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 financial statements of the Company included in Item 8 on page 29.
INCOME STATEMENT DATA Premiums and other income $ 1,199 $ 1,067 $ 1,000 $ 696 $ 245 Net investment income 792 Realized investment gains (losses) (21) (72) (4) Total Revenues 2,015 1,910 1,696 1,513 $ 902 Total benefits and expenses 1,824 $ 1,733 $ 1,593 $ 1,417 $ 844 Income tax expense 31 Cumulative effect of adopting a new accounting method for income taxes
(23) Net Income $ 135 $ 128 $ 74 $ 65 $ 63
Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments, some of which may be national in scope, such as general economic conditions and interest rates, some of which may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation, and others of which may relate to the Company specifically, such as credit, volatility and other risks associated with the Company's investment portfolio, and other factors. Readers are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the SEC. The Company disclaims any obligations to update forward-looking information.
The Company's consolidated net income increased 5% to $134.6 million, when compared to 1995.
The Company's realized investment gains (losses) changed from a net realized gain of $7.5 million in 1995 to a net realized loss of $21.1 million in 1996. The increase in interest rates in 1996 resulted in realized losses on the sale of fixed maturities totaling $11.6 million, while lower interest rates contributed to $28.2 million of fixed maturity gains recorded in 1995. The 50% improvement in the provision for asset losses helped to partially offset the fixed maturities capital losses, as the change in provision was reduced from $22.0 million in 1995 to $10.6 million in 1996.
Net investment income increased $67.4 million in 1995 to a total of $835.1 million reflecting an increase in invested assets from $11.8 billion to $12.5 billion in 1995. The increase was driven by the growth in policy loans associated with COLI business.
Employers' heightened sensitivity to price has led to a demand for more tightly controlled managed care plans, which is why HMO development remains Employee Benefits' most important product development initiative. In 1996 the Company received state approval for HMO's in California, Texas, Illinois, Colorado, and Georgia and applied for licenses in additional states. The Company also entered into three agreements with other carriers, which will exclusively market the One Health Plan HMO in various states. These agreements, and others like them, will augment growth in the Company's HMO programs in the years to come.
The number of new 401(k) case sales, including business generated through the Company's joint venture with New England, continued to climb to 1,156 in 1996 from 960 in 1995 and 953 in 1994. This brings the total 401(k) block of business under administration to 4,942 employer groups and more than 350,000 individual participants.
During 1996, the in-force block of 401(k) business also performed well, with persistency of 93%. This, combined with a strong stock market, resulted in a 40% increase in assets under management, to $3.9 billion.
To promote long-term asset retention, the Company enhanced a number of products and services during 1996, including prepackaged "lifestyle" funds (The Profile Series), "Account Credits" for high-balance accounts, a rollover Individual Retirement Account product, strong enrollment communications, one-on-one retirement planning assistance and personal plan illustrations.
The Company's core savings business is the public/non-profit ("P/NP") pension market, providing investment products, administrative and communication services to employees of state and local governments (Internal Revenue Code Section 457 Deferred Compensation Plans), as well as employees of hospitals and public school districts (Internal Revenue Code Sections 403(b) Tax Deferred Annuities and 401(k) Cash or Deferred Arrangements). Assets under management in the P/NP business, including Separate Accounts, increased 4.6% during 1996 to $6.6 billion. Much of the growth came from the variable annuity business, which was driven by good sales results and strong investment returns in the equity markets.
The Company's P/NP lives under administration were 462,914 in 1996, compared to 410,843 in 1995, and 340,079 in 1994. The Company primarily used BenefitsCorp, its communication and marketing subsidiary, to sell 12 new large employer (100 lives or larger) cases and to increase the penetration of existing cases by enrolling new employees.
The Company experienced a 100% retention rate in P/NP contract renewals in 1996. The Company attributes part of this customer loyalty to initiatives to provide high-quality service while controlling expenses. Unit costs declined 11%, the result of further automation in policyholder recordkeeping and aggressive expense management.
The Company continued to limit sales of Guaranteed Investment Contracts ("GICs") and allow this block of business to contract. This decision was taken in 1993 in response to the highly competitive GIC market. As a result, GIC assets decreased 21% in 1996, to $524.6 million, and decreased 29% in 1995.
During the fourth quarter of 1996, the Company entered into a marketing agreement with Charles Schwab & Co., Inc., to sell individual fixed and variable qualified and non-qualified deferred annuities. Sales of the products commenced in November 1996, resulting in variable annuity deposits of $9.3 million during the last two months of 1996.
Individual life insurance premiums and deposits of $910.1 million in 1996 increased 45% from 1995 primarily due to the $164.8 million of reinsurance premium associated with the recapture of a block of participating individual insurance business from Great-West Life. The remaining growth was due to BOLI premium.
As of year end, legislation was in place which phases out the tax deductibility of interest on policy loans on COLI products during 1997 and 1998. However, the Company has shifted its emphasis from new sales of COLI business to the more stable BOLI market. This product provides long term benefits for bank employees and was not affected by the legislative changes. COLI sales were discontinued in 1996, but renewal premiums and deposits totaled $370.9 million. BOLI revenue premiums and deposits increased to $190.5 million during 1996, compared to $97.2 million in 1995. The Company is working closely with existing COLI customers to determine the options available to them. The effect of these legislative changes is not expected to be material to the Company's operations.
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. In excess of 85% of the value of the securities in this portfolio are rated by external rating agencies.
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, 1996, the Company had one bond in default in the amount of $8 million, and one potentially problematic bond, with a carrying value of $6.4 million, which, although current, is judged by management as likely to require either restructuring or other types of relief. Both bonds are carried at their estimated net realizable values. Their combined total of $14.4 million is a relatively low proportion of the total fixed maturity portfolio (less than .2%) as the high credit quality of the portfolio limits the Company's exposure to problematic bonds. At December 31, 1995, there were no bonds in default and only one potentially problematic security, with a carrying value of $7.4 million.
During 1996, the mortgage portfolio declined 13% to $1.5 billion, net of impairment reserves. The Company has not actively sought new loan opportunities since 1989 and, as such, has experienced an ongoing reduction in this portfolio's balance.
The average balance of impaired loans continued to remain low at $39.1 million in 1996 compared with $29.1 million in 1995, and foreclosures totaled $14.0 million and $37.0 million in 1996 and 1995, respectively. 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 improvement in market conditions.
Occasionally, the Company elects to restructure certain loans if the economic benefits to the Company are believed to be more advantageous than those achieved by acquiring the collateral through foreclosure. At December 31, 1996 and 1995, the Company's loan portfolio included $68.3 million and $89.2 million, respectively, of non-impaired restructured loans.
The Company's real estate portfolio is composed primarily of properties acquired through the foreclosure of troubled mortgages. The Company operates a wholly owned real estate subsidiary which attempts to maximize the value of these properties through rehabilitation, leasing and sale. The Company anticipates limited, if any, investments in voluntary real estate assets during 1997.
The common stock portfolio is composed of mutual fund seed money and some private equity investments. The Company anticipates a limited participation in the stock markets in 1997.
General economic conditions improved during 1996, including improvement or stabilization in many real estate markets. If present market conditions continue, the Company does not expect to recognize any asset chargeoffs or restructurings which would result in a material adverse effect upon the Company's financial condition in 1997.
Generally, the Company has met its operating requirements by maintaining appropriate levels of liquidity in its investment portfolio and utilizing positive cash flows from operations. Liquidity for the Company has remained strong, as evidenced by significant amounts of short-term investments and cash, which totaled $544.2 million and $225.8 million as of December 31, 1996 and 1995, respectively.
During 1995, cash decreased $40.7 million due to contract withdrawals ($217.2 million), net repurchase agreement payments ($191.2 million), net investment purchases ($27.4 million), and payment of dividends on stock ($49.0 million). Cash flow from operating activities was $458.1 million.
The 1994 increase in cash primarily reflects cash flows from operating activities net of withdrawals and net investment purchases.
In 1994, the Company implemented SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The cumulative effect as of January 1, 1994 of adopting SFAS No. 115 increased the opening balance of stockholder's equity by $6.5 million to reflect the net unrealized gains on securities classified as available-for-sale (previously carried at the lower of aggregated amortized cost or fair value) and the corresponding adjustments to deferred policy acquisition costs, policy reserves, and amounts allocable to the liability for undistributed earnings on participating business, all net of income taxes.
During the fourth quarter of 1995, the Financial Accounting Standards Board issued a guide to implementation of SFAS No. 115, which permits a one-time opportunity to reclassify securities subject to SFAS No. 115. Consequently, the Company reassessed the classification of its investment portfolio in December 1995 and reclassed securities totaling $2.1 billion from held-to-maturity to available-for-sale. In connection with this reclassification, an unrealized gain, net of related policyholder amounts and deferred income taxes, of $23.4 million was recognized in stockholder's equity at the date of transfer.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY (A wholly-owned subsidiary of The Great-West Life Assurance Company)
We have audited the accompanying consolidated balance sheets of Great-West Life & Annuity Insurance Company (a wholly-owned subsidiary of The Great-West Life Assurance Company) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (Dollars in Thousands)
57,244 40,038 Premiums in course of collection 74,693 85,990 Deferred income taxes 214,404 168,941 Separate account assets 5,484,631 3,998,878
GENERAL LIABILITIES: Due to Parent Corporation 151,431 149,974 Repurchase agreements 286,736 375,299 Commercial paper 84,682 84,854 Other liabilities 488,818 451,555 Undistributed earnings on participating business 133,255 136,617 Separate account liabilities 5,484,631 3,998,878 Total Liabilities 18,317,020 16,689,097
REVENUES: Annuity contract charges and premiums $91,881 $79,816 $61,122 Life, accident, and health premiums earned (net of premiums ceded totaling $(104,250), $60,880 and $48,115) 1,107,367 987,611 938,947 Net investment income 836,642 835,046 767,646 Net realized gains (losses) on investments (21,078) 7,465 (71,939)
PROVISION FOR INCOME TAXES: Current 77,134 88,366 65,070 Deferred (21,162) (39,434) (36,614)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (Dollars in Thousands)
Preferred Stock Shares Amount Common Stock Shares Amount Additional Paid-In Capital Net Unrealized Gains (Losses) Retained Earnings (Deficit) Total
BALANCE, JANUARY 1, 1994 2,000,800 $121,800 7,032,000 $7,032 $656,793 $0 $35,721 $821,346
Adjustment to beginning balance for change in accounting method for investment securities
OPERATING ACTIVITIES: Net income $134,575 $127,680 $74,278 Adjustments to reconcile net income to net cash provided by operating activities: Gain (loss) allocated to participating policyholders (7) 2,027 (725) Amortization of investments 15,518 26,725 36,978 Realized losses (gains) on disposal of investments and write-downs of mortgage loans and real estate 21,078 (7,465) 71,939 Amortization 49,454 49,464 29,197 Deferred income taxes (20,258) (39,763) (38,631) Changes in assets and liabilities: Policy benefit liabilities 358,393 346,975 93,998 Reinsurance receivable 136,966 (38,776) (25,868) Accrued interest and other receivables 24,778 (17,617) (26,032) Other, net (8,076) 8,834
Purchases of investments: Fixed maturities Held-to-maturity (453,787) (490,228) (673,567) Available-for-sale (4,753,154) (4,932,566) (2,606,028) Mortgage loans (23,237) (683) (9) Real estate (15,588) (5,302) (9,253) Common stock (12,113) (4,218) (2,063) Net cash used in investing activities (127,662) (27,426) (24,690)
The Company maintains an allowance for credit losses at a level that, in management's opinion, is sufficient to absorb possible credit losses on its impaired loans and to provide adequate provision for any possible future losses in the portfolio.
Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 114 "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures". In accordance with these standards, a mortgage loan is considered to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The measurement of impaired loans is based on the fair value of the collateral. As the Company was already providing for impairment of loans through an allowance for credit losses, the implementation of these statements had no material effect on the Company's financial statements.
6. Short-term investments include securities purchased with initial maturities of one year or less and are carried at amortized cost. The Company considers short-term investments to be available-for-sale and amortized cost approximates fair value.
Life Insurance and Annuity Reserves - Life insurance and annuity policy reserves with life contingencies of $5,242,753, and $4,675,175 at December 31, 1996 and 1995, respectively, 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 of $5,779,842 and $6,170,760, at December 31, 1996 and 1995, respectively, are established at the contractholder's account value.
Participating Fund Account - Participating life and annuity policy reserves are $3,591,077 and $3,339,316 at December 31, 1996 and 1995, respectively. Participating business approximates 50.3% of the Company's ordinary life insurance in force and 92.2% of ordinary life insurance premium income at December 31, 1996.
The liability for undistributed earnings on participating business was decreased by $3,362 in 1996, which represented $7 of losses on participating business, a reduction of $2,924 to reflect the net change in unrealized gains on securities classified as available-for-sale, net of certain adjustments to policy reserves and income taxes, and a decrease of $431 due to reinsurance transactions (See Note 2).
The Company has also established a Participation Fund Account (PFA) for the benefit of the participating policyholders previously transferred to the Company from the Parent under an assumption reinsurance transaction. The PFA is part of the PPEA. The assets and liabilities associated with these policies are segregated in the accounting records of the Company. Earnings derived from the operation of the PFA accrue solely for the benefit of the acquired participating policyholders.
The Company will implement Statement of Financial Accounting Standards (SFAS) No. 125 "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities" in 1998 as it relates to repurchase agreements and securities lending arrangements. Management estimates the effect of the change will not be material.
On October 31, 1996 the Company recaptured certain pieces of an individual participating insurance block of business previously reinsured to the Parent Corporation on December 31, 1992. The Company recorded, at estimated fair value, the following at October 31, 1996 as a result of this transaction:
investment income) $14,800 $15,182 $13,841 Administrative and underwriting payments (included in operating expenses) 304,599 301,529 269,020
Effective January 1, 1997 all employees of the U.S. operations of the Parent Corporation and the related benefit plans were transferred to the Company. All related employee benefit plan assets and liabilities were transferred from the Parent Corporation to the Company with no material impact on the Company's financial position. There will not be any material effect on the Company's operating expenses as the costs associated with the employees and these benefit plans are reflected in the present service agreements.
At December 31, 1996 and 1995, due to Parent Corporation includes $31,639 and $27,814 due on demand and $119,792 and $122,160 of notes payable which bear interest and mature at various dates. 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 Company also has available an arrangement to obtain advances from the Parent Corporation to fund short-term liquidity needs. The due on demand to the Parent Corporation bears interest at the public bond rate (7.0% and 6.4% at December 31, 1996 and 1995, respectively) while the remainder bear interest at various rates.
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; consequently, allowances are established for amounts deemed uncollectible. 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. At December 31, 1996 and 1995, reinsurance receivables with a carrying value of $196,958 and $333,924, respectively, were due primarily from the Parent Corporation.
Gross Amount Ceded Primarily to the Parent Corporation Assumed Primarily From Other Companies Net Amount Percentage of Amount Assumed to Net
Premiums: Life insurance $339,342 $51,688 $21,028 $308,682 6.8% Accident/health 623,626 9,192 64,495 678,929 9.5% Total $962,968 $60,880 $85,523 $987,611
December 31, 1994: Life insurance in force: Individual $21,461,590 $7,411,811 $3,415,596 $17,465,375 19.6% Group 48,948,669
Premiums: Life insurance $322,263 $42,946 $22,009 $301,326 7.3% Accident/health 579,650 5,169 63,140 637,621 9.9% Total $901,913 $48,115 $85,149 $938,947
Investment income: Fixed maturities and short-term investments $601,913 $591,561 $555,103 Mortgage loans on real estate 140,823 171,008 182,544 Real estate 5,292 3,936 5,700 Policy loans
Investment expenses, including interest on amounts charged by the Parent Corporation of $11,282, $10,778, and $11,145 90,453 95,006 91,761
Realized gains (losses): Fixed Maturities $(11,624) $28,166 $(39,775) Mortgage loans on real estate 1,143 1,309 2,120 Real estate
Collateralized mortgage obligations $ $ $ $ $ Direct mortgage pass-through certificates Other 10,935 11,459 10,935 Collateralized mortgage obligations
Public utilities 284,954 12,755 297,389 284,954 Corporate bonds 1,634,745 41,195 7,360 1,668,580 1,634,745 Foreign governments 12,577
Available-for-Sale: U.S. Treasury Securities and obligations of U.S. Government Agencies: Collateralized mortgage obligations $ 658,612 $ 8,058 $ 3,700 $ 662,970 $ 662,970 Direct mortgage pass-through certificates 844,291 5,093 10,908 838,476 838,476 Other 359,220 2,686 357,130 357,130 Collateralized mortgage obligations 614,773 13,619 3,553 624,839 624,839 Public utilities 628,382 6,523 5,375 629,530 629,530 Corporate bonds
Fixed maturities owned at December 31, 1995 are summarized as follows:
Public utilities 269,671 22,084 291,660 269,671 Corporate bonds 1,732,046 83,583 5,867 1,809,762 1,732,046 Foreign governments 18,596 1,087 19,671 18,596 State and municipalities 22,784 1,966
Government Agencies: Collateralized mortgage obligations $ 561,475 $ 9,983 $ 1,948 $ 569,510 $ 569,510 Direct mortgage pass-through certificates 794,056 11,980 2,233 803,803 803,803 Other 561,736 7,703 569,400 569,400 Collateralized mortgage obligations 490,074 18,044 3,304 504,814 504,814 Public utilities 581,482 16,607 2,425 595,664 595,664 Corporate bonds 2,943,918 121,537 3,065,429 3,065,429 Foreign governments 141,362 5,021 5,644 140,739 140,739 State and municipalities 13,866 13,828 13,828
Most of the collateralized mortgage obligations consist of planned amortization classes with final stated maturities of two to thirty years and average lives of less than one to fourteen years. Prepayments on all mortgage-backed securities are monitored monthly and amortization of the premium and/or the accretion of the discount associated with the purchase of such securities is adjusted by such prepayments.
The cumulative effect as of January 1, 1994 of adopting SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities," increased the opening balance of stockholders' equity by $6,515 to reflect the net unrealized gains on securities classified as available-for-sale (previously carried at the lower of aggregate amortized cost or fair value) and the corresponding adjustments to deferred policy acquisition costs, policy reserves, and amounts allocable to the liability for undistributed earnings on participating business, all net of income taxes.
Due in one year or less $197,135 $200,356 $294,236 $308,805 Due after one year through five years 840,192 860,192 1,294,892 1,300,473 Due after five years through ten years 621,900 641,103 934,312 940,880 Due after ten years 140,061 145,287 422,179 432,721 Mortgage-backed securities 2,117,676 2,126,285 Asset-backed securities 193,393 194,126 1,088,224 1,097,314
The Company makes limited use of derivative financial instruments to manage interest rate and foreign exchange risk. Such hedging activity consists of interest rate swap agreements, interest rate floors and caps, and foreign currency exchange contracts. Interest rate floors and caps are interest rate protection instruments that require the payment by a counter-party to the Company of an interest differential. This differential represents the difference between current interest rates and an agreed-upon rate, the strike rate, applied to a notional principal amount. Interest rate swap agreements are used to convert the interest rate on certain fixed maturities from a floating rate to a fixed rate. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Foreign currency exchange contracts are used to hedge the foreign exchange rate risk associated with bonds denominated in other than U.S. dollars. The differential paid or received on interest rate and amounts received under interest rate floor and cap agreements are recognized as an adjustment to net investment income on the accrual method. Gains and losses on foreign exchange contracts are deferred and recognized in net investment income when the hedged transactions are realized.
The Company has established specific investment guidelines designed to emphasize a diversified and geographically dispersed portfolio of mortgages collateralized by commercial and industrial properties located in the United States. The Company's policy is to obtain collateral sufficient to provide loan-to-value ratios of not greater than 75% at the inception of the mortgages. At December 31, 1996 approximately 32% and 10% of the Company's mortgage loans were collateralized by real estate located in California and Michigan, respectively.
The following represents impairments and other information under SFAS No. 114:
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 alter the original terms of certain loans. These restructured loans, all performing in accordance with their modified terms that are not impaired, aggregated $68,254, and $89,160 at December 31, 1996, and 1995, respectively.
Balance, beginning of year $63,994 $57,987 Provision for loan losses 4,470 15,877 Chargeoffs (3,468) (10,480) Recoveries Balance, end of year $65,242 $63,994
December 31, Carrying Amount Estimated Fair Amount Carrying Amount Estimated Fair Value
ASSETS: Fixed maturities and short-term investments $8,618,167 $8,666,550 $8,452,226 $8,556,065 Mortgage loans on real estate 1,487,575 1,506,162 1,713,195 1,749,514 Policy loans 2,523,477 2,523,477 2,237,745 2,237,745 Common stock 19,715 19,715 9,440 9,440
LIABILITIES: Annuity contract reserves without life contingencies 5,779,842 5,821,404 6,170,760 6,268,749 Policyholders' funds 153,867 153,867 154,872 154,872 Due to Parent Corporation 151,431 154,479 149,974 152,347 Repurchase agreements 286,736 286,736 375,299 375,299 Commercial paper 84,682 84,682
HEDGE CONTRACTS: Interest rate floor 1,320 Interest rate cap 90 Interest rate swaps 4,746 4,746 10,052 10,052 Foreign currency exchange contracts (8,954) (8,954) (4,604) (4,604)
The estimated fair value of financial hedge instruments, all of which are held for other than trading purposes, is the estimated amount the Company would receive or pay to terminate the agreement at each year-end, taking into consideration current interest rates and other relevant factors. Included in the net gain position for interest rates swaps are $160 and $0 of unrealized losses in 1996 and 1995, respectively. Included in the net loss position for foreign currencies exchange contracts are $8,954 and $5,497 loss exposures in 1996 and 1995, respectively.
Federal tax rate 35.0% 35.0% 35.0% Change in tax rate resulting from: Investment income not subject to federal tax (1.0) (0.5) (1.0) Release of contingent liability (4.7)
Change in valuation allowance 0.8 (7.8) (6.9) State and environmental taxes 0.7 0.7
Deferred Tax Asset Deferred Tax Liability Deferred Tax Asset Deferred Tax Liability
Amounts related to investment assets above include $8,530 and $33,735 related to the unrealized gains on the Company's fixed maturities available-for-sale at December 31, 1996 and 1995, respectively.
The Company files a separate tax return and, therefore, losses incurred by subsidiaries cannot be offset against operating income of the Company. At December 31, 1996, the Company's subsidiaries have approximately $35,128 of net operating loss carryforwards, expiring through the year 2011. The tax benefit of subsidiaries' net operating loss carryforwards, net of a valuation allowance of $1,612 are included in the deferred tax assets.
All of the Company's outstanding series of preferred stock are owned by the Parent Corporation. The dividend rate on the Series A Stated Rate Auction Preferred Stock (STRAPS) is 7.3% through December 30, 2002. The Series A STRAPS are redeemable at the option of the Company on or after December 29, 2002 at a price of $100,000 per share, plus accumulated and unpaid dividends.
The dividend rate on the Series B Straps is 5.8% through December 30, 1997. The Series B STRAPS are redeemable at the option of the Company on or after December 29, 1997 at a price of $100,000 per share, plus accumulated and unpaid dividends.
Net Income $180,635 $114,931 $70,091 Capital and Surplus 713,324 653,479 621,589
The maximum amount of dividends which can be paid to stockholders by insurance companies domiciled in the State of Colorado is subject to restrictions relating to statutory surplus and statutory net gain from operations. Statutory surplus and net gains from operations at December 31, 1996 were $584,492 and $182,044 (unaudited), respectively. The Company should be able to pay up to $182,044 (unaudited) of dividends without regulatory approval in 1997.
The Company is involved in various legal proceedings which arise in the ordinary course of its business. In the opinion of management, after consultation with counsel, the resolution of these proceedings should not have a material adverse effect on its financial position or results of operations.