-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NbXObrmWG8OB3nyM23vrclEf3oDzUjFLf7m1stWetX1X0KTktmwEGQRwRrat9g/k Z1AlePu2rksMbZkWpDeyLw== 0001036213-02-000001.txt : 20060215 0001036213-02-000001.hdr.sgml : 20060215 20020329111114 ACCESSION NUMBER: 0001036213-02-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 DATE AS OF CHANGE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST GREAT WEST LIFE & ANNUITY INSURANCE CO CENTRAL INDEX KEY: 0001036213 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 931225432 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-25269 FILM NUMBER: 02593230 BUSINESS ADDRESS: STREET 1: 50 MAIN STREET STREET 2: 9TH FLOOR CITY: WHITE PLAINS STATE: NY ZIP: 10606 BUSINESS PHONE: 303-737-3000 MAIL ADDRESS: STREET 1: 50 MAIN STREET STREET 2: 9TH FLOOR CITY: WHITE PALINS STATE: NY ZIP: 10606 10-K 1 firstgwla10k.txt FIRST GWLA 10K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 --------------------------------------------- OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transaction period from to ------------------ ------------------- Commission file number 333-25269 ---------------------------- FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- New York 93-1225432 - ---------------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 125 Wolf Road, Albany, New York 12205 --------------------------------------------- (Address of principal executive offices) (Zip Code) [518] 437-1816 --------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------------- -------------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _____ [ ____ ] As of March 1, 2002, the aggregate market value of the registrant's voting stock held by non-affiliates of the registrant was $0. As of March 1, 2002, 2,500 shares of the registrant's common stock were outstanding, all of which were owned by the registrant's parent company. NOTE:This Form 10-K is filed by the registrant only as a consequence of the sale by the registrant of a market value adjusted annuity product. PART I ITEM 1. BUSINESS A. ORGANIZATION AND CORPORATE STRUCTURE First Great-West Life & Annuity Insurance Company (the Company) is a stock life insurance company originally organized under the laws of the state of New York in 1996. The Company is a wholly-owned subsidiary of Great-West Life & Annuity Insurance Company (GWL&A), a life insurance company domiciled in Colorado. GWL&A is a wholly-owned subsidiary of GWL&A Financial Inc. (GWL&A Financial), a Delaware holding company. GWL&A Financial is an indirect wholly-owned subsidiary of Great-West Lifeco Inc. (Lifeco), a Canadian holding company. Lifeco is a subsidiary of Power Financial Corporation (Power Financial), a Canadian holding company with substantial interests in the financial services industry. Power Financial Corporation is a subsidiary of Power Corporation of Canada (Power Corporation), a Canadian holding and management company. Mr. Paul Desmarais, through a group of private holding companies that he controls, has voting control of Power Corporation. Shares of Great-West Lifeco, Power Financial, and Power Corporation are traded publicly in Canada. B. BUSINESS OF THE COMPANY The Company is authorized to engage in the sale of life insurance, annuities, and accident and health insurance. The Company became licensed to do business in New York and Iowa in 1997. The Company operates in the following two business segments: Employee Benefits - life, health, and 401(k) products for group clients Financial Services - savings products for both public and non-profit employers and individuals, and life insurance products for individuals and businesses. The table that follows summarizes premiums and deposits for the years indicated. For further consolidated financial information concerning the Company, see Item 6 (Selected Financial Data), and Item 8 (Financial Statements and Supplementary Data). For commentary on the information in the following table, see Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations).
[Thousands](1) 2001 2000 1999 ------------------------------------- ------------- ------------- ------------- Premium Income Employee Benefits Group life & health $ 15,055 $ 13,467 $ 9,195 ------------- ------------- ------------- Total Employee Benefits 15,055 13,467 9,195 ------------- ------------- ------------- Financial Services Savings (9) (11) (8) Individual insurance 84 109 (43) ------------- ------------- ------------- Total Financial Services 75 98 (51) ------------- ------------- ------------- Premium income $ 15,130 $ 13,565 $ 9,144 ============= ============= ============= Fee Income Employee Benefits Group life & health $ 5,196 $ 6,213 $ 430 401(k) 6 2 ------------- ------------- ------------- Total Employee Benefits 5,202 6,215 430 ------------- ------------- ------------- Financial Services Savings 373 362 262 Individual insurance ------------- ------------- ------------- Total Financial Services 373 362 262 ------------- ------------- ------------- Fee income $ 5,575 $ 6,577 $ 692 ============= ============= ============= Deposits for investment-type contracts (2) Financial Services $ 10,173 $ 37,344 $ 20,000 ------------- ------------- ------------- Total investment-type deposits $ 10,173 $ 37,344 $ 20,000 ============= ============= ============= Deposits to Separate Accounts Employee Benefits $ 708 $ 3,249 $ Financial Services 7,185 11,189 9,389 ------------- ------------- ------------- Total separate accounts deposits $ 7,893 $ 14,438 $ 9,389 ============= ============= ============= Self-funded equivalents - Employee Benefits (3) $ 38,410 $ 16,225 $ ============= ============= =============
(1)All information in the following table and other tables herein is derived from information that has been prepared in conformity with accounting principles generally accepted in the United States of America, unless otherwise indicated. (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 of which amounts approximate the additional premiums that would have been earned under such contracts if they had been written as traditional indemnity or HMO programs. C. EMPLOYEE BENEFITS 1. Principal Products The Employee Benefits segment of the Company provides a full range of employee benefits products. The Company began operating in this segment as of December 1, 1999 by entering into an assumption reinsurance agreement with Anthem Health & Life Insurance Company of New York (AH&L NY), to acquire a block of life and health insurance business. The business primarily consists of administration services only, and stop loss policies. Annualized premium equivalents rose to $88.6 million in 2001 resulting from significant sales late in the fourth quarter. In 2002, the Company will continue to focus on writing new employee benefits business. The Company offers customers a variety of health plan options to help them maximize the value of their employee benefits package. The majority of the Company's health care business is self-funded, whereby the employer assumes all or a significant portion of the risk. For companies with better than average claims experience, this can result in significant health care savings. The Company offers employers a total benefits solution - an integrated package of group life and disability insurance, managed-care programs, and flexible spending accounts. The Company began marketing 401(k) savings plans in 2000 to complement its group life and health products. Through integrated pricing, administration, funding, and service, the Company helps employers provide cost-effective benefits that will attract and retain quality employees, and at the same time, helps employees reach their personal goals by offering benefit choices, along with information needed to make appropriate choices. Many customers also find this integrated approach appealing because their benefit plans are administered through a single company with linked systems that provide on-line administration and account access, for enhanced efficiency and simplified plan administration. The Company offers a choice of managed care products including Preferred Provider Organization (PPO) plans and Point of Service (POS) plans. PPO plans offer members a greater choice of physicians and hospitals. Members do not need to enroll with a primary care physician - they simply select a contracted PPO provider at the time of the service to receive the highest level of benefits. If members seek care outside of the PPO network, they receive a lower level of benefits. POS plans also require that a member enroll with a primary care physician who is responsible for coordinating the member's health care. Members receive the highest benefit coverage and the lowest out-of-pocket costs when they use their primary care physician to coordinate their health care. Members can seek care outside of the primary care physician's direction, at a reduced level of benefits. Some benefits may not be covered outside the in-network POS plan. The Company offers Internal Revenue Code Section 125 plans that enable participants to set aside pre-tax dollars to pay for non-reimbursement medical expenses and dependent care expenses. This creates tax efficiencies for both the employer and its employees. The Company offers group life insurance. Sales of group life insurance consist principally of renewable term coverage, the amounts of which are usually linked to individual employee wage levels. Group life insurance in force prior to reinsurance ceded to other insurance enterprises for the year ended December 31, 2001 totaled $394 million. The Company offers disability insurance that is a type of health insurance designed to compensate insured people for a portion of the income they lose because of a disabling injury or illness. Generally, benefits are in the form of monthly payments. The Company's 401(k) product is offered by way of a group fixed and variable deferred annuity contract. The product provides a variety of funding and distribution options for employer-approved retirement plans that qualify under Internal Revenue Code Section 401(k). The 401(k) product investment options for the employer include guaranteed interest rates for various lengths of time and variable investment options. For the fully guaranteed option, the difference between the income earned on investments in the Company's general account and the interest credited to the participant's account balance flows through to operating income. Variable investment options utilize separate accounts to provide participants with a vehicle to assume the investment risks. Assets held under these options are invested, as designated by the participant, in separate accounts that in turn invest in shares of underlying funds managed by a subsidiary of GWL&A or by selected external fund managers. The Company is compensated by the separate accounts for bearing expense risks pertaining to the variable annuity contract, and for providing administrative services. Customer retention is a key factor for the profitability of the Company's 401(k) product. The annuity contract imposes a charge for termination during a designated period of time after the contract's inception. The charge is determined in accordance with a formula in the contract. Existing federal tax penalties on distributions prior to age 59 1/2 provide an additional disincentive to premature surrenders of account balances, but do not impede rollovers to products of competitors. The Company offers a rollover Individual Retirement Account that allows individuals to move retirement funds from a 401(k) plan to a qualified Individual Retirement Account. 2. Method of Distribution The Company distributes its products and services through affiliated sales staff. Each sales office works with insurance brokers, agents, and consultants in their local market. 3. Competition The employee benefits industry is highly competitive. The United States health care industry continues to experience mergers and consolidations. A number of larger carriers have dropped out of the group health market entirely. Although there are still many different carriers in the marketplace, it has become dominated by an increasingly smaller number of carriers. The highly competitive marketplace creates pricing pressures that encourage employers to seek competitive bids each year. Although most employers are looking for affordably priced employee benefits products, they also want to offer product choices because employee needs differ. In many cases it is more cost-effective and efficient for an employer to contract with a carrier such as the Company that offers multiple product lines and centralized administration. In addition to price there are a number of other factors that influence employer decision-making. These factors include; quality of services; scope, cost-effectiveness and quality of provider networks; product responsiveness to customers' needs; cost-containment services; and effectiveness of marketing and sales. 4. Reserves For group 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 contracts, the policy reserves equal the present value of future benefits and expenses using best estimate assumptions for interest, mortality, and expenses (including margins for adverse deviation). Reserves for long-term disability products are established for lives currently in payment status, or that are approved for payment but are in a waiting period, using industry and Company morbidity factors, and interest rates based on Company experience. In addition, reserves are held for claims that have been incurred but not reported and for long term disability claims that have been reported but not yet adjudicated. For medical, dental, and vision insurance products, reserves reflect the ultimate cost of claims including, on an estimated basis, (i) claims that have been reported but not settled, and (ii) claims that have been incurred but not reported. Claim reserves are based upon factors derived from past experience. Reserves also reflect retrospective experience rating that is done on certain types of business. Reserves for investment contracts (401(k) deferred annuities) are equal to the participants' account balances. Assumptions for mortality and morbidity experience are periodically reviewed against published industry data and company experience. The above mentioned reserves are computed amounts that, with additions from premiums and deposits to be received, and with interest on such reserves, are expected to be sufficient to meet the Company's policy obligations, pay expected death 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 $250 thousand. D. FINANCIAL SERVICES 1. Principal Products The Financial Services segment primarily markets savings products to public and not-for-profit employers and individuals and offers life insurance products to individuals and businesses. The Company's individual fixed annuity 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. Guaranteed period durations of one to ten years are currently being offered by the Company. Distributions from the amounts allocated to a Guarantee Period Fund more than six months prior to the maturity date results in a market value adjustment (MVA). The MVA reflects the relationship as of the time of its calculation between the current U.S. Treasury Strip ask side yield and the U.S. Treasury Strip ask side yield at the inception of the contract. The Company's individual variable annuity products offer a number of investment options. This product provides the opportunity for contractholders to assume the risks of, and receive all the benefits from, the investment of retirement assets. The variable product assets are invested, as designated by the participant, in a separate account that in turn invests in shares of underlying funds managed by selected external fund managers. The individual fixed annuity product generates earnings from the investment spreads on guaranteed investment returns. The individual variable annuity product generates earnings from the fees collected for mortality and expense risks associated with the variable options. The Company entered the retirement savings business in the public/non-profit pension market. The Company provides investment products, and administrative and communication services, to employees of state and local governments as well as employees of hospitals, non-profit organizations, and public school districts. The Company provides pension plan administrative services through a subsidiary company, Financial Administrative Services Corporation. The Company provides marketing and communication services through another subsidiary company, BenefitsCorp, Inc., and through BenefitsCorp Equities, Inc., a broker-dealer subsidiary of BenefitsCorp, Inc. (collectively, BenefitsCorp). The Company's primary marketing emphasis in the public/non-profit pension market is group fixed and variable annuity contracts for defined contribution retirement savings plans. Defined contribution plans provide for benefits based upon the value of contributions to, and investment returns on, the individual's account. This has been the fastest growing portion of the pension marketplace in recent years. The amount of annuities in-force is measured by account balances. At December 31, 2001, annuity account balances were $587 thousand for fixed annuities and $42.5 million for variable annuities. At December 31, 2000, annuity account balances were $141 thousand for fixed annuities and $44.1 million for variable annuities. During 1998, the Company began selling life insurance products in the Business-Owned Life Insurance (BOLI) market. These products are interest-sensitive whole life products that fund post-retirement benefits for bank employees. BOLI deposits of $5.0 million were received in 2001, representing $493.6 million of life insurance in-force. 2. Method of Distribution The Company primarily uses BenefitsCorp to distribute pension products and to provide communication and enrollment services to employers in the public/non-profit market. Pension products are also distributed through independent marketing agencies. The Company distributes its individual annuity products through Charles Schwab & Co., Inc. pursuant to a distribution agreement. The Company's BOLI product is currently marketed through one broker, Clark/Bardes, Inc. 3. Competition The individual life and annuity insurance marketplace is highly competitive. The Company's competitors include mutual fund companies, insurance companies, banks, investment advisors, and certain service and professional organizations. No one competitor or small number of competitors is dominant. Competition focuses on service, technology, cost, variety of investment options, investment performance, product features, price, and financial strength as indicated by ratings issued by nationally recognized agencies. For more information on the Company's ratings, see Item 1(G) (Ratings). 4. Reserves Reserves for interest-sensitive whole life products are equal to cumulative deposits, less withdrawals and charges, plus credited interest. 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 investment contracts (deferred annuities) 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 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 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 $250 thousand of coverage per individual life. E. INVESTMENT OPERATIONS GWL&A manages the Company's general and separate accounts in support of cash and liquidity requirements of the Company's insurance and investment products. Invested assets under management at December 31, 2001, totaled $228.0 million, comprised of $182.4 million of general account assets and separate account assets of $45.6 million. Invested assets under management at December 31, 2000, totaled $213.9 million, comprised of $166.5 million of general account assets and separate account assets of $47.4 million. The Company invests in a broad range of asset classes, investments such as government bonds, public and privately placed corporate bonds, mortgage-backed securities and asset-backed securities. The Company's investments are subject to New York insurance laws. The Company manages the characteristics of its investment assets, such as liquidity, currency, yield, and duration, to reflect the underlying characteristics of related insurance and policyholder liabilities that vary among the Company's principal product lines. The Company observes strict asset and liability matching guidelines that are designed to ensure that the investment portfolio will appropriately meet the cast flow and income requirements of its liabilities. The Company routinely monitors and evaluates the status of its investments in light of current economic conditions, trends in capital markets, and other factors. These other factors include investment size, quality, concentration by industry and other diversification considerations for fixed maturity investments. The Company's long-term bond portfolio constituted 98% of investment assets as of December 31, 2001 compared to 90% in 2000. The Company reduces credit risk for the portfolio as a whole by investing primarily in investment grade bonds. As of December 31, 2001 and 2000, 98% and 100%, respectively, of the bond portfolio carried an investment grade rating. The following table sets forth the distribution of invested assets, cash and accrued investment income for the Company's general account as of the end of the years indicated:
Carrying Value in Millions 2001 2000 1999 1998 1997 ----------------------- --------- ---------- ---------- ---------- ---------- U.S. Government Securities and Agencies $ 48 $ 54 $ 22 $ 24 $ 5 Collaterized mortgage obligations 10 10 19 20 Corporate bonds 53 35 35 35 Asset backed securities 67 52 35 --------- ---------- ---------- ---------- ---------- Total 178 151 111 79 5 Short-term investments 4 16 2 1 --------- ---------- ---------- ---------- ---------- Total investments $ 182 $ 167 $ 113 $ 80 $ 5 ========= ========== ========== ========== ========== Cash $ 8 $ 8 $ 5 $ 1 $ Accrued investment income 2 1 1 1
Net Investment Earned Net Income Investment For the year: [Thousands] Income Rate -------------------- ------------- -------------- 2001 $ 11,763 7.04 % 2000 10,333 6.99 % 1999 6,278 6.79 % 1998 3,367 6.35 % 1997 243 6.00 % F. REGULATION 1. Insurance Regulation The Company must comply with the insurance laws of New York and Iowa. These laws govern the 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 and the type, amounts and valuation of investments permitted. The Company's operations and accounts are subject to examination by the New York Insurance Department at specified intervals. New York has adopted the National Association of Insurance Commissioners' (NAIC) risk-based capital rules and other financial ratios for life insurance companies. Based on the Company's December 31, 2001 statutory financial reports, the Company has risk-based capital well in excess of that required. In March 1998, the NAIC adopted the Codification of Statutory Accounting Principles (Codification). The Codification that is intended to standardize accounting and reporting to state insurance departments is effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. The New York Insurance Department required adoption of Codification with certain modifications for the preparation of statutory financial statements effective January 1, 2001. 2. Insurance Holding Company Regulations The Company is subject to and complies with insurance holding company regulations in New York. These regulations contain certain restrictions and reporting requirements for transactions between an insurer and its 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 separate accounts and annuity products are registered under the Investment Company Act of 1940 and the Securities Act of 1933. 4. Potential Legislation United States legislative developments in various areas including pension regulation, financial services regulation, and health care legislation could significantly and adversely affect the Company in the future. Congress continues to consider legislation relating to health care reform and managed care issues (including patients' rights, mental health parity and managed care or enterprise liability). Congress is also considering changes to various features of retirement plans such as the holding of company stock, diversification rights, imposition of transaction restrictions, expanded disclosure requirements and greater access to investment advice for participants. It is not possible to predict whether future legislation or regulation adversely affecting the business of the Company will be enacted and, if enacted, the extent to which such legislation or regulation will have an effect on the Company and its competitors. G. RATINGS The Company is rated by a number of nationally recognized rating agencies. The ratings represent the opinion of the rating agencies regarding the financial strength of the Company and its ability to meet ongoing obligations to policyholders. The ratings take into account an agreement whereby GWL&A has undertaken to provide the Company with certain financial support related to maintaining required statutory surplus and liquidity.
Rating Agency Measurement Rating ------------------------------ ------------------------------------------ ------- A.M. Best Company, Inc. Financial strength, operating A++(1) performance and market profile Fitch, Inc. Financial strength AAA(2) Moody's Investors Service Financial strength Aa3(3) Standard & Poor's Corporation Financial strength AA(4)
(1) Superior (highest rating out of six categories) (2) Exceptionally Strong (highest rating out of twelve categories) (3) Excellent (second highest rating out of nine categories) (4) Very Strong (second highest rating out of nine categories) H. MISCELLANEOUS Although the Company's BOLI business is comprised of a few customers that account for the majority of the total deposits, the BOLI contracts allow for no more than 20% surrenders in any given year. The Company and GWL&A have administrative services agreements whereby GWL&A administers, distributes, and underwrites business for the Company and administers the Company's investment portfolio. ITEM 2. PROPERTIES The Company leases its home office in Albany, New York. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of 2001 to a vote of security holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS A. EQUITY SECURITY HOLDERS AND MARKET INFORMATION There is no established public trading market for the Company's common equity. B. DIVIDENDS The Company has not paid dividends on its common shares. Under New York law, the Company may distribute a dividend if the total of all dividends paid in any calendar year does not exceed the lesser of (i) 10% of surplus to policyholders as of the preceding December 31; or (ii) the net gain from operations for the preceding calendar year, not including realized capital gains. The Company cannot distribute any greater dividend amount unless a notice of its intention to declare such dividend and the amount thereof has been filed with the New York Superintendent of Insurance not less than thirty days in advance of such proposed declaration. The Superintendent may disapprove of such distribution by giving written notice to the Company within thirty days after such filing stating that he finds the financial condition of the Company does not warrant such distribution. 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 consolidated financial statements of the Company included in Item 8 (Financial Statements and Supplementary Data). Note 2 in the financial statements discusses the significant accounting policies of the Company. Significant estimates are required to account for the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates.
For the period from [Dollars in Thousands] April 4, 1997 (inception) through INCOME STATEMENT Years Ended December 31, December 31, -------------------------------------------- DATA 2001 2000 1999 1998 1997 ------------------------ --------- --------- -------- -------- ------------ Premium income $ 15,130 $ 13,565 $ 9,144 $ (65) $ 21 Fee income 5,575 6,577 692 143 Net investment income 11,763 10,333 6,278 3,367 243 Net realized investment gains (losses) 642 67 (6) 74 --------- --------- -------- -------- ------------ Total revenues 33,110 30,542 16,108 3,519 264 Total benefits and expenses 24,323 27,152 14,444 2,124 213 Income tax expense 3,294 1,346 641 603 18 --------- --------- -------- -------- ------------ Net income $ 5,493 $ 2,044 $ 1,023 $ 792 $ 33 ========= ========= ======== ======== ============ Deposits for investment- type contracts $ 10,173 $ 37,344 $ 20,000 $ 62,528 $ Deposits to separate accounts $ 7,893 $ 14,438 $ 9,389 $ 12,776 $ Self-funded premium equivalents $ 38,410 $ 16,225 $ $ $ BALANCE SHEET Years Ended December 31, ---------------------------------------------------------- DATA 2001 2000 1999 1998 1997 ------------------------- --------- --------- --------- --------- --------- [Dollars in Thousands] Investment assets $ 182,445 $ 166,538 $ 112,799 $ 80,353 $ 5,381 Separate account assets 47,359 39,881 23,836 9,045 45,576 Total assets 248,728 247,806 171,710 107,095 16,154 Total policy benefit liabilities 156,850 144,270 98,421 64,445 84 Total shareholder's equity 36,074 30,614 16,642 6,538 41,212
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 with the Securities and Exchange Commission. Management's discussion and analysis of financial conditions and results of operations of the Company for the three years ended December 31, 2001 follows. This management discussion and analysis should be read in conjunction with the financial data contained in Item 6 and the Company's consolidated Financial Statements. A. COMPANY RESULTS OF OPERATIONS 1. Consolidated Results The Company's consolidated net income increased $3.4 million or 169% in 2001 when compared to 2000. The Employee Benefits segment contributed $3.1 million to the improved consolidated results and the Financial Services segment contributed $336 thousand. Of total consolidated net income for 2001, 2000, and 1999, the Employee Benefits segment contributed 82%, 67%, and 44%, respectively, while the Financial Services segment contributed 18%, 33%, and 56%, respectively. The Employee Benefits segment began operations in 1999 by entering into an assumption reinsurance agreement on December 1, 1999 with AH&L NY to acquire a block of life and health insurance business. The subsequent operations resulting from this agreement combined with new case sales within other blocks of business resulted in net income of $4.5 million, $1.4 million, and $.4 million being recorded in 2001, 2000, and 1999, respectively. The Financial Services net income increased $336 thousand in 2001 primarily due to realized gains on fixed maturities in 2001 of $679 thousand compared to realized gains in 2000 of $67 thousand. The Financial Services net income increased in 2000 from 1999 due to realized gains in 2000 of $67 thousand compared to realized losses in 1999 of $6 thousand and increased margins and fees on larger asset balances from BOLI sales in 2000. In 2001 total Company revenues increased $2.6 million or 8% to $33.1 million when compared to 2000. The growth in revenues in 2001 was comprised of increased premium and fee income of $563 thousand, increased net investment income of $1.4 million and increased realized gain on investments of $575 thousand. The increased premium and fee income in 2001 was comprised of growth in Employee Benefits of $575 thousand partially offset by a decrease of $12 thousand in Financial Services premium and fee income. The premium and fee income increase in 2000 was comprised of growth in Employee Benefits and Financial Services premium and fee income of $10.1 million and $249 thousand, respectively. Net investment income grew to $11.8 million and $10.3 million in 2001 and 2000, respectively, from $6.3 million in 1999, primarily due to BOLI sales each year, as well as a capital infusion from GWL&A of $16 million in 1999. The growth in all years was primarily in the Financial Services segment. Realized investment gains from fixed maturities increased from $67 thousand in 2000 to $642 thousand in 2001. The realized investment gains were the result of sales of U.S. Treasury securities. Total benefits and expenses decreased $2.8 million or 10% in 2001 when compared to 2000. The Employee Benefits segment contributed $3.9 million of the decrease in 2001 while the Financial Services segment contributed an increase of $1.1 million. The decrease in total benefits and expenses in the Employee Benefits segment in 2001 resulted primarily from improvement in the health claims experience. The increase in Financial Services related to higher interest credits on BOLI account balances and increased operating expenses associated with growth in the Company's business. Total benefits and expenses increased $12.7 million in 2000 when compared to 1999. This increase was primarily due to an increase in the Employee Benefits segment as a result of the acquisition of the group health and life business from AH&L NY in December 1999. Income tax expense increased $1.9 million or 145% in 2001 when compared to 2000. Income tax expense increased $705 thousand in 2000 when compared to 1999. The increases in income tax expense in both years reflect higher net earnings. The Company's effective tax rate was 37.5% in 2001 compared to 39.7% in 2000, and 38.5% in 1999. 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 generally represent paid claims under minimum premium and administrative services only contracts that amounts approximate the additional premiums that would have been earned under such contracts if they had been written as traditional indemnity programs. Deposits for investment-type contracts decreased $27 million or 73% and increased $17.3 million or 87% in 2001 and 2000, respectively, due to BOLI deposits. BOLI sales are single premium and very large in nature, and therefore, can vary significantly from year to year. Deposits for separate accounts decreased $6.5 million in 2001 when compared to 2000 and increased $5.0 million in 2000 compared to 1999. These fluctuations are expected in the small market in which the Company operates. Self-funded premium equivalents increased $22 million or 137% in 2001 when compared to 2000 primarily due to the inclusion in 2001 of the first full year of operations resulting from the Allmerica assumption reinsurance agreement. 2000 was the first full year of Employee Benefit operations resulting from the AH&L NY assumption reinsurance agreement. Total assets and liabilities increased $922 thousand or 4% and $76.1 million or 44% in 2001 and 2000, respectively. The increases are primarily attributable to BOLI business. 2. Other Matters On October 6, 1999, GWL&A entered into a purchase and sales agreement (the Agreement) with Allmerica Financial Corporation (Allmerica) to acquire, via assumption reinsurance, Allmerica's group life and health business on March 1, 2000. The policies resident in the state of New York have been assigned to the Company as part of the Agreement. This business primarily consists of administrative services only, and stop loss policies. The in-force business was immediately co-insured back to Allmerica and then underwritten and retained by the Company upon each policy renewal date. The purchase price, as defined in the Agreement, was based on a percentage of the amount in force at March 1, 2000, contingent on the persistency of the block of business through March 2001. B. EMPLOYEE BENEFITS RESULTS OF OPERATIONS The results below reflect the Employee Benefits segment for the following periods:
Years Ended December 31, ----------------------------------------------- INCOME STATEMENT DATA 2001 2000 1999 ------------------------------------- ------------- ------------- ------------- [thousands] Premium income $ 15,055 $ 13,467 $ 9,195 Fee income 5,202 6,215 430 Net investment income 1,479 1,111 Net realized investment (losses) (37) ------------- ------------- ------------- Total revenues 21,699 20,793 9,625 Policyholder benefits 9,473 14,431 8,378 Operating expenses 5,085 4,087 506 ------------- ------------- ------------- Total benefits and expenses 14,558 18,518 8,884 ------------- ------------- ------------- Income from operations 7,141 2,275 741 Income tax expense 2,662 908 295 ------------- ------------- ------------- Net income $ 4,479 $ 1,367 $ 446 ============= ============= ============= Deposits to separate accounts $ 708 $ 3,249 $ Self-funded premium equivalents 38,410 16,225
During 2001, the Employee Benefits segment had an overall increase in its net income. The increase was due primarily to increased revenue and good morbidity experience, resulting in net income of $4.5 million in 2001, compared with $1.4 million in 2000. In order to remain competitive, a focused effort on provider contracting is essential to ensure strong morbidity results. Sales efforts will be streamlined and concentrated on self-funded products. Business development strategies will emphasize greater penetration in the New York market. Continued emphasis will be placed on expense economies and synergies to ensure competitive administrative costs. Efficiency will be improved through implementation of various system initiatives and through process redesign. Online enrollment for life and health members was implemented in 2001. As a further enhancement to our Internet services, online billing is scheduled for implementation in 2002 and will provide our customers with improved service, as well as generate cost savings to the Company. C. FINANCIAL SERVICES RESULTS OF OPERATIONS The results below reflect the Financial Services segment for the following periods:
Years Ended December 31, ----------------------------------------------- INCOME STATEMENT DATA 2001 2000 1999 ------------------------------------- ------------- ------------- ------------- [thousands] Premium income $ 75 $ 98 $ (51) Fee income 373 362 262 Net investment income 10,284 9,222 6,278 Net realized investment gains 679 67 (6) (losses) ------------- ------------- ------------- Total revenues 11,411 9,749 6,483 Policyholder benefits 8,226 7,261 4,600 Operating expenses 1,539 1,373 960 ------------- ------------- ------------- Total benefits and expenses 9,765 8,634 5,560 ------------- ------------- ------------- Income from operations 1,646 1,115 923 Income tax expense 632 438 346 ------------- ------------- ------------- Net income $ 1,014 $ 677 $ 577 ============= ============= ============= Deposits for investment-type contracts $ 10,173 $ 37,344 $ 20,000 Deposits to separate accounts 7,185 11,189 9,389
During 2001, the Financial Services segment had an overall increase in its net income. The increase is due primarily to the realized investment gains increase of $612 thousand in 2001, as a result of realized gains on fixed maturities. The additional earnings in 2000 reflected an increased asset base, an increase in investment margins, and additional realized gains on fixed maturities. Premium and fee income decreased $12 thousand in 2001 compared to an increase of $249 thousand in 2000. The decrease in 2001 was driven by a decrease in premium income due to normal fluctuations that can be expected in the small market in which the Company operates. The increase in 2000 was driven by higher fee income related to growth in separate accounts. Deposits for investment-type contracts were down in 2001 due mostly to BOLI deposits of $5.0 million in 2001 compared to $35.0 million in 2000 and $10.0 million in 1999. The nature of this type of product leads to large fluctuations from year to year. In 2001, the deposits for separate accounts decreased $4.0 million to $7.2 million. Deposits for separate accounts increased $1.8 million in 2000 to $11.2 million. The separate account assets decreased by $4.8 million in 2001 due to market conditions and increased $7.5 million in 2000 due to the new deposits. Net investment income increased $1.1 million in 2001 compared to 2000, and $2.9 million in 2000 compared to 1999, primarily due to BOLI sales. Total benefits and expenses increased $1.1 million in 2001 compared to an increase of $3.1 million in 2000, primarily due to additional interest credits on BOLI balances and increased operating expenses. D. INVESTMENT OPERATIONS The Company's primary investment objective is to acquire assets with duration and cash flow characteristics reflective of the Company's liabilities, while meeting industry, size, issuer, and geographic diversification standards. Formal liquidity and credit quality parameters have also been established. The Company follows rigorous procedures to control interest rate risk and observes strict asset and liability matching guidelines. These guidelines are designed to ensure that even under changing market conditions, the Company's assets will always be able to meet the cash flow and income requirements of its liabilities. Using dynamic modeling to analyze the effects of a wide range of possible market changes upon investments and policyholder benefits, the Company ensures that its investment portfolio is appropriately structured to fulfill financial obligations to its policyholders. A summary of the Company's general account invested assets follows:
[Dollars in Thousands] 2001 2000 ----------------------------------------------------- -------------- ------------- Fixed maturities, available-for-sale, at fair value $ 178,591 $ 150,631 Short-term investments 3,854 15,907 -------------- ------------- Total invested assets $ 182,445 $ 166,538 ============== =============
During 2000, the Company transferred all securities classified as held-to-maturity into the available-for-sale category. The Company recorded a $645 unrealized gain associated with this transfer in other comprehensive income, net of tax. Fixed maturity investments include public and privately placed corporate bonds, government bonds and mortgage-backed and asset-backed securities. Private placement investments that are primarily in the held-to-maturity category are generally less marketable than publicly traded assets, yet they typically offer covenant protection that allows the Company, if necessary, to take appropriate action to protect its investment. The Company believes that the cost of the additional monitoring and analysis required by private placements is more than offset by their enhanced yield. One of the Company's primary objectives is to ensure that its fixed maturity portfolio is maintained at a high average quality so as to limit credit risk. If not externally rated, the securities are rated by the Company on a basis intended to be similar to that of the rating agencies. The distribution of the fixed maturity portfolio by credit rating is summarized as: Credit Rating 2001 2000 ---------------------------------------- ---------- ---------- AAA 65.0 % 62.8 % AA 6.8 14.3 A 11.9 7.3 BBB 13.9 15.6 BB and lower 2.4 ---------- ---------- TOTAL 100.0 % 100.0 % ========== ========== E. LIQUIDITY AND CAPITAL RESOURCES The Company's operations have liquidity requirements that are dependent upon the principal product lines currently offered. Life insurance and pension plan reserves are primarily long-term liabilities. Life insurance and pension plan reserve requirements are usually stable and predictable, and are supported primarily by long-term, fixed income investments. Generally, the Company has met its operating requirements by maintaining appropriate levels of liquidity in its investment portfolio. Liquidity for the Company has remained strong, as evidenced by significant amounts of short-term investments and cash that totaled $11.7 million and $24.4 million as of December 31, 2001 and 2000, respectively. The Company and GWL&A have an agreement whereby GWL&A has undertaken to provide the Company with certain financial support related to maintaining required statutory surplus and liquidity. F. ACCOUNTING PRONOUNCEMENTS In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - A replacement of FASB Statement No. 125", which revises the standards for accounting for securitizations, and other transfers of financial assets and collateral, and requires certain disclosures. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of the new SFAS did not have a significant effect on earnings or the financial position of the Company. Effective April 1, 2001, the Company adopted Emerging Issues Task Force Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Financial Assets (EITF 99-20). This pronouncement requires investors in certain asset-backed securities to record changes in their estimated yield on a prospective basis and to apply specific evaluation methods to these securities for an other-than-temporary decline in value. The adoption of EITF 99-20 did not have a material impact on the Company's financial position or results of operations. On June 29, 2001, Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" was approved by the FASB. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and certain intangible assets will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company implemented SFAS No. 141 on July 1, 2001. Adoption of the Statement did not have a material impact on the Company's financial position or results of operations. On June 29, 2001, SFAS No. 142, "Goodwill and Other Tangible Assets" was approved by the FASB. SFAS No. 142 changes the accounting for goodwill and certain other intangibles from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. The Company is required to implement SFAS No. 142 on January 1, 2002 and, although it is still reviewing the provisions of this Statement, management's preliminary assessment is that the Statement will not have a material impact on the Company's financial position or results of operations. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 supercedes current accounting guidance relating to impairment of long-lived assets and provides a single accounting methodology for long-lived assets to be disposed of, and also supercedes existing guidance with respect to reporting the effects of the disposal of a business. SFAS No. 144 is effective beginning January 1, 2002, with earlier adoption encouraged. Although management is still reviewing the provisions of the Statement, it does not expect SFAS No. 144 to have a material impact on the Company's financial position or results of operations, upon adoption. See Note 1 to the Consolidated Financial Statements for additional information regarding accounting pronouncements. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary risk facing the Company is rising interest rates. To manage interest rate risk, the Company invests in assets that are suited to the products that it sells. For products with uncertain timing of benefit payments such as life insurance, the Company invests in fixed income assets with expected cash flows that are earlier than the expected timing of the benefit payments. The Company can then react to changing interest rates as these assets mature for reinvestment. The Company has estimated the possible effects of interest rate changes at December 31, 2001. If interest rates increased by 100 basis points (1%), the fair value of the fixed income assets would decrease by approximately $8 million. The calculation used projected cash flows, discounted back to December 31,2001. The cash projections are shown in the table below. The table shows cash flows rather than expected maturity dates because many of the Company's assets have substantial expected principal payments prior to the final maturity date. The fair value shown in the table below was calculated using spot discount interest rates that varied by the year in which the cash flows were expected to be received. These spot rates in the benchmark calculation ranged from 3.62% to 8.85%.
Projected Cash Flows by Calendar Year [$ There- Undiscounted Fair millions] 2002 2003 2004 2005 2006 after Total Value ----- ----- ------ ------ ------ ------ ----------- ------ Benchmark 18 28 18 18 55 102 238 186 Interest rates up 1% 16 21 19 21 57 110 243 178
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following are the Company's Financial Statements for the years ended December 31, 2001, 2000, and 1999, and the Independent Auditor's Report thereon. First Great-West Life & Annuity Insurance Company (A wholly-owned subsidiary of Great-West Life & Annuity Insurance Company) Financial Statements for the Years Ended December 31, 2001, 2000, and 1999 and Independent Auditors' Report INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of First Great-West Life & Annuity Insurance Company: We have audited the accompanying balance sheets of First Great-West Life & Annuity Insurance Company (a wholly-owned subsidiary of Great-West Life & Annuity Insurance Company) as of December 31, 2001 and 2000, and the related statements of income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of First Great-West Life & Annuity Insurance Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. January 28, 2002 FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY BALANCE SHEETS DECEMBER 31, 2001 AND 2000
====================================================================================================================== (Dollars in Thousands) ASSETS 2001 2000 - ------ -------------------- -------------------- INVESTMENTS: Fixed maturities, available-for-sale, at fair value (amortized cost $176,687 and $148,522) $ 178,591 $ 150,631 Short-term investments, available-for-sale (cost approximates fair value) 3,854 15,907 -------------------- -------------------- Total Investments 182,445 166,538 OTHER ASSETS: Cash 7,860 8,462 Reinsurance receivable 2,346 1,924 Deferred policy acquisition costs 1,257 1,717 Investment income due and accrued 1,713 1,325 Amounts receivable related to uninsured accident and health plan claims (net of allowances of $1,835 and $0) 1,884 2,069 Premiums in course of collection (net of allowances of $875 and $776) 792 2,502 Deferred income taxes 1,377 1,107 Due from Parent Corporation 107 10,207 Other assets 3,371 4,596 SEPARATE ACCOUNT ASSETS 45,576 47,359 -------------------- -------------------- TOTAL ASSETS $ 248,728 $ 247,806 ==================== ==================== (Continued) ====================================================================================================================== LIABILITIES AND STOCKHOLDER'S EQUITY POLICY BENEFIT LIABILITIES: Policy reserves $ 152,874 $ 137,657 Policy and contract claims 1,175 3,851 Policyholders' funds 2,801 2,762 GENERAL LIABILITIES: Bank overdrafts 3,104 8,954 Contract deposits 7,761 Other liabilities 1,986 3,388 SEPARATE ACCOUNT LIABILITIES 45,576 47,359 -------------------- -------------------- Total Liabilities 207,516 211,732 -------------------- -------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S EQUITY: Common stock, $1,000 par value, 10,000 shares authorized, 2,500 issued and outstanding 2,500 2,500 Additional paid-in capital 28,600 28,600 Accumulated other comprehensive income 727 1,082 Retained earnings 9,385 3,892 -------------------- -------------------- Total Stockholder's Equity 41,212 36,074 -------------------- -------------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 248,728 $ 247,806 ==================== ==================== See notes to financial statements. (Concluded)
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
=================================================================================================================== (Dollars in Thousands) 2001 2000 1999 ---------------- ----------------- ----------------- REVENUES: Premium income (net of premium ceded of $140, $109, and $64) $ 15,130 $ 13,565 $ 9,144 Fee income 5,575 6,577 692 Net investment income 11,763 10,333 6,278 Net realized gains (losses) on investments 642 67 (6) ---------------- ----------------- ----------------- 33,110 30,542 16,108 ---------------- ----------------- ----------------- BENEFITS AND EXPENSES: Life and other policy benefits (net of reinsurance recoveries of $177, $964, and $740) 11,132 15,625 4,391 (Decrease) increase in reserves (1,262) (944) 4,003 Interest paid or credited to contractholders 7,829 7,011 4,584 General and administrative expenses 6,624 5,460 1,466 ---------------- ----------------- ----------------- 24,323 27,152 14,444 ---------------- ----------------- ----------------- INCOME BEFORE INCOME TAXES 8,787 3,390 1,664 PROVISION FOR INCOME TAXES: Current 3,383 2,307 65 Deferred (89) (961) 576 ---------------- ----------------- ----------------- 3,294 1,346 641 ---------------- ----------------- ----------------- NET INCOME $ 5,493 $ 2,044 $ 1,023 ================ ================= =================
See notes to financial statements. FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
================================================================================================================================== (Dollars in Thousands) Accumulated Additional Other Paid-in Comprehensive Retained Shares Amount Capital Income (Loss) Earnings Total --------- ---------- --------------- ------------------ --------------- --------------- BALANCES, JANUARY 1, 1999 2,500 $ 2,500 $ 12,600 $ 717 $ 825 $ 16,642 Net income 1,023 1,023 Other comprehensive income (loss) (3,051) (3,051) --------------- Comprehensive income (loss) (2,028) --------------- Capital contribution 16,000 16,000 --------- ---------- --------------- ------------------ --------------- --------------- BALANCES, DECEMBER 31, 1999 2,500 2,500 28,600 (2,334) 1,848 30,614 Net income 2,044 2,044 Other comprehensive income 3,416 3,416 --------------- Comprehensive income 5,460 --------- ---------- --------------- ------------------ --------------- --------------- BALANCES, DECEMBER 31, 2000 2,500 2,500 28,600 1,082 3,892 36,074 Net income 5,493 5,493 Other comprehensive income (loss) (355) (355) --------------- Comprehensive income 5,138 --------- ---------- --------------- ------------------ --------------- --------------- BALANCES, DECEMBER 31, 2001 2,500 $ 2,500 $ 28,600 $ 727 $ 9,385 $ 41,212 ========= ========== =============== ================== =============== ===============
See notes to financial statements. FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
==================================================================================================================== (Dollars in Thousands) 2001 2000 1999 -------------- -------------- -------------- OPERATING ACTIVITIES: Net income $ 5,493 $ 2,044 $ 1,023 Adjustments to reconcile net income to net cash provided by operating activities Amortization of investments (1,144) (1,032) 59 Realized (gains) losses on sale of investments (642) (67) 6 Amortization of deferred acquisition costs 393 213 112 Deferred income taxes (89) (961) 576 Changes in assets and liabilities: Accrued interest and other receivables 1,322 (2,086) (1,046) Policy benefit liabilities 3,484 5,902 13,389 Reinsurance receivable (422) (498) (1,303) Bank overdrafts (5,850) 7,446 1,508 Contract deposits (7,761) 7,761 Other, net (235) 695 (2,765) -------------- -------------- -------------- Net cash provided by (used in) operating activities (5,451) 19,417 11,559 -------------- -------------- -------------- INVESTING ACTIVITIES: Proceeds from sales, maturities, and redemptions of investments: Fixed maturities: Held-to-maturity 667 447 Available-for-sale 59,417 50,107 15,683 Purchases of investments: Fixed maturities: Held-to-maturity (14,144) (23,000) Available-for-sale (73,742) (83,570) (31,066) -------------- -------------- -------------- Net cash used in investing activities $ (14,325) $ (46,940) $ (37,936) -------------- -------------- -------------- See notes to financial statements. (Continued) FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 ==================================================================================================================== (Dollars in Thousands) 2001 2000 1999 -------------- -------------- -------------- FINANCING ACTIVITIES: Contract deposits, net of withdrawals 9,074 37,447 20,494 Due (from) to Parent Corporation 10,100 (6,905) (5,379) Capital contributions 16,000 -------------- -------------- -------------- Net cash provided by financing activities 19,174 30,542 31,115 -------------- -------------- -------------- NET INCREASE (DECREASE) IN CASH (602) 3,019 4,738 CASH, BEGINNING OF YEAR 8,462 5,443 705 -------------- -------------- -------------- CASH, END OF YEAR $ 7,860 $ 8,462 $ 5,443 ============== ============== ============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid (received) during the year for: Income taxes $ 0 $ 2,217 $ (1,073) See notes to financial statements. (Concluded)
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 ================================================================================ (Dollars in Thousands) 1. ORGANIZATION First Great-West Life & Annuity Insurance Company (the Company) is a wholly-owned subsidiary of Great-West Life & Annuity Insurance Company (the Parent Corporation). The Company was incorporated as a stock life insurance company in the State of New York and was capitalized on April 4, 1997, through a $6,000 cash investment from the Parent Corporation for 2,000 shares of common stock. On December 29, 1997, the Company issued an additional 500 shares of common stock to the Parent Corporation for $500. The Company was licensed as an insurance company in the State of New York on May 28, 1997. The Company does business in New York through two business segments, as discussed in Note 12. 2. SIGNIFICANT ACCOUNTING POLICIES 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. Certain reclassifications have been made to the 2000 and 1999 financial statements to conform to the 2001 presentation. These changes in classification had no effect on previously reported stockholder's equity or net income. Investments - Management has classified its fixed maturities as available for sale and carries them at fair value with the net unrealized gains and losses reported as accumulated other comprehensive income (loss) in stockholder's equity. Premiums and discounts are recognized as a component of net investment income using the effective interest method. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net realized gains/(losses) on investments. 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. Cash - Cash includes only amounts in demand deposit accounts. Deferred Policy Acquisition Costs - Policy acquisition costs, which primarily consist of sales commissions related to the production of new business, have been deferred to the extent recoverable. These costs are variable in nature and are dependant 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. Amortization of deferred policy acquisition costs totaled $393, $213, and $112 in 2001, 2000, and 1999, respectively. Separate Accounts - Separate account assets and related liabilities are carried at fair value. The Company's separate accounts invest in shares of various external mutual funds. 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, administration fees, and mortality and expense risk charges. Policy Reserves - Life insurance and annuity policy reserves with life contingencies of $145,593 and $135,191 at December 31, 2001 and 2000, 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 $5,995 and $141 at December 31, 2001 and 2000, respectively, are established at contractholders' 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 (See Note 6). 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. Recognition of Premium Income and Expenses - Life insurance premiums are recognized when due. Accident and health premiums are earned on a monthly pro rata basis. Revenues for annuity and other contracts without significant life contingencies consist of contract charges for the cost of insurance, contract administration, and surrender fees that have been assessed against the contract account balance during the period, and are realized as assessed and earned. Fee income is derived primarily from contracts for claim processing or other administrative services related to uninsured business and from assets under management. Fees from contracts for claim processing or other administrative services are recorded as the services are provided. Fees from assets under management, which consist of contract maintenance fees, administration fees and mortality and expense risk charges, are recognized when due. Benefits and expenses on policies with life contingencies impact income by means of the provision for future policy benefit reserves, resulting in recognition of profits over the life of the contracts. This association is accomplished by means of the provision for future policy benefit reserves. The average credit rating on annuity products, first sold in 2001, was approximately 4.2%. Income Taxes - Income taxes are recorded using the asset and liability approach, which requires, among other provisions, the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events (other than the enactments or changes in the tax laws or rules) are considered. Although realization is not assured, management believes it is more likely than not that the deferred tax asset will be realized. Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - FASB has issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - A replacement of FASB Statement No. 125", (SFAS No. 140) which revises the standards for accounting for securitizations and other transfers of financial assets and collateral, and requires certain disclosures. SFAS No. 140 was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Certain disclosure requirements under SFAS No. 140 were effective December 15, 2000, and these requirements have been incorporated in the Company's financial statements. The adoption of SFAS No. 140 did not have a material effect on the financial position or results of operations of the Company. Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Financial Assets - Effective April 1, 2001, the Company adopted Emerging Issues Task Force Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Financial Assets" (EITF 99-20). This pronouncement requires investors in certain asset-backed securities to record changes in their estimated yield on a prospective basis and to apply specific evaluation methods to these securities for an other-than-temporary decline in value. The adoption of EITF 99-20 did not have a material impact on the Company's financial position or results of operations. Business Combinations - On June 29, 2001 Statement of Financial Accounting Standards (SFAS) No.141, "Business Combinations" (SFAS No. 141) was approved by the FASB. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The Company implemented SFAS No. 141 on July 1, 2001. Adoption of the Statement did not have a material impact on the Company's financial position or results of operations. Goodwill and Other Intangible Assets - On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142) was approved by the FASB. SFAS No. 142 changes the accounting for goodwill and certain other intangibles from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. The Company implemented SFAS No. 142 on January 1, 2002 and, although it is still reviewing the provisions of this Statement, management's preliminary assessment is that the Statement will not have a material impact on the Company's financial position or results of operations. Long Lived Assets - In August 2001, the FASB issued SFAS No.144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No.144). SFAS No.144 supercedes current accounting guidance relating to impairment of long-lived assets and provides a single accounting methodology for long-lived assets to be disposed of, and also supercedes existing guidance with respect to reporting the effects of the disposal of a business. SFAS No.144 was adopted January 1, 2002 without a material impact on the Company's financial position or results of operations. Regulatory Requirements - In accordance with the requirements of the State of New York, the Company must demonstrate adequate capital, as defined. At December 31, 2001, the Company was in compliance with the requirement. The Company is also required to maintain an investment deposit in the amount of $5,000 in cash or investment certificates with the New York Insurance Commissioner for the protection of policyholders in the event the Company is unable to satisfactorily meet its contractual obligations. A United States Treasury obligation, whose cost approximates market value, was designated to meet this requirement at December 31, 2001. 3. ACQUISITIONS On October 6, 1999, the Parent Corporation entered into a purchase and sale agreement (the Agreement) with Allmerica Financial Corporation (Allmerica) to acquire, via assumption reinsurance, Allmerica's group life and health insurance business on March 1, 2000. The policies resident in the State of New York have been assigned to the Company as part of the Agreement. This business primarily consists of administrative services only and stop loss policies. The in-force business was immediately coinsured back to Allmerica and then underwritten and retained by the Company upon each policy renewal date. The purchase price, as defined in the Agreement, was based on a percentage of the amount in-force at March 1, 2000 contingent on the persistency of the block of business through March 2001. The effect of this transaction was not material to the Company's results of operations or financial position. 4. RELATED-PARTY TRANSACTIONS The Company and the Parent Corporation have service agreements whereby the Parent Corporation administers, distributes, and underwrites business for the Company and administers the Company's investment portfolio, and whereby, the Company provides certain services for the Parent Corporation. 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. These transactions are summarized as follows:
Years Ended December 31, -------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Investment management expense (included in net investment income) $ 123 $ 128 $ 96 Administrative and underwriting services (included in general and administrative expenses) 3,070 2,222 166
The Company and the Parent Corporation have an agreement whereby the Parent Corporation has committed to provide certain financial support related to maintaining adequate regulatory surplus and liquidity. 5. ALLOWANCES ON POLICYHOLDER RECEIVABLES 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 and premiums in course of collection. Management's judgement is based on past loss experience and current and projected economic conditions. Allowances for amounts receivable related to uninsured accident and health plan claims:
2001 2000 1999 --------------- --------------- --------------- Balance, beginning of year $ $ $ Provisions charged to operations 1,935 Amounts written off - net (100) --------------- --------------- --------------- Balance, end of year $ 1,835 $ 0 $ 0 =============== =============== =============== Allowances for premiums in course of collection: 2001 2000 1999 --------------- --------------- --------------- Balance, beginning of year $ 776 $ 580 $ Provisions charged to operations 167 196 580 Amounts written off - net (68) --------------- --------------- --------------- Balance, end of year $ 875 $ 776 $ 580 =============== =============== ===============
6. REINSURANCE 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 100% of the first $50 of coverage per individual life and has a maximum retention of $250 per individual life. Life insurance policies are first reinsured to the Parent Corporation up to a maximum of $1,250 of coverage per individual life. Any excess amount is reinsured to a third party. 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, 2001 and 2000, the reinsurance receivable had a carrying value of $2,346 and $1,924, respectively. Total reinsurance premiums ceded to the Parent Corporation in 2001, 2000, and 1999 were $107, $77, and $43, respectively. On December 1, 1999, the Company entered into an assumption reinsurance agreement with Anthem Health & Life Insurance Company of New York (AH&L NY), to acquire a block of life and health insurance business. The Company also agreed to the assignment of a coinsurance agreement between the Parent Corporation and AH&L NY on certain policies that would not be transferred to the Company via assumption reinsurance. The business primarily consists of administration services only, and stop loss policies. The Company assumed $7,904 of policy reserves and miscellaneous assets and liabilities in exchange for equal consideration from AH&L NY and the Parent Corporation. The following schedule details life insurance in force and life and accident/health premiums:
Ceded Assumed Percentage Primarily to Primarily of Amount Gross the Other From Other Net Assumed Amount Companies Companies Amount To Net --------------- ---------------- ------------- ---------------- ------------- December 31, 2001: Life insurance in force: Individual $ 493,567 $ 136,613 $ $ 356,954 0.0% Group 393,861 393,861 0.0% --------------- ---------------- ------------- ---------------- Total $ 887,428 $ 136,613 $ $ 750,815 =============== ================ ============= ================ Premium Income: Life insurance $ 3,789 $ 107 $ $ 3,682 0.0% Accident/health 11,724 268 11,456 0.0% --------------- ---------------- ------------- ---------------- Total $ 15,513 $ 375 $ $ 15,138 =============== ================ ============= ================ December 31, 2000: Life insurance in force: Individual $ 468,463 $ 125,222 $ $ 343,241 0.0% Group 623,454 623,454 0.0% --------------- ---------------- ------------- ---------------- Total $ 1,091,917 $ 125,222 $ $ 966,695 =============== ================ ============= ================ Premium Income: Life insurance $ 3,193 $ 76 $ $ 3,117 0.0% Accident/health 8,591 76 1,933 10,448 18.5% --------------- ---------------- ------------- ---------------- Total $ 11,784 $ 152 $ 1,933 $ 13,565 =============== ================ ============= ================ December 31, 1999: Life insurance in force: Individual $ 329,346 $ 125,688 $ $ 203,658 0.0% Group 1,075,000 1,075,000 0.0% --------------- ---------------- ------------- ---------------- Total $ 1,404,346 $ 125,688 $ $ 1,278,658 =============== ================ ============= ================ Premium Income: Life insurance $ 685 $ 57 $ 93 $ 721 12.9% Accident/health 9,471 1,064 23 8,430 0.3% --------------- ---------------- ------------- ---------------- Total $ 10,156 $ 1,121 $ 116 $ 9,151 =============== ================ ============= ================
7. SUMMARY OF INVESTMENTS Fixed maturities owned at December 31, 2001 are summarized as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Cost Gains Losses Value Value ----------- ------------ ------------ ------------ ------------ Available-for-Sale: U.S. Government Agencies $ 46,579 $ 1,584 $ 187 $ 47,976 $ 47,976 Collateralized mortgage obligations 9,954 259 10,213 10,213 Public utilities 7,000 524 7,524 7,524 Corporate bonds 46,480 549 1,213 45,816 45,816 Asset backed securities 66,674 1,030 642 67,062 67,062 ----------- ------------ ------------ ------------ ------------ $ 176,687 $ 3,946 $ 2,042 $ 178,591 $ 178,591 =========== ============ ============ ============ ============ Fixed maturities owned at December 31, 2000 are summarized as follows: Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Cost Gains Losses Value Value ----------- ------------ ------------ ------------ ------------ Available-for-Sale: U.S. Government Agencies $ 52,169 $ 1,454 $ 25 $ 53,598 $ 53,598 Collateralized mortgage obligations 9,953 237 9,716 9,716 Public utilities 7,000 218 7,218 7,218 Corporate bonds 29,029 160 991 28,198 28,198 Asset backed securities 50,371 1,743 213 51,901 51,901 ----------- ------------ ------------ ------------ ------------ $ 148,522 $ 3,575 $ 1,466 $ 150,631 $ 150,631 =========== ============ ============ ============ ============
The collateralized mortgage obligations consist primarily of sequential and planned amortization classes with final stated maturities of two to thirty years and average lives of less than one to fifteen 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. See Note 8 for additional information on policies regarding estimated fair value of fixed maturities. The amortized cost and estimated fair value of fixed maturity investments at December 31, 2001, by projected maturity, are shown below. Actual maturities will likely differ from these projections because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Available-for-Sale -------------------------- Amortized Estimated Cost Fair Value ------------ ------------ Due in one year or less $ 2,882 $ 3,075 Due after one year through five years 40,924 42,592 Due after five years through ten years 26,265 25,469 Due after ten years 1,252 1,271 Mortgage-backed securities 38,690 39,122 Asset-backed securities 66,674 67,062 ------------ ------------ $ 176,687 $ 178,591 ============ ============ Proceeds from sales of securities available-for-sale were $54,832, $44,237, and $15,158 during 2001, 2000, and 1999, respectively. The realized gains on such sales totaled $950, $296, and $15 for 2001, 2000, and 1999, respectively. The realized losses totaled $308, $229, and $21 for 2001, 2000, and 1999, respectively. During 2000, the Company transferred all securities classified as held-to-maturity into the available-for-sale category. The Company recorded a $645 unrealized gain associated with this transfer in other comprehensive income, net of tax. 8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
December 31, ------------------------------------------------------------ 2001 2000 ---------------------------- ---------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------------ ------------ ------------ ------------ ASSETS: Fixed maturities and short-term investments $ 182,445 $ 182,445 $ 166,538 $ 166,538 LIABILITIES: Annuity contract reserves without life contingencies 5,995 5,995 141 141 Policyholders' funds 2,801 2,801 2,762 2,762
The estimated fair value of financial instruments have been determined using available information and appropriate valuation methodologies. However, considerable judgement 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. The estimated fair value of fixed maturities that are publicly traded are obtained from an independent pricing service. To determine fair value for fixed maturities not actively traded, the Company utilized discounted cash flows calculated at current market rates on investments of similar quality and term. The fair value of annuity contract reserves without life contingencies are estimated by discounting the cash flows to maturity of the contracts, utilizing current credited rates for similar products. The estimated fair value of policyholders' funds is the same as the carrying amount as the Company can change the crediting rates with 30 days notice. 9. FEDERAL INCOME TAXES The following is a reconciliation between the federal income tax rate and the Company's effective rate:
2001 2000 1999 ------------- ------------- ------------- Federal tax rate 35.0 % 35.0 % 35.0 % Change in tax rate resulting from: Prior year tax adjustment (3.9) (0.9) (1.1) State taxes 6.0 5.6 4.6 Other 0.4 ------------- ------------- ------------- Total 37.5 % 39.7 % 38.5 % ============= ============= =============
Temporary differences, which give rise to the deferred tax assets and liabilities as of December 31, 2001 and 2000, are as follows:
2001 2000 ------------------------ ------------------------ Deferred Deferred Deferred Deferred Tax Tax Tax Tax Asset Liability Asset Liability ---------- ---------- ---------- ---------- Policy reserves $ 261 $ 204 Deferred policy acquisition costs $ 279 $ 601 Deferred acquisition cost proxy tax 2,180 2,226 Investment assets 837 753 State taxes 92 31 Other 40 ---------- ---------- ---------- ---------- Total deferred taxes $ 2,533 $ 1,156 $ 2,461 $ 1,354 ========== ========== ========== ==========
Amounts related to investment assets above include $666 and $738 related to the unrealized gains on the Company's fixed maturities available-for-sale at December 31, 2001, and 2000, respectively. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The Company and the Parent Corporation have entered into an income tax allocation agreement whereby the Parent Corporation could file a consolidated federal income tax return. Under the agreement the Company is responsible for and will receive the benefits of any income tax liability or benefit computed on a separate basis. In 2001, the Company will file on a consolidated basis with its Parent Corporation. 10. OTHER COMPREHENSIVE INCOME Other comprehensive income (loss) for the year ended December 31, 2001 is summarized as follows:
Tax Before-Tax (Expense) Net-of-Tax Amount or Benefit Amount ----------------- ----------------- ---------------- Unrealized gains on available-for-sale securities: Unrealized holding gains arising during the period 16 (5) 11 Less: reclassification adjustment for (gains) losses realized in net income $ (220) $ 69 $ (151) ----------------- ----------------- ---------------- Net unrealized gains (losses) (204) 64 (140) Reserve and DAC adjustment (331) 116 (215) ----------------- ----------------- ---------------- Other comprehensive income (loss) $ (535) $ 180 $ (355) ================= ================= ================ Other comprehensive income for the year ended December 31, 2000 is summarized as follows: Tax Before-Tax (Expense) Net-of-Tax Amount or Benefit Amount ----------------- ----------------- ---------------- Unrealized gains on available-for-sale securities: Unrealized holding gains Arising during the period $ 5,700 $ (1,995) $ 3,705 ----------------- ----------------- ---------------- Net unrealized gains 5,700 (1,995) 3,705 Reserve and DAC adjustment (444) 155 (289) ----------------- ----------------- ---------------- Other comprehensive income $ 5,256 $ (1,840) $ 3,416 ================= ================= ================ Other comprehensive income (loss) for the year ended December 31, 1999 is summarized as follows: Tax Before-Tax (Expense) Net-of-Tax Amount or Benefit Amount ----------------- ----------------- ---------------- Unrealized gains on available-for-sale securities: Unrealized holding gains (losses) Arising during the period $ (5,425) $ 1,900 $ (3,525) ----------------- ----------------- ---------------- Net unrealized gains (losses) (5,425) 1,900 (3,525) Reserve and DAC adjustment 729 (255) 474 ----------------- ----------------- ---------------- Other comprehensive income (loss) $ (4,696) $ 1,645 $ (3,051) ================= ================= ================
11. DIVIDEND RESTRICTIONS AND CODIFICATION The Company's net income and capital and surplus, as determined in accordance with statutory accounting principles and practices for December 31 are as follows:
2001 2000 1999 -------------- -------------- -------------- (Unaudited) Net income $ 7,138 $ 27 $ 1,202 Capital and surplus 33,406 26,999 29,289
In March 1998, the National Association of Insurance Commissioners adopted the Codification of Statutory Accounting Principles (Codification). The Codification, which is intended to standardize accounting and reporting to state insurance departments, was effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. The New York Division of Insurance required adoption of Codification with certain modifications for the preparation of statutory financial statements effective January 1, 2001. The adoption of Codification as modified by the New York Division of Insurance increased statutory net worth as of January 1, 2001, by approximately $2,795 (Unaudited). (The modifications adopted by the New York Division of Insurance had the effect of decreasing the effect on statutory net worth by approximately $2,901 (Unaudited).) As an insurance company domiciled in the State of New York, the Company is required to maintain a minimum of $6,000 of capital and surplus. In addition, the maximum amount of dividends, which can be paid to stockholders, is subject to restrictions relating to statutory surplus and statutory adjusted net investment income. The Company should be able to pay dividends of $3,341 in 2002. The Company paid no dividends in 2001 and 2000. Dividends are paid as determined by the Board of Directors. 12. SEGMENT INFORMATION The Company has two reportable segments: Employee Benefits and Financial Services. The Employee Benefits segment markets group life and health and 401(k) products to small and mid-sized corporate employers. The Financial Services segment markets and administers savings products to public and not-for-profit employers and individuals and offers life insurance products to individuals and businesses. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately as each segment has unique distribution channels. The accounting policies of the segments are the same as those described in Note 2. The Company evaluates performance based on profit or loss from operations after income taxes. The Company's operations are not materially dependent on one or a few customers, brokers or agents. Summarized segment financial information for the year ended and as of December 31, 2001 was as follows:
Operations: Employee Financial Benefits Services Total ----------------- ----------------- ---------------- Revenue: Premium income $ 15,055 $ 75 $ 15,130 Fee income 5,202 373 5,575 Net investment income 1,479 10,284 11,763 Realized investment gains (losses) (37) 679 642 ----------------- ----------------- ---------------- Total revenue 21,699 11,411 33,110 Benefits and Expenses: Benefits 9,473 8,226 17,699 Operating expenses 5,085 1,539 6,624 ----------------- ----------------- ---------------- Total benefits and expenses 14,558 9,765 24,323 ----------------- ----------------- ---------------- Net operating income before Income taxes 7,141 1,646 8,787 Income taxes 2,662 632 3,294 ----------------- ----------------- ---------------- Net income $ 4,479 $ 1,014 $ 5,493 ================= ================= ================ Assets: Investment assets $ 26,223 $ 156,222 $ 182,445 Other assets 18,540 2,167 20,707 Separate account assets 3,027 42,549 45,576 ----------------- ----------------- ---------------- Total assets $ 47,790 $ 200,938 $ 248,728 ================= ================= ================ Summarized segment financial information for the year ended and as of December 31, 2000 was as follows: Operations: Employee Financial Benefits Services Total ----------------- ----------------- ----------------- Revenue: Premium income $ 13,467 $ 98 $ 13,565 Fee income 6,215 362 6,577 Net investment income 1,111 9,222 10,333 Realized investment gains 67 67 ----------------- ----------------- ----------------- Total revenue 20,793 9,749 30,542 Benefits and Expenses: Benefits 14,431 7,261 21,692 Operating expenses 4,087 1,373 5,460 ----------------- ----------------- ----------------- Total benefits and expenses 18,518 8,634 27,152 ----------------- ----------------- ----------------- Net operating income before Income taxes 2,275 1,115 3,390 Income taxes 908 438 1,346 ----------------- ----------------- ----------------- Net income $ 1,367 $ 677 $ 2,044 ================= ================= ================= Assets: Investment assets $ 16,201 $ 150,337 $ 166,538 Other assets 20,625 13,284 33,909 Separate account assets 47,359 47,359 ----------------- ----------------- ----------------- Total assets $ 36,826 $ 210,980 $ 247,806 ================= ================= ================= Summarized segment financial information for the year ended and as of December 31, 1999 was as follows: Operations: Employee Financial Benefits Services Total ----------------- ----------------- ---------------- Revenue: Premium income $ 9,195 $ (51) $ 9,144 Fee income 430 262 692 Net investment income 6,278 6,278 Realized investment gains (losses) (6) (6) ----------------- ----------------- ---------------- Total revenue 9,625 6,483 16,108 Benefits and Expenses: Benefits 8,378 4,600 12,978 Operating expenses 505 961 1,466 ----------------- ----------------- ---------------- Total benefits and expenses 8,883 5,561 14,444 ----------------- ----------------- ---------------- Net operating income before Income taxes 742 922 1,664 Income taxes 295 346 641 ----------------- ----------------- ---------------- Net income $ 447 $ 576 $ 1,023 ================= ================= ================
13. COMMITMENTS AND CONTINGENCIES 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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has been no change in the Company's independent accountants or resulting disagreements on accounting and financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT A. IDENTIFICATION OF DIRECTORS
Served as Director Principal Occupation(s) Director Age from: for last Five Years ------------------------ ------ ----------- ------------------------------------- Marcia D. Alazraki 60 1996 Partner, Kalkines, Arky, Zall & Bernstein LLP (a law firm) since January 1998; previously Counsel, Simpson, Thacher & Bartlett (a law firm) James Balog (1) 73 1997 Company Director James W. Burns, O.C. 72 1997 Chairman of the Boards of Great-West Lifeco, Great-West Life, London Insurance Group Inc. and London Life Insurance Company; Deputy Chairman Power Corporation Orest T. Dackow (1) 65 2000 Company Director since April 2000; previously President and Chief Executive Officer, Great-West Lifeco Paul Desmarais, Jr. 47 1997 Chairman and Co-Chief Executive Officer, Power Corporation; Chairman, Power Financial Robert Gratton 58 1997 Chairman of the Board of GWL&A; President and Chief Executive Officer, Power Financial Stuart Z. Katz 59 1997 Partner, Fried, Frank, Harris, Shriver & Jacobson (a law firm) William T. McCallum 59 1997 Chairman, President and Chief Executive Officer of the Company; President and Chief Executive Officer, GWL&A; Co-President and Chief Executive Officer, Great-West Lifeco Brian E. Walsh (1) 48 1997 Managing Partner, QVan Capital, LLC (a merchant banking company) since September1997, previously Partner, Trinity L.P. (an investment company)
(1)Member of the Audit Committee Unless otherwise indicated, all of the directors have been engaged for not less than five years in their present principal occupations or in another executive capacity with the companies or firms identified. Directors are elected annually to serve until the following annual meeting of shareholders. The following is a list of directorships held by the directors of the Company, on companies whose securities are traded publicly in the United States or that are investment companies registered under the Investment Company Act of 1940. J. Balog Transatlantic Holdings, Inc. Phoenix/Zweig Advisers LLC Euclid Advisers LLC W.T. McCallum Maxim Series Fund, Inc. Orchard Series Fund Variable Annuity Account A B. IDENTIFICATION OF EXECUTIVE OFFICERS
Served as Executive Officer Principal Occupation(s) Executive Officer Age from: for last Five Years ------------------------ ------ ----------- ------------------------------------- William T. McCallum 59 1997 Chairman, President and Chief Chairman, President Executive Officer of the Company; and Chief Executive President and Chief Executive Officer Officer, GWL&A; Co-President and Chief Executive Officer, Great-West Lifeco Mitchell T.G. Graye 46 1997 Executive Vice President and Chief Executive Vice Financial Officer of the Company and President and Chief GWL&A Financial Officer Douglas L. Wooden 45 1997 Executive Vice President, Financial Executive Vice Services of the Company and GWL&A President, Financial Services John A. Brown 54 1992 Senior Vice President, BenefitsCorp Senior Vice President Healthcare Markets of the Company BenefitsCorp and GWL&A Healthcare Markets Mark S. Corbett 42 2001 Senior Vice President, Investments of Senior Vice the Company President, Investments Wayne T. Hoffmann 46 2001 Senior Vice President, Investments of Senior Vice the Company and GWL&A President, Investments D. Craig Lennox 54 1997 Senior Vice President, General Senior Vice Counsel and Secretary of the President, General Counsel and Company and GWL&A Secretary Steve H. Miller 49 1997 Senior Vice President, Employee Senior Vice Benefits Sales of the Company and President, Employee Benefits GWL&A Sales Charles P. Nelson 41 1998 President, BenefitsCorp of the Company President, and GWL&A BenefitsCorp Martin Rosenbaum 49 1997 Senior Vice President, Employee Senior Vice Benefits Finance of the Company President, and Employee Benefits GWL&A Finance Gregory E. Seller 48 1997 Senior Vice President, Senior Vice BenefitsCorp Government Markets President, BenefitsCorp of the Company and GWL&A Government Markets Robert K. Shaw 46 1997 Senior Vice President, Individual Senior Vice President Markets of the Company and GWL&A Individual Markets George D. Webb 58 1999 President, Advised Assets Group, President, Inc. of the Company and GWL&A; prior to Advised Assets July 1999, Principal, William M. Mercer Group, Inc. Investment Consulting Inc. (an Investment consulting company) Warren J. Winer 55 2001 Senior Vice President, Employee Senior Vice Benefits of the Company and GWL&A; President, Employee Benefits prior to January 2001, Executive Vice President, General American Life Insurance Company Jay W. Wright 50 2001 Senior Vice President, Senior Vice Employee Benefits of the Company President, Employee Benefits and GWL&A; prior to January 2001, Senior Vice President, New England Financial Unless otherwise indicated, all of the executive officers have been engaged for not less than five years in their present principal occupations or in another executive capacity with the companies or firms identified. The appointments of executive officers are confirmed annually.
ITEM 11. EXECUTIVE COMPENSATION A. COMPENSATION OF EXECUTIVE OFFICERS The executive officers of the Company are not compensated for their services to the Company. They are compensated as executive officers of GWL&A. B. COMPENSATION OF DIRECTORS For each director of the Company who is not also a director of GWL&A, Great-West Life or Great-West Lifeco, the Company pays an annual fee of $10,000. For each director of the Company who is also a director of GWL&A, Great-West Life or Great-West Lifeco, the Company pays an annual fee of $5,000. The Company pays each director a meeting fee of $1,000 for each meeting of the Board of Directors, or a committee thereof, attended. At their option, in lieu of cash payments, directors may receive deferred share units under The Great-West Life Assurance Company Deferred Share Unit Plan. In addition, all directors are reimbursed for incidental expenses. The above amounts are paid in the currency of the country of residence of the director. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS Set forth below is certain information, as of March 1, 2002, concerning beneficial ownership of the voting securities of the Company by entities and persons who beneficially own more than 5% of the voting securities of the Company. The determinations of "beneficial ownership" of voting securities are based upon Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the Exchange Act). This rule provides that securities will be deemed to be "beneficially owned" where a person has, either solely or in conjunction with others, (1) the power to vote or to direct the voting of securities and/or the power to dispose or to direct the disposition of, the securities or (2) the right to acquire any such power within 60 days after the date such "beneficial ownership" is determined. (1) 100% of the Company's 2,500 outstanding common shares are owned by Great-West Life & Annuity Insurance Company, 8515 East Orchard Road, Greenwood Village, Colorado 80111. (2) 100% of the outstanding common shares of Great-West Life & Annuity Insurance Company's are owned by GWL&A Financial Inc., 8515 East Orchard Road, Greenwood Village, Colorado 80111. (3) 100% of the outstanding common shares of GWL&A Financial Inc. are owned by GWL&A Financial (Nova Scotia) Co., Suite 800, 1959 Upper Water Street, Halifax, Nova Scotia, Canada B3J 2X2. (4) 100% of the outstanding common shares of GWL&A Financial (Nova Scotia) co. are owned by GWL&A Financial (Canada) Inc., 100 Osborne Street North, Winnipeg, Manitoba, Canada R3C 3A5. (5) 100% of the outstanding common shares of GWL&A Financial (Canada) Inc. are owned by Great-West Lifeco Inc., 100 Osborne Street North, Winnipeg, Manitoba, Canada R3C 3A5. (6) 82.2% of the outstanding common shares of Great-West Lifeco Inc. are controlled by Power Financial Corporation, 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3, representing approximately 65% of the voting rights attached to all outstanding voting shares of Great-West Lifeco Inc. (7) 67.5% of the outstanding common shares of Power Financial Corporation are owned by 171263 Canada Inc., 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3. (8) 100% of the outstanding common shares of 171263 Canada Inc. are owned by 2795957 Canada Inc., 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3. (9) 100% of the outstanding common shares of 2795957 Canada Inc. are owned by Power Corporation of Canada, 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3. (10) Mr. Paul Desmarais, 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3, through a group of private holding companies, that he controls, has voting control of Power Corporation of Canada. As a result of the chain of ownership described in paragraphs (1) through (10) above, each of the entities and persons listed in paragraphs (1) through (10) would be considered under Rule 13d-3 of the Exchange Act to be a "beneficial owner" of 100% of the outstanding voting securities of the Company. B. SECURITY OWNERSHIP OF MANAGEMENT The following table sets out the number of equity securities, and exercisable options (including options that will become exercisable within 60 days) for equity securities, of the Company or any of its parents or subsidiaries, beneficially owned, as of December 31, 2001, by (i) the directors of the Company; and (ii) the directors and executive officers of the Company as a group.
--------------------- ---------------------- ---------------------- ------------------- Great-West Lifeco Power Financial Power Corporation Inc. Corporation of Canada --------------------- ---------------------- ---------------------- ------------------- Directors (1) (2) (3) --------------------- ---------------------- ---------------------- ------------------- M.D. Alazraki --------------------- ---------------------- ---------------------- ------------------- J. Balog --------------------- ---------------------- ---------------------- ------------------- J.W. Burns 153,659 8,000 400,640 200,000 options --------------------- ---------------------- ---------------------- ------------------- O.T. Dackow 79,973 200,000 options --------------------- ---------------------- ---------------------- ------------------- P. Desmarais, Jr. 43,624 178,221 2,379,000 options --------------------- ---------------------- ---------------------- ------------------- R. Gratton 331,846 310,000 10,460 6,780,000 options --------------------- ---------------------- ---------------------- ------------------- S.Z. Katz --------------------- ---------------------- ---------------------- ------------------- W.T. McCallum 84,474 19,500 840,000 options --------------------- ---------------------- ---------------------- ------------------- B.E. Walsh 2,000 --------------------- ---------------------- ---------------------- ------------------- --------------------- ---------------------- ---------------------- ------------------- Great-West Lifeco Power Financial Power Corporation Inc. Corporation of Canada --------------------- ---------------------- ---------------------- ------------------- Directors and (1) (2) (3) Executive Officers as a Group --------------------- ---------------------- ---------------------- ------------------- 844,216 500,500 592,121 1,607,680 options 6,850,000 options 2,579,000 options --------------------- ---------------------- ---------------------- -------------------
(1)All holdings are common shares, or where indicated, exercisable options for common shares, of Great-West Lifeco Inc. (2)All holdings are common shares, or where indicated, exercisable options for common shares, of Power Financial Corporation. (3)All holdings are subordinate voting shares, or where indicated, exercisable options for subordinate voting shares, of Power Corporation of Canada. The number of common shares and exercisable options for common shares of Power Financial Corporation held by R. Gratton represents 2.0% of the total number of common shares and exercisable options for common shares of Power Financial Corporation outstanding. The number of common shares and exercisable options for common shares of Power Financial Corporation held by the directors and executive officers as a group represents 2.1% of the total number of common shares and exercisable options for common shares of Power Financial Corporation outstanding. The number of subordinate voting shares and exercisable options for subordinate voting shares of Power Corporation of Canada held by P. Desmarais, Jr. represents 1.3% of the total number of subordinate voting shares and exercisable options for subordinate voting shares of Power Corporation of Canada outstanding. The number of subordinate voting shares and exercisable options for subordinate voting shares of Power Corporation of Canada held by the directors and executive officers represents 1.6% of the total number of subordinate voting shares and exercisable options for subordinate voting shares of Power Corporation of Canada outstanding. None of the remaining holdings set out above exceeds 1% of the total number of shares and exercisable options for shares of the class outstanding. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS M.D. Alazraki, a director of the Company, is a partner with Kalkines, Arky, Zall & Bernstein, a law firm that provided legal services to the Company. In 2001, the amount of such services was $36,387.28. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The documents identified below are filed as a part of this report. A. INDEX TO FINANCIAL STATEMENTS
Page ------------ Independent Auditors' Report on Financial Statements for the Years Ended December 31, 2001, and 2000............................... Balance Sheets as of December 31, 2001 and 2000......................... Statements of Income for the Years Ended December 31, 2001, and 2000.......................................................... Statements of Stockholder's Equity for the Years Ended December 31, 2001, and 2000.......................................................... Statements of Cash Flows for the Years Ended December 31, 2001, and 2000.......................................................... Notes to Financial Statements for the Years Ended December 31, 2001, and 2000.......................................................... All schedules and separate financial statements of the Registrant are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto. B. INDEX TO EXHIBITS Exhibit Number Title Page ------------------- -------------------------------------------- ---------------- 3(i) Restated Charter of First Great-West Life & Annuity Insurance Company Filed as Exhibit 3(i) to Registrant's Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. 3(ii) Bylaws of First Great-West Life & Annuity Insurance Company Filed as Exhibit 3(ii) to Registrant's Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. Material Contracts 10.1 Description Agreement between First Great- West Life & Annuity Insurance Company Charles Schwab & Co., Inc. Filed as Exhibit 10.1 to Registrant's Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. 10.2 Administration Services Agreement between First Great-West Life & Annuity Insurance Company and Great-West Life & Annuity Insurance Company Filed as Exhibit 10.2 Registrant's Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. 10.3 Financial Support Agreement between First Great-West Life & Annuity Insurance Company and Great-West Life & Annuity Insurance Company. Filed as Exhibit 10.3 to Registrant's Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. Filed as Exhibit 10.3 to Registrant/s Form 10-K for the year ended December 31, 2000 and incorporated herein by reference. 10.4 Administrative Services Agreement between First Great-West Life & Annuity Insurance Company and Great-West Life & Annuity Insurance Company, respecting employee benefits business. 10.5 Deferred Share Unit Plan filed herewith. 24 Directors' Powers of Attorney Filed as Exhibit 24 to Registrant's Form 10-K for the years ended December 31, 1997 and 2000 and incorporated herein by reference.
C. REPORTS ON FORM 8-K No reports on Form 8-K were filed during the fourth quarter of 2001. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY By: /s/ William T. McCallum ---------------------------------------------------------------- William T. McCallum, President and Chief Executive Officer Date: March 28, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature and Title Date ---------------------------------------------------------------- ----------------- /s/ William T. McCallum March 28, 2002 ---------------------------------------------------------------- William T. McCallum Chairman, President, and Chief Executive Officer and a Director /s/ Mitchell T.G. Graye March 28, 2002 ---------------------------------------------------------------- Mitchell T.G. Graye Executive Vice President and Chief Financial Officer /s/ Glen R. Derback March 28, 2002 ---------------------------------------------------------------- Glen R. Derback Vice President and Treasurer /s/ Marcia D. Alazraki * March 28, 2002 ---------------------------------------------------------------- Marcia D. Alazraki, Director /s/ James Balog * March 28, 2002 ---------------------------------------------------------------- James Balog, Director /s/ James W. Burns * March 28, 2002 ---------------------------------------------------------------- James W. Burns, Director /s/ Orest T. Dackow * March 28, 2002 ---------------------------------------------------------------- Orest T. Dackow, Director /s/ Paul Desmarais, Jr. * March 28, 2002 ---------------------------------------------------------------- Paul Desmarais, Jr., Director /s/ Robert Gratton * March 28, 2002 ---------------------------------------------------------------- Robert Gratton, Director /s/ Stuart Z. Katz * March 28, 2002 ---------------------------------------------------------------- Stuart Z. Katz, Director /s/ Brian E. Walsh * March 28, 2002 ---------------------------------------------------------------- Brian E. Walsh, Director *By: /s/ D. Craig Lennox March 28, 2002 ----------------------------------------------------------- D. Craig Lennox Attorney-in-fact pursuant to filed Power of Attorney
EXHIBIT 10.5 DEFERRED SHARE UNIT PLAN FOR DESIGNATED U.S. RESIDENT DIRECTORS OF THE GREAT-WEST LIFE ASSURANCE COMPANY, LONDON LIFE INSURANCE COMPANY, LONDON INSURANCE GROUP INC., GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY AND FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
TABLE OF CONTENTS Page 1. PREAMBLE AND DEFINITIONS.....................................................1 2. CONSTRUCTION AND INTERPRETATION..............................................2 3. ELIGIBILITY..................................................................3 4. DEFERRED SHARE UNIT GRANTS AND ACCOUNTS......................................3 5. REDEMPTION ON RETIREMENT OR DEATH............................................7 6. CURRENCY.....................................................................7 7. SHAREHOLDER RIGHTS...........................................................8 8. ADMINISTRATION...............................................................8 9. ASSIGNMENT...................................................................8
PREAMBLE AND DEFINITIONS 1.1 Title The Plan herein described shall be called the "Deferred Share Unit Plan for Designated U.S. Resident Directors of The Great-West Life Assurance Company, London Life Insurance Company, London Insurance Group Inc., Great-West Life & Annuity Insurance Company" and First Great-West Life & Annuity Insurance Company and is referred to herein as "the Plan". 1.2 Purpose of the Plan The purpose of the Plan is to promote a greater alignment of interests between Members and the shareholders of the Corporations. 1.3 Definitions 1.3.1 "Annual Board Retainer" means the Canadian dollar equivalent of the aggregate basic annual remuneration paid by the Corporations to a Director in a financial year for service on the Boards together with Board committee fees and additional fees and retainers to committee chairs, but excluding Attendance Fees. 1.3.2 "Affiliate" means any related or associated corporation, or any corporation that is a member of a group of corporations that do not deal at arm's length, notwithstanding that they may not be related or associated for purposes of the Income Tax Act (Canada). 1.3.3 "Attendance Fees" means the Canadian dollar equivalent of the aggregate fees paid by the Corporations to a Director in a financial year for attendance at meetings of the Boards and their committees. 1.3.4 "Board" means the Board of Directors of any of the Corporations. 1.3.5 "Corporations" means The Great-West Life Assurance Company, London Life Insurance Company, London Insurance Group Inc., Great-West Life & Annuity Insurance Company and First Great-West Life & Annuity Insurance Company and any successor corporations whether by amalgamation, merger or otherwise. 1.3.6 "Deferred Share Unit" means a share unit notionally credited to a Member's Deferred Share Unit Account through a bookkeeping entry, the value of which at the relevant time shall be equal to the weighted average trading price per Share on the Toronto Stock Exchange for the last five Trading Days immediately before the date in issue. 1.3.7 "Deferred Share Unit Account" has the meaning ascribed thereto in Article 4.9. 1.3.8 "Director" means a director of any of the Corporations designated by the President and Chief Executive Officer of any of the Corporations as eligible to participate in the Plan, and who is resident in the United States. 1.3.9 "Member" means a Director who elects to participate in the Plan in accordance with Article 4. 1.3.10 "Share" means a common share of Great-West Lifeco Inc. and such other share as is added thereto or substituted therefor as a result of amendments to the articles of Great-West Lifeco Inc., a reorganization or otherwise. 1.3.11 "Trading Day" means any date on which the Toronto Stock Exchange is open for the trading of Shares. 2. CONSTRUCTION AND INTERPRETATION 2.1 In the Plan, references to the masculine include the feminine and reference to the singular shall include the plural and vice versa, as the context shall require. 2.2 Unless otherwise stated herein, the Plan shall be governed by and interpreted in accordance with the laws of Colorado and applicable U.S. federal law. 2.3 If any provision of the Plan or part thereof is determined to be void or unenforceable in whole or in part, such determination shall not affect the validity or enforceability of any other provision or part thereof. 2.4 Headings wherever used herein are for reference purposes only and do not limit or extend the meaning of the provisions herein contained. 2.5 The Corporations and the Members confirm their desire that this document along with all other documents including all notices relating hereto be written in the English language. La Compagnie et les membres confirment leur volonte que ce document de meme que tous les documents, y compris tout avis, s'y rattachant soient rediges en anglais. 3. ELIGIBILITY 3.1 The Corporations are establishing the Plan for Directors, beginning with the Corporations' first fiscal quarter of 2001. 3.2 Participation in the Plan by each Director is voluntary. 3.3 Nothing herein contained shall be deemed to give any person the right to be retained as a Director or an employee of any of the Corporations. 4. DEFERRED SHARE UNIT GRANTS AND ACCOUNTS 4.1 Each Director may, subject to the conditions stated herein, elect in accordance with Section 4.2 to participate in the Plan. If a Director so elects to participate he or she will be entitled to receive: (A) his or her Annual Board Retainer payable for the subsequent calendar years as follows: (a) entirely in cash; (b) as to 1/2 in Deferred Share Units and the balance in cash; or (c) entirely in Deferred Share Units; and (B) his or her Attendance Fees payable for the subsequent calendar years as follows: (d) entirely in cash; (e) as to 1/2 in Deferred Share Units and the balance in cash; or (f) entirely in Deferred Share Units. 4.2 Each Director who elects to participate in the Plan must file a notice of election in the form of Schedule A hereto (the "Election Notice") with the Secretary of Great-West Life & Annuity Insurance Company before the commencement of a calendar year. The election of a Director (who has not filed a notice to (i) change his or her elected percentage in the form of Schedule B hereto, or (ii) terminate the receipt of additional Deferred Share Units in the form of Schedule C hereto) to participate in the Plan shall be deemed to apply to all calendar years subsequent to the filing of the Election Notice and such Director will not be required to file another Election Notice. 4.3 The election made in accordance with section 4.2 shall relate to the Annual Board Retainer and the Attendance Fees paid with respect to any and all of the Corporations' calendar years following the filing of the Election Notice. 4.4 Each Member may, once per calendar year, change his or her elected percentage of the Annual Board Retainer and the Attendance Fees to be paid in Deferred Share Units by filing with the Secretary of Great-West Life & Annuity Insurance Company a notice in the form of Schedule B hereto. Such Member's change shall be effective with respect to the Annual Board Retainer and the Attendance Fees payable for calendar years following that election. 4.5 Each Member may, once per calendar year, terminate the Member's participation in the Plan by filing with the Secretary of Great-West Life & Annuity Insurance Company a notice electing to terminate the receipt of additional Deferred Share Units in the form of Schedule C hereto. Such Member's election shall be effective with respect to the Annual Board Retainer and the Attendance Fees payable for the calendar years following that election. Any Deferred Share Units granted under the Plan prior to the election shall remain in the Plan and will be redeemable only in accordance with the terms of the Plan. A Member who has filed a notice in accordance with Schedule C may elect to reinstate their acquisition of Deferred Share Units by filing an Election Notice in accordance with Section 4.2. 4.6 A Member shall, for the purposes of the Plan, be deemed to retire on the date he or she is no longer any of a Director or an employee of any of the Corporations. 4.7 The Annual Board Retainer and the Attendance Fees are payable quarterly in arrears on January 1, April 1, July 1 and October 1 in each fiscal year. 4.8 The number of Deferred Share Units granted at any particular time with respect to the Annual Board Retainers and/or the Attendance Fees deferred pursuant to Section 4.1 will be calculated by quarterly dividing the portion of one-quarter of the Annual Board Retainer and/or Attendance Fees payable at that time which is to be paid in Deferred Share Units by the weighted average trading price per Share on the Toronto Stock Exchange for the last five Trading Days of the preceding fiscal quarter. For example, $10,000 = ------- TSE weighted average trading price Number of Deferred Share of 1 Share for the last 5 Trading Units Granted Days of the preceding fiscal quarter 4.9 An account, to be known as a "Deferred Share Unit Account" shall be maintained by The Great-West Life Assurance Company for each Member and will be credited with notional grants of Deferred Share Units received by such Member from time to time. 4.10 Whenever cash dividends are paid on the Shares, additional Deferred Share Units will be credited to each Member's Deferred Share Unit Account. The number of such additional Deferred Share Units will be calculated by dividing the dividends that would have been paid to such Member if the Deferred Share Units in the Member's Deferred Share Unit Account had been Shares by the value of a Deferred Share Unit on the date on which the dividends were paid on the Shares. 4.11 In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off or other distribution (other than normal cash dividends) of Great-West Lifeco Inc. assets to shareholders, or any other changes affecting the Shares, proportionate adjustments to reflect such change or changes shall be made with respect to the number of Deferred Share Units outstanding under the Plan. 4.12 For greater certainty, no amount will be paid to, or in respect of, a Member under the Plan or pursuant to any other arrangement, and no additional Deferred Share Units will be granted to such Member, to compensate for a downward fluctuation in the price of the Shares, nor will any other form of benefit be conferred upon, or in respect of, a Member for such purpose. 5. REDEMPTION ON RETIREMENT OR DEATH 5.1 The value of the Deferred Share Units credited to a Member's Deferred Share Unit Account shall be redeemable by the Member (or, where the Member has died, his estate) at the Member's option (or after the Member's death at the option of his legal representative) following the event, including death, causing the Member to be no longer any of a Director or an employee of any of the Corporations or a person related to any of the Corporations or to an Affiliate of any of the Corporations (the "Member's Termination Date"), by filing a written notice of redemption in the form of Schedule D hereto with the Secretary of Great-West Life & Annuity Insurance Company, specifying a redemption date within the period from January 1st of the first calendar year commencing after the Member's Termination Date to December 15th of the first calendar year commencing after the Member's Termination Date. If no notice of redemption has been filed by December 15th of the first calendar year after the Member's Termination Date that date will be deemed to be the redemption date. 5.2 The value of the Deferred Share Units redeemed by or in respect of a Member shall be paid to the Member (or, if the Member has died, to his or her estate, as the case may be) by The Great-West Life Assurance Company in the form of a lump sum cash payment, net of any applicable withholdings as soon as practicable after the redemption date, provided that in any event such payment date shall be no later than December 31st of the first calendar year commencing after the Member's Termination Date. The Great-West Life Assurance Company shall charge to London Life Insurance Company, London Insurance Group Inc., Great-West Life & Annuity Insurance Company and First Great-West Life & Annuity Insurance Company the portion of the amount paid to the Member above which relates to service on their respective board of directors. 6. CURRENCY 6.1 All references in the Plan to currency refer to lawful Canadian currency. 7. SHAREHOLDER RIGHTS 7.1 Deferred Share Units are not shares and will not entitle a Member to any shareholder rights, including, without limitation, voting rights, dividend entitlement or rights on liquidation. 8. ADMINISTRATION 8.1 Unless otherwise determined by the Board of Directors of The Great-West Life Assurance Company, the Plan shall remain an unfunded obligation of the Corporation. 8.2 The Plan shall be administered by the Executive Committee of the Board of Directors of The Great-West Life Assurance Company. 8.3 The Plan may be amended or terminated at any time by the Board of Directors of The Great-West Life Assurance Company, except as to rights already accrued thereunder by the Members. Notwithstanding the foregoing, any amendment or termination of the Plan shall be such that the Plan continuously meets the requirements of applicable U.S. tax laws. 8.4 Each of the Corporations will be responsible for its proportionate share of all costs relating to the operation and administration of the Plan. 9. ASSIGNMENT 9.1 The assignment or transfer of the Deferred Share Units, or any other benefits under this Plan, shall not be permitted other than by operation of law. Schedule A Deferred Share Unit Plan for Designated U.S. Resident Directors of The Great-West Life Assurance Company, London Life Insurance Company, London Insurance Group Inc., Great-West Life & Annuity Insurance Company and First Great-West Life & Annuity Insurance Company (the "Plan") ELECTION NOTICE I hereby elect to participate in the Plan and (i) my elected percentage with respect to my aggregate Annual Board Retainer payable from each of The Great-West Life Assurance Company, London Life Insurance Company, London Insurance Group Inc., Great-West Life & Annuity Insurance Company and First Great-West Life & Annuity Insurance Company (the "Corporations") until changed in accordance with Schedule B and/or C is: 0% or 50% or 100% (ii) my elected percentage with respect to my aggregate Attendance Fees payable from each of the Corporations until changed in accordance with Schedule B and/or C is: 0% or 50% or 100% I confirm that: 1. I have received and reviewed a copy of the terms of the Plan and agree to be bound by them. 2. I understand that this election will apply to the Annual Board Retainer and Attendance Fees payable to me for services commencing in the calendar year following the calendar year in which I make this election. 3. I understand that I will not be able to cause any of the Corporations to redeem Deferred Share Units granted under the Plan ("DSUs") until I am no longer either a Director or an employee of any of the Corporations or any related corporation. 4. I recognize that under current law, the Corporations intend to treat the time when DSUs credited pursuant to this election are redeemed in accordance with the terms of the Plan, after I am no longer either a Director or employee of any of the Corporations or any related corporation, as the date as of which income tax and other withholdings are required. Upon redemption of the DSUs, the Corporations will make all appropriate withholdings as required by law at that time. 5. The value of DSUs are based on the value of the common shares of Great-West Lifeco Inc. and therefore are not guaranteed. 6. No funds will be set aside to guarantee the payment of DSUs. Future payment of DSUs will remain an unfunded liability recorded on the books of the Corporations. The foregoing is only a brief outline of certain key provisions of the Plan. For more complete information, reference should be made to the Plan text. Date (Name of Director) (Signature of Director) Schedule B Deferred Share Unit Plan for Designated U.S. Resident Directors of The Great-West Life Assurance Company, London Life Insurance Company, London Insurance Group Inc., Great-West Life & Annuity Insurance Company and First Great-West Life & Annuity Insurance Company (the "Plan") ELECTION TO CHANGE ELECTED PERCENTAGE I hereby elect, notwithstanding my previous election in the form of Schedule A to the Plan dated _______________, to change my elected percentage relating to the (i) aggregate Annual Board Retainer payable for my services in the calendar year commencing after the date hereof and, subject to any subsequent elections I may make in accordance with the terms of the Plan, for calendar years thereafter to 0% or 50% or 100% (ii) aggregate Attendance Fees payable for my services in the calendar year commencing after the date hereof and, subject to any subsequent elections I may make in accordance with the terms of the Plan, for calendar years thereafter to 0% or 50% or 100% Except as stated above the provisions of Schedule A continue to apply. Date (Name of Director) (Signature of Director) NB: An election to change the elected percentages can only be made by any Member once in a calendar year. Schedule C Deferred Share Unit Plan for Designated U.S. Resident Directors of The Great-West Life Assurance Company, London Life Insurance Company, London Insurance Group Inc., Great-West Life & Annuity Insurance Company and First Great-West Life & Annuity Insurance Company (the "Plan") ELECTION TO TERMINATE RECEIPT OF ADDITIONAL DEFERRED SHARE UNITS I hereby elect that, notwithstanding my previous election in the form of Schedule A to the Plan, no portion of the aggregate Annual Board Retainer and aggregate Attendance Fees payable for my services in the calendar year commencing after the date hereof or, subject to any subsequent election I may make in accordance with the terms of the Plan, for calendar years thereafter shall be paid in Deferred Share Units in accordance with the terms of the Plan. I understand that the Deferred Share Units already granted under the Plan cannot be redeemed until I am no longer either a Director or employee of The Great-West Life Assurance Company, London Life Insurance Company, London Insurance Group Inc., Great-West Life & Annuity Insurance Company and First Great-West Life & Annuity Insurance Company or any related corporation. I confirm that I have received and reviewed a copy of the terms of the Plan and agree to be bound by them. Date (Name of Director) (Signature of Director) NB: An election to terminate receipt of additional Deferred Share Units can only be made by any Member once in a calendar year. Schedule D Deferred Share Unit Plan for Designated U.S Resident Directors of The Great-West Life Assurance Company, London Life Insurance Company, London Insurance Group Inc., Great-West Life & Annuity Insurance Company and First Great-West Life & Annuity Insurance Company (the "Plan") REDEMPTION NOTICE I hereby advise The Great-West Life Assurance Company (the "Corporation") that I wish to redeem all the Deferred Share Units credited to my account under the Plan on [insert redemption date, which shall be at least five (5) business days following the date on which this notice is filed with the Corporation, and which date shall be no earlier than January 1 but no later than December 15 of the first calendar year commencing after the year in which the participant ceases to be both a director or an employee of any of the Corporation, London Life Insurance Company, London Insurance Group Inc., Great-West Life & Annuity Insurance Company and First Great-West Life & Annuity Insurance Company or any related corporation]. Date (Name of Director) (Signature of Director) If the Redemption is signed by a beneficiary or legal representative documents providing the authority of such signature should be provided. -----END PRIVACY-ENHANCED MESSAGE-----