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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, 2004
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition 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)
Colorado 84-0467907
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
8515 East Orchard Road, Greenwood Village, CO 80111
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(Address of principal executive offices)
(Zip Code)
(303) 737-3000
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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. [X]
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, 2004, the aggregate market value of the registrant's voting stock
held by non-affiliates of the registrant was $0.
As of March 1, 2005, 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
PART I ITEM 1. BUSINESS........................................................................................1
A. ORGANIZATION AND CORPORATE STRUCTURE............................................................1
B. BUSINESS OF THE COMPANY.........................................................................1
C. GREAT-WEST HEALTHCARE...........................................................................3
D. FINANCIAL SERVICES..............................................................................5
E. INVESTMENT OPERATIONS...........................................................................8
F. REGULATION.....................................................................................10
G. RATINGS........................................................................................12
H. MISCELLANEOUS..................................................................................12
ITEM 2. PROPERTIES.....................................................................................12
ITEM 3. LEGAL PROCEEDINGS..............................................................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................12
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................13
A. EQUITY SECURITY HOLDERS AND MARKET INFORMATION.................................................13
B. DIVIDENDS......................................................................................13
ITEM 6. SELECTED FINANCIAL DATA........................................................................13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........14
A. EXECUTIVE SUMMARY..............................................................................15
B. CRITICAL ACCOUNTING POLICIES AND ESTIMATES.....................................................15
C. COMPANY RESULTS OF OPERATIONS..................................................................17
D. GREAT-WEST HEALTHCARE RESULTS OF OPERATIONS....................................................20
E. FINANCIAL SERVICES RESULTS OF OPERATIONS.......................................................23
F. INVESTMENT OPERATIONS..........................................................................27
G. LIQUIDITY AND CAPITAL RESOURCES................................................................29
H. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS.....................................30
I. APPLICATION OF RECENT ACCOUNTING PRONOUNCEMENTS................................................31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.......................................................................72
ITEM 9A. CONTROLS AND PROCEDURES........................................................................72
ITEM 9B. OTHER INFORMATION..............................................................................72
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................72
A. IDENTIFICATION OF DIRECTORS....................................................................72
B. IDENTIFICATION OF EXECUTIVE OFFICERS...........................................................73
C. CODE OF ETHICS.................................................................................76
D. AUDIT COMMITTEE FINANCIAL EXPERT...............................................................76
ITEM 11. EXECUTIVE COMPENSATION.........................................................................77
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................................................80
A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS................................................80
B. SECURITY OWNERSHIP OF MANAGEMENT...............................................................80
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................82
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.........................................................82
A. PRINCIPAL ACCOUNTING FEES......................................................................82
B. PRE-APPROVAL POLICIES AND PROCEDURES...........................................................83
PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.....................................................83
A. INDEX TO FINANCIAL STATEMENTS..................................................................83
B. INDEX TO EXHIBITS..............................................................................83
SIGNATURES.........................................................................................86
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 United States primarily through the Company and in Canada
through The Great-West Life Assurance Company ("Great-West Life") and its
subsidiaries, London Life Insurance Company and The Canada Life Assurance
Company ("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 licensed 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 HealthcareSM - Health care plans and services for group
clients (including self-funded health plans, consumer-driven health
models, flexible spending accounts, life and disability insurance,
and dental and vision coverage).
Financial Services - Savings, 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.
Sales of new individual products in the United States by CLAC, CLICA and
CLINY were discontinued in 2003, shortly after the acquisition of CLFC by
Lifeco. On February 29, 2004 and August 31, 2004, respectively, CLAC's
and CLINY's United States group businesses, excluding medical stop-loss
policies, were sold to Jefferson-Pilot Corporation. The Company manages
CLAC's existing individual insurance and annuity business in the United
States. In connection with this management, the Company provides certain
corporate and operational administrative services for which it receives a
fee.
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 United States branch.
The Company originally recorded a reinsurance receivable in connection
with the Indemnity Reinsurance Agreement which relates to the amount due
to it 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, as defined by the agreement, on a
segregated pool of investments of CLAC's United States branch. Pursuant
to an interpretation of Statement of Financial Accounting Standards 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"), as amended, the Company has identified an embedded derivative for
its exposure to interest rate and to credit risk on the segregated pool
of investments. As this embedded derivative does not qualify for hedge
accounting, the Company's net income decreased $5.3 million and increased
$7.4 million during the years ended December 31, 2004 and 2003,
respectively.
In the third quarter of 2004, the deferred ceding commission asset and
certain policy reserve liabilities acquired as part of this reinsurance
transaction were both decreased $157 million based on the Company's final
analysis of the policy reserves acquired. CLAC's United States branch had
not previously computed policy liabilities under United States Generally
Accepted Accounting Principles, which required the Company to estimate
the amount of liabilities assumed, which was approximately $3.0 billion
at September 1, 2003. These adjustments had no material effect on the
Company's consolidated financial position or results of operations.
On February 29, 2004, CLAC recaptured the group life and health business
from the Company associated with the original Indemnity Reinsurance
Agreement dated August 31, 2003. The Company recorded an income statement
impact of $256 million of negative premium income and a change in
reserves associated with these policies. The Company recorded, at fair
value, the following at February 29, 2004, as a result of the CLAC
recapture of the group life and health business from the Company:
Assets (In thousands) Liabilities and Stockholder's Equity
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Cash $ (126,105) Policy reserves $ (286,149)
Reinsurance receivable (152,077) Policy and contract
Deferred ceding commission (29,831) claims (32,755)
Premiums in course of Policyholder funds (3,982)
collection (14,873)
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$ (322,886) $ (322,886)
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The table that follows summarizes the Company's 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.
Year Ended December 31,
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(In millions) 2004 2003 2002
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Premium Income:
Great-West Healthcare:
Group life & health $ 262 $ 838 $ 960
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Total Great-West Healthcare 262 838 960
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Financial Services:
Individual Markets 311 1,415 160
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Total Financial Services 311 1,415 160
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Total premium income $ 573 $ 2,253 $ 1,120
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Fee Income:
Great-West Healthcare:
Group life & health $ 649 $ 607 $ 660
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Total Great-West Healthcare 649 607 660
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Financial Services:
Retirement Services 227 200 197
Individual Markets 40 33 26
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Total Financial Services 267 233 223
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Total fee income $ 916 $ 840 $ 883
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Year Ended December 31,
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(In millions) (1) 2004 2003 2002
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Deposits for investment-type contracts -
Financial Services (2) $ 711 $ 676 $ 691
Deposits to Separate Accounts -
Financial Services $ 1,979 $ 2,217 $ 2,461
Self-funded equivalents -
Great-West Healthcare (3) $ 4,706 $ 4,674 $ 5,228
(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 Statement of Financial
Accounting Standards 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 health maintenance organization ("HMO")
programs.
C. GREAT-WEST HEALTHCARE
1. Principal Products
The Great-West Healthcare segment provides services for approximately
5,200 employers. It is a national employee benefits provider with
expertise in self-funding and creative health care management solutions.
Under self-funded arrangements, the employer assumes all or a significant
portion of the insurance risk. For companies with better than average
claims experience, this arrangement can result in significant health care
cost savings.
The Great-West Healthcare division operations are organized in the
following market segments: (i) select markets, focusing on employers with
50-250 employees; (ii) mid-market, focusing on employers with 250-2,500
employees; (iii) national accounts, focusing on employers with over 2,500
employees and (iv) specialty-risk, a market segment exploring business
opportunities outside the Company's typical target markets, such as third
party administrator partnerships.
In 2003, the Company adopted the new brand name, "Great-West Healthcare,"
which refers to all employee benefit products and services offered by the
Company and its subsidiaries. The new name has been successful in
eliminating market confusion over different carriers and networks.
Efforts to enhance brand awareness continue. The theme of the Company's
new targeted advertising campaign introduced in 2004, "New Ideas From the
Frontier of Health Care," communicates a strategy for delivering
innovative, affordable benefits plans to businesses.
The Company provides employers in the United States with a comprehensive
line of employee benefits products and services, including health plans,
flexible spending account administration plans (established pursuant to
Internal Revenue Code ("IRC") Sections 125 and 129), dental and vision
plans, life insurance benefits and short- and long-term disability
coverage.
The Company offers a range of health coverage options, including
traditional and managed care plan designs, consumer-driven health plans
and tiered benefit options. The Company continues to reduce its focus on
HMO products in most markets.
The Company also offers health reimbursement accounts ("HRA"). With an
HRA, employers contribute a specified annual amount for each employee to
spend on health care expenses. Funds remaining in an account at the end
of the year can be rolled over for future use.
All products include state-of-the-art cost and care management
procedures, as well as comprehensive networks that help ensure quality
health care. Medical management programs are offered to complement each
health plan the Company offers. The Company's disease management program
services enroll members with asthma, diabetes, cardiac, cancer, neonatal
and other conditions. In addition, the Company provides a nurse hotline
and online educational and comparison tools to help members manage their
health care and make medically and financially sound treatment choices.
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 at December 31 for each of the years
indicated:
December 31,
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(In millions) 2004 (1) 2003 (2) 2002 (3) 2001 (4) 2000
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Life insurance
in force $ 49,244 $ 102,721 $ 58,572 $ 66,539 $ 96,311
(1) The insurance in force at December 31, 2004 reflects the
recapture by CLAC during 2004 of certain group life
business it ceded to the Company in 2003.
(2) The insurance in force at December 31, 2003 reflects
the ceding to the Company by CLAC of certain life business.
(3) The insurance in force at December 31, 2002 was
influenced by a related decline in health care membership.
(4) The insurance in force at December 31, 2001 was
influenced by a related decline in health care
membership and a decision by the Company 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, 2004, 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.
Additionally, the Company is expanding its distribution channels to
include third party administrators through its specialty-risk group.
3.Competition
The employee benefits industry is highly competitive. The 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 considerations, there are a number of other factors
that influence employer decision making. These factors include: the
quality of services; size, cost-effectiveness and the quality of provider
networks; product responsiveness to customer 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 waiver of premium on account of
disability and paid up group whole life contracts, 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, 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 used for mortality and morbidity experience are periodically
reviewed against published industry data and the Company's 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 enters into reinsurance transactions as both a provider and a
purchaser of reinsurance. When purchasing 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. Under the terms of these contracts,
the reinsurer agrees to reimburse the Company for the ceded amount in the
event a claim is paid. However, the Company remains liable to its
policyholders with respect to the ceded insurance if a reinsurer fails to
meet the obligations it has assumed. Accordingly, the Company only cedes
insurance to highly rated, well-capitalized companies. The maximum amount
of group life insurance retained on any one life or for accidental death
coverage is $600,000. The maximum amount of group disability income
benefit at risk on any one life is $6,000 per month.
The Company entered into a reinsurance agreement during the third quarter
of 2003 with Allianz Risk Transfer (Bermuda) Limited ("Allianz") to cede
90% in 2003 and 75% in 2004 of direct written group health stop-loss and
excess-loss business. This Allianz agreement was retroactive to January
1, 2003.
On February 29, 2004, CLAC recaptured the group life and health business
from the Company associated with the original August 31, 2003, Indemnity
Reinsurance Agreement.
D. FINANCIAL SERVICES
1.Principal Products
The Financial Services business segment of the Company develops and
administers products under two general categories: Great-West Retirement
ServicesSM and Individual Markets. These areas distribute retirement and
life insurance products and services for public, private and non-profit
employers, corporations and individuals.
Great-West Retirement Services
In 2003, the Retirement Services area launched the new brand name,
"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, an 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 IRC 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 contribution plans may also be provided to this
target market. Through a subsidiary, Financial Administrative Services
Corporation, 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, 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 its
general account and the interest credited to the participant's account
balance. The Company's general account assets support the guaranteed
investment product. The Company also manages separate account fixed
interest rate options where it 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/or 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 as well as other factors such as size of the
prospective group, projected annual contributions for all participants in
the group, frequency of projected withdrawals, type and frequency of
administrative and sales services provided, level of other charges, type
and level of communication services provided, and number and type of
plans. Existing federal tax penalties on distributions prior to age 59
1/2 provide an additional disincentive to premature surrenders of
balances held under the group annuity contract, 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 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 Company's consolidated balance sheets. Participating
policyholder earnings are not included in the Company's consolidated net
income.
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. These expenses are shown as deferred policy
acquisition costs in the Company's consolidated balance sheets.
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). In 2004, the operational units and systems of
Canada Life were fully integrated into Individual Markets in order to
support retention efforts.
In 2004, 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, US Bank, Citibank, SunTrust Bank,
AmSouth Bank and Colonial Bank.
At December 31, 2004 and 2003, the Company had $4.2 billion and $3.8
billion, respectively, of policy reserves on individual insurance
products sold to corporations to provide coverage on the lives of certain
employees, also known as Corporate-Owned Life Insurance ("COLI"). Due to
legislation enacted during 1996 that phased out the interest deductions
on COLI policy loans over a two-year period ending 1998, leveraged COLI
product sales have ceased.
The Company has shifted its emphasis from COLI to the Business-Owned Life
Insurance ("BOLI") market. BOLI was not affected by the aforementioned
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
benefit plans. At December 31, 2004, the Company had $1.6 billion of
fixed and $1.6 billion of separate account BOLI policy reserves, compared
to $1.5 billion of fixed and $1.5 billion of separate account reserves at
December 31, 2003.
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.
Certain of the Company's life insurance and group annuity products allow
policy owners to borrow against their policies. At December 31, 2004,
approximately 10% (also 10% in both 2003 and 2002) 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 6.13% at December 31, 2004. Investment
income from policy loans was $203.1 million, $195.6 million and $209.6
million for the years ended December 31, 2004, 2003 and 2002,
respectively.
2.Method of Distribution
The Great-West Retirement Services area distributes pension products
through its subsidiary, GWFS Equities, Inc., as well as over 270 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
primarily distributed through Clark Consulting and SunTrust Bank.
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, 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 1G, Ratings.
4.Reserves
Reserves for investment-type policies (deferred annuities and 401(k)) are
equal to cumulative deposits, less withdrawals and mortality and expense
and/or administrative service 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 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 enters into reinsurance transactions as both a provider and a
purchaser of reinsurance. When purchasing 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. Under the terms of
these contracts, the reinsurer agrees to reimburse the Company for the
ceded amount in the event a claim is paid. However, the Company remains
liable to its policyholders with respect to the ceded insurance if a
reinsurer fails to meet the obligations it assumed. Accordingly, the
Company only cedes insurance to highly rated, well-capitalized companies.
The Company retains a maximum of $3.5 million of coverage per individual
life.
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 United States branch.
E. INVESTMENT OPERATIONS
The Company's investment division manages and administers its general and
separate accounts in support of the cash and liquidity requirements of
its insurance and investment products. The Company's principal
investments are in fixed maturities and mortgage loans on real estate,
all of which are exposed to three primary sources of investment risk:
credit; interest rate and market valuation. Total investments at December
31, 2004, were $33.8 billion, comprised of general account assets of
$19.6 billion and separate account assets of $14.2 billion. 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.
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 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 its 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 such as
variability in cash flows or changes in the fair value of an asset or a
liability. 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 Company's 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 general
account investment assets as of December 31, 2004. The Company reduces
credit risk for the portfolio as a whole by investing primarily in
investment grade fixed maturities. As of both December 31, 2004 and 2003,
97% of the fixed maturity portfolio carried an investment grade rating.
The Company's equity investments increased from 2% of its investment
assets at December 31, 2003, to 3% at December 31, 2004. The Company
increased its investments in various limited partnerships and limited
liability companies that make equity investments in affordable-housing
projects throughout the United States by approximately $87 million. These
investments generate tax credits as their principal source of investment
return. In addition, the Company maintained an investment in an
exchange-traded fund investing in debt securities. The investment
represents approximately 31% of the equity investments at both December
31, 2004 and December 31, 2003. This investment provides both liquidity
and diversification at relatively low risk levels. The fund has an
investment grade debt rating.
The Company's mortgage loans on real estate portfolio constituted 8% and
10% of investment assets as of December 31, 2004 and 2003, respectively.
At December 31, 2004, 18% of investment assets were invested in policy
loans and 4% were invested in short-term investments compared to 17% and
4%, respectively, at December 31, 2003.
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:
(In millions) December 31,
------------- ----------------------------------------------------------------------------
Carrying Value 2004 2003 2002 2001 2000
---------------------------- ------------ ------------ ------------ ------------ ------------
Debt Securities:
U.S. government and
agencies direct
obligations $ 3,154 $ 3,199 $ 2,710 $ 3,075 $ 2,315
Bonds 10,045 9,880 7,618 7,013 7,055
Foreign governments 16 58 43 28 50
------------ ------------ ------------ ------------ ------------
Total debt securities 13,215 13,137 10,371 10,116 9,420
Other Investments:
Equity investments 637 428 90 73 95
Mortgage loans 1,544 1,894 421 625 950
Policy loans 3,548 3,389 2,964 3,001 2,810
Short-term
investments 709 852 710 425 414
------------ ------------ ------------ ------------ ------------
Total investments $ 19,653 $ 19,700 $ 14,556 $ 14,240 $ 13,689
============ ============ ============ ============ ============
Cash $ 111 $ 151 $ 155 $ 214 $ 154
Accrued investment
income 159 165 133 131 139
The following table summarizes the Company's general account investment
results:
(In millions) Earned Net
-------------
Year Ended December 31, Net Investment Income Investment Income Rate
--------------------------------- ----------------------------------- ---------------------------------
2004 $ 1,033 5.37 %
2003 988 6.23 %
2002 919 6.79 %
2001 935 7.10 %
2000 925 7.34 %
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 (the "CDOI") and other regulators at
specified intervals. Most recently, 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 findings regarding the
Company.
The National Association of Insurance Commissioners (the "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, 2004, 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 (the "Codification"). Codification was intended to standardize
accounting and reporting to state insurance departments. However,
statutory accounting principles will continue to be established by
individual state laws and permitted practices. The CDOI requires, with
certain modifications, statutory financial statements to be prepared
under the provisions of the Codification.
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 (the "SEC") and the National
Association of Securities Dealers, Inc. The SEC regulates the Company's
investment adviser subsidiaries and its transfer agent subsidiary.
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, 2004 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
$1.6 million at December 31, 2004.
5.Potential Legislation
United States federal and state legislative and regulatory developments
could significantly and adversely affect the Company's health and
retirement services business. Congress continues to consider changes to
various aspects of retirement plans and health care coverage.
It is impossible 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 the closing, several of the rating agencies 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
Ratings Services lowered the financial strength rating of the Company by
one rating notch. The Company's financial strength ratings as of the date
of this filing are as follows:
Rating Agency Measurement Current Rating
------------------------------------- -------------------------------------- ----------------------
A.M. Best Company, Inc. Financial strength, operating A+ (1)
performance and
business profile
Fitch Ratings Financial strength AA+ (2)
Moody's Investors Service Financial strength Aa3 (3)
Standard & Poor's Ratings Services 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 2004, 2003 or 2002. 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 it or either of its business
segment's operations. 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 either of its business segments.
The Company had approximately 6,200 employees at December 31, 2004.
ITEM 2. PROPERTIES
The corporate office of the Company consists of a 752,000 square foot
complex located in Greenwood Village, Colorado. The Company owns its
corporate office facilities. 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 to a vote of security holders during the fourth
quarter of 2004.
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 $163.2
million and $75.7 million in the years ended December 31, 2004 and 2003,
respectively.
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 Company's own securities.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain consolidated financial information
for the Company. This summary has been derived in part from, and should
be read in conjunction with, the Company's audited consolidated financial
statements for the years indicated and Item 1, Part B, regarding the
acquisition of CLICA and CLINY and the reinsurance agreement with CLAC.
Note 1 to the consolidated 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.
Year Ended December 31,
------------------------------------------------------------------------
(In millions) 2004 2003 2002 2001 2000
------------- ----------- ----------- ------------ ----------- -----------
Income Statement Data
---------------------
Premium income $ 573 $ 2,253 $ 1,120 $ 1,203 $ 1,332
Fee income 916 840 884 947 872
Net investment income 1,033 988 919 935 925
Net realized investment
gains 58 40 42 47 28
----------- ----------- ------------ ----------- -----------
Total revenue 2,580 4,121 2,965 3,132 3,157
----------- ----------- ------------ ----------- -----------
Policyholder benefits 1,136 2,684 1,593 1,696 1,746
Operating expenses 968 965 958 1,021 1,018
----------- ----------- ------------ ----------- -----------
Total benefits and
expenses excluding
special charges 2,104 3,649 2,551 2,717 2,764
----------- ----------- ------------ ----------- -----------
Income from operations
excluding special
charges 476 472 414 415 393
Income tax expense 150 154 130 141 134
----------- ----------- ------------ ----------- -----------
Net income before
special charges 326 318 284 274 259
Special charges, net 81
----------- ----------- ------------ ----------- -----------
Net income $ 326 $ 318 $ 284 $ 193 $ 259
=========== =========== ============ =========== ===========
Year Ended December 31,
------------------------------------------------------------------------
(In millions) 2004 2003 2002 2001 2000
------------- ----------- ----------- ------------ ----------- -----------
Deposits for investment-
type contracts $ 711 $ 676 $ 691 $ 627 $ 835
Deposits to separate
accounts 1,979 2,217 2,461 3,240 3,105
Self-funded premium
equivalents 4,706 4,674 5,228 5,721 5,181
(In millions) Year Ended December 31,
------------- ------------------------------------------------------------------------
Balance Sheet Data 2004 2003 2002 2001 2000
------------------------------- ----------- ----------- ------------ ----------- -----------
Investment assets $ 19,653 $ 19,700 $ 14,556 $ 14,240 $ 13,689
Separate account assets 14,155 13,175 11,338 12,585 12,381
Total assets 37,041 36,610 27,656 28,818 27,897
Total policy benefit
liabilities 18,942 19,703 13,007 12,931 12,825
Due to The Great-West
Life Assurance
Company 27 31 34 42 43
Due to GWL&A
Financial Inc. 194 176 171 215 171
Total shareholder's
equity 2,044 1,887 1,664 1,470 1,427
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 its
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 its 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. This discussion should be read in
conjunction with the Company's consolidated financial statements included
in Item 8.
Management's discussion and analysis of financial condition and results
of operations of the Company for the three years ended December 31, 2004
follows. This management discussion and analysis should be read in
conjunction with the financial data contained in Item 6, Selected
Financial Data, and in Item 8, Financial Statements and Supplementary
Data.
A. EXECUTIVE SUMMARY
The Company and its subsidiaries are providers of insurance and other
financial service products to a large spectrum of individual, corporate,
institutional and governmental customers. The Company offers life
insurance and annuities to individuals, while corporations and other
institutions are offered group life and health insurance, retirement and
savings products and services.
The Company is organized into two business segments: Great-West
Healthcare and Financial Services. There is no legal separation of the
two segments. To separately assess and reflect the financial performance
of the two segments, the Company has allocated all of its assets,
liabilities and earnings between them. The segments are accounted for and
analyzed as if they were separate entities. For this purpose, corporate
and other overhead expenses are allocated between the two segments.
In assessing the performance of the Great-West Healthcare segment,
management considers its profitability and the level of membership
(number of individuals covered under health contracts with employers) to
be its primary points of focus. Increased membership is expected to
improve the Company's ability to obtain health care provider network
discounts, which will enable it to enhance pricing competitiveness and
earnings.
In the highly competitive health care marketplace, employers often
regularly seek competitive bids to obtain better pricing as well as
varied product choices to meet their employees' differing needs. In many
cases, it is more cost effective and efficient for an employer to
contract with a carrier that offers multiple product lines and
centralized administration. The Great-West Healthcare segment continues
to focus on its consumer driven product portfolio in addition to
improving programs that benefit members and deliver cost savings to
employers.
During 2005, the Company plans to continue to introduce innovative
products, increase health care membership to obtain better provider
network discounts, improve retention and increase its customer and
partnership base. A new advertising campaign, "New Ideas From the
Frontier of Health Care," is underway.
In assessing the performance of the Financial Services segment,
management considers the ability to continue to expand its presence in
the United States defined contribution and institutional insurance
markets to be its primary points of focus. The life insurance, savings
and investments marketplace is also highly competitive. Competitors
include mutual fund companies, insurance companies, banks, investment
advisors and certain service and professional organizations.
During 2004, the integration of the United States business blocks of
Canada Life with those of the Company was successfully completed. The
following support activities have been centralized at the Company's
headquarters in Greenwood Village: asset/liability management; accounting
services; financial reporting; human resources; investment operations;
information systems; legal and actuarial services. Significant synergies
and economies of scale have been realized and will continue to be
realized.
At the close of 2004, qualitative research was completed by the
Individual Markets area to help formulate plans for new product
development and to begin laying the groundwork for electronic signatures
on applications for online prospects. A pilot program for electronic
signatures is scheduled for implementation in 2005, under which customers
may execute applications and other documents using their computer,
without the need for a manual signature.
B. 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 significant 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 its 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 - The Company's liability for
contract and policy benefits is the largest liability included in its
consolidated balance sheets. They represented 54.1% and 56.7% of total
liabilities at December 31, 2004 and 2003, respectively. 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. If actual experience is different than estimated,
adjustments to such reserves may be required. Annuity contract reserves
without life contingencies are established at the contractholder's
account value.
Reinsurance - The Company enters into reinsurance transactions as both a
provider and a purchaser of reinsurance. Policy reserves ceded to other
insurance companies are carried as reinsurance receivable on the
Company's consolidated balance sheets. 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. Ceded reinsurance contracts do not
relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations under these contracts 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 defaults. 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 $3.5 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 the Company's prior experience.
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 amounts
receivable related to uninsured accident and health plan claims paid on
behalf of policyholders, premiums in course of collection and to absorb
credit losses on its impaired mortgage loans. Management's judgment is
based on past loss experience and current and projected economic
conditions and, as relates to mortgages, extensive situational analysis
of each individual loan. The measurement of impaired loans is based on
the fair value of the collateral. Because receivables from policyholders
are not subject to concentration in individual companies, general
economic trends and the Company's operating practices can impact the
adequacy of allowances for such receivables. Individual mortgage and
related collateral characteristics have a more pronounced impact on the
ultimate adequacy of the allowance for mortgage loans.
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. The recoverability of such costs is dependent upon the
future profitability of the related business. Deferred costs associated
with 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, which can be affected by
such factors as investment yield, realized investment gains and losses,
and policyholder retention. 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
A large portion of the Company's invested assets is stated at fair value
in its consolidated balance sheets based on quoted market prices.
However, when such information is not available, fair value is estimated.
The estimated fair values of financial instruments have been determined
using available information and established 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. The fair value of approximately 39% of the Company's fixed
maturity investments at December 31, 2004 are valued using these type
estimates.
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.
C. COMPANY RESULTS OF OPERATIONS
Year ended December 31, 2004 compared with the year ended December 31,
2003
Consolidated Results
Net Income
The Company's consolidated net income increased $8 million or 2.5% to
$326 million for the year ended December 31, 2004 from $318 million in
2003. The net income increase reflects a $32 million increase from the
Financial Services segment, partially offset by a decrease of $24 million
from the Great-West Healthcare segment. The Great-West Healthcare segment
experienced a combination of weaker morbidity results primarily from
lower customer deficit recoveries and a decrease in premium income,
partially offset by an increase in fee income. The Financial Services
segment increase reflected higher fee income and improved margins on
invested assets. In addition, the Financial Services segment included the
results of CLFC businesses for twelve months in the year ended December
31, 2004, compared with less than six months in 2003.
Revenues
In the year ended December 31, 2004, total revenues decreased $1.5
billion or 37.4% to $2.6 billion when compared to the year ended December
31, 2003. The decrease in revenues in 2004 was primarily the result of
the effect of the one-time increase of $1,427 million to premium revenue
in 2003 related to the CLAC Indemnity Reinsurance Agreement. Also, the
group life and health portion of this reinsurance agreement was
recaptured by CLAC on February 29, 2004, as previously discussed. The
Company recorded an income statement impact of $256 million of negative
premium income and change in reserves associated with these policies.
Fee income is derived from the management of separate account assets, the
administration of group health administrative services only business and
third party administration fees. Fee income in 2004 was comprised of
Great-West Healthcare fee income and Financial Services fee income of
$649 million and $267 million, increases of 6.9% and 14.5%, respectively,
when compared to 2003. Administrative fees also include the impact of
increased pharmacy benefit management revenue due to higher utilization
combined with favorable contract amendments.
Net investment income increased by $45 million to $1,033 million during
the year ended December 31, 2004 when compared to 2003. The increase was
primarily the result of the inclusion of CLFC's business for twelve
months for the year ended December 31, 2004 compared with less than six
months in 2003. This increase was partially offset by generally lower
interest rates and the impact of the change in the embedded derivative on
CLFC funds withheld which decreased investment income by $27.4 million in
2004 compared to 2003.
Benefits
Benefit expenses include amounts paid or credited to policyholders,
changes in policy liabilities, claims, surrenders and annuity and
maturity payments. Total benefits decreased $1.5 billion or 57.7% in the
year ended December 31, 2004 when compared to 2003. The decrease was
primarily attributed to the one-time adjustment increasing benefit
reserves in 2003 associated with the CLAC Indemnity Reinsurance
Agreement, and its subsequent group life and health recapture on February
29, 2004, as mentioned above.
Expenses
Operating expenses include general and administrative expenses,
commissions and premium taxes. Total operating expenses remained stable,
increasing $3.0 million to $968 million in the year ended December 31,
2004 when compared to 2003.
Income tax expense decreased $4 million or 2.6% in the year ended
December 31, 2004 when compared to 2003. This decrease was primarily due
to the decrease in the Company's 2004 effective tax rate, from 32.6% to
31.5% in the years ended December 31, 2003 and 2004, respectively, which
resulted primarily from tax credits realized from investments in low
income housing assets.
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 increased $35 million or 5.2% in
the year ended December 31, 2004 when compared to 2003. The increase was
primarily attributable to a net increase in participant accounts in the
retirement products area in 2004.
Deposits for separate accounts decreased $238 million or 10.7% in the
year ended December 31, 2004 when compared to 2003. This decrease is
primarily due to a combination of decreased sales of institutional
annuity and insurance products partially offset by significant increases
in the sales of the BOLI product line.
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.
Self-funded premium equivalents increased $32 million or 0.7% in the year
ended December 31, 2004 when compared to 2003. This increase was
primarily due to an overall increase in membership during 2004.
Other
The Company's Great-West Healthcare segment entered into a reinsurance
agreement during the third quarter of 2003 with Allianz to cede 75% in
2004 and 90% in 2003 of direct written group health stop-loss and
excess-loss business. This Allianz agreement was retroactive to January
1, 2003.
Year ended December 31, 2003 compared with the year ended December 31,
2002
Consolidated Results
Net Income
The Company's consolidated net income increased $34 million or 12% to
$318 million for the year ended December 31, 2003 from $284 million in
2002. The net income increase reflects a $10 million increase as a result
of the Canada Life acquisition in July 2003, 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.
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.
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.
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, increased $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.
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 primarily to the reinsurance agreement with
Allianz and a decrease of $51 million in the Financial Services 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 medical membership.
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. The 2003 effective tax rate differs from the corporate
tax rate of 35% primarily due to a reduction in a tax contingency and
certain investment income not being subject to federal income tax.
Deposits for Investment-Type Contracts, Deposits to Separate Accounts and
Self-Funded Equivalents
Deposits for investment-type contracts were relatively unchanged in 2003
when compared to 2002.
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.
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 medical membership.
Other
The Company's Great-West Healthcare segment entered into a reinsurance
agreement during the third quarter of 2003 with 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.
D. GREAT-WEST HEALTHCARE RESULTS OF OPERATIONS
Year ended December 31, 2004 compared with the year ended December 31,
2003
The following is a summary of certain financial data of the Great-West
Healthcare segment:
T
(In millions) Year Ended December 31,
-------------
Income Statement Data 2004 2003 Percent Change
------------------------------------- ----------------- ----------------- --------------------
Premiums $ 262 $ 838 (68.7%)
Fee income 649 607 6.9%
Net investment income 47 72 (34.7%)
Net realized investment gains 15 11 36.4%
----------------- ----------------- --------------------
Total revenue 973 1,528 (36.3%)
----------------- ----------------- --------------------
Policyholder benefits 68 568 (88.0%)
Operating expenses 681 699 (2.6%)
----------------- ----------------- --------------------
Total benefits and expenses 749 1,267 (40.9%)
----------------- ----------------- --------------------
Income from operations 224 261 (14.2%)
Income tax expense 75 88 (14.8%)
----------------- ----------------- --------------------
Net income $ 149 $ 173 (13.9%)
================= ================= ====================
Self-funded premium equivalents $ 4,706 $ 4,674 0.7%
The Great-West Healthcare segment net income decreased $24 million or
13.9% to $149 million for the year ended December 31, 2004 from $173
million in 2003. The decrease was primarily due to lower premium income
and weaker morbidity results in the Select and Mid-Market market
segments.
Excluding premium and fee income associated with the CLAC reinsurance and
the Allianz reinsurance, premium and fee income decreased $5.4 million or
0.4% in 2004 when compared to 2003. The decrease is primarily due to
lower membership levels during the first few months of 2004. The
decreases in early 2004 were offset by increased sales and membership
later in the year. Additionally, this decrease was partially offset by
increased revenues associated with the pharmacy benefit management
contract, which resulted from greater utilization and certain favorable
contract amendments during 2004.
The Great-West Healthcare segment net investment income decreased by $25
million to $47 million for the year ended December 31, 2004 when compared
to 2003. The decrease is attributed to a reduction in the net earned rate
on investments from 6.23% in 2003 to 5.37% in 2004 and the reduction in
investment assets associated with the recapture of the CLAC group life
and health business.
Self-funded premium equivalents increased $32 million or 0.7% to $4,706
million in 2004 when compared to 2003 as a result of increased
membership.
Excluding benefits and expenses associated with the CLAC reinsurance and
the Allianz reinsurance, total benefits and expenses increased $15.7
million or 1.2% to $1,305 million in 2004 when compared to 2003.
Increased utilization, higher medical costs, accelerated claims payments
and lower customer deficit recoveries have contributed to higher health
claims. In addition, there were higher commissions on increased sales and
program amendments.
Excluding customers associated with Canada Life, the Great-West
Healthcare segment experienced a net increase of 3.8% or 186 group health
care customers (employer groups) during 2004. There was an 8.9% increase
in total health care membership from 1.856 million at the end of 2003 to
2.021 million at year-end 2004. Point of service ("POS") and HMO members
decreased 6.5% from approximately 244,000 at December 31, 2003 to
approximately 228,000 at December 31, 2004.
The overall increase in membership is primarily the result of improved
persistency, increased sales productivity and an enhanced product
portfolio. The persistency increase from 74.1% at December 31, 2003 to
82.2% at December 31, 2004 is the result of more competitive pricing of
renewals and increased service efforts.
Year ended December 31, 2003 compared with the year ended December 31,
2002
The following is a summary of certain financial data of the Great-West
Healthcare segment:
(In millions) Year Ended December 31,
-------------
Income Statement Data 2003 2002 Percent Change
--------------------------------------------- ----------------- ----------------- --------------------
Premiums $ 838 $ 960 (12.7%)
Fee income 607 660 (8.0%)
Net investment income 72 68 5.9%
Net realized investment gains 11 9 22.2%
----------------- ----------------- --------------------
Total revenue 1,528 1,697 (10.0%)
----------------- ----------------- --------------------
Policyholder benefits 568 762 (25.5%)
Operating expenses 699 732 (4.5%)
----------------- ----------------- --------------------
Total benefits and expenses 1,267 1,494 (15.2%)
----------------- ----------------- --------------------
Income from operations 261 203 28.6%
Income tax expense 88 67 31.3%
----------------- ----------------- --------------------
Net income $ 173 $ 136 27.2%
================= ================= ====================
Self-funded premium equivalents $ 4,674 $ 5,228 (10.6%)
The Great-West Healthcare segment net income increased $37 million or 27%
to $173 million for the year ended December 31, 2003 from $136 million in
2002. The increase was primarily due to improved aggregate and specific
stop-loss morbidity. The CLAC reinsurance agreement contributed $3
million to net income in 2003.
Excluding premium and fee income associated with the CLAC reinsurance and
the 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 the CLAC
reinsurance and the Allianz reinsurance, total benefits and expenses
decreased $206 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 medical membership.
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.
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
approximately 346,900 in 2002 to approximately 244,000 in 2003.
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 continues to
change. An enhanced product portfolio, increased sales productivity and
improved case persistency has helped drive membership growth during 2004
despite this changing environment.
The Company continues to reduce its focus on its HMO products in most
markets. Great-West Healthcare Consumer AdvantageSM, a consumer-driven
tiered benefits product that was introduced during 2003, has proven to be
successful. This first-to-market consumer-driven PPO provides employers
with a more affordable option than a traditional plan design and engages
employees in health care decisions. The new plan distinguishes between
three basic tiers of services: preventive care services; catastrophic
services and routine or scheduled services, with different coverage
levels for each tier.
Also strengthening the Company's consumer-driven product portfolio is the
development of a Health Savings Account ("HSA") for employer-sponsored
health plans. This new offering pairs a high-deductible health plan
administered by Great-West Healthcare with an HSA administered by an
outside third party. These innovative product offerings are critical to
the continued success of this business. The Company will continue to
explore further innovations in the consumer-driven product area.
The Great-West Healthcare segment continues to focus on programs that
benefit members and deliver savings to employers. By expanding the out of
network coverage program, members were offered discounts on services from
thousands of additional providers outside the proprietary network. The
expanded partnership with Express Scripts, Inc. for pharmacy benefit
management will enhance pricing and increase pharmaceutical options in
2005.
Efforts surrounding provider re-contracting and additional disease
management programs will continue to enhance the Company's medical cost
and market positions. These efforts are key elements in controlling
health care costs for clients and members. The Company's disease
management programs focus on asthma, cancer, diabetes, emphysema, heart
disease and premature births. These programs benefit employers and
members by reducing hospitalization costs, employee absences and
increasing productivity. To further enhance the disease management
programs and increase participation, Great-West Healthcare contracted
with CorSolutions, Inc. ("CorSolutions"), the nation's leading provider
of health intelligence solutions. CorSolutions assists with data
analysis, risk assessment and predictive modeling for client groups and
provides an interactive health and wellness website for members. This
service is expected to provide additional growth and revenue in the
coming year.
Great-West Healthcare is also expanding its specialty-risk market group.
In this market, selected third party administrators sell the Company's
stop-loss service and offer their clients access to the Company's
provider network and medical management services. In 2004, Great-West
Healthcare entered into such an arrangement with Acordia National, one of
the nation's largest third party administrators. Great-West Healthcare
continues to explore alternative distribution and delivery channels to
enhance growth.
E. FINANCIAL SERVICES RESULTS OF OPERATIONS
Year ended December 31, 2004 compared with the year ended December 31,
2003
The following is a summary of certain financial data of the Financial
Services segment:
(In millions) Year Ended December 31,
-------------
Income Statement Data 2004 2003 Percent Change
--------------------------------------------- ---------------- ----------------- --------------------
Premiums $ 311 $ 1,415 (78.0%)
Fee income 267 233 14.6%
Net investment income 987 916 7.8%
Net realized investment gains 43 29 48.3%
---------------- ----------------- --------------------
Total revenue 1,608 2,593 (38.0%)
---------------- ----------------- --------------------
Policyholder benefits 1,067 2,116 (49.6%)
Operating expenses 288 267 7.9%
---------------- ----------------- --------------------
Total benefits and expenses 1,355 2,383 (43.1%)
---------------- ----------------- --------------------
Income from operations 253 210 20.5%
Income tax expense 76 65 16.9%
---------------- ----------------- --------------------
Net income $ 177 $ 145 22.1%
================ ================= ====================
Deposits for investment-type
contracts $ 711 $ 676 5.2%
Deposits to separate accounts 1,979 2,217 (10.7%)
Effective July 10, 2003, the Company acquired CLICA and CLINY. The
results of operations for the life insurance and annuity business of
these subsidiaries have been included in the results of the Financial
Services segment for the year ended December 31, 2004 and the period from
July 10 through December 31, 2003. In addition, under the terms of the
Indemnity Reinsurance Agreement, as previously discussed, the results of
operations of certain life insurance and annuity business of the United
States branch of CLAC were included in the results of the Financial
Services segment for twelve months and four months for the years ended
December 31, 2004 and 2003, respectively. Under the terms of this
reinsurance agreement, on August 31, 2003, the Financial Services segment
recorded a one-time increase in premiums and reserves in the amount of
$1,174 million.
The Financial Services segment net income increased $32 million or 22.1%
to $177 million for the year ended December 31, 2004 from $145 million in
2003. The increase in this segment's earnings was the result of a
combination of the inclusion of Canada Life in the Individual Markets
line of business for the full twelve months of 2004 and higher fee income
and improved investment margins on invested assets transferred from
variable rate to fixed rate products within Great-West Retirement
Services.
Total premiums, including deposits to investment-type contracts and
deposits to separate accounts, but excluding the one-time CLAC adjustment
of $1,174, mentioned above, decreased $133 million or 4.2% in 2004.
Premiums and deposits decreased $38 million in the Individual Markets
area where the Company has experienced negligible sales of the
institutional annuity and insurance product in 2004. The remaining
difference was due to lower cash flows in 2004 on the variable annuity
products driven by lower single premium deposits or rollovers in the
Great-West Retirement Services area from new plans.
Variable fee income fluctuates with changes in the United States 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, 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 record keeping services fluctuate with the
number of participants and with services provided.
Fee income in 2004 increased $34 million or 14.6%. Fee income represents
a combination of variable fee income from separate accounts, fee income
charged on fixed investment options for mortality and expense risks
and/or administrative services, as well as fees for third-party
administrative and record keeping services to financial institutions and
employer-sponsored retirement plans.
Great-West Retirement Services participant accounts, including
third-party administration and institutional accounts, increased 9.9% in
2004 from 2.274 million at December 31, 2003 to 2.498 million at December
31, 2004.
During 2004, net investment income increased $71 million or 7.7% from
2003. This increase is due to the inclusion of Canada Life activity for
twelve months in 2004 compared to less than six months in 2003, partially
offset by a drop in the interest earned rate on investments from 6.23% in
2003 to 5.37% in 2004. Offsetting this decrease's impact on net income
was a corresponding decrease in the interest rate credited on
policyholder general account products.
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 annuity balances in the
separate accounts:
Retirement Individual
Services Markets
(In millions) General Account Separate Separate
Year ended December 31, Annuity Reserves Accounts Accounts
---------------------------------- --------------------- -------------------- --------------------
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
2004 7,099 11,152 1,237
Total policyholder benefits increased $125 million or 13.3% during 2004
excluding the one-time CLAC adjustment of $1,174 million, mentioned
above. The increase is primarily due to the inclusion of Canada Life
activity for twelve months in 2004 compared to less than six months in
2003. 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 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, 2004 and 2003, the Company had $9.5 billion and $8.9
billion, respectively, of policy reserves on individual insurance on the
consolidated balance sheets. The following table summarizes individual
life insurance in force prior to reinsurance ceded for the years
indicated:
As of December 31,
---------------------------------------------------------------------------
(In millions) 2004 2003 2002 2001 2000
------------- ----------- ----------- ----------- ----------- ------------
Life insurance
in force $ 65,027 $ 67,645 $ 50,605 $ 50,769 $ 46,631
Year ended December 31, 2003 compared with the year ended December 31,
2002
The following is a summary of certain financial data of the Financial
Services segment:
(In millions) Year Ended December 31,
-------------
Income Statement Data 2003 2002 Percent Change
--------------------------------------------- ----------------- ----------------- --------------------
Premiums $ 1,415 $ 160 784.4%
Fee income 233 223 4.5%
Net investment income 916 851 7.6%
Net realized investment gains 29 33 (12.1%)
----------------- ----------------- --------------------
Total revenues 2,593 1,267 104.7%
----------------- ----------------- --------------------
Policyholder benefits 2,116 831 154.6%
Operating expenses 267 225 18.7%
----------------- ----------------- --------------------
Total benefits and expenses 2,383 1,056 125.7%
----------------- ----------------- --------------------
Income from operations 210 211 (0.1%)
Income tax expense 65 63 3.2%
----------------- ----------------- --------------------
Net income $ 145 $ 148 (2.0%)
================= ================= ====================
Deposits for investment-type contracts
$ 676 $ 691 (2.2)%
Deposits to separate accounts 2,217 2,461 (9.9)%
The Financial Services segment net income decreased $3 million or 2% to
$145 million for the year ended December 31, 2003 from $148 million in
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 their acquisition, July 10, 2003. The
life insurance and annuity reinsurance transactions related to the CLAC
reinsurance agreement effective August 31, 2003, have also been included
in the above Income Statement Data.
Net income for the Financial Services segment (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.
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.
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, fee income charged on fixed
investment options for mortality and expense risks and/or administrative
services, as well as fees for third-party administrative and
recordkeeping services to financial institutions and employer-sponsored
retirement plans.
Great-West Retirement Services participant accounts, including
third-party administration and institutional accounts, increased 5% in
2003 from 2.16 million at December 31, 2002 to 2.27 million 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.
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 and 74,080 in the years
ended 2003 and 2002, 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 6.79% in 2002 to 6.23% in 2003. Offsetting this
decrease's impact on net income was a corresponding decrease in the
interest rate credited on policyholder general account products.
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:
(In millions) 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
Policyholder benefits decreased $51 million or 6% during 2003 excluding
the impact of the Canada Life activity. The decrease is due to
fluctuations in the amount of interest credited to policyholders or
participant account balances, from the difference 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 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,
---------------------------------------------------------------------------
(In millions) 2003 2002 2001 2000 1999
--------------- ----------- ----------- ----------- ----------- -----------
Life insurance
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. 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
The Financial Services segment continues to enhance its relationships
with key consultants and to develop new marketing materials to
communicate its proprietary strengths and expertise.
During 2005, the Individual Markets line of business plans to continue to
focus on core strengths, increasing the number of placed policies,
improving retention and increasing its partnership base. Plans are also
underway to introduce new market driven products and value added service
enhancements to existing partners. The legislative environment has
stabilized considerably and the economic outlook appears to be improving.
In the Great-West Retirement Services line of business, solid
partnerships with government plan sponsors helped to maintain its
position as the largest provider of services to state defined
contribution plans, with fourteen of fifty state clients as well as the
government of Guam. During 2004, Great-West Retirement Services
introduced the first phase of an enhanced field service model. This
strategy offers a proactive, measurable approach to increasing
participation among existing clients, providing education, encouraging
appropriate asset allocation and meeting the information needs of
participants. This initiative should enable the Company to continue its
penetration of its existing client base in 2005, while continuing to seek
out new opportunities in this highly competitive market place.
In 2004, Great-West Retirement Services completed its integration of the
operations of Emjay Corporation ("Emjay"). This acquisition was made by
the Company in late 2003 and will create additional infrastructure to
support the growth experienced in the Great-West Retirement Services
business line. Several key partnerships were established in 2004,
including with Fifth Third Bank. In 2004, the 401(k) marketing group
developed a new product in conjunction with another leading provider of
defined contribution services, designed for employers with $5 million to
$50 million in plan assets. The product bundles investment options,
administration, education and recordkeeping services.
At the end of 2004, the Company announced the acquisition of Metavante
401(k) Services, Inc. by Emjay, effective January 1, 2005. Metavante
401(k) Services, Inc. has been renamed EMJAY Retirement Plan Services,
Inc. The acquisition has added 3,000 plan sponsors in the small and
mid-market area to the Great-West Retirement Services block of business.
In late 2004, Advised Assets Group, LLC ("AAG"), the Company's registered
investment advisory subsidiary, introduced Reality Investing, a program
that expands AAG's participant level advice tool into a suite of
investment advisory services. Reality Investing provides access to a
range of advice services including professional account management at the
participant level. AAG partnered with Ibbotson Associates, an industry
leader in asset allocation and investment analytics, to develop the new
advice and managed account services.
F. INVESTMENT OPERATIONS
The Company's primary investment objective is to acquire assets with
duration and cash flow characteristics reflective of its 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:
December 31,
--------------------------------------
(In millions) 2004 2003
---------------------------------------------------------------- ----------------- -----------------
Fixed maturities, available-for-sale, at fair value $ 13,215 $ 13,137
Equity investments, at fair value 637 428
Mortgage loans on real estate 1,544 1,894
Short-term investments, available-for-sale 709 852
Policy loans 3,548 3,389
----------------- -----------------
Total invested assets $ 19,653 $ 19,700
================= =================
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, 2004, the Company had 29 bonds in default representing a
carrying value of $33.4 million (0.3% of the total fixed maturity
investment portfolio), compared to 19 bonds representing $18.4 million
(0.1% of the total fixed maturity investment portfolio) at December 31,
2003.
The distribution of the fixed maturity portfolio by credit rating is
summarized as follows:
December 31,
--------------------------------------
Credit Rating 2004 2003
----------------------------------------------------------- ----------------- ------------------
AAA 56.9% 54.3%
AA 8.2 8.7
A 15.6 16.0
BBB 16.7 18.4
BB and below (non-investment grade) 2.6 2.6
----------------- -----------------
Total 100.0% 100.0%
================= =================
2. Mortgage Loans
During 2004, the mortgage loan portfolio decreased 18.5% to $1,544
million, net of allowances for credit losses.
The Company follows a comprehensive approach with 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 $25.0 million in 2004
compared with $29.6 million in 2003. There were no properties acquired
through foreclosure in 2004 or 2003. The low levels of problematic
mortgage loans relative to the Company's overall financial position are
due to its active loan management program.
Occasionally, the Company elects to restructure certain mortgage loans if
the economic benefits to it are believed to be more advantageous than
those achieved by acquiring the collateral through foreclosure. At
December 31, 2004 and 2003, the Company's mortgage loan portfolio
included $18.9 million and $34.9 million, respectively, of non-impaired
restructured loans. The Company anticipates limited participation in the
real estate market in 2005.
3. Other Investments
Other investments consist primarily of policy loans, equity investments,
and short-term investments. The Company anticipates limited participation
in the equity markets during 2005.
4. Derivatives
The Company uses certain derivatives, such as futures, options and swaps,
for purposes of hedging interest rate, market and foreign currency
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. Notes 1 and 7 to the consolidated financial statements contains
a discussion of the Company's outstanding derivatives.
5. Impairment of Securities
All securities with gross unrealized losses at the consolidated balance
sheet date are subjected to the Company's process for identifying
other-than-temporary impairments. Considerations used by the Company in
the impairment evaluation process include, but are not limited to, the
following:
o Fair value is significantly below cost.
o The decline in fair value is attributable to specific adverse
conditions affecting a particular instrument, its issuer, an
industry, or a geographic area.
o The decline in fair value has existed for an extended period of
time.
o A debt security has been downgraded by a rating agency.
o The financial condition of the issuer has deteriorated.
o Dividends have been reduced/eliminated or scheduled interest
payments have not been made.
The Company's portfolio of fixed maturities fluctuates in value based on
interest rates in financial markets and other economic factors. These
fluctuations caused by market rate changes have little bearing on whether
or not the investment will be ultimately recoverable. Therefore, the
Company considers these declines in value as temporary even in periods
exceeding one year.
If the Company has determined that there is an other-than-temporary
impairment, it records a writedown to the estimated fair value that
adjusts the cost basis in the period the security is deemed to be
impaired. The new cost basis is not adjusted for subsequent recoveries in
value.
For the years ended December 31, 2004 and 2003, the Company recorded
other-than-temporary impairments in the fair value of its fixed maturity
investments of $13.2 million and $14.2 million, respectively. The
writedowns in the year ended December 31, 2004 generally related to
securities in the airline industry while the writedowns recorded in 2003
were not concentrated in any one industry. No impairments were recorded
on equity securities for either of the years ended December 31, 2004 or
2003.
6. 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 the first half of 2004, 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.
G. LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to a company's ability to generate sufficient cash flows
to meet the needs of its operations. The Company manages its operations
to ensure stable, reliable and cost-effective sources of cash flows to
meet all of its obligations.
The principal sources of the Company's liquidity are premium and annuity
considerations, investment and fee income and investment maturities and
sales. The principal uses of the Company's liquidity relate to benefit
payments, claim payments, payments to policy and contract holders in
connection with surrenders and withdrawals, purchase of investments,
commissions and general and administrative expenses.
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
cash flows from operations. Liquidity for the Company has remained
strong, as evidenced by significant amounts of short-term investments and
cash that totaled $819.3 million and $1,003.5 million as of December 31,
2004 and 2003, respectively. In addition, as of both December 31, 2004
and 2003, 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. Management believes
that the liquidity profile of its assets is sufficient to satisfy the
liquidity requirements of reasonably foreseeable scenarios.
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 $95.0 million and $96.4 million of commercial
paper outstanding at December 31, 2004 and 2003, respectively. The
commercial paper has been given a rating of A-1+ by Standard & Poor's
Ratings Services and a rating of P-1 by Moody's Investors Service, each
being the highest rating available.
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.
H. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's major contractual
obligations at December 31, 2004:
Payments due by period
--------------------------------------------------------------------------
Less than 1 1-3 3-5 More than 5
(In millions) Total year years years years
- ------------------------------- ----------- ------------- ----------- --------- --------------
Policyholder obligations with
known contractual
maturities (1) $ 2,964.0 $ 621.4 $ 981.7 $ 522.7 $ 838.2
Related party long-term
debt - principal 220.0 25.0 195.0
Related party long-term
debt - interest 391.2 14.4 27.0 26.0 323.8
Commercial paper 95.0 95.0
Operating leases 100.2 22.0 37.4 33.5 7.3
----------- ------------- ----------- --------- --------------
Total $ 3,770.4 $ 752.8 $ 1,071.1 $ 582.2 $ 1,364.3
=========== ============= =========== ========= ==============
(1) Policyholder obligations with known contractual maturities include
contractually certain individual and group annuity payments, such as
guaranteed investment contracts and term certain annuity payouts.
The table above does not include obligations under the Company's life or
health insurance contracts, as the timing of cash requirements is largely
dependent on the occurrence and timing of future events. As discussed
previously, the Company follows strict asset/liability management
practices designed to provide funds for the payment of its insurance
obligations.
From time to time, the Company enters into agreements or contracts,
including capital leases, to purchase goods or services in the normal
course of its business. However, these agreements and contracts are not
material to the Company's results of operations or financial position.
I. APPLICATION OF RECENT ACCOUNTING PRONOUNCEMENTS
In January 2004, Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("FIN 46R"), was reissued by the Financial Accounting
Standards Board ("FASB"). FIN 46R 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 VIE's 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 confirmed it does not have any investments or ownership in VIEs.
In December 2002, Statement of Financial Accounting Standards No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure"
("SFAS No. 148"), was issued by the FASB. SFAS No. 148 amends the
disclosures that a company is required to make in its annual financial
statements and requires certain disclosures in interim financial reports.
In addition to the disclosures required by SFAS 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 SFAS No. 123 to account for its stock-based employee
compensation. In December 2004, Statement of Financial Accounting
Standards No. 123R "Share-Based Payment" ("SFAS No. 123R") was issued by
the FASB. SFAS 123R replaces SFAS 123 and supersedes APB No. 25. SFAS
123R requires a company to use the fair value method to account for its
stock-based employee compensation and to provide certain other additional
disclosures. The Company will adopt the provisions of SFAS 123R on July
1, 2005 and does not expect this statement to have a material effect on
its consolidated financial position or results of operations.
In July 2003, the Accounting Standards Executive Committee (the "AcSEC")
of the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 03-01, "Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts
and for Separate Accounts ("SOP 03-1"). AcSEC developed SOP 03-1 to
address the evolution of product designs since the issuance of Statement
of Financial Accounting Standards No. 60, "Accounting and Reporting by
Insurance Enterprises," and Statement of Financial Accounting Standards
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 was effective on January 1, 2004. The adoption of SOP 03-1 did not
have a material effect on the Company's consolidated financial position
or results of operations.
In January 2004, FASB issued Emerging Issues Task Force ("EITF") Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" ("EITF 03-1"). EITF 03-1 provides
guidance on the disclosure requirements, which were effective as of
December 31, 2003, for other-than-temporary impairments of debt and
marketable equity investments that are accounted for under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). EITF 03-1 also included guidance on the measurement and
recognition of other-than-temporary impairments of certain investments,
which was originally going to be effective during the quarter ended
September 30, 2004. However, in response to various concerns raised by
financial statement preparers and others, the measurement and recognition
provisions of EITF 03-1 were delayed. The staff of the FASB is currently
evaluating the guidance of EITF 03-1 in the context of developing
implementation guidance for its measurement and recognition provisions.
The Company is continuing to evaluate potential other-than-temporary
impairments under SFAS 115 and SEC Staff Accounting Bulletin Topic 5-M,
"Other-Than-Temporary Impairment Of Certain Investments In Debt and
Equity Securities." Due to the current uncertainty as to the
implementation guidance for EITF 03-1 by the FASB staff, the Company is
unable to evaluate the impact EITF 03-1 will ultimately have on its
financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's assets are purchased to fund future benefit payments to its
policyholders and contractholders. The primary risk of these assets is
exposure to rising interest rates. The Company's exposure to foreign
currency exchange rate fluctuations is minimal as only nominal foreign
investments are held.
To manage interest rate risk, the Company invests in assets that are
suited to the products that it sells. For products with fixed and highly
predictable benefit payments such as certificate annuities and payout
annuities, the Company invests in fixed income assets with cash flows
that closely match the liability product cash flows. The Company is then
protected against interest rate changes, as any change in the fair value
of the assets will be offset by a similar change in the fair value of the
liabilities. For products with uncertain timing of benefit payments such
as portfolio annuities and life insurance, the Company invests in fixed
income assets with expected cash flows that are earlier than the expected
timing of the benefit payments. The Company can then react to changing
interest rates sooner as these assets mature for reinvestment.
The Company also manages risk with interest rate derivatives such as
interest rate caps that would pay the Company investment income if
interest rates rise above the level specified in the cap. These
derivatives are only used to reduce risk and are not used for speculative
purposes.
To manage foreign currency exchange risk, the Company uses currency swaps
to convert foreign currency back to United States dollars. These swaps
are purchased each time a foreign currency denominated asset is
purchased.
The Company has estimated the possible effects of interest rate changes
at December 31, 2004. If interest rates increased by 100 basis points
(1.00%), the fair value of the fixed income assets would decrease by
approximately $664 million. This calculation uses projected asset cash
flows, discounted back to December 31, 2004. 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
are expected to be received. These spot rates in the benchmark
calculation range from 2.46% to 6.62%.
Projected Cash Flows by Calendar Year
(In millions)
There- Undiscounted Fair
2005 2006 2007 2008 2009 after Total Value
------- ------- ------- ------- ------- ------- -------------- ---------
Benchmark $ 2,502 $ 2,428 $ 2,290 1,742 $ 1,700 $ 7,934 $ 18,596 $ 14,546
Interest rates
up one
percent 2,316 2,358 2,281 1,723 1,584 8,716 18,978 13,882
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 $10.8 million per year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003,
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, 2004. Our
audits also included the financial statement schedule listed in the Index at
Item 8. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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, 2004 and 2003, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Denver, Colorado
February 25, 2005
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(Dollars in Thousands, Except Share Amounts)
December 31,
--------------------------------------------------
2004 2003
----------------------- -----------------------
ASSETS
INVESTMENTS:
Fixed maturities, available-for-sale, at fair value
(amortized cost $12,909,455 and $12,757,614) $ 13,215,042 $ 13,136,564
Equity investments, at fair value (cost $591,474
and $407,797) 637,434 427,810
Mortgage loans on real estate (net of
allowances of $30,339 and $31,889) 1,543,507 1,893,724
Policy loans 3,548,225 3,389,534
Short-term investments, available-for-sale (cost
approximates fair value) 708,801 852,198
----------------------- -----------------------
Total Investments 19,653,009 19,699,830
----------------------- -----------------------
OTHER ASSETS:
Cash 110,518 151,278
Reinsurance receivable:
Related party 1,072,940 1,345,847
Other 260,409 287,036
Deferred policy acquisition costs 301,603 284,866
Deferred ceding commission 82,648 285,165
Investment income due and accrued 159,398 165,417
Amounts receivable related to uninsured accident
and health plan claims (net of allowances of
$22,938 and $32,329) 144,312 129,031
Premiums in course of collection (net of
allowances of $7,751 and $9,768) 95,627 85,706
Deferred income taxes 138,845 119,971
Securities pledged to creditors 340,755 299,521
Due from GWL&A Financial Inc. 55,915
Other assets 494,515 580,987
SEPARATE ACCOUNT ASSETS 14,155,397 13,175,480
----------------------- -----------------------
TOTAL ASSETS $ 37,065,891 $ 36,610,135
======================= =======================
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(Dollars in Thousands, Except Share Amounts)
December 31,
--------------------------------------
2004 2003
----------------- -----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves:
Related party $ 5,170,447 $ 5,640,251
Other 12,771,872 13,009,827
Policy and contract claims 360,862 418,930
Policyholders' funds 327,409 330,123
Provision for policyholders' dividends 118,096 127,074
Undistributed earnings on participating business 192,878 177,175
GENERAL LIABILITIES:
Due to The Great-West Life Assurance Company 26,659 30,950
Due to GWL&A Financial Inc. 194,164 175,691
Repurchase agreements 563,247 389,715
Commercial paper 95,044 96,432
Payable under securities lending agreements 349,913 317,376
Other liabilities 695,542 834,485
SEPARATE ACCOUNT LIABILITIES 14,155,397 13,175,480
----------------- -----------------
Total Liabilities 35,021,530 34,723,509
----------------- -----------------
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 725,935 722,365
Accumulated other comprehensive income 118,795 127,820
Retained earnings 1,192,599 1,029,409
----------------- -----------------
Total Stockholder's Equity 2,044,361 1,886,626
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 37,065,891 $ 36,610,135
================= =================
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands)
Year Ended December 31,
---------------------------------------------------------
2004 2003 2002
----------------- ---------------- ----------------
REVENUES:
Premiums:
Related party (net of premiums ceded totaling $ (52,134) $ 1,595,357 $ 16,715
$260,445, $815 and $2,046)
Other (net of premiums ceded totaling
$428,010, $460,277 and $81,743) 625,394 657,540 1,103,380
Fee income 915,644 840,072 883,562
Net investment income 1,033,307 988,400 919,365
Net realized gains on investments 57,947 39,560 41,626
----------------- ---------------- ----------------
Total revenues 2,580,158 4,120,929 2,964,648
----------------- ---------------- ----------------
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
reinsurance recoveries totaling $396,886,
$410,430 and $50,974) 756,227 573,976 936,215
Increase (decrease) in reserves:
Related party (186,972) 1,450,185 15,934
Other (69,901) 51,320 55,414
Interest paid or credited to contractholders 517,448 514,846 498,549
Provision for policyholders' share of earnings
on participating business 10,181 1,159 7,790
Dividends to policyholders 108,822 92,118 78,851
----------------- ---------------- ----------------
Total benefits 1,135,805 2,683,604 1,592,753
----------------- ---------------- ----------------
Commissions 193,943 180,673 185,450
Operating expenses 740,740 753,336 741,979
Premium taxes 33,030 31,675 30,714
----------------- ---------------- ----------------
Total benefits and expenses 2,103,518 3,649,288 2,550,896
----------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 476,640 471,641 413,752
PROVISION FOR INCOME TAXES:
Current 152,028 173,181 126,222
Deferred (1,808) (19,561) 3,993
----------------- ---------------- ----------------
Total income taxes 150,220 153,620 130,215
----------------- ---------------- ----------------
NET INCOME $ 326,420 $ 318,021 $ 283,537
================= ================ ================
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands)
Accumulated Other
Comprehensive
Income (Loss)
----------- --- ----------
Unrealized Minimum
Additional Gains Pension
Preferred Common Paid-in (Losses) on Liability Retained
Stock Stock Capital Securities Adjustment Earnings Total
----------- ----------- ----------- ----------- ---------- ----------- -----------
BALANCES, JANUARY 1, 2002 $ 0 $ 7,032 $ 712,801 $ 76,507 $ 0 $ 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
Net income 326,420 326,420
Other comprehensive income (3,585) (5,440) (9,025)
-----------
Total comprehensive income 317,395
Dividends (163,230) (163,230)
Income tax benefit on stock
compensation 3,570 3,570
----------- ----------- ----------- ----------- ---------- ----------- -----------
BALANCES, DECEMBER 31, 2004 $ 0 $ 7,032 $ 725,935 $ 133,546 $ (14,751) $ 1,192,599 $ 2,044,361
=========== =========== =========== =========== ========== =========== ===========
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands)
Year Ended December 31,
------------------------------------------------------
2004 2003 2002
---------------- ---------------- ----------------
OPERATING ACTIVITIES:
Net income $ 326,420 $ 318,021 $ 283,537
Adjustments to reconcile net income to net
cash provided by operating activities:
Earnings allocated to participating
policyholders 10,181 1,159 7,790
Amortization of investments 28,367 (64,126) (76,002)
Net realized gains on investments (57,947) (39,560) (41,626)
Depreciation and amortization 93,580 95,542 74,012
Deferral of acquisition costs (52,693) (49,245) (49,763)
Deferred income taxes (1,808) (19,561) 3,993
Changes in assets and liabilities, net of effects from acquisitions:
Policy benefit liabilities (106,912) 478,066 622,854
Reinsurance receivable 21,352 (71,123) 41,199
Receivables (34,056) (33,621) 89,686
Other, net 63,437 55,531 (146,172)
---------------- ---------------- ----------------
Net cash (used in) provided by operating activities $ 289,921 $ 671,083 $ 809,508
---------------- ---------------- ----------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities and
redemptions of investments:
Fixed maturities available-for-sale:
Sales $ 6,150,160 $ 7,852,152 $ 5,729,919
Maturities and redemptions 7,465,130 6,033,863 1,456,176
Mortgage loans on real estate 368,734 191,353 213,794
Equity investments 148,685 86,908 2,798
Purchases of investments:
Fixed maturities available-for -sale (13,715,370) (14,128,309) (7,087,170)
Mortgage loans on real estate (50,577) (11,690) (2,768)
Equity investments (323,551) (369,650) (29,690)
Net change in short-term investments 143,397 (136,798) (282,194)
Acquisitions, net of cash acquired (128,636)
Other, net (124,944) 96,155 (77,769)
---------------- ---------------- ----------------
Net cash provided by (used in) investing activities $ 61,664 $ (514,652) $ (76,904)
---------------- ---------------- ----------------
(Continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002,
(In Thousands)
2004 2003 2002
----------------- ---------------- -----------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (296,378) $ (180,346) $ (599,724)
Change in due to The Great-West Life Assurance
Company (4,291) (6,341) (8,033)
Change in due to/from GWL&A Financial Inc. (37,442) 4,275 (43,415)
Dividends paid (163,230) (75,711) (170,572)
Change in bank overdrafts (63,148) 32,068 (41,901)
Net commercial paper repayments (1,388) (213) (401)
Net repurchase agreements borrowings 173,532 66,515 72,311
----------------- ---------------- -----------------
Net cash used in financing activities (392,345) (159,753) (791,735)
----------------- ---------------- -----------------
NET DECREASE IN CASH (40,760) (3,322) (59,131)
CASH, BEGINNING OF YEAR 151,278 154,600 213,731
----------------- ---------------- -----------------
CASH, END OF YEAR $ 110,518 $ 151,278 $ 154,600
================= ================ =================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 147,287 $ 144,273 $ 164,863
Interest 15,220 16,155 16,697
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(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"). 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. The Company uses the equity method of accounting
for investments in which it has more than a minor equity interest or more
than minor influence over the entity's operations, but does not have a
controlling interest. The Company uses the cost method of accounting for
investments in which it has a minor equity interest and virtually no
influence over the entity's operations. All material inter-company
transactions and balances have been eliminated in consolidation.
Certain reclassifications have been made to the 2003 and 2002
consolidated financial statements and related notes to conform to the
2004 presentation. These changes in classification had no effect on
previously reported stockholder's equity or net income.
Investments - Investments are reported as follows:
1. The Company has classified its fixed maturity investments 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. Net unrealized gains and losses related to participating
contract policies are recorded as undistributed earnings on
participating business.
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 determined 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 judgment is based upon
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.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
3. 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.
Realized gains and losses and declines in value determined to be
other-than-temporary are included in net realized gains on
investments.
4. Policy loans are carried at their unpaid balances.
5. 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.
6. Gains and losses realized on disposal of investments are
determined on a specific identification basis.
7. From time to time, the Company may employ a trading strategy
that involves the sale of securities with a simultaneous
agreement to repurchase similar securities at a future date
at an agreed-upon price. Proceeds of the sale are reinvested
in other securities and may enhance the current yield and total
return. The difference between the sales price and the future
repurchase price is recorded as an adjustment to interest
income. During the period between the sale and repurchase, the
Company will not be entitled to receive interest and principal
payments on the securities sold. Losses may arise from changes
in the value of the securities or if the counterparty files
for bankruptcy or becomes insolvent. In such cases, the
Company's right to repurchase the security may be restricted.
Amounts owing to brokers under these arrangements are included in
repurchase agreements on the accompanying consolidated balance
sheets. At December 31, 2004 and 2003, this liability was $563,247
and $389,715, respectively. The liability is collateralized
by securities with approximately the same value.
Cash - Cash includes only amounts in demand deposit accounts.
Bank overdrafts - The Company's cash management system provides for the
reimbursement of all major bank disbursement accounts on a daily basis.
Checks issued but not yet presented to banks for payment frequently
result in overdraft balances for accounting purposes and are included in
other liabilities in the consolidated balance sheets.
Internal use software - Capitalized internal use software development
costs, net of accumulated depreciation, in the amount of $74,021 and
$68,244 are included in other assets at December 31, 2004 and 2003,
respectively. The Company capitalized $21,484, $27,882 and $20,091 of
internal use software development costs for the years ended December 31,
2004, 2003 and 2002, 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. The
recoverability of such costs is dependent upon the future profitability
of the related business. 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 $40,536, $36,283 and $38,707 in
2004, 2003 and 2002, respectively.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
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. an, open-end management investment company,
which is an affiliate of the Company, and 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 contract holders 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 in the amount of $12,115,519 and
$12,111,180 at December 31, 2004 and 2003, 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 in
the amount of $4,831,428 and $5,157,776 at December 31, 2004 and 2003,
respectively, are established at the contract holder's account value.
Reinsurance - Policy reserves and policy and contract claims ceded to
other insurance companies are carried as a reinsurance receivable on the
consolidated balance sheets. 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 the process of
settlement. They are 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 $6,290,994 and $6,119,896 at December 31, 2004 and 2003,
respectively. Participating business approximates 29.2%, 34.3% and 24.8%
of the Company's ordinary life insurance in force and 74.3%, 66.4% and
80.2% of ordinary life insurance premium income for the years ended
December 31, 2004, 2003 and 2002, respectively.
The amount of dividends to be paid from undistributed earnings on
participating business is determined annually by the Board of Directors.
Earnings allocated 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
it 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.
Securities lending - 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.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
Derivative Financial Instruments - All derivatives, whether designated in
hedging relationships or not, are recorded on the consolidated balance
sheet at fair value. Accounting for the ongoing changes in the fair value
of a derivative depends on the intended use of the derivative and its
designation as determined when the derivative contract is entered into.
If the derivative is designated as a fair value hedge, the changes in its
fair value 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 on the
balance sheet and are recognized in the income statement when the hedged
item affects earnings. Changes in the fair value of derivatives not
qualifying for hedge accounting and the ineffective portion of cash flow
hedges are recognized in net investment income in the period of the
change.
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 4.3%, 5.2%, and 5.9%, in 2004, 2003
and 2002, respectively.
Income taxes - Income taxes are recorded using the asset and liability
approach, which 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 Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25") to stock-based compensation
awards to employees, as interpreted by AIPCA Accounting Interpretation
APB 25 (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 Lifeco to
employees of the Company. 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, the
Company's net income would have been reduced by $3,352, $3,105 and $2,364
in the years ended December 13, 2004, 2003 and 2002, respectively.
Regulatory requirements - In accordance with the requirements of the
State of Colorado, the Company must demonstrate adequate capital. At
December 31, 2004, the Company was in compliance with the requirement
(See Note 13).
At December 31, 2004 and 2003, fixed maturities with carrying values of
$60,353 and $63,843, respectively, were on deposit with various insurance
regulatory authorities as required by law.
Application of recent accounting pronouncements - In January 2004,
Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN 46R") was reissued by the Financial Accounting Standards Board
(FASB). FIN 46R addresses consolidation by business enterprises of
variable interest entities ("VIE"), which have one or both of the
following characteristics: a) insufficient equity investment at
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
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, Statement of Financial Accounting Standards No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure"
("SFAS No. 148") was issued by the FASB. SFAS No. 148 amends the
disclosures that a company is required to make in its annual financial
statements and requires certain disclosures in interim financial reports.
In addition to the disclosures required by SFAS 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 SFAS No. 123 to account for its stock-based employee
compensation. In December 2004, Statement of Financial Accounting
Standards No. 123R "Share-Based Payment" ("SFAS No. 123R") was issued by
the FASB. SFAS 123R replaces SFAS 123 and supersedes APB No. 25. SFAS
123R requires a company to use the fair value method to account for its
stock-based employee compensation and to provide certain other additional
disclosures. The Company will adopt the provisions of SFAS 123R on July
1, 2005 and does not expect this statement to have a material effect on
the Company's consolidated financial position or results of operations.
In July 2003, the Accounting Standards Executive Committee (the "AcSEC")
of the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 03-01, "Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts
and for Separate Accounts" ("SOP 03-1"). AcSEC developed SOP 03-1 to
address the evolution of product designs since the issuance of Statement
of Financial Accounting Standards No. 60, "Accounting and Reporting by
Insurance Enterprises," and Statement of Financial Accounting Standards
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 was effective on January 1, 2004. The adoption of SOP 03-1 did not
have a material effect on the Company's consolidated financial position
or results of operations.
In January 2004, FASB issued Emerging Issues Task Force ("EITF") Issue
No. 03-1, "The Meaning of Other-Than Temporary Impairment and Its
Application to Certain Investments" ("EITF 03-1"). EITF 03-1 provides
guidance on the disclosure requirements, which were effective as of
December 31, 2003, for other-than-temporary impairments of debt and
marketable equity investments that are accounted for under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). EITF 03-1 also included guidance on the measurement and
recognition of other-than-temporary impairments of certain investments,
which was originally going to be effective during the quarter ended
September 30, 2004. However, in response to various concerns raised by
financial statement preparers and others, the measurement and recognition
provisions of EITF 03-1 were delayed. The staff of the Financial
Accounting Standards Board ("FASB") is currently evaluating the guidance
of EITF 03-1 in the context of developing implementation guidance for its
measurement and recognition provisions. The Company is continuing to
evaluate potential other-than-temporary impairments under SFAS 115 and
SEC Staff Accounting Bulletin Topic 5-M, "Other Than Temporary Impairment
Of Certain Investments In Debt and Equity Securities." Due to the current
uncertainty as to the implementation guidance for EITF 03-1 by the FASB
staff, the Company is unable to evaluate the impact EITF 03-1 will
ultimately have on its financial position or results of operations.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
2. ACQUISITIONS AND RELATED TRANSACTIONS
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 $235,000. 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, 2004 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.
The Company recorded, as of December 31, 2003, the following as a result
of the acquisition (net of the $235,000 purchase price) of 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 on real Policy and contract claims 899
estate 1,146,044 Provision for
Policy loans 13,621 policyholders' dividends 2,800
Short-term investments 65,537 Other liabilities 439,439
---------------------
Cash (232,803) Total liabilities 3,436,952
Investment income Accumulated other
due and accrued 32,147 comprehensive income (14,433)
Other assets 439,864 Retained earnings 2,789
---------------------
Total stockholder's equity (11,644)
------------------ ---------------------
$ 3,425,308 $ 3,425,308
================== =====================
The Company's statements of income include the following related to CLICA
and CLINY for the period from July 10 to December 31, 2003:
Period July 10, 2003
to December 31, 2003
--------------------------
Total revenues $ 105,868
--------------------------
Benefits 92,193
Operating expenses 9,385
--------------------------
Total benefits and expenses 101,578
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 United States
Branch. The Company recorded $1,426,362 in premium income and increase in
reserves associated with these policies.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
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
Policy loans 278,152 claims 45,229
Reinsurance receivable 1,320,636 Policyholders' funds 65,958
Deferred ceding
commissions 313,364
Investment income
due and accrued 17,280
Premiums in course of
collection 21,466
------------------ -----------------
$ 3,037,684 $ 3,037,684
================== =================
In the third quarter of 2004, the deferred ceding commission asset and
certain policy reserve liabilities acquired as part of this reinsurance
transaction were both decreased $157,000 based on the Company's final
analysis of the policy reserves acquired. CLAC's United States branch had
not previously computed policy liabilities under United States GAAP,
which required the Company to estimate the amount of liabilities assumed,
which was approximately $3,000,000 at September 1, 2003. These
adjustments had no material effect on the Company's consolidated
financial position or results of operations.
The reinsurance receivable relates to the amount due to 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, as defined by the agreement, on a segregated pool of
investments of the CLAC's United States branch. Pursuant to an
interpretation of Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133), as amended, the Company has identified an embedded derivative for
its 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 decreased $5,282 and increased
$7,387 during the years ended December 31, 2004 and 2003, respectively.
3. RELATED-PARTY TRANSACTIONS
The Company performs administrative services for the United States
operations of The Great-West Life Assurance Company ("GWL"), a
wholly-owned subsidiary of Lifeco. Beginning in 2003, the Company began
providing administrative and operational services for the United States
operations of Canada Life. Beginning in 2002, the Company began
performing investment services for London Reinsurance Group, an indirect
subsidiary of GWL. The following table 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 estimated costs incurred (including a profit charge) and resources
expended based upon the number of policies, certificates in force and/or
administered assets.
Year Ended December 31,
------------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
Investment management revenue included in
net investment income $ 6,304 $ 3,355 $ 892
Administrative and underwriting revenue
included in operating expenses 6,427 1,859 860
--------------- --------------- ---------------
Total $ 12,731 $ 5,214 $ 1,752
=============== =============== ===============
At December 31, 2004 and 2003, due to GWL includes $1,321 and $5,612 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
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
in part at any time without penalty. The issuer may not demand payment
before the maturity date. The note payable bears interest at 5.4%.
At December 31, 2004 due from GWL&A Financial Inc. includes $55,915 due
on demand and due to GWL&A Financial includes a surplus note with a face
amount and carrying value of $195,000 and $194,164, respectively. At
December 31, 2003 due to GWL&A Financial Inc. includes $691 due on demand
and a $175,000 subordinated note. The surplus note, which bears interest
at the rate of 6.675% per annum, matures on November 14, 2034. On
November 15, 2004, GWL&A Financial issued a $175,000 deferrable debenture
through an affiliated limited partnership ("Great-West LP") to qualified
institutional investors. Also on November 15, 2004, Lifeco and 2023308
Ontario Inc. ("Ontario"), a wholly-owned subsidiary of Lifeco, made
equity contributions in the combined amount of $23,000 to Great-West LP.
Great-West LP in turn, invested the proceeds from the sale of the
deferrable debentures together with a portion of the equity contributions
from Lifeco and Ontario in certain junior subordinated deferrable
debentures of GWLA Financial. On November 15, 2004, GWL&A Financial used
the proceeds from the sale of its junior subordinated deferrable
debentures to purchase the surplus note from the Company. On December 16,
2004, the Company used the proceeds from the sale of the surplus note to
redeem the $175,000 subordinated note payable to GWL&A Financial and for
general corporate purposes. Payments of principal and interest under the
surplus note shall be made only out of surplus funds of the Company and
only with prior written approval of the Commissioner of Insurance of the
State of Colorado when the Commissioner of Insurance is satisfied that
the financial condition of the Company warrants such action pursuant to
applicable Colorado law. Payments of principal and interest on the
surplus note are payable only if at the time of such payment and after
giving effect to the making thereof, the Company's surplus would not fall
below two and one half times the authorized control level as required by
the most recent risk-based capital calculations.
Interest expense attributable to these related party obligations were
$15,189, $14,345 and $14,976 for the years ended December 31, 2004, 2003
and 2002, respectively.
On February 29, 2004, CLAC recaptured the group life and health business
from the Company associated with the original Indemnity Reinsurance
Agreement dated August 31, 2003, as discussed in Note 2. The Company
recorded an income statement impact of $256,318 of negative premium
income and change in reserves associated with these policies. The Company
recorded, at fair value, the following at February 29, 2004 as a result
of this transaction:
Assets Liabilities and Stockholder's Equity
-------------------------------------------------------- ------------------------------------------------
Cash $ (126,105) Policy reserves $ (286,149)
Reinsurance receivable (152,077) Policy and contract
Deferred ceding commission (29,831) claims (32,755)
Premiums in course of Policyholders' funds (3,982)
collection (14,873)
------------------- -----------------
$ (322,886) $ (322,886)
=================== =================
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 judgment is based on past
loss experience and current and projected economic conditions.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
Activity in the allowance for amounts receivable related to uninsured
accident and health plan claims is as follows:
2004 2003 2002
--------------- -------------- ---------------
Balance, beginning of year $ 32,329 $ 42,144 $ 53,431
Amounts acquired by reinsurance (1,859) 6,207
Provisions charged (reversed) to operations (517) 1,460 (7,544)
Amounts written off - net (7,015) (11,275) (9,950)
--------------- -------------- ---------------
Balance, end of year $ 22,938 $ 32,329 $ 42,144
=============== ============== ===============
Activity in the allowance for premiums in course of collection is as follows:
2004 2003 2002
--------------- -------------- ---------------
Balance, beginning of year $ 9,768 $ 12,011 $ 22,217
Amounts acquired by reinsurance (300) 1,600
Provisions charged (reversed) to operations 17 1,889 (5,729)
Amounts written off - net (1,734) (4,132) (6,077)
--------------- -------------- ---------------
Balance, end of year $ 7,751 $ 9,768 $ 12,011
=============== ============== ===============
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 $3,500
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% in 2003 and 75% in 2004 of
group health stop-loss and excess loss activity. This Allianz agreement
was retroactive to January 1, 2003.
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, 2004 and 2003, the
reinsurance receivables had carrying values of $1,333,349 and $1,632,883,
respectively.
The following table summarizes life insurance in force and life and
accident/health premiums at, and for the year ended, December 31, 2004:
Percentage
of Amount
Reinsurance Reinsurance Assumed
Direct Ceded Assumed Net to Net
---------------- ---------------- ---------------- ---------------- --------------
Life insurance in force:
Individual $ 50,946,388 $ 12,925,504 $ 14,080,477 $ 52,101,361 27.0%
Group 48,101,396 501,200 1,142,649 48,742,845 2.3%
---------------- ---------------- ---------------- ----------------
Total $ 99,047,784 $ 13,426,704 $ 15,223,126 $ 100,844,206
================ ================ ================ ================
Premium income:
Life insurance $ 347,603 $ 54,610 $ 128,097 $ 421,090 30.4%
Accident/health 628,257 377,632 (103,721) 146,904 (70.6)%
---------------- ---------------- ---------------- ----------------
Total $ 975,860 $ 432,242 $ 24,376 $ 567,994
================ ================ ================ ================
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
The following table summarizes life insurance in force and life and accident/health premiums at, and for the year ended,
December 31, 2003:
Percentage
of Amount
Reinsurance Reinsurance Assumed
Direct Ceded Assumed Net to Net
---------------- ---------------- --------------- ---------------- --------------
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 $ 71,624,980 $ 153,863,443
================ ================ =============== ================
Premium income:
Life insurance $ 355,791 $ 44,118 $ 1,301,560 $ 1,613,233 80.7%
Accident/health 678,516 423,592 321,996 576,920 55.8%
---------------- ---------------- --------------- ----------------
Total $ 1,034,307 $ 467,710 $ 1,623,556 $ 2,190,153
================ ================ =============== ================
The following table summarizes life insurance in force and life and accident/health premiums at, and for the year ended,
December 31, 2002:
Percentage
of Amount
Reinsurance Reinsurance Assumed
Direct Ceded Assumed Net to Net
---------------- ---------------- --------------- ---------------- --------------
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%
Accident/health 728,972 43,047 128,820 814,745 15.8%
---------------- ---------------- --------------- ----------------
Total $ 1,041,360 $ 83,629 $ 170,065 $ 1,127,796
================ ================ =============== ================
6. NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
The following table summarizes net investment income for the years ended December 31, 2004, 2003 and 2002:
Year Ended December 31,
------------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
Investment income:
Fixed maturities and short-term investments $ 687,329 $ 697,209 $ 673,825
Equity investments 10,749 4,703 3,272
Mortgage loans on real estate 104,902 85,966 51,440
Policy loans 203,127 195,633 209,608
Other 64,916 37,254 5,236
--------------- --------------- ---------------
1,071,023 1,020,765 943,381
Investment expenses, including interest on
amounts charged by related parties
of $15,189, $14,345 and $14,976 37,716 32,365 24,016
--------------- --------------- ---------------
Net investment income $ 1,033,307 $ 988,400 $ 919,365
=============== =============== ===============
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
The following table summarizes net realized gains on investments for the years ended December 31, 2004, 2003 and 2002:
Year Ended December 31,
------------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
Net realized gains:
Fixed maturities $ 34,960 $ 26,621 $ 33,455
Equity investments 8,040 1,013 1,639
Real estate and mortgage loans on real
estate 5,318 2,911 1,493
Other (13)
Provisions for mortgage impairments 9,642 9,015 5,039
--------------- --------------- ---------------
Net realized gains on investments $ 57,947 $ 39,560 $ 41,626
=============== =============== ===============
7. SUMMARY OF INVESTMENTS
The following table summarizes fixed maturities and equity securities available-for-sale at December 31, 2004:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Fixed Maturities: Cost Gains Losses Value Value
---------------------------- -------------- -------------- ---------------- -------------- --------------
U.S. Government and
agencies direct
obligations $ 3,107,235 $ 55,242 $ 8,687 $ 3,153,790 $ 3,153,790
Obligations of U.S.
states and their
subdivisions 1,197,912 61,951 4,930 1,254,933 1,254,933
Foreign government 15,759 276 218 15,817 15,817
Corporate debt
securities 5,257,149 203,603 43,919 5,416,833 5,416,833
Mortgage-backed and
asset-backed
securities 3,332,857 65,994 21,634 3,377,217 3,377,217
Other debt securities (1,457) 2,091 (3,548) (3,548)
-------------- -------------- ---------------- -------------- --------------
Total fixed maturities $ 12,909,455 $ 387,066 $ 81,479 $ 13,215,042 $ 13,215,042
============== ============== ================ ============== ==============
Total equity
Investments $ 591,474 $ 47,015 $ 1,055 $ 637,434 $ 637,434
============== ============== ================ ============== ==============
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
The following table summarizes fixed maturities and equity securities available for sale at December 31, 2003:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Fixed Maturities: Cost Gains Losses Value Value
---------------------------- -------------- -------------- ---------------- -------------- --------------
U.S. Government and
Agencies direct
Obligations $ 3,146,847 $ 72,031 $ 20,328 $ 3,198,550 $ 3,198,550
Obligations of U.S.
States and their
Subdivisions 1,133,234 79,323 4,204 1,208,353 1,208,353
Foreign government 58,211 1,191 940 58,462 58,462
Corporate debt
Securities 5,392,187 311,640 104,819 5,599,008 5,599,008
Mortgage-backed and
Asset-backed
Securities 3,025,297 84,057 35,196 3,074,158 3,074,158
Other debt securities 1,838 3,805 (1,967) (1,967)
-------------- -------------- ---------------- -------------- --------------
Total fixed maturities $ 12,757,614 $ 548,242 $ 169,292 $ 13,136,564 $ 13,136,564
============== ============== ================ ============== ==============
Total equity
Investments $ 407,797 $ 22,197 $ 2,184 $ 427,810 $ 427,810
============== ============== ================ ============== ==============
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, 2004 and 2003, by projected maturity, are shown in the
table 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.
December 31, 2004 December 31, 2003
------------------------------------- -----------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---------------- ----------------- ---------------- ---------------
Due in one year or less $ 824,954 $ 851,869 $ 684,947 $ 710,287
Due after one
Year through five years 2,989,404 3,069,032 3,351,405 3,495,805
Due after five years
Through ten years 1,887,974 1,956,626 1,660,758 1,743,056
Due after ten years 1,893,175 1,952,856 1,940,424 1,966,535
Mortgage backed and asset
Backed securities 5,313,948 5,384,659 5,120,080 5,220,881
---------------- ----------------- ---------------- ---------------
$ 12,909,455 $ 13,215,042 $ 12,757,614 $ 13,136,564
================ ================= ================ ===============
Mortgage-backed and asset-backed securities include collateralized
mortgage obligations that 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.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
The following table summarizes information regarding the sales of fixed
maturities for the years ended December 31, 2004, 2003 and 2002:
Year Ended December 31,
-----------------------------------------------------
2004 2003 2002
--------------- --------------- --------------
Proceeds from sales $ 6,150,160 $ 7,852,152 $ 5,729,919
Gross realized gains from sales 103,892 72,815 45,315
Gross realized losses from sales (59,930) (43,214) (10,410)
The Company makes limited use of derivative financial instruments to
manage interest rate, market credit and foreign exchange risk associated
with its invested assets. Derivatives are not used for speculative
purposes.
The Company controls the credit risk of its derivative contracts through
credit approvals, limits and monitoring procedures. Risk of loss is
generally limited to the fair value of derivative instruments and not to
the notional or contractual amounts of the derivatives. As the Company
generally enters into derivative transactions only with high quality
institutions, no losses associated with non-performance of derivative
financial instruments have occurred or are expected to occur.
Fair value hedges - Written call options are used in conjunction with
interest rate swap agreements to effectively convert fixed rate bonds to
variable rate bonds as part of the Company's overall asset/liability
matching program.
The Company's use of derivatives treated as fair value hedges has been
nominal in the last three years. Ineffective amounts had no material
impact on net income for the years ended December 31, 2004, 2003 and
2002.
Cash flow hedges - 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. Interest rate 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 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. 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.
Hedge ineffectiveness in the amounts of $3,534, $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, 2004, 2003 and 2002
respectively.
Unrealized derivative gains and losses included in accumulated other
comprehensive income are reclassified into earnings at the time interest
income is recognized. Derivative gains in the amounts of $975, $1,024 and
$563 were reclassified to net investment income in 2004, 2003 and 2002
respectively. As of December 31, 2004, the Company estimates that $1,410
of net derivative gains included in other comprehensive income will be
reclassified into net investment income within the next twelve months.
Derivatives not designated as hedging instruments - The Company attempts
to match the timing of when interest rates are committed on insurance
products and other new investments, however, timing differences may occur
and can expose the Company to fluctuating interest rates. To offset this
risk, the Company uses U.S. Treasury futures contracts. The Company also
utilizes U.S. Treasury futures as a method of adjusting the duration of
the overall portfolio.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
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,
2004, the Company has one such security that has been created through the
combination of a credit default swap and a United States Government
Agency security.
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 and carried at fair value.
Although the above-mentioned derivatives are effective hedges from an
economic standpoint, they do not meet the requirements for hedge
accounting treatment under SFAS No. 133, as amended. As such, periodic
changes in the market value of these instruments flow directly into net
income. In 2004, 2003 and 2002, increases to net investment income of
$4,043, $1,007 and $0 were recognized from market value changes of
derivatives not receiving hedge accounting treatment, excluding the
impact of the embedded derivative discussed in Note 2.
The following tables summarize derivative financial instruments at
December 31, 2004 and 2003:
T
December 31, 2004
----------------------------------------------------------------------------
Notional
Amount Strike / Swap Rate Maturity
-------------- -------------------------------- --------------------
Interest rate caps $ 300,000 11.65% January 2005
February 2006 -
Interest rate swaps 221,264 2.40% - 5.20% March 2031
October 2005 -
Credit default swaps 145,085 N/A November 2007
Foreign currency June 2005 -
exchange contracts 27,585 N/A November 2006
Options: Calls 22,000 Various February 2006
Total return swap:
Receivable for
coinsurance with
funds withheld 1,087,416 Variable Indeterminable
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
December 31, 2003
----------------------------------------------------------------------------
Notional
Amount Strike / Swap Rate Maturity
-------------- -------------------------------- --------------------
February 2004 -
Interest rate caps $ 617,000 7.91% - 11.65% January 2005
January 2004 -
Interest rate swaps 331,334 1.03% - 4.50% November 2009
October 2005 -
Credit default swaps 171,310 N/A November 2007
Foreign currency June 2005 -
exchange contracts 27,585 N/A November 2006
Options:
Calls 92,700 Various May 2004 -
June 2007
Puts 15,000 Various March 2007
Total return swap:
Receivable for
coinsurance with
funds withheld 1,287,059 Variable Indeterminable
The following table summarizes information with respect to impaired
mortgage loans at December 31, 2004 and 2003:
December 31,
---------------------------------
2004 2003
--------------- --------------
Loans, net of related allowance for credit losses of
$13,000 and $19,542 $ 8,700 $ 7,680
Loans with no related allowance for credit losses 5,560
Average balance of impaired loans during the year 25,049 29,633
Interest income recognized while impaired 890 1,350
Interest income received and recorded while impaired
using the cash basis method of recognition 1,029 1,405
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 $18,881 and $34,880 at December 31, 2004 and 2003,
respectively.
The following table summarizes activity in the allowance for mortgage
loan credit losses for the years 2004, 2003 and 2002:
Year Ended December 31,
-----------------------------------------------------
2004 2003 2002
--------------- --------------- --------------
Balance, beginning of year $ 31,889 $ 55,654 $ 57,654
Provisions reversed to operations (3,192) (9,817) (3,588)
Amounts written off (304) (15,766) (139)
Recoveries 1,946 1,818 1,727
--------------- --------------- --------------
Balance, end of year $ 30,339 $ 31,889 $ 55,654
=============== =============== ==============
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
The carrying value of the Company's equity investments was $637,434 and
$427,810 at December 31, 2004 and 2003, respectively. At December 31,
2004 and 2003, the Company had an investment of $199,162 and $130,473,
respectively, in an exchange-traded fund, which invests in corporate debt
securities. Upon redemption of the fund, the Company has the option of
receiving the underlying debt securities or the redemption value of the
investment. At December 31, 2004 and 2003, the Company has invested
$336,543 and $216,610, respectively 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, 2004 and 2003 were $85,867 and $128,341, respectively.
The Company participates in a securities lending program whereby
securities, which are included in invested assets, are loaned to third
parties. The Company requires a minimum of 102% of the fair value of the
loaned securities to be separately maintained as collateral for the
loans. Securities with a cost or amortized cost of $336,949 and $288,834
and an estimated fair value of $340,755 and $299,521 were on loan under
the program at December 31, 2004 and 2003, respectively. The Company was
liable for collateral under its control of $349,913 and $317,376 at
December 31, 2004 and 2003, respectively.
Impairment of Fixed Maturities and Equity Investments - The Company
classifies all of its fixed maturities and equity investments as
available-for-sale and marks them to market through other comprehensive
income. All securities with gross unrealized losses at the consolidated
balance sheet date are subjected to the Company's process for identifying
other-than-temporary impairments.
The Company writes down to fair value securities that it deems to be
other-than-temporarily impaired in the period the securities are deemed
to be so impaired. The Company records writedowns as investment losses
and adjusts the cost basis of the securities accordingly. The Company
does not change the revised cost basis for subsequent recoveries in
value.
The assessment of whether an other-than-temporary impairment has occurred
is based on management's case-by-case evaluation of the underlying
reasons for the decline in fair value. Management considers a wide range
of factors, as described below, about the security issuer and uses its
best judgment in evaluating the cause of the decline in the estimated
fair value of the security and in assessing the prospects for near-term
recovery. Inherent in management's evaluation of the security are
assumptions and estimates about the operations of the issuer and its
future earnings potential.
Considerations used by the Company in the impairment evaluation process
include, but are not limited to, the following:
o Fair value is significantly below cost.
o The decline in fair value is attributable to specific adverse
conditions affecting a particular instrument, its issuer, an industry
or a geographic area.
o The decline in fair value has existed for an extended period of time.
o A debt security has been downgraded by a rating agency.
o The financial condition of the issuer has deteriorated.
o Dividends have been reduced/eliminated or scheduled interest payments
have not been made.
While all available information is taken into account, it is difficult to
predict the ultimate recoverable amount of a distressed or impaired
security.
The Company's portfolio of fixed maturities fluctuates in value based
upon interest rates in financial markets and other economic factors.
These fluctuations, caused by market interest rate changes, have little
bearing on whether or not the investment will be ultimately recoverable.
Therefore, the Company considers these declines in value as temporary,
even in periods exceeding one year.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
The following tables summarize unrealized investment losses by class of
investment at December 31, 2004 and 2003. The Company considers these
investments to be only temporarily impaired.
December 31, 2004 Less than twelve months Twelve months or longer Total
-------------------------- ------------------------------ ------------------------------- ------------------------------
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fixed Maturities: Fair value Loss Fair value Loss Fair value Loss
-------------------------- ------------- ------------ -------------- ------------- ------------- -------------
U.S. Government
and agencies direct
obligations $ 850,994 $ 4,000 $ 220,214 4,687 $ 1,071,208 $ 8,687
Obligations of U.S.
states and their
subdivisions 160,000 2,256 107,556 2,674 267,556 4,930
Foreign government 59,208 193 8,525 25 67,733 218
Corporate debt
securities 643,064 17,054 600,119 26,865 1,243,183 43,919
Mortgage-backed
and asset-backed
securities 555,898 7,605 283,131 14,029 839,029 21,634
Other debt securities (3,547) 2,091 (3,547) 2,091
------------- ------------ -------------- ------------- ------------- -------------
Total fixed maturities $ 2,265,617 $ 33,199 $ 1,219,545 48,280 $ 3,485,162 $ 81,479
============= ============ ============== ============= ============= =============
December 31, 2003 Less than twelve months Twelve months or longer Total
-------------------------- ------------------------------ ------------------------------- ------------------------------
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fixed Maturities: Fair value Loss Fair value Loss Fair value Loss
-------------------------- ------------- ------------ -------------- ------------- ------------- -------------
U.S. Government
and agencies direct
obligations $ 472,620 $ 20,149 $ 30,791 179 $ 503,411 $ 20,328
Obligations of U.S.
states and their
subdivisions 160,668 3,947 16,679 257 177,347 4,204
Foreign government 26,133 940 26,133 940
Corporate debt
securities 1,174,753 77,477 332,880 27,342 1,507,633 104,819
Mortgage-backed
and asset-backed
securities 404,762 7,150 247,056 28,046 651,818 35,196
Other debt securities (1,967) 3,805 (1,967) 3,805
------------- ------------ -------------- ------------- ------------- -------------
Total fixed maturities $ 2,238,936 $ 109,663 $ 625,439 59,629 $ 2,864,375 $ 169,292
============= ============ ============== ============= ============= =============
At December 31, 2004 and 2003, there were 480 and 556 securities,
respectively, that had been in a loss position for less than twelve
months with carrying values of $2,265,617 and $2,238,936, respectively,
and unrealized losses of $33,199 and $109,663, respectively. At December
31, 2004 and 2003 less than 1% were rated non-investment grade. The
losses on these securities are primarily attributable to changes in
market interest rates and changes in credit spreads since the securities
were acquired.
At December 31, 2004 and 2003, there were 410 and 123 securities,
respectively, that had been in a continuous loss position for twelve
months or longer with carrying values of $1,219,545 and $625,439,
respectively, and unrealized losses of $48,280 and $59,629, respectively.
The Company's impairment exposure is not concentrated in any one
industry. At December 31, 2004, there are 14 airline industry securities
on which $9,820 of impairment write-downs was recognized during 2004. For
the years ended December 31, 2004 and 2003, mortgage-backed and
asset-backed securities represent $14,029, or 29% and $28,046, or 47% of
the unrealized losses, respectively. While the Company is in an
unrealized loss position on these securities, payments continue to be
made under their original terms. At December 31,
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
2004, the Company has no information to cause it to believe that any of
these investments are other than temporarily impaired.
At December 31, 2004 and 2003, the Company had unrealized losses on
equity investments of $1,055 and $2,184, respectively. The decrease
reflects security dispositions in 2004 and the overall improvement in the
equity markets. At December 31, 2004, the Company has no information to
cause it to believe that any of these investments are other than
temporarily impaired.
For the years ended December 31, 2004 and 2003, the Company recorded
total other-than-temporary impairments in the fair value of its
available-for-sale investments of $13,167 and $14,197, respectively.
8. COMMERCIAL PAPER
The Company has a commercial paper program that is partially supported by
a $50,000 standby letter-of-credit.
The following table provides information regarding the Company's
commercial paper program at December 31, 2004 and 2003:
December 31,
-------------------------------------------------------
2004 2003
------------------------- -------------------------
Commercial paper outstanding $ 95,044 $ 96,432
Maturity range (days) 10 - 66 9 - 86
Interest rate range 2.18% - 2.50% 1.18% - 1.20%
9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying amount and estimated fair
value of the Company's financial instruments at December 31, 2004 and
2003:
December 31,
-------------------------------------------------------------------------
2004 2003
---------------------------------- ----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- -------------- ---------------
ASSETS:
Fixed maturities and
short-term investments $ 13,923,843 $ 13,923,843 $ 13,988,762 $ 13,988,762
Equity investments 637,434 637,434 427,810 427,810
Mortgage loans on real estate
1,543,507 1,511,437 1,893,724 1,871,373
Policy loans 3,548,225 3,548,225 3,389,534 3,389,534
Reinsurance receivables 1,333,349 1,333,349 1,632,883 1,632,883
LIABILITIES:
Annuity contract reserves
without life contingencies 4,831,428 4,833,755 5,157,776 5,245,946
Policyholders' funds 327,409 327,409 330,123 330,123
Due to GWL 26,659 27,510 30,950 32,591
Due to GWL&A Financial 194,164 194,164 175,691 178,421
Commercial paper 95,044 95,044 96,432 96,432
Repurchase agreements 563,247 563,247 389,715 389,715
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
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.
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.
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 $13,372 and $20,416 at December 31, 2004 and 2003, respectively,
representing the estimated fair value of the embedded derivative
associated with the Company's reinsurance receivable under its
coinsurance with funds withheld agreement with the United States branch
of CLAC. Valuation of the derivative 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&A Financial and GWL is based on
discounted cash flows at current market rates on high quality
investments.
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.
Included in fixed maturities and short-term investments are derivative
financial instruments with a net liability position of $16,630 in 2004
and $1,967 in 2003. 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.
10. EMPLOYEE BENEFIT PLANS
The following table summarizes changes for the years ended December 31,
2004, 2003 and 2002 in the benefit obligations and in plan assets for the
Company's defined benefit pension plan and its unfunded post-retirement
medical plan:
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
Defined Benefit Pension Plan Post-Retirement Medical Plan
Year Ended December 31, Year Ended December 31,
------------------------------------------- --------------------------------------------
2004 2003 2002 2004 2003 2002
----------- ---------- ------------ ---------- ------------- -----------
Change in projected
benefit obligation:
Benefit obligation at
beginning of year $ 212,963 $ 186,047 $ 150,521 $ 44,105 $ 31,242 $ 57,861
Service cost 8,576 8,269 8,977 2,891 2,046 3,516
Interest cost 13,317 12,275 11,407 2,735 2,269 3,138
Amendments 827 (22,529)
Actuarial (gain) loss 9,781 12,746 20,679 1,482 9,614 (9,814)
Benefits paid (6,613) (6,374) (6,364) (1,139) (1,066) (930)
----------- ---------- ------------ ---------- ------------- -----------
Benefit obligation at
end of year $ 238,024 $ 212,963 $ 186,047 $ 50,074 $ 44,105 $ 31,242
=========== ========== ============ ========== ============= ===========
Defined Benefit Pension Plan
Year Ended December 31,
-----------------------------------------
2004 2003 2002
----------- ---------- ----------
Change in plan assets:
Fair value of plan
assets at beginning
of year $ 189,319 $ 163,316 $ 187,661
Actual return on plan
assets 13,058 32,377 (17,981)
Employer contributions 3,200
Benefits paid (6,613) (6,374) (6,364)
----------- ---------- ----------
Fair value of plan
assets at end of year $ 198,964 $ 189,319 $ 163,316
=========== ========== ==========
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
Defined Benefit Pension Plan Post-Retirement Medical Plan
Year Ended December 31, Year Ended December 31,
------------------------------------------- -------------------------------------------
2004 2003 2002 2004 2003 2002
----------- ---------- ------------ ----------- ----------- -----------
Funded (unfunded)
status $ (39,060) $ (23,643) $ (22,730) $ (50,074) $ (44,105) $ (31,242)
Unrecognized net
actuarial loss 50,682 41,777 51,943 14,532 13,715 4,361
Unrecognized prior
service cost 1,464 2,095 2,727 (7,965) (8,679) (9,392)
Unrecognized net
obligation or (asset)
at transition (10,599) (12,113) (13,627)
----------- ---------- ------------ ----------- ----------- -----------
Prepaid (accrued)
benefit cost 2,487 8,116 18,313 (43,507) (39,069) (36,273)
Additional minimum
liability (24,158) (16,419) (22,549)
----------- ---------- ------------ ----------- ----------- -----------
Prepaid benefit cost
(accrued benefit
liability) (21,671) (8,303) (4,236) (43,507) (39,069) (36,273)
Intangible asset 1,464 2,095 2,727
Accumulated other
comprehensive
income adjustments 22,694 14,324 19,822
----------- ---------- ------------ ----------- ----------- -----------
Net amount recognized $ 2,487 $ 8,116 $ 18,313 $ (43,507) $ (39,069) $ (36,273)
=========== ========== ============ =========== =========== ===========
Increase (decrease) in
minimum liability
included in other
comprehensive
income $ (5,440) $ 3,573 $ (12,884)
=========== ========== ============
Expected Benefit Payments Year Ended December 31,
---------------------------------------------------------------------------------------------
2010
through
2005 2006 2007 2008 2009 2014
----------- ---------- ------------ ----------- ----------- -----------
Defined benefit
pension plan $ 7,567 $ 7,881 $ 8,341 $ 8,968 $ 9,682 $ 61,557
Post-retirement
medical plan 1,381 1,658 1,937 2,216 2,487 17,669
During 2003, Congress passed the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 (the "Act"), which made significant changes
to the federal Medicare Program. The Act provides for drug benefits under
a new Medicare Part D program.
The measurement of the accumulated post-retirement benefit obligation and
the net post-retirement benefit cost included in 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 $220,635 and $197,623 at December 31, 2004 and 2003, respectively.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
The following table presents the components of net periodic benefit cost
for the years ended December 31, 2004, 2003 and 2002:
Years Ended December 31, Years Ended December 31,
Defined Benefit Pension Plan Post-Retirement Medical Plan
------------------------------------------- -----------------------------------
2004 2003 2002 2004 2003 2002
------------ ----------- ----------- --------- --------- --------
Components of net periodic
benefit cost:
Service cost $ 8,576 $ 8,269 $ 8,977 $ 2,891 $ 2,046 $ 3,516
Interest cost 13,317 12,275 11,406 2,735 2,269 3,138
Expected return on
plan assets (14,933) (12,954) (14,782)
Amortization of transition
obligation (1,514) (1,514) (1,514) 808
Amortization of unrecognized
prior service costs 632 632 632 (713) (713) 161
Amortization of gain from
earlier periods 2,751 3,489 664 261
------------ ----------- ----------- --------- --------- --------
Net periodic benefit cost $ 8,829 $ 10,197 $ 4,719 $ 5,577 $ 3,863 $ 7,623
============ =========== =========== ========= ========= ========
The following table presents the assumptions used in determining benefit obligations for the years ended
December 31, 2004, 2003 and 2002:
Pension Benefits Post-Retirement Medical Plan
------------------------------------------- -----------------------------------
2004 2003 2002 2004 2003 2002
------------ ----------- ----------- --------- --------- --------
Discount rate 6.00% 6.25% 6.75% 6.00% 6.25% 6.75%
Expected return on
plan asset 8.00% 8.00% 8.00%
Rate of compensation
increase 3.19% 3.44% 3.92% 3.19% 3.44% 3.92%
The Company-sponsored post-retirement medical plan (the "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 2004, 2003 or 2002.
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.
The following table presents what a one-percentage-point change would have on assumed health care cost trend rates:
One Percentage One Percentage
Point Increase Point Decrease
---------------------- ---------------------
Increase (decrease) on total of service and interest cost
on components $ 529 $ (451)
Increase (decrease) on post-retirement benefit obligation 4,211 (2,692)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
The following table presents how the Company's pension plan assets are invested at December 31, 2004 and 2003:
December 31,
----------------------------------------------
Asset Category: 2004 2003
---------------------- --------------------
Equity securities 64% 61%
Debt securities 29% 25%
Other 7% 14%
---------------------- --------------------
Total 100% 100%
====================== ====================
The following table presents the Company's target allocation for invested plan assets at December 31, 2005:
Asset Category: December 31, 2005
--------------------------
Equity securities 60%
Debt securities 30%
Other 10%
--------------------------
Total 100%
==========================
The Company does not expect to make contributions to its pension plan in
2005.
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 50% 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, 2004, 2003 and 2002 totaled $7,363, $6,646 and $7,257, respectively.
The Company has an executive 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
$16,810 and $15,350 at December 31, 2004 and 2003, respectively. The
participant deferrals earned interest at the average rate of 6.56% during
2004. The interest rate is based on the Moody's Average Annual Corporate
Bond Index rate plus 0.45% for actively employed participants and fixed
rates ranging from 7.25% to 8.3% for retired participants. Interest
expense related to this plan was $1,184, $1,087 and $1,085 for the years
ended December 31, 2004, 2003 and 2002, respectively.
The Company has a deferred compensation plan for regional sales managers
and individual sales managers and a deferred compensation plan for
producers providing select regional group managers, individual sales
managers and producers with the opportunity to participate in an unfunded
deferred
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
compensation program. Under this program, participants may defer
compensation and earn interest on the amounts deferred. The program is
not qualified under Section 401 of the Internal Revenue Code.
Effective January 1, 2005, this program will no longer accept deferrals.
Participant deferrals, which are reflected in other liabilities, are
$6,339 and $6,576 at December 31, 2004 and 2003, respectively. The
participant deferrals earned interest at the average rate of 4.50% during
2004. The interest rate is based on an annual rate determined by the
Company. The interest expense related to this plan was $291, $362 and $
374 for the years ended December 31, 2004, 2003 and 2002, respectively.
The Company has a non-qualified deferred compensation plan providing a
select group of management or highly compensated individuals with the
opportunity to participate in an unfunded deferred compensation program.
Under the program, participants may defer a portion of their compensation
and earn interest on the amount deferred. The program is not qualified
under Section 401 of the Internal Revenue Code.
Participant deferrals, which are reflected in other liabilities, are
$9,246 and $8,435 at December 31, 2004 and 2003, respectively.
Participant deferrals earned interest at rates ranging from 1.11% to
20.84% during 2004. The interest rate is based on the rates earned on the
investments elected by the participants.
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 was $2,966, $3,073 and 2,494 for the years ended December 31,
2004, 2003 and 2002, respectively. The total liability of $27,185 and
$24,942 at December 31, 2004 and 2003, respectively, is included in other
liabilities.
11. FEDERAL INCOME TAXES
The following table presents a reconciliation between the statutory
federal income tax rate and the Company's effective income tax rate for
the years 2004, 2003 and 2002:
2004 2003 2002
----------------- ----------------- ----------------
Statutory federal income tax rate 35.0 % 35.0 % 35.0 %
Tax effect of:
Reduction in tax contingency (0.3) (2.1) (3.3)
Investment income not subject to federal tax (1.3) (2.1) (1.4)
Tax credits (2.4) (0.2)
Other, net .5 1.8 1.4
----------------- ----------------- ----------------
Effective income tax rate 31.5 % 32.6 % 31.5 %
================= ================= ================
The Company has reduced its liability in each of the last three years for
tax contingencies due to the completion of Internal Revenue Service
examinations.
Deferred income taxes represent the tax effect of the differences between
the book and tax bases of assets and liabilities. The tax effect of
temporary differences, which give rise to the deferred tax assets and
liabilities as of December 31, 2004 and 2003 are as follows:
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
December 31,
------------------------------------------------------------------------
2004 2003
---------------------------------- ----------------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
--------------- -------------- -------------- ---------------
Policyholder reserves $ 334,357 $ $ 358,014 $
Deferred policy acquisition costs 127,563 96,067
Deferred acquisition cost proxy tax 137,867 126,662
Investment assets 242,297 277,358
Other 36,481 8,720
--------------- -------------- -------------- ---------------
Total deferred taxes $ 508,705 $ 369,860 $ 493,396 $ 373,425
=============== ============== ============== ===============
Amounts included for investment assets above include $75,726 and $74,326
related to the unrealized gains on the Company's fixed maturities
available-for-sale at December 31, 2004 and 2003, 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 at December 31, 2004 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
The following table presents the composition of other comprehensive income for the year ended December 31, 2004:
Tax
Before Tax (Expense) Net of Tax
Amount Benefit Amount
----------------- ----------------- -----------------
Unrealized gains on available-for-sale
securities:
Net changes during the year related to
cash flow hedges $ 7,326 $ (2,564) $ 4,762
Unrealized holding gains (losses) arising
during the period (12,706) 4,448 (8,258)
Less: reclassification adjustment for
(gains) losses realized in net income (35,908) 12,567 (23,341)
----------------- ----------------- -----------------
Net unrealized gains (losses) (41,288) 14,451 (26,837)
Reserve and deferred policy acquisition costs
adjustment 35,773 (12,521) 23,252
----------------- ----------------- -----------------
Net unrealized gains (losses) (5,515) 1,930 (3,585)
Minimum pension liability adjustment (8,370) 2,930 (5,440)
----------------- ----------------- -----------------
Other comprehensive income (loss) $ (13,885) $ 4,860 $ (9,025)
================= ================= =================
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
The following table presents the composition of other comprehensive income for the year ended December 31, 2003:
Tax
Before-Tax (Expense) Net-of-Tax
Amount 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 income (22,824) 7,989 (14,835)
----------------- ----------------- -----------------
Net unrealized gains (losses) (28,016) 9,807 (18,209)
Reserve and deferred policy acquisition costs
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)
================= ================= =================
The following table presents the composition of other comprehensive income for the year ended December 31, 2002:
Tax
Before-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 income (8,004) 2,802 (5,202)
----------------- ----------------- -----------------
Net unrealized gains (losses) 176,589 (61,868) 114,721
Reserve and deferred policy acquisition
costs 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 (loss) $ 114,086 $ (39,977) $ 74,109
================= ================= =================
13. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS AND OTHER MATTERS
At December 31, 2004 and 2003, the Company had 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.
Dividends in the amount of $163,230, $75,711 and $170,572, were paid on
common stock in 2004, 2003 and 2002, 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 years ended December 31, 2004, 2003 and 2002 are as
follows:
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
Year Ended December 31,
--------------------------------------------------------
2004 2003 2002
---------------- ----------------- ---------------
(Unaudited)
Net income (loss) $ 402,341 $ (75,626) $ 205,749
Capital and surplus 1,477,425 1,281,191 1,292,292
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. Unaudited statutory surplus and net gains from operations at
December 31, 2004 were $1,477,425 and 496,470, respectively. The Company
should be able to pay up to $496,470 (unaudited) of dividends in 2005.
14. STOCK OPTIONS
The Parent has a stock option plan (the "Lifeco plan") that provides for
the granting of options of its common shares to certain officers and
employees of its subsidiaries, including the Company. Options may be
granted with exercise prices not less than the market price on the date
of the grant. Termination of employment prior to vesting results in the
forfeiture of the options. The stock of Power Financial Corporation
("PFC"), which is the parent corporation of Lifeco, and Lifeco split on
July 21, 2004 and October 4, 2004, respectively. All prior year numbers
have been restated to reflect the stock splits. As of December 31, 2004,
2003 and 2002, stock available for award to Company employees under the
Lifeco plan aggregated 5,588,588, 6,068,688 and 7,834,688 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 vested and became 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 556,000 and 3,664,000 in 1998 and
1997, respectively, became exercisable, if certain cumulative financial
targets were attained by the end of 2001. A total of 351,022 options
vested and became exercisable. The exercise period runs from June 26,
2007
Additional variable options granted in 2004, 2003, 2001, 2000 and 1998
totaling 0, 200,000, 160,000, 240,000 and 760,000 shares, respectively,
become exercisable if certain sales or financial targets are attained.
During 2004, 2003 and 2002, none of these options vested and accordingly,
the Company did not recognize compensation expense. If exercisable, the
exercise period expires ten years from the date of grant.
The following table summarizes the status of, and changes in, the Lifeco
plan options granted to Company employees which are outstanding and the
weighted-average exercise price (the "WAEP") for 2004, 2003 and 2002. 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:
2004 2003 2002
-------------------------- -------------------------- ----------------------------
Options WAEP Options WAEP Options WAEP
--------------------------- ------------- --------- ------------ ---------- ------------- ----------
Outstanding, Jan. 1 7,754,314 $ 8.09 8,894,290 $ 6.83 12,796,298 $ 5.83
Granted 242,000 18.96 1,706,000 13.41 349,000 11.08
Exercised 1,248,834 6.65 972,352 5.43 2,718,982 3.58
Expired or canceled 473,276 14.36 1,873,624 6.98 1,532,026 5.51
------------ --------- ---------- ---------- ------------- ----------
Outstanding, Dec 31 6,274,204 $ 11.87 7,754,314 $ 10.29 8,894,290 $ 6.83
============= ========= =========== ========== ============= ==========
Options exercisable
At year-end 4,195,804 $ 9.98 4,554,584 $ 8.09 4,243,276 $ 5.84
============ ========= ============ ========== ============= ==========
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
2004 2003 2002
Options WAEP Options WAEP Options WAEP
Weighted average
fair value of
options granted
during year $ 4.80 $ 3.49 $ 3.73
============ ============ ============
The following table summarizes the range of exercise prices for
outstanding Lifeco common stock options granted to Company employees at
December 31, 2004:
Outstanding Exercisable
-------------------------------------------------- ---------------------------------
Average Average Average
Exercise Options Life Exercise Options Exercise
Price Range Outstanding Remaining Price Outstanding Price
--------------------- ---------------- ------------- ------------- ---------------- -------------
$3.53 - $6.76 686,800 1.93 $ 4.84 686,800 $ 4.84
$8.42 - $11.22 2,494,304 4.99 9.24 2,401,704 9.25
$14.28 - $20.93 3,093,100 7.60 15.55 1,107,300 14.75
Of the exercisable Lifeco options, 3,870,404 relate to fixed option
grants and 325,400 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 its common shares 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.
The following table summarizes the status of, and changes in, the PFC
plan options granted to Company officers and their WAEP for 2004, 2003
and 2002. 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:
2004 2003 2002
------------------------ -------------------------- --------------------------
Options WAEP Options WAEP Options WAEP
------------ --------- ------------- --------- ------------- ---------
Outstanding, Jan 1, 0 $ 0.00 0 $ 0.00 140,000 $ 1.08
Exercised 0 0.00 0 0.00 (140,000) 1.11
------------ --------- ------------- --------- ------------- ---------
Outstanding, Dec 31, 0 0.00 0 $ 0.00 0 $ 0.00
============ ========= ============= ========= ============= =========
Options exercisable
at year-end 0 $ 0.00 0 $ 0.00 0 $ 0.00
------------ --------- ------------- --------- ------------- ---------
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:
Granted During The Year Ended December 31,
--------------------------------------------------------
2004 2003 2002
---------------- ----------------- ---------------
Dividend yield 2.58% 2.81% 2.45%
Expected volatility 24.64% 26.21% 31.67%
Risk free interest rate 4.33% 4.48% 5.13%
Expected duration 6.7 years 7 years 7 years
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
15. SEGMENT INFORMATION
The Company has two reportable segments: Great-West Healthcare 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
individuals, public and not-for-profit employers and corporations, and
offers life insurance products to individuals and businesses. The
Company's reportable segments are strategic business units that offer
different products and services. They are managed separately as each
segment has unique distribution channels.
The accounting policies of the segments are the same as those described
in Note 1. The Company evaluates performance of its reportable segments
based on their profitability from operations after income taxes.
The Company's operations are not materially dependent on one or a few
customers, brokers or agents.
The following table summarizes segment financial information for the year
ended and as of December 31, 2004:
Year Ended December 31, 2004
---------------------------------------------------------------
Great-West Financial
Operations: Healthcare Services Total
------------------ ------------------- ------------------
Revenue:
Premium income $ 261,957 $ 311,303 $ 573,260
Fee income 649,113 266,531 915,644
Net investment income 46,253 987,054 1,033,307
Realized investment gains 15,248 42,699 57,947
------------------ ------------------- ------------------
Total revenue 972,571 1,607,587 2,580,158
------------------ ------------------- ------------------
Benefits and Expenses:
Benefits 68,306 1,067,499 1,135,805
Operating expenses 680,563 287,150 967,713
------------------ ------------------- ------------------
Total benefits and expenses 748,869 1,354,649 2,103,518
------------------ ------------------- ------------------
Net operating income before income taxes 223,702 252,938 476,640
Income taxes 74,541 75,679 150,220
------------------ ------------------- ------------------
Net income $ 149,161 $ 177,259 $ 326,420
================== =================== ==================
December 31, 2004
---------------------------------------------------------------
Assets: Great-West Financial
Healthcare Services Total
------------------ ------------------- ------------------
Investment assets $ 1,564,644 $ 18,088,365 $ 19,653,009
Other assets 274,914 2,982,571 3,257,485
Separate account assets 14,155,397 14,155,397
------------------ ------------------- ------------------
Total assets $ 1,839,558 $ 35,226,333 $ 37,065,891
================== =================== ==================
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
The following table summarizes segment financial information for the year ended and as of December 31, 2003:
Year Ended December 31, 2003
---------------------------------------------------------------
Great-West Financial
Operations: 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 taxes 261,345 210,296 471,641
Income taxes 88,104 65,516 153,620
------------------ ------------------- ------------------
Net income $ 173,241 $ 144,780 $ 318,021
================== =================== ==================
December 31, 2003
---------------------------------------------------------------
Assets: Great-West Financial
Healthcare Services Total
------------------ ------------------- ------------------
Investment assets $ 1,351,871 $ 18,347,959 $ 19,699,830
Other assets 275,005 3,459,820 3,734,825
Separate account assets 13,175,480 13,175,480
------------------ ------------------- ------------------
Total assets $ 1,626,876 $ 34,983,259 $ 36,610,135
================== =================== ==================
The following table summarizes segment financial information for the year ended and as of December 31, 2002:
Year Ended December 31, 2002
---------------------------------------------------------------
Great-West Financial
Operations: 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 taxes 203,502 210,250 413,752
Income taxes 67,198 63,017 130,215
------------------ ------------------ -----------------
Net income $ 136,304 $ 147,233 $ 283,537
================== ================== =================
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Share Amounts)
The following table, which summarizes premium and fee income by segment, represents supplemental information for the years
ended December 31, 2004, 2003 and 2002:
Year Ended December 31,
----------------------------------------------------------------
2004 2003 2002
------------------ ------------------- -------------------
Premium Income:
Great-West Healthcare:
Group Life & Health $ 261,957 $ 838,194 $ 960,191
------------------ ------------------- -------------------
Total Great-West Healthcare 261,957 838,194 960,191
------------------ ------------------- -------------------
Financial Services:
Retirement Services 1,640 824 15
Individual Markets 309,663 1,413,879 159,889
------------------- ------------------- ------------------
Total Financial Services 311,303 1,414,703 159,904
------------------ ------------------- -------------------
Total premium income $ 573,260 $ 2,252,897 $ 1,120,095
================== =================== ===================
Year Ended December 31,
----------------------------------------------------------------
2004 2003 2002
------------------ ------------------- -------------------
Fee Income:
Great-West Healthcare:
Group Life & Health (uninsured plans) $ 649,113 $ 607,369 $ 660,423
------------------ ------------------- -------------------
Total Great-West Healthcare 649,113 607,369 660,423
------------------ ------------------- -------------------
Financial Services:
Retirement Services 226,958 199,374 196,972
Individual Markets 39,573 33,329 26,167
------------------ ------------------- -------------------
Total Financial Services 266,531 232,703 223,139
------------------ ------------------- -------------------
Total fee income $ 915,644 $ 840,072 $ 883,562
================== =================== ===================
16. OBLIGATIONS RELATING TO DEBT AND LEASES
The Company enters into operating leases primarily for office space. The
following table shows, as of December 31, 2004, scheduled related party
debt repayments and minimum annual rental commitments for operating leases
having initial or remaining non-cancelable lease terms in excess of one
year during the years 2005 through 2009.
2005 2006 2007 2008 2009 Thereafter
---------- ---------- ----------- ---------- ----------- --------------
Related party notes $ $ 25,000 $ $ $ $ 195,000
Operating leases 21,968 19,471 17,935 17,463 16,019 7,279
---------- ---------- ----------- ---------- ----------- --------------
Total contractual
obligations $ 21,968 $ 44,471 $ 17,935 $ 17,463 $ 16,019 $ 202,279
========== ========== =========== ========== =========== ==============
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.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
SCHEDULE III
SUPPLEMENTAL INSURANCE INFORMATION
(In Thousands)
Financial
Healthcare Services
As of and for the year ended December 31, 2004 Segment Segment Total
- ----------------------------------------------
----------------- ---------------- -----------------
Deferred policy acquisition costs $ $ 301,603 $ 301,603
Future policy benefits, losses, claims, expenses 323,975 17,580,163 17,904,138
Unearned premiums 37,749 432 38,181
Other policy claims and benefits payable 564,623 434,622 999,245
Premium income 261,957 311,303 573,260
Net investment income 46,253 987,054 1,033,307
Benefits, claims, losses and settlement expenses 68,306 1,067,499 1,135,805
Amortization of deferred policy acquisition costs 40,536 40,536
Other operating expenses 680,563 287,150 967,713
Financial
Healthcare Services
As of and for the year ended December 31, 2003 Segment Segment Total
- ----------------------------------------------
----------------- ---------------- -----------------
Deferred policy acquisition costs $ $ 284,866 $ 284,866
Future policy benefits, losses, claims, expenses 569,425 18,051,633 18,621,058
Unearned premiums 28,475 545 29,020
Other policy claims and benefits payable 623,337 429,965 1,053,302
Premium income 838,194 1,414,703 2,252,897
Net investment income 72,191 916,209 988,400
Benefits, claims, losses and settlement expenses 567,603 2,116,001 2,683,604
Amortization of deferred policy acquisition costs 36,283 36,283
Other operating expenses 699,146 266,538 965,684
Financial
Healthcare Services
For the year ended December 31, 2002 Segment Segment Total
- ------------------------------------
----------------- ---------------- -----------------
Premium income $ 960,191 $ 159,904 $ 1,120,095
Net investment income 67,923 851,442 919,365
Benefits, claims, losses and settlement expenses 761,481 831,272 1,592,753
Amortization of deferred policy acquisition costs 38,707 38,707
Other operating expenses 732,472 225,671 958,143
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change in the Company's independent accountants nor
disagreements on accounting and financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
Based on their evaluation as of December 31, 2004, 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 2004 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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 76 1993 Corporate Director
(1)(2)(4)
James W. Burns, O.C. 75 1991 Director Emeritus, Power Corporation and
(1)(2)(5) Power Financial
Orest T. Dackow 68 1991 Corporate Director since April 2000;
(1)(2)(5) previously President and Chief
Executive Officer, Lifeco
Andre Desmarais, O.C. 48 1997 President and Co-Chief Executive
(1)(2)(4)(5)(6) Officer, Power Corporation; Deputy
Chairman, Power Financial
Paul Desmarais, Jr., O.C. 50 1991 Chairman and Co-Chief Executive
(1)(2)(4)(5)(6) Officer, Power Corporation; Chairman,
Power Financial
Robert Gratton 61 1991 Chairman of the Board of the Company;
(1)(2)(4)(5) 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, C.M. 72 1986 Corporate Director; Chancellor Emeritus,
(1)(3)(5) Brandon University
William Mackness 66 1991 Corporate Director
(1)(2)
William T. McCallum 62 1990 President and Chief Executive Officer of
(1)(2)(5) the Company; Co-President and Chief
Executive Officer, Lifeco
Jerry E.A. Nickerson 68 1994 Chairman of the Board, H.B. Nickerson &
(3)(5) Sons Limited (a management and
holding company)
David A. Nield 66 2003 Corporate Director; previously Chairman and
(1)(2)(5) Chief Executive Officer, Canada Life
Michel Plessis-Belair, 62 1991 Vice Chairman and Chief Financial
F.C.A.(1)(2)(3)(5) Officer, Power Corporation; Executive
Vice President and Chief Financial
Officer, Power Financial
Brian E. Walsh 51 1995 Managing Partner, QVan Capital, LLC
(1)(2)(3)(4) (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) Member of the Compensation Committee
(5) Also a director of Great-West Life
(6) Mr. Andre Desmarais and Mr. Paul Desmarais, Jr. are brothers.
Unless otherwise indicated, all of the directors have been engaged for
not less than five years in their present principal occupations or in
another executive capacity with the companies or firms identified.
Directors are elected annually to serve until the following annual
meeting of shareholders.
The following is a list of directorships held by the directors of the
Company, on companies whose securities are traded publicly in the
United States or that are investment companies registered under the
Investment Company Act of 1940.
J. Balog Transatlantic Holdings, Inc.
P. Desmarais, Jr. SUEZ
TOTAL S.A.
W.T. McCallum Maxim Series Fund, Inc.
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 62 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 49 1997 Executive Vice President and Chief
Executive Vice Financial Officer of the Company
President and Chief
Financial Officer
Richard F. Rivers 51 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 48 1991 Executive Vice President, Financial
Executive Vice Services of the Company
President,
Financial Services
S. Mark Corbett 45 2001 Senior Vice President,
Senior Vice President, Investments of the Company
Investments
Glen R. Derback 53 2003 Senior Vice President and Controller of the
Senior Vice President Company
and Controller
Terry L. Fouts 61 2003 Senior Vice President and Chief Medical
Senior Vice President and Officer of the Company since May 2003;
Chief Medical Officer previously National Medical Director for
Clinical Cost Management, Aetna U.S.
Healthcare from May 2001; previously Global
Medical Director for Cigna International
John R. Gabbert 50 2000 Senior Vice President and Chief
Senior Vice President Information Officer, Healthcare
and Chief Information of the Company since April 2000;
Officer, Healthcare previously Vice President, Information
Technology, AT&T Broadband
Donna A. Goldin 57 1996 Senior Vice President, Healthcare
Senior Vice President, Operations of the Company
Healthcare Operations
Wayne T. Hoffmann 49 2001 Senior Vice President,
Senior Vice President, Investments of the Company
Investments
D. Craig Lennox 57 1984 Senior Vice President, General Counsel
Senior Vice President, and Secretary of the Company
General Counsel and
Secretary
James L. McCallen 54 2003 Senior Vice President and Actuary of the
Senior Vice President and Company
Actuary
Graham R. McDonald 58 2003 Senior Vice President, Corporate
Senior Vice President, Administration of the Company
Corporate Administration
Charles P. Nelson 44 1998 Senior Vice President, Retirement Services
Senior Vice President, of the Company
Retirement Services
Deborah L. Origer 48 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 52 1997 Senior Vice President, Healthcare Finance
Senior Vice President, of the Company
Healthcare Finance
Gregory E. Seller 51 1999 Senior Vice President,
Senior Vice President, Government Markets of the Company
Government Markets
Robert K. Shaw 49 1998 Senior Vice President,
Senior Vice President, Individual Markets of the Company
Individual Markets
Mark L. Stadler 51 2003 Senior Vice President, U.S. Markets of the
Senior Vice President, Company since March 2003; previously
U.S. Markets Principal, Mercer Human Resource
Consulting
Douglas J. Stefanson 49 2003 Senior Vice President, Healthcare
Senior Vice President, Underwriting of the Company
Healthcare Underwriting
George D. Webb 61 1999 Senior Vice President, P/NP Operations of
Senior Vice President, the Company
P/NP Operations
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, 2004, 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
Annual Compensation Awards
-------------------------------- ---------- ---------------------------------------- ------------------------
Name and Year Salary Bonus Options(1)(2)
Principal Position
($) ($) (#)
-------------------------------- ---------- -------------------- ------------------- ------------------------
W.T. McCallum 2004 972,596 1,000,000 ---
President and Chief Executive 2003 903,333 915,000 ---
Officer 400,000(3)
2002 880,000 --- ---
-------------------------------- ---------- -------------------- ------------------- ------------------------
D.L. Wooden 2004 587,750 444,000 ---
Executive Vice President, 2003 568,750 200,000(3) 100,000(6)
Financial Services 2002 550,000 343,750 ---
-------------------------------- ---------- -------------------- ------------------- ------------------------
R.F. Rivers(4) 2004 562,700 427,500 ---
Executive Vice President, 2003 530,600 515,000 ---
Healthcare 2002 185,600(5) 225,000 240,000
-------------------------------- ---------- -------------------- ------------------- ------------------------
M.T.G. Graye 2004 506,250 382,500 ---
Executive Vice President 2003 490,000 371,250 100,000(6)
and Chief Financial Officer 200,000(3)
2002 457,000 237,500 ---
-------------------------------- ---------- -------------------- ------------------- ------------------------
C.P. Nelson 2004 412,000 247,200 ---
Senior Vice President, 2003 359,120 118,000 ---
Retirement Services 75,000(7)
2002 312,000 181,900 ---
-------------------------------- ---------- -------------------- ------------------- ------------------------
(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) After giving effect to the October 6, 2004 two-for-one subdivision
of Lifeco common shares.
(3) Special bonus paid in respect of the acquisition of Canada Life.
(4) Mr. Rivers joined the Company in August 2002.
(5) Mr. Rivers' annualized salary for 2002 was $500,000.
(6) These Lifeco Options are contingent upon the attainment of certain
financial targets.
(7) Special bonus paid in respect of business acquisitions.
B. OPTIONS
There were no options granted to the Named Executive Officers during
the most recently completed fiscal year.
The Great-West Lifeco Stock Option Plan was created effective April 24,
1996. The following table describes all Lifeco Options exercised in
2004, and all unexercised Lifeco Options held as of December 31, 2004,
by the Named Executive Officers. Lifeco Options are issued with an
exercise price in Canadian dollars. Year-end Canadian dollar amounts
have been translated to U.S. dollars at a rate of 1/1.20.
AGGREGATED LIFECO OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
-------------------- ----------- ------------- ------------------------------ -----------------------------
Value of unexercised in-the-
Unexercised options at money options at fiscal
fiscal year-end year-end
(#) ($)
-------------------- ----------- ------------- ------------------------------ -----------------------------
Shares
acquired
on Value
exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($)
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
W.T. McCallum 38,400 560,828 1,100,000 --- 14,279,409 ---
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
D.L. Wooden 87,100 1,323,413 672,902 100,000 9,425,630 606,679
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
R.F. Rivers --- --- 96,000 144,000 760,112 1,140,168
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
M.T.G. Graye 264,000 4,118,025 334,002 132,000 4,106,691 851,162
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
C.P. Nelson 144,000 1,576,753 24,000 96,000 191,189 764,756
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
C. PENSION PLAN TABLE
The following table sets out the pension benefits payable to the Named
Executive Officers.
PENSION PLAN TABLE
--------------------------------------------------------------------------------------
Years of Service
--------------------------------------------------------------------------------------
Remuneration
($) 15 20 25 30 35
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
400,000 120,000 160,000 200,000 240,000 240,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
600,000 180,000 240,000 300,000 360,000 360,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
800,000 240,000 320,000 400,000 480,000 480,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
1,000,000 300,000 400,000 500,000 600,000 600,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
1,200,000 360,000 480,000 600,000 720,000 720,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
1,400,000 420,000 560,000 700,000 840,000 840,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
1,600,000 480,000 640,000 800,000 960,000 960,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
1,800,000 540,000 720,000 900,000 1,080,000 1,080,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
2,000,000 600,000 800,000 1,000,000 1,200,000 1,200,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
2,200,000 660,000 880,000 1,100,000 1,320,000 1,320,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
2,400,000 720,000 960,000 1,200,000 1,440,000 1,440,000
-------------------- ---------------- ----------------- ---------------- ----------------- ----------------
The Named Executive Officers have the following years of service, as of
December 31, 2004.
------------------------------------------------------ ----------------------------------------------------
Name Years of Service
------------------------------------------------------ ----------------------------------------------------
W.T. McCallum 39
------------------------------------------------------ -----------------------------------------------------
D.L. Wooden 14
------------------------------------------------------ ----------------------------------------------------
R.F. Rivers 2
------------------------------------------------------ ----------------------------------------------------
M.T.G. Graye 11
------------------------------------------------------ ----------------------------------------------------
C.P. Nelson 21
------------------------------------------------------ ----------------------------------------------------
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 D.L. Wooden, R.F. Rivers, M.T.G. Graye and C.P. Nelson,
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
Compensation Committee. Messrs. Gratton, Balog, A. Desmarais,
P. Desmarais, Jr., and Walsh serve on the Committee. None of these
individuals are either current or former officers or employees of the
Company or any of its subsidiaries.
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, 2005, 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 900, 1959
Upper Water Street, Halifax, Nova Scotia, Canada B3J 3N2.
(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) 74.9% 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) 66.4% 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 March 1, 2005, 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.
-------------------------- ---------------------------- -------------------------- ------------------------
Power Financial Power Corporation
Great-West Lifeco Inc. Corporation of Canada
-------------------------- ---------------------------- -------------------------- ------------------------
Directors (1) (2) (3)
-------------------------- ---------------------------- -------------------------- ------------------------
J. Balog --- --- ---
-------------------------- ---------------------------- -------------------------- ------------------------
J.W. Burns 307,318 16,000 1,051,280
-------------------------- ---------------------------- -------------------------- ------------------------
O.T. Dackow 163,284 --- ---
-------------------------- ---------------------------- -------------------------- ------------------------
A. Desmarais 103,318 43,200 795,787
3,800,000 options
-------------------------- ---------------------------- -------------------------- ------------------------
P. Desmarais, Jr. 87,318 --- 138,648
3,780,000 options
-------------------------- ---------------------------- -------------------------- ------------------------
R. Gratton 664,992 11,180,000 34,370
3,000,000 options
-------------------------- ---------------------------- -------------------------- ------------------------
K.P. Kavanagh 20,104 --- ---
4,000 Preferred (Series D)
-------------------------- ---------------------------- -------------------------- ------------------------
W. Mackness 2,000 --- ---
-------------------------- ---------------------------- -------------------------- ------------------------
W.T. McCallum 163,936 --- ---
1,100,000 options
-------------------------- ---------------------------- -------------------------- ------------------------
J.E.A. Nickerson 1,500 10,200 14,429
-------------------------- ---------------------------- -------------------------- ------------------------
D.A. Nield 56,848 --- ---
2,777 Preferred (Series E)
38,553 Preferred (Series F)
-------------------------- ---------------------------- -------------------------- ------------------------
M. Plessis-Belair 40,000 6,000 203,798
470,000 options
-------------------------- ---------------------------- -------------------------- ------------------------
B.E. Walsh --- --- ---
-------------------------- ---------------------------- -------------------------- ------------------------
-------------------------- ---------------------------- -------------------------- ------------------------
Power Financial Power Corporation
Great-West Lifeco Inc. Corporation of Canada
-------------------------- ---------------------------- -------------------------- ------------------------
Named Executive (1) (2) (3)
Officers
-------------------------- ---------------------------- -------------------------- ------------------------
W.T. McCallum 163,936 --- ---
1,100,000 options
-------------------------- ---------------------------- -------------------------- ------------------------
D.L. Wooden --- 226,000 ---
672,902 options
-------------------------- ---------------------------- -------------------------- ------------------------
R.F. Rivers --- --- ---
96,000 options
-------------------------- ---------------------------- -------------------------- ------------------------
M.T.G. Graye 3,508 100,000 ---
334,002 options
-------------------------- ---------------------------- -------------------------- ------------------------
C.P. Nelson 58,910 --- ---
24,000 options
-------------------------- ---------------------------- -------------------------- ------------------------
-------------------------- ---------------------------- -------------------------- ------------------------
Power Financial Power Corporation
Great-West Lifeco Inc. Corporation of Canada
-------------------------- ---------------------------- -------------------------- ------------------------
Directors and
Executive Officers (1) (2) (3)
as a Group
-------------------------- ---------------------------- -------------------------- ------------------------
1,968,862 11,763,800 2,239,912
3,893,504 options 3,000,000 options 8,050,000 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 Robert Gratton represents 2% 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 Andre
Desmarais represents 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 2.5% 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, 2004 and 2003, professional services
were performed by Deloitte & Touche LLP ("Deloitte"). The total fees
for these services were $3,915,950 and $4,400,850 for the years ended
December 31, 2004 and 2003, 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, 2004 and 2003, and for the review of the financial
statements included in the Company's quarterly reports on Form 10-Q,
were $3,254,300 and $3,153,000, respectively.
Audit Related Fees
The aggregate fees billed for audit related services for the fiscal
years ended December 31, 2004 and 2003 were $415,850 and $335,750,
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, 2004 and 2003 were $196,950 and $284,000, 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 $48,850 and
$628,100, respectively, for the fiscal years ended December 31, 2004
and 2003. The fees for 2004 relate to an analysis of potential service
providers for the potential expansion of the Financial Services
division's recordkeeping services. The fees for 2003 relate primarily
to market and other analysis in support of strategic planning by the
Great-West Healthcare division.
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 de minimis safe harbor exemption from pre-approval
requirements. The amount of hours expended on Deloitte's audit of the
Company's financial statements for 2004 attributable to work performed
by persons other than Deloitte's full-time, permanent employees was
less than 50%.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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, 2004, 2003, and 2002..............................
Consolidated Balance Sheets as of December 31, 2004 and 2003.........................
Consolidated Statements of Income for the Years Ended
December 31, 2004, 2003, and 2002..................................................
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 2004, 2003, and 2002..................................................
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003, and 2002..................................................
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2004, 2003, and 2002..................................................
Schedule III - Supplemental Insurance Information....................................
All other 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, Exhibit
24 to Registrant's Form 10-K for the year
ended December 31, 1997, and Exhibit 24 to
Registrant's Form 10-K for the year ended
December 31, 2003 and incorporated herein
by reference.
31.1 Section 302 Certification of the Chief Executive
Officer filed herewith.
31.2 Section 302 Certification of the Chief Financial
Officer filed herewith.
32 Section 906 Certification of the Chief Executive
Officer and Chief Financial Officer filed herewith.
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, 2005
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, 2005
------------------------------------------------------------------------
William T. McCallum
President and Chief Executive Officer and a Director
/s/ Mitchell T.G. Graye March 30, 2005
------------------------------------------------------------------------
Mitchell T.G. Graye
Executive Vice President and Chief Financial Officer
/s/ Glen R. Derback March 30, 2005
------------------------------------------------------------------------
Glen R. Derback
Senior Vice President and Controller
/s/ James Balog* March 30, 2005
------------------------------------------------------------------------
James Balog, Director
/s/ James W. Burns* March 30, 2005
------------------------------------------------------------------------
James W. Burns, Director
/s/ Orest T. Dackow* March 30, 2005
------------------------------------------------------------------------
Orest T. Dackow, Director
/s/ Andre Desmarais* March 30, 2005
------------------------------------------------------------------------
Andre Desmarais, Director
/s/ Paul Desmarais, Jr. * March 30, 2005
------------------------------------------------------------------------
Paul Desmarais, Jr., Director
/s/ Robert Gratton* March 30, 2005
------------------------------------------------------------------------
Robert Gratton, Chairman of the Board
/s/ Kevin P. Kavanagh* March 30, 2005
------------------------------------------------------------------------
Kevin P. Kavanagh, Director
/s/ William Mackness* March 30, 2005
------------------------------------------------------------------------
William Mackness, Director
/s/ Jerry E.A. Nickerson* March 30, 2005
------------------------------------------------------------------------
Jerry E.A. Nickerson, Director
/s/ David A. Nield* March 30, 2005
------------------------------------------------------------------------
David A. Nield, Director
/s/ Michel Plessis-Belair* March 30, 2005
------------------------------------------------------------------------
Michel Plessis-Belair, Director
/s/ Brian E. Walsh* March 30, 2005
------------------------------------------------------------------------
Brian E. Walsh, Director
*By:/s/ Glen R. Derback March 30, 2005
------------------------------------------------------------------------
Glen R. Derback
Attorney-in-fact pursuant to filed Power of Attorney