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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 [FEE REQUIRED]
For The Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _____________
Commission file number 333-64473
GWL&A FINANCIAL INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1474245 (State or other jurisdiction of incorporation or
organization) (I.R.S. Employer Identification No.)
8515 East Orchard Road, Englewood, Colorado 80111
(Address of principal executive offices) (Zip Code)
(303) 737-4128
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of December 31, 1999, the aggregate market value of the registrant's voting
stock held by non-affiliates of the registrant was $0.
As of December 31, 1999, 50,025 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
TABLE OF CONTENTS
Page
PART I
Item 1. Business........................................................................
A. Organization and Corporate Structure...................................
B. Business of the Company ...............................................
C. Employee Benefits .....................................................
D. Financial Services ....................................................
E. Investment Operations..................................................
F. Regulation.............................................................
G. Ratings................................................................
H. Miscellaneous..........................................................
Item 2. Properties......................................................................
Item 3. Legal Proceedings...............................................................
Item 4. Submission of Matters to a Vote of Security Holders.............................
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................................
A. Equity Security Holders and Market Information.........................
B. Dividends..............................................................
Item 6. Selected Financial Data.........................................................
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................................
A. Company Results of Operations..........................................
B. Employee Benefits Results of Operations................................
C. Financial Services Results of Operations...............................
D. Investment Operations .................................................
E. Liquidity and Capital Resources........................................
F. Accounting Pronouncements..............................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................
Item 8. Financial Statements and Supplementary Data.....................................
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................................
PART III
Item 10. Directors and Executive Officers of the Registrant..............................
A. Identification of Directors............................................ B.
Identification of Executive Officers............................................
Item 11. Executive Compensation..........................................................
A. Summary Compensation Table.............................................
B. Options................................................................
C. Pension Plan Table.....................................................
D. Compensation of Directors..............................................
E. Compensation Committee Interlocks and Insider Participation............
Item 12. Security Ownership of Certain Beneficial Owners and Management..................
A. Security Ownership of Certain Beneficial Owners........................
B. Security Ownership of Management.......................................
Item 13. Certain Relationships and Related Transactions..................................
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................
A. Index to Financial Statements..........................................
B. Index to Exhibits......................................................
C. Reports on Form 8-K....................................................
Signatures ...........................................................................
PART I
ITEM 1. BUSINESS
A. ORGANIZATION AND CORPORATE STRUCTURE
GWL&A Financial Inc. (the "Company") was incorporated in the State of Delaware
on September 16, 1998 to act as a holding company for Great-West Life & Annuity
Insurance Company ("GWL&A") and its subsidiaries. GWL&A is a stock life
insurance company originally organized in 1907, which is domiciled in Colorado.
The Company is an indirect wholly-owned subsidiary of The Great-West Life
Assurance Company ("Great-West Life"), a Canadian life insurance company.
Great-West Life is a subsidiary of Great-West Lifeco Inc. ("Great-West Lifeco"),
a Canadian holding company. Great-West Lifeco is a subsidiary of Power Financial
Corporation ("Power Financial"), a Canadian holding company with substantial
interests in the financial services industry. Power Financial Corporation is a
subsidiary of Power Corporation of Canada ("Power Corporation"), a Canadian
holding and management company. Mr. Paul Desmarais, through a group of private
holding companies, which he controls, has voting control of Power Corporation.
In 1999, a trust subsidiary of the Company, Great-West Life & Annuity Insurance
Capital I, issued $175 million of 7.25% Subordinated Capital Income Securities,
which securities are listed on the New York Stock Exchange. Shares of Great-West
Lifeco, Power Financial and Power Corporation are traded publicly in Canada.
B. BUSINESS OF THE COMPANY
GWL&A is authorized to engage in the sale of life insurance, accident and health
insurance and annuities. It is qualified to do business in all states in the
United States except New York, and in the District of Columbia, Puerto Rico,
Guam and the U.S. Virgin Islands. GWL&A conducts business in New York through
its subsidiary, First Great-West Life & Annuity Insurance Company. GWL&A is also
a licensed reinsurer in the State of New York. As of December 31, 1998, GWL&A
ranked among the top 25 of all U.S. life insurance companies in terms of
admitted assets.
The Company operates, through GWL&A, in the following two business segments:
Employee Benefits -life, health and 401(k) products for group clients
Financial Services -savings products for both public and non-profit
employers and individuals (including 401, 403(b), 408 and 457 plans), and life
insurance products for individuals and businesses
The table that follows summarizes premiums and deposits for the years indicated.
For further consolidated financial information concerning the Company, see Item
6 (Selected Financial Data), and Item 8 (Financial Statements and Supplementary
Data). For commentary on the information in the following table, see Item 7
(Management's Discussion and Analysis of Financial Condition and Results of
Operations).
Millions (1) 1999 1998 1997
------------- ------------- -------------
Premium Income
Employee Benefits
Group Life & Health $ 991 $ 747 $ 465
------------- ------------- -------------
Total Employee Benefits 991 747 465
------------- ------------- -------------
Financial Services
Savings 14 17 23
Individual Insurance 158 231 (3) 345 (2)
------------- ------------- -------------
Total Financial Services 172 248 368
------------- ------------- -------------
Premium income $ 1,163 $ 995 $ 833
============= ============= =============
Fee Income
Employee Benefits
Group Life & Health $ 454 $ 367 $ 305
401(k) 95 78 53
------------- ------------- -------------
------------- ------------- -------------
Total Employee Benefits 549 445 358
------------- ------------- -------------
------------- ------------- -------------
Financial Services
Savings 81 71 62
Individual Insurance 5
------------- ------------- -------------
------------- ------------- -------------
Total Financial Services 86 71 62
------------- ------------- -------------
------------- ------------- -------------
Fee income $ 635 $ 516 $ 420
============= ============= =============
============= ============= =============
Deposits for Investment-type
Contracts:
Employee Benefits $ 26 $ 37 $ 25
Financial Services 608 1,307 (3) 633
------------- ------------- -------------
Total investment-type
deposits $ 634 $ 1,344 $ 658
============= ============= =============
Deposits to Separate Accounts
Employee Benefits $ 1,745 $ 1,568 $ 1,403
Financial Services 838 640 742
------------- ------------- -------------
Total separate accounts
deposits $ 2,583 $ 2,208 $ 2,145
============= ============= =============
Self-funded equivalents (4) $ 2,979 $ 2,606 $ 2,039
============= ============= =============
(1) All information in the above table and other tables herein is derived from
information that has been prepared in conformity with generally accepted
accounting principles, unless otherwise indicated.
(2) This amount includes the recapture of $156 million for the year ended
December 31, 1997 of participating policy reserves previously co-insured with
Great-West Life under a participating life coinsurance agreement.
(3) These amounts include $46 million in premium income for non-participating
life insurance policies and $520 million in deposits for investment-type
contracts which Great-West Life co-insured with the Company in 1998 under two
indemnity reinsurance agreements.
(4) Self-funded equivalents generally represent paid claims under minimum
premium and administrative services only contracts, which amounts approximate
the additional premiums that would have been earned under such contracts if they
had been written as traditional indemnity or HMO programs.
C. EMPLOYEE BENEFITS
1. Principal Products
The Employee Benefits segment of the Company provides a full range of employee
benefits products to more than 12,800 employers across the United States.
The Company offers customers a variety of health plan options to help them
maximize the value of their employee benefits package. The majority of the
Company's health care business is self-funded, whereby the employer assumes all
or a significant portion of the risk. For companies with better than average
claims experience, this can result in significant health care savings.
The Company offers employers a total benefits solution - an integrated package
of group life and disability insurance, managed care programs, 401(k) savings
plans and flexible spending accounts. Through integrated pricing,
administration, funding and service, the Company helps employers provide
cost-effective benefits that will attract and retain quality employees, and at
the same time, helps employees reach their personal goals by offering benefit
choices, along with information needed to make appropriate choices. Many
customers also find this integrated approach appealing because their benefit
plans are administered through a single company with linked systems that provide
on-line administration and account access, for enhanced efficiency and
simplified plan administration.
The Company offers a choice of managed care products including Health
Maintenance Organization ("HMO") plans, which provide a high degree of managed
care, and Preferred Provider Organization ("PPO") plans and Point of Service
("POS") plans which offer more flexibility in provider choice than HMO plans.
Under HMO plans, health care for the member is coordinated by a primary care
physician who is responsible for managing all aspects of the member's health
care. HMO plans offer a broad scope of benefits coverage including routine
office visits and preventive care, as well as lower premiums and low copayments,
which minimize out-of-pocket costs. There are no claims to file when services
are received through a primary care physician.
POS plans also require that a member enroll with a primary care physician who is
responsible for coordinating the member's health care. Similar to an HMO,
members receive the highest benefit coverage and the lowest out-of-pocket costs
when they use their primary care physician to coordinate their heath care. In
contrast to an HMO, members can seek care outside of the primary physician's
direction, at a reduced level of benefits. Some benefits may not be covered
outside the in-network POS plan. PPO plans offer members a greater choice of
physicians and hospitals. Members do not need to enroll with a primary care
physician - they simply select a contracted PPO provider at the time of the
service to receive the highest level of benefits. If members seek care outside
of the PPO network, they receive a lower level of benefits.
The One Health Plan HMO subsidiary organization administers provider networks
and provides medical management, member services and quality assurance for the
other managed care products of the Company, Alta Health & Life Insurance Company
("Alta"), formerly known as Anthem Health & Life Insurance Company, and New
England Life Insurance Company ("New England"). In addition to creating
economies of scale, this "pooling" of PPO, POS and HMO membership benefits the
Company by improving its position in negotiating provider reimbursement
arrangements, which leads to more competitive pricing.
The Company offers Internal Revenue Code Section 125 plans which enable
participants to set aside pre-tax dollars to pay for unreimbursed medical
expenses and dependent care expenses. This creates tax efficiencies for both the
employer and its employees.
The Company offers group life insurance. Sales of group life insurance consist
principally of renewable term coverage, the amounts of which are usually linked
to individual employee wage levels. The following table shows group life
insurance in force prior to reinsurance ceded for the years indicated:
[Millions] Years Ended December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
In force
end of year $ 83,901(1$ 84,121(1$ 53,211 $ 49,500 $ 50,370
(1) Includes $25,812 and $25,597 of in force group life insurance obtained from the acquisition of
Alta for the years ended December 31, 1999 and 1998, respectively.
The Company's 401(k) product is offered by way of a group fixed and variable
deferred annuity contract. The product provides a variety of funding and
distribution options for employer-approved retirement plans that qualify under
Internal Revenue Code Section 401(k).
The 401(k) product investment options for the employer include guaranteed
interest rates for various lengths of time and variable investment options. For
the fully guaranteed option, the difference between the income earned on
investments in the Company's general account and the interest credited to the
participant's account balance flows through to operating income.
Variable investment options utilize separate accounts to provide participants
with a vehicle to assume the investment risks. Assets held under these options
are invested, as designated by the participant, in separate accounts which in
turn invest in shares of underlying funds managed by a subsidiary of the Company
or by selected external fund managers.
Of the total 401(k) assets under administration in 1999, 97% were allocated to
variable investment options versus 96% in 1998.
The Company is compensated by the separate accounts for bearing expense risks
pertaining to the variable annuity contract, and for providing administrative
services. For certain funds, a subsidiary of the Company also receives fees for
serving as an investment advisor for those underlying funds, which are managed
by the subsidiary.
In 1999, the Company introduced a self-directed brokerage account option for its
401(k) product.
Customer retention is a key factor for the profitability of the Company's 401(k)
product. The annuity contract imposes a charge for termination during a
designated period of time after the contract's inception. The charge is
determined in accordance with a formula in the contract. Existing federal tax
penalties on distributions prior to age 59 1/2 provide an additional
disincentive to premature surrenders of account balances, but do not impact
rollovers to products of competitors.
The Company offers a rollover Individual Retirement Annuity, which allows
individuals to move retirement funds from a 401(k) plan to a qualified
Individual Retirement Account.
In the following table, the amount of 401(k) business in force is measured by
the total of individual account balances:
[Millions]
Year Ended
December 31, Fixed Annuities Variable Annuities
----------------------------- ------------------- -------------------------
1995 $ 358 $ 2,227
1996 347 3,229
1997 328 4,568
1998 299 5,770
1999 268 7,339
2. Method of Distribution
The Company distributes its products and services through field sales staff of
the Company, Alta and New England located in 63 sales offices throughout the
United States. Each sales office works with insurance brokers, agents and
consultants in their local market.
3. Competition
The employee benefits industry is highly competitive. Over the past year, the
United States health care industry has experienced a number of mergers and
consolidations. A number of larger carriers dropped out of the group health
market entirely. Although there are still many different carriers in the
marketplace, it has become dominated by an increasingly smaller number of
carriers, including the Company.
The highly competitive marketplace creates pricing pressures, which encourage
employers to seek competitive bids each year. Although most employers are
looking for affordably priced employee benefits products, they 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, which offers multiple product lines and centralized administration.
In addition to price, there are a number of other factors which influence
employer decision-making. These factors include quality of services; scope,
cost-effectiveness and quality of provider networks; product responsiveness to
customers' needs; cost-containment services; and effectiveness of marketing and
sales.
4. Reserves
For group whole life and term insurance products, policy reserve liabilities are
equal to the present value of future benefits and expenses less the present
value of future net premiums using best estimate assumptions for interest,
mortality and expenses (including margins for adverse deviation). For disability
waiver of premium and paid up group whole life contracts, the policy reserves
equal the present value of future benefits and expenses using best estimate
assumptions for interest, mortality and expenses (including margins for adverse
deviation). For group universal life, the policy reserves equal the accumulated
fund balance (which reflects cumulative deposits plus credited interest less
charges thereon). Reserves for long-term disability products are established for
lives currently in payment status using industry and Company morbidity factors,
and interest rates based on Company experience. In addition, reserves are held
for lives that have not satisfied their waiting period and for claims that have
been incurred but not reported.
For medical, dental and vision insurance products, reserves reflect the ultimate
cost of claims including, on an estimated basis, (i) claims that have been
reported but not settled, and (ii) claims that have been incurred but not
reported. Claim reserves are based upon factors derived from past experience.
Reserves also reflect retrospective experience rating that is done on certain
types of business.
Reserves for investment contracts (401(k) deferred annuities) are equal to
cumulative deposits, less withdrawals and charges, plus credited interest
thereon.
Assumptions for mortality and morbidity experience are periodically reviewed
against published industry data and company experience.
The above mentioned reserves are computed amounts that, with additions from
premiums and deposits to be received, and with interest on such reserves, are
expected to be sufficient to meet the Company's policy obligations at their
maturities, and pay expected death or retirement benefits or surrender requests.
5. Reinsurance
The Company has a marketing and administrative services arrangement with New
England. Under reinsurance agreements, New England issues group life and health
and 401(k) products and then immediately reinsures 50% of its group life and
health business, and nearly 100% of its guaranteed 401(k) business, with the
Company.
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 coinsurance contracts. The maximum amount of group life
insurance retained on any one life is $1.5 million. The maximum amount of group
monthly disability income benefit at risk on any one life is $6,000 per month.
D. FINANCIAL SERVICES
1. Principal Products
The Financial Services segment of the Company develops, administers and sells
retirement savings and life insurance products and services for individuals, and
for employees of state and local governments, hospitals, non-profit
organizations and public school districts.
The Company's core savings business is in the public/non-profit pension market.
The Company provides investment products, and administrative and communication
services, to employees of state and local governments (Internal Revenue Code
Section 457 plans), as well as employees of hospitals, non-profit organizations
and public school districts (Internal Revenue Code Section 401, 403(b) and 408
plans). The Company provides pension plan administrative services through a
subsidiary company, Financial Administrative Services Corporation ("FASCorp").
The Company provides marketing and communication services through another
subsidiary company, Benefits Communication Corporation, and BenefitsCorp
Equities, Inc., a broker-dealer subsidiary of Benefits Communication Corporation
(collectively, "BenefitsCorp").
The Company's primary marketing emphasis in the public/non-profit pension market
is group fixed and variable annuity contracts for defined contribution
retirement savings plans. Defined contribution plans provide for benefits based
upon the value of contributions to, and investment returns on, the individual's
account. This has been the fastest growing portion of the pension marketplace in
recent years.
The Company has a marketing agreement with Charles Schwab & Co., Inc. to sell
individual fixed and variable qualified and non-qualified deferred annuities.
The variable annuity product offers several investment options. The fixed
product is a Guarantee Period Fund, which was established as a non-unitized
separate account in which the owner does not participate in the performance of
the assets. The assets accrue solely to the benefit of the Company and any gain
or loss in the Guarantee Period Fund is borne entirely by the Company. Guarantee
period durations of one to ten years are currently being offered by the Company.
Distributions from the amounts allocated to a Guarantee Period Fund more than
six months prior to the maturity date results in a market value adjustment
("MVA"). The MVA reflects the relationship as of the time of its calculation
between the current U.S. Treasury Strip ask side yield and the U.S. Treasury
Strip ask side yield at the inception of the contract.
The Company's variable annuity products provide the opportunity for
contractholders to assume the risks of, and receive all the benefits from, the
investment of retirement assets. The variable product assets are invested, as
designated by the participant, in separate accounts which in turn invest in
shares of underlying funds managed by a subsidiary of the Company or by selected
external fund managers.
Demand for investment diversification for customers and their participants
continued to grow during 1999. The Company continues to expand the annuity
products available through Maxim Series Fund, Inc., a subsidiary of the Company,
which is an insurance products mutual fund company, and through arrangements
with external fund managers. This array of funds allows customers to diversify
their investments across a wide range of investment products, including fixed
income, stock and international equity fund offerings.
On a very limited basis the Company offers single premium annuities and
guaranteed certificates, which provide guarantees of principal and interest with
a fixed maturity date.
Customer retention is a key factor for the profitability of annuity products. To
encourage customer retention, annuity contracts typically impose a surrender
charge on policyholder balances withdrawn for a period of time after the
contract's inception. The period of time and level of the charge vary by
product. Existing federal tax penalties on distributions prior to age 59 1/2
provide an additional disincentive to premature surrenders of annuity balances,
but do not impede transfers of those balances to products of competitors.
Annuity products generate earnings from the investment spreads on the guaranteed
investment options and from the fees collected for mortality and expense risks
associated with the variable options. The Company also receives fees for
providing administration services to contractholders. A subsidiary of the
Company receives fees for serving as an investment advisor for underlying funds,
which are managed by the subsidiary.
The Company's annuity products are supported by the general account assets of
the Company for guaranteed investment options, and the separate accounts for the
variable investment options.
The amount of annuity products in force is measured by account balances. The
following table shows guaranteed investment contract and group and individual
annuity account balances for the years indicated:
[Millions]
Year Ended Fixed Variable
December 31, Annuities Annuities
1995 $ 5,722 $ 1,772
1996 5,531 2,256
1997 5,227 3,280
1998 4,849 4,330
1999 4,592 5,137
In addition to providing administrative services to customers of the Company's
annuities, FASCorp also provides comprehensive third-party administrative and
recordkeeping services for other financial institutions and employer-sponsored
retirement plans. Assets under administration with unaffiliated organizations
totaled $26.7 billion at December 31, 1999 and $12.6 billion at December 31,
1998.
Life insurance products in force include participating and non-participating
term life, whole life and universal life. Participating policyholders share in
the financial results (differences in experience of actual financial results
versus pricing expectations) of the participating business in the form of
dividends. Participating products are no longer actively marketed by the Company
but continue to produce renewal premium ($271.0 million in 1999). Participating
dividends for 1999 and 1998 were $70.1 million and $71.4 million, respectively.
The provision for participating policyholder earnings is reflected in
liabilities under undistributed earnings on participating policyholders in the
consolidated balance sheets of the Company. Participating policyholder earnings
are not included in the consolidated net income of the Company.
Term life provides coverage for a stated period and pays a death benefit only if
the insured dies within the period. Whole life provides guaranteed death
benefits and level premium payments for the life of the insured. Universal life
products include a cash value component that is credited with interest at
regular intervals. The Company's earnings result from the difference between the
investment income and interest credited on customer cash values and from
differences between charges for mortality and actual death claims. Universal
life cash values are charged for the cost of insurance coverage and for
administrative expenses.
At both December 31, 1999 and 1998, the Company had $3.5 billion of policy
reserves on individual insurance products sold to corporations to provide
coverage on the lives of certain employees - so-called Corporate-Owned Life
Insurance ("COLI"). Due to legislation enacted during 1996 which phased out the
interest deductions on COLI policy loans over a two-year period ending 1998,
COLI sales have ceased. The Company continues to work closely with existing COLI
customers to determine the options available to them and is confident that the
effect of the legislative changes will not be material to the Company's
operations.
The Company has shifted its emphasis to the Bank-Owned Life Insurance ("BOLI")
market. BOLI was not affected by the 1996 legislation. This interest-sensitive
whole life product funds post-retirement benefits for bank employees. At
December 31, 1999 and 1998, the Company had $1.4 billion and $0.9 billion,
respectively, of BOLI policy reserves.
Sales of life insurance products typically have initial marketing expenses.
Retention, an important factor in profitability, 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 credit rates
may be offered after policies have been in force for a period of time.
Certain of the Company's life insurance and group annuity products allow policy
owners to borrow against their policies. At December 31, 1999, approximately 5%
of outstanding policy loans were on individual life policies that had fixed
interest rates ranging from 5% to 8%. The remaining 95% of outstanding policy
loans had variable interest rates averaging 7.4% at December 31, 1999.
Investment income from policy loans was $167.8 million for the year ended
December 31, 1999.
The following table summarizes changes in individual life insurance in force
prior to reinsurance ceded for the years indicated:
Years Ended December 31,
-------------------------------------------------------------
[Millions] 1999 1998 1997 1996 1995
----------- ---------- ---------- --------- ----------
In force, begin-
ning of year $ 42,966 $ 28,266 $ 26,892 $ 25,865 $ 24,877
Sales and
additions 4,228 16,215 3,119 2,695 2,520
(1)
Terminations 3,363 1,515 1,745 1,668 1,532
----------- ---------- ---------- --------- ----------
Net 865 14,700 1,374 1,027 988
----------- ---------- ---------- --------- ----------
In force,
end of year 43,831 42,966 28,266 26,892 25,865
(1) Includes approximately $8.5 billion in adjustments related to COLI
policyholders exercising non-forfeiture options to increase the face value of
their policies, and $5.2 billion related to the reinsurance transactions
referred to in footnote (3) on page 2.
In 1998, the Company obtained membership in the Insurance Marketplace Standards
Association, which is granted in recognition of high standards of ethical
company behavior in advertising, sales and service for individually sold life
insurance and annuity products.
2. Method of Distribution
Financial Services primarily uses BenefitsCorp to distribute pension products
and to provide communication and enrollment services to employers in the
public/non-profit market. Pension products are also distributed through
independent marketing agencies.
The Company distributes universal and joint survivor life and term insurance, as
well as individual fixed and variable qualified and non-qualified deferred
annuities, through Charles Schwab & Co., Inc. Individual life products are also
sold through large banks and other financial institutions. BOLI products are
currently marketed through one broker, Clark/Bardes, Inc.
3. Competition
The life insurance, savings and investments marketplace is highly competitive.
The Company's competitors include mutual fund companies, insurance companies,
banks, investment advisors and certain service and professional organizations.
No one competitor or small number of competitors is dominant. Competition
focuses on service, technology, cost, variety of investment options, investment
performance, product features, price and financial strength as indicated by
ratings issued by nationally recognized agencies. For more information on the
Company's ratings see Item 1(G) (Ratings).
4. Reserves
Reserves for universal life policies are equal to cumulative deposits, less
withdrawals and mortality and expense charges, plus credited interest.
Reserves for all fixed individual life insurance contracts are computed on the
basis of assumed investment yield, mortality, morbidity and expenses (including
a margin for adverse deviation). These reserves are calculated as the present
value of future benefits (including dividends) and expenses less the present
value of future net premiums. The assumptions used in calculating the reserves
generally vary by plan, year of issue and policy duration.
For all life insurance contracts (including universal life insurance), reserves
are established for claims that have been incurred but not reported based on
factors derived from past experience.
Reserves for limited payment contracts (immediate annuities with life contingent
payouts) are computed on the basis of assumed investment yield, mortality,
morbidity and expenses. These assumptions generally vary by plan, year of issue
and policy duration. Reserves for investment contracts (deferred annuities and
immediate annuities without life contingent payouts) are equal to cumulative
deposits plus credited interest less withdrawals and other charges.
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 at their
maturities, and pay expected death or retirement benefits or surrender requests.
5. Reinsurance
The Company seeks to limit its exposure to loss on any single insured and to
recover a portion of benefits paid by ceding risks to other insurance
enterprises under excess coverage and coinsurance contracts. The Company retains
a maximum of $1.5 million of coverage per individual life.
E. INVESTMENT OPERATIONS
The Company's investment division manages or administers the Company's general
and separate accounts in support of cash and liquidity requirements of the
Company's insurance and investment products. Total investments at December 31,
1999 were $25.8 billion, comprised of general account assets of $13.0 billion
and separate account assets of $12.8 billion.
The Company invests in a broad range of asset classes, primarily domestic and
international fixed maturities and mortgage loans. Fixed maturity investments
include public and privately placed corporate bonds, government bonds and
redeemable preferred stocks. The Company also invests in mortgage-backed
securities and asset-backed securities.
The Company manages the characteristics of its investment assets, such as
liquidity, currency, yield and duration, to reflect the underlying
characteristics of related insurance and policyholder liabilities, which vary
among the Company's principal product lines. The Company observes strict asset
and liability matching guidelines, which are designed to ensure that the
investment portfolio will appropriately meet the cash flow and income
requirements of its liabilities. In connection with its investment strategy, the
Company makes limited use of derivative instruments in hedging applications to
manage market risk. Derivative instruments are not used for speculative
purposes. For more information on derivatives, see Notes 1 and 6 to the
consolidated financial statements of the Company (the "Consolidated Financial
Statements"), which are included in Item 8 (Financial Statements and
Supplementary Data).
The Company routinely monitors and evaluates the status of its investments in
light of current economic conditions, trends in capital markets and other
factors. These other factors include investment size, quality, concentration by
industry and other diversification considerations for fixed maturity
investments.
The Company's fixed maturity investments constituted 69% of investment assets as
of December 31, 1999. The Company reduces credit risk for the portfolio as a
whole by investing primarily in investment grade fixed maturities. As of
December 31, 1999, 97% of the bond portfolio carried an investment grade rating.
The Company's mortgage portfolio constituted 7% of investment assets as of
December 31, 1999. The Company's mortgage investment policy emphasizes a broadly
diversified portfolio of commercial and industrial mortgages. Mortgage loans are
subject to underwriting criteria addressing loan-to-value ratios, debt service
coverage, cash flow, tenant quality, leasing, market, location and financial
strength of borrower. Since 1986, the Company has reduced the overall weighting
of its mortgage portfolio with a greater emphasis in bond investments.
At December 31, 1999 only 0.8% of investment assets were invested in real
estate.
The following table sets forth the distribution of invested assets, cash and
accrued investment income for the Company's general account, as of the end of
the years indicated:
[Carrying Value 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
in Millions]
Debt Securities:
Bonds
U.S. Government
Securities and
obligations of U.S.
Government
Agencies $ 1,859 $ 1,951 $ 2,091 $ 1,947 $ 1,990
Corporate bonds 7,078 7,117 6,544 6,133 6,168
Foreign
Governments 51 69 146 119 159
--------- --------- --------- --------- ---------
Total 8,988 9,137 8,781 8,199 8,317
Common Stock 69 49 39 20 9
Mortgage loans 975 1,133 1,236 1,488 1,713
Real estate 104 73 94 68 61
Policy loans 2,681 2,859 2,657 2,523 2,238
Short-term
investments 244 420 399 419 135
--------- --------- --------- --------- ---------
Total investments $ 13,061 $ 13,671 $ 13,206 $ 12,717 $ 12,473
========= ========= ========= ========= =========
Cash $ 258 $ 176 $ 126 $ 125 $ 91
Accrued investment
income 138 158 166 198 212
The following table summarizes general account investment results of the Company's operations:
Net Earned Net
[Millions] Investment Investment
Income Income Rate
----------------- -----------------
For the year:
1999 $ 876 6.96%
1998 897 7.03
1997 882 7.21
1996 835 7.05
1995 835 7.36
F. REGULATION
1. Insurance Regulation
The business of the Company is subject to comprehensive state and federal
regulation and supervision throughout the United States, which primarily
provides safeguards for policyholders rather than investors. The laws of the
various state jurisdictions establish supervisory agencies with broad
administrative powers with respect to such matters as admittance of assets,
premium rating methodology, policy forms, establishing reserve requirements and
solvency standards, maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, the type, amounts and
valuation of investments permitted and HMO operations.
The Company's operations and accounts are subject to examination by the Colorado
Insurance Division and other regulators at specified intervals. The latest
financial examination by the Colorado Insurance Division was completed in 1997,
and covered the five year period ending December 31, 1995. This examination
produced no significant adverse findings regarding the Company.
The National Association of Insurance Commissioners has adopted risk-based
capital rules and other financial ratios for life insurance companies. Based on
the Company's December 31, 1999 statutory financial reports, the Company has
risk-based capital well in excess of that required and was within the usual
ranges of all ratios.
2. Insurance Holding Company Regulations
The Company is subject to and complies with insurance holding company
regulations in Colorado. These regulations contain certain restrictions and
reporting requirements for transactions between an insurer and its affiliates,
including the payments of dividends. They also regulate changes in control of an
insurance company.
3. Securities Laws
The Company is subject to various levels of regulation under federal securities
laws. The Company's broker-dealer subsidiaries are regulated by the Securities
and Exchange Commission ("SEC") and the National Association of Securities
Dealers, Inc. The Company's investment advisor subsidiary and transfer agent
subsidiary are regulated by the SEC. Certain of the Company's separate accounts,
mutual funds and variable insurance and annuity products are registered under
the Investment Company Act of 1940 and the Securities Act of 1933.
4. Guaranty Funds
Under insurance guaranty fund laws existing in all states, insurers doing
business in those states can be assessed (up to prescribed limits) for certain
obligations of insolvent insurance companies. The Company has established a
reserve of $7.1 million as of December 31, 1999 to cover future assessments of
known insolvencies. 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 $3.4
million at December 31, 1999.
5. Canadian Regulation
Because the Company is an indirect subsidiary of Great-West Life, which is a
Canadian company, the Office of the Superintendent of Financial Institutions
Canada conducts periodic examinations of the Company and approves certain
investments in subsidiary companies.
6. Potential Legislation
United States legislation and administrative developments in various areas,
including pension regulation, financial services regulation, health care
legislation and the insurance industry could significantly and adversely affect
the Company in the future. Congress has from time to time considered legislation
relating to health care reform and managed care issues (including patients'
rights, privacy of medical records and managed care plan or enterprise
liability), changes in the deferral of taxation on the accretion of value within
certain annuities and life insurance products, changes in regulation for the
Employee Retirement Income Security Act of 1974, as amended, and changes as to
the availability of Section 401(k) for individual retirement accounts.
It is not possible to predict whether future legislation or regulation adversely
affecting the business of the Company will be enacted and, if enacted, the
extent to which such legislation or regulation will have an effect on the
Company and its competitors.
G. RATINGS
GWL&A is rated by a number of nationally recognized rating agencies. The ratings
represent the opinion of the rating agencies on the financial strength of GWL&A
and its ability to meet the obligations of its insurance policies.
Rating Agency Measurement Rating
- - ------------------------------ ------------------------------------------ ------------
A.M. Best Company Financial Strength and Operating A++ *
Performance
Duff & Phelps Corporation Claims Paying Ability AAA *
Standard & Poor's Corporation Financial Strength AA+ **
Moody's Investors Service Financial Strength Aa2 ***
* Highest ratings available.
** Second highest rating out of 21 rating categories.
*** Third highest rating out of 21 rating categories.
H. MISCELLANEOUS
No customer accounted for 10% or more of the Company's consolidated revenues in
1999. In addition, no segment of the Company's business is dependent on a single
customer or a few customers, the loss of which would have a significant effect
on the Company or any of its business segments. The loss of business from any
one, or a few, independent brokers or agents would not have a material adverse
effect on the Company or any of its business segments.
The Company had approximately 6,900 employees at December 31, 1999.
ITEM 2. PROPERTIES
The Head Office of the Company consists of a 752,000 square foot office complex
located in Greenwood Village, Colorado. The office complex is owned by a
subsidiary of the Company. The Company leases sales and claims offices
throughout the United States.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1999 to a vote of security
holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. EQUITY SECURITY HOLDERS AND MARKET INFORMATION
There is no established public trading market for the Company's common equity.
B. DIVIDENDS
In the two most recent fiscal years, the Company has paid quarterly dividends on
its common shares. Dividends on common stock totaled $88.9 million in 1999 and
$73.3 million in 1998. Dividends on preferred stock totaled $0 and $6.7 million
in 1999 and 1998, 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 at the preceding December 31; or (ii) the Company's statutory net gain from
operations as at the preceding December 31.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain financial data of the Company. This
summary has been derived in part from, and should be read in conjunction with,
the Company's Consolidated Financial Statements.
[Millions]
Years Ended December 31,
-----------------------------------------------------------
INCOME STATEMENT 1999 1998 1997 1996 1995
---------- ----------- ---------- ---------- ----------
DATA
Premiums $ 1,163 $ 995 $ 833 $ 829 $ 732
Fee income 635 516 420 347 335
Net investment income 876 897 882 835 835
Realized investment
gains (losses) 1 38 10 (21) 8
---------- ----------- ---------- ---------- ----------
Total Revenues 2,675 2,446 2,145 1,990 1,910
Policyholder benefits 1,582 1,462 1,385 1,356 1,269
Operating expenses 804 688 552 469 464
---------- ----------- ---------- ---------- ----------
Total benefits and
expenses 2,386 2,150 1,937 1,825 1,733
---------- ----------- ---------- ---------- ----------
Income from operations 289 296 208 165 177
Income tax expense 83 99 49 30 49
---------- ----------- ---------- ---------- ----------
Net Income $ 206 $ 197 $ 159 $ 135 $ 128
========== =========== ========== ========== ==========
Deposits for
investment-
type contracts $ 634 $ 1,344 $ 658 $ 815 $ 868
Deposits to separate
accounts 2,583 2,208 2,145 1,438 1,165
Self-funded premium
equivalents 2,979 2,606 2,039 1,940 2,140
December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ---------- ---------- ----------
BALANCE SHEET DATA
Investment assets $ 13,061 $ 13,671 $ 13,206 $ 12,717 $ 12,473
Separate account assets 12,780 10,100 7,847 5,485 3,999
Total assets 27,397 25,123 22,078 19,351 17,682
Total policy benefit
liabilities 12,386 12,583 11,706 11,600 11,408
Due to Parent 35 52 118 120 122
Corporation
Guaranteed preferred
beneficial interests
in the
Company's junior
subordinated debentures 175
Total shareholder's 1,170 1,199 1,186 1,034 993
equity
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 which relate to future
operations, strategies, financial results or other developments. In particular,
statements using verbs such as "expect," "anticipate," "believe" or words of
similar import generally involve forward-looking statements. Without limiting
the foregoing, forward-looking statements include statements which represent the
Company's beliefs concerning future or projected levels of sales of the
Company's products, investment spreads or yields, or the earnings or
profitability of the Company's activities. Forward-looking statements are
necessarily based upon estimates and assumptions that are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond the Company's control and many of which, with respect
to future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company. Whether or not actual results differ materially from
forward-looking statements may depend on numerous foreseeable and unforeseeable
events or developments, some of which may be national in scope, such as general
economic conditions and interest rates, some of which may be related to the
insurance industry generally, such as pricing competition, regulatory
developments and industry consolidation, and others of which may relate to the
Company specifically, such as credit, volatility and other risks associated with
the Company's investment portfolio, and other factors. Readers are also directed
to consider other risks and uncertainties discussed in documents filed by the
Company and certain of its subsidiaries with the Securities and Exchange
Commission.
Management's discussion and analysis of financial condition and results of
operations of the Company for the three years ended December 31, 1999 follows.
A. COMPANY RESULTS OF OPERATIONS
1. Consolidated Results
The Company's consolidated net income increased $8.8 million or 5% in 1999 when
compared to the year ended December 31, 1998, reflecting improved results in the
Employee Benefits segment, offset by a slight decrease in the Financial Services
segment. The Employee Benefits segment contributed $9.5 million to the improved
consolidated results compared to the Financial Services segment which recorded a
$0.7 million decrease. Of total consolidated net income in 1999 and 1998, the
Employee Benefits segment contributed 57% and 54%, respectively, while the
Financial Services segment contributed 43% and 46%, respectively.
The Company's consolidated net income increased $38.1 million or 24% in 1998
when compared to the year ended December 31, 1997. In 1998, the Employee
Benefits segment contributed $8.8 million or 23% to the overall growth and the
Financial Services segment contributed $29.3 million or 77% to the overall
growth.
Pursuant to a required change in accounting policy, the Company capitalized
$18.4 million of software development costs (see Note 1 to the consolidated
financial statements), which increased the 1999 consolidated net income.
The Company's 1999 and 1997 consolidated net income increased by $8.3 million
and $21.1 million, respectively, due to changes in income tax provisions for
these years. The current income tax provisions were decreased by $17.2 million
and $42.2 million for 1999 and 1997, respectively, due to the release of a
contingent liability relating to taxes of Great-West Life's U.S. branch
associated with the blocks of business that had been transferred from Great-West
Life's U.S. branch to the Company, as discussed below.
Of the amount released in 1999 and 1997, $8.9 million and $15.1 million,
respectively, was attributable to participating policyholders and, therefore,
had no effect on the net income of the Company.
In 1989, Great-West Life began a series of transactions to transfer its U.S.
business from its U.S. branch to the Company; this process was essentially
completed in 1993. The objective of these transactions was to transfer to the
Company all of the risks and rewards of Great-West Life's U.S.-related business.
The transfers of insurance contracts and related assets were accomplished
through several reinsurance agreements executed by the Company and Great-West
Life's U.S. branch during these years. As part of this transfer of Great-West
Life's U.S. business, the Company in 1993 entered into a tax agreement with
Great-West Life in order to transfer the tax liabilities associated with the
insurance contracts and related assets that had been transferred.
In addition to the contingent tax liability release described above, the
Company's income tax provision for 1997 also reflected an increase for
additional contingent items related to open tax years where it was determined to
be probable that additional tax liabilities could be owed based on changes in
facts and circumstances. The increase in 1997 was $16.0 million, of which $10.1
million was attributable to participating policyholders and, therefore, had no
effect on the net income of the Company.
In 1999 total revenues increased $228.9 million or 9% to $2.7 billion when
compared to the year ended December 31, 1998. The growth in revenues in 1999 was
comprised of increased premium income of $168.3 million, increased fee income of
$119.1 million, decreased net investment income of $21.4 million and decreased
realized gains on investments of $37.1 million. In 1998 total revenues increased
$301.1 million or 14% to $2.4 billion when compared to the year ended December
31, 1997. The growth in revenues in 1998 was comprised of increased premium
income of $161.7 million, increased fee income of $95.3 million, increased net
investment income of $15.7 million and increased realized gains on investments
of $28.4 million.
The increased premium income in 1999 was comprised of growth in Employee
Benefits premium income of $243.5 million, offset by a decrease in Financial
Services premium income of $75.2 million. The growth in premium income in the
Employee Benefits segment primarily reflected an increase of $205.9 million of
premium income derived from Alta Health & Life Insurance Company ("Alta"),
formerly known as Anthem Health & Life Insurance Company, which the Company
acquired in July 1998 (see Other Matters). The decrease of $75.2 million in
Financial Services premium income was due primarily to reinsurance transactions
in 1998 of $46.2 million. There were no significant reinsurance transactions in
1999. The increased premium income in 1998 was comprised of growth in Employee
Benefits premium income of $281.8 million, offset by a decrease in Financial
Services premium income of $120.1 million. The growth in premium income in the
Employee Benefits segment primarily reflected $209.5 million of premium income
derived from the acquisition of Alta. The decrease of $120.2 million in
Financial Services premium income was primarily due to reinsurance transactions
in 1997 of $155.8 million versus only $46.2 million in premiums due to
reinsurance transactions in 1998.
The increased fee income in 1999 was comprised of growth in Employee Benefits
fee income and Financial Services fee income of $103.9 million and $15.2
million, respectively. The growth in Employee Benefits fee income reflected an
increase of $42.0 million of fee income derived from Alta during 1999. The
remaining increase was the result of new group health sales and increased fees
on 401(k) variable funds related to growth in equity markets. The increase in
fee income in 1998 was comprised of Employee Benefits fee income and Financial
Services fee income of $86.6 million and $8.7 million, respectively. The growth
in Employee Benefits fee income reflected $31.6 million of fee income derived
from the acquisition of Alta. The remaining increase was the result of new group
health sales and increased fees on 401(k) variable funds related to growth in
equity markets.
Realized investment gains decreased from a realized investment gain of $38.2
million in 1998 to a realized investment gain of $1.1 million in 1999. Realized
investment gains were $9.8 million in 1997. The increase in interest rates in
1999 contributed to $7.8 million of fixed maturity losses, while the decrease in
interest rates in 1998 and 1997 resulted in gains on sales of fixed maturities
totaling $38.4 and $16.0 million, respectively. Increases (decreases) in the
provision for asset losses of $(7.0) and $0.6 million, respectively, were
recognized in 1999 and 1998.
Total benefits and expenses increased $235.7 million or 11% in 1999 when
compared to the year ended December 31, 1998. The increase in 1999 was due to
Alta, which resulted in an increase in benefits and expenses of $245.3 million.
Excluding Alta, benefits and expenses would have decreased $9.6 million or 0.4%
in 1999. The decrease included the effect of a change in accounting policy,
which resulted in the capitalization of $18.4 million of software costs in 1999.
Overall, total benefits and expenses have increased due to higher costs of
managed care operations. The increase of $213.9 from 1997 to 1998 was a
combination of the acquisition of Alta, which resulted in benefits and expenses
increasing $258.3, partially offset by a decrease in policyholder benefits
related to reinsurance transactions of $109.4 million.
In June 1997, the Company recaptured all the remaining pieces of an individual
participating block of business previously reinsured to Great-West Life. The
Company recorded various assets and liabilities related to the recapture as
discussed in Note 3 to the Consolidated Financial Statements. In recording the
recapture, both life insurance premiums and benefits were increased by the
amount recaptured ($155.8 million). Consequently, the net income of the Company
was not impacted by the reinsurance transaction.
Income tax expense decreased $15.6 million or 16% in 1999 when compared to the
year ended December 31, 1998, which reflects a net $17.2 million release of
contingent tax liabilities relating to prior open tax years, as discussed above.
Income tax expense increased $49.0 million or 98% in 1998 when compared to the
year ended December 31, 1997. The increase in income tax expense from 1997 to
1998 reflected higher earnings in 1998, as well as the fact that the 1997 income
tax provision included a net $26.2 release of contingent tax liabilities
relating to prior open tax years, as discussed above. Excluding these contingent
tax releases, the Company's income tax expense increased 2% and 30% in 1999 and
1998, respectively. See Note 10 to the Consolidated Financial Statements for a
discussion of the Company's effective tax rates.
In evaluating its results of operations, the Company also considers net changes
in deposits received for investment-type contracts, deposits to separate
accounts and self-funded equivalents. Self-funded equivalents represent paid
claims under minimum premium and administrative services only contracts, which
amounts approximate the additional premiums that would have been earned under
such contracts if they had been written as traditional indemnity or HMO
programs.
Deposits for investment-type contracts decreased $709.6 million or 53% in 1999
when compared to the year ended December 31, 1998. Deposits for investment-type
contracts increased $686.0 million or 104% in 1998 when compared to the year
ended December 31, 1997. The decrease in 1999 was primarily due to two indemnity
reinsurance agreements with Great-West Life whereby the Company reinsured by
coinsurance certain Great-West Life individual non-participating life insurance
policies during 1998. This transaction increased deposits by $519.6 million in
1998 and accounted for (73)% and 76% of the increase (decrease) in 1999 and
1998, respectively.
Deposits for separate accounts increased $374.4 million or 17% in 1999 when
compared to the year ended December 31, 1998. This was due primarily to $200
million of BOLI deposits associated with the variable life product, and a
continuing movement toward variable funds and away from guaranteed interest rate
options. Deposits for separate accounts increased $63.7 million or 3% in 1998
when compared to the year ended December 31, 1997. This increase in 1998
reflected a continuing movement toward variable funds and away from guaranteed
interest rate options.
Self-funded premium equivalents increased $372.7 million or 14% in 1999 when
compared to the year ended December 31, 1998. The increase in 1999 was primarily
due to an increase in self-funded premium equivalents from Alta of $155.2
million, with the remainder coming from the growth in business. Self-funded
premium equivalents increased $567.1 million or 28% in 1998 when compared to the
year ended December 31, 1997. Approximately half of the 1998 increase ($281.3
million) was due to the acquisition of Alta, with the remainder coming from
sales growth.
Total assets increased $2.3 billion or 9% in 1999 when compared to the year
ended December 31, 1998. Separate account assets increased $2.7 billion
primarily due to the strength of the equity markets in the United States. The
$0.4 billion decrease in the general account reflected the continuing movement
away from guaranteed products.
2. Other Matters
Effective January 1, 2000, the Company coinsured the majority of General
American Life Insurance Company's ("General American") group life and health
insurance business, which primarily consists of administrative services only and
stop loss policies. This added over 900,000 medical members representing
approximately $1.7 billion of premium and premium equivalents. The agreement
will convert to an assumption reinsurance agreement by January 1, 2001, subject
to regulatory approval. On January 1, 2000, the Company assumed approximately
$150 million of policy reserves and miscellaneous liabilities in exchange for an
equal amount of cash and other assets from General American.
On October 6, 1999, the Company entered into an agreement with Allmerica
Financial Corporation ("Allmerica") to acquire Allmerica's group life and health
insurance business on March 1, 2000. This acquisition is anticipated to add
300,000 medical members and approximately $800 million of premium and premium
equivalents. This business primarily consists of administrative services only
and stop loss policies. The in-force business is expected to be underwritten and
retained by the Company upon each policy renewal date. The purchase price is
based on a percentage of the premium and administrative fees in force at March
1, 2000 and March 1, 2001.
On July 8, 1998, the Company acquired the outstanding common stock of Alta,
which was a subsidiary of Anthem, Inc. (the Blue Cross and Blue Shield licensee
for Indiana, Kentucky, Ohio, and Connecticut). The cost of the acquisition was
$82.7 million. The purchase price was based on adjusted book value and was
subject to further adjustments. The acquisition was accounted for as a purchase
and was financed through internally generated funds. The fair value of tangible
assets acquired and liabilities assumed was $379.9 million and $317.4 million,
respectively. The goodwill representing the purchase price in excess of fair
value of net assets acquired is included in other assets and is being amortized
over 30 years on a straight-line basis.
The majority of Alta's customers are in the Company's target market of small to
mid-size employers who prefer to self-fund their benefit plans. New and existing
customers have been migrated to the Company's One Health Plan network, which
provided substantial new growth for the One Health Plan subsidiary organization.
Life and health premium and fee income for Alta totaled $489.0 million and
$241.1 million for the periods ended December 31, 1999 and 1998, respectively,
while self-funded premium equivalents were $436.5 million and $281.3 million for
the years ended December 31, 1999 and 1998, respectively. The Company recorded
small losses associated with Alta operations in 1999 and 1998, respectively. The
results of Alta since the date of acquisition are included in the Employee
Benefits segment.
B. EMPLOYEE BENEFITS RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Employee Benefits
segment:
(Millions) Years Ended December 31,
--------------------------------------
INCOME STATEMENT 1999 1998 1997
----------- ---------- ----------
DATA
Premiums $ 990 $ 747 $ 465
Fee income 549 445 358
Net investment income 80 95 100
Realized investment gains (losses) (1) 8 3
----------- ---------- ----------
Total Revenues 1,618 1,295 926
Policyholder benefits 789 590 371
Operating expenses 661 547 428
----------- ---------- ----------
----------- ---------- ----------
Total benefits and expenses 1,450 1,137 799
----------- ---------- ----------
Income from operations 168 158 127
Income tax expense 51 51 29
----------- ---------- ----------
Net Income $ 117 $ 107 $ 98
=========== ========== ==========
Deposits for investment-type
contracts $ 26 $ 37 $ 25
Deposits to separate accounts 1,745 1,568 1,403
Self-funded premium equivalents 2,979 2,606 2,039
During 1999, the Employee Benefits segment experienced:
o significant growth in 401(k) assets under administration, o increased sales
offset by some deterioration in customer retention in group life and health, o
favorable morbidity results, and o license approval for one additional HMO
subsidiary, for a total of 15 fully operational HMOs.
Net income for Employee Benefits increased 9% in 1999 and 9% in 1998. The
improvement in earnings in 1999 reflected increased fee income from variable
401(k) assets, improved group morbidity experience and the capitalization of
$17.1 million of software costs in 1999, offset by a decrease in realized gains.
The improvement in earnings in 1998 reflected increased fee income from variable
401(k) assets and improved group mortality experience. The changes in income tax
provisions discussed above under "Company Results of Operations" resulted in an
increase in net income for the Employee Benefits segment of $4.7 million in
1999.
401(k) premiums and deposits for 1999 and 1998 increased 11% and 14%,
respectively, as the result of higher recurring deposits from existing customers
and new sales. Assets under administration (including third-party
administration) in 401(k) increased 26% over 1998 to $8.5 billion and 26% from
1997 to 1998, primarily due to strong equity markets.
Equivalent premium revenue and fee income for group life and health increased
19% from 1998 levels as the result of a combination of price increases and the
Alta acquisition. From 1997 to 1998, equivalent premium revenue and fee income
had increased 32% as a result of a combination of increased sales and the Alta
acquisition.
1. Group Life and Health
The Employee Benefits segment experienced a net increase of 468 group health
care customers (employer groups) during 1999 (versus 593 in 1998). Much of the
health care growth can be attributed to the introduction of new HMOs in markets
with high sales potential, and the Company's ability to offer a choice of
managed care products.
To position itself for the future, the Employee Benefits segment is focused on
putting in place the products, strategies and processes that will strengthen its
competitive position in the evolving managed care environment.
The Company experienced a 6% decrease in total health care membership from
2,266,700 at the end of 1998 to 2,130,400 at year-end 1999 as the result of
certain large case terminations. Gatekeeper (i.e., POS and HMO) members grew 5%
from 522,300 in 1998 to 549,900 in 1999. The Company expects this segment of the
business to grow as additional HMO licenses are obtained and additional Alta
members are converted.
Total health care membership increased from 1997 to 1998 by 35% (Alta accounted
for 76% of this growth). Gatekeeper members grew 26% from 414,500 in 1997 to
522,300 in 1998, including 61,800 Alta members. Excluding the Alta acquisition,
gatekeeper members increased 19%.
2. 401(k)
The number of new 401(k) case sales (employer groups), including third-party
administration business generated through the Company's marketing and
administration arrangement with New England, decreased 2% to 811 in 1999 from
828 in 1998 (1,235 in 1997). The 401(k) block of business under administration
totaled 6,400 employer groups and more than 500,000 individual participants,
compared to 6,100 employer groups and 475,000 individual participants in 1998,
and 5,700 employer groups and 430,000 individual participants in 1997.
During 1999, the in-force block of 401(k) business continued to perform well,
with customer retention of 92.9% versus 93.0% in 1998. This, combined with
strong equity markets, resulted in a 26% increase in assets under management
during 1999 and 1998, respectively.
In addition to the Company's internally-managed funds, the Company offers
externally-managed funds from recognized mutual funds companies such as AIM,
Fidelity, Putnam, American Century, Founders and T. Rowe Price. This strategy,
supported by participant education efforts, is validated by the fact that 99% of
assets contributed in 1999 were allocated to variable funds.
To promote long-term asset retention, the Company enhanced a number of products
and services including prepackaged "lifestyle" funds (The Profile Series),
expense reductions for high-balance accounts, a rollover IRA product, more
effective enrollment communications, one-on-one retirement planning assistance
and personal plan illustrations.
3. Outlook
The Alta, General American, and Allmerica acquisitions will help to provide the
Company with critical mass to compete in the consolidating health care market.
Through a combination of internal growth and new business acquisitions, the
Company expects to grow from 2.1 million members to 3.4 million members by the
end of the first quarter of 2001. The Company's life and health and 401(k) sales
are projected to double from 1999 results. In order to remain competitive, a
focused effort on provider contracting will be essential to ensure competitive
morbidity results. A continuing focus on expense levels and synergies will
ensure competitive administrative expenses. The ongoing consolidation of the
Company's benefit payment offices will remain an important operational issue
from both a cost and quality perspective.
The Company will continue the expansion of its One Health Plan managed care
subsidiaries. In 2000, it is anticipated that three new licensed HMOs, in
Kansas, Missouri and Pennsylvania, will be approved. This will bring the total
number of licensed One Health Plan HMOs to 18, which will provide current
customers with a comprehensive national managed care network.
Delivering cost-effective, value-added services via the Internet will continue
to be a focus for the Company. The Company has already introduced online
enrollment capability for 401(k) participants, and later in 2000 it will
introduce the same capability for life and health members. In addition, the
Company has signed an agreement with an online investment advisor to provide
401(k) participants with personal investment advice via the Internet. This
action, combined with a very competitive product portfolio should result in an
increase in new case sales.
C. FINANCIAL SERVICES RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Financial Services
segment:
(Millions) Years Ended December 31,
----------------------------------------
INCOME STATEMENT 1999 1998 1997
------------ ----------- -----------
DATA
Premiums $ 173 $ 248 $ 368
Fee income 86 71 62
Net investment income 796 802 782
Realized investment gains 2 30 7
(losses)
------------ ----------- -----------
Total Revenues 1,057 1,151 1,219
Policyholder benefits 793 872 1,014
Operating expenses 143 141 124
------------ ----------- -----------
Total benefits and expenses 936 1,013 1,138
------------ ----------- -----------
Income from operations 121 138 81
Income tax expense 32 48 20
------------ ----------- -----------
Net Income $ 89 $ 90 $ 61
============ =========== ===========
Deposits for investment-type
contracts $ 608 $ 1,307 $ 633
Deposits to separate accounts 838 640 742
During 1999, the Financial Services segment experienced:
o significant growth in participants and separate account funds primarily
attributable to the public/non-profit business, o very strong persistency in all
lines of business, and o increased sales of BOLI.
Net income for Financial Services decreased 1% in 1999 and increased 48% in
1998. The earnings in 1999 were favorably impacted by improved investment
margins and increased fee income, but were adversely impacted by the large
decrease in realized investment gains. The improvement in earnings in 1998
reflected higher earnings from an increased asset base, an increase in
investment margins, and larger capital gains on fixed maturities. The changes in
income tax provisions discussed above under "Company Results of Operations"
resulted in an increase in net income for the Financial Services segment of $3.6
million in 1999.
1. Savings
Premiums decreased $2.5 million or 14%, from $16.8 million in 1998 to $14.3
million in 1999. Premiums decreased $5.8 million or 26%, from $22.6 million in
1997 to $16.8 million in 1998. The decrease in both years is attributable to the
continuing trend of policyholders selecting variable annuity options (separate
accounts) as opposed to the more traditional fixed annuity products with life
contingencies.
Fee income related to savings products increased $10.3 million or 15%, from
$71.0 million in 1998 to $81.3 million in 1999. Fee income increased $8.6
million or 14%, from $62.4 million in 1997 to $71.0 million in 1998. The growth
in fee income in 1999 and 1998 was the result of new sales and increased fees on
variable funds related to growth in equity markets.
Deposits for investment-type contracts decreased $3.1 million or 1%, from $239.0
million in 1998 to $235.9 million in 1999. Deposits for investment-type
contracts increased $20.4 million or 9%, from $218.6 million in 1997 to $239.0
million in 1998.
Deposits to separate accounts decreased $2.9 million or 0.4%, from $640.6
million in 1998 to $637.7 million in 1999. Deposits to separate accounts
decreased $101.5 million or 14%, from $742.1 million in 1997 to $640.6 million
in 1998. The decrease in 1998 was the result of 1997 being inflated by the
receipt of a large single deposit in the amount of $120.0 million.
The Financial Services segment's core savings business is in the
public/non-profit pension market. The assets of the public/non-profit business,
including separate accounts but excluding Guaranteed Investment Contracts
("GICs"), increased 2% and 9% during 1999 and 1998 to $7.9 billion and $7.8
billion, respectively. Much of the growth came from the variable annuity
business, which was driven by premiums and deposits and strong investment
returns in the equity markets. The increase was offset by a decrease primarily
due to one major case moving to an independent money manager. The Company did
maintain the administrative services contract and fee income associated with
this client.
The Financial Services segment's savings business experienced strong growth in
1999. The number of new participants in 1999 was 214,100 compared to 151,300 in
1998 (129,200 in 1997), bringing the total lives under administration to 806,700
in 1999 and 642,500 in 1998.
The Financial Services segment again experienced a very high retention rate on
public/non-profit contract renewals, renewing 100% of contracts that were
eligible for renewal during the year. Part of this customer loyalty comes from
initiatives to provide high-quality service while controlling expenses.
The Company continued to limit sales of GICs and to allow this block of business
to contract in response to the highly competitive GIC market. As a result, GIC
assets decreased 62% in 1999, to $104.7 million. In 1998, GIC assets decreased
33% from 1997, to $274.8 million.
Customer demand for investment diversification continued to grow during 1999.
New contributions to variable business represented 64% of the total 1999
premiums versus 63% in 1998. The Company continues to expand the investment
products available through Maxim Series Fund, Inc., and through partnership
arrangements with external fund managers. Externally-managed funds offered to
participants in 1999 included American Century, Ariel, Fidelity, Founders,
INVESCO, Janus, Loomis Sayles, Templeton, T. Rowe Price and Vista.
Customer participation in guaranteed separate accounts increased, as many
customers prefer the security of fixed income securities and separate account
assets. Assets under management for guaranteed separate account funds were
$653.7 million in 1999, compared to $562.3 million in 1998 and $466.2 million in
1997.
FASCorp administered records for approximately 1,595,000 participants in 1999
versus 1,307,000 in 1998. FASCorp's fee income was $53.8 million, $44.0 million
and $36.1 million at December 31, 1999, 1998 and 1997, respectively.
2. Life Insurance
The Company continued its conservative approach to the manufacture and
distribution of traditional life insurance products, while focusing on customer
retention and expense management.
Individual life insurance revenue premiums and deposits of $735.3 million in
1999 decreased 43% from 1998 primarily due to reinsurance transactions with
Great-West Life, which resulted in $565.8 million of premiums and deposits in
1998. Excluding these reinsurance transactions, individual life insurance
revenue premiums and deposits increased 0.1% from 1998. Individual life
insurance revenue premiums and deposits of $1.3 billion in 1998 increased 71%
from 1997 primarily due to reinsurance transactions with Great-West Life, which
resulted in $565.8 million of premiums and deposits in 1998 versus $155.8
million in 1997. Excluding these reinsurance transactions, individual life
insurance revenue premiums and deposits increased 14% from 1997 to 1998. The
Company also experienced strong BOLI sales in 1998 which more than offset
reductions in COLI premiums.
In 1996, the U.S. Congress enacted legislation to phase out the tax
deductibility of interest on policy loans on COLI products. Since then, renewal
premiums and deposits for COLI products have decreased to $128.5 million in 1999
from $139.8 million in 1998 and $299.8 million in 1997, and the Company expects
this decline to continue. As a result of these legislative changes, the Company
has shifted its emphasis from COLI to new sales in the BOLI market. This product
provides long-term benefits for bank employees and was not affected by the 1996
legislative changes. BOLI premiums and deposits were $436.3 million during 1999,
compared to $408.3 million in 1998 and $179.3 million in 1997. The Company
continues working closely with existing COLI customers to determine the options
available to them and is confident that the effect of the legislative changes
will not be material to the Company's operations.
3. Outlook
During 2000, the Company expects to continue its growth of the third party
administration business through FASCorp. The savings business will continue to
improve customer service and, at the same time, lower unit costs through the use
of Internet services.
The Company will continue to emphasize the development of the institutional life
insurance and annuity markets. Internet sales and service is also expected to
play a significant role in the life insurance business lines. Increased emphasis
was placed on improving Internet functionality during 1999, and it will continue
to be a focus in the coming year in the bank and institutional markets.
Strong sales are expected in the BOLI market - the Company's new variable life
product has been well received in the market as the separate account option
limits credit risk.
d. INVESTMENT OPERATIONS
The Company's primary investment objective is to acquire assets whose durations
and cash flows reflect the characteristics of the Company's liabilities, while
meeting industry, size, issuer and geographic diversification standards. Formal
liquidity and credit quality parameters have also been established.
The Company follows rigorous procedures to control interest rate risk and
observes strict asset and liability matching guidelines. These guidelines ensure
that even under changing market conditions, the Company's assets will meet the
cash flow and income requirements of its liabilities. Through dynamic modeling,
using state-of-the-art software to analyze the effects of a wide range of
possible market changes upon investments and policyholder benefits, the Company
ensures that its investment portfolio is appropriately structured to fulfill
financial obligations to its policyholders.
A summary of the Company's general account invested assets follows:
[Millions]
1999 1998
----------- -----------
Fixed maturities, available for sale, at fair value $ 6,728 $ 6,937
Fixed maturities, held-to-maturity, at amortized cost 2,260 2,200
Mortgage loans 975 1,133
Real estate and common stock 173 122
Short-term investments 244 420
Policy loans 2,681 2,859
----------- -----------
Total invested assets $ 13,061 $ 13,671
=========== ===========
1. Fixed Maturities
Fixed maturity investments include public and privately placed corporate bonds,
government bonds and mortgage-backed and asset-backed securities. The Company's
strategy related to mortgage-backed and asset-backed securities is to focus on
those with lower volatility and minimal credit risk. The Company does not invest
in higher risk collateralized mortgage obligations such as interest-only and
principal-only strips, and currently has no plans to invest in such securities.
Private placement investments, which are primarily in the held-to-maturity
category, are generally less marketable than publicly traded assets, yet they
typically offer covenant protection which 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.
The distribution of the fixed maturity portfolio (both available for sale and
held to maturity) by credit rating is summarized as:
Credit Rating 1999 1998
-------------- ---------------
AAA 48.9% 45.6%
AA 8.9 9.4
A 19.6 23.8
BBB 22.3 20.7
BB and Below (non-investment grade) 0.3 0.5
-------------- ---------------
TOTAL 100.0% 100.0%
At December 31, 1999 and 1998, the Company owned no bonds in default.
2. Mortgage Loans
During 1999, the mortgage portfolio declined 14% to $1.0 billion, net of
impairment reserves. The Company has not actively sought new loan opportunities
since 1989 and, as such, has experienced an ongoing reduction in this
portfolio's balance.
The Company follows a comprehensive approach to the management of mortgage loans
which 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 which, 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 increased to $43.9 million in 1999
compared with $31.2 million in 1998, and there were no foreclosures in 1999,
compared to $3.0 million in 1998. The low levels of problematic mortgages
relative to the Company's overall balance sheet are due to the ongoing decrease
in the size of the mortgage portfolio, the Company's active loan management
program and overall strength in market conditions.
Occasionally, the Company elects to restructure certain loans if the economic
benefits to the Company are believed to be more advantageous than those achieved
by acquiring the collateral through foreclosure. At December 31, 1999 and 1998,
the Company's loan portfolio included $75.7 million and $52.9 million,
respectively, of non-impaired restructured loans.
3. Real Estate and Common Stock
The Company's real estate portfolio is composed primarily of the Head Office
property ($91.1 million) and properties acquired through the foreclosure of
troubled mortgages ($10.1 million). The Company operates a wholly-owned real
estate subsidiary, which attempts to maximize the value of these properties
through rehabilitation, leasing and sale. The Company added a third tower to its
Head Office complex during the first quarter of 2000.
The common stock portfolio is composed of mutual fund seed money and some
private equity investments. The Company anticipates a limited participation in
the stock markets in 2000.
4. Derivatives
The Company uses certain derivatives, such as futures, options and swaps, for
purposes of hedging interest rate and foreign exchange risk. These derivatives,
when taken alone, may subject the Company to varying degrees of market and
credit risk; however, when used for hedging, these instruments typically reduce
risk. The Company controls the credit risk of its financial contracts through
credit approvals, limits and monitoring procedures. The Company has also
developed controls within its operations to ensure that only Board authorized
transactions are executed. Note 6 to the Consolidated Financial Statements
contains a summary of the Company's outstanding financial hedging derivatives.
5. Outlook
General economic conditions continued to remain strong during 1999. The Company
does not expect to recognize any asset writedowns or restructurings in 2000 that
would result in a material adverse effect upon the Company's financial
condition.
E. LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that vary among the
principal product lines. Life insurance and pension plan reserves are primarily
long-term liabilities. Accident and health reserves, including long-term
disability, consist of both short-term and long-term liabilities. Life insurance
and pension plan reserve requirements are usually stable and predictable, and
are supported primarily by long-term, fixed income investments. Accident and
health claim demands are stable and predictable but generally shorter term,
requiring greater liquidity.
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and utilizing
positive cash flows from operations. Liquidity for the Company has remained
strong, as evidenced by significant amounts of short-term investments and cash,
which totaled $502.0 million and $596.5 million as of December 31, 1999 and
1998, respectively.
Funds provided from 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 Company's capital resources represent funds
available for long-term business commitments and primarily consist of retained
earnings and proceeds from the issuance of commercial paper and equity
securities. Capital resources provide protection for policyholders and the
financial strength to support the underwriting of insurance risks, and allow for
continued business growth. The amount of capital resources that may be needed is
determined by the Company's senior management and Board of Directors as well as
by regulatory requirements. The allocation of resources to new long-term
business commitments is designed to achieve an attractive return, tempered by
considerations of risk and the need to support the Company's existing business.
The Company's financial strength provides the capacity and flexibility to enable
it to raise funds in the capital markets through the issuance of commercial
paper. The Company continues to be well capitalized, with sufficient borrowing
capacity to meet the anticipated needs of its business. The Company had no
commercial paper outstanding at December 31, 1999, compared with $39.7 million
at December 31, 1998. The commercial paper has been given a rating of A-1+ by
Standard & Poor's Corporation and a rating of P-1 by Moody's Investors Service,
each being the highest rating available.
F. ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement No. 133,
"Accounting for Derivative Instruments and for Hedging Activities", which, as
amended, is required to be adopted in years beginning after June 15, 2000. This
Statement provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. Although management has
not completed its analysis of the impact of this Statement, management does not
anticipate that the adoption of the new Statement will have a significant effect
on earnings or the financial position of the Company because of the Company's
minimal use of derivatives.
See the Note 1 to the Consolidated Financial Statements for additional
information regarding accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's assets are purchased to fund future benefit payments to its
policyholders and contractholders. The primary risk of these assets is exposure
to rising interest rates. The Company's exposure to foreign currency exchange
rate fluctuations is minimal as only nominal foreign investments are held.
To manage interest rate risk, the Company invests in assets that are suited to
the products that it sells. For products with fixed and highly predictable
benefit payments such as certificate annuities and payout annuities, the Company
invests in fixed income assets with cash flows that closely match the liability
product cash flows. The Company is then protected against interest rate changes,
as any change in the fair value of the assets will be offset by a similar change
in the fair value of the liabilities. For products with uncertain timing of
benefit payments such as portfolio annuities and life insurance, the Company
invests in fixed income assets with expected cash flows that are earlier than
the expected timing of the benefit payments. The Company can then react to
changing interest rates sooner as these assets mature for reinvestment.
The Company also manages risk with interest rate derivatives such as interest
rate caps that pay when interest rates rise. 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 the 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, 1999. If interest rates increased by 100 basis points (1%), the
fair value of the fixed income assets would decrease by approximately $365
million. This calculation uses projected asset cash flows, discounted back to
December 31, 1999. The cash flow projections are shown in the table below. The
table shows cash flows rather than expected maturity dates because many of the
Company's assets have substantial expected principal payments prior to the final
maturity date. The fair value shown in the table below was calculated using spot
discount interest rates that varied by the year in which the cash flow was
expected to be received. These spot rates in the benchmark calculation ranged
from 5.25% to 6.93%.
Projected Cash Flows by Calendar Year ($ millions)
There- Undiscounted Fair
2000 2001 2002 2003 2004 after Total Value
------- ------- -------- ------- ------- --------- --------------- ---------
Benchmark 1,777 1,683 1,733 1,372 1,199 5,290 13,054 9,401
Interest Rates
up 1% 1,749 1,652 1,710 1,346 1,183 5,537 13,177 9,036
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 $11 million per year. The Company is managing this risk for 1999
with a derivative swap that pays the Company a fixed return in exchange for the
performance of a combination of equity and bond indexes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following are the Company's Consolidated Financial Statements for the Years
Ended December 31, 1999, 1998, and 1997 and the Independent Auditors' Report
thereon.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
of GWL&A Financial Inc.:
We have audited the accompanying consolidated balance sheets of GWL&A Financial
Inc. (an indirect wholly-owned subsidiary of The Great-West Life Assurance
Company) and subsidiaries as of December 31, 1999 and 1998, 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, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of GWL&A Financial Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1999, the Company adopted Statement of Position No. 98-1, "Accounting
for the Cost of Computer Software Developed or Obtained for Internal Use" and,
accordingly, changed its method of accounting for software development costs.
/s/Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
January 31, 2000
GWL&A FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(Dollars in Thousands)
===============================================================================================================
1999 1998
------------------- -------------------
ASSETS
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost (fair value
$2,238,581 and $2,298,936) $ 2,260,581 $ 2,199,818
Available-for-sale, at fair value (amortized cost
$6,953,383 and $6,752,532) 6,727,922 6,936,726
Common stock, at fair value (cost $43,978 and 69,240 48,640
$41,932)
Mortgage loans on real estate, net 974,645 1,133,468
Real estate, net 103,731 73,042
Policy loans 2,681,132 2,858,673
Short-term investments, available-for-sale (cost
approximates fair value) 243,709 420,169
------------------- -------------------
Total Investments 13,060,960 13,670,536
Cash 258,312 176,369
Reinsurance receivable
Related party 5,015 5,006
Other 168,307 187,952
Deferred policy acquisition costs 282,295 238,901
Investment income due and accrued 137,810 157,587
Other assets 308,450 311,078
Premiums in course of collection 142,199 84,940
Deferred income taxes 253,323 191,483
Separate account assets 12,780,016 10,099,543
------------------- -------------------
TOTAL ASSETS $ 27,396,687 $ 25,123,395
=================== ===================
See notes to consolidated financial statements.
===============================================================================================================
1999 1998
--------------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves
Related party $ 555,783 $ 555,300
Other 11,181,900 11,347,548
Policy and contract claims 391,968 428,798
Policyholders' funds 185,623 181,779
Provision for policyholders' dividends 70,726 69,530
GENERAL LIABILITIES:
Due to Parent Corporation 35,985 52,877
Repurchase agreements 80,579 244,258
Commercial paper 39,731
Other liabilities 638,495 761,505
Undistributed earnings on participating business 130,638 143,717
Separate account liabilities 12,780,016 10,099,543
--------------- --------------
Total Liabilities 26,051,713 23,924,586
--------------- --------------
COMMITMENTS AND CONTINGENCIES
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE COMPANY'S JUNIOR SUBORDINATED
DEBENTURES 175,000
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value, 50,000,000 shares
authorized,
0 shares issued and outstanding
Preferred stock, $0 par value; 500,00 shares
authorized; 50,025 shares issued and outstanding
Common stock, $0 par value; 500,000 shares
authorized; 50,025 shares issued and outstanding 250 250
Additional paid-in capital 707,348 706,588
Accumulated other comprehensive income (loss) (84,861) 61,560
Retained earnings 547,237 430,411
--------------- --------------
Total Stockholder's Equity 1,169,974 1,198,809
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 27,396,687 $ 25,123,395
=============== ==============
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in Thousands)
===============================================================================================================
1999 1998 1997
------------- -------------- -------------
REVENUES:
Premiums
Related party (including premiums
recaptured totaling $0,
$0, and $155,798) $ $ 46,191 $ 155,798
Other (net of premiums ceded totaling
$85,803, $86,511 and $61,194) 1,163,183 948,672 677,381
Fee income 635,147 516,052 420,730
Net investment income
Related party (10,923) (9,416) (8,957)
Other 886,960 906,776 890,630
Net realized gains on investments 1,084 38,173 9,800
------------- -------------- -------------
2,675,451 2,446,448 2,145,382
------------- -------------- -------------
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
reinsurance recoveries totaling $80,681,
$81,205, and $44,871) 970,250 768,474 543,903
Increase in reserves
Related party 46,191 155,798
Other 33,631 78,851 90,013
Interest paid or credited to contractholders 494,081 491,616 527,784
Provision for policyholders' share of earnings
on participating business 13,716 5,908 3,753
Dividends to policyholders 70,161 71,429 63,799
------------- -------------- -------------
1,581,839 1,462,469 1,385,050
Commissions 173,405 144,246 102,150
Operating expenses (income):
Related party (768) (5,094) (6,292)
Other 593,575 518,228 431,714
Premium taxes 38,330 30,848 24,153
------------- -------------- -------------
2,386,381 2,150,697 1,936,775
INCOME BEFORE INCOME TAXES 289,070 295,751 208,607
------------- -------------- -------------
PROVISION FOR INCOME TAXES:
Current 72,071 81,770 61,644
Deferred 11,223 17,066 (11,797)
------------- -------------- -------------
83,294 98,836 49,847
------------- -------------- -------------
NET INCOME $ 205,776 $ 196,915 $ 158,760
============= ============== =============
See notes to consolidated financial statements.
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in Thousands)
===============================================================================================================
Accumulated
Additional Other
Preferred Stock Common Stock Paid-in Comprehensive Retained
------------------------------------------------
Shares Amount Shares Amount Capital Income (Loss) Earnings Total
------------ -------------------- ----------- ---------------------- ---------- ----------
BALANCE, JANUARY 1, 1997 2,000,800 $ 121,800 50,025 $ 250 $ 671,297 $ 14,951 $ 226,166 $ 1,034,464
Net income 158,760 158,760
Other comprehensive income 37,856 37,856
----------
Total comprehensive income 196,616
----------
Capital contributions 26,483 26,483
Dividends (71,394) (71,394)
------------ -------------------- ----------- ------------ ----------- ---------- ----------
BALANCE, DECEMBER 31, 1997 2,000,800 121,800 50,025 250 697,780 52,807 313,532 1,186,169
Net income 196,915 196,915
Other comprehensive income 8,753 8,753
----------
Total comprehensive income 205,668
----------
Capital contributions 8,808 8,808
Dividends (80,036) (80,036)
Purchase of preferred shares (2,000,800) (121,800 (121,800)
------------ -------------------- ----------- ------------ ----------- ---------- ----------
BALANCE, DECEMBER 31, 1998 0 $ 0 50,025 $ 250 $ 706,588 $ 61,560 $ 430,411 $ 1,198,809
Net income 205,776 205,776
Other comprehensive loss 146,421) (146,421)
----------
Total comprehensive loss 59,355
----------
Capital contributions
Dividends (88,950) (88,950)
Income tax benefit on stock
compensation 760 760
------------ -------------------- ----------- ------------ ----------- ---------- ----------
BALANCE, DECEMBER 31, 1999 0 $ 0 50,025 $ 250 $ 707,348 $(84,861) $ 547,237 $ 1,169,974
============ ==================== =========== ============ =========== ========== ==========
See notes to consolidated financial
statements.
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in Thousands)
===============================================================================================================
1999 1998 1997
------------- -------------- -------------
OPERATING ACTIVITIES:
Net income $ 205,776 $ 196,915 $ 158,760
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain allocated to participating
policyholders 13,716 5,908 3,753
Amortization of investments (22,514) (15,068) 409
Net realized gains on investments (1,084) (38,173) (9,800)
Depreciation and amortization 47,339 55,550 46,929
Deferred income taxes 11,223 17,066 (11,824)
Changes in assets and liabilities:
Policy benefit liabilities 650,959 938,444 498,114
Reinsurance receivable 19,636 (43,643) 112,594
Accrued interest and other receivables (37,482) 28,467 30,299
Other, net (146,157) (184,536) 64,465
------------- -------------- -------------
Net cash provided by operating 741,412 960,930 893,699
activities
------------- -------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to maturity
Sales 9,920
Maturities and redemptions 520,511 471,432 359,021
Available-for-sale
Sales 3,176,802 6,169,678 3,174,246
Maturities and redemptions 822,606 1,268,323 771,737
Mortgage loans 165,104 211,026 248,170
Real estate 5,098 16,456 36,624
Common stock 18,116 3,814 17,211
Purchases of investments:
Fixed maturities
Held-to-maturity (563,285) (584,092) (439,269)
Available-for-sale (4,022,368) (7,410,485) (4,314,722)
Mortgage loans (2,720) (100,240) (2,532)
Real estate (41,482) (4,581) (64,205)
Common stock (19,698) (10,020) (29,608)
------------- -------------- -------------
Net cash provided by (used in)
investing activities $ 58,684 $ 41,231 $ (243,327)
============= ============== =============
(Continued)
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in Thousands)
===============================================================================================================
1999 1998 1997
-------------- -------------- --------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (583,900) $ (507,237) $ (577,538)
Due to Parent Corporation (16,892) (73,779) (19,522)
Dividends paid (88,950) (80,036) (71,394)
Net commercial paper repayments (39,731) (14,327) (30,624)
Net repurchase agreements (repayments)
borrowings (163,680) (81,280) 38,802
Capital contributions 8,808 11,000
Purchase of preferred shares (121,800)
Acquisition of subsidiary (82,669)
Issuance of junior subordinated debentures 175,000
-------------- -------------- --------------
-------------- -------------- --------------
Net cash used in financing activities (718,153) (952,320) (649,276)
-------------- -------------- --------------
NET INCREASE IN CASH 81,943 49,841 1,096
CASH, BEGINNING OF YEAR 176,369 126,528 125,432
-------------- -------------- --------------
CASH, END OF YEAR $ 258,312 $ 176,369 $ 126,528
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 76,156 $ 111,493 $ 86,829
Interest 14,125 13,849 15,124
See notes to consolidated financial statements. (Concluded)
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Amounts in Thousands, except Share Amounts)
================================================================================
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - GWL&A Financial Inc. (GWL&A Financial or the Company) is an
indirect wholly-owned subsidiary of The Great-West Life Assurance Company (the
Parent Corporation). GWL&A Financial was incorporated in the state of Delaware
on September 16, 1998 to act as a holding company for Great-West Life & Annuity
Insurance Company (GWL&A) and its subsidiaries, and was capitalized through a
$250 cash investment in exchange for shares of common stock. GWL&A, a Colorado
life insurance 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. In December 1998,
all of the outstanding common stock of GWL&A, which was owned by the Parent
Corporation, was contributed to GWL&A Financial. The contribution has been
accounted for as a pooling of interests as it represents a combination of
entities under common control, and accordingly, the financial statements have
been restated for all periods to include the combined financial results of GWL&A
Financial and GWL&A.
Basis of Presentation - The preparation of financial statements in conformity
with generally accepted accounting principles 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. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material inter-company transactions and balances have been
eliminated in consolidation.
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentation.
Investments - Investments are reported as follows:
1. Management determines the classification of fixed maturities at the time of
purchase. Fixed maturities are classified as held-to-maturity when the Company
has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost unless fair value is
less than cost and the decline is deemed to be other than temporary, in which
case they are written down to fair value and a new cost basis is established.
Fixed maturities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the net unrealized gains and losses reported as accumulated other
comprehensive income (loss) in stockholder's equity. The net unrealized gains
and losses on derivative financial instruments used to hedge available-for-sale
securities are also included in other comprehensive income (loss).
The amortized cost of fixed maturities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts using the effective interest method over the estimated life of the
related bonds. Such amortization is included in net investment income. Realized
gains and losses, and declines in value judged to be other-than-temporary are
included in net realized gains (losses) on investments. 2. Mortgage loans on
real estate are carried at their unpaid balances adjusted for any unamortized
premiums or discounts and any valuation reserves. Interest income is accrued on
the unpaid principal balance. Discounts and premiums are amortized to net
investment income using the effective interest method. Accrual of interest is
discontinued on any impaired loans where collection of interest is doubtful.
The Company maintains an allowance for credit losses at a level that, in
management's opinion, is sufficient to absorb credit losses on its impaired
loans. Management's judgement is based on past loss experience, current and
projected economic conditions, and extensive situational analysis of each
individual loan. The measurement of impaired loans is based on the fair value of
the collateral.
3. Real estate is carried at cost. The carrying value of real estate is subject
to periodic evaluation of recoverability.
4. Investments in common stock are carried at fair value.
5. Policy loans are carried at their unpaid balances.
6. Short-term investments include securities purchased with initial maturities
of one year or less and are carried at amortized cost. The Company considers
short-term investments to be available-for-sale and amortized cost approximates
fair value.
7. Gains and losses realized on disposal of investments are determined on a
specific identification basis.
Cash - Cash includes only amounts in demand deposit accounts.
Internal Use Software - Effective January 1, 1999, the Company adopted Statement
of Position (SOP) No. 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 provides guidance on
accounting for costs associated with computer software developed or obtained for
internal use. As a result of the adoption of SOP 98-1, the Company capitalized
$18,373 in internal use software development costs for the year ended December
31, 1999.
Deferred Policy Acquisition Costs - Policy acquisition costs, which primarily
consist of sales commissions related to the production of new and renewal
business, have been deferred to the extent recoverable. Other costs capitalized
include expenses associated with the Company's group sales representatives.
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 $43,512, $51,724, and $44,298 in 1999, 1998, and 1997,
respectively.
Separate Accounts - Separate account assets and related liabilities are carried
at fair value. The Company's separate accounts invest in shares of Maxim Series
Fund, Inc. and Orchard Series Fund, Inc., both diversified, open-end management
investment companies which are affiliates of the Company, shares of other
external mutual funds, or government or corporate bonds. Investment income and
realized capital gains and losses of the separate accounts accrue directly to
the contractholders and, therefore, are not included in the Company's statements
of income. Revenues to the Company from the separate accounts consist of
contract maintenance fees, administrative fees, and mortality and expense risk
charges.
Life Insurance and Annuity Reserves - Life insurance and annuity policy reserves
with life contingencies of $7,169,885 and $6,866,478 at December 31, 1999 and
1998, respectively, are computed on the basis of estimated mortality, investment
yield, withdrawals, future maintenance and settlement expenses, and
retrospective experience rating premium refunds. Annuity contract reserves
without life contingencies of $4,468,685 and $4,908,964 at December 31, 1999 and
1998, respectively, are established at the contractholder's account value.
Reinsurance - Policy reserves ceded to other insurance companies are carried as
a reinsurance receivable on the balance sheet (see Note 3). 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.
Policy and Contract Claims - Policy and contract claims include provisions for
reported life and health claims in process of settlement, valued in accordance
with the terms of the related policies and contracts, as well as provisions for
claims incurred and unreported based primarily on prior experience of the
Company.
Participating Fund Account - Participating life and annuity policy reserves are
$4,297,823 and $4,108,314 at December 31, 1999 and 1998, respectively.
Participating business approximates 31.0%, 32.7%, and 50.5% of the Company's
ordinary life insurance in force and 94.0%, 71.9% and 91.1% of ordinary life
insurance premium income for the years ended December 31, 1999, 1998 and 1997,
respectively.
The amount of dividends to be paid from undistributed earnings on participating
business is determined annually by the Board of Directors. Amounts allocable to
participating policyholders are consistent with established Company practice.
The Company has established a Participating Policyholder Experience Account
(PPEA) for the benefit of all participating policyholders which is included in
the accompanying consolidated balance sheet. Earnings associated with the
operation of the PPEA are credited to the benefit of all participating
policyholders. In the event that the assets of the PPEA are insufficient to
provide contractually guaranteed benefits, the Company must provide such
benefits from its general assets.
The Company has also established a Participation Fund Account (PFA) for the
benefit of the participating policyholders previously transferred to the Company
from the Parent 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 participating
policyholders.
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. Fee income is derived primarily from
contracts for claim processing or other administrative services 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 impact income by
means of the provision for future policy benefit reserves, resulting in
recognition of profits over the life of the contracts. The average crediting
rate on annuity products was approximately 6.2%, 6.3%, and 6.6% in 1999, 1998,
and 1997.
Income Taxes - Income taxes are recorded using the asset and liability approach,
which requires, among other provisions, the recognition of deferred tax assets
and liabilities for expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. In estimating
future tax consequences, all expected future events (other than the enactments
or changes in the tax laws or rules) are considered. Although realization is not
assured, management believes it is more likely than not that the deferred tax
asset, net of a valuation allowance, will be realized.
Repurchase Agreements and Securities Lending - The Company enters into
repurchase agreements with third-party broker/dealers in which the Company sells
securities and agrees to repurchase substantially similar securities at a
specified date and price. Such agreements are accounted for as collateralized
borrowings. Interest expense on repurchase agreements is recorded at the coupon
interest rate on the underlying securities. The repurchase fee received or paid
is amortized over the term of the related agreement and recognized as an
adjustment to investment income.
The Company requires collateral in an amount greater than or equal to 102% of
the borrowing for all securities lending transactions.
Derivatives - The Company makes limited use of derivative financial instruments
to manage interest rate, market, and foreign exchange risk. Such hedging
activity consists primarily of interest rate swap agreements, interest rate
floors and caps, foreign currency exchange contracts, options and equity swaps.
The differential paid or received under the terms of these contracts is
recognized as an adjustment to net investment income on the accrual method.
Gains and losses on foreign exchange contracts are deferred and recognized in
net investment income when the hedged transactions are realized.
Interest rate swap agreements are used to convert the interest rate on certain
fixed maturities from a floating rate to a fixed rate. Interest rate swap
transactions generally involve the exchange of fixed and floating rate interest
payment obligations without the exchange of the underlying principal amount.
Interest rate floors and caps are interest rate protection instruments that
require the payment by a counter-party to the Company of an interest rate
differential. The differential represents the difference between current
interest rates and an agreed-upon rate, the strike rate, applied to a notional
principal amount. Foreign currency exchange contracts are used to hedge the
foreign exchange rate risk associated with bonds denominated in other than U.S.
dollars. Written call options are stock conversion protection agreements that
require the counter-party to automatically call the bond for cash when the
issuer elects to convert the bond to common stock. Equity swap transactions
generally involve the exchange of variable market performance of a basket of
securities for a fixed interest rate.
Although derivative financial instruments taken alone may expose the Company to
varying degrees of market and credit risk when used solely for hedging purposes,
these instruments typically reduce overall market and interest rate risk. The
Company controls the credit risk of its financial contracts through credit
approvals, limits, and monitoring procedures. As the Company generally enters
into transactions only with high quality institutions, no losses associated with
non-performance on derivative financial instruments have occurred or are
expected to occur.
The Financial Accounting Standards Board has issued Statement No. 133,
"Accounting for Derivative Instruments and for Hedging Activities", which, as
amended, is required to be adopted in years beginning after June 15, 2000. This
Statement provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. Although management has
not completed its analysis of the impact of this Statement, management does not
anticipate that the adoption of the new Statement will have a significant effect
on earnings or the financial position of the Company because of the Company's
minimal use of derivatives.
Stock Options - The Company applies the intrinsic value measurement approach
under APB Opinion No. 25 to stock-based compensation awards to employees.
2. ACQUISITION
On July 8, 1998, the Company paid $82,669 in cash to acquire all of the
outstanding shares of Alta Health & Life Insurance Company (Alta), formerly
known as Anthem Health & Life Insurance Company. The purchase price was based on
Alta's adjusted book value, and was subject to further minor adjustments. The
results of Alta's operations, which had an insignificant effect on net income in
1998, have been combined with those of the Company since the date of
acquisition.
The acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to the net assets acquired based
on their estimated fair values. The fair value of tangible assets acquired and
liabilities assumed was $379,934 and $317,440, respectively. The goodwill
representing the purchase price in excess of fair value of net assets acquired
is included in other assets and is being amortized over 30 years on a
straight-line basis.
3. RELATED-PARTY TRANSACTIONS
On December 31, 1998, the Company and the Parent Corporation entered into an
Indemnity Reinsurance Agreement pursuant to which the Company reinsured by
coinsurance certain Parent Corporation individual non-participating life
insurance policies. The Company recorded $859 in premium income and increase in
reserves, associated with certain policies, as a result of this transaction. Of
the $137,638 in reserves that was recorded as a result of this transaction,
$136,779 was recorded under SFAS No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments" ("SFAS No. 97"), accounting principles. The
Company recorded, at the Parent Corporation's carrying amount, which
approximates estimated fair value, the following at December 31, 1998 as a
result of this transaction:
Assets Liabilities and Stockholder's Equity
Cash $ 24,600 Policy reserves $ 137,638
Deferred income taxes 3,816
Policy loans 82,649
Due from Parent Corporation 19,753
Other 6,820
----------- -----------
$ 137,638 $ 137,638
=========== ===========
================================================================================
In connection with this transaction, the Parent Corporation made a capital
contribution of $5,608 to the Company.
On September 30, 1998, the Company and the Parent Corporation entered into an
Indemnity Reinsurance Agreement pursuant to which the Company reinsured by
coinsurance certain Parent Corporation individual non-participating life
insurance policies. The Company recorded $45,332 in premium income and increase
in reserves as a result of this transaction. Of the $428,152 in reserves that
was recorded as a result of this transaction, $382,820 was recorded under SFAS
No. 97 accounting principles. The Company recorded, at the Parent Corporation's
carrying amount, which approximates estimated fair value, the following at
September 30, 1998 as a result of this transaction:
Assets Liabilities and Stockholder's Equity
===================================
===================================
Bonds $ 147,475 Policy reserves $ 428,152
===================================
Mortgages 82,637 Due to Parent Corporation 20,820
===================================
Cash 134,900
===================================
Deferred policy acquisition costs 9,724
===================================
Deferred income taxes 15,762
===================================
Policy loans 56,209
===================================
Other 2,265
===================================
----------- -----------
$ 448,972 $ 448,972
=================================== =========== ===========
In connection with this transaction, the Parent Corporation made a capital
contribution of $3,200 to the Company.
On September 30, 1998, the Company purchased furniture, fixtures and equipment
from the Parent Corporation for $25,184. In February 1997, the Company purchased
its corporate headquarters properties from the Parent Corporation for $63,700.
On June 30, 1997, the Company recaptured all remaining pieces of an individual
participating insurance block of business previously reinsured to the Parent
Corporation on December 31, 1992. The Company recorded $155,798 in premium
income and increase in reserves as a result of this transaction. The Company
recorded, at the Parent Corporation's carrying amount, which approximates
estimated fair value, the following at June 30, 1997 as a result of this
transaction:
Assets Liabilities and Stockholder's Equity
==============================
==============================
Cash $ 160,000 Policy reserves $ 155,798
==============================
Bonds 17,975 Due to Parent Corporation 20,373
==============================
Other 60 Deferred income taxes 2,719
==============================
Undistributed earnings on
==============================
participating business (855)
==============================
------------- -------------
$ 178,035 $ 178,035
============================== ============= =============
In connection with this transaction, the Parent Corporation made a capital
contribution of $11,000 to the Company.
Effective January 1, 1997, all employees of the U.S. operations of the Parent
Corporation and the related benefit plans were transferred to the Company. All
related employee benefit plan assets and liabilities were also transferred to
the Company (see Note 10). The transfer did not have a material effect on the
Company's operating expenses as the actual costs associated with the employees
and the benefit plans were charged previously to the Company under
administrative service agreements between the Company and the Parent
Corporation.
The Company performs administrative services for the U.S. operations of the
Parent Corporation. The following represents revenue from the Parent Corporation
for services provided pursuant to these service agreements. The amounts recorded
are based upon management's best estimate of actual costs incurred and resources
expended based upon number of policies and/or certificates in force.
Years Ended December 31,
----------------------------------------
1999 1998 1997
---------- ------------- -------------
Investment management revenue 130 $ 475 $ 801
Administrative and underwriting revenue 768 5,094 6,292
At December 31, 1999 and 1998, due to Parent Corporation includes $10,647 and
$17,930 due on demand and $25,338 and $34,947 of notes payable which bear
interest and mature on October 1, 2006. These notes may be prepaid in whole or
in part at any time without penalty; the issuer may not demand payment before
the maturity date. The amounts due on demand to the Parent Corporation bear
interest at the public bond rate (6.7% and 6.1% at December 31, 1999 and 1998,
respectively) while the note payable bears interest at 5.4%.
Interest expense attributable to these related party obligations was $2,665,
$9,891, and $9,758 for the years ended December 31, 1999, 1998 and 1997,
respectively.
4. REINSURANCE
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
risks to other insurance enterprises under excess coverage and co-insurance
contracts. The Company retains a maximum of $1.5 million of coverage per
individual life.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies. At
December 31, 1999 and 1998, the reinsurance receivable had a carrying value of
$173,322 and $192,958, respectively.
The following schedule details life insurance in force and life and
accident/health premiums:
Ceded Assumed Percentage
Primarily to Primarily of Amount
Gross the Parent from Other Net Assumed
Amount Corporation Companies Amount to Net
------------- ------------- ------------- ------------- -----------
December 31, 1999:
Life insurance in force:
Individual $ 35,362,934 $ 5,195,961 $ 8,467,877 $ 38,634,850 21.9%
Group 80,717,198 2,212,741 82,929,939 2.7%
------------- ------------- ------------- -------------
Total $ 116,080,132 $ 5,195,961 $ 10,680,618 $ 121,564,789
============= ============= ============= =============
Premium Income:
Life insurance $ 306,101 $ 27,399 $ 46,715 $ 325,417 14.4%
801,755 58,247 79,753 823,261 9.7%
Accident/health
------------- ------------- ------------- -------------
Total $ 1,107,856 $ 85,646 $ 126,468 $ 1,148,678
============= ============= ============= =============
December 31, 1998:
Life insurance in force:
Individual $ 34,017,379 $ 4,785,079 $ 8,948,442 $ 38,180,742 23.4%
Group 81,907,539 2,213,372 84,120,911 2.6%
------------- ------------- ------------- -------------
Total $ 115,924,918 $ 4,785,079 $ 11,161,814 $ 122,301,653
============= ============= ============= =============
Ceded Assumed Percentage
Primarily to Primarily of Amount
Gross the Parent from Other Net Assumed
Amount Corporation Companies Amount to Net
------------- ------------- ------------- ------------- -----------
Premium Income:
Life insurance $ 352,710 $ 24,720 $ 65,452 $ 393,442 16.6%
571,992 61,689 74,284 584,587 12.7%
Accident/health
------------- ------------- ------------- -------------
Total $ 924,702 $ 86,409 $ 139,736 $ 978,029
============= ============= ============= =============
December 31, 1997:
Life insurance in force:
Individual $ 24,598,679 $ 4,040,398 $ 3,667,235 $ 24,225,516 15.1%
Group 51,179,343 2,031,477 53,210,820 3.8%
------------- ------------- ------------- -------------
Total $ 75,778,022 $ 4,040,398 $ 5,698,712 $ 77,436,336
============= ============= ============= =============
Premium Income:
Life insurance $ 320,456 $ (127,388) $ 19,923 $ 467,767 4.3%
341,837 32,645 34,994 344,186 10.2%
Accident/health
------------- ------------- ------------- -------------
Total $ 662,293 $ (94,743) $ 54,917 $ 811,953
============= ============= ============= =============
5. NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Net investment income is summarized as follows:
Years Ended December 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
Investment income:
Fixed maturities and short-term investments $ 637,037 $ 638,079 $ 633,975
Mortgage loans on real estate 88,033 110,170 118,274
Real estate 19,618 20,019 20,990
Policy loans 167,109 180,933 194,826
Other 138 285 18
------------- ------------- -------------
911,935 949,486 968,083
Investment expenses, including interest on
amounts charged by the related parties
of $2,665, $9,891, and $9,758 35,898 52,126 86,410
------------- ------------- -------------
Net investment income $ 876,037 $ 897,360 $ 881,673
============= ============= =============
Net realized gains (losses) on investments are as follows:
Years Ended December 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
Realized gains (losses):
Fixed maturities $ (7,858) $ 38,391 $ 15,966
Mortgage loans on real estate 1,429 424 1,081
Real estate 513 363
Provisions 7,000 (642) (7,610)
------------- ------------- -------------
Net realized gains on investments $ 1,084 $ 38,173 $ 9,800
============= ============= =============
6. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 1999 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ----------- ----------- ----------- -----------
Held-to-Maturity:
U.S. Treasury Securities
and obligations of U.S.
Government Agencies $ 63,444 $ 448 $ 687 $ 63,205 $ 63,444
Collateralized
mortgage
obligations 115,357 9,360 105,997 115,357
Public utilities 223,705 2,773 3,011 223,467 223,705
Corporate bonds 1,724,915 19,179 30,753 1,713,341 1,724,915
Foreign governments 10,000 213 10,213 10,000
State and 123,160 738 1,540 122,358 123,160
municipalities
----------- ----------- ----------- ----------- -----------
$2,260,581 $ 23,351 $ 45,351 $ 2,238,581 $ 2,260,581
=========== =========== =========== =========== ===========
Available-for-Sale:
U.S. Treasury Securities
and obligations of U.S.
Government Agencies:
Collateralized
mortgage
obligations $ 752,130 $ 2,342 $ 21,459 $ 733,013 $ 733,013
Direct mortgage pass-
through 304,099 1,419 11,704 293,814 293,814
certificates
Other 178,142 77 1,431 176,788 176,788
Collateralized mortgage
obligations 909,105 1,183 39,980 870,308 870,308
Public utilities 468,087 1,106 14,242 454,951 454,951
Corporate bonds 3,929,160 24,287 148,923 3,804,524 3,804,524
Foreign governments 41,224 654 1,256 40,622 40,622
State and municipalities 371,436 108 17,642 353,902 353,902
----------- ----------- ----------- ----------- -----------
$6,953,383 $ 31,176 $ 256,637 $ 6,727,922 $ 6,727,922
=========== =========== =========== =========== ===========
Fixed maturities owned at December 31, 1998 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ----------- ----------- ----------- -----------
Held-to-Maturity:
U.S. Treasury Securities
and obligations of U.S.
Government Agencies $ 34,374 $ 1,822 $ $ 36,196 $ 34,374
Collateralized
mortgage
obligations 10,135 194 9,941 10,135
Public utilities 213,256 12,999 460 225,795 213,256
Corporate bonds 1,809,957 78,854 3,983 1,884,828 1,809,957
Foreign governments 10,133 782 10,915 10,133
State and 121,963 9,298 131,261 121,963
municipalities
----------- ----------- ----------- ----------- -----------
$2,199,818 $ 103,755 $ 4,637 $ 2,298,936 $ 2,199,818
=========== =========== =========== =========== ===========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ----------- ----------- ----------- -----------
Available-for-Sale:
U.S. Treasury Securities
and obligations of U.S.
Government Agencies:
Collateralized
mortgage
obligations $ 863,479 $ 39,855 $ 1,704 $ 901,630 $ 901,630
Direct mortgage pass-
through 467,100 4,344 692 470,752 470,752
certificates
Other 191,138 1,765 788 192,115 192,115
Collateralized mortgage
obligations 926,797 16,260 1,949 941,108 941,108
Public utilities 464,096 14,929 36 478,989 478,989
Corporate bonds 3,557,209 123,318 17,420 3,663,107 3,663,107
Foreign governments 56,505 2,732 59,237 59,237
State and municipalities 226,208 4,588 1,008 229,788 229,788
----------- ----------- ----------- ----------- -----------
$6,752,532 $ 207,791 $ 23,597 $ 6,936,726 $ 6,936,726
=========== =========== =========== =========== ===========
The collateralized mortgage obligations consist primarily of sequential and
planned amortization classes with final stated maturities of two to thirty years
and average lives of less than one to fifteen years. Prepayments on all
mortgage-backed securities are monitored monthly and amortization of the premium
and/or the accretion of the discount associated with the purchase of such
securities is adjusted by such prepayments.
See Note 8 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, 1999, by projected maturity, are shown below. Actual maturities
will likely differ from these projections because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
Held-to-Maturity Available-for-Sale
------------------------------ -------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
-------------- -------------- --------------- ---------------
Due in one year or less $ 221,172 $ 220,644 $ 323,466 $ 334,701
Due after one year
through five years 945,199 941,685 1,286,402 1,251,690
Due after five years
Through ten years 684,729 677,531 716,353 684,513
Due after ten years 118,170 121,921 690,073 650,432
Mortgage-backed
Securities 115,357 105,997 1,965,334 1,897,135
Asset-backed securities 175,954 170,803 1,971,755 1,909,451
-------------- -------------- --------------- ---------------
$ 2,260,581 $ 2,238,581 $ 6,953,383 $ 6,727,922
============== ============== =============== ===============
Proceeds from sales of securities available-for-sale were $3,176,802,
$6,169,678, and $3,174,246 during 1999, 1998, and 1997, respectively. The
realized gains on such sales totaled $10,080, $41,136, and $20,543 for 1999,
1998, and 1997, respectively. The realized losses totaled $19,720, $8,643, and
$10,643 for 1999, 1998, and 1997, respectively. During the years 1999, 1998, and
1997, held-to-maturity securities with and amortized cost of $0, $9,920 and $0
were sold due to deterioration with insignificant gains and losses.
At December 31, 1999 and 1998, pursuant to fully collateralized securities
lending arrangements, the Company had loaned $0 and $115,168 of fixed
maturities, respectively.
The Company engages in hedging activities to manage interest rate, market and
foreign exchange risk. The following table summarizes the 1999 financial hedge
instruments:
Notional Strike/Swap
December 31, 1999 Amount Rate Maturity
------------------------ -------------- -------------------------- ----------------------
Interest Rate Caps $ 1,362,000 7.64% - 11.82% (CMT) 6/00 - 12/04
Interest Rate Swaps 217,528 4.94%-6.8% 02/00 - 12/06
Foreign Currency
Exchange Contracts 19,478 N/A 03/00 - 07/06
Equity Swap 104,152 5.15% - 5.93% 01/01
Options 54,100 Various 01/02 - 12/02
The following table summarizes the 1998 financial hedge instruments:
Notional Strike/Swap
December 31, 1998 Amount Rate Maturity
------------------------ --------------- -------------------------- ----------------------
Interest Rate Floor $ 100,000 4.50% (LIBOR) 11/99
Interest Rate Caps 1,070,000 6.75% - 11.82% (CMT) 12/99 - 10/03
Interest Rate Swaps 242,451 4.95% - 9.35% 08/99 - 02/03
Foreign Currency
Exchange Contracts 34,123 N/A 05/99 - 07/06
Equity Swap 95,652 4.00% 12/99
LIBOR - London Interbank Offered Rate
CMT - Constant Maturity Treasury Rate
The Company has established specific investment guidelines designed to emphasize
a diversified and geographically dispersed portfolio of mortgages collateralized
by commercial and industrial properties located in the United States. The
Company's policy is to obtain collateral sufficient to provide loan-to-value
ratios of not greater than 75% at the inception of the mortgages. At December
31, 1999, approximately 34% of the Company's mortgage loans were collateralized
by real estate located in California.
The following represents impairments and other information with respect to
impaired mortgage loans:
1999 1998
========================================================== -------------- ---------------
==========================================================
Loans with related allowance for credit losses of
==========================================================
$14,727 and $2,492 $ 25,877 $ 13,192
==========================================================
Loans with no related allowance for credit losses 17,880 10,420
==========================================================
Average balance of impaired loans during the year 43,866 31,193
==========================================================
Interest income recognized (while impaired) 1,877 2,308
==========================================================
Interest income received and recorded (while impaired)
==========================================================
using the cash basis method of recognition 1,911 2,309
==========================================================
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 $75,691 and
$52,913 at December 31, 1999 and 1998, respectively.
The following table presents changes in allowance for credit losses:
1999 1998 1997
------------- ------------- -------------
Balance, beginning of year $ 67,242 $ 67,242 $ 65,242
Provision for loan losses (7,000) 642 4,521
Chargeoffs - (787) (2,521)
Recoveries 1,000 145
------------- ------------- -------------
Balance, end of year $ 61,242 $ 67,242 $ 67,242
============= ============= =============
7. COMMERCIAL PAPER
The Company has a commercial paper program that is partially supported by a
$50,000 standby letter-of-credit. At December 31, 1999, no commercial paper was
outstanding. At December 31, 1998, commercial paper outstanding had maturities
ranging from 69 to 118 days and interest rates ranging from 5.10% to 5.22%.
8. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S JUNIOR
SUBORDINATED DEBENTURES
On May 4, 1999, Great-West Life & Annuity Insurance Capital I (the Trust), the
Company's wholly-owned subsidiary trust created under the laws of the State of
Delaware, issued $175,000 of Subordinated Capital Income Securities. The sole
assets of the Trust are the $180,412 aggregate principal amount of the Company's
7.25% Junior Subordinated Debentures due June 30, 2048. The obligations of the
Trust related to its Junior Subordinated Debentures are fully and
unconditionally guaranteed by the Company.
9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
December 31,
----------------------------------------------------------
1999 1998
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
ASSETS:
Fixed maturities and
short-term investments $ 9,232,212 $ 9,210,212 $ 9,556,713 $ 9,655,831
Mortgage loans on real
Estate 974,645 968,964 1,133,468 1,160,568
Policy loans 2,681,132 2,681,132 2,858,673 2,858,673
Common stock 69,240 69,240 48,640 48,640
LIABILITIES:
Annuity contract reserves
without life 4,468,685 4,451,465 4,908,964 4,928,800
contingencies
Policyholders' funds 185,623 185,623 181,779 181,779
Due to Parent Corporation 35,985 33,596 52,877 52,877
Repurchase agreements 80,579 80,579 244,258 244,258
Commercial paper - - - - 39,731 39,731
Guaranteed preferred
beneficial interests in
the
Company's junior
subordinated debentures 175,000 137,410
December 31,
----------------------------------------------------------
1999 1998
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
HEDGE CONTRACTS:
Interest rate floor - - - - 17 17
Interest rate caps 4,140 4,140 971 971
Interest rate swaps (1,494) (1,494) 6,125 6,125
Foreign currency
exchange contracts (10) (10) 689 689
Equity swap (7,686) (7,686) (8,150) (8,150)
Options (6,220) (6,220) - - - -
The estimated fair values of financial instruments have been determined using
available information and appropriate valuation methodologies. However,
considerable judgement is required to interpret market data to develop estimates
of fair value. Accordingly, the estimates presented are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The estimated fair value of fixed maturities that are publicly traded are
obtained from an independent pricing service. To determine fair value for fixed
maturities not actively traded, the Company utilized discounted cash flows
calculated at current market rates on investments of similar quality and term.
Mortgage loans 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. 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 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 Parent Corporation is based on discounted
cash flows at current market rates on high quality investments.
The fair value of the guaranteed preferred beneficial interests in the Company's
junior subordinated debentures reflects the price determined in the public
market at December 31, 1999.
The carrying value of repurchase agreements and commercial paper is a reasonable
estimate of fair value due to the short-term nature of the liabilities.
The estimated fair value of financial hedge instruments, all of which are held
for other than trading purposes, is the estimated amount the Company would
receive or pay to terminate the agreement at each year-end, taking into
consideration current interest rates and other relevant factors. Included in the
net loss position for interest rates swaps are $772 and $0 of unrealized losses
in 1999 and 1998, respectively. Included in the net gain position for foreign
currency exchange contracts are $518 and $932 of loss exposures in 1999 and
1998, respectively.
The carrying amounts for receivables and liabilities reported in the balance
sheet approximate fair value due to their short nature.
10. EMPLOYEE BENEFIT PLANS
Effective January 1, 1997, all employees of the U.S. operations of the Parent
Corporation and the related benefit plans were transferred to the Company. See
Note 3 for further discussion.
The Company's Parent had previously accounted for the pension plan under the
Canadian Institute of Chartered Accountants (CICA) guidelines and had recorded a
prepaid pension asset of $19,091. As U.S. generally accepted accounting
principles do not materially differ from these CICA guidelines and the transfer
was between related parties, the prepaid pension asset was transferred at
carrying value. As a result, the Company recorded the following effective
January 1, 1997:
Prepaid pension cost $ 19,091 Undistributed earnings on $ 3,608
==============================
Participating business
==============================
Stockholder's equity 15,483
==============================
------------- -------------
$ 19,091 $ 19,091
============================== ============= =============
The following table summarizes changes for the three years December 31, 1999, in
the benefit obligations and in plan assets for the Company's defined benefit
pension plan and post-retirement medical plan. There is no additional minimum
pension liability required to be recognized. There were no amendments to the
plans due to the acquisition of Alta.
Post-Retirement
Pension Benefits Medical Plan
---------------------------- -----------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Change in benefit obligation
Benefit obligation at
beginning of year $ 131,305 $ 115,057 $ 96,417 $ 19,944 $ 19,454 $ 16,160
Service cost 7,853 6,834 5,491 2,186 1,365 1,158
Interest cost 8,359 7,927 7,103 1,652 1,341 1,191
Addition of former Alta 4,155
employees
Actuarial (gain) loss (22,363) 5,117 9,470 3,616 (1,613) 1,500
Prior service for former
Alta
employees 2,471
Benefits paid (3,179) (3,630) (3,424) (641) (603) (555)
-------- -------- -------- -------- -------- --------
Benefit obligation at end 126,130 131,305 115,057 29,228 19,944 19,454
of year
-------- -------- -------- -------- -------- --------
Change in plan assets
Fair value of plan assets
at
beginning of year $ 183,136 $ 162,879 $ 138,221 $ $ $
Actual return on plan assets 12,055 23,887 28,082
Addition of former Alta
employees
and other adjustments 81
Benefits paid (3,179) (3,630) (3,424)
-------- -------- -------- -------- -------- --------
Fair value of plan assets at
end of year 192,093 183,136 162,879
-------- -------- -------- -------- -------- --------
Funded status 65,963 51,831 47,822 (29,228) (19,944) (19,454)
Unrecognized net actuarial
(gain) loss (30,161) (11,405) (6,326) 3,464 (113) 1,500
Unrecognized prior service 3,614 2,310
cost
Unrecognized net obligation
or
(asset) at transition (18,170) (19,684) (21,198) 13,736 14,544 15,352
-------- -------- -------- -------- -------- --------
Prepaid (accrued) benefit $ 21,246 $ 20,742 $ 20,298 $ (9,718) $ (5,513) $ (2,602)
cost
======== ======== ======== ======== ======== ========
Weighted-average
assumptions as of
December 31
Discount rate 7.50% 6.50% 7.00% 7.50% 6.50% 7.00%
Expected return on plan 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%
assets
Rate of compensation 5.00% 4.00% 4.50% 5.00% 4.00% 4.50%
increase
Post-Retirement
Pension Benefits Medical Plan
---------------------------- -----------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Components of net periodic
benefit
Cost
Service cost $ 7,853 $ 6,834 $ 5,491 $ 2,186 $ 1,365 $ 1,158
Interest cost 8,360 7,927 7,103 1,652 1,341 1,191
Expected return on plan (15,664) (13,691) (12,286)
assets
Amortization of transition (1,514) (1,514) (1,514) 808 808 808
obligation
Amortization of
unrecognized prior
service cost 541 162
Amortization of gain from
earlier
periods (80) 38
-------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Net periodic (benefit) cost $ (504) $ (444) $ (1,206) $ 4,846 $ 3,514 $ 3,157
======== ======== ======== ======== ======== ========
The Company-sponsored post-retirement medical plan (medical plan) provides
health benefits to retired employees. The medical plan is contributory and
contains other cost sharing features, which may be adjusted annually for the
expected general inflation rate. The Company's policy will be 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 1999, 1998, or
1997.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the medical plan. For measurement purposes, a 7.5% annual rate of
increase in the per capita cost of covered health care benefits was assumed. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects:
1-Percentage 1-Percentage
Point Point
Increase Decrease
----------------- -----------------
Increase (decrease) on total of service and
interest cost on components $ 1,678 $ (1,285)
Increase (decrease) on post-retirement
benefit obligation 7,897 (6,186)
The Company sponsors a defined contribution 401(k) retirement plan which
provides eligible participants with the opportunity to defer up to 15% of base
compensation. The Company matches 50% of the first 5% of participant pre-tax
contributions. For employees hired after January 1, 1999, the Company matches
50% of the first 8% of participant pre-tax contributions. Company contributions
for the years ended December 31, 1999, 1998, and 1997 totaled $5,504, $3,915,
and $3,475, respectively.
The Company has a deferred compensation plan providing key executives with the
opportunity to participate in an unfunded, deferred compensation program. Under
the program, participants may defer base compensation and bonuses, and earn
interest on their deferred amounts. The program is not qualified under Section
401 of the Internal Revenue Code. The total of participant deferrals, which is
reflected in other liabilities, was $17,367, $16,102, and $13,952 for years
ending December 31, 1999, 1998, and 1997, respectively. The participant
deferrals earn interest at a rate based on the average ten-year composite
government securities rate plus 1.5%. The interest expense related to the plan
for the years ending December 31, 1999, 1998, and 1997 were $1,231, $1,185, and
$1,019, respectively.
The Company also provides a supplemental executive retirement plan (SERP) 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 incremental expense for this plan for 1999, 1998, and 1997 was
$3,002, $2,840, and $2,531, respectively. The total liability of $14,608,
$11,323, and $8,288 as of December 31, 1999, 1998, and 1997 is included in other
liabilities.
11. FEDERAL INCOME TAXES
The following is a reconciliation between the federal income tax rate and the
Company's effective rate:
1999 1998 1997
----------- ----------- -----------
Federal tax rate 35.0 % 35.0 % 35.0 %
Change in tax rate resulting from:
Settlement of Parent tax exposures (5.9) (20.2)
Provision for contingencies (0.5) 7.7
Policyholder share of earnings 1.7 0.7 0.6
Other, net (1.5) (2.3) 0.8
----------- ----------- -----------
Total 28.8 % 33.4 % 23.9 %
=========== =========== ===========
The Company's income tax provision was favorably impacted in 1999 and 1997 by
releases of contingent liabilities relating to taxes of the Parent Corporation's
U.S. branch associated with blocks of business that were transferred from the
Parent Corporation's U.S. branch to the Company from 1989 to 1993; the Company
had agreed to the transfer of these tax liabilities as part of the transfer of
this business. The release recorded in 1999 reflected the resolution of certain
tax issues with the Internal Revenue Service (IRS) relating to the 1992 - 1993
audit years. The release recorded in 1997 reflected the resolution of certain
tax issues with the IRS relating to the 1990-1991 audit years. The release
totaled $17,150 for 1999 and $42,150 for 1997; however, $8,900 of the 1999
release and $15,100 of the 1997 release was attributable to participating
policyholders and therefore had no effect on the net income of the Company since
that amount was credited to the provision for policyholders' share of earnings
(losses).
In addition to this release of contingent tax liabilities, the Company's income
tax provision for 1997 also reflects increases for other contingent items
relating to open tax years where the Company determined it was probable that
additional taxes could be owed based on changes in facts and circumstances. The
increase in 1997 was $16,000, of which $10,100 was attributable to participating
policyholders and therefore had no effect on the net income of the Company. This
increase in contingent tax liabilities has been reflected as a component of the
deferred income tax provisions as the Company does not expect near term
resolution of these contingencies.
Excluding the effect of the 1999 and 1997 tax items discussed above, the
effective tax rate for 1999 and 1997 was 35.2% and 36.4%.
Temporary differences which give rise to the deferred tax assets and liabilities
as of December 31, 1999 and 1998 are as follows:
1999 1998
--------------------------- -------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
------------ ------------- ------------ -----------
Policyholder reserves $ 131,587 $ $ 143,244 $
Deferred policy acquisition costs 49,455 39,933
Deferred acquisition cost proxy
tax 103,529 100,387
Investment assets 69,561 19,870
Net operating loss
carryforwards 444 2,867
Other 582 6,566
------------ ------------- ------------ -----------
Subtotal 305,121 50,037 253,064 59,803
Valuation allowance (1,761) (1,778)
------------ ------------- ------------ -----------
Total Deferred Taxes $ 303,360 $ 50,037 $ 251,286 $ 59,803
============ ============= ============ ===========
Amounts included in investment assets above include $58,711 and $(34,556)
related to the unrealized gains/(losses) on the Company's fixed maturities
available-for-sale at December 31, 1999 and 1998, respectively.
The Company will file a consolidated tax return for 1999. Losses incurred by
subsidiaries in prior years cannot be offset against operating income of the
Company. At December 31, 1999, the Company's subsidiaries had approximately
$1,271 of net operating loss carryforwards, expiring through the year 2014. The
tax benefit of subsidiaries' net operating loss carryforwards are included in
the deferred tax assets at December 31, 1999 and 1998, respectively.
The Company's valuation allowance was increased (decreased) in 1999, 1998, and
1997 by $(17), $(1,792), and $34, respectively, as a result of the re-evaluation
by management of future estimated taxable income in its subsidiaries.
Under pre-1984 life insurance company income tax laws, a portion of life
insurance company gain from operations was not subject to current income
taxation but was accumulated, for tax purposes, in a memorandum account
designated as "policyholders' surplus account." The aggregate accumulation in
the account is $7,742 and the Company does not anticipate any transactions which
would cause any part of the amount to become taxable. Accordingly, no provision
has been made for possible future federal income taxes on this accumulation.
12. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130 "Reporting Comprehensive Income". This Statement
established new rules for reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net income or stockholder's equity. This Statement requires unrealized
gains or losses on the Company's available-for-sale securities and related
offsets for reserves and deferred policy acquisition costs, which prior to
adoption were reported separately in stockholder's equity, to be included in
other comprehensive income. The 1997 financial statements have been reclassified
to conform to the requirements of Statement No. 130.
Other comprehensive loss at December 31, 1999 is summarized as follows:
Tax
=========================================
Before-Tax (Expense) Net-of-Tax
=========================================
Amount or Benefit Amount
========================================= --------------- -------------- --------------
Unrealized gains on available-for-sale
=========================================
securities:
=========================================
Unrealized holding gains (losses)
arising
=========================================
during the period $ (303,033) $ 106,061 $ (196,972)
=========================================
Less: reclassification adjustment
for
=========================================
(gains) losses realized in net (9,958) 3,485 (6,473)
income
=========================================
--------------- -------------- --------------
Net unrealized gains (losses) (312,991) 109,546 (203,445)
=========================================
=========================================
Reserve and DAC adjustment 87,729 (30,705) 57,024
--------------- -------------- --------------
--------------- -------------- --------------
Other comprehensive loss $ (225,262) $ 78,841 $ (146,421)
========================================= =============== ============== ==============
Other comprehensive income at December 31, 1998 is summarized as follows:
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
--------------- -------------------------------
Unrealized gains on available-for-sale
securities:
Unrealized holding gains (losses)
arising
during the period $ 39,430 $ (13,800) $ 25,630
Less: reclassification adjustment
for
(gains) losses realized in net (14,350) 5,022 (9,328)
income
--------------- -------------- --------------
Net unrealized gains 25,080 (8,778) 16,302
Reserve and DAC adjustment (11,614) 4,065 (7,549)
--------------- -------------- --------------
--------------- -------------- --------------
Other comprehensive income $ 13,466 $ (4,713) $ 8,753
=============== ============== ==============
Other comprehensive income at December 31, 1997 is summarized as follows:
Tax
=========================================
Before-Tax (Expense) Net-of-Tax
=========================================
Amount or Benefit Amount
========================================= --------------- -------------- --------------
Unrealized gains on available-for-sale
=========================================
securities:
=========================================
Unrealized holding gains (losses)
arising
=========================================
during the period $ 80,821 $ (28,313) $ 52,508
=========================================
Less: reclassification adjustment
for
=========================================
(gains) losses realized in net 2,012 (704) 1,308
income
=========================================
--------------- -------------- --------------
Net unrealized gains 82,833 (29,017) 53,816
=========================================
=========================================
Reserve and DAC adjustment (24,554) 8,594 (15,960)
--------------- -------------- --------------
--------------- -------------- --------------
Other comprehensive income $ 58,279 $ (20,423) $ 37,856
========================================= =============== ============== ==============
13. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS, AND OTHER MATTERS
Effective September 30, 1998, the Company purchased all of its outstanding
series of preferred stock, which were owned by the Parent Corporation, for
$121,800. At December 31, 1999 and 1998, the Company has 1,500 authorized shares
each of Series A, Series B, Series C and Series D cumulative preferred stock;
and 2,000,000 authorized shares of non-cumulative preferred stock.
Dividends of $0, $6,692, and $8,854 were paid on preferred stock in 1999, 1998,
and 1997, respectively. In addition, dividends of $88,950, $73,344, and $62,540
were paid on common stock in 1999, 1998, and 1997, respectively. Dividends are
paid as determined by the Board of Directors.
As an insurance company domiciled in the State of Colorado, the maximum amount
of dividends which can be paid to stockholders are subject to restrictions
relating to statutory surplus and statutory net gain from operations. Statutory
surplus and net gain from operations for GWL&A at December 31, 1998 were
$1,007,245 and $245,148 (unaudited), respectively. GWL&A should be able to pay
up to $245,148 (unaudited) of dividends in 1999.
14. STOCK OPTIONS
Great-West Lifeco Inc. (Lifeco) is the parent of the Parent Corporation. Lifeco
has a stock option plan (the Lifeco plan) that provides for the granting of
options for common shares of Lifeco to certain officers and employees of Lifeco
and its subsidiaries, including the Company. Options may be awarded at no less
than the market price on the date of the grant. Termination of employment prior
to vesting results in forfeiture of the options, unless otherwise determined by
a committee that administers the Lifeco plan. As of December 31, 1999, 1998, and
1997, stock available for award to Company employees under the Lifeco plan
aggregated 885,150, 1,424,400, and 3,440,000 shares.
The plan provides for the granting of options with varying terms and vesting
requirements. The basic options under the plan become exercisable twenty percent
per year commencing on the first anniversary of the grant and expire ten years
from the date of grant. Options granted in 1998 and 1997 to Company employees
totaling 278,000 and 1,832,000, respectively, become exercisable if certain
long-term cumulative financial targets are attained. If exercisable, the
exercise period runs from April 1, 2002 to June 26, 2007. Additional options
granted in 1998 totaling 380,000 become exercisable if certain sales or
financial targets are attained. During 1999 and 1998, 11,250 and 30,000 of these
options vested and accordingly, the Company recognized compensation expense of
$23 and $116, respectively. If exercisable, the exercise period runs from the
date that the particular options become exercisable until January 27, 2008.
The following table summarizes the status of, and changes in, Lifeco options
granted to Company employees which are outstanding and the weighted-average
exercise price (WAEP) for the years ended December 31. 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:
1999 1998 1997
--------------------- ---------------------- ----------------------
Options WAEP Options WAEP Options WAEP
----------- -------- ----------- --------- ----------- ---------
Outstanding, Jan. 1, 6,544,824 $ 8.07 5,736,000 $ 7.71 4,104,000 $ 6.22
Granted 575,500 16.48 988,000 13.90 1,932,000 11.56
Exercised 234,476 5.69 99,176 5.93 16,000 5.95
Expired or 318,750 13.81 80,000 13.05 284,000 6.17
canceled
----------- -------- ----------- --------- ----------- ---------
Outstanding, Dec. 6,567,098 9.04 6,544,824 8.07 5,736,000 7.71
31,
=========== ======== =========== ========= =========== =========
Options exercisable
at year-end 2,215,998 $ 6.31 1,652,424 $ 5.72 760,800 $ 5.96
=========== ======== =========== ========= =========== =========
Weighted average
fair
value of options
granted during year $ 5.23 $ 4.46 $ 2.83
=========== =========== ===========
The following table summarizes the range of exercise prices for outstanding Lifeco
common stock options granted to Company employees at December 31, 1999:
Outstanding Exercisable
==================== ---------------------------------------- ---------------------------
Average Average
====================
Exercise Average Exercise Exercise
====================
Price Range Options Life Price Options Price
-------------------- -------------- ---------- ------------ ------------- ------------
$ 5.87 - 7.80 3,554,348 6.63 $ 5.95 2,108,748 $ 5.92
====================
$11.25 - 15.81 2,842,000 7.86 $ 12.37 107,250 $ 14.03
====================
$16.53 - 18.65 170,500 9.18 17.93 - -
====================
Of the exercisable Lifeco options, 2,174,748 relate to basic option grants and 41,250
relate to variable grants.
Power Financial Corporation (PFC), which is the parent corporation of Lifeco,
has a stock option plan (the PFC plan) that provides for the granting of options
for common shares of PFC to key employees of PFC and its affiliates. Prior to
the creation of the Lifeco plan in April 1996, certain officers of the Company
participated in the PFC plan in Canada. Under the PFC plan, options may be
awarded at no less than the market price on the date of the grant. Termination
of employment prior to vesting results in forfeiture of the options, unless
otherwise determined by a committee that administers the PFC plan. As of
December 31, 1999, 1998 and 1997, stock available for award under the PFC plan
aggregated 4,340,800, 4,400,800, and 4,400,800 shares.
Options granted to officers of the Company under the PFC plan became exercisable
twenty percent per year commencing on the date of the grant and expire ten years
from the date of grant.
The following table summarizes the status of, and changes in, PFC options
granted to Company officers which remain outstanding and the weighted-average
exercise price (WAEP) for the years ended December 31. 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:
1999 1998 1997
--------------------- ---------------------- ----------------------
Options WAEP Options WAEP Options WAEP
----------- -------- ----------- --------- ----------- ---------
Outstanding, Jan. 1, 355,054 $ 2.89 1,076,000 $ 3.05 1,329,200 $ 3.14
Exercised 70,000 2.28 720,946 2.98 253,200 2.93
----------- -------- ----------- --------- ----------- ---------
Outstanding, Dec. 285,054 3.23 355,054 2.89 1,076,000 3.05
31,
=========== ======== =========== ========= =========== =========
Options exercisable
at year-end 285,054 $ 3.23 355,054 $ 2.89 1,076,000 $ 3.05
=========== ======== =========== ========= =========== =========
As of December 31, 1999, the PFC options outstanding have exercise prices
between $2.38 and $3.65 and a weighted-average remaining contractual life of 1.7
years.
The Company accounts for stock-based compensation using the intrinsic value
method prescribed by APB No. 25, "Accounting for Stock Issued to Employees",
under which compensation expenses for stock options are generally not recognized
for stock option awards granted at or above fair market value. Had compensation
expense for the Company's stock option plan been determined based upon fair
values at the grant dates for awards under the plan in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation", the Company's net income would
have been reduced by $1,039, $727, and $608, in 1999, 1998, and 1997,
respectively. The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for those options granted in 1999, 1998, and
1997, respectively: dividend yields of 3.63%, 3.0% and 3.0%, expected volatility
of 32.4%, 34.05%, and 24.04%, risk-free interest rates of 6.65%, 4.79%, and
4.72%, and expected lives of 7.5 years.
15. SEGMENT INFORMATION
The Company has two reportable segments: Employee Benefits and Financial
Services. The Employee Benefits segment markets group life and health and 401(k)
products to small and mid-sized corporate employers. The Financial Services
segment markets and administers savings products to public and not-for-profit
employers and individuals and offers life insurance products to individuals and
businesses.
The accounting policies of the segments are the same as those described in Note
1. The Company evaluates performance based on profit or loss from operations
after income taxes.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately as each segment has
unique distribution channels.
The Company's operations are not materially dependent on one or a few customers,
brokers or agents.
Summarized segment financial information for the year ended and as of December
31 was as follows:
Year ended December 31, 1999
Operations:
Employee Financial Total
========================================
Benefits Services U.S.
======================================== -------------- -------------- ---------------
Revenue:
========================================
Premium income $ 990,449 $ 172,734 $ 1,163,183
========================================
Fee income 548,580 86,567 635,147
========================================
Net investment income 80,090 795,947 876,037
========================================
Realized investment gains (losses) (1,224) 2,308 1,084
======================================== -------------- -------------- ---------------
Total revenue 1,617,895 1,057,556 2,675,451
========================================
Benefits and Expenses:
========================================
Benefits 789,084 792,755 1,581,839
========================================
Operating expenses 661,119 143,423 804,542
======================================== -------------- -------------- ---------------
Total benefits and expenses 1,450,203 936,178 2,386,381
======================================== -------------- -------------- ---------------
-------------- -------------- ---------------
========================================
========================================
Net operating income before 167,692 121,378 289,070
income taxes
========================================
Income taxes 51,021 32,273 83,294
-------------- -------------- ---------------
Net income $ 116,671 $ 89,105 $ 205,776
======================================== ============== ============== ===============
Assets:
Employee Financial Total
========================================
Benefits Services U.S.
======================================== -------------- -------------- ---------------
Investment assets $ 1,467,464 $ 11,593,496 $ 13,060,960
========================================
Other assets 646,036 909,675 1,555,711
========================================
Separate account assets 7,244,145 5,535,871 12,780,016
======================================== -------------- -------------- ---------------
Total assets $ 9,357,645 $ 18,039,042 $ 27,396,687
======================================== ============== ============== ===============
Year ended December 31, 1998
Operations:
Employee Financial Total
========================================
Benefits Services U.S.
======================================== -------------- -------------- ---------------
Revenue:
========================================
Premium income $ 746,898 $ 247,965 $ 994,863
========================================
Fee income 444,649 71,403 516,052
========================================
Net investment income 95,118 802,242 897,360
========================================
Realized investment gains (losses) 8,145 30,028 38,173
======================================== -------------- -------------- ---------------
Total revenue 1,294,810 1,151,638 2,446,448
========================================
Benefits and Expenses:
========================================
Benefits 590,058 872,411 1,462,469
========================================
Operating expenses 546,959 141,269 688,228
======================================== -------------- -------------- ---------------
Total benefits and expenses 1,137,017 1,013,680 2,150,697
======================================== -------------- -------------- ---------------
-------------- -------------- ---------------
========================================
========================================
Net operating income before 157,793 137,958 295,751
income taxes
========================================
Income taxes 50,678 48,158 98,836
-------------- -------------- ---------------
Net income $ 107,115 $ 89,800 $ 196,915
======================================== ============== ============== ===============
Assets:
Employee Financial Total
========================================
Benefits Services U.S.
======================================== -------------- -------------- ---------------
Investment assets $ 1,434,691 $ 12,235,845 $ 13,670,536
========================================
Other assets 567,126 785,940 1,353,066
========================================
Separate account assets 5,704,313 4,395,230 10,099,543
======================================== -------------- -------------- ---------------
Total assets $ 7,706,130 $ 17,417,015 $ 25,123,145
======================================== ============== ============== ===============
Year ended December 31, 1997
Operations:
Employee Financial Total
========================================
Benefits Services U.S.
======================================== -------------- -------------- ---------------
Revenue:
========================================
Premium income $ 465,143 $ 368,036 $ 833,179
========================================
Fee income 358,005 62,725 420,730
========================================
Net investment income 100,067 781,606 881,673
========================================
Realized investment gains (losses) 3,059 6,741 9,800
======================================== -------------- -------------- ---------------
Total revenue 926,274 1,219,108 2,145,382
========================================
Benefits and Expenses:
========================================
Benefits 371,333 1,013,717 1,385,050
========================================
Operating expenses 427,969 123,756 551,725
======================================== -------------- -------------- ---------------
Total benefits and expenses 799,302 1,137,473 1,936,775
======================================== -------------- -------------- ---------------
-------------- -------------- ---------------
========================================
========================================
Net operating income
========================================
before income taxes 126,972 81,635 208,607
========================================
Income taxes 28,726 21,121 49,847
-------------- -------------- ---------------
Net income $ 98,246 $ 60,514 $ 158,760
======================================== ============== ============== ===============
The following table, which summarizes premium and fee income by segment, represents supplemental information.
1999 1998 1997
=============================== --------------- -------------- --------------
---------------
Premium Income:
===============================
===============================
Employee Benefits
===============================
Group Life & Health $ 990,449 $ 746,898 $ 465,143
=============================== --------------- -------------- --------------
Total Employee 990,449 746,898 465,143
Benefits
--------------- -------------- --------------
--------------- -------------- --------------
Financial Services
===============================
===============================
Savings 14,344 16,765 22,634
===============================
Individual Insurance 158,390 231,200 345,402
--------------- -------------- --------------
--------------- -------------- --------------
Total Financial 172,734 247,965 368,036
Services
=============================== --------------- -------------- --------------
Total premium income $ 1,163,183 $ 994,863 $ 833,179
=============================== =============== ============== ==============
---------------
Fee Income:
===============================
===============================
Employee Benefits
===============================
Group Life & Health $ 454,071 $ 366,805 $ 305,302
===============================
(uninsured plans)
===============================
401(k) 94,509 77,844 52,703
--------------- -------------- --------------
--------------- -------------- --------------
Total Employee 548,580 444,649 358,005
Benefits
=============================== --------------- -------------- --------------
--------------- -------------- --------------
Financial Services
===============================
===============================
Savings 81,331 71,403 62,725
===============================
Individual Insurance 5,236
--------------- -------------- --------------
--------------- -------------- --------------
Total Financial 86,567 71,403 62,725
Services
=============================== --------------- -------------- --------------
Total fee income $ 635,147 $ 516,052 $ 420,730
=============================== =============== ============== ==============
16. COMMITMENTS AND CONTINGENCIES
On October 6, 1999, the Company entered into a purchase and sale agreement (the
Agreement) with Allmerica Financial Corporation (Allmerica) to acquire
Allmerica's group life and health insurance business on March 1, 2000. This
business primarily consists of administrative services only and stop loss
policies. The in-force business is expected to be underwritten and retained by
the Company upon each policy renewal date. The purchase price, as defined in the
Agreement, will be based on a percentage of the amount in-force at March 1, 2000
contingent on the persistency of the block of business through March 2001.
Management does not expect the purchase price to have a material impact on the
Company's consolidated financial statements.
The Company is involved in various legal proceedings, which arise in the
ordinary course of its business. In the opinion of management, after
consultation with counsel, the resolution of these proceedings should not have a
material adverse effect on its financial position or results of operations.
17. SUBSEQUENT EVENTS
Effective January 1, 2000, the Company coinsured the majority of General
American Life Insurance Company's (General American) group life and health
insurance business which primarily consists of administrative services only and
stop loss policies. The agreement is expected to convert to an assumption
reinsurance agreement by January 1, 2001, pending regulatory approval. The
Company assumed approximately $150,000 of policy reserves and miscellaneous
liabilities in exchange for an equal amount of cash and miscellaneous assets
from General American.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
In the two most recent fiscal years or any subsequent interim period, there has
been no change in the Company's independent accountants or resulting
disagreements on accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. IDENTIFICATION OF DIRECTORS
Director Age Served as Principal Occupation(s) For
Director From Last Five Years
James Balog 71 1998 Company Director
James W. Burns, O.C. 70 1998 Chairman of the Boards of
Great-West Lifeco, Great-West
Life, London Insurance Group
Inc. and London Life Insurance
Company; Deputy Chairman,
Power Corporation
Orest T. Dackow 63 1998 President and Chief Executive
Officer, Great-West Lifeco
Andre Desmarais 43 1998 President and Co-Chief
(2) Executive Officer, Power
Corporation; Deputy Chairman,
Power Financial
Paul Desmarais, Jr. 45 1998 Chairman and Co-Chief
(2) Executive Officer, Power
Corporation; Chairman, Power
Financial
Robert G. Graham 68 1998 Company Director since January
1996; previously Chairman and
Chief Executive Officer,
Inter-City Products
Corporation (a company engaged
in the manufacture and
distribution of air
conditioning, heating and
related products)
Robert Gratton 56 1998 Chairman of the Board of the
Company and GWL&A, President
and Chief Executive Officer,
Power Financial
N. Berne Hart 70 1998 Company Director
(1)
Kevin P. Kavanagh 67 1998 Company Director; Chancellor,
(1) Brandon University
William Mackness 61 1998 Company Director since July
1995; previously Dean, Faculty
of Management, University of
Manitoba
William T. McCallum 57 1998 President and Chief Executive
Officer of the Company and
GWL&A, President and Chief
Executive Officer, United
States Operations, Great-West
Life
Jerry E.A. Nickerson 63 1998 Chairman of the Board, H.B.
(1) Nickerson & Sons Limited (a
management and holding company)
The Honourable 62 1998 Vice-Chairman, Power
P. Michael Pitfield, P.C., Q.C. Corporation; Member of the
Senate of Canada
Michel Plessis-Belair, F.C.A. 57 1998 Vice-Chairman and Chief
(1) Financial Officer, Power
Corporation; Executive
Vice-President and Chief
Financial Officer, Power
Financial
Brian E. Walsh 46 1998 Co-Founder and Managing
Partner, Veritas Capital
Management, LLC (a merchant
banking company) since
September 1997; previously
Partner, Trinity L.P. (an
investment company) from
January 1996; previously
Managing Director and Co-Head,
Global Investment Bank,
Bankers Trust Company (an
investment/commercial bank)
(1) Member of the Audit Committee
(2) 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 lists 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
........ .......Phoenix Investment Partners
A. Desmarais The Seagram Company Limited
P. Desmarais, Jr......Rhodia S.A.
B.......IDENTIFICATION OF EXECUTIVE OFFICERS
Executive Officer Age Served as Executive Principal Occupation(s) For
Officer From Last Five Years
William T. McCallum 57 1998 President and Chief Executive
President and Chief Officer of the Company and GWL&A,
Executive Officer President and Chief Executive
Officer, United States Operations,
Great-West Life
Mitchell T.G. Graye 44 1998 Executive Vice President and Chief
Executive Vice President and Financial Officer of the Company and
Chief Financial Officer GWL&A, Executive Vice President and
Chief Financial Officer, United
States, Great-West Life
John T. Hughes 63 1998 Senior Vice President, Chief
Senior Vice President, Investment Officer of the Company
Chief Investment Officer and GWL&A, Senior Vice President,
Chief Investment Officer, United
States, Great-West Life
D. Craig Lennox 52 1998 Senior Vice President, General
Senior Vice President, Counsel and Secretary of the Company
General Counsel and Secretary and GWL&A, Senior Vice President and
Chief U.S. Legal Officer, Great-West
Life
Unless otherwise indicated, all of the executive officers have been engaged for
not less than five years in their present principal occupations or in another
executive capacity with the companies or firms identified.
The appointments of executive officers are confirmed annually.
ITEM 11. EXECUTIVE COMPENSATION
A. SUMMARY COMPENSATION TABLE
The executive officers of the Company do not receive any remuneration for their
services as executive officers of the Company. The following table sets out all
compensation paid by GWL&A to the individuals who were, at December 31, 1999,
the Chief Executive Officer and the other four most highly compensated executive
officers of GWL&A (collectively the "Named Executive Officers") for the three
most recently completed financial years.
SUMMARY COMPENSATION TABLE
======================================================================= =========================
Annual compensation Long-term compensation
awards
- - ----------------------------------------------------------------------- -------------------------
- - -------------------------- ------------- ------------- ---------------- -------------------------
Name and Year Salary Bonus Options (1)
principal position ($) ($) (#)
- - -------------------------- ------------- ------------- ---------------- -------------------------
- - -------------------------- ------------- ------------- ---------------- -------------------------
W.T. McCallum 1999 955,303 680,000 100,000 (2)
President and 1998 651,667 432,250 -
Chief Executive Officer 1997 608,708 406,250 600,000 (3)
- - -------------------------- ------------- ------------- ---------------- -------------------------
- - -------------------------- ------------- ------------- ---------------- -------------------------
D.L. Wooden 1999 365,000 219,000 -
Executive Vice 1998 330,000 198,000 -
President, Financial 1997 300,000 150,000 300,000 (3)
Services
- - -------------------------- ------------- ------------- ---------------- -------------------------
- - -------------------------- ------------- ------------- ---------------- -------------------------
J.D. Motz 1999 385,000 192,500 -
Executive Vice 1998 350,000 157,500 -
President, Employee 1997 300,000 151,300 100,000 (2)
Benefits 300,000 (3)
- - -------------------------- ------------- ------------- ---------------- -------------------------
- - -------------------------- ------------- ------------- ---------------- -------------------------
J.T. Hughes 1999 350,000 185,500 -
Senior Vice President, 1998 338,000 185,900 -
Chief Investment Officer 1997 324,000 162,000 -
- - -------------------------- ------------- ------------- ---------------- -------------------------
- - -------------------------- ------------- ------------- ---------------- -------------------------
M.T.G. Graye Executive 1999 315,000 189,000 -
Vice President and Chief 1998 275,000 151,250 18,000 (2)
Financial Officer 18,000 (3)
1997 219,469 117,958 132,000 (3)
========================== ============= ============= ================ =========================
(1) The options set out are options for common shares of Great-West Lifeco which
are granted by Great-West Lifeco pursuant to the Great-West Lifeco Stock Option
Plan ("Lifeco Options").
(2) These Lifeco Options become exercisable 20% per year commencing on the first
anniversary of the grant and expire ten years after the date of the grant.
(3) All or portions of these Lifeco Options become exercisable if certain
financial targets are attained. If exercisable, the exercise period runs from
April 1, 2002 to June 26, 2007.
B. OPTIONS
The following table describes options granted to the Named Executive Officers
during the most recently completed fiscal year. All options are Lifeco Options
granted pursuant to the Great-West Lifeco Stock Option Plan. Lifeco Options are
issued with an exercise price in Canadian dollars. Canadian dollar amounts have
been translated to U.S. dollars at a rate of 1/1.44.
OPTION GRANTS IN LAST FISCAL YEAR
============================================================================= ========================
Potential realizable
value at assumed
Individual grants annual rates of stock
price appreciation for
option term
- - ----------------------------------------------------------------------------- ------------------------
Percent of
total
Options options Exercise
Name granted granted to or base Expiration date 5% 10%
(#) employees price ($) ($)
in fiscal ($/share)
year
- - ------------------- ------------ ------------- ------------ ----------------- ----------- ------------
W.T. McCallum 100,000 11.01 15.37 June 9, 2009 967,000 2,450,000
=================== ============ ============= ============ ================= =========== ============
Prior to April 24,1996, the Named Executive Officers participated in the Power
Financial Employee Share Option Plan pursuant to which options to acquire common
shares of Power Financial ("PFC Options") were granted. The following table
describes all PFC Options exercised in 1999, and all unexercised PFC Options
held as of December 31, 1999, by the Named Executive Officers. PFC Options are
issued with an exercise price in Canadian dollars. Canadian dollar amounts have
been translated to U.S. dollars at a rate of 1/1.44.
AGGREGATED PFC OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
=================================================== =========================== ============================
Unexercised options at Value of unexercised
fiscal year-end in-the-money options at
(#) fiscal year-end
($)
- - --------------------------------------------------- --------------------------- ----------------------------
Shares
acquired Value
Name on exercise realized Exercisable Exercisable
(#) ($) Unexercisable Unexercisable
- - -------------------- ---------------- ------------- ------------- ------------- ------------- --------------
D.L. Wooden - - 176,000 - 2,309,809 -
------------- --------------
- - -------------------- ---------------- ------------- ------------- ------------- ------------- --------------
M.T.G. Graye 70,000 1,150,716 70,000 - 919,813 -
==================== ================ ============= ============= ============= ============= ==============
Commencing April 24,1996, the Named Executive Officers began participating in
the Great-West Lifeco Stock Option Plan. The following table describes all
Lifeco Options exercised in 1999, and all unexercised Lifeco Options held as of
December 31, 1999, by the Named Executive Officers. Lifeco Options are issued
with an exercise price in Canadian dollars. Canadian dollar amounts have been
translated to U.S. dollars at a rate of 1/1.44.
AGGREGATED LIFECO OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
================================================== =========================== ============================
Unexercised options at Value of unexercised
fiscal year-end in-the-money options at
(#) fiscal year-end
($)
- - -------------------------------------------------- --------------------------- ----------------------------
Shares
acquired Value
Name on realized Exercisable Exercisable
exercise ($) Unexercisable Unexercisable
(#)
- - ------------------------ ----------- ------------- ------------- ------------- ------------- --------------
W.T. McCallum - - 360,000 940,000 3,717,991 5,528,894
------------- --------------
- - ------------------------ ----------- ------------- ------------- ------------- ------------- --------------
D.L. Wooden - - 120,000 380,000 1,239,331 2,308,855
------------- --------------
- - ------------------------ ----------- ------------- ------------- ------------- ------------- --------------
J.D. Motz - - 160,000 440,000 1,575,242 2,812,722
------------- --------------
- - ------------------------ ----------- ------------- ------------- ------------- ------------- --------------
J.T. Hughes - - 96,000 64,000 991,464 660,976
------------- --------------
- - ------------------------ ----------- ------------- ------------- ------------- ------------- --------------
M.T.G. Graye - - 82,800 217,200 825,726 900,072
======================== =========== ============= ============= ============= ============= ==============
C. PENSION PLAN TABLE
The following table sets out the pension benefits payable to the Named Executive Officers by Great-West Life
or GWL&A.
PENSION PLAN TABLE
========================= =============================================================
Years of service
-------------------------------------------------------------
Remuneration
($)
15 20 25
30 35
- - ------------------------- -------------------------------------------------------------
400,000 120,000 160,000 200,000 240,000
240,000
- - ------------------------- -------------------------------------------------------------
500,000 150,000 200,000 250,000 300,000
300,000
- - ------------------------- -------------------------------------------------------------
600,000 180,000 240,000 300,000 360,000
360,000
- - ------------------------- -------------------------------------------------------------
700,000 210,000 280,000 350,000 420,000
420,000
- - ------------------------- -------------------------------------------------------------
800,000 240,000 320,000 400,000 480,000
480,000
- - ------------------------- -------------------------------------------------------------
- - ------------------------- -------------------------------------------------------------
900,000 270,000 360,000 450,000 540,000
540,000
- - ------------------------- -------------------------------------------------------------
- - ------------------------- -------------------------------------------------------------
1,000,000 300,000 400,000 500,000 600,000
600,000
========================= =============================================================
The Named Executive Officers have the following years of service.
Name Years of Service
W.T. McCallum 34
D.L. Wooden 9
J.D. Motz 29
J.T. Hughes 10
M.T.G. Graye 6
For W.T. McCallum, the benefits shown are payable commencing December 31, 2000,
and remuneration is the average of the highest 36 consecutive months of
compensation during the last 84 months of employment. For M.T.G. Graye, J.T.
Hughes, J.D. Motz and D.L. Wooden, the benefits shown are payable upon the
attainment of age 62, and remuneration is the average of the highest 60
consecutive months of compensation during the last 84 months of employment.
Compensation includes salary and bonuses prior to any deferrals. The normal form
of pension is a life only annuity. Other optional forms of pension payment are
available on an actuarially equivalent basis. The benefits listed in the table
are subject to deduction for social security and other retirement benefits.
D. COMPENSATION OF DIRECTORS
The directors of the Company do not receive any remuneration for their services
as directors of the Company. Each director of the Company is also a director of
GWL&A. The following sets out remuneration paid by GWL&A to its directors during
1999.
For each director of GWL&A who is not also a director of Great-West Life, GWL&A
pays an annual fee of $17,500, and a meeting fee of $1,000 for each meeting of
the Board of Directors or a committee thereof attended. For each director of
GWL&A who is also a director of Great-West Life, GWL&A pays a meeting fee of
$1,000 for each meeting of the Board of Directors or a committee thereof
attended which is not coincident with a Great-West Life meeting. 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 GWL&A's Board of Directors. W.T.
McCallum, President and Chief Executive Officer of GWL&A, is a member of the
Board of Directors. Mr. McCallum participated in executive compensation matters
generally but was not present when his own compensation was discussed or
determined.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below is certain information, as of March 1, 2000, 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 outstanding common shares of the Company are owned by GWL&A
Financial (Nova Scotia) Co., Suite 800, 1959 Upper Water Street, Halifax, Nova
Scotia, Canada B3J 2X2.
(2) 100% of the outstanding common shares of GWL&A Financial (Nova Scotia) Co.
are owned by The Great-West Life Assurance Company, 100 Osborne Street North,
Winnipeg, Manitoba, Canada R3C 3A5.
(3) 100% of the outstanding common shares of The Great-West Life Assurance
Company are owned by Great-West Lifeco Inc., 100 Osborne Street North, Winnipeg,
Manitoba, Canada R3C 3A5.
(4) 81.2% of the outstanding common shares of Great-West Lifeco Inc. are
controlled by Power Financial Corporation, 751 Victoria Square, Montreal,
Quebec, Canada H2Y 2J3.
(5) 67.4% of the outstanding common shares of Power Financial Corporation are
owned by 171263 Canada Inc., 751 Victoria Square, Montreal, Quebec, Canada H2Y
2J3.
(6) 100% of the outstanding common shares of 171263 Canada Inc. are owned by
2795957 Canada Inc., 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3.
(7) 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.
(8) 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
(8)above, each of the entities and persons listed in paragraphs (1) through (8)
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 which 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, 2000, by (i) the directors of the Company;
and (ii) the directors and executive officers of the Company as a group.
- - ------------------------- ---------------- ------------------ ------------------
Great-West Power Financial Power
Lifeco Inc. Corporation Corporation of
Canada
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
(1) (2) (3)
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
Directors
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
J. Balog - - -
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
J. W. Burns 153,659 8,000 400,640
200,000 options
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
O.T. Dackow 78,398 - -
300,000 options
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
A. Desmarais 51,659 21,600 140,800
1,658,000 options
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
P. Desmarais, Jr. 43,659 - 1,448,000
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
R.G. Graham - - -
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
R. Gratton 330,000 310,000 5,000
5,280,000 options 300,000 options
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
N.B. Hart - - -
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
K. P. Kavanagh 18,500 - -
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
W. Mackness - 4,000 -
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
W.T. McCallum 82,800 80,000 -
360,000 options
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
J.E.A. Nickerson - 4,000 4,000
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
P.M. Pitfield 90,000 75,000 100,000
309,000 options
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
M. Plessis-Belair 20,000 2,000 15,800
223,300 options
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
B.E. Walsh - - -
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
Directors and Executive
Officers as a Group
- - ------------------------- ---------------- ------------------ ------------------
- - ------------------------- ---------------- ------------------ ------------------
879,893 734,600 2,114,240
880,800 options 5,350,000 options 2,690,300 options
- - ------------------------- ---------------- ------------------ ------------------
(1) All holdings are common shares, or where indicated, exercisable options for
common shares, of Great-West Lifeco Inc. (2) All holdings are common shares, or
where indicated, exercisable options for common shares, of Power Financial
Corporation. (3) All holdings are subordinate voting shares, or where indicated,
exercisable options for subordinate voting shares, of Power Corporation of
Canada.
The number of common shares and exercisable options for common shares of Power
Financial Corporation held by R. Gratton represents 1.6% 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 1.7% 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 the directors
and executive officers as a group represents 2.1 % 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 exceed 1% of the total number of shares and exercisable options for
shares of the class outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The documents identified below are filed as a part of this report:
Page
A. INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report on Consolidated Financial Statements
for the Years Ended December 31, 1999, 1998, and 1997
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1999, 1998, and 1997
All schedules and separate financial statements of the Registrant are omitted
because they are not applicable, or not required, or because the required
information is included in the financial statements or notes thereto.
B. INDEX TO EXHIBITS
Exhibit Number Title Page
3(i) Articles of Incorporation of GWL&A Financial Inc.
3(ii) Bylaws of GWL&A Financial Inc.
21 Subsidiaries of GWL&A Financial Inc.
24 Directors' Powers of Attorney
27 Financial Data Schedule
C. REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1999.
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.
GWL&A FINANCIAL INC.
By: /s/ W.T. McCallum
William T. McCallum
President and Chief Executive Officer
Date: March 30, 2000
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, 2000
William T. McCallum
President and Chief Executive Officer
and a Director
/s/ Mitchell T.G. Graye March 30, 2000
Mitchell T.G. Graye
Executive Vice President and Chief Financial Officer
/s/ Glen R. Derback March 30, 2000
Glen R. Derback
Vice President and Controller
/s/ James Balog * March 30, 2000
James Balog, Director
____________________ March 30, 2000
James W. Burns, Director
/s/ Orest T. Dackow * March 30, 2000
Orest T. Dackow, Director
Signature and Title Date
______________________ March 30, 2000
Andre Desmarais, Director
________________________ March 30, 2000
Paul Desmarais, Jr., Director
/s/ Robert G. Graham * March 30, 2000
Robert G. Graham, Director
/s/ Robert Gratton * March 30, 2000
Robert Gratton, Director
/s/ N. Berne Hart * March 30, 2000
N. Berne Hart, Director
_______________________ March 30, 2000
Kevin P. Kavanagh, Director
/s/ William Mackness * March 30, 2000
William Mackness, Director
________________________ March 30, 2000
Jerry E.A. Nickerson, Director
/s/ P. Michael Pitfield * March 30, 2000
P. Michael Pitfield, Director
/s/ Michel Plessis-Belair * March 30, 2000
Michel Plessis-Belair, Director
/s/ Brian E. Walsh * March 30, 2000
Brian E. Walsh, Director
* By: /s/ D. Craig Lennox March 30, 2000
D. Craig Lennox
Attorney-in-fact pursuant to filed Powers of Attorney.
EXHIBIT 3(i)
ARTICLES OF INCORPORATION OF GWL&A FINANCIAL INC.
ARTICLES OF INCORPORATION
OF
GWL&A FINANCIAL INC.
ARTICLE I - NAME
The name of the Corporation is GWL&A Financial Inc.
ARTICLE II - PURPOSE
The Corporation may engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware.
ARTICLE III - REGISTERED OFFICE AND AGENT
The registered office is 1209 Orange Street, County of New Castle, Wilmington,
Delaware 19801. The registered agent is The Corporation Trust Company at said
address.
ARTICLE IV - CAPITAL STOCK
The total number of shares of all classes of capital stock which the Corporation
is authorized to issue is 1 million, of which 500,000 shares shall be Common
Stock, (the "Common Stock"), and 500,000 shares shall be Preferred Stock (the
"Preferred Stock"). Each share shall have no par value.
A. Common Stock
The powers, designations, preferences and relative participating, optional or
other special rights (and the qualifications, limitations or restrictions
thereof) in respect of the Common Stock are as follows:
1. Rank. The Common Stock shall rank junior to the Preferred Stock with respect
to payment of dividends and distributions on liquidation or dissolution and
shall have such other qualifications, limitations or restrictions as provided in
this Article.
2. Voting Rights. Except as otherwise expressly provided by law or as provided
for any series of Preferred Stock by the Board of Directors of the Corporation
in accordance with this Article, all voting rights shall be vested in the
holders of shares of the Common Stock, and at every meeting of stockholders of
the Corporation (or with respect to any action by written consent in lieu of a
meeting of stockholders), each share of Common Stock shall be entitled to one
vote (whether voted in person by the holder thereof or by proxy or pursuant to a
stockholders' consent) on all matters to come before such meeting.
3. Dividend and Liquidation Preference as between the Common Stock and the
Preferred Stock. For so long as any shares of Preferred Stock are outstanding,
the Corporation shall not declare, pay or set apart for payment any dividend or
other distribution (other than any dividend or distribution payable solely in
shares of Common Stock or any other stock of the Corporation ranking junior to
the shares of Preferred Stock as to dividends and liquidation) in respect of the
Common Stock or any other stock of the Corporation ranking junior to the shares
of Preferred Stock as to the dividends or upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any shares
of the Common Stock or any other stock of the Corporation ranking junior to the
shares of Preferred Stock as to dividends or upon liquidation, unless (i) full
cumulative dividends on all shares of Preferred Stock as to which dividends are
cumulative for all past dividend periods have been (a) paid or (b) declared and
a sum sufficient irrevocably deposited with the paying agent for the payment of
such dividends, and (ii) the Corporation has redeemed the full number of shares
of Preferred Stock, if any, it is then obligated to redeem in accordance with
the terms of any series of Preferred Stock as fixed by the Board of Directors of
the Corporation in accordance with this Article.
4. Assets Remaining After Liquidation. In the event of the dissolution,
liquidation or winding up of the Corporation, whether voluntary or involuntary,
after payment in full of the amounts, if any, required to be paid to the holders
of the Preferred Stock, the holders of shares of the Common Stock shall be
entitled, to the exclusion of the holders of shares of the Preferred Stock, to
share ratably in all remaining assets of the Corporation. The merger or
consolidation of the Corporation into or with any other corporation, or the
merger of any other corporation into the Corporation, or any purchase or
redemption of shares of stock of the Corporation of any class, shall not be
deemed to be a dissolution, liquidation or winding up of the Corporation for the
purposes of this paragraph.
B. PREFERRED STOCK
1. The Preferred Stock may be divided into and issued in classes and series. The
Board of Directors of the Corporation is authorized to divide the authorized
shares of Preferred Stock into one or more classes, and one or more series of
each such class, each of which shall be so designated as to distinguish the
shares thereof from the shares of all other series and classes. The Board of
Directors of the Corporation is authorized, within any limitations prescribed by
law and this Article, to fix and determine the designations, rights,
qualifications, preferences, limitations, restrictions and terms of the shares
of any series of Preferred Stock including but not limited to the following:
(a) The rate of dividend, the time of payment of dividends, whether dividends
are cumulative, and the date from which any dividends shall accrue;
(b) Whether shares may be redeemed, and, if so, the redemption price and the
terms and conditions of redemption;
(c) The amount payable upon shares in the event of involuntary liquidation;
(d) The amount payable upon shares in the event of voluntary liquidation;
(e) Sinking fund or other provisions, if any, for the redemption or purchase of
shares;
(f) The terms and conditions on which shares may be converted, if the shares of
any series are issued with the privilege of conversion;
(g) Voting powers, if any; and
(h) Such other terms, qualifications, privileges, limitations, options,
restrictions, and special or relative rights and preferences, if any, of shares
of such series as the Board of Directors of the Corporation may, at the time so
acting, lawfully fix and determine under the laws of the State of Delaware.
2. No Dividend Preference Between Series of Preferred Stock. No dividends shall
be declared on shares of any series of Preferred Stock for any dividend period
or part thereof unless full cumulative dividends have been or contemporaneously
are declared on the shares of each other series of Preferred Stock as to which
dividends are cumulative through the most recent dividend payment date for each
such other series. If at any time any accrued dividends on shares of any series
of Preferred Stock as to which dividends are cumulative (a "cumulative series")
have not been paid in full, then the Corporation will, if paying any dividends
on any shares of any cumulative series of Preferred Stock, pay dividends on
shares of all cumulative series of Preferred Stock pro rata in proportion to the
sums which would be payable on such cumulative series if all accrued but unpaid
dividends, if any, through the most recent applicable dividend payment date were
declared and paid in full. Dividends on any series of Preferred Stock shall be
cumulative only to the extent provided in the terms of that series.
3. Liquidation Preference. (a) In the event of any liquidation, dissolution or
winding up of the affairs of the Corporation, whether voluntary or involuntary,
holders of shares of each series of Preferred Stock shall be entitled to
receive, out of the assets of the Corporation available for distribution to
stockholders after satisfying claims of creditors but before any payment or
distribution on the Common Stock or on any other class of stock ranking junior
to the shares of Preferred Stock upon liquidation, a liquidation distribution
per share in the amount of the liquidation preference fixed or determined in
accordance with the terms of the shares of such series of Preferred Stock plus,
if so provided in such terms, an amount equal to accumulated and unpaid
dividends on each share of such series (whether or not earned or declared) to
the date of such distribution. If upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the assets of the Corporation are
insufficient to pay in full the holders of shares of any series of Preferred
Stock the preferential amount to which they are entitled, holders of shares of
all series of Preferred Stock will share ratably in any such distribution of
such assets in accordance with the respective amounts which would be payable on
such shares if all amounts payable thereon were paid in full. Unless and until
payment in full has been made to holders of shares of all series of Preferred
Stock of the liquidation distributions to which they are entitled as provided in
this Article, no dividends or distributions will be made to holders of the
Common Stock or any other stock ranking junior to the shares of any series of
Preferred Stock on liquidation and no purchase, redemption or other acquisition
for any consideration by the Corporation will be made in respect of the Common
Stock or any stock ranking junior to the shares of any series of Preferred Stock
upon liquidation. After the payment to all holders of series of Preferred Stock
of the full amount of the liquidation distributions to which they are entitled
pursuant to the preceding sentences, such holders (in their capacity as such
holders) shall have no right or claim to any of the remaining assets of the
Corporation.
(b) Neither the sale, lease or exchange (for cash, stock, securities or other
consideration ) of all or substantially all of the property and assets of the
Corporation, nor the consolidation or merger of the Corporation with or into any
other entity, nor the merger or consolidation of any other entity with or into
the Corporation, shall be deemed to be a dissolution, liquidation or winding up,
voluntary or involuntary, for the purposes of this Article.
4. Conversion Rights. Preferred Stock of any series may be convertible into
shares of any other class or into shares of any series of the same or any other
class, except as may otherwise be limited by law, if the terms and conditions of
such conversion are determined by the Board of Directors of the Corporation in
establishing such series of Preferred Stock.
5. Dividend Rate Periods of the Preferred Stock. The periods during which a
dividend rate would be applicable for any series of the Preferred Stock shall be
determined in accordance with the terms of that series. Such terms may provide
that the Board of Directors of the Corporation shall have the discretion to
establish the duration of the period during which a dividend rate may be
applicable. Such terms may provide that a dividend rate may be applicable during
all or part of the time any shares of such series are outstanding. If a dividend
rate is applicable during only part of the time any shares of a series are
outstanding, such terms may provide (subject to applicable law) that the Board
of Directors of the Corporation may select, from time to time, one or more
subsequent time periods of the same or varying lengths during which a dividend
rate will be applicable.
6. Redemption Provisions. (a) Shares of any series of the Preferred Stock shall
be subject to the right of the Corporation to redeem any of such shares if so
provided in the terms of such series. Such terms may provide that the Board of
Directors of the Corporation may change from time to time, the redemption terms
and conditions, including the redemption price, for shares of such series,
subject to applicable legal requirements.
(b) The Corporation shall not purchase or otherwise acquire any shares of any
series of Preferred Stock while any accumulated and unpaid dividends exist with
respect to such series or any other series of Preferred Stock, unless
contemporaneously with such purchase or acquisition such accumulated and unpaid
dividends are (i) paid or (ii) declared and a sum sufficient irrevocably
deposited with the paying agent for payment of such dividends; provided,
however, that the Corporation may purchase or otherwise acquire shares pursuant
to a voluntary purchase or exchange offer made on an equal basis to all holders
of shares of all series of Preferred Stock.
ARTICLE V - BYLAWS
In furtherance and not in limitation of the powers conferred by the Delaware
General Corporation Law, the Board of Directors is expressly authorized to
adopt, amend and repeal the Bylaws of the Corporation not inconsistent with
provisions of law or this certificate of incorporation.
ARTICLE VI - LIABILITY OF DIRECTORS
No director of this corporation shall have any personal liability for monetary
damages to the Corporation or its stockholders for breach of fiduciary duty as a
director except that this provision shall not eliminate or limit the liability
of a director to the Corporation or its stockholders for monetary damages for
(i) any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) payment of a
dividend or approval of a stock repurchase in contravention of the Delaware
General Corporation Law, or (iv) any transaction from which the director derives
an improper personal benefit.
ARTICLE VII - INCORPORATOR
The name and mailing address of the incorporator is:
The Great-West Life Assurance Company
8515 East Orchard Road
Englewood, Colorado 80111
IN WITNESS WHEREOF, the undersigned incorporator has hereunto set its hand.
Dated: September 10, 1998.
THE GREAT-WEST LIFE ASSURANCE COMPANY
By:
/s/ W.T. McCallum____________________ /s/ D.C. Lennox
Name: W.T. McCallum Name: D.C. Lennox
Title: President and Chief Executive Officer, Title: Senior Vice President and Chief
U.S. Operations U.S. Legal Officer