UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from to
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Commission file number 333-64473
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GWL&A FINANCIAL INC.
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(Exact name of registrant as specified in its charter)
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Colorado 84-1474245
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
8515 East Orchard Road, Greenwood Village, CO 80111
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(Address of principal executive offices)
(Zip Code)
[303] 737-4128
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark 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, 2002, the aggregate market value of the registrant's voting stock
held by non-affiliates of the registrant was $0.
As of March 1, 2002, 50,025 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
PART I
ITEM 1. BUSINESS
A. ORGANIZATION AND CORPORATE STRUCTURE
GWL&A Financial Inc. (the Company) was incorporated in the State of
Delaware on September 16, 1998 to act as a holding company for
Great-West Life & Annuity Insurance Company (GWL&A) and its
subsidiaries. GWL&A is a stock life insurance company originally
organized in 1907. The Company is domiciled in Colorado.
The Company is indirectly owned by Great-West Lifeco Inc. (Great-West
Lifeco), a Canadian holding company. Great-West Lifeco is a subsidiary
of Power Financial Corporation (Power Financial), a Canadian holding
company with substantial interests in the financial services industry.
Power Corporation of Canada (Power Corporation), a Canadian holding and
management company, has voting control of Power Financial. Mr. Paul
Desmarais, through a group of private holding companies that he
controls, has voting control of Power Corporation.
In 1999, a trust subsidiary of the Company, Great-West Life & Annuity
Insurance Capital I, issued $175 million of 7.25% Subordinated Capital
Income Securities of which are listed on the New York Exchange. Shares
of Great-West Lifeco, Power Financial, and Power Corporation are traded
publicly in Canada.
B. BUSINESS OF THE COMPANY
GWL&A is authorized to engage in the sale of life insurance, accident
and health insurance, and annuities. It is qualified to do business in
all states in the United States except New York, and in the District of
Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands. GWL&A
conducts business in New York through its subsidiary, First Great-West
Life & Annuity Insurance Company. GWL&A is also a licensed reinsurer in
the state of New York. Based on the latest available December 31, 2000
data, the Company ranks 31st in terms of admitted assets of all U.S.
life insurance companies.
The Company operates, through GWL&A, in the following two business
segments:
Employee Benefits - life, 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]2001 2000 1999
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Premium Income
Employee Benefits
Group life & health $ 1,034 $ 1,143 $ 991
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Total Employee Benefits 1,034 1,143 991
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Financial Services
Savings 9 7 14
Individual insurance 161 183 158
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Total Financial Services 170 190 172
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Total premium income $ 1,204 $ 1,333 $ 1,163
=============== =============== ================
Fee Income
Employee Benefits
Group life & health $ 713 $ 649 $ 454
401(k) 96 104 95
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Total Employee Benefits 809 753 549
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Financial Services
Savings 120 111 81
Individual insurance 18 8 5
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Total Financial Services 138 119 86
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Total fee income $ 947 $ 872 $ 635
=============== =============== ================
Deposits for investment-type
contracts
Employee Benefits $ 26 $ 27 $ 26
Financial Services 601 808 608
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Total investment-type deposits $ 627 $ 835 $ 634
=============== =============== ================
Deposits to Separate Accounts
Employee Benefits $ 1,806 $ 1,951 $ 1,745
Financial Services 1,434 1,154 838
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Total separate accounts deposits $ 3,240 $ 3,105 $ 2,583
=============== =============== ================
Self-funded equivalents-
Employee Benefits $ 5,721 $ 5,181 $ 2,979
=============== =============== ================
All information in the following table and other tables herein is derived from
information that has been prepared in conformity with accounting principles
generally accepted in the United States of America, unless otherwise indicated.
Investment-type contracts are contracts that include significant cash build-up
features, as discussed in FASB Statement No. 97.
Self-funded equivalents generally represent paid claims under minimum premium
and administrative services only contracts, which amounts approximate the
additional premiums that could have been earned under such contracts if they had
been written as traditional indemnity or HMO programs.
C. EMPLOYEE BENEFITS
1. Principal Products
The Employee Benefits segment of the Company provides a full range
of employee benefits products to more than 13,000 employers across
the United States. The Employee Benefits division is divided into
two units, one of which deals with employer groups of more than
five hundred employees and the other which deals with employer
groups of less than five hundred employees.
The Company offers customers a variety of health plan options to
help them maximize the value of their employee benefits package.
The Company's health care business is primarily self-funded,
whereby the employer assumes all or a significant portion of the
risk. For companies with better than average claims experience,
this can result in significant health care savings.
The Company offers employers a 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, Point of Service (POS) plans that offer
more flexibility in provider choice than HMO plans, and Preferred
Provider Organization (PPO) plans.
Under HMO plans, health care for the member is coordinated by a
primary care physician who is responsible for managing all aspects
of the member's health care. HMO plans offer a broad scope of
benefits coverage including routine office visits and preventive
care, as well as lower premiums and low co-payments that minimize
out-of-pocket costs. There are no claims for a member to file when
services are received through a primary care physician.
POS plans also require that a member enroll with a primary care
physician who is responsible for coordinating the member's health
care. Similar to an HMO, members receive the highest benefit
coverage and the lowest out-of-pocket costs when they use their
primary care physician to coordinate their health care. In
contrast to an HMO, members can seek care outside of the primary
care physician's direction, at a reduced level of benefits. Some
benefits may not be covered outside the in-network POS plan.
PPO plans offer members a greater choice of physicians and
hospitals. Members do not need to enroll with a primary care
physician - they simply select a contracted PPO provider at the
time of the service to receive the highest level of benefits. If
members seek care outside of the PPO network, they receive a lower
level of benefits.
The One Health Plan HMO subsidiary organization administers
provider networks and provides medical management, member
services, and quality assurance for the other managed care
products of the Company 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 that lead to more competitive pricing.
The Company offers Internal Revenue Code Section 125 plans that
enable participants to set aside pre-tax dollars to pay for
non-reimbursement medical expenses and dependent care expenses.
This creates tax efficiencies for both the employer and its
employees.
The Company offers group life insurance. Sales of group life
insurance consist principally of renewable term coverage, the
amounts of which are usually linked to individual employee wage
levels. The following table shows group life insurance in force
prior to reinsurance ceded for the year indicated:
Years Ended December 31,
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[Millions] 2001 2000 1999 1998 1997
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In force
end of year $ 66,539$ 96,311 $ 83,901 $ 84,121 $ 53,211
Includes $8,445, $18,397, $25,812, and $25,597 of in force group life insurance
obtained from the acquisition of Alta for the years ended December 31, 2001,
2000, 1999, and 1998, respectively. Also includes $14,659 and $18,408 for the
years ended December 31, 2001 and 2000, respectively, of in force group life
insurance obtained from the acquisition of General American. The 2001 figure was
influenced by a decline in total health care membership and the Company's
decision to discontinue certain group life insurance business obtained through
acquisitions.
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 includes
guaranteed interest rate options for various lengths of time,
variable investment options, or a self-directed brokerage option.
For the guaranteed interest rate option, the difference between
the income earned on investments in the Company's general account
and the interest credited to the participant's account balance
flows through to operating income.
Variable investment options utilize separate accounts to provide
participants with a vehicle to assume the investment risks. Assets
held under these options are invested, as designated by the
participant, in separate accounts that in turn invest in shares of
underlying funds managed by a subsidiary of the Company or by
selected external fund managers.
Of the total 401(k) assets under administration in 2001 and 2000,
96% were allocated to variable investment options.
The Company is compensated by the separate accounts for bearing
expense risks pertaining to the variable annuity contract and for
providing administrative services. For certain funds, a subsidiary
of the Company also receives fees for serving as an investment
advisor for those underlying funds that are managed by the
subsidiary.
Customer retention is a key factor for the profitability of the
Company's 401(k) product. The annuity contract imposes a charge
for termination during a designated period of time after the
contract's inception. The charge is determined in accordance with
a formula in the contract. Existing federal tax penalties on
distributions prior to age 59 1/2 provide an additional
disincentive to premature surrenders of account balances, but do
not impede rollovers to products of competitors.
The Company offers a rollover Individual Retirement Account that
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:
Year Ended Fixed Variable
December 31, Annuities Annuities
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[millions] [millions]
1997 $ 328 $ 4,568
1998 299 5,770
1999 268 7,339
2000 248 6,614
2001 240 5,911
2. Method of Distribution
The Company distributes its products and services through field
sales staff of the Company located in 43 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 that
encourage employers to seek competitive bids each year. Although
most employers are looking for affordably priced employee benefits
products, they also want to offer product choices because employee
needs differ. In many cases it is more cost-effective and
efficient for an employer to contract with a carrier such as the
Company that offers multiple product lines and centralized
administration.
In addition to price there are a number of other factors that
influence employer decision-making. These factors include; quality
of services; scope, cost-effectiveness and quality of provider
networks; product responsiveness to customers' needs;
cost-containment services; and effectiveness of marketing and
sales.
4. Reserves
For group whole life and term insurance products, policy reserve
liabilities are equal to the present value of future benefits and
expenses less the present value of future net premiums using best
estimate assumptions for interest, mortality, and expenses
(including margins for adverse deviation). For disability waiver
of premium and paid up group whole life contracts (included within
the group life family of products offered by the Company), the
policy reserves equal the present value of future benefits and
expenses using best estimate assumptions for interest, mortality,
and expenses (including margins for adverse deviation). For group
universal life (included within the group life family of products
offered by the Company), the policy reserves equal the accumulated
fund balance (that reflects cumulative deposits plus credited
interest less charges thereon). Reserves for long-term disability
products are established for lives currently in payment status, or
that are approved for payment but are in a waiting period, using
industry and Company morbidity factors, and interest rates based
on Company experience. In addition, reserves are held for claims
that have been incurred but not reported and for long term
disability claims that have been reported but not yet adjudicated.
For medical, 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 the participants' account balances.
Assumptions for mortality and morbidity experience are
periodically reviewed against published industry data and company
experience.
The above mentioned reserves are computed amounts that, with
additions from premiums and deposits to be received, and with
interest on such reserves, are expected to be sufficient to meet
the Company's policy obligations, such as paying expected death or
retirement benefits or surrender requests and to generate profits.
5. Reinsurance
The Company seeks to limit its exposure on any single insured and
to recover a portion of benefits paid by ceding risks to other
insurance enterprises under excess coverage and co-insurance
contracts. The maximum amount of group life insurance retained on
any one life is $1.5 million. 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. Effective January 1, 2001, the Company renegotiated this
arrangement with New England, resulting in a shift of
responsibility from New England to the Company for marketing
operations.
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), 408, and 457 plans). The Company provides
pension plan administrative services through a subsidiary company,
Financial Administrative Services Corporation (FASCorp). The
Company provides marketing and communication services through
another subsidiary company, BenefitsCorp, Inc., and through
BenefitsCorp Equities, Inc., a broker-dealer subsidiary of
BenefitsCorp, Inc. (collectively, BenefitsCorp).
The Company's primary marketing emphasis in the public/non-profit
pension market is group fixed and variable annuity contracts for
defined contribution retirement savings plans. Defined
contribution plans provide for benefits based upon the value of
contributions to, and investment returns on, the individual's
account. This has been the fastest growing portion of the pension
marketplace in recent years.
The Company has a marketing agreement with Charles Schwab & Co.,
Inc. to sell individual fixed and variable qualified and
non-qualified deferred annuities. The fixed product is a Guarantee
Period Fund that was established as a non-unitized separate
account in which the owner does not participate in the performance
of the assets. The assets accrue solely to the benefit of the
Company and any gain or loss in the Guarantee Period Fund is borne
entirely by the Company. Guarantee period durations of one to ten
years are currently being offered by the Company. Distributions
from the amounts allocated to a Guarantee Period Fund more than
six months prior to the maturity date results in a market value
adjustment (MVA). The MVA reflects the relationship as of the time
of its calculation between the current U.S. Treasury Strip ask
side yield and the U.S. Treasury Strip ask side yield at the
inception of the contract.
The Company's variable annuity products offer several investment
options. The Company's variable annuity products provide the
opportunity for contractholders to assume the risks of, and
receive the benefits from, the investment of retirement assets.
The variable product assets are invested, as designated by the
participant, in separate accounts that in turn invest in shares of
underlying funds managed by a subsidiary of the Company or by
selected external fund managers.
Demand for investment diversification by customers and their
participants continued to grow during 2001. The Company continues
to expand the annuity products available through Maxim Series
Fund, Inc., a subsidiary of the Company that is an insurance
products mutual fund company and through arrangements with
external fund managers. The array of funds allows customers to
diversify their investments across a 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 that provide guarantees of
principal and interest with a fixed maturity date.
Customer retention is a key factor for the profitability of
individual annuity products. To encourage customer retention,
annuity contracts typically impose a surrender charge on
policyholder balances withdrawn for a period of time after the
contract's inception. The period of time and level of the charge
vary by product. Existing federal tax penalties on distributions
prior to age 59 1/2 provide an additional disincentive to
premature surrenders of annuity balances but do not impede
transfers of those balances to products of competitors.
Annuity products generate earnings from the investment spreads on
the guaranteed investment options and from the fees collected for
mortality and expense risks associated with the variable options.
The Company also receives fees for providing administrative
services to contractholders. A subsidiary of the Company receives
fees for serving as an investment advisor for underlying funds
that are managed by the subsidiary.
The Company's annuity products are supported by the general
account assets of the Company for guaranteed investment options,
and the separate account assets for the variable investment
options.
The amount of annuity products in force is measured by account
balances. The following table shows guaranteed investment contract
and group and individual annuity account balances for the years
indicated:
Guaranteed
Year ended Investment Fixed Variable
December 31, Contracts Annuities Annuities
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[millions] [millions] [millions]
1997 $ 409 $ 5,227 $ 3,172
1998 275 4,849 4,318
1999 105 4,592 4,935
2000 103 4,394 5,081
2001 89 4,385 5,304
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 the FASCorp from PNP and third
party TPA customers totaled $28.1 billion at December 31, 2001 and
$24.3 billion at December 31, 2000.
Life insurance products in force include participating and
non-participating term life, whole life, and universal life.
Participating policyholders share in the financial results
(differences in experience of actual financial results versus
pricing expectations) of the participating business in the form of
dividends. Participating products are no longer actively marketed
by the Company but continued to produce renewal premium of $132.7
million, $152.3 million, and $146.5 million in 2001, 2000, and
1999, respectively. Participating dividends of $76.5 million,
$74.4 million, and $70.2 million were paid in 2001, 2000, and
1999, respectively. The provision for participating policyholder
earnings is reflected in liabilities in undistributed earnings on
participating policyholders in the consolidated balance sheets of
the Company. Participating policyholder earnings are not included
in the consolidated net income of the Company.
Term life provides coverage for a stated period and pays a death
benefit only if the insured dies within the period. Whole life
provides guaranteed death benefits and level premium payments for
the life of the insured. Universal life products include a cash
value component that is credited with interest at regular
intervals. The Company's earnings result from the difference
between the investment income and interest credited on customer
cash values and from differences between charges for mortality and
actual death claims. Universal life cash values are charged for
the cost of insurance coverage and for administrative expenses.
At December 31, 2001 and 2000, the Company had $3.9 billion and
$3.7 billion, respectively, of policy reserves on individual
insurance products sold to corporations to provide coverage on the
lives of certain employees, also known as Corporate-Owned Life
Insurance (COLI). Due to legislation enacted during 1996 that
phased out the interest deductions on COLI policy loans over a
two-year period ending 1998, COLI sales have ceased.
The Company has shifted its emphasis to the Business-Owned Life
Insurance (BOLI) market. BOLI was not affected by the 1996
legislation. These products are interest-sensitive whole life and
universal life policies that fund post-retirement benefits for
employees. At December 31, 2001, the Company had $1.7 billion of
fixed and $1.2 billion of separate account BOLI policy reserves
compared to $1.3 billion of fixed and $0.6 billion of separate
account reserves at December 31, 2000.
Sales of life insurance products typically have initial marketing
expenses which are deferred. Therefore, retention is an important
factor in profitability and is encouraged through product
features. For example, the Company's universal and whole life
insurance contracts typically impose a surrender charge on
policyholder balances withdrawn within the first ten years of the
contract's inception. The period of time and level of the charge
vary by product. In addition, more favorable credited rates may be
offered after policies have been in force for a period of time.
Certain of the Company's life insurance and group annuity products
allow policy owners to borrow against their policies. At December
31, 2001, approximately 7% (8% in 2000 and 5% in 1999) of
outstanding policy loans were on individual life policies that had
fixed interest rates ranging from 5.0% to 8.4%. The remaining 93%
of outstanding policy loans had variable interest rates averaging
6.14% at December 31, 2001. Investment income from policy loans
was $203.8 million, $191.5 million, and $167.8 million for the
years ended December 31, 2001, 2000, and 1999, respectively.
The following table summarizes individual life insurance in force
prior to reinsurance ceded for the years indicated:
Years Ended December 31,
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[Millions] 2001 2000 1999 1998 1997
----------------------- ----------- ----------- ----------- ----------- ------------
In force
end of year $ 50,769 $ 46,631 $ 43,831 $ 42,966 $ 28,266
2. Method of Distribution
Financial Services primarily uses BenefitsCorp to distribute
pension products and to provide communication and enrollment
services to employers in the public/non-profit market. Pension
products are also distributed through independent marketing
agencies.
The Company distributes universal and joint survivor life and term
insurance, as well as individual fixed and variable qualified and
non-qualified deferred annuities, through Charles Schwab & Co.,
Inc. Individual life products are also sold through large banks
and through the Internet. BOLI products are currently marketed
through one broker, Clark/Bardes, Inc.
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) are
computed on the basis of assumed investment yield, mortality
(where payouts are contingent on survivorship) and expenses. These
assumptions generally vary by plan, year of issue, and policy
duration. Reserves for investment contracts (deferred annuities)
are equal to the participants' account balances.
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
co-insurance 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, 2001, were $26.9 billion, comprised of
general account assets of $14.3 billion and separate account assets of
$12.6 billion. 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.
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 that
vary among the Company's principal product lines. The Company observes
strict asset and liability matching guidelines that 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 7 to the consolidated financial
statements of the Company (the Consolidated Financial Statements) that
are included in Item 8 (Financial Statements and Supplementary Data).
The Company routinely monitors and evaluates the status of its
investments in light of current economic conditions, trends in capital
markets, and other factors. These other factors include investment
size, quality, concentration by industry and other diversification
considerations for fixed maturity investments.
The Company's fixed maturity investments constituted 70% of investment
assets as of December 31, 2001 compared to 69% in 2000. The Company
reduces credit risk for the portfolio as a whole by investing primarily
in investment-grade fixed maturities. As of December 31, 2001 and 2000,
98%, and 99%, respectively, of the bond portfolio carried an investment
grade rating.
The Company's mortgage portfolio constituted 4% and 6% of investment
assets as of December 31, 2001 and 2000, 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, 2001, 21% of investment assets were invested in policy
loans, 3% were invested in short-term investments, 1% were invested in
stocks, and 1% were invested in real estate compared to 20%, 3%, 1%,
and 1%, respectively, in 2000.
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 2001 2000 1999 1998 1997
--------------------------- ------------ ------------ ------------ ------------ ------------
Debt Securities:
U.S. Government
Securities and
Obligations of
U.S. Government
Agencies $ 3,075 $ 2,315 $ 1,859 $ 1,951 $ 2,091
Corporate bonds 7,013 7,055 7,078 7,117 6,544
Foreign
Governments 28 50 51 69 146
------------ ------------ ------------ ------------ ------------
Total 10,116 9,420 8,988 9,137 8,781
Common stock 73 95 69 49 39
Mortgage loans 613 843 975 1,133 1,236
Real estate 113 107 104 73 94
Policy loans 3,001 2,810 2,681 2,859 2,657
Short-term
investments 425 415 241 420 399
------------ ------------ ------------ ------------ ------------
Total investments $ 14,341 $ 13,690 $ 13,058 $ 13,671 $ 13,206
============ ============ ============ ============ ============
Cash $ 216 $ 156 $ 268 $ 176 $ 126
Accrued investment
income 131 139 138 158 166
The following table summarizes the Company's general account investment
results:
[Millions] Net Earned Net
Investment Investment
For the year: Income Income Rate
------------------------- ----------------- ----------------
2001 $ 941 7.10 %
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
that 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. A 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 latest
financial examination by the Colorado Insurance Division is in
progress 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, 2001
statutory financial reports the Company has risk-based capital
well in excess of that required.
The NAIC has also adopted the Codification of Statutory Accounting
Principles (Codification). The Codification that 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 required adoption of Codification with
certain modifications for the preparation of statutory financial
statements effective January 1, 2001 (see Note 13 to the
consolidated financial statements).
2. Insurance Holding Company Regulations
The Company and certain of its subsidiaries are subject to and
comply with insurance holding company regulations in the
applicable states. These regulations contain certain restrictions
and reporting requirements for transactions between affiliates
including the payments of dividends. They also regulate changes in
control of an insurance company.
3. Securities Laws
The Company is subject to various levels of regulation under
federal securities laws. The Company's broker-dealer subsidiaries
are regulated by the Securities and Exchange Commission (SEC) and
the National Association of Securities Dealers, Inc. The Company's
investment advisor subsidiary and transfer agent subsidiary are
regulated by the SEC. Certain of the Company's separate accounts,
mutual funds, and variable insurance and annuity products are
registered under the Investment Company Act of 1940 and the
Securities Act of 1933.
4. Guaranty Funds
Under insurance guaranty fund laws existing in all states,
insurers doing business in those states can be assessed (up to
prescribed limits) for certain obligations of insolvent insurance
companies. The Company has established a reserve of $3.4 million
as of December 31, 2001 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, 2001.
5. Potential Legislation
United States legislative developments in various areas including
pension regulation, financial services regulation, and health care
legislation could significantly and adversely affect the Company
in the future. Congress continues to consider legislation relating
to health care reform and managed care issues (including patients'
rights, mental health parity and managed care or enterprise
liability). Congress is also considering changes to various
features of retirement plans such as the holding of company stock,
diversification rights, imposition of transaction restrictions,
expanded disclosure requirements and greater access to investment
advice for participants.
It is not possible to predict whether future legislation or
regulation adversely affecting the business of the Company will be
enacted and, if enacted, the extent to which such legislation or
regulation will have an effect on the Company and its competitors.
G. RATINGS
The Company is rated by a number of nationally recognized rating
agencies. The ratings represent the opinion of the rating agencies
regarding the financial strength of GWL&A and its ability to meet
ongoing obligations to policyholders.
Rating Agency Measurement Rating
------------------------------------- ----------------------------------------------------- ---------
A.M. Best Company, Inc. Financial strength, operating performance and A++(1)
market profile
Fitch, Inc. Financial strength AAA(2)
Moody's Investors Service Financial strength Aa2(3)
Standard & Poor's Corporation Financial strength AA+(4)
(1) Superior (highest rating out of six categories) (2) Exceptionally
Strong (highest rating out of twelve categories) (3) Excellent (second
highest rating out of nine categories) (4) Very strong (second highest
rating out of nine categories)
H. MISCELLANEOUS
No customer accounted for 10% or more of the Company's consolidated
revenues in 2001 or 2000. In addition, no segment of the Company's
business is dependent on a single customer or a few customers, the loss
of which would have a significant effect on the Company or any of its
business segments. The loss of business from any one, or a few,
independent brokers or agents would not have a material adverse effect
on the Company or any of its business segments.
The Company had approximately 8,200 employees at December 31, 2001.
ITEM 2. PROPERTIES
The Head Office of the Company consists of a 752,000 square foot
complex located in Greenwood Village, Colorado. The Company leases
sales and claims 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 2001 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
$187.6 million in 2001 and $134.1 million in 2000.
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 date of the Company.
This summary has been derived in part from and should be read in
conjunction with the Company's Consolidated Financial Statements. Note
1 in the financial statements discusses the significant accounting
policies of the Company. Significant estimates are required to account
for policy reserves, allowances for credit losses, deferred policy
acquisition costs, and valuation of privately placed fixed maturities.
Actual results could differ from those estimates.
INCOME STATEMENT Years Ended December 31,
------------------------------------------------------------------------
DATA 2001 2000 1999 1998 1997
------------------------------- ----------- ----------- ------------ ----------- -----------
[millions]
Premium income $ 1,204 $ 1,333 $ 1,163 $ 995 $ 833
Fee income 947 872 635 516 420
Net investment income 941 931 876 897 882
Net realized investment
gains 47 28 1 38 10
----------- ----------- ------------ ----------- -----------
Total revenues 3,139 3,164 2,675 2,446 2,145
Policyholder benefits 1,696 1,746 1,582 1,462 1,385
Operating expenses 1,028 1,025 804 688 552
----------- ----------- ------------ ----------- -----------
Total benefits and
expenses excluding
special charges 2,724 2,771 2,386 2,150 1,937
Income tax expense 141 134 83 99 49
----------- ----------- ------------ ----------- -----------
Net income before
special charges 274 259 206 197 159
Special charges (net) 81
----------- ----------- ------------ ----------- -----------
Net income $ 193 $ 259 $ 206 $ 197 $ 159
=========== =========== ============ =========== ===========
Deposits for investment-
type contracts $ 627 $ 835 $ 634 $ 1,344 $ 658
Deposits to separate
accounts 3,240 3,105 2,583 2,208 2,145
Self-funded premium
equivalents 5,721 5,181 2,979 2,606 1,940
BALANCE SHEET Years Ended December 31,
------------------------------------------------------------------------
DATA 2001 2000 1999 1998 1997
------------------------------- ----------- ----------- ------------ ----------- -----------
[millions]
Investment assets $ 14,341 $ 13,690 $ 13,058 $ 13,671 $ 13,206
Separate account assets 12,585 12,381 12,820 10,100 7,847
Total assets 28,814 27,900 27,533 25,123 22,078
Total policy benefit
liabilities 12,931 12,825 12,341 12,583 11,706
Due to GWL 42 43 35 52 118
Guaranteed preferred
beneficial interests in
the Company's junior
subordinated
debentures 175 175 175
Total shareholder's
equity 1,471 1,428 1,167 1,199 1,186
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements. Forward-looking
statements are statements not based on historical information and that
relate to future operations, strategies, financial results, or other
developments. In particular, statements using verbs such as "expected",
"anticipate", "believe", or words of similar import generally involve
forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements that represent the
Company's beliefs concerning future or projected levels of sales of the
Company's products, investment spreads or yields, or the earnings or
profitability of the Company's activities. Forward-looking statements
are necessarily based upon estimates and assumptions that are
inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's
control and may of which, with respect to future business decisions,
are subject to change. These uncertainties and contingencies can affect
actual results and could cause actual results to differ materially from
those expressed in any forward-looking statements made by, or on behalf
of, the Company. Whether or not actual results differ materially from
forward-looking statements may depend on numerous foreseeable and
unforeseeable events or developments, some of which may be national in
scope, such as general economic conditions and interest rates, some of
which may be related to the insurance industry generally, such as
pricing competition, regulatory developments and industry
consolidation, and others of which may relate to the Company
specifically, such as credit, volatility, and other risks associated
with the Company's investment portfolio and other factors. Readers are
also directed to consider other matters, including any risks and
uncertainties, discussed in documents filed by the Company and certain
of its subsidiaries with the Securities and Exchange Commission.
Management's discussion and analysis of financial conditions and
results of operations of the Company for the three years ended December
31, 2001 follows. This management discussion and analysis should be
read in conjunction with the financial data contained in Item 6 and the
Company's Consolidated Financial Statements.
A. COMPANY RESULTS OF OPERATIONS
1. Consolidated Results
The Company's consolidated net income increased $33.6 million or
13% in 2001 when compared to 2000, before one-time charges of
$80.9 million and operating losses of $18.7 million, net of tax,
related to the Alta Health & Life Insurance Company (Alta)
business. Alta was acquired by the Company on July 8, 1998. During
2001 and 2000 the Alta business continued to be run as a
free-standing unit but was converted to the Company's systems and
accounting processes. This conversion program resulted in
significant issues related to pricing, underwriting, and
administration of the business. The Company has decided to
transition Alta business to other Company products. All Alta sales
and administration staff have become employees of the Company and
the underwriting functions will be conducted by the underwriting
staff of the Company.
The Employee Benefits segment contributed $29.1 million and the
Financial Services segment contributed $4.5 million to the growth
in net income. Of total consolidated net income in 2001 and 2000
(before one-time charges and operating losses of Alta), the
Employee Benefits segment contributed 56% and 53%, respectively,
while the Financial Services segment contributed 44% and 47%,
respectively.
In 2001, total revenues decreased $24.7 million or 0.8% to $3.1
billion when compared to 2000. The decline in revenues in 2001 was
comprised of decreased premium income of $128.9 million, increased
fee income of $75.6 million, increased net investment income of
$10.1 million and increased realized gains on investments of $18.5
million. 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.
The decreased premium income in 2001 was comprised of a decline in
Employee Benefits premium income and Financial Services premium
income of $108.1 million and $20.8 million, respectively. The
decline in premium income in the Employee Benefits segment
reflected a 18% decline in medical members from 3.2 million in
2000 to 2.6 million in 2001. The decline in premium income in the
Financial Services segment was primarily due to lapses in the
closed block of traditional life business. 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 annuity products.
The increase in fee income in 2001 was comprised of Employee
Benefits fee income and Financial Services fee income of $57.2
million and $18.4 million, respectively. The 8% growth in Employee
Benefits fee income reflects a combination of an amendment to the
New England reinsurance contract, significant price increases in
the overall group health block of business, and fee increases from
service providers. The growth in Financial Services fee income in
2001 was primarily the result of new sales and the increase in
revenue from additional new participants in FASCorp. These
increases more than offset the decreased fees on variable funds
related to the weakness in the equity markets. 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.
Realized investment gains increased from $28.3 million in 2000 to
$46.8 million in 2001. Realized investment gains were $1.1 million
in 1999. The decrease in interest rates in 2001 and 2000
contributed to $32.1 million and $5.4 million of fixed maturity
gains, respectively. The increase in interest rates in 1999
contributed to $8.3 million of fixed maturity losses. The Company
experienced $22.2 million of fixed maturity credit losses in 2000.
Although the Company experienced stock gains in 2001, 2000 and
1999, 2000 stock gains were $20.3 million higher than 2001 and
$32.9 million higher than 1999. The Company also experienced
provisions for asset losses of $0, $8.9 and $7.0 million for 2001,
2000 and 1999, respectively.
Total benefits and expenses decreased $46.5 million or 2% in 2001
when compared to 2000. The decrease in 2001 was primarily in the
Employee Benefits segment reflecting lower claims associated with
a decrease in membership. The 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 that 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.
Income tax expense increased before special charges $7.1 million
or 5% in 2001 when compared to 2000. The increase reflects higher
pre-tax earnings in 2001. 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 liabilities. See Note 11 to the
Consolidated Financial Statements for a discussion of the
Company's effective tax rates.
In evaluating its results of operations, the Company also
considers net changes in deposits received for investment-type
contracts, deposits to separate accounts, and self-funded
equivalents. Self-funded equivalents represent paid claims under
minimum premium and administrative services only contracts of
which amounts approximate the additional premiums that would have
been earned under such contracts if they had been written as
traditional indemnity or HMO programs.
Deposits for investment-type contracts decreased $208 million or
25% in 2001 when compared to 2000. Deposits for investment-type
contracts increased $201.4 million or 32% in 2000 when compared to
1999. The decrease in 2001 was primarily attributable to the
Financial Services segment, due to a drop in demand for fixed BOLI
contracts due to low interest rates. This was replaced by the BOLI
business moving to the separate account product (see below). The
increase in 2000 was primarily attributable to the Financial
Services segment, where the Company had 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.
Deposits for separate accounts increased $135 million or 4% in
2001 when compared to 2000. This increase in 2001 is primarily due
to an increase in BOLI single premiums which was offset somewhat
by lower 401(k) deposits. 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 that
increased from $200 million and $1.7 billion, respectively, in
1999 to $365 million and $2.0 billion, respectively, in 2000.
Self-funded premium equivalents increased $540 million or 10% in
2001 when compared to 2000. This increase was due to the General
American business ($307 million), Allmerica business ($166
million) and higher overall claims volume for the self-funded
business. 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.
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. The agreement
converted to an assumption reinsurance agreement January 1, 2001.
The Company assumed approximately $150 million of policy reserves
and miscellaneous liabilities in exchange for $150 million of cash
and miscellaneous assets from General American.
On October 6, 1999, the Company entered into a purchase and sale
agreement with Allmerica Financial Corporation (Allmerica) to
acquire via assumption reinsurance Allmerica's group life and
health insurance business on March 1, 2000. This business
primarily consists of administrative services only and stop loss
policies. The in-force business was immediately co-insured back to
Allmerica and then underwritten and retained by the Company upon
each policy renewal date.
B. EMPLOYEE BENEFITS RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Employee
Benefits segment:
Years Ended December 31,
---------------------------------------------------------
INCOME STATEMENT DATA 2001 2000 1999
--------------------------------------------- ----------------- ----------------- ----------------
[millions]
Premiums $ 1,034 $ 1,142 $ 990
Fee income 809 752 549
Net investment income 91 95 80
Net realized investment gains (losses) 18 (3) (1)
----------------- ----------------- ----------------
Total revenues 1,952 1,986 1,618
Policyholder benefits 867 923 789
Operating expenses 863 857 661
----------------- ----------------- ----------------
Total benefits and expenses
before special charges 1,730 1,780 1,450
Income tax expense 76 70 51
----------------- ----------------- ----------------
Net income excluding special charges 146 137 117
Special charges (net) 81
----------------- ----------------- ----------------
Net income $ 65 $ 136 $ 117
================= ================= ================
Deposits for investment-type
Contracts $ 26 $ 27 $ 26
Deposits to separate accounts 1,806 1,951 1,745
Self-funded premium equivalents 5,721 5,181 2,979
In the second quarter of 2001, the Company recorded a $127 million
special charge ($80.9 million, net of tax), related to Alta. The
principal components of the charge include a $46 million premium
deficiency reserve related to underpricing on the block of business, a
$29 million reserve for doubtful premium receivables, a $28 million
reserve for doubtful accident and health plan claim receivables, and a
$24 million decrease in goodwill and other.
Net income, excluding special charges of $80.9 million for Employee
Benefits after tax, increased 7% in 2001 and increased 15% in 2000. The
improvement in earnings in 2001 reflected favorable experience in
realized investment gains, expense gains associated with higher fee
income partially offset by a deterioration in morbidity (which
negatively impacted stop-loss coverages), decreases in premiums due to
membership declines, and increased bad debts due to the impact of the
economic slowdown. During 2001, the Employee Benefits segment
experienced increased medical costs and utilization trends which
contributed to a deterioration in morbidity experience. 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.
401(k) premiums and deposits for 2001 and 2000 decreased 7% and
increased 12%, respectively, as the result of lower than expected new
case sales in 2001 and higher recurring deposits from existing
customers and new sales in 2000. The number of contributing
participants decreased from 551,000 at December 31, 2000 to 546,000 at
December 31, 2001. Assets under administration (including third-party
administration) in 401(k) decreased 7% in 2001 to $7.6 billion and
decreased 5% from 1999 to 2000. The decrease in 2001 was primarily due
to the impact of lower U.S equity markets.
Equivalent premium revenue and fee income for group life and health
decreased 3% from 2000 levels as the result of a decline in membership.
From 1999 to 2000, equivalent premium revenue and fee income increased
23% as a result of increased sales and the Allmerica and General
American acquisitions.
1. Group Life and Health
The Employee Benefits segment experienced a net decrease of 1,232
group health care customers (employer groups) during 2001. There
was an 18% decrease in total health care membership from 3,158,900
at the end of 2000 to 2,587,900 at year-end 2001. POS and HMO
members decreased 30% from 718,400 in 2000 to 500,600 in 2001.
Much of the health care decline in 2001 can be attributed to
terminations resulting from aggressive pricing related to target
margins. The decline in membership was also, in part, due to
difficulties with the implementation of a systems enhancement,
which was resolved by the end of 2001; a decrease in the employee
base for existing group health care customers; and the general
decline in the economy.
There was a net increase of 107 group healthcare customers
(employer groups) during 2000. 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.
2. 401(k)
The number of new 401(k) case sales (employer groups), including
third-party administration business generated through the
Company's marketing and administration arrangement with New
England, decreased 39% to 598 in 2001 as compared to 973 in 2000,
an increase of 20% as compared to 811 in 1999. The 401(k) block of
business under administration totaled 6,900 employer groups and
546,000 individual participants in 2001, compared to 7,000
employer groups and 551,000 individual participants in 2000 and
6,400 employer groups and 501,000 individual participants in 1999.
During 2001, the in force block of 401(k) business declined
slightly, with customer retention falling to 89.9% from 91.5% in
2000, reflecting the impact of health care terminations
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 97%
of assets contributed in 2001 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
To position itself for the future, the Employee Benefits segment
is focused on putting in place the products, strategies and
processes that will improve its competitive position in the
evolving managed care environment.
A focus on provider contracting continues to be essential to
ensuring strong morbidity results. Sales efforts will be
streamlined and concentrated on self-funded products. Continued
emphasis will be placed on expense economies and synergies to
ensure competitive administrative costs. Efficiency and customer
service will be improved through implementation of various system
initiatives and through process redesign.
The Company will continue to enhance its One Health Plan managed
care program with emphasis on medical claims management. In 2001,
the Company began converting to a three tier prescription drug
program that has different levels of co-payments. This conversion
will continue into 2002 and will help to reduce drug costs. The
Company will continue to develop its Internet based disease
management program for members with diabetes, asthma, coronary
heart disease and other chronic illnesses.
Online enrollment for life and health members was implemented in
2001. As a further enhancement to our Internet services, online
billing is scheduled for implementation in 2002 and will provide
our customers with improved service, as well as generate cost
savings to the Company.
C. FINANCIAL SERVICES RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Financial
Services segment:
Years Ended December 31,
---------------------------------------------------------
INCOME STATEMENT DATA 2001 2000 1999
--------------------------------------------- ----------------- ----------------- ----------------
[millions]
Premiums $ 170 $ 191 $ 173
Fee income 138 120 86
Net investment income 850 836 796
Net realized investment gains 29 31 2
----------------- ----------------- ----------------
Total revenues 1,187 1,178 1,057
Policyholder benefits 829 823 793
Operating expenses 165 168 143
----------------- ----------------- ----------------
Total benefits and expenses 994 991 936
----------------- ----------------- ----------------
Income from operations 193 187 121
Income tax expense 65 64 32
----------------- ----------------- ----------------
Net income $ 128 $ 123 $ 89
================= ================= ================
Deposits for investment-type
contracts $ 601 $ 808 $ 608
Deposits to separate accounts 1,434 1,154 838
During 2001, the Financial Services segment experienced continued
significant growth of participants in the public non-profit business
due to several large case sales, separate account sales due to large
case sales in the BOLI line of business, and strong persistency in all
lines of business.
Net income for Financial Services increased 4% in 2001 and increased
38% in 2000. The increase in earnings in 2001 reflected higher earnings
from an increase in investment margins, additional fee income from new
third-party administration cases, and improved mortality. This growth
in the fees was somewhat suppressed by the impact of the significant
decrease in the equity markets. The earnings in 2000 reflected strong
earnings from an increased asset base, an increase in investment
margins, and significant capital gains on fixed maturities.
1. Savings
Premiums increased $1.2 million or 16% from $7.3 million in 2000
to $8.5 million in 2001. Premiums decreased $7.0 million or 49%
from $14.3 million in 1999 to $7.3 million in 2000. The decrease
in 2000 was 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. This trend changed in 2001 as the drop in the
equity markets increased the flow into the fixed products as
participants moved towards the more stable investments.
Fee income increased $8.6 million or 8% from $111.2 million in
2000 to $119.8 million in 2001. Fee income increased $29.9 million
or 37% from $81.3 million in 1999 to $111.2 million in 2000. The
growth in fee income in 2001 was the result of new sales and the
increase in revenue from additional new participants in FASCorp.
These increases more than offset the decreased fees on variable
funds related to the weakness in the equity markets. The growth in
fee income in 2000 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 decreased $207 million or
26% from $808 million in 2000 to $601 million in 2001. This
decrease was the result of lower demand for small BOLI fixed
business due to lower fixed interest rates. Deposits for
investment-type contracts increased $200 million or 30% from $608
million in 1999 to $808 million 2000. This significant increase
was the result of several large case sales in the fixed portfolio
products.
Deposits to separate accounts increased $280 million or 24% from
$1.1 billion in 2000 to $1.4 billion in 2001. Deposits to separate
accounts increased $316 million or 30% from $838 million in 1999
to $1.1 billion in 2000. The increases in 2001 and 2000 were
primarily from the sale of large BOLI single premium cases.
The Financial Services segment's core savings business is in the
public/non-profit pension market. The assets of the
public/non-profit business, including separate accounts but
excluding Guaranteed Investment Contracts (GIC), increased $300
million or 4% from $7.9 billion in 2000 to $8.2 billion in 2001.
The majority of this growth occurred in the stable value funds,
which resulted from large case sales, as new investments moved to
the more stable fixed separate accounts due to the instability in
the equity markets in 2001.
The Financial Services segment's savings business experienced
strong growth in 2001. The number of new participants in 2001 was
339,000 compared to 233,000 in 2000 and 214,100 in 1999, bringing
the total lives under administration to 1,268,549 in 2001 and
1,002,785 in 2000.
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 2001, GIC assets decreased
13.4% from 2000 to $89.2 million. GIC assets decreased 1.7% in
2000 to $103.0 million.
Customer demand for investment diversification continued to grow
during 2001. New contributions to variable business represented
56% of the total premium equivalents in 2001 versus 51% in 2000.
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 2001
included AIM, American Century, Ariel, Fidelity, Founders,
INVESCO, Janus, Loomis Sayles, Templeton, and T. Rowe Price.
Customer participation in guaranteed separate accounts increased,
as many customers prefer the security of fixed income securities
and separate account assets. Assets under management for
guaranteed separate account funds were $1,207.9 million in 2001
compared to $749.3 million in 2000 and $653.7 million in 1999.
FASCorp administered records for approximately 2,191,000
participants in 2001 versus 1,875,000 in 2000. FASCorp's fee
income was $72.4 million, $63.8 million, and $53.8 million for the
years ended December 31, 2001, 2000, and 1999, 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 $179.1
million in 2001 reflected a decrease of 6% over 2000 premiums and
deposits of $191.3 million. The decrease was primarily due to the
reduction of the traditional policies due to lapses. The term life
business marketed through banks and other financial institutions
has experienced significant growth over the past several years.
Policies sold were 37,480, 17,367 and 9,000 in the years 2001,
2000 and 1999.
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 $83.1 million in 2001 from $84.1 million in 2000 and
$128.5 million in 1999 and the Company expects this decline to
continue. As a result of these legislative changes, the Company
has shifted its emphasis in new sales from COLI to 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 $547.9 million during 2001
compared to $581.9 million in 2000 and $436.3 million in 1999. 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. Market pressures have led the government agencies to
introduce employer-matching plans that should also increase the
number of potential government employees who will be contributing
to retirement plans. 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. There was an
increase of 316,000 new lives under administration in FASCorp in
the year 2001, and growth is expected to continue in the future.
Individual annuities have experienced sales 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 policy sales through banks are expected to increase in
the year 2002. Distribution channels are presently established in
five large banks and management plans to expand into additional
banks in 2002. BOLI sales are expected to continue to be strong in
the separate account market.
In 2002, the Financial Services division will assume
responsibility for the development and administration of the
Company's 401(k) product. The Employee Benefits division will
continue to provide sales and marketing support for the product.
D. INVESTMENT OPERATIONS
The Company's primary investment objective is to acquire assets with
duration and cash flow characteristics reflective of the Company's
liabilities, while meeting industry, size, issuer, and geographic
diversification standards. Formal liquidity and credit quality
parameters have also been established.
The Company follows rigorous procedures to control interest rate risk
and observes strict asset and liability matching guidelines. These
guidelines ensure that even under changing market conditions, the
Company's assets will meet the cash flow and income requirements of its
liabilities. Using dynamic modeling to analyze the effects of a 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] 2001 2000
---------------------------------------------------------------- ----------------- -----------------
Fixed maturities, available-for-sale, at fair value $ 10,116 $ 9,420
Mortgage loans 613 843
Real estate and common stock 186 202
Short-term investments 425 415
Policy loans 3,001 2,810
----------------- -----------------
Total invested assets $ 14,341 $ 13,690
================= =================
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 that allows the Company, if necessary, to take
appropriate action to protect its investment. The Company believes
that the cost of the additional monitoring and analysis required
by private placements is more than offset by their enhanced yield.
One of the Company's primary objectives is to ensure that its
fixed maturity portfolio is maintained at a high average quality,
so as to limit credit risk. If not externally rated, the
securities are rated by the Company on a basis intended to be
similar to that of the rating agencies.
During the fourth quarter of 2000, the Company transferred all
securities classified as held-to-maturity into the
available-for-sale category. See Item 8 (Financial Statements and
Supplementary Data), Note 7 for further discussion related to this
transfer.
The distribution of the fixed maturity portfolio by credit rating
is summarized as:
Credit Rating 2001 2000
----------------------------------------------------------- ----------------- -----------------
AAA 57.9% 53.5%
AA 9.2 10.2
A 14.2 16.2
BBB 16.4 19.0
BB and below (non-investment grade) 2.3 1.1
----------------- -----------------
TOTAL 100.0% 100.0%
================= =================
At December 31, 2001, the Company had nine bonds in default with a
carrying value of $71.1 million, compared to two bonds for $10.7
million for 2000.
2. Mortgage Loans
During 2001, the mortgage portfolio declined 27% to $613 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 that includes ongoing analysis of key mortgage
characteristics such as debt service coverage, net collateral cash
flow, property condition, loan-to-value ratios, and market
conditions. Collateral valuations are performed for those
mortgages that after review are determined by management to
present possible risks and exposures. These valuations are then
incorporated into the determination of the Company's allowance for
credit losses.
The average balance of impaired loans decreased to $31.6 million
in 2001 compared with $39.3 million in 2000, and there were $10.6
million of foreclosures in 2001, compared to $2.0 in 2000. 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, 2001 and 2000, the Company's
loan portfolio included $56.3 million and $73.5 million,
respectively, of non-impaired restructured loans.
3. Derivatives
The Company uses certain derivatives, such as futures, options,
and SWAPS, for purposes of hedging interest rate 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.
4. Outlook
A global economic slowdown was the theme of 2001. Policy makers,
both domestically and internationally, cut short rates through
2001 as growth slowed or contracted. A very moderate upturn in
U.S. economic growth is expected in the second half of 2002;
foreign economies are expected to lag a U.S. economic turnaround
by at least one quarter. Ultimately, very aggressive monetary and
fiscal policy should provide support for the U.S. economy.
In the U.S., the Federal Reserve Board cut short rates eleven
times over the course of the year, from 6.50% to the current rate
of 1.75%. Interest rates across the curve established lows in
early November and have been trading in a range since then. It is
likely that yields will decline again as inflation slows further
in the first part of the recovery, and then resume an upward bias.
The Company's investment portfolio is well positioned for a rising
interest rate environment pending economic recovery. The portfolio
is well diversified and comprised of high quality, relatively
stable assets. We have taken advantage of wide spreads across
asset classes, opportunistically adding exposure to investment
grade bonds appropriate for the expected economic and interest
rate environment as well as 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 that totaled $641.4 million and $571.2
million as of December 31, 2001 and 2000, 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
sources of the funds that may be required in such events include
retained earnings, and 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 $97.0 million of commercial paper outstanding
at December 31, 2001 compared with $97.6 million at December 31, 2000.
The commercial paper has been given a rating of A-1+ by Standard &
Poors' Corporation and a rating of P-1 by Moody's Investors Services,
each being the highest rating available. In addition, the Company
issued a surplus note to GWL&A Financial in 1999. The surplus note
bears interest at 7.25% and is due June 30, 2048.
F. ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement No
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - A Replacement of FASB Statement No.
125" (SFAS No. 140), which revises the standards for accounting for
securitizations and other transfers of financial assets and collateral,
and requires certain disclosures. SFAS No. 140 was effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. Certain disclosure
requirements under SFAS No. 140 were effective December 15, 2000, and
these requirements have been incorporated in the Company's financial
statements. The adoption of SFAS No. 140 did not have a material effect
on the financial position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements" that provides guidance with respect to revenue recognition
issues and disclosures. As amended by SAB No. 101B, "Second Amendment:
Revenue Recognition in Financial Statements," the Company implemented
the provisions of SAB 101 during the fourth quarter of 2000. The
adoption of SAB No. 101 did not affect the Company's revenue
recognition practices.
Effective January 1, 2001, the Company adopted Financial Account
Standards Board (FASB) Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), as amended by FASB
Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." SFAS 138 requires all derivatives, whether
designated in hedging relationships or not, to be recorded on the
balance sheet at fair value. If the derivative is designated as a fair
value hedge, the changes in the fair value of the derivative and of the
hedged item attributable to the hedged risk are recognized in earnings.
If the derivative is designated as a cash flow hedge, the effective
portions of the changes in the fair value of the derivative are
recorded in accumulated other comprehensive income and are recognized
in the income statement when the hedged item affects earnings.
Ineffective portions of changes in the fair value of cash flow hedges
are recognized in earnings. The adoption of SFAS No. 133 resulted in an
approximate $1.0 million after-tax increase to accumulated other
comprehensive income, which has been included in the current year