The Head Office of the Company consists of a 752,000 square foot office complex located in Greenwood Village, Colorado. The Company leases sales and claims offices throughout the United States.
Management's discussion and analysis of financial condition and results of operations of the Company for the three years ended December 31, 2000 follows.
In 2000 total revenues increased $488.6 million or 18% to $3.2 billion when compared to 1999. The growth in revenues in 2000 was comprised of increased premium income of $169.4 million, increased fee income of $236.5 million, increased net investment income of $55.5 million and increased realized gains on investments of $27.2 million. In 1999 total revenues increased $228.9 million or 9% to $2.7 billion when compared to 1998. The growth in revenues in 1999 was comprised of increased premium income of $168.3 million, increased fee income of $119.1 million, decreased net investment income of $21.4 million and decreased realized gains on investments of $37.1 million.
Effective January 1, 2000, the Company co-insured the majority of General American Life Insurance Company's ("General American") group life and health insurance business, which primarily consists of administrative services only and stop loss policies. On January 1, 2000, the Company assumed approximately $150 million of policy reserves and miscellaneous liabilities in exchange for an equal amount of cash and other assets from General American. The agreement converted to an assumption reinsurance agreement on January 1, 2001. As of December 31, 2000, this acquisition added over 1,008,700 medical members representing approximately $2.3 billion of annual medical and non-mdeical premium and premium equivalents.
Deposits to separate accounts 1,951 1,745 1,568 Self-funded premium equivalents 5,181 2,979 2,606
o increased sales offset by some deterioration in customer retention in group life and health,
Equivalent premium revenue and fee income for group life and health increased 23% from 1999 levels as the result of increased sales and the Alta and General American acquisitions. From 1998 to 1999, equivalent premium revenue and fee income increased 19% as a result of a combination of increased prices and the Alta acquisition.
The Company experienced a 48% increase in total health care membership from 2,130,300 at the end of 1999 to 3,158,900 at year-end 2000. The General American and Allmerica acquisitions added 1,099,500 medical members, offset by a decrease of 70,900 in the remaining business. POS and HMO members grew 31% from 549,900 in 1999 to 718,400 in 2000. The Company expects this segment of the business to grow as additional HMO licenses are obtained and additional Alta members are converted.
The Company experienced a 6% decrease in total health care membership from 2,266,700 at the end of 1998 to 2,130,300 at year-end 1999 as the result of certain large case terminations. POS and HMO members grew 5% from 522,300 in 1998 to 549,500 in 1999.
During 2000, the in-force block of 401(k) business continued to perform well with customer retention of 93.7% versus 92.9% in 1999.
The Alta, General American, and Allmerica acquisitions will continue to provide the Company with critical mass to compete in the consolidating health care insurance business. Through a combination of internal growth and new business acquisitions, the Company has over 3.1 million medical members. This growth presented service challenges that are being addressed. The Company is working to ensure that its service levels are maintained at the level its customers expect.
Delivering cost-effective, value-added services via the Internet will continue to be a main focus for the Company. The Company has implemented online enrollment capabilities for 401(k) participants, as well as an online investment advisor to provide 401(k) participants with personal investment advise via the Internet. This action, combined with a competitive product portfolio, should result in an increase in new case sales and cross sales. Online enrollment for life and health members was introduced in 2000, and is scheduled for implementation in 2001.
Premium income $ 191 $ 173 $ 248 Fee income 120 86 71 Net investment income 836 796 802 Realized investment gains 31 2 30 ------------ ----------- ---------- Total Revenues 1,178 1,057 1,151
Premiums decreased $7.0 million or 49%, from $14.3 million in 1999 to $7.3 million in 2000. Premiums decreased $2.5 million or 14%, from $16.8 million in 1998 to $14.3 million in 1999. The decrease in both years is attributable to the continuing trend of policyholders selecting variable annuity options (separate accounts) as opposed to the more traditional fixed annuity products with life contingencies.
Deposits for investment-type contracts increased $200 million or 30%, from $608 million in 1999 to $808 million in 2000. This significant increase was the result of several large case sales in the fixed portfolio products. Deposits for investment-type contracts decreased $699 million or 50%, from $1.3 billion in 1998 to $608 million in 1999.
Deposits to separate accounts increased $316 million or 30%, from $838 million in 1999 to $1.2 billion in 2000. Deposits to separate accounts increased $198 million or 30%, from $640 million in 1998 to $838 million in 1999. The increases in 2000 and 1999 were primarily from an increase in single premiums.
Customer participation in guaranteed separate accounts increased, as many customers prefer the security of fixed income securities and separate account assets. Assets under management for guaranteed separate account funds were $749.3 million in 2000, compared to $653.7 million in 1999 and $562.3 million in 1998.
Individual life insurance revenue premiums and deposits of $871.3 million in 2000 reflected an increase of 18% over 1999 premiums and deposits of $735.3 million. The increase was primarily due to significant BOLI separate account deposits.
Continued management emphasis on the reduction of unit costs in the FASCorp administration arena are designed to allow the Company to remain competitive in the recordkeeping market. The increase of 300,000 new lives under administration in FASCorp in the year 2000 is indicative of this trend. This is expected to continue in the future.
The average balance of impaired loans decreased to $39.3 million in 2000 compared with $43.9 million in 1999, and there were $2.0 million of foreclosures in 2000, compared to $0 in 1999. The low levels of problematic mortgages relative to the Company's overall balance sheet are due to the ongoing decrease in the size of the mortgage portfolio, the Company's active loan management program and overall strength in market conditions.
Effective January 1, 2001, the Company adopted FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by FASB Statement No. 138. The Statements require that all derivative financial instruments be recognized in the financial statements as assets or liabilities and measured at fair value regardless of the purpose or intent for holding them. Gains or losses resulting from changes in the fair value of derivatives are accounted for depending on the intended use of the derivative and whether it qualifies for hedge accounting. Upon adoption, a transition adjustment of approximately $1 million increased accumulated comprehensive income.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY (A wholly-owned subsidiary of GWL&A Financial Inc.) Consolidated Financial Statements for the Years Ended December 31, 2000, 1999, and 1998 and Independent Auditors' Report
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Great-West Life & Annuity Insurance Company and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Basis of Presentation - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The consolidated financial statements include the accounts of the Company and its subsidiaries. All material inter-company transactions and balances have been eliminated in consolidation.
Separate Accounts - Separate account assets and related liabilities are carried at fair value. The Company's separate accounts invest in shares of Maxim Series Fund, Inc. and Orchard Series Fund, Inc., open-end management investment companies which are affiliates of the Company, shares of other external mutual funds, and government and corporate bonds. Investment income and realized capital gains and losses of the separate accounts accrue directly to the contractholders and, therefore, are not included in the Company's statements of income. Revenues to the Company from the separate accounts consist of contract maintenance fees, administrative fees, and mortality and expense risk charges.
The Company receives collateral for lending securities that are held as part of its investment portfolio. The company requires collateral in an amount greater than or equal to 102% of the market value of domestic securities loaned and 105% of foreign securities loaned. Such collateral is used to replace the securities loaned in event of default by the borrower.
On July 8, 1998, the Company paid $82,669 in cash to acquire all of the outstanding shares of Alta Health & Life Insurance Company (Alta), formerly known as Anthem Health & Life Insurance Company. The purchase price was based on Alta's adjusted book value, and was subject to further minor adjustments. The results of Alta's operations have been combined with those of the Company since the date of acquisition.
Effective January 1, 2000, the Company coinsured the majority of General American Life Insurance Company's (General American) group life and health insurance business which primarily consists of administrative services only and stop loss policies. The agreement converted to an assumption reinsurance agreement January 1, 2001. The Company assumed approximately $150,000 of policy reserves and miscellaneous liabilities in exchange for $150,000 of cash and miscellaneous assets from General American.
Cash $ 24,600 Policy reserves $ 137,638 Deferred income taxes 3,816 Policy loans 82,649 Due from Parent Corporation 19,753 Other 6,820 ----------- ----------- $ 137,638 $ 137,638 =========== ===========
In connection with this transaction, GWL made a capital contribution of $3,200 to the Company.
The Company performs administrative services for the U.S. operations of GWL. The following represents revenue from GWL for services provided pursuant to these service agreements. The amounts recorded are based upon management's best estimate of actual costs incurred and resources expended based upon number of policies and/or certificates in force.
At December 31, 2000 and 1999, due to GWL includes $17,743 and $10,641 due on demand and $25,338 and $25,338 of notes payable which bear interest and mature on October 1, 2006. These notes may be prepaid in whole or in part at any time without penalty; the issuer may not demand payment before the maturity date. The amounts due on demand to GWL bear interest at the public bond rate (7.0% and 6.7% at December 31, 2000 and 1999, respectively) while the note payable bears interest at 5.4%.
Interest expense attributable to these related party obligations was $14,637, $11,053, and $9,891 for the years ended December 31, 2000, 1999, and 1998, respectively.
Fixed maturities owned at December 31, 2000 are summarized as follows:
Securities 1,899,963 1,912,319 Asset-backed securities 2,533,214 2,559,873 -------------- -------------- $ 9,372,009 $ 9,419,865 ============== ==============
At December 31, 2000 and 1999, pursuant to fully collateralized securities lending arrangements, the Company had loaned $208,702 and $0 of fixed maturities, respectively. The fair value of collateral held by the Company at December 31, 2000, that can be sold or repledged is $212,876. No portion of the collateral had been sold or repledged at December 31, 2000.
As part of an active loan management policy and in the interest of maximizing the future return of each individual loan, the Company may from time to time modify the original terms of certain loans. These restructured loans, all performing in accordance with their modified terms, aggregated $73,518 and $75,691 at December 31, 2000 and 1999, respectively.
The Company has a commercial paper program that is partially supported by a $50,000 standby letter-of-credit. At December 31, 2000, commercial paper outstanding of $97,631 had maturities ranging from 11 to 46 days and interest rates ranging from 6.59% to 6.62%. At December 31, 1999, no commercial paper was outstanding.
Policy loans accrue interest generally at variable rates with no fixed maturity dates and, therefore, estimated fair value approximates carrying value.
The fair value of due to GWL&A Financial reflects the last trading price of the subordinated notes in the public market at December 31, 2000.
The following table summarizes changes for the years ended December 31, 2000, 1999, and 1998, in the benefit obligations and in plan assets for the Company's defined benefit pension plan and post-retirement medical plan. There is no additional minimum pension liability required to be recognized. There were no amendments to the plans due to the acquisition of Alta.
The Company has a deferred compensation plan providing key executives with the opportunity to participate in an unfunded, deferred compensation program. Under the program, participants may defer base compensation and bonuses, and earn interest on their deferred amounts. The program is not qualified under Section 401 of the Internal Revenue Code. Participant deferrals, which are reflected in other liabilities, are $19,264, $17,367, and $16,102 for years ending December 31, 2000, 1999, and 1998, respectively. The participant deferrals earn interest at a rate based on the average ten-year composite government securities rate plus 1.5%. The interest expense related to the plan for the years ending December 31, 2000, 1999, and 1998 was $1,358, $1,231, and $1,185, respectively.
The Company also provides a supplemental executive retirement plan (SERP) to certain key executives. This plan provides key executives with certain benefits upon retirement, disability, or death based upon total compensation. The Company has purchased individual life insurance policies with respect to each employee covered by this plan. The Company is the owner and beneficiary of the insurance contracts. The expense for this plan for 2000, 1999, and 1998 was $3,023, $3,002, and $2,840, respectively. The total liability of $18,794 and $14,608 as of December 31, 2000 and 1999 is included in other liabilities.
The following is a reconciliation between the federal income tax rate and the Company's effective income tax rate:
2000 1999 1998 ---------- ----------- ----------- Federal tax rate 35.0 % 35.0 % 35.0 % Change in tax rate resulting from: Settlement of GWL tax exposures (5.9) Other, net (0.9) (0.3) (1.6) ---------- ----------- ----------- Total 34.1 % 28.8 % 33.4 % ========== =========== ===========
Temporary differences which give rise to the deferred tax assets and liabilities as of December 31, 2000 and 1999 are as follows:
The maximum amount of dividends which can be paid to stockholders by insurance companies domiciled in the State of Colorado are subject to restrictions relating to statutory surplus and statutory net gain from operations. Statutory surplus and net gains from operations at December 31, 2000 were $1,083,718 and $275,231 [Unaudited], respectively. The Company should be able to pay up to $275,231[Unaudited] of dividends in 2001.
The Parent has a stock option plan (the Lifeco plan) that provides for the granting of options on common shares of Lifeco to certain officers and employees of Lifeco and its subsidiaries, including the Company. Options may be awarded with exercise prices of no less than the market price on the date of the grant. Termination of employment prior to vesting results in forfeiture of the options, unless otherwise determined by a committee that administers the Lifeco plan. As of December 31, 2000, 1999, and 1998, stock available for award to Company employees under the Lifeco plan aggregated 4,808,047, 885,150, and 1,424,400 shares.
Additional variable options granted in 1998 and 2000 totaling 380,000 and 120,000, respectively, become exercisable if certain sales or financial targets are attained. During 2000, 1999, and 1998, 13,250, 11,250, and 30,000 of these options vested and accordingly, the Company recognized compensation expense of $151, $23, and $116, respectively. If exercisable, the exercise period expires ten years from the date of grant.
The following table summarizes the range of exercise prices for outstanding Lifeco common stock options granted to Company employees at December 31, 2000: