Management's discussion and analysis of financial condition and results of operations of the Company for the years ended 2000 and 1999 follows.
The Company's consolidated net income increased $1.0 million in 2000 when compared to 1999, reflecting growth in the Employee Benefits and Financial Services segments during 2000. The Employee Benefits segment contributed $921 thousand to the improved consolidated results and the Financial Services segment contributed a $100 thousand increase. Of total consolidated net income in 2000 and 1999, the Employee Benefits segment contributed 67% and 44%, respectively, while the Financial Services segment contributed 33% and 56%, respectively.
The Company's consolidated net income increased $231 thousand in 1999 when compared to 1998. The increase in 1999 was primarily due to the acquisition of AH&L NY and higher investment income resulting from increased BOLI sales.
In 2000, total revenues increased $14.4 million to $30.5 million when compared to 1999. The growth in revenues in 2000 was comprised of increased premium and fee income of $10.3 million, increased net investment income of $4.1 million and increased realized gain on investments of $73 thousand.
Net investment income grew to $10.3 million and $6.3 million in 2000 and 1999, respectively, from $3.4 million in 1998, primarily due to BOLI sales each year, as well as a capital infusion from GWL&A of $16 million in 1999. The growth in both years was primarily in the Financial Services segment.
Realized investment income from fixed maturities increased from $6 thousand in 1999 to $67 thousand in 2000. The realized investment gain in 2000 was the result of sales of U.S. Treasury securities while the increase in interest rates in 1999 contributed to fixed maturity losses.
Total benefits and expenses increased $12.7 million in 2000 when compared to 1999. The Employee Benefits segment contributed $9.6 million of the increase in 2000 compared to the Financial Services segment, which contributed $3.1 million. The increase in total benefits and expenses was $12.3 million in 1999. The increase in total benefits and expenses in the Employee Benefits segment in 2000 and 1999 resulted from the acquisition of the group health and life business from AH&L NY in December 1999. The increases in Financial Services in both years relates to higher interest credits on BOLI account balances and increased operating expenses associated with growth in the Company's business.
(Thousands) Years Ended December 31, ----------------------------------- 2000 1999 --------------- ---------------- INCOME STATEMENT DATA Premium income $ 13,467 $ 9,195 Fee income 6,215 430 Net investment income 1,111 --------------- ---------------- Total Revenues 20,793 9,625 --------------- ---------------- --------------- ----------------
In 2000, the deposits for separate accounts increased $1.8 million to $11.2 million. Deposits for separate accounts decreased $3.4 million in 1999 to $9.4 million. The separate account assets have increased by $7.5 million and $16.0 million in 2000 and 1999, respectively, due to the new deposits.
The Company follows rigorous procedures to control interest rate risk and observes strict asset and liability matching guidelines. These guidelines are designed to ensure that even in changing interest rate environments, 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 wide range of possible market changes upon investments and policyholder benefits, the Company ensures that its investment portfolio is appropriately structured to fulfill financial obligations to its policyholders.
Credit Rating 2000 1999 ------------- -------------- -------------- AAA 62.8% 57.4% AA 14.3 11.2 A 7.3 10.1 BBB 15.6 21.3 -------------- -------------- TOTAL 100.0% 100.0% ============== ==============
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 $24.4 million and $7.0 million as of December 31, 2000 and 1999, respectively.
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, 2000 and 1999, and the related statements of income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2000. 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 INCOME FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Fixed maturities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the net unrealized gains and losses reported as accumulated other comprehensive income (loss) in stockholder's equity.
Deferred Policy Acquisition Costs - Policy acquisition costs, which primarily consist of sales commissions related to the production of new and renewal business, have been deferred to the extent recoverable. 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 was $213, $112, and $0 in 2000, 1999, and 1998, respectively.
Separate Accounts - Separate account assets and related liabilities are carried at fair value. The Company's separate accounts invest in shares of various external mutual funds. Investment income and realized capital gains and losses of the separate accounts accrue directly to the contractholders and, therefore, are not included in the Company's statements of income. Revenues to the Company from the separate accounts consist of contract maintenance fees, administration fees, and mortality and expense risk charges.
Policy Reserves - Life insurance reserves of $137,516 and $93,315 at December 31, 2000 and 1999, respectively, are computed on the basis of estimated mortality, investment yield, withdrawals, future maintenance and settlement expenses, and retrospective experience rating premium refunds. Annuity contract reserves without life contingencies of $141 and $119 are carried at contractholders' account value at December 31, 2000 and 1999, respectively.
Income Taxes - Income taxes are recorded using the asset and liability approach, which requires, among other provisions, the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events (other than the enactments or changes in the tax laws or rules) are considered.
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, 2000.
Reclassifications - Certain amounts in the 1999 and 1998 financial statements have been reclassified to conform to the 2000 presentation.
On December 1, 1999, the Company entered into an assumption reinsurance agreement with Anthem Health & Life Insurance Company of New York (AH&L NY), to acquire a block of life and health insurance business. The Company also agreed to the assignment of a coinsurance agreement between the Parent and AH&L NY on certain policies that would not be transferred to the Company via assumption reinsurance. The business primarily consists of administration services only and stop loss policies. The Company assumed $7,904 of policy reserves and miscellaneous assets and liabilities in exchange for equal consideration from AH&L NY and the Parent.
----------- ----------- Due in one year or less $ 2,634 $ 2,767 Due after one year through five 18,102 18,815 years Due after five years through ten 47,308 47,333 years Due after ten years 2,298 2,254 Mortgage-backed securities 27,808 27,561 Asset-backed securities 50,372 51,901 ----------- ----------- $ 148,522 $ 150,631 =========== ===========
Amounts related to investment assets above include $738 and $(1,256) related to the unrealized gains (losses) on the Company's fixed maturities available-for-sale at December 31, 2000, and 1999, respectively. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized.
Summarized segment financial information for the year ended and as of December 31, 2000 was as follows: