The following is a summary of certain financial data of the Company. This summary has been derived in part from and should be read in conjunction with the consolidated financial statements of the Company included in Item 8 (Financial Statements and Supplementary Data). Note 2 to the financial statements discusses the significant accounting policies of the Company. Significant estimates are required to account for the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates.
The decreased premium and fee income in 2002 was comprised of a decline in Employee Benefits of $7.3 million partially offset by an increase of $536 thousand in Financial Services premium and fee income. The premium and fee income increase in 2001 was comprised of growth in Employee Benefits premium and fee income of $569 thousand.
Deposits for investment-type contracts decreased $6.3 million or 62% and decreased $27 million or 73% in 2002 and 2001, respectively, due to BOLI deposits. BOLI sales are single premium and individually large in nature, and therefore, can vary significantly from year to year.
Total assets and liabilities increased $17 million or 7% and $1 million or 1% in 2002 and 2001, respectively. The increase in 2002 is primarily attributable to interest credited to existing Financial Services reserves and the related invested assets.
During 2002, the Employee Benefits segment had an overall decrease in its net income. The decrease was due primarily to a reduction in business volume, resulting in net income of $3.2 million in 2002, compared with $4.5 million in 2001.
Equivalent premium revenue and fee income for group life and health decreased 44% from 2001 levels as the result of continued membership decline. This reduction was partially offset by increased pricing.
Policyholder benefits decreased $2.9 million or 31% in 2002 when compared to 2001, reflecting lower group life and health claims primarily as a result of the decline in membership.
Expenses decreased $1 million or 20% in 2002 when compared to 2001, due to a reduction in business volume primarily as a result of the decline in membership.
During 2002, the Financial Services segment had a significant decrease in its net income attributable to a reduction in realized gains on fixed maturities. The higher realized gains in 2001 were a contributing factor to the significant increase in net income in 2001 to $1 million from $674 thousand in 2000.
Deposits for separate accounts increased $988 thousand in 2002 when compared to 2001 and decreased $6.5 million in 2001 compared to 2000. These fluctuations are expected in the small market in which the Company operates.
Fee income decreased $36 thousand in 2002 compared to an increase of $16 thousand in 2001. The fluctuations in fee income were a result of the changes in asset values in the separate accounts over the three-year period due to U.S. equity markets and sales activity.
In managing the Company's assets, GWL&A 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 range of possible market changes upon investments and policyholder benefits, GWL&A ensures that the Company's investment portfolio is appropriately structured to fulfill financial obligations to the Company's policyholders.
During 2000, the Company transferred all securities classified as held-to-maturity into the available-for-sale category. The Company recorded a $645 thousand unrealized gain associated with this transfer in other comprehensive income, net of tax.
Fixed maturity investments include public and privately placed corporate bonds, government bonds and mortgage-backed and asset-backed securities. Private placement investments that are primarily in the held-to-maturity category are generally less marketable than publicly traded assets, yet they typically offer enhanced 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.
The Company's operations have liquidity requirements that are dependent upon the principal product lines currently offered. Life insurance and pension plan reserves are primarily long-term liabilities. Life insurance and pension plan reserve requirements are usually stable and predictable, and are supported primarily by long-term, fixed income investments.
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 revised the standards for accounting for securitizations, and other transfers of financial assets and collateral, and requires certain disclosures. SFAS No. 140 was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of the new SFAS did not have a significant effect on earnings or the financial position of the Company.
On June 29, 2001, Statement No. 141, "Business Combinations" was approved by the FASB. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and certain intangible assets will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company implemented SFAS No. 141 on July 1, 2001. Adoption of the Statement did not have a material impact on the Company's financial position or results of operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Tangible Assets" was approved by the FASB. SFAS No. 142 changes the accounting for goodwill and certain other intangibles from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, ceased upon adoption of this statement. The Company implemented SFAS No. 142 on January 1, 2002 and, adoption of this statement did not have a material impact on the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 superceded prior accounting guidance relating to impairment of long-lived assets and provides a single accounting methodology for long-lived assets to be disposed of, and also supercedes existing guidance with respect to reporting the effects of the disposal of a business. SFAS No. 144 was effective January 1, 2002, and adoption of this statement did not have a material impact on the Company's financial position or results of operations.
The following are the Company's Financial Statements for the years ended December 31, 2002, 2001, and 2000, and the Independent Auditor's Report thereon.
To the Board of Directors and Stockholder of First Great-West Life & Annuity Insurance Company:
We have audited the accompanying balance sheets of First Great-West Life & Annuity Insurance Company (a wholly-owned subsidiary of Great-West Life & Annuity Insurance Company) as of December 31, 2002 and 2001, and the related statements of income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2002. 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.
STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 ================================================================================ (Dollars in Thousands)
Investments - Management has classified its fixed maturities as available for sale and carries them at fair value with the net unrealized gains and losses (net of deferred taxes) reported as accumulated other comprehensive income (loss) in stockholder's equity.
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.
Deferred Policy Acquisition Costs - Policy acquisition costs, which primarily consist of sales commissions related to the production of new business, have been deferred to the extent recoverable. These costs are variable in nature and are dependent upon sales volume. Deferred costs associated with the annuity products are being amortized over the life of the contracts in proportion to the emergence of gross profits. Retrospective adjustments of these amounts are made when the Company revises its estimates of current or future gross profits. Deferred costs associated with traditional life insurance are amortized over the premium paying period of the related policies in proportion to premium revenues recognized. Amortization of deferred policy acquisition costs totaled $560, $393 and $213 in 2002, 2001, and 2000, respectively.
Recognition of Premium Income and Expenses - Life insurance premiums are recognized when due. Accident and health premiums are earned on a monthly pro rata basis. Revenues for annuity and other contracts without significant life contingencies consist of contract charges for the cost of insurance, contract administration, and surrender fees that have been assessed against the contract account balance during the period, and are realized as assessed and earned. Fee income is derived primarily from contracts for claim processing or other administrative services related to uninsured business and from assets under management. Fees from contracts for claim processing or other administrative services are recorded as the services are provided. Fees from assets under management, which consist of contract maintenance fees, administration fees and mortality and expense risk charges, are recognized when due. Benefits and expenses on policies with life contingencies impact income by means of the provision for future policy benefit reserves, resulting in recognition of profits over the life of the contracts. This association is accomplished by means of the provision for future policy benefit reserves. The average credit rating on annuity products, first sold in 2001, was approximately 4.0% and 4.2% in 2002 and 2001.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - FASB has issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - A replacement of FASB Statement No. 125", (SFAS No. 140) which revises the standards for accounting for securitizations and other transfers of financial assets and collateral, and requires certain disclosures. SFAS No. 140 was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Certain disclosure requirements under SFAS No. 140 were effective December 15, 2000, and these requirements have been incorporated in the Company's financial statements. The adoption of SFAS No. 140 did not have a material effect on the financial position or results of operations of the Company.
Business Combinations - On June 29, 2001 Statement of Financial Accounting Standards (SFAS) No.141, "Business Combinations" (SFAS No. 141) was approved by the FASB. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The Company implemented SFAS No. 141 on July 1, 2001. Adoption of the Statement did not have a material impact on the Company's financial position or results of operations.
Selected Loan Loss Allowance Methodology - In July 2001, the SEC released Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues (SAB 102). SAB 102 summarizes certain of the SEC's views on the development, documentation and application of a systematic methodology for determining allowances for loan and lease losses. Adoption of SAB 102 by the Company did not have a material impact on the Company's financial position or results of operations.
The Company is also required to maintain an investment deposit in the amount of $5,000 in cash or investment certificates with the New York Insurance Commissioner for the protection of policyholders in the event the Company is unable to satisfactorily meet its contractual obligations. A United States Treasury obligation, whose cost approximates market value, was designated to meet this requirement at December 31, 2002.
On October 6, 1999, the Parent Corporation entered into a purchase and sale agreement (the Agreement) with Allmerica Financial Corporation (Allmerica) to acquire, via assumption reinsurance, Allmerica's group life and health insurance business on March 1, 2000. The policies resident in the State of New York have been assigned to the Company as part of the Agreement. This business primarily consists of administrative services only and stop loss policies. The in-force business was immediately co-insured back to Allmerica and then underwritten and retained by the Company upon each policy renewal date. The purchase price, as defined in the Agreement, was based on a percentage of the amount in-force at March 1, 2000 contingent on the persistency of the block of business through March 2001. The effect of this transaction was not material to the Company's results of operations or financial position.
The Company and the Parent Corporation have service agreements whereby the Parent Corporation administers, distributes, and underwrites business for the Company and administers the Company's investment portfolio, and whereby, the Company provides certain services for the Parent Corporation. The amounts recorded are based upon management's best estimate of actual costs incurred and resources expended based upon number of policies and/or certificates in force. These transactions are summarized as follows:
Total reinsurance premiums ceded to the Parent Corporation in 2002, 2001, and 2000 were $343, $107 and $77, respectively.
----------- ----------- Due in one year or less $ 9,970 $ 10,575 Due after one year through five 60,625 65,174 years Due after five years through ten 19,872 22,103 years Due after ten years 442 488 Mortgage-backed securities 42,063 43,861 Asset-backed securities 62,921 63,480 ----------- ----------- $ 195,893 $ 205,681 =========== ===========
During 2000, the Company transferred all securities classified as held-to-maturity into the available-for-sale category. The Company recorded a $645 unrealized gain associated with this transfer in other comprehensive income, net of tax.
The estimated fair-value of financial instruments have been determined using available information and appropriate valuation methodologies. However, considerable judgement is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Other comprehensive income (loss) for the year ended December 31, 2002 is summarized as follows:
As an insurance company domiciled in the State of New York, the Company is required to maintain a minimum of $6,000 of capital and surplus. In addition, the maximum amount of dividends, which can be paid to stockholders, is subject to restrictions relating to statutory surplus and statutory adjusted net investment income. The Company should be able to pay dividends of $3,322 in 2002. The Company paid no dividends in 2002, 2001, and 2000. Dividends are paid as determined by the Board of Directors.
Summarized segment financial information for the year ended and as of December 31, 2002 was as follows: