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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For The Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _____________
Commission file number 333-64473
GWL&A FINANCIAL INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1474245 (State or other jurisdiction of incorporation or
organization) (I.R.S. Employer Identification No.)
8515 East Orchard Road, Englewood, Colorado 80111
(Address of principal executive offices) (Zip Code)
(303) 737-4128
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of December 31, 1999, the aggregate market value of the registrant's voting
stock held by non-affiliates of the registrant was $0.
As of December 31, 1999, 50,025 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
TABLE OF CONTENTS
Page
PART I
Item 1. Business........................................................................
A. Organization and Corporate Structure...................................
B. Business of the Company ...............................................
C. Employee Benefits .....................................................
D. Financial Services ....................................................
E. Investment Operations..................................................
F. Regulation.............................................................
G. Ratings................................................................
H. Miscellaneous..........................................................
Item 2. Properties......................................................................
Item 3. Legal Proceedings...............................................................
Item 4. Submission of Matters to a Vote of Security Holders.............................
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................................
A. Equity Security Holders and Market Information.........................
B. Dividends..............................................................
Item 6. Selected Financial Data.........................................................
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................................
A. Company Results of Operations..........................................
B. Employee Benefits Results of Operations................................
C. Financial Services Results of Operations...............................
D. Investment Operations .................................................
E. Liquidity and Capital Resources........................................
F. Accounting Pronouncements..............................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................
Item 8. Financial Statements and Supplementary Data.....................................
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................................
PART III
Item 10. Directors and Executive Officers of the Registrant..............................
A. Identification of Directors............................................ B.
Identification of Executive Officers............................................
Item 11. Executive Compensation..........................................................
A. Summary Compensation Table.............................................
B. Options................................................................
C. Pension Plan Table.....................................................
D. Compensation of Directors..............................................
E. Compensation Committee Interlocks and Insider Participation............
Item 12. Security Ownership of Certain Beneficial Owners and Management..................
A. Security Ownership of Certain Beneficial Owners........................
B. Security Ownership of Management.......................................
Item 13. Certain Relationships and Related Transactions..................................
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................
A. Index to Financial Statements..........................................
B. Index to Exhibits......................................................
C. Reports on Form 8-K....................................................
Signatures ...........................................................................
PART I
ITEM 1. BUSINESS
A. ORGANIZATION AND CORPORATE STRUCTURE
GWL&A Financial Inc. (the "Company") was incorporated in the State of Delaware
on September 16, 1998 to act as a holding company for Great-West Life & Annuity
Insurance Company ("GWL&A") and its subsidiaries. GWL&A is a stock life
insurance company originally organized in 1907, which is domiciled in Colorado.
The Company is an indirect wholly-owned subsidiary of The Great-West Life
Assurance Company ("Great-West Life"), a Canadian life insurance company.
Great-West Life is a subsidiary of Great-West Lifeco Inc. ("Great-West Lifeco"),
a Canadian holding company. Great-West Lifeco is a subsidiary of Power Financial
Corporation ("Power Financial"), a Canadian holding company with substantial
interests in the financial services industry. Power Financial Corporation is a
subsidiary of Power Corporation of Canada ("Power Corporation"), a Canadian
holding and management company. Mr. Paul Desmarais, through a group of private
holding companies, which he controls, has voting control of Power Corporation.
In 1999, a trust subsidiary of the Company, Great-West Life & Annuity Insurance
Capital I, issued $175 million of 7.25% Subordinated Capital Income Securities,
which securities are listed on the New York Stock Exchange. Shares of Great-West
Lifeco, Power Financial and Power Corporation are traded publicly in Canada.
B. BUSINESS OF THE COMPANY
GWL&A is authorized to engage in the sale of life insurance, accident and health
insurance and annuities. It is qualified to do business in all states in the
United States except New York, and in the District of Columbia, Puerto Rico,
Guam and the U.S. Virgin Islands. GWL&A conducts business in New York through
its subsidiary, First Great-West Life & Annuity Insurance Company. GWL&A is also
a licensed reinsurer in the State of New York. As of December 31, 1998, GWL&A
ranked among the top 25 of all U.S. life insurance companies in terms of
admitted assets.
The Company operates, through GWL&A, in the following two business segments:
Employee Benefits -life, health and 401(k) products for group clients
Financial Services -savings products for both public and non-profit
employers and individuals (including 401, 403(b), 408 and 457 plans), and life
insurance products for individuals and businesses
The table that follows summarizes premiums and deposits for the years indicated.
For further consolidated financial information concerning the Company, see Item
6 (Selected Financial Data), and Item 8 (Financial Statements and Supplementary
Data). For commentary on the information in the following table, see Item 7
(Management's Discussion and Analysis of Financial Condition and Results of
Operations).
Millions (1) 1999 1998 1997
------------- ------------- -------------
Premium Income
Employee Benefits
Group Life & Health $ 991 $ 747 $ 465
------------- ------------- -------------
Total Employee Benefits 991 747 465
------------- ------------- -------------
Financial Services
Savings 14 17 23
Individual Insurance 158 231 (3) 345 (2)
------------- ------------- -------------
Total Financial Services 172 248 368
------------- ------------- -------------
Premium income $ 1,163 $ 995 $ 833
============= ============= =============
Fee Income
Employee Benefits
Group Life & Health $ 454 $ 367 $ 305
401(k) 95 78 53
------------- ------------- -------------
------------- ------------- -------------
Total Employee Benefits 549 445 358
------------- ------------- -------------
------------- ------------- -------------
Financial Services
Savings 81 71 62
Individual Insurance 5
------------- ------------- -------------
------------- ------------- -------------
Total Financial Services 86 71 62
------------- ------------- -------------
------------- ------------- -------------
Fee income $ 635 $ 516 $ 420
============= ============= =============
============= ============= =============
Deposits for Investment-type
Contracts:
Employee Benefits $ 26 $ 37 $ 25
Financial Services 608 1,307 (3) 633
------------- ------------- -------------
Total investment-type
deposits $ 634 $ 1,344 $ 658
============= ============= =============
Deposits to Separate Accounts
Employee Benefits $ 1,745 $ 1,568 $ 1,403
Financial Services 838 640 742
------------- ------------- -------------
Total separate accounts
deposits $ 2,583 $ 2,208 $ 2,145
============= ============= =============
Self-funded equivalents (4) $ 2,979 $ 2,606 $ 2,039
============= ============= =============
(1) All information in the above table and other tables herein is derived from
information that has been prepared in conformity with generally accepted
accounting principles, unless otherwise indicated.
(2) This amount includes the recapture of $156 million for the year ended
December 31, 1997 of participating policy reserves previously co-insured with
Great-West Life under a participating life coinsurance agreement.
(3) These amounts include $46 million in premium income for non-participating
life insurance policies and $520 million in deposits for investment-type
contracts which Great-West Life co-insured with the Company in 1998 under two
indemnity reinsurance agreements.
(4) Self-funded equivalents generally represent paid claims under minimum
premium and administrative services only contracts, which amounts approximate
the additional premiums that would have been earned under such contracts if they
had been written as traditional indemnity or HMO programs.
C. EMPLOYEE BENEFITS
1. Principal Products
The Employee Benefits segment of the Company provides a full range of employee
benefits products to more than 12,800 employers across the United States.
The Company offers customers a variety of health plan options to help them
maximize the value of their employee benefits package. The majority of the
Company's health care business is self-funded, whereby the employer assumes all
or a significant portion of the risk. For companies with better than average
claims experience, this can result in significant health care savings.
The Company offers employers a total benefits solution - an integrated package
of group life and disability insurance, managed care programs, 401(k) savings
plans and flexible spending accounts. Through integrated pricing,
administration, funding and service, the Company helps employers provide
cost-effective benefits that will attract and retain quality employees, and at
the same time, helps employees reach their personal goals by offering benefit
choices, along with information needed to make appropriate choices. Many
customers also find this integrated approach appealing because their benefit
plans are administered through a single company with linked systems that provide
on-line administration and account access, for enhanced efficiency and
simplified plan administration.
The Company offers a choice of managed care products including Health
Maintenance Organization ("HMO") plans, which provide a high degree of managed
care, and Preferred Provider Organization ("PPO") plans and Point of Service
("POS") plans which offer more flexibility in provider choice than HMO plans.
Under HMO plans, health care for the member is coordinated by a primary care
physician who is responsible for managing all aspects of the member's health
care. HMO plans offer a broad scope of benefits coverage including routine
office visits and preventive care, as well as lower premiums and low copayments,
which minimize out-of-pocket costs. There are no claims to file when services
are received through a primary care physician.
POS plans also require that a member enroll with a primary care physician who is
responsible for coordinating the member's health care. Similar to an HMO,
members receive the highest benefit coverage and the lowest out-of-pocket costs
when they use their primary care physician to coordinate their heath care. In
contrast to an HMO, members can seek care outside of the primary physician's
direction, at a reduced level of benefits. Some benefits may not be covered
outside the in-network POS plan. PPO plans offer members a greater choice of
physicians and hospitals. Members do not need to enroll with a primary care
physician - they simply select a contracted PPO provider at the time of the
service to receive the highest level of benefits. If members seek care outside
of the PPO network, they receive a lower level of benefits.
The One Health Plan HMO subsidiary organization administers provider networks
and provides medical management, member services and quality assurance for the
other managed care products of the Company, Alta Health & Life Insurance Company
("Alta"), formerly known as Anthem Health & Life Insurance Company, and New
England Life Insurance Company ("New England"). In addition to creating
economies of scale, this "pooling" of PPO, POS and HMO membership benefits the
Company by improving its position in negotiating provider reimbursement
arrangements, which leads to more competitive pricing.
The Company offers Internal Revenue Code Section 125 plans which enable
participants to set aside pre-tax dollars to pay for unreimbursed medical
expenses and dependent care expenses. This creates tax efficiencies for both the
employer and its employees.
The Company offers group life insurance. Sales of group life insurance consist
principally of renewable term coverage, the amounts of which are usually linked
to individual employee wage levels. The following table shows group life
insurance in force prior to reinsurance ceded for the years indicated:
[Millions] Years Ended December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
In force
end of year $ 83,901(1$ 84,121(1$ 53,211 $ 49,500 $ 50,370
(1) Includes $25,812 and $25,597 of in force group life insurance obtained from the acquisition of
Alta for the years ended December 31, 1999 and 1998, respectively.
The Company's 401(k) product is offered by way of a group fixed and variable
deferred annuity contract. The product provides a variety of funding and
distribution options for employer-approved retirement plans that qualify under
Internal Revenue Code Section 401(k).
The 401(k) product investment options for the employer include guaranteed
interest rates for various lengths of time and variable investment options. For
the fully guaranteed option, the difference between the income earned on
investments in the Company's general account and the interest credited to the
participant's account balance flows through to operating income.
Variable investment options utilize separate accounts to provide participants
with a vehicle to assume the investment risks. Assets held under these options
are invested, as designated by the participant, in separate accounts which in
turn invest in shares of underlying funds managed by a subsidiary of the Company
or by selected external fund managers.
Of the total 401(k) assets under administration in 1999, 97% were allocated to
variable investment options versus 96% in 1998.
The Company is compensated by the separate accounts for bearing expense risks
pertaining to the variable annuity contract, and for providing administrative
services. For certain funds, a subsidiary of the Company also receives fees for
serving as an investment advisor for those underlying funds, which are managed
by the subsidiary.
In 1999, the Company introduced a self-directed brokerage account option for its
401(k) product.
Customer retention is a key factor for the profitability of the Company's 401(k)
product. The annuity contract imposes a charge for termination during a
designated period of time after the contract's inception. The charge is
determined in accordance with a formula in the contract. Existing federal tax
penalties on distributions prior to age 59 1/2 provide an additional
disincentive to premature surrenders of account balances, but do not impact
rollovers to products of competitors.
The Company offers a rollover Individual Retirement Annuity, which allows
individuals to move retirement funds from a 401(k) plan to a qualified
Individual Retirement Account.
In the following table, the amount of 401(k) business in force is measured by
the total of individual account balances:
[Millions]
Year Ended
December 31, Fixed Annuities Variable Annuities
----------------------------- ------------------- -------------------------
1995 $ 358 $ 2,227
1996 347 3,229
1997 328 4,568
1998 299 5,770
1999 268 7,339
2. Method of Distribution
The Company distributes its products and services through field sales staff of
the Company, Alta and New England located in 63 sales offices throughout the
United States. Each sales office works with insurance brokers, agents and
consultants in their local market.
3. Competition
The employee benefits industry is highly competitive. Over the past year, the
United States health care industry has experienced a number of mergers and
consolidations. A number of larger carriers dropped out of the group health
market entirely. Although there are still many different carriers in the
marketplace, it has become dominated by an increasingly smaller number of
carriers, including the Company.
The highly competitive marketplace creates pricing pressures, which encourage
employers to seek competitive bids each year. Although most employers are
looking for affordably priced employee benefits products, they want to offer
product choices because employee needs differ. In many cases it is more
cost-effective and efficient for an employer to contract with a carrier such as
the Company, which offers multiple product lines and centralized administration.
In addition to price, there are a number of other factors which influence
employer decision-making. These factors include quality of services; scope,
cost-effectiveness and quality of provider networks; product responsiveness to
customers' needs; cost-containment services; and effectiveness of marketing and
sales.
4. Reserves
For group whole life and term insurance products, policy reserve liabilities are
equal to the present value of future benefits and expenses less the present
value of future net premiums using best estimate assumptions for interest,
mortality and expenses (including margins for adverse deviation). For disability
waiver of premium and paid up group whole life contracts, the policy reserves
equal the present value of future benefits and expenses using best estimate
assumptions for interest, mortality and expenses (including margins for adverse
deviation). For group universal life, the policy reserves equal the accumulated
fund balance (which reflects cumulative deposits plus credited interest less
charges thereon). Reserves for long-term disability products are established for
lives currently in payment status using industry and Company morbidity factors,
and interest rates based on Company experience. In addition, reserves are held
for lives that have not satisfied their waiting period and for claims that have
been incurred but not reported.
For medical, dental and vision insurance products, reserves reflect the ultimate
cost of claims including, on an estimated basis, (i) claims that have been
reported but not settled, and (ii) claims that have been incurred but not
reported. Claim reserves are based upon factors derived from past experience.
Reserves also reflect retrospective experience rating that is done on certain
types of business.
Reserves for investment contracts (401(k) deferred annuities) are equal to
cumulative deposits, less withdrawals and charges, plus credited interest
thereon.
Assumptions for mortality and morbidity experience are periodically reviewed
against published industry data and company experience.
The above mentioned reserves are computed amounts that, with additions from
premiums and deposits to be received, and with interest on such reserves, are
expected to be sufficient to meet the Company's policy obligations at their
maturities, and pay expected death or retirement benefits or surrender requests.
5. Reinsurance
The Company has a marketing and administrative services arrangement with New
England. Under reinsurance agreements, New England issues group life and health
and 401(k) products and then immediately reinsures 50% of its group life and
health business, and nearly 100% of its guaranteed 401(k) business, with the
Company.
The Company seeks to limit its exposure on any single insured and to recover a
portion of benefits paid by ceding risks to other insurance enterprises under
excess coverage and coinsurance contracts. The maximum amount of group life
insurance retained on any one life is $1.5 million. The maximum amount of group
monthly disability income benefit at risk on any one life is $6,000 per month.
D. FINANCIAL SERVICES
1. Principal Products
The Financial Services segment of the Company develops, administers and sells
retirement savings and life insurance products and services for individuals, and
for employees of state and local governments, hospitals, non-profit
organizations and public school districts.
The Company's core savings business is in the public/non-profit pension market.
The Company provides investment products, and administrative and communication
services, to employees of state and local governments (Internal Revenue Code
Section 457 plans), as well as employees of hospitals, non-profit organizations
and public school districts (Internal Revenue Code Section 401, 403(b) and 408
plans). The Company provides pension plan administrative services through a
subsidiary company, Financial Administrative Services Corporation ("FASCorp").
The Company provides marketing and communication services through another
subsidiary company, Benefits Communication Corporation, and BenefitsCorp
Equities, Inc., a broker-dealer subsidiary of Benefits Communication Corporation
(collectively, "BenefitsCorp").
The Company's primary marketing emphasis in the public/non-profit pension market
is group fixed and variable annuity contracts for defined contribution
retirement savings plans. Defined contribution plans provide for benefits based
upon the value of contributions to, and investment returns on, the individual's
account. This has been the fastest growing portion of the pension marketplace in
recent years.
The Company has a marketing agreement with Charles Schwab & Co., Inc. to sell
individual fixed and variable qualified and non-qualified deferred annuities.
The variable annuity product offers several investment options. The fixed
product is a Guarantee Period Fund, which was established as a non-unitized
separate account in which the owner does not participate in the performance of
the assets. The assets accrue solely to the benefit of the Company and any gain
or loss in the Guarantee Period Fund is borne entirely by the Company. Guarantee
period durations of one to ten years are currently being offered by the Company.
Distributions from the amounts allocated to a Guarantee Period Fund more than
six months prior to the maturity date results in a market value adjustment
("MVA"). The MVA reflects the relationship as of the time of its calculation
between the current U.S. Treasury Strip ask side yield and the U.S. Treasury
Strip ask side yield at the inception of the contract.
The Company's variable annuity products provide the opportunity for
contractholders to assume the risks of, and receive all the benefits from, the
investment of retirement assets. The variable product assets are invested, as
designated by the participant, in separate accounts which in turn invest in
shares of underlying funds managed by a subsidiary of the Company or by selected
external fund managers.
Demand for investment diversification for customers and their participants
continued to grow during 1999. The Company continues to expand the annuity
products available through Maxim Series Fund, Inc., a subsidiary of the Company,
which is an insurance products mutual fund company, and through arrangements
with external fund managers. This array of funds allows customers to diversify
their investments across a wide range of investment products, including fixed
income, stock and international equity fund offerings.
On a very limited basis the Company offers single premium annuities and
guaranteed certificates, which provide guarantees of principal and interest with
a fixed maturity date.
Customer retention is a key factor for the profitability of annuity products. To
encourage customer retention, annuity contracts typically impose a surrender
charge on policyholder balances withdrawn for a period of time after the
contract's inception. The period of time and level of the charge vary by
product. Existing federal tax penalties on distributions prior to age 59 1/2
provide an additional disincentive to premature surrenders of annuity balances,
but do not impede transfers of those balances to products of competitors.
Annuity products generate earnings from the investment spreads on the guaranteed
investment options and from the fees collected for mortality and expense risks
associated with the variable options. The Company also receives fees for
providing administration services to contractholders. A subsidiary of the
Company receives fees for serving as an investment advisor for underlying funds,
which are managed by the subsidiary.
The Company's annuity products are supported by the general account assets of
the Company for guaranteed investment options, and the separate accounts for the
variable investment options.
The amount of annuity products in force is measured by account balances. The
following table shows guaranteed investment contract and group and individual
annuity account balances for the years indicated:
[Millions]
Year Ended Fixed Variable
December 31, Annuities Annuities
1995 $ 5,722 $ 1,772
1996 5,531 2,256
1997 5,227 3,280
1998 4,849 4,330
1999 4,592 5,137
In addition to providing administrative services to customers of the Company's
annuities, FASCorp also provides comprehensive third-party administrative and
recordkeeping services for other financial institutions and employer-sponsored
retirement plans. Assets under administration with unaffiliated organizations
totaled $26.7 billion at December 31, 1999 and $12.6 billion at December 31,
1998.
Life insurance products in force include participating and non-participating
term life, whole life and universal life. Participating policyholders share in
the financial results (differences in experience of actual financial results
versus pricing expectations) of the participating business in the form of
dividends. Participating products are no longer actively marketed by the Company
but continue to produce renewal premium ($271.0 million in 1999). Participating
dividends for 1999 and 1998 were $70.1 million and $71.4 million, respectively.
The provision for participating policyholder earnings is reflected in
liabilities under undistributed earnings on participating policyholders in the
consolidated balance sheets of the Company. Participating policyholder earnings
are not included in the consolidated net income of the Company.
Term life provides coverage for a stated period and pays a death benefit only if
the insured dies within the period. Whole life provides guaranteed death
benefits and level premium payments for the life of the insured. Universal life
products include a cash value component that is credited with interest at
regular intervals. The Company's earnings result from the difference between the
investment income and interest credited on customer cash values and from
differences between charges for mortality and actual death claims. Universal
life cash values are charged for the cost of insurance coverage and for
administrative expenses.
At both December 31, 1999 and 1998, the Company had $3.5 billion of policy
reserves on individual insurance products sold to corporations to provide
coverage on the lives of certain employees - so-called Corporate-Owned Life
Insurance ("COLI"). Due to legislation enacted during 1996 which phased out the
interest deductions on COLI policy loans over a two-year period ending 1998,
COLI sales have ceased. The Company continues to work closely with existing COLI
customers to determine the options available to them and is confident that the
effect of the legislative changes will not be material to the Company's
operations.
The Company has shifted its emphasis to the Bank-Owned Life Insurance ("BOLI")
market. BOLI was not affected by the 1996 legislation. This interest-sensitive
whole life product funds post-retirement benefits for bank employees. At
December 31, 1999 and 1998, the Company had $1.4 billion and $0.9 billion,
respectively, of BOLI policy reserves.
Sales of life insurance products typically have initial marketing expenses.
Retention, an important factor in profitability, is encouraged through product
features. For example, the Company's universal and whole life insurance
contracts typically impose a surrender charge on policyholder balances withdrawn
within the first ten years of the contract's inception. The period of time and
level of the charge vary by product. In addition, more favorable credit rates
may be offered after policies have been in force for a period of time.
Certain of the Company's life insurance and group annuity products allow policy
owners to borrow against their policies. At December 31, 1999, approximately 5%
of outstanding policy loans were on individual life policies that had fixed
interest rates ranging from 5% to 8%. The remaining 95% of outstanding policy
loans had variable interest rates averaging 7.4% at December 31, 1999.
Investment income from policy loans was $167.8 million for the year ended
December 31, 1999.
The following table summarizes changes in individual life insurance in force
prior to reinsurance ceded for the years indicated:
Years Ended December 31,
-------------------------------------------------------------
[Millions] 1999 1998 1997 1996 1995
----------- ---------- ---------- --------- ----------
In force, begin-
ning of year $ 42,966 $ 28,266 $ 26,892 $ 25,865 $ 24,877
Sales and
additions 4,228 16,215 3,119 2,695 2,520
(1)
Terminations 3,363 1,515 1,745 1,668 1,532
----------- ---------- ---------- --------- ----------
Net 865 14,700 1,374 1,027 988
----------- ---------- ---------- --------- ----------
In force,
end of year 43,831 42,966 28,266 26,892 25,865
(1) Includes approximately $8.5 billion in adjustments related to COLI
policyholders exercising non-forfeiture options to increase the face value of
their policies, and $5.2 billion related to the reinsurance transactions
referred to in footnote (3) on page 2.
In 1998, the Company obtained membership in the Insurance Marketplace Standards
Association, which is granted in recognition of high standards of ethical
company behavior in advertising, sales and service for individually sold life
insurance and annuity products.
2. Method of Distribution
Financial Services primarily uses BenefitsCorp to distribute pension products
and to provide communication and enrollment services to employers in the
public/non-profit market. Pension products are also distributed through
independent marketing agencies.
The Company distributes universal and joint survivor life and term insurance, as
well as individual fixed and variable qualified and non-qualified deferred
annuities, through Charles Schwab & Co., Inc. Individual life products are also
sold through large banks and other financial institutions. BOLI products are
currently marketed through one broker, Clark/Bardes, Inc.
3. Competition
The life insurance, savings and investments marketplace is highly competitive.
The Company's competitors include mutual fund companies, insurance companies,
banks, investment advisors and certain service and professional organizations.
No one competitor or small number of competitors is dominant. Competition
focuses on service, technology, cost, variety of investment options, investment
performance, product features, price and financial strength as indicated by
ratings issued by nationally recognized agencies. For more information on the
Company's ratings see Item 1(G) (Ratings).
4. Reserves
Reserves for universal life policies are equal to cumulative deposits, less
withdrawals and mortality and expense charges, plus credited interest.
Reserves for all fixed individual life insurance contracts are computed on the
basis of assumed investment yield, mortality, morbidity and expenses (including
a margin for adverse deviation). These reserves are calculated as the present
value of future benefits (including dividends) and expenses less the present
value of future net premiums. The assumptions used in calculating the reserves
generally vary by plan, year of issue and policy duration.
For all life insurance contracts (including universal life insurance), reserves
are established for claims that have been incurred but not reported based on
factors derived from past experience.
Reserves for limited payment contracts (immediate annuities with life contingent
payouts) are computed on the basis of assumed investment yield, mortality,
morbidity and expenses. These assumptions generally vary by plan, year of issue
and policy duration. Reserves for investment contracts (deferred annuities and
immediate annuities without life contingent payouts) are equal to cumulative
deposits plus credited interest less withdrawals and other charges.
The above-mentioned reserves are computed amounts that, with additions from
premiums and deposits to be received, and with interest on such reserves, are
expected to be sufficient to meet the Company's policy obligations at their
maturities, and pay expected death or retirement benefits or surrender requests.
5. Reinsurance
The Company seeks to limit its exposure to loss on any single insured and to
recover a portion of benefits paid by ceding risks to other insurance
enterprises under excess coverage and coinsurance contracts. The Company retains
a maximum of $1.5 million of coverage per individual life.
E. INVESTMENT OPERATIONS
The Company's investment division manages or administers the Company's general
and separate accounts in support of cash and liquidity requirements of the
Company's insurance and investment products. Total investments at December 31,
1999 were $25.8 billion, comprised of general account assets of $13.0 billion
and separate account assets of $12.8 billion.
The Company invests in a broad range of asset classes, primarily domestic and
international fixed maturities and mortgage loans. Fixed maturity investments
include public and privately placed corporate bonds, government bonds and
redeemable preferred stocks. The Company also invests in mortgage-backed
securities and asset-backed securities.
The Company manages the characteristics of its investment assets, such as
liquidity, currency, yield and duration, to reflect the underlying
characteristics of related insurance and policyholder liabilities, which vary
among the Company's principal product lines. The Company observes strict asset
and liability matching guidelines, which are designed to ensure that the
investment portfolio will appropriately meet the cash flow and income
requirements of its liabilities. In connection with its investment strategy, the
Company makes limited use of derivative instruments in hedging applications to
manage market risk. Derivative instruments are not used for speculative
purposes. For more information on derivatives, see Notes 1 and 6 to the
consolidated financial statements of the Company (the "Consolidated Financial
Statements"), which are included in Item 8 (Financial Statements and
Supplementary Data).
The Company routinely monitors and evaluates the status of its investments in
light of current economic conditions, trends in capital markets and other
factors. These other factors include investment size, quality, concentration by
industry and other diversification considerations for fixed maturity
investments.
The Company's fixed maturity investments constituted 69% of investment assets as
of December 31, 1999. The Company reduces credit risk for the portfolio as a
whole by investing primarily in investment grade fixed maturities. As of
December 31, 1999, 97% of the bond portfolio carried an investment grade rating.
The Company's mortgage portfolio constituted 7% of investment assets as of
December 31, 1999. The Company's mortgage investment policy emphasizes a broadly
diversified portfolio of commercial and industrial mortgages. Mortgage loans are
subject to underwriting criteria addressing loan-to-value ratios, debt service
coverage, cash flow, tenant quality, leasing, market, location and financial
strength of borrower. Since 1986, the Company has reduced the overall weighting
of its mortgage portfolio with a greater emphasis in bond investments.
At December 31, 1999 only 0.8% of investment assets were invested in real
estate.
The following table sets forth the distribution of invested assets, cash and
accrued investment income for the Company's general account, as of the end of
the years indicated:
[Carrying Value 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
in Millions]
Debt Securities:
Bonds
U.S. Government
Securities and
obligations of U.S.
Government
Agencies $ 1,859 $ 1,951 $ 2,091 $ 1,947 $ 1,990
Corporate bonds 7,078 7,117 6,544 6,133 6,168
Foreign
Governments 51 69 146 119 159
--------- --------- --------- --------- ---------
Total 8,988 9,137 8,781 8,199 8,317
Common Stock 69 49 39 20 9
Mortgage loans 975 1,133 1,236 1,488 1,713
Real estate 104 73 94 68 61
Policy loans 2,681 2,859 2,657 2,523 2,238
Short-term
investments 244 420 399 419 135
--------- --------- --------- --------- ---------
Total investments $ 13,061 $ 13,671 $ 13,206 $ 12,717 $ 12,473
========= ========= ========= ========= =========
Cash $ 258 $ 176 $ 126 $ 125 $ 91
Accrued investment
income 138 158 166 198 212
The following table summarizes general account investment results of the Company's operations:
Net Earned Net
[Millions] Investment Investment
Income Income Rate
----------------- -----------------
For the year:
1999 $ 876 6.96%
1998 897 7.03
1997 882 7.21
1996 835 7.05
1995 835 7.36
F. REGULATION
1. Insurance Regulation
The business of the Company is subject to comprehensive state and federal
regulation and supervision throughout the United States, which primarily
provides safeguards for policyholders rather than investors. The laws of the
various state jurisdictions establish supervisory agencies with broad
administrative powers with respect to such matters as admittance of assets,
premium rating methodology, policy forms, establishing reserve requirements and
solvency standards, maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, the type, amounts and
valuation of investments permitted and HMO operations.
The Company's operations and accounts are subject to examination by the Colorado
Insurance Division and other regulators at specified intervals. The latest
financial examination by the Colorado Insurance Division was completed in 1997,
and covered the five year period ending December 31, 1995. This examination
produced no significant adverse findings regarding the Company.
The National Association of Insurance Commissioners has adopted risk-based
capital rules and other financial ratios for life insurance companies. Based on
the Company's December 31, 1999 statutory financial reports, the Company has
risk-based capital well in excess of that required and was within the usual
ranges of all ratios.
2. Insurance Holding Company Regulations
The Company is subject to and complies with insurance holding company
regulations in Colorado. These regulations contain certain restrictions and
reporting requirements for transactions between an insurer and its affiliates,
including the payments of dividends. They also regulate changes in control of an
insurance company.
3. Securities Laws
The Company is subject to various levels of regulation under federal securities
laws. The Company's broker-dealer subsidiaries are regulated by the Securities
and Exchange Commission ("SEC") and the National Association of Securities
Dealers, Inc. The Company's investment advisor subsidiary and transfer agent
subsidiary are regulated by the SEC. Certain of the Company's separate accounts,
mutual funds and variable insurance and annuity products are registered under
the Investment Company Act of 1940 and the Securities Act of 1933.
4. Guaranty Funds
Under insurance guaranty fund laws existing in all states, insurers doing
business in those states can be assessed (up to prescribed limits) for certain
obligations of insolvent insurance companies. The Company has established a
reserve of $7.1 million as of December 31, 1999 to cover future assessments of
known insolvencies. The Company has historically recovered more than half of the
guaranty fund assessments through statutorily permitted premium tax offsets. The
Company has a prepaid asset associated with guaranty fund assessments of $3.4
million at December 31, 1999.
5. Canadian Regulation
Because the Company is an indirect subsidiary of Great-West Life, which is a
Canadian company, the Office of the Superintendent of Financial Institutions
Canada conducts periodic examinations of the Company and approves certain
investments in subsidiary companies.
6. Potential Legislation
United States legislation and administrative developments in various areas,
including pension regulation, financial services regulation, health care
legislation and the insurance industry could significantly and adversely affect
the Company in the future. Congress has from time to time considered legislation
relating to health care reform and managed care issues (including patients'
rights, privacy of medical records and managed care plan or enterprise
liability), changes in the deferral of taxation on the accretion of value within
certain annuities and life insurance products, changes in regulation for the
Employee Retirement Income Security Act of 1974, as amended, and changes as to
the availability of Section 401(k) for individual retirement accounts.
It is not possible to predict whether future legislation or regulation adversely
affecting the business of the Company will be enacted and, if enacted, the
extent to which such legislation or regulation will have an effect on the
Company and its competitors.
G. RATINGS
GWL&A is rated by a number of nationally recognized rating agencies. The ratings
represent the opinion of the rating agencies on the financial strength of GWL&A
and its ability to meet the obligations of its insurance policies.
Rating Agency Measurement Rating
- - ------------------------------ ------------------------------------------ ------------
A.M. Best Company Financial Strength and Operating A++ *
Performance
Duff & Phelps Corporation Claims Paying Ability AAA *
Standard & Poor's Corporation Financial Strength AA+ **
Moody's Investors Service Financial Strength Aa2 ***
* Highest ratings available.
** Second highest rating out of 21 rating categories.
*** Third highest rating out of 21 rating categories.
H. MISCELLANEOUS
No customer accounted for 10% or more of the Company's consolidated revenues in
1999. In addition, no segment of the Company's business is dependent on a single
customer or a few customers, the loss of which would have a significant effect
on the Company or any of its business segments. The loss of business from any
one, or a few, independent brokers or agents would not have a material adverse
effect on the Company or any of its business segments.
The Company had approximately 6,900 employees at December 31, 1999.
ITEM 2. PROPERTIES
The Head Office of the Company consists of a 752,000 square foot office complex
located in Greenwood Village, Colorado. The office complex is owned by a
subsidiary of the Company. The Company leases sales and claims offices
throughout the United States.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1999 to a vote of security
holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. EQUITY SECURITY HOLDERS AND MARKET INFORMATION
There is no established public trading market for the Company's common equity.
B. DIVIDENDS
In the two most recent fiscal years, the Company has paid quarterly dividends on
its common shares. Dividends on common stock totaled $88.9 million in 1999 and
$73.3 million in 1998. Dividends on preferred stock totaled $0 and $6.7 million
in 1999 and 1998, respectively.
Under Colorado law, the Company cannot, without the approval of the Colorado
Commissioner of Insurance, pay a dividend if, as a result of such payment, the
total of all dividends paid in the preceding twelve months would exceed the
greater of (i) 10% of the Company's statutory surplus as regards policyholders
as at the preceding December 31; or (ii) the Company's statutory net gain from
operations as at the preceding December 31.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain financial data of the Company. This
summary has been derived in part from, and should be read in conjunction with,
the Company's Consolidated Financial Statements.
[Millions]
Years Ended December 31,
-----------------------------------------------------------
INCOME STATEMENT 1999 1998 1997 1996 1995
---------- ----------- ---------- ---------- ----------
DATA
Premiums $ 1,163 $ 995 $ 833 $ 829 $ 732
Fee income 635 516 420 347 335
Net investment income 876 897 882 835 835
Realized investment
gains (losses) 1 38 10 (21) 8
---------- ----------- ---------- ---------- ----------
Total Revenues 2,675 2,446 2,145 1,990 1,910
Policyholder benefits 1,582 1,462 1,385 1,356 1,269
Operating expenses 804 688 552 469 464
---------- ----------- ---------- ---------- ----------
Total benefits and
expenses 2,386 2,150 1,937 1,825 1,733
---------- ----------- ---------- ---------- ----------
Income from operations 289 296 208 165 177
Income tax expense 83 99 49 30 49
---------- ----------- ---------- ---------- ----------
Net Income $ 206 $ 197 $ 159 $ 135 $ 128
========== =========== ========== ========== ==========
Deposits for
investment-
type contracts $ 634 $ 1,344 $ 658 $ 815 $ 868
Deposits to separate
accounts 2,583 2,208 2,145 1,438 1,165
Self-funded premium
equivalents 2,979 2,606 2,039 1,940 2,140
December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ---------- ---------- ----------
BALANCE SHEET DATA
Investment assets $ 13,061 $ 13,671 $ 13,206 $ 12,717 $ 12,473
Separate account assets 12,780 10,100 7,847 5,485 3,999
Total assets 27,397 25,123 22,078 19,351 17,682
Total policy benefit
liabilities 12,386 12,583 11,706 11,600 11,408
Due to Parent 35 52 118 120 122
Corporation
Guaranteed preferred
beneficial interests
in the
Company's junior
subordinated debentures 175
Total shareholder's 1,170 1,199 1,186 1,034 993
equity
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements. Forward-looking statements
are statements not based on historical information and which relate to future
operations, strategies, financial results or other developments. In particular,
statements using verbs such as "expect," "anticipate," "believe" or words of
similar import generally involve forward-looking statements. Without limiting
the foregoing, forward-looking statements include statements which represent the
Company's beliefs concerning future or projected levels of sales of the
Company's products, investment spreads or yields, or the earnings or
profitability of the Company's activities. Forward-looking statements are
necessarily based upon estimates and assumptions that are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond the Company's control and many of which, with respect
to future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company. Whether or not actual results differ materially from
forward-looking statements may depend on numerous foreseeable and unforeseeable
events or developments, some of which may be national in scope, such as general
economic conditions and interest rates, some of which may be related to the
insurance industry generally, such as pricing competition, regulatory
developments and industry consolidation, and others of which may relate to the
Company specifically, such as credit, volatility and other risks associated with
the Company's investment portfolio, and other factors. Readers are also directed
to consider other risks and uncertainties discussed in documents filed by the
Company and certain of its subsidiaries with the Securities and Exchange
Commission.
Management's discussion and analysis of financial condition and results of
operations of the Company for the three years ended December 31, 1999 follows.
A. COMPANY RESULTS OF OPERATIONS
1. Consolidated Results
The Company's consolidated net income increased $8.8 million or 5% in 1999 when
compared to the year ended December 31, 1998, reflecting improved results in the
Employee Benefits segment, offset by a slight decrease in the Financial Services
segment. The Employee Benefits segment contributed $9.5 million to the improved
consolidated results compared to the Financial Services segment which recorded a
$0.7 million decrease. Of total consolidated net income in 1999 and 1998, the
Employee Benefits segment contributed 57% and 54%, respectively, while the
Financial Services segment contributed 43% and 46%, respectively.
The Company's consolidated net income increased $38.1 million or 24% in 1998
when compared to the year ended December 31, 1997. In 1998, the Employee
Benefits segment contributed $8.8 million or 23% to the overall growth and the
Financial Services segment contributed $29.3 million or 77% to the overall
growth.
Pursuant to a required change in accounting policy, the Company capitalized
$18.4 million of software development costs (see Note 1 to the consolidated
financial statements), which increased the 1999 consolidated net income.
The Company's 1999 and 1997 consolidated net income increased by $8.3 million
and $21.1 million, respectively, due to changes in income tax provisions for
these years. The current income tax provisions were decreased by $17.2 million
and $42.2 million for 1999 and 1997, respectively, due to the release of a
contingent liability relating to taxes of Great-West Life's U.S. branch
associated with the blocks of business that had been transferred from Great-West
Life's U.S. branch to the Company, as discussed below.
Of the amount released in 1999 and 1997, $8.9 million and $15.1 million,
respectively, was attributable to participating policyholders and, therefore,
had no effect on the net income of the Company.
In 1989, Great-West Life began a series of transactions to transfer its U.S.
business from its U.S. branch to the Company; this process was essentially
completed in 1993. The objective of these transactions was to transfer to the
Company all of the risks and rewards of Great-West Life's U.S.-related business.
The transfers of insurance contracts and related assets were accomplished
through several reinsurance agreements executed by the Company and Great-West
Life's U.S. branch during these years. As part of this transfer of Great-West
Life's U.S. business, the Company in 1993 entered into a tax agreement with
Great-West Life in order to transfer the tax liabilities associated with the
insurance contracts and related assets that had been transferred.
In addition to the contingent tax liability release described above, the
Company's income tax provision for 1997 also reflected an increase for
additional contingent items related to open tax years where it was determined to
be probable that additional tax liabilities could be owed based on changes in
facts and circumstances. The increase in 1997 was $16.0 million, of which $10.1
million was attributable to participating policyholders and, therefore, had no
effect on the net income of the Company.
In 1999 total revenues increased $228.9 million or 9% to $2.7 billion when
compared to the year ended December 31, 1998. The growth in revenues in 1999 was
comprised of increased premium income of $168.3 million, increased fee income of
$119.1 million, decreased net investment income of $21.4 million and decreased
realized gains on investments of $37.1 million. In 1998 total revenues increased
$301.1 million or 14% to $2.4 billion when compared to the year ended December
31, 1997. The growth in revenues in 1998 was comprised of increased premium
income of $161.7 million, increased fee income of $95.3 million, increased net
investment income of $15.7 million and increased realized gains on investments
of $28.4 million.
The increased premium income in 1999 was comprised of growth in Employee
Benefits premium income of $243.5 million, offset by a decrease in Financial
Services premium income of $75.2 million. The growth in premium income in the
Employee Benefits segment primarily reflected an increase of $205.9 million of
premium income derived from Alta Health & Life Insurance Company ("Alta"),
formerly known as Anthem Health & Life Insurance Company, which the Company
acquired in July 1998 (see Other Matters). The decrease of $75.2 million in
Financial Services premium income was due primarily to reinsurance transactions
in 1998 of $46.2 million. There were no significant reinsurance transactions in
1999. The increased premium income in 1998 was comprised of growth in Employee
Benefits premium income of $281.8 million, offset by a decrease in Financial
Services premium income of $120.1 million. The growth in premium income in the
Employee Benefits segment primarily reflected $209.5 million of premium income
derived from the acquisition of Alta. The decrease of $120.2 million in
Financial Services premium income was primarily due to reinsurance transactions
in 1997 of $155.8 million versus only $46.2 million in premiums due to
reinsurance transactions in 1998.
The increased fee income in 1999 was comprised of growth in Employee Benefits
fee income and Financial Services fee income of $103.9 million and $15.2
million, respectively. The growth in Employee Benefits fee income reflected an
increase of $42.0 million of fee income derived from Alta during 1999. The
remaining increase was the result of new group health sales and increased fees
on 401(k) variable funds related to growth in equity markets. The increase in
fee income in 1998 was comprised of Employee Benefits fee income and Financial
Services fee income of $86.6 million and $8.7 million, respectively. The growth
in Employee Benefits fee income reflected $31.6 million of fee income derived
from the acquisition of Alta. The remaining increase was the result of new group
health sales and increased fees on 401(k) variable funds related to growth in
equity markets.
Realized investment gains decreased from a realized investment gain of $38.2
million in 1998 to a realized investment gain of $1.1 million in 1999. Realized
investment gains were $9.8 million in 1997. The increase in interest rates in
1999 contributed to $7.8 million of fixed maturity losses, while the decrease in
interest rates in 1998 and 1997 resulted in gains on sales of fixed maturities
totaling $38.4 and $16.0 million, respectively. Increases (decreases) in the
provision for asset losses of $(7.0) and $0.6 million, respectively, were
recognized in 1999 and 1998.
Total benefits and expenses increased $235.7 million or 11% in 1999 when
compared to the year ended December 31, 1998. The increase in 1999 was due to
Alta, which resulted in an increase in benefits and expenses of $245.3 million.
Excluding Alta, benefits and expenses would have decreased $9.6 million or 0.4%
in 1999. The decrease included the effect of a change in accounting policy,
which resulted in the capitalization of $18.4 million of software costs in 1999.
Overall, total benefits and expenses have increased due to higher costs of
managed care operations. The increase of $213.9 from 1997 to 1998 was a
combination of the acquisition of Alta, which resulted in benefits and expenses
increasing $258.3, partially offset by a decrease in policyholder benefits
related to reinsurance transactions of $109.4 million.
In June 1997, the Company recaptured all the remaining pieces of an individual
participating block of business previously reinsured to Great-West Life. The
Company recorded various assets and liabilities related to the recapture as
discussed in Note 3 to the Consolidated Financial Statements. In recording the
recapture, both life insurance premiums and benefits were increased by the
amount recaptured ($155.8 million). Consequently, the net income of the Company
was not impacted by the reinsurance transaction.
Income tax expense decreased $15.6 million or 16% in 1999 when compared to the
year ended December 31, 1998, which reflects a net $17.2 million release of
contingent tax liabilities relating to prior open tax years, as discussed above.
Income tax expense increased $49.0 million or 98% in 1998 when compared to the
year ended December 31, 1997. The increase in income tax expense from 1997 to
1998 reflected higher earnings in 1998, as well as the fact that the 1997 income
tax provision included a net $26.2 release of contingent tax liabilities
relating to prior open tax years, as discussed above. Excluding these contingent
tax releases, the Company's income tax expense increased 2% and 30% in 1999 and
1998, respectively. See Note 10 to the Consolidated Financial Statements for a
discussion of the Company's effective tax rates.
In evaluating its results of operations, the Company also considers net changes
in deposits received for investment-type contracts, deposits to separate
accounts and self-funded equivalents. Self-funded equivalents represent paid
claims under minimum premium and administrative services only contracts, which
amounts approximate the additional premiums that would have been earned under
such contracts if they had been written as traditional indemnity or HMO
programs.
Deposits for investment-type contracts decreased $709.6 million or 53% in 1999
when compared to the year ended December 31, 1998. Deposits for investment-type
contracts increased $686.0 million or 104% in 1998 when compared to the year
ended December 31, 1997. The decrease in 1999 was primarily due to two indemnity
reinsurance agreements with Great-West Life whereby the Company reinsured by
coinsurance certain Great-West Life individual non-participating life insurance
policies during 1998. This transaction increased deposits by $519.6 million in
1998 and accounted for (73)% and 76% of the increase (decrease) in 1999 and
1998, respectively.
Deposits for separate accounts increased $374.4 million or 17% in 1999 when
compared to the year ended December 31, 1998. This was due primarily to $200
million of BOLI deposits associated with the variable life product, and a
continuing movement toward variable funds and away from guaranteed interest rate
options. Deposits for separate accounts increased $63.7 million or 3% in 1998
when compared to the year ended December 31, 1997. This increase in 1998
reflected a continuing movement toward variable funds and away from guaranteed
interest rate options.
Self-funded premium equivalents increased $372.7 million or 14% in 1999 when
compared to the year ended December 31, 1998. The increase in 1999 was primarily
due to an increase in self-funded premium equivalents from Alta of $155.2
million, with the remainder coming from the growth in business. Self-funded
premium equivalents increased $567.1 million or 28% in 1998 when compared to the
year ended December 31, 1997. Approximately half of the 1998 increase ($281.3
million) was due to the acquisition of Alta, with the remainder coming from
sales growth.
Total assets increased $2.3 billion or 9% in 1999 when compared to the year
ended December 31, 1998. Separate account assets increased $2.7 billion
primarily due to the strength of the equity markets in the United States. The
$0.4 billion decrease in the general account reflected the continuing movement
away from guaranteed products.
2. Other Matters
Effective January 1, 2000, the Company coinsured the majority of General
American Life Insurance Company's ("General American") group life and health
insurance business, which primarily consists of administrative services only and
stop loss policies. This added over 900,000 medical members representing
approximately $1.7 billion of premium and premium equivalents. The agreement
will convert to an assumption reinsurance agreement by January 1, 2001, subject
to regulatory approval. On January 1, 2000, the Company assumed approximately
$150 million of policy reserves and miscellaneous liabilities in exchange for an
equal amount of cash and other assets from General American.
On October 6, 1999, the Company entered into an agreement with Allmerica
Financial Corporation ("Allmerica") to acquire Allmerica's group life and health
insurance business on March 1, 2000. This acquisition is anticipated to add
300,000 medical members and approximately $800 million of premium and premium
equivalents. This business primarily consists of administrative services only
and stop loss policies. The in-force business is expected to be underwritten and
retained by the Company upon each policy renewal date. The purchase price is
based on a percentage of the premium and administrative fees in force at March
1, 2000 and March 1, 2001.
On July 8, 1998, the Company acquired the outstanding common stock of Alta,
which was a subsidiary of Anthem, Inc. (the Blue Cross and Blue Shield licensee
for Indiana, Kentucky, Ohio, and Connecticut). The cost of the acquisition was
$82.7 million. The purchase price was based on adjusted book value and was
subject to further adjustments. The acquisition was accounted for as a purchase
and was financed through internally generated funds. The fair value of tangible
assets acquired and liabilities assumed was $379.9 million and $317.4 million,
respectively. The goodwill representing the purchase price in excess of fair
value of net assets acquired is included in other assets and is being amortized
over 30 years on a straight-line basis.
The majority of Alta's customers are in the Company's target market of small to
mid-size employers who prefer to self-fund their benefit plans. New and existing
customers have been migrated to the Company's One Health Plan network, which
provided substantial new growth for the One Health Plan subsidiary organization.
Life and health premium and fee income for Alta totaled $489.0 million and
$241.1 million for the periods ended December 31, 1999 and 1998, respectively,
while self-funded premium equivalents were $436.5 million and $281.3 million for
the years ended December 31, 1999 and 1998, respectively. The Company recorded
small losses associated with Alta operations in 1999 and 1998, respectively. The
results of Alta since the date of acquisition are included in the Employee
Benefits segment.
B. EMPLOYEE BENEFITS RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Employee Benefits
segment:
(Millions) Years Ended December 31,
--------------------------------------
INCOME STATEMENT 1999 1998 1997
----------- ---------- ----------
DATA
Premiums $ 990 $ 747 $ 465
Fee income 549 445 358
Net investment income 80 95 100
Realized investment gains (losses) (1) 8 3
----------- ---------- ----------
Total Revenues 1,618 1,295 926
Policyholder benefits 789 590 371
Operating expenses 661 547 428
----------- ---------- ----------
----------- ---------- ----------
Total benefits and expenses 1,450 1,137 799
----------- ---------- ----------
Income from operations 168 158 127
Income tax expense 51 51 29
----------- ---------- ----------
Net Income $ 117 $ 107 $ 98
=========== ========== ==========
Deposits for investment-type
contracts $ 26 $ 37 $ 25
Deposits to separate accounts 1,745 1,568 1,403
Self-funded premium equivalents 2,979 2,606 2,039
During 1999, the Employee Benefits segment experienced:
o significant growth in 401(k) assets under administration, o increased sales
offset by some deterioration in customer retention in group life and health, o
favorable morbidity results, and o license approval for one additional HMO
subsidiary, for a total of 15 fully operational HMOs.
Net income for Employee Benefits increased 9% in 1999 and 9% in 1998. The
improvement in earnings in 1999 reflected increased fee income from variable
401(k) assets, improved group morbidity experience and the capitalization of
$17.1 million of software costs in 1999, offset by a decrease in realized gains.
The improvement in earnings in 1998 reflected increased fee income from variable
401(k) assets and improved group mortality experience. The changes in income tax
provisions discussed above under "Company Results of Operations" resulted in an
increase in net income for the Employee Benefits segment of $4.7 million in
1999.
401(k) premiums and deposits for 1999 and 1998 increased 11% and 14%,
respectively, as the result of higher recurring deposits from existing customers
and new sales. Assets under administration (including third-party
administration) in 401(k) increased 26% over 1998 to $8.5 billion and 26% from
1997 to 1998, primarily due to strong equity markets.
Equivalent premium revenue and fee income for group life and health increased
19% from 1998 levels as the result of a combination of price increases and the
Alta acquisition. From 1997 to 1998, equivalent premium revenue and fee income
had increased 32% as a result of a combination of increased sales and the Alta
acquisition.
1. Group Life and Health
The Employee Benefits segment experienced a net increase of 468 group health
care customers (employer groups) during 1999 (versus 593 in 1998). Much of the
health care growth can be attributed to the introduction of new HMOs in markets
with high sales potential, and the Company's ability to offer a choice of
managed care products.
To position itself for the future, the Employee Benefits segment is focused on
putting in place the products, strategies and processes that will strengthen its
competitive position in the evolving managed care environment.
The Company experienced a 6% decrease in total health care membership from
2,266,700 at the end of 1998 to 2,130,400 at year-end 1999 as the result of
certain large case terminations. Gatekeeper (i.e., POS and HMO) members grew 5%
from 522,300 in 1998 to 549,900 in 1999. The Company expects this segment of the
business to grow as additional HMO licenses are obtained and additional Alta
members are converted.
Total health care membership increased from 1997 to 1998 by 35% (Alta accounted
for 76% of this growth). Gatekeeper members grew 26% from 414,500 in 1997 to
522,300 in 1998, including 61,800 Alta members. Excluding the Alta acquisition,
gatekeeper members increased 19%.
2. 401(k)
The number of new 401(k) case sales (employer groups), including third-party
administration business generated through the Company's marketing and
administration arrangement with New England, decreased 2% to 811 in 1999 from
828 in 1998 (1,235 in 1997). The 401(k) block of business under administration
totaled 6,400 employer groups and more than 500,000 individual participants,
compared to 6,100 employer groups and 475,000 individual participants in 1998,
and 5,700 employer groups and 430,000 individual participants in 1997.
During 1999, the in-force block of 401(k) business continued to perform well,
with customer retention of 92.9% versus 93.0% in 1998. This, combined with
strong equity markets, resulted in a 26% increase in assets under management
during 1999 and 1998, respectively.
In addition to the Company's internally-managed funds, the Company offers
externally-managed funds from recognized mutual funds companies such as AIM,
Fidelity, Putnam, American Century, Founders and T. Rowe Price. This strategy,
supported by participant education efforts, is validated by the fact that 99% of
assets contributed in 1999 were allocated to variable funds.
To promote long-term asset retention, the Company enhanced a number of products
and services including prepackaged "lifestyle" funds (The Profile Series),
expense reductions for high-balance accounts, a rollover IRA product, more
effective enrollment communications, one-on-one retirement planning assistance
and personal plan illustrations.
3. Outlook
The Alta, General American, and Allmerica acquisitions will help to provide the
Company with critical mass to compete in the consolidating health care market.
Through a combination of internal growth and new business acquisitions, the
Company expects to grow from 2.1 million members to 3.4 million members by the
end of the first quarter of 2001. The Company's life and health and 401(k) sales
are projected to double from 1999 results. In order to remain competitive, a
focused effort on provider contracting will be essential to ensure competitive
morbidity results. A continuing focus on expense levels and synergies will
ensure competitive administrative expenses. The ongoing consolidation of the
Company's benefit payment offices will remain an important operational issue
from both a cost and quality perspective.
The Company will continue the expansion of its One Health Plan managed care
subsidiaries. In 2000, it is anticipated that three new licensed HMOs, in
Kansas, Missouri and Pennsylvania, will be approved. This will bring the total
number of licensed One Health Plan HMOs to 18, which will provide current
customers with a comprehensive national managed care network.
Delivering cost-effective, value-added services via the Internet will continue
to be a focus for the Company. The Company has already introduced online
enrollment capability for 401(k) participants, and later in 2000 it will
introduce the same capability for life and health members. In addition, the
Company has signed an agreement with an online investment advisor to provide
401(k) participants with personal investment advice via the Internet. This
action, combined with a very competitive product portfolio should result in an
increase in new case sales.
C. FINANCIAL SERVICES RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Financial Services
segment:
(Millions) Years Ended December 31,
----------------------------------------
INCOME STATEMENT 1999 1998 1997
------------ ----------- -----------
DATA
Premiums $ 173 $ 248 $ 368
Fee income 86 71 62
Net investment income 796 802 782
Realized investment gains 2 30 7
(losses)
------------ ----------- -----------
Total Revenues 1,057 1,151 1,219
Policyholder benefits 793 872 1,014
Operating expenses 143 141 124
------------ ----------- -----------
Total benefits and expenses 936 1,013 1,138
------------ ----------- -----------
Income from operations 121 138 81
Income tax expense 32 48 20
------------ ----------- -----------
Net Income $ 89 $ 90 $ 61
============ =========== ===========
Deposits for investment-type
contracts $ 608 $ 1,307 $ 633
Deposits to separate accounts 838 640 742
During 1999, the Financial Services segment experienced:
o significant growth in participants and separate account funds primarily
attributable to the public/non-profit business, o very strong persistency in all
lines of business, and o increased sales of BOLI.
Net income for Financial Services decreased 1% in 1999 and increased 48% in
1998. The earnings in 1999 were favorably impacted by improved investment
margins and increased fee income, but were adversely impacted by the large
decrease in realized investment gains. The improvement in earnings in 1998
reflected higher earnings from an increased asset base, an increase in
investment margins, and larger capital gains on fixed maturities. The changes in
income tax provisions discussed above under "Company Results of Operations"
resulted in an increase in net income for the Financial Services segment of $3.6
million in 1999.
1. Savings
Premiums decreased $2.5 million or 14%, from $16.8 million in 1998 to $14.3
million in 1999. Premiums decreased $5.8 million or 26%, from $22.6 million in
1997 to $16.8 million in 1998. The decrease in both years is attributable to the
continuing trend of policyholders selecting variable annuity options (separate
accounts) as opposed to the more traditional fixed annuity products with life
contingencies.
Fee income related to savings products increased $10.3 million or 15%, from
$71.0 million in 1998 to $81.3 million in 1999. Fee income increased $8.6
million or 14%, from $62.4 million in 1997 to $71.0 million in 1998. The growth
in fee income in 1999 and 1998 was the result of new sales and increased fees on
variable funds related to growth in equity markets.
Deposits for investment-type contracts decreased $3.1 million or 1%, from $239.0
million in 1998 to $235.9 million in 1999. Deposits for investment-type
contracts increased $20.4 million or 9%, from $218.6 million in 1997 to $239.0
million in 1998.
Deposits to separate accounts decreased $2.9 million or 0.4%, from $640.6
million in 1998 to $637.7 million in 1999. Deposits to separate accounts
decreased $101.5 million or 14%, from $742.1 million in 1997 to $640.6 million
in 1998. The decrease in 1998 was the result of 1997 being inflated by the
receipt of a large single deposit in the amount of $120.0 million.
The Financial Services segment's core savings business is in the
public/non-profit pension market. The assets of the public/non-profit business,
including separate accounts but excluding Guaranteed Investment Contracts
("GICs"), increased 2% and 9% during 1999 and 1998 to $7.9 billion and $7.8
billion, respectively. Much of the growth came from the variable annuity
business, which was driven by premiums and deposits and strong investment
returns in the equity markets. The increase was offset by a decrease primarily
due to one major case moving to an independent money manager. The Company did
maintain the administrative services contract and fee income associated with
this client.
The Financial Services segment's savings business experienced strong growth in
1999. The number of new participants in 1999 was 214,100 compared to 151,300 in
1998 (129,200 in 1997), bringing the total lives under administration to 806,700
in 1999 and 642,500 in 1998.
The Financial Services segment again experienced a very high retention rate on
public/non-profit contract renewals, renewing 100% of contracts that were
eligible for renewal during the year. Part of this customer loyalty comes from
initiatives to provide high-quality service while controlling expenses.
The Company continued to limit sales of GICs and to allow this block of business
to contract in response to the highly competitive GIC market. As a result, GIC
assets decreased 62% in 1999, to $104.7 million. In 1998, GIC assets decreased
33% from 1997, to $274.8 million.
Customer demand for investment diversification continued to grow during 1999.
New contributions to variable business represented 64% of the total 1999
premiums versus 63% in 1998. The Company continues to expand the investment
products available through Maxim Series Fund, Inc., and through partnership
arrangements with external fund managers. Externally-managed funds offered to
participants in 1999 included American Century, Ariel, Fidelity, Founders,
INVESCO, Janus, Loomis Sayles, Templeton, T. Rowe Price and Vista.
Customer participation in guaranteed separate accounts increased, as many
customers prefer the security of fixed income securities and separate account
assets. Assets under management for guaranteed separate account funds were
$653.7 million in 1999, compared to $562.3 million in 1998 and $466.2 million in
1997.
FASCorp administered records for approximately 1,595,000 participants in 1999
versus 1,307,000 in 1998. FASCorp's fee income was $53.8 million, $44.0 million
and $36.1 million at December 31, 1999, 1998 and 1997, respectively.
2. Life Insurance
The Company continued its conservative approach to the manufacture and
distribution of traditional life insurance products, while focusing on customer
retention and expense management.
Individual life insurance revenue premiums and deposits of $735.3 million in
1999 decreased 43% from 1998 primarily due to reinsurance transactions with
Great-West Life, which resulted in $565.8 million of premiums and deposits in
1998. Excluding these reinsurance transactions, individual life insurance
revenue premiums and deposits increased 0.1% from 1998. Individual life
insurance revenue premiums and deposits of $1.3 billion in 1998 increased 71%
from 1997 primarily due to reinsurance transactions with Great-West Life, which
resulted in $565.8 million of premiums and deposits in 1998 versus $155.8
million in 1997. Excluding these reinsurance transactions, individual life
insurance revenue premiums and deposits increased 14% from 1997 to 1998. The
Company also experienced strong BOLI sales in 1998 which more than offset
reductions in COLI premiums.
In 1996, the U.S. Congress enacted legislation to phase out the tax
deductibility of interest on policy loans on COLI products. Since then, renewal
premiums and deposits for COLI products have decreased to $128.5 million in 1999
from $139.8 million in 1998 and $299.8 million in 1997, and the Company expects
this decline to continue. As a result of these legislative changes, the Company
has shifted its emphasis from COLI to new sales in the BOLI market. This product
provides long-term benefits for bank employees and was not affected by the 1996
legislative changes. BOLI premiums and deposits were $436.3 million during 1999,
compared to $408.3 million in 1998 and $179.3 million in 1997. The Company
continues working closely with existing COLI customers to determine the options
available to them and is confident that the effect of the legislative changes
will not be material to the Company's operations.
3. Outlook
During 2000, the Company expects to continue its growth of the third party
administration business through FASCorp. The savings business will continue to
improve customer service and, at the same time, lower unit costs through the use
of Internet services.
The Company will continue to emphasize the development of the institutional life
insurance and annuity markets. Internet sales and service is also expected to
play a significant role in the life insurance business lines. Increased emphasis
was placed on improving Internet functionality during 1999, and it will continue
to be a focus in the coming year in the bank and institutional markets.
Strong sales are expected in the BOLI market - the Company's new variable life
product has been well received in the market as the separate account option
limits credit risk.
d. INVESTMENT OPERATIONS
The Company's primary investment objective is to acquire assets whose durations
and cash flows reflect the characteristics of the Company's liabilities, while
meeting industry, size, issuer and geographic diversification standards. Formal
liquidity and credit quality parameters have also been established.
The Company follows rigorous procedures to control interest rate risk and
observes strict asset and liability matching guidelines. These guidelines ensure
that even under changing market conditions, the Company's assets will meet the
cash flow and income requirements of its liabilities. Through dynamic modeling,
using state-of-the-art software to analyze the effects of a wide range of
possible market changes upon investments and policyholder benefits, the Company
ensures that its investment portfolio is appropriately structured to fulfill
financial obligations to its policyholders.
A summary of the Company's general account invested assets follows:
[Millions]
1999 1998
----------- -----------
Fixed maturities, available for sale, at fair value $ 6,728 $ 6,937
Fixed maturities, held-to-maturity, at amortized cost 2,260 2,200
Mortgage loans 975 1,133
Real estate and common stock 173 122
Short-term investments 244 420
Policy loans 2,681 2,859
----------- -----------
Total invested assets $ 13,061 $ 13,671
=========== ===========
1. Fixed Maturities
Fixed maturity investments include public and privately placed corporate bonds,
government bonds and mortgage-backed and asset-backed securities. The Company's
strategy related to mortgage-backed and asset-backed securities is to focus on
those with lower volatility and minimal credit risk. The Company does not invest
in higher risk collateralized mortgage obligations such as interest-only and
principal-only strips, and currently has no plans to invest in such securities.
Private placement investments, which are primarily in the held-to-maturity
category, are generally less marketable than publicly traded assets, yet they
typically offer covenant protection which allows the Company, if necessary, to
take appropriate action to protect its investment. The Company believes that the
cost of the additional monitoring and analysis required by private placements is
more than offset by their enhanced yield.
One of the Company's primary objectives is to ensure that its fixed maturity
portfolio is maintained at a high average quality, so as to limit credit risk.
If not externally rated, the securities are rated by the Company on a basis
intended to be similar to that of the rating agencies.
The distribution of the fixed maturity portfolio (both available for sale and
held to maturity) by credit rating is summarized as:
Credit Rating 1999 1998
-------------- ---------------
AAA 48.9% 45.6%
AA 8.9 9.4
A 19.6 23.8
BBB 22.3 20.7
BB and Below (non-investment grade) 0.3 0.5
-------------- ---------------
TOTAL 100.0% 100.0%
At December 31, 1999 and 1998, the Company owned no bonds in default.
2. Mortgage Loans
During 1999, the mortgage portfolio declined 14% to $1.0 billion, net of
impairment reserves. The Company has not actively sought new loan opportunities
since 1989 and, as such, has experienced an ongoing reduction in this
portfolio's balance.
The Company follows a comprehensive approach to the management of mortgage loans
which includes ongoing analysis of key mortgage characteristics such as debt
service coverage, net collateral cash flow, property condition, loan to value
ratios and market conditions. Collateral valuations are performed for those
mortgages which, after review, are determined by management to present possible
risks and exposures. These valuations are then incorporated into the
determination of the Company's allowance for credit losses.
The average balance of impaired loans increased to $43.9 million in 1999
compared with $31.2 million in 1998, and there were no foreclosures in 1999,
compared to $3.0 million in 1998. The low levels of problematic mortgages
relative to the Company's overall balance sheet are due to the ongoing decrease
in the size of the mortgage portfolio, the Company's active loan management
program and overall strength in market conditions.
Occasionally, the Company elects to restructure certain loans if the economic
benefits to the Company are believed to be more advantageous than those achieved
by acquiring the collateral through foreclosure. At December 31, 1999 and 1998,
the Company's loan portfolio included $75.7 million and $52.9 million,
respectively, of non-impaired restructured loans.
3. Real Estate and Common Stock
The Company's real estate portfolio is composed primarily of the Head Office
property ($91.1 million) and properties acquired through the foreclosure of
troubled mortgages ($10.1 million). The Company operates a wholly-owned real
estate subsidiary, which attempts to maximize the value of these properties
through rehabilitation, leasing and sale. The Company added a third tower to its
Head Office complex during the first quarter of 2000.
The common stock portfolio is composed of mutual fund seed money and some
private equity investments. The Company anticipates a limited participation in
the stock markets in 2000.
4. Derivatives
The Company uses certain derivatives, such as futures, options and swaps, for
purposes of hedging interest rate and foreign exchange risk. These derivatives,
when taken alone, may subject the Company to varying degrees of market and
credit risk; however, when used for hedging, these instruments typically reduce
risk. The Company controls the credit risk of its financial contracts through
credit approvals, limits and monitoring procedures. The Company has also
developed controls within its operations to ensure that only Board authorized
transactions are executed. Note 6 to the Consolidated Financial Statements
contains a summary of the Company's outstanding financial hedging derivatives.
5. Outlook
General economic conditions continued to remain strong during 1999. The Company
does not expect to recognize any asset writedowns or restructurings in 2000 that
would result in a material adverse effect upon the Company's financial
condition.
E. LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that vary among the
principal product lines. Life insurance and pension plan reserves are primarily
long-term liabilities. Accident and health reserves, including long-term
disability, consist of both short-term and long-term liabilities. Life insurance
and pension plan reserve requirements are usually stable and predictable, and
are supported primarily by long-term, fixed income investments. Accident and
health claim demands are stable and predictable but generally shorter term,
requiring greater liquidity.
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and utilizing
positive cash flows from operations. Liquidity for the Company has remained
strong, as evidenced by significant amounts of short-term investments and cash,
which totaled $502.0 million and $596.5 million as of December 31, 1999 and
1998, respectively.
Funds provided from premiums and fees, investment income and maturities of
investment assets are reasonably predictable and normally exceed liquidity
requirements for payment of claims, benefits and expenses. However, since the
timing of available funds cannot always be matched precisely to commitments,
imbalances may arise when demands for funds exceed those on hand. Also, a demand
for funds may arise as a result of the Company taking advantage of current
investment opportunities. The Company's capital resources represent funds
available for long-term business commitments and primarily consist of retained
earnings and proceeds from the issuance of commercial paper and equity
securities. Capital resources provide protection for policyholders and the
financial strength to support the underwriting of insurance risks, and allow for
continued business growth. The amount of capital resources that may be needed is
determined by the Company's senior management and Board of Directors as well as
by regulatory requirements. The allocation of resources to new long-term
business commitments is designed to achieve an attractive return, tempered by
considerations of risk and the need to support the Company's existing business.
The Company's financial strength provides the capacity and flexibility to enable
it to raise funds in the capital markets through the issuance of commercial
paper. The Company continues to be well capitalized, with sufficient borrowing
capacity to meet the anticipated needs of its business. The Company had no
commercial paper outstanding at December 31, 1999, compared with $39.7 million
at December 31, 1998. The commercial paper has been given a rating of A-1+ by
Standard & Poor's Corporation and a rating of P-1 by Moody's Investors Service,
each being the highest rating available.
F. ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement No. 133,
"Accounting for Derivative Instruments and for Hedging Activities", which, as
amended, is required to be adopted in years beginning after June 15, 2000. This
Statement provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. Although management has
not completed its analysis of the impact of this Statement, management does not
anticipate that the adoption of the new Statement will have a significant effect
on earnings or the financial position of the Company because of the Company's
minimal use of derivatives.
See the Note 1 to the Consolidated Financial Statements for additional
information regarding accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's assets are purchased to fund future benefit payments to its
policyholders and contractholders. The primary risk of these assets is exposure
to rising interest rates. The Company's exposure to foreign currency exchange
rate fluctuations is minimal as only nominal foreign investments are held.
To manage interest rate risk, the Company invests in assets that are suited to
the products that it sells. For products with fixed and highly predictable
benefit payments such as certificate annuities and payout annuities, the Company
invests in fixed income assets with cash flows that closely match the liability
product cash flows. The Company is then protected against interest rate changes,
as any change in the fair value of the assets will be offset by a similar change
in the fair value of the liabilities. For products with uncertain timing of
benefit payments such as portfolio annuities and life insurance, the Company
invests in fixed income assets with expected cash flows that are earlier than
the expected timing of the benefit payments. The Company can then react to
changing interest rates sooner as these assets mature for reinvestment.
The Company also manages risk with interest rate derivatives such as interest
rate caps that pay when interest rates rise. These derivatives are only used to
reduce risk and are not used for speculative purposes.
To manage foreign currency exchange risk, the Company uses currency swaps to
convert the foreign currency back to United States dollars. These swaps are
purchased each time a foreign currency denominated asset is purchased.
The Company has estimated the possible effects of interest rate changes at
December 31, 1999. If interest rates increased by 100 basis points (1%), the
fair value of the fixed income assets would decrease by approximately $365
million. This calculation uses projected asset cash flows, discounted back to
December 31, 1999. The cash flow projections are shown in the table below. The
table shows cash flows rather than expected maturity dates because many of the
Company's assets have substantial expected principal payments prior to the final
maturity date. The fair value shown in the table below was calculated using spot
discount interest rates that varied by the year in which the cash flow was
expected to be received. These spot rates in the benchmark calculation ranged
from 5.25% to 6.93%.
Projected Cash Flows by Calendar Year ($ millions)
There- Undiscounted Fair
2000 2001 2002 2003 2004 after Total Value
------- ------- -------- ------- ------- --------- --------------- ---------
Benchmark 1,777 1,683 1,733 1,372 1,199 5,290 13,054 9,401
Interest Rates
up 1% 1,749 1,652 1,710 1,346 1,183 5,537 13,177 9,036
The Company administers separate account variable annuities for retirement
savings products. The Company collects a fee from each account, and this fee is
a percentage of the account balance. There is a market risk of lost fee revenue
to the Company if equity and bond markets decline. If the equity and bond
portfolios decline by 10%, the Company's fee revenue would decline by
approximately $11 million per year. The Company is managing this risk for 1999
with a derivative swap that pays the Company a fixed return in exchange for the
performance of a combination of equity and bond indexes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following are the Company's Consolidated Financial Statements for the Years
Ended December 31, 1999, 1998, and 1997 and the Independent Auditors' Report
thereon.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
of GWL&A Financial Inc.:
We have audited the accompanying consolidated balance sheets of GWL&A Financial
Inc. (an indirect wholly-owned subsidiary of The Great-West Life Assurance
Company) and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholder's equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of GWL&A Financial Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1999, the Company adopted Statement of Position No. 98-1, "Accounting
for the Cost of Computer Software Developed or Obtained for Internal Use" and,
accordingly, changed its method of accounting for software development costs.
/s/Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
January 31, 2000
GWL&A FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(Dollars in Thousands)
===============================================================================================================
1999 1998
------------------- -------------------
ASSETS
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost (fair value
$2,238,581 and $2,298,936) $ 2,260,581 $ 2,199,818
Available-for-sale, at fair value (amortized cost
$6,953,383 and $6,752,532) 6,727,922 6,936,726
Common stock, at fair value (cost $43,978 and 69,240 48,640
$41,932)
Mortgage loans on real estate, net 974,645 1,133,468
Real estate, net 103,731 73,042
Policy loans 2,681,132 2,858,673
Short-term investments, available-for-sale (cost
approximates fair value) 243,709 420,169
------------------- -------------------
Total Investments 13,060,960 13,670,536
Cash 258,312 176,369
Reinsurance receivable
Related party 5,015 5,006
Other 168,307 187,952
Deferred policy acquisition costs 282,295 238,901
Investment income due and accrued 137,810 157,587
Other assets 308,450 311,078
Premiums in course of collection 142,199 84,940
Deferred income taxes 253,323 191,483
Separate account assets 12,780,016 10,099,543
------------------- -------------------
TOTAL ASSETS $ 27,396,687 $ 25,123,395
=================== ===================
See notes to consolidated financial statements.
===============================================================================================================
1999 1998
--------------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves
Related party $ 555,783 $ 555,300
Other 11,181,900 11,347,548
Policy and contract claims 391,968 428,798
Policyholders' funds 185,623 181,779
Provision for policyholders' dividends 70,726 69,530
GENERAL LIABILITIES:
Due to Parent Corporation 35,985 52,877
Repurchase agreements 80,579 244,258
Commercial paper 39,731
Other liabilities 638,495 761,505
Undistributed earnings on participating business 130,638 143,717
Separate account liabilities 12,780,016 10,099,543
--------------- --------------
Total Liabilities 26,051,713 23,924,586
--------------- --------------
COMMITMENTS AND CONTINGENCIES
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE COMPANY'S JUNIOR SUBORDINATED
DEBENTURES 175,000
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value, 50,000,000 shares
authorized,
0 shares issued and outstanding
Preferred stock, $0 par value; 500,00 shares
authorized; 50,025 shares issued and outstanding
Common stock, $0 par value; 500,000 shares
authorized; 50,025 shares issued and outstanding 250 250
Additional paid-in capital 707,348 706,588
Accumulated other comprehensive income (loss) (84,861) 61,560
Retained earnings 547,237 430,411
--------------- --------------
Total Stockholder's Equity 1,169,974 1,198,809
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 27,396,687 $ 25,123,395
=============== ==============
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMEN