This Form 10-K contains forward-looking statements. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. In particular, statements using verbs such as "expect," "anticipate," "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company's beliefs concerning future or projected levels of sales of the Company's products, investment spreads or yields, or the earnings or profitability of the Company's activities. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments, some of which may be national in scope, such as general economic conditions and interest rates, some of which may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation, and others of which may relate to the Company specifically, such as credit, volatility and other risks associated with the Company's investment portfolio, and other factors. Readers are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the Securities and Exchange Commission.
Management's discussion and analysis of financial condition and results of operations of the Company for the years ended 1999 and 1998 follows.
The Company's consolidated net income increased $231 thousand in 1999 when compared to the year ended December 31, 1998, reflecting net income in the Employee Benefits segment during 1999, offset by a decrease in the Financial Services segment. The Employee Benefits segment contributed $446 thousand to the improved consolidated results compared to the Financial Services segment, which recorded a $215 thousand decrease. Of total consolidated net income in 1999 and 1998, the Employee Benefits segment contributed 44% and 0%, respectively, while the Financial Services segment contributed 56% and 100%, respectively.
The Employee Benefits segment began operations in 1999 by entering into an assumption reinsurance agreement on December 1, 1999 with AH&L NY to acquire a block of life and health insurance premium. The subsequent operations resulting from this agreement resulted in net income of $446 thousand being recorded in 1999.
The Financial Services net income decreased in 1999 primarily due to realized losses on fixed maturities in 1999 of $6 thousand compared to realized gains in 1998 of $74 thousand and a strengthening of BOLI reserves by $300 thousand.
The Company's consolidated net income increased $759 thousand in 1998 when compared to the year ended December 31, 1997. During 1998 the Company received approval from the New York Department of Insurance to market its BOLI product. The growth in net income in 1998 was primarily due to higher investment income resulting from BOLI sales as well as a capital infusion from GWL&A of $8.6 million in December 1998. 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 1997), and preliminary marketing activities.
Income tax expense increased $38 thousand in 1999 when compared to the year ended December 31, 1998. Income tax expense increased $585 thousand in 1998 when compared to the year ended December 31, 1997. The increase in income tax expense in 1999 reflected higher net earnings. The increase in income tax expense from 1997 to 1998 reflected higher earnings in 1998 as well as state income taxes. The Company's effective tax rate was 38.5% in 1999 compared to 43.2% in 1998, due to lower state income taxes in 1999. The Company's effective tax rate was 43.2% in 1998 compared to 35% in 1997, due to the inclusion of state income taxes in 1998.
In evaluating its results of operations, the Company also considers net changes in deposits received for investment-type contracts and deposits to separate accounts.
Deposits for investment-type contracts decreased $42.5 million in 1999 when compared to the year ended December 31, 1998, primarily due to BOLI deposits of $62.5 million in 1998 compared to $20.0 million in 1999. Deposits for investment-type contracts increased $62.4 million in 1998 when compared to the year ended December 31, 1997, which represents the BOLI deposits of $62.5 million in 1998. BOLI sales are single premium and very large in nature, and therefore, can vary from year to year.
On October 6, 1999, GWL&A entered into an agreement with Allmerica Financial Corporation ("Allmerica") to acquire Allmerica's group life and health insurance business on March 1, 2000. The Allmerica policies resident in the State of New York are expected to be underwritten and retained by the Company upon each policy renewal date. The purchase price is based on a percentage of the premium and administrative fees in force at March 1, 2000 and March 1, 2001.
In 2000, the Company will build upon the acquisition of the AH&L NY business though new sales and the addition of the Allmerica group life and health business beginning March 1, 2000. The Company also intends to market 401(k) savings plans to customers to complete the overall product offering in the Employee Benefits segment.
During 1999, the Financial Services segment experienced increased net investment income and increased total benefits and expenses.
Net income for Financial Services decreased $215 thousand in 1999 and increased $759 thousand in 1998. The decrease in 1999 was due primarily to higher benefits related to BOLI products and realized losses on fixed maturities in 1999 compared to realized gains in 1998. The improvement in earnings in 1998 reflected higher earnings from an increased asset base, an increase in investment margins, and larger realized gains on fixed maturities.
Deposits for separate accounts decreased $3.4 million in 1999 to $9.4 million. In 1998 the deposits for separate accounts increased $3.7 million to $12.8 million. The separate account assets have increased by $16.0 million and $14.8 million in 1999 and 1998, respectively, due to the strength of the equity markets in the United States and new deposits.
In 2000, the Company will focus on improving its Internet capability in the annuity markets.
Financial Statements for the Years Ended December 31, 1999, 1998, and for 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, 1999 and 1998, and the related statements of income, stockholder's equity, and cash flows for the years then ended and for 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.
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE PERIOD ============================================================================= FROM APRIL 4, 1997 (INCEPTION) TO DECEMBER 31, 1997 [Dollars in thousands except for share information]
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 $112, $0, and $0 in 1999, 1998, and 1997, respectively.
Policy Reserves - Life insurance reserves of $93,315 and $64,228 at December 31, 1999 and 1998 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 $119 and $92 are carried at contractholders' account value at December 31, 1999 and 1998, respectively.
Recognition of Premium Income and Expenses - Life insurance premiums are recognized when due. Revenues for annuity and other contracts without significant life contingencies are recognized as received. They 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. Fee income is derived primarily from assets under management, consisting of contract maintenance fees, administration fees and mortality and expense risk charges, and is 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.
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 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 1999, 1998, and 1997 were $43, $61, and $0, respectively.
The fair value of annuity contract reserves without life contingencies are estimated by discounting the cash flows to maturity of the contracts, utilizing current credited rates for similar products.
The carrying amounts for receivables and liabilities reported in the balance sheet approximate fair value due to their short-term nature.
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 $2,949 in 2000. The Company paid no dividends in 1999 and 1998. Dividends are paid as determined by the Board of Directors.