The Company's consolidated net income increased $53.4 million or 26% in 2000 when compared to 1999, reflecting improved results in both the Employee Benefits and Financial Services segments. The Employee Benefits segment contributed $19.5 million and the Financial Services segment contributed $33.9 million to the growth in net income. Of total consolidated net income in 2000 and 1999, the Employee Benefits segment contributed 53% and 57%, respectively, while the Financial Services segment contributed 47% and 43%, respectively.
The Company's 1999 consolidated net income included $8.3 million due to changes in income tax provisions for prior years. The current income tax provision was decreased by $17.2 million in 1999 due to the release of a contingent liability relating to taxes of Great-West Life's U.S. branch associated with the blocks of business transferred from Great-West Life's U.S. branch to the Company, as discussed below. Of the amount released in 1999, $8.9 million was attributable to participating policyholders and, therefore, had no effect on the net income of the Company.
Realized investment gains increased from $1.1 million in 1999 to $28.3 million in 2000. Realized investment gains were $38.2 million in 1998. The increase in interest rates in the past two years contributed to $16.7 million and $7.8 million of fixed maturity losses in 2000 and 1999, while the decrease in interest rates in 1998 resulted in gains on sales of fixed maturities totaling $38.4 million in 1998. Decreases in the provision for asset losses of $8.9 and $7.0 million, respectively, were recognized in 2000 and 1999.
Deposits for investment-type contracts increased $201.4 million or 32% in 2000 when compared to 1999. Deposits for investment-type contracts decreased $709.6 million or 53% in 1999 when compared to 1998. The increase in 2000 was primarily attributable to the Financial Services segment, where the Company has experienced growth in premium for fixed annuity products due to higher interest crediting rates being offered to customers and the volatility in the variable marketplace. The decrease in 1999 was primarily due to two indemnity reinsurance agreements with Great-West Life whereby the Company reinsured by coinsurance certain Great-West Life individual non-participating life insurance policies during 1999. This transaction increased deposits by $519.6 million in 1998 and accounted for 73% of the decrease in 1999.
Deposits for separate accounts increased $522 million or 20% in 2000 when compared to 1999. This increase in 2000 is primarily due to BOLI and 401(k) deposits, which increased from $200 million and $1.7 billion, respectively, in 1999 to $365 million and $2.0 billion, respectively, in 2000. Deposits for separate accounts increased $374.4 million or 17% in 1999 when compared to 1998. This was due primarily to $200 million of BOLI deposits associated with the variable life product, and a continuing movement toward variable funds and away from guaranteed interest rate options.
Self-funded premium equivalents increased $2.2 billion or 74% in 2000 when compared to 1999. The General American and Allmerica acquisitions resulted in an increase of $1.7 billion for 2000. Self-funded premium equivalents increased $372.7 million or 14% in 1999 when compared to 1998. The increase in 1999 was primarily due to an increase in self-funded premium equivalents from Alta of $155.2 million, with the remainder coming from the growth in business.
On October 6, 1999, the Company entered into an agreement with Allmerica Financial Corporation ("Allmerica") to acquire Allmerica's group life and health insurance business on March 1, 2000. As of December 31, 2000, this acquisition added 90,800 medical members and $279 million of annual medical and non-medical premium and premium equivalents. This business primarily consists of administrative services only and stop loss policies. The purchase price was based on a percentage of the premium and administrative fees in force at March 1, 2000 and March 1, 2001.
Net income for Employee Benefits increased 15% in 2000 and increased 9% in 1999. The improvement in earnings in 2000 reflected favorable morbidity experience in large case business, and the acquisition of General American's group life and health business, which more than offset poor mortality experience. 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 investment gains.
401(k) premiums and deposits for 2000 and 1999 increased 12% and 11%, respectively, as the result of higher recurring deposits from existing customers and new sales. The number of contributing participants increased from 501,000 at December 31, 1999, to 551,000 at December 31, 2000. Assets under administration (including third-party administration) in 401(k) decreased 9% over 1999 to $7.8 billion and increased 26% from 1998 to 1999. The decrease in 2000 was primarily due to a weaker equity market, while the increase in 1999 was primarily due to a stronger equity market.
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 2000 were allocated to variable funds.
The Financial Services segment's savings business experienced strong growth in 2000. The number of new participants in 2000 was 233,000 compared to 214,100 in 1999 (151,300 in 1998), bringing the total lives under administration to 1,002,785 in 2000 and 834,725 in 1999.
Individual annuities have experienced substantial growth in the variable market with the Schwab qualified and non-qualified annuities. Sales are expected to increase, as the Schwab annuity is a very competitively priced product that is distributed through a well-known and respected broker.
Fixed maturities, available for sale, at fair value $ 9,420 $ 6,728 Fixed maturities, held-to-maturity, at amortized cost 2,260 Mortgage loans 843 975 Real estate and common stock 202 173 Short-term investments 415 241 Policy loans 2,810 2,681 ----------- ---------- Total invested assets $ 13,690 $ 13,058 =========== ==========
During the fourth quarter of 2000, the Company transferred all securities classified as held-to-maturity into the available-for-sale category. See Item 8 (Financial Statements and Supplementary Data), Note 6 for further discussion related to this transfer.
Credit Rating 2000 1999 ------------- -------------- --------------- AAA 53.5% 48.9% AA 10.2 8.9 A 16.2 19.6 BBB 19.0 22.3 BB and Below (non-investment grade) 1.1 0.3 -------------- --------------- TOTAL 100.0% 100.0%
The Company's real estate portfolio is composed primarily of the Head Office property ($102.8 million) and properties acquired through the foreclosure of troubled mortgages ($2.1 million), which attempts to maximize the value of these properties through rehabilitation, leasing and sale. The Company added a third tower to its Head Office complex during the first quarter of 2000.
Generally, the Company has met its operating requirements by maintaining appropriate levels of liquidity in its investment portfolio and utilizing positive cash flows from operations. Liquidity for the Company has remained strong, as evidenced by significant amounts of short-term investments and cash, which totaled $568.4 million and $508.3 million as of December 31, 2000 and 1999, respectively.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of GWL&A Financial Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
Internal Use Software - Effective January 1, 1999, the Company adopted Statement of Position (SOP) No. 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use". The Company capitalized $19,709 and $18,373 in internal use software development costs for the years ended December 31, 2000 and 1999, respectively.
Stock Options - The Company applies the intrinsic value measurement approach under APB Opinion No. 25, "Accounting for Stock Issued to Employees", to stock-based compensation awards to employees, as interpreted by AIN-APB 25 as it relates to accounting for stock options granted by the Parent to Company employees (See Note 14).
Assuming the reinsurance agreement had been effective on January 1, 1999, pro forma 1999 revenues would have been $2,973,247 and pro forma 1999 net income would have been $199,782. The pro forma financial information is not necessarily indicative of either the results of operations that would have occurred had this agreement been effective on January 1, 1999, or of future operations.
On September 30, 1998, the Company and GWL entered into an Indemnity Reinsurance Agreement pursuant to which the Company reinsured by coinsurance certain GWL individual non-participating life insurance policies. The Company recorded $45,332 in premium income and increase in reserves as a result of this transaction. Of the $428,152 in reserves that was recorded as a result of this transaction, $382,820 was recorded under SFAS No. 97 accounting principles. The Company recorded, at the Parent Corporation's carrying amount, which approximated fair value, the following at September 30, 1998 as a result of this transaction:
-------------- -------------- Due in one year or less $ 518,895 $ 527,576 Due after one year through five years 2,480,365 2,487,423 Due after five years through ten years 1,167,364 1,172,556 Due after ten years 772,208 760,118 Mortgage-backed
securities 1,899,963 1,912,319 Asset-backed securities 2,533,214 2,559,873 -------------- -------------- $ 9,372,009 $ 9,419,865 ============== ==============
The estimated fair-value of fixed maturities that are publicly traded are obtained from an independent pricing service. To determine fair value for fixed maturities not actively traded, the Company utilized discounted cash flows calculated at current market rates on investments of similar quality and term.
The fair value of the guaranteed preferred beneficial interest in the Company's junior subordinated debentures reflects the price determined in the public market at December 31, 2000.
The estimated fair value of financial hedge instruments, all of which are held for other than trading purposes, is the estimated amount the Company would receive or pay to terminate the agreement at each year-end, taking into consideration current interest rates and other relevant factors. Included in the net loss position for interest rates swaps are $1,858 and $772 of unrealized losses in 2000 and 1999, respectively. Included in the net gain position for foreign currency exchange contracts are $0 and $518 of loss exposures in 2000 and 1999, respectively.
The Company's valuation allowance was decreased in 2000, 1999, and 1998 by $0, $(17), and $(1,792), respectively, as a result of the re-evaluation by management of future estimated taxable income in its subsidiaries.
Dividends of $0, $0, and $6,692 were paid on preferred stock in 2000, 1999, and 1998, respectively. In addition, dividends of $137,149, $88,950, and $73,344 were paid on common stock in 2000, 1999, and 1998, respectively. Dividends are paid as determined by the Board of Directors.
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, 2000 were $1,083,718 and $275,231 (unaudited), respectively. GWL&A should be able to pay up to $275,231 (unaudited) of dividends in 2000.
In March 1998, the National Association of Insurance Commissioners adopted the Codification of Statutory Accounting Principles (Codification). The Codification, which is intended to standardize accounting and reporting to state insurance departments, is effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. The Colorado Division of Insurance will require adoption of Codification with certain modifications for the preparation of statutory financial statements effective January 1, 2001. The Company estimates that the adoption of Codification as modified by the Colorado Division of Insurance will increase statutory net worth as of January 1, 2001, by approximately $105,760 [Unaudited]. (The modifications adopted by the Colorado Division of Insurance had no effect on statutory net worth).
The plan provides for the granting of options with varying terms and vesting requirements. The majority of basic options under the plan vest and become exercisable twenty percent per year commencing on the first anniversary of the grant and expire ten years from the date of grant. Other basic options vest and become exercisable one-third per year commencing on various dates from December 31, 2000 to September 30, 2002 and expire ten years from the date of grant. Variable options granted to Company employees totaling 278,000 and 1,832,000 in 1998 and 1997, respectively, become exercisable if certain cumulative financial targets are attained by the end of 2001. If exercisable, the exercise period runs from April 1, 2002 to June 26, 2007. During 2000, the Company determined that it was probable that certain of these options would become exercisable and, accordingly, recorded compensation expense of $15,052 with a corresponding credit to additional paid-in capital as prescribed by AIN-APB 25.
Options granted to officers of the Company under the PFC plan become exercisable twenty percent per year commencing on the date of the grant and expire ten years from the date of grant.
The Company's operations are not materially dependent on one or a few customers, brokers or agents.