The Financial Services net income increased $336 thousand in 2001 primarily due to realized gains on fixed maturities in 2001 of $679 thousand compared to realized gains in 2000 of $67 thousand. The Financial Services net income increased in 2000 from 1999 due to realized gains in 2000 of $67 thousand compared to realized losses in 1999 of $6 thousand and increased margins and fees on larger asset balances from BOLI sales in 2000.
The increased premium and fee income in 2001 was comprised of growth in Employee Benefits of $575 thousand partially offset by a decrease of $12 thousand in Financial Services premium and fee income. The premium and fee income increase in 2000 was comprised of growth in Employee Benefits and Financial Services premium and fee income of $10.1 million and $249 thousand, respectively.
Realized investment gains from fixed maturities increased from $67 thousand in 2000 to $642 thousand in 2001. The realized investment gains were the result of sales of U.S. Treasury securities.
Deposits for separate accounts decreased $6.5 million in 2001 when compared to 2000 and increased $5.0 million in 2000 compared to 1999. These fluctuations are expected in the small market in which the Company operates.
The results below reflect the Employee Benefits segment for the following periods:
Premium and fee income decreased $12 thousand in 2001 compared to an increase of $249 thousand in 2000. The decrease in 2001 was driven by a decrease in premium income due to normal fluctuations that can be expected in the small market in which the Company operates. The increase in 2000 was driven by higher fee income related to growth in separate accounts.
Deposits for investment-type contracts were down in 2001 due mostly to BOLI deposits of $5.0 million in 2001 compared to $35.0 million in 2000 and $10.0 million in 1999. The nature of this type of product leads to large fluctuations from year to year.
The Company follows rigorous procedures to control interest rate risk and observes strict asset and liability matching guidelines. These guidelines are designed to ensure that even under changing market conditions, the Company's assets will always be able to meet the cash flow and income requirements of its liabilities. Using dynamic modeling to analyze the effects of a wide range of possible market changes upon investments and policyholder benefits, the Company ensures that its investment portfolio is appropriately structured to fulfill financial obligations to its policyholders.
Fixed maturity investments include public and privately placed corporate bonds, government bonds and mortgage-backed and asset-backed securities. Private placement investments that are primarily in the held-to-maturity category are generally less marketable than publicly traded assets, yet they typically offer covenant protection that allows the Company, if necessary, to take appropriate action to protect its investment. The Company believes that the cost of the additional monitoring and analysis required by private placements is more than offset by their enhanced yield.
AAA 65.0 % 62.8 % AA 6.8 14.3 A 11.9 7.3 BBB 13.9 15.6 BB and lower 2.4 ---------- ----------
In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - A replacement of FASB Statement No. 125", which revises the standards for accounting for securitizations, and other transfers of financial assets and collateral, and requires certain disclosures. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of the new SFAS did not have a significant effect on earnings or the financial position of the Company.
Financial Statements for the Years Ended December 31, 2001, 2000, and 1999 and Independent Auditors' Report
In our opinion, such financial statements present fairly, in all material respects, the financial position of First Great-West Life & Annuity Insurance Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 ================================================================================ (Dollars in Thousands)
Policy Reserves - Life insurance and annuity policy reserves with life contingencies of $145,593 and $135,191 at December 31, 2001 and 2000, respectively, are computed on the basis of estimated mortality, investment yield, withdrawals, future maintenance and settlement expenses, and retrospective experience rating premium refunds. Annuity contract reserves without life contingencies of $5,995 and $141 at December 31, 2001 and 2000, respectively, are established at contractholders' account value.
Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. At December 31, 2001 and 2000, the reinsurance receivable had a carrying value of $2,346 and $1,924, respectively.
Total reinsurance premiums ceded to the Parent Corporation in 2001, 2000, and 1999 were $107, $77, and $43, respectively.
On December 1, 1999, the Company entered into an assumption reinsurance agreement with Anthem Health & Life Insurance Company of New York (AH&L NY), to acquire a block of life and health insurance business. The Company also agreed to the assignment of a coinsurance agreement between the Parent Corporation and AH&L NY on certain policies that would not be transferred to the Company via assumption reinsurance. The business primarily consists of administration services only, and stop loss policies. The Company assumed $7,904 of policy reserves and miscellaneous assets and liabilities in exchange for equal consideration from AH&L NY and the Parent Corporation.
Available-for-Sale -------------------------- Amortized Estimated Cost Fair Value ------------ ------------ Due in one year or less $ 2,882 $ 3,075 Due after one year through five years 40,924 42,592 Due after five years through ten years 26,265 25,469 Due after ten years 1,252 1,271 Mortgage-backed securities 38,690 39,122 Asset-backed securities 66,674 67,062 ------------ ------------ $ 176,687 $ 178,591 ============ ============
Temporary differences, which give rise to the deferred tax assets and liabilities as of December 31, 2001 and 2000, are as follows:
In March 1998, the National Association of Insurance Commissioners adopted the Codification of Statutory Accounting Principles (Codification). The Codification, which is intended to standardize accounting and reporting to state insurance departments, was effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. The New York Division of Insurance required adoption of Codification with certain modifications for the preparation of statutory financial statements effective January 1, 2001. The adoption of Codification as modified by the New York Division of Insurance increased statutory net worth as of January 1, 2001, by approximately $2,795 (Unaudited). (The modifications adopted by the New York Division of Insurance had the effect of decreasing the effect on statutory net worth by approximately $2,901 (Unaudited).)
The Company has two reportable segments: Employee Benefits and Financial Services. The Employee Benefits segment markets group life and health and 401(k) products to small and mid-sized corporate employers. The Financial Services segment markets and administers savings products to public and not-for-profit employers and individuals and offers life insurance products to individuals and businesses. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately as each segment has unique distribution channels.