UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---------- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---------- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
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Commission file number 0-23375
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GE Financial Assurance Holdings, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 54-1829180
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6604 West Broad Street, Richmond, Virginia 23230
(Address of principal executive offices) (Zip Code)
(804) 281-6000
(Registrant's telephone number, including area code)
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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
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At May 15, 1999, 1,000 shares of common stock with a par value of $1.00 were
outstanding. The common stock of GE Financial Assurance Holdings, Inc. is not
publicly traded.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE
FORMAT.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION.
Item 1. Financial Statements.............................................................. 1
Item 2. Management's Discussion and Analysis of Results of Operations...................... 6
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges............................. 8
PART II - OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K.................................................. 9
Signatures.................................................................................. 10
Index to Exhibits........................................................................... 11
PART I - FINANCIAL INFORMATION.
Item 1. Financial Statements.
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Condensed, Consolidated Statement of Current and Retained Earnings
(Unaudited)
Three Months Ended
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(In millions) April 1, March 27,
2000 1999
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Revenues:
Premiums $ 1,229 $ 839
Net investment income 854 748
Net realized investment gains 21 16
Policy fees and other income 266 120
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Total revenues 2,370 1,723
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Benefits and expenses:
Benefits and other changes in policy reserves 995 849
Interest credited 341 314
Commissions 325 159
General expenses 560 260
Amortization of intangibles, net 198 65
Change in deferred acquisition costs, net (331) (136)
Interest expense 27 23
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Total benefits and expenses 2,115 1,534
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Earnings before income taxes, minority interest and
cumulative effect of accounting change 255 189
Provision for income taxes 94 72
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Earnings before minority interest and cumulative
effect of accounting change 161 117
Minority interest 1 ---
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Earnings before cumulative effect of accounting change 160 117
Cumulative effect of accounting change, net of tax --- 25
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Net earnings 160 142
Retained earnings at beginning of period 1,695 1,234
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Retained earnings at end of period $ 1,855 $ 1,376
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See Notes to Condensed, Consolidated Financial Statements.
1
Item 1. Financial Statements (Continued).
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Condensed, Consolidated Statement of Financial Position
April 1, December 31,
(In millions) 2000 1999
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Assets (Unaudited)
Investments:
Fixed maturities available-for-sale, at fair value $39,513 $36,932
Mortgage loans, net of valuation allowance 8,222 3,414
Policy loans 1,634 945
Short-term investments 9,689 267
Other invested assets 1,455 997
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Total investments 60,513 42,555
Cash 2,353 265
Accrued investment income 936 961
Deferred acquisition costs 2,625 2,307
Intangible assets 5,560 4,345
Reinsurance recoverable 1,384 1,537
Other assets 2,175 3,328
Separate account assets 10,854 9,308
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Total assets $86,400 $64,606
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Liabilities and Shareholder's Interest
Liabilities:
Future annuity and contract benefits $60,086 $39,639
Unearned premiums 814 842
Liability for policy and contract claims 2,043 1,886
Other policyholder liabilities 613 626
Accounts payable and accrued expenses 2,229 2,933
Short-term borrowings 1,699 1,036
Separate account liabilities 10,854 9,308
Long-term debt 703 705
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Total liabilities 79,041 56,975
Minority interest 37 475
Shareholder's interest:
Net unrealized investment losses (977) (1,079)
Foreign currency translation adjustments 124 220
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Accumulated non-owner changes in equity (853) (859)
Common stock --- ---
Additional paid-in capital 6,320 6,320
Retained earnings 1,855 1,695
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Total shareholder's interest 7,322 7,156
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Total liabilities and shareholder's interest $86,400 $64,606
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See Notes to Condensed, Consolidated Financial Statements.
2
Item 1. Financial Statements (Continued).
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Condensed, Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
April 1, March 27,
(In millions) 2000 1999
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Cash Flows From Operating Activities
Net earnings $ 160 $ 142
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Increase (decrease) in future policy benefits (1,050) 299
Cumulative effect of accounting change, net of tax --- (25)
Decrease in other assets 1,105 106
Decrease in accounts payable and accrued expenses (373) (209)
Increase in deferred acquisition costs (331) (136)
Other - net (7) 72
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Net cash provided by (used in) operating activities (496) 249
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Cash Flows From Investing Activities
Proceeds from investment securities and other invested assets 1,595 1,375
Principal collected on mortgage and policy loans 155 129
Purchases of investment securities and other invested assets (3,872) (1,685)
Mortgage and policy loan originations (429) (326)
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Net cash used in investing activities (2,551) (507)
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Cash Flows From Financing Activities
Proceeds from issuance of investment contracts 2,091 1,330
Redemption and benefit payments on investment contracts (1,441) (1,007)
Net commercial paper borrowings 616 4
Proceeds from other borrowings 187 306
Payments on other borrowings (141) (469)
Cash received upon assumption of Toho Mutual Life Insurance Company
insurance liabilities 13,177 ---
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Net cash provided by financing activities 14,489 164
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Effect of Exchange Rate Changes on Cash 68 2
Increase (Decrease) in Cash and Equivalents 11,510 (92)
Cash and Equivalents at Beginning of Period 532 378
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Cash and Equivalents at End of Period $12,042 $ 286
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See Notes to Condensed, Consolidated Financial Statements.
3
Item 1. Financial Statements (Continued).
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
(Unaudited)
1. The accompanying condensed, consolidated quarterly financial statements
represent GE Financial Assurance Holdings, Inc. and its consolidated
subsidiaries (collectively, the Company). All significant intercompany
transactions have been eliminated. Certain prior year amounts have been
reclassified to conform to the current year presentation.
2. The condensed, consolidated quarterly financial statements are unaudited.
These statements include all adjustments (consisting of normal recurring
accruals) considered necessary by management to present a fair statement of
the results of operations, financial position and cash flows. The results
reported in these condensed, consolidated financial statements should not be
regarded as necessarily indicative of results that may be expected for the
entire year.
3. A summary of changes in shareholder's interest that do not result directly
from transactions with the share owner follows:
Three Months Ended
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(In millions) April 1, 2000 March 27, 1999
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Net earnings $160 $ 142
Unrealized gains (losses) on investment securities - net 102 (327)
Foreign currency translation adjustments (96) (5)
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Total $166 $(190)
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4. The Company conducts its operations through two business segments: (1)
Wealth Accumulation and Transfer, comprised of products intended to increase the
policyholder's wealth, transfer wealth to beneficiaries or provide a means for
replacing the income of the insured in the event of premature death, and (2)
Lifestyle Protection and Enhancement, comprised of products intended to protect
accumulated wealth and income from the financial drain of unforeseen events and
provide consumer club membership opportunities.
The following is a summary of operating segment activity for the three month
periods ended April 1, 2000 and March 27, 1999:
Three Months Ended
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(In millions) April 1, 2000 March 27, 1999
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Revenues
Wealth Accumulation and Transfer................................... $1,650 $1,212
Lifestyle Protection and Enhancement............................... 720 511
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Total revenues................................................. $2,370 $1,723
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Earnings before income taxes, minority interest and cumulative
effect of accounting change
Wealth Accumulation and Transfer................................... $ 252 $ 154
Lifestyle Protection and Enhancement............................... 3 35
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Total earnings before income taxes, minority interest and
cumulative effect of accounting change........................ $ 255 $ 189
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4
The following is a summary of assets by operating segment as of April 1, 2000
and December 31, 1999:
April 1, December 31,
(In millions) 2000 1999
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Assets
Wealth Accumulation and Transfer................................... $79,491 $57,302
Lifestyle Protection and Enhancement............................... 6,909 7,304
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Total assets................................................... $86,400 $64,606
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5. Effective March 1, 2000, GE Edison Life Insurance Company (GE Edison), a
subsidiary of the Company, acquired, by means of a comprehensive transfer
(the Transfer) in accordance with the Insurance Business Law of Japan (IBL),
the insurance policies and related assets of Toho Mutual Life Insurance
Company (Toho). GE Edison assumed approximately $21.5 billion of policyholder
liabilities, $0.4 billion of accounts payable and accrued expenses, and $20.3
billion of cash, investments and other tangible assets. The difference
between such amounts of $1.6 billion represents the present value of future
profits (PVFP) on the transferred insurance policies. Assets acquired by GE
Edison include approximately $0.5 billion of redeemable preferred stock and
warrants issued by another of the Company's subsidiaries. The redeemable
preferred stock and warrants have been eliminated in the accompanying
Condensed, Consolidated Statement of Financial Position, and the
corresponding amount eliminates the minority interest in the Company
previously held by Toho. The Company has recorded the assets acquired and
liabilities assumed based on their estimated fair values according to
preliminary valuations. Such estimated values may change as additional
information is obtained and the valuations are finalized.
As disclosed in Note 2 to the Company's Consolidated Financial Statements for
the year ended December 31, 1999, included in the Company's Annual Report on
Form 10-K, GE Edison had previously acquired Toho's operating infrastructure
in March 1998. In June 1999, the Financial Supervisory Agency (FSA) of Japan
determined that Toho's continued operation was not in the best interests of
its policyholders given its weak financial position. As a result, the FSA
issued a partial business suspension order to Toho on June 4, 1999. In
connection with such suspension order, the FSA appointed two independent
individuals from the Japanese insurance industry and the Life Insurance
Association of Japan as administrators of Toho (collectively, the
Administrator).
Under the IBL, the sole means for rehabilitating an insolvent insurer is
through a comprehensive transfer of the insurer's insurance policies and
assets to a rescuing company. On December 22, 1999, the Administrator entered
into an agreement with GE Edison, acting as the rescuing company, for the
comprehensive transfer of Toho's insurance policies effective March 1, 2000.
In conjunction with the Transfer, the Administrator restructured Toho's in-
force insurance contracts. The restructured insurance contracts have
surrender charges, reduced benefits and lower policy guarantees. As an
inducement for GE Edison to become the rescuing company, Japan's Policyholder
Protection Corporation contributed approximately $3.6 billion as part of the
assets supporting Toho's restructured policies.
The Company accounted for the Transfer under the purchase method of
accounting and, accordingly, the results of operations of the restructured
insurance contracts and related assets have been included in the Company's
Condensed, Consolidated Statement of Current and Retained Earnings since the
date of the Transfer. In connection with the Transfer, the Company
terminated its former reinsurance arrangements with Toho. Certain amounts in
the Condensed, Consolidated Statement of Current and Retained Earnings for
the three months ended April 1, 2000 reflect the impact of terminating such
reinsurance arrangements. The termination of the reinsurance arrangements
did not have a significant effect on net earnings for the three months ended
April 1, 2000.
6. On April 3, 2000, the Company acquired Phoenix American Life Insurance
Company, a subsidiary of Phoenix Home Life Mutual Insurance Company for
approximately $280 million, Phoenix American Life Insurance Company, based in
Hartford, Connecticut, provides insurance to small companies.
7. On April 14, 2000, the Company signed a definitive agreement to underwrite
and distribute long term care insurance through a long term, strategic
alliance with Citigroup. Under the agreement, the Company will acquire 90%
of the long term care insurance portfolio of Citigroup's Travelers Life &
Annuity unit, as well as enter into a continuing marketing agreement with the
distribution channels of both Citigroup and Travelers. Consummation of
this transaction is subject to regulatory approval.
5
Item 2. Management's Discussion and Analysis of Results of Operations.
Overview
Net earnings before cumulative effect of accounting change for the first three
months of 2000 were $160 million, a $43 million, or 36.8%, increase over the
first three months of 1999. This increase was driven largely by increased
investment income and premiums earned due to the transfer of the insurance
policies and related assets of Toho to GE Edison and growth in sales of certain
existing products, partially offset by increased benefits and other changes in
policy reserves as well as increased general expenses principally relating to
recent acquisitions and the Company's core growth initiatives.
Operating Results
Net investment income increased $106 million, or 14.2%, to $854 million for the
first three months of 2000 from $748 million for the first three months of 1999.
The increase was primarily attributable to higher levels of average invested
assets ($50.6 billion in first three months of 2000 vs. $41.2 billion in first
three months of 1999) due to investments relating to the acquisition of certain
assets of Toho and the acquisition of The Signature Group in July 1999 and
growth in core invested assets, partially offset by a decrease in weighted
average yields to 6.8% for the first three months of 2000 from 7.3% for the
first three months of 1999.
Premiums increased $390 million, or 46.5%, to $1,229 million for the first three
months of 2000 from $839 million for the first three months of 1999. $154
million of the increase is a result of the termination of the Toho reinsurance
arrangements, as discussed in Note 5. The remaining increase primarily relates
to the transfer of the insurance policies of Toho to GE Edison, the acquisition
of The Signature Group in July 1999, the acquisition of Professional Insurance
Company in March 1999 and growth in the Company's life, long-term care and
accident and health businesses.
Policy fees and other income increased $146 million, or 121.7%, to $266 million
in the first three months of 2000 from $120 million in the first three months of
1999. Other income is principally comprised of surrender fees, insurance
charges made against universal life contracts, club membership revenues, fees
assessed against policyholder account values and commission income. The
increase in the first three months of 2000 was primarily due to club membership
revenues associated with the acquisition of The Signature Group in July 1999.
Interest credited increased $27 million, or 8.6%, to $341 million in the first
three months of 2000 from $314 million in the first three months of 1999. This
increase was a result of the increase in the underlying reserves arising
primarily from sales of annuity products. The increased sales resulted from
higher crediting rates that the Company implemented in response to changes in
market conditions and other factors.
Benefits and other changes in policy reserves includes both activity related to
future policy benefits on long-duration life and health insurance products as
well as claim costs incurred during the year under these contracts and property
and casualty policies. These amounts increased $146 million, or 17.2%, to $995
million in the first three months of 2000 from $849 million in the first three
months of 1999. $116 million of this increase results from the termination of
the Toho reinsurance arrangements, as discussed in Note 5. The remaining
increase primarily relates to the acquisition of The Signature Group in July
1999, the transfer of the insurance policies of Toho to GE Edison, the
acquisition of Professional Insurance Company in March 1999 and growth in
certain of the Company's life, long-term care and accident and health products.
Commission expenses increased $166 million, or 104.4%, to $325 million in the
first three months of 2000 from $159 million in the first three months of 1999
primarily due to higher production on certain of the Company's life and annuity
products, the acquisition of The Signature Group in July 1999, the acquisition
of Professional Insurance Company in March 1999 and the termination of
reinsurance arrangements with Toho (commissions formerly paid by Toho related to
insurance ceded by GE Edison).
General expenses were $560 million for the first three months of 2000, an
increase of $300 million or 115.4% over the first three months of 1999 expense
of $260 million. $96 million of the increase results from the termination of
the Toho reinsurance arrangements, as discussed in Note 5. The remaining
increase primarily relates to the transfer of the insurance policies and related
assets of Toho to GE Edison, the acquisition of The Signature Group in July 1999
and increases in compensation and other operating expenses in support of the
Company's core growth initiatives.
6
Item 2. Management's Discussion and Analysis of Results of Operations
(Continued).
Amortization of intangibles, net increased $133 million, or 204.6%, to $198
million for the first three months of 2000 from $65 million for the first three
months of 1999. The Company's significant intangible assets consist of two
components which both result from acquisition activities - the present value of
future profits (PVFP), representing the estimated future gross profit in
acquired insurance and annuity contracts, and goodwill, representing the excess
of purchase price over the fair value of identified net assets of the acquired
entities. Amortization of PVFP increased approximately $126 million as a result
of the transfer of the insurance policies and related assets of Toho to GE
Edison and the acquisition of The Signature Group in July 1999. Amortization of
goodwill increased approximately $7 million as a result of the acquisition of
The Signature Group in July 1999.
Change in deferred acquisition costs, net increased $195 million, or 143.4%, to
$331 million for the first three months of 2000 from $136 million for the first
three months of 1999. The increase in change in deferred acquisition costs, net
was related to the termination of the Toho reinsurance arrangements of $59
million as discussed in Note 5, an increase in deferral of capitalization costs
due to increased product sales as a result of acquisitions and growth in
existing products, as noted above, partially offset by amortization of
previously capitalized acquisition costs.
Interest expense increased $4 million, or 17.4%, to $27 million for the first
three months of 2000 from $23 million for the first three months of 1999. This
increase relates to an increase in weighted average commercial paper borrowings
outstanding, and an increase in the weighted average interest rate on commercial
paper borrowings, for the first quarter of 2000 compared to the first quarter of
the prior year.
Financial Condition
Total assets increased $21.8 billion, or 33.7%, at April 1, 2000 from December
31, 1999. As discussed in Note 5 to the Condensed, Consolidated Financial
Statements presented herewith, assets acquired in connection with the March 1,
2000 comprehensive transfer of the insurance policies and related assets of Toho
to GE Edison, net of amounts eliminated in consolidation, approximated $21.4
billion.
Excluding the assets acquired on March 1, 2000 from Toho, various other
fluctuations in core operations and changes in assets acquired from Toho have
occurred. Assets invested in separate accounts increased by approximately $1.5
billion, or 16.6%, at April 1, 2000 from December 31, 1999 primarily due to
continued sales of variable annuity products and overall increased market value
of the underlying investment funds. Total investments increased approximately
$12.1 billion, or 28.3%, at April 1, 2000 from December 31, 1999. This increase
was primarily driven by purchases of short-term investments and other securities
by GE Edison subsequent to the receipt of Toho cash, investment growth in core
operations, net investment income of approximately $854 million and net
unrealized gains of approximately $170 million. These increases were partially
offset by an $11.1 billion decrease in cash, primarily resulting from purchases
of investments at GE Edison, a $1.1 billion decrease in other assets, primarily
related to decreased balances due from brokers relating to investment
transactions and a decrease in commissions receivable related to the termination
of reinsurance arrangements with Toho, and various other decreases related to
cash flows and amortization affecting the balance of assets acquired from Toho
from the acquisition date through April 1, 2000.
Total liabilities increased $22.1 billion, or 38.7%, at April 1, 2000 from
December 31, 1999. As discussed in Note 5 to the Condensed, Consolidated
Financial Statements presented herewith, liabilities assumed in connection with
the March 1, 2000 transfer of the insurance policies and related assets of Toho
to GE Edison approximated $21.9 billion.
Excluding the liabilities assumed on March 1, 2000 from Toho, various other
fluctuations in core operations and changes in liabilities assumed from Toho
have occurred. Future annuity and contract benefits decreased approximately
$1.1 billion, or 2.6%, at April 1, 2000 from December 31, 1999. This decrease
resulted primarily from surrender payments made to former Toho policyholders
subsequent to the Transfer. Accounts payable and accrued other expenses
decreased $0.4 billion, or 12.7%, due primarily to the timing of net payments
and receipts related to the investment portfolio and normal business activity.
Borrowings (including short-term and long-term debt) increased approximately
$0.7 billion, or 38.0%, primarily as a result of the issuance of additional
commercial paper by the Company, the proceeds of which were used to support
strong solvency margins and claims paying ratings at GE Edison. Separate
account liabilities increased by approximately $1.5 billion, or 16.6%, at April
1, 2000 from December 31, 1999 primarily due to continued sales of variable
annuity products and overall increased market value of the underlying investment
funds.
7
PART II - OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
Exhibit 12.1 Computation of ratio of earnings to fixed charges.
Exhibit 27.1 Financial Data Schedule (filed electronically
herewith).
b. Reports on Form 8-K.
The Company filed a Current Report on Form 8-K, dated March 16, 2000,
reporting (under Item 2 thereof) the comprehensive transfer of the
insurance policies and related assets of Toho Mutual Life Insurance Company
to GE Edison Life Insurance Company.
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GE FINANCIAL ASSURANCE HOLDINGS, INC.
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(Registrant)
Date: May 15, 2000 By: /s/ Thomas W. Casey
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Thomas W. Casey,
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date: May 15, 2000 By: /s/ Richard G. Fucci
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Richard G. Fucci,
Vice President and Controller
(Principal Accounting Officer)
9
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Index to Exhibits
Exhibit No. Page
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12.1 Computation of ratio of earnings to fixed charges 8
27.1 Financial Data Schedule (filed electronically herewith)
10