During 2005, Great-West Healthcare expanded its specialty risk market segment. The specialty risk market segment provides services to third-party administrators and other specialized distribution channels. During September 2005, the Company completed the acquisition of Mediversal, Inc., a healthcare services company that administers claims for employers with self-funded group health and worker's compensation plans.
In late 2005, Advised Assets Group, LLC, ("AAG"), the Company's registered investment advisory subsidiary, rolled out Reality Investing, a program that expands AAG's participant level advice services including professional account management at the participant level.
The Great-West Healthcare segment net income decreased by $24 million, or 13.9%, to $149 million during the year ended December 31, 2004 from $173 million in 2003. The decrease was primarily due to lower premium income and weaker morbidity results in the select and mid-market market segments.
Excluding premium and fee income associated with the CLAC reinsurance and the Allianz reinsurance, premium and fee income decreased by $5.4 million, or 0.4%, during 2004 when compared to 2003. The decrease was primarily due to lower membership levels during the first few months of 2004. The decreases in early 2004 were offset by increased sales and membership later in the year. Additionally, this decrease was partially offset by increased revenues associated with the pharmacy benefit management contract, which resulted from greater utilization and certain favorable contract amendments during 2004.
Net investment income increased by $19 million, or 1.9%, to $1.006 billion during the year ended December 31, 2005 from $987 million in 2004. This increase is primarily due to an increase in the average earned rate on investments from 5.37% in 2004 to 5.82% in 2005 primarily due to less amortization of premiums on fixed maturity investments in 2005 and more invested assets. This increase was partially offset by a $17 million reduction resulting from the marking to market of the embedded derivative on the funds withheld reinsurance agreement.
For the year ended December 31, 2005, the unrealized losses are generally related to the automobile and technology industries. For the year ended December 31, 2004, the unrealized losses are generally related to the airline and technology industries. The Company considers these investments to be only temporarily impaired.
The principal sources of the Company's liquidity are premium, fee, and investment income and investment maturities and sales. The principal uses of the Company's liquidity relate to benefit payments, payments to policy and contract holders in connection with surrenders and withdrawals, purchase of investments, commissions and general and administrative expenses.
To the Board of Directors and Stockholder of Great-West Life & Annuity Insurance Company Greenwood Village, Colorado
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Great-West Life & Annuity Insurance Company and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Certain reclassifications have been made to the 2004 and 2003 consolidated financial statements and related notes to conform to the 2005 presentation. These changes in classification had no effect on previously reported stockholder's equity or net income.
Premiums and discounts are recognized as a component of net investment income using the scientific interest method. Realized gains and losses and declines in value determined to be other-than-temporary are included in net realized gains on investments.
For the years ended December 31, 2005 and 2004, the Company recorded other-than-temporary impairments in the fair value of its available-for-sale investments in the amounts of $12,958 and $13,167, respectively.
The estimated fair value of fixed maturities and equity investments that are publicly traded are obtained from an independent pricing service. To determine fair value of fixed maturity and equity investments that are not actively traded, the Company utilizes discounted cash flows calculated at current market rates on investments of similar quality and term. The fair value of a cost method investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect.
The estimated fair value and carrying amount of reinsurance receivables at December 31, 2005 and 2004 includes $(34,063) and $13,372, respectively, representing the estimated fair value of the embedded derivative associated with the Company's reinsurance receivable under its coinsurance with funds withheld agreement with the United States branch of CLAC (See Note 3). Valuation of the derivative is based upon the estimated fair value of the segregated pool of assets from which the Company derives its return on the reinsurance receivable.
The Company maintains an allowance for credit losses at a level that, in management's opinion, is sufficient to absorb credit losses on amounts receivable related to uninsured accident and health insurance plan claims and premiums in course of collection. Management's judgment is based upon past loss experience and current and projected economic conditions.
Dividends are paid as determined by the Board of Directors, subject to restrictions as discussed below. Dividends in the amounts of $221,358, $163,230 and $75,711, were paid on the Company's common stock during the years ended December 31, 2005, 2004 and 2003, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Dollars In Thousands, Except Share Amounts)
During 2002, the Company entered into a corporate credit facility agreement in the amount of $50,000 for general corporate purposes. The agreement was extended by an amended agreement on May 26, 2005. The credit facility matures on May 26, 2010. Interest accrues at a rate dependent on various conditions and terms of borrowings. The agreement requires the Company to maintain a minimum adjusted net worth of $900,000 plus 50% of its net income, if positive (both compiled by the unconsolidated statutory accounting basis prescribed by the National Association of Insurance Commissioners), for each quarter ending after March 31, 2005. The Company had no borrowings under the credit facility at either December 31, 2005 or 2004.