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, 2003
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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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Delaware 84-1474245
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(State or other jurisdiction of incorporation or (I.R.S. Employer Identification
organization) Number)
8515 East Orchard Road, Greenwood Village, CO 80111
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(Address of principal executive offices)
(Zip Code)
[303] 737-4128
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer as defined
in ss.240.12(b)-2 of this chapter.
Yes No X
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The public may read and copy any of the registrant's reports filed with the SEC
at the SEC's Public Reference Room, 450 Fifth Street NW, Washington DC 20549,
telephone 1-800-SEC-0330 or online at (http://www.sec.gov).
As of June 30, 2003, the aggregate market value of the registrant's voting stock
held by non-affiliates of the registrant was $0.
As of March 1, 2004, 50,025 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
TABLE OF CONTENTS
Page
Part I Item 1 Business..............................................................
A. Organization and Corporate Structure..............................
B. Business of the Company...........................................
C. Great-West Healthcare.............................................
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. Critical Accounting Policies......................................
B. Company Results of Operations.....................................
C. Great-West Healthcare Results of Operations.......................
D. Financial Services Results of Operations..........................
E. Investment Operations.............................................
F. Liquidity and Capital Resources...................................
G. Off-Balance Sheet Arrangements....................................
H. Obligations Relating to Debt and Leases...........................
I. Accounting Pronouncements.........................................
Item 7A Quantitative and Qualitative Disclosure About Market Risk.............
Item 8 Financial Statements and Supplementary Data...........................
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................
Item 9A Controls and Procedures...............................................
Part III Item 10 Directors and Executive Officers of the Registrant....................
A. Identification of Directors.......................................
B. Identification of Executive Officers..............................
C. Code of Ethics....................................................
D. Audit Committee Financial Expert..................................
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........................
Item 14 Principal Accountant Fees and Services................................
A. Principal Accountant Fees.........................................
B. Pre-Approval Policies and Procedures..............................
Part IV Item 15 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 on March 28, 1907. The Company is headquartered in Colorado.
The Company is indirectly owned by Great-West Lifeco Inc. (Lifeco), a
Canadian holding company. Lifeco operates in the U.S. through GWL&A and
The Canada Life Assurance Company (CLAC), and in Canada through The
Great-West Life Assurance Company (Great-West Life) and its
subsidiaries, London Life Insurance Company and CLAC. 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 which are listed on the New York Stock Exchange.
Shares of 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 subsidiaries, First Great-West Life &
Annuity Insurance Company (First GWL&A) and Canada Life Insurance
Company of New York (CLINY). GWL&A is also a licensed reinsurer in the
state of New York.
The Company operates the following two business segments:
Great-West Healthcare - Employee benefits products and services for
group clients
Financial Services - Savings products and
administrative and recordkeeping services for
public, private and non-profit employers,
corporations and individuals (including
401(a), 401(k), 403(b), 408, and 457 plans),
and life insurance products for individuals
and businesses
On July 10, 2003, Lifeco completed its acquisition of Canada Life
Financial Corporation (CLFC), the parent company of CLAC, Canada Life
Insurance Company of America (CLICA) and CLINY. Immediately thereafter,
Lifeco transferred all of the common shares of CLFC it acquired to its
subsidiary, Great-West Life. On December 31, 2003, CLAC transferred all
of the outstanding common shares of CLICA and CLINY owned by it to
GWL&A.
CLAC, CLICA and CLINY sell individual and group insurance and annuity
products in the United States. Since the time of its acquisition by
Lifeco, this insurance and annuity business in the United States has
been managed by the Company. In connection with this management, the
Company provides certain corporate and operational administrative
services for which it receives a fee.
Sales of new individual products by CLAC, CLICA and CLINY were
discontinued in 2003, shortly after the acquisition of CLFC by Lifeco.
They are now being operated as closed blocks of business. On January 14,
2004, Lifeco announced the sale of CLAC's and CLINY's U.S. group
business, excluding medical stop loss policies, to Jefferson Pilot
Corporation.
The Canada Life acquisitions have been accounted for as a
"reorganization of businesses under common control." Accordingly, the
assets and liabilities of CLICA and CLINY were recorded at Lifeco's cost
basis, and the results of operations of CLICA and CLINY from July 10,
2003 through December 31, 2003 are included in the Company's financial
statements.
The Company recorded as of December 31, 2003, the following (in
thousands) as a result of the acquisition of CLICA and CLINY:
Assets Liabilities and Stockholder's Equity
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Fixed maturities $ 1,937,218 Policy reserves $ 2,991,407
Equity investments 23,680 Policyholders' funds 2,407
Mortgage loans 1,145,494 Policy and contract 899
claims
Real estate 550 Provision for
policyholders' dividends 2,800
Policy loans 13,621 Other liabilities 439,439
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Short-term investments 65,537 Total liabilities 3,436,952
Cash (net of acquisition (232,803)
cost)
Investment income Accumulated other
due and accrued 32,147 comprehensive income (14,433)
Other assets 439,864 Retained earnings 2,789
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Total stockholder's (11,644)
equity
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$ 3,425,308 $ 3,425,308
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The Company's statement of operations for the year ended December 31,
2003 includes the following (in thousands) related to CLICA and CLINY
for the period from July 10, 2003 to December 31, 2003:
Total revenues $ 105,868
Benefits 92,193
Operating expenses 9,385
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Total benefits and 101,578
expenses
Income from operations 4,290
Income taxes 1,501
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Net income $ 2,789
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On August 31, 2003, the Company and CLAC entered into an Indemnity
Reinsurance Agreement pursuant to which the Company reinsured 80% (45%
coinsurance and 35% coinsurance with funds withheld) of certain United
States life, health and annuity business of CLAC's U.S. branch. The
Company recorded $1,427 million in premium income and increase in
reserves associated with these policies. The Company recorded, at fair
value, the following (in thousands) at August 31, 2003 as a result of
this transaction:
Assets Liabilities and Stockholder's Equity
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Fixed Maturities $ 635,061 Policy reserves $ 2,926,497
Mortgage loans 451,725 Policy and contract 45,229
claims
Policy loans 278,152 Policyholders' funds 65,958
Reinsurance receivable 1,320,636
Deferred policy
acquisition 313,364
costs acquired
Investment income
due and accrued 17,280
Premiums in course of
collection 21,466
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$ 3,037,684 $ 3,037,684
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The reinsurance receivable relates to the amount due the Company for
reserves ceded by coinsurance with funds withheld. The Company's return
on this reinsurance receivable will be the interest and other investment
returns earned net of realized gains and losses on a segregated pool of
investments of CLAC's U.S. branch. Pursuant to SFAS 133, the Company has
identified an embedded derivative for the Company's exposure to interest
rate and credit risk on the segregated pool of investments. This
embedded derivative does not qualify for hedge accounting.
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 2003 2002 2001
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Premium Income
Great-West Healthcare
Group life & health $ 838 $ 960 $ 1,034
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Total Great-West Healthcare 838 960 1,034
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Financial Services
Retirement Services 1 4
Individual Markets 1,414 160 166
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Total Financial Services 1,415 160 170
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Total premium income $ 2,253 $ 1,120 $ 1,204
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Fee Income
Great-West Healthcare
Group life & health $ 607 $ 660 $ 713
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Total Great-West Healthcare 607 660 713
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Financial Services
Retirement Services 200 197 208
Individual Markets 33 26 26
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Total Financial Services 233 223 234
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Total fee income $ 840 $ 883 $ 947
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Deposits for investment-type
contracts -
Financial Services 2 $ 676 $ 691 $ 627
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Deposits to Separate Accounts -
Financial Services $ 2,217 $ 2,461 $ 3,240
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Self-funded equivalents -
Great-West Healthcare 3 $ 4,674 $ 5,228 $ 5,721
====================================== ============= ============ =============
1 All information in the preceding table and other tables herein is
derived from information that has been prepared in conformity with
accounting principles generally accepted in the United States of
America, unless otherwise indicated.
2 Investment-type contracts are contracts that include significant cash
build-up features, as discussed in FASB Statement No. 97.
3 Self-funded equivalents generally represent paid claims under minimum
premium and administrative services only contracts, which amounts
approximate the additional premiums that could have been earned under
such contracts if they had been written as traditional indemnity or
HMO programs.
C. GREAT-WEST HEALTHCARE
1. Principal Products
The Great-West Healthcare segment of the Company provides employee
benefits products and services to approximately 5,000 employers
across the United States.
The Company's product line includes traditional group health plans as
well as consumer-driven plans that are supported by the Company's
disease management program. Other products and services include
COBRA, HIPAA and flexible spending account administration (Internal
Revenue Code (Sections 125/129); dental and vision plans; life
insurance benefits; and short and long-term disability coverage.
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 cost savings.
During 2003, the Great-West Healthcare division reorganized into
market segments: Select, focusing on employers with 50-250 employees;
Mid-market, focusing on employers with 250-2,500 employees; National
Accounts, focusing on employers with over 2,500 employees; and
Specialty Risk, a new market segment exploring new business
opportunities outside the Company's typical target market.
In 2003 the Company adopted the new brand name, "Great-West
Healthcare," which refers to all employee benefit products and
services offered by what was previously known as the Employee
Benefits division of the Company and the following subsidiaries: Alta
Health & Life Insurance Company (Alta), First GWL&A, and the HMO
companies. The new name is intended to eliminate potential market
confusion over different carriers and networks.
In 2003 the Company introduced a consumer-driven tiered benefit
health plan that covers preventive care at 100 percent, provides
high-level coverage for medically complex or catastrophic services,
and gives members more financial responsibility for discretionary
services.
The Company also began offering Health Reimbursement Accounts (HRA),
through which employers contribute a set annual amount for each
employee to spend on health care expenses. Funds remaining at the end
of the year can be rolled over for future use.
The Company continues to offer a range of other health coverage
options including Health Maintenance Organization (HMO) plans, Point
of Service (POS) plans, Preferred Provider Organization (PPO) plans,
and Open Access plans.
Medical management programs are offered to complement each health
plan the Company offers, along with a nurse hotline and online
educational and comparison tools to help members manage their health
and make medically and financially sound treatment choices. The
Company's disease management program services enrolled members with
asthma, diabetes, cardiac and other conditions.
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:
As of December 31,
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[Millions] 2003 2002 2001 2000 1999
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In force $ 102,721 $ 58,572 $ 66,539 $ 96,311 $ 83,901
Note: Includes $52,745 of in force group life insurance obtained from
the CLAC activity for the year ended December 31, 2003. Also
includes $9,049 and $11,237 for the years ended December 31,
2003 and 2002, respectively of in force group life insurance
obtained from the acquisition of General American Life
Insurance Company (General American). The 2002 figure was
influenced by a decline in total health care membership. The
2001 figure was influenced by a decline in total health care
membership and the Company's decision to discontinue certain
group life insurance business obtained through acquisitions.
2. Method of Distribution
The Company distributes its products and services through field sales
staff. As of December 31, 2003, the sales staff was located in 31
sales offices throughout the United States. Each sales office works
with insurance brokers, agents, and consultants in its local market.
3. Competition
The employee benefits industry is highly competitive. 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 the effectiveness of marketing and sales.
4. Reserves
For group whole life and term insurance products, policy reserve
liabilities are equal to the present value of future benefits and
expenses less the present value of future net premiums using best
estimate assumptions for interest, mortality, and expenses (including
margins for adverse deviation). For disability waiver of premium and
paid up group whole life contracts (included within the group life
family of products offered by the Company), the policy reserves equal
the present value of future benefits and expenses using best estimate
assumptions for interest, mortality, morbidity, and expenses
(including margins for adverse deviation). For group universal life
(included within the group life family of products offered by the
Company), the policy reserves equal the accumulated fund balance
(that reflects cumulative deposits plus credited interest less
charges thereon). Reserves for long-term disability products are
established for lives currently in payment status, or that are
approved for payment but are in a waiting period, using industry and
Company morbidity factors, and interest rates based on Company
experience. In addition, reserves are held for claims that have been
incurred but not reported and for long term disability claims that
have been reported but not yet adjudicated.
For fully insured medical and dental insurance products, reserves
reflect the ultimate cost of claims including, on an estimated basis,
(i) claims that have been reported but not settled, and (ii) claims
that have been incurred but not reported. Claim reserves are based
upon factors derived from past experience. Reserves also reflect a
retrospective experience rating that is done on certain types of
business.
Assumptions for mortality and morbidity experience are periodically
reviewed against published industry data and company experience.
The above mentioned reserves are computed amounts that, with
additions from premiums and deposits to be received, and with
interest on such reserves, are expected to be sufficient to meet the
Company's policy obligations such as paying expected death or
retirement benefits or surrender requests and to generate profits.
5. Reinsurance
The Company seeks to limit its exposure on any single insured and to
recover a portion of benefits paid by ceding risks to other insurance
enterprises under excess coverage and co-insurance contracts. The
maximum amount of group life insurance retained on any one life is
$1.5 million and $1.0 million for accidental death coverage. The
maximum amount of group monthly disability income benefit at risk on
any one life is $6,000 per month.
The Company has a marketing and administrative services arrangement
with New England Financial (NEF). Effective January 1, 2002, the
Company renegotiated this arrangement to assume the full risk on this
block of business. The Company pays a per member fee to NEF.
D. FINANCIAL SERVICES
1. Principal Products
The Financial Services business segment of the Company develops and
administers products under two general categories: Retirement
Services and Individual Markets. These areas distribute retirement
and life insurance products and services for public, private and
non-profit employers, corporations and individuals.
Retirement Services
In 2003 the division launched the new brand name of "Great-West
Retirement Services" to bring together multiple products and services
under one name. Under the Great-West Retirement Services brand, the
Company provides enrollment services, communication materials,
investment options, and education services to employer sponsored
defined contribution and voluntary 403(b) plans, as well as
comprehensive administrative and recordkeeping services for financial
institutions and employers. 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 marketing focus is directed towards providing services and
investment products under Internal Revenue Code Sections 401(a),
401(k), 403(b), 408, and 457 to state and local governments,
hospitals, non-profit organizations, public school districts,
corporations and individuals. Recordkeeping and administrative
services for defined contributions plans may also be provided to this
target market. Through a subsidiary, Financial Administrative
Services Corporation (FASCorp), the Company is focused on partnering
with other large institutions to provide third-party recordkeeping
and administration services.
The Company offers both guaranteed interest rate investment options
for various lengths of time and variable annuity products designed to
meet the specific needs of the customer. In addition, for larger
cases the Company offers both customized annuity and non-annuity
products.
For the guaranteed interest rate option, the Company earns investment
margins on the difference between the income earned on investments in
the Company's general account and the interest credited to the
participant's account balance. The general account assets of the
Company support the guaranteed investment product. The Company also
manages separate account fixed interest rate options where the
Company is paid a management fee.
The Company's variable investment options provide the opportunity for
participants 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.
The Company is compensated by separate account fees for mortality and
expense risks pertaining to the variable annuity contract and for
providing administrative services. The Company is reimbursed by
external mutual funds for marketing, sales and service costs under
various revenue sharing agreements.
The Company also receives fees for providing third-party
administrative and recordkeeping services to financial institutions
and employer-sponsored retirement plans.
Customer retention is a key factor for the profitability of group
annuity products. To encourage customer retention, annuity contracts
may 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.
Individual Markets
In the Individual Markets area, the Company distributes life
insurance and individual annuity products to both individuals and
businesses through various distribution channels. Life insurance
products in force include participating and non-participating term
life, whole life, universal life, and variable 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.
The Company no longer actively markets participating products. 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.
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.
Through the acquisition of Canada Life discussed earlier, Individual
Markets has expanded its in force blocks of individual protection
(participating and non-participating whole life, term and universal
life insurance) and wealth management products (variable annuities,
single premium immediate annuities, structured settlements, and
guaranteed investment contracts). The area is focused on fully
integrating the operational units and systems and providing excellent
customer service to support retention efforts.
In 2003, the Company continued its efforts to partner with large
financial institutions to provide individual term and whole life
insurance to the general population. Some of the institutional
partners include Huntington National Bank, U S Bank, Citibank,
SunTrust Bank, AmSouth Bank, Affiliated Financial Services and
Colonial Bank.
At both December 31, 2003 and 2002, the Company had $3.8 billion of
policy reserves on individual insurance products sold to corporations
to provide coverage on the lives of certain employees, also known as
Corporate-Owned Life Insurance (COLI). Due to legislation enacted
during 1996 that phased out the interest deductions on COLI policy
loans over a two-year period ending 1998, leveraged COLI product
sales have ceased.
The Company has shifted its emphasis to the Business-Owned Life
Insurance (BOLI) market. BOLI was not affected by the 1996
legislation. These products are interest-sensitive whole life,
universal life and variable universal life policies that indirectly
fund post-retirement benefits for employees and non-qualified
executive benefits. At December 31, 2003, the Company had $1.5
billion of fixed and $1.5 billion of separate account BOLI policy
reserves compared to $1.5 billion of fixed and $1.4 billion of
separate account reserves at December 31, 2002.
The Company also has a marketing agreement with Charles Schwab & Co.,
Inc. (Schwab) 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. The Company is currently offering guarantee period
durations of three to ten years. Distributions from the amounts
allocated to a Guarantee Period Fund more than six months prior to
the maturity date result 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.
On a very limited basis, the Company also 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.
Certain of the Company's life insurance and group annuity products
allow policy owners to borrow against their policies. At December 31,
2003, approximately 10% (10% in 2002 and 7% in 2001) of outstanding
policy loans were on individual life policies that had fixed interest
rates ranging from 5% to 8%. The remaining 90% of outstanding policy
loans had variable interest rates averaging 6.54% at December 31,
2003. Investment income from policy loans was $189.1 million, $209.6
million, and $203.8 million for the years ended December 31, 2003,
2002, and 2001, respectively.
2. Method of Distribution
Great-West Retirement Services distributes pension products through
its subsidiary, GWFS Equities, Inc., as well as over 200 pension
consultants, representatives and service personnel. Recordkeeping and
administrative services are also distributed through institutional
partners.
The Individual Markets area distributes individual life insurance
through marketing agreements with various retail financial
institutions. BOLI is distributed through Clark Consulting primarily,
and recently through SunTrust. Individual life insurance and annuity
products are also offered through Schwab.
3. Competition
The life insurance, savings, and investments marketplace is highly
competitive. The Company's competitors include mutual fund companies,
insurance companies, banks, investment advisers, and certain service
and professional organizations. No one competitor or small number of
competitors is dominant. Competition focuses on service, technology,
cost, and 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 investment-type policies are equal to cumulative
deposits, less withdrawals and mortality and expense charges, plus
credited interest.
Reserves for all fixed individual life insurance contracts are
computed on the basis of assumed investment yield, mortality,
morbidity, and expenses (including a margin for adverse deviation).
These reserves are calculated as the present value of future benefits
(including dividends) and expenses less the present value of future
net premiums. The assumptions used in calculating the reserves
generally vary by plan, year of issue, and policy duration.
For all life insurance contracts, reserves are established for claims
that have been incurred but not reported based on factors derived
from past experience.
Reserves for limited payment contracts (immediate annuities) are
computed on the basis of assumed investment yield, mortality (where
payouts are contingent on survivorship) and expenses. These
assumptions generally vary by plan, year of issue, and policy
duration.
Reserves for investment contracts (deferred annuities and 401(k)) are
equal to the participants' account balances. Reserves for immediate
annuities without life contingent payouts are computed on the basis
of assumed investment yield and expenses.
The mentioned reserves are computed amounts that, with additions from
premiums and deposits to be received, and with interest on such
reserves, are expected to be sufficient to meet the Company's policy
obligations (such as paying expected death or retirement benefits or
surrender requests) and to generate profits.
5. Reinsurance
The Company seeks to limit its exposure to loss on any single insured
and to recover a portion of benefits paid by ceding risks to other
insurance enterprises under excess coverage and co-insurance
contracts. The Company retains a maximum of $1.5 million of coverage
per individual life.
Under the Company's marketing and administrative services arrangement
with NEF, NEF issues 401(k) products and then immediately reinsures
nearly 100% of its guaranteed 401(k) business with the Company.
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, 2003, were $32.9 billion, comprised of
general account assets of $19.7 billion and separate account assets of
$13.2 billion. Total investments at December 31, 2002, were $25.9
billion, comprised of general account assets of $14.6 billion and
separate account assets of $11.3 billion.
The Company's general account investments are in a broad range of asset
classes, primarily domestic and international fixed maturities. Fixed
maturity investments include public and privately placed corporate
bonds, government bonds, redeemable preferred stocks and mortgage-backed
securities and asset-backed securities.
The Company manages the characteristics of its investment assets, such
as liquidity, currency, yield, and duration, to reflect the underlying
characteristics of related insurance and policyholder liabilities that
vary among the Company's principal product lines. The Company observes
strict asset and liability matching guidelines designed to ensure that
the investment portfolio will appropriately meet the cash flow and
income requirements of its liabilities. In connection with its
investment strategy, the Company makes limited use of derivative
instruments in hedging transactions to manage certain portfolio related
risks. The Company also utilizes derivative instruments to engage in
replicated synthetic asset transactions. Derivative instruments are not
used for speculative purposes. For more information on derivatives see
Notes 1 and 7 to the consolidated financial statements of the Company
(the Consolidated Financial Statements) that are included in Item 8
(Financial Statements and Supplementary Data).
The Company routinely monitors and evaluates the status of its
investments in light of current economic conditions, trends in capital
markets, and other factors. These other factors include investment size,
quality, concentration by issuer and industry and other diversification
considerations relevant to the Company's fixed maturity investments.
The Company's fixed maturity investments comprised 67% of its investment
assets, as of December 31, 2003. The Company reduces credit risk for the
portfolio as a whole by investing primarily in investment-grade fixed
maturities. As of both December 31, 2003 and 2002, 97% of the bond
portfolio carried an investment grade rating.
The Company's equity investments increased from 1% at December 31, 2002,
to 2% at December 31, 2003. The Company made a significant investment in
an exchange-traded fund investing in debt securities. This investment
provides both liquidity and diversification at relatively low risk
levels. This fund has an investment grade debt rating. In addition, the
Company invested in various limited partnerships and limited liability
companies that make equity investments in affordable-housing projects
throughout the United States.
The Company's mortgage loan portfolio constituted 10% and 3% of
investment assets as of December 31, 2003 and 2002, respectively. The
increase is a result of the asset transfer associated with the Indemnity
Reinsurance Agreement entered into with CLAC as well as the assets
associated with the acquisition of CLICA and CLINY.
At December 31, 2003, 17% of investment assets were invested in policy
loans, 4% were invested in short-term investments, and less than 1% were
invested in real estate compared to 20%, 5%, and 1%, respectively, in
2002.
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 2003 2002 2001 2000 1999
---------------------- ---------- ---------- ---------- ---------- ---------
Debt Securities:
U.S. government
securities and
obligations of
U.S. government
agencies $ 3,199 $ 2,710 $ 3,075 $ 2,315 $ 1,859
Bonds 9,880 7,618 7,013 7,055 7,078
Foreign
governments 58 43 28 50 51
---------- ---------- ---------- ---------- ---------
Total debt securities 13,137 10,371 10,116 9,420 8,988
Other Investments:
Equity investments 428 90 73 95 69
Mortgage loans 1,886 417 613 843 975
Real estate 8 4 12 107 104
Policy loans 3,389 2,964 3,001 2,810 2,681
Short-term
Investments 853 710 425 414 241
---------- ---------- ---------- ---------- ---------
Total investments $ 19,701 $ 14,556 $ 14,240 $ 13,689 $ 13,058
========== ========== ========== ========== =========
Cash $ 188 $ 155 $ 214 $ 154 $ 268
Accrued investment
Income 165 133 131 139 138
The following table summarizes the Company's general account investment
results:
[Millions] Net Earned Net Investment Investment
For the year: Income Income Rate
-------------------- ------------- --------------
2003 $ 988 6.23 %
2002 919 6.83 %
2001 935 7.10 %
2000 925 7.34 %
1999 876 6.96 %
F. REGULATION
1. Insurance Regulation
The business of the Company is subject to comprehensive state and
federal regulation and supervision throughout the United States that
primarily provides safeguards for policyholders. The laws of the
various state jurisdictions establish supervisory agencies with broad
administrative powers with respect to such matters as admittance of
assets, premium rating methodology, policy forms, establishing
reserve requirements and solvency standards, maximum interest rates
on life insurance policy loans and minimum rates for accumulation of
surrender values, the type, amounts and valuation of investments
permitted, and HMO operations.
The Company's operations and accounts are subject to examination by
the Colorado Division of Insurance (CDOI) and other regulators at
specified intervals. A financial examination by the CDOI was
completed in 2002 and covered the five-year period ended December 31,
2000. The examination produced no significant adverse findings
regarding the Company.
The National Association of Insurance Commissioners (NAIC) has
prescribed risk-based capital (RBC) rules and other financial ratios
for life insurance companies. The calculations set forth in these
rules, which are used by regulators to assess the sufficiency of an
insurer's capital, measure the risk characteristics of an insurer's
assets, liabilities, and certain off-balance sheet items. RBC is
calculated by applying factors to various asset, premium and
liability items. The application of the RBC levels contained within
the rules is a regulatory tool which may indicate the need for
possible corrective action with respect to an insurer, and is not
intended as a means to rank insurers generally.
Based on their December 31, 2003, statutory financial reports, the
Company and its insurance subsidiaries have risk-based capital well
in excess of that required by their regulators.
The NAIC has also adopted the Codification of Statutory Accounting
Principles (Codification). The Codification was intended to
standardize accounting and reporting to state insurance departments
effective January 1, 2001. However, statutory accounting principles
will continue to be established by individual state laws and
permitted practices. The CDOI 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 adviser subsidiaries and transfer agent subsidiary are
regulated by the SEC. Certain of the Company's separate accounts
supporting its variable insurance and annuity products, as well its
mutual fund subsidiaries, are registered under the Investment Company
Act of 1940 while the securities they issue are registered under the
Securities Act of 1933.
4. Guaranty Funds
Under insurance guaranty fund laws existing in all states, insurers
doing business in those states can be assessed (up to prescribed
limits) for certain obligations of insolvent insurance companies. The
Company has established a reserve of $1.1 million as of December 31,
2003 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 $2.8 million at December 31, 2003.
5. Potential Legislation
United States federal and state legislative and regulatory
developments in various areas, including health care and retirement
services, could significantly and adversely affect the Company in the
future. Congress continues to consider health care legislation
relating to the uninsured, class action and medical liability reform,
and mental health parity. Congress also continues to consider changes
to various features of retirement plans, the taxation of BOLI,
expanding access to investment advice, and increasing oversight of
mutual funds.
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. On July 10, 2003, Lifeco announced
that it had closed its transaction to acquire the common shares of CLFC.
As a result of this closing, several of the rating agencies have changed
their ratings of Lifeco and certain of its subsidiaries, such as the
Company. A.M. Best Company, Inc., Moody's Investors Service and Standard
& Poor's Corporation lowered the financial strength rating of the
Company by one rating notch.
Rating Agency Measurement Current Rating
------------------------------ ------------------------------- ------------------
A.M. Best Company, Inc. Financial strength, operating A+ (1)
performance and
business profile
Fitch, Inc. Financial strength AA+ (2)
Moody's Investors Service Financial strength Aa3 (3)
Standard & Poor's Corporation Financial strength AA (4)
(1) Superior (highest category out of ten categories) (2) Very Strong
(second highest category out of eight categories) (3) Excellent (second
highest category out of nine categories) (4) Very strong (second highest
category out of nine categories)
H. MISCELLANEOUS
No customer accounted for 10% or more of the Company's consolidated
revenues in 2003, 2002 or 2001. In addition, no segment of the Company's
business is dependent on a single customer or a few customers, the loss
of which would have a significant effect on the Company or any of its
business segments. The loss of business from any one, or a few,
independent brokers or agents would not have a material adverse effect
on the Company or any of its business segments.
The Company had approximately 6,200 employees at December 31, 2003.
ITEM 2. PROPERTIES
The Head Office of the Company consists of a 752,000 square foot complex
located in Greenwood Village, Colorado. The Company leases sales and
claims processing offices throughout the United States.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is a party or of which any of their property is
the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2003 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. GWL&A Financial (Nova Scotia) Co. is the sole shareholder of
the Company's common equity securities.
B. DIVIDENDS
In the two most recent fiscal years the Company has paid quarterly
dividends on its common shares. Dividends on common stock totaled $75.7
million in 2003 and $170.6 million in 2002.
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 of the preceding December 31; or
(ii) the Company's statutory net gain not including realized capital
gains, for the twelve-month period ending December 31 next preceding not
including pro rata distributions from the insurer's own securities.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain financial data of the Company.
This summary has been derived in part from and should be read in
conjunction with the Company's Consolidated Financial Statements. Note 1
to the financial statements discusses the significant accounting
policies of the Company. Significant estimates are required to account
for policy reserves, allowances for credit losses, deferred policy
acquisition costs, and valuation of privately placed fixed maturities.
Actual results could differ from those estimates.
INCOME STATEMENT Years Ended December 31,
----------------------------------------------------------
DATA 2003 2002 2001 2000 1999
------------------------- --------- --------- --------- --------- ---------
[millions]
Premium income $ 2,253 $ 1,120 $ 1,203 $ 1,332 $ 1,163
Fee income 840 884 947 872 635
Net investment income 988 919 935 925 876
Net realized investment
gains 40 42 47 28 1
--------- --------- --------- --------- ---------
Total revenues 4,121 2,965 3,132 3,157 2,675
Policyholder benefits 2,684 1,593 1,696 1,746 1,582
Operating expenses 965 958 1,021 1,018 804
--------- --------- --------- --------- ---------
Total benefits and
expenses excluding
special charges 3,649 2,551 2,717 2,764 2,386
Income tax expense 154 130 141 134 83
--------- --------- --------- --------- ---------
Net income before
special charges 318 284 274 259 206
Special charges (net) 81
--------- --------- --------- --------- ---------
Net income $ 318 $ 284 $ 193 $ 259 $ 206
========= ========= ========= ========= =========
Deposits for investment-
type contracts $ 675 $ 691 $ 627 $ 835 $ 634
Deposits to separate
accounts 2,217 2,461 3,240 3,105 2,583
Self-funded premium
equivalents 4,674 5,228 5,721 5,181 2,979
BALANCE SHEET Years Ended December 31,
----------------------------------------------------------
DATA 2003 2002 2001 2000 1999
------------------------- --------- --------- --------- --------- ---------
[millions]
Investment assets $ 19,701 $ 14,556 $ 14,240 $ 13,689 $ 13,058
Separate account assets 13,175 11,338 12,585 12,381 12,820
Total assets 36,457 27,659 28,814 27,900 27,533
Total policy benefit
liabilities 19,526 13,007 12,931 12,825 12,341
Due to GWL 31 34 42 43 35
Guaranteed preferred
beneficial interests in
the
Company's junior
subordinated debentures 175 175 175 175 175
Total shareholder's
equity 1,887 1,665 1,471 1,428 1,167
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements. Forward-looking
statements are statements not based on historical information and that
relate to future operations, strategies, financial results, or other
developments. In particular, statements using verbs such as "expected,"
"anticipate," "believe," or words of similar import generally involve
forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements that represent the
Company's beliefs concerning future or projected levels of sales of the
Company's products, investment spreads or yields, or the earnings or
profitability of the Company's activities. Forward-looking statements
are necessarily based upon estimates and assumptions that are inherently
subject to significant business, economic and competitive uncertainties
and contingencies, many of which are beyond the Company's control and
many of which, with respect to future business decisions, are subject to
change. These uncertainties and contingencies can affect actual results
and could cause actual results to differ materially from those expressed
in any forward-looking statements made by, or on behalf of, the Company.
Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable events
or developments, some of which may be national in scope, such as general
economic conditions and interest rates, some of which may be related to
the insurance industry generally, such as pricing competition,
regulatory developments and industry consolidation, and others of which
may relate to the Company specifically, such as credit, volatility, and
other risks associated with the Company's investment portfolio and other
factors. Readers are also directed to consider other matters, including
any risks and uncertainties, discussed in documents filed by the Company
and certain of its subsidiaries with the SEC.
Management's discussion and analysis of financial conditions and results
of operations of the Company for the three years ended December 31, 2003
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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
the Company's management to make a variety of estimates and assumptions.
These estimates and assumptions affect, among other things, the reported
amounts of assets and liabilities, the disclosure of contingent
liabilities and the reported amounts of revenues and expenses. Actual
results can differ from the amounts previously estimated, which were
based on the information available at the time the estimates were made.
The critical accounting policies described below are those that the
Company believes are important to the portrayal of the Company's
financial condition and results, and which require management to make
difficult, subjective and/or complex judgments. Critical accounting
policies cover accounting matters that are inherently uncertain because
the future resolution of such matters is unknown. The Company believes
that critical accounting policies include policy reserves, allowances
for credit losses, deferred policy acquisition costs, and valuation of
privately placed fixed maturities.
Policy Reserves
Life Insurance and Annuity Reserves - Life insurance and annuity policy
reserves with life contingencies are computed on the basis of estimated
mortality, investment yield, withdrawals, future maintenance and
settlement expenses, and retrospective experience rating premium
refunds. Annuity contract reserves without life contingencies are
established at the contractholder's account value.
Reinsurance - Policy reserves ceded to other insurance companies are
carried as a reinsurance receivable on the balance sheet. The cost of
reinsurance related to long-duration contracts is accounted for over the
life of the underlying reinsured policies using assumptions consistent
with those used to account for the underlying policies. Reinsurance
contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. In the normal course of
business, the Company seeks to limit its exposure to loss on any single
insured and to recover a portion of benefits paid by ceding risks to
other insurance enterprises under excess coverage and co-insurance
contracts. The Company retains a maximum of $1.5 million of coverage per
individual life.
Policy and Contract Claims - Policy and contract claims include
provisions for reported life and health claims in process of settlement,
valued in accordance with the terms of the related policies and
contracts, as well as provisions for claims incurred and unreported
based primarily on prior experience of the Company.
Allowance For Credit Losses
The Company maintains an allowance for credit losses at a level that, in
management's opinion, is sufficient to absorb credit losses on its
amounts receivable related to uninsured accident and health plan claims
paid on behalf of policyholders and premiums in course of collection,
and to absorb credit losses on its impaired loans. Management's judgment
is based on past loss experience and current and projected economic
conditions, and extensive situational analysis of each individual loan.
The measurement of impaired loans is based on the fair value of the
collateral.
Deferred Policy Acquisition Costs
Policy acquisition costs, which primarily consist of sales commissions
and costs associated with the Company's sales representatives related to
the production of new business, have been deferred to the extent deemed
recoverable. These costs are variable in nature and are dependent upon
sales volume. Deferred costs associated with the annuity products are
being amortized over the life of the contracts in proportion to the
emergence of gross profits. Retrospective adjustments of these amounts
are made when the Company revises its estimates of current or future
gross profits. Deferred costs associated with traditional life insurance
are amortized over the premium paying period of the related policies in
proportion to premium revenues recognized.
Valuation Of Privately Placed Fixed Maturities
The estimated fair values of financial instruments have been determined
using available information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data to
develop estimates of fair value. Accordingly, the estimates presented
are not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
To determine fair value for fixed maturities not actively traded, the
Company utilizes discounted cash flows calculated at current market
rates on investments of similar quality and term.
B. COMPANY RESULTS OF OPERATIONS
1. Consolidated Results
Net Income
The Company's consolidated net income increased $34 million or 12% in
2003 when compared to 2002. The net income increase reflects a $10
million increase as a result of the Canada Life activity, a $34
million increase in the Great-West Healthcare segment excluding the
CLAC reinsurance activity, and a $10 million decrease in the
Financial Services segment excluding the impact of the CLAC
reinsurance activity.
The Company's consolidated net income decreased $8.8 million or 3.0%
in 2002 when compared to 2001 (before one-time charges in 2001 of
$80.9 million and operating losses of $18.7 million, net of tax,
related to the Alta business). Alta was acquired by the Company on
July 8, 1998. During 2001 and 2000, the Alta business continued to be
run as a free-standing unit but was converted to the Company's
systems and accounting processes. This conversion program resulted in
significant issues related to pricing, underwriting, and
administration of the business. The Company is transitioning Alta
business to other Company products. All Alta sales and administration
staff have become employees of the Company and the underwriting
functions are conducted by the underwriting staff of the Company.
Segment Contribution
In 2003, the Great-West Healthcare segment (excluding Canada Life
activity) contributed $170.2 million, the Financial Services segment
(excluding Canada Life activity) contributed $138.1 million, and the
Canada Life activity contributed $9.7 million to net income. Of total
consolidated net income in 2003 and 2002, the Great-West Healthcare
segment contributed 53% and 48%, respectively, the Financial Services
segment contributed 44% and 52%, and the Canada Life activity
contributed 3% and 0%, respectively.
Revenues
In 2003, total revenues increased $1.2 billion or 39% to $4.1 billion
when compared to 2002. The increase in revenues in 2003 was comprised
of increased premium income of $1.1 billion and increased net
investment income of $69 million offset by decreased fee income of
$43 million and decreased net realized gains on investments of $2
million. In 2002, total revenues decreased $167.8 million or 5.4% to
$3.0 billion when compared to 2001. The decline in revenues in 2002
was comprised of decreased premium income of $83.5 million, decreased
fee income of $63.7 million, decreased net investment income of $15.4
million, and a $5.2 million decrease in realized investment gains.
The $1.1 billion increase in premium income in 2003 was comprised of
a $1.6 billion increase from the Canada Life activity and a $12.4
million increase in the Financial Services segment's non-Canada life
activity, offset by a $468.1 million decrease in the Great-West
Healthcare segment's non-Canada Life activity. The decline in premium
income in the Great-West Healthcare segment reflected the reinsurance
agreement with Allianz discussed under "Other" below, and a 15%
decline in medical members from 2.2 million in 2002 to 1.9 million in
2003. The decreased premium income in 2002 was comprised of a decline
in Great-West Healthcare premium income and Financial Services
premium income of $73.7 million and $9.8 million, respectively. The
decline in premium income in the Great-West Healthcare segment
reflected a 15.4% decline in medical members from 2.6 million in 2001
to 2.2 million in 2002. Financial Services experienced lower sales
and higher terminations in 2002.
Fee income in 2003 was comprised of Great-West Healthcare fee income,
Financial Services fee income and Canada Life fee income of $607.2
million, $229.6 million and $3.3 million, respectively. Great-West
Healthcare fee income, excluding the Canada Life activity, declined
$53.2 million or 8.1% when compared to 2002, due to a decline in
medical members. Financial Services fee income, excluding the Canada
Life activity, declined $6.5 million or 2.9% when compared to 2002,
primarily the result of an increase during 2003 of participant
accounts including third-party administration and institutional
accounts. Fee income in 2002 was comprised of Great-West Healthcare
fee income and Financial Services fee income of $660.4 million and
$223.1 million, respectively. Great-West Healthcare fee income
declined $52.0 million or 7.4% when compared with 2001, due to a
decline in medical members. Financial Services fee income declined
$11.0 million or 4.7% when compared to 2001, primarily the result of
weak U.S. equity markets, which reduced revenues from asset-based
fees.
Benefits
Total benefits increased $1.1 billion or 68.5% in 2003 when compared
to 2002, reflecting an increase of $1.6 billion resulting from the
Canada Life activity offset by a decrease of $514 million in the
Great-West Healthcare segment due to the reinsurance agreement with
Allianz and a decrease of $51 million in the Financial Services
segment. Total benefits decreased $103.8 million or 6.1% in 2002 when
compared to 2001, reflecting lower group life and health claims
primarily as a result of the decline in membership in the Great-West
Healthcare segment.
Expenses
Total expenses increased $7.5 million or 0.8% in 2003 when compared
to 2002 primarily due to a $69.1 million increase related to the
Canada Life acquisition, offset by a $62.6 million decrease in the
Great-West Healthcare segment, excluding the Canada Life activity,
due to process efficiencies and a decrease in membership.
Total expenses decreased $63.0 million or 6.2% in 2002 when compared
to 2001, before special charges, as the Company focused on reducing
administrative costs. During 2002, Great-West Healthcare's operating
expenses decreased $41 million due primarily to reduced
administrative costs and medical membership. Financial Services'
operating expenses decreased $22 million due primarily to effective
expense management and lower commissions.
Income tax expense increased $23.4 million or 18.0% in 2003 when
compared to 2002. This increase was primarily due to the increase in
net income from operations. Income tax expense before special charges
decreased $10.9 million or 7.7% in 2002 when compared to 2001. The
decrease reflects a reduction in the liability for tax contingencies
due to the completion of the 1994 - 1996 Internal Revenue Service
examination. See Note 11 to the Consolidated Financial Statements for
a discussion of the Company's effective tax rates.
Deposits for Investment-Type Contracts, Deposits to Separate Accounts
and Self-Funded Equivalents In evaluating its results of operations,
the Company also considers net changes in deposits received for
investment-type contracts, deposits to separate accounts, and
self-funded equivalents. Self-funded equivalents represent paid
claims under minimum premium and administrative services only
contracts. These amounts approximate the additional premiums which
would have been earned under such contracts if they had been written
as traditional indemnity or HMO programs.
Deposits for investment-type contracts decreased $15.2 million or 2%
in 2003 when compared to 2002. Deposits for investment-type contracts
increased $64.1 million or 10% in 2002 when compared to 2001. The
decrease in 2003 was primarily attributable to a net decrease in
participant accounts in the retirement products area in 2003. The
increase in 2002 was primarily attributable to one large case sale in
the Financial Services segment.
Deposits for separate accounts decreased $244.1 million or 10% in
2003 when compared to 2002. This decrease in 2003 is primarily due to
a combination of decreased sales of the BOLI product and the net
decrease in contributions in the group retirement services market.
Deposits for separate accounts decreased $778.8 million or 24.0% in
2002 when compared to 2001. This decrease in 2002 is primarily due to
a combination of lower 401(k) sales and higher 401(k) terminations as
well as a decline in BOLI sales.
Self-funded premium equivalents decreased $554.6 million or 11% in
2003 when compared to 2002. This decrease was due to improved
morbidity as well as the decrease in membership. Self-funded premium
equivalents decreased $492.4 million or 8.6% in 2002 when compared to
2001. This decrease was due to the membership decline in the
Great-West Healthcare segment.
2. Other
Prior to 2002, the 401(k) business unit had been included with the
Great-West Healthcare segment. In order to capitalize on
administrative system efficiencies and group pension expertise,
beginning in 2002 the 401(k) business was administered by the
Financial Services segment. As a result, prior period segment results
have been reclassified to conform with this change.
The Great-West Healthcare division of the Company entered into a
reinsurance agreement during the third quarter of 2003 with Allianz
Risk Transfer (Bermuda) Limited (Allianz) to cede 90% of direct
written group health stop-loss and excess loss business. This Allianz
agreement was retroactive to January 1, 2003. The net cost of the
Allianz agreement was charged to the Financial Services division as
part of the Canada Life integration.
Effective January 1, 2000, the Company co-insured the majority of
General American's 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.
C. GREAT-WEST HEALTHCARE RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Great-West
Healthcare segment:
Years Ended December 31,
-----------------------------------------------
INCOME STATEMENT DATA 2003 2002 2001
------------------------------------- ------------- ------------- -------------
[millions]
Premiums $ 838 $ 960 $ 1,033
Fee income 608 661 713
Net investment income 72 68 66
Net realized investment gains 10 9 16
(losses)
------------- ------------- -------------
Total revenues 1,528 1,698 1,828
Policyholder benefits 568 762 859
Operating expenses 699 733 774
------------- ------------- -------------
Total benefits and expenses
before special charges 1,267 1,495 1,633
Income tax expense 88 67 68
------------- ------------- -------------
Net income excluding special charges 173 136 127
Special charges (net) 81
------------- ------------- -------------
Net income $ 173 $ 136 $ 46
============= ============= =============
Self-funded premium equivalents $ 4,674 $ 5,228 $ 5,721
Net income increased $37 million or 27% in 2003 when compared to 2002
primarily due to improved aggregate and specific stop loss morbidity.
The CLAC reinsurance agreement contributed $3 million to net income in
2003.
Net income, excluding special charges of $80.9 million after tax,
increased 7.1% in 2002 when compared to 2001. This improvement in
earnings reflected improved morbidity margins.
Excluding premium and fee income associated with CLAC reinsurance and
Allianz reinsurance, premium and fee income decreased $149 million or 9%
in 2003 when compared to 2002. The decreases are primarily due to lower
membership levels associated with lower case sales offset by an increase
in revenue resulting from pricing actions taken during 2002 and 2003.
Excluding total benefits and expenses associated with CLAC reinsurance
and Allianz reinsurance, total benefits and expenses decreased $202
million or 14% in 2003 when compared to 2002. While increased
utilization and higher medical costs increased benefits on in-force
cases, the decrease in overall membership, combined with pricing actions
taken in 2002, resulted in a reduction of benefits.
Self-funded premium equivalents decreased $554.6 million or 11% in 2003
when compared to 2002. This decrease was due to improved morbidity
experience as well as the decrease in membership. Self-funded premium
equivalents decreased $492.4 million or 8.6% in 2002 when compared to
2001. This decrease was due to the membership decline in the Great-West
Healthcare segment.
The Company recorded $18.5 million ($12.0 million, net of tax) of
restructuring costs during 2002 related to the costs associated with the
consolidation of benefit payment offices and sales offices throughout
the United States. The charges relate to severance of $4.3 million,
disposal of furniture and equipment of $4.9 million, and termination of
leasing agreements of $9.3 million.
During 2001, the Company recorded a $127 million special charge ($80.9
million, net of tax), related to Alta. The principal components of the
charge include a $46 million premium deficiency reserve related to
under-pricing on the block of business, a $29 million reserve for
doubtful premium receivables, a $28 million reserve for doubtful
accident and health plan claim receivables, and a $24 million decrease
in goodwill and other.
The Company established a premium deficiency reserve of $46 million
(included in special charges previously discussed) on the Alta block of
business in 2001. Releases of $18.7 million in 2001, $6.2 million in the
first quarter of 2002, and $2.1 million in the second quarter of 2002
were made to offset the underwriting losses incurred on the under-priced
block of business. During the first quarter of 2002 the reserve was
reduced by $15 million ($9.8 million net of tax) and during the second
quarter of 2002 the reserve was reduced by $4 million ($2.6 million, net
of tax) based on an analysis of emerging experience which was more
favorable than originally estimated. The balance of the premium
deficiency reserve at December 31, 2002 was zero.
Excluding customers associated with Canada Life, the Great-West
Healthcare segment experienced a net decrease of 959 group health care
customers (employer groups) during 2003. There was a 15% decrease in
total health care membership from 2.2 million at the end of 2002 to 1.9
million at year-end 2003. POS and HMO members decreased 29.7% from
346,900 in 2002 to 244,000 in 2003.
The Great-West Healthcare segment experienced a net decrease of 1,766
group health care customers (employer groups) during 2002. There was a
16% decrease in total health care membership from 2.6 million at the end
of 2001 to 2.2 million at year-end 2002. POS and HMO members decreased
30.7% from 500,600 in 2001 to 346,900 in 2002.
Much of the health care decline in 2003 and 2002 can be attributed to
terminations resulting from aggressive pricing related to target
margins, as well as a decrease in the employee base for existing group
health care customers and the general decline in the economy.
Outlook
The Company recognizes that the health care marketplace is changing. The
Company has reduced its focus on its HMO product in most markets. The
Company continues to explore product design options that reduce cost to
the employer and provide incentives for employees to become more engaged
in health care buying decisions. The Company has launched a consumer
driven tiered benefits product called Great-West Healthcare Consumer
Advantage, and also implemented its HRA capability. The Company will
continue to explore further innovations in the consumer driven product
area including health spending account models enabled through recent
legislative changes.
Efforts surrounding provider re-contracting and enhanced disease
management will build on the success achieved during 2003 in enhancing
the Company's medical cost and market positions. These efforts are a key
element in controlling health care costs for members and enhancing the
ability to attract new members in the future.
During 2003, the Company was successful in its efforts to combine its
multiple distribution channels under one name - Great-West Healthcare.
Efforts to enhance brand awareness continue. Based on the Company's
evaluation of the marketplace, the sales organization has been
reorganized along market segments. New leadership has rebuilt the sales
team and implemented a sales process to improve overall effectiveness of
the sales organization. A new sales support function has been built and
will continue to focus on supporting and improving the sales process and
customer satisfaction.
The Company continues to evaluate opportunities to enhance customer
satisfaction and reduce administrative costs. The Company's successful
implementation of HIPAA (Health Insurance Portability and Accountability
Act of 1996) and focus on Web enabled technology will likely increase
automated interactions with providers, employers and members.
The Company plans on achieving further productivity improvements in
2004. Claims processing costs will likely decrease due to consolidation
of claims processing and customer service locations, and the
implementation of productivity improvement software (claims workflow
software). A dedicated team has been formed to further explore and
implement additional opportunities.
D. 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 2003 2002 2001
------------------------------------- ------------- ------------- -------------
[millions]
Premiums $ 1,415 $ 160 $ 170
Fee income 233 223 234
Net investment income 916 851 869
Net realized investment gains 29 33 31
------------- ------------- -------------
Total revenues 2,593 1,267 1,304
Policyholder benefits 2,116 831 837
Operating expenses 267 225 247
------------- ------------- -------------
Total benefits and expenses 2,383 1,056 1,084
------------- ------------- -------------
Income from operations 210 211 220
Income tax expense 65 63 73
------------- ------------- -------------
Net income $ 145 $ 148 $ 147
============= ============= =============
Deposits for investment-type
Contracts $ 676 $ 691 $ 627
Deposits to separate accounts 2,217 2,461 3,240
Net income for Financial Services decreased $3 million or 2% in 2003
when compared to 2002. The results of operations for the life insurance
and annuity business of CLINY and CLICA have been included in the Income
Statement Data above for the period since the acquisition. The life
insurance and annuity reinsurance transactions related to the CLAC
reinsurance agreement have also been included in the above Income
Statement Data.
The impact of both of these transactions (Canada Life activity) on the
Financial Services division results for 2003 was as follows:
[Millions]
Premiums $1,242
Fee income 3
Net investment income 144
Net realized gains on inv 2
----------
Total revenues 1,391
Policyholder benefits 1,341
Operating expenses 41
----------
Total benefits and expenses 1,382
Income from operations 9
Income taxes 2
----------
Net income 7
Net income for the Financial Services division (excluding the Canada
Life activity discussed above) decreased $10 million or 7% from 2002.
The decrease was primarily related to a decrease in interest margins on
fixed or general account products (see discussion below) and poor
mortality (death benefits exceed actuarial reserves released)
experienced on the individual insurance lines in 2003.
Net income for Financial Services remained stable in 2002 when compared
to 2001. During 2002, the Company experienced lower sales in most of its
product areas and higher termination rates. The weak U.S. equity markets
also negatively impacted the Company. Offsetting these challenges was a
decrease in operating expenses and effective management of investment
margins on products which resulted in a relatively flat net income for
the year.
Total premiums including deposits to investment-type contracts and
deposits to separate accounts decreased $352 million or 11% in 2003
(excluding the Canada Life activity mentioned above). Premiums and
deposits decreased $218 million in the Individual Markets area where the
Company has experienced negligible sales of the BOLI product in 2003.
The remaining difference was due to lower cash flows in 2003 on the
variable annuity products driven by lower single premium deposits or
rollovers in the Great-West Retirement Services area from new plans.
In 2002, total premiums including deposits to investment-type contract
and deposits to separate accounts decreased $725 million or 18%. The
decreases were driven by lower cash flows on annuity products and
decreased BOLI sales in the Individual Markets area.
Variable fee income fluctuates with changes in the U.S. equities markets
as these fees are typically assessed on account balances. Variable fee
income is also affected by fluctuations in the participant account
balances associated with cash flows to and from the separate accounts,
participation in plans and with the types of services offered. Fixed
fees (or expense recoveries on annuities and insurance products) also
fluctuate with changes in the participant or policyholder account
balances due to cash flows, participation and services. Fees from
third-party administration and recordkeeping services fluctuate with the
number of participants and with services provided.
Fee income in 2003 increased $6.5 million or 2.9% (excluding the Canada
Life activity discussed above). Fee income represents a combination of
variable fee income from separate accounts and fee income charged on
fixed investment options for mortality and expense risks and fees for
third-party administrative and recordkeeping services to financial
institutions and employer-sponsored retirement plans.
In 2002, fee income decreased $11 million or 5% from 2001. The decrease
was primarily associated with the challenges experienced in the U.S.
equities markets resulting in a decrease in the variable participant
account balances. These fluctuations also had a negative impact on the
net cash flows to separate accounts.
Retirement services participant accounts, including third-party
administration and institutional accounts, increased 5% in 2003 from
2,159,910 at December 31, 2002 to 2,265,713 at December 31, 2003.
Although the area experienced a decrease of 117,000 participant accounts
from one large case termination in the first quarter of 2003, this was
offset by growth from sales and increased participation in existing case
sales during 2003. In 2002 Retirement Services participant accounts
decreased from 2,191,264 at the end of 2001 to 2,159,910 at the end of
2002. The decrease was due to the termination of one large institutional
client during 2002.
The term life insurance product marketed through banks and other
financial institutions experienced significant growth over the past
several years. Policies in force totaled 116,739, 74,080 and 38,813 in
the years ended 2003, 2002 and 2001, respectively. Although the sales of
term life insurance were improved in 2003 and 2002, the premiums on
these policies are smaller and, therefore, were not a significant offset
to the large decrease in BOLI premiums.
During 2003, net investment income and realized gains excluding the
impact of the Canada Life activity decreased $85 million or 10% from
2002. This decrease represented a drop in the net earned rate on
investments from 6.88% in 2002 to 6.23% in 2003. Offsetting this
decrease was a corresponding decrease in the interest rate credited on
policyholder general account products.
In 2002, net investment income and realized gains decreased $16 million
or 2% from the previous year. The decrease represented a drop in the net
earned rate on investments from 7.1% in 2001 to 6.88% in 2002.
On fixed products or general account products, earnings are generated
from the difference between the net investment income earned on
investments and the amount credited to policyholders' or participants'
accounts. This difference is referred to as the "interest margins" or
"margins" on fixed assets.
The amount of fixed annuity products in force is measured by policy
reserves. The following table shows group and individual annuity policy
reserves for the years indicated as well as the balances in the separate
accounts:
Retirement Individual
Services Markets
Year ended General Account Separate Separate Accounts
December 31, Annuity Reserves Accounts
----------------- ----------------- ----------------- ------------------
1999 $ 4,969 $ 11,425 $ 843
----------------- -- ----------------- -- ----------------- -- ------------------
2000 4,738 10,753 950
----------------- -- ----------------- -- ----------------- -- ------------------
2001 4,687 10,277 945
----------------- -- ----------------- -- ----------------- -- ------------------
2002 4,612 8,859 808
----------------- -- ----------------- -- ----------------- -- ------------------
2003 7,124 10,289 1,244
----------------- -- ----------------- -- ----------------- -- ------------------
Total policyholder benefits decreased $51 million or 6% during 2003
excluding the impact of the Canada Life activity. In 2002 total
policyholder benefits decreased $6 million or 1% from 2001. Total
policyholder benefits represent benefits on insurance and annuity
products, interest paid or credited to policyholder and participant
accounts, dividends paid, and change in actuarial reserves.
Total policyholder benefits fluctuate with the amount of interest
credited to policyholder or participant account balances (see discussion
on net investment income above), from differences between charges for
mortality and actual death claims and from fluctuations in premiums and
cash flows to and from general account products.
At December 31, 2003 and 2002, the Company had $8.9 billion (including
$1.6 billion for Canada Life) and $7.1 billion, respectively, of policy
reserves on individual insurance on the balance sheet. The following
table summarizes individual life insurance in force prior to reinsurance
ceded for the years indicated:
As of December 31,
-------------------------------------------------------------
[Millions] 2003 2002 2001 2000 1999
------------------- --------- --------- --------- --------- ---------
In force $ 67,645 $ 50,605 $ 50,769 $ 46,631 $ 43,831
Excluding the impact of the Canada Life activity, operating expenses
increased $1 million in 2003 and decreased in 2002 by $22 million. The
division created expense synergies by focusing on overall effective
expense management and by consolidating similar operational functions
(the 401(k) and Public/Non-Profit retirement services areas) under
common management.
Outlook
During 2003, the Financial Services division was successful in its
efforts in bringing together multiple products and services under one
name - Great-West Retirement Services. Efforts to capitalize on brand
awareness continue.
During 2002, the division had assumed responsibility for the marketing,
sales and administration of the Company's 401(k) product. At the
beginning of 2003, the division established a new, focused marketing
strategy for the 401(k) product. A new customer relationship management
model has been established with the continued goal of establishing
stronger relationships with existing 401(k) customers and improving
persistency.
In 2003, the Company formed a strategic institutional relationship with
Wells Fargo. The first phase of the relationship transferred the
ownership of a Wells Fargo subsidiary, EMJAY Corporation (EMJAY), from
Wells Fargo to the Company. EMJAY provides retirement plan services to
third party external brokers, registered investment advisers, and other
investment professionals. The Company believes that the combination of
its existing recordkeeping platform and administrative services, coupled
with EMJAY's known expertise for compliance and customer service, will
provide a competitive advantage in the 401(k) market. In the second
phase of the relationship with Wells Fargo, the Company will provide
private-label recordkeeping services for non-annuity 401(k) plans and
will offer annuity contracts for those small 401(k) plans desiring
annuity investment options. The acquisition of EMJAY has resulted in an
additional 68,000 participants in 2003.
In 2003, the Company continued its efforts to partner with large
financial institutions to provide individual term and whole life
insurance to the general population.
With the anticipated expansion of the economy, the Company also expects
the BOLI market to grow and will continue to focus on its partnership
with Clark Consulting.
E. INVESTMENT OPERATIONS
The Company's primary investment objective is to acquire assets with
duration and cash flow characteristics reflective of the Company's
liabilities, while meeting industry, size, issuer, and geographic
diversification standards. Formal liquidity and credit quality
parameters have also been established.
The Company follows rigorous procedures to control interest rate risk
and observes strict asset and liability matching guidelines. These
guidelines ensure that even under changing market conditions, the
Company's assets will meet the cash flow and income requirements of its
liabilities. Using dynamic modeling to analyze the effects of a range of
possible market changes upon investments and policyholder benefits, the
Company works to ensure 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] 2003 2002
----------------------------------------------------- -------------- -------------
Fixed maturities, available-for-sale, at fair value $ 13,137 $ 10,371
Equity investments, at fair value 428 90
Mortgage loans, on real estate 1,886 417
Real estate 8 4
Short-term investments 853 710
Policy loans 3,389 2,964
-------------- -------------
Total invested assets $ 19,701 $ 14,556
============== =============
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
investments with low prepayment risk and minimal credit risk. The
Company does not invest in higher-risk collateralized mortgage
obligations such as interest-only and principal-only strips, and
currently has no plans to invest in such securities.
Private placement investments are generally less marketable than
publicly traded assets, yet they typically offer enhanced covenant
protection that allows the Company, if necessary, to take appropriate
action to protect its investment. The Company believes that the cost
of the additional monitoring and analysis required by private
placements is more than offset by their enhanced yield.
One of the Company's primary objectives is to ensure that its fixed
maturity portfolio is maintained at a high average quality, so as to
limit credit risk. If not externally rated, the securities are rated
by the Company on a basis intended to be similar to that of the
rating agencies.
At December 31, 2003, the Company had 19 bonds in default
representing a carrying value of $18.4 million (0.1% of the total
fixed maturity investment portfolio), compared to four bonds
representing $24.3 million (0.2% of the total fixed maturity
investment portfolio) for 2002.
The distribution of the fixed maturity portfolio by credit rating is
summarized as follows:
Credit Rating 2003 2002
-------------------------------------------------- -------------- -------------
AAA 54.3 58.9%
AA 8.7 8.9
A 16.0 15.2
BBB 18.4 14.4
BB and below (non-investment grade) 2.6 2.6
-------------- -------------
TOTAL 100.0% 100.0%
============== =============
2. Mortgage Loans
During 2003, the mortgage loan portfolio increased 352% to $1,886
million, net of impairment reserves primarily as a result of the
assets associated with the Indemnity