The Employee Benefits segment began operations in 1999 by entering into an assumption reinsurance agreement on December 1, 1999 with AH&L NY to acquire a block of life and health insurance business. The subsequent operations resulting from this agreement resulted in net income of $1.4 million and $446 thousand being recorded in 2000 and 1999, respectively.
The Financial Services net income increased in 2000 primarily due to realized gains on fixed maturities 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 2000 was comprised of growth in Employee Benefits and Financial Services premium and fee income of $10.1 million and $249 thousand, respectively.
Income tax expense increased $705 thousand in 2000 when compared to 1999. Income tax expense increased $38 thousand in 1999 when compared to 1998. The increase in income tax expense in 2000 reflected higher net earnings. The increase in income tax expense from 1998 to 1999 reflected higher earnings in 1999. The Company's effective tax rate was 39.7% in 2000 compared to 38.5% in 1999, due to higher state income taxes in 2000. The Company's effective tax rate was 38.5% in 1999 compared to 43.2% in 1998, due to lower state income taxes in 1999 compared to 1998.
Self-funded premium equivalents were $16,225 in 2000, the first full year of operations resulting from the AH&L NY assumption reinsurance agreement.
Total assets and liabilities increased $76.1 million or 44% when compared to 1999. The increase is primarily attributable to BOLI business.
On October 6, 1999, GWL&A entered into an agreement with First Allmerica Financial Corporation ("Allmerica") to acquire, via reinsurance, Allmerica's group life and health insurance business on March 1, 2000. The Allmerica policies resident in the State of New York are expected to be underwritten and retained by the Company upon each policy renewal date. This business primarily consists of administrative services only and stop loss policies. The purchase price is based on a percentage of the premium and administrative fees in force at March 1, 2000 and March 1, 2001. Management does not expect the purchase price to have a material impact on the Company's financial statements.
On December 1, 1999, the Employee Benefits segment entered into a reinsurance transaction with AH&L NY. The results below reflect the operations for the Employee Benefits segment for the following periods:
Policyholder benefits 14,431 8,378 Operating expenses 4,087 506 --------------- ---------------- Total benefits and expenses 18,518 8,884 --------------- ---------------- Income from operations 2,275 741 Income tax expense 908 295 --------------- ---------------- Net Income $ 1,367 $ 446
During 2000, the Employee Benefits segment had an overall increase in its results of operations. The increases are due to the inclusion of a full year of operating results in 2000, versus only one month in 1999, due to the AH&L NY acquisition in December 1999. The Company also began marketing 401(k) savings plans to customers to complete the overall product offering in the Employee Benefits segment.
In 2001, the Company will continue to build upon the acquisition of the AH&L NY business though new sales and the addition of the Allmerica group life and health business.
Net income for Financial Services increased $100 thousand in 2000 and decreased $215 thousand in 1999. The realized investment gains increase of $73 thousand in 2000 was due primarily to realized gains on fixed maturities. The additional earnings in 2000 reflected larger earnings from an increased asset base, an increase in investment margins, and additional realized gains on fixed maturities. The decrease in 1999 was due primarily to higher benefits related to BOLI products and realized losses on fixed maturities in 1999 compared to realized gains in 1998.
Premium and fee income increased $249 thousand in 2000 compared to an increase of $133 thousand in 1999. The increase in 2000 was driven by higher fee income related to growth in the separate accounts.
Deposits for investment type contracts included BOLI deposits of $37.3 million in 2000 compared to $20.0 million in 1999. The nature of this type of product leads to large fluctuations from year to year.
Net investment income increased $2.9 million in 2000 compared to 1999 and $2.9 million in 1999 compared to 1998 primarily due to BOLI sales, as well as a capital infusion from GWL&A of $16 million in 1999.
Total benefits and expenses increased $3.1 million in 2000 compared to $3.4 million in 1999 primarily due to additional interest credits on BOLI balances and increased operating expenses.
The following are the Company's Financial Statements for the years ended December 31, 2000 and 1999 and the Independent Auditors' Report thereon.
First Great-West Life & Annuity Insurance Company (A wholly-owned subsidiary of Great-West Life & Annuity Insurance Company) Financial Statements for the Years Ended December 31, 2000, 1999, and 1998 Independent Auditors' Report
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 ================================================================================ (Dollars in Thousands)
First Great-West Life & Annuity Insurance Company (the Company) is a wholly-owned subsidiary of Great-West Life & Annuity Insurance Company (the Parent Corporation). The Company was incorporated as a stock life insurance company in the State of New York and was capitalized on April 4, 1997, through a $6,000 cash investment from the Parent Corporation for 2,000 shares of common stock. On December 29, 1997, the Company issued an additional 500 shares of common stock to the Parent Corporation for $500. The Company was licensed as an insurance company in the State of New York on May 28, 1997. The Company does business in New York through two business segments, as discussed in Note 9.
Investments - 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 (See Note 5).
Revenue Recognition - In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which provides guidance with respect to revenue recognition issues and disclosures. As amended by SAB No. 101B, the Company was required to implement the provisions of SAB No. 101 no later than the fourth quarter of the fiscal year ending December 31, 2000. The adoption of SAB No. 101 did not affect the Company's revenue recognition policies.
Recognition of Premium Income and Expenses - Life insurance premiums are recognized when due. Accident and health premiums are earned on a monthly pro rata basis. Revenues for annuity and other contracts without significant life contingencies consist of contract charges for the cost of insurance, contract administration, and surrender fees that have been assessed against the contract account balance during the period, and are realized as assessed and earned. Fee income is derived primarily from contracts for claim processing or other administrative services related to uninsured business and from assets under management. Fees from contracts for claim processing or other administrative services are recorded as the services are provided. Fees from assets under management, which consist of contract maintenance fees, administration fees and mortality and expense risk charges, are recognized when due. Benefits and expenses on policies with life contingencies impact income by means of the provision for future policy benefit reserves, resulting in recognition of profits over the life of the contracts.
Regulatory Requirements - In accordance with the requirements of the State of New York, the Company must demonstrate adequate capital, as defined. At December 31, 2000, the Company was in compliance with the requirement.
In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding risks to other insurance enterprises under excess coverage and co-insurance contracts. The Company retains 100% of the first $50 of coverage per individual life and has a maximum retention of $250 per individual life. Life insurance policies are first reinsured to the Parent Corporation up to a maximum of $1,250 of coverage per individual life. Any excess amount is reinsured to a third party.
Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. At December 31, 2000 and 1999, the reinsurance receivable had a carrying value of $1,924 and $1,426, respectively.
Proceeds from sales of securities available-for-sale were $44,237, $15,158, and $68,109 during 2000, 1999, and 1998, respectively. The realized gains on such sales totaled $296, $15, and $201 for 2000, 1999, and 1998, respectively. The realized losses totaled $229, $21, and $127 for 2000, 1999, and 1998, respectively.
The Company and its Parent have entered into an income tax allocation agreement whereby the Parent could file a consolidated federal income tax return. Under the agreement the Company is responsible for and will receive the benefits of any income tax liability or benefit computed on a separate basis. In 2000, the Company will file on a consolidated basis with its Parent.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income". This Statement establishes new rules for reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or stockholder's equity. This Statement requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in stockholder's equity, to be included in other comprehensive income (loss).
Other comprehensive income (loss) at December 31, 2000 is summarized as follows:
During 2000 and 1999, the Company had two reportable segments: Employee Benefits and Financial Services. During 1998, the Company had only one reportable segment, Financial Services. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately, as each segment has unique distribution channels. The Employee Benefits segment markets group life and health and 401(k) products to small and mid-sized corporate employers. The Financial Services segment primarily markets products to public and not-for-profit employers and individuals and offers life insurance products to individuals and businesses. In both 2000 and 1999 the Financial Services segment sold large dollar bank-owned life insurance policies to a limited number of customers. Accordingly, these transactions account for the majority of the investment assets and reserves, and significantly impact the results of operations, of this segment.
The accounting policies of the segments are the same as those described in Note 2. The Company evaluates performance based on profit or loss from operations after income taxes.
The Company's operations are not materially dependent on one or a few customers, brokers, or agents.
On October 6, 1999, the Parent entered into a purchase and sale agreement (the Agreement) with First Allmerica Financial Corporation (Allmerica) to acquire, via assumption reinsurance, Allmerica's group life and health insurance business on March 1, 2000. The policies resident in the State of New York have been assigned to the Company as part of the Agreement. This business primarily consists of administrative services only and stop loss policies. The in-force business will be immediately coinsured back to Allmerica and is expected to be underwritten and retained by the Company upon each policy renewal date. The purchase price, as defined in the Agreement, will be based on a percentage of the amount in-force at March 1, 2000 contingent on the persistency of the block of business through March 2001. Management does not expect the purchase price to have a material impact on the Company's financial statements.
2000 1999 1998 ===================== -------------- ------------- ------------ (Unaudited) Net income (loss) $ 27 $ 1,202 $ (2,182) Capital and surplus 26,999 29,289 12,808 ========================================
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, is 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 will require adoption of Codification with certain modifications for the preparation of statutory financial statements effective January 1, 2001. The Company estimates that the adoption of Codification as modified by the New York Division of Insurance will increase statutory net worth as of January 1, 2001, by approximately $2,795 (Unaudited). (The modifications adopted by the New York Division of Insurance had the effect of decreasing the effect on statutory net worth by approximately $2,901 (Unaudited).)
As an insurance company domiciled in the State of New York, the Company is required to maintain a minimum of $6,000 of capital and surplus. In addition, the maximum amount of dividends, which can be paid to stockholders, is subject to restrictions relating to statutory surplus and statutory adjusted net investment income. The Company should be able to pay dividends of $2,700 in 2001. The Company paid no dividends in 2000 and 1999. Dividends are paid as determined by the Board of Directors.