14. Employee Benefit Plans

Defined Benefit Pension, Post-Retirement Medical and Supplemental Executive Retirement Plans

The Company has a noncontributory Defined Benefit Pension Plan covering substantially all of its employees that were hired before January 1, 1999. Prior to December 31, 2012, the Company accounted for the Defined Benefit Pension Plan as the direct legal obligation of the Company and accounted for the corresponding plan obligations on its Balance Sheet and Statements of Income. Effective December 31, 2012, the Company transferred the sponsorship of the Defined Benefit Pension Plan to GWL&A Financial, the Company’s immediate parent. Despite the change in sponsorship of the Defined Benefit Pension Plan, the Company will continue to account for the corresponding plan obligations on its Balance Sheet and Statements of Income.

Benefits for the Defined Benefit Pension Plan are based principally on an employee’s years of service and compensation levels near retirement. The Company’s policy for funding the Defined Benefit Pension Plans is to make annual contributions, which equal or exceed regulatory requirements.

The Company sponsors an unfunded Post-Retirement Medical Plan (the “Medical Plan”) that provides health benefits to retired employees who are not Medicare eligible. 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 is to fund the cost of the medical plan benefits in amounts determined at the discretion of management.

The Company also provides supplemental executive retirement plans to certain key executives. These plans provide key executives with certain benefits upon retirement, disability or death based upon total compensation. The Company has purchased individual life insurance policies with respect to each employee covered by this plan. The Company is the owner and beneficiary of the insurance contracts.

A December 31 measurement date is used for the employee benefit plans.

The following tables provide a reconciliation of the changes in the benefit obligations, fair value of plan assets and the underfunded status for the Company’s Defined Benefit Pension, Post-Retirement Medical and Supplemental Executive Retirement plans as of the years ended December 31, 2012 and 2011:

													Supplemental executive
	Defined benefit pension plan						Post-retirement medical plan						retirement plan						Total
	2012			2011			2012			2011			2012			2011			2012			2011

Change in projected benefit obligation:
Benefit obligation, January 1	$	401,134		$	349,435		$	11,725		$	10,162		$	61,358		$	54,855		$	474,217		$	414,452
Service cost	4,350			3,935			817			622			991			916			6,158			5,473
Interest cost	20,945			20,286			569			585			2,912			3,136			24,426			24,007
Actuarial (gain) loss	87,117			39,211			974			693			6,760			3,520			94,851			43,424
Regular benefits paid	(12,943		)	(11,733		)	(623		)	(337		)	(2,792		)	(2,719		)	(16,358		)	(14,789		)
Plan amendments	—			—			—			—			—			1,650			—			1,650
Benefit obligation, December 31	$	500,603		$	401,134		$	13,462		$	11,725		$	69,229		$	61,358		$	583,294		$	474,217
Accumulated benefit obligation	$	491,712		$	393,487		$	13,462		$	11,725		$	58,135		$	50,033		$	563,309		$	455,245

													Supplemental executive
	Defined benefit pension plan						Post-retirement medical plan						retirement plan						Total
	2012			2011			2012			2011			2012			2011			2012			2011

Change in plan assets:
Value of plan assets, January 1	$	293,336		$	282,616		$	—		$	—		$	—		$	—		$	293,336		$	282,616
Actual return on plan assets	38,541			12,353			—			—			—			—			38,541			12,353
Employer contributions	17,600			10,100			623			337			2,792			2,719			21,015			13,156
Benefits paid	(12,943		)	(11,733		)	(623		)	(337		)	(2,792		)	(2,719		)	(16,358		)	(14,789		)
Value of plan assets, December 31	$	336,534		$	293,336		$	—		$	—		$	—		$	—		$	336,534		$	293,336

													Supplemental executive
	Defined benefit pension plan						Post-retirement medical plan						retirement plan						Total
	2012			2011			2012			2011			2012			2011			2012			2011

Under funded status at December 31	$	(164,069	)	$	(107,798	)	$	(13,462	)	$	(11,725	)	$	(69,229	)	$	(61,358	)	$	(246,760	)	$	(180,881	)

The following table presents amounts recognized in the consolidated balance sheets at December 31, 2012 and 2011 for the Company’s Defined Benefit Pension, Post-retirement Medical and Supplemental Executive Retirement plans:

													Supplemental executive
	Defined benefit pension plan						Post-retirement medical plan						retirement plan						Total
	2012			2011			2012			2011			2012			2011			2012			2011

Amounts recognized in consolidated balance sheets:
Other assets	$	—		$	12,690		$	—		$	—		$	—		$	—		$	—		$	12,690
Other liabilities	(164,069		)	(120,488		)	(13,462		)	(11,725		)	(69,229		)	(61,358		)	(246,760		)	(193,571		)
Accumulated other comprehensive income (loss)	(180,869		)	(120,487		)	12,662			15,741			(20,710		)	(15,520		)	(188,917		)	(120,266		)

The following table provides information regarding amounts in AOCI that have not yet been recognized as components of net periodic benefit cost at December 31, 2012:

											Supplemental executive
	Defined benefit pension plan						Post-retirement medical plan				retirement plan						Total
	Gross			Net of tax			Gross		Net of tax		Gross			Net of tax			Gross			Net of tax

Net gain (loss)	$	(180,754	)	$	(117,490	)	$	6,170	$	4,011	$	(15,710	)	$	(10,211	)	$	(190,294	)	$	(123,690	)
Net prior service (cost) credit	(115		)	(75		)	6,492		4,220		(5,000		)	(3,250		)	1,377			895
	$	(180,869	)	$	(117,565	)	$	12,662	$	8,231	$	(20,710	)	$	(13,461	)	$	(188,917	)	$	(122,795	)

The following table provides information regarding amounts in AOCI that are expected to be recognized as components of net periodic benefit costs during the year ended December 31, 2013:

											Supplemental executive
	Defined benefit pension plan						Post-retirement medical plan				retirement plan						Total
	Gross			Net of tax			Gross		Net of tax		Gross			Net of tax			Gross			Net of tax

Net gain (loss)	$	(15,577	)	$	(10,125	)	$	413	$	268	$	(1,300	)	$	(845	)	$	(16,464	)	$	(10,702	)
Prior service (cost) credit	(51		)	(33		)	1,650		1,072		(933		)	(606		)	666			433
	$	(15,628	)	$	(10,158	)	$	2,063	$	1,340	$	(2,233	)	$	(1,451	)	$	(15,798	)	$	(10,269	)

The expected benefit payments for the Company’s Defined Benefit Pension, Post-Retirement Medical and Supplemental Executive Retirement plans for the years indicated are as follows:

					Supplemental
	Defined benefit		Post-retirement		executive
	pension plan		medical plan		retirement plan

2013	$	13,621	$	637	$	3,720
2014	14,259		697		3,529
2015	15,136		727		4,940
2016	16,640		743		3,390
2017	17,708		771		18,909
2018 through 2022	112,582		4,166		13,813

Net periodic (benefit) cost of the Defined Benefit Pension, Post-Retirement Medical and Supplemental Executive Retirement plans included in general insurance expenses in the accompanying consolidated statements of income for the years ended December 31, 2012, 2011 and 2010 includes the following components:

	Defined benefit pension plan
	2012			2011			2010

Components of net periodic cost:
Service cost	$	4,350		$	3,935		$	3,739
Interest cost	20,945			20,286			19,578
Expected return on plan assets	(21,797		)	(21,093		)	(18,618		)
Amortization of transition obligation	—			(1,388		)	(1,514		)
Amortization of unrecognized prior service cost	51			51			82
Amortization of loss from earlier periods	9,941			5,115			5,091
Net periodic cost	$	13,490		$	6,906		$	8,358

	Post-retirement medical plan
	2012			2011			2010

Components of net periodic benefit:
Service cost	$	817		$	622		$	728
Interest cost	569			585			713
Amortization of unrecognized prior service benefit	(1,650		)	(1,650		)	(1,650		)
Amortization of gain from earlier periods	(455		)	(611		)	(461		)
Net periodic benefit	$	(719	)	$	(1,054	)	$	(670	)

	Supplemental executive retirement plan
	2012		2011		2010

Components of net periodic (benefit) cost:
Service cost	$	991	$	916	$	673
Interest cost	2,912		3,136		2,905
Amortization of unrecognized prior service cost	934		2,584		899
Amortization of net (gain) loss	637		145		—
Net periodic (benefit) cost	$	5,474	$	6,781	$	4,477

The following tables present the assumptions used in determining benefit obligations of the Defined Benefit Pension, Post-Retirement Medical and the Supplemental Executive Retirement plans at December 31, 2012 and 2011:

	Defined benefit pension plan
	2012		2011

Discount rate	4.19	%	5.23	%
Rate of compensation increase	3.14	%	3.14	%

	Post-retirement medical plan
	2012		2011

Discount rate	3.74	%	4.70	%
Initial health care cost trend	7.50	%	8.00	%
Ultimate health care cost trend	5.25	%	5.25	%
Year ultimate trend is reached	2018		2018

	Supplemental executive
	retirement plan
	2011		2011

Discount rate	3.79	%	4.87	%
Rate of compensation increase	4.00	%	5.00	%

The following tables present the assumptions used in determining the net periodic benefit/cost of the Defined Benefit Pension, Post-Retirement Medical and the Supplemental Executive Retirement plans for the years ended December 31, 2012 and 2011:

	Defined benefit pension plan
	2012		2011

Discount rate	5.23	%	5.87	%
Expected return on plan assets	7.25	%	7.50	%
Rate of compensation increase	3.14	%	3.14	%

	Post-retirement medical plan
	2012		2011

Discount rate	4.70	%	5.87	%
Initial health care cost trend	8.00	%	7.50	%
Ultimate health care cost trend	5.25	%	5.25	%
Year ultimate trend is reached	2018		2016

	Supplemental executive
	retirement plan
	2012		2011

Discount rate	4.87	%	5.87	%
Rate of compensation increase	5.00	%	6.00	%

The discount rate has been set based upon the rates of return on high-quality fixed-income investments currently available and expected to be available during the period the benefits will be paid. In particular, the yields on bonds rated AA or better on the measurement date have been used to set the discount rate.

The following table presents the impact on the Post-Retirement Medical Plan that a one-percentage-point change in assumed healthcare cost trend rates would have on the following:

	One percentage		One percentage
	point increase		point decrease

Increase (decrease) on total service and interest cost on components	$	199	$	(170	)
Increase (decrease) on post-retirement benefit obligation	1,448		(1,260		)

The following table presents how the Company’s Defined Benefit Pension Plan assets are invested at December 31, 2012 and 2011:

	December 31,
	2012		2011

Equity securities	56	%	52	%
Debt securities	41	%	44	%
Other	3	%	4	%
Total	100	%	100	%

The following tables present information about the Defined Benefit Retirement Plan’s assets measured at fair value on a recurring basis as of December 31, 2012 and 2011 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:

	Defined Benefit Plan Assets Measured at Fair Value on a Recurring Basis
	December 31, 2012
	Quoted prices		Significant
	in active		other		Significant
	markets for		observable		unobservable
	identical assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total

Common collective trust funds:
Equity index funds	$	—	$	60,601	$	—	$	60,601
Midcap index funds	—		60,289		—		60,289
World equity index funds	—		6,798		—		6,798
U.S. equity market funds	—		60,723		—		60,723
Total common collective trust funds	—		188,411		—		188,411

Fixed maturity investments:
U.S. government direct obligations and agencies	—		9,907		—		9,907
Obligations of U.S. states and their municpalities	—		16,899		—		16,899
Corporate debt securities	—		100,142		—		100,142
Asset-backed securities	—		8,386		—		8,386
Commercial mortgage-backed securities	—		2,961		—		2,961
Total fixed maturity investments	—		138,295		—		138,295

Preferred stock	134		—		—		134
Limited partnership investments	—		—		6,485		6,485
Money market funds	3,209		—		—		3,209
Total defined benefit plan assets	$	3,343	$	326,706	$	6,485	$	336,534

	Defined Benefit Plan Assets Measured at Fair Value on a Recurring Basis
	December 31, 2011
	Quoted prices		Significant
	in active		other		Significant
	markets for		observable		unobservable
	identical assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total

Common collective trust funds:
Equity index funds	$	—	$	49,211	$	—	$	49,211
Midcap index funds	—		48,406		—		48,406
World equity index funds	—		5,336		—		5,336
U.S. equity market funds	—		48,972		—		48,972
Total common collective trust funds	—		151,925		—		151,925

Fixed maturity investments:
U.S. government direct obligations and agencies	—		10,676		—		10,676
Obligations of U.S. states and their municpalities	—		22,467		—		22,467
Corporate debt securities	—		86,836		—		86,836
Asset-backed securities	—		7,711		—		7,711
Commercial mortgage-backed securities	—		2,487		—		2,487
Total fixed maturity investments	—		130,177		—		130,177

Preferred stock	—		111		—		111
Limited partnership investments	—		—		7,116		7,116
Money market funds	4,007		—		—		4,007
Total defined benefit plan assets	$	4,007	$	282,213	$	7,116	$	293,336

The following tables present additional information at December 31, 2012 and 2011 about assets of the Defined Benefit Retirement Plan measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

	Fair Value Measurements Using
	Significant Unobservable Inputs (Level 3)
	Limited partnership interest
	2012			2011

Balance, January 1	$	7,116		$	6,030
Actual return on plan assets
Purchases	61			(34		)
Issuances	(692		)	1,542
Settlement				(422		)
Balance, December 31	$	6,485		$	7,116

The investment objective of the Defined Benefit Pension Plan is to provide a risk-adjusted return that will ensure the payment of benefits while protecting against the risk of substantial investment losses. Correlations among the asset classes are used to identify an asset mix that the Company believes will provide the most attractive returns. Long-term return forecasts for each asset class using historical data and other qualitative considerations to adjust for projected economic forecasts are used to set the expected rate of return for the entire portfolio.

The Defined Benefit Pension Plan utilizes various investment securities. Generally, investment securities are exposed to various risks, such as interest rate risks, credit risk and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur and that such changes could materially affect the amounts reported.

The following table presents the ranges the Company targets for the allocation of invested Defined Benefit Pension Plan assets at December 31, 2013:

		December 31, 2013

Equity securities		25% - 80%
Debt securities		25% - 75%
Other		0% - 40%

Management estimates the value of these investments will be recoverable. The Company does not expect any plan assets to be returned to it during the year ended December 31, 2013. The Company expects to make payments of approximately $637 with respect to its Post-Retirement Medical Plan and $3,720 with respect to its Supplemental Executive Retirement Plan during the year ended December 31, 2013. The Company expects to make a contribution of $6,300 to its Defined Benefit Pension Plan during the year ended December 31, 2013.

Other employee benefit plans

The Company has an executive deferred compensation plan providing key executives with the opportunity to participate in an unfunded deferred compensation program. Under the program, participants may defer base compensation and bonuses and earn interest on the amounts deferred. The program is not qualified under Section 401 of the Internal Revenue Code. Participant balances, which are reflected in other liabilities in the accompanying consolidated balance sheets, are $12,430 and $13,330 at December 31, 2012 and 2011, respectively. The participant deferrals earned interest at the average rates of 7.17% and 6.72% during the years ended December 31, 2012 and 2011, respectively. The interest rate is based on the Moody’s Average Annual Corporate Bond Index rate plus 0.45% for actively employed participants and fixed rates ranging from 6.37% to 7.91% for retired participants.

The Company offers an unfunded, non-qualified deferred compensation plan to a select group of management and highly compensated individuals. Participants defer a portion of their compensation and realize potential market gains or losses on the invested contributions. The program is not qualified under Section 401 of the Internal Revenue Code. Participant balances, which are included in other liabilities in the accompanying consolidated balance sheets are $12,239 and $11,258 at December 31, 2012 and 2011, respectively.