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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
---------------------------------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transaction period from to
------------------ -------------------
Commission file number 333-25269
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FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
New York 93-1225432
- ---------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
125 Wolf Road, Albany, New York 12205
---------------------------------------------
(Address of principal executive offices)
(Zip Code)
[518] 437-1816
---------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------------- --------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. _____ [ ____ ]
As of March 1, 2002, the aggregate market value of the registrant's voting stock
held by non-affiliates of the registrant was $0.
As of March 1, 2002, 2,500 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
NOTE:This Form 10-K is filed by the registrant only as a consequence of the
sale by the registrant of a market value adjusted annuity product.
PART I
ITEM 1. BUSINESS
A. ORGANIZATION AND CORPORATE STRUCTURE
First Great-West Life & Annuity Insurance Company (the Company) is a
stock life insurance company originally organized under the laws of the
state of New York in 1996.
The Company is a wholly-owned subsidiary of Great-West Life & Annuity
Insurance Company (GWL&A), a life insurance company domiciled in
Colorado. GWL&A is a wholly-owned subsidiary of GWL&A Financial Inc.
(GWL&A Financial), a Delaware holding company. GWL&A Financial is an
indirect wholly-owned subsidiary of Great-West Lifeco Inc. (Lifeco), a
Canadian holding company. Lifeco is a subsidiary of Power Financial
Corporation (Power Financial), a Canadian holding company with
substantial interests in the financial services industry. Power
Financial Corporation is a subsidiary of Power Corporation of Canada
(Power Corporation), a Canadian holding and management company. Mr. Paul
Desmarais, through a group of private holding companies that he
controls, has voting control of Power Corporation.
Shares of Great-West Lifeco, Power Financial, and Power Corporation are
traded publicly in Canada.
B. BUSINESS OF THE COMPANY
The Company is authorized to engage in the sale of life insurance,
annuities, and accident and health insurance. The Company became
licensed to do business in New York and Iowa in 1997.
The Company operates in the following two business segments:
Employee Benefits - life, health, and 401(k) products for group
clients
Financial Services - savings products for both
public and non-profit employers and
individuals, and life insurance products for
individuals and businesses.
The table that follows summarizes premiums and deposits for the years
indicated. For further consolidated financial information concerning the
Company, see Item 6 (Selected Financial Data), and Item 8 (Financial
Statements and Supplementary Data).
For commentary on the information in the following table, see Item 7
(Management's Discussion and Analysis of Financial Condition and Results
of Operations).
[Thousands](1) 2001 2000 1999
------------------------------------- ------------- ------------- -------------
Premium Income
Employee Benefits
Group life & health $ 15,055 $ 13,467 $ 9,195
------------- ------------- -------------
Total Employee Benefits 15,055 13,467 9,195
------------- ------------- -------------
Financial Services
Savings (9) (11) (8)
Individual insurance 84 109 (43)
------------- ------------- -------------
Total Financial Services 75 98 (51)
------------- ------------- -------------
Premium income $ 15,130 $ 13,565 $ 9,144
============= ============= =============
Fee Income
Employee Benefits
Group life & health $ 5,196 $ 6,213 $ 430
401(k) 6 2
------------- ------------- -------------
Total Employee Benefits 5,202 6,215 430
------------- ------------- -------------
Financial Services
Savings 373 362 262
Individual insurance
------------- ------------- -------------
Total Financial Services 373 362 262
------------- ------------- -------------
Fee income $ 5,575 $ 6,577 $ 692
============= ============= =============
Deposits for investment-type
contracts (2)
Financial Services $ 10,173 $ 37,344 $ 20,000
------------- ------------- -------------
Total investment-type deposits $ 10,173 $ 37,344 $ 20,000
============= ============= =============
Deposits to Separate Accounts
Employee Benefits $ 708 $ 3,249 $
Financial Services 7,185 11,189 9,389
------------- ------------- -------------
Total separate accounts deposits $ 7,893 $ 14,438 $ 9,389
============= ============= =============
Self-funded equivalents -
Employee Benefits (3) $ 38,410 $ 16,225 $
============= ============= =============
(1)All information in the following table and other tables herein is
derived from information that has been prepared in conformity with
accounting principles generally accepted in the United States of
America, unless otherwise indicated.
(2)Investment-type contracts are contracts that include significant
cash build-up features, as discussed in FASB Statement No. 97.
(3)Self-funded equivalents generally represent paid claims under minimum
premium and administrative services only contracts of which amounts
approximate the additional premiums that would have been earned under
such contracts if they had been written as traditional indemnity or
HMO programs.
C. EMPLOYEE BENEFITS
1. Principal Products
The Employee Benefits segment of the Company provides a full range of
employee benefits products. The Company began operating in this
segment as of December 1, 1999 by entering 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 business primarily consists of administration services
only, and stop loss policies. Annualized premium equivalents rose to
$88.6 million in 2001 resulting from significant sales late in the
fourth quarter. In 2002, the Company will continue to focus on
writing new employee benefits business.
The Company offers customers a variety of health plan options to help
them maximize the value of their employee benefits package. The
majority of the Company's health care business is self-funded,
whereby the employer assumes all or a significant portion of the
risk. For companies with better than average claims experience, this
can result in significant health care savings.
The Company offers employers a total benefits solution - an
integrated package of group life and disability insurance,
managed-care programs, and flexible spending accounts. The Company
began marketing 401(k) savings plans in 2000 to complement its group
life and health products. Through integrated pricing, administration,
funding, and service, the Company helps employers provide
cost-effective benefits that will attract and retain quality
employees, and at the same time, helps employees reach their personal
goals by offering benefit choices, along with information needed to
make appropriate choices. Many customers also find this integrated
approach appealing because their benefit plans are administered
through a single company with linked systems that provide on-line
administration and account access, for enhanced efficiency and
simplified plan administration.
The Company offers a choice of managed care products including
Preferred Provider Organization (PPO) plans and Point of Service
(POS) plans. PPO plans offer members a greater choice of physicians
and hospitals. Members do not need to enroll with a primary care
physician - they simply select a contracted PPO provider at the time
of the service to receive the highest level of benefits. If members
seek care outside of the PPO network, they receive a lower level of
benefits.
POS plans also require that a member enroll with a primary care
physician who is responsible for coordinating the member's health
care. Members receive the highest benefit coverage and the lowest
out-of-pocket costs when they use their primary care physician to
coordinate their health care. Members can seek care outside of the
primary care physician's direction, at a reduced level of benefits.
Some benefits may not be covered outside the in-network POS plan.
The Company offers Internal Revenue Code Section 125 plans that
enable participants to set aside pre-tax dollars to pay for
non-reimbursement medical expenses and dependent care expenses. This
creates tax efficiencies for both the employer and its employees.
The Company offers group life insurance. Sales of group life
insurance consist principally of renewable term coverage, the amounts
of which are usually linked to individual employee wage levels. Group
life insurance in force prior to reinsurance ceded to other insurance
enterprises for the year ended December 31, 2001 totaled $394
million.
The Company offers disability insurance that is a type of health
insurance designed to compensate insured people for a portion of the
income they lose because of a disabling injury or illness. Generally,
benefits are in the form of monthly payments.
The Company's 401(k) product is offered by way of a group fixed and
variable deferred annuity contract. The product provides a variety of
funding and distribution options for employer-approved retirement
plans that qualify under Internal Revenue Code Section 401(k).
The 401(k) product investment options for the employer include
guaranteed interest rates for various lengths of time and variable
investment options. For the fully guaranteed option, the difference
between the income earned on investments in the Company's general
account and the interest credited to the participant's account
balance flows through to operating income.
Variable investment options utilize separate accounts to provide
participants with a vehicle to assume the investment risks. Assets
held under these options are invested, as designated by the
participant, in separate accounts that in turn invest in shares of
underlying funds managed by a subsidiary of GWL&A or by selected
external fund managers.
The Company is compensated by the separate accounts for bearing
expense risks pertaining to the variable annuity contract, and for
providing administrative services.
Customer retention is a key factor for the profitability of the
Company's 401(k) product. The annuity contract imposes a charge for
termination during a designated period of time after the contract's
inception. The charge is determined in accordance with a formula in
the contract. Existing federal tax penalties on distributions prior
to age 59 1/2 provide an additional disincentive to premature
surrenders of account balances, but do not impede rollovers to
products of competitors.
The Company offers a rollover Individual Retirement Account that
allows individuals to move retirement funds from a 401(k) plan to a
qualified Individual Retirement Account.
2. Method of Distribution
The Company distributes its products and services through affiliated
sales staff. Each sales office works with insurance brokers, agents,
and consultants in their local market.
3. Competition
The employee benefits industry is highly competitive. The United
States health care industry continues to experience mergers and
consolidations. A number of larger carriers have dropped out of the
group health market entirely. Although there are still many different
carriers in the marketplace, it has become dominated by an
increasingly smaller number of carriers.
The highly competitive marketplace creates pricing pressures that
encourage employers to seek competitive bids each year. Although most
employers are looking for affordably priced employee benefits
products, they also want to offer product choices because employee
needs differ. In many cases it is more cost-effective and efficient
for an employer to contract with a carrier such as the Company that
offers multiple product lines and centralized administration.
In addition to price there are a number of other factors that
influence employer decision-making. These factors include; quality of
services; scope, cost-effectiveness and quality of provider networks;
product responsiveness to customers' needs; cost-containment
services; and effectiveness of marketing and sales.
4. Reserves
For group term insurance products, policy reserve liabilities are
equal to the present value of future benefits and expenses less the
present value of future net premiums using best estimate assumptions
for interest, mortality, and expenses (including margins for adverse
deviation). For disability waiver of premium contracts, the policy
reserves equal the present value of future benefits and expenses
using best estimate assumptions for interest, mortality, and expenses
(including margins for adverse deviation). Reserves for long-term
disability products are established for lives currently in payment
status, or that are approved for payment but are in a waiting period,
using industry and Company morbidity factors, and interest rates
based on Company experience. In addition, reserves are held for
claims that have been incurred but not reported and for long term
disability claims that have been reported but not yet adjudicated.
For medical, dental, and vision insurance products, reserves reflect
the ultimate cost of claims including, on an estimated basis, (i)
claims that have been reported but not settled, and (ii) claims that
have been incurred but not reported. Claim reserves are based upon
factors derived from past experience. Reserves also reflect
retrospective experience rating that is done on certain types of
business.
Reserves for investment contracts (401(k) deferred annuities) are
equal to the participants' account balances.
Assumptions for mortality and morbidity experience are periodically
reviewed against published industry data and company experience.
The above mentioned reserves are computed amounts that, with
additions from premiums and deposits to be received, and with
interest on such reserves, are expected to be sufficient to meet the
Company's policy obligations, pay expected death surrender requests,
and to generate profits.
5. Reinsurance
The Company seeks to limit its exposure on any single insured and to
recover a portion of benefits paid by ceding risks to other insurance
enterprises under excess coverage and co-insurance contracts. The
maximum amount of group life insurance retained on any one life is
$250 thousand.
D. FINANCIAL SERVICES
1. Principal Products
The Financial Services segment primarily markets savings products to
public and not-for-profit employers and individuals and offers life
insurance products to individuals and businesses.
The Company's individual fixed annuity product is a Guarantee Period
Fund that was established as a non-unitized Separate Account in which
the owner does not participate in the performance of the assets. The
assets accrue solely to the benefit of the Company and any gain or
loss in the Guarantee Period Fund is borne entirely by the Company.
Guaranteed period durations of one to ten years are currently being
offered by the Company. Distributions from the amounts allocated to a
Guarantee Period Fund more than six months prior to the maturity date
results in a market value adjustment (MVA). The MVA reflects the
relationship as of the time of its calculation between the current
U.S. Treasury Strip ask side yield and the U.S. Treasury Strip ask
side yield at the inception of the contract.
The Company's individual variable annuity products offer a number of
investment options. This product provides the opportunity for
contractholders to assume the risks of, and receive all the benefits
from, the investment of retirement assets. The variable product
assets are invested, as designated by the participant, in a separate
account that in turn invests in shares of underlying funds managed by
selected external fund managers.
The individual fixed annuity product generates earnings from the
investment spreads on guaranteed investment returns. The individual
variable annuity product generates earnings from the fees collected
for mortality and expense risks associated with the variable options.
The Company entered the retirement savings business in the
public/non-profit pension market. The Company provides investment
products, and administrative and communication services, to employees
of state and local governments as well as employees of hospitals,
non-profit organizations, and public school districts. The Company
provides pension plan administrative services through a subsidiary
company, Financial Administrative Services Corporation. The Company
provides marketing and communication services through another
subsidiary company, BenefitsCorp, Inc., and through BenefitsCorp
Equities, Inc., a broker-dealer subsidiary of BenefitsCorp, Inc.
(collectively, BenefitsCorp).
The Company's primary marketing emphasis in the public/non-profit
pension market is group fixed and variable annuity contracts for
defined contribution retirement savings plans. Defined contribution
plans provide for benefits based upon the value of contributions to,
and investment returns on, the individual's account. This has been
the fastest growing portion of the pension marketplace in recent
years.
The amount of annuities in-force is measured by account balances. At
December 31, 2001, annuity account balances were $587 thousand for
fixed annuities and $42.5 million for variable annuities. At December
31, 2000, annuity account balances were $141 thousand for fixed
annuities and $44.1 million for variable annuities.
During 1998, the Company began selling life insurance products in the
Business-Owned Life Insurance (BOLI) market. These products are
interest-sensitive whole life products that fund post-retirement
benefits for bank employees. BOLI deposits of $5.0 million were
received in 2001, representing $493.6 million of life insurance
in-force.
2. Method of Distribution
The Company primarily uses BenefitsCorp to distribute pension
products and to provide communication and enrollment services to
employers in the public/non-profit market. Pension products are also
distributed through independent marketing agencies.
The Company distributes its individual annuity products through
Charles Schwab & Co., Inc. pursuant to a distribution agreement. The
Company's BOLI product is currently marketed through one broker,
Clark/Bardes, Inc.
3. Competition
The individual life and annuity insurance marketplace is highly
competitive. The Company's competitors include mutual fund companies,
insurance companies, banks, investment advisors, and certain service
and professional organizations. No one competitor or small number of
competitors is dominant. Competition focuses on service, technology,
cost, variety of investment options, investment performance, product
features, price, and financial strength as indicated by ratings
issued by nationally recognized agencies. For more information on the
Company's ratings, see Item 1(G) (Ratings).
4. Reserves
Reserves for interest-sensitive whole life products are equal to
cumulative deposits, less withdrawals and charges, plus credited
interest. For all life insurance contracts, reserves are established
for claims that have been incurred but not reported based on factors
derived from past experience.
Reserves for investment contracts (deferred annuities) are equal to
the participants' account balances. Reserves for immediate annuities
without life contingent payouts are computed on the basis of assumed
investment yield and expenses.
The above mentioned reserves are computed amounts that, with
additions from premiums and deposits to be received, and with
interest on such reserves, are expected to be sufficient to meet the
Company's policy obligations (such as paying expected death or
retirement benefits or surrender requests) and to generate profits.
5. Reinsurance
The Company seeks to limit its exposure to loss on any single insured
and to recover a portion of benefits paid by ceding risks to other
insurance enterprises under excess coverage and co-insurance
contracts. The Company retains a maximum of $250 thousand of coverage
per individual life.
E. INVESTMENT OPERATIONS
GWL&A manages the Company's general and separate accounts in support of
cash and liquidity requirements of the Company's insurance and
investment products. Invested assets under management at December 31,
2001, totaled $228.0 million, comprised of $182.4 million of general
account assets and separate account assets of $45.6 million. Invested
assets under management at December 31, 2000, totaled $213.9 million,
comprised of $166.5 million of general account assets and separate
account assets of $47.4 million.
The Company invests in a broad range of asset classes, investments such
as government bonds, public and privately placed corporate bonds,
mortgage-backed securities and asset-backed securities. The Company's
investments are subject to New York insurance laws.
The Company manages the characteristics of its investment assets, such
as liquidity, currency, yield, and duration, to reflect the underlying
characteristics of related insurance and policyholder liabilities that
vary among the Company's principal product lines. The Company observes
strict asset and liability matching guidelines that are designed to
ensure that the investment portfolio will appropriately meet the cast
flow and income requirements of its liabilities.
The Company routinely monitors and evaluates the status of its
investments in light of current economic conditions, trends in capital
markets, and other factors. These other factors include investment size,
quality, concentration by industry and other diversification
considerations for fixed maturity investments.
The Company's long-term bond portfolio constituted 98% of investment
assets as of December 31, 2001 compared to 90% in 2000. The Company
reduces credit risk for the portfolio as a whole by investing primarily
in investment grade bonds. As of December 31, 2001 and 2000, 98% and
100%, respectively, of the bond portfolio carried an investment grade
rating.
The following table sets forth the distribution of invested assets, cash
and accrued investment income for the Company's general account as of
the end of the years indicated:
Carrying Value in
Millions 2001 2000 1999 1998 1997
----------------------- --------- ---------- ---------- ---------- ----------
U.S. Government
Securities and
Agencies $ 48 $ 54 $ 22 $ 24 $ 5
Collaterized mortgage
obligations 10 10 19 20
Corporate bonds 53 35 35 35
Asset backed
securities 67 52 35
--------- ---------- ---------- ---------- ----------
Total 178 151 111 79 5
Short-term
investments 4 16 2 1
--------- ---------- ---------- ---------- ----------
Total investments $ 182 $ 167 $ 113 $ 80 $ 5
========= ========== ========== ========== ==========
Cash $ 8 $ 8 $ 5 $ 1 $
Accrued investment
income 2 1 1 1
Net
Investment Earned Net
Income Investment
For the year: [Thousands] Income Rate
-------------------- ------------- --------------
2001 $ 11,763 7.04 %
2000 10,333 6.99 %
1999 6,278 6.79 %
1998 3,367 6.35 %
1997 243 6.00 %
F. REGULATION
1. Insurance Regulation
The Company must comply with the insurance laws of New York and Iowa.
These laws govern the admittance of assets, premium rating
methodology, policy forms, establishing reserve requirements and
solvency standards, maximum interest rates on life insurance policy
loans and minimum rates for accumulation of surrender values and the
type, amounts and valuation of investments permitted.
The Company's operations and accounts are subject to examination by
the New York Insurance Department at specified intervals.
New York has adopted the National Association of Insurance
Commissioners' (NAIC) risk-based capital rules and other financial
ratios for life insurance companies. Based on the Company's December
31, 2001 statutory financial reports, the Company has risk-based
capital well in excess of that required.
In March 1998, the NAIC adopted the Codification of Statutory
Accounting Principles (Codification). The Codification that 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 New York Insurance Department
required adoption of Codification with certain modifications for the
preparation of statutory financial statements effective January 1,
2001.
2. Insurance Holding Company Regulations
The Company is subject to and complies with insurance holding company
regulations in New York. These regulations contain certain
restrictions and reporting requirements for transactions between an
insurer and its affiliates, including the payments of dividends. They
also regulate changes in control of an insurance company.
3. Securities Laws
The Company is subject to various levels of regulation under federal
securities laws. The Company's separate accounts and annuity products
are registered under the Investment Company Act of 1940 and the
Securities Act of 1933.
4. Potential Legislation
United States legislative developments in various areas including
pension regulation, financial services regulation, and health care
legislation could significantly and adversely affect the Company in
the future. Congress continues to consider legislation relating to
health care reform and managed care issues (including patients'
rights, mental health parity and managed care or enterprise
liability). Congress is also considering changes to various features
of retirement plans such as the holding of company stock,
diversification rights, imposition of transaction restrictions,
expanded disclosure requirements and greater access to investment
advice for participants.
It is not possible to predict whether future legislation or
regulation adversely affecting the business of the Company will be
enacted and, if enacted, the extent to which such legislation or
regulation will have an effect on the Company and its competitors.
G. RATINGS
The Company is rated by a number of nationally recognized rating
agencies. The ratings represent the opinion of the rating agencies
regarding the financial strength of the Company and its ability to meet
ongoing obligations to policyholders. The ratings take into account an
agreement whereby GWL&A has undertaken to provide the Company with
certain financial support related to maintaining required statutory
surplus and liquidity.
Rating Agency Measurement Rating
------------------------------ ------------------------------------------ -------
A.M. Best Company, Inc. Financial strength, operating A++(1)
performance and
market profile
Fitch, Inc. Financial strength AAA(2)
Moody's Investors Service Financial strength Aa3(3)
Standard & Poor's Corporation Financial strength AA(4)
(1) Superior (highest rating out of six categories)
(2) Exceptionally Strong (highest rating out of twelve categories)
(3) Excellent (second highest rating out of nine categories)
(4) Very Strong (second highest rating out of nine categories)
H. MISCELLANEOUS
Although the Company's BOLI business is comprised of a few customers
that account for the majority of the total deposits, the BOLI contracts
allow for no more than 20% surrenders in any given year.
The Company and GWL&A have administrative services agreements whereby
GWL&A administers, distributes, and underwrites business for the Company
and administers the Company's investment portfolio.
ITEM 2. PROPERTIES
The Company leases its home office in Albany, New York.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is a party or of which any of their property is
the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2001 to a vote of
security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. EQUITY SECURITY HOLDERS AND MARKET INFORMATION
There is no established public trading market for the Company's common
equity.
B. DIVIDENDS
The Company has not paid dividends on its common shares.
Under New York law, the Company may distribute a dividend if the total
of all dividends paid in any calendar year does not exceed the lesser of
(i) 10% of surplus to policyholders as of the preceding December 31; or
(ii) the net gain from operations for the preceding calendar year, not
including realized capital gains. The Company cannot distribute any
greater dividend amount unless a notice of its intention to declare such
dividend and the amount thereof has been filed with the New York
Superintendent of Insurance not less than thirty days in advance of such
proposed declaration. The Superintendent may disapprove of such
distribution by giving written notice to the Company within thirty days
after such filing stating that he finds the financial condition of the
Company does not warrant such distribution.
ITEM 6. SELECTED FINANCIAL DATA
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.
For the
period from
[Dollars in Thousands] April 4,
1997
(inception)
through
INCOME STATEMENT Years Ended December 31, December
31,
--------------------------------------------
DATA 2001 2000 1999 1998 1997
------------------------ --------- --------- -------- -------- ------------
Premium income $ 15,130 $ 13,565 $ 9,144 $ (65) $ 21
Fee income 5,575 6,577 692 143
Net investment income 11,763 10,333 6,278 3,367 243
Net realized investment
gains (losses) 642 67 (6) 74
--------- --------- -------- -------- ------------
Total revenues 33,110 30,542 16,108 3,519 264
Total benefits and
expenses 24,323 27,152 14,444 2,124 213
Income tax expense 3,294 1,346 641 603 18
--------- --------- -------- -------- ------------
Net income $ 5,493 $ 2,044 $ 1,023 $ 792 $ 33
========= ========= ======== ======== ============
Deposits for
investment-
type contracts $ 10,173 $ 37,344 $ 20,000 $ 62,528 $
Deposits to separate
accounts $ 7,893 $ 14,438 $ 9,389 $ 12,776 $
Self-funded premium
equivalents $ 38,410 $ 16,225 $ $ $
BALANCE SHEET Years Ended December 31,
----------------------------------------------------------
DATA 2001 2000 1999 1998 1997
------------------------- --------- --------- --------- --------- ---------
[Dollars in Thousands]
Investment assets $ 182,445 $ 166,538 $ 112,799 $ 80,353 $ 5,381
Separate account assets 47,359 39,881 23,836 9,045
45,576
Total assets 248,728 247,806 171,710 107,095 16,154
Total policy benefit
liabilities 156,850 144,270 98,421 64,445 84
Total shareholder's
equity 36,074 30,614 16,642 6,538
41,212
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
A. COMPANY RESULTS OF OPERATIONS
1. Consolidated Results
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.
The Financial Services net income increased $336 thousand in 2001
primarily due to realized gains on fixed maturities in 2001 of $679
thousand compared to realized gains in 2000 of $67 thousand. The
Financial Services net income increased in 2000 from 1999 due to
realized gains in 2000 of $67 thousand compared to realized losses in
1999 of $6 thousand and increased margins and fees on larger asset
balances from BOLI sales in 2000.
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.
The increased premium and fee income in 2001 was comprised of growth
in Employee Benefits of $575 thousand partially offset by a decrease
of $12 thousand in Financial Services premium and fee income. The
premium and fee income increase in 2000 was comprised of growth in
Employee Benefits and Financial Services premium and fee income of
$10.1 million and $249 thousand, respectively.
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.
Realized investment gains from fixed maturities increased from $67
thousand in 2000 to $642 thousand in 2001. The realized investment
gains were the result of sales of U.S. Treasury securities.
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.
Deposits for separate accounts decreased $6.5 million in 2001 when
compared to 2000 and increased $5.0 million in 2000 compared to 1999.
These fluctuations are expected in the small market in which the
Company operates.
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.
2. Other Matters
On October 6, 1999, GWL&A entered into a purchase and sales agreement
(the Agreement) with Allmerica Financial Corporation (Allmerica) to
acquire, via assumption reinsurance, Allmerica's group life and
health 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 co-insured 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.
B. EMPLOYEE BENEFITS RESULTS OF OPERATIONS
The results below reflect the Employee Benefits segment for the
following periods:
Years Ended December 31,
-----------------------------------------------
INCOME STATEMENT DATA 2001 2000 1999
------------------------------------- ------------- ------------- -------------
[thousands]
Premium income $ 15,055 $ 13,467 $ 9,195
Fee income 5,202 6,215 430
Net investment income 1,479 1,111
Net realized investment (losses) (37)
------------- ------------- -------------
Total revenues 21,699 20,793 9,625
Policyholder benefits 9,473 14,431 8,378
Operating expenses 5,085 4,087 506
------------- ------------- -------------
Total benefits and expenses 14,558 18,518 8,884
------------- ------------- -------------
Income from operations 7,141 2,275 741
Income tax expense 2,662 908 295
------------- ------------- -------------
Net income $ 4,479 $ 1,367 $ 446
============= ============= =============
Deposits to separate accounts $ 708 $ 3,249 $
Self-funded premium equivalents 38,410 16,225
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.
In order to remain competitive, a focused effort on provider contracting
is essential to ensure strong morbidity results. Sales efforts will be
streamlined and concentrated on self-funded products. Business
development strategies will emphasize greater penetration in the New
York market. Continued emphasis will be placed on expense economies and
synergies to ensure competitive administrative costs. Efficiency will be
improved through implementation of various system initiatives and
through process redesign.
Online enrollment for life and health members was implemented in 2001.
As a further enhancement to our Internet services, online billing is
scheduled for implementation in 2002 and will provide our customers with
improved service, as well as generate cost savings to the Company.
C. FINANCIAL SERVICES RESULTS OF OPERATIONS
The results below reflect the Financial Services segment for the
following periods:
Years Ended December 31,
-----------------------------------------------
INCOME STATEMENT DATA 2001 2000 1999
------------------------------------- ------------- ------------- -------------
[thousands]
Premium income $ 75 $ 98 $ (51)
Fee income 373 362 262
Net investment income 10,284 9,222 6,278
Net realized investment gains 679 67 (6)
(losses)
------------- ------------- -------------
Total revenues 11,411 9,749 6,483
Policyholder benefits 8,226 7,261 4,600
Operating expenses 1,539 1,373 960
------------- ------------- -------------
Total benefits and expenses 9,765 8,634 5,560
------------- ------------- -------------
Income from operations 1,646 1,115 923
Income tax expense 632 438 346
------------- ------------- -------------
Net income $ 1,014 $ 677 $ 577
============= ============= =============
Deposits for investment-type
contracts $ 10,173 $ 37,344 $ 20,000
Deposits to separate accounts 7,185 11,189 9,389
During 2001, the Financial Services segment had an overall increase in
its net income. The increase is due primarily to the realized investment
gains increase of $612 thousand in 2001, as a result of realized gains
on fixed maturities. The additional earnings in 2000 reflected an
increased asset base, an increase in investment margins, and additional
realized gains on fixed maturities.
Premium and fee income decreased $12 thousand in 2001 compared to an
increase of $249 thousand in 2000. The decrease in 2001 was driven by a
decrease in premium income due to normal fluctuations that can be
expected in the small market in which the Company operates. The increase
in 2000 was driven by higher fee income related to growth in separate
accounts.
Deposits for investment-type contracts were down in 2001 due mostly to
BOLI deposits of $5.0 million in 2001 compared to $35.0 million in 2000
and $10.0 million in 1999. The nature of this type of product leads to
large fluctuations from year to year.
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.
D. INVESTMENT OPERATIONS
The Company's primary investment objective is to acquire assets with
duration and cash flow characteristics reflective of the Company's
liabilities, while meeting industry, size, issuer, and geographic
diversification standards. Formal liquidity and credit quality
parameters have also been established.
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 under changing market
conditions, 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.
A summary of the Company's general account invested assets follows:
[Dollars in Thousands] 2001 2000
----------------------------------------------------- -------------- -------------
Fixed maturities, available-for-sale, at fair value $ 178,591 $ 150,631
Short-term investments 3,854 15,907
-------------- -------------
Total invested assets $ 182,445 $ 166,538
============== =============
During 2000, the Company transferred all securities classified as
held-to-maturity into the available-for-sale category. The Company
recorded a $645 unrealized gain associated with this transfer in other
comprehensive income, net of tax.
Fixed maturity investments include public and privately placed corporate
bonds, government bonds and mortgage-backed and asset-backed securities.
Private placement investments that are primarily in the held-to-maturity
category are generally less marketable than publicly traded assets, yet
they typically offer covenant protection that allows the Company, if
necessary, to take appropriate action to protect its investment. The
Company believes that the cost of the additional monitoring and analysis
required by private placements is more than offset by their enhanced
yield.
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.
The distribution of the fixed maturity portfolio by credit rating is
summarized as:
Credit Rating 2001 2000
---------------------------------------- ---------- ----------
AAA 65.0 % 62.8 %
AA 6.8 14.3
A 11.9 7.3
BBB 13.9 15.6
BB and lower 2.4
---------- ----------
TOTAL 100.0 % 100.0 %
========== ==========
E. LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that are dependent
upon the principal product lines currently offered. Life insurance and
pension plan reserves are primarily long-term liabilities. Life
insurance and pension plan reserve requirements are usually stable and
predictable, and are supported primarily by long-term, fixed income
investments.
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.
F. ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board (FASB)
issued SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - A replacement of
FASB Statement No. 125", which revises the standards for accounting for
securitizations, and other transfers of financial assets and collateral,
and requires certain disclosures. SFAS No. 140 is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The adoption of the new SFAS
did not have a significant effect on earnings or the financial position
of the Company.
Effective April 1, 2001, the Company adopted Emerging Issues Task Force
Issue No. 99-20, Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interest in Securitized Financial
Assets (EITF 99-20). This pronouncement requires investors in certain
asset-backed securities to record changes in their estimated yield on a
prospective basis and to apply specific evaluation methods to these
securities for an other-than-temporary decline in value. The adoption of
EITF 99-20 did not have a material impact on the Company's financial
position or results of operations.
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.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Tangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill
and certain other intangibles from an amortization method to an
impairment-only approach. Amortization of goodwill, including goodwill
recorded in past business combinations, will cease upon adoption of this
statement. The Company is required to implement SFAS No. 142 on January
1, 2002 and, although it is still reviewing the provisions of this
Statement, management's preliminary assessment is that the Statement
will 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.
See Note 1 to the Consolidated Financial Statements for additional
information regarding accounting pronouncements.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary risk facing the Company is rising interest rates.
To manage interest rate risk, the Company invests in assets that are
suited to the products that it sells. For products with uncertain timing
of benefit payments such as life insurance, the Company invests in fixed
income assets with expected cash flows that are earlier than the
expected timing of the benefit payments. The Company can then react to
changing interest rates as these assets mature for reinvestment.
The Company has estimated the possible effects of interest rate changes
at December 31, 2001. If interest rates increased by 100 basis points
(1%), the fair value of the fixed income assets would decrease by
approximately $8 million. The calculation used projected cash flows,
discounted back to December 31,2001. The cash projections are shown in
the table below. The table shows cash flows rather than expected
maturity dates because many of the Company's assets have substantial
expected principal payments prior to the final maturity date. The fair
value shown in the table below was calculated using spot discount
interest rates that varied by the year in which the cash flows were
expected to be received. These spot rates in the benchmark calculation
ranged from 3.62% to 8.85%.
Projected Cash Flows by Calendar Year
[$ There- Undiscounted Fair
millions]
2002 2003 2004 2005 2006 after Total Value
----- ----- ------ ------ ------ ------ ----------- ------
Benchmark 18 28 18 18 55 102 238 186
Interest
rates
up 1% 16 21 19 21 57 110 243 178
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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.
First Great-West Life & Annuity Insurance Company
(A wholly-owned subsidiary of Great-West Life & Annuity Insurance Company)
Financial Statements for the Years Ended
December 31, 2001, 2000, and 1999
and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
First Great-West Life & Annuity Insurance Company:
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.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of First Great-West Life & Annuity Insurance
Company as of December 31, 2001 and 2000, and the results of its operations and
its cash flows for the each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
January 28, 2002
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
======================================================================================================================
(Dollars in Thousands)
ASSETS 2001 2000
- ------ -------------------- --------------------
INVESTMENTS:
Fixed maturities, available-for-sale, at fair value
(amortized cost $176,687 and $148,522) $ 178,591 $ 150,631
Short-term investments, available-for-sale (cost
approximates fair value) 3,854 15,907
-------------------- --------------------
Total Investments 182,445 166,538
OTHER ASSETS:
Cash 7,860 8,462
Reinsurance receivable 2,346 1,924
Deferred policy acquisition costs 1,257 1,717
Investment income due and accrued 1,713 1,325
Amounts receivable related to uninsured
accident and health plan claims (net of allowances of
$1,835 and $0) 1,884 2,069
Premiums in course of collection
(net of allowances of $875 and $776) 792 2,502
Deferred income taxes 1,377 1,107
Due from Parent Corporation 107 10,207
Other assets 3,371 4,596
SEPARATE ACCOUNT ASSETS 45,576 47,359
-------------------- --------------------
TOTAL ASSETS $ 248,728 $ 247,806
==================== ====================
(Continued)
======================================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves $ 152,874 $ 137,657
Policy and contract claims 1,175 3,851
Policyholders' funds 2,801 2,762
GENERAL LIABILITIES:
Bank overdrafts 3,104 8,954
Contract deposits 7,761
Other liabilities 1,986 3,388
SEPARATE ACCOUNT LIABILITIES 45,576 47,359
-------------------- --------------------
Total Liabilities 207,516 211,732
-------------------- --------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1,000 par value, 10,000 shares
authorized, 2,500 issued and outstanding 2,500 2,500
Additional paid-in capital 28,600 28,600
Accumulated other comprehensive income 727 1,082
Retained earnings 9,385 3,892
-------------------- --------------------
Total Stockholder's Equity 41,212 36,074
-------------------- --------------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 248,728 $ 247,806
==================== ====================
See notes to financial statements. (Concluded)
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
===================================================================================================================
(Dollars in Thousands)
2001 2000 1999
---------------- ----------------- -----------------
REVENUES:
Premium income (net of premium ceded
of $140, $109, and $64) $ 15,130 $ 13,565 $ 9,144
Fee income 5,575 6,577 692
Net investment income 11,763 10,333 6,278
Net realized gains (losses) on investments 642 67 (6)
---------------- ----------------- -----------------
33,110 30,542 16,108
---------------- ----------------- -----------------
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
reinsurance recoveries of $177, $964,
and $740) 11,132 15,625 4,391
(Decrease) increase in reserves (1,262) (944) 4,003
Interest paid or credited to
contractholders 7,829 7,011 4,584
General and administrative expenses 6,624 5,460 1,466
---------------- ----------------- -----------------
24,323 27,152 14,444
---------------- ----------------- -----------------
INCOME BEFORE INCOME TAXES 8,787 3,390 1,664
PROVISION FOR INCOME TAXES:
Current 3,383 2,307 65
Deferred (89) (961) 576
---------------- ----------------- -----------------
3,294 1,346 641
---------------- ----------------- -----------------
NET INCOME $ 5,493 $ 2,044 $ 1,023
================ ================= =================
See notes to financial statements.
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
==================================================================================================================================
(Dollars in Thousands)
Accumulated
Additional Other
Paid-in Comprehensive Retained
Shares Amount Capital Income (Loss) Earnings Total
--------- ---------- --------------- ------------------ --------------- ---------------
BALANCES, JANUARY 1, 1999 2,500 $ 2,500 $ 12,600 $ 717 $ 825 $ 16,642
Net income 1,023 1,023
Other comprehensive income (loss) (3,051) (3,051)
---------------
Comprehensive income (loss) (2,028)
---------------
Capital contribution 16,000 16,000
--------- ---------- --------------- ------------------ --------------- ---------------
BALANCES, DECEMBER 31, 1999 2,500 2,500 28,600 (2,334) 1,848 30,614
Net income 2,044 2,044
Other comprehensive income 3,416 3,416
---------------
Comprehensive income 5,460
--------- ---------- --------------- ------------------ --------------- ---------------
BALANCES, DECEMBER 31, 2000 2,500 2,500 28,600 1,082 3,892 36,074
Net income 5,493 5,493
Other comprehensive income (loss) (355) (355)
---------------
Comprehensive income 5,138
--------- ---------- --------------- ------------------ --------------- ---------------
BALANCES, DECEMBER 31, 2001 2,500 $ 2,500 $ 28,600 $ 727 $ 9,385 $ 41,212
========= ========== =============== ================== =============== ===============
See notes to financial statements.
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
====================================================================================================================
(Dollars in Thousands)
2001 2000 1999
-------------- -------------- --------------
OPERATING ACTIVITIES:
Net income $ 5,493 $ 2,044 $ 1,023
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization of investments (1,144) (1,032) 59
Realized (gains) losses on sale of investments (642) (67) 6
Amortization of deferred acquisition costs 393 213 112
Deferred income taxes (89) (961) 576
Changes in assets and liabilities:
Accrued interest and other receivables 1,322 (2,086) (1,046)
Policy benefit liabilities 3,484 5,902 13,389
Reinsurance receivable (422) (498) (1,303)
Bank overdrafts (5,850) 7,446 1,508
Contract deposits (7,761) 7,761
Other, net (235) 695 (2,765)
-------------- -------------- --------------
Net cash provided by (used in)
operating activities (5,451) 19,417 11,559
-------------- -------------- --------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and redemptions
of investments:
Fixed maturities:
Held-to-maturity 667 447
Available-for-sale 59,417 50,107 15,683
Purchases of investments:
Fixed maturities:
Held-to-maturity (14,144) (23,000)
Available-for-sale (73,742) (83,570) (31,066)
-------------- -------------- --------------
Net cash used in investing activities $ (14,325) $ (46,940) $ (37,936)
-------------- -------------- --------------
See notes to financial statements. (Continued)
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
====================================================================================================================
(Dollars in Thousands)
2001 2000 1999
-------------- -------------- --------------
FINANCING ACTIVITIES:
Contract deposits, net of withdrawals 9,074 37,447 20,494
Due (from) to Parent Corporation 10,100 (6,905) (5,379)
Capital contributions 16,000
-------------- -------------- --------------
Net cash provided by financing activities 19,174 30,542 31,115
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH (602) 3,019 4,738
CASH, BEGINNING OF YEAR 8,462 5,443 705
-------------- -------------- --------------
CASH, END OF YEAR $ 7,860 $ 8,462 $ 5,443
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid (received) during the year for:
Income taxes $ 0 $ 2,217 $ (1,073)
See notes to financial statements. (Concluded)
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
================================================================================
(Dollars in Thousands)
1. ORGANIZATION
First Great-West Life & Annuity Insurance Company (the Company) is a
wholly-owned subsidiary of Great-West Life & Annuity Insurance Company
(the Parent Corporation). The Company was incorporated as a stock life
insurance company in the State of New York and was capitalized on April
4, 1997, through a $6,000 cash investment from the Parent Corporation
for 2,000 shares of common stock. On December 29, 1997, the Company
issued an additional 500 shares of common stock to the Parent
Corporation for $500. The Company was licensed as an insurance company
in the State of New York on May 28, 1997. The Company does business in
New York through two business segments, as discussed in Note 12.
2. SIGNIFICANT ACCOUNTING POLICIES
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.
Short-term investments include securities purchased with initial
maturities of one year or less and are carried at amortized cost. The
Company considers short-term investments to be available-for-sale and
amortized cost approximates fair value.
Cash - Cash includes only amounts in demand deposit accounts.
Deferred Policy Acquisition Costs - Policy acquisition costs, which
primarily consist of sales commissions related to the production of new
business, have been deferred to the extent recoverable. These costs are
variable in nature and are dependant upon sales volume. 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
totaled $393, $213, and $112 in 2001, 2000, and 1999, 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 and annuity policy reserves with life
contingencies of $145,593 and $135,191 at December 31, 2001 and 2000,
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 $5,995 and $141 at
December 31, 2001 and 2000, respectively, are established at
contractholders' account value.
Reinsurance - Policy reserves ceded to other insurance companies are
carried as a reinsurance receivable on the balance sheet. The cost of
reinsurance related to long-duration contracts is accounted for over
the life of the underlying reinsured policies using assumptions
consistent with those used to account for the underlying policies (See
Note 6).
Policy and Contract Claims - Policy and contract claims include
provisions for reported life and health claims in process of
settlement, valued in accordance with the terms of the related policies
and contracts, as well as provisions for claims incurred and unreported
based primarily on prior experience of the Company.
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%.
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. Although realization
is not assured, management believes it is more likely than not that the
deferred tax asset will be realized.
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - FASB has issued Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - A replacement of FASB Statement No. 125", (SFAS No. 140)
which revises the standards for accounting for securitizations and
other transfers of financial assets and collateral, and requires
certain disclosures. SFAS No. 140 was effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. Certain disclosure requirements under
SFAS No. 140 were effective December 15, 2000, and these requirements
have been incorporated in the Company's financial statements. The
adoption of SFAS No. 140 did not have a material effect on the
financial position or results of operations of the Company.
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interest in Securitized Financial Assets - Effective April
1, 2001, the Company adopted Emerging Issues Task Force Issue No.
99-20, "Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interest in Securitized Financial Assets" (EITF
99-20). This pronouncement requires investors in certain asset-backed
securities to record changes in their estimated yield on a prospective
basis and to apply specific evaluation methods to these securities for
an other-than-temporary decline in value. The adoption of EITF 99-20
did not have a material impact on the Company's financial position or
results of operations.
Business Combinations - On June 29, 2001 Statement of Financial
Accounting Standards (SFAS) No.141, "Business Combinations" (SFAS No.
141) 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. 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.
Goodwill and Other Intangible Assets - On June 29, 2001, SFAS No. 142,
"Goodwill and Other Intangible Assets" (SFAS No. 142) was approved by
the FASB. SFAS No. 142 changes the accounting for goodwill and certain
other intangibles from an amortization method to an impairment-only
approach. Amortization of goodwill, including goodwill recorded in past
business combinations, will cease upon adoption of this statement. The
Company implemented SFAS No. 142 on January 1, 2002 and, although it is
still reviewing the provisions of this Statement, management's
preliminary assessment is that the Statement will not have a material
impact on the Company's financial position or results of operations.
Long Lived Assets - 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 was adopted January 1, 2002
without a material impact on the Company's financial position or
results of operations.
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.
3. ACQUISITIONS
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.
4. RELATED-PARTY TRANSACTIONS
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 whereby, 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:
Years Ended
December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Investment management expense
(included in net investment income) $ 123 $ 128 $ 96
Administrative and underwriting services
(included in general and administrative
expenses) 3,070 2,222 166
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.
5. ALLOWANCES ON POLICYHOLDER RECEIVABLES
The Company maintains an allowance for credit losses at a level that,
in management's opinion, is sufficient to absorb credit losses on its
amounts receivable related to uninsured accident and health plan claims
and premiums in course of collection. Management's judgement is based
on past loss experience and current and projected economic conditions.
Allowances for amounts receivable related to uninsured accident and
health plan claims:
2001 2000 1999
--------------- --------------- ---------------
Balance, beginning of year $ $ $
Provisions charged to operations 1,935
Amounts written off - net (100)
--------------- --------------- ---------------
Balance, end of year $ 1,835 $ 0 $ 0
=============== =============== ===============
Allowances for premiums in course of collection:
2001 2000 1999
--------------- --------------- ---------------
Balance, beginning of year $ 776 $ 580 $
Provisions charged to operations 167 196 580
Amounts written off - net (68)
--------------- --------------- ---------------
Balance, end of year $ 875 $ 776 $ 580
=============== =============== ===============
6. REINSURANCE
In the normal course of business, the Company seeks to limit its
exposure to loss on any single insured and to recover a portion of
benefits paid by ceding risks to other insurance enterprises under
excess coverage and co-insurance contracts. The Company retains 100% of
the first $50 of coverage per individual life and has a maximum
retention of $250 per individual life. Life insurance policies are
first reinsured to the Parent Corporation up to a maximum of $1,250 of
coverage per individual life. Any excess amount is reinsured to a third
party.
Reinsurance contracts do not relieve the Company from its obligations
to policyholders. Failure of reinsurers to honor their obligations
could result in losses to the Company; consequently, allowances are
established for amounts deemed uncollectible. The Company evaluates the
financial condition of its reinsurers and monitors concentrations of
credit risk arising from similar geographic regions, activities, or
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. At December 31, 2001
and 2000, the reinsurance receivable had a carrying value of $2,346 and
$1,924, respectively.
Total reinsurance premiums ceded to the Parent Corporation in 2001,
2000, and 1999 were $107, $77, and $43, respectively.
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 Corporation 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 Corporation.
The following schedule details life insurance in force and life and
accident/health premiums:
Ceded Assumed Percentage
Primarily to Primarily of Amount
Gross the Other From Other Net Assumed
Amount Companies Companies Amount To Net
--------------- ---------------- ------------- ---------------- -------------
December 31, 2001:
Life insurance in force:
Individual $ 493,567 $ 136,613 $ $ 356,954 0.0%
Group 393,861 393,861 0.0%
--------------- ---------------- ------------- ----------------
Total $ 887,428 $ 136,613 $ $ 750,815
=============== ================ ============= ================
Premium Income:
Life insurance $ 3,789 $ 107 $ $ 3,682 0.0%
Accident/health 11,724 268 11,456 0.0%
--------------- ---------------- ------------- ----------------
Total $ 15,513 $ 375 $ $ 15,138
=============== ================ ============= ================
December 31, 2000:
Life insurance in force:
Individual $ 468,463 $ 125,222 $ $ 343,241 0.0%
Group 623,454 623,454 0.0%
--------------- ---------------- ------------- ----------------
Total $ 1,091,917 $ 125,222 $ $ 966,695
=============== ================ ============= ================
Premium Income:
Life insurance $ 3,193 $ 76 $ $ 3,117 0.0%
Accident/health 8,591 76 1,933 10,448 18.5%
--------------- ---------------- ------------- ----------------
Total $ 11,784 $ 152 $ 1,933 $ 13,565
=============== ================ ============= ================
December 31, 1999:
Life insurance in force:
Individual $ 329,346 $ 125,688 $ $ 203,658 0.0%
Group 1,075,000 1,075,000 0.0%
--------------- ---------------- ------------- ----------------
Total $ 1,404,346 $ 125,688 $ $ 1,278,658
=============== ================ ============= ================
Premium Income:
Life insurance $ 685 $ 57 $ 93 $ 721 12.9%
Accident/health 9,471 1,064 23 8,430 0.3%
--------------- ---------------- ------------- ----------------
Total $ 10,156 $ 1,121 $ 116 $ 9,151
=============== ================ ============= ================
7. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 2001 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ------------ ------------ ------------ ------------
Available-for-Sale:
U.S. Government Agencies $ 46,579 $ 1,584 $ 187 $ 47,976 $ 47,976
Collateralized mortgage
obligations 9,954 259 10,213 10,213
Public utilities 7,000 524 7,524 7,524
Corporate bonds 46,480 549 1,213 45,816 45,816
Asset backed securities 66,674 1,030 642 67,062 67,062
----------- ------------ ------------ ------------ ------------
$ 176,687 $ 3,946 $ 2,042 $ 178,591 $ 178,591
=========== ============ ============ ============ ============
Fixed maturities owned at December 31, 2000 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ------------ ------------ ------------ ------------
Available-for-Sale:
U.S. Government Agencies $ 52,169 $ 1,454 $ 25 $ 53,598 $ 53,598
Collateralized mortgage
obligations 9,953 237 9,716 9,716
Public utilities 7,000 218 7,218 7,218
Corporate bonds 29,029 160 991 28,198 28,198
Asset backed securities 50,371 1,743 213 51,901 51,901
----------- ------------ ------------