Exhibit 99.1
Independent Auditors' Report
The Board of Directors
GE Financial Assurance Holdings, Inc.
We have audited the accompanying statement of assets acquired and liabilities
assumed from Toho Mutual Life Insurance Company by GE Edison Life Insurance
Company, an indirect wholly-owned subsidiary of GE Financial Assurance Holdings,
Inc. related to the comprehensive transfer as of March 1, 2000. This statement
of assets acquired and liabilities assumed is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement referred to above is 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 audit provides a reasonable basis for our
opinion.
The statement of assets acquired and liabilities assumed from Toho Mutual Life
Insurance Company was prepared to present the assets acquired and liabilities
assumed by GE Edison Life Insurance Company related to the comprehensive
transfer with Toho Mutual Life Insurance Company pursuant to the transaction
described in Note 1, and is not intended to be a complete presentation of either
Toho Mutual Life Insurance Company or GE Edison Life Insurance Company's assets
and liabilities.
In our opinion, the statement of assets acquired and liabilities assumed
referred to above presents fairly, in all material respects, the assets acquired
and liabilities assumed by GE Edison Life Insurance Company related to the
comprehensive transfer with Toho Mutual Life Insurance Company as of March 1,
2000, pursuant to the transaction described in Note 1, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Richmond, Virginia
May 5, 2000
Statement of Assets Acquired and Liabilities Assumed from
Toho Mutual Life Insurance Company
As of March 1, 2000
(Dollar amounts in millions)
Assets
Fixed maturities available-for-sale $ 289
Corporate and individual loans 4,534
Policy loans 650
Investment in GE Financial Assurance Japan K.K. 508
Other invested assets 499
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Total investments 6,480
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Cash 13,177
Present value of future profits 1,588
Reinsurance receivable 346
Other assets 239
Separate account assets 114
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Total assets $ 21,944
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Liabilities
Future annuity and contract benefits $ 20,685
Liability for policy and contract claims 396
Other policyholder liabilities 352
Accounts payable and accrued expenses 398
Separate account liabilities 114
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Total liabilities $ 21,944
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See accompanying notes to special purpose financial statement.
Assets Acquired and Liabilities Assumed From Toho Mutual Life Insurance Company
Notes to Special Purpose Financial Statement
As of March 1, 2000
(Dollar amounts in millions)
(1) Organization and Summary of Significant Accounting Policies
(a) Organization and Description of Transaction
The accompanying special purpose financial statement reflects the assets
acquired and liabilities assumed by GE Financial Assurance Holdings, Inc. and
its subsidiaries (the Company) in connection with the comprehensive transfer
(the Transfer) of insurance policies and related assets of Toho Mutual Life
Insurance Company (Toho) to the Company's wholly-owned subsidiary GE Edison Life
Insurance Company (GE Edison) effective March 1, 2000.
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. 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 Insurance Business Law (IBL) of Japan, 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. 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 comprehensive transfer, the Administrator restructured
Toho's in-force insurance contracts. The restructured insurance contracts, which
consist primarily of traditional long duration life insurance and annuity
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 (PPC) initially contributed $3,644 as part
of the assets supporting Toho's restructured policies. As part of the Transfer,
certain existing reinsurance, administrative services, lease and employment
contracts have been terminated between GE Edison and Toho. Toho, which continues
to exist as a separate and independent entity, will liquidate its remaining
assets and liabilities. Such liquidation is not expected to have any impact on
the Company's financial position or operations.
The Company has accounted for the Transfer under the purchase method of
accounting.
(b) Basis of Presentation
The accompanying statement of assets acquired and liabilities assumed was
prepared in accordance with generally accepted accounting principles in the
United States (GAAP). The Transfer was based in the Japanese Yen functional
currency. Amounts shown in the accompanying special purpose financial
statement were translated into United States Dollars at the spot rate in effect
at March 1, 2000 (Y105.64/$). The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts and related disclosures. The Company has recorded
the assets acquired and liabilities assumed based on their estimated fair values
according to preliminary valuations. Certain contractual settlement procedures
(including the final determination of the PPC contribution amount, which is not
expected to significantly differ from the initial contribution) with the
Administrator and PPC have not been completed at this time. Estimated fair
values may change as valuations are finalized and as contractual settlements
occur.
Assets Acquired and Liabilities Assumed From Toho Mutual Life Insurance Company
Notes to Special Purpose Financial Statement
As of March 1, 2000
(Dollar amounts in millions)
(c) Investments
GE Edison acquired a limited number of Japanese fixed maturity debt
securities with the Transfer. Approximately $188 of these holdings are Japanese
Government Bonds with 10-15 year maturities. The remaining holdings are
primarily issued by Japanese financial institutions. The Company has designated
the fixed maturities (bonds, notes, and redeemable preferred stock) acquired as
available-for-sale. The fair value for fixed maturities is based on quoted
market prices, where available. For fixed maturities not actively traded, fair
values are estimated using values obtained from independent broker-dealers.
Corporate and individual loans are presented net of allowance for
estimated uncollectible amounts.
Policy loans are stated at their estimated fair values represented by the
unpaid contractual principal balance of such loans of $682, net of allowances
for estimated uncollectible amounts of $32. The allowance for uncollectible
amounts represents the unpaid contractual principal and interest amounts in
excess of related cash surrender values for each policy.
Other invested assets consist of equity real estate properties of $452
located throughout Japan and $47 in equity investments in investment trust
funds. Approximately 50% of the equity real estate properties are at least
partially occupied as branch offices of GE Edison. Other invested assets are
valued at estimated fair values.
(d) Present Value of Future Profits
In conjunction with the Transfer, the Company recorded an intangible
asset, representing the right to receive future gross profits arising from
transferred, restructured insurance and investment contracts. This intangible
asset, called the present value of future profits (PVFP), represents the
actuarially determined present value of the projected future net cash flows
from the transferred policies.
(e) Reinsurance
Amounts due from reinsurers for incurred and estimated future claims are
reflected in the reinsurance receivable asset. Toho had previously ceded
certain insurance contracts to GE Edison. The transferred asset of $346 offsets
GE Edison's previously recorded net reinsurance liability assumed from Toho.
In conjunction with the Transfer, and in order to limit the amount of loss
retention, certain policy risks are reinsured on an excess loss coverage basis
with an unrelated company. The maximum amount of individual ordinary life
insurance retained by GE Edison on any one policy is approximately $2 plus 50%
of the excess of the sum insured over the policy reserves. Reinsurance
contracts do not relieve GE Edison from its obligations to policyholders. In
the event that the reinsurer would be unable to meet its obligation, GE Edison
is liable for the reinsured claims.
(f) Other Assets
Other assets consist primarily of due and unpaid premiums receivable and
accrued investment income.
Assets Acquired and Liabilities Assumed From Toho Mutual Life Insurance Company
Notes to Special Purpose Financial Statement
As of March 1, 2000
(Dollar amounts in millions)
(g) Separate Accounts
The separate account assets and liabilities represent funds held for the
exclusive benefit of certain group annuity and variable life policyholders. The
separate account assets are carried at fair value and are equal to the
liabilities that represent the policyholders' equity in those assets.
(h) Future Annuity and Contract Benefits
Future annuity and contract benefits consist of the liability for life
insurance contracts, investment contracts and accident and health contracts.
Investment contract liabilities are equal to the policyholder's current account
value. The liability for life insurance and accident and health contracts is
calculated based upon actuarial assumptions as to investment yields, mortality,
morbidity, interest, expense, withdrawals and other assumptions based on GE
Edison's experience modified as necessary to reflect anticipated trends and to
include provisions for possible adverse deviations. Reserve interest assumptions
are graded and range from 2.2% to 2.5%. The calculations of future annuity and
contract benefits incorporate the restructured terms of the policy contracts.
(i) Liability for Policy and Contract Claims
The liability for policy and contract claims represents the amount
transferred from Toho needed to provide for the estimated ultimate cost of
settling claims relating to insured events that have occurred on or before March
1, 2000. The estimated liability includes requirements for future payments of
(a) claims that have been reported to the insurer, and (b) claims related to
insured events that have occurred but that have not been reported to the insurer
as of March 1, 2000.
(j) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include certain current tax
liabilities, estimated fair value of amounts payable to brokers on interest rate
swap contracts, lease deposits on real estate, and miscellaneous accrued
liabilities.
(k) Income Taxes
GE Edison files a separate income tax return with the National Tax
Authority of Japan. Deferred taxes are determined by applying the asset and
liability method of accounting for income taxes. Total deferred tax assets of
$345 and total deferred tax liabilities of $326 have been reflected as other
assets in the accompanying special purpose financial statement. Deferred income
tax assets relate primarily to PVFP and accrued expenses. Deferred income tax
liabilities relate primarily to future annuity and contract benefits. Based on
an analysis of GE Edison's tax position, management believes it is more likely
than not that the results of future operations will generate sufficient taxable
income enabling GE Edison to realize all deferred tax assets.
(l) Accounting Pronouncement Not Yet Adopted
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (Statement 133), effective for the Company on January 1,
2001 (as amended by Statement of Financial Accounting Standards No. 137,
Deferral of the Effective Date of Statement No. 133). Upon adoption, all
derivative instruments (including certain derivative instruments embedded in
other contracts) will be recognized in the Company's consolidated balance sheet
at fair value, and changes in such fair values must be recognized immediately in
earnings unless specific hedging criteria are met. Changes in the values of
Assets Acquired and Liabilities Assumed From Toho Mutual Life Insurance Company
Notes to Special Purpose Financial Statement
As of March 1, 2000
(Dollar amounts in millions)
derivatives meeting these hedging criteria will ultimately offset related
earnings effects of the hedged items; effects of qualifying changes in fair
value are to be recorded in equity pending recognition in earnings. Certain
significant refinements and interpretations of Statement 133 are being
deliberated by the FASB, and the effects on accounting for the Company's
financial instruments will depend to some degree on the results of such
deliberations. Management has not determined the total probable effects of
adopting Statement 133, and does not believe that an estimate of such effects
would be meaningful at this time.
(2) Investments
(a) Corporate and Individual Loans
At March 1, 2000, the acquired loan portfolio consisted of 482 corporate loans
located throughout Japan and individual housing loans originated directly by
Toho. In addition, certain individual housing and consumer loans were
originated and are serviced by third party guarantors. Approximately 50,000
individual consumer loans originated throughout Japan have been transferred.
Corporate loans are general unsecured obligations of corporate borrowers. Only
performing corporate loans were acquired in the Transfer. Individual housing
loans are loans secured by the underlying property. In most cases, performance
on the loan is also guaranteed by the housing builder. Loans originated and
serviced by third party guarantors represent both housing and consumer loans.
The following table summarizes corporate and individual loans:
Principal Carrying
Balance Value
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Corporate Loans $3,715 $3,518
Individual Loans:
Housing 1,065 898
Consumer 204 181
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Total 4,984 4,597
Less: Allowance for uncollectible amounts -- (63)
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Net Amount $4,984 $4,534
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The net carrying amount represents the estimated fair value of loans
transferred.
(b) Investment in GE Financial Assurance Japan K.K.
The Company had previously issued preferred stock and warrants of its
subsidiary, GE Financial Assurance Japan K.K., to Toho. On March 1, 2000,
in connection with the Transfer, the Company acquired the preferred stock and
warrants held by Toho and has reflected the preferred stock and warrants as an
investment in GE Financial Assurance Japan K.K. in the accompanying special
purpose financial statement.
Assets Acquired and Liabilities Assumed From Toho Mutual Life Insurance Company
Notes to Special Purpose Financial Statement
As of March 1, 2000
(Dollar amounts in millions)
(3) Derivative Financial Instruments
Derivative financial instruments assumed at March 1, 2000, consisted of an
estimated fair value of amounts payable on interest rate swap contracts of $136.
The notional value of the swap contracts at March 1, 2000 was $10,318. These
contracts require semi-annual net settlement, expire in March 2010 and have been
designated as hedges of future annuity and contract benefits liabilities.