Election Notice in accordance with Section 4.2.
4.6 A Member shall, for the purposes of the Plan, be deemed to
retire on the date he or she is no longer any of a Director or an
employee of any of the Corporations.
4.7 The Annual Board Retainer and the Attendance Fees are
payable quarterly in arrears on January 1, April 1, July 1 and
October 1 in each fiscal year.
4.8 The number of Deferred Share Units granted at any particular time
with respect to the Annual Board Retainers and/or the Attendance
Fees deferred pursuant to Section 4.1 will be calculated by
quarterly dividing the portion of one-quarter of the Annual Board
Retainer and/or Attendance Fees payable at that time which is to
be paid in Deferred Share Units by the weighted average trading
price per Share on the Toronto Stock Exchange for the last five
Trading Days of the preceding fiscal quarter. For example,
$10,000 =
-------
TSE weighted average trading price Number of Deferred
Share of 1 Share for the last 5 Trading Units Granted
Days of the preceding fiscal quarter
4.9 An account, to be known as a "Deferred Share Unit Account"
shall be maintained by The Great-West Life Assurance Company for
each Member and will be credited with notional grants of Deferred
Share Units received by such Member from time to time.
4.10 Whenever cash dividends are paid on the Shares, additional
Deferred Share Units will be credited to each Member's Deferred
Share Unit Account. The number of such additional Deferred Share
Units will be calculated by dividing the dividends that would
have been paid to such Member if the Deferred Share Units in the
Member's Deferred Share Unit Account had been Shares by the value
of a Deferred Share Unit on the date on which the dividends were
paid on the Shares.
4.11 In the event of any stock dividend, stock split, combination
or exchange of shares, merger, consolidation, spin-off or other
distribution (other than normal cash dividends) of Great-West
Lifeco Inc. assets to shareholders, or any other changes
affecting the Shares, proportionate adjustments to reflect such
change or changes shall be made with respect to the number of
Deferred Share Units outstanding under the Plan.
4.12 For greater certainty, no amount will be paid to, or in
respect of, a Member under the Plan or pursuant to any other
arrangement, and no additional Deferred Share Units will be
granted to such Member, to compensate for a downward fluctuation
in the price of the Shares, nor will any other form of benefit be
conferred upon, or in respect of, a Member for such purpose.
5. REDEMPTION ON RETIREMENT OR DEATH
5.1 The value of the Deferred Share Units credited to a
Member's Deferred Share Unit Account shall be redeemable by the
Member (or, where the Member has died, his estate) at the
Member's option (or after the Member's death at the option of his
legal representative) following the event, including death,
causing the Member to be no longer any of a Director or an
employee of any of the Corporations or a person related to any of
the Corporations or to an Affiliate of any of the Corporations
(the "Member's Termination Date"), by filing a written notice of
redemption in the form of Schedule D hereto with the Secretary of
Great-West Life & Annuity Insurance Company, specifying a
redemption date within the period from January 1st of the first
calendar year commencing after the Member's Termination Date to
December 15th of the first calendar year commencing after the
Member's Termination Date. If no notice of redemption has been
filed by December 15th of the first calendar year after the
Member's Termination Date that date will be deemed to be the
redemption date.
5.2 The value of the Deferred Share Units redeemed by or in
respect of a Member shall be paid to the Member (or, if the
Member has died, to his or her estate, as the case may be) by The
Great-West Life Assurance Company in the form of a lump sum cash
payment, net of any applicable withholdings as soon as
practicable after the redemption date, provided that in any event
such payment date shall be no later than December 31st of the
first calendar year commencing after the Member's Termination
Date. The Great-West Life Assurance Company shall charge to
London Life Insurance Company, London Insurance Group Inc.,
Great-West Life & Annuity Insurance Company and First Great-West
Life & Annuity Insurance Company the portion of the amount paid
to the Member above which relates to service on their respective
board of directors.
6. CURRENCY
6.1 All references in the Plan to currency refer to lawful
Canadian currency.
7. SHAREHOLDER RIGHTS
7.1 Deferred Share Units are not shares and will not entitle a
Member to any shareholder rights, including, without limitation,
voting rights, dividend entitlement or rights on liquidation.
8. ADMINISTRATION
8.1 Unless otherwise determined by the Board of Directors of
The Great-West Life Assurance Company, the Plan shall remain an
unfunded obligation of the Corporation.
8.2 The Plan shall be administered by the Executive Committee
of the Board of Directors of The Great-West Life Assurance
Company.
8.3 The Plan may be amended or terminated at any time by the
Board of Directors of The Great-West Life Assurance Company,
except as to rights already accrued thereunder by the Members.
Notwithstanding the foregoing, any amendment or termination of
the Plan shall be such that the Plan continuously meets the
requirements of applicable U.S. tax laws.
8.4 Each of the Corporations will be responsible for its
proportionate share of all costs relating to the operation and
administration of the Plan.
9. ASSIGNMENT
9.1 The assignment or transfer of the Deferred Share Units, or any
other benefits under this Plan, shall not be permitted other than
by operation of law.
Schedule A
Deferred Share Unit Plan for Designated U.S. Resident
Directors of The Great-West Life Assurance Company, London Life
Insurance Company, London Insurance Group Inc., Great-West Life &
Annuity Insurance Company and First Great-West Life & Annuity
Insurance Company (the "Plan")
ELECTION NOTICE
I hereby elect to participate in the Plan and
(i) my elected percentage with respect to my aggregate Annual
Board Retainer payable from each of The Great-West Life Assurance
Company, London Life Insurance Company, London Insurance Group
Inc., Great-West Life & Annuity Insurance Company and First
Great-West Life & Annuity Insurance Company (the "Corporations")
until changed in accordance with Schedule B and/or C is:
0% or 50% or 100%
(ii) my elected percentage with respect to my aggregate Attendance
Fees payable from each of the Corporations until changed in
accordance with Schedule B and/or C is:
0% or 50% or 100%
I confirm that:
1. I have received and reviewed a copy of the terms of the Plan and
agree to be bound by them.
2. I understand that this election will apply to the Annual
Board Retainer and Attendance Fees payable to me for services
commencing in the calendar year following the calendar year in
which I make this election.
3. I understand that I will not be able to cause any of the
Corporations to redeem Deferred Share Units granted under the
Plan ("DSUs") until I am no longer either a Director or an
employee of any of the Corporations or any related corporation.
4. I recognize that under current law, the Corporations
intend to treat the time when DSUs credited pursuant to this
election are redeemed in accordance with the terms of the Plan,
after I am no longer either a Director or employee of any of the
Corporations or any related corporation, as the date as of which
income tax and other withholdings are required. Upon redemption
of the DSUs, the Corporations will make all appropriate
withholdings as required by law at that time.
5. The value of DSUs are based on the value of the common shares of
Great-West Lifeco Inc. and therefore are not guaranteed.
6. No funds will be set aside to guarantee the payment of DSUs.
Future payment of DSUs will remain an unfunded liability recorded
on the books of the Corporations.
The foregoing is only a brief outline of certain key provisions of the
Plan. For more complete information, reference should be made to the Plan text.
Date (Name of Director)
(Signature of Director)
Schedule B
Deferred Share Unit Plan for Designated U.S. Resident Directors of The
Great-West Life Assurance Company, London Life Insurance Company, London
Insurance Group Inc., Great-West Life & Annuity Insurance Company and First
Great-West Life & Annuity Insurance Company (the "Plan")
ELECTION TO CHANGE ELECTED PERCENTAGE
I hereby elect, notwithstanding my previous election in the form of
Schedule A to the Plan dated _______________, to change my elected percentage
relating to the
(i) aggregate Annual Board Retainer payable for my services in
the calendar year commencing after the date hereof and, subject
to any subsequent elections I may make in accordance with the
terms of the Plan, for calendar years thereafter to
0% or 50% or 100%
(ii) aggregate Attendance Fees payable for my services in the
calendar year commencing after the date hereof and, subject to
any subsequent elections I may make in accordance with the terms
of the Plan, for calendar years thereafter to
0% or 50% or 100%
Except as stated above the provisions of Schedule A continue to apply.
Date (Name of Director)
(Signature of Director)
NB: An election to change the elected percentages can only be made by any Member
once in a calendar year.
Schedule C
Deferred Share Unit Plan for Designated U.S. Resident Directors of The
Great-West Life Assurance Company, London Life Insurance Company, London
Insurance Group Inc., Great-West Life & Annuity Insurance Company and First
Great-West Life & Annuity Insurance Company (the "Plan")
ELECTION TO TERMINATE RECEIPT
OF ADDITIONAL DEFERRED SHARE UNITS
I hereby elect that, notwithstanding my previous election in the form of
Schedule A to the Plan, no portion of the aggregate Annual Board Retainer and
aggregate Attendance Fees payable for my services in the calendar year
commencing after the date hereof or, subject to any subsequent election I may
make in accordance with the terms of the Plan, for calendar years thereafter
shall be paid in Deferred Share Units in accordance with the terms of the Plan.
I understand that the Deferred Share Units already granted under the
Plan cannot be redeemed until I am no longer either a Director or employee of
The Great-West Life Assurance Company, London Life Insurance Company, London
Insurance Group Inc., Great-West Life & Annuity Insurance Company and First
Great-West Life & Annuity Insurance Company or any related corporation.
I confirm that I have received and reviewed a copy of the terms of the
Plan and agree to be bound by them.
Date (Name of Director)
(Signature of Director)
NB: An election to terminate receipt of additional Deferred Share Units can only
be made by any Member once in a calendar year.
Schedule D
Deferred Share Unit Plan for Designated U.S Resident Directors of The Great-West
Life Assurance Company, London Life Insurance Company, London Insurance Group
Inc., Great-West Life & Annuity Insurance Company and First Great-West Life &
Annuity Insurance Company (the "Plan")
REDEMPTION NOTICE
I hereby advise The Great-West Life Assurance Company (the
"Corporation") that I wish to redeem all the Deferred Share Units credited to my
account under the Plan on [insert redemption date, which shall be at least five
(5) business days following the date on which this notice is filed with the
Corporation, and which date shall be no earlier than January 1 but no later than
December 15 of the first calendar year commencing after the year in which the
participant ceases to be both a director or an employee of any of the
Corporation, London Life Insurance Company, London Insurance Group Inc.,
Great-West Life & Annuity Insurance Company and First Great-West Life & Annuity
Insurance Company or any related corporation].
Date (Name of Director)
(Signature of Director)
If the Redemption is signed by a beneficiary or legal representative documents
providing the authority of such signature should be provided.
EXHIBIT 21
SUBSIDIARIES OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
JURISDICTION OF
INCORPORATION OR
SUBSIDIARY ORGANIZATION
Advised Assets Group, LLC Colorado
Alta Health & Life Insurance Company Indiana
Alta Agency, Inc. New York
BenefitsCorp, Inc. (1) Delaware
BenefitsCorp, Inc. of Wyoming Wyoming
BenefitsCorp Equities, Inc. Delaware
Deferred Compensation of Michigan, Inc. Michigan
Financial Administrative Services Corporation (2) Colorado
First Great-West Life & Annuity Insurance Company New York
Great-West Benefit Services, Inc. Delaware
Greenwood Investments, LLC Colorado
GW Capital Management, LLC Colorado
GWL Properties, Inc. Colorado
Maxim Series Fund, Inc. Maryland
National Plan Coordinators of Delaware, Inc. Delaware
National Plan Coordinators of Ohio, Inc. Ohio
National Plan Coordinators of Washington, Inc. Washington
NPC Securities, Inc. California
One Benefits, Inc. Colorado
One Health Plan, Inc. Vermont
One Health Plan of Alaska, Inc. Alaska
One Health Plan of Arizona, Inc. Arizona
One Health Plan of California, Inc. California
One Health Plan of Colorado, Inc. Colorado
One Health Plan of Florida, Inc. Florida
One Health Plan of Georgia, Inc. Georgia
One Health Plan of Illinois, Inc. Illinois
One Health Plan of Indiana, Inc. Indiana
One Health Plan of Kansas/Missouri, Inc. Kansas
One Health Plan of Maine, Inc. Maine
One Health Plan of Massachusetts, Inc. Massachusetts
One Health Plan of Michigan, Inc. Michigan
One Health Plan of Minnesota, Inc. Minnesota
One Health Plan of Nevada, Inc. Nevada
One Health Plan of New Hampshire, Inc. New Hampshire
One Health Plan of New Jersey, Inc. New Jersey
One Health Plan of New York, Inc. New York
One Health Plan of North Carolina, Inc. North Carolina
One Health Plan of Ohio, Inc. Ohio
One Health Plan of Oregon, Inc. Oregon
One Health Plan of Pennsylvania Pennsylvania
One Health Plan of South Carolina, Inc. South Carolina
One Health Plan of Tennessee, Inc. Tennessee
One Health Plan of Texas, Inc. Texas
One Health Plan of Virginia, Inc. Virginia
One Health Plan of Washington, Inc. Washington
One Health Plan of Wisconsin, Inc. Wisconsin
One Health Plan of Wyoming, Inc. Wyoming
One of Arizona, Inc. Arizona
One Orchard Equities, Inc. Colorado
Orchard Capital Management, LLC Colorado
Orchard Series Fund Delaware
Orchard Trust Company Colorado
P.C. Enrollment Services & Insurance Brokerage, Inc. Massachusetts
Renco, Inc. Delaware
Westkin Properties Ltd. California
(1) Also doing business as Benefits Insurance Services, Inc.
(2) Also doing business as Financial Administrative Services Corporation of
Colorado.