d UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
----------------------------------------
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
-----------------
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 incorporation (I.R.S. Employer Identification
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 whether the registrant is an accelerated filer as defined
in ss.240.12(b)-2 of this chapter.
Yes No X
-------------- --------------
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.
[ ]
The public may read and copy any of the registrant's reports filed with the SEC
at the SEC's Public Reference Room, 450 Fifth Street NW, Washington DC 20549,
telephone 1-800-SEC-0330 or online at (http://www.sec.gov).
As of June 30, 2002, the aggregate market value of the registrant's voting stock
held by non-affiliates of the registrant was $0.
As of March 1, 2003, 7,032,000 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.
17
TABLE OF CONTENTS
Part I Item 1. Business................................................
A. Organization and Corporate Structure...............
B. Business of the Company............................
C. Employee Benefits..................................
D. Financial Services.................................
E. Investment Operations..............................
F. Regulation.........................................
G. Ratings............................................
H. Miscellaneous......................................
Item 2. Properties..............................................
Item 3. Legal Proceedings.......................................
Item 4. Submission of Matters 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.......
B. Dividends............................................
Item 6. Selected Financial Data.................................
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................
A. Company Results of Operations........................
B. Employee Benefits Results of Operations..............
C. Financial Services Results of Operations.............
D. Investment Operations................................
E. Liquidity and Capital Resources......................
F. Accounting Pronouncements............................
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk.............................................
Item 8. Financial Statements and Supplementary Data.............
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................
Part III Item 10. Directors and Executive Officers of the Registrant......
A. Identification of Directors..........................
B. Identification of Executive Officers.................
Item 11. Executive Compensation..................................
A. Compensation of Executive Officers...................
B. Compensation of Directors............................
Item 12. Security Ownership of Certain Beneficial Owners and
Management..............................................
A. Security Ownership of Certain Beneficial Owners......
B. Security Ownership of Management.....................
Item 13. Certain Relationships and Related Transactions..........
Item 14. Controls and Procedures.................................
Part IV Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.............................................
A. Index to Financial Statements........................
B. Index to Exhibits....................................
C. Reports on Form 8-K..................................
Signatures..............................................
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. Great-West Lifeco operates in the U.S. through
GWL&A, and in Canada through its wholly owned subsidiary, The
Great-West Life Assurance Company (Great-West Life). 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 the following two business segments:
Employee Benefits - life and health products for group clients
Financial Services - savings products for public and non-profit
employers, corporations and individuals, and
life insurance products for individuals and
businesses.
On February 17, 2003, Great-West Lifeco announced a definitive agreement
to acquire Canada Life Financial Corporation for $7.3 billion
(Canadian). Canada Life is a Canadian based insurance company with
business principally in Canada, the United Kingdom, the United States
and Ireland. In the United States, Canada Life sells individual and
group insurance and annuity products. Subject to required shareholder
and regulatory approvals, the transaction is expected to close on July
10, 2003.
Canada Life's U.S. operations represented approximately $1.6 billion in
annual revenue in 2002 and $7.4 billion in assets as of December 31,
2002. If the transaction proceeds, Canada Life's U.S. operations will be
integrated with GWL&A's operations. The details of the integration are
still to be determined.
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) 2002 2001 2000
------------------------------------- ------------- ------------- -------------
Premium Income
Employee Benefits
Group life & health $ 9,366 $ 15,054 $ 13,467
------------- ------------- -------------
Total Employee Benefits 9,366 15,054 13,467
------------- ------------- -------------
Financial Services
Savings (2) (8) (11)
Individual insurance 650 84 109
------------- ------------- -------------
Total Financial Services 648 76 98
------------- ------------- -------------
Premium income $ 10,014 $ 15,130 $ 13,565
============= ============= =============
Fee Income
Employee Benefits
Group life & health $ 3,630 $ 5,196 $ 6,214
------------- ------------- -------------
Total Employee Benefits 3,630 5,196 6,214
------------- ------------- -------------
Financial Services
Savings 337 373 362
Individual insurance
401(k) 6 6 1
------------- ------------- -------------
Total Financial Services 343 379 363
------------- ------------- -------------
Fee income $ 3,973 $ 5,575 $ 6,577
============= ============= =============
Deposits for investment-type
contracts (2)
Financial Services $ 3,890 $ 10,173 $ 37,344
------------- ------------- -------------
Total investment-type deposits $ 3,890 $ 10,173 $ 37,344
============= ============= =============
Deposits to Separate Accounts
Employee Benefits $ 2,485 $ 708 $ 3,249
Financial Services 6,396 7,185 11,189
------------- ------------- -------------
Total separate accounts deposits $ 8,881 $ 7,893 $ 14,438
============= ============= =============
Self-funded equivalents -
Employee Benefits (3) $ 19,892 $ 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 administrative services
only, and stop loss policies. Annualized premium equivalents declined
to $21.2 million in 2002 resulting from terminations during the year.
In 2003, 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 strategic benefits solution - an
integrated package of group life and disability insurance,
managed-care programs, and flexible spending accounts. 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 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 POS plan in- network.
The Company offers Internal Revenue Code Section 125 and 129 plans
that enable participants to set aside pre-tax dollars to pay for
non-reimbursed 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, 2002 totaled $418
million, up from $394 million in 2001.
The Company offers group 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.
2. Method of Distribution
The Company distributes its products and services through affiliated
sales staff located in two sales offices. Each sales office works
with insurance brokers, agents, and consultants in its 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
morbidity 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 and dental 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.
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 of the Company develops, administers,
and sells retirement savings and life insurance products and services
for individuals, for employees of public and non-profit employers and
for employees of corporations.
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 investments returns on, the individual's account.
The Company ceased selling its individual fixed annuity product on
March 1, 2003. The 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 were offered by the
Company. Distributions from the amounts allocated to a Guarantee
Period Fund more than six months prior to the maturity date result 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 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).
Investment options for employers and corporations 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 an affiliate of the Company 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 on
annuities. Annuity contracts impose a charge for termination during a
designated period of time after the contracts' 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 amount of annuities in force is measured by account balances. At
December 31, 2002, annuity account balances were $14.6 million for
fixed annuities and $35.2 million for variable annuities. At December
31, 2001, annuity account balances were $6 million for fixed
annuities and $45.6 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 employees.
In 2002 the Company continued its efforts to partner with a large
financial institution to deliver life insurance to the mass market.
This strategy allows the Company to offer traditional life insurance
products through an established institutional channel at a
competitive price.
2. Method of Distribution
The Company primarily uses BenefitsCorp, Inc., an affiliate, 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 401(k) product is sold by licensed and appointed representatives
of the Company.
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.
Institutional term life insurance is marketed through Citibank.
3. Competition
The retirement savings 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 universal life policies 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 and 401(k)) 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.
Reserves for all fixed individual life insurance contracts are
computed on the basis of assumed investment yield, mortality,
morbidity, and expenses (including a margin for adverse deviation).
These reserves are calculated as the present value of future benefits
(including dividends) and expenses less the present value of future
net premiums. The assumptions used in calculating the reserves
generally vary by plan, year of issue, and policy duration.
The 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,
2002, totaled $245 million, comprised of $209.7 million of general
account assets and separate account assets of $35.3 million. Invested
assets under management at December 31, 2001, totaled $228 million,
comprised of $182.4 million of general account assets and separate
account assets of $45.6 million.
The Company's general account investments are in a broad range of asset
classes and 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.
GWL&A manages the characteristics of the Company's 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. GWL&A
observes strict asset and liability matching guidelines on behalf of the
Company designed to ensure that the Company's investment portfolio will
appropriately meet the cash flow and income requirements of the
Company's liabilities.
GWL&A routinely monitors and evaluates the status of the Company's
investments in light of current economic conditions, trends in capital
markets, and other factors. These other factors include investment size,
quality, concentration by issuer and industry and other diversification
considerations relevant to fixed maturity investments.
The Company's long-term bond portfolio remained at 98% of investment
assets as of December 31, 2002, compared to 98% in 2001. Credit risk for
the portfolio as a whole is reduced by investing primarily in investment
grade bonds. As of December 31, 2002 and 2001, 100% and 98%,
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 2002 2001 2000 1999 1998
----------------------- --------- ---------- ---------- ---------- ----------
U.S. Government
Securities and
Agencies $ 70 $ 48 $ 54 $ 22 $ 24
Mortgage-backed
securities 9 10 10 19 20
Bonds 64 53 35 35 35
Asset-backed
securities 63 67 52 35
--------- ---------- ---------- ---------- ----------
Total 206 178 151 111 79
Short-term
investments 4 4 16 2 1
--------- ---------- ---------- ---------- ----------
Total investments $ 210 $ 182 $ 167 $ 113 $ 80
========= ========== ========== ========== ==========
Cash $ 12 $ 8 $ 8 $ 5 $ 1
Accrued investment
income 2 2 1 1 1
Net
Investment Earned Net
Income Investment
For the year: [Thousands] Income Rate
-------------------- ------------- --------------
2002 $ 12,844 6.83 %
2001 11,763 7.04 %
2000 10,333 6.99 %
1999 6,278 6.79 %
1998 3,367 6.35 %
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, 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, 2002 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 is intended to
standardize accounting and reporting to state insurance departments
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. GWL&A's broker-dealer subsidiaries are regulated by
the Securities and Exchange Commission (SEC) and the National
Association of Securities Dealers, Inc. GWL&A's investment advisor
subsidiary and transfer agent subsidiary are regulated by the SEC.
Certain of the Company's separate accounts, mutual funds, and
variable insurance 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. 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. In connection with the announcement by Great-West
Lifeco regarding the acquisition of Canada Life, the Company's ratings
are under review with negative implications. Upon completion of the
acquisition of Canada Life by Great-West Lifeco, Standard & Poor's
Corporation has indicated it is likely that the company's rating will be
lowered one notch and a negative outlook maintained.
Rating Agency Measurement Current
Rating
------------------------------ ------------------------------- --------------
A.M. Best Company, Inc. Financial strength,
operating A++(1) performance and
market profile
Fitch, Inc. Financial strength AA+(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) Very Strong (second 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
The Company's BOLI business is comprised of a few customers that account
for the majority of the total deposits. The BOLI contracts do not
explicitly restrict surrenders, however, significant tax penalties will
arise if money is withdrawn from the contracts. The contracts do limit
the amount of money exchanged to new policies on a tax-free basis to 20%
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 2002 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
to 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.
INCOME STATEMENT Years Ended December 31,
-----------------------------------------------------------
DATA 2002 2001 2000 1999 1998
------------------------ --------- --------- -------- -------- ------------
[Dollars in Thousands]
Premium income $ 10,014 $ 15,130 $ 13,565 $ 9,144 $ (65)
Fee income 3,973 5,575 6,577 692 143
Net investment income 12,844 11,763 10,333 6,278 3,367
Net realized investment
gains (losses) 363 642 67 (6) 74
--------- --------- -------- -------- ------------
Total revenues 27,194 33,110 30,542 16,108 3,519
Total benefits and
expenses 21,970 24,323 27,152 14,444 2,124
Income tax expense 1,607 3,294 1,346 641 603
--------- --------- -------- -------- ------------
Net income $ 3,617 $ 5,493 $ 2,044 $ 1,023 $ 792
========= ========= ======== ======== ============
Deposits for
investment-
type contracts $ 3,890 $ 10,173 $ 37,344 $ 20,000 $ 62,528
Deposits to separate
accounts $ 8,881 $ 7,893 $ 14,438 $ 9,389 $ 12,776
Self-funded premium
equivalents $ 19,892 $ 38,410 $ 16,225 $ $
BALANCE SHEET Years Ended December 31,
----------------------------------------------------------
DATA 2002 2001 2000 1999 1998
------------------------- --------- --------- --------- --------- ---------
[Dollars in Thousands]
Investment assets $ 209,707 $ 182,445 $ 166,538 $ 112,799 $ 80,353
Separate account assets 35,250 45,576 47,359 39,881 23,836
Total assets 266,324 249,114 247,806 171,710 107,095
Total policy benefit
liabilities 175,427 156,850 144,270 98,421 64,445
Total shareholder's
equity 47,770 41,212 36,074 30,614 16,642
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, 2002
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 of $3.6 million decreased $1.9
million or 34.2% in 2002 when compared to 2001. The Employee Benefits
segment contributed $3.2 million to the consolidated results, and the
Financial Services segment contributed $404 thousand. Of total
consolidated net income for 2002, 2001, and 2000, the Employee
Benefits segment contributed 89%, 82%, and 67%, respectively, while
the Financial Services segment contributed 11%, 18%, and 33%,
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
$3.2 million, $4.5 million, and $1.4 million being recorded in 2002,
2001, and 2000, respectively.
The Financial Services net income decreased $598 thousand in 2002
primarily due to a reduction in realized gains on fixed maturities.
The Financial Services net income increased in 2001 from 2000 due to
realized gains on fixed maturities in 2001 of $679 thousand compared
to realized gains in 2000 of $67 thousand.
In 2002 total Company revenues decreased $5.9 million or 18% to $27.2
million when compared to 2001. The decline in revenues in 2002 was
comprised of decreased premium and fee income of $6.7 million,
decreased realized gain on investments of $279 thousand, partially
offset by increased net investment income of $1.1 million.
The decreased premium and fee income in 2002 was comprised of a
decline in Employee Benefits of $7.3 million partially offset by an
increase of $536 thousand in Financial Services premium and fee
income. The premium and fee income increase in 2001 was comprised of
growth in Employee Benefits premium and fee income of $569 thousand.
Net investment income grew to $12.8 million and $11.8 million in 2002
and 2001, respectively, from $10.3 million in 2000, primarily as a
result of growth in policyholder reserves on BOLI business and
increased shareholder's equity.
Total benefits and expenses decreased $2.4 million or 9.7% in 2002
when compared to 2001. The Employee Benefits segment contributed $4
million of the decrease in 2002 while the Financial Services segment
contributed an increase of $1.6 million. The decrease in total
benefits and expenses in the Employee Benefits segment in 2002
resulted primarily from loss of membership due to higher terminations
and reduced operating expenses. The increase in Financial Services
related to additional interest credits on BOLI account balances and
increased operating expenses associated with growth in the Company's
business. Total benefits and expenses decreased $2.8 million in 2001
when compared to 2000. This decrease was primarily due to a decrease
in the Employee Benefits segment.
Income tax expense decreased $1.7 million or 51% in 2002 when
compared to 2001. Income tax expense increased $1.9 million in 2001
when compared to 2000. The changes in income tax expense reflect the
impact of the fluctuations in pre-tax earnings.
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 which would have been earned
under such contracts if they had been written as traditional
indemnity programs.
Deposits for investment-type contracts decreased $6.3 million or 62%
and decreased $27 million or 73% in 2002 and 2001, respectively, due
to BOLI deposits. BOLI sales are single premium and individually
large in nature, and therefore, can vary significantly from year to
year.
Deposits for separate accounts increased $988 thousand in 2002 when
compared to 2001 and decreased $6.5 million in 2001 compared to 2000.
These fluctuations are expected in the small market in which the
Company operates.
Self-funded premium equivalents decreased $18.5 million or 48% in
2002 when compared to 2001 primarily due to membership decline in the
Employee Benefits segment.
Total assets and liabilities increased $17 million or 7% and $1
million or 1% in 2002 and 2001, respectively. The increase in 2002 is
primarily attributable to interest credited to existing Financial
Services reserves and the related invested assets.
2. Other Matters
On February 17, 2003, Great-West Lifeco announced a definitive
agreement to acquire Canada Life Financial Corporation for $7.3
billion (Canadian). Canada Life is a Canadian based insurance company
with business principally in Canada, the United Kingdom, the United
States and Ireland. In the United States, Canada Life sells
individual and group insurance and annuity products. Subject to
required shareholder and regulatory approvals, the transaction is
expected to close on July 10, 2003.
Canada Life's U.S. operations represented approximately $1.6 billion
in annual revenue in 2002 and $7.4 billion in assets as of December
31, 2002. If the transaction proceeds, Canada Life's U.S. operations
will be integrated with GWL&A's operations. The details of the
integration are still to be determined.
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 2002 2001 2000
------------------------------------- ------------- ------------- -------------
[thousands]
Premium income $ 9,366 $ 15,054 $ 13,467
Fee income 3,630 5,196 6,214
Net investment income 1,992 1,479 1,111
Net realized investment 234 (37)
gains(losses)
------------- ------------- -------------
Total revenues 15,222 21,692 20,792
Policyholder benefits 6,537 9,472 14,431
Operating expenses 4,022 5,059 4,081
------------- ------------- -------------
Total benefits and expenses 10,559 14,531 18,512
------------- ------------- -------------
Income from operations 4,663 7,161 2,280
Income tax expense 1,450 2,670 910
------------- ------------- -------------
Net income $ 3,213 $ 4,491 $ 1,370
============= ============= =============
Self-funded premium equivalents $ 19,892 $ 38,410 $ 16,225
During 2002, the Employee Benefits segment had an overall decrease in
its net income. The decrease was due primarily to a reduction in
business volume, resulting in net income of $3.2 million in 2002,
compared with $4.5 million in 2001.
Equivalent premium revenue and fee income for group life and health
decreased 44% from 2001 levels as the result of continued membership
decline. This reduction was partially offset by increased pricing.
Policyholder benefits decreased $2.9 million or 31% in 2002 when
compared to 2001, reflecting lower group life and health claims
primarily as a result of the decline in membership.
Expenses decreased $1 million or 20% in 2002 when compared to 2001, due
to a reduction in business volume primarily as a result of the decline
in membership.
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 billing was implemented in 2002 for our small to mid size life
and health customers. As a further enhancement to our Internet services,
online billing for our large customers is scheduled for implementation
in 2003. This initiative will continue to 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 2002 2001 2000
------------------------------------- ------------- ------------- -------------
[thousands]
Premium income $ 648 $ 76 $ 98
Fee income 343 379 363
Net investment income 10,852 10,284 9,222
Net realized investment gains 129 679 67
------------- ------------- -------------
Total revenues 11,972 11,418 9,750
Policyholder benefits 9,044 8,227 7,261
Operating expenses 2,367 1,565 1,379
------------- ------------- -------------
Total benefits and expenses 11,411 9,792 8,640
------------- ------------- -------------
Income from operations 561 1,626 1,110
Income tax expense 157 624 436
------------- ------------- -------------
Net income $ 404 $ 1,002 $ 674
============= ============= =============
Deposits for investment-type
contracts $ 3,890 $ 10,173 $ 37,344
Deposits to separate accounts 8,881 7,893 14,438
During 2002, the Financial Services segment had a significant decrease
in its net income attributable to a reduction in realized gains on fixed
maturities. The higher realized gains in 2001 were a contributing factor
to the significant increase in net income in 2001 to $1 million from
$674 thousand in 2000.
Deposits for investment-type contracts decreased $6.3 million or 62% and
decreased $27 million or 73% in 2002 and 2001, respectively. In both
years the decreases were a result of reductions in BOLI sales. BOLI
premiums and deposits were $0 in 2002 compared to $5 million in 2001 and
$35 million in 2000 The reduction in BOLI premiums and deposits was
impacted by lower U.S. equity markets, lower fixed interest rates and
recent negative publicity regarding this type of insurance product.
Deposits for separate accounts increased $988 thousand in 2002 when
compared to 2001 and decreased $6.5 million in 2001 compared to 2000.
These fluctuations are expected in the small market in which the Company
operates.
Fee income decreased $36 thousand in 2002 compared to an increase of $16
thousand in 2001. The fluctuations in fee income were a result of the
changes in asset values in the separate accounts over the three-year
period due to U.S. equity markets and sales activity.
Net investment income increased $568 thousand in 2002 compared to 2001
and $1.1 million in 2001 compared to 2000. The increase is the result of
interest income associated with BOLI business.
Total benefits and expenses increased $1.6 million in 2002 compared to
an increase of $1.2 million in 2001, 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.
In managing the Company's assets, GWL&A 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 range of possible
market changes upon investments and policyholder benefits, GWL&A ensures
that the Company's investment portfolio is appropriately structured to
fulfill financial obligations to the Company's policyholders.
A summary of the Company's general account invested assets follows:
[Dollars in Thousands] 2002 2001
----------------------------------------------------- -------------- -------------
Fixed maturities, available-for-sale, at fair value $ 205,681 $ 178,591
Short-term investments 4,026 3,854
-------------- -------------
Total invested assets $ 209,707 $ 182,445
============== =============
During 2000, the Company transferred all securities classified as
held-to-maturity into the available-for-sale category. The Company
recorded a $645 thousand 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 enhanced 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
GWL&A for 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 follows:
Credit Rating 2002 2001
----------------------------------------------- ---------- ----------
AAA 60.3 % 65.0 %
AA 7.4 6.8
A 15.1 11.9
BBB 17.2 13.9
BB and lower 0.0 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 $15.6 million and $11.7
million as of December 31, 2002 and 2001, 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 revised 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. 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 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, ceased upon adoption of this
statement. The Company implemented SFAS No. 142 on January 1, 2002 and,
adoption of this 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 superceded prior 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 effective January 1, 2002, and adoption of
this statement did not have a material impact on the Company's financial
position or results of operations.
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, 2002. If interest rates increased by 100 basis points
(1%), the fair value of the fixed income assets would decrease by
approximately $7 million. The calculation used projected cash flows,
discounted back to December 31, 2002. The cash projections are shown in
the table below. The table shows cash flows rather than expected
maturity dates because many of the Company's assets have substantial
expected principal payments prior to the final maturity date. The fair
value shown in the table below was calculated using spot discount
interest rates that varied by the year in which the cash flows were
expected to be received. These spot rates in the benchmark calculation
ranged from 2.77% to 7.70%.
Projected Cash Flows by Calendar Year
[$ millions] There- Undiscounted Fair
2003 2004 2005 2006 2007 after Total Value
----- ----- ------ ------ ------ ------ ------------ ------
Benchmark 31 32 43 39 32 74 251 214
Interest
rates
up 1% 29 24 42 48 25 87 255 207
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following are the Company's Financial Statements for the years ended
December 31, 2002, 2001, and 2000, 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, 2002, 2001, and 2000
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, 2002 and 2001, and the related
statements of income, stockholder's equity, and cash flows for each of the three
years in the period ended December 31, 2002. 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, 2002 and 2001, and the results of its operations and
its cash flows for the each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Denver, Colorado
January 27, 2003
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
==============================================================================================
(Dollars in Thousands)
ASSETS 2002 2001
- ------
----------------- -----------------
INVESTMENTS:
Fixed maturities, available-for-sale, at fair value
(amortized cost $195,893 and $176,687) $ 205,681 $ 178,591
Short-term investments, available-for-sale (cost
approximates fair value) 4,026 3,854
----------------- -----------------
Total Investments 209,707 182,445
OTHER ASSETS:
Cash 11,550 7,860
Reinsurance receivable 2,870 2,346
Deferred policy acquisition costs 1,069 1,257
Investment income due and accrued 1,807 1,713
Amounts receivable related to uninsured
accident and health plan claims (net of allowances of
$1,491 and $1,835) 903 2,377
Premiums in course of collection
(net of allowances of $300 and $875) 456 792
Deferred income taxes 1,377
Other assets 2,712 3,371
SEPARATE ACCOUNT ASSETS 35,250 45,576
----------------- -----------------
TOTAL ASSETS $ 266,324 $ 249,114
================= =================
(Continued)
==============================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves $ 169,985 $ 152,874
Policy and contract claims 2,819 1,175
Policyholders' funds 2,623 2,801
GENERAL LIABILITIES:
Due to Parent Corporation 3,125 386
Bank overdrafts 1,370 3,104
Deferred taxes 670
Other liabilities 2,712 1,986
SEPARATE ACCOUNT LIABILITIES 35,250 45,576
----------------- -----------------
Total Liabilities 218,554 207,902
----------------- -----------------
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 3,668 727
Retained earnings 13,002 9,385
----------------- -----------------
Total Stockholder's Equity 47,770 41,212
----------------- -----------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 266,324 $ 249,114
================= =================
See notes to financial statements. (Concluded)
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
==============================================================================================
(Dollars in Thousands)
2002 2001 2000
--------------- --------------- --------------
REVENUES:
Premium income (net of premium ceded
of $496, $384, and $152) $ 10,014 $ 15,130 $ 13,565
Fee income 3,973 5,575 6,577
Net investment income 12,844 11,763 10,333
Net realized gains on investments 363 642 67
--------------- --------------- --------------
27,194 33,110 30,542
--------------- --------------- --------------
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
reinsurance recoveries of $306, $177,
and $964) 6,848 11,132 15,625
Increase (decrease) in reserves 136 (1,262) (944)
Interest paid or credited to
contractholders 8,597 7,829 7,011
General and administrative expenses 6,389 6,624 5,460
--------------- --------------- --------------
21,970 24,323 27,152
--------------- --------------- --------------
INCOME BEFORE INCOME TAXES 5,224 8,787 3,390
PROVISION FOR INCOME TAXES:
Current 694 3,383 2,307
Deferred 913 (89) (961)
--------------- --------------- --------------
1,607 3,294 1,346
--------------- --------------- --------------
NET INCOME $ 3,617 $ 5,493 $ 2,044
=============== =============== ==============
See notes to financial statements.
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
==============================================================================================
(Dollars in Thousands)
Accumulated
Additional Other
Paid-in Comprehensive Retained
Shares Amount Capital Income (Loss) Earnings Total
------------- ------------- ------------- ---------------- ------------- ------------
BALANCES, JANUARY 1, 2000 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
------------- ------------- ------------- ---------------- ------------- ------------
Net income 3,617 3,617
Other comprehensive income 2,941 2,941
------------
Comprehensive income 6,558
------------- ------------- ------------- ---------------- ------------- ------------
BALANCES, DECEMBER 31, 2002 2,500 $ 2,500 $ 28,600 $ 3,668 $ 13,002 $ 47,770
============= ============= ============= ================ ============= ============
See notes to financial statements.
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
==============================================================================================
(Dollars in Thousands)
2002 2001 2000
------------ ------------ -------------
OPERATING ACTIVITIES:
Net income $ 3,617 $ 5,493 $ 2,044
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization of investments (928) (1,144) (1,032)
Realized (gains) losses on sale of (363) (642) (67)
investments
Amortization of deferred acquisition costs 560 393 213
Deferred income taxes 913 (89) (961)
Changes in assets and liabilities:
Accrued interest and other receivables 242 1,322 (2,086)
Policy benefit liabilities 18,660 3,484 5,902
Reinsurance receivable (524) (422) (498)
Bank overdrafts (1,734) (5,850) 7,446
Other, net (1,189) (235) 695
------------ ------------ -------------
------------ ------------ -------------
Net cash provided by operating activities 19,254 2,310 11,656
------------ ------------ -------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and redemptions of investments:
Fixed maturities:
Held-to-maturity 667
Available-for-sale 29,686 59,417 50,107
Purchases of investments:
Fixed maturities:
Held-to-maturity (14,144)
Available-for-sale (47,772) (73,742) (83,570)
------------ ------------ -------------
Net cash used in investing activities (18,086) (14,325) (46,940)
------------ ------------ -------------
See notes to financial statements. (Continued)
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
==============================================================================================
(Dollars in Thousands)
2002 2001 2000
------------ ------------ -------------
FINANCING ACTIVITIES:
Contract deposits, net of withdrawals (217) 1,313 45,208
Due (from) to Parent Corporation 2,739 10,100 (6,905)
Capital contributions
------------ ------------ -------------
Net cash provided by financing activities 2,522 11,413 38,303
------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH 3,690 (602) 3,019
CASH, BEGINNING OF YEAR 7,860 8,462 5,443
------------ ------------ -------------
CASH, END OF YEAR $ 11,550 $ 7,860 $ 8,462
============ ============ =============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 0 $ 0 $ 2,217
Income taxes are paid by the Parent Corporation on behalf of the Company
as part of the income tax allocation agreement.
See notes to financial statements. (Concluded)
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
================================================================================
(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 2001 and 2000 financial
statements and related footnotes to conform to the 2002 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 (net of deferred taxes) 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.
Gains and losses realized on disposal of investments are determined on a
specific identification basis.
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 dependent 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 $560, $393 and $213 in 2002, 2001, and 2000, respectively.
Separate Accounts - Separate account assets and related liabilities are
carried at fair value. The Company's separate accounts invest in shares
of Maxim Series Fund, Inc. and Orchard Series Fund, open-end management
investment companies which are affiliates of the Parent Corporation,
shares of other non-affiliated mutual funds, and government and
corporate bonds. 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.
Life Insurance and Annuity Reserves - Life insurance and annuity policy
reserves with life contingencies of $154,348 and $145,593 at December
31, 2002 and 2001, 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 $14,379
and $5,995 at December 31, 2002 and 2001, 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 4.0% and 4.2% in 2002 and 2001.
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, ceased upon adoption of this statement. The
Company implemented SFAS No. 142 on January 1, 2002. Adoption of this
Statement did not have a material impact on the Company's financial
position or results of operations.
Selected Loan Loss Allowance Methodology - In July 2001, the SEC
released Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance
Methodology and Documentation Issues (SAB 102). SAB 102 summarizes
certain of the SEC's views on the development, documentation and
application of a systematic methodology for determining allowances for
loan and lease losses. Adoption of SAB 102 by the Company did 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.
Technical Corrections - April 2002, the FASB issued Statement No. 145
"Rescission of FASB No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections" (SFAS No. 145). FASB No. 4 required all
gains or losses from extinguishment of debt to be classified as
extraordinary items net of income taxes. SFAS No. 145 requires that
gains and losses from extinguishment of debt be evaluated under the
provision of Accounting Principles Board Opinion No. 30, and be
classified as ordinary items unless they are unusual or infrequent or
meet the specific criteria for treatment as an extraordinary item. This
statement is effective January 1, 2003. The Company does not expect this
statement to have a material effect on the Company's financial position
or results of operations.
Costs Associated With Exit or Disposal Activities - In July 2002, the
FASB issued Statement No. 146 "Accounting for Costs Associated With Exit
or Disposal Activities" (SFAS No. 146). This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
This statement requires recognition of a liability for a cost associated
with an exit or disposal activity when the liability is incurred, as
opposed to when the entity commits to an exit plan under EITF 94-3. SFAS
No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company does not expect this
statement to have 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, 2002, 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, 2002.
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 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. 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,
-------------------------------------
2002 2001 2000
============================================ ----------- ----------- -----------
Investment management expense
============================================
(included in net investment income) $ 130 $ 123 $ 128
============================================
Administrative and underwriting services
============================================
(included in general and administrative
============================================
expenses) 3,961 3,070 2,222
============================================
==============================================================================================
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
Amount receivable for accident and health plan claims and premiums in
the course of collection are generally uncollateralized. 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.
Activity in the allowance for amounts receivable related to uninsured
accident and health plan claims is as follows:
2002 2001 2000
------------- ------------- -------------
Balance, beginning of year $ 1,835 $
Provisions charged to operations 869 1,935
Amounts written off - net (1,213) (100)
------------- ------------- -------------
Balance, end of year $ 1,491 $ 1,835 0
============= ============= =============
Activity in the allowance for premiums in course of collection is as follows:
2002 2001 2000
------------- ------------- -------------
Balance, beginning of year $ 875 $ 776 $ 580
Provisions charged (reversed) to (442) 167 196
operations
Amounts written off - net (133) (68)
------------- ------------- -------------
Balance, end of year $ 300 $ 875 $ 776
============= ============= =============
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, 2002 and
2001, the reinsurance receivable had a carrying value of $2,870 and
$2,346, respectively.
Total reinsurance premiums ceded to the Parent Corporation in 2002,
2001, and 2000 were $343, $107 and $77, respectively.
The following schedule details life insurance in force and life and
accident/health premiums:
Percentage
of Amount
Reinsurance Reinsurance Assumed
Direct Ceded Assumed Net To Net
------------- ------------- ------------ ------------- -----------
December 31, 2002:
Life insurance in force:
Individual $ 1,489,496 $ 603,672 $ $ 885,824 0.0%
Group 418,254 418,254 0.0%
------------- ------------- ------------ -------------
Total $ 1,907,750 $ 603,672 $ $ 1,304,078
============= ============= ============ =============
Premium Income:
Life $ 3,384 $ 343 $ $ 3,041 0.0%
insurance
7,120 145 6,975 0.0%
Accident/health
------------- ------------- ------------ -------------
Total $ 10,504 $ 488 $ $ 10,016
============= ============= ============ =============
December 31, 2001:
Life insurance in force:
Individual $ 493,567 $ 136,613 $ $ 356,954 0.0%
Group 393,861 393,861 0.0%
--