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).
The Company's operations during the period April 4, 1997 (inception) to December 31, 1997 were focused on obtaining a New York insurance license (which occurred May 28, 1997), and preliminary marketing activities.
Net investment income grew from $243 thousand in 1997 to $3.4 million in 1998, primarily due to BOLI sales as well as a capital infusion from GWL&A of $8.6 million in December 1998.
It is expected that the sale of individual annuities and BOLI will continue and increase during 1999. The Company intends to begin marketing group life and health and 401(k) products in 1999.
Fixed maturity investments include public and privately placed corporate bonds, public and privately placed structured assets and government bonds. 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.
Credit Rating 1998 1997 ------------- -------------- -------------- AAA 62.7% 100.0% AA 6.5 A 13.1 BBB 17.7 BB and Below (non-investment grade) ============== ============== TOTAL 100.0% 100.0% ============== ==============
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and for Hedging Activities". This Statement provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. This Statement is effective for the Company beginning January 1, 2000, and earlier adoption is encouraged. The Company has not adopted this Statement as of December 31, 1998. Management has not determined the impact of the Statement on the Company's financial position or results of operations.
GWL&A's plan establishes five phases for becoming Y2K compliant. Phase 1 is "impact analysis" which includes initial inventory and preliminary assessment of Y2K impact. Phase 2 is "solution planning" which includes system by system planning to outline the approach and timing for reaching compliance. Phase 3 is "conversion/renovation" which means the actual process of replacing or repairing non-compliant systems. Phase 4 is "testing" to ensure that the systems function correctly under a variety of different date scenarios including current dates, year 2000 and leap year dates. Phase 5 is "implementation" which means putting Y2K compliant systems back into production.
As of December 31, 1998, GWL&A had completed impact analysis (phase 1) and solution planning (phase 2) for all of its core systems and was more than 95% complete for phases 1 and 2 with respect to its systems as a whole. In addition, GWL&A was approximately 87% complete with respect to conversion and renovation (phase 3), 79% complete with respect to testing (phase 4), and 78% complete with respect to implementation (phase 5).
In an effort to mitigate risks associated with Y2K failures, GWL&A is in the process of developing contingency plans to address core functions, including relations with third parties. It is GWL&A's expectation that contingency plans will address possible failures generated internally, by vendors or business partners, and by customers. Possible general approaches include manual processing, payments on an estimated basis and use of disaster recovery facilities.
The following are the Company's Financial Statements for the year ended December 31, 1998 and for the period April 4, 1997 (inception) to December 31, 1997 and the Independent Auditors' Report thereon.
Financial Statements for the Year Ended December 31, 1998 and the Period from April 4, 1997 (Inception) to December 31, 1997 and Independent Auditors' Report
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, 1998 and 1997, and the related statements of income, stockholder's equity, and cash flows for the year ended December 31, 1998 and the period from April 4, 1997 [inception] to December 31, 1997. 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.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD FROM APRIL 4, 1997 [INCEPTION] TO DECEMBER 31, 1997 [Dollars in thousands]
NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD FROM APRIL 4, 1997 [INCEPTION] TO DECEMBER 31, 1997 [Dollars in thousands except for share information]
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.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and for Hedging Activities". This Statement provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. This Statement is effective for the Company beginning January 1, 2000, and earlier adoption is encouraged. The Company has not adopted this Statement as of December 31, 1998. Management has not determined the impact of the Statement on the financial statements.
Proceeds from sales of securities available-for-sale were $73,340 and $0 during 1998, and 1997, respectively. The realized gains on such sales totaled $201 and $0 for 1998 and 1997, respectively. The realized losses totaled $127 and $0 for 1998 and 1997, respectively. During 1998, no held-to-maturity securities were sold.
The Company and the Parent Corporation have entered into an income tax allocation agreement whereby the Parent Corporation 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 1998, the Company will not file on a consolidated basis with the Parent Corporation.
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. Prior year financial statements have been reclassified to conform to the requirements of Statement 130.
The Company's net income and capital and surplus, as determined in accordance with statutory accounting principles and practices for December 31 are as follows (unaudited):
Net loss $ (2,182) $ (19) Capital and surplus 12,808 6,469