The Company's consolidated net income increased $8.8 million or 5% in 1999 when compared to the year ended December 31, 1998, reflecting improved results in the Employee Benefits segment, offset by a slight decrease in the Financial Services segment. The Employee Benefits segment contributed $9.5 million to the improved consolidated results compared to the Financial Services segment which recorded a $0.7 million decrease. Of total consolidated net income in 1999 and 1998, the Employee Benefits segment contributed 57% and 54%, respectively, while the Financial Services segment contributed 43% and 46%, respectively.
Total benefits and expenses increased $235.7 million or 11% in 1999 when compared to the year ended December 31, 1998. The increase in 1999 was due to Alta, which resulted in an increase in benefits and expenses of $245.3 million. Excluding Alta, benefits and expenses would have decreased $9.6 million or 0.4% in 1999. The decrease included the effect of a change in accounting policy, which resulted in the capitalization of $18.4 million of software costs in 1999. Overall, total benefits and expenses have increased due to higher costs of managed care operations. The increase of $213.9 from 1997 to 1998 was a combination of the acquisition of Alta, which resulted in benefits and expenses increasing $258.3, partially offset by a decrease in policyholder benefits related to reinsurance transactions of $109.4 million.
Total assets increased $2.3 billion or 9% in 1999 when compared to the year ended December 31, 1998. Separate account assets increased $2.7 billion primarily due to the strength of the equity markets in the United States. The $0.4 billion decrease in the general account reflected the continuing movement away from guaranteed products.
o significant growth in 401(k) assets under administration, o increased sales offset by some deterioration in customer retention in group life and health, o favorable morbidity results, and o license approval for one additional HMO subsidiary, for a total of 15 fully operational HMOs.
Net income for Employee Benefits increased 9% in 1999 and 9% in 1998. The improvement in earnings in 1999 reflected increased fee income from variable 401(k) assets, improved group morbidity experience and the capitalization of $17.1 million of software costs in 1999, offset by a decrease in realized gains. The improvement in earnings in 1998 reflected increased fee income from variable 401(k) assets and improved group mortality experience. The changes in income tax provisions discussed above under "Company Results of Operations" resulted in an increase in net income for the Employee Benefits segment of $4.7 million in 1999.
Total health care membership increased from 1997 to 1998 by 35% (Alta accounted for 76% of this growth). Gatekeeper members grew 26% from 414,500 in 1997 to 522,300 in 1998, including 61,800 Alta members. Excluding the Alta acquisition, gatekeeper members increased 19%.
During 1999, the in-force block of 401(k) business continued to perform well, with customer retention of 92.9% versus 93.0% in 1998. This, combined with strong equity markets, resulted in a 26% increase in assets under management during 1999 and 1998, respectively.
In addition to the Company's internally-managed funds, the Company offers externally-managed funds from recognized mutual funds companies such as AIM, Fidelity, Putnam, American Century, Founders and T. Rowe Price. This strategy, supported by participant education efforts, is validated by the fact that 99% of assets contributed in 1999 were allocated to variable funds.
The Company will continue the expansion of its One Health Plan managed care subsidiaries. In 2000, it is anticipated that three new licensed HMOs, in Kansas, Missouri and Pennsylvania, will be approved. This will bring the total number of licensed One Health Plan HMOs to 18, which will provide current customers with a comprehensive national managed care network.
Premiums decreased $2.5 million or 14%, from $16.8 million in 1998 to $14.3 million in 1999. Premiums decreased $5.8 million or 26%, from $22.6 million in 1997 to $16.8 million in 1998. The decrease in both years is attributable to the continuing trend of policyholders selecting variable annuity options (separate accounts) as opposed to the more traditional fixed annuity products with life contingencies.
The Financial Services segment's core savings business is in the public/non-profit pension market. The assets of the public/non-profit business, including separate accounts but excluding Guaranteed Investment Contracts ("GICs"), increased 2% and 9% during 1999 and 1998 to $7.9 billion and $7.8 billion, respectively. Much of the growth came from the variable annuity business, which was driven by premiums and deposits and strong investment returns in the equity markets. The increase was offset by a decrease primarily due to one major case moving to an independent money manager. The Company did maintain the administrative services contract and fee income associated with this client.
Strong sales are expected in the BOLI market - the Company's new variable life product has been well received in the market as the separate account option limits credit risk.
The average balance of impaired loans increased to $43.9 million in 1999 compared with $31.2 million in 1998, and there were no foreclosures in 1999, compared to $3.0 million in 1998. The low levels of problematic mortgages relative to the Company's overall balance sheet are due to the ongoing decrease in the size of the mortgage portfolio, the Company's active loan management program and overall strength in market conditions.
The Company's operations have liquidity requirements that vary among the principal product lines. Life insurance and pension plan reserves are primarily long-term liabilities. Accident and health reserves, including long-term disability, consist of both short-term and 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. Accident and health claim demands are stable and predictable but generally shorter term, requiring greater liquidity.
The following are the Company's Consolidated Financial Statements for the Years Ended December 31, 1999, 1998, and 1997 and the Independent Auditors' Report thereon.
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (Dollars in Thousands)
Basis of Presentation - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The consolidated financial statements include the accounts of the Company and its subsidiaries. All material inter-company transactions and balances have been eliminated in consolidation.
The amortized cost of fixed maturities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts using the effective interest method over the estimated life of the related bonds. Such amortization is included in net investment income. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net realized gains (losses) on investments. 2. Mortgage loans on real estate are carried at their unpaid balances adjusted for any unamortized premiums or discounts and any valuation reserves. Interest income is accrued on the unpaid principal balance. Discounts and premiums are amortized to net investment income using the effective interest method. Accrual of interest is discontinued on any impaired loans where collection of interest is doubtful.
Reinsurance - Policy reserves ceded to other insurance companies are carried as a reinsurance receivable on the balance sheet (see Note 3). The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies.
The Company has also established a Participation Fund Account (PFA) for the benefit of the participating policyholders previously transferred to the Company from the Parent under an assumption reinsurance transaction. The PFA is part of the PPEA. Earnings derived from the operation of the PFA net of a management fee paid to the Company accrue solely for the benefit of the participating policyholders.
On December 31, 1998, the Company and the Parent Corporation entered into an Indemnity Reinsurance Agreement pursuant to which the Company reinsured by coinsurance certain Parent Corporation individual non-participating life insurance policies. The Company recorded $859 in premium income and increase in reserves, associated with certain policies, as a result of this transaction. Of the $137,638 in reserves that was recorded as a result of this transaction, $136,779 was recorded under SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments" ("SFAS No. 97"), accounting principles. The Company recorded, at the Parent Corporation's carrying amount, which approximates estimated fair value, the following at December 31, 1998 as a result of this transaction:
Effective January 1, 1997, all employees of the U.S. operations of the Parent Corporation and the related benefit plans were transferred to the Company. All related employee benefit plan assets and liabilities were also transferred to the Company (see Note 10). The transfer did not have a material effect on the Company's operating expenses as the actual costs associated with the employees and the benefit plans were charged previously to the Company under administrative service agreements between the Company and the Parent Corporation.
At December 31, 1999 and 1998, due to Parent Corporation includes $10,647 and $17,930 due on demand and $25,338 and $34,947 of notes payable which bear interest and mature on October 1, 2006. These notes may be prepaid in whole or in part at any time without penalty; the issuer may not demand payment before the maturity date. The amounts due on demand to the Parent Corporation bear interest at the public bond rate (6.7% and 6.1% at December 31, 1999 and 1998, respectively) while the note payable bears interest at 5.4%.
At December 31, 1999 and 1998, pursuant to fully collateralized securities lending arrangements, the Company had loaned $0 and $115,168 of fixed maturities, respectively.
The Company has established specific investment guidelines designed to emphasize a diversified and geographically dispersed portfolio of mortgages collateralized by commercial and industrial properties located in the United States. The Company's policy is to obtain collateral sufficient to provide loan-to-value ratios of not greater than 75% at the inception of the mortgages. At December 31, 1999, approximately 34% of the Company's mortgage loans were collateralized by real estate located in California.
The following represents impairments and other information with respect to impaired mortgage loans:
The Company sponsors a defined contribution 401(k) retirement plan which provides eligible participants with the opportunity to defer up to 15% of base compensation. The Company matches 50% of the first 5% of participant pre-tax contributions. For employees hired after January 1, 1999, the Company matches 50% of the first 8% of participant pre-tax contributions. Company contributions for the years ended December 31, 1999, 1998, and 1997 totaled $5,504, $3,915, and $3,475, respectively.
The Company will file a consolidated tax return for 1999. Losses incurred by subsidiaries in prior years cannot be offset against operating income of the Company. At December 31, 1999, the Company's subsidiaries had approximately $1,271 of net operating loss carryforwards, expiring through the year 2014. The tax benefit of subsidiaries' net operating loss carryforwards are included in the deferred tax assets at December 31, 1999 and 1998, respectively.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income". This Statement established 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 and related offsets for reserves and deferred policy acquisition costs, which prior to adoption were reported separately in stockholder's equity, to be included in other comprehensive income. The 1997 financial statements have been reclassified to conform to the requirements of Statement No. 130.
As an insurance company domiciled in the State of Colorado, the maximum amount of dividends which can be paid to stockholders are subject to restrictions relating to statutory surplus and statutory net gain from operations. Statutory surplus and net gain from operations for GWL&A at December 31, 1998 were $1,007,245 and $245,148 (unaudited), respectively. GWL&A should be able to pay up to $245,148 (unaudited) of dividends in 1999.
Options granted to officers of the Company under the PFC plan became exercisable twenty percent per year commencing on the date of the grant and expire ten years from the date of grant.
As of December 31, 1999, the PFC options outstanding have exercise prices between $2.38 and $3.65 and a weighted-average remaining contractual life of 1.7 years.
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.