-----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, PUMIDAzrDzJ82vY3fBuIHKIHiJEXyupvJ1LOXOJZEIqPX6+UyhmdffAW3W16xIvl WSbTTauvdRDOjZUmxZp5rg== 0000744455-98-000003.txt : 19980401 0000744455-98-000003.hdr.sgml : 19980401 ACCESSION NUMBER: 0000744455-98-000003 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT WEST LIFE & ANNUITY INSURANCE CO CENTRAL INDEX KEY: 0000744455 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 840467907 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 333-01173 FILM NUMBER: 98581463 BUSINESS ADDRESS: STREET 1: 8515 E ORCHARD RD CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3036893831 MAIL ADDRESS: STREET 1: 8515 E ORCHARD RD CITY: ENGLEWOOD STATE: CO ZIP: 80111 10-K/A 1 GWLA UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For The Fiscal Year Ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ______________ to _____________/ Commission file number 333-1173 GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY (Exact name of registrant as specified in its charter) Colorado 84-0467907 (State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.) 8515 East Orchard Road, Englewood, Colorado 80111 (Address of principal executive offices) (Zip Code) (303) 689-3000 (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, 1998, the aggregate market value of the registrant's voting stock held by non-affiliates of the registrant was $0. As of March 1, 1998, 7,032,000 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. 32 TABLE OF CONTENTS Page PART I Item 1. Business........................................................................1 A. Organization and Corporate Structure...................................1 B. Business of the Company ...............................................1 C. Description of Business Units..........................................3 Item 2. Properties......................................................................16 Item 3. Legal Proceedings...............................................................16 Item 4. Submission of Matters to a Vote of Security Holders.............................17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................................................17 A. Equity Security Holders and Market Information.........................17 B. Dividends..............................................................17 Item 6. Selected Financial Data.........................................................18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................................18 A. Company Results of Operations..........................................19 B. Business Unit Results of Operations....................................21 C. Liquidity and Capital Resources........................................28 D. Accounting Pronouncements..............................................28 E. Year 2000 .............................................................30 Item 8. Financial Statements and Supplementary Data.....................................30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................56 PART III Item 10. Directors and Executive Officers of the Registrant..............................56 A. Identification of Directors............................................56 B. Identification of Executive Officers...................................59 Item 11. Executive Compensation..........................................................62 A. Summary Compensation Table.............................................62 B. Options................................................................63 C. Pension Plan Table.....................................................65 D. Compensation of Directors..............................................66 E. Compensation Committee Interlocks and Insider Participation............66 Item 12. Security Ownership of Certain Beneficial Owners and Management..................67 A. Security Ownership of Certain Beneficial Owners........................67 B. Security Ownership of Management.......................................67 Item 13. Certain Relationships and Related Transactions..................................69 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................69 A. Index to Financial Statements..........................................69 B. Index to Exhibits......................................................70 C. Reports on Form 8-K....................................................70 Signatures................................................................................71
PART I ITEM 1. BUSINESS A. ORGANIZATION AND CORPORATE STRUCTURE Great-West Life & Annuity Insurance Company (the "Company") is a stock life insurance company originally organized under the laws of the State of Kansas in 1907 as the National Interment Association. Its name was changed to Ranger National Life Insurance Company and to Insuramerica Corporation prior to changing to its current name in 1982. In September of 1990, the Company redomesticated and is now organized under the laws of the State of Colorado. The Company ranks in the top 2% of all U.S. life insurers in terms of assets. The Company is a wholly-owned subsidiary of The Great-West Life Assurance Company ("Great-West Life"), a Canadian life insurance company. Great-West Life is a subsidiary of Great-West Lifeco Inc. ("Great-West Lifeco"), a Canadian holding company. Great-West Lifeco is in turn a subsidiary of Power Financial Corporation ("Power Financial"), a Canadian holding company with substantial interests in the financial services industry. Power Corporation of Canada ("Power Corporation"), a Canadian holding and management company, has voting control of Power Financial. Mr. Paul Desmarais, through a group of private holding companies, which he controls, has voting control of Power Corporation. Common and preferred shares of Great-West Life, 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, accident and health insurance and annuities. It is qualified to do business in all states in the United States except New York, and in the District of Columbia, Puerto Rico and Guam. The Company conducts business in New York through First Great-West Life & Annuity Insurance Company, a subsidiary New York life insurance company. The Company operates in one business segment as a provider of life, health and annuity products; however, the business operations of the Company will be discussed in terms of its major business units, which are: Employee Benefits - life, health, disability income and 401(k) products for group clients. Financial Services - accumulation and payout annuity products for both group and individual clients, primarily in the public/non-profit sector, as well as insurance products for individual clients. Investment Operations - management of assets, both general account and separate accounts which segregate, from the Company's general account, the assets and liabilities of contractholders of variable products ("Separate Accounts"). 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(B) (Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Unit Results of Operations). Millions (1) 1997 1996 1995 ----- ---- ---- Employee Benefits Group Life $ 123 $ 121 $ 138 Group Health 656 642 679 401(k) 53 41 29 Financial Services Savings 62 51 50 Individual Insurance 385 (2) 344 (2) 171 --- ------------ ---- ---------- ---- ----------- Premium and other income $ 1,279 $ 1,199 $ 1,067 === ============ ==== ========== ==== =========== Deposits for Investment-type Contracts: 401(k) $ 25 $ 34 $ 47 Savings 219 215 364 Individual Insurance 414 566 457 === ============ ==== === ====== ==== =========== Total investment-type deposits $ 658 $ 815 $ 868 === ============ ==== === ====== ==== =========== Deposits to Separate Accounts: 401(k) $ 1,403 $ 1,109 $ 883 Savings 329 282 742 === ============ ==== === ====== ==== =========== Total separate accounts deposits $ 2,145 $ 1,438 $ 1,165 === ============ ==== === ====== ==== =========== === ============ ==== === ====== ==== =========== Self-funded equivalents (3) $ 2,039 $ 1,940 $ 2,140 === ============ ==== === ====== ==== ===========
(1) All information in the above table and other tables herein is presented in conformity with generally accepted accounting principles, unless otherwise indicated. (2) These amounts include the recapture of $156 million and $164 million for the years ended December 31, 1997 and 1996, respectively, of participating policy reserves previously coinsured with Great-West Life under a participating life coinsurance agreement. (3) Self-funded equivalents generally represent paid claims under minimum premium and administrative services only contracts, which amounts approximate the premiums that would have been earned under such contracts if they had been written as traditional indemnity or HMO programs. C. DESCRIPTION OF BUSINESS UNITS 1. Employee Benefits Principal Products The Employee Benefits division is responsible for marketing group life and health and 401(k) products to employers with 20 or more employees. The Company offers employers a fully integrated employee benefits package with a single service contact for multiple products. Through integrated pricing, administration and funding, the Company helps employers provide cost-effective benefits aimed at attracting and retaining quality employees. The Company offers customers a variety of health plan options to help them maximize the value of their employee benefits investment. These range from fully-insured products, whereby the Company assumes all or a portion of the health care cost and utilization risk, to self-funded, whereby the employer assumes all or a significant portion of the risk. Employee Benefits also provides administration and claims services and, in many cases, stop-loss insurance protection. The Company offers a full range of managed care products and services. These products include Health Maintenance Organization ("HMO") plans, which provide a high degree of managed care, Preferred Provider Organization ("PPO") plans and Point-of-Service ("POS") plans which offer more flexibility in provider choice than HMO plans. Because many employers want to offer employees a choice in health plans while containing costs, the Company offers PPO/POS/HMO option packages. In addition, the Company maintains a fully insured product to meet customer demand for traditional health care products. Under HMO plans, health care for the member is coordinated by a primary care physician who is responsible for managing all aspects of the member's care. HMO plans offer a broad scope of benefits coverage including routine office visits and preventive care, as well as lower premiums and low copayments which minimize out-of-pocket costs. Services for care not coordinated with the primary care physician are not covered, with the exception of emergency care. There are no claims to file when services are received through a primary care physician. Physicians are reimbursed on a monthly capitated rate per HMO patient for most services. POS plans also require that a member enroll with a primary care physician who is responsible for coordinating the member's health care. Similar to an HMO, members receive the highest benefit coverage and the lowest out-of-pocket costs when they use their primary care physician to coordinate their health care. In contrast to an HMO, members can seek care outside of the primary physician's direction, at a reduced level of benefits in terms of increased cost sharing. Some benefits may not be covered outside the in-network POS plan. PPO plans offer members a greater choice of physicians and hospitals. Members do not need to enroll with a primary care physician - they simply select a contracted PPO provider at the time of service to receive the highest level of benefits. If members seek care outside of the PPO network, they receive a lower level of benefits in terms of increased cost sharing. A traditional indemnity plan allows complete freedom of choice for covered services. After meeting an annual deductible, insureds pay their share of coinsurance for all covered services. These plans are not typically considered managed care, although they may include some medical management features, such as inpatient certification, reasonable and customary charges, and some benefits for preventive care. The Company continues to develop its One Health Plan subsidiary organization. In 1997, it licensed five One Health Plan HMOs (Massachusetts, Ohio, Oregon, Tennessee and Washington). This brings the total number of licensed HMO subsidiaries to ten. Through each One Health Plan subsidiary, the Company centralizes all network contracting and administration, medical management, member services, and quality assurance for all of the Company's medical members (PPO, POS and HMO) in the particular state. In addition to economies of scale, this "pooling" of PPO, POS, and HMO membership benefits the Company in negotiating provider reimbursement arrangements, which leads to more competitive pricing. The type of coverage provided by the Company continues to move toward the higher forms of managed care. As of December 31, 1997, of the 1,675,764 lives covered, 414,519 were in POS/HMO type plans, 1,099,439 were in PPO plans, and 161,806 were in fully insured plans. At December 31, 1996, of the 1,554,142 lives covered, 350,185 were in POS/HMO type plans, 1,003,333 were in PPO plans, and 200,624 were in fully insured plans. The Company offers group life insurance. Sales of group life insurance consist principally of renewable term coverage, the amounts of which are usually linked to individual employee wage levels. The following table shows group life insurance in force prior to reinsurance ceded for the years indicated: Years Ended December 31, ----------------------------------------------------------- Millions 1997 1996 1995 1994 1993 ---------- ---------- --------- ------------ --------- In force, end of year $ 53,211 $ 49,500 $ 50,370 $ 51,051 $ 39,898
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 contractholder 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 contractholders with a vehicle to assume the investment risks. Assets held under these options are invested, as designated by the participant, in Separate Accounts which in turn invest in shares of underlying funds managed by a subsidiary of the Company or by selected external fund managers. The participant currently has up to 32 different variable investment options. Of the total 401(k) assets under administration in 1997, 93% were allocated to variable investment options. The Company is compensated by the Separate Accounts for bearing expense risks pertaining to the variable annuity contract, and for providing administrative services to contractholders. A subsidiary of the Company also receives fees for serving as an investment advisor for underlying funds managed by the subsidiary. Customer retention is a key factor for the profitability of the Company's 401(k) product. The annuity contracts impose a charge for termination during a certain period of time after the contract's inception. The charge is determined in accordance with a formula in the contract. Existing tax penalties on annuity distributions prior to age 59 1/2 provide an additional disincentive to premature surrenders of account balances, but do not impact rollovers to products of competitors. Employee Benefits offers a rollover Individual Retirement Annuity which allows individuals to move retirement funds from a 401(k) plan to a qualified Individual Retirement Account. In 1997, the Company introduced a Non-Qualified Deferred Compensation ("NQDC") supplement to its 401(k) product. NQDC allows highly compensated employees to defer compensation on a pre-tax basis beyond 401(k) limits until retirement. The Company offers a unique deferred compensation arrangement which utilizes Orchard Series Fund, a mutual fund subsidiary of the Company. In the following table, the amount of 401(k) business in force is measured by the total of individual account balances: Millions Year Ended December 31, Fixed Annuities Variable Annuities 1993 $ 357 $ 868 1994 345 1,324 1995 358 2,227 1996 347 3,229 1997 328 4,568 Method of Distribution Products are sold principally through local field sales representatives in 33 sales offices in key metropolitan areas throughout the United States. Home office marketing, actuarial and operations staff support the field sales offices in new case installation and ongoing client services. The field sales staff work with independent insurance agents, brokers and consultants who assist in the production and servicing of business. Competition The employee benefits industry is highly competitive. Market share remains fragmented because of the large number of insurance carriers, third-party administrators and HMOs serving the various public and private sectors. No one competitor is dominant across the country. With managed care enrollment expected to increase dramatically over the remainder of the decade, many indemnity carriers are transitioning their members into more cost effective managed care products. The highly competitive marketplace creates pricing pressures which encourage employers to seek competitive bids each year. Although most employers are looking for affordably priced employee benefits products, they want to offer product choice 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, which offers multiple product lines and centralized administration. In addition to price, there are a number of other factors which 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. Reserves For group whole life and term insurance products, policy reserve liabilities are equal to the present value of future benefits and expenses less the present value of future net premiums using best estimate assumptions for interest, mortality and expenses (including margins for adverse deviation). For disability waiver of premium and paid up group whole life contracts, the policy reserves equal the present value of future benefits and expenses using best estimate assumptions for interest, mortality and expenses (including margins for adverse deviation). For group universal life, the policy reserves equal the accumulated fund balance (which reflects cumulative deposits plus credited interest less charges thereon). Reserves for long-term disability products are established for lives currently in payment status using industry and Company morbidity factors, and interest rates based on Company experience. In addition, reserves are held for lives that have not satisfied their waiting period and for claims that have been incurred but not reported. 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 cumulative deposits, less withdrawals and charges, plus credited interest thereon. 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 at their maturities, and pay expected death or retirement benefits or surrender requests. Reinsurance The Company has a marketing and administrative services arrangement with New England Life Insurance Company ("New England"). Under reinsurance agreements, New England issues group life and health and 401(k) products and then immediately reinsures 50% of its group life and health business, and nearly 100% of its guaranteed 401(k) business, with the Company. 2. Financial Services Principal Products The Financial Services division markets and administers savings and life insurance products. Savings products include (i) individual and group annuity contracts which offer a variety of funding and distribution options for personal and employer-sponsored retirement plans that qualify under Internal Revenue Code Sections 401, 403, 408, and 457, and (ii) individual and group non-qualified annuity contracts. These contracts may be immediate or deferred and are offered primarily to individuals and employers of public and non-profit sector employees. The Company also provides pension plan administrative services through a subsidiary company, Financial Administrative Services Corporation ("FASCorp"). The Company provides marketing and communication services through another subsidiary company, Benefits Communication Corporation, and BenefitsCorp Equities, Inc., a broker-dealer subsidiary of Benefits Communication Corporation (collectively, "BenefitsCorp"). The primary marketing emphasis for the Company's savings products is the public/non-profit market for defined contribution retirement savings plans. Defined contribution plans provide for participant accounts with benefits based upon the value of contributions to, and investment returns on, the individual's account. This has been the fastest growing portion of the pension marketplace in recent years. The Company's variable annuity products provide 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 Separate Accounts which in turn invest in shares of underlying funds managed by a subsidiary of the Company or by selected external fund managers. Demand for investment diversification for customers and their participants continued to grow during 1997. The Company continues to expand the annuity products available through Maxim Series Fund, Inc., a subsidiary of the Company which is a variable insurance products fund company, and through arrangements with external fund managers. This array of funds allows customers to diversify their investments across a wide range of investment products, including fixed income, stock, and international equity fund offerings. The Company also offers single premium annuities and guaranteed certificates on a very limited basis, which provide guarantees of principal and interest with a fixed maturity date. The Company has a marketing agreement with Charles Schwab & Co., Inc. to sell individual fixed and variable qualified and non-qualified deferred annuities. The variable annuity product offers 25 investment options. The fixed product is a Guarantee Period Fund which was established as a non-unitized Separate Account in which the owner does not participate in the performance of the assets. The assets accrue solely to the benefit of the Company and any gain or loss in the Guarantee Period Fund is borne entirely by the Company. Guarantee period durations of one to ten years are currently being offered by the Company. Distributions from the amounts allocated to a Guarantee Period Fund more than six months prior to the maturity date results in a market value adjustment ("MVA"). The MVA reflects the relationship as of the time of its calculation between the current U.S. Treasury Strip ask side yield and the U.S. Treasury Strip ask side yield at the inception of the contract. Customer retention is a key factor for the profitability of annuity products. To encourage customer retention, annuity contracts typically impose a surrender charge on policyholder balances withdrawn for a period of time after the contract's inception. The period of time and level of the charge vary by product. Existing tax penalties on annuity distributions prior to age 59 1/2 provide an additional disincentive to premature surrenders of annuity balances, but do not impede transfers of those balances to products of competitors. Savings products generate earnings from the investment spreads on the guaranteed investment options and from the fees collected for mortality and expense risks associated with the variable options. The Company also receives fees for providing administration services to contractholders. A subsidiary of the Company receives fees for serving as an investment advisor for underlying funds managed by the subsidiary. The Company's annuity products are supported by the general account assets of the Company for guaranteed investment options, and the Separate Accounts for the variable investment options. The amount of annuity products in force is measured by account balances. The following table shows guaranteed investment contract and group and individual annuity account balances for the years indicated: Millions Guaranteed Year Ended December 31, Investment Contracts Fixed Annuities Variable Annuities 1993 $ 1,263 $ 5,671 $ 812 1994 930 5,672 1,231 1995 664 5,722 1,772 1996 525 5,531 2,256 1997 409 5,227 3,280 In addition to providing administrative services to customers of the Company's annuities, FASCorp also provides comprehensive third-party administrative and recordkeeping services for other financial institutions and employer-sponsored retirement plans. Assets under administration with unaffiliated organizations totaled $8.5 billion at December 31, 1997 and $4.4 billion at December 31, 1996. FASCorp also is a registered transfer agent for Orchard Series Fund. Life insurance products in force include participating and non participating term life, whole life, and universal life. Term life provides coverage for a stated period and pays a death benefit only if the insured dies within the period. Whole life provides guaranteed death benefits and level premium payments for the life of the insured. Universal life products include a cash value component that is credited with interest at regular intervals. The Company's earnings result from the difference between the investment income and interest credited on customer cash values. Universal life cash values are charged for the cost of insurance coverage and for administrative expenses. At December 31, 1997, the Company had $3.3 billion of policy reserves on individual insurance products sold to corporations to provide coverage on the lives of certain employees - so called Corporate-Owned Life Insurance ("COLI"). Due to legislation enacted during 1996 which phases out the interest deductions on COLI policy loans over a two-year period ending 1998, COLI sales have ceased. The Company continues to work closely with existing COLI customers to determine the options available to them and is confident that the effect of the 1996 legislative changes will not be material to the Company's operations. The Company has shifted its emphasis to the Bank-Owned Life Insurance ("BOLI") market. BOLI was not affected by the 1996 legislation. This interest-sensitive whole life product funds post-retirement benefits for bank employees. At December 31, 1997, the Company had $0.5 billion of BOLI policy reserves. Sales of life insurance products typically have high initial marketing expenses. Retention, an important factor in profitability, is encouraged through product features. For example, the Company's universal and whole life insurance contracts typically impose a surrender charge on policyholder balances withdrawn within the first ten years of the contract's inception. The period of time and level of the charge vary by product. In addition, more favorable credited rates may be offered after policies have been in force for a period of time. Certain of the Company's life insurance and group annuity products allow policyowners to borrow against their policies. At December 31, 1997, approximately 4% of outstanding policy loans were on individual life policies that had fixed interest rates ranging from 5% to 8%. The remaining 96% of outstanding policy loans had variable interest rates averaging 7.69% at December 31, 1997. Investment income from policy loans was $194.8 million for the year ended December 31, 1997. The following table summarizes changes in life insurance in force prior to reinsurance ceded for the years indicated: Years Ended December 31, --------------------------------------------------------------- Millions 1997 1996 1995 1994 1993 ---------- ----------- ---------- ---------- ---------- In force, beginning of $ 26,892 $ 25,865 $ 24,877 $ 20,259 $ 18,192 year Sales and additions 3,119 2,695 2,520 6,302 2,842 Terminations 1,745 1,668 1,532 1,684 775 ---------- ----------- ---------- ---------- ---------- Net 1,374 1,027 988 4,618 2,067 ---------- ----------- ---------- ---------- ---------- In Force, end of year 28,266 26,892 25,865 24,877 20,259
Method of Distribution Financial Services primarily uses BenefitsCorp to distribute pension products to the public/non-profit market. BenefitsCorp also provides communication and enrollment services to employers. Prior to January 1, 1997, life insurance sold to individuals was distributed through a general agency system. The Company now distributes universal and joint survivor life insurance, as well as individual fixed and variable qualified and non-qualified deferred annuities, through Charles Schwab and Co., Inc. BOLI products are currently marketed through one broker, Clark/Bardes, Inc. Competition The life insurance, savings and investments marketplace is highly competitive. The Company's competitors include mutual fund companies, insurance companies, banks, investment advisors, and certain service and professional organizations. No one competitor or small number of competitors is dominant. Competition focuses on service, technology, cost, variety of investment options, investment performance, product features, price and financial strength as indicated by ratings issued by nationally recognized agencies. For more information on the Company's ratings see Item 1(B)(5) (Business - Business of the Company Ratings). Reserves Reserves for universal life and interest-sensitive whole life products are equal to cumulative deposits less withdrawals and charges plus credited interest. Reserves for all fixed individual life insurance contracts are computed on the basis of assumed investment yield, mortality, morbidity and expenses (including a margin for adverse deviation). These reserves are calculated as the present value of future benefits (including dividends) and expenses less the present value of future net premiums. The assumptions used in calculating the reserves generally vary by plan, year of issue and policy duration. For all life insurance contracts (including universal life insurance), reserves are established for claims that have been incurred but not reported based on factors derived from past experience. Reserves for limited payment contracts (immediate annuities with life contingent payouts) are computed on the basis of assumed investment yield, mortality, morbidity and expenses. These assumptions generally vary by plan, year of issue and policy duration. Reserves for investment contracts (deferred annuities and immediate annuities without life contingent payouts) are equal to cumulative deposits plus credited interest less withdrawals and other charges. The above-mentioned reserves are computed amounts that, with additions from premiums and deposits to be received, and with interest on such reserves, are expected to be sufficient to meet the Company's policy obligations at their maturities, and pay expected death or retirement benefits or surrender requests. 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 coinsurance contracts. The Company retains a maximum of $1.5 million of coverage per individual life. 3. Investment Operations The Company's investment operations division manages the Company's general and Separate Account funds in support of cash and liquidity requirements of the Company's insurance and investment products. Investments under management at year-end 1997 totaled $21.0 billion, comprised of corporate and insurance-related investments assets ("investment assets") of $13.2 billion and Separate Account assets of $7.8 billion. The Company invests in a broad range of asset classes, including domestic and international fixed maturities and common stocks, mortgage loans, real estate, and short-term investments. Fixed maturity investments include publicly traded and private placement corporate bonds, government bonds, publicly traded and private placement structured assets and redeemable preferred stocks. The Company's portfolio of structured assets is primarily invested in mortgage-backed securities and secondarily in other asset-backed securities. Mortgage-backed securities include collateralized mortgage obligations ("CMOs"). CMO holdings are concentrated in securities with limited prepayment, extension and default risk, such as planned amortization class bonds. The Company generally manages the characteristics of its investment assets, such as liquidity, currency, yield and duration to reflect the underlying characteristics of related insurance and contractholder liabilities, which vary among the Company's principal product lines. The Company observes strict asset and liability matching guidelines, which are designed to ensure that the investment portfolio will appropriately meet the cash flow and income requirements of its liabilities. In connection with its investment strategy, the Company may use derivative instruments in hedging applications to manage market risk. Derivative instruments are not used for speculative purposes. For more information on derivatives see Note 6 to the financial statements. 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 segment, and other diversification considerations for fixed maturity investments, and geographic and property-type considerations for mortgage loan investments. The Company's fixed maturity investments constituted 67% of investment assets as of December 31, 1997. The Company reduces credit risk for the portfolio as a whole by investing primarily in investment grade fixed maturities rated by either third-party rating agencies, or in the case of securities which may not be rated by third-parties, by the Company (for private investments). For more information on the credit rating of the fixed maturity portfolio, see Item 7(B)(3) (Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Unit Results of Operations - Investment Operations). The Company's mortgage loan investments constituted 9% of investment assets as of December 31, 1997. The Company's mortgage investment policy emphasizes a broadly diversified portfolio of commercial and industrial mortgages. Mortgage loan investments are subject to underwriting criteria addressing loan-to-value ratios, debt service coverage, cash flow, tenant quality, leasing, market, location, and financial strength of borrower. Since 1986, the Company has reduced the overall weighting of its mortgage portfolio with a greater emphasis in bond investments. For more information on the mortgage portfolio, see Item 7(B)(3) (Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Unit Results of Operations - Investment Operations). At December 31, 1997 only .7% of investment assets were invested in real estate. The following table sets forth the distribution of invested assets, cash and accrued investment income as of the end of the years indicated: [Carrying Value in 1997 1996 1995 1994 1993 Millions] ----------- ------------ ------------ ----------- ----------- *Debt Securities: Bonds U.S. Government Securities and obligations of U.S. Government Agencies $ 2,091 $ 1,947 $ 1,990 $ 1,672 $ 1,553 Corporate bonds 6,544 6,133 6,168 5,079 5,128 Foreign governments 146 119 159 368 375 ----------- ------------ ------------ ----------- ----------- Total 8,781 8,199 8,317 7,119 7,056 Common Stock 39 20 9 5 3 Mortgage loans 1,236 1,488 1,713 2,011 2,378 Real estate 94 68 61 44 41 Policy loans 2,657 2,523 2,238 1,905 1,431 Short-term 399 419 135 707 683 investments ----------- ------------ ------------ ----------- ----------- Total 13,206 12,717 12,473 11,791 11,592 investments Cash 126 125 91 132 86 Accrued investment income 166 198 212 196 183
* The majority (in value) of debt securities are carried at fair value in 1997, 1996, 1995, and 1994 due to the adoption of Statement of Financial Accounting Standards No. 115 at January 1, 1994. For more information, see Note 6 to the financial statements. The following table summarizes general account investment results of the Company's operations: Net Earned Net Investment Investment [Millions] Income Income Rate ----------------- ----------------- For the year: $ 897 7.36% 1997 837 7.07 1996 835 7.36 1995 768 7.23 1994 792 7.76 1993 4. Regulation General The Company must comply with the insurance laws of all jurisdictions in which it is licensed to do business. Although the intent of regulation varies, most jurisdictions have laws and regulations governing rates, solvency, standards of business conduct and various insurance and investment products. The form and content of statutory financial reports and the type and concentration of investments are also regulated. The Company's operations and accounts are subject to examination by the Colorado Insurance Division and other regulators at specified intervals. The latest financial examination by the Colorado Insurance Division was completed in 1997, and covered the five year period ending December 31, 1995. This examination produced no significant adverse findings regarding the Company. Solvency Regulation The National Association of Insurance Commissioners has adopted risk-based capital rules for life insurance companies. These rules recommend a specified level of capital depending upon the types and quality of investments held, the types of business written, and the types of liabilities maintained. Depending on the ratio of the insurer's adjusted capital to its risk based capital, the insurer could be subject to various regulatory actions ranging from increased scrutiny to conservatorship. Based on the Company's December 31, 1997 statutory financial reports, the Company was well within these rules. The National Association of Insurance Commissioners Insurance Regulatory Information System ratios are another set of tools used by regulators to provide an "early warning" as to when a company may require special attention. There are twelve categories of financial data with defined usual ranges for each. For 1997, the Company was within the usual ranges in all categories. Insurance Holding Company Regulations The Company is subject to and complies with insurance holding company regulations in Colorado. 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. Securities Laws The Company is subject to various levels of regulation under federal securities laws. The Company's broker-dealer subsidiaries are regulated by the Securities and Exchange Commission ("SEC") and the National Association of Securities Dealers, Inc. The Company's investment advisor subsidiary and transfer agent subsidiary are regulated by the SEC. Certain of the Company's Separate Accounts, mutual funds, and variable insurance and annuity products, are registered under the Investment Company Act of 1940 and the Securities Act of 1933. HMO Regulation The Company's HMO subsidiaries are subject to regulation by various government agencies in the states in which they are licensed to do business. This involves the regulation of solvency, contracts, rates, quality assurance, minimum levels of benefits, and the availability and continuity of care. Guaranty Funds Under insurance guaranty fund laws existing in all states, insurers doing business in those states can be assessed (up to prescribed limits) for certain obligations of insolvent insurance companies. The Company has established a reserve of $8.7 million as of December 31, 1997 to cover future assessments of known insolvencies. The Company has historically recovered more than half of the guaranty fund assessments through statutorily permitted premium tax offsets. The Company has a prepaid asset associated with guaranty fund assessments of $5.6 million at December 31, 1997. Canadian Regulation Because the Company is a subsidiary of Great-West Life, which is a Canadian company, the Office of the Superintendent of Financial Institutions Canada conducts periodic examinations of the Company and approves certain investments in subsidiary companies. 5. Ratings The Company is rated by a number of nationally recognized rating agencies. The ratings represent the opinion of the rating agencies on the financial strength of the Company and its ability to meet the obligations of its insurance policies. Rating Agency Measurement Rating - ----------------------------- ------------------------------------------ ------------ A.M. Best Company Financial Condition and Operating A++ * Performance Duff & Phelps Corporation Claims Paying Ability AAA * Standard & Poor's Claims Paying Ability AA+ ** Corporation Moody's Investors Service Insurance Financial Strength Aa2 ***
* Highest ratings available. ** Second highest rating out of 19 rating categories. *** Third highest rating out of 19 rating categories. 6. Miscellaneous No customer accounted for 10% or more of the Company's consolidated revenues in 1997. In addition, no unit of the Company's business is dependent on a single customer or a few customers, the loss of which would have a significant effect on the Company or any of its business units. The loss of business from any one, or a few, independent brokers or agents would not have a material adverse effect on the Company or any of its business units. The Company had approximately 4,600 employees at December 31, 1997. ITEM 2. PROPERTIES The executive offices of the Company consist of a 517,633 square foot office complex located in Englewood, Colorado. The office complex is owned by a subsidiary of the Company. The Company leases sales and claims offices throughout the United States. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of 1997 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 All of the Company's outstanding common shares are owned by Great-West Life. Accordingly, there is no established public trading market for the Company's common equity. B. DIVIDENDS In the two most recent fiscal years, the Company has paid quarterly dividends on its common shares. Dividends totaled $62.5 million in 1997 and $48.1 million in 1996. Under Colorado law, the Company cannot, without the approval of the Colorado Commissioner of Insurance, pay a dividend if, as a result of such payment, the total of all dividends paid in the preceding twelve months would exceed the greater of (i) 10% of the Company's surplus as regards policyholders as at the preceding December 31; or (ii) the Company's net gain from operations as at the preceding December 31. 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 financial statements of the Company, which are included in Item 8 (Financial Statements and Supplementary Data). Millions ....... Years Ended December 31 ----------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- INCOME STATEMENT DATA Premiums and other income $1,279 $ 1,199 $ 1,067 $ 1,000 $ 696 Net investment income 897 837 835 768 792 Realized investment gains 10 (21) (72) 25 (losses) 8 ----------- ----------- ----------- ----------- ----------- Total Revenues 2,186 2,015 1,910 1,696 1,513 Total benefits and expenses 1,930 1,824 1,733 1,593 1,417 Income tax expense 97 29 31 56 49 =========== =========== =========== =========== =========== Net Income $ 159 $ 135 $ 128 $ 74 $ 65 =========== =========== =========== =========== =========== BALANCE SHEET DATA Investment assets $13,206 $12,717 $12,473 $11,791 $11,592 Separate account assets 7,847 5,485 3,999 2,555 1,680 Total assets 22,078 19,351 17,682 15,616 14,296 Total policyholder liabilities 11,791 11,687 11,492 10,929 10,592 Total shareholder's equity 1,186 993 777 821 1,034
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations of the Company for the three years ended December 31, 1997 follows. In connection with, and because it desires to take advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward-looking statements contained in the following discussion and elsewhere in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the SEC. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. In particular, statements using verbs such as "expect," "anticipate," "believe," or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which 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 risks and uncertainties discussed in documents filed by the Company with the SEC. A. COMPANY RESULTS OF OPERATIONS 1. Comparison of Years Ended December 31, 1997 and 1996 ---------------------------------------------------- The Company's consolidated net income for 1997 increased $24.4 million or 18% to $158.8 million, when compared to 1996. Premiums and other income increased 7% from $1,199.2 million in 1996 to $1,278.9 million in 1997. The increase was primarily due to growth in individual participating insurance premiums and an increase in fee income from assets under management. Net investment income increased $61.0 million from $836.6 million in 1996 to $897.6 million in 1997. This change reflected improved interest income on investments and additional investment management fees recognized in prior years by Great-West Life. The Company's realized investment gains (losses) changed from a net realized loss of $21.1 million in 1996 to a net realized gain of $9.8 million in 1997. The decrease in interest rates in 1997 resulted in realized gains on the sale of fixed maturities totaling $16.0 million, while higher interest rates contributed to $11.6 million of fixed maturity losses recorded in 1996. There was also a 28% improvement in the provision for asset losses as the change in the provision was reduced from $10.6 million in 1996 to $7.6 million in 1997. Total benefits and expenses includes life and other policy benefits, increases in reserves, interest paid or credited to contractholders, expenses, and dividends to policyholders. The increase of 6% from $1,824.3 million in 1996 to $1,929.9 million in 1997 was primarily the result of increased operating expenses associated with the cost of developing HMOs, system enhancements, and developing FASCorp's business. In October 1996 the Company recaptured certain pieces of an individual participating block of business previously reinsured to Great-West Life. In June 1997 the Company recaptured all remaining pieces of that block of business. The Company recorded various assets and liabilities related to the recaptures as discussed in Note 2 to the financial statements. In recording the recaptures, both life insurance premiums and benefits were increased by the amounts recaptured ($155.8 million and $164.8 million in 1997 and 1996, respectively). Consequently, the net financial results of the Company were not impacted by recording the reinsurance transactions. Included in the 1997 and 1996 results of operations was the effect of a release of $47.8 million and $25.6 million for 1997 and 1996, respectively, from a previously recorded contingent tax liability that the Company assumed from Great-West Life in 1993 (see Note 10 to the financial statements). Of the $47.8 million released in 1997, $15.1 million was attributable to participating policyholders and reflected as a liability on the balance sheet. In addition to the contingent tax liability release, the Company also in the normal course of business reviewed its deferred tax assets and liabilities and increased its deferred tax liability by $21.6 million in 1997 (of which $10.1 million was attributable to participating policyholders), which resulted in a $11.5 million reduction in net income. The effect of the non-recurring transactions described above was to decrease net income by $4.4 million from 1996 to 1997. Excluding the effect of these transactions, the growth in net income reflected higher variable fee income from assets under management, improved investment income, increased realized capital gains and favorable mortality. The effective income tax rates were affected by the release of the contingent tax liability discussed above in 1997 and 1996 as these amounts were not taxable, although the increase in the deferred tax liability discussed above negated the impact of the 1997 release. 2. Comparison of Years Ended December 31, 1996 and 1995 ---------------------------------------------------- The Company's 1996 consolidated net income increased 5% to $134.6 million, when compared to 1995. Premiums and other income increased 12% from $1,067.4 million in 1995 to $1,199.2 million in 1996. The 1996 premiums included $164.8 million of reinsurance premium associated with the recapture of a block of participating individual insurance business from Great-West Life. This transaction did not impact consolidated net income, as it was offset by an increase in reserves (see discussion of policy benefits below). Therefore, premiums and other income from operations were down from 1995 levels, which reflects a 7% reduction in group life and health premiums due to high termination rates associated with price sensitivity and competition from managed care companies. Net investment income increased $1.5 million from $835.1 million in 1995 to $836.6 million in 1996. This change reflected an increase in the amount of invested assets of $243.8 million, which was largely offset by a lower effective yield on investments purchased in late 1995 and early 1996. The increase in invested assets is primarily the result of growth in policy loans on the Corporate-Owned Life Insurance ("COLI") business. The Company's realized investment gains (losses) changed from a net realized gain of $7.5 million in 1995 to a net realized loss of $21.1 million in 1996. The increase in interest rates in 1996 resulted in realized losses on the sale of fixed maturities totaling $11.6 million, while lower interest rates contributed to $28.2 million of fixed maturity gains recorded in 1995. The 50% improvement in the provision for asset losses helped to partially offset the fixed maturities capital losses, as the change in provision was reduced from $22.0 million in 1995 to $10.6 million in 1996. Total benefits and expenses includes life and other policy benefits, increase in reserves, interest paid or credited to contractholders, expenses, and dividends to policyholders. The increase of 5% from $1,733.3 million in 1995 to $1,824.3 million in 1996 is primarily the result of the increase in reserves of $164.8 million associated with the recapture of insurance from Great-West Life. After this adjustment the total benefits and expenses actually decreased from 1995 to 1996. This is the result of a reduction in group health claims which is consistent with the premium decrease discussed previously. Net income in 1996 also reflects a $25.6 million release of a previously recorded contingent liability that the Company assumed from Great-West Life in 1993. The release was triggered by the resolution of 1988 and 1989 tax issues with the Internal Revenue Service. The effective income tax rates were reduced in 1996 by the release of the contingent liability which was not taxable and in 1995 by the release of a $13.3 million deferred tax valuation allowance in a subsidiary investment company. B. BUSINESS UNIT RESULTS OF OPERATIONS The following discussion of results from operations is presented in terms of the major business units of the Company, and the financial information regarding such business units, described in Item 1(B) (Business - Business of the Company). 1. Employee Benefits Overall, the financial results for 1997 and 1996 improved with 401(k) premiums and deposits increasing 25% and 23%, respectively. Assets under administration (including third-party administration) in 401(k) increased 38% over 1996, to $5.4 billion from $3.9 billion in 1996. Equivalent revenue premium income for group life and health increased 4% from 1996 levels as the result of improved sales. From 1995 to 1996, equivalent revenue premium had decreased 9% due to high termination rates. Employee Benefits' operating income continued to increase in 1997 and 1996 due to favorable mortality and strong 401(k) asset growth. Group Life and Health The Company experienced strong sales growth during 1997 with 1,473 new group medical customers (versus 1,125 in 1996 and 1,031 in 1995), which added 121,622 new individual members. Much of the medical growth can be attributed to the introduction of new One Health Plan HMOs in markets with high sales potential, and the Company's ability to offer a choice of managed care products. To position itself for the future, the Company is focused on putting in place the products, strategies and processes that will strengthen its competitive position in the evolving managed care environment. During 1997, the U.S. insurance industry continued a pattern of consolidation. The Company demonstrated its long-term commitment to the group life and health business by acquiring an additional 150 self-funded group customers (75,000 new members) through a marketing agreement with a Minneapolis third-party administrator. With a heightened sensitivity to price comes the demand for more tightly managed health plans, which is why HMO development remains Employee Benefits' most important product development initiative. In 1997, the Company licensed HMOs in Massachusetts, Ohio, Oregon, Tennessee and Washington and applied for licenses in Florida, Indiana, New Jersey and North Carolina. The Company also entered into agreements with other companies, which will exclusively market the One Health Plan HMO product in various states. These types of agreements will augment growth in the Company's HMO programs in the future. The Company experienced an 8% increase in total medical membership, from 1,554,142 at the end of 1996 to 1,675,764 at year-end 1997. Gatekeeper (i.e., POS and HMO) members grew 18% from 350,185 in 1996 to 414,519 in 1997. The Company expects this segment of the business to grow as additional HMO licenses are obtained. Total membership had decreased from 1995 to 1996 by 4% due to terminations, however, gatekeeper members had grown by 35% (1996 was the first year the Company offered HMO plans). 401(k) The number of new 401(k) case sales, including third-party administration business generated through the Company's marketing and administration arrangement with New England Life Insurance Company, increased to 1,235 in 1997 from 1,156 in 1996 (960 in 1995). This brings the total 401(k) block of business under administration to 5,695 employer groups and more than 430,000 individual participants, compared to 4,857 employer groups and 355,434 individual participants in 1996, and 4,046 employer groups and 277,168 individual participants in 1995. During 1997, the in-force block of 401(k) business continued to perform well, with persistency of 93.8%. This, combined with strong equity markets, resulted in a 39% and 38% increase in assets under management during 1997 and 1996, respectively. Pension Plan Specialist services, which include drafting of plan documents, compliance testing, and completion of annual tax forms, were elected in an additional 900 cases in 1997. This brings the total in-force case count serviced by this in-house unit to over 2,000. In addition to offering employers the advantages of one-stop shopping, this program enables the Company and the employer to reduce costs associated with these services. To promote long-term asset retention, the Company enhanced its 401(k) product and services by adding prepackaged "lifestyle" funds (The Profile Series), expense reductions for high-balance accounts, more effective enrollment communications, one-on-one retirement planning assistance and personal plan illustrations. These efforts have led to a high level of customer satisfaction and persistency in the Company's 401(k) business. As discussed earlier, during 1997 the Company also introduced a Non-Qualified Deferred Compensation supplement to its 401(k) product, which allows highly compensated employees to defer compensation on a pre-tax basis beyond 401(k) limits until retirement. Outlook In 1998, the Company will continue to enhance managed care programs and services, further HMO development, seek National Committee for Quality Assurance accreditation for its HMOs, refine quality assurance programs and introduce member communications directed at health improvements. The Company will enhance the 401(k) product by placing more emphasis on improved enrollment strategies for the employer and by online participant education. 2. Financial Services Savings The Company's core savings business is the public/non-profit pension market. The assets of the public/non-profit business, including Separate Accounts, increased 8% and 5% during 1997 and 1996 to $7.2 billion and $6.6 billion, respectively. Much of the increase came from the variable annuity business which was driven by excellent sales results and strong investment returns in the equity markets. The Company's public/non-profit business experienced strong growth in 1997. The number of lives under administration increased by 181,700 in 1997, compared to a 79,466 increase in 1996 and a 91,009 increase in 1995. BenefitsCorp sold 13 new large employer cases and increased the penetration of existing cases by enrolling new employees. The Company again experienced a very high retention rate in public/non-profit contract renewals in 1997. Part of this customer loyalty comes from initiatives to provide high-quality service while controlling expenses. The Company continued to limit sales of Guaranteed Investment Contracts ("GIC") and allow this block of business to contract in response to the highly competitive GIC market. As a result, GIC assets decreased 22% in 1997, to $409 million. In 1996, GIC assets decreased 21% from 1995 to $524.6 million. Customer demand for investment diversification continued to grow during 1997. New contributions to variable business represented 69% of the total 1997 premiums. The Company continues to expand the investment products available through Maxim Series Fund, Inc., and arrangements with external fund managers. Externally-managed funds offered to participants in 1997 included American Century, Ariel, Fidelity, Founders, INVESCO, Janus, Loomis Sayles, Templeton, T. Rowe Price and Vista. In 1997 the Company introduced Profile portfolios for its public/non-profit variable annuity products. The Profiles provide the convenience of pre-selected investment mixes based on varying degrees of risk tolerance. The Profile options allow customers to diversify their investments across a wide range of investment products, including fixed income, stock and international equity fund offerings. Customer participation in guaranteed Separate Accounts increased as many customers prefer the security of fixed income securities and Separate Account assets. Assets under management for guaranteed Separate Account funds exceeded $466.2 million in 1997, compared to $392.8 million in 1996 and $411.5 million in 1995. FASCorp administered records for approximately 9,200 groups at year-end 1997 (versus 7,700 at year-end 1996 and 7,000 at year-end 1995), representing more than 1,000,000 participants (800,000 in 1996). As discussed earlier, the Company offers fixed and variable non-qualified deferred annuities under its marketing agreement with Charles Schwab & Co., Inc. Virtually all of the premium income has been variable, totaling $230.8 million in 1997, compared to the $9.3 million sold late in 1996. Life Insurance The Company continued its conservative approach to the manufacture and distribution of traditional life insurance products, while focusing on customer retention and expense management. Aggressive expense management and favorable individual life insurance persistency helped improve unit costs in 1997. Individual life insurance revenue premiums and deposits of $798.9 million in 1997 decreased 12% from 1996, due to the reduction of COLI premiums associated with the 1996 legislative changes. Individual life insurance premiums and deposits had increased 45% from 1995 to 1996 due to the reinsurance premiums of $164.8 million associated with a recaptured block of business. As discussed earlier, the Company has shifted its emphasis from COLI business to new sales in the BOLI market because of the 1996 legislative changes. Although COLI sales were discontinued in 1996, renewal premiums and deposits totaled $243.8 million in 1997 compared to $384.2 million in 1996 and $433.4 million in 1995. BOLI revenue premiums and deposits were $235.3 million during 1997, compared to $190.5 million in 1996 and $97.2 million in 1995. Outlook During 1998, the Company expects to continue its growth in the third party administration area through FASCorp. Emphasis will also be placed in developing the institutional insurance and annuity markets. Improved communications are expected to be provided to our customers in the public/non-profit market through the use of the world wide web. The Company is also seeking certification by the Insurance Marketplace Standards Association, which relates to ethical market conduct in the sale of individually sold life and annuity products. 3. Investment Operations The Company's primary investment objective is to acquire assets whose durations and cash flows reflect the characteristics 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 in changing interest rate environments, the Company's assets will always be able to meet the cash flow and income requirements of its liabilities. Through dynamic modeling, using state-of-the-art software 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 invested assets (Millions) follows: 1997 1996 ---- ---- Fixed maturities, available for sale, at fair value $6,698 $6,206 Fixed maturities, held-to-maturity, at amortized cost 2,083 1,993 Mortgage loans 1,236 1,488 Real estate and common stock 133 88 Short-term investments 399 419 Policy loans 2,657 2,523 -------- -------- $13,206 $12,717 ======= =======
Fixed Maturities Fixed maturity investments include publicly traded bonds, privately placed bonds and public and private structured assets. This latter category contains both asset-backed and mortgage-backed securities, including collateralized mortgage obligations ("CMOs"). The Company's strategy related to structured assets is to focus on those with lower volatility and minimal credit risk. The Company does not invest in higher risk CMOs such as interest-only and principal-only strips, and currently has no plans to invest in such securities. Private placement investments, which are primarily in the held-to-maturity category, are generally less marketable than publicly traded assets, yet they typically offer covenant protection which 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. In excess of 85% of the value of the securities in this portfolio are rated by external rating agencies. If not externally rated, the securities are rated by the Company on a basis intended to be similar to that of the rating agencies. The distribution of the fixed maturity portfolio (both available for sale and held to maturity) by credit rating is summarized as: Credit Rating 1997 1996 ------------- ---- ---- AAA 45.7% 45.9% AA 8.8 8.1 A 23.8 23.7 BBB 20.7 20.9 BB and Below (non-investment grade) 1.0 1.4 ------- ------- TOTAL 100.0% 100.0%
At December 31, 1997, the Company had no bonds in default. At December 31, 1996, there was one bond in default with a carrying value of $8 million. Mortgage Loans During 1997, the mortgage portfolio declined 17% to $1.2 billion, net of impairment reserves. The Company has not actively sought new loan opportunities since 1989 and, as such, has experienced an ongoing reduction in this portfolio's balance. The Company follows a comprehensive approach to the management of mortgage loans which includes ongoing analysis of key mortgage characteristics such as debt service coverage, net collateral cash flow, property condition, loan to value ratios and market conditions. Collateral valuations are performed for those mortgages which, after review, are determined by management to present possible risks and exposures. These valuations are then incorporated into the determination of the Company's allowance for credit losses. The average balance of impaired loans continued to remain low at $37.9 million in 1997 compared with $39.1 million in 1996, and foreclosures totaled $14.1 million and $13.0 million in 1997 and 1996, respectively. The low levels of problematic mortgages relative to the Company's overall balance sheet are due to the ongoing decrease in the size of the mortgage portfolio, the Company's active loan management program and improvement in market conditions. Occasionally, the Company elects to restructure certain loans if the economic benefits to the Company are believed to be more advantageous than those achieved by acquiring the collateral through foreclosure. At December 31, 1997 and 1996, the Company's loan portfolio included $64.4 million and $68.3 million, respectively, of non-impaired restructured loans. Real Estate and Common Stock The Company's real estate portfolio is composed primarily of the Home Office property ($56.9 million) and properties acquired through the foreclosure of troubled mortgages. The Company operates a wholly owned real estate subsidiary which attempts to maximize the value of these properties through rehabilitation, leasing and sale. The Company anticipates limited, if any, investments in real estate assets during 1998. The common stock portfolio is composed of mutual fund seed money and some private equity investments. The Company anticipates a limited participation in the stock markets in 1998. Derivatives The Company uses certain derivatives, such as futures, options, and swaps, for purposes of hedging interest rate and foreign exchange risk. These derivatives, when taken alone, may subject the Company to varying degrees of market and credit risk; however, when used for hedging, these instruments typically reduce risk. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures. The Company has also developed controls within its operations to ensure that only Board authorized transactions are executed. Note 6 to the financial statements contains a summary of the Company's outstanding financial hedging derivatives. Outlook General economic conditions continued to improve during 1997, including improvement or stabilization in many real estate markets. The Company does not expect to recognize any asset chargeoffs or restructurings which would result in a material adverse effect upon the Company's financial condition in 1998. C. LIQUIDITY AND CAPITAL RESOURCES The Company's operations have liquidity requirements that vary among the principal product lines. Life insurance and pension plan reserves are primarily long-term liabilities. Accident and health reserves, including long-term disability, consist of both short-term and long-term liabilities. Life insurance and pension plan reserve requirements are usually stable and predictable, and are supported primarily by long-term, fixed income investments. Accident and health claim demands are stable and predictable but generally shorter term, requiring greater liquidity. Generally, the Company has met its operating requirements by maintaining appropriate levels of liquidity in its investment portfolio and utilizing positive cash flows from operations. Liquidity for the Company has remained strong, as evidenced by significant amounts of short-term investments and cash, which totaled $525.4 million and $544.2 million as of December 31, 1997 and 1996, respectively. Funds provided from premiums and fees, investment income and maturities of investment assets are reasonably predictable and normally exceed liquidity requirements for payment of claims, benefits and expenses. However, since the timing of available funds cannot always be matched precisely to commitments, imbalances may arise when demands for funds exceed those on hand. Also, a demand for funds may arise as a result of the Company taking advantage of current investment opportunities. The Company's capital resources represent funds available for long-term business commitments and primarily consist of retained earnings and proceeds from the issuance of commercial paper and equity securities. Capital resources provide protection for policyholders and the financial strength to support the underwriting of insurance risks, and allow for continued business growth. The amount of capital resources that may be needed is determined by the Company's senior management and Board of Directors as well as by regulatory requirements. The allocation of resources to new long-term business commitments is designed to achieve an attractive return, tempered by considerations of risk and the need to support the Company's existing business. The Company's financial strength provides the capacity and flexibility to enable it to raise funds in the capital markets through the issuance of commercial paper. The Company continues to be well capitalized, with sufficient borrowing capacity to meet the anticipated needs of its business. The Company had $54.1 million of commercial paper outstanding at December 31, 1997, compared with $84.7 million at December 31, 1996. The commercial paper has been given a rating of A-1+ by Standard & Poor's Corporation and a rating of P-1 by Moody's Investors Service, each being the highest rating available. D. ACCOUNTING PRONOUNCEMENTS During the fourth quarter of 1995, the Financial Accounting Standards Board issued a guide to implementation of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which permits a one-time opportunity to reclassify securities subject to SFAS No. 115. Consequently, the Company reassessed the classification of its investment portfolio in December 1995 and reclassed securities totaling $2.1 billion from held-to-maturity to available-for-sale. In connection with this reclassification, an unrealized gain, net of related policyholder amounts and deferred income taxes, of $23.4 million was recognized in stockholder's equity at the date of transfer. In 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The implementation of this statement had no material effect on the Company's results of operations, liquidity or financial condition. In connection with the employee transfer discussed in Note 2 to the financial statements, effective January 1, 1997 the Company implemented SFAS No. 87, "Employers Accounting for Pensions" and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". Previously, employee expenses (including costs for benefit plans) were transferred from Great-West Life to the Company through administrative services agreements. Accordingly, the implementation of these standards had no material effect on the financial results of the Company. Effective January 1, 1998, the Company will implement SFAS No. 125, "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities", as it relates to repurchase agreements and securities lending arrangements. Management estimates that this change will not have a material effect on the Company's financial results. Effective January 1, 1998, the Company will implement SFAS No. 130, "Reporting Comprehensive Income", which requires the disclosure of comprehensive income and its components. The Company recognizes unrealized gains and losses, net of adjustments, on its investments available for sale portfolio. These items will be disclosed as comprehensive income. Effective October 1, 1998, the Company will implement the disclosure requirements of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The Company anticipates, with the adoption of SFAS No. 131, that it will incorporate segment disclosures of its current operating units. The Company believes the segment information required to be disclosed under SFAS No. 131 will be more comprehensive than previously provided, including expanded disclosures of income statement and balance sheet items for each of its reportable operating segments. Effective January 1, 1998, the Company will implement SFAS No. 132, "Employer's Disclosures About Pensions and Other Postretirement Benefits". The Company expects to modify its disclosure for its postretirement benefit plans to conform to the requirements of SFAS No. 132. E. YEAR 2000 The Company has a number of existing computer programs that use only two digits to identify a year in the date field, which creates a problem with the upcoming change in the century. The Company has developed detailed plans to rectify the year 2000 issue. These plans include modifying programs where necessary, replacing certain programs with year 2000 compliant software, and working with vendors and business partners who need to become year 2000 compliant. Management estimates that the total cost to implement these plans will not be material, and has budgeted the expense as part of its computer systems operating costs in 1998 and early 1999. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following are the Company's Consolidated Financial Statements for the Years Ended December 31, 1997, 1996, and 1995 and the Independent Auditors' Report thereon. GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY (A wholly-owned subsidiary of The Great-West Life Assurance Company) Consolidated Financial Statements for the Years Ended December 31, 1997, 1996, and 1995 .......and Independent Auditors' Report INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of Great-West Life & Annuity Insurance Company: We have audited the accompanying consolidated balance sheets of Great-West Life & Annuity Insurance Company (a wholly-owned subsidiary of The Great-West Life Assurance Company) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing standards. 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 consolidated financial statements present fairly, in all material respects, the financial position of Great-West Life & Annuity Insurance Company and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Denver, Colorado January 23, 1998 GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------ ASSETS 1997 1996 - ------ -------------- --------------- INVESTMENTS: Fixed Maturities: Held-to-maturity, at amortized cost (fair value $2,151,476 and $ 2,082,716 $ 1,992,681 $2,041,064) Available-for-sale, at fair value (amortized cost $6,541,422 and 6,698,629 6,206,478 $6,151,519) Common stock 39,021 19,715 Mortgage loans on real estate, net 1,235,594 1,487,575 Real estate, net 93,775 67,967 Policy loans 2,657,116 2,523,477 Short-term investments, available-for-sale (cost approximates 399,131 419,008 fair value) -------------- --------------- Total Investments 13,205,982 12,716,901 Cash 126,278 125,182 Reinsurance receivable 84,364 196,958 Deferred policy acquisition costs 255,442 282,780 Investment income due and accrued 165,827 198,441 Other assets 121,543 57,244 Premiums in course of collection 77,008 74,693 Deferred income taxes 193,820 214,404 Separate account assets 7,847,451 5,484,631 -------------- --------------- TOTAL ASSETS $ 22,077,715 $ 19,351,234 ============== ===============
See notes to consolidated financial statements. - ------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDER'S EQUITY 1997 1996 - ------------------------------------ -------------- --------------- POLICY BENEFIT LIABILITIES: Policy reserves $ 11,102,719 $ 11,022,595 Policy and contract claims 375,499 372,327 Policyholders' funds 165,106 153,867 Experience refunds 84,935 87,399 Provision for policyholders' dividends 62,937 51,279 GENERAL LIABILITIES: Due to Parent Corporation 126,656 151,431 Repurchase agreements 325,538 286,736 Commercial paper 54,058 84,682 Other liabilities 605,032 488,818 Undistributed earnings on participating business 141,865 133,255 Separate account liabilities 7,847,451 5,484,631 -------------- --------------- Total Liabilities 20,891,796 18,317,020 -------------- --------------- STOCKHOLDER'S EQUITY: Preferred stock, $1 par value, 50,000,000 shares authorized: Series A, cumulative, 1500 shares authorized, liquidation value of $100,000 per share, 600 shares issued and outstanding 60,000 60,000 Series B, cumulative, 1500 shares authorized, liquidation value of $100,000 per share, 200 shares issued and outstanding 20,000 20,000 Series C, cumulative, 1500 shares authorized, none outstanding Series D, cumulative, 1500 shares authorized, none outstanding Series E, non-cumulative, 2,000,000 shares authorized, issued, and outstanding, liquidation value of $20.90 per share 41,800 41,800 Common stock, $1 par value; 50,000,000 shares authorized; 7,032,000 shares issued and outstanding 7,032 7,032 Additional paid-in capital 690,748 664,265 Unrealized gains (losses) on securities available-for-sale, net 52,807 14,951 Retained earnings 313,532 226,166 -------------- --------------- Total Stockholder's Equity 1,185,919 1,034,214 -------------- --------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 22,077,715 $ 19,351,234 ============== ===============
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------ 1997 1996 1995 ------------- ------------- ------------- REVENUES: Annuity contract charges and premiums $ 115,054 $ 91,881 $ 79,816 Life, accident, and health premiums earned (net of premiums ceded (recaptured) totaling $(94,646), $(104,250) and $60,880) 1,163,855 1,107,367 987,611 Net investment income 897,572 836,642 835,046 Net realized gains (losses) on investments 9,800 (21,078) 7,465 ------------- ------------- ------------- 2,186,281 2,014,812 1,909,938 ------------- ------------- ------------- BENEFITS AND EXPENSES: Life and other policy benefits (net of reinsurance recoveries totaling $44,871, $52,675, and $43,574) 543,903 515,750 557,469 Increase in reserves 245,811 229,198 98,797 Interest paid or credited to contractholders 527,784 561,786 562,263 Provision for policyholders' share of earnings (losses) on participating business 3,753 (7) 2,027 Dividends to policyholders 63,799 49,237 48,150 ------------- ------------- ------------- 1,385,050 1,355,964 1,268,706 Commissions 102,150 106,561 122,926 Operating expenses 419,616 336,719 314,810 Premium taxes 23,108 25,021 26,884 ------------- ------------- ------------- 1,929,924 1,824,265 1,733,326 INCOME BEFORE INCOME TAXES 256,357 190,547 176,612 ------------- ------------- ------------- PROVISION FOR INCOME TAXES: Current 103,794 77,134 88,366 Deferred (6,197) (21,162) (39,434) ------------- ------------- ------------- 97,597 55,972 48,932 ------------- ------------- ------------- NET INCOME $ 158,760 $ 134,575 $ 127,680 ============= ============= =============
See notes to consolidated financial statements. GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------------------------- Net Additional Unrealized Preferred Stock Common Stock Paid-In Gains Retained ---------------------- --------------------- Shares Amount Shares Amount Capital (Losses) Earnings Total ---------- ---------- ----------- -------- ---------- ----------- ---------- ------------ BALANCE, JANUARY 1, 1995 2,000,800 $ 121,800 7,032,000 $ 7,032 $ 657,265 $ (78,427) $ 69,561 $ 777,231 Change in net unrealized gains (losses) 137,190 137,190 Dividends (48,980) (48,980) Net income 127,680 127,680 ---------- ---------- ----------- -------- ---------- ----------- ---------- ------------ BALANCE, DECEMBER 31, 1995 2,000,800 121,800 7,032,000 7,032 657,265 58,763 148,261 993,121 Change in net unrealized gains (losses) (43,812) (43,812) Capital contributions 7,000 7,000 Dividends (56,670) (56,670) Net income 134,575 134,575 ---------- ---------- ----------- -------- ---------- ----------- ---------- ------------ BALANCE, DECEMBER 31, 1996 2,000,800 121,800 7,032,000 7,032 664,265 14,951 226,166 1,034,214 Change in net unrealized gains (losses) 37,856 37,856 Capital contributions 26,483 26,483 Dividends (71,394) (71,394) Net income 158,760 158,760 ---------- ---------- ----------- -------- ---------- ----------- ---------- ------------ BALANCE, DECEMBER 31, 1997 2,000,800 $ 121,800 7,032,000 $ 7,032 $ 690,748 $ 52,807 $ 313,532 $ 1,185,919 ========== ========== =========== ======== ========== =========== ========== ============
See notes to consolidated financial statements. GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------ 1997 1996 1995 -------------- ------------- ------------- OPERATING ACTIVITIES: Net income $ 158,760 $ 134,575 $ 127,680 Adjustments to reconcile net income to net cash provided by operating activities: Gain (loss) allocated to participating 3,753 (7) 2,027 policyholders Amortization of investments 409 15,518 26,725 Realized losses (gains) on disposal of investments and provisions for mortgage loans and (9,800) 21,078 (7,465) real estate Amortization 46,929 49,454 49,464 Deferred income taxes (6,224) (20,258) (39,763) Changes in assets and liabilities: Policy benefit liabilities 498,114 358,393 346,975 Reinsurance receivable 112,594 136,966 (38,776) Accrued interest and other receivables 30,299 24,778 (17,617) Other, net 58,865 (8,076) 8,834 -------------- ------------- ------------- Net cash provided by operating 893,699 712,421 458,084 activities -------------- ------------- ------------- INVESTING ACTIVITIES: Proceeds from sales, maturities, and redemptions of investments: Fixed maturities Held-to-maturity Sales 18,821 Maturities and redemptions 359,021 516,838 655,993 Available-for-sale Sales 3,174,246 3,569,608 4,211,649 Maturities and redemptions 771,737 803,369 253,747 Mortgage loans 248,170 235,907 260,960 Real estate 36,624 2,607 4,401 Common stock 17,211 1,888 Purchases of investments: Fixed maturities Held-to-maturity (439,269) (453,787) (490,228) Available-for-sale (4,314,722) (4,753,154) (4,932,566) Mortgage loans (2,532) (23,237) (683) Real estate (64,205) (15,588) (5,302) Common stock (29,608) (12,113) (4,218) -------------- ------------- ------------- Net cash used in investing (243,327) (127,662) (27,426) activities -------------- ------------- ------------- (Continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------ 1997 1996 1995 ------------- ------------- ------------- FINANCING ACTIVITIES: Contract withdrawals, net of deposits $ (577,538) $ (413,568) $ (217,190) Due to Parent Corporation (19,522) 1,457 (9,143) Dividends paid (71,394) (56,670) (48,980) Net commercial paper repayments (30,624) (172) (4,832) Net repurchase agreements (repayments) borrowings 38,802 (88,563) (191,195) Capital contributions 11,000 7,000 ------------- ------------- ------------- Net cash used in financing activities (649,276) (550,516) (471,340) ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH 1,096 34,243 (40,682) CASH, BEGINNING OF YEAR 125,182 90,939 131,621 ------------- ------------- ------------- CASH, END OF YEAR $ 126,278 $ 125,182 $ 90,939 ============= ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Income taxes $ 86,829 $ 103,700 $ 83,841 Interest 15,124 15,414 17,016 See notes to consolidated financial statements. (Concluded)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (Amounts in Thousands, except Share Amounts) - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization - Great-West Life & Annuity Insurance Company (the Company) is a wholly-owned subsidiary of The Great-West Life Assurance Company (the Parent Corporation). The Company is an insurance company domiciled in the State of Colorado. The Company offers a wide range of life insurance, health insurance, and retirement and investment products to individuals, businesses, and other private and public organizations throughout the United States. Basis of Presentation - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. Investments - Investments are reported as follows: 1. Management determines the classification of fixed maturities at the time of purchase. Fixed maturities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost unless fair value is less than cost and the decline is deemed to be other than temporary, in which case they are written down to fair value and a new cost basis is established. Fixed maturities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the net unrealized gains and losses reported as a separate component of stockholder's equity. The net unrealized gains and losses in derivative financial instruments used to hedge available-for-sale securities are included in the separate component of stockholder's equity. The amortized cost of fixed maturities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts using the effective interest method over the estimated life of the related bonds. Such amortization is included in net investment income. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net realized gains (losses) on investments. 2. Mortgage loans on real estate are carried at their unpaid balances adjusted for any unamortized premiums or discounts and any valuation reserves. Interest income is accrued on the unpaid principal balance. Discounts and premiums are amortized to net investment income using the effective interest method. Accrual of interest is discontinued on any impaired loans where collection of interest is doubtful. The Company maintains an allowance for credit losses at a level that, in management's opinion, is sufficient to absorb possible credit losses on its impaired loans and to provide adequate provision for any possible future losses in the portfolio. Management's judgment is based on past loss experience, current and projected economic conditions, and extensive situational analysis of each individual loan. The measurement of impaired loans is based on the fair value of the collateral. 3. Real estate is carried at the lower of cost or fair value, net of costs of disposal. Effective January 1, 1996, the Company adopted SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The implementation of this statement had no material effect on the Company's financial statements. 4. Investments in common stock are carried at fair value. 5. Policy loans are carried at their unpaid balances. 6. Short-term investments include securities purchased with initial maturities of one year or less and are carried at amortized cost. The Company considers short-term investments to be available-for-sale and amortized cost approximates fair value. Gains and losses realized on disposal of investments are determined on a specific identification basis. Cash - Cash includes only amounts in demand deposit accounts. Deferred Policy Acquisition Costs - Policy acquisition costs, which consist of sales commissions and other costs that vary with and are primarily related to the production of new and renewal business, have been deferred to the extent recoverable. 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 $44,298, $47,089, and $48,054 in 1997, 1996, and 1995, respectively. Separate Account - Separate account assets and related liabilities are carried at fair value. The Company's separate accounts invest in shares of Maxim Series Fund, Inc. and Orchard Series Fund, Inc., both diversified, open-end management investment companies which are affiliates of the Company, shares of other external mutual funds, or government or corporate bonds. Life Insurance and Annuity Reserves - Life insurance and annuity policy reserves with life contingencies of $5,741,596 and $5,242,753, at December 31, 1997 and 1996, 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 $5,346,516 and $5,766,533, at December 31, 1997 and 1996, respectively, are established at the contractholder's account value. Reinsurance - Policy reserves ceded to other insurance companies are carried as reinsurance receivable on the balance sheet (See Note 3). 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. Policy and Contract Claims - Policy and contract claims include provisions for reported 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. Participating Fund Account - Participating life and annuity policy reserves are $3,901,297 and $3,591,077 at December 31, 1997 and 1996, respectively. Participating business approximates 50.5% and 50.3% of the Company's ordinary life insurance in force and 91.1% and 92.2% of ordinary life insurance premium income at December 31, 1997 and 1996, respectively. The liability for undistributed earnings on participating business was increased (decreased) by $8,610 and $(3,362) in 1997 and 1996, which represented $3,753 and $(7) of gains (losses) on participating business, increases (decreases) of $2,102 and $(2,924) to reflect the net change in unrealized gains on securities classified as available-for-sale, net of certain adjustments to policy reserves and income taxes, and increases (decreases) of $2,755 and $(431) due to reinsurance transactions (See Note 2). The amount of dividends to be paid from undistributed earnings on participating business is determined annually by the Board of Directors. Amounts allocable to participating policyholders are consistent with established Company practice. The Company has established a Participating Policyholder Experience Account (PPEA) for the benefit of all participating policyholders which is included in the accompanying consolidated balance sheet. Earnings associated with the operation of the PPEA are credited to the benefit of all participating policyholders. In the event that the assets of the PPEA are insufficient to provide contractually guaranteed benefits, the Company must provide such benefits from its general assets. The Company has also established a Participation Fund Account (PFA) for the benefit of the participating policyholders previously transferred to the Company from the Parent under an assumption reinsurance transaction. The PFA is part of the PPEA. Earnings derived from the operation of the PFA accrue solely for the benefit of the acquired participating policyholders. Recognition of Premium Income and Benefits and Expenses - Life insurance premiums are recognized as earned. Annuity premiums with life contingencies are recognized as received. 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. Benefits and expenses on policies with life contingencies are associated with premium income by means of the provision for future policy benefit reserves, resulting in recognition of profits over the life of the contracts. The average crediting rate on annuity products was approximately 6.6%, 6.8%, and 7.2% in 1997, 1996, and 1995. 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, net of a valuation allowance, will be realized. Repurchase Agreements and Securities Lending - The Company enters into repurchase agreements with third-party broker-dealers in which the Company sells securities and agrees to repurchase substantially similar securities at a specified date and price. Such agreements are accounted for as collateralized borrowings. Interest expense on repurchase agreements is recorded at the coupon interest rate on the underlying securities. The repurchase fee received or paid is amortized over the term of the related agreement and recognized as an adjustment to investment income. The Company will implement Statement of Financial Accounting Standards (SFAS) No. 125 "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities" in 1998 as it relates to repurchase agreements and securities lending arrangements. Management estimates the effect of the change will not have a material affect on the Company's financial statements. Derivatives - The Company makes limited use of derivative financial instruments to manage interest rate, market, and foreign exchange risk. Such hedging activity consists of interest rate swap agreements, interest rate floors and caps, foreign currency exchange contracts and equity swaps. The differential paid or received under the terms of these contracts are recognized as an adjustment to net investment income on the accrual method. Gains and losses on foreign exchange contracts are deferred and recognized in net investment income when the hedged transactions are realized. Interest rate swap agreements are used to convert the interest rate on certain fixed maturities from a floating rate to a fixed rate. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amount. Interest rate floors and caps are interest rate protection instruments that require the payment by a counter-party to the Company of an interest rate differential. The differential represents the difference between current interest rates and an agreed-upon rate, the strike rate, applied to a notional principal amount. Foreign currency exchange contracts are used to hedge the foreign exchange rate risk associated with bonds denominated in other than U.S. dollars. Equity swap transactions generally involve the exchange of variable market performance of a basket of securities for a fixed interest rate. Although derivative financial instruments taken alone may expose the Company to varying degrees of market and credit risk when used solely for hedging purposes, these instruments typically reduce overall market and interest rate risk. The Company controls the credit risk of its financial contracts through credit approvals, limits, and monitoring procedures. As the Company generally enters into transactions only with high quality institutions, no losses associated with non-performance on derivative financial instruments have occurred or are expected to occur. 2. RELATED-PARTY TRANSACTIONS On June 30, 1997 the Company recaptured all remaining pieces of an individual participating insurance block of business previously reinsured to the Parent Corporation on December 31, 1992. The Company recorded, at estimated fair value, the following at June 30, 1997 as a result of this transaction: Assets Liabilities and Stockholder's Equity -------- ------------------------------- Cash $ 160,000 Policy reserves $ 155,798 Bonds 17,975 Due to parent corporation 9,373 Other 60 Deferred income taxes 2,719 Undistributed earnings on participating business (855) Stockholder's equity 11,000 ----------- ---------- $ 178,035 $ 178,035 =========== ==========
On October 31, 1996 the Company recaptured certain pieces of an individual participating insurance block of business previously reinsured to the Parent Corporation on December 31, 1992. The Company recorded, at estimated fair value, the following at October 31, 1996 as a result of this transaction: Assets Liabilities and Stockholder's Equity --------- ------------------------------- Cash $ 162,000 Policy reserves $ 164,839 Mortgages 19,753 Due to parent corporation 9,180 Other 118 Deferred income taxes 1,283 Undistributed earnings on participating business (431) Stockholder's equity 7,000 ============ =========== $ 181,871 $ 181,871 ============ ===========
Effective January 1, 1997 all employees of the U.S. operations of the Parent Corporation and the related benefit plans were transferred to the Company. All related employee benefit plan assets and liabilities were also transferred to the Company (see Note 9). The transfer did not have a material effect on the Company's operating expenses as the costs associated with the employees and the benefit plans were charged previously to the Company under administrative service agreements between the Company and the Parent Corporation. Prior to January 1997, the Parent Corporation administered, distributed, and underwrote business for the Company and administered the Company's investment portfolio under various administrative agreements. As of January 1, 1997, the Company performs these services for the U.S. operations of the Parent Corporation. The following represents allocations between the two companies for services provided pursuant to these service agreements: Years Ended December 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Investment management revenue (expense) $ 801 $ (14,800) $ (15,182) Administrative and underwriting revenue 6,292 (304,599) (301,529) (payments)
At December 31, 1997 and 1996, due to Parent Corporation includes $8,957 and $31,639 due on demand and $117,699 and $119,792 of notes payable which bear interest and mature at various dates through December 31, 2005. These notes may be prepaid in whole or in part at any time without penalty; the issuer may not demand payment before the maturity date. The due on demand to the Parent Corporation bears interest at the public bond rate (7.1% and 7.0% at December 31, 1997 and 1996, respectively) while the remainder bear interest at various rates ranging from 6.6% to 9.5%. 3. 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 a maximum of $1.5 million of coverage per individual life. 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, 1997 and 1996, the reinsurance receivable had a carrying value of $84,364 and $196,958, respectively. Total reinsurance premiums assumed from the Parent Corporation were $1,712, $1,693, and $1,606 in 1997, 1996, and 1995, respectively. The Company considers all accident and health policies to be short-duration contracts. The following schedule details life insurance in force and life and accident/health premiums: Assumed Ceded Primarily Percentage Primarily From of Amount to Gross the Parent Other Net Assumed to Amount Corporation Companies Amount Net ------------- ------------ ------------ ------------- ----------- December 31, 1997: Life insurance in force: Individual $ 24,598,679 $ 4,040,398 $ 3,667,235 $ 24,225,516 15.1% Group 51,179,343 2,031,477 53,210,820 3.8% ------------- ------------ ------------ ------------- Total $ 75,778,022 $ 4,040,398 $ 5,698,712 $ 77,436,336 ============= ============ ============ ============= Premiums: Life insurance $ 361,093 $ (127,291)$ 19,923 $ 508,307 3.9% Accident/health 628,398 32,645 59,795 655,548 9.1% ------------- ------------ ------------ ------------- Total $ 989,491 $ (94,646)$ 79,718 $ 1,163,855 ============= ============ ============ ============= December 31, 1996: Life insurance in force: Individual $ 23,409,823 $ 5,246,079 $ 3,482,118 $ 21,645,862 16.1% Group 47,682,237 1,817,511 49,499,748 3.7% ------------- ------------ ------------ ------------- Total $ 71,092,060 $ 5,246,079 $ 5,299,629 $ 71,145,610 ============= ============ ============ ============= Premiums: Life insurance $ 334,127 $ (111,743)$ 19,633 $ 465,503 4.2% Accident/health 592,577 7,493 56,780 641,864 8.8% ------------- ------------ ------------ ------------- Total $ 926,704 $ (104,250)$ 76,413 $ 1,107,367 ============= ============ ============ ============= December 31, 1995: Life insurance in force: Individual $ 22,388,520 $ 7,200,882 $ 3,476,784 $ 18,664,422 18.6% Group 48,415,592 1,954,313 50,369,905 3.9% ============= ============ ============ ============= Total $ 70,804,112 $ 7,200,882 $ 5,431,097 $ 69,034,327 ============= ============ ============ ============= Premiums: Life insurance $ 339,342 $ 51,688 $ 21,028 $ 308,682 6.8% Accident/health 623,626 9,192 64,495 678,929 9.5% ------------- ------------ ------------ ------------- Total $ 962,968 $ 60,880 $ 85,523 $ 987,611 ============= ============ ============ =============
4. NET INVESTMENT INCOME Net investment income is summarized as follows: Years Ended December 31, ------------------------------------------------ 1997 1996 1995 --------------- --------------- -------------- Investment income: Fixed maturities and short-term investments $ 633,975 $ 601,913 $ 591,561 Mortgage loans on real estate 118,274 140,823 171,008 Real estate 20,990 5,292 3,936 Policy loans 194,826 175,746 163,547 Other 22,119 3,321 --------------- --------------- -------------- 990,184 927,095 930,052 Investment expenses, including interest on amounts charged by the Parent Corporation of $9,758, $11,282, and $10,778 92,612 90,453 95,006 --------------- --------------- -------------- Net investment income $ 897,572 $ 836,642 $ 835,046 =============== =============== ============== 5. NET REALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments are as follows: Years Ended December 31, ------------------------------------------------- 1997 1996 1995 --------------- --------------- --------------- Realized gains (losses): Fixed Maturities $ 15,966 $ (11,624) $ 28,166 Mortgage loans on real estate 1,081 1,143 1,309 Real estate 363 (10) Provisions (7,610) (10,597) (22,000) --------------- --------------- --------------- Net realized gains (losses) on $ 9,800 $ (21,078) $ 7,465 investments =============== =============== ===============
6. SUMMARY OF INVESTMENTS Fixed maturities owned at December 31, 1997 are summarized as follows: Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Cost Gains Losses Value Value ---------- --------- ---------- ----------- ----------- Held-to-Maturity: U.S. Treasury Securities and obligations of U.S. $ $ 1,186 $ 25 $ 27,044 $ 25,883 Government 25,883 Agencies - Other: Collateralized mortgage 174 obligations 5,006 5,180 5,006 Public utilities 11,214 3 245,394 256,605 245,394 Corporate bonds 1,668,710 57,036 3,069 1,722,677 1,668,710 Foreign governments 659 10,268 10,927 10,268 State and municipalities 1,588 127,455 129,043 127,455 --------- ---------- ----------- ---------- ----------- $ 2,082,716 $ 71,857 $ 3,097 $ 2,151,476 $ 2,082,716 ========== ========= ========== =========== =========== Available-for-Sale: U.S. Treasury Securities and obligations of U.S. Government Agencies Collateralized mortgage obligations $ $ 17,339 $ 310 $ $ 652,975 670,004 670,004 Direct mortgage pass-through certificates 7,911 2,668 917,216 922,459 922,459 Other 1,794 244 297,337 298,887 298,887 Collateralized mortgage obligations 19,494 1,453 682,158 700,199 700,199 Public utilities 8,716 1,320 549,435 556,831 556,831 Corporate bonds 3,265,039 107,740 4,350 3,368,429 3,368,429 Foreign governments 4,115 60 131,586 135,641 135,641 State and municipalities 503 45,676 46,179 46,179 ----------- ---------- --------- ---------- ----------- $ 6,541,422 $ 167,612 $ 10,405 $ $ 6,698,629 6,698,629 ========== ========= ========== =========== ===========
6. SUMMARY OF INVESTMENTS [Continued] Fixed maturities owned at December 31, 1996 are summarized as follows: Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Cost Gains Losses Value Value ---------- ---------- ---------- ---------- ----------- Held-to-Maturity: U.S. Treasury Securities and obligations of U.S. $ $ 630 $ 106 $ $ Government 10,935 11,459 10,935 Agencies - Other: Public utilities 12,755 320 284,954 297,389 284,954 Corporate bonds 1,634,745 41,195 7,360 1,668,580 1,634,745 Foreign governments 556 3 12,577 13,130 12,577 State and municipalities 1,051 15 49,470 50,506 49,470 ---------- ---------- ---------- ---------- ----------- $ 1,992,681 $ 56,187 $ 7,804 $ 2,041,064 $ 1,992,681 ========== ========== ========== ========== =========== Available-for-Sale: U.S. Treasury Securities and obligations of U.S. Government Agencies: Collateralized mortgage obligations $ $ 8,058 $ 3,700 $ $ 658,612 662,970 662,970 Direct mortgage pass-through certificates 5,093 10,908 844,291 838,476 838,476 Other 596 2,686 359,220 357,130 357,130 Collateralized mortgage obligations 13,619 3,553 614,773 624,839 624,839 Public utilities 6,523 5,375 628,382 629,530 629,530 Corporate bonds 2,907,875 56,551 5,250 2,959,176 2,959,176 Foreign governments 1,762 5,673 110,013 106,102 106,102 State and municipalities 21 119 28,353 28,255 28,255 ----------- ---------- ---------- ---------- ---------- $ 6,151,519 $ 92,223 $ 37,264 $ 6,206,478 $ 6,206,478 ========== ========== ========== ========== ===========
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. In November 1995, the Financial Accounting Standards Board issued a special report entitled "A Guide to Implementation of Statement of Financial Accounting Standards No. 115 (SFAS No. 115) on Accounting for Certain Investments in Debt and Equity Securities". In accordance with the adoption of this guidance, the Company reassessed the classification of its investment portfolio in December 1995 and reclassed securities totalling $2,119,814 from held-to-maturity to available-for-sale. In connection with this reclassification, an unrealized gain, net of related adjustments, of $23,449 was recognized in stockholder's equity at the date of transfer. 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, 1997, 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. Held-to-Maturity Available-for-Sale ------------------------- ------------------------- Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value ------------ ----------- ------------ ----------- Due in one year or less $ 286,088 $ 290,164 $ 447,703 $ 462,719 Due after one year through five 787,376 809,237 1,182,390 1,209,692 years Due after five years through ten 718,818 751,753 842,019 865,153 years Due after ten years 129,957 137,190 447,642 466,949 Mortgage-backed securities 5,006 5,180 2,252,349 2,292,662 Asset-backed securities 155,471 157,952 1,369,319 1,401,454 ------------ ----------- =========== ============ =========== $ 2,082,716 $ 2,151,476 $ 6,541,422 $ 6,698,629 ============ =========== ============ ===========
Proceeds from sales of securities available-for-sale were $3,174,246, $3,569,608, and $4,211,649 during 1997, 1996, and 1995, respectively. The realized gains on such sales totaled $20,543, $24,919, and $39,755 for 1997, 1996, and 1995, respectively. The realized losses totaled $10,643, $40,748, and $15,516 for 1997, 1996, and 1995, respectively. During 1997, 1996, and 1995 held-to-maturity securities with an amortized cost of $0, $0, and $18,087 were sold due to credit deterioration with insignificant realized gains and losses. At December 31, 1997 and 1996, pursuant to fully collateralized securities lending arrangements, the Company had loaned $162,817 and $230,419 of fixed maturities, respectively. The Company engages in hedging activities to manage interest rate and exchange risk. The following table summarizes the 1997 financial hedge instruments: Notional Strike/Swap December 31, 1997 Amount Rate Maturity --------------------------------- --------------- ---------------------- ----------------- Interest Rate Floor $ 100,000 4.5% (LIBOR) 1999 Interest Rate Caps 565,000 6.75% to 11.82%(CMT) 1999 to 2002 Interest Rate Swaps 212,139 6.20% to 9.35% 01/98 to 02/2003 Foreign Currency Exchange Contracts 57,168 N/A 09/98 to 07/2006 Equity Swap 100,000 5.64% 12/98
The following table summarizes the 1996 financial hedge instruments: Notional Strike/Swap December 31, 1996 Amount Rate Maturity --------------------------------- --------------- ---------------------- --------------- Interest Rate Floor $ 100,000 4.5% [LIBOR] 1999 Interest Rate Caps 260,000 11.0% to 11.82%[CMT] 2000 to 2001 Interest Rate Swaps 187,847 6.20% to 9.35% 01/98 to 02/2003 Foreign Currency Exchange Contracts 61,012 N/A 09/98 to 03/2003
LIBOR - London Interbank Offered Rate CMT - Constant Maturity Treasury Rate The Company has established specific investment guidelines designed to emphasize a diversified and geographically dispersed portfolio of mortgages collateralized by commercial and industrial properties located in the United States. The Company's policy is to obtain collateral sufficient to provide loan-to-value ratios of not greater than 75% at the inception of the mortgages. At December 31, 1997 approximately 32% and 10% of the Company's mortgage loans were collateralized by real estate located in California and Michigan, respectively. The following represents impairments and other information with respect to impaired loans: 1997 1996 ----------- ----------- Loans with related allowance for credit losses of $2,493 and $ 13,193 $ 16,443 $2,793 Loans with no related allowance for credit losses 20,013 31,709 Average balance of impaired loans during the year 37,890 39,064 Interest income recognized [while impaired] 2,428 923 Interest income received and recorded [while impaired] using the 2,484 1,130 cash basis method of recognition
As part of an active loan management policy and in the interest of maximizing the future return of each individual loan, the Company may from time to time alter the original terms of certain loans. These restructured loans, all performing in accordance with their modified terms that are not impaired, aggregated $64,406, and $68,254 at December 31, 1997, and 1996, respectively. The following table presents changes in the allowance for credit losses: 1997 1996 1995 ---------------- ---------------- ---------------- Balance, beginning of year $ 65,242 63,994 $ 57,987 $ Provision for loan losses 4,521 4,470 15,877 Chargeoffs (2,521) (3,468) (10,480) Recoveries 246 610 ================ ================ ================ Balance, end of year $ 67,242 65,242 $ 63,994 $ ================ ================ ================
7. COMMERCIAL PAPER The Company has a commercial paper program which is partially supported by a $50,000 standby letter-of-credit. At December 31, 1997, commercial paper outstanding has maturities ranging from 41 to 99 days and interest rates ranging from 5.6% to 5.8%. At December 31, 1996, maturities ranged from 49 to 123 days and interest rates ranged from 5.4% to 5.6%. 8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The following table provides estimated fair value for all assets and liabilities and hedge contracts considered to be financial instruments: December 31, ------------------------------------------------------- 1997 1996 ---------------------------- -------------------------- Estimated Carrying Estimated Carrying Fair Amount Fair Value Amount Value ------------ -------------- ----------- ------------- ASSETS: Fixed maturities and short- term investments $ 9,180,476 $ 9,249,235 $ 8,618,167 $ 8,666,550 Mortgage loans on real estate 1,235,594 1,261,949 1,487,575 1,506,162 Policy loans 2,657,116 2,657,116 2,523,477 2,523,477 Common stock 39,021 39,021 19,715 19,715 LIABILITIES: Annuity contract reserves without life 5,346,516 5,373,818 5,766,533 5,808,095 contingencies Policyholders' funds 165,106 165,106 153,867 153,867 Due to Parent Corporation 126,656 124,776 151,431 154,479 Repurchase agreements 325,538 325,538 286,736 286,736 Commercial paper 54,058 54,058 84,682 84,682 HEDGE CONTRACTS: Interest rate floor 25 25 62 124 Interest rate cap 130 130 173 173 Interest rate swaps 4,265 4,265 4,746 4,746 Foreign currency exchange contracts 3,381 3,381 (8,954) (8,954) Equity swaps 856 856
The estimated fair value of financial instruments has been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the 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. Mortgage loans fair value estimates generally are based on a discounted cash flow basis. A discount rate "matrix" is incorporated whereby the discount rate used in valuing a specific mortgage generally corresponds to that mortgage's remaining term. The rates selected for inclusion in the discount rate "matrix" reflect rates that the Company would quote if placing loans representative in size and quality to those currently in the portfolio. Policy loans accrue interest generally at variable rates with no fixed maturity dates and, therefore, estimated fair value approximates carrying value. The fair value of annuity contract reserves without life contingencies is 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. The estimated fair value of due to Parent Corporation is based on discounted cash flows at current market spread rates on high quality investments. The carrying value of repurchase agreements and commercial paper is a reasonable estimate of fair value due to the short-term nature of the liabilities. The estimated fair value of financial hedge instruments, all of which are held for other than trading purposes, is the estimated amount the Company would receive or pay to terminate the agreement at each year-end, taking into consideration current interest rates and other relevant factors. Included in the net gain position for interest rates swaps are $0 and $160 of unrealized losses in 1997 and 1996, respectively. Included in the net loss position for foreign currency exchange contracts are $0 and $8,954 of loss exposures in 1997 and 1996, respectively. 9. EMPLOYEE BENEFIT PLANS Effective January 1, 1997, all employees of the U.S. operations of the Parent Corporation and the related benefit plans were transferred to the Company. See Note 2 for further discussion. The Company's defined benefit pension plan (pension plan) covers substantially all of its employees. The benefits are based on years of service, age at retirement, and the compensation during the last seven years of employment. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Investments of the pension plan are managed by the Company and invested primarily in investment contracts and separate accounts. The Company's Parent had previously accounted for the pension plan under the Canadian Institute of Chartered Accountants (CICA) guidelines and had recorded a prepaid pension asset of $19,091. As generally accepted accounting principles do not materially differ from CICA guidelines and the transfer is between related parties, the prepaid pension asset was transferred at cost. As a result, the Company recorded the following effective January 1, 1997: Prepaid pension cost $ 19,091 Undistributed earnings $ 3,608 on participating business Stockholder's equity 15,483 =============== ============== $ 19,091 $ 19,091 =============== ==============
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 87, "Employers Accounting for Pensions" effective January 1, 1997, immediately following the transfer. The following table sets forth the pension plan's funded status and amounts at December 31, 1997, in accordance with SFAS No. 87: Actuarial present value of accumulated benefit obligation, including vested benefits of $88,235 $ 91,387 Actuarial present value of projected benefit obligation for service rendered to date 112,331 Plan assets at fair value 162,422 -------------- Plan assets in excess of projected benefit obligation 50,091 Unrecognized net (gain) loss from past experience different from that assumed (8,595) Unrecognized net obligation being recognized over 15 years (21,198) -------------- Prepaid pension cost included in other assets $ 20,298 ============== The weighted-average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.0% and 4.5%, respectively. Components of net pension cost for the year ended December 31, 1997 were as follows: Service cost - benefits earned during the period $ 5,491 Interest accrued on projected benefit obligation 7,103 Return on plan assets (28,072) Net amortization and deferral 14,271 --------------- Net pension benefit $ (1,207) ===============
The Company also sponsors a post-retirement medical plan (medical plan) which provides health benefits to employees who have worked for 15 years and attained age 65 while in service with the Company. The medical plan is contributory and contains other cost sharing features which may be adjusted annually for the expected general inflation rate. The Company's policy will be to fund the cost of the medical plan benefits in amounts determined at the discretion of management. The Plan as of January 1, 1997 was not funded. The Parent Company was not required under CICA guidelines to record any liability related to the Plan. Effective January 1, 1997, on the date of transfer, the Company has adopted SFAS No. 106, "Post-retirement Benefits Other Than Pensions." The Company has elected to delay recognition of the unfunded accumulated post-retirement benefit obligation and has set up a transition obligation to be amortized over 20 years. The following table sets forth the medical plan status of December 31, 1997: Accumulated post-retirement benefit obligation: Retirees $ 4,985 Fully eligible active plan participants 2,438 Other active plan participants 12,031 --------------- 19,454 Unrecognized net gain (loss) from past experience different from (1,500) that assumed Unrecognized net transition obligation at December 31, 1997, being recognized over 20 years (15,352) --------------- Accrued post-retirement benefit obligation included in other $ 2,602 liabilities ===============
For measurement purposes, a 7.5% annual rate of increase in the per capita cost of covered health care benefits was assumed. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1% in each year would increase the accumulated post-retirement benefit obligation as of December 31, 1997 by $3,847. The weighted average discount rate used in determining the accumulated post-retirement benefit obligation was 7.0%. Components of net other post-retirement benefit cost for the year ended December 31, 1997 were as follows: Service cost - benefits earned during the year $ 1,158 Interest accrued on benefits obligation 1,191 Net amortization and deferral 808 --------------- Net other post-retirement benefit cost $ 3,157 ===============
The Company sponsors a defined contribution 401(k) retirement plan which provides eligible participants with the opportunity to defer up to 15% of compensation. The Company matches 50% of the first 5% of participant contributions. Company contributions for the year ended December 31, 1997 totalled $3,475. 10. FEDERAL INCOME TAXES The following is a reconciliation between the federal income tax rate and the Company's effective rate: 1997 1996 1995 -------- -------- -------- Federal tax rate 35.0 % 35.0 % 35.0 % Change in tax rate resulting from: Settlement of prior years tax (6.5) (4.7) Provision for contingencies 8.4 Change in valuation allowance 0.8 (7.8) Investment income not subject to (0.3) (1.0) (0.5) federal tax State and environmental taxes 0.6 0.7 0.7 Other, net 0.9 (1.4) 0.3 ======== ======== ======== Total 38.1 % 29.4 % 27.7 % ======== ======== ========
Temporary differences which give rise to the deferred tax assets and liabilities as of December 31, 1997 and 1996 are as follows: 1997 1996 -------------------------- -------------------------- Deferred Deferred Tax Deferred Deferred Tax Tax Asset Liability Tax Asset Liability ----------- ------------- ----------- ------------- Policyholder reserves $ 163,975 $ $ 151,239 $ Deferred policy acquisition 47,463 57,031 costs Deferred acquisition cost proxy tax 79,954 70,413 Investment assets 2,226 35,658 Net operating loss 9,427 12,295 carryforwards Other 10,729 5,366 ----------- ------------ ---------- ------------ Subtotal 255,582 58,192 274,971 57,031 Valuation allowance (3,570) (3,536) =========== ============ ========== ============ Total Deferred Taxes $ 252,012 $ 58,192 $ 271,435 $ 57,031 =========== ============ ========== ============
Amounts related to investment assets above include $30,085 and $8,530 related to the unrealized gains on the Company's fixed maturities available-for-sale at December 31, 1997 and 1996, respectively. The Company files a separate tax return and, therefore, losses incurred by subsidiaries cannot be offset against operating income of the Company. At December 31, 1997, the Company's subsidiaries have approximately $26,934 of net operating loss carryforwards, expiring through the year 2011. The tax benefit of subsidiaries' net operating loss carryforwards, net of a valuation allowance of $3,570 and $3,536 are included in the deferred tax assets at December 31, 1997 and 1996, respectively. The Company's valuation allowance was increased/(decreased) in 1997, 1996, and 1995 by $34, $1,463, and $(13,145), respectively, as a result of the re-evaluation by management of future estimated taxable income in the subsidiaries. Under pre-1984 life insurance company income tax laws, a portion of life insurance company gain from operations was not subject to current income taxation but was accumulated, for tax purposes, in a memorandum account designated as "policyholders' surplus account." The aggregate accumulation in the account is $7,742 and the Company does not anticipate any transactions which would cause any part of the amount to become taxable. Accordingly, no provision has been made for possible future federal income taxes on this accumulation. Pursuant to a December 31, 1993 agreement between the Company and its Parent whereby the Company assumed responsibility for the Parent Corporation's income tax liability for fiscal years prior to 1994, the Company had previously recorded a contingent liability provision. The Company's 1997 and 1996 results of operations include a release of $47,750 and $25,600 from the provision, to reflect the resolution of certain tax issues related to 1990 - 1991 and 1988 - 1989 audit years, respectively, with the Internal Revenue Service (IRS). In addition, in 1997 the tax provision was increased for contingent items related to open tax years. The IRS is currently auditing tax years 1992 and 1993. In the opinion of Company management, the amounts paid or accrued are adequate; however, it is possible that the Company's accrued amounts may change as a result of the completion of the IRS audits. 11. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS, AND OTHER MATTERS All of the Company's outstanding series of preferred stock are owned by the Parent Corporation. The dividend rate on the Series A Stated Rate Auction Preferred Stock (STRAPS) is 7.3% through December 30, 2002. The Series A STRAPS are redeemable at the option of the Company on or after December 29, 2002 at a price of $100,000 per share, plus accumulated and unpaid dividends. Through December 30, 1997, the Series B STRAPS had a dividend rate of 5.8%. Thereafter, short-term dividend periods of approximately 49 days will be in effect. The dividend rate for each short-term dividend period will be determined in accordance with a formula set out in the share conditions. The Series B STRAPS are redeemable at the option of the Company at the end of any short-term dividend period, at a price of $100,000 per share, plus accumulated and unpaid dividends. The Company's Series E 7.5% non-cumulative, non-redeemable preferred shares are redeemable by the Company after April 1, 1999. The shares are convertible into common shares at the option of the holder on or after September 30, 1999, at a conversion price negotiated between the holder and the Company or at a formula determined conversion price in accordance with the share conditions. 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: 1997 1996 1995 -------------- -------------- --------------- (Unaudited) Net Income $ 181,312 $ 180,634 $ 114,931 Capital and Surplus 759,429 713,324 653,479
The maximum amount of dividends which can be paid to stockholders by insurance companies domiciled in the State of Colorado is subject to restrictions relating to statutory surplus and statutory net gain from operations. Statutory surplus and net gains from operations at December 31, 1997 were $759,429 and $180,834 (unaudited), respectively. The Company should be able to pay up to $180,834 (unaudited) of dividends in 1998. Dividends of $8,854, $8,587, and $9,217, were paid on preferred stock in 1997, 1996, and 1995, respectively. In addition, dividends of $62,540, $48,083, and $39,763, were paid on common stock in 1997, 1996 and 1995, respectively. Dividends are paid as determined by the Board of Directors. 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 In the two most recent fiscal years or any subsequent interim period, 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 Director Age Served as Principal Occupation(s) For Director From Last Five Years James Balog 69 1993 Company Director (1)(2) James W. Burns, O.C. 68 1991 Chairman of the Boards of Great-West (1)(2) Lifeco, Great-West Life, London Insurance Group Inc. and London Life Insurance Company; Deputy Chairman, Power Corporation Orest T. Dackow 61 1991 President and Chief Executive (1)(2) Officer, Great-West Lifeco Andre Desmarais 41 1997 President and Co-Chief Executive (3) Officer, Power Corporation; Deputy Chairman, Power Financial Paul Desmarais, Jr. 43 1991 Chairman and Co-Chief Executive (1)(2) Officer, Power Corporation; Chairman, Power Financial Robert G. Graham 66 1991 Company Director since January 1996; (1)(2) previously Chairman and Chief Executive Officer, Inter-City Products Corporation (a company engaged in the manufacture and distribution of air conditioning, heating and related products) Robert Gratton 54 1991 Chairman of the Board of the (1)(2) Company; President and Chief Executive Officer, Power Financial N. Berne Hart 68 1991 Company Director (1)(2)(3) Kevin P. Kavanagh 65 1986 Company Director (1)(3) William Mackness 59 1991 Company Director since July 1995; (1)(2) previously Dean, Faculty of Management, University of Manitoba William T. McCallum 55 1990 President and Chief Executive (1)(2) Officer of the Company; President and Chief Executive Officer, United States Operations, Great-West Life Jerry E.A. Nickerson 61 1994 Chairman of the Board, H.B. (3) Nickerson & Sons Limited (a management and holding company) The Honourable 60 1991 Vice-Chairman, Power Corporation; P. Michael Pitfield, P.C., Q.C. Member of the Senate of Canada (1)(2) Michel Plessis-Belair, F.C.A. 55 1991 Vice-Chairman and Chief Financial (1)(2)(3) Officer, Power Corporation; Executive Vice-President and Chief Financial Officer, Power Financial Brian E. Walsh 44 1995 Co-Founder and Managing Partner, (1)(2) Veritas Capital Management, LLC since September 1997 (a merchant banking company); previously Partner, Trinity L.P. from January 1996 (an investment company); previously Managing Director and Co-Head, Global Investment Bank, Bankers Trust Company (an investment/commercial bank)
(1) Member of the Executive Committee (2) Member of the Investment and Credit Committee (3) 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 lists 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 .......Elan plc ........ .......Euclid Mutual Funds ........ .......Transatlantic Holdings ........ .......Zweig Series Trust A. Desmarais The Seagram Company Limited P. Desmarais, Jr......Petrofina S.A. J.E.A. Nickerson......Bank of Montreal B.......IDENTIFICATION OF EXECUTIVE OFFICERS Executive Officer Age Served as Executive Principal Occupation(s) For Officer From Last Five Years William T. McCallum 55 1984 President and Chief Executive President and Chief Officer of the Company; President Executive Officer and Chief Executive Officer, United States Operations, Great-West Life Dennis Low 54 1988 Executive Vice President, Financial Executive Vice President, Services of the Company and Financial Services Great-West Life Alan D. MacLennan 54 1992 Executive Vice President, Employee Executive Vice President, Benefits of the Company and Employee Benefits Great-West Life James D. Motz 48 1992 Executive Vice President, Employee Executive Vice President, Benefits of the Company and Employee Benefits Great-West Life Douglas L. Wooden 41 1991 Executive Vice President, Financial Executive Vice President, Services of the Company and Financial Services Great-West Life John A. Brown 50 1992 Senior Vice President, Sales, Senior Vice President, Financial Services of the Company Sales, Financial Services and Great-West Life Donna A. Goldin 50 1996 Executive Vice President and Chief Executive Vice President Operating Officer, One Corporation and Chief Operating since June 1996; previously Officer, Executive Vice President and Chief One Corporation Operating Officer, Harris Methodist Health Plan since March 1995 (a health maintenance organization); previously Executive Vice President and Chief Operating Officer, Private Healthcare Systems, Inc. (a managed care company) Mitchell T.G. Graye 42 1997 Senior Vice President, Chief Senior Vice President, Financial Officer of the Company; Chief Financial Officer Senior Vice President, Chief Financial Officer, United States, Great-West Life John T. Hughes 61 1989 Senior Vice President, Chief Senior Vice President, Investment Officer of the Company; Chief Investment Officer Senior Vice President, Chief Investment Officer, United States, Great-West Life D. Craig Lennox 50 1984 Senior Vice President, General Senior Vice President, Counsel and Secretary of the General Counsel and Company; Senior Vice President and Secretary Chief U.S. Legal Officer, Great-West Life Steve H. Miller 45 1997 Senior Vice President, Employee Senior Vice President, Benefits Sales of the Company and Employee Benefits Sales Great-West Life Charles P. Nelson 37 1998 Senior Vice President, Senior Vice President, Public Non-Profit Markets of the Public Non-Profit Markets Company and Great-West Life Martin Rosenbaum 45 1997 Senior Vice President, Employee Senior Vice President, Benefits Operations of the Company Employee Benefits and Great-West Life Operations Robert K. Shaw 42 1998 Senior Vice President, Individual Senior Vice President, Markets of the Company and Individual Markets Great-West Life
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. SUMMARY COMPENSATION TABLE The following table sets out all compensation paid to the individuals who were, at December 31, 1997, the Chief Executive Officer and the other four most highly compensated executive officers of the Company (collectively the "Named Executive Officers") for services rendered to the Company and its subsidiaries, and Great-West Life, in all capacities for fiscal years ended 1995, 1996 and 1997, respectively. SUMMARY COMPENSATION TABLE - ---------------------------------------------------------------------- ========================= Annual compensation Long-term compensation awards - ---------------------------------------------------------------------- ========================= - ------------------------- ------------- ------------- ---------------- ========================= Name and Year Salary Bonus Options (1) principal position ($) ($) (#) - ------------------------- ------------- ------------- ---------------- ========================= - ------------------------- ------------- ------------- ---------------- ========================= W.T. McCallum, 1997 608,708 406,250 300,000 (3) President and 1996 561,818 370,500 300,000 (2) Chief Executive Officer 1995 523,958 351,000 - 225,000(4) - ------------------------- ------------- ------------- ---------------- ========================= - ------------------------- ------------- ------------- ---------------- ========================= J.T. Hughes, 1997 324,000 162,000 - Senior Vice President, 1996 312,000 136,968 80,000 (2) Chief Investment Officer 1995 301,000 150,500 - - ------------------------- ------------- ------------- ---------------- ========================= - ------------------------- ------------- ------------- ---------------- ========================= D. Low, Executive Vice 1997 340,000 132,000 50,000 (3) President, Financial 1996 325,000 146,250 150,000 (2) Services 1995 305,000 150,500 - - ------------------------- ------------- ------------- ---------------- ========================= - ------------------------- ------------- ------------- ---------------- ========================= A.D. MacLennan, 1997 340,000 132,000 50,000 (3) Executive Vice 1996 325,000 115,000 150,000 (2) President, Employee 1995 312,000 125,000 - Benefits - ------------------------- ------------- ------------- ---------------- ========================= - ------------------------- ------------- ------------- ---------------- ========================= D.L. Wooden 1997 300,000 150,000 150,000 (3) Executive Vice 1996 287,000 143,500 100,000 (2) President, Financial 1995 275,500 137,500 - Services - ------------------------- ------------- ------------- ---------------- =========================
(1) The options set out are options for common shares of Great-West Lifeco which are granted by Great-West Lifeco pursuant to the Great-West Lifeco Stock Option Plan ("Lifeco Options"). (2) These Lifeco Options become exercisable 20% per year commencing on the first anniversary of the grant and expire ten years after the date of the grant. (3) All or portions of these Lifeco Options become exercisable if certain financial targets are attained. If exercisable, the exercise period runs from April 1, 2002 to June 26, 2007. (4) A special one-time bonus payment with respect to long-term performance. B. OPTIONS The following table describes options granted to the Named Executive Officers during the most recently completed fiscal year. All options are Lifeco Options granted pursuant to the Great-West Lifeco Stock Option Plan. Lifeco Options are issued with an exercise price in Canadian dollars. Canadian dollar amounts have been translated to U.S. dollars at a rate of 1/1.43. OPTION GRANTS IN LAST FISCAL YEAR - ------------------------------------------------------------------------ ========================== Potential realizable value at assumed annual Individual grants rates of stock price appreciation for option term - ------------------------------------------------------------------------ ========================== Percent of total Options options Exercise Name granted granted to or base Expiration date 5% 10% (#) employees in price ($) ($) fiscal year ($/share) - ---------------- ----------- -------------- ----------- ---------------- ------------ ============= - ---------------- ----------- -------------- ----------- ---------------- ------------ ============= W.T. McCallum 300,000 19.43 22.70 June 26, 2007 4,282,772 10,853,386 - ---------------- ----------- -------------- ----------- ---------------- ------------ ============= - ---------------- ----------- -------------- ----------- ---------------- ------------ ============= J.T. Hughes - - - - - - - ---------------- ----------- -------------- ----------- ---------------- ------------ ============= - ---------------- ----------- -------------- ----------- ---------------- ------------ ============= D. Low 50,000 3.24 22.70 June 26, 2007 713,795 1,808,898 - ---------------- ----------- -------------- ----------- ---------------- ------------ ============= - ---------------- ----------- -------------- ----------- ---------------- ------------ ============= A.D. MacLennan 50,000 3.24 22.70 June 26, 2007 713,795 1,808,898 - ---------------- ----------- -------------- ----------- ---------------- ------------ ============= D.L. Wooden 150,000 9.72 22.70 June 26, 2007 2,141,386 5,426,693 - ---------------- ----------- -------------- ----------- ---------------- ------------ =============
Prior to April 24,1996, the Named Executive Officers participated in the Power Financial Employee Share Option Plan pursuant to which options to acquire common shares of Power Financial ("PFC Options") were granted. The following table describes all PFC Options exercised in 1997, and all unexercised PFC Options held as of December 31, 1997, by the Named Executive Officers. PFC Options are issued with an exercise price in Canadian dollars. Canadian dollar amounts have been translated to U.S. dollars at a rate of 1/1.43. AGGREGATED PFC OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES - ----------------------------------------------- --------------------------- ============================ Unexercised options at Value of unexercised fiscal year-end in-the-money options at (#) fiscal year-end ($) - ----------------------------------------------- --------------------------- ============================ Shares acquired Value Name on exercise realized Exercisable Exercisable (#) ($) Unexercisable Unexercisable ================= --------------- ------------- ------------- ------------- -------------- ============= W.T. McCallum 12,000 240,445 40,000 - 1,201,486 - ------------- ============= ================= --------------- ------------- ------------- ------------- -------------- ============= J.T. Hughes - - 120,000 - 3,312,063 - ------------- ============= ================= --------------- ------------- ------------- ------------- -------------- ============= D. Low 74,600 1,123,970 - - - - ------------- ============= ================= --------------- ------------- ------------- ------------- -------------- ============= A.D. MacLennan - - - - - - ------------- ============= ================= =============== ============= ============= ============= ============== ============= D.L. Wooden - - 88,000 - 2,449,038 - ================= =============== ============= ============= ============= ============== =============
Commencing April 24,1996, the Named Executive Officers began participating in the Great-West Lifeco Stock Option Plan. The following table describes all Lifeco Options exercised in 1997, and all unexercised Lifeco Options held as of December 31, 1997, by the Named Executive Officers. Lifeco Options are issued with an exercise price in Canadian dollars. Canadian dollar amounts have been translated to U.S. dollars at a rate of 1/1.43. AGGREGATED LIFECO OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES - ----------------------------------------------- --------------------------- ============================ Unexercised options at Value of unexercised fiscal year-end in-the-money options at (#) fiscal year-end ($) - ----------------------------------------------- --------------------------- ============================ Shares acquired Value Name on exercise realized Exercisable Exercisable (#) ($) Unexercisable Unexercisable ================= --------------- ------------- ------------- ------------- -------------- ============= W.T. McCallum - - 60,000 540,000 903,941 4,881,489 ------------- ============= ================= --------------- ------------- ------------- ------------- -------------- ============= J.T. Hughes - - 16,000 64,000 241,051 964,204 ------------- ============= ================= --------------- ------------- ------------- ------------- -------------- ============= D. Low - - 30,000 170,000 451,970 2,018,836 ------------- ============= ================= --------------- ------------- ------------- ------------- -------------- ============= A.D. MacLennan - - 30,000 170,000 451,970 2,018,836 ------------- ============= ================= =============== ============= ============= ============= ============== ============= D.L. Wooden - - 20,000 230,000 301,314 1,838,117 ================= =============== ============= ============= ============= ============== =============
C. PENSION PLAN TABLE The following table sets out the pension benefits payable to the Named Executive Officers by Great-West Life or the Company. PENSION PLAN TABLE ========================= ============================================================= Years of service ============================================================= Remuneration ($) 15 20 25 30 35 ========================= ============================================================= 400,000 120,000 160,000 200,000 240,000 240,000 ========================= ============================================================= 500,000 150,000 200,000 250,000 300,000 300,000 ========================= ============================================================= 600,000 180,000 240,000 300,000 360,000 360,000 ========================= ============================================================= 700,000 210,000 280,000 350,000 420,000 420,000 - ------------------------- ============================================================= 800,000 240,000 320,000 400,000 480,000 480,000 - ------------------------- ============================================================= - ------------------------- ============================================================= 900,000 270,000 360,000 450,000 540,000 540,000 - ------------------------- ============================================================= ========================= ============================================================= 1,000,000 300,000 400,000 500,000 600,000 600,000 ========================= =============================================================
The Named Executive Officers have the following years of service. Name Years of Service W.T. McCallum 31 J.T. Hughes 7 D. Low 32 A.D. MacLennan 31 D.L. Wooden 6 For W.T. McCallum, the benefits shown are payable commencing December 31, 2000, and remuneration is the average of the highest 36 consecutive months of compensation during the last 84 months of employment. For J.T. Hughes, D. Low, A.D. MacLennan and D.L. Wooden, the benefits shown are payable upon the attainment of age 62, and remuneration is the average of the highest 60 consecutive months of compensation during the last 84 months of employment. Compensation includes salary and bonuses prior to any deferrals. The normal form of pension is a life only annuity. Other optional forms of pension payment are available on an actuarially equivalent basis. The benefits listed in the table are subject to deduction for social security and other retirement benefits. D. COMPENSATION OF DIRECTORS 1. Great-West Life Directors The following sets out remuneration paid by Great-West Life to its directors. Great-West Life pays an annual fee of $15,000 to each director. Great-West Life pays an annual fee of $10,000 to the Chairman of each of the Audit Committee, the Conduct Review Committee and the Corporate Management Committee, $20,000 to the Chairman of each of the Canadian Investment and Credit Committee and the United States Investment and Credit Committee, $25,000 to the Chairman of each of the Canadian Executive Committee and the United States Executive Committee, and $25,000 to the Chairman of the Board. With the exception of the President and Chief Executive Officer of Great-West Lifeco, the President and Chief Executive Officer of Great-West Life and the President and Chief Executive Officer of the Company, Great-West Life pays a meeting fee of $1,000 to each director for each meeting of the Board of Directors or a committee thereof attended. 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. 2. Directors of the Company The following sets out remuneration paid by the Company to its directors. For each director of the Company who is not also a director of Great-West Life, the Company pays an annual fee of $15,000, and a meeting fee of $1,000 for each meeting of the Board of Directors or a committee thereof attended. With the exception of the President and Chief Executive Officer of Great-West Lifeco and the President and Chief Executive Officer of the Company, for each director of the Company who is also a director of Great-West Life, the Company pays a meeting fee of $1,000 for each meeting of the Board of Directors or a committee thereof attended which is not coincident with a Great-West Life meeting. 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. E. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Executive compensation is determined by the Company's Board of Directors. W.T. McCallum, President and Chief Executive Officer of the Company, is a member of the Board of Directors. Mr. McCallum participated in executive compensation matters generally but was not present when his own compensation was discussed or determined. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS As of March 1, 1998, the following sets out the beneficial owners of more than 5% of the Company's voting securities: (1) 100% of the Company's 7,032,000 outstanding common shares are owned by The Great-West Life Assurance Company, 100 Osborne Street North, Winnipeg, Manitoba, Canada R3C 3A5. (2) 99.5% of the outstanding common shares of The Great-West Life Assurance Company are owned by Great-West Lifeco Inc., 100 Osborne Street North, Winnipeg, Manitoba, Canada R3C 3A5. (3) 81.2% of the outstanding common shares of Great-West Lifeco Inc. are controlled by Power Financial Corporation, 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3. (4) 67.7% of the outstanding common shares of Power Financial Corporation are owned by 171263 Canada Inc., 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3. (5) 100% of the outstanding common shares of 171263 Canada Inc. are owned by Marquette Communications Corporation, 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3. (6) 100% of the outstanding common shares of Marquette Communications Corporation are owned by Power Corporation of Canada, 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3. (7) Mr. Paul Desmarais, 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3, through a group of private holding companies, which he controls, has voting control of Power Corporation of Canada. B. SECURITY OWNERSHIP OF MANAGEMENT The following table sets out the number of equity securities, and exercisable options for equity securities, of the Company or any of its parents or subsidiaries, beneficially owned, as of March 1, 1998, by (i) the directors of the Company; (ii) the Named Executive Officers; and (iii) the directors and executive officers of the Company as a group. - ------------------------ ------------------------------------------------------------------------ Company ------------------------------------------------------------------------ ----------------- ---------------- ----------------- ------------------- The Great-West Great-West Power Financial Power Corporation Life Assurance Lifeco Inc. Corporation of Canada Company (1) (2) (3) (4) ----------------- ---------------- ----------------- ------------------- Directors - ------------------------------------------------------------------------------------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- J. Balog - - - - - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- J. W. Burns 50 56,000 4,000 200,320 101,750 options - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- O.T. Dackow 16 35,881 10,000 options - 100,000 options - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- A. Desmarais 50 20,000 10,800 170,800 306,750 options - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- P. Desmarais, Jr. 50 30,000 - 306,750 options - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- R.G. Graham - - - - - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- R. Gratton - 165,000 155,000 2,500 2,160,000 150,000 options options - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- N.B. Hart - - - - - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- K. P. Kavanagh - 27,584 - - - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- W. Mackness - - - - - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- W.T. McCallum 17 35,133 52,000 - 60,000 options - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- J.E.A. Nickerson - - - - - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- P.M. Pitfield - 45,000 35,000 50,000 121,750 options - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- M. Plessis-Belair - 10,000 1,000 7,900 21,750 options - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- B.E. Walsh - - - 3,700 - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------------------------------------------------------------------------------- Named Executive Officers - ------------------------------------------------------------------------------------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- W.T. McCallum 17 35,133 52,000 - 60,000 options - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- J.T. Hughes - 4,788 120,000 options - 16,000 options - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- D. Low - 8,266 64,600 - 30,000 options - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- A.D. MacLennan - 9,502 - - 30,000 options - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- D.L. Wooden - 20,000 options 88,000 options - - ------------------------ ----------------- ---------------- ----------------- ------------------- - ------------------------------------------------------------------------------------------------- Directors and Executive Officers as a Group - ------------------------------------------------------------------------------------------------- - ------------------------ ----------------- ---------------- ----------------- ------------------- 183 470,520 322,400 435,220 353,600 options 2,378,000 1,008,750 options options - ------------------------ ----------------- ---------------- ----------------- -------------------
(1) All holdings are common shares of The Great-West Life Assurance Company. (2) All holdings are common shares, or where indicated, exercisable options for common shares, of Great-West Lifeco Inc. (3) All holdings are common shares, or where indicated, exercisable options for common shares, of Power Financial Corporation. (4) 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 1.31% 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 1.53% 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 the directors and executive officers as a group represents 1.44% 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 exceed 1% of the total number of shares and exercisable options for shares of the class outstanding. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 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: Page A. INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report On Consolidated Financial Statements 32 for the Years Ended December 31, 1997, 1996, and 1995 Consolidated Balance Sheets as of December 31, 1997 and 1996 33 Consolidated Statements of Income for the Years Ended 35 December 31, 1997, 1996, and 1995 Consolidated Statements of Stockholder's Equity for the Years Ended 36 December 31, 1997, 1996, and 1995 Consolidated Statements of Cash Flows for the Years Ended 37 December 31, 1997, 1996, and 1995 Notes to Consolidated Financial Statements for the Years Ended 39 December 31, 1997, 1996, and 1995
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) Articles of Redomestication of Great-West Life & Annuity Insurance Company Filed as Exhibit 3(i) to Registrant's Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. 3(ii) Bylaws of Great-West Life & Annuity Insurance 74 Company, as amended June 17, 1997 Material Contracts 10.1 - Description of Executive Officer Annual 84 Incentive Bonus Program 10.2 - Great-West Lifeco Inc. Stock Option Plan 86 10.3 - Supplemental Executive Retirement Plan 94 10.4 - Executive Deferred Compensation Plan 112 21 Subsidiaries of Great-West Life & Annuity 130 Insurance Company 24 Directors' Powers of Attorney 132 Directors' Powers of Attorney for Andre Desmarais and Robert G. Graham filed herewith. Remaining Directors' Powers of Attorney filed as Exhibit 24 to Registrant's Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. 27 Financial Data Schedule 135
C. REPORTS ON FORM 8-K No reports on Form 8-K have been filed during the fourth quarter of 1997. 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. GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY By: /s/ W.T. McCallum William T. McCallum President and Chief Executive Officer Date: March 27, 1998 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 27, 1998 William T. McCallum President and Chief Executive Officer and a Director /s/ Mitchell T.G. Graye March 27, 1998 Mitchell T.G. Graye Senior Vice President, Chief Financial Officer /s/ Glen R. Derback March 27, 1998 Glen R. Derback Vice President and Controller Signature and Title Date /s/ James Balog * March 27, 1998 James Balog, Director /s/ James W. Burns * March 27, 1998 - -------------------- James W. Burns, Director /s/ Orest T. Dackow * March 27, 1998 - --------------------- Orest T. Dackow, Director /s/ Andre Desmarais* March 27, 1998 Andre Desmarais, Director /s/ Paul Desmarais, Jr. * March 27, 1998 - ------------------------- Paul Desmarais, Jr., Director /s/ Robert G. Graham * March 27, 1998 - ------------------------ Robert G. Graham, Director /s/ Robert Gratton * March 27, 1998 Robert Gratton, Director /s/ N. Berne Hart * March 27, 1998 - ------------------- N. Berne Hart, Director /s/ Kevin P. Kavanagh * March 27, 1998 - ----------------------- Kevin P. Kavanagh, Director /s/ William Mackness * March 27, 1998 William Mackness, Director /s/ Jerry E.A. Nickerson * March 27, 1998 - -------------------------- Jerry E.A. Nickerson, Director Signature and Title Date /s/ P. Michael Pitfield * March 27, 1998 - ------------------------- P. Michael Pitfield, Director /s/ Michel Plessis-Belair * March 27, 1998 Michel Plessis-Belair, Director /s/ Brian E. Walsh * March 27, 1998 - -------------------- Brian E. Walsh, Director * By: /s/ D. Craig Lennox March 27, 1998 --------------------- D. Craig Lennox Attorney-in-fact pursuant to Powers of Attorney filed herewith. EX-3.(II) 2 BYLAWS EXHIBIT 3(ii) AMENDED BYLAWS OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY As amended - June 17, 1997 BYLAWS OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY ARTICLE I SHAREHOLDERS' MEETING SECTION 1. Annual Meeting. The Annual Meeting of the Shareholders for the election of the Directors and for the transaction of any other business pertaining to the corporation (whether or not stated in the notice of the meeting) shall be held at such time, date and place as the Board of Directors, by resolution, shall determine and set forth in the notice of the meeting. SECTION 2. Special Meetings. Special Meetings of the Shareholders shall be called whenever ordered by the Chairman of the Board, the President, a quorum of the Board of Directors, or the holders of at least one-quarter (1/4) of the total amount of stock issued and outstanding. Notice of the meeting may be waived and neither the business to be transacted at, nor the purpose of the meeting, need be specified in the waiver of notice. In the absence of waiver of notice, the purposes for which the meeting is called shall be stated in the notice and no other corporate action shall be taken without the consent of all Shareholders entitled to vote. SECTION 3. Place of Meetings. All meetings of the Shareholders shall be held at the office of the corporation in Englewood, Colorado, or at such other place or places, within or without the State of Colorado, as shall from time to time be designated by the Board of Directors. SECTION 4. Notice of Meetings. Notice of all meetings, regular or special, shall be given by mailing to each Shareholder entitled to vote thereat, directed to his address as it appears on the records of the corporation, at least ten days and not more than fifty days before such meeting, a written or printed notice of the time, place, and purpose or purposes thereof. SECTION 5. Quorum. The holders of a majority of the outstanding stock of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum for all purposes. In the absence of a quorum, the Shareholders entitled to vote thereat, represented in person or by proxy, may adjourn the meeting to a day certain. SECTION 6. Voting. At all meetings of Shareholders each share of stock held by a Shareholder, represented in person or by proxy, shall be entitled to one vote. Proxies shall be in writing and shall be signed by the Shareholder. Two judges of election shall be appointed by the Chairman of the meeting at any Shareholders' Meeting at which judges are required. The Directors shall be elected by ballot, and each full-paid share of stock shall be entitled to one vote. Shares may be voted by proxy, signed by the person legally entitled to vote the same. Each Shareholder shall have the right to cast as many votes in the aggregate as shall equal the number of shares of stock held by him, multiplied by the number of Directors to be elected. ARTICLE II BOARD OF DIRECTORS SECTION 1. Number and Authority. The business and property of this corporation shall be conducted and managed by a Board of Directors consisting of not more than 25 Directors and not less than 5 Directors, the exact number thereof to be fixed and determined by action taken from time to time by the Board of Directors. SECTION 2. Election. At each annual meeting of Shareholders, the Shareholders shall elect Directors to hold office until the next succeeding annual meeting. Each Director shall hold office for the term for which he is elected and until his successor has been elected and qualified, subject to removal as hereinafter provided. SECTION 3. Removal and Vacancies. Any or all Directors may be removed at any time, with or without cause, by a majority vote of the Shareholders who shall thereupon elect a successor Director or Directors to fill the vacancy or vacancies and in which case the election of such successor Directors may be at a Special Meeting of Shareholders called for such purpose. A vacancy in the Board of Directors, other than one occurring by reason of removal by Shareholders, shall be filled by the Board of Directors to serve until the next annual meeting of the Shareholders. Where the number of Directors is increased additional Directors may be elected by the Board of Directors to serve until the next annual meeting of the Shareholders. SECTION 4. Regular Meeting. The Regular Meeting of the Board of Directors shall be held immediately following the Annual Meeting of the Shareholders. SECTION 5. Special Meetings. Special Meetings of the Board of Directors may be called by order of the Chairman of the Board, the President, or the Secretary. SECTION 6. Place of Meetings. Meetings of the Board of Directors shall be held at the office of the corporation in Englewood, Colorado, or at such other place within or without the State of Colorado as may be designated in the notice thereof. SECTION 7. Notice of Meetings. Notice of meetings of the Board of Directors, except the regular meeting of the Board, shall be given by mailing to each member at least two days before such meeting, a written or printed notice of the time, and place thereof. Such notice may also be given by telegram sent at least one day before such meeting. SECTION 8. Business Transacted at Meetings. Any business may be transacted and any corporate action taken at any meeting of the Board of Directors whether stated in the notice of such meeting or not, except as otherwise expressly required by law. SECTION 9. Quorum. A majority of the number of Directors fixed by Section 1 shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such majority is present at a meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice, for a period not to exceed 60 days at any one adjournment. SECTION 10. Interest of Directors. Except as prohibited by statute, any Director may vote or act on behalf of the corporation in contracting with any other company although he may be a Shareholder, Director, or Officer of such other company. SECTION 11. Indemnification. (1) In this section, the following terms shall have the following meanings: (a) "expenses" means reasonable expenses incurred in a proceeding, including expenses of investigation and preparation, expenses in connection with an appearance as a witness, and fees and disbursement of counsel, accountants or other experts; (b) "liability" means an obligation incurred with respect to a proceeding to pay a judgment, settlement, penalty or fine; (c) "party" includes a person who was, is, or is threatened to be made a named defendant or respondent in a proceeding; (d) "proceeding" means any threatened, pending or completed action, suit, or proceeding whether civil, criminal, administrative or investigative, and whether formal or informal. (2) Subject to applicable law, if any person who is or was a director, officer or employee of the corporation is made a party to a proceeding because the person is or was a director, officer or employee of the corporation, the corporation shall indemnify the person, or the estate or personal representative of the person, from and against all liability and expenses incurred by the person in the proceeding (and advance to the person expenses incurred in the proceeding) if, with respect to the matter(s) giving rise to the proceeding: (a) the person conducted himself or herself in good faith; and (b) the person reasonably believed that his or her conduct was in the corporation's best interests; and (c) in the case of any criminal proceeding, the person had no reasonable cause to believe that his or her conduct was unlawful; and (d) if the person is or was an employee of the corporation, the person acted in the ordinary course of the person's employment with the corporation. (3) Subject to applicable law, if any person who is or was serving as a director, officer or employee of another company or entity at the request of the corporation is made a party to a proceeding because the person is or was serving as a director, officer or employee of the other company or entity, the corporation shall indemnify the person, or the estate or personal representative of the person, from and against all liability and expenses incurred by the person in the proceeding (and advance to the person expenses incurred in the proceeding) if: (i) the person is or was appointed to serve at the request of the corporation as a director, officer or employee of the other company or entity in accordance with Indemnification Procedures approved by the Board of Directors of the corporation; and (ii) with respect to the matter(s) giving rise to the proceeding: (a) the person conducted himself or herself in good faith; and (b) the person reasonably believed that his or her conduct was at least not opposed to the corporation's best interests; and (c) in the case of any criminal proceeding, the person had no reasonable cause to believe that his or her conduct was unlawful; and (d) if the person is or was an employee of the other company or entity, the person acted in the ordinary course of the person's employment with the other company or entity. ARTICLE III EXECUTIVE COMMITTEE SECTION 1. Membership. The Board of Directors shall elect from its own number an Executive Committee, to serve at the pleasure of the Board, consisting of not less than three members, the exact number to be fixed and determined by action taken from time to time by the Board of Directors. The Executive Committee shall elect from among its members a Chairman, and shall appoint a Secretary. SECTION 2. Powers of the Executive Committee. The Executive Committee shall have and may exercise all the powers of the Board with respect to the conduct and management of the business and property of the Company, except that the Executive Committee shall not have power to declare dividends on or distributions of the capital stock of the corporation, amend the Bylaws, fill vacancies in the Committee or the Board of Directors, or exercise any powers prohibited by C.R.S. ss.7-5-107 or which the Board of Directors may from time to time, by proper resolution, reserve to itself. SECTION 3. Meetings. The Committee may determine the times and places for the holding of meetings. The Committee shall prepare regular minutes of the transactions at its meetings and shall cause them to be recorded in books kept for that purpose. All actions of the Committee shall be reported to the Board of Directors at its next meeting succeeding the date of such action. SECTION 4. Place of Meetings. Meetings of the Executive Committee shall be held at the office of the corporation in Englewood, Colorado, or at such other place, within or without the State of Colorado, as may be designated in the notice or waiver of notice of the meeting. SECTION 5. Notice of Meetings. Notice of all meetings shall be given by mailing to each member at least two days before such meeting, a written or printed notice of the time and place thereof. Such notice may also be given by telegram at least one day before such meeting. SECTION 6. Quorum. A quorum shall consist of two members of the Committee. ARTICLE IV INVESTMENT AND CREDIT COMMITTEE SECTION 1. Membership. The Board of Directors shall elect from its own number an Investment and Credit Committee, to serve at the pleasure of the Board, consisting of not less than three members, the exact number to be fixed and determined by action taken from time to time by the Board of Directors. The Investment and Credit Committee shall elect from among its members a Chairman, and shall appoint a Secretary. SECTION 2. Powers of the Investment and Credit Committee. The Investment and Credit Committee shall have the authority to approve the investments of the funds of the corporation, except for all or any part of that authority which the Board of Directors may from time to time, by proper resolution, reserve to itself. SECTION 3. Meetings. The Committee may determine the times and places for the holding of meetings. The Committee shall prepare regular minutes of the transactions at its meetings and shall cause them to be recorded in books kept for that purpose. All actions of the Committee shall be reported to the Board of Directors at its next meeting succeeding the date of such action. SECTION 4. Place of Meetings. Meetings of the Investment and Credit Committee shall be held at the office of the corporation in Englewood, Colorado, or at such other place, within or without the State of Colorado, as may be designated in the notice thereof. SECTION 5. Notice of Meetings. Notice of all meetings shall be given by mailing to each member at least two days before such meetings, a written or printed notice of the time and place thereof. Such notice may also be given by telegram at least one day before such meetings. SECTION 6. Quorum. A quorum shall consist of three members of the Committee. ARTICLE V OFFICERS SECTION 1. Duties in General. All Officers of the corporation, in addition to the duties prescribed by the Bylaws, shall perform such duties in the conduct and management of the business and property of the corporation as may be determined by the Board of Directors. In the case of more than one person holding an office of the same title, any one of them may perform the duties of the office except insofar as the Board of Directors, or the President may otherwise direct. SECTION 2. Number and Designation. The Officers of the corporation shall be a Chairman of the Board, a President, one or more Vice Presidents, one or more Secretaries, one or more Treasurers, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other Officers and Committees as the Board of Directors may from time to time deem advisable. It shall be permissible for the same person to hold more than one office, except that the offices of President and Secretary shall not be held by the same person. SECTION 3. Election and Term of Office. The Board of Directors shall elect from their number a President and Vice President, and shall appoint a Secretary, Treasurer, and such other Officers as shall be prescribed in the Bylaws, and shall fill any vacancy that may occur. SECTION 4. Chairman of the Board. The Chairman of the Board of Directors shall preside at all meetings of the Shareholders and at all meetings of the Board and shall perform such other duties as the Board of Directors may from time to time prescribe. SECTION 5. President. The President, in the absence of the Chairman of the Board, shall preside at all meetings of the Shareholders and of the Board of Directors. He shall have the powers and perform the duties usually pertaining to the Office of President. SECTION 6. Vice Presidents. The Vice Presidents shall have such powers and perform such duties as may be assigned to them from time to time by the Board of Directors or by the President. The Board of Directors or the President may from time to time determine the order of priority as between two or more Vice Presidents. SECTION 7. Secretary. The Secretary shall keep the minutes of the meetings of the Shareholders, of the Board of Directors, and of the Executive and Investment Committees; shall issue notices of meetings; shall have custody of the corporation's seal and corporate books and records; shall have charge of the issuance, transfer, and cancellation of stock certificates; shall have authority to attest and affix the corporate seal of any instruments executed on behalf of the corporation; and shall perform such other duties as are incident to his office and as are required by the Board of Directors or the President. SECTION 8. Assistant Secretaries. The Assistant Secretaries in order of their priority shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary, and shall have such other powers and perform such other duties as may be assigned to them from time to time by the Board of Directors or the President. SECTION 9. Treasurer. The Treasurer shall have custody of the funds and securities of the corporation and shall deposit the same in such banks or depositories as the Board of Directors or the President may direct. The Treasurer may, under the direction of the Board of Directors, disburse all monies and sign checks or other instruments drawn on or payable out of the funds of the corporation, which, however, shall be countersigned by the President, a Vice President, the Secretary, or an Assistant Secretary, or an Assistant Treasurer. He shall also make such transfers of the securities of the corporation as may be ordered by the Board of Directors or the President. In general, the Treasurer shall perform all of the duties incident to his office and such other duties as are required of him by the Board of Directors or the President. SECTION 10. Assistant Treasurers. The Assistant Treasurers in order of their priority shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer, and shall have such other powers and perform such other duties as may be assigned to them from time to time by the Board of Directors or the President. SECTION 11. Other Officers. Other Officers who may from time to time be elected by the Board of Directors shall have such powers and perform such duties as may be assigned to them by the Board of Directors or the President. SECTION 12. Compensation. The compensation of the Officers shall be fixed by the Chairman of the Board and the President. SECTION 13. Emergency Management Committee. Notwithstanding anything to the contrary contained in these Bylaws, during any period of emergency as contemplated by C.R.S. ss.7-5-118 or when the Board of Directors shall be unable to function by reason of vacancies therein and there shall be no Director remaining and able to fill such vacancies, the first two of the following who are readily available shall constitute an Emergency Management Committee: (a) Vice Presidents in order of priority based upon their period of service in such offices; (b) Other Officers in order of priority based upon their period of service in such offices. The Emergency Management Committee shall manage and control the business and property of the corporation and shall have and exercise all of the powers, rights, and prerogatives of the corporation until a Board of Directors shall have been duly constituted. The decisions of the Committee shall be final and shall be superior to the decisions of any other Officer of the corporation. In addition to, and not in modification or limitation of, its authority as stated above, the Emergency Management Committee shall have the power and authority: (a) To call meetings of Shareholders whether Annual or Special; (b) To elect and appoint Officers to fill vacancies; (c) To make rules and regulations of procedure for its operation. Any vacancy which occurs on the Emergency Management Committee shall be filled by the next Vice President or other Officers (as the case may be) in order of priority as provided above. ARTICLE VI CAPITAL STOCK SECTION 1. Certificates. Every Shareholder shall be entitled at his request to a certificate signed by the President or a Vice President, and also by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer and under the seal of the corporation, certifying the number of shares to which he is entitled. SECTION 2. Transfers. Transfers of stock may be made on the books of the corporation only by the holder thereof in person or by his attorney duly authorized thereto in writing and upon surrender and cancellation of the certificate therefor duly assigned or accompanied by a duly executed stock power. SECTION 3. Lost or Destroyed Certificates. The Board of Directors may order a new certificate to be issued in place of a certificate lost or destroyed upon proof of such loss or destruction and upon tender to the corporation by the Shareholder of a bond in such amount and in such form and with or without surety as may be ordered, indemnifying the corporation against any liability, claim, loss, cost, or damage by reason of such loss or destruction and the issuance of a new certificate. SECTION 4. Dividends. Dividends may be declared from the legally available surplus of the corporation at such times and in such amounts as the Board of Directors may determine. Such dividends on the capital stock of the corporation may not be declared by a committee of the Board. ARTICLE VII CORPORATE FUNDS SECTION 1. Deposits. Checks, drafts, bills, notes, negotiable instruments or any other orders for the payment of money or evidence of indebtedness payable to and received by the corporation may be endorsed for deposit to the credit of the corporation by such Officers or agents of the corporation as the Board of Directors may determine and may be endorsed for deposit to the credit of agents of the corporation in such manner as the Board of Directors may direct. SECTION 2. Withdrawals. All disbursements of the funds of the corporation shall be made by check, draft, or other order signed by such Officers or other persons as the Board of Directors may from time to time authorize to sign the same. ARTICLE VIII MISCELLANEOUS PROVISIONS SECTION 1. Voting Stock of Other Corporations. The President, any Vice President, or any other Officer designated by the Board of Directors may execute in the name of the corporation and attach the corporate seal to any proxy or power of attorney authorizing the proxy or proxies or attorney or attorneys named therein to vote the stock of any corporation held in this corporation on any matter on which such stock may be voted. If any stock owned by this corporation is held in any name other than the name of this corporation, instructions as to the manner in which such stock is to be voted on behalf of this corporation may be given to the holder of record by the President, any Vice President, or any other Officer designated by the Board of Directors. SECTION 2. Notices. Any notice under these Bylaws may be given by mail by depositing the same in a post office or postal letter box or postal mail chute in a sealed postpaid wrapper addressed to the person entitled thereto at his address as the same appears upon the books or records of the corporation or at such other address as may be designated by such person except that notice which may be given by telegram may be telegraphed to such person at such address; and such notice shall be deemed to be given at the time such notice is mailed or telegraphed. SECTION 3. Waiver of Notice. Any Shareholder, Director, or member of the Executive or Investment Committees may at any time waive any notice required to be given under these Bylaws in accordance with the provisions of C.R.S. ss.7-4-119 and ss.7-5-108, including written waiver executed before, at, or after the meeting or by presence at the meeting. ARTICLE IX AMENDMENTS The Bylaws may be amended in whole or in part by the Board of Directors. No Bylaws shall be in conflict with the laws of the State of Colorado or with the Regulations of the Colorado Commissioner of Insurance. ARTICLE X EFFECTIVE DATE AND RESTATEMENT These Bylaws become effective immediately upon the redomestication of the corporation from the State of Kansas to the State of Colorado. They thereafter constitute an amendment and restatement of all prior Bylaws of the corporation under the laws of the State of Kansas. ************************** EX-10.1 3 CONTRACT EXHIBIT 10.1 DESCRIPTION OF EXECUTIVE OFFICER ANNUAL INCENTIVE BONUS PROGRAM Description of Executive Officer Annual Incentive Bonus Program To relate the compensation of the executive officers of Great-West to the performance of Great-West, an annual incentive bonus program is provided. Bonus opportunity is expressed as a percentage of base salary, with actual bonus amounts determined on the basis of the following three elements: (i) actual earnings of Great-West and/or a business unit within Great-West; and/or (ii) other performance objectives of Great-West and/or a business unit within Great-West; and (iii) the individual's personal performance. These elements are designed to be integrated with Great-West's overall goals and initiatives. EX-10.2 4 CONTRACTS EXHIBIT 10.2 GREAT-WEST LIFECO INC. STOCK OPTION PLAN GREAT-WEST LIFECO INC. STOCK OPTION PLAN 1. Purpose of the Plan The purpose of the Plan is to provide, on a selective basis, certain officers and employees (the "Participants") of the Corporation and/or its Subsidiaries with an opportunity to purchase Common Shares and to benefit from the appreciation thereof. This will provide an increased incentive for these persons to contribute to the future success and prosperity of the Corporation, thus enhancing the value of the Common Shares for the benefit of all the shareholders and increasing the ability of the Corporation and its Subsidiaries to attract and retain individuals of exceptional skill. 2. Defined Terms Where used herein, the following terms shall have the following meanings, respectively: 2.1 "Board" means the board of directors of the Corporation. 2.2 "Common Shares" means the common shares of the Corporation or, in the event of an adjustment contemplated by Article 8 hereof, such other common shares to which a Participant may be entitled upon the exercise of an Option as a result of such adjustment. 2.3 "Corporation" means Great-West Lifeco Inc. and includes any successor corporation thereto. 2.4 "Administrative Committee" means the Stock Option Plan Administrative Committee of the Board. 2.5 "Exchanges" means The Toronto Stock Exchange and The Montreal Exchange or, if the Common Shares are not then listed and posted for trading on such Exchanges, such stock exchange or exchanges in Canada on which such shares are listed and posted for trading as may be selected for such purpose by the Board. 2.6 "Market Price per Common Share" at any date means the weighted average trading price per Common Share on the Exchanges for the five trading days preceding the date of the grant. If no trades are reported on any one or more of such five trading days, the trades occurring on the last five trading days on which trades occurred will be used in the computation. 2.7 "Option(s)" means an option to purchase Common Shares granted by the Corporation to Participants, subject to the provisions contained herein. 2.8 "Option Price" means the price per share at which Common Shares may be purchased under an Option, as the same may be adjusted in accordance with Articles 4 and 8 hereof. 2.9 "Participants" means those officers and employees of the Corporation and/or its Subsidiaries to whom Options have been granted, provided that such Options or a portion thereof have not been exercised and have not terminated. 2.10 "Plan" means the Stock Option Plan of the Corporation, as the same may be amended or varied from time to time. 2.11 "Subsidiary" means any corporation that is a subsidiary of the Corporation, as such term is defined in subsection 2(5) of the Canada Business Corporations Act, as such provision is from time to time amended, varied or re-enacted. 3. Administration of the Plan 3.1 The Plan shall be administered by the Administrative Committee. The Corporation shall effect the grant of Options under the Plan in accordance with determinations made by the Administrative Committee pursuant to the provisions of the Plan as to: (a) the officers and employees of the Corporation and its Subsidiaries to whom Options will be granted; (b) the number of Common Shares which shall be the subject of such Options; and (c) the terms of such Options; by the execution and delivery of a stock option agreement in writing in form approved by the Administrative Committee. 3.2 The Board or Administrative Committee may, from time to time, adopt such rules and regulations for administering the Plan as it may deem proper and in the best interests of the Corporation and the Board may, subject to applicable law, delegate its powers hereunder to administer the Plan to a committee of the Board. 4. Granting of Options 4.1 The Administrative Committee may from time to time grant Options to officers and employees of the Corporation and/or of its Subsidiaries. The grant of Options will be subject to the terms and conditions contained herein and may be subject to additional terms and conditions determined by the Administrative Committee from time to time including, without limiting the generality of the foregoing, a condition requiring that a Participant also be a participant in a specified stock purchase plan of the Corporation and/or its Subsidiaries. 4.2 Subject to adjustment pursuant to paragraph 8, the aggregate number of Common Shares reserved for issuance under the Plan shall not exceed 3,000,000 Common Shares. The aggregate number of Common Shares reserved for issuance to any one person under the Plan shall not exceed 5% of the outstanding Common Shares. The Common Shares in respect of which Options are not exercised shall be available for subsequent options. No fractional shares may be purchased or issued hereunder. The aforementioned limits of Common Shares reserved for issuance may be formulated on a diluted basis with the consent of the Exchanges. 4.3 The Option Price shall be fixed by the Administrative Committee but under no circumstances shall any Option Price at the time of the grant be lower than the Market Price per Common Share. 4.4 At the discretion of the Administrative Committee, the Option Price may increase, throughout the period or for any part of the period that the Option or a portion thereof remains unexercised, by an amount per annum fixed by the Administrative Committee at the time the Option is granted. 5. Option Period 5.1 Each Option shall be exercisable during a period (the "Option Period") established by the Administrative Committee which shall commence not earlier than the date of the granting of the Option and shall in no event terminate later than the earlier of ten (10) years after such date or: (a) in the event of the death of the Participant either before or after retirement, the Option Period for the Options outstanding to such Participant at the date of death shall terminate on the earlier of: (i) the date of termination specified in the terms of such Option, and (ii) 24 months after the date of death; (b) if a Participant's employment terminates or has terminated because of retirement at or subsequent to normal retirement age, or because of retirement prior to normal retirement age with the approval of the President and Chief Executive Officer of the Corporation or of a Subsidiary, as the case may be, the Option Period for Options then outstanding to such Participant shall terminate at the earlier of: (i) the date of termination specified in the terms of such Option, and (ii) the date which is five years after the date upon which such Participant retired; (c) if a Participant's employment terminates by reason of his dismissal for fraud or willful fault or neglect, the Option Period for Options then outstanding to such Participant shall terminate on the date of such dismissal; (d) in the case of a Participant with less than one year's service at the date of the granting of the Option, the Option Period shall commence, unless the Administrative Committee otherwise determines, not earlier than the first anniversary of the date of commencement of his employment, and if such Participant's employment terminates for any cause other than death or disability prior to such first anniversary, the Option Period shall terminate on the date of such termination of employment; and (e) if a Participant's employment terminates for any cause other than the reasons set forth in paragraphs (a), (b), (c) or (d) herein, the Option Period for Options then outstanding to such Participant shall terminate: (i) on the earlier of the date of termination specified in the terms of such Option or 12 months after the date of termination of employment, or (ii) such later date as the Administrative Committee may fix (but not later than the date of termination specified in the terms of such Option). All rights under an Option unexercised at the termination of the Option Period shall be forfeited, and all rights under an Option for which the Option Period has not commenced prior to the date of termination of employment shall, unless otherwise determined by the Committee, be forfeited. Where used in this Clause 5, the word "month" means a period of 30 consecutive days. 6. Exercise of Options Subject to the provisions of the Plan and the terms of the granting of the Option, an Option or a portion thereof may be exercised from time to time by delivery to the Corporation at its registered office of a notice in writing in form and content satisfactory to the Corporation signed by the Participant or by the Participant's legal personal representative. The notice shall state the intention of the Participant or the Participant's legal personal representative to exercise the said Option or portion thereof and shall be accompanied by payment of the Option Price for the Common Shares which are the subject of the exercise, in a manner satisfactory to the Corporation. 7. Non-Assignable No Option or any interest therein shall be transferable or assignable by a Participant otherwise than by will or pursuant to the laws of succession. 8. Adjustments in Shares Appropriate adjustments in the number of Common Shares subject to the Plan and, as regards Options granted or to be granted, in the number of Common Shares optioned and in the Option Price, shall be deemed to be made to give effect to adjustments in the number of Common Shares resulting from subdivisions, consolidations or reclassifications of the Common Shares, the payment of stock dividends by the Corporation (other than dividends in the ordinary course) or other relevant changes in the authorized or issued capital of the Corporation, which changes occur subsequent to the approval of the Plan by the Board and the Corporation shall take all necessary action so as to give effect to such changes. 9. Decisions of the Administrative Committee Except for the contractual provisions of any stock option agreements, all decisions and interpretations of the Administrative Committee respecting the Plan or Options granted hereunder shall be conclusive and binding on the Corporation and the Participants and their respective legal personal representatives and on all officers and employees of the Corporation and/or its Subsidiaries eligible under the provisions of the Plan to participate therein. 10. Amendment or Discontinuance of Plan Subject to regulatory approval, the Board may amend or terminate the Plan or the terms of Options granted hereunder at any time without the consent of the Participants provided that such amendment shall not alter or impair any of the Participants' rights under any stock option agreements or any Option previously granted under the Plan. 11. Government Regulation The Corporation's obligation to issue and deliver Common Shares under any Option is subject to: (a) the satisfaction of all requirements under applicable securities laws in respect thereof and the obtaining of all regulatory approvals as the Corporation shall determine to be necessary or advisable in connection with the authorization, issuance or sale thereof; (b) the admission of the Common Shares to listing on the Exchanges; and (c) the receipt from the Participant of such representations, agreements and undertakings as to future dealings in such Common Shares as the Corporation determines to be necessary or advisable in order to safeguard against the violation of the securities laws of any jurisdiction. In this connection, the Corporation shall take all reasonable steps to obtain such approvals and registrations as may be necessary for the issuance of such Common Shares in compliance with applicable securities laws and for the listing of such Common Shares on the Exchanges. 12. Participants' Rights A Participant shall not have rights as a shareholder of the Corporation until a certificate for Common Shares has been issued to such Participant upon the exercise of an Option or a portion thereof, and then only with respect to the Common Shares represented by such certificate or certificates and for so long as the Participant holds said Common Shares. No employee, officer, or Participant is entitled to be granted Options, or additional Options, under the Plan. Neither any period of notice of termination of employment, payment in lieu thereof, nor combination thereof, shall extend the period of employment for the purposes of the Plan. Neither the Plan, nor any action taken hereunder, shall interfere with the right of the employer of a Participant to terminate a Participant's employment at any time. 13. Approvals 13.1 The Plan shall be subject to: (a) the approval of the shareholders of the Corporation to be given by a resolution at a meeting of the shareholders of the Corporation; and (b) acceptance by the Exchanges. 13.2 Any Options granted prior to such approval and acceptance shall be conditional upon such approval and acceptance being given and no such Options may be exercised unless such approval and acceptance is given. 14. Laws The Plan in all matters to which reference is made herein shall be governed by and interpreted in accordance with the laws of the Province of Manitoba and those of Canada insofar as the latter may be applicable. Furthermore, no Option may be exercised nor will the Corporation have any obligation to issue Common Shares pursuant thereto if such exercise or issue would be contrary to or violate any applicable law or any applicable regulation of a duly constituted authority. EX-10.3 5 CONTRACT EXHIBIT 10.3 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AMENDMENT NO. 2 This Amendment No. 2 to the Great-West Life & Annuity Insurance Company Supplemental Executive Retirement Plan is effective as of January 1, 1998 and has been executed as of this 27th day of January, 1998. WHEREAS, pursuant to Section 9.1 of the Plan, the Board of Directors of Great-West Life & Annuity Insurance Company (the "Board" ) has the right to amend the Plan; and WHEREAS, the Board wishes to provide for additional annuity forms of payment, allow an early retirement age, and allow a deferral of commencement of benefits to age 70 1/2 ; NOW, THEREFORE, the Plan shall be amended as follows: FIRST, Section 5.5 shall be amended to add the following: (c) Any other form of payment option available under the "Qualified Plan," as amended from time to time, and which form of payment is allowable for use under this Plan pursuant to the Internal Revenue Code. SECOND, Section 2.9 Early Retirement Date shall be amended in its entirety to read as follows: "Early Retirement Date" means the first day of the month coincident with or next following the month in which a Participant terminates employment with Employer, if such termination date occurs on or after (1) the earlier of a date mutually agreed to between the Employer and the Participant or such Participant's attainment of age fifty-seven (57) and (2) the completion of fifteen (15) Years of Service, but prior to the Participant's Normal Retirement Date. THIRD, Section 5.6 shall be amended to add the following: Notwithstanding the above, a Participant may elect to defer the commencement of payments to any later age up to age 70 1/2 by making such election on a form and pursuant to any Plan requirements prior to the commencement of payments outlined in this section. IN WITNESS WHEREOF this Amendment No. 2 has been executed as of the date first written above. AMENDMENT NO. 1 TO THE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN THIS IS AN AMENDMENT to Great-West Life & Annuity Company Supplemental Executive Retirement Plan (the "Plan") made this 26th day of November, 1996 pursuant to the discretion of the Executive Committee of the Board of Directors of Great-West Life & Annuity Insurance Company (the "Company"). BACKGROUND STATEMENT The Company desires to amend the Plan to recognize the transfer of the U.S. employees covered by the Plan from The Great-West Life Assurance Company to the Company and to conform the Plan with such transfer. Therefore, the Plan is amended in the following respects, effective on January 1, 1997: 1. Section 2.10 shall be amended by substituting for the current text the following: "2.10 Employer. `Employer' means Great-West Life & Annuity Insurance Company and/or any subsidiary or affiliate of the Employer designated by the Board." 2. Section 2.11 shall be amended by substituting for the current text the following: "2.10 Executive Deferred Compensation Plan. `Executive Deferred Compensation Plan' means Great-West Life & Annuity Insurance Company Executive Deferred Compensation Plan, formerly known as The Great-West Life Assurance Company United States Employees' Executive Deferred Compensation Plan, a nonqualified deferred compensation plan established by the Employer for a select group of highly compensated and management employees of Employer. 3. Section 2.19 shall be amended by substituting for the current text the following: "2.19 Qualified Plan. `Qualified Plan' means the Employees' and Agents' Pension Benefits Plan for the Great-West Life & Annuity Insurance Company, or any predecessor or successor defined benefit plan maintained by Employer that qualifies under Section 401(a) of the Internal Revenue Code." IN WITNESS WHEREOF, the Company has caused this amendment to be adopted by resolution of the Executive Committee of its Board of Directors, a copy of which is attached hereto. GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ARTICLE I--PURPOSE; EFFECTIVE DATE The purpose of this Supplemental Executive Retirement Plan (the "Plan") is to provide supplemental retirement benefits for certain key officers of the Company. It is intended that the Plan will aid in retaining and attracting individuals of exceptional ability by providing them with these benefits. This Plan shall be effective as of January 1, 1993. ARTICLE II--DEFINITIONS Whenever used in this document, the following terms shall have the meanings set forth in this Article unless a contrary or different meaning is expressly provided: 2.1 Actuarial Equivalent "Actuarial Equivalent" means equivalence in value between two (2) or more forms and/or times of payment based on the 1984 Unisex Pension Mortality Table (UP84) and an interest rate equal to the rate used by the Pension Benefit Guaranty Corporation (PBGC) for valuing immediate annuities under terminating pension plans. Such rate shall be the rate in effect on January 1 of the year of determination. 2.2 Beneficiary "Beneficiary" means the person, persons or entity entitled under Article VI to receive any Plan benefits payable after a Participant's death. 2.3 Board "Board" means the Board of Directors of the Company. 2.4 Cause "Cause" means: (a) The willful and continued failure by the Participant to substantially perform the Participant's duties with Employer (other than any such failure resulting from the Participant's incapacity due to physical or mental illness), after a demand for substantial performance is delivered to the Participant in writing by the Board or the Chief Executive Officer of Employer which specifically identifies the manner in which such executive or the Board believes that the Participant has not substantially performed the Participant's duties; or (b) The willful engaging by the Participant in gross misconduct which is demonstrably injurious to Employer and its affiliates, taken as a whole. For purposes of this paragraph, no act or failure to act, on the Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that the Participant's action or omission was in the best interest of Employer. Notwithstanding the foregoing, the Participant shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Participant a copy of a notice of termination from the Board or the Chief Executive Officer of Employer after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant's counsel, to be heard before the Board or the Chief Executive Officer, and a finding that in the good faith opinion of such executive or the Board, the Participant was guilty of conduct set forth above in clauses (a) or (b) of the first sentence of this Section and specifying the particulars thereof in detail. A Participant who is terminated for Cause shall forfeit any right to receive benefits under the Plan. 2.5 Committee "Committee" means the committee appointed by the Board to administer the Plan pursuant to Article VII. 2.6 Company "Company" means Great-West Life & Annuity Insurance Company, a Colorado corporation, its successors, and any U.S. affiliate of the Company designated by the Board. 2.7 Compensation "Compensation" means the Salary, bonuses and commissions paid to a Participant by Employer and considered to be "wages" for purposes of federal income tax withholding. Compensation shall be calculated before reduction for any amounts deferred by the Participant pursuant to the Company's tax qualified plans which may be maintained under Section 401(k) or Section 125 of the Internal Revenue Code, or under the Executive Deferred Compensation Plan. Compensation does not include expense reimbursements or any form of noncash compensation or benefits. 2.8 Disability "Disability" means a physical or mental condition which prevents the Participant from satisfactorily performing the Participant's usual duties for Employer. The Committee shall determine the existence of Disability and may rely upon advice from a medical examiner satisfactory to the Committee in making the determination. 2.9 Early Retirement Date "Early Retirement Date" means the first day of the month coincident with or next following the month in which a Participant terminates employment with Employer, if such termination date occurs on or after such Participant's attainment of age fifty-seven (57) and completion of fifteen (15) Years of Service, but prior to the Participant's Normal Retirement Date. 2.10 Employer "Employer" means The Great-West Life Assurance Company, a Canadian stock life insurance company, and/or any subsidiary or affiliate of the Employer designated by the Board. 2.11 Executive Deferred Compensation Plan "Executive Deferred Compensation Plan" means The Great-West Life Assurance Company United States Employees' Executive Deferred Compensation Plan, a nonqualified deferred compensation plan established by the Employer for a select group of highly compensated and management employees of Employer. 2.12 Final Annual Compensation "Final Annual Compensation" means the Participant's Compensation earned during the twelve (12) consecutive complete months of employment with Employer prior to the Participant's Disability. 2.13 Final Average Compensation "Final Average Compensation" means the Participant's Compensation earned during the sixty (60) consecutive complete months out of the eighty-four (84) months of employment with Employer during which the Participant's Compensation is the highest, divided by sixty (60). 2.14 Final Average Salary "Final Average Salary" means the Participant's Salary earned during the sixty (60) consecutive complete months out of the last eighty-four (84) months of employment with Employer during which the Participant's Salary is the highest, divided by sixty (60). 2.15 Normal Retirement Date "Normal Retirement Date" means the first day of the month coincident with or next following the month in which a Participant terminates employment with Employer, if such termination occurs on or after such Participant's attainment of age sixty-two (62) and completion of fifteen (15) Years of Service. 2.16 Participant "Participant" means any individual who is participating in or has participated in this Plan, and who has not yet received full benefits hereunder, as provided in Article III. 2.17 Participation Agreement "Participation Agreement" means the agreement filed by a Participant and approved by the Board pursuant to Article III. 2.18 Plan "Plan" means this Supplemental Executive Retirement Plan as amended from time to time. 2.19 Qualified Plan "Qualified Plan" means Part AA - United States Employees' and Agents' Pension Benefits Plan for The Great-West Life Assurance Company, or any successor defined benefit plan maintained by Employer and/or the Company that qualifies under Section 401(a) of the Internal Revenue Code. 2.20 Qualified Plan Offset "Qualified Plan Offset" means the Participant's benefit in the form of a monthly single life annuity under the Qualified Plan less any amounts attributable to the Guaranteed Fund or Surplus Fund, as those terms are defined by the Qualified Plan, or any Participant voluntary contributions. 2.21 Retirement "Retirement" means a Participant's termination from employment with Employer at an Early Retirement Date or Normal Retirement Date, as applicable. 2.22 Salary "Salary" means periodic payments made by Employer to the Participant on a bi-monthly basis. Salary does not include commissions, bonuses, expense reimbursements or any form of noncash compensation or benefits. 2.23 Supplemental Retirement Benefit "Supplemental Retirement Benefit" means the benefit determined under Article V of this Plan. 2.24 Target Amount "Target Amount" means sixty percent (60%) of Final Average Compensation multiplied by a fraction, the numerator of which is the Participant's actual Years of Credited Service, not to exceed thirty (30), and the denominator of which is thirty (30). 2.25 Termination Target Amount "Termination Target Amount" means sixty percent (60%) of Final Average Salary multiplied by a fraction, the numerator of which is the Participant's actual Years of Credited Service, not to exceed thirty (30), and the denominator of which is thirty (30), reduced by the early retirement factor at age sixty-two (62) under the Qualified Plan. 2.26 Years of Credited Service "Years of Credited Service" means the number of years of credited service determined in accordance with the provisions of the Qualified Plan, whether or not the Participant is a participant in such Plan. 2.27 Years of Service "Years of Service" means the number of years of service determined in accordance with the provisions of the Qualified Plan, whether or not the Participant is a participant in such plan. ARTICLE III--PARTICIPATION AND VESTING 3.1 Eligibility and Participation (a) Eligibility. Eligibility to participate in the Plan shall be limited to those key officers of the Company who are designated, from time to time, by the Board. (b) Participation. An employee's participation in the Plan shall be effective upon notification to the employee by the Committee of eligibility to participate, completion of a Participation Agreement and acceptance of the Participation Agreement by the Company. Subject to Section 3.2, participation in the Plan shall continue until such time as the Participant terminates employment with Employer and as long thereafter as the Participant is eligible to receive benefits under this Plan. 3.2 Change in Employment Status If the Board determines that a Participant's employment performance is no longer at a level that deserves reward through participation in this Plan, but does not terminate the Participant's employment with Employer, participation herein and eligibility to receive benefits hereunder shall be limited to the Participant's vested interest in such benefits as of the date designated by the Board ("Participation Termination Date"). Such benefits shall be based solely on the Participant's Years of Service, Years of Credited Service and Compensation as of the Participation Termination Date. 3.3 Vesting A Participant shall be one hundred percent (100%) vested after fifteen (15) Years of Service with Employer. ARTICLE IV--SURVIVOR BENEFITS 4.1 Pretermination Survivor Benefit If a Participant dies while employed by Employer, Employer shall pay a survivor benefit to the Participant's Beneficiary as follows: (a) Amount. The amount of the survivor benefit shall be the Actuarial Equivalent lump sum present value of the Participant's Supplemental Retirement Benefit determined under the section of Article V which gives the Beneficiary the most valuable accrued benefit the Participant would have been entitled to as of the date of death. (b) Time and Form of Payment. The survivor benefit shall be paid to the Beneficiary in the basic form provided below unless the Participant elects an alternative form in the Form of Payment Designation. Any alternative form shall be the Actuarial Equivalent of the basic form of benefit payment. All payments shall be made on the date(s) the Participant would have received payment under Article V, assuming the Participant retired or terminated on the date of death. The basic and alternative forms of payment are as follows: (i) Basic Form of Benefit Payment. A lump sum payment. (ii) Alternative Forms of Payment. Equal monthly installments of the benefit over a period certain of sixty (60) or one hundred twenty (120) months. 4.2 Posttermination Survivor Benefit (a) Death Prior to Commencement of Benefits. If a Participant dies following termination of employment with Employer and prior to the commencement of benefits hereunder, Employer shall pay a survivor benefit to the Participant's Beneficiary as follows: (i) Amount. The amount of the survivor benefit shall be equal to the Actuarial Equivalent lump sum present value of the Participant's Supplemental Retirement Benefit determined under the section of Article V which gives the Beneficiary the most valuable accrued benefit the Participant would have been entitled to as of the date of death. (ii) Time and Form of Payment. The survivor benefit shall be paid to the Beneficiary in the basic form provided below unless the Participant elects an alternative form in the Form of Payment Designation. Any alternative form shall be the Actuarial Equivalent of the basic form of benefit payment. All payments shall be made on the date(s) the Participant would have received payment under Article V, assuming the Participant retired or terminated on the date of death. The basic and alternative forms of payment are as follows: a) Basic Form of Benefit Payment. A lump sum payment. b) Alternative Forms of Payment. Equal monthly installments of the benefit over a period certain of sixty (60) or one hundred twenty (120) months. (b) Death After Commencement of Benefits. If a Participant dies following the Participant's termination of employment with Employer and after payments have commenced, a survivor benefit will be paid only if, and to the extent, provided for under Section 5.6. 4.3 Suicide; Misrepresentation No benefit shall be paid to a Beneficiary if the Participant's death occurs as a result of suicide during the twelve (12) calendar months beginning with the calendar month following commencement of participation in this Plan. The Committee may deny payment if death occurs within twenty-four (24) months beginning with the calendar month following commencement of participation in this Plan if the Participant has made a material misrepresentation in any form or document provided by the Participant to or for the benefit of Employer. ARTICLE V--SUPPLEMENTAL RETIREMENT BENEFIT 5.1 Normal Retirement Benefit If a Participant retires at a Normal Retirement Date, Employer shall pay to the Participant a Supplemental Retirement Benefit equal to the Target Amount, less: (a) Fifty percent (50%) of the Participant's monthly primary Social Security benefit payable at Retirement; and (b) The Qualified Plan Offset at Retirement. 5.2 Early Retirement Benefit If a Participant retires at an Early Retirement Date, Employer shall pay to the Participant the monthly Supplemental Retirement Benefit calculated under Section 5.1 except: (a) Any bonus amounts which are treated as Compensation shall be reduced by five-sixths percent (5/6%) for each month by which the Participant's Early Retirement Date precedes the Participant's Normal Retirement Date; (b) The Target Amount shall be reduced by five-twelfths percent (5/12%) for each month by which the Participant's Early Retirement Date precedes the Participant's Normal Retirement Date; (c) The offset required by Section 5.1(a) shall only reduce the Participant's Supplemental Retirement Benefit commencing with the Normal Retirement Date. The offset shall be determined at Retirement using the Social Security Act in effect at Retirement and assuming zero (0) future earnings from the Participant's Early Retirement Date to the Participant's Normal Retirement Date; and (d) The offset required by Section 5.1(b) shall be the amount payable at the Early Retirement Date. 5.3 Termination Benefit If a Participant terminates employment with Employer prior to Retirement, death or Disability, Employer shall pay to the Participant a Supplemental Retirement Benefit equal to the Termination Target Amount, less: (a) Fifty percent (50%) of the Participant's monthly primary Social Security benefit payable at the Participant's Normal Retirement Date. This offset shall be determined at termination using the Social Security Act in effect at termination and assuming earnings from the date of termination to the Participant's Normal Retirement Date are equal to the Participant's Salary at termination; and (b)The Qualified Plan Offset at the Participant's Normal Retirement Date. 5.4 Disability Retirement Benefit If a Participant terminates employment prior to Retirement as a result of Disability, Employer shall pay to the Participant the monthly Supplemental Retirement Benefit calculated under Section 5.1 or 5.2, whichever is applicable, except that Years of Service and Years of Credited Service shall continue to accrue during the period of Disability up to the date of actual Retirement. For purposes of determining Final Average Compensation under this section, the Participant shall be deemed to have earned an amount equal to Final Annual Compensation during each year the Disability continues. 5.5 Form of Benefit Payment The Supplemental Retirement Benefit under Sections 5.1, 5.2, 5.3 and 5.4 shall be paid in the basic form provided below unless the Participant elects an alternative form in the Form of Payment Designation. Any alternative form shall be the Actuarial Equivalent of the basic form of benefit payment. The basic and alternative forms of payment are as follows: (a) Basic Form of Benefit Payment. A monthly single life annuity for the Participant's life. (b) Alternative Forms of Benefit Payment. (i) A lump sum payment. (ii) A monthly joint and survivor annuity with payment continued to the survivor at one hundred percent (100%) or fifty percent (50%) of the amount paid to the Participant. (iii) Equal monthly installments of the benefit over a period certain of sixty (60), one hundred twenty (120) or one hundred eighty (180) months. 5.6 Commencement of Benefit Payments Benefits payable to a Participant under Sections 5.1, 5.2 and 5.4 as a result of Normal or Early Retirement shall commence as soon as practicable after the appropriate application for benefits has been made but not later than sixty (60) days after all information necessary to calculate the benefit amount has been received by Employer. Benefits payable to a Participant under Section 5.3 as a result of termination shall commence on the first day of the month coincident with or following the date on which the Participant attains age sixty-two (62). All payments shall be made as of the last day of the month. 5.7 Withholding; Payroll Taxes Employer shall withhold from payments hereunder any taxes required to be withheld from such payments under federal, state or local law. A Beneficiary, however, may elect not to have withholding of federal income tax pursuant to Section 3405(a)(2) of the Internal Revenue Code, or any successor provision thereto. 5.8 Payment to Guardian If a Plan benefit is payable to a minor or a person declared incompetent or to a person incapable of handling the disposition of property, the Committee may direct payment to the guardian, legal representative or person having the care and custody of such minor, incompetent or person. The Committee may require proof of incompetency, minority, incapacity or guardianship as it may deem appropriate prior to distribution. Such distribution shall completely discharge the Committee and Employer from all liability with respect to such benefit. ARTICLE VI--BENEFICIARY DESIGNATION 6.1 Beneficiary Designation Each Participant shall have the right, at any time, to designate one (1) or more persons or an entity as Beneficiary (both primary as well as secondary) to whom benefits under this Plan shall be paid in the event of a Participant's death prior to complete distribution to the Participant of the benefits due under the Plan. Each Beneficiary designation shall be in a written form prescribed by the Committee and will be effective only when filed with the Committee during the Participant's lifetime. Designation by a married Participant of a Beneficiary other than the Participant's spouse shall not be effective without spousal execution of a written consent acknowledging the effect of the designation, unless such consent cannot be obtained because the spouse cannot be located. 6.2 Changing Beneficiary Any Beneficiary designation may be changed by an unmarried Participant without the consent of the previously named Beneficiary by the filing of a new designation with the Committee. A married Participant's Beneficiary designation may be changed with the consent of the Participant's spouse as provided for in Section 6.1 by the filing of a new designation with the Committee. The filing of a new designation shall cancel all designations previously filed. 6.3 Change in Marital Status If the Participant's marital status changes after the Participant has designated a Beneficiary, the following shall apply: (a) If the Participant is married at death but was unmarried when the designation was made, the designation shall be void unless the spouse has consented to it in the manner prescribed above. (b) If the Participant is unmarried at death but was married when the designation was made: (i) The designation shall be void if the spouse was named as Beneficiary. (ii) The designation shall remain valid if a nonspouse Beneficiary was named. (c) If the Participant was married when the designation was made and is married to a different spouse at death, the designation shall be void unless the new spouse has consented to it in the manner prescribed above. 6.4 No Beneficiary Designation If any Participant fails to designate a Beneficiary in the manner provided above, if the designation is void, or if the Beneficiary designated by a deceased Participant dies before the Participant or before complete distribution of the Participant's benefits, the Participant's Beneficiary shall be the person in the first of the following classes in which there is a survivor: (a) The Participant's surviving spouse; (b) The Participant's children in equal shares, except that if any of the children predeceases the Participant but leave issue surviving, then such issue shall take by right of representation the share the parent would have taken if living; (c) The Participant's estate. 6.5 Effect of Payment Payment to the Beneficiary shall completely discharge the Employer's obligations under this Plan. ARTICLE VII--ADMINISTRATION 7.1 Committee; Duties The Plan shall be administered by the Committee. The Committee shall have the authority to make, amend, interpret, and enforce all appropriate rules and regulations for the administration of the Plan and decide or resolve any and all questions, including interpretations of the Plan, as may arise in such administration. Members of the Committee may be Participants under the Plan. 7.2 Agents The Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit, and may from time to time consult with counsel who may be counsel to the Company. 7.3 Binding Effect of Decisions The decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final, conclusive and binding upon all persons having any interest in the Plan. 7.4 Indemnity of Committee The Company shall indemnify and hold harmless the members of the Committee against any and all claims, loss, damage, expense or liability arising from any action or failure to act with respect to the Plan on account of such member's service on the Committee, except in the case of gross negligence or willful misconduct. ARTICLE VIII--CLAIMS PROCEDURE 8.1 Claim Any person claiming a benefit, requesting an interpretation or ruling under the Plan, or requesting information under the Plan shall present the request in writing to the Committee which shall respond in writing as soon as practicable. 8.2 Denial of Claim If the claim or request is denied, the written notice of denial shall state: (a) The reason for denial, with specific reference to the Plan provisions on which the denial is based. (b) A description of any additional material or information required and an explanation of why it is necessary. (c) An explanation of the Plan's claims review procedure. 8.3 Review of Claim Any person whose claim or request is denied or who has not received a response within thirty (30) days may request a review by notice given in writing to the Committee. The claim or request shall be reviewed by the Committee which may, but shall not be required to, grant the claimant a hearing. On review, the claimant may have representation, examine pertinent documents, and submit issues and comments in writing. 8.4 Final Decision The decision on review shall normally be made within sixty (60) days. If an extension of time is required for a hearing or other special circumstances, the claimant shall be notified and the time shall be one hundred twenty (120) days. The decision shall be in writing and shall state the reason and the relevant Plan provisions. All decisions on review shall be final and bind all parties concerned. ARTICLE IX--TERMINATION, SUSPENSION OR AMENDMENT 9.1 Termination, Suspension or Amendment of Plan The Board may, in its sole discretion, terminate or suspend the Plan at any time, in whole or in part. The Board may amend the Plan at any time. Any amendment may provide different benefits or amounts of benefits from those herein set forth. No such termination, suspension or amendment, however, shall adversely affect the accrued benefits of Participants (determined as of the day prior to such action), the benefits of any Participant who has previously retired, or the benefits of any Beneficiary of a Participant who has previously died, except as otherwise determined by the Board under Section 10.1 with respect to any Participant. Furthermore, no suspension or amendment shall alter the applicability of the vesting schedule in Section 3.3 with respect to a Participant's accrued benefit at the time of such suspension or amendment. Upon termination of the Plan, however, all Participants shall be one hundred percent (100%) vested in their accrued Supplemental Retirement Benefits. ARTICLE X--MISCELLANEOUS 10.1 Unfunded Plan This Plan is an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of "management or highly-compensated employees" within the meaning of Sections 201, 301, and 401 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and therefore is exempt from the provisions of Parts 2, 3 and 4 of Title I of ERISA. Accordingly, the Board may terminate the Plan and make no further benefit payments or remove certain employees as Participants if it is determined by the United States Department of Labor, a court of competent jurisdiction, or an opinion of counsel that the Plan constitutes an employee pension benefit plan within the meaning of Section 3(2) of ERISA (as currently in effect or hereafter amended) which is not so exempt. 10.2 Unsecured General Creditor Participants and their Beneficiaries, heirs, successors, and assigns shall have no secured legal or equitable rights, interest or claims in any property or assets of Employer, nor shall they be Beneficiaries of, or have any rights, claims or interests in any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by Employer. Except as provided in Section 10.3, such policies, annuity contracts or other assets of Employer shall not be held under any trust for the benefit of Participants, their Beneficiaries, heirs, successors or assigns, or held in any way as collateral security for the fulfilling of the obligations of Employer under this Plan. Any and all of Employer's assets and policies shall be, and remain, the general, unpledged, unrestricted assets of Employer. Employer's obligation under the Plan shall be that of an unfunded and unsecured promise to pay money in the future. 10.3 Trust Fund Employer shall be responsible for the payment of all benefits provided under the Plan. At its discretion, Employer may establish one (1) or more trusts, with such trustees as the Board may approve, for the purpose of providing for the payment of such benefits. Although such a trust shall be irrevocable, its assets shall be held for payment of all Employer's general creditors in the event of insolvency. To the extent any benefits provided under the Plan are paid from any such trust, Employer shall have no further obligation to pay them. If not paid from the trust, such benefits shall remain the obligation of Employer. 10.4 Nonassignability Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and nontransferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. 10.5 Not a Contract of Employment This Plan shall not constitute a contract of employment between Employer and the Participant. Nothing in this Plan shall give a Participant the right to be retained in the service of Employer or to interfere with the right of Employer to discipline or discharge a Participant at any time. 10.6 Protective Provisions A Participant shall cooperate with Employer by furnishing any and all information requested by Employer in order to facilitate the payment of benefits hereunder, and by taking such physical examinations as Employer may deem necessary and by taking such other action as may be requested by Employer. 10.7 Governing Law The provisions of this Plan shall be construed and interpreted according to the laws of the State of Colorado, except as preempted by federal law. 10.8 Validity If any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein. 10.9 Notice Any notice or filing required or permitted under the Plan shall be sufficient if in writing and hand delivered or sent by registered or certified mail. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Mailed notice to the Committee shall be directed to the Company's address. Mailed notice to a Participant or Beneficiary shall be directed to the individual's last known address in Employer's records. 10.10 Successors The provisions of this Plan shall bind and inure to the benefit of Employer and its successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise acquire all or substantially all of the business and assets of Employer, and successors of any such corporation or other business entity. EX-10.4 6 CONTRACTS EXHIBIT 10.4 EXECUTIVE DEFERRED COMPENSATION PLAN GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY EXECUTIVE DEFERRED COMPENSATION PLAN AMENDMENT NO. 2 This Amendment No. 2 to the Great-West Life & Annuity Insurance Company United States Employees' Executive Deferred Compensation Plan is effective as of January 1, 1998 and has been executed as of this 27th day of January, 1997. WHEREAS, pursuant to Section 9.1 of the Plan, the United States Executive Committee of the Board of Directors of the Great-West Life & Annuity Insurance Company (the "Board") has the right to amend the Plan; and WHEREAS, the Board would like to allow participants to receive benefits pursuant to the same option for payment available in the Great-West Life & Annuity Staff and Agents Pension Plan; NOW, THEREFORE, the Plan shall be amended as follows: FIRST: Section 5.4 shall amended to add the following section 5.4 (c): (c) Any other form of payment option available under the "Qualified Plan", as amended from time to time, and which form of payment is allowable to this Plan pursuant to the Internal Revenue Code. . IN WITNESS WHEREOF, this Amendment No. 2 has been executed as of the date first written above. AMENDMENT NO. 1 TO THE THE GREAT-WEST LIFE ASSURANCE COMPANY EXECUTIVE DEFERRED COMPENSATION PLAN THIS IS AN AMENDMENT to The Great-West Life Assurance Company Executive Deferred Compensation Plan (the "Plan") made this 26th day of November, 1996, pursuant to the discretion of the Executive Committee of the Board of Directors of The Great-West Life Assurance Company (the "Company"). BACKGROUND STATEMENT The Company desires to amend the Plan to recognize the transfer of the U.S. employees covered by the Plan from the Company to Great-West Life & Annuity Insurance Company and to conform the Plan with such transfer. Therefore, the Plan is amended in the following respects, effective on January 1, 1997: 1. Section 2.3 shall be amended by substituting for the current text the following: "2.3 Board. `Board' means the Executive Committee of the Board of Directors of the Company." 2. Section 2.5 shall be amended by substituting for the current text the following: "2.5 Company. `Company' means Great-West Life & Annuity Insurance Company, a Colorado corporation, its successors, and any U.S. affiliate of the Company designated by the Board." 3. Section 2.14 shall be amended by substituting for the current text the following: "2.14 Other Plan. `Other Plan' means Great-West Life & Annuity Insurance Company Deferred Compensation Plan for Regional Group Managers and Individual Field Sales Managers, formerly known as The Great-West Life Assurance Company Deferred Compensation Plan for Regional Group Managers and Individual Field Sales Managers." 4. Section 2.18 shall be amended by substituting for the current text the following: "2.18 Qualified Pension Plan. `Qualified Pension Plan' means the Employees' and Agents' Pension Benefits Plan Great-West Life & Annuity Insurance Company, or any predecessor or successor defined benefit plan maintained by the Employer that qualifies under Section 401(a) of the Internal Revenue Code." IN WITNESS WHEREOF, the Company has caused this amendment to be adopted by resolution of its Board of Directors, a copy of which is attached hereto. THE GREAT-WEST LIFE ASSURANCE COMPANY UNITED STATES EMPLOYEES' EXECUTIVE DEFERRED COMPENSATION PLAN THE GREAT-WEST LIFE ASSURANCE COMPANY UNITED STATES EMPLOYEES' EXECUTIVE DEFERRED COMPENSATION PLAN ARTICLE I--PURPOSE; EFFECTIVE DATE The purpose of this Executive Deferred Compensation Plan is to provide current tax planning opportunities as well as supplemental funds for retirement or death for certain employees of Employer. It is intended that the Plan will aid in attracting and retaining employees of exceptional ability by providing them with these benefits. The Plan shall be effective as of January 1, 1993. ARTICLE II--DEFINITIONS Whenever used in this document, the following terms shall have the meanings set forth in this Article unless a contrary or different meaning is expressly provided: 2.1 Account "Account" means the device used by Employer to measure and determine the amounts to be paid to a Participant under the Plan. 2.2 Beneficiary "Beneficiary" means the person, persons or entity entitled under Article VI to receive any Plan benefits payable after a Participant's death. 2.3 Board "Board" means the United States Executive Committee of the Board of Directors of the Company. 2.4 Committee "Committee" means the committee appointed by the Board to administer the Plan pursuant to Article VII. 2.5 Company "Company" means The Great-West Life Assurance Company, a Canadian stock life insurance company, its successors, and any U.S. affiliate of the Company designated by the Board. 2.6 Compensation "Compensation" means the salary and bonuses payable by Employer, determined before reduction for amounts deferred under this Plan. 2.7 Deferral Commitment "Deferral Commitment" means a commitment made by a Participant to defer Compensation pursuant to Article III. 2.8 Deferral Period "Deferral Period" means each calendar year. 2.9 Determination Date "Determination Date" means the last day of each calendar month. 2.10 Disability "Disability" means a physical or mental condition which prevents the Participant from satisfactorily performing the Participant's usual duties for Employer. The Committee shall determine the existence of Disability and may rely upon advise from a medical examiner satisfactory to the Committee in making the determination. 2.11 Earnings "Earnings" means the rate of growth credited to an Account on each Determination Date in a calendar year which shall be equal to one and one-half (1-1/2) percentage points higher than the nominal annual yield on over ten (10) year composite Government Securities for the previous calendar month, as published by the Federal Reserve Board (or any successor thereto), or, if such index is no longer published, a substantially similar index selected by the Board. 2.12 Employer "Employer" means the Company and any subsidiary or affiliate of the Company designated by the Board. 2.13 Financial Hardship "Financial Hardship" means a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. Financial Hardship shall be determined by the Committee on the basis of information supplied by the Participant in accordance with uniform guidelines promulgated from time to time by the Committee. 2.14 Other Plan "Other Plan" means The Great-West Life Assurance Company Deferred Compensation Plan for Regional Group Managers and Individual Field Sales Managers. 2.15 Participant "Participant" means any eligible individual who has elected to defer Compensation under this Plan. 2.16 Participation Agreement "Participation Agreement" means the agreement submitted by a Participant to the Committee prior to the beginning of a Deferral Period, with respect to a Deferral Commitment made for such Deferral Period. 2.17 Plan "Plan" means this Executive Deferred Compensation Plan as amended from time to time. 2.18 Qualified Pension Plan "Qualified Pension Plan" means Part AA--United States Employees' and Agents' Pension Benefits Plan for The Great-West Life Assurance Company, or any successor defined benefit plan maintained by the Employer that qualifies under Section 401(a) of the Internal Revenue Code. 2.19 Retirement "Retirement" means a Participant's termination from employment with Employer on or after the Participant's attainment of age fifty-seven (57) and the completion of fifteen (15) Years of Service. 2.20 Years of Service "Years of Service" means the number of years of service determined in accordance with the provisions of the Qualified Pension Plan, whether or not the Participant is a Participant in such plan. ARTICLE III--PARTICIPATION AND DEFERRAL COMMITMENTS 3.1 Eligibility and Participation (a) Eligibility. Eligibility to participate in the Plan shall be limited to those key employees of Employer who are designated, from time to time, by the Board. (b) Participation. An eligible individual may elect to participate in the Plan with respect to any Deferral Period by submitting a Participation Agreement to the Committee by the December 31 immediately preceding the beginning of the Deferral Period. (c) Part-Year Participation. When an individual first becomes eligible to participate during a Deferral Period, a Participation Agreement may be submitted to the Committee no later than thirty (30) days after the Committee notifies the individual of eligibility to participate. Such Participation Agreement will be effective only with regard to Compensation earned following submission to the Committee. 3.2 Form of Deferral A Participant may elect Deferral Commitments in the Participation Agreement as follows: (a) Salary Deferral Commitment. A salary Deferral Commitment shall be the salary payable by Employer to a Participant during the Deferral Period. The amount to be deferred shall be stated as a flat percentage or as a flat dollar amount. (b) Bonus Deferral Commitment. A bonus Deferral Commitment shall be the annual bonuses payable by Employer to a Participant for the Deferral Period. In no event shall a Participant defer bonuses earned from any long-term incentive plan which currently exists or may exist in the future. The amount to be deferred shall be stated as a flat percentage, as a flat dollar amount of the total bonus amount, or as a flat percentage above an amount designated by the Participant in the Participation Agreement. 3.3 Limitations on Deferral Commitments The following limitations shall apply to Deferral Commitments: (a) Maximum. The maximum percentage of Compensation deferred shall be fifty percent (50%) in a salary Deferral Commitment and one hundred percent (100%) in a bonus Deferral Commitment. (b) Minimum. The minimum salary deferral amount shall be two hundred dollars ($200) for each month in the Deferral Period. The minimum bonus deferral amount shall be five percent (5%) or twenty-four hundred dollars ($2,400), whichever is greater. (c) Changes in Minimum or Maximum. The Committee may change the minimum or maximum deferral amounts from time to time by giving written notice to all Participants. No such change may affect a Deferral Commitment made prior to the Committee's action. 3.4 Commitment Limited by Termination If a Participant terminates employment with Employer or service on the Board prior to the end of the Deferral Period, the Deferral Period shall end at the date of termination. The minimum deferral for the Deferral Period shall be based on the number of months to the date of termination. 3.5 Period of Deferral Commitment; Modification Once a Participant has made a Deferral Commitment, that Commitment shall remain in effect for that Deferral Period. Deferral Commitments shall be irrevocable except that the Committee may reduce the amount to be deferred or waive the remainder of the Deferral Commitment upon a finding that the Participant has suffered a Financial Hardship. 3.6 Change in Employment Status If the Board determines that a Participant's performance is no longer at a level that deserves reward through participation in the Plan, but does not terminate the Participant's employment with Employer, no new Deferral Commitments may be made by such Participant after notice of such determination is given by the Board. ARTICLE IV--DEFERRED COMPENSATION ACCOUNT 4.1 Account The amounts deferred by a Participant under the Plan, any Employer contributions and Earnings shall be credited to the Participant's Account. Separate subaccounts may be maintained to reflect different forms of payment. The Account shall be a bookkeeping device utilized for the sole purpose of determining the benefits payable under the Plan and shall not constitute a separate fund of assets. On the effective date of the Plan, each Participant shall have an Account balance equal to the amounts held for the Participant pursuant to the Other Plan. 4.2 Timing of Credits; Withholding A Participant's deferred Compensation shall be credited to the Account at the time it would have been payable to the Participant. Any withholding of taxes or other amounts with respect to deferred Compensation that is required by state, federal or local law shall be withheld from the Participant's corresponding nondeferred Compensation to the maximum extent possible and any remaining amount shall reduce the amount credited to the Participant's Account. 4.3 Pension Make-Up Employer shall restore an amount equal to any reduction in a Participant's Qualified Pension Plan benefits because of deferrals under this Plan to the extent that the Qualified Pension Plan benefits are not restored by any other Employer-provided plan or agreement. 4.4 Discretionary Contributions Employer may make discretionary contributions to a Participant's Account. Discretionary contributions shall be credited at such times and in such amounts as the Board in its sole discretion shall determine. 4.5 Determination of Accounts Each Participant's Account as of each Determination Date shall consist of the balance of the Account as of the immediately preceding Determination Date, adjusted as follows: (a) New Deferrals. The Account shall be increased by any deferred Compensation credited since such Determination Date. (b) Employer Contributions. The Account shall be increased by any discretionary contributions credited since such Determination Date. (c) Distributions. The Account shall be reduced by any benefits distributed to the Participant since such Determination Date. (d) Earnings. The Account shall be increased by the Earnings on the average daily balance in the Account since such Determination Date. 4.6 Vesting of Accounts Each Participant shall be one hundred percent (100%) vested at all times in the amounts credited to such Participant's Account and Earnings thereon. 4.7 Statement of Accounts The Committee shall give to each Participant a statement showing the balances in the Participant's Account on an annual basis and at such times as may be determined by the Committee. ARTICLE V--PLAN BENEFITS 5.1 Withdrawals A Participant's Account may be distributed to the Participant before termination of employment as follows: (a) Early Withdrawals. A Participant may elect in a Participation Agreement to withdraw all or any portion of the amount deferred by that Participation Agreement as of a date specified in the election. Such date shall not be sooner than seven (7) years after the date the Deferral Period commences. The amount withdrawn shall not exceed the amount of Compensation deferred, without Earnings. (b) Hardship Withdrawals. Upon a finding that a Participant or a Beneficiary has suffered a Financial Hardship, the Committee may, in its sole discretion, make distributions from the Participant's Account. The amount of such a withdrawal shall be limited to the amount reasonably necessary to meet the Participant's or Beneficiary's needs resulting from the Financial Hardship. If payment is made due to Financial Hardship under this Plan, the Participant's deferrals shall cease for a twelve (12) month period. Any resumption of the Participant's deferrals under the Plan after such twelve (12) month period shall be made only at the election of the Participant in accordance with Article III herein. (c) Form of Payment. Withdrawals shall be paid in a lump sum and shall be charged to the Participant's Account as a distribution. 5.2 Retirement and Termination Benefits If a Participant terminates employment with Employer for any reason except death, Employer shall pay to the Participant benefits equal to the balance in the Account. 5.3 Death Benefit (a) Preretirement. If a Participant dies while employed by Employer, Employer shall pay to the Participant's Beneficiary benefits equal to the balance in the Account. (b) Postretirement. If a Participant dies following the Participant's Retirement from the Company, Employer shall pay to the Participant's Beneficiary benefits equal to the balance, if any, in the Account. 5.4 Form of Benefits Except as provided below, benefits due to a Participant as a result of Retirement, Disability, termination or death shall be paid in the form elected by the Participant prior to the beginning of the Deferral Period in the Form of Payment Designation. Forms of benefit payment shall be: (a) A lump sum amount which is equal to the applicable Account balance. (b) Equal monthly installments of the Account amortized over a period of sixty (60), one hundred twenty (120), or one hundred eighty (180) months. Earnings on the unpaid balance shall be equal to the average rate of Earnings on the Account over the thirty-six (36) months immediately preceding the commencement of benefit payments. Notwithstanding Section 5.4(b), if the Participant's Account is one hundred thousand dollars ($100,000) or less on the valuation date, the benefit shall be paid in a lump sum. 5.5 Accelerated Distribution Notwithstanding any other provision of the Plan, a Participant at any time shall be entitled to receive, upon written request to the Committee, a lump sum distribution equal to ninety percent (90%) of the vested Account balance as of the Determination Date immediately preceding the date on which the Committee receives the written request. The remaining balance shall be forfeited by the Participant and the Participant shall no longer be eligible to participate in the Plan from that date forward. The amount payable under this section shall be paid in a lump sum within sixty-five (65) days following the receipt of the notice by the Committee from the Participant. 5.6 Withholding; Payroll Taxes Employer shall withhold from payments hereunder any taxes required to be withheld from such payments under federal, state or local law. A Beneficiary, however, may elect not to have withholding of federal income tax pursuant to Section 3405(a)(2) of the Internal Revenue Code, or any successor provision thereto. 5.7 Valuation The last day of the month following the month of retirement, termination or death shall be the valuation date. The amount of all payments shall be based on the value of the Participant's Account on the valuation date. Payments shall be made or commence within thirty-one (31) days after the valuation date. 5.8 Payment to Guardian If a distribution is payable to a minor or a person declared incompetent or to a person incapable of handling the disposition of property, the Committee may direct payment to the guardian, legal representative or person having the care and custody of such minor, incompetent or person. The Committee may require proof of incompetency, minority, incapacity or guardianship as it may deem appropriate prior to distribution. Such distribution shall completely discharge the Committee from all liability with respect to such benefit. ARTICLE VI--BENEFICIARY DESIGNATION 6.1 Beneficiary Designation Each Participant shall have the right, at any time, to designate one (1) or more persons or an entity as Beneficiary (both primary as well as secondary) to whom benefits under this Plan shall be paid in the event of a Participant's death prior to complete distribution of the Participant's Account. Each Beneficiary designation shall be in a written form prescribed by the Committee and will be effective only when filed with the Committee during the Participant's lifetime. Designation by a married Participant of a Beneficiary other than the Participant's spouse shall not be effective unless the spouse executes a written consent that acknowledges the effect of the designation and is witnessed by a notary public, or the consent cannot be obtained because the spouse cannot be located. 6.2 Amendments Except as provided below, any nonspousal designation of Beneficiary may be changed by a Participant without the consent of such Beneficiary by the filing of a new designation with the Committee. The filing of a new designation shall cancel all designations previously filed. 6.3 Change in Marital Status If the Participant's marital status changes after the Participant has designated a Beneficiary, the following shall apply: (a) If the Participant is married at death but was unmarried when the designation was made, the designation shall be void unless the spouse has consented to it in the manner prescribed above. (b) If the Participant is unmarried at death but was married when the designation was made: (i) The designation shall be void if the spouse was named as Beneficiary. (ii) The designation shall remain valid if a nonspouse Beneficiary was named. (c) If the Participant was married when the designation was made and is married to a different spouse at death, the designation shall be void unless the new spouse has consented to it in the manner prescribed above. 6.4 No Beneficiary Designation If any Participant fails to designate a Beneficiary in the manner provided above, or if the Beneficiary designated by a deceased Participant dies before the Participant or before complete distribution of the Participant's benefits, the Participant's Beneficiary shall be the person in the first of the following classes in which there is a survivor: (a) The Participant's surviving spouse; (b) The Participant's children in equal shares, except that if any of the children predeceases the Participant but leaves issue surviving, then such issue shall take by right of representation the share the parent would have taken if living; (c) The Participant's estate. ARTICLE VII--ADMINISTRATION 7.1 Committee; Duties This Plan shall be administered by the Committee. The Committee shall have the authority to make, amend, interpret and enforce all appropriate rules and regulations for the administration of the Plan and decide or resolve any and all questions, including interpretations of the Plan, as may arise in such administration. A majority vote of the Committee members shall control any decision. Members of the Committee may be Participants under this Plan. 7.2 Agents The Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit, and may from time to time consult with counsel who may be counsel to the Company. 7.3 Binding Effect of Decisions The decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final, conclusive and binding upon all persons having any interest in the Plan. 7.4 Indemnity of Committee The Company shall indemnify and hold harmless the members of the Committee against any and all claims, loss, damage, expense or liability arising from any action or failure to act with respect to this Plan on account of such person's service on the Committee, except in the case of gross negligence or willful misconduct. ARTICLE VIII--CLAIMS PROCEDURE 8.1 Claim Any person claiming a benefit, requesting an interpretation or ruling under the Plan, or requesting information under the Plan shall present the request in writing to the Committee, which shall respond in writing as soon as practicable. 8.2 Denial of Claim If the claim or request is denied, the written notice of denial shall state: (a) The reasons for denial, with specific reference to the Plan provisions on which the denial is based. (b) A description of any additional material or information required and an explanation of why it is necessary. (c) An explanation of the Plan's claim review procedure. 8.3 Review of Claim Any person whose claim or request is denied or who has not received a response within thirty (30) days may request review by notice given in writing to the Committee. The claim or request shall be reviewed by the Committee which may, but shall not be required to, grant the claimant a hearing. On review, the claimant may have representation, examine pertinent documents, and submit issues and comments in writing. 8.4 Final Decision The decision on review shall normally be made within sixty (60) days. If an extension of time is required for a hearing or other special circumstances, the claimant shall be notified and the time limit shall be one hundred twenty (120) days. The decision shall be in writing and shall state the reasons and the relevant Plan provisions. All decisions on review shall be final and bind all parties concerned. ARTICLE IX--AMENDMENT AND TERMINATION OF PLAN 9.1 Amendment The Board may at any time amend the Plan by written instrument, notice of which shall be given to all Participants and to Beneficiaries receiving installment payments, subject to the following: (a) Preservation of Account Balance. No amendment shall reduce the amount accrued in any Account to the date such notice of the amendment is given. (b) Changes in Earnings Rate. No amendment shall reduce the rate of Earnings to be credited, after the date of the amendment, to the amount already accrued in any Account and any deferred Compensation credited to the Account under Deferral Commitments already in effect on that date. 9.2 Employer's Right to Terminate The Board may at any time partially or completely terminate the Plan if, in its judgment, the tax, accounting or other effects of the continuance of the Plan, or potential payments thereunder would not be in the best interests of Employer. (a) Partial Termination. The Board may partially terminate the Plan by instructing the Committee not to accept any additional Deferral Commitments. If such a partial termination occurs, the Plan shall continue to operate and be effective with regard to Deferral Commitments entered into prior to the effective date of such partial termination. (b) Complete Termination. The Board may completely terminate the Plan by instructing the Committee not to accept any additional Deferral Commitments, and by terminating all ongoing Deferral Commitments. If such a complete termination occurs, the Plan shall cease to operate and Employer shall pay out each Account. Payment shall be made as a lump sum or in equal monthly installments over the following period, based on the Account balance: Account Balance Payout Period ------------------------------------------------------------ Less than $100,000 Lump Sum $100,000 but less than $500,000 3 Years $500,000 or more 5 Years ============================================================ Earnings at the appropriate rate shall continue to be credited on the unpaid balance in each Account. ARTICLE X--MISCELLANEOUS 10.1 Unfunded Plan This plan is an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of "management or highly-compensated employees" within the meaning of Sections 201, 301 and 401 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and therefore is exempt from the provisions of Parts 2, 3 and 4 of Title I of ERISA. Accordingly, the Board may terminate the Plan and make no further benefit payments or remove certain employees as Participants if it is determined by the United States Department of Labor, a court of competent jurisdiction, or an opinion of counsel that the Plan constitutes an employee pension benefit plan within the meaning of Section 3(2) of ERISA (as currently in effect or hereafter amended) which is not so exempt. 10.2 Unsecured General Creditor Participants and their Beneficiaries, heirs, successors, and assigns shall have no secured legal or equitable rights, interest or claims in any property or assets of Employer, nor shall they be Beneficiaries of, or have any rights, claims or interests in any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by Employer. Except as provided in Section 10.3, such policies, annuity contracts or other assets of Employer shall not be held under any trust for the benefit of Participants, their Beneficiaries, heirs, successors or assigns, or held in any way as collateral security for the fulfilling of the obligations of Employer under this Plan. Any and all of Employer's assets and policies shall be, and remain, the general, unpledged, unrestricted assets of Employer. Employer's obligation under the Plan shall be that of an unfunded and unsecured promise to pay money in the future. 10.3 Trust Fund At its discretion, Employer may establish one (1) or more trusts, with such trustees as the Board may approve, for the purpose of providing for the payment of benefits owed under the Plan. Although such a trust shall be irrevocable, its assets shall be held for payment of all Employer's general creditors in the event of insolvency. To the extent any benefits provided under the Plan are paid from any such trust, Employer shall have no further obligation to pay them. If not paid from the trust, such benefits shall remain the obligation of Employer. 10.4 Nonassignability Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and nontransferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. 10.5 Not a Contract of Employment This Plan shall not constitute a contract of employment between Employer and the Participant. Nothing in this Plan shall give a Participant the right to be retained in the service of Employer or to interfere with the right of Employer to discipline or discharge a Participant at any time. 10.6 Protective Provisions A Participant will cooperate with Employer by furnishing any and all information requested by Employer, in order to facilitate the payment of benefits hereunder, and by taking such physical examinations as Employer may deem necessary and taking such other action as may be requested by Employer. 10.7 Governing Law The provisions of this Plan shall be construed and interpreted according to the laws of the State of Colorado, except as preempted by federal law. 10.8 Validity In case any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein. 10.9 Notice Any notice required or permitted under the Plan shall be sufficient if in writing and hand delivered or sent by registered or certified mail. Such notice shall be deemed as given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Mailed notice to the Committee shall be directed to the Company's address. Mailed notice to a Participant or Beneficiary shall be directed to the individual's last known address in Employer's records. 10.10 Successors The provisions of this Plan shall bind and inure to the benefit of Employer and its successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise acquire all or substantially all of the business and assets of Employer, and successors of any such corporation or other business entity. EX-21 7 SUBS EXHIBIT 21 SUBSIDIARIES OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY SUBSIDIARIES OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY JURISDICTION OF INCORPORATION OR ORGANIZATION SUBSIDIARY Benefits Communication Corporation (1) Delaware BenefitsCorp Equities, Inc. Delaware Confed Admin Services, Inc. Delaware Financial Administrative Services Corporation (2) Colorado First Great-West Life & Annuity Insurance Company New York Great-West Benefit Services, Inc. Delaware Great-West Realty Investments, Inc. Delaware Greenwood Property Corporation Colorado GW Capital Management, LLC Colorado GWL Properties, Inc. Colorado Maxim Series Fund, Inc. Maryland One Corporation Colorado One Health Plan of Arizona, Inc. Arizona One Health Plan of California, Inc. California One Health Plan of Colorado, Inc. Colorado One Health Plan of Florida, Inc. Florida One Health Plan of Georgia, Inc. Georgia One Health Plan of Illinois, Inc. Illinois One Health Plan of Indiana, Inc. Indiana One Health Plan of Massachusetts, Inc. Massachusetts One Health Plan of North Carolina, Inc. North Carolina One Health Plan of Ohio, Inc. Ohio One Health Plan of Oregon, Inc. Oregon One Health Plan of Tennessee, Inc. Tennessee One Health Plan of Texas, Inc. Texas One Health Plan of Washington, Inc. Washington One Orchard Equities, Inc. Colorado Orchard Capital Management, LLC Colorado Orchard Series Fund Delaware (1) Also doing business as Benefits Insurance Services, Inc. (2) Also doing business as Financial Administrative Services Corporation of Colorado. EX-24 8 POA EXHIBIT 24 DIRECTORS' POWERS OF ATTORNEY POWER OF ATTORNEY RE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Know all men by these presents, that I, Andre Desmarais, a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, a Colorado corporation, do hereby constitute and appoint each of D.C. Lennox and G.R. Derback as my true and lawful attorney and agent for me and in my name and on my behalf to, individually and without the concurrence of the other attorney and agent, sign my name, in my capacity as a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, on Form 10-K Annual Reports of Great-West Life & Annuity Insurance Company to be filed with the Securities and Exchange Commission from time to time, and to any and all amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand this 10th day of March, 1998. /s/ Andre Desmarais Member, Board of Directors of Great-West Life & Annuity Insurance Company Witness: /s/ Lisa Gagnon Signature Lisa Gagnon Name Printed POWER OF ATTORNEY RE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Know all men by these presents, that I, Robert G. Graham, a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, a Colorado corporation, do hereby constitute and appoint each of D.C. Lennox and G.R. Derback as my true and lawful attorney and agent for me and in my name and on my behalf to, individually and without the concurrence of the other attorney and agent, sign my name, in my capacity as a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, on Form 10-K Annual Reports of Great-West Life & Annuity Insurance Company to be filed with the Securities and Exchange Commission from time to time, and to any and all amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand this 26th day of March, 1997. /s/ R.G. Graham Member, Board of Directors of Great-West Life & Annuity Insurance Company Witness: /s/ Robin Graham Signature Robin Graham Name Printed EX-27 9 FDS
7 EXHIBIT 27 FINANCIAL DATA SCHEDULE 0000744455 GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY 1,000 U.S. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 6698629 2082716 2151476 39021 1235594 0 13205982 126278 84364 255442 22077715 11478218 0 0 454843 54058 0 121800 7032 1057087 22077715 1278909 897572 9800 0 1385050 0 44298 500576 256357 97597 158760 0 0 0 158760 0 0 0 0 0 0 0 0
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