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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 333-64473
GWL&A FINANCIAL INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1474245
(State or other jurisdiction of incorporation or organization) (I.R.S.Employer
Identification No.)
8515 East Orchard Road, Greenwood Village, 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 (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of March 1, 2001, the aggregate market value of the registrant's voting stock
held by non-affiliates of the registrant was $0.
As of March 1, 2001, 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
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.
On December 31, 2000, the Company and certain affiliated companies completed a
corporate reorganization. Under the new structure, The Great-West Life Assurance
Company ("Great-West Life") will continue to be owned by Great-West Lifeco Inc.
("Great-West Lifeco"), a Canadian holding company, but will no longer hold an
indirect equity interest in the Company. The Company will continue to be
indirectly owned by Great-West Lifeco. Lifeco is a subsidiary of Power Financial
Corporation ("Power Financial"), a Canadian holding company with substantial
interests in the financial services industry. Power Corporation of Canada
("Power Corporation"), a Canadian holding and management company, has voting
control of Power Financial. Mr. Paul Desmarais, through a group of private
holding companies 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, 1999, 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)
2000 1999 1998
------------- ------------- ------------
Premium Income
Employee Benefits
Group Life & Health $ 1,142 $ 991 $ 747
------------- ------------- ------------
Total Employee 1,142 991 747
Benefits
------------- ------------- ------------
Financial Services
Savings 7 14 17
Individual Insurance 183 158 231 (2)
------------- ------------- ------------
Total Financial 190 172 248
Services
------------- ------------- ------------
Premium income $ 1,332 $ 1,163 $ 995
============= ============= ============
Fee Income
Employee Benefits
Group Life & Health $ 649 $ 454 $ 367
401(k) 104 95 78
------------- ------------- ------------
------------- ------------- ------------
Total Employee 753 549 445
Benefits
------------- ------------- ------------
------------- ------------- ------------
Financial Services
Savings 111 81 71
Individual Insurance 8 5
------------- ------------- ------------
------------- ------------- ------------
Total Financial 119 86 71
Services
------------- ------------- ------------
------------- ------------- ------------
Fee income $ 872 $ 635 $ 516
============= ============= ============
============= ============= ============
Deposits for investment-type
contracts (3)
Employee Benefits $ 27 $ 26 $ 37
Financial Services 808 608 1,307 (2)
------------- ------------- ------------
Total
investment-type
deposits $ 835 $ 634 $ 1,344
============= ============= ============
Deposits to Separate Accounts
Employee Benefits $ 1,951 $ 1,745 $ 1,568
Financial Services 1,154 838 640
------------- ------------- ------------
Total separate accounts
deposits $ 3,105 $ 2,583 $ 2,208
============= ============= ============
Self-funded equivalents - $ $ $
Employee Benefits (4) 5,181 2,979 2,606
============= ============= ============
(1) All information in the above table and other tables herein is
derived from information that has been prepared in conformity
with accounting principles generally accepted in the United
States of America, unless otherwise indicated.
(2) 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.
(3) Investment-type contracts are contracts which include significant
cash build-up features, as discussed in FASB Statement No. 97.
(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 14,100 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 disability insurance which is a type of health insurance
designed to compensate insured people for a portion of the income they lose
because of a disabling injury or illness. Generally, benefits are in the form of
monthly payments.
The Company offers a choice of managed care products including Health
Maintenance Organization ("HMO") plans, which provide a high degree of managed
care, and Point of Service ("POS") plans which offer more flexibility in
provider choice than HMO plans, and Preferred Provider Organization ("PPO")
plans.
Under HMO plans, health care for the member is coordinated by a primary care
physician who is responsible for managing all aspects of the member's health
care. HMO plans offer a broad scope of benefits coverage including routine
office visits and preventive care, as well as lower premiums and low copayments,
which minimize out-of-pocket costs. There are no claims for a member to file
when services are received through a primary care physician.
POS plans also require that a member enroll with a primary care physician who is
responsible for coordinating the member's health care. Similar to an HMO,
members receive the highest benefit coverage and the lowest out-of-pocket costs
when they use their primary care physician to coordinate their 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") 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,
----------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- -------
In force
end of year $ 96,311(1$ 83,901(1$ 84,121(1$ 53,211 $ 49,500
(1) Includes $18,397, $25,812 and $25,597 of in force group life
insurance obtained from the acquisition of Alta for the years ended
December 31, 2000, 1999 and 1998, respectively. Also includes $18,408
(in 2000 only) of in force group life insurance obtained from the
acquisition of General American.
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, variable investment options or a
self directed brokerage option. 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 2000 and 1999, 97% were
allocated to variable investment options.
The Company is compensated by the separate accounts for bearing expense risks
pertaining to the variable annuity contract, and for providing administrative
services. For certain funds, a subsidiary of the Company also receives fees for
serving as an investment advisor for those underlying funds, which are managed
by the subsidiary.
Customer retention is a key factor for the profitability of the Company's 401(k)
product. The annuity contract imposes a charge for termination during a
designated period of time after the contract's inception. The charge is
determined in accordance with a formula in the contract. Existing federal tax
penalties on distributions prior to age 59 1/2 provide an additional
disincentive to premature surrenders of account balances, but do not impact
rollovers to products of competitors.
The Company offers a rollover Individual Retirement Account, 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
- --------------------------- ------------------- -------------------------
1996 $ 347 $ 3,229
1997 328 4,568
1998 299 5,770
1999 268 7,339
2000 248 6,614
2. Method of Distribution
The Company distributes its products and services through field sales staff of
the Company located in 86 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. The United States health
care industry continues to experience mergers and consolidations. A number of
larger carriers have dropped out of the group health market entirely. Although
there are still many different carriers in the marketplace, it has become
dominated by an increasingly smaller number of carriers, including the Company.
The highly competitive marketplace creates pricing pressures, which encourage
employers to seek competitive bids each year. Although most employers are
looking for affordably priced employee benefits products, they also want to
offer product choices because employee needs differ. In many cases it is more
cost-effective and efficient for an employer to contract with a carrier such as
the Company, 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 (included within the
group life family of products offered by the Company), the policy reserves equal
the present value of future benefits and expenses using best estimate
assumptions for interest, mortality and expenses (including margins for adverse
deviation). For group universal life (included within the group life family of
products offered by the Company), the policy reserves equal the accumulated fund
balance (which reflects cumulative deposits plus credited interest less charges
thereon). Reserves for long-term disability products are established for lives
currently in payment status, or which are approved for payment but are in a
waiting period, using industry and Company morbidity factors, and interest rates
based on Company experience. In addition, reserves are held for claims that have
been incurred but not reported.
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, pay expected death or retirement benefits or surrender requests, and
to generate profits.
5. Reinsurance
The Company seeks to limit its exposure on any single insured and to recover a
portion of benefits paid by ceding risks to other insurance enterprises under
excess coverage and 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.
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.
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 retirement savings business is in the public/non-profit
pension market. The Company provides investment products, and administrative and
communication services, to employees of state and local governments (Internal
Revenue Code Section 457 plans), as well as 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, BenefitsCorp, Inc. and BenefitsCorp Equities, Inc.,
a broker-dealer subsidiary of BenefitsCorp, Inc. (collectively, "BenefitsCorp").
The Company's primary marketing emphasis in the public/non-profit pension market
is group fixed and variable annuity contracts for defined contribution
retirement savings plans. Defined contribution plans provide for benefits based
upon the value of contributions to, and investment returns on, the individual's
account. This has been the fastest growing portion of the pension marketplace in
recent years.
The Company has a marketing agreement with Charles Schwab & Co., Inc. to sell
individual fixed and variable qualified and non-qualified deferred annuities.
The 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 by customers and their participants
continued to grow during 2000. 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 individual annuity
products. To encourage customer retention, annuity contracts typically impose a
surrender charge on policyholder balances withdrawn for a period of time after
the contract's inception. The period of time and level of the charge vary by
product. Existing federal tax penalties on distributions prior to age 59 1/2
provide an additional disincentive to premature surrenders of annuity balances,
but do not impede transfers of those balances to products of competitors.
Annuity products generate earnings from the investment spreads on the guaranteed
investment options and from the fees collected for mortality and expense risks
associated with the variable options. The Company also receives fees for
providing 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 account assets
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]
Guaranteed
Year Ended Investment Fixed Variable
December 31, Contracts Annuities Annuities
--------------------- -------------- ---------------- ---------------
1996 $ 525 $ 5,531 $ 2,256
1997 409 5,227 3,280
1998 275 4,849 4,330
1999 105 4,592 5,481
2000 103 4,394 5,757
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 $24.3 billion at December 31, 2000 and $23.3 billion at December 31,
1999.
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 ($273.7 million, $271.0 million, and
$283.8 million in 2000, 1999, and 1998, respectively). Participating dividends
for 2000 and 1999 were $74.4 million and $70.1 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 December 31, 2000 and 1999, the Company had $3.7 billion and $3.5 billion,
respectively, 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 Business-Owned Life Insurance
("BOLI") market. BOLI was not affected by the 1996 legislation. These products
are interest-sensitive whole life and universal life policies, and they fund
post-retirement benefits for bank employees. At December 31, 2000, the Company
had $1.5 billion fixed and $0.6 billion separate account of BOLI policy reserves
compared to $1.2 billion fixed and $0.2 billion separate account at 1999.
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 credited rates
may be offered after policies have been in force for a period of time.
Certain of the Company's life insurance and group annuity products allow policy
owners to borrow against their policies. At December 31, 2000, approximately 8%
(5% in 1999 and 1998) of outstanding policy loans were on individual life
policies that had fixed interest rates ranging from 5.0% to 8.4%. The remaining
92% of outstanding policy loans had variable interest rates averaging 7.7% at
December 31, 2000. Investment income from policy loans was $191.5 million,
$167.8 million, and $180.9 million for the years ended December 31, 2000, 1999,
and 1998, respectively.
The following table summarizes changes in individual life insurance in force
prior to reinsurance ceded for the years indicated:
Years Ended December 31,
-------------------------------------------------------------
[Millions] 2000 1999 1998 1997 1996
----------- ---------- ---------- --------- ----------
In force,
End of year 46,536 43,831 42,966 28,266 26,892
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, pay expected death or retirement benefits or surrender requests, and
to generate profits.
5. Reinsurance
The Company seeks to limit its exposure to loss on any single insured and to
recover a portion of benefits paid by ceding risks to other insurance
enterprises under excess coverage and 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,
2000, were $26.1 billion, comprised of general account assets of $13.7 billion
and separate account assets of $12.4 billion. 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, 2000, and 1999. The Company reduces credit risk for the
portfolio as a whole by investing primarily in investment grade fixed
maturities. As of December 31, 2000, and 1999, 99% and 97%, respectively, of the
bond portfolio carried an investment grade rating.
The Company's mortgage portfolio constituted 6% and 7% of investment assets as
of December 31, 2000 and 1999, respectively. 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, 2000, 20% of investment assets were invested in policy loans, 3%
were invested in short-term investments, 1% were invested in stocks, and 0.8%
were invested in real estate, compared to 21%, 2%, 1%, and 0.8%, respectively,
in 1999.
The following table sets forth the distribution of invested assets, cash and
accrued investment income for the Company's general account, as of the end of
the years indicated:
[Carrying Value in Millions] 2000 1999 1998 1997 1996
--------- --------- ---------- --------- ---------
Debt Securities:
U.S. Government
Securities and
Obligations of U.S.
Government
Agencies $ 2,315 $ 1,859 $ 1,951 $ 2,091 $ 1,947
Corporate bonds 7,055 7,078 7,117 6,544 6,133
Foreign
Governments 50 51 69 146 119
--------- --------- ---------- --------- ---------
Total 9,420 8,988 9,137 8,781 8,199
Common Stock 95 69 49 39 20
Mortgage loans 843 975 1,133 1,236 1,488
Real estate 107 104 73 94 68
Policy loans 2,810 2,681 2,859 2,657 2,523
Short-term
Investments 415 241 420 399 419
--------- --------- ---------- --------- ---------
Total investments $ 13,690 $ 13,058 $ 13,671 $ 13,206 $ 12,717
========= ========= ========== ========= =========
Cash $ 156 $ 267 $ 176 $ 126 $ 125
Accrued investment
Income 139 138 158 166 198
The following table summarizes the Company's general account investment results:
Net Earned Net
[Millions] Investment Investment
Income Income Rate
----------------- ----------------
For the year:
2000 $ 931 7.34%
1999 876 6.96%
1998 897 7.03%
1997 882 7.21%
1996 835 7.05%
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 ended December 31, 1995. This examination
produced no significant adverse findings regarding the Company. The next
examination by the Colorado Insurance Division is scheduled for 2001, and will
cover the five-year period ended December 31, 2000.
The National Association of Insurance Commissioners ("NAIC") has adopted
risk-based capital rules and other financial ratios for life insurance
companies. Based on the Company's December 31, 2000 statutory financial reports,
the Company has risk-based capital well in excess of that required and was
within the usual ranges of all ratios.
The NAIC has also adopted the Codification of Statutory Accounting Principles
("Codification"). The Codification, which is intended to standardize accounting
and reporting to state insurance departments, is effective January 1, 2001.
However, statutory accounting principles will continue to be established by
individual state laws and permitted practices. The Colorado Division of
Insurance will require adoption of Codification with certain modifications for
the preparation of statutory financial statements effective January 1, 2001 (see
Note 13 to the consolidated financial statements).
2. Insurance Holding Company Regulations
The Company and certain of its subsidiaries are subject to and comply with
insurance holding company regulations in the applicable states. These
regulations contain certain restrictions and reporting requirements for
transactions between affiliates, including the payments of dividends. They also
regulate changes in control of an insurance company.
3. Securities Laws
The Company is subject to various levels of regulation under federal securities
laws. The Company's broker-dealer subsidiaries are regulated by the Securities
and Exchange Commission ("SEC") and the National Association of Securities
Dealers, Inc. The Company's investment advisor subsidiary and transfer agent
subsidiary are regulated by the SEC. Certain of the Company's separate accounts,
mutual funds and variable insurance and annuity products are registered under
the Investment Company Act of 1940 and the Securities Act of 1933.
4. Guaranty Funds
Under insurance guaranty fund laws existing in all states, insurers doing
business in those states can be assessed (up to prescribed limits) for certain
obligations of insolvent insurance companies. The Company has established a
reserve of $7.1 million as of December 31, 1999 to cover future assessments of
known insolvencies of other companies. The Company has historically recovered
more than half of the guaranty fund assessments through statutorily permitted
premium tax offsets. The Company has a prepaid asset associated with guaranty
fund assessments of $2.0 million at December 31, 2000.
5. Potential Legislation
United States legislative developments in various areas, including pension
regulation, financial services regulation and health care legislation could
significantly and adversely affect the Company in the future. Congress 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 to various features of retirement plans such as deferral
limits, distribution options, portability and catch-up.
It is not possible to predict whether future legislation or regulation adversely
affecting the business of the Company will be enacted and, if enacted, the
extent to which such legislation or regulation will have an effect on the
Company and its competitors.
G. RATINGS
The Company is rated by a number of nationally recognized rating agencies. The
ratings represent the opinion of the rating agencies on the financial strength
of the Company and its ability to meet the obligations of its insurance
policies.
Rating Agency Measurement Rating
- ----------------------------------- ------------------------------------------------ ----------
A.M. Best Company Financial Strength and Operating Performance A++ *
Fitch, Inc. 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
2000 and 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 8,600 employees at December 31, 2000.
ITEM 2. PROPERTIES
The Head Office of the Company consists of a 752,000 square foot office complex
located in Greenwood Village, Colorado. 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 2000 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 $134.1 million in 2000 and
$92.1 million in 1999. The Company paid no dividends on preferred stock in both
2000 and 1999.
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.
[Dollars in Millions]
....... Years Ended December 31,
INCOME STATEMENT DATA 2000 1999 1998 1997 1996
----------- ---------- ---------- ------- -------
Premiums $ 1,333 $ 1,163 $ 995 $ 833 $ 829
Fee income 872 635 516 420 347
Net investment income 931 876 897 882 835
Realized investment
gains (losses) 28 1 38 10 (21)
----------- ---------- ---------- ------- -------
Total Revenues 3,164 2,675 2,446 2,145 1,990
Policyholder benefits 1,746 1,582 1,462 1,385 1,356
Operating expenses 1,025 804 688 552 469
----------- ---------- ---------- ------- -------
Total benefits and
expenses 2,771 2,386 2,150 1,937 1,825
----------- ---------- ---------- ------- -------
Income from operations 393 289 296 208 165
Income tax expense 134 83 99
49 30
------- -------
----------- ---------- ----------
Net Income $ 259 $ 206 $ 197 $ 159 $ 135
=========== ========== ========== ======= =======
Years Ended December 31,
2000 1999 1998 1997 1996
---------- ----------- ---------- ------- -------
Deposits for investment-
type contracts $ 835 $ 634 $ 1,344 $ 658 $ 815
Deposits to separate
accounts 3,105 2,583 2,208 2,145 1,438
Self-funded premium
equivalents 5,181 2,979 2,606 2,039 1,940
....... Years Ended December 31,
BALANCE SHEET DATA 2000 1999 1998 1997 1996
--------- ---------- --------- ---------- --------
Investment assets $ 13,690 $ 13,058 $ 13,671 $ 13,206 $ 12,717
Separate account assets 12,381 12,820 10,100 7,847 5,485
Total assets 27,900 27,533 25,123 22,078 19,351
Total policy benefit
Liabilities 12,757 12,341 12,583 11,706 11,600
Due to GWL 43 35 52 118 120
Guaranteed preferred
beneficial interests in
the
Company's junior 175 175
subordinated debentures
Total shareholder's equity 1,428 1,167 1,199 1,186 1,034
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, 2000 follows.
A. COMPANY RESULTS OF OPERATIONS
1. Consolidated Results
The Company's consolidated net income increased $53.4 million or 26% in 2000
when compared to 1999, reflecting improved results in both the Employee Benefits
and Financial Services segments. The Employee Benefits segment contributed $19.5
million and the Financial Services segment contributed $33.9 million to the
growth in net income. Of total consolidated net income in 2000 and 1999, the
Employee Benefits segment contributed 53% and 57%, respectively, while the
Financial Services segment contributed 47% and 43%, respectively.
The Company's consolidated net income increased $8.8 million or 5% in 1999 when
compared to the year ended December 31, 1998. In 1999, 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.
Pursuant to a required change in accounting policy, the Company capitalized
$19.7 and $18.4 million of software development costs (see Note 1 to the
consolidated financial statements), which increased the 2000 and 1999
consolidated net income, respectively.
The Company's 1999 consolidated net income included $8.3 million due to changes
in income tax provisions for prior years. The current income tax provision was
decreased by $17.2 million in 1999 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 transferred from Great-West Life's U.S. branch to the Company, as
discussed below. Of the amount released in 1999, $8.9 million was attributable
to participating policyholders and, therefore, had no effect on the net income
of the Company.
In 2000 total revenues increased $488.6 million or 18% to $3.2 billion when
compared to 1999. The growth in revenues in 2000 was comprised of increased
premium income of $169.4 million, increased fee income of $236.5 million,
increased net investment income of $55.5 million and increased realized gains on
investments of $27.2 million. In 1999 total revenues increased $228.9 million or
9% to $2.7 billion when compared to 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.
The increased premium income in 2000 was comprised of growth in Employee
Benefits premium income and Financial Services premium income of $151.7 million
and $17.7 million, respectively. The growth in premium income in the Employee
Benefits segment reflected $172.1 million of premium income derived from the
acquisition of the group life and health business from General American in 2000.
The growth in premium income in the Financial Services segment was primarily due
to increased sales of the variable annuity products. 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
reflected an increase of $205.9 million of premium income derived from Alta. 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 increase in fee income in 2000 was comprised of Employee Benefits fee income
and Financial Services fee income of $203.7 million and $32.8 million,
respectively. The growth in Employee Benefits fee income reflected $127.7
million of fee income derived from General American during 2000. 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 during the first part of
2000. The growth in Financial Services fee income in 2000 was primarily due to
new sales and increased fees in variable funds. 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.
Realized investment gains increased from $1.1 million in 1999 to $28.3 million
in 2000. Realized investment gains were $38.2 million in 1998. The increase in
interest rates in the past two years contributed to $16.7 million and $7.8
million of fixed maturity losses in 2000 and 1999, while the decrease in
interest rates in 1998 resulted in gains on sales of fixed maturities totaling
$38.4 million in 1998. Decreases in the provision for asset losses of $8.9 and
$7.0 million, respectively, were recognized in 2000 and 1999.
Total benefits and expenses increased $384.4 million or 16% in 2000 when
compared to 1999. The increase in 2000 was due to General American group life
and health business, which resulted in an increase in benefits and expenses of
$296.6 million. Excluding General American benefits and expenses would have
increased $87.8 million or 4% in 2000. The total benefits and expenses increase
of $235.7 million from 1998 to 1999 was a combination of the acquisition of
Alta, which resulted in benefits and expenses increasing $245.3 million, offset
by a decrease in benefits and expenses due to the effect of a change in
accounting policy, which resulted in the capitalization of $18.4 million of
software costs in 1999.
Income tax expense increased $50.8 million or 61% in 2000 when compared to 1999.
This increase reflects higher pre-tax earnings in 2000 and the impact of the
1999 release of contingent tax liabilities. Income tax expense decreased $15.6
million or 16% in 1999 when compared to 1998. Excluding the contingent tax
release, the Company's income tax expense increased 2% in 1999. 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 increased $201.4 million or 32% in 2000
when compared to 1999. Deposits for investment-type contracts decreased $709.6
million or 53% in 1999 when compared to 1998. The increase in 2000 was primarily
attributable to the Financial Services segment, where the Company has
experienced growth in premium for fixed annuity products due to higher interest
crediting rates being offered to customers and the volatility in the variable
marketplace. 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 1999. This transaction increased deposits by $519.6 million in 1998 and
accounted for 73% of the decrease in 1999.
Deposits for separate accounts increased $522 million or 20% in 2000 when
compared to 1999. This increase in 2000 is primarily due to BOLI and 401(k)
deposits, which increased from $200 million and $1.7 billion, respectively, in
1999 to $365 million and $2.0 billion, respectively, in 2000. Deposits for
separate accounts increased $374.4 million or 17% in 1999 when compared to 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.
Self-funded premium equivalents increased $2.2 billion or 74% in 2000 when
compared to 1999. The General American and Allmerica acquisitions resulted in an
increase of $1.7 billion for 2000. Self-funded premium equivalents increased
$372.7 million or 14% in 1999 when compared to 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.
2. Other Matters
Effective January 1, 2000, the Company co-insured the majority of General
American Life Insurance Company's ("General American") group life and health
insurance business, which primarily consists of administrative services only and
stop loss policies. 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. The agreement
converted to an assumption reinsurance agreement on January 1, 2001. As of
December 31, 2000, this acquisition added over 1,008,700 medical members
representing approximately $2.3 billion of annual medical and non-mdeical
premium and premium equivalents.
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. As of December 31, 2000, this acquisition
added 90,800 medical members and $279 million of annual medical and non-medical
premium and premium equivalents. This business primarily consists of
administrative services only and stop loss policies. The purchase price was
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.
Life and health premium and fee income for Alta totaled $376.7 million and
$489.0 million for the years ended December 31, 2000 and 1999, respectively,
while self-funded premium equivalents were $480.4 million and $436.5 million for
the years ended December 31, 2000 and 1999, 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 DATA 2000 1999 1998
----------- ---------- ----------
Premium income $ 1,142 $ 990 $ 747
Fee income 752 549 445
Net investment income 95 80 95
Realized investment gains (losses) (3) (1) 8
----------- ---------- ----------
Total Revenues 1,986 1,618 1,295
Policyholder benefits 923 789 590
Operating expenses 856 661 547
----------- ---------- ----------
----------- ---------- ----------
Total benefits and expenses 1,779 1,450 1,137
----------- ---------- ----------
Income from operations 206 168 158
Income tax expense 70 51 51
----------- ---------- ----------
Net Income $ 136 $ 117 $ 107
=========== ========== ==========
Deposits for investment-type $ 27 $ 26 $ 37
contracts
Deposits to separate accounts 1,951 1,745 1,568
Self-funded premium equivalents 5,181 2,979 2,606
During 2000, the Employee Benefits segment experienced:
o growth in 401(k) lives 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 15% in 2000 and increased 9% in 1999.
The improvement in earnings in 2000 reflected favorable morbidity experience in
large case business, and the acquisition of General American's group life and
health business, which more than offset poor mortality experience. 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
investment gains.
401(k) premiums and deposits for 2000 and 1999 increased 12% and 11%,
respectively, as the result of higher recurring deposits from existing customers
and new sales. The number of contributing participants increased from 501,000 at
December 31, 1999, to 551,000 at December 31, 2000. Assets under administration
(including third-party administration) in 401(k) decreased 9% over 1999 to $7.8
billion and increased 26% from 1998 to 1999. The decrease in 2000 was primarily
due to a weaker equity market, while the increase in 1999 was primarily due to a
stronger equity market.
Equivalent premium revenue and fee income for group life and health increased
23% from 1999 levels as the result of increased sales and the Alta and General
American acquisitions. From 1998 to 1999, equivalent premium revenue and fee
income increased 19% as a result of a combination of increased prices and the
Alta acquisition.
1. Group Life and Health
The Employee Benefits segment experienced a net increase of 107 group health
care customers (employer groups) during 2000 (versus a net increase of 468 in
1999). Much of the health care growth can be attributed to 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 48% increase in total health care membership from
2,130,300 at the end of 1999 to 3,158,900 at year-end 2000. The General American
and Allmerica acquisitions added 1,099,500 medical members, offset by a decrease
of 70,900 in the remaining business. POS and HMO members grew 31% from 549,900
in 1999 to 718,400 in 2000. The Company expects this segment of the business to
grow as additional HMO licenses are obtained and additional Alta members are
converted.
The Company experienced a 6% decrease in total health care membership from
2,266,700 at the end of 1998 to 2,130,300 at year-end 1999 as the result of
certain large case terminations. POS and HMO members grew 5% from 522,300 in
1998 to 549,500 in 1999.
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, increased 973 or 19% in 2000 as
compared to 811 in 1999 (828 in 1998). The 401(k) block of business under
administration totaled 7,000 employer groups and 551,000 individual
participants, compared to 6,400 employer groups and more than 500,000 individual
participants in 1999, and 6,100 employer groups and 475,000 individual
participants in 1998.
During 2000, the in-force block of 401(k) business continued to perform well
with customer retention of 93.7% versus 92.9% in 1999.
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 2000 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 continue to provide
the Company with critical mass to compete in the consolidating health care
insurance business. Through a combination of internal growth and new business
acquisitions, the Company has over 3.1 million medical members. This growth
presented service challenges that are being addressed. The Company is working to
ensure that its service levels are maintained at the level its customers expect.
In order to remain competitive with respect to our morbidity results, an
increased emphasis on our provider contracting is essential. Furthermore, the
Company will enhance its focus on expense economies and synergies, to ensure
competitive administrative costs on a per member per month basis. The successful
consolidation of the benefit payment offices will remain an important
operational issue from both a cost and quality perspective.
The Company will continue to enhance its One Health Plan managed care
subsidiaries. In 2001, the total number of licensed One Health Plan HMOs is
expected to be 18. These HMO's will continue to provide current customers with a
comprehensive national managed care network. In 2000, the Company implemented an
Internet based disease management program for members with diabetes, asthma, or
coronary heart disease, which will continue in 2001, with expansion to include
new conditions.
Delivering cost-effective, value-added services via the Internet will continue
to be a main focus for the Company. The Company has implemented online
enrollment capabilities for 401(k) participants, as well as an online investment
advisor to provide 401(k) participants with personal investment advise via the
Internet. This action, combined with a competitive product portfolio, should
result in an increase in new case sales and cross sales. Online enrollment for
life and health members was introduced in 2000, and is scheduled for
implementation in 2001.
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 DATA 2000 1999 1998
------------ ----------- -----------
Premium income $ 191 $ 173 $ 248
Fee income 120 86 71
Net investment income 836 796 802
Realized investment gains 31 2 30
------------ ----------- -----------
Total Revenues 1,178 1,057 1,151
Policyholder benefits 823 793 872
Operating expenses 168 143 141
------------ ----------- -----------
Total benefits and expenses 991 936 1,013
------------ ----------- -----------
Income from operations 187 121 138
Income tax expense 64 32 48
------------ ----------- -----------
Net Income $ 123 $ 89 $ 90
============ =========== ===========
Deposits for investment-type $ 808 $ 608 $ 1,307
contracts
Deposits to separate accounts 1,154 838 640
During 2000, the Financial Services segment experienced:
o significant growth in participants and separate account deposits 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 increased 38% in 2000 and decreased 1% in
1999. The increase in earnings in 2000 reflected strong earnings from an
increased asset base, an increase in investment margins, and significant capital
gains on fixed maturities. 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 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 $7.0 million or 49%, from $14.3 million in 1999 to $7.3
million in 2000. Premiums decreased $2.5 million or 14%, from $16.8 million in
1998 to $14.3 million in 1999. 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 increased $29.9 million or 37%, from $81.3 million in 1999 to $111.2
million in 2000. Fee income related to savings products increased $10.3 million
or 15%, from $71.0 million in 1998 to $81.3 million in 1999. The growth in fee
income in 2000 and 1999 was the result of new sales and increased fees on
variable funds related to significant growth in equity markets during the first
three quarters of 2000.
Deposits for investment-type contracts increased $200 million or 30%, from $608
million in 1999 to $808 million in 2000. This significant increase was the
result of several large case sales in the fixed portfolio products. Deposits for
investment-type contracts decreased $699 million or 50%, from $1.3 billion in
1998 to $608 million in 1999.
Deposits to separate accounts increased $316 million or 30%, from $838 million
in 1999 to $1.2 billion in 2000. Deposits to separate accounts increased $198
million or 30%, from $640 million in 1998 to $838 million in 1999. The increases
in 2000 and 1999 were primarily from an increase in single premiums.
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"), remained flat during 2000 and 1999 at $7.9 billion. In 2000, the drop
in the equity markets during the fourth quarter offset a large portion of the
new premiums in the variable annuity business. This, along with the reduction of
fixed premiums, resulted in a zero increase for the year in the total assets of
the public/non-profit business.
The Financial Services segment's savings business experienced strong growth in
2000. The number of new participants in 2000 was 233,000 compared to 214,100 in
1999 (151,300 in 1998), bringing the total lives under administration to
1,002,785 in 2000 and 834,725 in 1999.
The Financial Services segment again experienced a very high retention rate on
public/non-profit contract renewals, renewing nearly 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, in
2000, GIC assets decreased 1.7% from 1999, to $103.0 million. GIC assets
decreased 62% in 1999, to $104.7 million.
Customer demand for investment diversification continued to grow during 2000.
New contributions to variable business represented 56% of the total premium
equivalents in 2000 versus 64% in 1999. The Company continues to expand the
investment products available through its in-house Maxim Series Fund, Inc., and
Orchard Series Fund, and through partnership arrangements with external fund
managers. Externally managed funds offered to participants in 2000 included AIM,
American Century, Ariel, Fidelity, Founders, INVESCO, Janus, Loomis Sayles,
Templeton and T. Rowe Price.
Customer participation in guaranteed separate accounts increased, as many
customers prefer the security of fixed income securities and separate account
assets. Assets under management for guaranteed separate account funds were
$749.3 million in 2000, compared to $653.7 million in 1999 and $562.3 million in
1998.
FASCorp administered records for approximately 1,875,000 participants in 2000
versus 1,595,000 in 1999. FASCorp's fee income was $63.8 million, $53.8 million,
and $44.0 million for the years ending December 31, 2000, 1999 and 1998,
respectively.
2. Life Insurance
The Company continued its conservative approach to the design and distribution
of traditional life insurance products, while focusing on customer retention and
expense management.
Individual life insurance revenue premiums and deposits of $871.3 million in
2000 reflected an increase of 18% over 1999 premiums and deposits of $735.3
million. The increase was primarily due to significant BOLI separate account
deposits.
In 1996, the U.S. Congress enacted legislation to phase out the tax
deductibility of interest on policy loans on COLI products. Since then, renewal
premiums and deposits for COLI products have decreased to $84.1 million in 2000
from $128.5 million in 1999 and $139.8 million in 1998, 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 $581.9 million during 2000,
compared to $436.3 million in 1999 and $408.3 million in 1998. 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
Increased emphasis on the employee's need for retirement funds in the maturing
government pension market is expected to continue the flow of deposits into the
retirement accounts of existing participants. The shortage of employees in the
job market has led the governments to introduce employer-matching plans, which
should also increase the number of potential government employees who will be
contributing to retirement plans. Current market trends are to replace the
existing defined benefit plans with defined contribution plans and this is
expected to provide marketing opportunities in the future.
Continued management emphasis on the reduction of unit costs in the FASCorp
administration arena are designed to allow the Company to remain competitive in
the recordkeeping market. The increase of 300,000 new lives under administration
in FASCorp in the year 2000 is indicative of this trend. This is expected to
continue in the future.
Individual annuities have experienced substantial growth in the variable market
with the Schwab qualified and non-qualified annuities. Sales are expected to
increase, as the Schwab annuity is a very competitively priced product that is
distributed through a well-known and respected broker.
Individual bank policy sales are expected to grow significantly in the year
2000. Distribution channels are presently established in three large banks and
management plans to expand into additional banks in 2001. BOLI sales are
expected to continue to be strong in the separate account market and also in the
small case BOLI market.
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. Using dynamic modeling 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] 2000 1999
----------- ----------
Fixed maturities, available for sale, at fair value $ 9,420 $ 6,728
Fixed maturities, held-to-maturity, at amortized cost 2,260
Mortgage loans 843 975
Real estate and common stock 202 173
Short-term investments 415 241
Policy loans 2,810 2,681
----------- ----------
Total invested assets $ 13,690 $ 13,058
=========== ==========
1. Fixed Maturities
Fixed maturity investments include public and privately placed corporate bonds,
government bonds and mortgage-backed and asset-backed securities. The Company's
strategy related to mortgage-backed and asset-backed securities is to focus on
those with lower volatility and minimal credit risk. The Company does not invest
in higher risk collateralized mortgage obligations such as interest-only and
principal-only strips, and currently has no plans to invest in such securities.
Private placement investments are generally less marketable than publicly traded
assets, yet they typically offer 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.
During the fourth quarter of 2000, the Company transferred all securities
classified as held-to-maturity into the available-for-sale category. See Item 8
(Financial Statements and Supplementary Data), Note 6 for further discussion
related to this transfer.
The distribution of the fixed maturity portfolio by credit rating is summarized
as:
Credit Rating 2000 1999
-------------
-------------- ---------------
AAA 53.5% 48.9%
AA 10.2 8.9
A 16.2 19.6
BBB 19.0 22.3
BB and Below (non-investment grade) 1.1 0.3
-------------- ---------------
TOTAL 100.0% 100.0%
At December 31, 2000 and 1999, the Company had two bonds in default with a
carrying value of $10.7 million.
2. Mortgage Loans
During 2000, the mortgage portfolio declined 14% to $800 million, 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 decreased to $39.3 million in 2000
compared with $43.9 million in 1999, and there were $2.0 million of foreclosures
in 2000, compared to $0 in 1999. 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, 2000 and 1999,
the Company's loan portfolio included $73.5 million and $75.7 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 ($102.8 million) and properties acquired through the foreclosure of
troubled mortgages ($2.1 million), 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 public and
private equity investments. The Company anticipates a limited participation in
the stock markets in 2001.
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 1 to the Consolidated Financial Statements
contains a summary of the Company's outstanding financial hedging derivatives.
5. Outlook
The U.S. economy grew at a real rate of approximately 5% in 2000. The rate of
growth, however, slowed noticeably in the second half of the year, and several
factors suggest that the slowdown will be sustained. The Federal Reserve Board,
after 18 months of restrictive policy, on January 3, 2001 and January 31, 2001,
cut the Federal Funds rate by 50 basis points from 6.50% to 6.00% and from 6.00%
to 5.50%, respectively. The rate cut was in response to data releases indicating
that the economy was slowing more quickly than anticipated. The Federal Open
Market Committee bias is currently towards easing the interest rates. The
magnitude and timing of further rate cuts will be dependent on economic
conditions.
The Company's investment portfolio is well positioned for a potential declining
interest rate environment. The portfolio is diversified and is comprised of high
quality, stable assets. Asset acquisitions in 2001 will target investment grade
bonds appropriate for the expected economic and interest rate environment and
liability requirements. It is the Company's philosophy and intent to maintain
its proactive portfolio management policies in an ongoing effort to ensure the
quality and performance of its investments.
E. LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that vary among 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 $568.4 million and $508.3 million as of December 31, 2000 and
1999, respectively.
Funds provided by premiums and fees, investment income and maturities of
investment assets are reasonably predictable and normally exceed liquidity
requirements for payment of claims, benefits and expenses. However, since the
timing of available funds cannot always be matched precisely to commitments,
imbalances may arise when demands for funds exceed those on hand. Also, a demand
for funds may arise as a result of the Company taking advantage of current
investment opportunities. The 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 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 $97.6
million of commercial paper outstanding at December 31, 2000, compared with $0
million at December 31, 1999. 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. In addition, the Company
issued a surplus note to GWL&A Financial in 1999. The surplus note bears
interest at 7.25% and is due June 30, 2048.
F. ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities - A Replacement of FASB Statement No. 125", which revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral, and requires certain disclosures. Statement No. 140 will
be effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. However, certain disclosure
requirements under Statement No. 140 were effective December 15, 2000, and these
requirements have been incorporated in the Company's financial statements (see
Note 6 to the Consolidated Financial Statements). Management does not anticipate
that the adoption of the New Statement will have a significant effect on the
financial position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", which
provides guidance with respect to revenue recognition issues and disclosures. As
amended by SAB No. 101 no later than the fourth quarter of the fiscal year
ending December 31, 2000. The adoption of SAB No. 101 did not affect the
Company's revenue recognition practices.
Effective January 1, 2001, the Company adopted FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as amended by
FASB Statement No. 138. The Statements require that all derivative financial
instruments be recognized in the financial statements as assets or liabilities
and measured at fair value regardless of the purpose or intent for holding them.
Gains or losses resulting from changes in the fair value of derivatives are
accounted for depending on the intended use of the derivative and whether it
qualifies for hedge accounting. Upon adoption, a transition adjustment of
approximately $1 million increased accumulated comprehensive income.
See Note 1 to the Consolidated Financial Statements for additional information
regarding accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's assets are purchased to fund future benefit payments to its
policyholders and contractholders. The primary risk of these assets is exposure
to rising interest rates. The company's exposure to foreign currency exchange
rate fluctuations is minimal as only nominal foreign investments are held.
To manage interest rate risk, the Company invests in assets that are suited to
the products that it sells. For products with fixed and highly predictable
benefit payments such as certificate annuities and payout annuities, the Company
invests in fixed income assets with cash flows that closely match the liability
product cash flows. The Company is then protected against interest rate changes,
as any change in the fair value of the assets will be offset by a similar change
in the fair value of the liabilities. For products with uncertain timing of
benefit payments such as portfolio annuities and life insurance, the Company
invests in fixed income assets with expected cash flows that are earlier than
the expected timing of the benefit payments. The Company 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 which would pay the Company investment income if interest rates rise
above the level specified in the cap. These derivatives are only used to reduce
risk and are not used for speculative purposes.
To manage foreign currency exchange risk, the Company uses currency swaps to
convert 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, 2000. If interest rates increased by 100 basis points (1%), the
fair value of the fixed income assets would decrease by approximately $358
million. This calculation uses projected asset cash flows, discounted back to
December 31, 2000. The cash flows projections are shown in the table below. The
table below shows cash flows rather than expected maturity dates because many of
the Company's assets have substantial expected principal payments prior to the
final maturity date. The fair value shown in the table below was calculated
using spot discount interest rates that varied by the year in which the cash
flow was expected to be received. These spot rates in the benchmark calculation
ranged from 7.14% to 8.01%.
Projected Cash Flows by Calendar Year ($ millions)
There- Undiscounted Fair
2001 2002 2003 2004 2005 after Total Value
------- ------- -------- ------- ------- -------- -------------- -------
Benchmark 1,850 1,914 1,616 1,403 1,541 4,943 13,268 9,816
Interest Rates
up 1% 1,822 1,883 1,610 1,365 1,497 5,250 13,427 9,458
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 $16.6 million per year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Following are the Company's Consolidated Financial Statements for the Years
Ended December 31, 2000, 1999, and 1998 and the Independent Auditors' Report
thereon.
GWL&A FINANCIAL INC.
Consolidated Financial Statements for the Years
Ended December 31, 2000, 1999, and 1998
and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of of GWL&A Financial Inc.:
We have audited the accompanying consolidated balance sheets of GWL&A Financial
Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, stockholder's equity, and cash flows for each
of the three years ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of GWL&A Financial Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States of America.
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.
DELOITE & TOUCHE LLP
Denver, Colorado
January 29, 2001
GWL&A FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
==============================================================================================
(Dollars in Thousands)
2000 1999
------------------- -------------------
ASSETS
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost (fair value
$2,238,581) $ $ 2,260,581
Available-for-sale, at fair value (amortized
cost
$9,372,009 and $6,953,383) 9,419,865 6,727,922
Common stock, at fair value (cost $68,472 and
$43,978) 95,036 69,240
Mortgage loans on real estate, net 843,371 974,645
Real estate, net 106,690 103,731
Policy loans 2,809,973 2,681,132
Short-term investments, available-for-sale (cost
approximates fair value) 414,860 243,709
------------------- -------------------
Total Investments 13,689,795 13,060,960
OTHER ASSETS:
Cash 156,388 267,986
Reinsurance receivable
Related party 4,297 5,015
Other 229,671 168,307
Deferred policy acquisition costs 279,688 282,295
Investment income due and accrued 139,155 137,810
Uninsured claims receivable (net of
allowances of $34,700 and $31,200) 227,803 150,133
Other assets 503,533 308,450
Premiums in course of collection (net of 149,969 79,299
allowances of $18,700 and $13,900)
Deferred income taxes 138,870 253,323
Separate account assets 12,381,137 12,819,897
------------------- -------------------
TOTAL ASSETS $ 27,900,306 $ 27,533,475
=================== ===================
See notes to consolidated financial statements.
==============================================================================================
2000 1999
-------------- ---------------
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
POLICY BENEFIT LIABILITIES:
Policy reserves
Related party $ 547,558 $ 555,783
Other 11,497,442 11,181,900
Policy and contract claims 441,326 346,868
Policyholders' funds 197,941 185,623
Provision for policyholders' dividends 72,716 70,726
GENERAL LIABILITIES:
Due to GWL 43,081 35,985
Repurchase agreements 80,579
Commercial paper 97,631
Other liabilities 852,842 780,502
Undistributed earnings on participating business 165,754 130,638
Separate account liabilities 12,381,137 12,819,897
-------------- ---------------
Total Liabilities 26,297,428 26,188,501
-------------- ---------------
COMMITMENTS AND CONTINGENCIES
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE COMPANY'S JUNIOR SUBORDINATED
DEBENTURES 175,000 175,000
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value, 50,000,000 shares
authorized,
0 shares issued and outstanding
Preferred stock, $0 par value; 500,000 shares
authorized; 0 shares issued and outstanding
Common stock, $0 par value; 500,000 shares
authorized; 50,025 shares issued and outstanding 250 250
Additional paid-in capital 724,736 707,348
Accumulated other comprehensive income (loss) 33,672 (84,861)
Retained earnings 669,220 547,237
-------------- ---------------
Total Stockholder's Equity 1,427,878 1,169,974
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 27,900,306 $ 27,533,475
============== ===============
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
==============================================================================================
(Dollars in Thousands)
2000 1999 1998
-------------- -------------- --------------
REVENUES:
Premiums
Related party $ $ $ 46,191
Other (net of premiums ceded totaling
$115,404, $85,803, and $86,511) 1,332,566 1,163,183 948,672
Fee income 871,627 635,147 516,052
Net investment income