The increased premium and fee income in 1999 was comprised of growth in Employee Benefits and Financial Services premium and fee income of $9.6 million and $0.2 million, respectively.
Net investment income grew to $6.3 million and $3.4 million in 1999 and 1998, respectively, from $243 thousand in 1997, primarily due to BOLI sales as well as capital infusions from GWL&A of $16 million and $8.6 million in 1999 and 1998, respectively. The growth in both years was in the Financial Services segment.
Realized investment income from fixed maturities decreased from a realized investment gain of $74 thousand in 1998 to a realized investment loss of $6 thousand in 1999. There were no realized investment gains in 1997. The increase in interest rates in 1999 contributed to fixed maturity losses, while the decrease in interest rates in 1998 resulted in gains on sales of fixed maturities.
Total benefits and expenses increased $12.3 million in 1999 when compared to the year ended December 31, 1998. The Employee Benefits segments contributed $8.9 million of the increase in 1999 compared to the Financial Services segment, which contributed $3.4 million. The increase in total benefits and expenses was $1.9 million in 1998. The increase in Employee Benefits in 1999 reflects the impact of operating in a new segment. The increase in Financial Services in both years related to higher interest credits on BOLI account balances and increased operating expenses associated with growth in the Company's business.
Deposits for separate accounts decreased $3.4 million in 1999 when compared to the year ended December 31, 1998. Deposits for separate accounts increased $3.7 million in 1998 when compared to the year ended December 31, 1997.
As discussed above, 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 month of December:
Deposits for investment type contracts included BOLI deposits of $20.0 million in 1999 compared to $62.5 million in 1998. The large BOLI deposits in the prior year were attributable to one large transaction of $50.0 million. The nature of this type of product leads to large fluctuations from year to year.
Net investment income increased $2.9 million in 1999 compared to $3.1 million in 1998 primarily due to BOLI sales as well as capital infusions from GWL&A of $16 million and $8.6 million in 1999 and 1998, respectively.
Total benefits and expenses increased $3.4 million in 1999 compared to $1.9 million in 1998 primarily due to higher interest credits on BOLI balances and increased operating expenses.
Fixed maturity investments include public and privately placed corporate bonds, government bonds and mortgage-backed and asset-backed 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.
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 by long-term, fixed income investments.
Generally, the Company has met its operating requirements by maintaining appropriate levels of liquidity in its investment portfolio. Liquidity for the Company is strong, as evidenced by significant amounts of short-term investments and cash, which totaled $7.0 million and $1.4 million as of December 31, 1999 and December 31, 1998, respectively.
As discussed above, the Company and GWL&A have an agreement whereby GWL&A has undertaken to provide the Company with certain financial support related to maintaining required statutory surplus and liquidity.
The following are the Company's Financial Statements for the years ended December 31, 1999 and 1998 and the Independent Auditors' Report thereon.
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, 1999 and 1998, and the results of its operations and its cash flows for the years then ended and for the period from April 7, 1997 (Inception) to December 31, 1997, in conformity with generally accepted accounting principles.
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.
Regulatory Requirements - In accordance with the requirements of the State of New York, the Company must demonstrate adequate capital. At December 31, 1999, the Company was in compliance with the requirement.
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, 1999.
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, 1999 and 1998, the reinsurance receivable had a carrying value of $1,426 and $123, respectively.