UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from to
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Commission file number 333-64473
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GWL&A FINANCIAL, INC.
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(Exact name of registrant as specified in its charter)
Colorado 84-1474245
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
8515 East Orchard Road, Greenwood Village, CO 80111
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(Address of principal executive offices) (Zip Code)
[303] 737-4128
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer as defined
in ss.240.12(b)-2 of this chapter.
Yes No X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The public may read and copy any of the registrant's reports filed with the SEC
at the SEC's Public Reference Room, 450 Fifth Street NW, Washington DC 20549,
telephone 1-800-SEC-0330 or online at (http://www.sec.gov).
As of June 30, 2002, the aggregate market value of the registrant's voting stock
held by non-affiliates of the registrant was $0.
As of March 1, 2003, 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. Obligations Relating to Debt and Leases------
G. Accounting Pronouncements--------------------
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk---------------------------------------
Item 8. Financial Statements and Supplementary Data-------
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure------------
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. The Company is domiciled in Colorado.
The Company is indirectly owned by Great-West Lifeco, Inc. (Great-West
Lifeco), a Canadian holding company. Great-West Lifeco operates in the
U.S. through GWL&A, and in Canada through its wholly owned
subsidiary, The Great-West Life Assurance Company (Great-West Life).
Great-West Lifeco is a subsidiary of Power Financial Corporation
(Power Financial), a Canadian holding company with substantial
interests in the financial services industry.
Power Corporation of Canada (Power Corporation), a Canadian holding and
management company, has voting control of Power Financial. Mr. Paul
Desmarais, through a group of private holding companies that he
controls, has voting control of Power Corporation.
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 of which 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. Based on the latest available December 31, 2001 data,
the Company ranks 29th in terms of admitted assets of all U.S. life
insurance companies.
The Company operates, through GWL&A, in the following two business
segments:
Employee Benefits - Life and health products for group clients
Financial - Services - Savings products for public, private
and non-profit employers, corporations and
individuals (including 401, 401(k), 403(b),
408, and 457 plans), and life insurance
products for individuals and businesses.
Prior to 2002, the Employee Benefits segment marketed and administered
the Company's 401(k) product. In 2002, the Financial Services division
assumed responsibility for this product. The 2001 and 2000 segment
information has been reclassified to account for this change.
On February 17, 2003, Great-West Lifeco announced a definitive agreement
to acquire Canada Life Financial Corporation for $7.3 billion
(Canadian). Canada Life is a Canadian based insurance company with
business principally in Canada, the United Kingdom, the United States
and Ireland. In the United States, Canada Life sells individual and
group insurance and annuity products. Subject to required shareholder
and regulatory approvals, the transaction is expected to close on July
10, 2003.
Canada Life's U.S. operations represented approximately $1.6 billion in
annual revenue in 2002 and $7.4 billion in assets as of December 31,
2002. If the transaction proceeds, Canada Life's U.S. operations will be
integrated with the Company's operations. The details of the integration
are still to be determined.
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) 2002 2001 2000
------------------------------------- ------------- ------------- -------------
Premium Income
=====================================
Employee Benefits
=====================================
Group life & health $ 960 $ 1,034 $ 1,143
===================================== ------------- ------------- -------------
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Total Employee Benefits 960 1,034 1,143
===================================== ------------- ------------- -------------
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Financial Services
=====================================
Savings 2 9 7
=====================================
Individual insurance 158 161 183
===================================== ------------- ------------- -------------
=====================================
Total Financial Services 160 170 190
===================================== ------------- ------------- -------------
=====================================
Total premium income $ 1,120 $ 1,204 $ 1,333
===================================== ============= ============= =============
Fee Income
=====================================
Employee Benefits
=====================================
Group life & health $ 660 $ 713 $ 649
===================================== ------------- ------------- -------------
=====================================
Total Employee Benefits 660 713 649
===================================== ------------- ------------- -------------
Financial Services
=====================================
Savings 118 120 111
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Individual insurance 18 18 8
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401(k) 87 96 104
===================================== ------------- ------------- -------------
=====================================
Total Financial Services 223 234 223
===================================== ------------- ------------- -------------
=====================================
Total fee income $ 883 $ 947 $ 872
===================================== ============= ============= =============
Deposits for investment-type
=====================================
contracts -
=====================================
Financial Services (2) $ 691 $ 627 $ 835
===================================== ============= ============= =============
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Deposits to Separate Accounts -
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Financial Services $ 2,461 $ 3,240 $ 3,105
===================================== ============= ============= =============
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Self-funded equivalents -
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Employee Benefits (3) $ 5,228 $ 5,721 $ 5,181
===================================== ============= ============= =============
(1) All information in the following table and other tables herein is
derived from information that has been prepared in conformity with
accounting principles generally accepted in the United States of
America, unless otherwise indicated.
(2) Investment-type contracts are contracts that include significant
cash build-up features, as discussed in FASB Statement No. 97.
(3) Self-funded equivalents generally represent paid claims under
minimum premium and administrative services only contracts, which
amounts approximate the additional premiums that could have been
earned under such contracts if they had been written as traditional
indemnity or HMO programs.
C. EMPLOYEE BENEFITS
1. Principal Products
The Employee Benefits segment of the Company provides a full range of
employee benefits products to more than 5,000 employers across the
United States. The Employee Benefits division is in the process of
reorganizing into two units, one of which deals with employer groups
of more than 2,000 employees (handled through the consultant channel)
and the other which deals with employer groups of less than 2,000
employees (handled through the brokerage channel).
The Company offers customers a variety of health plan options to help
them maximize the value of their employee benefits package. The
Company's health care business is primarily self-funded, whereby the
employer assumes all or a significant portion of the risk. For
companies with better than average claims experience, this can result
in significant health care savings.
The Company offers employers a strategic benefits solution - an
integrated package of group life and disability insurance,
managed-care programs 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 group disability insurance, which is a type of
health insurance designed to compensate insured people for a portion
of the income they lose because of a disabling injury or illness.
Generally, benefits are in the form of monthly payments.
The Company offers a choice of managed care products including Health
Maintenance Organization (HMO) plans, which provide a high degree of
managed care, Point of Service (POS) plans that offer more
flexibility in provider choice than HMO plans, and Preferred Provider
Organization (PPO) plans.
Under HMO plans, health care for the member is coordinated by a
primary care physician who is responsible for managing all aspects of
the member's health care. HMO plans offer a broad scope of benefits
coverage including routine office visits and preventive care, as well
as lower premiums and low co-payments that minimize out-of-pocket
costs. There are no claims for a member to file when services are
received through a primary care physician.
POS plans also require that a member enroll with a primary care
physician who is responsible for coordinating the member's health
care. Similar to an HMO, members receive the highest benefit coverage
and the lowest out-of-pocket costs when they use their primary care
physician to coordinate their health care. In contrast to an HMO,
members can seek care outside of the primary care physician's
direction, at a reduced level of benefits. Some benefits may not be
covered outside the in-network POS plan.
PPO plans offer members a greater choice of physicians and hospitals.
Members do not need to enroll with a primary care physician - they
simply select a contracted PPO provider at the time of the service to
receive the highest level of benefits. If members seek care outside
of the PPO network, they receive a lower level of benefits.
The One Health Plan HMO subsidiary organization administers provider
networks and provides medical management, member services, and
quality assurance for the other managed care products of the Company.
In addition to creating economies of scale, this "pooling" of PPO,
POS, and HMO membership benefits the Company by improving its
position in negotiating provider reimbursement arrangements that lead
to more competitive pricing.
The Company offers Internal Revenue Code Section 125 and 129 plans
that enable participants to set aside pre-tax dollars to pay for
non-reimbursed medical expenses and dependent care expenses. This
creates tax efficiencies for both the employer and its employees.
The Company offers group life insurance. Sales of group life
insurance consist principally of renewable term coverage, the amounts
of which are usually linked to individual employee wage levels. The
following table shows group life insurance in force prior to
reinsurance ceded for the year indicated:
Years Ended December 31,
-------------------------------------------------------------
[Millions] 2002 2001 2000 1999 1998
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In force
end of year $ 58,572(1) $ 66,539(1) $ 96,311(1) $ 83,901(1) $ 84,121(1)
(1) Includes $5,138, $8,445, $18,397, $25,812, and $25,597 of in
force group life insurance obtained from the acquisition of Alta
for the years ended December 31, 2002, 2001, 2000, 1999, and
1998, respectively. Also includes $11,237 and $14,659 for the
years ended December 31, 2002 and 2001, respectively, of in force
group life insurance obtained from the acquisition of General
American. The 2002 figure was influenced by a decline in total
health care membership. The 2001 figure was influenced by a
decline in total health care membership and the Company's
decision to discontinue certain group life insurance business
obtained through acquisitions.
2. Method of Distribution
The Company distributes its products and services through field sales
staff. As of December 31, 2002, the sales staff was located in 39
sales offices throughout the United States. During March 2003, the
Company consolidated the 39 sales offices into 30 sales offices.
Through these consolidations, the Company will realize increased
efficiencies. Each sales office works with insurance brokers, agents,
and consultants in its local market.
3. Competition
The employee benefits industry is highly competitive. The United
States health care industry continues to experience mergers and
consolidations. A number of larger carriers have dropped out of the
group health market entirely. Although there are still many different
carriers in the marketplace, it has become dominated by an
increasingly smaller number of carriers, including the Company.
The highly competitive marketplace creates pricing pressures that
encourage employers to seek competitive bids each year. Although most
employers are looking for affordably priced employee benefits
products, they also want to offer product choices because employee
needs differ. In many cases it is more cost-effective and efficient
for an employer to contract with a carrier such as the Company that
offers multiple product lines and centralized administration.
In addition to price, there are a number of other factors that
influence employer decision-making. These factors include: quality of
services; scope, cost-effectiveness and quality of provider networks;
product responsiveness to customers' needs; cost-containment
services; and effectiveness of marketing and sales.
4. Reserves
For group whole life and term insurance products, policy reserve
liabilities are equal to the present value of future benefits and
expenses less the present value of future net premiums using best
estimate assumptions for interest, mortality, and expenses (including
margins for adverse deviation). For disability waiver of premium and
paid up group whole life contracts (included within the group life
family of products offered by the Company), the policy reserves equal
the present value of future benefits and expenses using best estimate
assumptions for interest, mortality, morbidity, and expenses
(including margins for adverse deviation). For group universal life
(included within the group life family of products offered by the
Company), the policy reserves equal the accumulated fund balance
(that reflects cumulative deposits plus credited interest less
charges thereon). Reserves for long-term disability products are
established for lives currently in payment status, or that are
approved for payment but are in a waiting period, using industry and
Company morbidity factors, and interest rates based on Company
experience. In addition, reserves are held for claims that have been
incurred but not reported and for long term disability claims that
have been reported but not yet adjudicated.
For medical and dental insurance products, reserves reflect the
ultimate cost of claims including, on an estimated basis, (i) claims
that have been reported but not settled, and (ii) claims that have
been incurred but not reported. Claim reserves are based upon factors
derived from past experience. Reserves also reflect retrospective
experience rating that is done on certain types of business.
Assumptions for mortality and morbidity experience are periodically
reviewed against published industry data and company experience.
The above mentioned reserves are computed amounts that, with
additions from premiums and deposits to be received, and with
interest on such reserves, are expected to be sufficient to meet the
Company's policy obligations such as paying expected death or
retirement benefits or surrender requests and to generate profits.
5. Reinsurance
The Company seeks to limit its exposure on any single insured and to
recover a portion of benefits paid by ceding risks to other insurance
enterprises under excess coverage and co-insurance contracts. The
maximum amount of group life insurance retained on any one life is
$1.5 million and $1.0 million for accidental death coverage. The
maximum amount of group monthly disability income benefit at risk on
any one life is $6,000 per month.
The Company has a marketing and administrative services arrangement
with New England. Effective January 1, 2002, the Company renegotiated
this arrangement to assume the full risk on this block of business.
The Company pays a per member fee for New England customers.
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, public school districts and
corporations.
The Company's core retirement savings business is in the
public/non-profit pension market. The Company provides investment
products, and administrative and communication services, to employees
of state and local governments (Internal Revenue Code Section 457
plans), as well as to employees of hospitals, non-profit
organizations, public school districts, and corporations (Internal
Revenue Code Section 401, 401(k), 403(b), 408, and 457 plans). The
Company provides pension plan administrative services through a
subsidiary company, Financial Administrative Services Corporation
(FASCorp). The Company provides marketing and communication services
through another subsidiary company, BenefitsCorp, Inc., and through
BenefitsCorp Equities, Inc., a broker-dealer subsidiary of
BenefitsCorp, Inc. (collectively, BenefitsCorp).
The Company's primary marketing emphasis in the public/non-profit
pension market is group fixed and variable annuity contracts for
defined contribution retirement savings plans. Defined contribution
plans provide for benefits based upon the value of contributions to,
and investment returns on, the individual's account. This has been
the fastest growing portion of the pension marketplace in recent
years.
The Company has a marketing agreement with Charles Schwab & Co., Inc.
to sell individual fixed and variable qualified and non-qualified
deferred annuities. The fixed product is a Guarantee Period Fund that
was established as a non-unitized separate account in which the owner
does not participate in the performance of the assets. The assets
accrue solely to the benefit of the Company and any gain or loss in
the Guarantee Period Fund is borne entirely by the Company. Guarantee
period durations of one to ten years are currently being offered by
the Company. Distributions from the amounts allocated to a Guarantee
Period Fund more than six months prior to the maturity date results
in a market value adjustment (MVA). The MVA reflects the relationship
as of the time of its calculation between the current U.S. Treasury
Strip ask side yield and the U.S. Treasury Strip ask side yield at
the inception of the contract.
The Company's variable annuity products offer several investment
options. The Company's variable annuity products provide the
opportunity for contractholders to assume the risks of, and receive
the benefits from, the investment of retirement assets. The variable
product assets are invested, as designated by the participant, in
separate accounts that in turn invest in shares of underlying funds
managed by a subsidiary of the Company or by selected external fund
managers.
Demand for investment diversification by customers and their
participants continued to grow during 2002. The Company continues to
expand the fund options available through Maxim Series Fund, Inc., a
subsidiary of the Company that is an insurance products mutual fund
company and through arrangements with external fund managers. The
array of funds allows customers to diversify their investments across
a range of investment products, including fixed income, stock, and
international equity fund offerings.
On a very limited basis, the Company offers single premium annuities
and guaranteed certificates that provide guarantees of principal and
interest with a fixed maturity date.
Customer retention is a key factor for the profitability of
individual annuity products. To encourage customer retention, annuity
contracts typically impose a surrender charge on policyholder
balances withdrawn for a period of time after the contract's
inception. The period of time and level of the charge vary by
product. Existing federal tax penalties on distributions prior to age
59 1/2 provide an additional disincentive to premature surrenders of
annuity balances but do not impede transfers of those balances to
products of competitors.
Annuity products generate earnings from the investment spreads on the
guaranteed investment options and from the fees collected for
mortality and expense risks associated with the variable options. The
Company also receives fees for providing administrative services to
contractholders. A subsidiary of the Company receives fees for
serving as an investment advisor for underlying funds that are
managed by the subsidiary.
The Company's annuity products are supported by the general account
assets of the Company for guaranteed investment options, and the
separate account assets for the variable investment options.
The amount of annuity products in force is measured by policy
reserves. The following table shows guaranteed investment contract
and group and individual annuity policy reserves for the years
indicated:
Guaranteed
Year ended Investment Fixed Variable
December 31, Contracts Annuities Annuities
-------------------- ----------------- ----------------- ------------------
[millions] [millions] [millions]
1998 $ 275 $ 4,849 $ 4,318
1999 105 4,592 4,935
2000 103 4,394 5,081
2001 89 4,385 5,304
2002 93 4,333 5,011
In addition to providing administrative services to customers of the
Company's annuities, FASCorp also provides comprehensive third party
administrative and recordkeeping services for other financial
institutions and employer-sponsored retirement plans. Assets under
administration with FASCorp from public/non-profit and third party
administration customers totaled $26.5 billion at December 31, 2002
and $28.1 billion at December 31, 2001.
Life insurance products in force include participating and
non-participating term life, whole life, and universal life.
Participating policyholders share in the financial results
(differences in experience of actual financial results versus pricing
expectations) of the participating business in the form of dividends.
Participating products are no longer actively marketed by the Company
but continued to produce renewal premium of $122.6 million, $132.7
million, and $152.3 million in 2002, 2001, and 2000, respectively.
Participating dividends of $78.9 million, $76.5 million, and $74.4
million were paid in 2002, 2001, and 2000, respectively. The
provision for participating policyholder earnings is reflected in
liabilities in undistributed earnings on participating policyholders
in the consolidated balance sheets of the Company. Participating
policyholder earnings are not included in the consolidated net income
of the Company.
Term life provides coverage for a stated period and pays a death
benefit only if the insured dies within the period. Whole life
provides guaranteed death benefits and level premium payments for the
life of the insured. Universal life products include a cash value
component that is credited with interest at regular intervals. The
Company's earnings result from the difference between the investment
income and interest credited on customer cash values and from
differences between charges for mortality and actual death claims.
Universal life cash values are charged for the cost of insurance
coverage and for administrative expenses.
At December 31, 2002 and 2001, the Company had $3.8 billion and $3.9
billion, respectively, of policy reserves on individual insurance
products sold to corporations to provide coverage on the lives of
certain employees, also known as Corporate-Owned Life Insurance
(COLI). Due to legislation enacted during 1996 that phased out the
interest deductions on COLI policy loans over a two-year period
ending 1998, leveraged COLI product sales have ceased.
The Company has shifted its emphasis to the Business-Owned Life
Insurance (BOLI) market. BOLI was not affected by the 1996
legislation. These products are interest-sensitive whole life and
universal life policies that fund post-retirement benefits for
employees. At December 31, 2002, the Company had $1.5 billion of
fixed and $1.4 billion of separate account BOLI policy reserves
compared to $1.7 billion of fixed and $1.2 billion of separate
account reserves at December 31, 2001. The Company has also recently
introduced variable universal life and retail mutual fund product
lines into the Executive Benefits market.
In 2002 the Company continued its efforts to partner with large
financial institutions to deliver life insurance to the mass market.
This strategy allows the Company to offer traditional life insurance
products through established institutional channels at a competitive
price. Some of the institutional partners include Huntington, U.S.
Bank, Fifth Third, Citibank, SunTrust, AmSouth, Affiliated Financial
Services and Bank One.
Sales of life insurance products typically have initial marketing
expenses which are deferred. Therefore, retention is an important
factor in profitability and is encouraged through product features.
For example, the Company's universal and whole life insurance
contracts typically impose a surrender charge on policyholder
balances withdrawn within the first ten years of the contract's
inception. The period of time and level of the charge vary by
product. In addition, more favorable credited rates may be offered
after policies have been in force for a period of time.
Certain of the Company's life insurance and group annuity products
allow policy owners to borrow against their policies. At December 31,
2002, approximately 10% (7% in 2001 and 8% in 2000) of outstanding
policy loans were on individual life policies that had fixed interest
rates ranging from 5.0% to 8.4%. The remaining 90% of outstanding
policy loans had variable interest rates averaging 6.24% at December
31, 2002. Investment income from policy loans was $209.6 million,
$203.8 million, and $191.5 million for the years ended December 31,
2002, 2001, and 2000, respectively.
The following table summarizes individual life insurance in force
prior to reinsurance ceded for the years indicated:
Years Ended December 31,
-------------------------------------------------------------
[Millions] 2002 2001 2000 1999 1998
------------------- --------- --------- --------- --------- ---------
In force
end of year $ 50,605 $ 50,769 $ 46,631 $ 43,831 $ 42,966
The Company's 401(k) product is offered by way of a group fixed and
variable deferred annuity contract. The product provides a variety of
funding and distribution options for employer-approved retirement
plans that qualify under Internal Revenue Code Section 401(k).
The 401(k) product investment options includes guaranteed interest
rate options for various lengths of time, variable investment
options, or a self-directed brokerage option. For the guaranteed
interest rate option, the difference between the income earned on
investments in the Company's general account and the interest
credited to the participant's account balance flows through to
operating income.
Variable investment options utilize separate accounts to provide
participants with a vehicle to assume the investment risks. Assets
held under these options are invested, as designated by the
participant, in separate accounts that in turn invest in shares of
underlying funds managed by a subsidiary of the Company or by
selected external fund managers.
Of the total 401(k) assets under administration in 2002 and 2001, 95%
were allocated to variable investment options.
The Company is compensated by the separate accounts for bearing
expense risks pertaining to the variable annuity contract and for
providing administrative services. For certain funds, a subsidiary of
the Company also receives fees for serving as an investment advisor
for those underlying funds that are managed by the subsidiary.
Customer retention is a key factor for the profitability of the
Company's 401(k) product. The annuity contract imposes a charge for
termination during a designated period of time after the contract's
inception. The charge is determined in accordance with a formula in
the contract. Existing federal tax penalties on distributions prior
to age 59 1/2 provide an additional disincentive to premature
surrenders of account balances, but do not impede rollovers to
products of competitors.
In the following table the amount of 401(k) business in force is
measured by the total of individual account balances:
Year Ended Fixed Variable
December 31, Annuities Annuities
---------------------- ------------------ ------------------
[millions] [millions]
1998 $ 299 $ 5,770
1999 268 7,339
2000 248 6,614
2001 240 5,911
2002 225 4,656
2. Method of Distribution
Financial Services primarily uses BenefitsCorp to distribute pension
products and to provide communication and enrollment services to
employers in the public/non-profit market. Pension products are also
distributed through independent marketing agencies.
The Company distributes universal and joint survivor life and term
insurance, as well as individual fixed and variable qualified and
non-qualified deferred annuities, through Charles Schwab & Co., Inc.
Individual life products are also sold through large banks and
through the internet. BOLI products are currently marketed through
one broker, Clark/Bardes, Inc.
At the end of 2002, the Company established a specialized sales force
to target 401(k) sales.
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, reserves are established for claims
that have been incurred but not reported based on factors derived
from past experience.
Reserves for limited payment contracts (immediate annuities) are
computed on the basis of assumed investment yield, mortality (where
payouts are contingent on survivorship) and expenses. These
assumptions generally vary by plan, year of issue, and policy
duration.
Reserves for investment contracts (deferred annuities and 401(k)) are
equal to the participants' account balances. Reserves for immediate
annuities without life contingent payouts are computed on the basis
of assumed investment yield and expenses.
The mentioned reserves are computed amounts that, with additions from
premiums and deposits to be received, and with interest on such
reserves, are expected to be sufficient to meet the Company's policy
obligations (such as paying expected death or retirement benefits or
surrender requests) and to generate profits.
5. Reinsurance
The Company seeks to limit its exposure to loss on any single insured
and to recover a portion of benefits paid by ceding risks to other
insurance enterprises under excess coverage and co-insurance
contracts. The Company retains a maximum of $1.5 million of coverage
per individual life.
The Company has a marketing and administrative services arrangement
with New England. Under reinsurance agreements, New England issues
401(k) products and then immediately reinsures nearly 100% of its
guaranteed 401(k) business with the Company. Effective January 1,
2001, the Company renegotiated this arrangement with New England,
resulting in a shift of responsibility from New England to the
Company for marketing operations. In 2002, the Company renegotiated
this arrangement to assume the full risk on this block of business.
The Company pays an asset fee for New England customer fund balances.
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, 2002, were $25.9 billion, comprised of
general account assets of $14.6 billion and separate account assets of
$11.3 billion. Total investments at December 31, 2001, were $26.8
billion, comprised of general account assets of $14.2 billion and
separate account assets of $12.6 billion.
The Company's general account investments are in a broad range of asset
classes, primarily domestic and international fixed maturities and
mortgage loans. Fixed maturity investments include public and privately
placed corporate bonds, government bonds, and redeemable preferred
stocks. The Company also invests in mortgage-backed securities and
asset-backed securities.
The Company manages the characteristics of its investment assets, such
as liquidity, currency, yield, and duration, to reflect the underlying
characteristics of related insurance and policyholder liabilities that
vary among the Company's principal product lines. The Company observes
strict asset and liability matching guidelines designed to ensure that
the investment portfolio will appropriately meet the cash flow and
income requirements of its liabilities. In connection with its
investment strategy, the Company makes limited use of derivative
instruments in hedging transactions to manage certain portfolio related
risks. The Company also utilizes derivative instruments to engage in
replicated synthetic asset transactions. Derivative instruments are not
used for speculative purposes. For more information on derivatives see
Notes 1 and 7 to the consolidated financial statements of the Company
(the Consolidated Financial Statements) that are included in Item 8
(Financial Statements and Supplementary Data).
The Company routinely monitors and evaluates the status of its
investments in light of current economic conditions, trends in capital
markets, and other factors. These other factors include investment size,
quality, concentration by issuer and industry and other diversification
considerations relevant to fixed maturity investments.
The Company's fixed maturity investments were at 90% of investment
assets, excluding policy loans, as of December 31, 2002. The Company
reduces credit risk for the portfolio as a whole by investing primarily
in investment-grade fixed maturities. As of December 31, 2002 and 2001,
97% and 98%, respectively, of the bond portfolio carried an investment
grade rating.
The Company's mortgage loan portfolio constituted 3% and 4% of
investment assets as of December 31, 2002 and 2001, respectively. Since
1986, the Company has reduced the overall weighting of its mortgage loan
portfolio, instead placing a greater emphasis in bond investments.
At December 31, 2002, 20% of investment assets were invested in policy
loans, 5% were invested in short-term investments, 1% were invested in
stocks, and less than 1% were invested in real estate compared to 21%,
3%, 1%, and 1%, respectively, in 2001.
The following table sets forth the distribution of invested assets, cash
and accrued investment income for the Company's general account as of
the end of the years indicated:
Carrying Value in
Millions 2002 2001 2000 1999 1998
---------------------- ---------- ---------- ---------- ---------- ---------
Debt Securities:
U.S. government
securities and
obligations of
U.S. government
agencies $ 2,710 $ 3,075 $ 2,315 $ 1,859 $ 1,951
Bonds 7,618 7,013 7,055 7,078 7,117
Foreign
governments 43 28 50 51 69
---------- ---------- ---------- ---------- ---------
Total debt securities 10,371 10,116 9,420 8,988 9,137
Other Investments:
Common stock 90 73 95 69 49
Mortgage loans 417 613 843 975 1,133
Real estate 4 12 107 104 73
Policy loans 2,964 3,001 2,810 2,681 2,859
Short-term
Investments 710 425 415 241 420
---------- ---------- ---------- ---------- ---------
Total investments $ 14,556 $ 14,240 $ 13,690 $ 13,058 $ 13,671
========== ========== ========== ========== =========
Cash $ 155 $ 216 $ 156 $ 268 $ 176
Accrued investment
Income 133 131 139 138 158
The following table summarizes the Company's general account investment
results:
[Millions] Net Earned Net
Investment Investment
For the year: Income Income Rate
-------------------- ------------- --------------
2002 $ 919 6.83 %
2001 935 7.10 %
2000 925 7.34 %
1999 876 6.96 %
1998 897 7.03 %
F. REGULATION
1. Insurance Regulation
The business of the Company is subject to comprehensive state and
federal regulation and supervision throughout the United States that
primarily provides safeguards for policyholders. The laws of the
various state jurisdictions establish supervisory agencies with broad
administrative powers with respect to such matters as admittance of
assets, premium rating methodology, policy forms, establishing
reserve requirements and solvency standards, maximum interest rates
on life insurance policy loans and minimum rates for accumulation of
surrender values, the type, amounts and valuation of investments
permitted, and HMO operations.
The Company's operations and accounts are subject to examination by
the Colorado Division of Insurance and other regulators at specified
intervals. A financial examination by the Colorado Division of
Insurance was completed in 1997 and covered the five-year period
ended December 31, 1995. This examination produced no significant
adverse findings regarding the Company. The latest financial
examination by the Colorado Division of Insurance is in progress and
will cover the five-year period ended December 31, 2000. Field work
has been completed and the Company is awaiting the final report.
The National Association of Insurance Commissioners (NAIC) has
adopted risk-based capital rules and other financial ratios for life
insurance companies. Based on the Company's December 31, 2002
statutory financial reports the Company has risk-based capital well
in excess of that required by regulators.
The NAIC has also adopted the Codification of Statutory Accounting
Principles (Codification). The Codification is intended to
standardize accounting and reporting to state insurance departments
effective January 1, 2001. However, statutory accounting principles
will continue to be established by individual state laws and
permitted practices. The Colorado Division of Insurance required
adoption of Codification with certain modifications for the
preparation of statutory financial statements effective January 1,
2001 (see Note 13 to the consolidated financial statements).
2. Insurance Holding Company Regulations
The Company and certain of its subsidiaries are subject to and comply
with insurance holding company regulations in the applicable states.
These regulations contain certain restrictions and reporting
requirements for transactions between affiliates including the
payments of dividends. They also regulate changes in control of an
insurance company.
3. Securities Laws
The Company is subject to various levels of regulation under federal
securities laws. The Company's broker-dealer subsidiaries are
regulated by the Securities and Exchange Commission (SEC) and the
National Association of Securities Dealers, Inc. The Company's
investment advisor subsidiary and transfer agent subsidiary are
regulated by the SEC. Certain of the Company's separate accounts,
mutual funds, and variable insurance and annuity products are
registered under the Investment Company Act of 1940 and the
Securities Act of 1933.
4. Guaranty Funds
Under insurance guaranty fund laws existing in all states, insurers
doing business in those states can be assessed (up to prescribed
limits) for certain obligations of insolvent insurance companies. The
Company has established a reserve of $1.3 million as of December 31,
2002 to cover future assessments of known insolvencies of other
companies. The Company has historically recovered more than half of
the guaranty fund assessments through statutorily permitted premium
tax offsets. The Company has a prepaid asset associated with guaranty
fund assessments of $1.9 million at December 31, 2002.
5. Potential Legislation
United States legislative developments in various areas including
pension regulation, financial services regulation, and health care
legislation could significantly and adversely affect the Company in
the future. Congress continues to consider legislation relating to
health care reform and managed care issues. Congress is also
considering changes to various features of retirement plans such as
the holding of company stock, diversification rights, imposition of
transaction restrictions, expanded disclosure requirements and
greater access to investment advice for participants.
It is not possible to predict whether future legislation or
regulation adversely affecting the business of the Company will be
enacted and, if enacted, the extent to which such legislation or
regulation will have an effect on the Company and its competitors.
G. CURRENT RATINGS
The Company is rated by a number of nationally recognized rating
agencies. The ratings represent the opinion of the rating agencies
regarding the financial strength of GWL&A and its ability to meet
ongoing obligations to policyholders. In connection with the
announcement by Great-West Lifeco regarding the acquisition of Canada
Life, the Company's ratings are under review with negative implications.
Upon completion of the acquisition of Canada Life by Great-West Lifeco,
Standard & Poor's Corporation has indicated it is likely that the
Company's rating will be lowered one notch and a negative outlook
maintained.
Rating Agency Measurement Current Rating
------------------------------ ------------------------------- ------------------
A.M. Best Company, Inc. Financial strength, operating A++ (1)
performance and
business profile
Fitch, Inc. Financial strength AA+ (2)
Moody's Investors Service Financial strength Aa2 (3)
Standard & Poor's Corporation Financial strength AA+ (4)
(1) Superior (highest rating out of nine categories) (2) Very Strong
(second highest rating out of twelve categories) (3) Excellent (second
highest rating out of nine categories) (4) Very strong (second highest
rating out of nine categories)
H. MISCELLANEOUS
No customer accounted for 10% or more of the Company's consolidated
revenues in 2002, 2001 or 2000. In addition, no segment of the Company's
business is dependent on a single customer or a few customers, the loss
of which would have a significant effect on the Company or any of its
business segments. The loss of business from any one, or a few,
independent brokers or agents would not have a material adverse effect
on the Company or any of its business segments.
The Company had approximately 6,800 employees at December 31, 2002.
ITEM 2. PROPERTIES
The Head Office of the Company consists of a 752,000 square foot complex
located in Greenwood Village, Colorado. The Company leases sales and
claims processing offices throughout the United States.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is a party or of which any of their property is
the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2002 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 $170.6
million in 2002 and $187.6 million in 2001.
Under Colorado law the Company cannot, without the approval of the
Colorado Commissioner of Insurance, pay a dividend if as a result of
such payment, the total of all dividends paid in the preceding twelve
months, would exceed the greater of (i) 10% of the Company's statutory
surplus as regards policyholders as at the preceding December 31; or
(ii) the Company's statutory net gain from operations as at the
preceding December 31.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain financial data of the Company.
This summary has been derived in part from and should be read in
conjunction with the Company's Consolidated Financial Statements. Note 1
to the financial statements discusses the significant accounting
policies of the Company. Significant estimates are required to account
for policy reserves, allowances for credit losses, deferred policy
acquisition costs, and valuation of privately placed fixed maturities.
Actual results could differ from those estimates.
INCOME STATEMENT Years Ended December 31,
----------------------------------------------------------
DATA 2002 2001 2000 1999 1998
------------------------- --------- --------- --------- --------- ---------
[millions]
Premium income $ 1,120 $ 1,203 $ 1,332 $ 1,163 $ 995
Fee income 884 947 872 635 516
Net investment income 919 935 925 876 897
Net realized investment
gains 42 47 28 1 38
--------- --------- --------- --------- ---------
Total revenues 2,965 3,132 3,157 2,675 2,446
Policyholder benefits 1,593 1,696 1,746 1,582 1,462
Operating expenses 958 1,021 1,018 804 688
--------- --------- --------- --------- ---------
Total benefits and
expenses excluding
special charges 2,551 2,717 2,764 2,386 2,150
Income tax expense 130 141 134 83 99
--------- --------- --------- --------- ---------
Net income before
special charges 284 274 259 206 197
Special charges (net) 81
--------- --------- --------- --------- ---------
Net income $ 284 $ 193 $ 259 $ 206 $ 197
========= ========= ========= ========= =========
Deposits for investment-
type contracts $ 691 $ 627 $ 835 $ 634 $ 1,344
Deposits to separate
accounts 2,461 3,240 3,105 2,583 2,208
Self-funded premium
equivalents 5,228 5,721 5,181 2,979 2,606
BALANCE SHEET Years Ended December 31,
----------------------------------------------------------
DATA 2002 2001 2000 1999 1998
------------------------- --------- --------- --------- --------- ---------
[millions]
Investment assets $ 14,556 $ 14,240 $ 13,689 $ 13,058 $ 13,671
Separate account assets 11,338 12,585 12,381 12,820 10,100
Total assets 27,659 28,814 27,900 27,533 25,123
Total policy benefit
liabilities 13,007 12,931 12,825 12,341 12,583
Due to GWL 34 42 43 35 52
Guaranteed preferred
beneficial interests in
the
Company's junior
subordinated debentures 175 175 175 175
Total shareholder's
equity 1,665 1,471 1,428 1,167 1,199
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements. Forward-looking
statements are statements not based on historical information and that
relate to future operations, strategies, financial results, or other
developments. In particular, statements using verbs such as "expected",
"anticipate", "believe", or words of similar import generally involve
forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements that represent the
Company's beliefs concerning future or projected levels of sales of the
Company's products, investment spreads or yields, or the earnings or
profitability of the Company's activities. Forward-looking statements
are necessarily based upon estimates and assumptions that are inherently
subject to significant business, economic and competitive uncertainties
and contingencies, many of which are beyond the Company's control and
many of which, with respect to future business decisions, are subject to
change. These uncertainties and contingencies can affect actual results
and could cause actual results to differ materially from those expressed
in any forward-looking statements made by, or on behalf of, the Company.
Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable events
or developments, some of which may be national in scope, such as general
economic conditions and interest rates, some of which may be related to
the insurance industry generally, such as pricing competition,
regulatory developments and industry consolidation, and others of which
may relate to the Company specifically, such as credit, volatility, and
other risks associated with the Company's investment portfolio and other
factors. Readers are also directed to consider other matters, including
any risks and uncertainties, discussed in documents filed by the Company
and certain of its subsidiaries with the Securities and Exchange
Commission.
Management's discussion and analysis of financial conditions and results
of operations of the Company for the three years ended December 31, 2002
follows. This management discussion and analysis should be read in
conjunction with the financial data contained in Item 6 and the
Company's Consolidated Financial Statements.
A. COMPANY RESULTS OF OPERATIONS
1. Consolidated Results
The Company's consolidated net income decreased $9.0 million or 3.0%
in 2002 when compared to 2001 (before one-time charges in 2001 of
$80.9 million and operating losses of $18.7 million, net of tax,
related to the Alta Health & Life Insurance Company (Alta) business).
Alta was acquired by the Company on July 8, 1998. During 2001 and
2000 the Alta business continued to be run as a free-standing unit
but was converted to the Company's systems and accounting processes.
This conversion program resulted in significant issues related to
pricing, underwriting, and administration of the business. The
Company is transitioning Alta business to other Company products. All
Alta sales and administration staff have become employees of the
Company and the underwriting functions are conducted by the
underwriting staff of the Company.
The Employee Benefits segment contributed $136.3 million and the
Financial Services segment contributed $147.2 million to net income.
Of total consolidated net income in 2002 and 2001 (before one-time
charges and operating losses of Alta), the Employee Benefits segment
contributed 48% and 56%, respectively, while the Financial Services
segment contributed 52% and 44%, respectively.
In 2002, total revenues decreased $168.1 million or 5.7% to $3.0
billion when compared to 2001. The decline in revenues in 2002 was
comprised of decreased premium income of $83.5 million, decreased fee
income of $63.7 million, decreased net investment income of $15.6
million, and a $5.2 million decrease in realized investment gains. In
2001, total revenues decreased $24.7 million or 0.8% to $3.1 billion
when compared to 2000. The decline in revenues in 2001 was comprised
of decreased premium income of $128.9 million, increased fee income
of $75.6 million, increased net investment income of $10.1 million
and increased realized gains on investments of $18.5 million.
The decreased premium income in 2002 was comprised of a decline in
Employee Benefits premium income and Financial Services premium
income of $73.7 million and $9.8 million, respectively. The decline
in premium income in the Employee Benefits segment reflected a 15.4%
decline in medical members from 2.6 million in 2001 to 2.2 million in
2002. Financial Services experienced lower sales and higher
terminations in 2002. The decreased premium income in 2001 was
comprised of a decline in Employee Benefits premium income and
Financial Services premium income of $108.1 million and $20.8
million, respectively. The decline in premium income in the Employee
Benefits segment reflected a 18% decline in medical members from 3.2
million in 2000 to 2.6 million in 2001. The decline in premium income
in the Financial Services segment was primarily due to lapses in the
closed block of traditional life business.
Fee income in 2002 was comprised of Employee Benefits fee income and
Financial Services fee income of $660.4 million and $223.1 million,
respectively. The $5.2 million or 7.4% decline in Employee Benefits
fee income is due to the decline in medical members. The $11 million
or 4.7% decline in Financial Services fee income was primarily the
result of weak U.S. equity markets. The increase in fee income in
2001 was comprised of Employee Benefits fee income and Financial
Services fee income of $65.0 million and $10.7 million, respectively.
The 10% growth in Employee Benefits fee income reflects a combination
of an amendment to the New England reinsurance contract, significant
price increases in the overall group health block of business, and
fee increases from service providers. The growth in Financial
Services fee income in 2001 was primarily the result of new sales and
the increase in revenue from additional new participants in FASCorp.
These increases more than offset the decreased fees on variable funds
related to the weakness in the equity markets.
Total benefits decreased $103.8 million or 6.1% in 2002 when compared
to 2001, reflecting lower group life and health claims primarily as a
result of the decline in membership in the Employee Benefits segment.
The decline from 2000 to 2001 was also the result of lower claims as
a result of declining membership.
Total expenses decreased $63.0 million or 6.2% in 2002 when compared
to 2001, before special charges, as the Company remains focused on
reducing administrative costs. During 2002, Employee Benefits'
operating expenses decreased $41 million due primarily to reduced
administrative costs and medical membership. Financial Services'
operating expenses decreased $22 million due primarily to decreased
sales and lower premium income.
Income tax expense before special charges decreased $10.9 million or
7.7% in 2002 when compared to 2001. The decrease reflects a reduction
in the liability for tax contingencies due to the completion of the
1994 - 1996 Internal Revenue Service examination. Income tax expense
increased before special charges $7.1 million or 5% in 2001 when
compared to 2000. The increase reflects higher pre-tax earnings in
2001. See Note 11 to the Consolidated Financial Statements for a
discussion of the Company's effective tax rates.
In evaluating its results of operations, the Company also considers
net changes in deposits received for investment-type contracts,
deposits to separate accounts, and self-funded equivalents.
Self-funded equivalents represent paid claims under minimum premium
and administrative services only contracts. These amounts approximate
the additional premiums which would have been earned under such
contracts if they had been written as traditional indemnity or HMO
programs.
Deposits for investment-type contracts increased $161.2 million or
25.7% in 2002 when compared to 2001. Deposits for investment-type
contracts decreased $208 million or 25% in 2001 when compared to
2000. The increase in 2002 was primarily attributable to one large
case sale in the Financial Services segment. The decrease in 2001 was
primarily attributable to the Financial Services segment, due to a
drop in demand for fixed BOLI contracts due to low interest rates.
This was replaced by the BOLI business moving to the separate account
product (see below).
Deposits for separate accounts decreased $778.8 million or 24.0% in
2002 when compared to 2001. This decrease in 2002 is primarily due to
a combination of lower 401(K) sales and higher 401(K) terminations as
well as a decline in BOLI sales due to the nature of the BOLI
business. Deposits for separate accounts increased $135 million or 4%
in 2001 when compared to 2000. This increase in 2001 is primarily due
to an increase in BOLI single premiums, which was offset somewhat by
lower 401(k) deposits.
Self-funded premium equivalents decreased $492.4 million or 8.6% in
2002 when compared to 2001. This decrease was due to the membership
decline in the Employee Benefits segment. Self-funded premium
equivalents increased $540 million or 10% in 2001 when compared to
2000. This increase was due to the General American business ($307
million), Allmerica business ($166 million) and higher overall claims
volume for the self-funded business.
Historically, the 401(k) business unit had been included with the
Employee Benefits segment. In order to capitalize on administrative
system efficiencies and group pension expertise, the 401(k) business
is now administered by the Financial Services segment. As a result,
prior period segment results have been reclassified to conform with
this change.
2. Other Matters
On February 17, 2003, Great-West Lifeco announced a definitive
agreement to acquire Canada Life Financial Corporation for $7.3
billion (Canadian). Canada Life is a Canadian based insurance company
with business principally in Canada, the United Kingdom, the United
States and Ireland. In the United States, Canada Life sells
individual and group insurance and annuity products. Subject to
required shareholder and regulatory approvals, the transaction is
expected to close on July 10, 2003.
Canada Life's U.S. operations represented approximately $1.6 billion
in annual revenue in 2002 and $7.4 billion in assets as of December
31, 2002. If the transaction proceeds, Canada Life's U.S. operations
will be integrated with the Company's operations. The details of the
integration are still to be determined.
Effective January 1, 2000, the Company co-insured the majority of
General American Life Insurance Company's (General American) group
life and health insurance business of which primarily consists of
administrative services only and stop loss policies. The agreement
converted to an assumption reinsurance agreement January 1, 2001. The
Company assumed approximately $150 million of policy reserves and
miscellaneous liabilities in exchange for $150 million of cash and
miscellaneous assets from General American.
On October 6, 1999, the Company entered into a purchase and sale
agreement with Allmerica Financial Corporation (Allmerica) to acquire
via assumption reinsurance Allmerica's group life and health
insurance business on March 1, 2000. This business primarily consists
of administrative services only and stop loss policies. The in-force
business was immediately co-insured back to Allmerica and then
underwritten and retained by the Company upon each policy renewal
date.
B. EMPLOYEE BENEFITS RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Employee
Benefits segment:
Years Ended December 31,
-----------------------------------------------
INCOME STATEMENT DATA 2002 2001 2000
------------------------------------- ------------- ------------- -------------
[millions]
Premiums $ 960 $ 1,033 $ 1,142
Fee income 661 713 648
Net investment income 68 66 71
Net realized investment gains 9 16 (3)
(losses)
------------- ------------- -------------
Total revenues 1,698 1,828 1,858
Policyholder benefits 762 859 915
Operating expenses 733 774 780
------------- ------------- -------------
Total benefits and expenses
before special charges 1,495 1,633 1,695
Income tax expense 67 68 57
------------- ------------- -------------
Net income excluding special charges 136 127 106
Special charges (net) 81
------------- ------------- -------------
Net income $ 136 $ 46 $ 106
============= ============= =============
Self-funded premium equivalents $ 5,228 $ 5,721 $ 5,181
In the second quarter of 2001, the Company recorded a $127 million
special charge ($80.9 million, net of tax), related to Alta. The
principal components of the charge include a $46 million premium
deficiency reserve related to under-pricing on the block of business, a
$29 million reserve for doubtful premium receivables, a $28 million
reserve for doubtful accident and health plan claim receivables, and a
$24 million decrease in goodwill and other.
The Company established a premium deficiency reserve of $46 million
(included in special charges previously discussed) on the Alta block of
business in 2001. Releases of $18.7 million in 2001, $6.2 million in the
first quarter of 2002, and $2.1 million in the second quarter of 2002
were made to offset the underwriting losses incurred on the under-priced
block of business. During the first quarter of 2002 the reserve was
reduced by $15 million ($9.8 million net of tax) and during the second
quarter of 2002 the reserve was reduced by $4 million ($2.6 million, net
of tax) based on an analysis of emerging experience which was more
favorable than originally estimated. The balance of the premium
deficiency reserve at December 31, 2002 was zero.
Net income, excluding special charges of $80.9 million after tax,
increased 7.1% in 2002 and increased 20% in 2001. The improvement in
earnings in 2002 reflected improved morbidity margins. The improvement
in earnings in 2001 reflected favorable experience in realized
investment gains, expense gains associated with higher fee income
partially offset by a deterioration in morbidity (which negatively
impacted stop-loss coverages), decreases in premiums due to membership
declines, and increased bad debts due to the impact of the economic
slowdown. During 2001, the Employee Benefits segment experienced
increased medical costs and utilization trends which contributed to the
deterioration in morbidity experience.
Equivalent premium revenue and fee income for group life and health
decreased 8.3% from 2001 levels as the result of continued membership
decline. This reduction is partially offset by increased pricing
actions. Equivalent premium revenue and fee income for group life and
health decreased 2.4% in 2001 from 2000 levels as the result of a
decline in membership.
Group Life and Health
In 2002, the sales and administration functions of the Company's 401(k)
product was transferred from the Employee Benefits division to the
Financial Services division. The Company's 40l(k) business and customers
are discussed in the Financial Services Results of Operations which
follows.
The Employee Benefits segment experienced a net decrease of 1,766 group
health care customers (employer groups) during 2002. There was a 14.8%
decrease in total health care membership from 2.6 million at the end of
2001 to 2.2 million at year-end 2002. POS and HMO members decreased
30.7% from 500,600 in 2001 to 346,900 in 2002.
The Employee Benefits segment experienced a net decrease of 1,232 group
health care customers (employer groups) during 2001. There was an 18%
decrease in total health care membership from 3.2 million at the end of
2000 to 2.6 million at year-end 2001. POS and HMO members decreased 30%
from 718,400 in 2000 to 500,600 in 2001.
Much of the health care decline in 2002 and 2001 can be attributed to
terminations resulting from aggressive pricing related to target margins
as well as a decrease in the employee base for existing group health
care customers and the general decline in the economy. In 2001, the
decline in membership was also, in part, due to difficulties with the
implementation of a systems enhancement, which was resolved by the end
of 2001.
Outlook
The Company knows remaining competitive means focusing on the core
disciplines that provide value to our clients, specifically: health care
cost management, underwriting and product design management and sales
force management. The Company also knows administration costs must
remain at levels consistent with industry standards.
Medical service provider contracting efforts are critical to the
Company's value equation in an environment of escalating medical costs.
In 2003, the Company will increase spending to evaluate provider
networks and provider recontracting. The Company will also continue to
expand health care management and disease management programs for
members with diabetes, asthma, coronary heart disease and other chronic
illnesses.
The Company has expanded medical underwriting to ensure pricing is
consistent with health care risk; an item that is difficult to estimate
on smaller cases. Therefore, the Company is reducing its focus on cases
with fewer than 50 members in 2003.
The Company continues to evaluate product design. The three-tier
prescription drug program launched in 2001 proved very attractive to its
clients and will continue in 2003. The Company reaffirmed its commitment
to traditional, self-funded health plans.
The sales force reorganization will continue in 2003. The Company has
discontinued new sales under the Alta, GenAm and New England names and
has combined these teams with its own sales force to create a unified
sales force organized along distribution channels. Resources will also
be invested to enhance a unified brand identity.
The Company remains focused on reducing administrative costs. In 2002,
the Employee Benefits segment achieved three main productivity
improvements: 1) reduced the number of employees from approximately
6,600 in 2001 to fewer than 4,900 in 2002; 2) enhanced efficiencies
through online billing and other internet-enabled functions; and 3)
significant claims payment efficiencies. The Company anticipates similar
productivity strides in 2003 as a result of ongoing investments in
process improvement and continued sales and claims payment offices
consolidation.
In 2003, along with all other carriers in the industry, the Company will
incur significant implementation and administrative cost associated with
Administrative Simplification compliance federally mandated in HIPAA
(the Health Insurance Portability and Accountability Act of 1996).
C. FINANCIAL SERVICES RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Financial
Services segment:
Years Ended December 31,
-----------------------------------------------
INCOME STATEMENT DATA 2002 2001 2000
------------------------------------- ------------- ------------- -------------
[millions]
Premiums $ 160 $ 170 $ 190
Fee income 223 234 224
Net investment income 851 869 854
Net realized investment gains 33 31 31
------------- ------------- -------------
Total revenues 1,267 1,304 1,299
Policyholder benefits 831 837 831
Operating expenses 225 247 238
------------- ------------- -------------
Total benefits and expenses 1,056 1,084 1,069
------------- ------------- -------------
Income from operations 211 220 230
Income tax expense 63 73 77
------------- ------------- -------------
Net income $ 148 $ 147 $ 153
============= ============= =============
Deposits for investment-type
contracts $ 691 $ 627 $ 835
Deposits to separate accounts 2,461 3,240 3,105
Net income for Financial Services remained stable in 2002 but decreased
4% in 2001. The decrease in earnings from $153 million in 2000 to $147
million in 2001 reflects the reduction in earnings on the 401(k) product
due to weak U.S. equity markets and higher terminations offset by
increased investment income and improved mortality in the other product
areas.
During 2002, the Company experienced lower sales in most of its product
areas and higher termination rates. The Company was also negatively
impacted by the weak U.S. equity markets. Offsetting these challenges
was a decrease in operating expenses and effective management of
investment margins on products which resulted in a relatively flat net
income for the year.
Prior to 2002, the Employee Benefits segment marketed and administered
corporate savings products (401(k) plans). In 2002, the Financial
Services segment assumed responsibility for these products. The segment
information above has been adjusted for this change.
1. Savings
The Financial Services segment's savings business is focused on group
and individual fixed and variable annuities with a marketing emphasis
on the public/non-profit pension market.
Premiums and deposits for investment-type contracts and separate
accounts have increased $227.6 million or 17% from 2001 to 2002. The
in-year growth was attributable primarily to a $115.3 million
increase in deposits for investment-type contracts and a $121.2
million increase in deposits to separate accounts. The growth was
primarily related to one large case sale.
Fee income decreased $1.8 million or 1.5% from $119.8 million in 2001
to $118.0 million in 2002. The decline in fee income in 2002 was the
result of lower asset values in the separate accounts due to weak
U.S. equity markets and higher terminations of participants in
FASCorp. Fee income increased $8.6 million or 8% from $111.2 million
in 2000 to $119.8 million in 2001. The growth in fee income in 2001
was the result of new sales and the increase in revenue from
additional new participants in FASCorp. These increases more than
offset the decreased fees on variable funds related to weak equity
markets.
The Financial Services segment's core savings business is in the
public/non-profit pension market. The assets of the public/non-profit
business, including separate accounts but excluding Guaranteed
Investment Contracts (GIC), decreased $92.5 million or 1.1% from $8.2
billion in 2001 to $8.1 billion in 2002. The decline was primarily
the result of customers choosing alternative fixed income investment
products.
The Financial Services segment's public/non-profit pension business
experienced lower growth in 2002. The number of new participants in
2002 was 163,000 compared to 339,000 in 2001 and 233,000 in 2000.
Terminations increased in 2002 to 101,000 compared to 72,000 and
63,000 in 2001 and 2000, respectively. This brings the total lives
under administration to 1,331,100 in 2002 and 1,268,500 in 2001.
Customer demand for investment diversification continued during 2002
in spite of weak U.S. equity markets. New contributions to separate
account business represented 62% of the total premium equivalents in
2002 versus 63% in 2001. The Company continues to expand the fund
options available through its subsidiary Maxim Series Fund and
through arrangements with external fund managers. Externally-managed
funds offered to participants in 2002 included AIM, American Century,
Ariel, Fidelity, Founders, INVESCO, Janus, Loomis Sayles, Templeton,
and T. Rowe Price.
Customer participation in guaranteed separate accounts increased, as
many customers prefer the security of fixed income securities and
separate account assets. Assets under management for guaranteed
separate account funds were $1,649.6 million in 2002 compared to
$1,214.4 million in 2001 and $755.7 million in 2000.
FASCorp administered records for approximately 2,159,900 participants
in 2002 versus 2,191,000 in 2001. FASCorp's fee income (including fee
income from related parties) was $89.8 million, $72.4 million, and
$63.8 million for the years ended, December 31, 2002, 2001, and 2000,
respectively.
2. Life Insurance
The Company continued its approach to the design and distribution of
traditional life insurance products, focusing on customer retention
and expense management. At the same time, the Company continues to
evaluate new individual markets. In 2002, the Company continued its
efforts to partner with large financial institutions to deliver term
life insurance to the mass market.
Individual life insurance revenue premiums and deposits for
investment-type contract and separate accounts of $434.3 million in
2002 reflected a decrease of 55% or $527.6 million from 2001 levels.
The decrease was primarily due to decreased BOLI separate account
deposits.
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 $82.2 million in 2002 from $83.1 million in 2001 and $84.1 million
in 2000 and the Company expects this decline to continue. The Company
continues working closely with existing COLI customers to determine
the options available to them.
As a result of these legislative changes, the Company has shifted its
sales emphasis from COLI to the BOLI market. This product provides
long-term benefits for employees and was not affected by the 1996
legislative changes. BOLI premiums and deposits were $170.9 million
during 2002 compared to $547.9 million in 2001 and $581.9 million in
2000. The decrease in BOLI premiums and deposits in 2002 was the
result of the lower fixed interest rates and recent negative
publicity regarding this type of insurance product.
The term life insurance product marketed through banks and other
financial institutions has experienced significant growth over the
past several years. Policies sold totaled 53,400, 37,500 and 17,400
in the years 2002, 2001 and 2000, respectively. Although the sales of
term life insurance were improved in 2002 and 2001, the premiums on
these policies are smaller and, therefore, were not a significant
offset to the large decrease in BOLI premiums.
Fee income for the individual lines in 2002 was $18.1 million
compared to $17.9 million in 2001 and $8.2 million in 2000. The
increase relates to strong sales of BOLI separate accounts in prior
years.
3. 401(k)
401(k) premiums and deposits for investment-type contracts and
separate accounts decreased 23% in 2002 to $1.4 billion compared to a
7% decrease in 2001 as a result of lower sales and higher
terminations in both years.
The 401(k) block of business under administration totaled 6,012
employer groups and 477,300 individual participants in 2002, compared
to 6,447 employer groups and 545,800 individual participants in 2001
and 6,514 employer groups and 551,000 individual participants in
2000.
In addition to the Company's affiliate-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. Assets under administration in 401(k) decreased
15% in 2002 to $6.4 billion and decreased 7% from 2000 to 2001. The
decrease in both years was due to the impact of lower U.S. equity
markets and the reduction in the number of participants.
To promote long-term asset retention, the Company in 2002 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 and one-on-one retirement planning assistance.
4. Outlook
Market pressures have led the government agencies to introduce
employer-matching plans that should also increase the number of
potential government employees who will be contributing to retirement
plans.
Continued management emphasis on the reduction of unit costs in the
FASCorp administration is designed to allow the Company to remain
competitive in the recordkeeping market.
Individual insurance policy sales through banks are expected to
increase in the year 2003. Distribution channels are presently
established and management plans to expand with additional bank
partners in 2003.
In 2002, the Financial Services division assumed responsibility for
the development and administration of the Company's 401(k) product.
At the end of 2002, the division established a new, focused marketing
strategy for the 401(k) product. A new customer relationship
management group has also been established with the goal of
establishing stronger relationships with existing 401(k) customers
and improving persistency.
D. INVESTMENT OPERATIONS
The Company's primary investment objective is to acquire assets with
duration and cash flow characteristics reflective of the Company's
liabilities, while meeting industry, size, issuer, and geographic
diversification standards. Formal liquidity and credit quality
parameters have also been established.
The Company follows rigorous procedures to control interest rate risk
and observes strict asset and liability matching guidelines. These
guidelines ensure that even under changing market conditions, the
Company's assets will meet the cash flow and income requirements of its
liabilities. Using dynamic modeling to analyze the effects of a 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] 2002 2001
----------------------------------------------------- -------------- -------------
Fixed maturities, available-for-sale, at fair value $ 10,371 $ 10,116
Mortgage loans 417 613
Real estate and common stock 94 85
Short-term investments 710 425
Policy loans 2,964 3,001
-------------- -------------
Total invested assets $ 14,556 $ 14,240
============== =============
1. Fixed Maturities
Fixed maturity investments include public and privately placed
corporate bonds, government bonds, and mortgage-backed and
asset-backed securities. The Company's strategy related to
mortgage-backed and asset-backed securities is to focus on those with
lower volatility and minimal credit risk. The Company does not invest
in higher risk collateralized mortgage obligations such as
interest-only and principal-only strips, and currently has no plans
to invest in such securities.
Private placement investments are generally less marketable than
publicly traded assets, yet they typically offer enhanced covenant
protection that allows the Company, if necessary, to take appropriate
action to protect its investment. The Company believes that the cost
of the additional monitoring and analysis required by private
placements is more than offset by their enhanced yield.
One of the Company's primary objectives is to ensure that its fixed
maturity portfolio is maintained at a high average quality, so as to
limit credit risk. If not externally rated, the securities are rated
by the Company on a basis intended to be similar to that of the
rating agencies.
During the fourth quarter of 2000, the Company transferred all
securities classified as held-to-maturity into the available-for-sale
category. See Item 8 (Financial Statements and Supplementary Data),
Note 7 for further discussion related to this transfer.
At December 31, 2002, the Company had four bonds in default
representing a carrying value of $24.3 million (0.2% of the total
fixed maturity investment portfolio), compared to nine bonds
representing $71.1 million (0.7% of the total fixed maturity
investment portfolio), for 2001.
The distribution of the fixed maturity portfolio by credit rating is
summarized as follows:
Credit Rating 2002 2001
-------------------------------------------------- -------------- -------------
AAA 58.9% 57.9%
AA 8.9 9.2
A 15.2 14.2
BBB 14.4 16.4
BB and below (non-investment grade) 2.6 2.3
-------------- -------------
TOTAL 100.0% 100.0%
============== =============
2. Mortgage Loans
During 2002, the mortgage loan portfolio declined 32% to $417
million, net of impairment reserves. The Company has not actively
sought new mortgage loan opportunities since 1989 and, as such, has
experienced an ongoing reduction in this portfolio's balance.
The Company follows a comprehensive approach to the management of
mortgage loans that includes ongoing analysis of key mortgage
characteristics such as debt service coverage, net collateral cash
flow, property condition, loan-to-value ratios, and market
conditions. Collateral valuations are performed for those mortgages
that after review are determined by management to present possible
risks and exposures. These valuations are then incorporated into the
determination of the Company's allowance for credit losses.
The average balance of impaired loans decreased to $31.2 million in
2002 compared with $31.6 million in 2001, and there were no
foreclosures in 2002, compared to $10.6 million in 2001. The low
levels of problematic mortgage loans relative to the Company's
overall balance sheet are due to the ongoing decrease in the size of
the mortgage loan portfolio, the Company's active loan management
program and overall strength in market conditions.
Occasionally, the Company elects to restructure certain mortgage
loans if the economic benefits to the Company are believed to be more
advantageous than those achieved by acquiring the collateral through
foreclosure. At December 31, 2002 and 2001, the Company's loan
portfolio included $40.3 million and $56.3 million, respectively, of
non-impaired restructured loans.
3. Derivatives
The Company uses certain derivatives, such as futures, options, and
swaps, for purposes of hedging interest rate, market and foreign
exchange risks. These derivatives, when taken alone, may subject the
Company to varying degrees of market and credit risk; however, when
used for hedging, these instruments typically reduce risk. The
Company controls the credit risk of its financial contracts through
established credit approvals, limits, and monitoring procedures. The
Company has also developed controls within its operations to ensure
that only Board authorized derivative transactions are executed. In
addition, the Company uses derivatives to synthetically create
investments that are either more expensive to acquire, or otherwise
unavailable, in the cash markets. Note 1 to the Consolidated
Financial Statements contains a discussion of the Company's
outstanding derivatives.
4. Outlook
The U.S. economic recovery is proving to be sluggish and uneven. The
Company expects growth to be below trend for the next few quarters,
gaining momentum through the second half of 2003. Currently,
economic indicators are mixed. Expectations are for domestic real
GDP growth in 2002 and 2003 of approximately 2.5%. Globally,
economies remain weak with the exception of China.
The Federal Reserve Board responded aggressively to weaker than
expected economic data with a 50 basis point cut in the Fed Funds
rate to 1.25% at the November 2002 meeting. While stimulative policy
and strong underlying productivity growth were expected to restore
the economy to a sustainable trend rate of growth, persistent stock
market weakness has undercut monetary policy stimulus and economic
risks are biased to a below potential growth scenario.
Interest rates across the curve bottomed in early October after
declining to levels not experienced since the 1960's, rising
modestly since then. It is likely that inflation and yields will
stay relatively low over the intermediate term, providing the
Federal Reserve Board significant latitude to allow the economy to
gain some momentum before they begin to resume an upward bias.
The Company's investment portfolio is well positioned for the
current interest rate environment. The portfolio is well diversified
and comprised of high quality, relatively stable assets. The Company
opportunistically added exposure in investment grade corporate
securities at historically wide spreads in 2002 in addition to
investing in structured securities with moderate interest rate
sensitivity. It is the Company's philosophy and intent to maintain
its proactive portfolio management policies in an ongoing effort to
ensure the quality and performance of its investments.
E. LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that vary among its
principal product lines. Life insurance and pension plan reserves are
primarily long-term liabilities. Accident and health reserves, including
long-term disability, consist of both short-term and long-term
liabilities. Life insurance and pension plan reserve requirements are
usually stable and predictable, and are supported primarily by
long-term, fixed income investments. Accident and health claim demands
are stable and predictable but generally shorter term, requiring greater
liquidity.
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and
utilizing positive cash flows from operations. Liquidity for the Company
has remained strong, as evidenced by significant amounts of short-term
investments and cash that totaled $864.9 million and $641.4 million as
of December 31, 2002 and 2001, respectively. In addition, as of December
31, 2002 and 2001, 97% and 98%, respectively, of the bond portfolio
carried an investment grade rating, thereby providing significant
liquidity to the Company's overall investment portfolio.
Funds provided by premiums and fees, investment income and maturities of
investment assets are reasonably predictable and normally exceed
liquidity requirements for payment of claims, benefits, and expenses.
However, since the timing of available funds cannot always be matched
precisely to commitments, imbalances may arise when demands for funds
exceed those on hand. Also, a demand for funds may arise as a result of
the Company taking advantage of current investment opportunities. The
sources of the funds that may be required in such situations include the
issuance of commercial paper and equity securities.
Capital resources provide protection for policyholders and financial
strength to support the underwriting of insurance risks, and allow for
continued business growth. The amount of capital resources that may be
needed is determined by the Company's senior management and Board of
Directors, as well as by regulatory requirements. The allocation of
resources to new long-term business commitments is designed to achieve
an attractive return, tempered by considerations of risk and the need to
support the Company's existing business.
The Company's financial strength provides the capacity and flexibility
to enable it to raise funds in the capital markets through the issuance
of commercial paper. The Company continues to be well capitalized, with
sufficient borrowing capacity to meet the anticipated needs of its
business. The Company had $96.6 million of commercial paper outstanding
at December 31, 2002 compared with $97.0 million at December 31, 2001.
The commercial paper has been given a rating of A-1+ by Standard &
Poors' Corporation and a rating of P-1 by Moody's Investors Services,
each being the highest rating available. In addition, the Company issued
a surplus note to GWL&A Financial in 1999. The surplus note bears
interest at 7.25% and is due June 30, 2048.
F. OBLIGATIONS RELATING TO DEBT AND LEASES
The Company's obligations relating to debt and leases at December 31,
2002 were as follows:
2003 2004 2005 2006 2007 Thereafter
-------- -------- -------- -------- -------- -----------
Related party $ $ $ $ 25.0 $ $ 175.0
note
Operating leases 26.3 23.5 22.1 20.6 15.4 33.1
-------- -------- -------- -------- -------- -----------
Total contractual
obligations $ 26.3 $ 23.5 $ 22.1 $ 45.6 $ 15.4 $ 208.1
======== ======== ======== ======== ======== ===========
G. ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement No
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - A Replacement of FASB Statement No.
125" (SFAS No. 140), which revises the standards for accounting for
securitizations and other transfers of financial assets and collateral,
and requires certain disclosures. SFAS No. 140 was effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. Certain disclosure
requirements under SFAS No. 140 were effective December 15, 2000, and
these requirements have been incorporated in the Company's financial
statements. The adoption of SFAS No. 140 did not have a material effect
on the financial position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements" that provides guidance with respect to revenue recognition
issues and disclosures. As amended by SAB No. 101B, "Second Amendment:
Revenue Recognition in Financial Statements," the Company implemented
the provisions of SAB 101 during the fourth quarter of 2000. The
adoption of SAB No. 101 did not affect the Company's revenue recognition
practices.
Effective January 1, 2001, the Company adopted FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133), as amended by FASB Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." SFAS 133
requires all derivatives, whether designated in hedging relationships or
not, to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable to the
hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of the changes in the fair
value of the derivative are recorded in accumulated other comprehensive
income and are recognized in the income statement when the hedged item
affects earnings. Ineffective portions of changes in the fair value of
cash flow hedges are recognized in earnings. The adoption of SFAS No.
133 resulted in an approximate $1.0 million after-tax increase to
accumulated other comprehensive income, which has been included in the
2001 change in other comprehensive income in the Statement of
Stockholder's Equity. This amount is not material to the Company's
financial position or results of operations.
Effective April 1, 2001, the Company adopted Emerging Issues Task Force
Issue No. 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interest in Securitized Financial
Assets" (EITF 99-20). This pronouncement requires investors in certain
asset-backed securities to record changes in their estimated yield on a
prospective basis and to apply specific evaluation methods to these
securities for an other-than-temporary decline in value. The adoption of
EITF 99-20 did not have a material impact on the Company's financial
position or results of operations.
On June 29, 2001 Statement No.141, "Business Combinations" (SFAS No.
141) was approved by the FASB. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated
after June 30, 2001. The Company implemented SFAS No. 141 on July 1,
2001. Adoption of the Statement did not have a material impact on the
Company's financial position or results of operations.
On June 29, 2001, Statement No. 142, "Goodwill and Other Intangible
Assets" (SFAS No. 142) was approved by the FASB. SFAS No. 142 changes
the accounting for goodwill and certain other intangibles from an
amortization method to an impairment-only approach. Amortization of
goodwill, including goodwill recorded in past business combinations,
ceased upon adoption of this statement. The Company implemented SFAS No.
142 on January 1, 2002. Adoption of this statement did not have a
material impact on the Company's financial position or results of
operations.
In August 2001, the FASB issued Statement No.144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No.144). SFAS No.144
superceded prior accounting guidance relating to impairment of
long-lived assets and provides a single accounting methodology for
long-lived assets to be disposed of, and also supercedes existing
guidance with respect to reporting the effects of the disposal of a
business. SFAS No.144 was adopted January 1, 2002 without a material
impact on the Company's financial position or results of operations.
In July 2001, the SEC released Staff Accounting Bulletin No. 102,
Selected Loan Loss Allowance Methodology and Documentation Issues (SAB
102). SAB 102 summarizes certain of the SEC's views on the development,
documentation and application of a systematic methodology for
determining allowances for loan and lease losses. Adoption of SAB 102 by
the Company did not have a material impact on the Company's financial
position or results of operations.
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS No. 145). FASB No. 4 required all gains or losses
from extinguishment of debt to be classified as extraordinary items net
of income taxes. SFAS No. 145 requires that gains and losses from
extinguishment of debt be evaluated under the provision of Accounting
Principles Board Opinion No. 30, and be classified as ordinary items
unless they are unusual or infrequent or meet the specific criteria for
treatment as an extraordinary item. This statement is effective January
1, 2003. The Company does not expect this statement to have a material
effect on the Company's financial position or results of operations.
In July 2002, the FASB issued Statement No. 146 " Accounting for Costs
Associated With Exit or Disposal Activities" (SFAS No. 146). This
statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in
a Restructuring)." This statement requires recognition of a liability
for a cost associated with an exit or disposal activity when the
liability is incurred, as opposed to when the entity commits to an exit
plan under EITF 94-3. SFAS No. 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. The
Company does not expect this statement to have a material impact on the
Company's financial position or results of operations
See Note 1 to the Consolidated Financial Statements for additional
information regarding accounting pronouncements.
ITEM 7a.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's investment 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 liabilities' projected cash flows. The Company is
then protected against interest rate changes, as any change in the fair
value of the assets will be offset by a similar change in the fair value
of the liabilities. For products with uncertain timing of benefit
payments such as portfolio annuities and life insurance, the Company
invests in fixed income assets with expected cash flows that are earlier
than the expected timing of the benefit payments. The Company can then
react to changing interest rates sooner as these assets mature for
reinvestment.
The Company also manages risk with interest rate derivatives such as
interest rate caps that would pay the Company investment income if
interest rates rise above the level specified in the cap. These
derivatives are only used to reduce risk and are not used for
speculative purposes.
To manage foreign currency exchange risk, the Company uses currency
swaps to convert foreign currency denominated investments back to United
States dollars. These swaps are purchased each time a foreign currency
denominated asset is purchased.
The Company has estimated the possible effects on its investments of
interest rate changes at December 31, 2002. If interest rates increased
by 100 basis points (1%), the fair value of the fixed income assets
would decrease by approximately $326 million. This calculation uses
projected asset cash flows, discounted back to December 31, 2002. The
cash flow projections are shown in the table below. The table below
shows cash flows rather than expected maturity dates because many of the
Company's assets have substantial expected principal payments prior to
the final maturity date. The fair value shown in the table below was
calculated using spot discount interest rates that varied by the year in
which the cash flows were expected to be received. These spot rates in
the benchmark calculation ranged from 2.77% to 7.70%.
Projected Cash Flows by Calendar Year
[$ millions] There- Undiscounted Fair
2003 2004 2005 2006 2007 after Total Value
----- ----- ------ ------ ------ ------ ------------ --------
Benchmark 2,271 2,044 1,988 1,347 1,384 3,374 12,409 10,588
Interest
rates
up 1% 2,044 1,926 2,016 1,408 1,379 3,829 12,601 10,262
The Company administers separate account variable annuities for
retirement savings products. The Company collects a fee from each
account, and this fee is a percentage of the account balance. There is a
market risk of lost fee revenue to the Company if equity and bond
markets decline. If the equity and bond portfolios decline by 10%, the
Company's fee revenue would decline by approximately $8.5 million per
year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following are the Company's Consolidated Financial Statements for
the years ended December 31, 2002, 2001, and 2000 and the Independent
Auditor's Report thereon.
GWL&A FINANCIAL INC.
Consolidated Financial Statements for the Years
Ended December 31, 2002, 2001, and 2000
and Independent Auditors' Report
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. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, stockholder's equity, and cash flows for each
of the three years ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of GWL&A Financial Inc. and
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Denver, Colorado
January 27, 2003
GWL&A FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
==============================================================================================
(Dollars in Thousands)
2002 2001
------------------- -------------------
ASSETS
INVESTMENTS:
Fixed maturities, available-for-sale, at fair
value
(amortized cost $9,910,662 and $9,904,453) $ 10,371,152 $ 10,116,175
Common stock, at fair value (cost $102,862 and
$74,107) 90,188 73,344
Mortgage loans on real estate (net of allowances
of $55,654 and $57,654) 417,412 613,453
Real estate 3,735 11,838
Policy loans 2,964,030 3,000,441
Short-term investments, available-for-sale (cost
$710,085 and $427,866) 710,297 425,198
------------------- -------------------
Total Investments 14,556,814 14,240,449
OTHER ASSETS:
Cash 154,631 216,209
Reinsurance receivable:
Related party 3,104 3,678
Other 238,049 278,674
Deferred policy acquisition costs 267,846 275,570
Investment income due and accrued 133,166 130,775
Amounts receivable related to uninsured accident
and health plan claims (net of allowances of
$42,144 and $53,431) 86,228 132,988
Premiums in course of collection (net of
allowances of $12,011 and $22,217) 54,494 99,811
Deferred income taxes 71,206 112,940
Other assets 754,869 745,617
SEPARATE ACCOUNT ASSETS 11,338,376 12,584,661
------------------- -------------------
TOTAL ASSETS $ 27,658,783 $ 28,821,372
=================== ===================
See notes to consolidated financial statements. (Continued)
==============================================================================================
2002 2001
-------------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves:
Related party $ 518,587 $ 532,374
Other 11,732,627 11,679,122
Policy and contract claims 378,995 401,389
Policyholders' funds 299,730 242,916
Provision for policyholders' dividends 76,983 74,740
Undistributed earnings on participating business 170,456 163,086
GENERAL LIABILITIES:
Due to GWL 33,766 41,874
Repurchase agreements 323,200 250,889
Commercial paper 96,645 97,046
Other liabilities 849,370 1,107,190
SEPARATE ACCOUNT LIABILITIES 11,338,376 12,584,661
-------------- --------------
Total Liabilities 25,818,735 27,175,287
-------------- --------------
COMMITMENTS AND CONTINGENCIES:
GUARANTEED PREFERRED BENEFICIAL
INTERESTS IN THE COMPANY'S JUNIOR
SUBORDINATED DEBENTURES 175,000 175,000
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value, 50,000,000
shares authorized, 0 shares issued and
outstanding
Preferred stock, $0 par value; 500,000 shares
authorized; 0 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 726,741 719,833
Accumulated other comprehensive income 150,616 76,507
Retained earnings 787,441 674,495
-------------- --------------
Total Stockholder's Equity 1,665,048 1,471,085
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 27,658,783 $ 28,821,372
============== ==============
See notes to consolidated financial statements. (Concluded)
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
==============================================================================================
(Dollars in Thousands)
2002 2001 2000
-------------- -------------- --------------
REVENUES:
Premiums:
Related party $ 16,715 $ 18,144 $ 20,853
Other (net of premiums ceded totaling
$83,789, $82,028, and $115,404) 1,103,380 1,185,495 1,311,713
Fee income 883,562 947,255 871,627
Net investment income (expense):
Related party (1,270) (1,859) (1,830)
Other 920,643 936,878 926,949
Net realized gains on investments 41,626 46,825 28,283
-------------- -------------- --------------
2,964,656 3,132,738 3,157,595
-------------- -------------- --------------
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
Reinsurance recoveries totaling, $50,974,
$40,144, and $62,803) 936,215 1,029,495 1,122,560
Increase in reserves 71,348 58,433 53,550
Interest paid or credited to contractholders 498,549 530,027 490,131
Provision for policyholders' share of
earnings on participating business 7,790 2,182 5,188
Dividends to policyholders 78,851 76,460 74,443
-------------- -------------- --------------
1,592,753 1,696,597 1,745,872
Commissions 185,450 197,099 204,444
Operating expenses (income):
Related party (861) (1,043) (704)
Other 742,852 788,157 769,493
Premium taxes 30,737 36,921 45,298
Special Charges 127,040
-------------- -------------- --------------
2,550,931 2,844,771 2,764,403
-------------- -------------- --------------
INCOME BEFORE INCOME TAXES 413,725 287,967 393,192
-------------- -------------- --------------
PROVISION FOR INCOME TAXES:
Current 126,213 137,052 108,529
Deferred 3,993 (41,993) 25,531
-------------- -------------- --------------
130,206 95,059 134,060
-------------- -------------- --------------
NET INCOME $ 283,519 $ 192,908 $ 259,132
============== ============== ==============
See notes to consolidated financial statements.
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
==============================================================================================
(Dollars in Thousands)
Accumulated Other
Comprehensive
Income (Loss)
---------------------------------
---------------------------------
Additional Unrealized Minimum
Preferred Common Paid-in Gains Pension Retained
(Losses) Liability
Stock Stock Capital on Securities Adjustment Earnings Total
--------- ---------- ------------ -------------- ----------------- ---------- ------------
BALANCE, JANUARY 1, 2000 $ 0 $ 250 $ 707,348 $ (84,861) $ $ 547,237 $ 1,169,974
--------- ---------- ------------ -------------- ----------------- ---------- ------------
Net income 259,132 259,132
Other comprehensive income 118,533 118,533
------------
Total comprehensive income 377,665
------------
Dividends (137,149) (137,149)
Capital contributions -
Parent stock options 15,052 15,052
Income tax benefit on stock
Compensation 2,336 2,336
--------- ---------- ------------ -------------- ----------------- ---------- ------------
BALANCE, DECEMBER 31, 2000 0 250 724,736 33,672 669,220 1,427,878
--------- ---------- ------------ -------------- ----------------- ---------- ------------
Net income 192,908 192,908
Other comprehensive income 42,835 42,835
------------
Total comprehensive income 235,743
------------
Dividends (187,633) (187,633)
Capital contributions adjustment -
Parent stock options (12,098) (12,098)
Income tax benefit on stock
Compensation 7,195 7,195
--------- ---------- ------------ -------------- ----------------- ---------- ------------
BALANCE, DECEMBER 31, 2001 0 250 719,833 76,507 674,495 1,471,085
--------- ---------- ------------ -------------- ----------------- ---------- ------------
Net income 283,519 283,519
Other comprehensive income 86,993 (12,884) 74,109
------------
Total comprehensive income 357,628
------------
Dividends (170,573) (170,573)
Income tax benefit on stock
compensation 6,908 6,908
--------- ---------- ------------ -------------- ----------------- ---------- ------------
BALANCE, DECEMBER 31, 2002 $ 0 $ 250 $ 726,741 $ 163,500 $ (12,884) $ 787,441 $ 1,665,048
========= ========== ============ ============== ================= ========== ============
See notes to consolidated financial statements.
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
==============================================================================================
(Dollars in Thousands)
2002 2001 2000
-------------- -------------- --------------
OPERATING ACTIVITIES:
Net income $ 283,519 $ 192,908 $ 259,132
Adjustments to reconcile net income to net
cash provided by operating activities:
earnings allocated to participating
policyholders 7,790 2,182 5,188
Amortization of investments (76,002) (82,955) (62,428)
Net realized gains on investments (41,626) (46,825) (28,283)
Depreciation and amortization
(including goodwill impairment) 37,639 62,101 41,693
Deferred income taxes 3,993 (41,993) 25,531
Stock compensation (adjustment) (12,098) 15,052
Changes in assets and liabilities, net of effects from purchase of subsidiary:
Policy benefit liabilities 622,854 334,025 310,511
Reinsurance receivable 41,199 (48,384) (35,368)
Receivables 89,686 153,350 (128,385)
Bank overdrafts (41,901) (29,121) 102,073
Other, net (205,305) 202,368 (214,144)
-------------- -------------- --------------
Net cash provided by operating 721,846 685,558 290,572
activities
-------------- -------------- --------------
(Continued)
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
================================================================================================
(Dollars in Thousands)
2002 2001 2000
-------------- -------------- --------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
Redemptions of investments:
Fixed maturities
Held-to-maturity
Sales 8,571
Maturities and redemptions 323,728
Available-for-sale
Sales 5,729,919 5,201,692 1,460,672
Maturities and redemptions 1,456,176 1,244,547 887,420
Mortgage loans 210,224 224,810 139,671
Real estate 3,570 8,910
Common stock 2,798 38,331 61,889
Purchases of investments:
Fixed maturities
Held-to-maturity (100,524)
Available-for-sale (7,369,389) (6,878,203) (2,863,803)
Mortgage loans (4,208)
Real estate (2,768) (3,124) (20,570)
Common stock (29,690) (27,777) (52,972)
Corporate owned life insurance (100,000)
Other, net (77,769) 95,808
Acquisitions, net of cash acquired 82,214
-------------- -------------- --------------
Net cash used in investing
activities $ (76,929) $ (203,916) $ (69,002)
============== ============== ==============
(Continued)
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
================================================================================================
(Dollars in Thousands)
2002 2001 2000
-------------- -------------- --------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (599,724) $ (483,285) $ (220,167)
Due to GWL (8,108) (1,207) 7,096
Dividends paid (170,573) (187,633) (137,149)
Net commercial paper borrowings
(repayments) (401) (585) 97,631
Net repurchase agreements
borrowings (repayments) 72,311 250,889 (80,579)
-------------- -------------- --------------
Net cash used in financing activities (706,495) (421,821) (333,168)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH (61,578) 59,821 (111,598)
CASH, BEGINNING OF YEAR 216,209 156,388 267,986
-------------- -------------- --------------
CASH, END OF YEAR $ 154,631 $ 216,209 $ 156,388
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 164,863 $ 59,895 $ 78,510
Interest 16,697 17,529 21,060
Non-cash financing activity:
Effect of capital - Parent stock options (12,098) 15,052
See notes to consolidated financial statements. (Concluded)
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
================================================================================
(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 Great-West Lifeco Inc., a Canadian
holding company (the Parent or LifeCo). 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.
On December 31, 2000, the Company and certain affiliated companies
completed a corporate reorganization. Prior to December 31, 2000, GWL&A
Financial was an indirect wholly-owned subsidiary of The Great-West Life
Assurance Company (GWL). Under the new structure, GWL&A Financial and GWL
each continue to be indirectly and directly, respectively, owned by
Great-West Lifeco Inc., a Canadian holding company (the Parent or LifeCo),
but GWL no longer holds an equity interest in the Company or GWL&A
Financial.
Basis of Presentation - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates are required to account for policy
reserves, allowances for credit losses, deferred policy acquisition costs,
and valuation of privately placed fixed maturities. Actual results could
differ from those estimates. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All material
inter-company transactions and balances have been eliminated in
consolidation.
Certain reclassifications have been made to the 2001 and 2000 financial
statements and related footnotes to conform to the 2002 presentation.
These changes in classification had no effect on previously reported
stockholder's equity or net income.
Investments - Investments are reported as follows:
1. Management has classified its fixed maturities as available for sale
and carries them at fair value with the net unrealized gains and
losses (net of deferred taxes) reported as accumulated other
comprehensive income (loss) in stockholder's equity.
Premiums and discounts are recognized as a component of net
investment income using the effective interest method. Realized gains
and losses, and declines in value judged to be other-than-temporary
are included in net realized gains/(losses) on investments.
2. Mortgage loans on real estate are carried at their unpaid balances
adjusted for any unamortized premiums or discounts and any allowances
for uncollectible accounts. Interest income is accrued on the unpaid
principal balance. Discounts and premiums are amortized to net
investment income using the effective interest method. Accrual of
interest is discontinued on any impaired loans where collection of
interest is doubtful.
The Company maintains an allowance for credit losses at a level that,
in management's opinion, is sufficient to absorb credit losses on its
impaired loans. Management's judgement is based on past loss
experience, current and projected economic conditions, and extensive
situational analysis of each individual loan. The measurement of
impaired loans is based on the fair value of the collateral.
3. Real estate is carried at cost. The carrying value of real estate is
subject to periodic evaluation of recoverability.
4. Investments in common stock are carried at fair value with net
unrealized gains and losses (net of deferred taxes) reported as
accumulated other comprehensive income (loss) in stockholder's
equity.
5. Policy loans are carried at their unpaid balances.
6. Short-term investments include securities purchased with initial
maturities of one year or less and are carried at fair value. The
Company considers short-term investments to be available-for-sale.
7. Gains and losses realized on disposal of investments are determined
on a specific identification basis.
Cash - Cash includes only amounts in demand deposit accounts.
Internal Use Software - Capitalized internal use software development
costs of $55,363 and $44,914 are included in other assets at December 31,
2002, and 2001, respectively. The Company capitalized, net of
depreciation, $10,448, $6,896 and $17,309 of internal use software
development costs for the years ended December 31, 2002, 2001 and 2000,
respectively.
Deferred Policy Acquisition Costs - Policy acquisition costs, which
primarily consist of sales commissions and costs associated with the
Company's group sales representatives related to the production of new
business, have been deferred to the extent recoverable. These costs are
variable in nature and are dependent upon sales volume. Deferred costs
associated with the annuity products are being amortized over the life of
the contracts in proportion to the emergence of gross profits.
Retrospective adjustments of these amounts are made when the Company
revises its estimates of current or future gross profits. Deferred costs
associated with traditional life insurance are amortized over the premium
paying period of the related policies in proportion to premium revenues
recognized. Amortization of deferred policy acquisition costs totaled
$38,707, $44,096, and $36,834 in 2002, 2001, and 2000, respectively.
Separate Accounts - Separate account assets and related liabilities are
carried at fair value. The Company's separate accounts invest in shares of
Maxim Series Fund, Inc. and Orchard Series Fund, open-end management
investment companies which are affiliates of the Company, shares of other
non-affiliated mutual funds, and government and corporate bonds.
Investment income and realized capital gains and losses of the separate
accounts accrue directly to the contractholders and, therefore, are not
included in the Company's statements of income. Revenues to the Company
from the separate accounts consist of contract maintenance fees,
administrative fees, and mortality and expense risk charges.
Life Insurance and Annuity Reserves - Life insurance and annuity policy
reserves with life contingencies of $8,029,337 and $7,941,905 at December
31, 2002 and 2001, 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 $4,152,594 and
$4,188,553 at December 31, 2002 and 2001, respectively, are established at
the contractholder's account value.
Reinsurance - Policy reserves ceded to other insurance companies are
carried as a reinsurance receivable on the balance sheet. The cost of
reinsurance related to long-duration contracts is accounted for over the
life of the underlying reinsured policies using assumptions consistent
with those used to account for the underlying policies (see Note 5).
Policy and Contract Claims - Policy and contract claims include provisions
for reported life and health claims in process of settlement, valued in
accordance with the terms of the related policies and contracts, as well
as provisions for claims incurred and unreported based primarily on prior
experience of the Company.
Participating Fund Account - Participating life and annuity policy
reserves are $4,947,081 and $4,844,214 at December 31, 2002 and 2001,
respectively. Participating business approximates 24.8%, 25.8%, and 28.6%
of the Company's ordinary life insurance in force and 80.2%, 85.4%, and
85.2% of ordinary life insurance premium income for the years ended
December 31, 2002, 2001, and 2000, respectively.
The amount of dividends to be paid from undistributed earnings on
participating business is determined annually by the Board of Directors.
Earnings allocable to participating policyholders are consistent with
established Company practice.
The Company has established a Participating Policyholder Experience
Account (PPEA) for the benefit of all participating policyholders of which
is included in the accompanying consolidated balance sheets. Earnings
associated with the operation of the PPEA are credited to the benefit of
all participating policyholders. In the event that the assets of the PPEA
are insufficient to provide contractually guaranteed benefits, the Company
must provide such benefits from its general assets.
The Company has also established a Participation Fund Account (PFA) for
the benefit of the participating policyholders previously transferred to
the Company from GWL under an assumption reinsurance transaction. The PFA
is part of the PPEA. Earnings derived from the operation of the PFA, net
of a management fee paid to the Company, accrue solely for the benefit of
the transferred participating policyholders.
Repurchase Agreements and Securities Lending - The Company enters into
repurchase agreements with third-party broker/dealers in which the Company
sells securities and agrees to repurchase substantially similar securities
at a specified date and price. Such agreements are accounted for as
collateralized borrowings. Interest expense on repurchase agreements is
recorded at the coupon interest rate on the underlying securities. The
repurchase fee is amortized over the term of the related agreement and
recognized as an adjustment to net investment income.
The Company receives collateral for lending securities that are held as
part of its investment portfolio. The company requires collateral in an
amount greater than or equal to 102% of the market value of domestic
securities loaned and 105% of foreign securities loaned. Such collateral
is used to replace the securities loaned in event of default by the
borrower. The Company's securitized lending transactions are accounted for
as collateralized borrowings.
Derivatives - The Company makes limited use of derivative financial
instruments to manage interest rate, market, and foreign exchange risk
associated with invested assets. Derivatives are not used for speculative
purposes. The Company controls the credit risk of its financial contracts
through credit approvals, limits, and monitoring procedures. As the
Company generally enters into derivative transactions only with high
quality institutions, no losses associated with non-performance on
derivative financial instruments have occurred or are expected to occur.
Derivative instruments typically used consist of interest rate swap
agreements, credit default swaps, interest rate floors and caps, foreign
currency exchange contracts, options, and interest rate futures.
Interest rate swap agreements are used to convert the interest rate on
certain debt securities from a floating rate to a fixed rate or vice
versa, to convert from a fixed rate to a floating rate. Credit default
swaps may be used in conjunction with another purchased security to
reproduce the investment characteristics of a cash investment in the same
credit. Interest rate floors and caps are interest rate protection
instruments that require the payment by a counter-party to the Company of
an interest rate differential only if interest rates fall or rise to
certain levels. The differential represents the difference between current
interest rates and an agreed upon rate, the strike rate, applied to a
notional principal amount. Foreign currency exchange contracts are used to
hedge the foreign exchange rate risk associated with bonds denominated in
other than U.S. dollars. Written call options are used in conjunction with
interest rate swap agreements to effectively convert convertible, fixed
rate bonds to non-convertible variable rate bonds as part of the Company's
overall asset/liability matching program. Purchased put options are used
to protect against significant drops in equity markets. Interest rate
futures are used to hedge the interest rate risks of forecasted
acquisitions of fixed rate fixed maturity investments.
The Company also uses derivatives to synthetically create investments that
are either more expensive to acquire or otherwise unavailable in the cash
markets. These securities, called replication synthetic asset transactions
(RSAT's), are a combination of a derivative and a cash security to
synthetically create a third replicated security. As of December 31, 2002,
the Company has one such security that has been created through the
combination of a credit default swap and U.S. Government Agency security.
These derivatives do not qualify as hedges and therefore, changes in fair
value are recorded in earnings.
Effective January 1, 2001, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), as amended by FASB
Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." The adoption of SFAS 133 resulted in an
approximate $1,000 after-tax increase to accumulated comprehensive income,
which has been included in the 2001 change in other comprehensive income
in the Statement of Stockholder's Equity.
The Statements require all derivatives, whether designated in hedging
relationships or not, to be recorded on the balance sheet at fair value.
If the derivative is designated as a fair value hedge, the changes in the
fair value of the derivative and of the hedged item attributable to the
hedged risk are recognized in earnings. If the derivative is designated as
a cash flow hedge, the effective portions of the changes in the fair value
of the derivative are recorded in accumulated other comprehensive income
and are recognized in the income statement when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow
hedges and changes in fair value of derivatives not qualifying for hedge
accounting are recognized in earnings.
The Company occasionally purchases a financial instrument that contains a
derivative instrument that is "embedded" in the financial instrument. Upon
purchasing the instrument, the Company assesses whether the economic
characteristics of the embedded derivative are clearly and closely related
to the economic characteristics of the remaining component of the
financial instrument (i.e, the host contract) and whether a separate
instrument with the same terms as the embedded instrument could meet the
definition of a derivative instrument. When it is determined that (1) the
embedded derivative possesses economic characteristics that are not
clearly and closely related to the economic characteristics of the host
contract, and (2) a separate instrument with the same terms would qualify
as a derivative instrument, the embedded derivative is separated from the
host contract, carried at fair value, and changes in its fair value are
included in earnings.
Hedge ineffectiveness of $177 and $907, determined in accordance with SFAS
No. 133, was recorded as a decrease to net investment income for the years
ended December 31, 2002 and 2001, respectively.
Derivative gains and losses included in accumulated other comprehensive
income (OCI) are reclassified into earnings at the time interest income is
recognized or interest receipts are received on bonds. Derivative gains of
$563 and $469 were reclassified to net investment income in 2002 and 2001,
respectively. The Company estimates that $837 of net derivative gains
included in OCI will be reclassified into net investment income within the
next twelve months.
Revenue Recognition - In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements (SAB No. 101)," which provides
guidance with respect to revenue recognition issues and disclosures. As
amended by SAB No. 101B, "Second Amendment: Revenue Recognition in
Financial Statements," the Company implemented the provisions of SAB No.
101 during the fourth quarter of 2000. The adoption of SAB No. 101 did not
affect the Company's revenue recognition practices.
Recognition of Premium and Fee Income and Benefits and Expenses - Life
insurance premiums are recognized when due. Annuity premiums with life
contingencies are recognized as received. Accident and health premiums are
earned on a monthly pro rata basis. Revenues for annuity and other
contracts without significant life contingencies consist of contract
charges for the cost of insurance, contract administration, and surrender
fees that have been assessed against the contract account balance during
the period and are recognized when earned. Fee income is derived primarily
from contracts for claim processing or other administrative services
related to uninsured business and from assets under management. Fees from
contracts for claim processing or other administrative services are
recorded as the services are provided. Fees from assets under management,
which consist of contract maintenance fees, administration fees and
mortality and expense risk charges, are recognized when due. Benefits and
expenses on policies with life contingencies are associated with earned
premiums so as to result in recognition of profits over the life of the
contracts. This association is accomplished by means of the provision for
future policy benefit reserves. The average crediting rate on annuity
products was approximately 5.9%, 6.1%, and 6.2% in 2002, 2001, and 2000.
Income Taxes - Income taxes are recorded using the asset and liability
approach, which requires, among other provisions, the recognition of
deferred tax assets and liabilities for expected future tax consequences
of events that have been recognized in the Company's financial statements
or tax returns. In estimating future tax consequences, all expected future
events (other than the enactments or changes in the tax laws or rules) are
considered. Although realization is not assured, management believes it is
more likely than not that the deferred tax asset will be realized.
Stock Options - The Company applies the intrinsic value measurement
approach under APB Opinion No. 25, "Accounting for Stock Issued to
Employees", to stock-based compensation awards to employees, as
interpreted by AIN-APB 25 as it relates to accounting for stock options
granted by the Parent to Company employees (see Note 14).
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - FASB has issued Statement No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - A
replacement of FASB Statement No. 125" (SFAS No. 140), which revises the
standards for accounting for securitizations and other transfers of
financial assets and collateral, and requires certain disclosures. SFAS
140 was effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. Certain
disclosure requirements under SFAS No. 140 were effective December 15,
2000, and these requirements have been incorporated in the Company's
financial statements. The adoption of SFAS No. 140 did not have a
significant effect on the financial position or results of operations of
the Company.
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interest in Securitized Financial Assets - Effective April 1,
2001, the Company adopted Emerging Issues Task Force Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interest in Securitized Financial Assets" (EITF 99-20). This
pronouncement requires investors in certain asset-backed securities to
record changes in their estimated yield on a prospective basis and to
apply specific evaluation methods to these securities for an
other-than-temporary decline in value. The adoption of EITF 99-20 did not
have a material impact on the Company's financial position or results of
operations.
Business Combinations - On June 29, 2001 Statement of Financial Accounting
Standards (SFAS) FAS No.141, "Business Combinations" (SFAS No. 141) was
approved by the FASB. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001. The Company implemented SFAS No. 141 on July 1, 2001. Adoption of
the Statement did not have a material impact on the Company's financial
position or results of operations.
Goodwill and Other Intangible Assets - On June 29, 2001, SFAS No. 142,
"Goodwill and Other Intangible Assets" (SFAS No. 142) was approved by the
FASB. SFAS No. 142 changes the accounting for goodwill and certain other
intangibles from an amortization method to an impairment-only approach.
Amortization of goodwill, including goodwill recorded in past business
combinations, ceased upon adoption of this statement. The Company
implemented SFAS No. 142 on January 1, 2002. Adoption of this Statement
did not have a material impact on the Company's financial position or
results of operations.
Selected Loan Loss Allowance Methodology - In July 2001, the SEC released
Staff Accounting Bulletin No. 102, "Selected Loan Loss Allowance
Methodology and Documentation Issues" (SAB 102). SAB 102 summarizes
certain of the SEC's views on the development, documentation and
application of a systematic methodology for determining allowances for
loan and lease losses. Adoption of SAB 102 by the Company did not have a
material impact on the Company's financial position or results of
operations.
Long Lived Assets - In August 2001, the FASB issued SFAS No.144
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
No.144). SFAS No.144 supercedes current accounting guidance relating to
impairment of long-lived assets and provides a single accounting
methodology for long-lived assets to be disposed of, and also supercedes
existing guidance with respect to reporting the effects of the disposal of
a business. SFAS No.144 was adopted January 1, 2002 without a material
impact on the Company's financial position or results of operations.
Technical Corrections - April 2002, the FASB issued Statement No. 145
"Rescission of FASB No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections" (SFAS No. 145). FASB No. 4 required all gains
or losses from extinguishment of debt to be classified as extraordinary
items net of income taxes. SFAS No. 145 requires that gains and losses
from extinguishment of debt be evaluated under the provision of Accounting
Principles Board Opinion No. 30, and be classified as ordinary items
unless they are unusual or infrequent or meet the specific criteria for
treatment as an extraordinary item. This statement is effective January 1,
2003. The Company does not expect this statement to have a material effect
on the Company's financial position or results of operations.
Costs Associated With Exit or Disposal Activities - In July 2002, the FASB
issued Statement No. 146 "Accounting for Costs Associated With Exit or
Disposal Activities" (SFAS No. 146). This statement addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This statement
requires recognition of a liability for a cost associated with an exit or
disposal activity when the liability is incurred, as opposed to when the
entity commits to an exit plan under EITF 94-3. SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after
December 31, 2002. The Company does not expect this statement to have a
material impact on the Company's financial position or results of
operations.
2. ACQUISITIONS AND SPECIAL CHARGES
Effective January 1, 2000, the Company co-insured the majority of General
American Life Insurance Company's (General American) group life and health
insurance business, which primarily consists of administrative services
only and stop loss policies. The agreement converted to an assumption
reinsurance agreement January 1, 2001. The Company assumed approximately
$150,000 of policy reserves and miscellaneous liabilities in exchange for
$150,000 of cash and miscellaneous assets from General American.
On October 6, 1999, the Company entered into a purchase and sale agreement
with Allmerica Financial Corporation (Allmerica) to acquire via assumption
reinsurance Allmerica's group life and health insurance business on March
1, 2000. This business primarily consists of administrative services only,
and stop loss policies. The in-force business was immediately co-insured
back to Allmerica and then underwritten and retained by the Company upon
each policy renewal date. The effect of this transaction was not material
to the Company's results of operations or financial position.
Alta Health & Life Insurance Company (Alta) was acquired by the Company on
July 8, 1998. During 1999 and 2000 the Alta business continued to be run
as a free-standing unit but was converted to the Company's system and
accounting processes. This conversion program resulted in significant
issues related to pricing, underwriting, and administration of the
business. The Company has decided to discontinue writing new Alta business
and all Alta customers will be moved to the Company's contracts over time.
All Alta sales and administration staff have become employees of the
Company and the underwriting functions are being conducted by the
underwriting staff of the Company. In the second quarter of 2001, the
Company recorded a $127 million special charge ($80.9 million, net of
tax), related to its decision to cease marketing the Alta products. The
principal components of the charge include $46 million from premium
deficiency reserves, $29 million from premium receivables, $28 million
from uninsured accident and health plan claim receivables and $24 million
from goodwill and other.
3. RELATED-PARTY TRANSACTIONS
The Company performs administrative services for the U.S. operations of
GWL and, beginning in 2002, performs investment services for London
Reinsurance Group, an indirect subsidiary of GWL. The following represents
revenue from related parties 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, certificates in force and/or administered assets.
Years Ended December 31,
-------------------------------------------
2002 2001 2000
------------- ------------- -------------
Investment management revenue $ 892 $ 186 $ 120
Administrative and underwriting revenue 860 1,043 704
At December 31, 2002 and 2001, due to GWL includes $8,503 and $16,536 due
on demand and $25,338 and $25,338 of notes payable which bear interest and
mature on October 1, 2006. These notes may be prepaid in whole or in part
at any time without penalty; the issuer may not demand payment before the
maturity date. The amounts due on demand to GWL bear interest at the
public bond rate (4.75% and 6.0% at December 31, 2002 and 2001,
respectively) while the note payable bears interest at 5.4%.
Interest expense attributable to these related party obligations was
$2,162, $2,045, and $1,950 for the years ended December 31, 2002, 2001,
and 2000, respectively.
4. ALLOWANCES ON POLICYHOLDER RECEIVABLES
Amounts receivable for accident and health plan claims and premiums in the
course of collection are generally uncollateralized. Such receivables are
from policyholders dispersed throughout the United States and throughout
many industry groups.
The Company maintains an allowance for credit losses at a level that, in
management's opinion, is sufficient to absorb credit losses on its amounts
receivable related to uninsured accident and health plan claims and
premiums in course of collection. Management's judgement is based on past
loss experience and current and projected economic conditions.
Activity in the allowance for amounts receivable related to uninsured
accident and health plan claims is as follows:
2002 2001 2000
------------- ------------- -------------
Balance, beginning of year $ 53,431 $ 34,700 $ 31,200
Amounts acquired by reinsurance 6,207
Provisions charged (reversed) to operations (7,544) 50,500 7,700
Amounts written off - net (9,950) (31,769) (4,200)
------------- ------------- -------------
Balance, end of year $ 42,144 $ 53,431 $ 34,700
============= ============= =============
Activity in the allowance for premiums in course of collection is as
follows:
2002 2001 2000
------------- ------------- -------------
Balance, beginning of year $ 22,217 $ 18,700 $ 13,900
Amounts acquired by reinsurance 1,600
Provisions charged (reversed) to operations (5,729) 29,642 14,500
Amounts written off - net (6,077) (26,125) (9,700)
------------- ------------- -------------
Balance, end of year $ 12,011 $ 22,217 $ 18,700
============= ============= =============
5. REINSURANCE
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid by
ceding risks to other insurance enterprises under excess coverage and
co-insurance contracts. The Company retains a maximum of $1.5 million of
coverage per individual life.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to significant
losses from reinsurer insolvencies. At December 31, 2002 and 2001, the
reinsurance receivable had a carrying value of $241,153 and $282,352,
respectively.
The following schedule details life insurance in force and life and
accident/health premiums:
Percentage
of Amount
Reinsurance Reinsurance Assumed
Direct Ceded Assumed Net to Net
------------- ------------- ------------- ------------- -----------
December 31, 2002:
Life insurance in force:
Individual $ 43,324,059 $ 12,786,783 $ 7,280,731 37,818,007 19.3%
Group 51,385,610 7,186,698 58,572,308 12.3%
------------- ------------- ------------- -------------
Total $ 94,709,669 $ 12,786,783 $ 14,467,429 $ 96,390,315
============= ============= ============= =============
Premium Income:
Life insurance $ 312,388 $ 40,582 $ 41,245 $ 313,051 13.2%
728,972 43,047 128,820 814,745 15.8%
Accident/health
------------- ------------- ------------- -------------
Total $ 1,041,360 $ 83,629 $ 170,065 $ 1,127,796
============= ============= ============= =============
December 31, 2001:
Life insurance in force:
Individual $ 43,370,006 $ 8,330,282 $ 7,399,250 $ 42,438,974 17.4%
Group 56,650,090 9,888,796 66,538,886 14.9%
------------- ------------- ------------- -------------
Total $ 100,020,096 $ 8,330,282 $ 17,288,046 $ 108,977,860
============= ============= ============= =============
Premium Income:
Life insurance $ 384,688 $ 32,820 $ 37,442 $ 389,310 9.6%
830,970 49,001 42,750 824,719 5.2%
Accident/health
------------- ------------- ------------- -------------
Total $ 1,215,658 $ 81,821 $ 80,192 $ 1,214,029
============= ============= ============= =============
December 31, 2000:
Life insurance in force:
Individual $ 39,067,268 $ 5,727,745 $ 7,563,302 $ 40,902,825 18.5%
Group 75,700,120 20,610,896 96,311,016 21.4%
------------- ------------- ------------- -------------
Total $ 114,767,388 $ 5,727,745 $ 28,174,198 $ 137,213,841
============= ============= ============= =============
Premium Income:
Life insurance $ 349,097 $ 35,448 $ 88,994 $ 402,643 22.1%
827,044 79,705 175,294 922,633 19.0%
Accident/health
------------- ------------- ------------- -------------
Total $ 1,176,141 $ 115,153 $ 264,288 $ 1,325,276
============= ============= ============= =============
6. NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Net investment income is summarized as follows:
Years Ended December 31,
-------------------------------------------
2002 2001 2000
------------- ------------- -------------
Investment income:
Fixed maturities and short-term
Investments $ 673,833 $ 693,836 $ 675,286
Common stock 3,272 4,882 1,584
Mortgage loans on real estate 48,625 69,237 80,775
Real estate 2,815 1,113 1,863
Policy loans 209,608 200,533 191,320
Other 5,236 3,766 120
------------- ------------- -------------
943,389 973,367 950,948
Investment expenses, including interest on
amounts charged by the related parties
of $2,162, $2,045, and $1,950 24,016 38,348 25,829
------------- ------------- -------------
Net investment income $ 919,373 $ 935,019 925,119
============= ============= =============
Net realized gains (losses) on investments are as follows:
Years Ended December 31,
-------------------------------------------
2002 2001 2000
------------- ------------- -------------
Realized gains (losses):
Fixed maturities $ 33,455 $ 32,116 $ (16,752)
Common stock 1,639 13,052 33,411
Mortgage loans on real estate 1,493 1,657 2,207
Real estate 490
Provisions 5,039 8,927
------------- ------------- -------------
Net realized gains on investments $ 41,626 $ 46,825 $ 28,283
============= ============= =============
SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 2002 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------------------ ---------- ---------- ----------- ----------- -----------
U.S. Government CMO $ 1,304,614 $ 43,929 $ $ 1,348,543 $ 1,348,543
U.S. Government ABS 491,183 16,310 1,785 505,708 505,708
U.S. Government MBS 385,764 5,957 149 391,572 391,572
U.S. Government Other 445,281 19,589 4 464,866 464,866
Credit tenant loans 104,648 11,081 115,729 115,729
State and 1,019,049 100,256 194 1,119,111 1,119,111
municipalities
Foreign government 42,182 1,038 61 43,159 43,159
Corporate bonds 2,771,977 182,787 53,534 2,901,230 2,901,230
Mortgage-backed
securities - CMO 96,776 16,170 18 112,928 112,928
Public utilities 698,365 44,334 11,369 731,330 731,330
Asset-backed securities 2,138,025 86,261 27,089 2,197,197 2,197,197
Derivatives (3,422) 15,343 11,921 11,921
Collateralized mortgage
obligation 416,220 11,638 427,858 427,858
---------- ---------- ----------- ----------- -----------
$ 9,910,662 $ 554,693 $ 94,203 $ 10,371,152 $ 10,371,152
========== ========== =========== =========== ===========
Fixed maturities owned at December 31, 2001 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------------------ ---------- ---------- ----------- ----------- -----------
U.S. Government CMO $ 1,182,723 $ 18,025 $ 5,767 $ 1,194,981 $ 1,194,981
U.S. Government ABS 463,028 11,422 1,153 473,297 473,297
U.S. Government MBS 345,979 2,537 2,840 345,676 345,676
U.S. Government Other 559,932 8,878 1,810 567,000 567,000
State and 935,758 35,462 3,955 967,265 967,265
municipalities
Foreign government 26,466 1,824 28,290 28,290
Corporate bonds 2,943,635 114,871 71,504 2,987,002 2,987,002
Mortgage-backed
securities - CMO 97,136 7,020 104,156 104,156
Public utilities 647,754 22,823 5,997 664,580 664,580
Asset-backed securities 2,265,033 64,765 11,336 2,318,462 2,318,462
Derivatives 1,935 18,682 20,617 20,617
Collateralized mortgage
obligation 435,074 9,900 125 444,849 444,849
---------- ---------- ----------- ----------- -----------
$ 9,904,453 $ 316,209 $ 104,487 $ 10,116,175 $ 10,116,175
========== ========== =========== =========== ===========
The collateralized mortgage obligations consist primarily of sequential
and planned amortization classes with final stated maturities of two to
thirty years and expected average lives of less than one to fifteen years.
Prepayments on all mortgage-backed securities are monitored monthly and
amortization of the premium and/or the accretion of the discount
associated with the purchase of such securities is adjusted by such
prepayments.
See Note 9 for additional information on policies regarding estimated fair
value of fixed maturities.
The amortized cost and estimated fair value of fixed maturity investments
at December 31, 2002, by projected maturity, are shown below. Actual
maturities will likely differ from these projections because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Estimated
Cost Fair Value
-------------- --------------
Due in one year or less $ 592,856 615,583
Due after one year through five 2,509,745 2,684,171
years
Due after five years through ten 1,144,037 1,238,155
years
Due after ten years 857,672 875,859
Mortgage-backed securities 2,177,144 2,254,479
Asset-backed securities 2,629,208 2,702,905
-------------- --------------
$ 9,910,662 10,371,152
============== ==============
Proceeds from sales of securities available-for-sale were $5,729,919,
$5,201,692, and $1,460,672 during 2002, 2001, and 2000, respectively. The
realized gains on such sales totaled $45,315, $42,299, and $8,015 for
2002, 2001, and 2000, respectively. The realized losses totaled $10,410,
$10,186, and $24,053 for 2002, 2001, and 2000, respectively. During the
years 2002, 2001, and 2000, held-to-maturity securities with amortized
cost of $0, $0, and $8,571 were sold due to credit deterioration with
insignificant gains and losses.
During the fourth quarter of 2000, the Company transferred all securities
classified as held-to-maturity into the available-for-sale category. The
Company recorded a $19,908 unrealized gain associated with this transfer
in other comprehensive income, net of tax.
At December 31, 2002 and 2001, pursuant to fully collateralized securities
lending arrangements, the Company had loaned $284,990 and $278,471 of
fixed maturities, respectively.
The Company engages in hedging activities to manage interest rate, market,
credit and foreign exchange risk.
The following table summarizes the 2002 financial hedge instruments:
Notional Strike/Swap
December 31, 2002 Amount Rate Maturity
-------------------------- ------------- -------------------------- ------------------
Interest Rate Caps $ 1,122,000 7.64% - 11.65% (CMT) 02/03 - 01/05
Interest Rate Swaps 400,188 2.62% - 7.32% 02/03 - 11/09
Credit Default Swaps 128,157 N/A 02/03 - 11/07
Foreign Currency
Exchange Contracts 27,585 N/A 06/05 - 11/06
Options Calls 191,200 Various 05/04 - 06/07
Puts 15,000 Various 03/07 - 03/07
The following table summarizes the 2001 financial hedge instruments:
Notional Strike/Swap
December 31, 2001 Amount Rate Maturity
-------------------------- ------------- ---------------------------- -----------------
Interest Rate Caps $ 1,402,000 6.75% - 11.65% (CMT) 01/02 - 01/05
Interest Rate Swaps 365,018 3.13% - 7.32% 01/02- 12/06
Foreign Currency
Exchange Contracts 13,585 N/A 06/05 - 07/06
Options Calls 191,300 Various 01/02 - 01/06
Puts 131,000 Various 12/01 - 12/02
CMT - Constant Maturity Treasury Rate
The Company no longer actively invests in mortgage loans. The following is
information with respect to impaired mortgage loans:
2002 2001
========================================================= -------------- --------------
Loans, net of related allowance for credit losses of
=========================================================
$20,917 and $13,018 $ 8,200 $ 6,300
=========================================================
Loans with no related allowance for credit losses 2,638 5,180
=========================================================
Average balance of impaired loans during the year 31,243 31,554
=========================================================
Interest income recognized (while impaired) 2,007 1,617
=========================================================
Interest income received and recorded (while impaired)
=========================================================
using the cash basis method of recognition 2,249 1,744
=========================================================
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 $40,302 and $56,258 at December 31, 2002 and 2001,
respectively.
The following table presents changes in the allowance for credit losses:
2002 2001 2000
------------- ------------- -------------
Balance, beginning of year $ 57,654 $ 61,242 $ 77,416
Provision for loan losses (3,588) (8,927)
Charge-offs (139) (3,588) (7,247)
Recoveries 1,727
------------- ------------- -------------
Balance, end of year $ 55,654 $ 57,654 $ 61,242
============= ============= =============
8. COMMERCIAL PAPER
The Company has a commercial paper program that is partially supported by
a $50,000 standby letter-of-credit. At December 31, 2002, commercial paper
outstanding of $96,645 had maturities ranging from 3 to 66 days and
interest rates ranging from 1.40% to 1.88%. At December 31, 2001,
commercial paper outstanding of $97,046 had maturities from 4 to 63 days
and an interest rates ranging from 1.91% to 2.55%.
9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
December 31,
----------------------------------------------------------
2002 2001
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
ASSETS:
Fixed maturities and
short-term investments $ 11,081,449 11,081,449 $ 10,541,373 $ 10,541,373
Mortgage loans on real
estate 417,412 429,907 613,453 624,102
Policy loans 2,964,030 2,964,030 3,000,441 3,000,441
Common stock 90,188 90,188 73,344 73,344
LIABILITIES:
Annuity contract reserves
without life 4,152,594 4,228,080 4,188,553 4,210,759
contingencies
Policyholders' funds 299,730 299,730 242,916 242,916
Due to GWL 33,766 32,391 41,874 41,441
Commercial paper 96,645 96,645 97,046 97,046
Repurchase agreements 323,200 323,200 250,889 250,889
Guaranteed preferred
beneficial interest in the
company's junior 175,000 176,960 175,000 175,000
subordinated debentures
The estimated fair values of financial instruments have been determined
using available information and appropriate valuation methodologies.
However, considerable judgement is required to interpret market data to
develop estimates of fair value. Accordingly, the estimates presented are
not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
The estimated fair value of fixed maturities and common stocks that are
publicly traded are obtained from an independent pricing service. To
determine fair value for fixed maturities not actively traded, the Company
utilizes discounted cash flows calculated at current market rates on
investments of similar quality and term. Fair values of derivatives of
$11,921 and $20,617 at December 31, 2002 and 2001, respectively,
consisting principally of interest rate swaps are included in fixed
maturities.
Mortgage loan fair value estimates generally are based on discounted cash
flows. A discount rate "matrix" is incorporated whereby the discount rate
used in valuing a specific mortgage generally corresponds to that
mortgage's remaining term and credit quality. The rates selected for
inclusion in the discount rate "matrix" reflect rates that the Company
would quote if placing loans representative in size and quality to those
currently in the portfolio.
Policy loans accrue interest generally at variable rates with no fixed
maturity dates and, therefore, estimated fair value approximates carrying
value.
The estimated fair value of annuity contract reserves without life
contingencies is estimated by discounting the cash flows to maturity of
the contracts, utilizing current crediting rates for similar products.
The estimated fair value of policyholders' funds is the same as the
carrying amount as the Company can change the crediting rates with 30 days
notice.
The estimated fair value of due to GWL is based on discounted cash flows
at current market rates on high quality investments.
The fair value of the guaranteed preferred beneficial interest in the
Company's junior subordinated debentures reflects the last trading price
in the public market at December 31, 2002.
The carrying value of repurchase agreements and commercial paper is a
reasonable estimate of fair value due to the short-term nature of the
liabilities.
The estimated fair value of derivatives, primarily consisting of interest
rate swaps which are held for other than trading purposes, is the
estimated amount the Company would receive or pay to terminate the
agreement at each year-end, taking into consideration current interest
rates and other relevant factors. Included in the net asset position for
interest rates swaps are $1,488 and $33 of liabilities in 2002 and 2001,
respectively. Included in the net asset position for foreign currency
exchange contracts are $2,518 and $127 of liabilities in 2002 and 2001,
respectively.
10. EMPLOYEE BENEFIT PLANS
The following table summarizes changes for the years ended December 31,
2002, 2001, and 2000 in the benefit obligations and in plan assets for the
Company's defined benefit pension plan and post-retirement medical plan.
Based on an accumulated pension benefit obligation of $167,552 at December
31, 2002, an additional minimum liability of $22,549 was recorded
resulting in a net accrued benefit liability of $4,236 as of December 31,
2002. There was no additional minimum pension liability required to be
recognized as of December 31, 2001 or 2000.
Post-Retirement
Pension Benefits Medical Plan
---------------------------- ----------------------------
2002 2001 2000 2002 2001 2000
-------- -------- -------- ------- -------- --------
Change in projected benefit
obligation
Benefit obligation at $ 150,521 $ 140,563 $ 126,130 $ 57,861 $ 33,018 $ 29,228
beginning of year
Service cost 8,977 8,093 7,062 3,516 3,331 2,305
Interest cost 11,407 9,718 9,475 3,138 3,303 2,167
Acquisition of new employees 7,823
Amendments 827 (22,529)
Actuarial (gain) loss 20,679 (2,640) 2,510 (9,814) 11,401
Benefits paid (6,364) (5,213) (4,614) (930) (1,015) (682)
-------- -------- -------- ------- -------- --------
Benefit obligation at end $ 186,047 $ 150,521 $ 140,563 $ 31,242 $ 57,861 $ 33,018
of year
-------- -------- -------- ------- -------- --------
Change in plan assets
Fair value of plan assets
at
beginning of year $ 187,661 $ 193,511 $ 192,093 $ $ $
Actual return on plan assets (17,981) (637) 6,032
Benefits paid (6,364) (5,213) (4,614)
-------- -------- -------- ------- -------- --------
Fair value of plan assets 163,316 187,661 193,511
at end of year
-------- -------- -------- ------- -------- --------
Funded (unfunded) status (22,731) 37,140 52,948 (31,242) (57,861) (33,018)
Unrecognized net actuarial 51,943 (1,499) (15,239) 4,361 14,659 3,430
(gain) loss
Unrecognized prior service 2,727 2,533 3,073 (9,392) 9,326 2,148
cost
Unrecognized net obligation
or (asset)
at transition (13,628) (15,142) (16,655) 12,120 12,928
Acquisition of GenAm (7,823)
employees
-------- -------- -------- ------- -------- --------
Prepaid (accrued) benefit 18,313
cost
Additional minimum liability (22,549)
-------- -------- -------- ------- -------- --------
Prepaid benefit cost/
(accrued benefit (4,236) 23,032 24,127 (36,273) (29,579) (14,512)
liability)
Intangible asset 2,727
Accumulated other
comprehensive
income adjustments 19,822
-------- -------- -------- ------- -------- --------
Net amount recognized $ 18,313 $ 23,032 $ 24,127 $ (36,273$ (29,579)$ (14,512)
======== ======== ======== ======= ======== ========
Components of net periodic
benefit cost
Service cost $ 8,977 $ 8,093 $ 7,062 $ 3,516 $ 3,331 $ 2,305
Interest cost 11,406 9,718 9,475 3,138 3,303 2,167
Expected return on plan (14,782) (15,276) (17,567)
assets
Amortization of transition (1,514) (1,514) (1,514) 808 808 808
obligation
Amortization of
unrecognized prior
service cost 632 541 541 161 645 162
Amortization of unrecognized
prior service cost - GenAm (484)
Amortization of gain from
earlier
periods (467) (879) 172 34
-------- -------- -------- ------- -------- --------
Net periodic (benefit) cost $ 4,719 $ 1,095 $ (2,882) $ 7,623 $ 7,775 $ 5,476
======== ======== ======== ======= ======== ========
Weighted-average
assumptions as
of December 31
Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Expected return on plan 8.00% 8.00% 9.25% 8.00% 8.00% 9.25%
assets
Rate of compensation 3.92% 4.00% 5.00% 3.92% 4.00% 5.00%
increase
The Company-sponsored post-retirement medical plan (medical plan) provides
health benefits to retired employees. The medical plan is contributory and
contains other cost sharing features, which may be adjusted annually for
the expected general inflation rate. The Company's policy is to fund the
cost of the medical plan benefits in amounts determined at the discretion
of management. The Company made no contributions to this plan in 2002,
2001, or 2000.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the medical plan. For measurement purposes, a 9.5%
annual rate of increase in the per capita cost of covered health care
benefits was assumed and that the rate would gradually decrease to a level
of 5.25% by 2011. Additionally, it was assumed that the Company's cost for
retirees eligible for health care benefits under Medicare would be limited
to an increase of 3% starting in 2003, due to a plan change. A
one-percentage-point change in assumed health care cost trend rates would
have the following effects:
1-Percentage 1-Percentage
Point Point
Increase Decrease
----------------- -----------------
Increase (decrease) on total of service and
interest cost on components $ 1,506 $ (1,166)
Increase (decrease) on post-retirement benefit
obligation 2,221 (1,907)
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, 2002, 2001, and
2000 totaled $7,257, $7,773, and $6,130, respectively.
The Company has a deferred compensation plan providing key executives with
the opportunity to participate in an unfunded, deferred compensation
program. Under the program, participants may defer base compensation and
bonuses, and earn interest on their deferred amounts. The program is not
qualified under Section 401 of the Internal Revenue Code. Participant
deferrals, which are reflected in other liabilities, are $20,606 and
$20,033 as of December 31, 2002 and 2001, respectively. The participant
deferrals earn interest at 7.3% at December 31, 2002, 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, 2002, 2001,
and 2000 was $1,459, $1,434, and $1,358, respectively.
The Company also provides a supplemental executive retirement plan to
certain key executives. This plan provides key executives with certain
benefits upon retirement, disability, or death based upon total
compensation. The Company has purchased individual life insurance policies
with respect to each employee covered by this plan. The Company is the
owner and beneficiary of the insurance contracts. The expense for this
plan for 2002, 2001, and 2000 was $2,527, $2,726, and $3,023,
respectively. The total liability of $20,037 and $20,881 as of December
31, 2002 and 2001 is included in other liabilities.
11. FEDERAL INCOME TAXES
The following is a reconciliation between the federal income tax rate and
the Company's effective income tax rate:
2002 2001 2000
----------- ----------- ----------
Federal tax rate 35.0 % 35.0 % 35.0 %
Reduction in tax contingency (3.3)
Investment income not subject
to federal tax (1.3) (1.7) (0.9)
Other, net 1.1 (0.3)
----------- ----------- ----------
Total 31.5 % 33.0 % 34.1 %
=========== =========== ==========
The Company has reduced its liability for tax contingencies due to the
completion of the 1994 - 1996 Internal Revenue Service examination. The
amount released was $13,810; however, $4,000 of the release was
attributable to participating policyholders and therefore, had no affect
on the net income of the Company since that amount was credited to the
provision for policyholders' share of earnings on participating business
in the accompanying 2002 statement of income.
Temporary differences which give rise to the deferred tax assets and
liabilities as of December 31, 2002 and 2001 are as follows:
2002 2001
--------------------------- --------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
------------ ------------- ------------ ------------
Policyholder reserves $ 231,679 $ $ 219,227 $
Deferred policy acquisition costs 94,018 96,567
Deferred acquisition cost
proxy tax 109,779 119,052
Investment assets 149,958 67,136
Other 26,276 61,636
------------ ------------- ------------ ------------
Total deferred taxes $ 341,458 $ 270,252 $ 338,279 $ 225,339
============ ============= ============ ============
Amounts included for investment assets above include $86,907 and $40,122
related to the unrealized gains on the Company's fixed maturities
available-for-sale at December 31, 2002 and 2001, respectively.
Under pre-1984 life insurance company income tax laws, a portion of life
insurance company gain from operations was not subject to current income
taxation but was accumulated, for tax purposes, in a memorandum account
designated as "policyholders' surplus account." The aggregate accumulation
in the account is $7,742 and the Company does not anticipate any
transactions, which would cause any part of the amount to become taxable.
Accordingly, no provision has been made for possible future federal income
taxes on this accumulation.
12. OTHER COMPREHENSIVE INCOME
Other comprehensive income for the year ended December 31, 2002 is
summarized as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
--------------- -------------- --------------
Unrealized gains on available-for-sale securities:
Net changes during the year related
to cash flow hedges $ (7,486) $ 2,620 $ (4,866)
Unrealized holding gains (losses)
arising during the period 192,079 (67,290) 124,789
Less: reclassification adjustment
for (gains) losses realized in net income (8,004) 2,802 (5,202)
--------------- -------------- --------------
Net unrealized gains 176,589 (61,868) 114,721
Reserve and DAC adjustment (42,681) 14,953 (27,728)
--------------- -------------- --------------
--------------- -------------- --------------
Net unrealized gains (losses) $ 133,908 $ (46,915) $ 86,993
--------------- -------------- --------------
--------------- -------------- --------------
Minimum pension liability adjustment (19,822) 6,938 (12,884)
--------------- -------------- --------------
Other comprehensive income 114,086 (39,977) 74,109
=============== ============== ==============
Other comprehensive income for the year ended December 31, 2001 is
summarized as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
======================================== --------------- -------------- --------------
Unrealized gains on available-for-sale
securities:
Net changes during the year related
to cash flow hedges $ 12,637 $ (4,423) $ 8,214
Unrealized holding gains (losses)
arising during the period 112,544 (39,397) 73,147
Less: reclassification adjustment
for (gains) losses realized in net (15,912) 5,569 (10,343)
income
--------------- -------------- --------------
Net unrealized gains 109,269 (38,251) 71,018
Reserve and DAC adjustment (43,358) 15,175 (28,183)
======================================== --------------- -------------- --------------
Other comprehensive income $ 65,911 $ (23,076) $ 42,835
=============== ============== ==============
Other comprehensive income for the year ended December 31, 2000 is
summarized as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
======================================== --------------- -------------- --------------
Unrealized gains on available-for-sale
securities:
Unrealized holding gains (losses)
arising during the period $ 204,274 $ (71,495) $ 132,779
Less: reclassification adjustment
for (gains) losses realized in net income 9,436 (3,303) 6,133
--------------- -------------- --------------
Net unrealized gains (losses) 213,710 (74,798) 138,912
Reserve and DAC adjustment (31,352) 10,973 (20,379)
======================================== --------------- -------------- --------------
Other comprehensive income $ 182,358 $ (63,825) $ 118,533
=============== ============== ==============
13. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS, AND OTHER MATTERS
At December 31, 2002 and 2001, the Company has 1,500 authorized shares
each of Series A, Series B, Series C and Series D cumulative preferred
stock; and 2,000,000 authorized shares of non-cumulative preferred stock.
No dividends were paid on preferred stock in 2002, 2001, and 2000,
respectively. Dividends of $170,573, $187,633, and $134,149 were paid on
common stock in 2002, 2001, and 2000, respectively. Dividends are paid as
determined by the Board of Directors, subject to restrictions as discussed
below.
The maximum amount of dividends which can be paid to stockholders by
insurance companies domiciled in the State of Colorado are subject to
restrictions relating to statutory surplus and statutory net gain from
operations. Statutory surplus and net gains from operations for GWL&A at
December 31, 2002 were $1,292,292 and $208,194 [Unaudited], respectively.
GWL&A should be able to pay up to $208,194 [Unaudited] of dividends in
2003.
In March 1998, the National Association of Insurance Commissioners adopted
the Codification of Statutory Accounting Principles (Codification). The
Codification, which is intended to standardize accounting and reporting to
state insurance departments, was effective January 1, 2001. However,
statutory accounting principles will continue to be established by
individual state laws and permitted practices. The Colorado Division of
Insurance required adoption of Codification with certain modifications for
the preparation of statutory financial statements effective January 1,
2001. The adoption of Codification as modified by the Colorado Division of
Insurance increased statutory net worth as of January 1, 2001, by
approximately $105,760. (The modifications adopted by the Colorado
Division of Insurance had no effect on statutory net worth).
14. 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.
15. STOCK OPTIONS
The Parent has a stock option plan (the Lifeco plan) that provides for the
granting of options on common shares of Lifeco to certain officers and
employees of Lifeco and its subsidiaries, including the Company. Options
may be awarded with exercise prices of no less than the market price on
the date of the grant. Termination of employment prior to vesting results
in forfeiture of the options. As of December 31, 2002, 2001, and 2000,
stock available for award to Company employees under the Lifeco plan
aggregated 3,917,344, 3,278,331, and 4,808,047 shares.
The plan provides for the granting of options with varying terms and
vesting requirements. The majority of basic options under the plan vest
and become exercisable twenty percent per year commencing on the first
anniversary of the grant and expire ten years from the date of grant.
Other basic options vest and become exercisable one-third per year
commencing on various dates from December 31, 2000 to September 30, 2004,
and expire ten years from the date of grant. Variable options granted to
Company employees totaling 278,000 and 1,832,000 in 1998 and 1997,
respectively, became exercisable, if certain cumulative financial targets
were attained by the end of 2001. A total of 205,511 options vested and
became exercisable. The exercise period runs from June 26, 2007. During
2000, the Company determined that it was probable that certain of these
options would become exercisable and, accordingly, accrued compensation
expense of $15,052 with a corresponding credit to additional paid-in
capital as prescribed by AIN-APB 25. During 2001, the Company released
$12,098 of this accrual when certain financial targets were not attained.
Additional variable options granted in 2001, 2000, and 1998 totaling
80,000, 120,000 and 380,000 respectively, become exercisable if certain
sales or financial targets are attained. During 2002, 2001, and 2000, 0,
7,750, and 13,250 of these options vested and accordingly, the Company
recognized compensation expense of $0, $48, and $151, respectively. If
exercisable, the exercise period expires ten years from the date of grant.
The following table summarizes the status of, and changes in, Lifeco
options granted to Company employees, which are outstanding and the
weighted-average exercise price (WAEP) for 2002, 2001, and 2000. As the
options granted relate to Canadian stock, the values, which are presented
in U.S. dollars, will fluctuate as a result of exchange rate fluctuations:
2002 2001 2000
--------------------- ---------------------- ---------------------
Options WAEP Options WAEP Options WAEP
---------- --------- ----------- --------- ---------- --------
Outstanding, Jan. 1 6,398,149$ 11.66 7,675,551 $ 9.91 6,867,098 $ 9.20
Granted 174,500 22.16 947,500 22.28 1,386,503 14.88
Exercised 1,359,491 7.16 1,534,568 5.87 451,300 7.74
Expired or
canceled 766,013 11.02 690,334 11.24 126,750 12.17
---------- --------- ----------- --------- ---------- --------
Outstanding, Dec 31 4,447,145$ 13.66 6,398,149 $ 11.66 7,675,551 $ 9.91
========== ========= =========== ========= ========== ========
Options
exercisable
at year-end 2,121,638$ 11.67 2,602,480 $ 8.08 3,077,998 $ 7.11
========== ========= =========== ========= ========== ========
Weighted average
fair value of
options granted
during year $ 7.46 $ 7.10 $ 5.00
========== =========== ==========
The following table summarizes the range of exercise prices for
outstanding Lifeco common stock options granted to Company employees at
December 31, 2002:
Outstanding Exercisable
================== ----------------------------------------- ----------------------------
Average Average
Exercise Average Exercise Exercise
Price Range Options Life Price Options Price
------------------ -------------- ----------- ------------ -------------- ------------
$5.37 - 7.13 696,076 3.55 $ 5.43 696,076 $ 5.43
==================
$10.27 - 17.04 2,735,569 5.88 $ 12.67 1,256,325 $ 13.74
==================
$21.70 - 23.66 1,015,500 8.79 $ 21.96 169,237 $ 21.94
==================
Of the exercisable Lifeco options, 1,941,364 relate to fixed option grants
and 180,274 relate to variable grants.
Power Financial Corporation (PFC), which is the parent corporation of
Lifeco, has a stock option plan (the PFC plan) that provides for the
granting of options for common shares of PFC to key employees of PFC and
its affiliates. Prior to the creation of the Lifeco plan in 1996, certain
officers of the Company participated in the PFC plan in Canada.
The following table summarizes the status of, and changes in, PFC options
granted to Company officers, which remain outstanding and WAEP for 2002,
2001, and 2000. 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:
2002 2001 2000
---------------------- ---------------------- ----------------------
Options WAEP Options WAEP Options WAEP
----------- --------- ----------- -------- ----------- ---------
Outstanding, 70,000 $ 2.16 70,000 $ 2.29 285,054 $ 3.23
Jan.1,
Exercised 70,000 2.21 215,054 3.30
----------- --------- ----------- -------- ----------- ---------
Outstanding, Dec 0 $ 0.00 70,000 $ 2.16 70,000 $ 2.29
31,
=========== ========= =========== ======== =========== =========
Options exercisable
at year-end 0 $ 0.00 70,000 $ 2.16 70,000 $ 2.29
=========== ========= =========== ======== =========== =========
The Company accounts for stock-based compensation using the intrinsic
value method prescribed by APB 25 under which compensation expenses for
stock options are generally not recognized for stock option awards granted
at or above fair market value. Had compensation expense for the Company's
stock option plan been determined based upon fair value at the grant dates
for awards under the plan in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company's net income would have been
reduced by $2,364, $2,092, and $1,799, in 2002, 2001, and 2000,
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
2002, 2001, and 2000, respectively: dividend yields of 2.453%, 2.27%, and
2.44%, expected volatility of 31.67%, 28.56%, and 29.57%, risk-free
interest rates of 5.125%, 5.30%, and 6.61% and expected lives of 7 years.
16. SEGMENT INFORMATION
The Company has two reportable segments: Employee Benefits and Financial
Services. The Employee Benefits segment markets group life and health to
small and mid-sized corporate employers. The Financial Services segment
markets and administers savings products to public and not-for-profit
employers, corporations, and individuals and offers life insurance
products to individuals and businesses. The Company's reportable segments
are strategic business units that offer different products and services.
They are managed separately as each segment has unique distribution
channels. Prior to 2002, the Employee Benefits segment marketed and
administered corporate savings products (401(k) plans). In 2002 the
Financial Services segment assumed responsibility for these products. The
2001 and 2000 segment information has been reclassified to account for
this change.
The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates performance based on profit or loss from
operations after income taxes.
The Company's operations are not materially dependent on one or a few
customers, brokers or agents.
Summarized segment financial information for the year ended and as of
December 31 was as follows:
Year ended December 31, 2002
Operations: Employee Financial
Benefits Services Total
======================================== -------------- -------------- ---------------
Revenue:
Premium income $ 960,191 $ 159,904 $ 1,120,095
Fee income 660,423 223,139 883,562
Net investment income 67,927 851,446 919,373
Realized investment gains 8,918 32,708 41,626
======================================== -------------- -------------- ---------------
Total revenue 1,697,459 1,267,197 2,964,656
========================================
Benefits and Expenses:
========================================
Benefits 761,481 831,272 1,592,753
========================================
Operating expenses 732,489 225,689 958,178
======================================== -------------- -------------- ---------------
Total benefits and expenses 1,493,970 1,056,961 2,550,931
======================================== -------------- -------------- ---------------
-------------- -------------- ---------------
Net operating income before income 203,489 210,236 413,725
taxes
Income taxes 67,194 63,012 130,206
======================================== -------------- -------------- ---------------
Net income $ 136,295 $ 147,224 $ 283,519
============== ============== ===============
Assets: Employee Financial
Benefits Services Total
======================================== -------------- -------------- ---------------
Investment assets $ 1,492,350 $ 13,064,464 $ 14,556,814
Other assets 607,250 1,156,343 1,763,593
Separate account assets 11,338,376 11,338,376
-------------- -------------- ---------------
Total assets $ 2,099,600 $ 25,559,183 $ 27,658,783
======================================== ============== ============== ===============
Year ended December 31, 2001
Operations: Employee Financial
Benefits Services Total
======================================== -------------- -------------- ---------------
Revenue:
Premium income $ 1,033,886 $ 169,753 $ 1,203,639
Fee income 713,297 233,958 947,255
Net investment income 65,537 869,482 935,019
Realized investment gains 15,638 31,187 46,825
======================================== -------------- -------------- ---------------
Total revenue 1,828,358 1,304,380 3,132,738
========================================
Benefits and Expenses:
Benefits 858,945 837,652 1,696,597
Operating expenses 775,022 246,112 1,021,134
======================================== -------------- -------------- ---------------
Total benefits and expenses 1,633,967 1,083,764 2,717,731
Income taxes 67,790 73,409 141,199
======================================== -------------- -------------- ---------------
Net income before special charges 126,601 147,207 273,808
Special charges (net) 80,900 80,900
-------------- -------------- ---------------
Net income $ 45,701 $ 147,207 $ 192,908
======================================== ============== ============== ===============
Assets: Employee Financial
Benefits Services Total
======================================== -------------- -------------- ---------------
Investment assets $ 1,081,442 $ 13,159,007 $ 14,240,449
Other assets 794,889 1,201,373 1,996,262
Separate account assets 12,584,661 12,584,661
-------------- -------------- ---------------
Total assets $ 1,876,331 $ 26,945,041 $ 28,821,372
======================================== ============== ============== ===============
Year ended December 31, 2000
Operations: Employee Financial
Benefits Services Total
======================================== -------------- -------------- ---------------
Revenue:
Premium income $ 1,142,319 $ 190,247 $ 1,332,566
Fee income 648,329 223,298 871,627
Net investment income 70,967 854,152 925,119
Realized investment gains (losses) (2,998) 31,281 28,283
======================================== -------------- -------------- ---------------
Total revenue 1,858,617 1,298,978 3,157,595
========================================
Benefits and Expenses:
Benefits 914,730 831,142 1,745,872
Operating expenses 780,292 238,239 1,018,531
======================================== -------------- -------------- ---------------
Total benefits and expenses 1,695,022 1,069,381 2,764,403
======================================== -------------- -------------- ---------------
-------------- -------------- ---------------
Net operating income before income 163,595 229,597 393,192
taxes
Income taxes 57,086 76,974 134,060
======================================== -------------- -------------- ---------------
Net income $ 106,509 $ 152,623 $ 259,132
============== ============== ===============
The following table, which summarizes premium and fee income by segment,
represents supplemental information.
2002 2001 2000
======================================= -------------- --------------- --------------
Premium Income:
Employee Benefits
Group Life & Health $ 960,191 $ 1,033,886 $ 1,142,319
-------------- --------------- --------------
Total Employee Benefits 960,191 1,033,886 1,142,319
======================================= -------------- --------------- --------------
-------------- --------------- --------------
Financial Services
Savings 1,382 8,429 7,253
Individual Insurance 158,423 161,227 182,957
401(K) 99 97 37
-------------- --------------- --------------
Total Financial Services 159,904 169,753 190,247
======================================= -------------- --------------- --------------
Total premium income $ 1,120,095 $ 1,203,639 $ 1,332,566
======================================= ============== =============== ==============
Fee Income:
Employee Benefits
Group Life & Health
(uninsured plans) $ 660,423 $ 713,297 $ 648,329
-------------- --------------- --------------
Total Employee Benefits 660,423 713,297 648,329
======================================= -------------- --------------- --------------
-------------- --------------- --------------
Financial Services
Savings 117,952 119,793 111,201
Individual Insurance 18,152 17,888 8,117
401(k) 87,035 96,277 103,980
-------------- --------------- --------------
-------------- --------------- --------------
Total Financial Services 223,139 233,958 223,298
======================================= -------------- --------------- --------------
Total fee income $ 883,562 $ 947,255 $ 871,627
============== =============== ==============
17. OBLIGATIONS RELATING TO DEBT AND LEASES:
The Company enters into operating leases primarily for office space. As of
December 31, 2002, minimum annual rental commitments on operating leases
having initial or remaining non-cancellable lease terms in excess of one
year during the years 2003 through 2007 were $26,323.4, $23,525.5,
$22,069.9, $20,584.4 and $15,443.2, respectively, with $33,105.2 in minimum
commitments thereafter.
2003 2004 2005 2006 2007 Thereafter
-------- --------- -------- -------- -------- ----------
Subordinated
debentures $ $ $ $ $ $ 175,000.0
Related party
notes 25,000.0
Operating leases 26,323.4 23,525.5 22,069.9 20,584.4 15,443.2 33,105.2
-------- --------- -------- -------- -------- ----------
Total contractual
obligations $ 26,323.4 $ 23,525.5 $ 22,069.9 $ 45,584.4 $ 15,443.2 $ 208,105.2
======== ========= ======== ======== ======== ==========
18. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings, which arise in the
ordinary course of its business. In the opinion of management, after
consultation with counsel, the resolution of these proceedings should not
have a material adverse effect on its financial position or results of
operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
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
Served as
Director Principal Occupation(s)
Director Age from: for last Five Years
------------------------ ------ ----------- -------------------------------------
James Balog 74 1993 Company Director
James W. Burns, O.C. 73 1991 Director Emeritus, Power Corporation
(2)
Orest T. Dackow 66 1991 Company Director since April 2000;
(2) previously President and Chief
Executive Officer, Great-West
Lifeco
Andre Desmarais 46 1997 President and Co-Chief Executive
(2)(3) Officer, Power Corporation; Deputy
Chairman, Power Financial
Paul Desmarais, Jr. 48 1991 Chairman and Co-Chief Executive
(2)(3) Officer, Power Corporation;
Chairman,
Power Financial
Robert Gratton 59 1991 Chairman of the Board of the Company;
(2) President and Chief Executive Officer,
Power Financial; Chairman of the Boards
of Great-West Lifeco, Great-West Life,
London Insurance Group Inc.and London
Life Insurance Company
Kevin P. Kavanagh 70 1986 Company Director; Chancellor, Brandon
(1)(2) University
William Mackness 64 1991 Company Director
William T. McCallum 60 1990 President and Chief Executive Officer of
(2) the Company; Co-President and Chief
Executive Officer, Great-West Lifeco
Jerry E.A. Nickerson 66 1994 Chairman of the Board, H.B. Nickerson
(1)(2) & Sons Limited (a management and
holding company)
The Honourable 65 1991 Vice Chairman, Power Corporation;
P. Michael Pitfield, Member of the Senate of Canada
P.C., Q.C. (2)
Michel Plessis-Belair, 60 1991 Vice Chairman and Chief Financial
F.C.A. (1)(2) Officer, Power Corporation; Executive
Vice President and Chief Financial
Officer, Power Financial
Brian E. Walsh 49 1995 Managing Partner, QVan Capital,
(1) LLC (a merchant banking company)
(1)Member of the Audit Committee
(2)Also a director of Great-West Life
(3)Mr. Andre Desmarais and Mr. Paul Desmarais, Jr. are brothers.
Unless otherwise indicated, all of the directors have been engaged for
not less than five years in their present principal occupations or in
another executive capacity with the companies or firms identified.
Directors are elected annually to serve until the following annual
meeting of shareholders.
The following is a list of directorships held by the directors of the
Company, on companies whose securities are traded publicly in the United
States or that are investment companies registered under the Investment
Company Act of 1940.
J.Balog Transatlantic Holdings, Inc. Phoenix Investment
Partners Phoenix Euclid Fund
P.Desmarais, Jr. SUEZ
TotalFinaElf
W.T.McCallum Maxim Series Fund, Inc. Orchard Series Fund
Variable Annuity Account A
B.E.Walsh Offshore Systems Inc.
B. IDENTIFICATION OF EXECUTIVE OFFICERS
Served as
Executive
Officer Principal Occupation(s)
Executive Officer Age from: for last Five Years
------------------------ ------ ----------- -------------------------------------
William T. McCallum 60 1984 President and Chief Executive Officer
President and Chief of the Company and GWL&A Co-
Executive Officer President and Chief Executive Officer,
Great-West Lifeco
Mitchell T.G. Graye 47 1997 Executive Vice President and Chief
Executive Vice Financial Officer of the Company and
President and Chief GWL&A
Financial Officer
D. Craig Lennox 55 1984 Senior Vice President, General Counsel
Senior Vice President, and Secretary of the Company and
General Counsel and GWL&A
Secretary
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 service 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, 2002, 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 fiscal years.
--------------------------------------------------------------------------------------
Long-term
Annual Compensation Compensation
Awards
--------------------------------------------------------------------------------------
Name and Year Salary Bonus Options(1)
Principal Position ($) ($) (#)
----------------------------- ---------- ---------- --------------- ------------------
W.T. McCallum 2002 880,000 --- ---
President and Chief 2001 880,000 --- ---
Executive Officer 2000 871,500 --- 450,001
----------------------------- ---------- ---------- --------------- ------------------
D.L. Wooden 2002 550,000 343,750 ---
Executive Vice President 2001 525,000 393,750 ---
Financial Services 2000 475,000 356,250 200,001
----------------------------- ---------- ---------- --------------- ------------------
M.T.G. Graye 2002 457,000 237,500 ---
Executive Vice President 2001 415,000 75,000(2) 40,000
Chief Financial Officer 2000 375,000 253,200 125,001
----------------------------- ---------- ---------- --------------- ------------------
Charles P. Nelson 2002 312,000 181,900 ---
President 2001 300,000 150,000 60,000
BenefitsCorp 2000 270,400 202,435 ---
----------------------------- ---------- ---------- --------------- ------------------
R.F. Rivers(3) 2002 185,600(4) 225,000(5) 120,000
Executive Vice President 2001 --- --- ---
Employee Benefits 2000 --- --- ---
----------------------------- ---------- ---------- --------------- ------------------
(1)The options set out are options for common shares of Great-West
Lifeco that are granted by Great-West Lifeco pursuant to the
Great-West Lifeco Stock Option Plan (Lifeco Options). Lifeco Options
become exercisable on specified dates and expire ten years after the
date of the grant.
(2)Special bonus paid in 2002, for performance in 2001.
(3)Mr. Rivers became an employee and senior officer of the Company
effective August 19, 2002.
(4)Mr. Rivers' annualized salary for 2002 was $500,000.
(5)Amount represents a one time bonus incident to Mr. Rivers'
commencement of employment.
B. OPTIONS
The following table describes options granted to the Named Executive
Officers during the most recently completed fiscal year. All options are
Lifeco Options granted pursuant to the Great-West Lifeco Stock Option
Plan. Lifeco Options are issued with an exercise price in Canadian
dollars. Canadian dollar amounts have been translated to U.S. dollars at
a rate of 1/1.58.
OPTION GRANTS IN LAST FISCAL YEAR
-------------------------------------------------------------------------------------------
Potential realized value
at assumed annual rates
Individual Grants of stock price
appreciation for
option term
-------------------------------------------------------------------------------------------
Percentage
of total
options
granted to Exercise
Options employees or base
Granted in fiscal price Expiration 5% 10%
Name (#) year ($/share) date ($) ($)
----------------- ---------- ------------ --------- -------------- ----------- ------------
R.F. Rivers 120,000 68.77 21.77 Aug. 19, 2012 1,642,912 4,163,382
----------------- ---------- ------------ --------- -------------- ----------- ------------
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 2002, and all
unexercised PFC Options held as of December 31, 2002, 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 1/1.58.
AGGREGATED PFC OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
------------------------------------------------------------------------------------------
Value of unexercised in-
the-money options at
Unexercised options at fiscal year-end
fiscal year-end
(#) ($)
------------------------------------------------------------------------------------------
Shares
acquired
on Value
exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($)
---------------- --------- ----------- ----------- ------------- ----------- -------------
M.T.G. Graye 70,000 1,540,180
---------------- --------- ----------- ----------- ------------- ----------- -------------
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 2002, and all
unexercised Lifeco Options held as of December 31, 2002, 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 1/1.58.
AGGREGATED LIFECO OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
--------------------------------------------------------------------------------------------
Value of unexercised in-the-
Unexercised options at money options at fiscal
fiscal year-end year-end
(#) ($)
--------------------------------------------------------------------------------------------
Shares
acquired
on Value
exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($)
---------------- --------- ----------- ----------- ------------- ----------- -------------
W.T. McCallum 380,800 6,992,018 629,200 40,000 7,011,057 382,873
---------------- --------- ----------- ----------- ------------- ----------- -------------
D.L. Wooden 0 0 246,667 133,334 3,026,320 1,264,037
---------------- --------- ----------- ----------- ------------- ----------- -------------
M.T.G. Graye 0 0 196,067 118,934 2,964,820 873,055
---------------- --------- ----------- ----------- ------------- ----------- -------------
C.P. Nelson 0 0 84,000 48,000 797,572 90,195
---------------- --------- ----------- ----------- ------------- ----------- -------------
R.F. Rivers 0 0 0 120,000 0 216,668
-------------------------------------------------------------------------------------------
C. PENSION PLAN TABLE
The following table sets out the pension benefits payable to the Named
Executive Officers.
PENSION PLAN TABLE
---------------- ----------------------------------------------------------------------
Years of Service
----------------------------------------------------------------------
Remuneration
($) 15 20 25 30 35
---------------- ------------- -------------- ------------- ------------- -------------
400,000 120,000 160,000 200,000 240,000 240,000
---------------- ------------- -------------- ------------- ------------- -------------
500,000 150,000 200,000 250,000 300,000 300,000
---------------- ------------- -------------- ------------- ------------- -------------
600,000 180,000 240,000 300,000 360,000 360,000
---------------- ------------- -------------- ------------- ------------- -------------
700,000 210,000 280,000 350,000 420,000 420,000
---------------- ------------- -------------- ------------- ------------- -------------
800,000 240,000 320,000 400,000 480,000 480,000
---------------- ------------- -------------- ------------- ------------- -------------
900,000 270,000 360,000 450,000 540,000 540,000
---------------- ------------- -------------- ------------- ------------- -------------
1,000,000 300,000 400,000 500,000 600,000 600,000
---------------- ------------- -------------- ------------- ------------- -------------
The Named Executive Officers have the following years of service, as of
December 31, 2002.
-------------------------------------------- ------------------------------------------
Name Years of Service
-------------------------------------------- ------------------------------------------
W.T. McCallum 37
-------------------------------------------- ------------------------------------------
D.L. Wooden 12
-------------------------------------------- ------------------------------------------
M.T.G. Graye 9
-------------------------------------------- ------------------------------------------
C.P. Nelson 19
-------------------------------------------- ------------------------------------------
R.F. Rivers 1
-------------------------------------------- ------------------------------------------
W.T. McCallum is entitled, upon election, to receive the benefits shown,
with remuneration based on the average of the highest 36 consecutive
months of compensation during the last 84 months of employment. For D.L.
Wooden, M.T.G. Graye, C.P. Nelson, and R.F. Rivers, 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 2002. For each director of the Company who
is not also a director of Great-West Life, the Company pays an annual
fee of $22,500, and a meeting fee of $1,500 for each meeting of the
Board of Directors or a committee thereof attended. For each director of
the Company who is also a director of Great-West Life, the Company pays
a meeting fee of $1,500 for each meeting of the Board of Directors, or a
committee thereof, attended that is not coincident with a Great-West
Life meeting. At their option, in lieu of cash payments, directors may
receive deferred share units under The Great-West Life Assurance Company
Deferred Share Unit Plan. In addition, all directors are reimbursed for
incidental expenses.
The above amounts are paid in the currency of the country of residence
of the director.
E. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Executive compensation is determined by the Company's Board of
Directors. W.T. McCallum, President and Chief Executive Officer of the
Company, is a member of the Board of Directors. Mr. McCallum
participated in executive compensation matters generally but was not
present when his own compensation was discussed or determined.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below is certain information, as of March 1, 2003, concerning
beneficial ownership of the voting securities of the Company by entities
and persons who beneficially own more than 5% of the voting securities
of the Company. The determinations of "beneficial ownership" of voting
securities are based upon Rule 13d-3 under the Securities Exchange Act
of 1934, as amended (the Exchange Act). This rule provides that
securities will be deemed to be "beneficially owned" where a person has,
either solely or in conjunction with others, (1) the power to vote or to
direct the voting of securities and/or the power to dispose or to direct
the disposition of, the securities or (2) the right to acquire any such
power within 60 days after the date such "beneficial ownership" is
determined.
(1)100% of the Company's 7,032,000 outstanding common shares are owned
by GWL&A Financial Inc., 8515 East Orchard Road, Greenwood Village,
Colorado 80111.
(2)100% of the outstanding common shares of GWL&A Financial Inc. are
owned by GWL&A Financial (Nova Scotia) Co., Suite 800, 1959 Upper
Water Street, Halifax, Nova Scotia, Canada B3J 2X2.
(3)100% of the outstanding common shares of GWL&A Financial (Nova
Scotia) Co. are owned by GWL&A Financial (Canada) Inc., 100 Osborne
Street North, Winnipeg, Manitoba, Canada R3C 3A5.
(4)100% of the outstanding common shares of GWL&A Financial (Canada)
Inc. are owned by Great-West Lifeco Inc., 100 Osborne Street North,
Winnipeg, Manitoba, Canada R3C 3A5.
(5)82.9% of the outstanding common shares of Great-West Lifeco Inc. are
controlled by Power Financial Corporation, 751 Victoria Square,
Montreal, Quebec, Canada H2Y 2J3, representing approximately 65% of
the voting rights attached to all outstanding voting shares of
Great-West Lifeco Inc.
(6)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.
(7)100% of the outstanding common shares of 171263 Canada Inc. are owned
by 2795957 Canada Inc., 751 Victoria Square, Montreal, Quebec, Canada
H2Y 2J3.
(8)100% of the outstanding common shares of 2795957 Canada Inc. are
owned by Power Corporation of Canada, 751 Victoria Square, Montreal,
Quebec, Canada H2Y 2J3.
(9) Mr. Paul Desmarais, 751 Victoria Square, Montreal, Quebec, Canada
H2Y 2J3, through a group of private holding companies, which he
controls, has voting control of Power Corporation of Canada.
As a result of the chain of ownership described in paragraphs (1)
through (9) above, each of the entities and persons listed in paragraphs
(1) through (9) would be considered under Rule 13d-3 of the Exchange Act
to be a "beneficial owner" of 100% of the outstanding voting securities
of the Company.
B. SECURITY OWNERSHIP OF MANAGEMENT
The following table sets out the number of equity securities, and
exercisable options (including options that will become exercisable
within 60 days) for equity securities, of the Company or any of its
parents or subsidiaries, beneficially owned, as of December 31, 2002, by
(i) the directors of the Company; (ii) the Named Executive Officers; and
(iii) the directors and executive officers of the Company as a group.
--------------------- ---------------------- ---------------------- -------------------
Great-West Lifeco Power Financial Power Corporation
Inc. Corporation of Canada
--------------------- ---------------------- ---------------------- -------------------
Directors (1) (2) (3)
--------------------- ---------------------- ---------------------- -------------------
J. Balog
--------------------- ---------------------- ---------------------- -------------------
J.W. Burns 153,659 8,000 385,640
200,000 options
--------------------- ---------------------- ---------------------- -------------------
O.T. Dackow 82,892
100,000 options
--------------------- ---------------------- ---------------------- -------------------
A. Desmarais 51,659 21,600 146,999
1,946,500 options
--------------------- ---------------------- ---------------------- -------------------
P. Desmarais, Jr. 43,659 5,698
1,821,500 options
--------------------- ---------------------- ---------------------- -------------------
R. Gratton 332,496 310,000 12,965
5,880,000 options
--------------------- ---------------------- ---------------------- -------------------
K.P. Kavanagh 10,052
--------------------- ---------------------- ---------------------- -------------------
W. Mackness
--------------------- ---------------------- ---------------------- -------------------
W.T. McCallum 216,193 19,500
629,200 options
--------------------- ---------------------- ---------------------- -------------------
J.E. A. Nickerson 4,000 4,000
--------------------- ---------------------- ---------------------- -------------------
P.M. Pitfield 46,200 67,800 60,000
269,000 options
--------------------- ---------------------- ---------------------- -------------------
M. Plessis-Belair 20,000 3,000 20,199
347,125 options
--------------------- ---------------------- ---------------------- -------------------
B.E. Walsh 1,000
--------------------- ---------------------- ---------------------- -------------------
--------------------- ---------------------- ---------------------- -------------------
Great-West Lifeco Power Financial Power Corporation
Inc.
Corporation of Canada
--------------------- ---------------------- ---------------------- -------------------
Directors and (1) (2) (3)
Executive Officers
as a Group
--------------------- ---------------------- ---------------------- -------------------
1,116,866 575,100 636,501
997,267 options 5,880,000 options 4,584,125 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 1.8% 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 1.8%
of the total number of common shares and exercisable options for common
shares of Power Financial Corporation outstanding.
The number of subordinate voting shares and exercisable options for
subordinate voting shares of Power Corporation of Canada held by A.
Desmarais represents 1% of the total number of subordinate voting
shares and exercisable options for subordinate voting shares of Power
Corporation of Canada outstanding. The number of subordinate voting
shares and exercisable options for subordinate voting shares of Power
Corporation of Canada held by the directors and executive officers as a
group represents 2.5% of the total number of subordinate voting shares
and exercisable options for subordinate voting shares of Power
Corporation of Canada outstanding.
None of the remaining holdings set out above exceeds 1% of the total
number of shares and exercisable options for shares of the class
outstanding.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. CONTROLS AND PROCEDURES
Based on their evaluation as of January 22, 2003, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's
Disclosure Controls and Procedures are effective in ensuring that
information relating to the Company and its subsidiaries which is
required to be disclosed in reports filed under the Securities Exchange
Act of 1934 is (i) accumulated, processed and reported in a timely
manner; and (ii) communicated to the Company's senior management,
including the President and Chief Executive Officer and the Executive
Vice President and Chief Financial Officer, so that timely decisions may
be made regarding disclosure.
The Chief Executive Officer and Chief Financial Officer hereby confirm
that, since the date of their evaluation on January 22, 2003, there were
no significant changes in the Company's internal controls or in other
factors that could significantly affect these internal controls
including any corrective actions with regard to significant deficiencies
and material weaknesses.
PART IV
ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The documents identified below are filed as a part of this report:
A. INDEX TO FINANCIAL STATEMENTS
Page
----------
Independent Auditors' Report on Consolidated Financial
Statements for the Years Ended December 31, 2002,
2001, and 2000............................................
Consolidated Balance Sheets as of December 31, 2002 and
2001........................................................
Consolidated Statements of Income for the Years Ended
December 31, 2002, 2001, and 2000...........................
Consolidated Statements of Stockholder's Equity for the
Years Ended December 31, 2002, 2001, and 2000...............
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001, and 2000...........................
Notes to Consolidated Financial Statements for the Years
Ended December 31, 2002, 2001, and 2000.....................
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.
Filed as Exhibit 3(i) to Registrant's Form
10-K for the year ended December 31, 1999
and incorporated herein by reference.
3(ii) Bylaws of GWL&A Financial Inc.
Filed as Exhibit 3(ii) to Registrant's
Form 10-K
for the year ended December 31, 1999 and
incorporated herein by reference.
21 Subsidiaries of GWL&A Financial Inc. filed herewith.
24 Directors' Powers of Attorney
24 Directors' Powers of Attorney filed as Exhibit 24
to Registrant's Form 10-K for the year ended
December 31, 1999.
C. REPORTS ON FORM 8-K
A report on Form 8-K, dated October 29, 2002, was filed disclosing
Great-West Lifeco's third quarter results.
A report on Form 8-K, dated January 30, 2003, was filed disclosing
Great-West Lifeco's year-end results.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GWL&A FINANCIAL INC.
By: /s/ William T. McCallum
----------------------------------------------------------
William T. McCallum, President and Chief Executive Officer
Date: March 28, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature and Title Date
---------------------------------------------------------------- -----------------
/s/ William T. McCallum March 28, 2003
----------------------------------------------------------------
William T. McCallum
President and Chief Executive Officer and a Director
/s/ Mitchell T.G. Graye March 28, 2003
----------------------------------------------------------------
Mitchell T.G. Graye
Executive Vice President and Chief Financial Officer
/s/ Glen R. Derback March 28, 2003
----------------------------------------------------------------
Glen R. Derback
Vice President and Controller
/s/ James Balog * March 28, 2003
----------------------------------------------------------------
James Balog, Director
/s/ James W. Burns * March 28, 2003
----------------------------------------------------------------
James W. Burns, Director
/s/ Orest T. Dackow * March 28, 2003
----------------------------------------------------------------
Orest T. Dackow, Director
/s/ Andre Desmarais * March 28, 2003
----------------------------------------------------------------
Andre Desmarais, Director
/s/ Paul Desmarais, Jr. * March 28, 2003
----------------------------------------------------------------
Paul Desmarais, Jr., Director
/s/ Robert Gratton * March 28, 2003
----------------------------------------------------------------
Robert Gratton, Director
/s/ Kevin P. Kavanagh * March 28, 2003
----------------------------------------------------------------
Kevin P. Kavanagh, Director
/s/ William Mackness * March 28, 2003
----------------------------------------------------------------
William Mackness, Director
/s/ Jerry E.A. Nickerson * March 28, 2003
----------------------------------------------------------------
Jerry E.A. Nickerson, Director
(Continued)
/s/ P. Michael Pitfield * March 28, 2003
----------------------------------------------------------------
P. Michael Pitfield, Director
/s/ Michel Plessis-Belair * March 28, 2003
----------------------------------------------------------------
Michel Plessis-Belair, Director
/s/ Brian E. Walsh * March 28, 2003
----------------------------------------------------------------
Brian E. Walsh, Director
/s/ D. Craig Lennox March 28, 2003
----------------------------------------------------------------
D. Craig Lennox
*Attorney-in-fact pursuant to filed Power of Attorney
CERTIFICATIONS
I, William T. McCallum, certify that:
1. I have reviewed this annual report on Form 10-K of GWL&A Financial Inc. (the
"registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusion about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 /s/ William T. McCallum
--------------------------------------
William T. McCallum
President and Chief Executive Officer
CERTIFICATIONS
I, Mitchell T.G. Graye, certify that:
1. I have reviewed this annual report on Form 10-K of GWL&A Financial Inc. (the
"registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusion about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 /s/ Mitchell T.G. Graye
--------------------------------------
Mitchell T.G. Graye
Executive Vice President
and Chief Financial Officer
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United
States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections
(a) and (b) of section 1350, chapter 63 of title 18, United States Code), each
of the undersigned officers of GWL&A Financial Inc., a Delaware corporation (the
"Company"), does hereby certify, to such officer's knowledge, that:
The Annual Report on Form 10-K for the year ended December 31, 2002 (the
"Form 10-K") of the Company fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained
in the Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: March 28, 2003 /s/ William T. McCallum
__________________________________________
William T. McCallum
President and Chief Executive Officer
Dated: March 28, 2003 /s/ Mitchell T.G. Graye
__________________________________________
Mitchell T.G. Graye
Executive Vice President
and Chief Financial Officer
The foregoing certification is being furnished solely pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of
section 1350, chapter 63 of title 18, United States Code) and is not being filed
as part of the Form 10-K or as a separate disclosure document.
EXHIBIT 21
SUBSIDIARIES OF GWL&A FINANCIAL INC.
JURISDICTION OF
INCORPORATION OR
SUBSIDIARY ORGANIZATION
- ---------- ------------
Advised Assets Group, LLC Colorado
Alta Health & Life Insurance Company Indiana
Alta Agency, Inc. New York
BenefitsCorp, Inc. (1) Delaware
BenefitsCorp, Inc. of Wyoming Wyoming
BenefitsCorp Equities, Inc. Delaware
Deferred Compensation of Michigan, Inc. Michigan
Financial Administrative Services Corporation (2) Colorado
First Great-West Life & Annuity Insurance Company New York
Great-West Benefit Services, Inc. Delaware
Great-West Life & Annuity Capital I Delaware
Great-West Life & Annuity Insurance Company Colorado
Greenwood Investments, LLC Colorado
GW Capital Management, LLC Colorado
GWL Properties, Inc. Colorado
Maxim Series Fund, Inc. Maryland
National Plan Coordinators of Delaware, Inc. Delaware
National Plan Coordinators of Ohio, Inc. Ohio
National Plan Coordinators of Washington, Inc. Washington
NPC Securities, Inc. California
One Benefits, Inc. Colorado
One Health Plan, Inc. Vermont
One Health Plan of Alaska, Inc. Alaska
One Health Plan of Arizona, Inc. Arizona
One Health Plan of California, Inc. California
One Health Plan of Colorado, Inc. Colorado
One Health Plan of Florida, Inc. Florida
One Health Plan of Georgia, Inc. Georgia
One Health Plan of Illinois, Inc. Illinois
One Health Plan of Indiana, Inc. Indiana
One Health Plan of Kansas/Missouri, Inc. Kansas
One Health Plan of Maine, Inc. Maine
One Health Plan of Massachusetts, Inc. Massachusetts
One Health Plan of Michigan, Inc. Michigan
One Health Plan of Minnesota Minnesota
One Health Plan of Nevada, Inc. Nevada
One Health Plan of New Hampshire, Inc. New Hampshire
One Health Plan of New Jersey, Inc. New Jersey
One Health Plan of New York, Inc New York
One Health Plan of North Carolina, Inc. North Carolina
One Health Plan of Ohio, Inc. Ohio
One Health Plan of Oregon, Inc. Oregon
One Health Plan of Pennsylvania, Inc Pennsylvania
One Health Plan of South Carolina, Inc. South Carolina
One Health Plan of Tennessee, Inc. Tennessee
One Health Plan of Texas, Inc. Texas
One Health Plan of Virginia, Inc. Virginia
One Health Plan of Washington, Inc. Washington
One Health Plan of Wisconsin, Inc. Wisconsin
One Health Plan of Wyoming, Inc. Wyoming
One of Arizona, Inc. Arizona
One Orchard Equities, Inc. Colorado
Orchard Capital Management, LLC Colorado
Orchard Series Fund Delaware
Orchard Trust Company Colorado
P.C. Enrollment Services & Insurance Brokerage, Inc. Massachusetts
Renco, Inc. Delaware
Westkin Properties Ltd. California
(1) Also doing business as Benefits Insurance Services, Inc.
(2) Also doing business as Financial Administrative Services Corporation of
Colorado.