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). Note 2 in the financial statements discusses the significant accounting policies of the Company. Significant estimates are required to account for the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates.
This Form 10-K contains forward-looking statements. Forward-looking statements are statements not based on historical information and that relate to future operations, strategies, financial results, or other developments. In particular, statements using verbs such as "expected", "anticipate", "believe", or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements that 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 matters, including any risks and uncertainties, discussed in documents filed by the Company with the Securities and Exchange Commission.
Management's discussion and analysis of financial conditions and results of operations of the Company for the three years ended December 31, 2001 follows. This management discussion and analysis should be read in conjunction with the financial data contained in Item 6 and the Company's consolidated Financial Statements.
The Company's consolidated net income increased $3.4 million or 169% in 2001 when compared to 2000. The Employee Benefits segment contributed $3.1 million to the improved consolidated results and the Financial Services segment contributed $336 thousand. Of total consolidated net income for 2001, 2000, and 1999, the Employee Benefits segment contributed 82%, 67%, and 44%, respectively, while the Financial Services segment contributed 18%, 33%, and 56%, 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 business. The subsequent operations resulting from this agreement combined with new case sales within other blocks of business resulted in net income of $4.5 million, $1.4 million, and $.4 million being recorded in 2001, 2000, and 1999, respectively.
In 2001 total Company revenues increased $2.6 million or 8% to $33.1 million when compared to 2000. The growth in revenues in 2001 was comprised of increased premium and fee income of $563 thousand, increased net investment income of $1.4 million and increased realized gain on investments of $575 thousand.
Net investment income grew to $11.8 million and $10.3 million in 2001 and 2000, respectively, from $6.3 million in 1999, primarily due to BOLI sales each year, as well as a capital infusion from GWL&A of $16 million in 1999. The growth in all years was primarily in the Financial Services segment.
Total benefits and expenses decreased $2.8 million or 10% in 2001 when compared to 2000. The Employee Benefits segment contributed $3.9 million of the decrease in 2001 while the Financial Services segment contributed an increase of $1.1 million. The decrease in total benefits and expenses in the Employee Benefits segment in 2001 resulted primarily from improvement in the health claims experience. The increase in Financial Services related to higher interest credits on BOLI account balances and increased operating expenses associated with growth in the Company's business. Total benefits and expenses increased $12.7 million in 2000 when compared to 1999. This increase was primarily due to an increase in the Employee Benefits segment as a result of the acquisition of the group health and life business from AH&L NY in December 1999.
Income tax expense increased $1.9 million or 145% in 2001 when compared to 2000. Income tax expense increased $705 thousand in 2000 when compared to 1999. The increases in income tax expense in both years reflect higher net earnings. The Company's effective tax rate was 37.5% in 2001 compared to 39.7% in 2000, and 38.5% in 1999.
In evaluating its results of operations, the Company also considers net changes in deposits received for investment-type contracts, deposits to separate accounts, and self-funded equivalents. Self-funded equivalents generally represent paid claims under minimum premium and administrative services only contracts that amounts approximate the additional premiums that would have been earned under such contracts if they had been written as traditional indemnity programs.
Deposits for investment-type contracts decreased $27 million or 73% and increased $17.3 million or 87% in 2001 and 2000, respectively, due to BOLI deposits. BOLI sales are single premium and very large in nature, and therefore, can vary significantly from year to year.
Self-funded premium equivalents increased $22 million or 137% in 2001 when compared to 2000 primarily due to the inclusion in 2001 of the first full year of operations resulting from the Allmerica assumption reinsurance agreement. 2000 was the first full year of Employee Benefit operations resulting from the AH&L NY assumption reinsurance agreement.
Total assets and liabilities increased $922 thousand or 4% and $76.1 million or 44% in 2001 and 2000, respectively. The increases are primarily attributable to BOLI business.
During 2001, the Employee Benefits segment had an overall increase in its net income. The increase was due primarily to increased revenue and good morbidity experience, resulting in net income of $4.5 million in 2001, compared with $1.4 million in 2000.
The results below reflect the Financial Services segment for the following periods:
In 2001, the deposits for separate accounts decreased $4.0 million to $7.2 million. Deposits for separate accounts increased $1.8 million in 2000 to $11.2 million. The separate account assets decreased by $4.8 million in 2001 due to market conditions and increased $7.5 million in 2000 due to the new deposits.
Net investment income increased $1.1 million in 2001 compared to 2000, and $2.9 million in 2000 compared to 1999, primarily due to BOLI sales.
Total benefits and expenses increased $1.1 million in 2001 compared to an increase of $3.1 million in 2000, primarily due to additional interest credits on BOLI balances and increased operating expenses.
One of the Company's primary objectives is to ensure that its fixed maturity portfolio is maintained at a high average quality so as to limit credit risk. If not externally rated, the securities are rated by the Company on a basis intended to be similar to that of the rating agencies.
Generally, the Company has met its operating requirements by maintaining appropriate levels of liquidity in its investment portfolio. Liquidity for the Company has remained strong, as evidenced by significant amounts of short-term investments and cash that totaled $11.7 million and $24.4 million as of December 31, 2001 and 2000, respectively.
The Company and GWL&A have an agreement whereby GWL&A has undertaken to provide the Company with certain financial support related to maintaining required statutory surplus and liquidity.
On June 29, 2001, Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" was approved by the FASB. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and certain intangible assets will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company implemented SFAS No. 141 on July 1, 2001. Adoption of the Statement did not have a material impact on the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 supercedes current accounting guidance relating to impairment of long-lived assets and provides a single accounting methodology for long-lived assets to be disposed of, and also supercedes existing guidance with respect to reporting the effects of the disposal of a business. SFAS No. 144 is effective beginning January 1, 2002, with earlier adoption encouraged. Although management is still reviewing the provisions of the Statement, it does not expect SFAS No. 144 to have a material impact on the Company's financial position or results of operations, upon adoption.
The following are the Company's Financial Statements for the years ended December 31, 2001, 2000, and 1999, and the Independent Auditor's Report thereon.
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, 2001 and 2000, and the related statements of income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2001. 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, 2001, 2000 AND 1999
STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
Basis of Presentation - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
Certain reclassifications have been made to the 2000 and 1999 financial statements to conform to the 2001 presentation. These changes in classification had no effect on previously reported stockholder's equity or net income.
Investments - Management has classified its fixed maturities as available for sale and carries them at fair value with the net unrealized gains and losses reported as accumulated other comprehensive income (loss) in stockholder's equity.
Premiums and discounts are recognized as a component of net investment income using the effective interest method. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net realized gains/(losses) on investments.
Recognition of Premium Income and Expenses - Life insurance premiums are recognized when due. Accident and health premiums are earned on a monthly pro rata basis. Revenues for annuity and other contracts without significant life contingencies 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, and are realized as assessed and earned. Fee income is derived primarily from contracts for claim processing or other administrative services related to uninsured business and from assets under management. Fees from contracts for claim processing or other administrative services are recorded as the services are provided. Fees from assets under management, which consist of contract maintenance fees, administration fees and mortality and expense risk charges, are 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. This association is accomplished by means of the provision for future policy benefit reserves. The average credit rating on annuity products, first sold in 2001, was approximately 4.2%.
Regulatory Requirements - In accordance with the requirements of the State of New York, the Company must demonstrate adequate capital, as defined. At December 31, 2001, the Company was in compliance with the requirement.
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, 2001.
On October 6, 1999, the Parent Corporation entered into a purchase and sale agreement (the Agreement) with Allmerica Financial Corporation (Allmerica) to acquire, via assumption reinsurance, Allmerica's group life and health insurance business on March 1, 2000. The policies resident in the State of New York have been assigned to the Company as part of the Agreement. This business primarily consists of administrative services only and stop loss policies. The in-force business was immediately coinsured back to Allmerica and then underwritten and retained by the Company upon each policy renewal date. The purchase price, as defined in the Agreement, was based on a percentage of the amount in-force at March 1, 2000 contingent on the persistency of the block of business through March 2001. The effect of this transaction was not material to the Company's results of operations or financial position.
The Company and the Parent Corporation have an agreement whereby the Parent Corporation has committed to provide certain financial support related to maintaining adequate regulatory surplus and liquidity.
Proceeds from sales of securities available-for-sale were $54,832, $44,237, and $15,158 during 2001, 2000, and 1999, respectively. The realized gains on such sales totaled $950, $296, and $15 for 2001, 2000, and 1999, respectively. The realized losses totaled $308, $229, and $21 for 2001, 2000, and 1999, respectively.
The estimated fair value of financial instruments have been determined using available information and appropriate valuation methodologies. However, considerable judgement is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Amounts related to investment assets above include $666 and $738 related to the unrealized gains on the Company's fixed maturities available-for-sale at December 31, 2001, and 2000, respectively. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized.
The Company is involved in various legal proceedings, which arise in the ordinary course of its business. In the opinion of management, after consultation with counsel, the resolution of these proceedings should not have a material adverse effect on its financial position or results of operations.