UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from to
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Commission file number 333-1173
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
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Colorado 84-0467907
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(State or other jurisdiction of incorporation or (I.R.S. Employer Identification
organization) Number)
8515 East Orchard Road, Greenwood Village, CO 80111
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(Address of principal executive offices)
(Zip Code)
[303] 737-4128
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(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
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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. [ ]
Indicate by check mark whether the registrant is an accelerated filer as defined
in ss.240.12(b)-2 of this chapter.
Yes No X
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The public may read and copy any of the registrant's reports filed with the SEC
at the SEC's Public Reference Room, 450 Fifth Street NW, Washington DC 20549,
telephone 1-800-SEC-0330 or online at (http://www.sec.gov).
As of June 30, 2003, the aggregate market value of the registrant's voting stock
held by non-affiliates of the registrant was $0.
As of March 1, 2004, 7,032,000 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
NOTE: This Form 10-K is filed by the registrant only as a consequence of
the sale by the registrant of a market value adjusted annuity
product.
TABLE OF CONTENTS
Page
Part I Item 1 Business....................................................
A. Organization and Corporate Structure....................
B. Business of the Company.................................
C. Great-West Healthcare...................................
D. Financial Services......................................
E. Investment Operations...................................
F. Regulation..............................................
G. Ratings.................................................
H. Miscellaneous...........................................
Item 2 Properties..................................................
Item 3 Legal Proceedings...........................................
Item 4 Submission of Matters to a Vote of Security Holders.........
Part II Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters.........................................
A. Equity Security Holders and Market Information..........
B. Dividends...............................................
Item 6 Selected Financial Data.....................................
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................
A. Critical Accounting Policies............................
B. Company Results of Operations...........................
C. Great-West Healthcare Results of Operations.............
D. Financial Services Results of Operations................
E. Investment Operations...................................
F. Liquidity and Capital Resources.........................
G. Off-Balance Sheet Arrangements..........................
H. Obligations Relating to Debt and Leases.................
I. Accounting Pronouncements...............................
Item 7A Quantitative and Qualitative Disclosure About Market Risk...
Item 8 Financial Statements and Supplementary Data.................
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................
Item 9A Controls and Procedures.....................................
Part III Item 10 Directors and Executive Officers of the Registrant..........
A. Identification of Directors.............................
B. Identification of Executive Officers....................
C. Code of Ethics..........................................
D. Audit Committee Financial Expert........................
Item 11 Executive Compensation......................................
A. Summary Compensation Table..............................
B. Options.................................................
C. Pension Plan Table......................................
D. Compensation of Directors...............................
E. Compensation Committee Interlocks and Insider
Participation...........................................
Item 12 Security Ownership of Certain Beneficial Owners and
Management..................................................
A. Security Ownership of Certain Beneficial Owners.........
B. Security Ownership of Management........................
Item 13 Certain Relationships and Related Transactions..............
Item 14 Principal Accountant Fees and Services......................
A. Principal Accountant Fees...............................
B. Pre-Approval Policies and Procedures....................
Part IV Item 15 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K....................................................
A. Index to Financial Statements...........................
B. Index to Exhibits.......................................
C. Reports on Form 8-K.....................................
Signatures..................................................
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 on March 28, 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. (Lifeco), a Canadian holding company. Lifeco
operates in the U.S. through the Company and The Canada Life Assurance
Company (CLAC), and in Canada through The Great-West Life Assurance
Company (Great-West Life) and its subsidiaries, London Life Insurance
Company and CLAC. 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 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 subsidiaries,
First Great-West Life & Annuity Insurance Company (First GWL&A) and
Canada Life Insurance Company of New York (CLINY). The Company is also a
licensed reinsurer in the state of New York.
The Company operates the following two business segments:
Great-West
Healthcare - Employee benefits products and services for
group clients
Financial
Services - Savings products and administrative and recordkeeping
services for public, private and non-profit employers,
corporations and individuals (including 401(a), 401(k),
403(b), 408, and 457 plans), and life insurance
products for individuals and businesses
On July 10, 2003, Lifeco completed its acquisition of Canada Life
Financial Corporation (CLFC), the parent company of CLAC, Canada Life
Insurance Company of America (CLICA) and CLINY. Immediately thereafter,
Lifeco transferred all of the common shares of CLFC it acquired to its
subsidiary, Great-West Life. On December 31, 2003, CLAC transferred all
of the outstanding common shares of CLICA and CLINY owned by it to the
Company.
CLAC, CLICA and CLINY sell individual and group insurance and annuity
products in the United States. Since the time of its acquisition by
Lifeco, this insurance and annuity business in the United States has
been managed by the Company. In connection with this management, the
Company provides certain corporate and operational administrative
services for which it receives a fee.
Sales of new individual products by CLAC, CLICA and CLINY were
discontinued in 2003, shortly after the acquisition of CLFC by Lifeco.
They are now being operated as closed blocks of business. On January 14,
2004, Lifeco announced the sale of CLAC's and CLINY's U.S. group
business, excluding medical stop loss policies, to Jefferson Pilot
Corporation.
The Canada Life acquisitions have been accounted for as a
"reorganization of businesses under common control." Accordingly, the
assets and liabilities of CLICA and CLINY were recorded at Lifeco's cost
basis, and the results of operations of CLICA and CLINY from July 10,
2003 through December 31, 2003 are included in the Company's financial
statements.
The Company recorded as of December 31, 2003, the following (in
thousands) as a result of the acquisition of CLICA and CLINY:
Assets Liabilities and Stockholder's Equity
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Fixed maturities $ 1,937,218 Policy reserves $ 2,991,407
Equity investments 23,680 Policyholders' funds 2,407
Mortgage loans 1,145,494 Policy and contract claims 899
Real estate 550 Provision for
policyholders' 2,800
dividends
Policy loans 13,621 Other liabilities 439,439
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Short-term investments 65,537 Total liabilities 3,436,952
Cash (net of acquisition (232,803)
cost)
Investment income Accumulated other
due and accrued 32,147 comprehensive income (14,433)
Other assets 439,864 Retained earnings 2,789
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Total stockholder's (11,644)
equity
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$ 3,425,308 $ 3,425,308
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The Company's statement of operations for the year ended December 31, 2003
includes the following (in thousands) related to CLICA and CLINY for the
period from July 10, 2003 to December 31, 2003:
Total revenues $ 105,868
Benefits 92,193
Operating expenses 9,385
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Total benefits and 101,578
expenses
Income from operations 4,290
Income taxes 1,501
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Net income $ 2,789
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On August 31, 2003, the Company and CLAC entered into an Indemnity
Reinsurance Agreement pursuant to which the Company reinsured 80% (45%
coinsurance and 35% coinsurance with funds withheld) of certain United
States life, health and annuity business of CLAC's U.S. branch. The Company
recorded $1,427 million in premium income and increase in reserves
associated with these policies. The Company recorded, at fair value, the
following (in thousands) at August 31, 2003 as a result of this
transaction:
Assets Liabilities and Stockholder's Equity
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Fixed Maturities $ 635,061 Policy reserves $ 2,926,497
Mortgage loans 451,725 Policy and contract 45,229
claims
Policy loans 278,152 Policyholders' funds 65,958
Reinsurance receivable 1,320,636
Deferred policy
acquisition 313,364
costs acquired
Investment income
due and accrued 17,280
Premiums in course of
collection 21,466
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$ 3,037,684 $ 3,037,684
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The reinsurance receivable relates to the amount due the Company for
reserves ceded by coinsurance with funds withheld. The Company's return
on this reinsurance receivable will be the interest and other investment
returns earned net of realized gains and losses on a segregated pool of
investments of CLAC's U.S. branch. Pursuant to SFAS 133, the Company has
identified an embedded derivative for the Company's exposure to interest
rate and credit risk on the segregated pool of investments. This
embedded derivative does not qualify for hedge accounting.
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]1 2003 2002 2001
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Premium Income
Great-West Healthcare
Group life & health $ 838 $ 960 $ 1,034
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Total Great-West Healthcare 838 960 1,034
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Financial Services
Retirement Services 1 4
Individual Markets 1,414 160 166
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Total Financial Services 1,415 160 170
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Total premium income $ 2,253 $ 1,120 $ 1,204
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Fee Income
Great-West Healthcare
Group life & health $ 607 $ 660 $ 713
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Total Great-West Healthcare 607 660 713
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Financial Services
Retirement Services 200 197 208
Individual Markets 33 26 26
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Total Financial Services 233 223 234
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Total fee income $ 840 $ 883 $ 947
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Deposits for investment-type
contracts -
Financial Services 2 $ 676 $ 691 $ 627
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Deposits to Separate Accounts -
Financial Services $ 2,217 $ 2,461 $ 3,240
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Self-funded equivalents -
Great-West Healthcare 3 $ 4,674 $ 5,228 $ 5,721
====================================== ============= ============ =============
1 All information in the preceding 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.
2 Investment-type contracts are contracts that include significant cash
build-up features, as discussed in FASB Statement No. 97.
3 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. GREAT-WEST HEALTHCARE
1. Principal Products
The Great-West Healthcare segment of the Company provides employee
benefits products and services to approximately 5,000 employers
across the United States.
The Company's product line includes traditional group health plans as
well as consumer-driven plans that are supported by the Company's
disease management program. Other products and services include
COBRA, HIPAA and flexible spending account administration (Internal
Revenue Code Sections 125/129); dental and vision plans; life
insurance benefits; and short and long-term disability coverage.
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 cost savings.
During 2003, the Great-West Healthcare division reorganized into
market segments: Select, focusing on employers with 50-250 employees;
Mid-market, focusing on employers with 250-2,500 employees; National
Accounts, focusing on employers with over 2,500 employees; and
Specialty Risk, a new market segment exploring new business
opportunities outside the Company's typical target market.
In 2003 the Company adopted the new brand name, "Great-West
Healthcare," which refers to all employee benefit products and
services offered by what was previously known as the Employee
Benefits division of the Company and the following subsidiaries: Alta
Health & Life Insurance Company (Alta), First GWL&A, and the HMO
companies. The new name is intended to eliminate potential market
confusion over different carriers and networks.
In 2003 the Company introduced a consumer-driven tiered benefit
health plan that covers preventive care at 100 percent, provides
high-level coverage for medically complex or catastrophic services,
and gives members more financial responsibility for discretionary
services.
The Company also began offering Health Reimbursement Accounts (HRA),
through which employers contribute a set annual amount for each
employee to spend on health care expenses. Funds remaining at the end
of the year can be rolled over for future use.
The Company continues to offer a range of other health coverage
options including Health Maintenance Organization (HMO) plans, Point
of Service (POS) plans, Preferred Provider Organization (PPO) plans,
and Open Access plans.
Medical management programs are offered to complement each health
plan the Company offers, along with a nurse hotline and online
educational and comparison tools to help members manage their health
and make medically and financially sound treatment choices. The
Company's disease management program services enrolled members with
asthma, diabetes, cardiac and other conditions.
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:
As of December 31,
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[Millions] 2003 2002 2001 2000 1999
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In force $ 102,721 $ 58,572 $ 66,539 $ 96,311 $ 83,901
Note: Includes $52,745 of in force group life insurance obtained
from the CLAC activity for the year ended December 31, 2003.
Also includes $9,049 and $11,237 for the years ended December
31, 2003 and 2002, respectively of in force group life
insurance obtained from the acquisition of General American
Life Insurance Company (General American). The 2002 figure was
influenced by a decline in total health care membership. 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.
2. Method of Distribution
The Company distributes its products and services through field sales
staff. As of December 31, 2003, the sales staff was located in 31
sales offices throughout the United States. Each sales office works
with insurance brokers, agents, and consultants in its local market.
3. Competition
The employee benefits industry is highly competitive. 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 the 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, morbidity, 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 fully insured medical and dental 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 a
retrospective experience rating that is done on certain types of
business.
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 and $1.0 million for accidental death coverage. 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 Financial (NEF). Effective January 1, 2002, the
Company renegotiated this arrangement to assume the full risk on this
block of business. The Company pays a per member fee to NEF.
D. FINANCIAL SERVICES
1. Principal Products
The Financial Services business segment of the Company develops and
administers products under two general categories: Retirement
Services and Individual Markets. These areas distribute retirement
and life insurance products and services for public, private and
non-profit employers, corporations and individuals.
Retirement Services
In 2003 the division launched the new brand name of "Great-West
Retirement Services" to bring together multiple products and services
under one name. Under the Great-West Retirement Services brand, the
Company provides enrollment services, communication materials,
investment options, and education services to employer sponsored
defined contribution and voluntary 403(b) plans, as well as
comprehensive administrative and recordkeeping services for financial
institutions and employers. 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 marketing focus is directed towards providing services and
investment products under Internal Revenue Code Sections 401(a),
401(k), 403(b), 408, and 457 to state and local governments,
hospitals, non-profit organizations, public school districts,
corporations and individuals. Recordkeeping and administrative
services for defined contributions plans may also be provided to this
target market. Through a subsidiary, Financial Administrative
Services Corporation (FASCorp), the Company is focused on partnering
with other large institutions to provide third-party recordkeeping
and administration services.
The Company offers both guaranteed interest rate investment options
for various lengths of time and variable annuity products designed to
meet the specific needs of the customer. In addition, for larger
cases the Company offers both customized annuity and non-annuity
products.
For the guaranteed interest rate option, the Company earns investment
margins on the difference between the income earned on investments in
the Company's general account and the interest credited to the
participant's account balance. The general account assets of the
Company support the guaranteed investment product. The Company also
manages separate account fixed interest rate options where the
Company is paid a management fee.
The Company's variable investment options provide the opportunity for
participants 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.
The Company is compensated by separate account fees for mortality and
expense risks pertaining to the variable annuity contract and for
providing administrative services. The Company is reimbursed by
external mutual funds for marketing, sales and service costs under
various revenue sharing agreements.
The Company also receives fees for providing third-party
administrative and recordkeeping services to financial institutions
and employer-sponsored retirement plans.
Customer retention is a key factor for the profitability of group
annuity products. To encourage customer retention, annuity contracts
may 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.
Individual Markets
In the Individual Markets area, the Company distributes life
insurance and individual annuity products to both individuals and
businesses through various distribution channels. Life insurance
products in force include participating and non-participating term
life, whole life, universal life, and variable 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.
The Company no longer actively markets participating products. 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.
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.
Through the acquisition of Canada Life discussed earlier, Individual
Markets has expanded its in force blocks of individual protection
(participating and non-participating whole life, term and universal
life insurance) and wealth management products (variable annuities,
single premium immediate annuities, structured settlements, and
guaranteed investment contracts). The area is focused on fully
integrating the operational units and systems and providing excellent
customer service to support retention efforts.
In 2003, the Company continued its efforts to partner with large
financial institutions to provide individual term and whole life
insurance to the general population. Some of the institutional
partners include Huntington National Bank, U S Bank, Citibank,
SunTrust Bank, AmSouth Bank, Affiliated Financial Services and
Colonial Bank.
At both December 31, 2003 and 2002, the Company had $3.8 billion 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, leveraged COLI product
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,
universal life and variable universal life policies that indirectly
fund post-retirement benefits for employees and non-qualified
executive benefits. At December 31, 2003, the Company had $1.5
billion of fixed and $1.5 billion of separate account BOLI policy
reserves compared to $1.5 billion of fixed and $1.4 billion of
separate account reserves at December 31, 2002.
The Company also has a marketing agreement with Charles Schwab & Co.,
Inc. (Schwab) 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. The Company is currently offering guarantee period
durations of three to ten years. Distributions from the amounts
allocated to a Guarantee Period Fund more than six months prior to
the maturity date result 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.
On a very limited basis, the Company also 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.
Certain of the Company's life insurance and group annuity products
allow policy owners to borrow against their policies. At December 31,
2003, approximately 10% (10% in 2002 and 7% in 2001) of outstanding
policy loans were on individual life policies that had fixed interest
rates ranging from 5% to 8%. The remaining 90% of outstanding policy
loans had variable interest rates averaging 6.54% at December 31,
2003. Investment income from policy loans was $189.1 million, $209.6
million, and $203.8 million for the years ended December 31, 2003,
2002, and 2001, respectively.
2. Method of Distribution
Great-West Retirement Services distributes pension products through
its subsidiary, GWFS Equities, Inc., as well as over 200 pension
consultants, representatives and service personnel. Recordkeeping and
administrative services are also distributed through institutional
partners.
The Individual Markets area distributes individual life insurance
through marketing agreements with various retail financial
institutions. BOLI is distributed through Clark Consulting primarily,
and recently through SunTrust. Individual life insurance and annuity
products are also offered through Schwab.
3. Competition
The life insurance, savings, and investments marketplace is highly
competitive. The Company's competitors include mutual fund companies,
insurance companies, banks, investment advisers, and certain service
and professional organizations. No one competitor or small number of
competitors is dominant. Competition focuses on service, technology,
cost, and 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 investment-type 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, 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 and 401(k)) are
equal to the participants' account balances. Reserves for immediate
annuities without life contingent payouts are computed on the basis
of assumed investment yield and expenses.
The 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.
Under the Company's marketing and administrative services arrangement
with NEF, NEF issues 401(k) products and then immediately reinsures
nearly 100% of its guaranteed 401(k) business with the Company.
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, 2003, were $32.9 billion, comprised of
general account assets of $19.7 billion and separate account assets of
$13.2 billion. Total investments at December 31, 2002, were $25.9
billion, comprised of general account assets of $14.6 billion and
separate account assets of $11.3 billion.
The Company's general account investments are in a broad range of asset
classes, primarily domestic and international fixed maturities. Fixed
maturity investments include public and privately placed corporate
bonds, government bonds, redeemable preferred stocks and 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 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 transactions to manage certain portfolio related
risks. The Company also utilizes derivative instruments to engage in
replicated synthetic asset transactions. 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 issuer and industry and other diversification
considerations relevant to the Company's fixed maturity investments.
The Company's fixed maturity investments comprised 67% of its investment
assets, as of December 31, 2003. The Company reduces credit risk for the
portfolio as a whole by investing primarily in investment-grade fixed
maturities. As of both December 31, 2003 and 2002, 97% of the bond
portfolio carried an investment grade rating.
The Company's equity investments increased from 1% at December 31, 2002,
to 2% at December 31, 2003. The Company made a significant investment in
an exchange-traded fund investing in debt securities. This investment
provides both liquidity and diversification at relatively low risk
levels. This fund has an investment grade debt rating. In addition, the
Company invested in various limited partnerships and limited liability
companies that make equity investments in affordable-housing projects
throughout the United States.
The Company's mortgage loan portfolio constituted 10% and 3% of
investment assets as of December 31, 2003 and 2002, respectively. The
increase is a result of the asset transfer associated with the Indemnity
Reinsurance Agreement entered into with CLAC as well as the assets
associated with the acquisition of CLICA and CLINY.
At December 31, 2003, 17% of investment assets were invested in policy
loans, 4% were invested in short-term investments, and less than 1% were
invested in real estate compared to 20%, 5%, and 1%, respectively, in
2002.
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 2003 2002 2001 2000 1999
---------------------- ---------- ---------- ---------- ---------- ---------
Debt Securities:
U.S. government
securities and
obligations of
U.S. government
agencies $ 3,199 $ 2,710 $ 3,075 $ 2,315 $ 1,859
Bonds 9,880 7,618 7,013 7,055 7,078
Foreign
governments 58 43 28 50 51
---------- ---------- ---------- ---------- ---------
Total debt securities 13,137 10,371 10,116 9,420 8,988
Other Investments:
Equity investments 428 90 73 95 69
Mortgage loans 1,886 417 613 843 975
Real estate 8 4 12 107 104
Policy loans 3,389 2,964 3,001 2,810 2,681
Short-term
Investments 852 710 425 414 241
---------- ---------- ---------- ---------- ---------
Total investments $ 19,700 $ 14,556 $ 14,240 $ 13,689 $ 13,058
========== ========== ========== ========== =========
Cash $ 188 $ 155 $ 214 $ 154 $ 268
Accrued investment
Income 165 133 131 139 138
The following table summarizes the Company's general account investment
results:
[Millions] Net Earned Net Investment Investment
For the year: Income Income Rate
-------------------- ------------- --------------
2003 $ 988 6.23 %
2002 919 6.83 %
2001 935 7.10 %
2000 925 7.34 %
1999 876 6.96 %
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. 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 Division of Insurance (CDOI) and other regulators at
specified intervals. A financial examination by the CDOI was
completed in 2002 and covered the five-year period ended December 31,
2000. The examination produced no significant adverse findings
regarding the Company.
The National Association of Insurance Commissioners (NAIC) has
prescribed risk-based capital (RBC) rules and other financial ratios
for life insurance companies. The calculations set forth in these
rules, which are used by regulators to assess the sufficiency of an
insurer's capital, measure the risk characteristics of an insurer's
assets, liabilities, and certain off-balance sheet items. RBC is
calculated by applying factors to various asset, premium and
liability items. The application of the RBC levels contained within
the rules is a regulatory tool which may indicate the need for
possible corrective action with respect to an insurer, and is not
intended as a means to rank insurers generally.
Based on their December 31, 2003, statutory financial reports, the
Company and its insurance subsidiaries have risk-based capital well
in excess of that required by their regulators.
The NAIC has also adopted the Codification of Statutory Accounting
Principles (Codification). Codification was intended to standardize
accounting and reporting to state insurance departments effective
January 1, 2001. However, statutory accounting principles will
continue to be established by individual state laws and permitted
practices. The CDOI 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
payment 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 adviser subsidiaries and transfer agent subsidiary are
regulated by the SEC. Certain of the Company's separate accounts
supporting its variable insurance and annuity products, as well its
mutual fund subsidiaries, are registered under the Investment Company
Act of 1940 while the securities they issue are registered under 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 $1.1 million as of December 31,
2003 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 $2.8 million at December 31, 2003.
5. Potential Legislation
United States federal and state legislative and regulatory
developments in various areas, including health care and retirement
services, could significantly and adversely affect the Company in the
future. Congress continues to consider health care legislation
relating to the uninsured, class action and medical liability reform,
and mental health parity. Congress also continues to consider changes
to various features of retirement plans, the taxation of BOLI,
expanding access to investment advice, and increasing oversight of
mutual funds.
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. On July 10, 2003, Lifeco announced
that it had closed its transaction to acquire the common shares of CLFC.
As a result of this closing, several of the rating agencies have changed
their ratings of Lifeco and certain of its subsidiaries, such as the
Company. A.M. Best Company, Inc., Moody's Investors Service and Standard
& Poor's Corporation lowered the financial strength rating of the
Company by one rating notch.
Rating Agency Measurement Current Rating
------------------------------ ------------------------------- ------------------
A.M. Best Company, Inc. Financial strength, operating A+ (1)
performance and
business profile
Fitch, Inc. Financial strength AA+ (2)
Moody's Investors Service Financial strength Aa3 (3)
Standard & Poor's Corporation Financial strength AA (4)
(1) Superior (highest category out of ten categories) (2) Very Strong
(second highest category out of eight categories) (3) Excellent (second
highest category out of nine categories) (4) Very strong (second highest
category out of nine categories)
H. MISCELLANEOUS
No customer accounted for 10% or more of the Company's consolidated
revenues in 2003, 2002 or 2001. In addition, no segment of the Company's
business is dependent on a single customer or a few customers, the loss
of which would have a significant effect on the Company or any of its
business segments. The loss of business from any one, or a few,
independent brokers or agents would not have a material adverse effect
on the Company or any of its business segments.
The Company had approximately 6,200 employees at December 31, 2003.
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 processing 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 2003 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. GWL&A Financial is the sole shareholder of the Company's common
equity securities.
B. DIVIDENDS
In the two most recent fiscal years the Company has paid quarterly
dividends on its common shares. Dividends on common stock totaled $75.7
million in 2003 and $170.6 million in 2002.
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 of the preceding December 31; or
(ii) the Company's statutory net gain, not including realized capital
gains, for the twelve-month period ending December 31 next preceding not
including pro rata distributions of the insurer's own securities.
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
to 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 2003 2002 2001 2000 1999
------------------------- --------- --------- --------- --------- ---------
[millions]
Premium income $ 2,253 $ 1,120 $ 1,203 $ 1,332 $ 1,163
Fee income 840 884 947 872 635
Net investment income 988 919 935 925 876
Net realized investment
gains 40 42 47 28 1
--------- --------- --------- --------- ---------
Total revenues 4,121 2,965 3,132 3,157 2,675
Policyholder benefits 2,684 1,593 1,696 1,746 1,582
Operating expenses 965 958 1,021 1,018 804
--------- --------- --------- --------- ---------
Total benefits and
expenses excluding
special charges 3,649 2,551 2,717 2,764 2,386
Income tax expense 154 130 141 134 83
--------- --------- --------- --------- ---------
Net income before
special charges 318 284 274 259 206
Special charges (net) 81
--------- --------- --------- --------- ---------
Net income $ 318 $ 284 $ 193 $ 259 $ 206
========= ========= ========= ========= =========
Deposits for investment-
type contracts $ 675 $ 691 $ 627 $ 835 $ 634
Deposits to separate
accounts 2,217 2,461 3,240 3,105 2,583
Self-funded premium
equivalents 4,674 5,228 5,721 5,181 2,979
BALANCE SHEET December 31,
----------------------------------------------------------
DATA 2003 2002 2001 2000 1999
------------------------- --------- --------- --------- --------- ---------
[millions]
Investment assets $ 19,700 $ 14,556 $ 14,240 $ 13,689 $ 13,058
Separate account assets 13,175 11,338 12,585 12,381 12,820
Total assets 36,453 27,656 28,818 27,897 27,530
Total policy benefit
liabilities 19,149 13,007 12,931 12,825 12,341
Due to GWL 31 34 42 43 35
Due to GWL&A Financial 176 171 215 171 175
Total shareholder's
equity 1,887 1,664 1,470 1,427 1,167
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 SEC.
Management's discussion and analysis of financial conditions and results
of operations of the Company for the three years ended December 31, 2003
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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
the Company's management to make a variety of estimates and assumptions.
These estimates and assumptions affect, among other things, the reported
amounts of assets and liabilities, the disclosure of contingent
liabilities and the reported amounts of revenues and expenses. Actual
results can differ from the amounts previously estimated, which were
based on the information available at the time the estimates were made.
The critical accounting policies described below are those that the
Company believes are important to the portrayal of the Company's
financial condition and results, and which require management to make
difficult, subjective and/or complex judgments. Critical accounting
policies cover accounting matters that are inherently uncertain because
the future resolution of such matters is unknown. The Company believes
that critical accounting policies include policy reserves, allowances
for credit losses, deferred policy acquisition costs, and valuation of
privately placed fixed maturities.
Policy Reserves
Life Insurance and Annuity Reserves - Life insurance and annuity policy
reserves with life contingencies 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 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. 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. 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.
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.
Allowance For Credit Losses
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
paid on behalf of policyholders and premiums in course of collection,
and to absorb credit losses on its impaired loans. Management's judgment
is based on past loss experience and 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.
Deferred Policy Acquisition Costs
Policy acquisition costs, which primarily consist of sales commissions
and costs associated with the Company's sales representatives related to
the production of new business, have been deferred to the extent deemed
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.
Valuation Of Privately Placed Fixed Maturities
The estimated fair values of financial instruments have been determined
using available information and appropriate valuation methodologies.
However, considerable judgment 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.
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.
B. COMPANY RESULTS OF OPERATIONS
1. Consolidated Results
Net Income
The Company's consolidated net income increased $34 million or 12% in
2003 when compared to 2002. The net income increase reflects a $10
million increase as a result of the Canada Life activity, a $34
million increase in the Great-West Healthcare segment excluding the
CLAC reinsurance activity, and a $10 million decrease in the
Financial Services segment excluding the impact of the CLAC
reinsurance activity.
The Company's consolidated net income decreased $8.8 million or 3.0%
in 2002 when compared to 2001 (before one-time charges in 2001 of
$80.9 million and operating losses of $18.7 million, net of tax,
related to the 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 is transitioning Alta
business to other Company products. All Alta sales and administration
staff have become employees of the Company and the underwriting
functions are conducted by the underwriting staff of the Company.
Segment Contribution
In 2003, the Great-West Healthcare segment (excluding Canada Life
activity) contributed $170.2 million, the Financial Services segment
(excluding Canada Life activity) contributed $138.1 million, and the
Canada Life activity contributed $9.7 million to net income. Of total
consolidated net income in 2003 and 2002, the Great-West Healthcare
segment contributed 53% and 48%, respectively, the Financial Services
segment contributed 44% and 52%, and the Canada Life activity
contributed 3% and 0%, respectively.
Revenues
In 2003, total revenues increased $1.2 billion or 39% to $4.1 billion
when compared to 2002. The increase in revenues in 2003 was comprised
of increased premium income of $1.1 billion and increased net
investment income of $69 million offset by decreased fee income of
$43 million and decreased net realized gains on investments of $2
million. In 2002, total revenues decreased $167.8 million or 5.4% to
$3.0 billion when compared to 2001. The decline in revenues in 2002
was comprised of decreased premium income of $83.5 million, decreased
fee income of $63.7 million, decreased net investment income of $15.4
million, and a $5.2 million decrease in realized investment gains.
The $1.1 billion increase in premium income in 2003 was comprised of
a $1.6 billion increase from the Canada Life activity and a $12.4
million increase in the Financial Services segment's non-Canada life
activity, offset by a $468.1 million decrease in the Great-West
Healthcare segment's non-Canada Life activity. The decline in premium
income in the Great-West Healthcare segment reflected the reinsurance
agreement with Allianz discussed under "Other" below, and a 15%
decline in medical members from 2.2 million in 2002 to 1.9 million in
2003. The decreased premium income in 2002 was comprised of a decline
in Great-West Healthcare premium income and Financial Services
premium income of $73.7 million and $9.8 million, respectively. The
decline in premium income in the Great-West Healthcare segment
reflected a 15.4% decline in medical members from 2.6 million in 2001
to 2.2 million in 2002. Financial Services experienced lower sales
and higher terminations in 2002.
Fee income in 2003 was comprised of Great-West Healthcare fee income,
Financial Services fee income and Canada Life fee income of $607.2
million, $229.6 million and $3.3 million, respectively. Great-West
Healthcare fee income, excluding the Canada Life activity, declined
$53.2 million or 8.1% when compared to 2002, due to a decline in
medical members. Financial Services fee income, excluding the Canada
Life activity, declined $6.5 million or 2.9% when compared to 2002,
primarily the result of an increase during 2003 of participant
accounts including third-party administration and institutional
accounts. Fee income in 2002 was comprised of Great-West Healthcare
fee income and Financial Services fee income of $660.4 million and
$223.1 million, respectively. Great-West Healthcare fee income
declined $52.0 million or 7.4% when compared with 2001, due to a
decline in medical members. Financial Services fee income declined
$11.0 million or 4.7% when compared to 2001, primarily the result of
weak U.S. equity markets, which reduced revenues from asset-based
fees.
Benefits
Total benefits increased $1.1 billion or 68.5% in 2003 when compared
to 2002, reflecting an increase of $1.6 billion resulting from the
Canada Life activity offset by a decrease of $514 million in the
Great-West Healthcare segment due to the reinsurance agreement with
Allianz and a decrease of $51 million in the Financial Services
segment. Total benefits decreased $103.8 million or 6.1% in 2002 when
compared to 2001, reflecting lower group life and health claims
primarily as a result of the decline in membership in the Great-West
Healthcare segment.
Expenses
Total expenses increased $7.5 million or 0.8% in 2003 when compared
to 2002 primarily due to a $69.1 million increase related to the
Canada Life acquisition, offset by a $62.6 million decrease in the
Great-West Healthcare segment, excluding the Canada Life activity,
due to process efficiencies and a decrease in membership.
Total expenses decreased $63.0 million or 6.2% in 2002 when compared
to 2001, before special charges, as the Company focused on reducing
administrative costs. During 2002, Great-West Healthcare's operating
expenses decreased $41 million due primarily to reduced
administrative costs and medical membership. Financial Services'
operating expenses decreased $22 million due primarily to effective
expense management and lower commissions.
Income tax expense increased $23.4 million or 18.0% in 2003 when
compared to 2002. This increase was primarily due to the increase in
net income from operations. Income tax expense before special charges
decreased $10.9 million or 7.7% in 2002 when compared to 2001. The
decrease reflects a reduction in the liability for tax contingencies
due to the completion of the 1994 - 1996 Internal Revenue Service
examination. See Note 11 to the Consolidated Financial Statements for
a discussion of the Company's effective tax rates.
Deposits for Investment-Type Contracts, Deposits to Separate Accounts
and Self-Funded Equivalents 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. These amounts approximate the additional premiums which
would have been earned under such contracts if they had been written
as traditional indemnity or HMO programs.
Deposits for investment-type contracts decreased $15.2 million or 2%
in 2003 when compared to 2002. Deposits for investment-type contracts
increased $64.1 million or 10% in 2002 when compared to 2001. The
decrease in 2003 was primarily attributable to a net decrease in
participant accounts in the retirement products area in 2003. The
increase in 2002 was primarily attributable to one large case sale in
the Financial Services segment.
Deposits for separate accounts decreased $244.1 million or 10% in
2003 when compared to 2002. This decrease in 2003 is primarily due to
a combination of decreased sales of the BOLI product and the net
decrease in contributions in the group retirement services market.
Deposits for separate accounts decreased $778.8 million or 24.0% in
2002 when compared to 2001. This decrease in 2002 is primarily due to
a combination of lower 401(k) sales and higher 401(k) terminations as
well as a decline in BOLI sales.
Self-funded premium equivalents decreased $554.6 million or 11% in
2003 when compared to 2002. This decrease was due to improved
morbidity as well as the decrease in membership. Self-funded premium
equivalents decreased $492.4 million or 8.6% in 2002 when compared to
2001. This decrease was due to the membership decline in the
Great-West Healthcare segment.
2. Other
Prior to 2002, the 401(k) business unit had been included with the
Great-West Healthcare segment. In order to capitalize on
administrative system efficiencies and group pension expertise,
beginning in 2002 the 401(k) business was administered by the
Financial Services segment. As a result, prior period segment results
have been reclassified to conform with this change.
The Great-West Healthcare division of the Company entered into a
reinsurance agreement during the third quarter of 2003 with Allianz
Risk Transfer (Bermuda) Limited (Allianz) to cede 90% of direct
written group health stop-loss and excess loss business. This Allianz
agreement was retroactive to January 1, 2003. The net cost of the
Allianz agreement was charged to the Financial Services division as
part of the Canada Life integration.
Effective January 1, 2000, the Company co-insured the majority of
General American's 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.
C. GREAT-WEST HEALTHCARE RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Great-West
Healthcare segment:
Years Ended December 31,
-----------------------------------------------
INCOME STATEMENT DATA 2003 2002 2001
------------------------------------- ------------- ------------- -------------
[millions]
Premiums $ 838 $ 960 $ 1,033
Fee income 608 661 713
Net investment income 72 68 66
Net realized investment gains 10 9 16
(losses)
------------- ------------- -------------
Total revenues 1,528 1,698 1,828
Policyholder benefits 568 762 859
Operating expenses 699 733 774
------------- ------------- -------------
Total benefits and expenses
before special charges 1,267 1,495 1,633
Income tax expense 88 67 68
------------- ------------- -------------
Net income excluding special charges 173 136 127
Special charges (net) 81
------------- ------------- -------------
Net income $ 173 $ 136 $ 46
============= ============= =============
Self-funded premium equivalents $ 4,674 $ 5,228 $ 5,721
Net income increased $37 million or 27% in 2003 when compared to 2002
primarily due to improved aggregate and specific stop loss morbidity.
The CLAC reinsurance agreement contributed $3 million to net income in
2003.
Net income, excluding special charges of $80.9 million after tax,
increased 7.1% in 2002 when compared to 2001. This improvement in
earnings reflected improved morbidity margins.
Excluding premium and fee income associated with CLAC reinsurance and
Allianz reinsurance, premium and fee income decreased $149 million or 9%
in 2003 when compared to 2002. The decreases are primarily due to lower
membership levels associated with lower case sales offset by an increase
in revenue resulting from pricing actions taken during 2002 and 2003.
Excluding total benefits and expenses associated with CLAC reinsurance
and Allianz reinsurance, total benefits and expenses decreased $202
million or 14% in 2003 when compared to 2002. While increased
utilization and higher medical costs increased benefits on in-force
cases, the decrease in overall membership, combined with pricing actions
taken in 2002, resulted in a reduction of benefits.
Self-funded premium equivalents decreased $554.6 million or 11% in 2003
when compared to 2002. This decrease was due to improved morbidity
experience as well as the decrease in membership. Self-funded premium
equivalents decreased $492.4 million or 8.6% in 2002 when compared to
2001. This decrease was due to the membership decline in the Great-West
Healthcare segment.
The Company recorded $18.5 million ($12.0 million, net of tax) of
restructuring costs during 2002 related to the costs associated with the
consolidation of benefit payment offices and sales offices throughout
the United States. The charges relate to severance of $4.3 million,
disposal of furniture and equipment of $4.9 million, and termination of
leasing agreements of $9.3 million.
During 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
under-pricing 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.
The Company established a premium deficiency reserve of $46 million
(included in special charges previously discussed) on the Alta block of
business in 2001. Releases of $18.7 million in 2001, $6.2 million in the
first quarter of 2002, and $2.1 million in the second quarter of 2002
were made to offset the underwriting losses incurred on the under-priced
block of business. During the first quarter of 2002 the reserve was
reduced by $15 million ($9.8 million net of tax) and during the second
quarter of 2002 the reserve was reduced by $4 million ($2.6 million, net
of tax) based on an analysis of emerging experience which was more
favorable than originally estimated. The balance of the premium
deficiency reserve at December 31, 2002 was zero.
Excluding customers associated with Canada Life, the Great-West
Healthcare segment experienced a net decrease of 959 group health care
customers (employer groups) during 2003. There was a 15% decrease in
total health care membership from 2.2 million at the end of 2002 to 1.9
million at year-end 2003. POS and HMO members decreased 29.7% from
346,900 in 2002 to 244,000 in 2003.
The Great-West Healthcare segment experienced a net decrease of 1,766
group health care customers (employer groups) during 2002. There was a
16% decrease in total health care membership from 2.6 million at the end
of 2001 to 2.2 million at year-end 2002. POS and HMO members decreased
30.7% from 500,600 in 2001 to 346,900 in 2002.
Much of the health care decline in 2003 and 2002 can be attributed to
terminations resulting from aggressive pricing related to target
margins, as well as a decrease in the employee base for existing group
health care customers and the general decline in the economy.
Outlook
The Company recognizes that the health care marketplace is changing. The
Company has reduced its focus on its HMO product in most markets. The
Company continues to explore product design options that reduce cost to
the employer and provide incentives for employees to become more engaged
in health care buying decisions. The Company has launched a consumer
driven tiered benefits product called Great-West Healthcare Consumer
Advantage, and also implemented its HRA capability. The Company will
continue to explore further innovations in the consumer driven product
area including health spending account models enabled through recent
legislative changes.
Efforts surrounding provider re-contracting and enhanced disease
management will build on the success achieved during 2003 in enhancing
the Company's medical cost and market positions. These efforts are a key
element in controlling health care costs for members and enhancing the
ability to attract new members in the future.
During 2003, the Company was successful in its efforts to combine its
multiple distribution channels under one name - Great-West Healthcare.
Efforts to enhance brand awareness continue. Based on the Company's
evaluation of the marketplace, the sales organization has been
reorganized along market segments. New leadership has rebuilt the sales
team and implemented a sales process to improve overall effectiveness of
the sales organization. A new sales support function has been built and
will continue to focus on supporting and improving the sales process and
customer satisfaction.
The Company continues to evaluate opportunities to enhance customer
satisfaction and reduce administrative costs. The Company's successful
implementation of HIPAA (Health Insurance Portability and Accountability
Act of 1996) and focus on Web enabled technology will likely increase
automated interactions with providers, employers and members.
The Company plans on achieving further productivity improvements in
2004. Claims processing costs will likely decrease due to consolidation
of claims processing and customer service locations, and the
implementation of productivity improvement software (claims workflow
software). A dedicated team has been formed to further explore and
implement additional opportunities.
D. 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 2003 2002 2001
------------------------------------- ------------- ------------- -------------
[millions]
Premiums $ 1,415 $ 160 $ 170
Fee income 233 223 234
Net investment income 916 851 869
Net realized investment gains 29 33 31
------------- ------------- -------------
Total revenues 2,593 1,267 1,304
Policyholder benefits 2,116 831 837
Operating expenses 267 225 247
------------- ------------- -------------
Total benefits and expenses 2,383 1,056 1,084
------------- ------------- -------------
Income from operations 210 211 220
Income tax expense 65 63 73
------------- ------------- -------------
Net income $ 145 $ 148 $ 147
============= ============= =============
Deposits for investment-type
Contracts $ 676 $ 691 $ 627
Deposits to separate accounts 2,217 2,461 3,240
Net income for Financial Services decreased $3 million or 2% in 2003
when compared to 2002. The results of operations for the life insurance
and annuity business of CLINY and CLICA have been included in the Income
Statement Data above for the period since the acquisition. The life
insurance and annuity reinsurance transactions related to the CLAC
reinsurance agreement have also been included in the above Income
Statement Data.
The impact of both of these transactions (Canada Life activity) on the
Financial Services division results for 2003 was as follows:
[Millions]
Premiums $1,242
Fee income 3
Net investment income 144
Net realized gains on inv 2
----------
Total revenues 1,391
Policyholder benefits 1,341
Operating expenses 41
---------
Total benefits and expenses 1,382
Income from operations 9
Income taxes 2
---------
Net income 7
Net income for the Financial Services division (excluding the Canada
Life activity discussed above) decreased $10 million or 7% from 2002.
The decrease was primarily related to a decrease in interest margins on
fixed or general account products (see discussion below) and poor
mortality (death benefits exceed actuarial reserves released)
experienced on the individual insurance lines in 2003.
Net income for Financial Services remained stable in 2002 when compared
to 2001. During 2002, the Company experienced lower sales in most of its
product areas and higher termination rates. The weak U.S. equity markets
also negatively impacted the Company. Offsetting these challenges was a
decrease in operating expenses and effective management of investment
margins on products which resulted in a relatively flat net income for
the year.
Total premiums including deposits to investment-type contracts and
deposits to separate accounts decreased $352 million or 11% in 2003
(excluding the Canada Life activity mentioned above). Premiums and
deposits decreased $218 million in the Individual Markets area where the
Company has experienced negligible sales of the BOLI product in 2003.
The remaining difference was due to lower cash flows in 2003 on the
variable annuity products driven by lower single premium deposits or
rollovers in the Great-West Retirement Services area from new plans.
In 2002, total premiums including deposits to investment-type contract
and deposits to separate accounts decreased $725 million or 18%. The
decreases were driven by lower cash flows on annuity products and
decreased BOLI sales in the Individual Markets area.
Variable fee income fluctuates with changes in the U.S. equities markets
as these fees are typically assessed on account balances. Variable fee
income is also affected by fluctuations in the participant account
balances associated with cash flows to and from the separate accounts,
participation in plans and with the types of services offered. Fixed
fees (or expense recoveries on annuities and insurance products) also
fluctuate with changes in the participant or policyholder account
balances due to cash flows, participation and services. Fees from
third-party administration and recordkeeping services fluctuate with the
number of participants and with services provided.
Fee income in 2003 increased $6.5 million or 2.9% (excluding the Canada
Life activity discussed above). Fee income represents a combination of
variable fee income from separate accounts and fee income charged on
fixed investment options for mortality and expense risks and fees for
third-party administrative and recordkeeping services to financial
institutions and employer-sponsored retirement plans.
In 2002, fee income decreased $11 million or 5% from 2001. The decrease
was primarily associated with the challenges experienced in the U.S.
equities markets resulting in a decrease in the variable participant
account balances. These fluctuations also had a negative impact on the
net cash flows to separate accounts.
Retirement services participant accounts, including third-party
administration and institutional accounts, increased 5% in 2003 from
2,159,910 at December 31, 2002 to 2,265,713 at December 31, 2003.
Although the area experienced a decrease of 117,000 participant accounts
from one large case termination in the first quarter of 2003, this was
offset by growth from sales and increased participation in existing case
sales during 2003. In 2002 Retirement Services participant accounts
decreased from 2,191,264 at the end of 2001 to 2,159,910 at the end of
2002. The decrease was due to the termination of one large institutional
client during 2002.
The term life insurance product marketed through banks and other
financial institutions experienced significant growth over the past
several years. Policies in force totaled 116,739, 74,080 and 38,813 in
the years ended 2003, 2002 and 2001, respectively. Although the sales of
term life insurance were improved in 2003 and 2002, the premiums on
these policies are smaller and, therefore, were not a significant offset
to the large decrease in BOLI premiums.
During 2003, net investment income and realized gains excluding the
impact of the Canada Life activity decreased $85 million or 10% from
2002. This decrease represented a drop in the net earned rate on
investments from 6.88% in 2002 to 6.23% in 2003. Offsetting this
decrease was a corresponding decrease in the interest rate credited on
policyholder general account products.
In 2002, net investment income and realized gains decreased $16 million
or 2% from the previous year. The decrease represented a drop in the net
earned rate on investments from 7.1% in 2001 to 6.88% in 2002.
On fixed products or general account products, earnings are generated
from the difference between the net investment income earned on
investments and the amount credited to policyholders' or participants'
accounts. This difference is referred to as the "interest margins" or
"margins" on fixed assets.
The amount of fixed annuity products in force is measured by policy
reserves. The following table shows group and individual annuity policy
reserves for the years indicated as well as the balances in the separate
accounts:
Retirement Individual
Services Markets
Year ended General Account Separate Separate
December 31, Annuity Reserves Accounts Accounts
----------------- ----------------- ---------------- ----------------
1999 $ 4,969 $ 11,425 $ 843
----------------- -- ----------------- -- ---------------- --- ----------------
2000 4,738 10,753 950
----------------- -- ----------------- -- ---------------- --- ----------------
2001 4,687 10,277 945
----------------- -- ----------------- -- ---------------- --- ----------------
2002 4,612 8,859 808
----------------- -- ----------------- -- ---------------- --- ----------------
2003 7,124 10,289 1,244
----------------- -- ----------------- -- ---------------- --- ----------------
Total policyholder benefits decreased $51 million or 6% during 2003
excluding the impact of the Canada Life activity. In 2002 total
policyholder benefits decreased $6 million or 1% from 2001. Total
policyholder benefits represent benefits on insurance and annuity
products, interest paid or credited to policyholder and participant
accounts, dividends paid, and change in actuarial reserves.
Total policyholder benefits fluctuate with the amount of interest
credited to policyholder or participant account balances (see discussion
on net investment income above), from differences between charges for
mortality and actual death claims and from fluctuations in premiums and
cash flows to and from general account products.
At December 31, 2003 and 2002, the Company had $8.9 billion (including
$1.6 billion for Canada Life) and $7.1 billion, respectively, of policy
reserves on individual insurance on the balance sheet. The following
table summarizes individual life insurance in force prior to reinsurance
ceded for the years indicated:
As of December 31,
-------------------------------------------------------------
[Millions] 2003 2002 2001 2000 1999
------------------- --------- --------- --------- --------- ---------
In force $ 67,645 $ 50,605 $ 50,769 $ 46,631 $ 43,831
Excluding the impact of the Canada Life activity, operating expenses
increased $1 million in 2003 and decreased in 2002 by $22 million. The
division created expense synergies by focusing on overall effective
expense management and by consolidating similar operational functions
(the 401(k) and Public/Non-Profit retirement services areas) under
common management.
Outlook
During 2003, the Financial Services division was successful in its
efforts in bringing together multiple products and services under one
name - Great-West Retirement Services. Efforts to capitalize on brand
awareness continue.
During 2002, the division had assumed responsibility for the marketing,
sales and administration of the Company's 401(k) product. At the
beginning of 2003, the division established a new, focused marketing
strategy for the 401(k) product. A new customer relationship management
model has been established with the continued goal of establishing
stronger relationships with existing 401(k) customers and improving
persistency.
In 2003, the Company formed a strategic institutional relationship with
Wells Fargo. The first phase of the relationship transferred the
ownership of a Wells Fargo subsidiary, EMJAY Corporation (EMJAY), from
Wells Fargo to the Company. EMJAY provides retirement plan services to
third party external brokers, registered investment advisers, and other
investment professionals. The Company believes that the combination of
its existing recordkeeping platform and administrative services, coupled
with EMJAY's known expertise for compliance and customer service, will
provide a competitive advantage in the 401(k) market. In the second
phase of the relationship with Wells Fargo, the Company will provide
private-label recordkeeping services for non-annuity 401(k) plans and
will offer annuity contracts for those small 401(k) plans desiring
annuity investment options. The acquisition of EMJAY has resulted in an
additional 68,000 participants in 2003.
In 2003, the Company continued its efforts to partner with large
financial institutions to provide individual term and whole life
insurance to the general population.
With the anticipated expansion of the economy, the Company also expects
the BOLI market to grow and will continue to focus on its partnership
with Clark Consulting.
E. 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 range of
possible market changes upon investments and policyholder benefits, the
Company works to ensure 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] 2003 2002
----------------------------------------------------- -------------- -------------
Fixed maturities, available-for-sale, at fair value $ 13,137 $ 10,371
Equity investments, at fair value 428 90
Mortgage loans, on real estate 1,886 417
Real estate 8 4
Short-term investments 852 710
Policy loans 3,389 2,964
-------------- -------------
Total invested assets $ 19,700 $ 14,556
============== =============
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
investments with low prepayment risk 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 enhanced 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.
At December 31, 2003, the Company had 19 bonds in default
representing a carrying value of $18.4 million (0.1% of the total
fixed maturity investment portfolio), compared to four bonds
representing $24.3 million (0.2% of the total fixed maturity
investment portfolio) for 2002.
The distribution of the fixed maturity portfolio by credit rating is
summarized as follows:
Credit Rating 2003 2002
-------------------------------------------------- -------------- -------------
AAA 54.3 58.9%
AA 8.7 8.9
A 16.0 15.2
BBB 18.4 14.4
BB and below (non-investment grade) 2.6 2.6
-------------- -------------
TOTAL 100.0% 100.0%
============== =============
2. Mortgage Loans
During 2003, the mortgage loan portfolio increased 352% to $1,886
million, net of impairment reserves primarily as a result of the
assets associated with the Indemnity Reinsurance Agreement entered
into with CLAC as well as the assets associated with the acquisition
of CLICA and CLINY.
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 $29.6 million in
2003 compared with $31.2 million in 2002, and no property was
acquired through foreclosure in 2003 or 2002. The low levels of
problematic mortgage loans relative to the Company's overall balance
sheet are due to the Company's active loan management program.
Occasionally, the Company elects to restructure certain mortgage
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, 2003 and 2002, the Company's mortgage
loan portfolio included $34.9 million and $40.3 million,
respectively, of non-impaired restructured loans.
3. Other Investments
Other investments consist primarily of policy loans and short-term
investments. The Company anticipates limited participation in the
real estate and equity markets during 2004.
4. Derivatives
The Company uses certain derivatives, such as futures, options, and
swaps, for purposes of hedging interest rate, market and foreign
exchange risks. 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
established credit approvals, limits, and monitoring procedures. The
Company has also developed controls within its operations to ensure
that only Board of Directors authorized derivative transactions are
executed. In addition, the Company uses derivatives to synthetically
create investments that are either more expensive to acquire, or
otherwise unavailable, in the cash markets. Note 1 to the
Consolidated Financial Statements contains a discussion of the
Company's outstanding derivatives.
5. Outlook
The Company's investment portfolio is well positioned for the current
interest rate environment. The portfolio is diversified and comprised
of high quality, relatively stable assets. The Company took advantage
of the steep yield curve in 2003, adding modestly to portfolio
duration. Investment grade corporate securities and structured
securities with moderate interest rate sensitivity were added to the
investment portfolio. 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.
F. LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that vary among its
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 $1,040.5 million and $864.4 million as
of December 31, 2003 and 2002, respectively. In addition, as of both
December 31, 2003 and 2002, 97% of the bond portfolio carried an
investment grade rating, thereby providing significant liquidity to the
Company's overall investment portfolio.
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 situations include the
issuance of commercial paper and equity securities.
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 $96.4 million of commercial paper outstanding
at December 31, 2003 compared with $96.6 million at December 31, 2002.
The commercial paper has been given a rating of A-1+ by Standard &
Poor's Corporation and a rating of P-1 by Moody's Investors Services,
each being the highest rating available. In addition, the Company issued
a surplus note to GWL&A Financial in 1999. The surplus note bears
interest at 7.25% and is due June 20, 2048.
Capital resources provide protection for policyholders and financial
strength to support the underwriting of insurance risks, and allow for
continued business growth. The amount of capital resources that may be
needed is determined by the Company's senior management and Board of
Directors, as well as by regulatory requirements. The allocation of
resources to new long-term business commitments is designed to achieve
an attractive return, tempered by considerations of risk and the need to
support the Company's existing business.
G. OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
H. OBLIGATIONS RELATING TO DEBT AND LEASES
Payments due by period ($ millions)
Less than 1-3 3-5 More than
Total 1 year Years Years 5 Years
-------- ----------- -------- -------- -----------
Long-term debt 200.0 25.0 175.0
Capital leases 129.2 25.6 62.5 41.1
-------- ----------- -------- -------- -----------
Total 329.2 25.6 87.5 41.1 175.0
======== =========== ======== ======== ===========
I. 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.
Effective January 1, 2001, the Company adopted 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 133
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
2001 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 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,
ceased upon adoption of this statement. The Company implemented SFAS No.
142 on January 1, 2002. Adoption of this statement did 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
superceded prior 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.
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS No. 145). FASB No. 4 required all gains or losses
from extinguishment of debt to be classified as extraordinary items net
of income taxes. SFAS No. 145 requires that gains and losses from
extinguishment of debt be evaluated under the provision of Accounting
Principles Board Opinion No. 30, and be classified as ordinary items
unless they are unusual or infrequent or meet the specific criteria for
treatment as an extraordinary item. This statement was effective January
1, 2003 and did not have a material effect on the Company's financial
position or results of operations.
In July 2002, the FASB issued Statement No. 146 " Accounting for Costs
Associated With Exit or Disposal Activities" (SFAS No. 146). This
statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in
a Restructuring)." This statement requires recognition of a liability
for a cost associated with an exit or disposal activity when the
liability is incurred, as opposed to when the entity commits to an exit
plan under EITF 94-3. SFAS No. 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. This
statement did not have a material impact on the Company's financial
position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" to clarify
accounting and disclosure requirements relating to a guarantor's
issuance of certain types of guarantees. FIN 45 requires entities to
disclose additional information about certain guarantees, or groups of
similar guarantees, even if the likelihood of the guarantor's having to
make any payments under the guarantee is remote. The disclosure
provisions are effective for financial statements for fiscal years ended
after December 15, 2002. For certain guarantees, the interpretation also
requires that guarantors recognize a liability equal to the fair value
of the guarantee upon its issuance. This initial recognition and
measurement provision is to be applied only on a prospective basis to
guarantees issued or modified after December 31, 2002. In the normal
course, the Company may enter into agreements which may contain features
which meet the FIN 45 definition of a guarantee, and while the maximum
guarantee cannot always be determined, given the nature of the future
events which may or may not occur, any such arrangements that were
material have been previously disclosed by the Company.
In January 2004, FASB reissued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities" as FIN 46R. This
Interpretation addresses consolidation by business enterprises of
variable interest entities (VIE), which have one or both of the
following characteristics: a) insufficient equity investment at risk, or
b) insufficient control by equity investors. This guidance, as reissued,
is effective for VIEs created after January 31, 2003, and for
pre-existing VIEs as of March 31, 2004. In conjunction with the issuance
of this guidance, the Company conducted a review of its involvement with
VIEs and does not have any investments or ownership in VIEs.
In December 2002, the FASB issued Statement No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure" (SAFS No. 148).
SAFS No. 148 amends the disclosures that a company is required to make
in its annual financial statements and requires, for the first time,
certain disclosures in interim financial reports. In addition to the
disclosures required by SAFS No 123, a company must disclose additional
information as part of its Summary of Significant Policies. These
disclosures are required regardless of whether a company is using the
intrinsic value method under APB No. 25 or the fair value based method
under SAFS No. 123 to account for its stock-based employee compensation.
In April 2003, the FASB issued Statement No. 149 "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" (SFAS No. 149).
SFAS No. 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities. Except for certain implementation guidance
that is incorporated in SFAS No. 149 and already effective, SFAS No. 149
is effective for contracts entered into or modified after June 30, 2003.
The adoption of SFAS No. 149 did not have a material effect on the
Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with characteristics of both Liabilities and
Equity" (SFAS No. 150). SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances), many of which were
previously classified as equity. The provisions of SFAS No. 150 are
effective for financial instruments entered into or modified after May
31, 2003 and with one exception, is effective at the beginning of the
first interim period beginning after June 15, 2003. The adoption of SFAS
No. 150 did not have a material effect on the Company's financial
statements.
In July 2003, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SOP") 03-01, "Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts
and for Separate Accounts." AcSEC developed the SOP to address the
evolution of product designs since the issuance of SFAS No. 60,
"Accounting and Reporting by Insurance Enterprises," and SFAS No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale
of Investments." SOP 03-1 provides guidance related to the reporting and
disclosure of certain insurance contracts and separate accounts,
including guidance for computing reserves for products with guaranteed
benefits, such as guaranteed minimum death benefits, and for products
with annuitization benefits such as guaranteed minimum income benefits.
In addition, SOP 03-1 addresses certain issues related to the
presentation and reporting of separate accounts, as well as rules
concerning the capitalization and amortization of sales inducements. SOP
03-1 will be effective for the Company's financial statements on January
1, 2004. The Company is currently evaluating the impact of adopting SOP
03-1 on its consolidated financial position and 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 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 on its investments of
interest rate changes at December 31, 2003. If interest rates increased
by 100 basis points (1%), the fair value of the fixed income assets
would decrease by approximately $641 million. This calculation uses
projected asset cash flows, discounted back to December 31, 2003. The
cash flow projections are shown in the table below. The table below
shows cash flows rather than expected maturity dates because many of the
Company's assets have substantial expected principal payments prior to
the final maturity date. The fair value shown in the table below was
calculated using spot discount interest rates that varied by the year in
which the cash flows were expected to be received. These spot rates in
the benchmark calculation ranged from 2.88% to 8.79%.
Projected Cash Flows by Calendar Year
[$ millions] There- Undiscounted Fair
2004 2005 2006 2007 2008 after Total Value
------ ----- ----- ----- ------ ------ ----------- -------
Benchmark 2,817 2,634 2,517 2,041 1,907 7,850 19,767 15,464
Interest rates
up 1% 2,708 2,529 2,462 2,100 1,946 8,186 19,930 14,823
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 $8.0 million per
year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY (A
wholly-owned subsidiary of GWL&A Financial Inc.)
Consolidated Financial Statements for the Years Ended
December 31, 2003, 2002, and 2001 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, 2003 and 2002,
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, 2003.
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, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
February 25, 2004
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
==============================================================================================
(Dollars in Thousands)
2003 2002
------------------- -------------------
ASSETS
INVESTMENTS:
Fixed maturities, available-for-sale, at fair
value
(amortized cost $12,757,614 and $9,910,662 ) $ 13,136,564 $ 10,371,152
Equity investments, at fair value (cost $407,797
and $102,862) 427,810 90,188
Mortgage loans on real estate (net of allowances
of $31,889 and $55,654) 1,885,812 417,412
Real estate 7,912 3,735
Policy loans 3,389,534 2,964,030
Short-term investments, available-for-sale (cost
$852,198 and $709,592) 852,198 709,804
------------------- -------------------
------------------- -------------------
Total Investments 19,699,830 14,556,321
------------------- -------------------
------------------- -------------------
OTHER ASSETS:
Cash 188,329 154,600
Reinsurance receivable:
Related party 1,312,139 3,104
Other 262,685 238,049
Deferred policy acquisition costs 284,866 267,846
Deferred ceding commission 285,165
Investment income due and accrued 165,417 133,166
Amounts receivable related to uninsured accident
and health plan claims (net of allowances of
$32,329 and $42,144) 129,031 86,228
Premiums in course of collection (net of
allowances of $9,768 and $12,011) 75,809 54,494
Deferred income taxes 119,971 69,016
Other assets 754,160 754,869
SEPARATE ACCOUNT ASSETS 13,175,480 11,338,376
------------------- -------------------
TOTAL ASSETS $ 36,452,882 $ 27,656,069
=================== ===================
==============================================================================================
2003 2002
--------------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves:
Related party $ 3,429,873 $ 518,587
Other 15,220,205 11,732,627
Policy and contract claims 418,930 378,995
Policyholders' funds 368,076 299,730
Provision for policyholders' dividends 89,121 76,983
Undistributed earnings on participating business 177,175 170,456
GENERAL LIABILITIES:
Due to GWL 30,950 33,841
Due to GWL&A Financial 175,691 171,416
Repurchase agreements 389,715 323,200
Commercial paper 96,432 96,645
Other liabilities 994,608 850,757
SEPARATE ACCOUNT LIABILITIES 13,175,480 11,338,376
--------------- --------------
Total Liabilities 34,566,256 25,991,613
--------------- --------------
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 722,365 719,709
Accumulated other comprehensive income 127,820 150,616
Retained earnings 1,029,409 787,099
--------------- --------------
Total Stockholder's Equity 1,886,626 1,664,456
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 36,452,882 $ 27,656,069
=============== ==============
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
==============================================================================================
(Dollars in Thousands)
2003 2002 2001
------------- ------------- --------------
REVENUES:
Premiums:
Related party $ 1,595,357 $ 16,715 $ 18,144
Other (net of premiums ceded totaling
$461,092, $83,789 and $82,028) 657,540 1,103,380 1,185,495
Fee income 840,072 883,562 947,255
Net investment income 988,400 919,365 934,756
Net realized gains on investments 39,560 41,626 46,825
------------- ------------- --------------
------------- --------------
4,120,929 2,964,648 3,132,475
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
reinsurance recoveries totaling
$410,430,
$50,974 and $40,144) 573,976 936,215 1,029,495
Increase in reserves:
Related party 1,450,185 15,934 12,475
Other 51,320 55,414 45,958
Interest paid or credited to contractholders 514,846 498,549 530,027
Provision for policyholders' share of
earnings
on participating business 1,159 7,790 2,182
Dividends to policyholders 92,118 78,851 76,460
------------- ------------- --------------
------------- ------------- --------------
2,683,604 1,592,753 1,696,597
Commissions 180,673 185,450 197,099
Operating expenses 753,336 741,979 787,110
Premium taxes 31,675 30,714 36,911
Special charges 127,040
------------- ------------- --------------
------------- ------------- --------------
3,649,288 2,550,896 2,844,757
INCOME BEFORE INCOME TAXES 471,641 413,752 287,718
PROVISION FOR INCOME TAXES:
Current 173,181 126,222 136,965
Deferred (19,561) 3,993 (41,993)
------------- ------------- --------------
------------- ------------- --------------
153,620 130,215 94,972
------------- ------------- --------------
------------- ------------- --------------
NET INCOME $ 318,021 $ 283,537 $ 192,746
============= ============= ==============
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
==============================================================================================
(Dollars in Thousands)
Accumulated Other
Comprehensive
Income (Loss)
---------------------------
Unrealized Minimum
Additional Gains Pension
Preferred Common Paid-in (Losses) Liability Retained
Stock Stock Capital on Adjustment Earnings Total
Securities
---------- ----------- ----------- ------------- ------------ ---------- -----------
---------- ----------- ----------- ------------- ------------ ---------- -----------
BALANCES, JANUARY 1, 2001 $ 0 $ 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 7,032 712,801 76,507 674,134 1,470,474
---------- ----------- ----------- ------------- ------------ ---------- -----------
Net income 283,537 283,537
Other comprehensive income 86,993 (12,884) 74,109
-----------
Total comprehensive income 357,646
-----------
Dividends (170,572) (170,572)
Income tax benefit on stock
Compensation 6,908 6,908
---------- ----------- ----------- ------------- ------------ ---------- -----------
BALANCES, DECEMBER 31, 2002 0 7,032 719,709 163,500 (12,884) 787,099 1,664,456
---------- ----------- ----------- ------------- ------------ ---------- -----------
Net income 318,021 318,021
Other comprehensive income (26,369) 3,573 (22,796)
-----------
Total comprehensive income 295,225
-----------
Dividends (75,711) (75,711)
Income tax benefit on stock
compensation 2,656 2,656
---------- ----------- ----------- ------------- ------------ ---------- -----------
BALANCES, DECEMBER 31, 2003 $ 0 $ 7,032 $ 722,365 $ 137,131 $ (9,311) 1,029,409 $ 1,886,626
========== =========== =========== ============= ============ ========== ===========
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
==============================================================================================
(Dollars in Thousands)
2003 2002 2001
-------------- ------------- -------------
OPERATING ACTIVITIES:
Net income $ 318,021 $ 283,537 $ 192,746
Adjustments to reconcile net income to net
cash provided by operating activities:
Earnings allocated to participating
policyholders 1,159 7,790 2,182
Amortization of investments (64,126) (76,002) (82,955)
Net realized gains on investments (39,560) (41,626) (46,825)
Depreciation and amortization (including
goodwill impairment in 2001) 59,375 37,639 62,101
Deferred income taxes (19,561) 3,993 (41,993)
Stock compensation adjustment (12,098)
Changes in assets and liabilities, net of effects from acquisitions:
Policy benefit liabilities 516,019 622,854 334,025
Reinsurance receivable (13,064) 41,199 (48,384)
Receivables (23,724) 89,686 153,350
Bank overdrafts 32,068 (41,901) (29,121)
Other, net (26,405) (159,562) 157,228
-------------- ------------- -------------
Net cash provided by operating $ 740,202 $ 767,607 $ 640,256
activities
-------------- ------------- -------------
(Continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
(Dollars in Thousands)
================================================================================================
================================================================================================
2003 2002 2001
--------------- ------------- -------------
--------------- ------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities and
redemptions of investments:
Fixed maturities available-for-sale:
Sales $ 7,852,152 5,729,919 $ 5,201,692
Maturities and redemptions 6,033,863 1,456,176 1,244,547
Mortgage loans 188,341 210,224 224,810
Real estate 3,012 3,570
Equity investments 86,908 2,798 38,331
Purchases of investments:
Fixed maturities available-for -sale (14,265,107) (7,369,364) (6,878,213)
Mortgage loans (5,500)
Real estate (6,190) (2,768) (3,124)
Equity investments (369,650) (29,690) (27,777)
Corporate owned life insurance (100,000)
Other, net 96,155 (77,769) 95,808
Acquisitions, net of cash acquired (128,636)
================================================= --------------- ------------- -------------
Net cash used in investing activities $ (514,652) (76,904) $ (203,926)
--------------- ------------- -------------
--------------- ------------- -------------
================================================================================================
(Continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001,
==============================================================================================
(Dollars in Thousands)
2003 2002 2001
-------------- -------------- --------------
-------------- --------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (180,346) $ (599,724) $ (483,285)
Due to GWL (6,341) (8,033) (1,207)
Due to GWL&A Financial 4,275 (43,415) 45,245
Dividends paid (75,711) (170,572) (187,633)
Net commercial paper repayments (213) (401) (585)
Net repurchase agreements borrowings 66,515 72,311 250,889
--------------
-------------- -------------- --------------
Net cash used in financing activities (191,821) (749,834) (376,576)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH 33,729 (59,131) 59,754
CASH, BEGINNING OF YEAR 154,600 213,731 153,977
-------------- -------------- --------------
CASH, END OF YEAR $ 188,329 $ 154,600 $ 213,731
============== ============== ==============
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 144,273 $ 164,863 $ 59,895
Interest 16,155 16,697 17,529
Non-cash financing activity:
Effect on capital - Parent stock options (12,098)
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
================================================================================
(Amounts in Thousands, except Share Amounts)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Great-West Life & Annuity Insurance Company (the Company)
is a direct wholly-owned subsidiary of GWL&A Financial Inc. (GWL&A
Financial), a holding company formed in 1998. GWL&A Financial is an
indirect wholly-owned subsidiary of Great-West Lifeco, Inc. (Lifeco or the
Parent). 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. The Company is an insurance company domiciled in the State
of Colorado, and is subject to regulation by the Colorado Division of
Insurance.
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 2002 and 2001 financial
statements and related footnotes to conform to the 2003 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 (net of deferred taxes) 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. Equity investments are carried at fair value with net unrealized
gains and losses (net of deferred taxes) reported as accumulated
other comprehensive income (loss) in stockholder's equity. The
Company classifies its equity investments not accounted for under the
equity method as available-for-sale. The Company uses the equity
method of accounting for investments in which it has more than a
minority interest, has influence in the entity's operating and
financial policies, but does not have a controlling interest.
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 $68,244 and $55,363 are included in other assets at December 31,
2003 and 2002, respectively. The Company capitalized, net of depreciation,
$12,881, $10,448, and $6,896 of internal use software development costs
for the years ended December 31, 2003, 2002 and 2001, respectively.
Deferred Policy Acquisition Costs - Policy acquisition costs, which
primarily consist of sales commissions and costs associated with the
Company's 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 $60,288, $38,707 and $44,096, in
2003, 2002 and 2001, 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 $12,111,180 and $8,029,337 at December
31, 2003 and 2002, 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 $6,215,416 and
$4,152,594 at December 31, 2003 and 2002, respectively, are established at
the contractholder's account value.
Reinsurance - Policy reserves ceded to other insurance companies are
carried as 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 $5,875,033 and $4,947,081 at December 31, 2003 and 2002,
respectively. Participating business approximates 34.3%, 24.8% and 25.8%
of the Company's ordinary life insurance in force and 66.4%, 80.2% and
85.4% of ordinary life insurance premium income for the years ended
December 31, 2003, 2002 and 2001, 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 The Great-West Life Assurance Company (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 it 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, credit default swaps, 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. Credit default
swaps may be used in conjunction with another purchased security to
reproduce the investment characteristics of a cash investment in the same
credit. 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.
The Company also uses derivatives to synthetically create investments that
are either more expensive to acquire or otherwise unavailable in the cash
markets. These securities, called replication synthetic asset
transactions, are a combination of a derivative and a cash security to
synthetically create a third replicated security. As of December 31, 2003,
the Company has one such security that has been created through the
combination of a credit default swap and U.S. Government Agency security.
These derivatives do not qualify as hedges and therefore, changes in fair
value are recorded in earnings.
Effective January 1, 2001, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), as amended by FASB
Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." The adoption of SFAS 133 resulted in an
approximate $1,000 after-tax increase to accumulated comprehensive income,
which has been included in the 2001 change in other comprehensive income
in the Statement of Stockholder's Equity.
The Statements, as subsequently amended by SFAS 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities", require
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 and
changes in fair value of derivatives not qualifying for hedge accounting
are recognized in net investment income.
The Company occasionally purchases a financial instrument that contains a
derivative instrument that is "embedded" in the financial instrument. Upon
purchasing the instrument, the Company assesses whether the economic
characteristics of the embedded derivative are clearly and closely related
to the economic characteristics of the remaining component of the
financial instrument (i.e, the host contract) and whether a separate
instrument with the same terms as the embedded instrument could meet the
definition of a derivative instrument. When it is determined that (1) the
embedded derivative possesses economic characteristics that are not
clearly and closely related to the economic characteristics of the host
contract, and (2) a separate instrument with the same terms would qualify
as a derivative instrument, the embedded derivative is separated from the
host contract, carried at fair value, and changes in its fair value are
included in earnings.
Hedge ineffectiveness of $125 and $177, determined in accordance with SFAS
No. 133, was recorded as a decrease to net investment income for the years
ended December 31, 2003 and 2002, respectively.
Derivative gains and losses included in accumulated other comprehensive
income (OCI) are reclassified into earnings at the time interest income is
recognized. Derivative gains of $1,024 and $563 were reclassified to net
investment income in 2003 and 2002, respectively. The Company estimates
that $975 of net derivative gains included in OCI will be reclassified
into net investment income within the next twelve months.
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 5.2%, 5.9%, and 6.1%, in 2003, 2002 and 2001.
Income Taxes - Income taxes are recorded using the asset and liability
approach, which requires, among other provisions, the recognition of
deferred tax assets and liabilities for expected future tax consequences
of events that have been recognized in the Company's financial statements
or tax returns. In estimating future tax consequences, all expected future
events (other than the enactments or changes in the tax laws or rules) are
considered. Although realization is not assured, management believes it is
more likely than not that the deferred tax asset will be realized.
Stock Options - The Company applies the intrinsic value measurement
approach under Accounting Principle Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25), to stock-based compensation
awards to employees, as interpreted by AIN-APB 25 and amended by Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (SFAS No. 123) as it relates to accounting for stock options
granted by the Parent to employees of the Company (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
No. 140 was effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. 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, ceased upon adoption of this statement. The Company
implemented SFAS No. 142 on January 1, 2002. Adoption of this Statement
did not have a material impact on the Company's financial position or
results of operations.
Selected Loan Loss Allowance Methodology - In July 2001, the Securities
and Exchange Commission (SEC) released Staff Accounting Bulletin No. 102,
"Selected Loan Loss Allowance Methodology and Documentation Issues" (SAB
No. 102). SAB No. 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 No. 102
by the Company did 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.
Technical Corrections - In April 2002, the FASB issued Statement No. 145
"Rescission of FASB Nos. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections" (SFAS No. 145). FASB No. 4 required all gains
or losses from extinguishment of debt to be classified as extraordinary
items net of income taxes. SFAS No. 145 requires that gains and losses
from extinguishment of debt be evaluated under the provisions of
Accounting Principles Board Opinion No. 30, and be classified as ordinary
items unless they are unusual or infrequent or meet the specific criteria
for treatment as an extraordinary item. This statement is effective
January 1, 2003. The Company does not expect this statement to have a
material effect on the Company's financial position or results of
operations.
Costs Associated With Exit or Disposal Activities - In July 2002, the FASB
issued Statement No. 146 "Accounting for Costs Associated With Exit or
Disposal Activities" (SFAS No. 146). This statement addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This statement
requires recognition of a liability for a cost associated with an exit or
disposal activity when the liability is incurred, as opposed to when the
entity commits to an exit plan under EITF 94-3. SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after
December 31, 2002. The Company does not expect this statement to have a
material impact on the Company's financial position or results of
operations.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" to clarify
accounting and disclosure requirements relating to a guarantor's issuance
of certain types of guarantees. FIN 45 requires entities to disclose
additional information about certain guarantees, or groups of similar
guarantees, even if the likelihood of the guarantor's having to make any
payments under the guarantee is remote. The disclosure provisions are
effective for financial statements for fiscal years ended after December
15, 2002. For certain guarantees, the interpretation also requires that
guarantors recognize a liability equal to the fair value of the guarantee
upon its issuance. This initial recognition and measurement provision is
to be applied only on a prospective basis to guarantees issued or modified
after December 31, 2002. In the normal course, the Company may enter into
agreements which may contain features which meet the FIN 45 definition of
a guarantee, and while the maximum guarantee cannot always be determined,
given the nature of the future events which may or may not occur, any such
arrangements that were material have been previously disclosed by the
Company.
In January 2004, FASB reissued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities" as FIN 46R. This
Interpretation addresses consolidation by business enterprises of variable
interest entities (VIE), which have one or both of the following
characteristics: a) insufficient equity investment at risk, or b)
insufficient control by equity investors. This guidance, as reissued, is
effective for VIEs created after January 31, 2003, and for pre-existing
VIEs as of March 31, 2004. In conjunction with the issuance of this
guidance, the Company conducted a review of its involvement with VIEs and
does not have any investments or ownership in VIEs.
In December 2002, the FASB issued Statement No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure" (SAFS No. 148). SAFS
No. 148 amends the disclosures that a company is required to make in its
annual financial statements and requires, for the first time, certain
disclosures in interim financial reports. In addition to the disclosures
required by SAFS No 123, a company must disclose additional information as
part of its Summary of Significant Policies. These disclosures are
required regardless of whether a company is using the intrinsic value
method under APB No. 25 or the fair value based method under SAFS No. 123
to account for its stock-based employee compensation.
In April 2003, the FASB issued Statement No. 149 "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" (SFAS No. 149). SFAS
No. 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. Except for certain implementation guidance that is
incorporated in SFAS No. 149 and already effective, SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. The
adoption of SFAS No. 149 did not have a material effect on the Company's
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with characteristics of both Liabilities and Equity"
(SFAS No. 150). SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset
in some circumstances), many of which were previously classified as
equity. The provisions of SFAS No. 150 are effective for financial
instruments entered into or modified after May 31, 2003 and with one
exception, is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a
material effect on the Company's financial statements.
In July 2003, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SOP") 03-01, "Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts
and for Separate Accounts." AcSEC developed the SOP to address the
evolution of product designs since the issuance of SFAS No. 60,
"Accounting and Reporting by Insurance Enterprises," and SFAS No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments." SOP 03-1 provides guidance related to the reporting and
disclosure of certain insurance contracts and separate accounts, including
guidance for computing reserves for products with guaranteed benefits,
such as guaranteed minimum death benefits ("GMDB"), and for products with
annuitization benefits such as guaranteed minimum income benefits. In
addition, SOP 03-1 addresses certain issues related to the presentation
and reporting of separate accounts, as well as rules concerning the
capitalization and amortization of sales inducements. SOP 03-1 will be
effective for the Company's financial statements on January 1, 2004. The
Company is currently evaluating the impact of adopting SOP 03-1 on its
consolidated financial position and results of operations.
2. ACQUISITIONS, DIVESTITURES AND SPECIAL CHARGES
On July 10, 2003, Lifeco completed its acquisition of Canada Life
Financial Corporation (Canada Life). Canada Life is a Canadian based
holding company that is the owner of insurance companies with businesses
principally in Canada, the United Kingdom, the United States and Ireland.
On December 31, 2003 Canada Life sold two direct wholly-owned
subsidiaries, Canada Life Insurance Company of New York (CLINY) and Canada
Life Insurance Company of America (CLICA) to the Company for cash in the
amount of $235 million. These acquisitions have been accounted for as a
"reorganization of businesses under common control" and, accordingly the
assets and liabilities of CLICA and CLINY were recorded at Lifeco's cost
basis, and the results of operations of CLICA and CLINY from July 10, 2003
through December 31, 2003 are included in the Company's financial
statements. CLINY and CLICA sell individual and group insurance and
annuity products in the United States. Since the time of its acquisition
by Lifeco, Canada Life's insurance and annuity businesses in the United
States, including that conducted by its U.S. branch, have been managed by
the Company whereby it provides certain corporate and operational
administrative services for which it receives a fee. In the United States,
Canada Life's subsidiary insurance companies' business includes individual
and group insurance and annuity products.
The Company recorded as of December 31, 2003, the following as a result of
the acquisition (net of the $235 million purchase price) CLICA and CLINY:
Assets Liabilities and Stockholder's Equity
-------------------------------------------- --------------------------------------------
Fixed maturities $ 1,937,218 Policy reserves $ 2,991,407
Equity investments 23,680 Policyholders' funds 2,407
Mortgage loans 1,145,494 Policy and contract 899
claims
Real estate 550 Provision for
policyholders' 2,800
dividends
Policy loans 13,621 Other liabilities 439,439
-----------------
Short-term investments 65,537 Total liabilities 3,436,952
Cash (232,803)
Investment income Accumulated other
due and accrued 32,147 comprehensive income (14,433)
Other assets 439,864 Retained earnings 2,789
Total stockholder's (11,644)
equity
-------------- -----------------
$ 3,425,308 $ 3,425,308
============== =================
The Company's statement of operations for the year ended December 31, 2003
includes the following related to CLICA and CLINY for the period from July
10, 2003 to December 31, 2003:
Total revenues $ 105,868
Benefits 92,193
Operating expenses 9,385
--------------
Total benefits and 101,578
expenses
Income from operations 4,290
Income taxes 1,501
--------------
Net income $ 2,789
==============
On August 31, 2003, the Company and The Canada Life Assurance Company
(CLAC), a wholly owned subsidiary of Canada Life, entered into an
Indemnity Reinsurance Agreement pursuant to which the Company reinsured
80% (45% coinsurance and 35% coinsurance with funds withheld) of certain
United States life, health and annuity business of CLAC's U.S. Branch. The
Company recorded $1,427 million in premium income and increase in reserves
associated with these policies. The Company recorded, at fair value, the
following at August 31, 2003 as a result of this transaction:
Assets Liabilities and Stockholder's Equity
-------------------------------------------- ---------------------------------------
Fixed Maturities $ 635,061 Policy reserves $ 2,926,497
Mortgage loans 451,725 Policy and contract 45,229
claims
Policy loans 278,152 Policyholders' funds 65,958
Reinsurance receivable 1,320,636
Deferred policy
acquisition costs acquired 313,364
Investment income
due and accrued 17,280
Premiums in course of
collection 21,466
-------------- --------------
-------------- --------------
$ 3,037,684 $ 3,037,684
============== ==============
The reinsurance receivable relates to the amount due the Company for
reserves ceded by coinsurance with funds withheld. The Company's return on
this reinsurance receivable will be the interest and other investment
returns earned net of realized gains and losses on a segregated pool of
investments of the CLAC's U.S. branch. Pursuant to an interpretation of
SFAS 133, the Company has identified an embedded derivative for the
Company's exposure to interest rate and credit risk on the segregated pool
of investments. As this embedded derivative does not qualify for hedge
accounting the Company's net income increased $5.7 million.
On July 8, 1998, the Company acquired Alta Health & Life Insurance Company
(Alta). 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 Alta
business. The Company decided to discontinue writing new Alta business and
that all Alta customers will be moved to its contracts over time. All Alta
sales and administration staff have become employees of the Company and
the underwriting functions are being conducted by its underwriting staff.
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
included $46 million for premium deficiency reserves, $29 million for
premium receivables, $28 million for uninsured accident and health plan
claim receivables and $24 million for goodwill and other.
3. RELATED-PARTY TRANSACTIONS
The Company performs administrative services for the U.S. operations of
GWL and, beginning in 2003, the U.S. operations of Canada Life. Beginning
in 2002, the Company performs investment services for London Reinsurance
Group, an indirect subsidiary of GWL. The Company also manages the U.S.
businesses of Canada Life, providing administrative and operational
services. The following represents revenue from related parties for
services provided pursuant to these service agreements. These amounts, in
accordance with the terms of the various contracts, are based upon
management's best estimate of actual costs incurred and resources expended
based upon the number of policies, certificates in force and/or
administered assets.
Years Ended December 31,
-------------------------------------------
2003 2002 2001
------------- ------------- -------------
Investment management revenue $ 3,355 $ 892 $ 186
Administrative and underwriting revenue 1,859 860 1,043
------------- ------------- -------------
------------- ------------- -------------
Total $ 5,214 $ 1,752 $ 1,229
============= ============= =============
At December 31, 2003 and 2002, due to GWL includes $5,612 and $8,503 due
on demand and, at each date, $25,338 of a note payable which matures on
October 1, 2006. The note 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 (4.59% and 4.75% at December 31, 2003 and 2002, respectively). The
note payable bears interest at 5.4%.
At December 31, 2003 and 2002, due to GWL&A Financial includes $656 and
$(3,619) due on demand and, at each date, $175,035 of a subordinated note
payable. The note, which was issued in 1999, 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 its financial condition 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 (4.59% and 4.75% at December 31,
2003 and 2002, respectively). The note payable bears interest at 7.25%.
Interest expense attributable to these related party obligations was
$14,345, $14,976 and $14,732 for the years ended December 31, 2003, 2002
and 2001, respectively.
4. ALLOWANCES ON POLICYHOLDER RECEIVABLES
Amounts receivable for accident and health plan claims and premiums in the
course of collection are generally uncollateralized. Such receivables are
from a large number of policyholders dispersed throughout the United
States and throughout many industry groups.
The Company maintains an allowance for credit losses at a level that, in
management's opinion, is sufficient to absorb credit losses on 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.
Activity in the allowance for amounts receivable related to uninsured
accident and health plan claims is as follows:
2003 2002 2001
------------- ------------- -------------
Balance, beginning of year $ 42,144 $ 53,431 $ 34,700
Amounts acquired by reinsurance 6,207
Provisions charged (reversed) to operations 1,460 (7,544) 50,500
Amounts written off - net (11,275) (9,950) (31,769)
-------------
------------- ------------- -------------
Balance, end of year $ 32,329 $ 42,144 $ 53,431
============= ============= =============
Activity in the allowance for premiums in course of collection is as
follows:
2003 2002 2001
------------- ------------- -------------
Balance, beginning of year $ 12,011 $ 22,217 $ 18,700
Amounts acquired by reinsurance 1,600
Provisions charged (reversed) to operations 1,889 (5,729) 29,642
Amounts written off - net (4,132) (6,077) (26,125)
------------- ------------- -------------
Balance, end of year $ 9,768 $ 12,011 $ 22,217
============= ============= =============
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 liability of $1,500
of coverage per individual life.
In addition to the Indemnity Reinsurance Agreement entered into with CLAC
(see Note 2), the Great-West Healthcare division of the Company entered
into a reinsurance agreement during 2003 with Allianz Risk Transfer
(Bermuda) Limited (Allianz) to cede 90% of direct written group health
stop-loss and excess loss activity. This Allianz agreement was retroactive
to January 1, 2003. The net cost of the Allianz agreement was charged
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, 2003
and 2002, the reinsurance receivables had carrying values of
$1,574,824 and $241,153, respectively.
The following schedule details life insurance in force and life and
accident/health premiums:
Percentage
of Amount
Reinsurance Reinsurance Assumed
Direct Ceded Assumed Net To Net
------------- ------------- ------------- ------------- -----------
December 31, 2003:
Life insurance in force:
Individual $ 49,590,015 $ 16,483,477 $ 18,054,587 $ 51,161,125 35.3%
Group 49,150,866 18,941 53,570,393 102,702,318 52.2%
------------- ------------- ------------- -------------
Total $ 98,740,881 $ 16,502,418 $ 71,624,979 $ 153,863,442
============= ============= ============= =============
Premium Income:
Life insurance $ 459,039 $ 30,138 $ 1,184,332 $ 1,613,233 73.4%
678,516 423,592 321,996 576,920 55.8%
Accident/health
------------- ------------- ------------- -------------
Total $ 1,137,555 $ 453,730 $ 1,506,328 $ 2,190,153
============= ============= ============= =============
December 31, 2002:
Life insurance in force:
Individual $ 43,324,059 $ 12,786,783 $ 7,280,731 $ 37,818,007 19.3%
Group 51,385,610 7,186,698 58,572,308 12.3%
------------- ------------- ------------- -------------
Total $ 94,709,669 $ 12,786,783 $ 14,467,429 $ 96,390,315
============= ============= ============= =============
Premium Income:
Life insurance $ 312,388 $ 40,582 $ 41,245 $ 313,051 13.2%
728,972 43,047 128,820 814,745 15.8%
Accident/health
------------- ------------- ------------- -------------
Total $ 1,041,360 $ 83,629 $ 170,065 $ 1,127,796
============= ============= ============= =============
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%
830,970 49,001 42,750 824,719 5.2%
Accident/health
------------- ------------- ------------- -------------
Total $ 1,215,658 $ 81,821 $ 80,192 $ 1,214,029
============= ============= ============= =============
6. NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Net investment income is summarized as follows:
Years Ended December 31,
-------------------------------------------
2003 2002 2001
------------- ------------- -------------
Investment income:
Fixed maturities and short-term $ 697,209 $ 673,825 $ 693,573
investments
Equity investments 4,703 3,272 4,882
Mortgage loans on real estate 84,532 48,625 69,237
Real estate 1,434 2,815 1,113
Policy loans 195,633 209,608 200,533
Other 37,254 5,236 3,766
------------- ------------- -------------
1,020,765 943,381 973,104
Investment expenses, including interest on
amounts charged by the related parties
of $14,345, $14,976 and $14,732 32,365 24,016 38,348
------------- ------------- -------------
Net investment income $ 988,400 $ 919,365 $ 934,756
============= ============= =============
Net realized gains (losses) on investments are as follows:
Years Ended December 31,
-------------------------------------------
2003 2002 2001
------------- ------------- -------------
Realized gains (losses):
Fixed maturities $ 26,621 $ 33,455 $ 32,116
Equity investments 1,013 1,639 13,052
Mortgage loans on real estate 3,159 1,493 1,657
Real estate (248)
Provisions 9,015 5,039
-------------
------------- ------------- -------------
Net realized gains on investments $ 39,560 $ 41,626 $ 46,825
============= ============= =============
7. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 2003 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------------------ ---------- ---------- ----------- ----------- -----------
U.S. Government CMO $ 1,112,972 $ 27,273 $ 1,992 $ 1,138,253 $ 1,138,253
U.S. Government ABS 461,185 21,490 232 482,443 482,443
U.S. Government MBS 520,629 5,521 123 526,027 526,027
U.S. Government Other 1,052,061 17,747 17,981 1,051,827 1,051,827
Credit tenant loans 128,931 11,717 265 140,383 140,383
State and 1,133,234 79,323 4,204 1,208,353 1,208,353
municipalities
Foreign government 58,211 1,191 940 58,462 58,462
Corporate bonds 4,107,100 238,908 84,306 4,261,702 4,261,702
Mortgage backed
securities - CMO 353,750 15,914 1,315 368,349 368,349
Public utilities 1,156,156 61,015 20,248 1,196,923 1,196,923
Asset backed securities 2,272,648 64,538 33,751 2,303,435 2,303,435
Derivatives 1,838 3,805 (1,967) (1,967)
Collateralized mortgage
obligation 398,899 3,605 130 402,374 402,374
---------- ---------- ----------- ----------- -----------
$ 12,757,614$ 548,242 $ 169,292 $ 13,136,564 $ 13,136,564
========== ========== =========== =========== ===========
Fixed maturities owned at December 31, 2002 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------------------ ---------- ---------- ----------- ----------- -----------
U.S. Government CMO $ 1,304,614 $ 43,929 $ $ 1,348,543 $ 1,348,543
U.S. Government ABS 491,183 16,310 1,785 505,708 505,708
U.S. Government MBS 385,764 5,957 149 391,572 391,572
U.S. Government Other 445,281 19,589 4 464,866 464,866
Credit tenant loans 104,648 11,081 115,729 115,729
State and 1,019,049 100,256 194 1,119,111 1,119,111
municipalities
Foreign government 42,182 1,038 61 43,159 43,159
Corporate bonds 2,771,977 182,787 53,534 2,901,230 2,901,230
Mortgage backed
Securities - CMO 96,776 16,170 18 112,928 112,928
Public utilities 698,365 44,334 11,369 731,330 731,330
Asset backed securities 2,138,025 86,261 27,089 2,197,197 2,197,197
Derivatives (3,422) 15,343 11,921 11,921
Collateralized mortgage
obligation 416,220 11,638 427,858 427,858
---------- ---------- ----------- ----------- -----------
$ 9,910,662 $ 554,693 $ 94,203 $ 10,371,152 $ 10,371,152
========== ========== =========== =========== ===========
The collateralized mortgage obligations consist primarily of sequential
and planned amortization classes with final stated maturities of two to
thirty years and expected 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 are 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, 2003, 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 $ 684,947 $ 710,287
Due after one year through five 3,351,405 3,495,805
years
Due after five years through ten 1,660,758 1,743,056
years
Due after ten years 1,940,424 1,966,535
Mortgage backed securities 2,386,248 2,435,003
Asset backed securities 2,733,832 2,785,878
-------------- --------------
$ 12,757,614 $ 13,136,564
============== ==============
Proceeds from sales of securities available-for-sale were $7,852,152,
$5,729,919, and $5,201,692 during 2003, 2002 and 2001, respectively. The
realized gains on such sales totaled $72,815, $45,315 and $42,299 for
2003, 2002 and 2001, respectively. The realized losses totaled $43,214,
$10,410, and $10,186 for 2003, 2002 and 2001, respectively.
At December 31, 2003 and 2002, pursuant to fully collateralized securities
lending arrangements, the Company had loaned $193,200 and $284,990 of
fixed maturities, respectively.
The Company makes limited use of derivative financial instruments to
manage interest rate, market, credit and foreign exchange risk.
The following tables summarize the derivative financial instruments:
Notional Strike/Swap
December 31, 2003 Amount Rate Maturity
-------------------------- ------------- ---------------------------- -----------------
Interest Rate Caps $ 617,000 7.91% - 11.65% 02/04 - 01/05
Interest Rate Swaps 331,334 1.03% - 4.50% 01/04 - 11/09
Credit Default Swaps 171,310 N/A 10/05 - 11/07
Foreign Currency
Exchange Contracts 27,585 N/A 06/05 - 11/06
Options Calls 92,700 Various 05/04 -03/07
Puts 15,000 Various 03/07 - 03/07
Total Return Swap -
Receivable for
Coinsurance with Funds 1,309,160 Variable Indeterminate
Withheld
Notional Strike/Swap
December 31, 2002 Amount Rate Maturity
-------------------------- ------------- -------------------------- ------------------
Interest Rate Caps $ 1,122,000 7.64% - 11.65% 02/03 - 01/05
Interest Rate Swaps 400,188 1.26% - 4.75% 02/03 - 11/09
Credit Default Swaps 128,157 N/A 02/03 - 11/07
Foreign Currency
Exchange Contracts 27,585 N/A 06/05 - 11/06
Options Calls 191,200 Various 05/04 - 06/07
Puts 15,000 Various 03/07 - 03/07
The following is information with respect to impaired mortgage loans:
2003 2002
-------------- --------------
-------------- --------------
Loans, net of related allowance for credit losses of
$19,542 and $20,917 $ 7,680 $ 8,200
Loans with no related allowance for credit losses 2,638
Average balance of impaired loans during the year 29,633 31,243
Interest income recognized (while impaired) 1,350 2,007
Interest income received and recorded (while impaired)
using the cash basis method of recognition 1,405 2,249
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 $34,880 and $40,302 at December 31, 2003 and 2002,
respectively.
The following table presents changes in the allowance for credit losses:
2003 2002 2001
------------- ------------- -------------
-------------
Balance, beginning of year $ 55,654 $ 57,654 $ 61,242
Provision (credits) (9,817) (3,588)
Charge-offs (15,766) (139) (3,588)
Recoveries 1,818 1,727
-------------
------------- ------------- -------------
Balance, end of year $ 31,889 $ 55,654 $ 57,654
============= =============--=============
The carrying value of the Company's equity investments was $427,810 and
$90,188 at December 31, 2003 and 2002, respectively. At December 31, 2003,
the Company has invested $130,473 in an exchange-traded fund which invests
in corporate debt securities. Upon redemption of the equity ownership, the
Company has the option of receiving the debt securities or the redemption
value of the investment. At December 31, 2003, the Company has invested
$216,610 in limited partnerships and limited liability corporations .
The Company makes commitments to fund partnership interests in the normal
course of its business. The amounts of unfunded commitments at December
31, 2003 and 2002 were $128,341 and $16,689, respectively.
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, 2003, commercial paper
outstanding in the amount of $96,432 had maturities ranging from 9 to 86
days and interest rates ranging from 1.18% to 1.2%. At December 31, 2002,
commercial paper outstanding in the amount of $96,645 had maturities from
3 to 66 days and interest rates ranging from 1.40% to 1.88%.
9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
December 31,
----------------------------------------------------------
2003 2002
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
ASSETS:
Fixed maturities and
short-term investments $ 13,988,762 $ 13,988,762 $ 11,080,956 $ 11,080,956
Mortgage loans on real
estate 1,885,812 1,871,373 417,412 429,907
Policy loans 3,389,534 3,389,534 2,964,030 2,964,030
Equity investments 427,810 427,810 90,188 90,188
Reinsurance receivables 1,574,824 1,574,824 241,153 241,153
LIABILITIES:
Annuity contract reserves
without life 6,552,507 6,640,677 4,152,594 4,228,080
contingencies
Policyholders' funds 368,076 368,076 299,730 299,730
Due to GWL 30,950 32,591 33,841 35,316
Due to GWL&A Financial 175,691 178,421 171,416 173,376
Commercial paper 96,432 96,432 96,645 96,645
Repurchase agreements 389,715 389,715 323,200 323,200
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 equity investments that
are publicly traded are obtained from an independent pricing service. To
determine fair value for fixed maturities and equity investments 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 in the amounts of $(1,967) and $11,921 at December
31, 2003 and 2002, 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 and carrying amount of reinsurance receivables
includes $20,416 representing the estimated fair value of the total return
swap, which is an embedded derivative associated with the Company's
reinsurance receivable under its coinsurance with funds withheld agreement
with the U.S. branch of CLAC. Valuation of the total return swap is based
on the estimated fair value of the segregated pool of assets from which
the Company derives its return on the reinsurance receivable.
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, 2003.
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 over-the-counter 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 fixed
maturities are derivative financial instruments with a net liability
position of $1,967 in 2003 and a net asset position of $11,921 in 2002.
Included in the net asset position for foreign currency exchange contracts
are $7,464 and $2,518 of liabilities in 2003 and 2002, respectively.
10. EMPLOYEE BENEFIT PLANS
The following table summarizes changes for the years ended December 31,
2003, 2002 and 2001 in the benefit obligations and in plan assets for the
Company's defined benefit pension plan and post-retirement medical plan.
Post-Retirement
Pension Benefits Medical Plan
---------------------------- ----------------------------
2003 2002 2001 2003 2002 2001
-------- -------- -------- ------- -------- --------
Change in projected benefit
obligation
Benefit obligation at $ 186,047 $ 150,521 $ 140,563 $ 31,242 $ 57,861 $ 33,018
beginning of year
Service cost 8,269 8,977 8,093 2,046 3,516 3,331
Interest cost 12,275 11,407 9,718 2,269 3,138 3,303
Acquisition of new employees 7,823
Amendments 827 (22,529)
Actuarial (gain) loss 12,746 20,679 (2,640) 9,614 (9,814) 11,401
Benefits paid (6,374) (6,364) (5,213) (1,066) (930) (1,015)
-------- -------- -------- ------- -------- --------
-------- -------- -------- ------- -------- --------
Benefit obligation at end $ 212,963 $ 186,047 $ 150,521 $ 44,105 $ 31,242 $ 57,861
of year
======== ======== ======== ======= ======== ========
Change in plan assets
Fair value of plan assets
at
Beginning of year $ 163,316 $ 187,661 $ 193,511 $ $ $
Actual return on plan assets 32,377 (17,981) (637)
Benefits paid (6,374) (6,364) (5,213)
-------- -------- -------- ------- -------- --------
Fair value of plan assets 189,319 163,316 187,661
at end of year
-------- -------- -------- ------- -------- --------
Funded (unfunded) status (23,643) (22,730) 37,140 (44,105) (31,242) (57,861)
Unrecognized net actuarial 41,777 51,943 (1,499) 13,715 4,361 14,659
(gain) loss
Unrecognized prior service 2,095 2,727 2,533 (8,679) (9,392) 9,326
cost
Unrecognized net obligation
or (asset)
at transition (12,113) (13,627) (15,142) 12,120
Acquisition of GenAm (7,823)
employees
-------- -------- -------- ------- -------- --------
Prepaid (accrued) benefit 8,116 18,313 23,032 (39,069) (36,273) (29,579)
cost
Additional minimum liability (16,419) (22,549)
-------- -------- -------- ------- -------- --------
Prepaid benefit cost/
(accrued benefit (8,303) (4,236) 23,032 (39,069) (36,273) (29,579)
liability)
Intangible asset 2,095 2,727
Accumulated other
comprehensive
income adjustments 14,324 19,822
-------- -------- -------- ------- -------- --------
Net amount recognized $ 8,116 $ 18,313 $ 23,032 $ (39,069$ (36,273)$ (29,579)
======== ======== ======== ======= ======== ========
Increase (decrease) in
minimum
liability included in
other
Comprehensive income $ 3,573 $ (12,884)$ $ $ $
Late last year Congress passed the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 which made significant changes to the federal
Medicare Program. The Act provides for drug benefits under a new Medicare
Part D program. Employers such as the Company who provide drug benefits for
post-65 retirees are expected to make use of the subsidies inherent in this
new program.
The measurement of the accumulated post-retirement benefit obligation
(APBO) and the net post-retirement benefit cost included these financial
statements do not reflect the effects that this legislation may have on the
plan. Authoritative guidance on the accounting for this issue is currently
pending and when issued, could require the Company to revise previously
reported information.
The accumulated benefit obligation for all defined benefit pension plans
was $197.6 million and $167.5 million at December 31, 2003 and 2002,
respectively.
Post-Retirement
Pension Benefits Medical Plan
---------------------------- ----------------------------
2003 2002 2001 2003 2002 2001
-------- -------- -------- ------- -------- --------
Components of net periodic
benefit cost
Service cost $ 8,269 8,977 $ 8,093 $ 2,046 $ 3,516 $ 3,331
Interest cost 12,275 11,406 9,718 2,269 3,138 3,303
Expected return on plan (12,954) (14,782) (15,276)
assets
Amortization of transition (1,514) (1,514) (1,514) 808 808
obligation
Amortization of
unrecognized prior
service cost 632 632 541 (713) 161 645
Amortization of unrecognized
prior service cost - GenAm (484)
Amortization of gain from
earlier
periods 3,489 (467) 261 172
-------- -------- -------- ------- -------- --------
Net periodic (benefit) cost $ 10,197 4,719 $ 1,095 $ 3,863 $ 7,623 $ 7,775
======== ======== ======== ======= ======== ========
Weighted-average
assumptions as
of December 31
Discount rate 6.25% 6.75% 7.25% 6.25% 6.75% 7.25%
Expected return on plan 8.00% 8.00% 8.00%
assets
Rate of compensation 3.44% 3.92% 4.00% 3.44% 3.92% 4.00%
increase
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 2003,
2002 or 2001.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the medical plan. For measurement purposes, a 10%
annual rate of increase in the per capita cost of covered health care
benefits was assumed and that the rate would gradually decrease to a level
of 5.25% by 2014. Additionally, it was assumed that the Company's cost for
retirees eligible for health care benefits under Medicare would be limited
to an increase of 3% starting in 2003, due to a plan change. 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 $ 428 $ (367)
Increase (decrease) on post-retirement benefit
obligation 3,157 (2,612)
The Company's pension plan assets are invested as follows:
Plan Assets at December 31
-------------------------------------
2003 2002
----------------- -----------------
Asset Category
Equity securities 61% 55%
Debt securities 25% 36%
Real estate 0% 0%
Other 14% 9%
----------------- -----------------
----------------- -----------------
Total 100% 100%
================= =================
The Company's target allocation for invested plan assets at December 31,
2004 is as follows:
Asset Category
Equity securities 60%
Debt securities 30%
Real estate 0%
Other 10%
-----------------
-----------------
Total 100%
=================
The Company expects to contribute $4,800 to its pension plan and $1,300 to
its other post-retirement benefit plan in 2004.
The discount rate has been set based on the rates of return on
high-quality fixed-income investments currently available and expected to
be available during the period the benefits will be paid. In particular,
the yields on bonds rated AA or better on the measurement date have been
used to set the discount rate.
The investment objective is to provide an attractive risk-adjusted return
that will ensure the payment of benefits while protecting against the risk
of substantial investment losses. Correlations among the asset classes are
used to identify an asset mix that the Company believes will provide the
most attractive returns. Long-term return forecasts for each asset class
using historical data and other qualitative considerations to adjust for
projected economic forecasts are used to set the expected rate of return
for the entire portfolio.
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 before January 1, 1999. For all
other employees the Company matches 50% of the first 8% of participant
pre-tax contributions. Company contributions for the years ended December
31, 2003, 2002 and 2001 totaled $6,646, $7,257 and $7,773, 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 the amounts deferred. The program is not
qualified under Section 401 of the Internal Revenue Code. Participant
deferrals, which are reflected in other liabilities, are $21,926 and
$20,606 as of December 31, 2003 and 2002, respectively. The participant
deferrals earned interest at 6.87% at December 31, 2003, 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,
2003, 2002 and 2001 was $1,449, $1,459 and $1,434, 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 2003, 2002 and 2001 was $3,123, $2,527 and $2,726, respectively.
The total liability of $24,942 and $20,037 as of December 31, 2003 and
2002 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:
2003 2002 2001
----------- ----------- ----------
Federal tax rate 35.0 % 35.0 % 35.0 %
Reduction in tax contingency (2.1) (3.3)
Investment income not subject to federal tax (2.1) (1.3) (1.7)
Other, net 1.8 1.1 (0.3)
----------- ----------- ----------
Total 32.6 % 31.5 % 33.0 %
=========== =========== ==========
During 2003, the Company reduced its liability for tax contingencies due
to the completion of Internal Revenue Service examinations. The amount
released was $9,600; however, $5,000 of the release was attributable to
participating policyholders and therefore, had no affect 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 2003 statement of income.
The tax effect of temporary differences, which give rise to the deferred
tax assets and liabilities, as of December 31, 2003 and 2002 are as
follows:
2003 2002
--------------------------- --------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
------------ ------------- ------------ ------------
Policyholder reserves $ 219,490 $ 231,679 $
Deferred policy acquisition 96,207 94,018
costs
Deferred acquisition cost
proxy tax 124,498 109,779
Investment assets 130,090 149,958
Other 2,280 28,466
------------ ------------- ------------ ------------
Total deferred taxes $ 346,268 226,297 $ 341,458 $ 272,442
============ ============= ============ ============
Amounts included for investment assets above include $74,326 and $86,907
related to the unrealized gains on the Company's fixed maturities
available-for-sale at December 31, 2003 and 2002, respectively.
Under pre-1984 life insurance company income tax laws, a portion of a life
insurance company's 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, 2003 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 $ (18,159) $ 6,356 $ (11,803)
Unrealized holding gains (losses)
arising
during the period 12,967 (4,538) 8,429
Less: reclassification adjustment
for
(gains) losses realized in net (22,824) 7,989 (14,835)
income
--------------- -------------- --------------
(28,016) 9,807 (18,209)
Reserve and DAC adjustment (12,553) 4,393 (8,160)
--------------- -------------- --------------
--------------- -------------- --------------
Net unrealized gains (losses) (40,569) 14,200 (26,369)
Minimum pension liability adjustment 5,498 (1,925) 3,573
--------------- -------------- --------------
Other comprehensive income (loss) $ (35,071) $ 12,275 $ (22,796)
=============== ============== ==============
Other comprehensive income for the year ended December 31, 2002 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 $ (7,486) $ 2,620 $ (4,866)
Unrealized holding gains (losses)
arising
during the period 192,079 (67,290) 124,789
Less: reclassification adjustment
for
(gains) losses realized in net (8,004) 2,802 (5,202)
income
--------------- -------------- --------------
Net unrealized gains 176,589 (61,868) 114,721
Reserve and DAC adjustment (42,681) 14,953 (27,728)
--------------- -------------- --------------
--------------- -------------- --------------
Net unrealized gains (losses) $ 133,908 $ (46,915) $ 86,993
Minimum pension liability adjustment (19,822) 6,938 (12,884)
--------------- -------------- --------------
Other comprehensive income 114,086 (39,977) 74,109
=============== ============== ==============
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 (15,912) 5,569 (10,343)
income
--------------- -------------- --------------
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
=============== ============== ==============
13. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS AND OTHER MATTERS
At December 31, 2003 and 2002, 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 2003, 2002 and 2001.
Dividends of $75,711, $170,572 and $187,633, were paid on common stock in
2003, 2002 and 2001, 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:
2003 2002 2001
-------------- -------------- ------------
-------------- -------------- ------------
(Unaudited)
Net income (loss) $ (75,627) $ 205,749 $ 266,398
Capital and surplus 1,212,548 1,292,292 1,200,372
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. 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 is subject to
restrictions relating to statutory surplus and statutory net gain from
operations. Statutory surplus and net losses from operations at December
31, 2003 were $1,212,548 and ($77,158)[Unaudited], respectively. The
Company should be able to pay up to $121,255 [Unaudited] of dividends in
2004.
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 not less than the market price on the
date of the grant. Termination of employment prior to vesting results in
forfeiture of the options. As of December 31, 2003, 2002 and 2001, stock
available for award to Company employees under the Lifeco plan aggregated
3,034,344, 3,917,344 and 3,278,331 shares, respectively.
The Lifeco plan provides for the granting of options with varying terms
and vesting requirements. The majority of basic options under the Lifeco
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, 2004
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, became exercisable if certain cumulative financial targets
were attained by the end of 2001. A total of 175,511 options vested and
became exercisable. The exercise period runs from 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 2003, 2001, 2000 and 1998 totaling
100,000, 80,000, 120,000 and 380,000 respectively, become exercisable if
certain sales or financial targets are attained. During 2003, 2002 and
2001, 0, 0, and 7,750 of these options vested and accordingly, the Company
recognized compensation expense of $0, $0, and $48, respectively. If
exercisable, the exercise period expires ten years from the date of grant.
The following table summarizes the status of, and changes in, Lifeco
options granted to Company employees which are outstanding and the
weighted-average exercise price (WAEP) for 2003, 2002 and 2001. As the
options granted relate to Canadian stock, the values, which are presented
in U.S. dollars, will fluctuate as a result of exchange rate fluctuations:
2003 2002 2001
--------------------- ---------------------- ---------------------
Options WAEP Options WAEP Options WAEP
-------------------- ---------- --------- ----------- --------- ---------- --------
Outstanding, Jan. 1 4,447,145$ 13.66 6,398,149 $ 11.66 7,675,551$ 9.91
Granted 1,336,000 27.28 174,500 22.16 947,500 22.28
Exercised 486,176 10.85 1,359,491 7.16 1,534,568 5.87
Expired or
Canceled 980,000 14.07 766,013 11.02 690,334 11.24
---------- --------- ----------- --------- ---------- --------
Outstanding, Dec 31 4,316,969$ 21.63 4,447,145 $ 13.66 6,398,149$ 11.66
========== ========= =========== ========= ========== ========
Options
Exercisable
at year-end 2,237,810$ 16.08 2,121,638 $ 11.67 2,602,480$ 8.08
========== ========= =========== ========= ========== ========
Weighted average
Fair value of
Options granted
During year $ 7.05 $ 7.46 $ 7.10
========== =========== ==========
The following table summarizes the range of exercise prices for
outstanding Lifeco common stock options granted to Company employees at
December 31, 2003:
Outstanding Exercisable
================== ----------------------------------------- ----------------------------
Average Average
Exercise Average Exercise Exercise
Price Range Options Life Price Options Price
------------------ -------------- ----------- ------------ -------------- ------------
$6.57 - 8.73 437,500 2.56 6.57 437,500 6.57
$12.58 - 20.87 1,736,469 5.50 16.62 1,471,436 16.50
$26.57 - 32.29 2,143,000 8.74 28.77 328,874 26.86
Of the exercisable Lifeco options, 1,838,810 relate to fixed option grants
and 399,000 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.
The following table summarizes the status of, and changes in, PFC options
granted to Company officers, which remain outstanding and WAEP for 2003,
2002 and 2001. 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:
2003 2002 2001
---------------------- ---------------------- ----------------------
Options WAEP Options WAEP Options WAEP
----------- --------- ----------- -------- ----------- ---------
Outstanding, Jan.1, 0 $ 0.00 70,000 $ 2.16 70,000 $ 2.29
Exercised 0 0.00 70,000 2.21
----------- --------- ----------- -------- ----------- ---------
Outstanding, Dec 0 $ 0.00 0 $ 0.00 70,000 $ 2.16
31,
=========== ========= =========== ======== =========== =========
Options exercisable
at year-end 0 $ 0.00 0 $ 0.00 70,000 $ 2.16
=========== ========= =========== ======== =========== =========
The Company accounts for stock-based compensation using the intrinsic
value method prescribed by APB No. 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 $3,315, $2,364, and $2,092, in 2003, 2002 and 2001,
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
2003, 2002, and 2001, respectively: dividend yields of 2.81%, 2.453%, and
2.27%, expected volatility of 26.21%, 31.67%, and 28.56%, risk-free
interest rates of 4.48%, 5.125%, and 5.30%, and expected lives of 7 years.
15. SEGMENT INFORMATION
The Company has two reportable segments: Great-West Healthcare (formerly
Employee Benefits) and Financial Services. The Great-West Healthcare
segment markets group life and health insurance to small and mid-sized
corporate employers. The Financial Services segment markets and
administers savings products to public and not-for-profit employers,
corporations, 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.
Prior to 2002, the Great-West Healthcare segment marketed and administered
corporate savings products (401(k) plans). In 2002 the Financial Services
segment assumed responsibility for these products. The 2001 and 2000
segment information has been reclassified to account for this change.
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, 2003
Operations: Great-West Financial
Healthcare Services Total
======================================== -------------- -------------- ---------------
Revenue:
Premium income $ 838,194 1,414,703 2,252,897
Fee income 607,369 232,703 840,072
Net investment income 72,191 916,209 988,400
Realized investment gains 10,340 29,220 39,560
======================================== -------------- -------------- ---------------
-------------- -------------- ---------------
Total revenue 1,528,094 2,592,835 4,120,929
======================================== -------------- -------------- ---------------
-------------- -------------- ---------------
Benefits and Expenses:
Benefits 567,603 2,116,001 2,683,604
Operating expenses 699,146 266,538 965,684
-------------- -------------- ---------------
Total benefits and expenses 1,266,749 2,382,539 3,649,288
======================================== -------------- -------------- ---------------
-------------- -------------- ---------------
Net operating income before income 261,345 210,296 471,641
taxes
Income taxes 88,104 65,516 153,620
======================================== -------------- -------------- ---------------
Net income $ 173,241 144,780 318,021
============== ============== ===============
Assets: Great-West Financial
Healthcare Services Total
======================================== -------------- -------------- ---------------
Investment assets $ 1,351,871 $ 18,347,959 $ 19,699,830
Other assets 244,100 3,333,472 3,577,572
Separate account assets 13,175,480 13,175,480
-------------- -------------- ---------------
Total assets $ 1,595,971 $ 34,856,911 $ 36,452,882
======================================== ============== ============== ===============
Year ended December 31, 2002
Operations: Great-West Financial
Healthcare Services Total
======================================== -------------- -------------- ---------------
Revenue:
Premium income $ 960,191 $ 159,904 $ 1,120,095
Fee income 660,423 223,139 883,562
Net investment income 67,923 851,442 919,365
Realized investment gains 8,918 32,708 41,626
======================================== -------------- -------------------------------
-------------- -------------------------------
Total revenue 1,697,455 1,267,193 2,964,648
======================================== -------------- -------------------------------
-------------- -------------------------------
Benefits and Expenses:
Benefits 761,481 831,272 1,592,753
Operating expenses 732,472 225,671 958,143
-------------- -------------- ---------------
-------------- -------------- ---------------
Total benefits and expenses 1,493,953 1,056,943 2,550,896
======================================== -------------- -------------- ---------------
-------------- -------------- ---------------
Net operating income before income 203,502 210,250 413,752
taxes
Income taxes 67,198 63,017 130,215
-------------- -------------- ---------------
-------------- -------------- ---------------
Net income $ 136,304 $ 147,233 $ 283,537
======================================== ============== ============== ===============
Assets: Great-West Financial
Healthcare Services Total
======================================== -------------- -------------- ---------------
Investment assets $ 1,491,857 $ 13,064,464 $ 14,556,321
Other assets 605,029 1,156,343 1,761,372
Separate account assets 11,338,376 11,338,376
-------------- -------------- ---------------
Total assets $ 2,096,886 $ 25,559,183 $ 27,656,069
======================================== ============== ============== ===============
Year ended December 31, 2001
Operations: Great-West Financial
Healthcare Services Total
======================================== -------------- -------------- ---------------
Revenue:
Premium income $ 1,033,886 $ 169,753 $ 1,203,639
Fee income 713,297 233,958 947,255
Net investment income 65,474 869,282 934,756
Realized investment gains 15,638 31,187 46,825
======================================== -------------- -------------- ---------------
-------------- -------------- ---------------
Total revenue 1,828,295 1,304,180 3,132,475
======================================== -------------- -------------- ---------------
-------------- -------------- ---------------
Benefits and Expenses:
Benefits 858,945 837,652 1,696,597
Operating expenses 775,018 246,102 1,021,120
======================================== -------------- -------------- ---------------
Total benefits and expenses 1,633,963 1,083,754 2,717,717
Income taxes 67,771 73,341 141,112
-------------- -------------- ---------------
Net income before special charges 126,561 147,085 273,646
Special charges (net of tax) 80,900 80,900
-------------- -------------- ---------------
Net income $ 45,661 $ 147,085 $ 192,746
======================================== ============== ============== ===============
Assets: Great-West Financial
Healthcare Services Total
======================================== -------------- -------------- ---------------
Investment assets $ 1,080,974 $ 13,159,007 $ 14,239,981
Other assets 792,383 1,201,373 1,993,756
Separate account assets 12,584,661 12,584,661
-------------- -------------- ---------------
Total assets $ 1,873,357 $ 26,945,041 $ 28,818,398
======================================== ============== ============== ===============
The following table, which summarizes premium and fee income by segment,
represents supplemental information.
2003 2002 2001
======================================= -------------- --------------- --------------
Premium Income:
Great-West Healthcare:
Group Life & Health $ 838,194 $ 960,191 $ 1,033,886
-------------- --------------- --------------
Total Great-West 838,194 960,191 1,033,886
Healthcare
======================================= -------------- --------------- --------------
-------------- --------------- --------------
Financial Services:
Retirement Services 824 15 3,533
Individual Markets 1,413,879 159,889 166,220
-------------- --------------- --------------
Total Financial Services 1,414,703 159,904 169,753
======================================= -------------- --------------- --------------
Total premium income $ 2,252,897 $ 1,120,095 $ 1,203,639
======================================= ============== =============== ==============
Fee Income:
Great-West Healthcare:
Group Life & Health (uninsured $ 607,369 $ 660,423 $ 713,297
plans)
-------------- --------------- --------------
Total Great-West 607,369 660,423 713,297
Healthcare
======================================= -------------- --------------- --------------
-------------- --------------- --------------
Financial Services:
Retirement Services 199,374 196,972 207,677
Individual Markets 33,329 26,167 26,281
======================================= -------------- --------------- --------------
Total Financial Services 232,703 223,139 233,958
======================================= -------------- --------------- --------------
Total fee income $ 840,072 $ 883,562 $ 947,255
============== =============== ==============
16. OBLIGATIONS RELATING TO DEBT AND LEASES
The Company enters into operating leases primarily for office space. As of
December 31, 2003, minimum annual rental commitments on operating leases
having initial or remaining non-cancelable lease terms in excess of one
year during the years 2004 through 2008 are $25,586, $23,564, $20,469,
$18,426 and $17,616, respectively, with $23,502 in minimum commitments
thereafter.
2004 2005 2006 2007 2008 Thereafter
-------- --------- -------- -------- -------- ----------
Related party
notes $ $ $ 25,000 $ $ $ 175,000
Operating leases 25,586 23,564 20,469 18,426 17,616 23,502
-------- --------- -------- -------- -------- ----------
Total contractual
obligations $ 25,586 $ 23,564 $ 45,469 $ 18,426 $ 17,616 $ 198,502
======== ========= ======== ======== ======== ==========
17. 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 the Company's financial position or the
results of its operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change in the Company's independent accountants or
resulting disagreements on accounting and financial disclosure.
ITEM 9A.CONTROLS AND PROCEDURES
Based on their evaluation as of December 31, 2003, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's
Disclosure Controls and Procedures are effective at the reasonable
assurance level in ensuring that information relating to the Company
which is required to be disclosed in reports filed under the Securities
Exchange Act of 1934 is (i) recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commission's rules and forms; and is (ii) accumulated and communicated
to the Company's senior management, including the President and Chief
Executive Officer and the Executive Vice President and Chief Financial
Officer, as appropriate so that timely decisions may be made regarding
disclosure.
The Chief Executive Officer and Chief Financial Officer hereby confirm
that there were no changes in the Company's internal control over
financial reporting during the fourth quarter of 2003 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. IDENTIFICATION OF DIRECTORS
Served as
Director Principal Occupation(s)
Director Age from: for last Five Years
James Balog 75 1993 Company Director
(1)(2)
James W. Burns, O.C. 74 1991 Director Emeritus, Power
(1)(2)(4) Corporation and Power Financial
Orest T. Dackow 67 1991 Company Director since April 2000;
(1)(2)(4) previously President and Chief
Executive Officer, Lifeco
Andre Desmarais, O.C. 47 1997 President and Co-Chief Executive
(1)(2)(4)(5) Officer, Power Corporation; Deputy
Chairman, Power Financial
Paul Desmarais, Jr. 49 1991 Chairman and Co-Chief Executive
(1)(2)(4)(5) Officer, Power Corporation;
Chairman,
Power Financial
Robert Gratton 60 1991 Chairman of the Board of the
(1)(2)(4) Company;
President and Chief
Executive Officer,
Power Financial;
Chairman of the Boards
of Lifeco, Great-West
Life, Canada Life and
London Life Insurance
Company
Kevin P. Kavanagh 71 1986 Company Director; Chancellor
(1)(3)(4) Emeritus, Brandon University
William Mackness 65 1991 Company Director
(1)(2)(4)
William T. McCallum 61 1990 President and Chief Executive
(1)(2)(4) Officer of
the Company; Co-President and Chief
Executive Officer, Lifeco
Jerry E.A. Nickerson 67 1994 Chairman of the Board, H.B.
(3)(4) Nickerson &
Sons Limited (a
management and holding
company)
David A. Nield 65 2003 Company Director; previously
(1)(2)(4) Chairman and Chief Executive
Officer, Canada Life
Michel Plessis-Belair, 61 1991 Vice Chairman and Chief Financial
F.C.A.(1)(2)(3)(4) Officer, Power Corporation;
Executive
Vice President and Chief Financial
Officer, Power Financial
Brian E. Walsh 50 1995 Managing Partner, QVan Capital,
(1)(2)(3) LLC (a merchant banking company)
(1)Member of the Executive Committee
(2)Member of the Investment and Credit Committee
(3)Member of the Audit Committee
(4)Also a director of Great-West Life
(5)Mr. Andre Desmarais and Mr. Paul Desmarais, Jr. are brothers.
Unless otherwise indicated, all of the directors have been engaged for
not less than five years in their present principal occupations or in
another executive capacity with the companies or firms identified.
Directors are elected annually to serve until the following annual
meeting of shareholders.
The following 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. In addition, all directors of the Company currently
serve on the board of directors of GWL&A Financial.
J. Balog Transatlantic Holdings, Inc.
P. Desmarais, Jr. SUEZ
TOTAL S.A.
W.T. McCallum Maxim Series Fund, Inc.
Orchard Series Fund
Great-West 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 61 1984 President and Chief Executive Officer
President and Chief of the Company; Co-President
Executive Officer and Chief Executive Officer,
Lifeco
Mitchell T.G. Graye 48 1997 Executive Vice President and Chief
Executive Vice Financial Officer of the Company
President and Chief
Financial Officer
Richard F. Rivers 50 2002 Executive Vice-President, Healthcare
Executive Vice President of the Company since August
Healthcare 2002; previously Senior Vice
President,
PacifiCare Health System from
August 2002; previously Chief
Operating Officer, Blue Cross/Blue
Shield Georgia
Douglas L. Wooden 47 1991 Executive Vice President, Financial
Executive Vice Services of the Company
President,
Financial Services
John A. Brown 56 1992 Senior Vice President, Healthcare Markets
Senior Vice of the Company
President,
Healthcare Markets
Charles B. Childs, Jr. 48 2003 Senior Vice President and Chief
Senior Vice Technology Officer of the Company;
President and Chief previously Associate Partner,
Technology Officer Accenture
S. Mark Corbett 44 2001 Senior Vice President,
Senior Vice Investments of the Company
President,
Investments
Glen R. Derback 52 2003 Senior Vice President and
Senior Vice Controller of the Company
President
and Controller
Terry L. Fouts 60 2003 Senior Vice President and Chief
Senior Vice Medical Officer of the Company
President and Chief since May 2003; previously National
Medical Officer Medical Director for Clinical Cost
Management, Aetna U.S. Healthcare
from May 2001; previously Global
Medical Director for Cigna
International
John R. Gabbert 49 2000 Senior Vice President and Chief
Senior Vice President Information Officer, Healthcare
and Chief of the Company since April 2000;
Information previously Vice President,
Officer, Healthcare Information
Technology, AT&T Broadband
Donna A. Goldin 56 1996 Senior Vice President, Healthcare
Senior Vice Operations of the Company
President,
Healthcare Operations
Wayne T. Hoffmann 48 2001 Senior Vice President,
Senior Vice Investments of the Company
President,
Investments
D. Craig Lennox 56 1984 Senior Vice President, General Counsel
Senior Vice and Secretary of the Company
President,
General Counsel and
Secretary
James L. McCallen 53 2003 Senior Vice President and Actuary
Senior Vice President of the Company
and Actuary
Graham R. McDonald 57 2003 Senior Vice President, Corporate
Senior Vice Administration of the Company
President,
Corporate
Administration
Charles P. Nelson 43 1998 Senior Vice President, Retirement
Senior Vice President, Services of the Company
Retirement Services
Deborah L. Origer 47 2002 Senior Vice President, Healthcare
Senior Vice President, Management of the Company since
Healthcare Management November 2002; previously Chief
Strategy Officer, Providence Health System
Martin Rosenbaum 51 1997 Senior Vice President, Healthcare Finance
Senior Vice of the Company
President,
Healthcare Finance
Gregory E. Seller 50 1999 Senior Vice President,
Senior Vice Government Markets of the Company
President,
Government Markets
Robert K. Shaw 48 1998 Senior Vice President,
Senior Vice Individual Markets of the Company
President,
Individual Markets
Mark L. Stadler 50 2003 Senior Vice President, U.S. Markets
Senior Vice President, of the Company since March 2003;
U.S. Markets previously Principal, Mercer Human
Resource
Consulting
Douglas J. Stefanson 48 2003 Senior Vice President, Healthcare
Senior Vice Underwriting of the Company
President,
Healthcare Underwriting
George D. Webb 60 1999 Senior Vice President, P/NP Operations of
Senior the Company since July 1999;
Vice-President, previously Principal, William M. Mercer
P/NP Operations Investment Consulting Inc.
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.
C. CODE OF ETHICS
The Company has adopted a Code of Business Conduct (the Code) that is
applicable to its senior financial officers, as well as to other
officers and employees. All of the items identified as elements of a
"code of ethics" as defined in SEC regulations adopted pursuant to the
Sarbanes-Oxley Act of 2002 are substantively covered by the Code. A copy
of the Code is available without charge upon written request to David C.
Aspinwall, Chief Compliance Officer, 8515 East Orchard Road, Greenwood
Village, Colorado 80111.
D. AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has reviewed the qualifications and backgrounds
of the members of the Audit Committee and determined that, although no
one member of the Audit Committee is an "audit committee financial
expert" within the meaning of the Rules under the Securities Exchange
Act of 1934, the combined qualifications and experience of the members
of the Audit Committee give the Committee collectively the financial
expertise necessary to discharge its responsibilities.
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, 2003, 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 fiscal years.
-------------------------- -------- ---------------- --------------- --------------------
Long-term
Awards
Annual Compensation
-------------------------- -------- ---------------- --------------- --------------------
Name and Year Salary Bonus Options(1)
Principal Position
($) ($) (#)
-------------------------- -------- ---------------- --------------- --------------------
W.T. McCallum 2003 903,333 915,000 ---
President and Chief 400,000(2)
Executive Officer 2002 880,000 --- ---
2001 880,000 --- ---
-------------------------- -------- ---------------- --------------- --------------------
R.F. Rivers(3) 2003 530,600 515,000 ---
Executive Vice President, 2002 185,600(4) 225,000 120,000
Healthcare 2001 N/A N/A N/A
-------------------------- -------- ---------------- --------------- --------------------
M.T.G. Graye 2003 490,000 371,250 50,000(5)
Executive Vice 200,000(2)
President, Chief 2002 457,000 237,500 ---
Financial Officer 2001 415,000 75,000 40,000
-------------------------- -------- ---------------- --------------- --------------------
D.L. Wooden 2003 568,750 200,000(2) 50,000(5)
Executive Vice President, 2002 550,000 343,750 ---
Financial Services 2001 525,000 393,750 ---
-------------------------- -------- ---------------- --------------- --------------------
Donna A. Goldin 2003 322,125 217,400 60,000
Senior Vice President, 2002 315,000 155,000 ---
Healthcare Operations 2001 315,000 36,500 ---
-------------------------- -------- ---------------- --------------- --------------------
(1)The options set out are options for common shares of Lifeco that are
granted by Lifeco pursuant to the Lifeco Stock Option Plan (Lifeco
Options). Lifeco Options become exercisable on specified dates and
expire ten years after the date of the grant.
(2)Special bonus paid in respect of the acquisition of Canada Life.
(3)Mr. Rivers joined the Company in August 2002.
(4)Mr. Rivers' annualized salary for 2002 was $500,000.
(5)These Lifeco Options are contingent upon the attainment of certain
financial targets.
B. OPTIONS
The following table describes options granted to the Named Executive
Officers during the most recently completed fiscal year. All options are
Lifeco Options granted pursuant to the Lifeco Stock Option Plan. Lifeco
Options are issued with an exercise price in Canadian dollars. Canadian
dollar amounts have been translated to U.S. dollars at a rate of 1/1.29.
OPTION GRANTS IN LAST FISCAL YEAR
--------------- ------------ ------------ -------- --------------- ------------------------
Potential realized
value
at assumed annual rates
Individual Grants of stock price
appreciation for
option term
--------------- ---------- ------------ ---------- --------------- ------------------------
Percentage
of total
options
Granted to Exercise
Options employees or base
Granted in fiscal price Expiration 5% 10%
Name (#) Year ($/share) date ($) ($)
--------------- ---------- ------------ ---------- --------------- ----------- ------------
M.T.G. Graye 50,000 2.6 30.11 July 9, 2013 946,794 2,399,315
D.L. Wooden 50,000 2.6 30.11 July 9, 2013 946,794 2,399,315
D.A. Goldin 60,000 3.1 29.21 January 29, 1,102,193 2,793,119
2013
--------------- ---------- ------------ ---------- --------------- ----------- ------------
The Great-West Lifeco Stock Option Plan was created effective April 24,
1996. The following table describes all Lifeco Options exercised in
2003, and all unexercised Lifeco Options held as of December 31, 2003,
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 1/1.29.
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 2,312,330 549,200 20,000 10,103,549 362,380
---------------- --------- ----------- ---------- ------------- ---------- -------------
R.F. Rivers --- --- 24,000 96,000 175,556 826,255
---------------- --------- ----------- ---------- ------------- ---------- -------------
M.T.G. Graye --- --- 249,334 115,667 5,770,743 1,200,278
---------------- --------- ----------- ---------- ------------- ---------- -------------
D.L. Wooden --- --- 313,334 116,667 6,484,635 1,458,610
---------------- --------- ----------- ---------- ------------- ---------- -------------
D.A. Goldin 36,000 666,847 30,000 60,000 860,976 363,385
---------------- --------- ----------- ---------- ------------- ---------- -------------
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, 2003.
-------------------------------------------- ------------------------------------------
Name Years of Service
-------------------------------------------- ------------------------------------------
W.T. McCallum 38
-------------------------------------------- ------------------------------------------
-------------------------------------------- ------------------------------------------
R.F. Rivers 1
-------------------------------------------- ------------------------------------------
-------------------------------------------- ------------------------------------------
M.T.G. Graye 10
-------------------------------------------- ------------------------------------------
-------------------------------------------- ------------------------------------------
D.L. Wooden 13
-------------------------------------------- ------------------------------------------
-------------------------------------------- ------------------------------------------
D.A. Goldin 20
-------------------------------------------- ------------------------------------------
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 R.F.
Rivers, M.T.G. Graye, D.L. Wooden, and D.A. Goldin, 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. The Company
pays all directors a meeting fee of $1,500 for each meeting of the Board
of Directors or a committee thereof attended. 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, 2004, 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)70.4% 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)67.1% 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, 2003, 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 Power Financial Power Corporation
Inc. Corporation of Canada
--------------------- ---------------------- ---------------------- -------------------
Directors (1) (2) (3)
--------------------- ---------------------- ---------------------- -------------------
J. Balog - - -
--------------------- ---------------------- ---------------------- -------------------
J.W. Burns 153,659 8,000 385,640
200,000 options
--------------------- ---------------------- ---------------------- -------------------
O.T. Dackow 81,642 - -
50,000 options
--------------------- ---------------------- ---------------------- -------------------
A. Desmarais 51,659 21,600 149,000
2,129,000 options
--------------------- ---------------------- ---------------------- -------------------
P. Desmarais, Jr. 43,659 - 17,702
2,040,000
options
--------------------- ---------------------- ---------------------- -------------------
R. Gratton 332,496 1,710,000 10,318
5,080,000 options
--------------------- ---------------------- ---------------------- -------------------
K.P. Kavanagh 10,052 - -
4,000 Preferred
(Series D)
--------------------- ---------------------- ---------------------- -------------------
W. Mackness - - -
--------------------- ---------------------- ---------------------- -------------------
W.T. McCallum 184,768 - -
569,200 options
--------------------- ---------------------- ---------------------- -------------------
J.E.A. Nickerson - 5,100 5,479
--------------------- ---------------------- ---------------------- -------------------
D.A. Nield 28,424 - -
2,777 Preferred
(Series E)
38,553 Preferred
(Series F)
--------------------- ---------------------- ---------------------- -------------------
M. Plessis-Belair 20,000 3,000 201,246
176,250 options
--------------------- ---------------------- ---------------------- -------------------
B.E. Walsh - - -
--------------------- ---------------------- ---------------------- -------------------
--------------------- ---------------------- ---------------------- -------------------
Great-West Lifeco Power Financial Power Corporation
Inc. Corporation of Canada
--------------------- ---------------------- ---------------------- -------------------
Named Executive (1) (2) (3)
Officers
--------------------- ---------------------- ---------------------- -------------------
W.T. McCallum 184,768 - -
569,200 options
--------------------- ---------------------- ---------------------- -------------------
D.L. Wooden 113,000 -
430,001 options
--------------------- ---------------------- ---------------------- -------------------
M.T.G. Graye 1,754 50,000 -
365,001 options
--------------------- ---------------------- ---------------------- -------------------
R.F. Rivers 120,000 options - -
--------------------- ---------------------- ---------------------- -------------------
D.A.Goldin 30 - -
90,000 options
--------------------- ---------------------- ---------------------- -------------------
--------------------- ---------------------- ---------------------- -------------------
Great-West Lifeco Power Financial Power Corporation
Inc. Corporation of Canada
--------------------- ---------------------- ---------------------- -------------------
Directors and (1) (2) (3)
Executive Officers
as a Group
--------------------- ---------------------- ---------------------- -------------------
1,058,194 2,281,900 770,185
2,639,808 options 5,080,000 options 4,545,250 options
4,000 Preferred
(Series D)
2,777 Preferred
(Series E)
38,553 Preferred
(Series F)
--------------------- ---------------------- ---------------------- -------------------
(1)All holdings are common shares, or where indicated, preferred shares
or exercisable options for common shares, of Great-West Lifeco Inc.
(2)All holdings are common shares, or where indicated, exercisable
options for common shares, of Power Financial Corporation.
(3)All holdings are subordinate voting shares, or where indicated,
exercisable options for subordinate voting shares, of Power
Corporation of Canada.
The number of common shares and exercisable options for common shares of
Power Financial Corporation held by R. Gratton represents 1.9% 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% 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 1.1% 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 2.6% 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.
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
A. PRINCIPAL ACCOUNTING FEES
For the years ended December 31, 2003 and 2002, professional services
were performed by Deloitte & Touche LLP (Deloitte). The total fees for
these services were $4,400,850 and $3,055,400 for the years ended
December 31, 2003 and 2002, respectively, and were composed of the
following:
Audit Fees
The aggregate fees billed for the audit of the Company's and its
subsidiaries' annual financial statements for the fiscal years ended
December 31, 2003 and 2002, and for the review of the financial
statements included in the Company's quarterly reports on Form 10-Q,
were $3,153,000 and $2,348,400, respectively.
Audit Related Fees
The aggregate fees billed for audit related services for the fiscal
years ended December 31, 2003 and 2002 were $335,750 and $296,750,
respectively. These services included "SAS 70" internal control reports
and audits of the Company's employee benefit plans.
Tax Fees
The aggregate fees billed for tax services for the fiscal years ended
December 31, 2003 and 2002 were $284,000 and $328,000, respectively.
These services included tax compliance services for the Company's
affiliated mutual funds, Maxim Series Fund, Inc. and Orchard Series
Fund, as well as tax planning and compliance services for the Company
and its subsidiaries.
All Other Fees
The aggregate fees for services not included above were $628,100 and
$82,250, respectively, for the fiscal years ended December 31, 2003 and
2002. The fees for 2003 primarily relate to a market and other analysis
in support of strategic planning by the Great-West Healthcare division,
and for both 2003 and 2002 included audits of employee benefit plans for
customers of the Company.
B. PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee pre-approves all services, including both audit and
non-audit services, provided by Deloitte. Each year, the Committee
receives a schedule of the audit, audit-related and tax services that it
is asked to approve for the year before Deloitte may be engaged.
The Committee has authorized its Chairman, in his discretion, to approve
additional services between meetings of the Committee. Such discretion
may only be exercised by the Chairman so long as he remains
"independent" for purposes of Section 301 of the Sarbanes-Oxley Act of
2002. Any approval by the Chairman must be reviewed by the Committee at
its next meeting.
None of the services described in this Item 14 were approved by the
Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation
S-X. The amount of hours expended on Deloitte's audit of the Company's
financial statements for 2003 attributable to work performed by persons
other than Deloitte's full-time, permanent employees was less than 50%.
PART IV
ITEM 15.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, 2003, 2002, and 2001..............................
Consolidated Balance Sheets as of December 31, 2003 and 2002.........................
Consolidated Statements of Income for the Years Ended December 31, 2003,
2002, and 2001.....................................................................
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 2003, 2002, and 2001..................................................
Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2002, and 2001...............................................................
Notes to Consolidated Financial Statements for the Years Ended December
31, 2003, 2002, and 2001...........................................................
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
Filed as Exhibit 10.2 to Registrant's Form 10-K
for the year ended December 31, 2001 and
incorporated herein by reference.
10.3 Supplemental Executive Retirement Plan
Filed as Exhibit 10.3 to Registrant's Form 10-K
for the year ended December 31, 1997 and
incorporated herein by reference.
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 as Exhibit 10.5 to Registrant's Form 10-K
for the year ended December 31, 2001 and
incorporated herein by reference.
10.6 Executive Long Term Disability Plan.
Filed as Exhibit 10.6 to Registrant's Form 10-K
for the year ended December 31, 2002 and
incorporated herein by reference.
10.7 Nonqualified Deferred Compensation Plan.
Filed as Exhibit 10.7 to Registrant's Form 10-K
for the year ended December 31, 2002 and
incorporated herein by reference.
21 Subsidiaries of Great-West Life & Annuity
Insurance Company filed herewith.
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.
Director's Power of Attorney for D.A.
Nield filed herewith.
C. REPORTS ON FORM 8-K
A report on Form 8-K, dated October 29, 2003, was filed disclosing
Lifeco'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 30, 2004
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 30, 2004
-----------------------------------------------------------
William T. McCallum
President and Chief Executive Officer and a Director
/s/ Mitchell T.G. Graye March 30, 2004
-----------------------------------------------------------
Mitchell T.G. Graye
Executive Vice President and Chief Financial Officer
/s/ Glen R. Derback March 30, 2004
-----------------------------------------------------------
Glen R. Derback
Senior Vice President and Controller
/s/ James Balog * March 30, 2004
-----------------------------------------------------------
James Balog, Director
/s/ James W. Burns * March 30, 2004
-----------------------------------------------------------
James W. Burns, Director
/s/ Orest T. Dackow * March 30, 2004
-----------------------------------------------------------
Orest T. Dackow, Director
/s/ Andre Desmarais * March 30, 2004
-----------------------------------------------------------
Andre Desmarais, Director
/s/ Paul Desmarais, Jr. * March 30, 2004
-----------------------------------------------------------
Paul Desmarais, Jr., Director
/s/ Robert Gratton * March 30, 2004
-----------------------------------------------------------
Robert Gratton, Chairman of the Board
/s/ Kevin P. Kavanagh * March 30, 2004
-----------------------------------------------------------
Kevin P. Kavanagh, Director
/s/ William Mackness * March 30, 2004
-----------------------------------------------------------
William Mackness, Director
/s/ Jerry E.A. Nickerson * March 30, 2004
-----------------------------------------------------------
Jerry E.A. Nickerson, Director
/s/ David A. Nield * March 30, 2004
-----------------------------------------------------------
David A. Nield, Director
/s/ Michel Plessis-Belair * March 30, 2004
-----------------------------------------------------------
Michel Plessis-Belair, Director
/s/ Brian E. Walsh * March 30, 2004
-----------------------------------------------------------
Brian E. Walsh, Director
*By:/s/ D. Craig Lennox March 30, 2004
-----------------------------------------------------------
D. Craig Lennox
Attorney-in-fact pursuant to filed Power of Attorney