UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-K
__________________________
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
________________
Commission file number 0-23375
________________
GE Financial Assurance Holdings, Inc.
(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 (804) 281-6000
(Address of principal executive offices) (Zip Code) (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:
Common Stock, par value $1.00 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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. [X]
At March 23, 2001, 1,000 shares of voting common stock, which constitute all of
the outstanding common equity, with a par value of $1.00 per share were
outstanding.
Aggregate market value of the outstanding common equity held by nonaffiliates of
the registrant at March 23, 2001. None.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business.............................................................................. 3
Item 2. Properties............................................................................ 31
Item 3. Legal Proceedings..................................................................... 32
Item 4. Submission of Matters to a Vote of Security Holders................................... 32
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............. 33
Item 6. Selected Financial Data............................................................... 33
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition. 34
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................ 48
Item 8. Financial Statements and Supplementary Data........................................... 51
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 90
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 90
Item 11. Executive Compensation............................................................... 90
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 90
Item 13. Certain Relationships and Related Transactions....................................... 90
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... 90
PART I
Item 1. Business.
GE Financial Assurance Holdings, Inc. ("GE Financial Assurance", together
with its subsidiaries, the "Company"), through its direct and indirect
subsidiaries, is engaged in the life insurance, annuity, long-term care
insurance, mutual fund, retirement investment plan, income protection package,
and property and casualty insurance business almost entirely in North America
and Asia.
Ownership of the Company
All the outstanding common stock of GE Financial Assurance is owned by
General Electric Capital Corporation ("GE Capital"), a wholly owned subsidiary
of General Electric Capital Services, Inc., which in turn is wholly owned,
directly or indirectly, by General Electric Company ("GE"). GE Financial
Assurance's principal executive offices are located at 6604 West Broad Street,
Richmond, Virginia 23230 (telephone (804) 281-6000).
GE Capital provides a wide variety of financing, asset management, and
insurance products and services which are organized into five operating
segments. These segments are (1) consumer services; (2) equipment management;
(3) mid-market financing; (4) specialized financing; and (5) specialty
insurance. The long-term debt obligations of GE Capital are rated "AAA" by
Standard & Poor's Corporation ("S&P") and "Aaa" by Moody's Investors Services,
Inc. ("Moody's").
General Description of Business
GE Financial Assurance is a holding company that, through its subsidiaries,
provides consumers financial security solutions by selling a wide variety of
insurance, investment and retirement products and income protection packages
almost entirely in North America and Asia. The Company effectively began
operations in April 1993 with the acquisition of GNA Corporation. The Company
has continued to broaden its operations through a series of acquisitions and
other transactions consummated since 1993. See "Acquisitions and Other
Transactions." The Company's product offerings are divided along two major
segments of consumer needs: (i) Wealth Accumulation and Transfer, and (ii)
Lifestyle Protection and Enhancement.
The Company's principal product lines under the Wealth Accumulation and
Transfer segment are (i) annuities (deferred and immediate; either fixed or
variable), (ii) life insurance (universal, term, ordinary and group), (iii)
guaranteed investment contracts (GICs) including funding agreements and (iv)
mutual funds and retirement plans. Wealth Accumulation and Transfer products are
used by customers as vehicles for accumulating wealth, often on a tax-deferred
basis, transferring wealth to beneficiaries, or providing a means to replace the
insured's income in the event of premature death. The Company's distribution of
Wealth Accumulation and Transfer products is currently accomplished through
three primary distribution methods: (i) intermediaries, (ii) dedicated sales
forces and financial advisors, and (iii) marketing through businesses.
3
The Company's principal product lines under the Lifestyle Protection and
Enhancement segment are (i) long-term care insurance, (ii) supplemental accident
and health insurance, (iii) personal lines of automobile insurance and (iv)
income protection packages. Lifestyle Protection and Enhancement products are
used by customers to protect their income and assets from the adverse economic
impacts of significant health care costs, unanticipated events that cause
temporary or permanent loss of earnings capabilities, and automobile accidents
and related liabilities. The Company also provides consumers with club
membership opportunities which are primarily income protection packages allowing
coverage of or discounts on certain personal expenses (auto towing, vision care,
etc.). The Company's distribution of Lifestyle Protection and Enhancement
products is currently accomplished through four primary distribution methods:
(i) intermediaries, (ii) dedicated sales forces and financial advisors, (iii)
marketing through businesses, and (iv) direct and affinity based marketing
through e-commerce, telemarketing, and direct mail.
Recent Transactions
On July 1, 2000, the Company acquired 90% of the long-term care insurance
portfolio of Citigroup's Travelers Life and Annuity unit and certain assets
related thereto for $411 million ("the Travelers Transaction"). In addition, the
Company and certain Citigroup companies entered into agreements to underwrite
and distribute long-term care insurance through a long-term strategic alliance.
Under this agreement, the Company will market to the distribution channels of
Citigroup, including Travelers.
On April 1, 2000, the Company acquired Phoenix American Life Insurance
Company, a subsidiary of Phoenix Home Mutual Life Insurance Company. Phoenix
American Life Insurance Company, subsequently renamed GE Group Life Insurance,
provides insurance to small companies.
Effective March 1, 2000, one of the Company's subsidiaries, GE Edison Life
Insurance Company ("GE Edison"), acquired, by means of a comprehensive transfer
("the Toho Transfer") in accordance with the Insurance Business Law of Japan
("IBL"), the insurance policies and related assets of Toho Mutual Life Insurance
Company, a Japanese life insurer ("Toho"). GE Edison assumed approximately $21.9
billion of policyholder liabilities and other obligations and $20.3 billion of
cash and invested assets, the difference between such amounts being attributable
to the present value of future profits on the transferred insurance policies.
Toho, which continues to exist as a separate and independent entity, will
liquidate its remaining assets and liabilities following the comprehensive
transfer. Such liquidation is not expected to have any impact on the Company's
financial position or results of operations.
GE Edison had previously acquired Toho's operating infrastructure in March
1998. See "Acquisitions and Other Transactions". In June 1999, the Financial
Services Agency ("FSA") of Japan determined that Toho's continued operation was
not in the best interest 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. In conjunction with the comprehensive
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
4
become the rescuing company, Japan's Policyholder Protection Corporation
contributed approximately $3.6 billion as part of the assets supporting Toho's
restructured policies. In December 1999, in connection with the comprehensive
transfer, the Company acquired the common stock of GE Edison held by Toho.
Consequently, the Company owns 100% of GE Edison through various subsidiaries.
The Company accounted for the comprehensive 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 Consolidated Financial Statements since the date of the Toho Transfer.
In connection with the Toho Transfer, the Company terminated its reinsurance
arrangements with Toho. Certain amounts in the Consolidated Statements of Income
for the year ended December 31, 2000 reflect the impact of terminating such
arrangements. The termination of the reinsurance arrangements did not have a
significant effect on net earnings for the year ended December 31, 2000.
On July 30, 1999, in connection with Montgomery Ward Holding Corp.'s plan
of reorganization under Chapter 11 of the federal bankruptcy laws, GE Capital
acquired Signature Financial/Marketing, Inc. ("The Signature Group") - for an
aggregate purchase price of $885 million. The acquisition was completed through
a series of mergers involving various Signature companies and subsidiaries of
the Company with the Company's subsidiaries being the surviving company in such
mergers. The effect of the mergers was to cause Signature to become a subsidiary
of GE Financial Assurance. This acquisition provides strategic value through the
enhancement of the Company's affinity group and direct marketing capabilities.
Strategy
The Company believes that changes in demographics such as the increased
number of baby boomers entering middle and late middle age, longer life
expectancies due to medical advances, the reduction in government- and employer-
sponsored benefit programs and the increased need for estate planning for the
most affluent group of retirees in history, have, and will continue to increase,
the demand for innovative products and services to solve individual financial
challenges. The Company's strategy is designed to take advantage of these trends
by offering a broad array of products and services through the Company's four
major channels of distribution. See "Marketing and Distribution - North America
and Japan."
The Company's approach to this opportunity is to maintain a number of
businesses with unique product and distribution capabilities designed to deliver
innovative products and services associated with accumulating, transferring and
protecting the consumer's wealth and lifestyle. Most of the Company's products
are targeted at middle to upper income consumers and individuals employed by
small to mid-sized companies. To date, the Company has operated almost entirely
in North America and Asia.
The Company's strategy is to be a consumer financial solutions provider
through (i) intense customer focus, (ii) generation of core business line
growth, and (iii) competitive cost leadership. These elements are further
supported by a strong foundation of operating fundamentals. The Company's
strategy consists of the following four elements:
. Customer Focus: This is the foundation on which the Company is based.
---------------
The Company focuses on two sets of customers on two fronts: (i) end
consumers and (ii) distribution partners/producers. The core concept
for the Company is to be customer needs driven and to simplify
consumers' financial lives. In order to accomplish this, the Company
has positioned itself to go beyond only offering products to offering
financial planning tools and education and enabling personalized
solutions that provide options and choices for consumers. By providing
financial
5
solutions for every stage of a consumer's life, the Company believes
it will differentiate itself and create an affinity with customers
that will translate into lifetime relationships. In addition, the
Company focuses on continuously expanding the support services and
technology offered to its distribution channels.
. Growth. This element begins with the Company's focus on driving core
-------
business growth, building its distribution capabilities, maintaining a
broad range of fresh innovative products and services, and expanding
its international presence. The Company's business units focus on key
customer groups and distribution channels which are well positioned to
maximize marketplace penetration. The Company believes that its
customers are becoming increasingly sophisticated in assessing their
needs for savings, insurance and retirement. The Company's products
and services are designed to meet needs based on input from customers
and the distributors who service them. To enable the Company to obtain
this input, it endeavors to create and maintain direct contact with
its key customer groups, as well as the distributors who service them.
The Company sees branding as increasingly important in the competitive
financial security industry. As such, the Company actively promotes
the GE brand, which is highly attractive to consumers and
distributors, while ensuring all appropriate legal and regulatory
disclosures are made.
The Company's distribution strategy is focused on penetrating its
targeted markets through four types of distribution methods: (i)
intermediaries, (ii) dedicated sales forces and financial advisors,
(iii) marketing through businesses and (iv) direct and affinity based
marketing through e-commerce, telemarketing and direct mail. Through
each distribution type, core growth will be driven by strong product
development, disciplined marketing and sales expansion of specific
distribution relationships, and selective cross-marketing of products.
Additionally, the Company's commitment to e-commerce has allowed it to
capitalize on two fundamental opportunities to further accelerate its
growth: (1) making the Company's existing businesses and ways of
serving consumers more effective by being faster and more cost
efficient, and (2) creating entirely new product and service
capabilities or processes to build new ways of reaching consumers and
its distributors. In the Company's view, the Internet and Internet
based processes represent not just a new distribution channel, but a
new way of doing business. See "Marketing and Distribution-North
America and Japan."
The Company has acquired a number of organizations which offer a broad
array of products and services designed to address the wealth
accumulation and transfer and lifestyle protection and enhancement
needs of consumers. While the Company's primary focus will be on
increasing its sales of existing products by enhancing its marketing
and sales, product development and service capabilities, the Company
will continue to consider opportunities to enter new markets. Entry
into these new markets will be accomplished through (1) development of
new products for sale through existing channels, (2) development of
new products to serve new channels, (3) creation of new distribution
segments within established channels and (4) alliances with, or
acquisition of, entities with an established presence in existing
markets or distribution channels.
The Company recognizes that demographic trends similar to those
existing in the United States are also present in Japan, Western
Europe, and in other developed countries. Additionally, other markets
are in the process of developing financial services capabilities like
those currently available in the United States and are going through
various stages of deregulation, demutualization, or restructuring. The
Company continually monitors these developments and
6
considers opportunities to participate in these markets. GE Financial
Assurance believes that deregulation, consolidation, the growth of the
new middle income classes, and the shift towards consumers taking
control of their own retirement and protection needs (versus relying
solely on government and corporate plans) will create additional
opportunities for international expansion.
. Leadership in Cost Competitiveness and Productivity. The Company
---------------------------------------------------
recognizes that consolidation in the financial services industry will
create fewer, but larger competitors. The Company's ability to
effectively compete will be dependent upon, among other things, its
ability to maintain operating scale and continually reduce its
expenses through the elimination of duplicate functions and the use of
enhanced technology. The Company's continued commitment to bring
together its recent acquisitions into integrated platforms with common
information systems is designed to create a competitive advantage in
the marketplace. While the Company believes that the diversity of its
distribution channels is also a competitive advantage, it recognizes
the need to coordinate its efforts to provide a unified face to its
customers and distributors. The Company has worked, and will continue
to work, to promptly integrate its recent acquisitions, many of which
have enhanced existing distribution channels or added new ones. The
Company is committed to service excellence through the implementation
of quality initiatives and technology to provide timely and efficient
response to all consumer inquiries, needs and requests. Further, the
Company is continuously analyzing means by which it can digitize and
e-enable processes. The e-business initiative is a broad-based program
to enable the Company to conduct a growing portion of its business
over the Internet. Benefits from this initiative include improved
customer service, expanded product and service offerings, and
increased operating efficiency for both the Company and its customers.
The Company believes that its continued success will be predicated
upon its ability to achieve game-changing efficiencies through the use
of digitization and the Internet.
. Strong Foundation of Operating Fundamentals. The Company's dedication
-------------------------------------------
to providing quality products to its customers rests on maintaining a
strong risk management, compliance and controllership focus while
utilizing technology for competitive advantage. This focus provides a
solid foundation for the Company's successful execution of its
business strategy. Risk management, compliance and controllership
processes and practices have been a long-standing strength of GE and
GE Capital. The Company has developed processes and practices
appropriate for its operating businesses leveraging the experience of
the GE System. The Company believes that its commitment to technology,
as demonstrated by its upgrading of its life insurance administration
and underwriting systems and development of integrated computer
systems which propose, issue and administer various types of
contracts, will enable the Company and its distributors to be
increasingly more productive and thus provide competitive advantages
in the marketplace.
7
Acquisitions and Other Transactions
The Company effectively began operations in April 1993 with the acquisition
of GNA Corporation. The Company has continued to broaden its operations through
a series of acquisitions and other transactions since 1993. The following table
sets forth the primary acquisitions and other transactions that GE Financial
Assurance has completed over the last five years with a brief description of the
new products and principal distribution channels each has brought to GE
Financial Assurance.
Principal
Transaction Date Principal Products Distribution Channel
----------- ---- ------------------ --------------------
Union Fidelity Life Insurance Company April 1996 Credit products and Affinity marketing
supplemental accident and and marketing
health products through businesses
and brokers
The Life Insurance Company of Virginia April 1996 Variable annuities, universal Intermediaries,
(subsequently renamed GE Life and Annuity life insurance guaranteed dedicated sales
Assurance Company) investment contracts ("GICS") force and financial
and funding agreements advisors
First Colony Life Insurance Company ("First December 1996 Life insurance, retirement Intermediaries
Colony") annuities and structured
settlements
Colonial Penn Insurance Company ("Colonial November 1997 Personal lines of automobile Direct marketing
Penn") insurance
GE Edison (former operating infrastructure March 1998 Life insurance, health and Dedicated sales
of Toho Mutual Life Insurance Co.) annuity products force and
intermediaries
The Signature Group July 1999 Income protection packages, Affinity and direct based
life insurance, accident and marketing
health and credit products
Toho Mutual Life Insurance Company March 2000 Life insurance, health, and Acquired block of
(insurance policies and related assets) annuity products business
Phoenix American Life Insurance Company April 2000 Life insurance, disability, and Dedicated
dental products sales force
The Travelers Transaction July 2000 Long-term care insurance Dedicated
products sales force
8
Ratings
GE Financial Assurance's principal subsidiaries are rated by A.M. Best
Company (A. M. Best) Standard & Poor's (S&P), and Moody's independent rating
agencies, as follows:
Company A.M. Best Rating S&P Rating Moody's Rating
- ------- ----------------- ---------- --------------
First Colony Life Insurance Company.............................. A++ (superior) AA (very strong) Aa2 (excellent)
Federal Home Life Insurance Company.............................. A+ (superior) A\\pi\\ (good) Aa2 (excellent)
General Electric Capital Assurance Company....................... A+ (superior) AA (very strong) Aa2 (excellent)
GE Life and Annuity Assurance Company............................ A+ (superior) AA (very strong) Aa2 (excellent)
Union Fidelity Life Insurance Company............................ A+ (superior) A\\pi \\ (good) Not Rated
Colonial Penn Insurance Company.................................. A- (excellent) AA (very strong) Not Rated
GE Edison Life Insurance Company................................. Not Rated AA (very strong) Not Rated
A.M. Best's ratings for insurance companies currently range from A++ to F
and some companies are not rated. A.M. Best's ratings are based upon an
evaluation of a company's: (i) financial strength (leverage/capitalization,
capital structure/holding company, quality and appropriateness of reinsurance
program, adequacy of loss/policy reserves, quality and diversification of
assets, and liquidity); (ii) operating performance (profitability, revenue
composition, and management experience and objectives) and (iii) market profile
(market risk, competitive market position, spread of risk, and event risk).
"A++" and "A+" ratings are assigned to those companies that in A.M. Best's
opinion have, on balance, superior financial strength, operating performance and
market profile when compared to the standards established by A.M. Best and have
a very strong ability to meet their ongoing obligations to policyholders. "A"
and "A-" ratings are assigned to those companies that in A.M. Best's opinion
have, on balance, excellent financial strength, operating performance and market
profile when compared to the standards established by A.M. Best and have a
strong ability to meet their ongoing obligations to policyholders. A.M. Best's
ratings are based upon factors of concern to policyholders, agents and
intermediaries and are not directed toward the protection of investors.
Standard & Poor's ratings for insurance companies currently range from AAA
to R. Standard & Poor's ratings are based upon information furnished by rated
organizations or obtained from other sources that it deems reliable. Standard &
Poor's Insurer Financial Strength Rating is a current opinion of the financial
security characteristics of an insurance organization with respect to its
ability to pay under its insurance contracts and policies in accordance with
their terms. "AAA" ratings are assigned to those companies that in Standard &
Poor's opinion have extremely strong financial security characteristics. "AA+",
"AA" and "AA-"ratings are assigned to those companies that in Standard & Poor's
opinion have very strong financial security characteristics and differ only
slightly from "AAA". "A" ratings are assigned to those companies that in
Standard & Poor's opinion have strong financial security characteristics, but
are somewhat more likely to be affected by adverse business conditions than
those insurers with higher ratings. Ratings denoted with a "pi" subscript, are
Insurer Financial Strength Ratings based solely on an analysis of published
financial information and additional information in the public domain.
Moody's ratings for insurance companies currently range from Aaa to C.
Moody's ratings are based upon the use of a multidisciplinary approach to risk
analysis. Moody's relies on the judgement of a diverse group of credit risk
professionals who analyze relevant risk factors in connection with a variety of
scenarios specific to the rated company. Moody's insurance financial strength
ratings are opinions on the ability of a
9
company to punctually repay senior policyholder claims and obligations. "Aa"
ratings are assigned to those companies that in Moody's opinion offer excellent
financial security. These companies are deemed high-grade companies. Numeric
modifiers are used to refer to the ranking within a group, with "1" being the
highest, and "3" being the lowest.
Products
Wealth Accumulation and Transfer Products - North America
Annual Life Insurance
The following table presents the aggregate amount of the Company's North
American annualized premiums of life insurance for the periods presented.
Annualized Premiums of Life Insurance
Years ended December 31,
------------------------
2000 1999 1998
---- ---- ----
(Dollars in Millions)
Annualized Premiums of Life Insurance
Term...................................................... $ 745 $ 577 $ 503
Permanent................................................. 698 580 528
----------------------------
Total..................................................... $1,443 $ 1,157 $1,031
============================
The following table presents first year sales of the Company's life
insurance products, by type, for the periods presented.
Life Insurance Policies by Type - First Year Premiums Received
Years ended December 31,
------------------------
2000 1999 1998
---- ---- ----
(Dollars in Millions)
First Year Life Insurance Premiums Received:
Term..................................................... $ 211 $ 157 $ 85
Permanent................................................ 123 80 117
-----------------------
Total.................................................... $ 334 $ 237 $ 202
=======================
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Term Life Insurance. Term life insurance provides life insurance protection for
a limited time: a death benefit is paid only if the insured dies during the
specified term. The Company's term life insurance products offer competitively
priced graded premium life insurance products that offer low cost insurance
protection. These products generally have level premiums for initial terms of 1,
5, 10, 15, 20 or 30 years and give the policyholder the contractual right to
continue coverage for life.
Permanent Life Insurance. Permanent life insurance provides life insurance
protection for the entire life of the insured and, unlike term life insurance,
has an investment component. The Company's permanent life insurance products
include a variety of guaranteed premium interest-sensitive whole life insurance,
universal life insurance, and employee plans/salary savings products.
Single Premium Immediate Annuities
The following table presents the aggregate amount of single premium
immediate annuities ("SPIAs") in force measured by reserves as of the dates
indicated.
Single Premium Immediate Annuities - Deposit Liabilities
As of December 31,
------------------
2000 1999 1998
---- ---- ----
(Dollars in Millions)
Single Premium Immediate Annuities:
Structured Settlement......................... $10,812 $10,092 $ 9,102
Retirement.................................... 3,458 3,216 2,746
-------------------------------
Total......................................... $14,270 $13,308 $11,848
===============================
SPIAs provide long-term guaranteed benefit payments utilizing a fixed
interest rate assumption. SPIAs guarantee a series of payments beginning
immediately and continuing over a period of years and, in some cases, for the
life of the annuitants. The Company's SPIAs fall into two categories: structured
settlement and retirement.
11
SPIAs differ from deferred annuities in that they generally provide for
payments to begin immediately, for the payments to be contractually guaranteed,
and that the policyholder may not borrow from or surrender the annuity. The
implicit interest rate on SPIAs is based on market conditions when the policy is
issued and is guaranteed for the term of the annuity. Since immediate annuities
are not subject to surrender or borrowing by the policyholder, they provide the
opportunity for an insurance company to match closely the underlying investment
of premium received to the cash benefits to be paid under a policy, thereby
providing an anticipated margin for expenses and profit, subject to mortality
risk. The Company is one of the few companies that offer medically underwritten
annuities. This allows retirees with medical conditions that could shorten their
life expectancies to purchase annuities at lower prices or higher payouts, which
reflect their individual life expectancies.
The following table presents total sales of the Company's single premium
immediate annuity products for the periods presented. Premiums related to single
premium immediate annuity contracts without life contingencies are reported as
deposit liabilities under accounting principles generally accepted in the United
States of America ("U.S. GAAP").
Single Premium Immediate Annuities - Deposits Received
Years ended December 31,
------------------------
2000 1999 1998
---- ---- ----
(Dollars in Millions)
Single Premium Immediate Annuities:
Structured Settlement.............................. $ 569 $ 752 $ 827
Retirement......................................... 549 565 360
--------------------------
Total.............................................. $1,118 $1,317 $1,187
==========================
Structured Settlement. Structured settlements provide an alternative to a lump
sum settlement in a personal injury case and are generally purchased by property
and casualty insurance companies for the benefit of an injured claimant with
benefits scheduled over a fixed period and/or for the life of the claimant
thereafter. Structured settlements offer tax advantaged long-range financial
security to the injured party and facilitate claim settlement for the casualty
insurance carrier. First Colony was a pioneer in this business in the late
1970's and early 1980's and has consistently been a significant provider since
the market's inception. General Electric Capital Assurance Company ("GE Capital
Assurance") has been a significant provider since 1993.
Structured settlement contracts are long-term in nature, guarantee a fixed
benefit stream and generally cannot be surrendered or borrowed against. Since
many structured settlement contracts generally provide for guaranteed payments
for a predetermined period that do not depend on the survival of the annuitant,
the mortality risk portion of the Company's liability with respect to such
policies is relatively small.
12
Retirement. SPIAs used for retirement purposes are identical to those used to
facilitate structured settlements in that payments begin immediately, cannot be
surrendered or borrowed against and guarantee a fixed stream of benefits.
Retirement annuities are typically sold to older annuitants and, therefore, are
somewhat shorter in average contract life than structured settlement annuities.
Single and Flexible Premium Deferred Annuities, GICs and Funding Agreements
The following table presents the Company's single and flexible premium
deferred annuities and GICs and funding agreements in force for the periods
presented. Premiums related to these products are reported as deposit
liabilities in accordance with U.S. GAAP.
Single and Flexible Premium Deferred Annuities, GICs and Funding Agreements -
Deposit Liabilities
As of December 31,
------------------
2000 1999 1998
---- ---- ----
(Dollars in Millions)
Single and Flexible Premium Deferred Annuities
Fixed............................................... $10,720 $11,894 $11,976
Variable............................................ 10,759 9,223 5,885
GICs and Funding Agreements.......................... 5,836 4,194 2,425
Other................................................ 110 111 250
-----------------------
Total............................................... $27,425 $25,422 $20,536
=======================
Single and Flexible Premium Deferred Annuities, GICs and Funding Agreements -
Deposits Received
Years ended December 31,
------------------------
2000 1999 1998
---- ---- ----
(Dollars in Millions)
Single and Flexible Premium Deferred Annuities
Fixed............................................ $1,794 $1,060 $ 658
Variable......................................... 3,071 2,662 908
GICs and Funding Agreements....................... 2,395 2,054 1,087
---------------------------
Total............................................ $7,260 $5,776 $2,653
===========================
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Single and Flexible Premium Deferred Annuities
Fixed Annuities. A fixed single premium deferred annuity ("SPDA") provides
for a single premium payment at time of issue, an accumulation period and an
annuity payout period at some future date. A flexible premium deferred annuity
("FPDA") provides the same features but allows the owner to make additional
payments into the contract. During the accumulation period, the insurance
company credits the account value of the annuity with interest earnings at a
current interest rate (the crediting rate) that is guaranteed for a period of
one to five years, at the annuitant's option, and, thereafter, is subject to
change based on prevailing market rates and product profitability. Each contract
also has a minimum guaranteed rate. This accrual of interest during the
accumulation period is on a tax-deferred basis to the policy owner. After the
number of years specified in the annuity contract, the annuitant may elect to
take the proceeds of the annuity as a single payment, a specified income for
life or a specified income for a fixed number of years. The annuitant is
permitted at any time during the accumulation period to withdraw all or part of
the single premium paid plus the amount credited to his account. Withdrawals in
the early years of the contract are subject to a significant surrender charge.
In 2000, issued policies impose surrender charges which vary from 6% to 7% of
the account value starting in the year of policy issue and decrease to zero over
a six to nine year period. After the first twelve months that the contract is
in-force, an annuitant may withdraw annually up to 10% of the account value
without penalty.
At least once each month, the Company establishes an interest crediting
rate for its new fixed SPDA and FPDA policies. In determining the Company's
interest crediting rate on new policies, management considers the competitive
position of the Company, prevailing market rates and the profitability of the
annuity product. After policy issue, the Company maintains the initial crediting
rate for a minimum period of one year. Thereafter, the Company may adjust the
crediting rate not more frequently than once per year for a given SPDA policy.
Interest rates credited on the Company's in-force SPDA and FPDA policies ranged
from 4% to 7.5% at December 31, 2000. All of the Company's annuity products have
minimum guaranteed crediting rates ranging from 3.0% to 7.5% for the life of the
policy.
The Company offers an SPDA product that links the amount of interest
credited to the S&P 500 Index. This indexed annuity allows customers to
participate in the growth in the S&P 500 while providing protection of principal
and a guaranteed return on the substantial portion of the initial premium. The
guaranteed minimum crediting rate on the product is 3% per annum. The product
has a ten-year surrender charge period with surrender charges of up to 8%. The
Company earns an annual administrative fee on the product that is computed based
on the policy's accumulated value.
Variable Annuities. A variable annuity has an accumulation period and a
payout period. The main difference from a fixed SPDA or FPDA is that the
contractholder can place a portion of their premiums in a separate account
maintained for variable annuities, distinct from the Company's general assets
and liabilities. Contractholders have discretion to allocate their premiums
among several available subaccounts (mutual funds and other investment funds,
including a fixed account, which are held by the Company). The cash surrender
value of a variable annuity policy depends on the age of the policy and the
performance of these underlying funds, which the contractholder may reallocate
from time to time. There is no guaranteed minimum rate in the subaccount
components of variable annuity policies. Similarly, during the variable
annuity's payout period, the payments distributed to the annuitant may fluctuate
with the performance of the underlying subaccounts selected by the owner (a
fixed payout may also be available depending upon individual contract
provisions). Variable annuities provide the Company with fee based revenue in
the form of mortality and expense fees charged to the contractholder's account.
14
GICs and Funding Agreements
GICs are deposit-type products that provide a guaranteed return (on a fixed
or indexed basis) to the contract holder. GICs are purchased by Employee
Retirement Income Security Act (ERISA) qualified defined contribution plans,
including but not limited to, 401(k) plans where plan participants elect a
stable value option. Funding Agreements, which operate substantially similarly
to GICs, are purchased by institutional accredited investors for various kinds
of funds and accounts that are not ERISA qualified. Examples include money
market funds, bank common trust funds and other corporate and trust accounts.
GICs typically credit interest at a fixed interest rate (determined by
market conditions) and have a fixed maturity ranging from two to six years. Both
rates and maturities are set at the time of sale. Substantially all GICs allow
for the payment of benefits at contract value to ERISA plan participants in the
event of death, disability, retirement or change in investment election. The
Company underwrites these risks before issuing a GIC to a plan. In addition, the
Company requires plans buying its GICs to have certain restrictions on
participant transfers to money market and similar funds in order to reduce
disintermediation risk. The Company's GICs can also be terminated prior to their
maturity by the contract holder, but only after an adjustment to the contract
value for changes in the level of interest rates and the application of a
significant penalty (net payment amount may not exceed contract value).
Funding Agreements credit interest at a rate that is indexed to LIBOR
(London Interbank Offered Rate).These contracts are typically renewed annually,
however, either the Company or the contract holders can terminate the Funding
Agreement after giving notice within the contract's specified notice period
(generally a period of 90 days or less). The aggregate amount of the Company's
outstanding Funding Agreements with put option features is approximately $2.3
billion. The Company has established a line of credit with its parent in an
amount sufficient to provide liquidity in the event of an unusual level of early
terminations. The Company has also issued $0.4 billion of longer term Funding
Agreements. These contracts have maturities of up to 7 years and contain no
early termination provision.
Mutual Funds
The Company through its subsidiary, GE Investment Distributors, Inc.,
offers certain mutual funds to retail customers through various distribution
channels. These funds are managed by GE Asset Management Incorporated ("GEAM"),
a wholly owned subsidiary of GE and an affiliate of the Company.
In addition, the Company markets GE Investments Funds, Inc. ("GEI Funds"),
a family of mutual funds also managed by GEAM and offered exclusively as
investment vehicles for certain variable annuity contracts and variable life
insurance contracts issued by the Company or by other affiliated insurers.
Wealth Accumulation and Transfer Products - Japan
GE Edison in Japan offers various life insurance, health, and annuity
products using a dedicated sales force and institutional sales. GE Edison's in
force business expanded significantly due to the transfer of the Toho insurance
policies to GE Edison in March 2000.
15
Annual Life Insurance
The following table presents the aggregate amount of GE Edison's annualized
premiums of insurance for the periods presented.
Annualized Premiums of Insurance
Years ended December 31,
------------------------
2000 1999 1998
---- ---- ----
(Dollars in Millions)
Annualized Premiums of Insurance:
Term.................................................. $ 163 $ 43 $ 16
Whole Life, Endowment, and Medical.................... 1,202 193 83
----------------------
Total................................................. $1,365 $ 236 $ 99
======================
The following table presents first year sales of GE Edison's insurance
products, by type, for the periods presented.
Insurance Policies by Type - First Year Premiums Received
Years ended December 31,
------------------------
2000 1999 1998
---- ---- ----
(Dollars in Millions)
First Year Insurance Premiums Received:
Term............................................... $ 36 $ 28 $ 21
Whole life, Endowment, and Medical................. 184 115 210
-----------------------
Total.............................................. $ 220 $ 143 $ 231
=======================
Term Life Insurance. Term life insurance provides life insurance protection for
a limited time: a death benefit is paid only if the insured dies during the
specified term. These policies generally have initial terms of 10 and 15 years
and are now only sold as non-participating.
Whole Life Insurance. Life insurance provides life insurance protection for the
entire life of the insured and has an investment component. Benefits are paid
in the event of death or severe disability. Attached riders provide coverage
for hospitalization and certain diseases. Since April 1999, underwriting has
included non-smoking and preferred risk categories.
Endowment Insurance. Endowment insurance provides life and insurance protection
with a limited time with a maturity benefit.
Medical insurance. Medical insurance provides supplemental medical protection
for a fixed period or for a lifetime. In the case of hospitalization, a certain,
fixed amount is paid daily based on the length of hospitalization up to a
maximum of 60 or 124 days per stay and up to a maximum of 500 or 1,000 days per
policy depending on the specific product terms.
16
Fixed Single Premium Deferred Annuities
Premium deposits are reported as deposit liabilities in accordance with
U.S. GAAP. Deposit liabilities for SPDAs were $609, $534, and $10 million as
of December 31, 2000, 1999, and 1998, respectively. Deposits received for fixed
SPDAs were $435, $219, and $46 million for the years ended December 31, 2000,
1999, and 1998, respectively.
A fixed single premium deferred annuity provides for a single premium
payment at time of issue, an accumulation period and an annuity payout period at
some future date. Initially, the annuitant must select either a yen or dollar-
dominated policy. During the accumulation period, GE Edison credits the account
value of the annuity with interest earnings at a guaranteed interest rate. This
accrual of interest during the accumulation period is on a tax-deferred basis to
the annuitant. After the number of years specified in the annuity contract, the
annuitant may elect to take the proceeds of the annuity as a single payment or a
specified income payment for a fixed number of years. The annuitant is permitted
at any time during the accumulation period to withdraw all or part of the single
premium paid plus the interest credited to his account. Withdrawals in the early
years of the contract are subject to a significant surrender charge. In 2000,
policies issued impose surrender charges which vary from 6.5% to 10.5% of the
account value starting in the year of policy issue and decrease to zero over a 5
to 8 year period.
On a monthly basis, GE Edison establishes a guaranteed interest rate for
its new fixed SPDA policies. GE Edison's interest crediting rate on new policies
is determined based on the previous months U.S. Government Bond Rate and the
Japanese Government Bond Rate. After policy issuance, GE Edison maintains the
initial crediting rate for the accumulation period. Interest rates credited on
GE Edison's in-force fixed SPDA policies ranged from 1.0% to 4.93% at December
31, 2000. The 4.93% relates to an innovative U.S. Dollar-based annuity product.
Lifestyle Protection and Enhancement Products -North America and Japan
The Company's Lifestyle Protection and Enhancement product lines in North
America and Japan include long-term care insurance, supplemental accident and
health, Medicare supplement, automobile insurance and income protection
packages. The Company's Lifestyle Protection and Enhancement product lines in
Japan are not significant.
The following table presents total sales of the Company's Lifestyle
Protection and Enhancement products for the periods presented.
17
Lifestyle Protection and Enhancement Products-Annualized Premiums
Years ended December 31,
------------------------
2000 1999 1998
---- ---- ----
(Dollars in Millions)
Long-Term Care....................................... $ 203 $ 158 $ 112
Supplemental Accident and Health..................... 223 120 66
Automobile Insurance................................. 84 130 106
Income Protection Packages........................... 153 95 -
Other (Medicare Supplement and Credit Insurance)..... 75 66 90
-----------------------
Total.............................................. $ 738 $ 569 $ 374
=======================
Long-Term Care Insurance
The Company is among the leading companies in the sale of individual long-
term care insurance policies when measured by first-year annualized premium and
policies in force. Such policies provide coverage within prescribed limits for
nursing facilities, community and in-home care. Long-term care insurance
policies are expected to continue to grow due to the increased awareness of such
products among senior citizens and the rapid growth of the senior population.
The impact of sales to the emerging senior population may affect the Company's
historical experience with this product. The Company will continue to closely
monitor trends and developments which may impact the operating results for this
product.
Coverages in force for nursing facilities include both expense incurred and
daily fixed dollar benefit policies. Currently, only expense incurred policies
subject to a monthly maximum are being sold, with an elimination period (which,
similar to a deductible, requires the insured to pay for a certain number of
days of nursing facility stay before the insurance coverage begins) and a
maximum benefit amount. Home health care benefits pay covered charges, after
Medicare coordination, and are also subject to a monthly maximum dollar limit
and an overall maximum. The applicant may select from one of several available
benefit levels.
The Company's policies are guaranteed renewable and, consequently, the
Company has the right to change premiums by policy class, but not based on age
or health of any individual.
Supplemental Accident and Health, and Medicare Supplement
The Company offers supplemental accident, health and disability products to
corporations, associations, affinity groups and certain individuals. The Company
markets supplemental accident and health products because it believes that
offering a broad range of products is essential to being a preferred provider of
benefits which effectively meets the needs of employers and consumers. The
Company's supplemental accident and health products include a variety of
coverages such as specified disease policies, hospital indemnity coverages,
accident policies, disability income policies and group life insurance. These
policies pay a fixed daily benefit while an insured is hospitalized, pay a lump
sum upon the occurrence of a covered event, or in the case of disability income,
provide continuous payments to insureds during periods of disability. Accidental
death and dismemberment products pay a lump sum benefit upon the occurrence of
accidental death or dismemberment. Many of the Company's supplemental accident
and health products have defined benefit limits. The Company has a maximum
retention of risk per any single case or
18
individual, which limits risk in the event that its claims experience deviates
from the assumptions used in setting premium rates.
Automobile Insurance
The Company primarily writes personal automobile insurance which covers the
legal liability of individuals arising out of the ownership or operation of an
automobile and also provides physical damage insurance on the automobile,
medical payments insurance and protection against uninsured motorists. All of
the Company's personal automobile insurance policies are written for a term of
one year.
Income Protection Packages
The Company, through its acquisition of The Signature Group, is a leading
provider of membership-based products and services, including credit card
registration, auto clubs, dental, and legal services plans. These products are
typically sold through affiliations with major banks, retailers, oil companies,
communications companies, credit card issuers and associations. The Company
pays a portion of consumer membership fees to the affiliated organizations,
representing a commission for marketing rights.
Other
This category includes Medicare supplement and credit life products.
Medicare supplement policies provide coverage for many of the medical expenses
which the Medicare program does not cover, such as the deductible and
coinsurance costs (in which the insured and Medicare share the costs of medical
expenses) and specified losses which exceed the federal program's maximum
benefits. Credit life products consist of life and accident and health insurance
coverages offered to consumer debtors.
Product/Service Centers
The Company has established the following five primary product/service
centers for creating and servicing its North American products: (i) the fixed
life and annuities business primarily operates in Lynchburg, Virginia; (ii) the
variable life and annuities business primarily operates in Richmond, Virginia;
(iii) the long-term care insurance business primarily operates in San Rafael,
California; (iv) the automobile insurance business primarily operates in Ft.
Washington, Pennsylvania; and (v) the income protection package membership
business primarily operates in Schaumburg, Illinois. The Company's
product/service centers for the Asian market are located in Tokyo and Yokohoma,
Japan.
Marketing and Distribution - North America
The Company presently distributes its products through four primary
channels:
. Intermediaries, such as brokerage general agencies (BGAs), banks,
securities brokerage firms, financial planners, accountants,
producers, and specialized brokers;
. Dedicated sales forces and financial advisors;
. Marketing through businesses; and
. Direct and affinity based marketing through e-commerce, telemarketing
and direct mail.
19
Further, the Company has developed a web portal for its distribution
channels called GEFinancialPro.com. The GE Financial Pro portal improves
productivity for financial intermediaries and agents by enabling business
submissions, account tracking and status updates through the World Wide Web.
Additionally, the Company has developed The GE Financial Service site for the
Company's intermediaries and consumers. GE Financial Service provides similar
life simplification services for these consumers, giving them the ability to
change everything from their addresses to investment accounts online.
Intermediaries
BGAs. The Company distributes many of its products (including fixed and variable
annuities, long term care insurance, life products such as variable, universal,
whole, survivorship and term life insurance (including impaired risk
underwriting), and immediate annuities) through more than 200 independent
insurance brokerage firms located throughout the United States. These BGAs
market the Company's products through approximately 135,000 licensed insurance
agents or brokers, who also represent other companies. The Company believes its
consistent commitment to this system has helped it earn a reputation as a
leading provider of insurance products among BGAs. The Company endeavors to be
placed at the top of the BGAs' list of sources of insurance products and
services (such as impaired risk life underwriting) in which the Company
specializes. To achieve this objective, the Company seeks to provide innovative
and competitive products and services for BGA and end-customer needs,
personalized quality service for the BGAs' agents and brokers and competitive
pricing. Services offered by the Company to the BGAs' agents and brokers
includes the opportunity to participate in the Company's Brokerage University,
which offers an integrated insurance training curriculum. Agents and brokers
also have access to a computer-based system which gives them instant access to
data regarding their customers' policies and applications with the Company and
information systems that assist in running their businesses.
The Company's commitment to the independent general agency system has
allowed it to develop a loyal relationship with these general agencies. Of the
Company's 20 leading BGAs in 2000, on the basis of first year commissions
earned, most were among the leading general agents of the Company for the prior
10 years. No individual general agency accounted for more than 23% of total
BGA's first year annualized life premium, and 18% of total fixed life first year
annualized premium. The Company believes the loss of any one BGA relationship in
any given year would not materially impact the Company's financial results.
Banks and Securities Brokerages. Banks and securities brokerage firms are a
significant and growing distribution channel for the Company's fixed and
variable annuities, life insurance products and mutual funds. Over the last few
years distribution of the Company's products through securities brokerage firms
has substantially increased, primarily due to GE Life and Annuity Assurance
Company's ("GE Life and Annuity") distribution of variable annuity products
through a large network of securities brokerage firms. In addition, a
significant percentage of the Company's single premium immediate annuities are
sold through major stock brokerage firms and banks.
20
Financial Planners, Accountants, and Producer Groups. The Company sells some of
its products under the Wealth Accumulation and Transfer segment, such as fixed
and variable annuities and universal and term life insurance, through financial
planners, accountants and producer groups. These groups emphasize providing
investment and insurance products to one of the Company's target customer
groups. The Company believes that financial planners, accountants and producer
groups present an opportunity for growth within the intermediary distribution
channel.
Specialized Brokers and Other Distribution. The Company's single premium
immediate annuities used to facilitate structured settlements are sold through a
network of specialized independent brokers. These brokers are skilled in claims
negotiation and experts in the creation of benefit plans tailored to the needs
of individual claimants and their families. As a pioneer in this industry, the
Company has the oldest and largest distribution system in this market. Its
products are sold through approximately 350 specialized brokers located
throughout the United States. The Company's relationship with many of these
specialized brokers dates back to the inception of this market. The Company
believes it can continue to expand its product offerings to further develop its
position in this market.
The Company sells GICs through specialized GIC brokers, fund managers,
employee benefit investment advisors and directly to large employee benefit
plans. The Company sells Funding Agreements directly, as well as through
brokers, institutional accredited investors, and banks acting in a fiduciary
capacity.
Dedicated Sales Forces and Financial Advisors.
Dedicated sales forces consist primarily of non-employees who sell products
of the Company on an exclusive basis and to a lesser extent, a sales force
employed directly by the Company. All non-employee dedicated sales force agents
are affiliated with an insurance agency. Dedicated sales forces are compensated
by the Company primarily on a commission basis.
The Company has a network of specialized agents who develop customized
solutions to customer's future financial requirements utilizing the Company's
annuity, mutual fund, life insurance, long-term care insurance, and supplemental
accident and health insurance products. The Company offers customers free
financial profiles to assist their understanding and development of financial
objectives. Prospective customers are identified through direct mail
solicitation, educational seminars, policyholder referrals, and targeted
promotions linked to the Company's national advertising campaigns.
The Company also sells employment based benefits and services utilizing a
dedicated sales force of company employees, selling to a producer network of
specialized group brokers, consultants and brokerage general agencies. This
dedicated sales force leverages an independent retailing producer network of
approximately 40,000 producers.
Marketing Through Businesses
The Company sells supplemental accident and health insurance and universal
life products through employer-sponsored payroll deduction programs. Under these
programs, the Company enters into a contractual arrangement with a corporate
customer permitting agents of the Company to market these products directly to
the corporate customers' employees on site. Employees are able to pay premiums
on products they purchase by means of automatic deductions from their paychecks.
21
Direct and Affinity Based Marketing through e-Commerce, Telemarketing
and Direct Mail
Direct and affinity based marketing is a form of marketing in which a
company and a customer deal directly or through an affinity relationship with
each other, rather than through a financial intermediary or agent. As a direct
and affinity based marketer, the Company deals directly with the public and
endeavors to be the lowest cost provider in this market. While the Company
previously relied heavily on direct mail and telemarketing, the Company also
uses the Internet and Internet sites of affinity partners to offer products
directly to consumers.
During 1999, the Company's parent, GE Capital, acquired The Signature Group
and contributed it to the Company. The Signature Group is the platform for the
Company's Partnership Marketing Group ("PMG"). PMG provides strategic value to
the Company through greatly enhanced direct and affinity marketing capabilities.
PMG provides services for consumer clubs and insurance products to customers of
the most recognized names in the business. Products include auto club services,
legal, dental, accident, and life and health insurance plans. The vast majority
of PMG's sales are generated through direct response methods.
Additionally, the Company expanded its e-commerce activities through, among
other things, the launch of GE Financial Network, which is the Company's
Internet-based channel for direct product sales. The GE Financial Network is a
source for consumers to access a range of consumer financial products and
services that GE Capital and the Company offers.
As a further extension of brand and relationship enhancement, the Company
also uses the Internet to educate consumers through the GE Center for Financial
Learning, which was launched in February 2000. The site's goal is to provide
access to financial education and insight; it is not focused on selling products
directly. All of the Company's distribution channels benefit from the GE Center
for Financial Learning.
Marketing and Distribution - Japan
GE Edison presently distributes its products in Japan through two primary
channels:
. Dedicated sales forces and financial advisors, which sell directly to
the consumer; and
. Intermediaries, such as independent agents
Dedicated Sales Force and Financial Advisors.
Distribution through dedicated sales forces represents approximately 91% of
total company sales in Japan. Dedicated sales forces consist of approximately
5,000 employees in 300 sales offices who sell products of GE Edison on an
exclusive basis. Approximately 10% of the sales force is dedicated to serving
the Japanese Defense Agency ("JDA") where GE Edison has sales force employees on
site at JDA locations throughout Japan. Dedicated sales forces are compensated
by GE Edison primarily on a commission basis.
22
GE Edison has a network of specialized agents who develop customized
financial services solutions to customer's future financial requirements
utilizing its annuity, life insurance, and supplemental accident and health
insurance products. GE Edison offers customers free financial profiles to assist
in their understanding and development of financial objectives. Prospective
customers are identified through educational seminars, policyholder referrals,
and targeted promotions linked to GE Edison's national advertising campaigns.
Intermediaries
GE Edison also distributes it products in Japan through more than 1,000
insurance agents located throughout Japan, 45% of whom work exclusively for GE
Edison. The agency sales force is supported by a captive field force of about
100 professionals. No individual agent accounted for more than 2% of the total
first year annualized premium. GE Edison believes that the loss of any one agent
relationship in any given year would not materially impact its financial
results. GE Edison endeavors to be placed at the top of the agent's list of
sources of insurance products and services that it provides. To achieve this
objective, GE Edison seeks to provide innovative and competitive products and
services for agents and end-customer needs, personalized quality service for the
agents and competitive pricing. Services offered by GE Edison to the agents
include the opportunity to participate in the Company's Edison University, which
offers an integrated insurance training curriculum.
Competition
The Company operates in a highly competitive environment. While the Company
believes it has assembled a unique collection of products and distribution
channels, there are competitors that have also assembled a similar array of
financial products and have similar strategic goals. The Company believes that
the principal competitive factors in the sale of insurance and investment
products are product features, commission structure, perceived stability of the
insurer, claims paying ability ratings, service, name recognition, price and
cost efficiency. Many other companies are capable of competing for sales in the
Company's target markets. The Company's ability to compete is affected in part
by its ability to provide competitive products and quality service to the
consumer, general agents, licensed insurance agents and brokers. However, the
Company believes that it competes primarily on the basis of its high level of
customer focus, its financial strength and its competitively priced products.
The Company's competition from banks and other financial institutions is
likely to increase as a result of recent federal legislation. The Gramm-Leach-
Bliley Act ("the Act"), enacted on November 12, 1999, will allow bank holding
companies to acquire insurance companies and insurance holding companies to
acquire banks. Although the ultimate effect of the Act on GE Financial Assurance
and its subsidiaries and their competitors is uncertain, the Company's ability
to retain its customers and to sell products could be materially impacted in the
future. However, the Company believes that it is well positioned to address
these challenges.
23
Risk Management, Compliance and Controllership
The Company maintains a strong commitment to risk management and
compliance, availing itself of GE and GE Capital's long-standing strength and
experience in risk management. For example, the Company's commitment to risk
management, compliance, and controllership processes includes requiring
underwriting of all new products and reviews of all existing product
performance, both of which are reviewed by a team of risk managers and
actuaries. In addition, both internal and external periodic reviews of the
Company's products, internal processes and pricing strategy are conducted. The
Company also has obtained Insurance Marketplace Standards Association ("IMSA")
certification and has instituted company-wide compliance initiatives such as
centralized complaint databases and agent complaint tracking and licensing.
Underwriting
Applications for most of the Company's underwritten insurance related
products are individually reviewed and analyzed by the Company's dedicated
underwriting staff based on standardized underwriting guidelines and procedures.
After initial processing, each file is reviewed and additional information (such
as medical examinations, attending physician's statements and special medical
tests, if applicable) is obtained to make an underwriting decision. The
independent sales agents and the Company's own sales staff do not retain any
underwriting authority.
Reserves
The Company establishes and carries as liabilities actuarially determined
reserves that are calculated to meet the Company's future obligations. The
reserves are based on actuarially recognized methods using prescribed morbidity
and mortality tables in general use in the United States and Japan modified to
reflect the Company's actual experience when appropriate. These reserves are
computed at amounts that, with additions from premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet the Company's policy obligations at their
maturities or in the event of an insured's death. Reserves include unearned
premiums, premium deposits, claims reported but not yet paid, claims incurred
but not reported and claims in the process of settlement.
For the Company's individual life policies, universal life and interest-
sensitive whole life policies, reserves are set according to premiums collected,
plus interest, less charges. Reserves for other fixed death benefit and
supplemental accident and health policies are based on assumed investment yield,
persistency, mortality and morbidity as per commonly used actuarial tables,
expenses, and margins for adverse deviations. For the Company's accident and
health policies, the level of reserves is based on a variety of factors
including particular diagnoses, termination rates and benefit payments.
24
The stability of the Company's annuity and interest-sensitive life
insurance reserves is enhanced by policy restrictions on withdrawal of funds.
Withdrawals in excess of allowable penalty-free amounts are assessed a surrender
charge during a penalty period ranging up to twenty years. Such surrender charge
is a percentage of the accumulation value, which varies by product, and
generally decreases gradually during the penalty period. Surrender charges are
set at levels to protect the Company from loss on early terminations and to
reduce the likelihood of policyholders terminating their policies during periods
of increasing interest rates, thereby lengthening the effective duration of
policy liabilities and improving the Company's ability to maintain profitability
on such policies. The Company's reserves comply in all material respects with
state insurance department statutory requirements; however, in the Consolidated
Financial Statements, insurance reserves are determined in accordance with U.S.
GAAP, which may vary from statutory requirements.
Reinsurance
The Company follows the usual industry practice of reinsuring (ceding)
portions of its life insurance risks with other companies. The use of
reinsurance permits the Company to write policies in amounts larger than the
risk it is willing to retain on any one life, and also to continue writing a
larger volume of new business. The maximum amount of individual ordinary life
insurance normally retained by the Company on any one life policy is $1,000,000.
Certain supplemental accident and health and long-term care insurance policies
are reinsured on either a quota share or excess of risk basis. The Company cedes
insurance primarily on a treaty basis, under which risks are ceded to a
reinsurer on specific blocks of business where the underlying risks meet certain
predetermined criteria. To a lesser extent, the Company cedes insurance risks on
a facultative basis, under which the reinsurer's prior approval is required on
each risk reinsured. Use of reinsurance does not discharge an insurer from
liability on the insurance ceded. An insurer is required to pay the full amount
of its insurance obligations regardless of whether it is entitled or able to
receive payments from its reinsurer. The principal reinsurers to which the
Company cedes risks have A. M. Best ratings ranging from A++ to A- and the
Company does not have significant concentrations of reinsurance risk with any
one reinsurer.
Insurance Regulation
General Regulation at State Level
The domestic insurance business of the Company is subject to comprehensive
state and federal regulation and supervision throughout the United States. The
laws of the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to, among other things, licensing to transact
business, licensing agents, admitting of assets, regulating premium rates,
approving policy forms, regulating unfair trade and claims practices,
establishing reserve requirements and solvency standards, fixing maximum
interest rates on life insurance policy loans and minimum rates for accumulation
of surrender values, restricting certain transactions between affiliates and
regulating the type, amounts and valuations of investments permitted.
25
As a holding company with no significant business operations of its own,
the Company relies on dividends from its subsidiaries as the principal source of
cash to meet its obligations, including the payment of principal and interest on
any debt obligations. The Company's domestic insurance subsidiaries are subject
to various state statutory and regulatory restrictions, applicable generally to
each insurance company in its state of domicile, which limit the amount of
dividends or distributions an insurance company may pay to its shareholders
without regulatory approval.
The Company's principal domestic insurance subsidiaries are domiciled in
the states of Delaware, Illinois, New York, Pennsylvania, and Virginia. Each of
these states has laws and regulations that govern the parameters for approval
and payment of dividends.
Generally, dividends may be paid out of earned surplus without approval
with thirty days prior written notice within certain limits. The limits are
generally based on 10% of the prior year surplus (net of adjustments in some
cases) and prior year statutory income (net gain from operations, net income
adjusted for realized capital gains, or net investment income). Dividends paid
or distributed within any twelve consecutive months in excess of the prescribed
limits or the company's earned surplus are deemed extraordinary and require
formal state insurance commission approval.
Delaware (GE Capital Assurance), Illinois (Union Fidelity Life Insurance
Company) and Pennsylvania (Colonial Penn) allow companies to pay dividends up to
the greater of 10% of prior year surplus or 100% of prior year statutory net
gain from operations to the extent of their earned surplus. Virginia (GE Life
and Annuity, First Colony and Federal Home Life Insurance Company) and New York
(in which the Company has two subsidiaries) allow companies to pay dividends up
to the lesser of 10% of prior year surplus or 100% of prior year statutory net
gain from operations. Each insurance subsidiary's dividend capacity is
calculated separately; therefore, total dividend capacity for the Company is
driven in part by its legal structure.
Insurance laws of the states in which the Company's insurance subsidiaries
are domiciled generally provide that no person may acquire control of the
Company, and thus indirect control of these insurance company subsidiaries,
without the prior approval of the appropriate insurance regulators. In general,
any person who acquires beneficial ownership of 10% or more of the voting
securities of the Company would be presumed to have acquired such control,
although the appropriate insurance regulators, upon application, may determine
otherwise.
Each domestic insurance company is required to file detailed annual reports
with supervisory departments in each of the jurisdictions in which it does
business and its operations and accounts are subject to examination by such
departments at regular intervals. Each of the Company's domestic insurance
subsidiaries prepare statutory financial statements in accordance with
accounting practices prescribed or permitted by the insurance departments of
their respective states of domicile. Prescribed statutory accounting practices
include publications of the National Association of Insurance Commissioners (the
"NAIC"), as well as state laws, regulations and general administrative rules.
Life insurance companies are required to establish an Asset Valuation
Reserve ("AVR") consisting of two components: (i) a "default component" which
provides for future credit-related losses on fixed maturity investments and (ii)
an "equity component" which provides for losses on all types of equity
investments, including real estate. The amount of AVR required to be held by the
Company's insurance subsidiaries totaled $499 million and $500 million at
December 31, 2000 and 1999, respectively. The default component totaled $397
million and $406 million, while the equity component totaled $102 million and
$94 million at December 31, 2000 and 1999, respectively. Insurers are also
required to establish an Interest Maintenance Reserve ("IMR") for
26
fixed maturity net realized capital gains and losses, net of tax, related to
changes in interest rates. The IMR is required to be amortized into statutory
earnings on a basis reflecting the remaining period to maturity of the fixed
maturity securities sold. The amount of IMR required to be held by the Company's
domestic insurance subsidiaries totaled $455 million and $416 million at
December 31, 2000 and 1999, respectively. These reserves are required by state
insurance regulatory authorities to be established as a liability on a life
insurer's statutory financial statements, but do not affect financial statements
of the Company prepared in accordance with U.S. GAAP. Although future additions
to AVR will reduce the future statutory surplus of the Company's domestic
insurance subsidiaries, the Company does not believe that the impact under
current regulations of such reserve requirements will materially affect the
ability of its insurance subsidiaries to grow their statutory surplus and pay
dividends to the Company in the future.
The NAIC has established risk-based capital ("RBC") standards to determine
the amount of Total Adjusted Capital (as defined by the NAIC) that an insurance
company must have, taking into account the risk characteristics of such
company's investments and liabilities. The formula establishes a standard of
capital adequacy that is related to risk. The RBC formula establishes capital
requirements for four categories of risk: asset risk, insurance risk, interest
rate risk and business risk. For each category, the capital requirements are
determined by applying specified factors to various asset, premium, reserve and
other items, with the factor being higher for items with greater underlying risk
and lower for items with less risk. The formula is used by insurance regulators
as an early warning tool to identify deteriorating or weakly capitalized
companies for the purpose of initiating regulatory action.
The NAIC's RBC requirements provide for four levels of regulatory attention
depending on the ratio of the company's Total Adjusted Capital to its Authorized
Control Level RBC ("ACL") (as defined by the NAIC). If a company's Total
Adjusted Capital is less than 200% of its ACL but greater than or equal to 150%
of its ACL, or if a negative trend has occurred (as defined by the NAIC) and
Total Adjusted Capital is less than 250% of its ACL, the company must submit a
comprehensive plan to the regulatory authority which discusses proposed
corrective actions to improve its capital position. If a company's Total
Adjusted Capital is less than 150% of its ACL but greater than or equal to 100%
of its ACL, in addition to the above required actions, the regulatory authority
will perform a special examination of the company and issue an order specifying
corrective actions that must be followed. If a company's Total Adjusted Capital
is less than 100% of its ACL but greater than or equal to 70% of its ACL, in
addition to the above required actions, the regulatory authority may take any
action it deems necessary, including placing the company under its control. If a
company's Total Adjusted Capital is less than 70% of its ACL, the regulatory
authority is mandated to place the company under its control. The Total Adjusted
Capital for each of the Company's significant insurance subsidiaries is in
excess of 250% of their respective ACL.
In addition, as part of their routine regulatory oversight process, state
insurance departments conduct detailed examinations periodically (generally once
every three to five years) of the books, records, accounts and market conduct of
insurance companies domiciled in their states. None of the recent regulatory
examinations have disclosed any findings that would have a material adverse
impact on the Company.
27
Regulatory Initiatives
State insurance regulators and the NAIC are continually re-examining
existing laws and regulations, specifically focusing on insurance company
investments and solvency issues, risk-adjusted capital guidelines,
interpretation of existing laws, development of new laws, implementation of
non-statutory guidelines, and circumstances under which dividends may be paid.
These initiatives may be adopted by the various states in which the Company's
insurance subsidiaries are licensed, but the ultimate content and timing of any
statutes and regulations adopted by the states cannot be determined at this
time. It is impossible to predict the future impact of changing state and
federal regulations on the Company's operations, and there can be no assurance
that existing or future insurance-related laws and regulations will not become
more restrictive.
Furthermore, the NAIC has adopted model regulations regarding the treatment
of personal financial and health information to comply with the privacy
requirements of the federal Gramm-Leach-Bliley Act. Under the model regulation,
insurance companies must disclose their policies with respect to the privacy of
personal financial and health information. These policies must give consumers
the opportunity to "opt-out" by choosing not to allow their personal financial
information to be shared with third parties. Moreover, the model regulation
requires that an insurance company may not share health information with third
parties, unless the consumer "opts-in" by authorizing the insurance company to
share such information. Insurance companies must deliver an initial privacy
disclosure statement to its existing customers by July 1, 2001. Thereafter,
companies must make an annual privacy disclosure for existing customers and make
a disclosure to new customers when a policy is issued. The Company has been
complying with existing privacy laws and is preparing to implement the privacy
requirements of the model regulation.
The NAIC has also recently adopted model statutory accounting practices to
take effect beginning in 2001. Statutory accounting practices determine, among
other things, the statutory surplus of an insurance company and, therefore, the
amount of funds that can be paid as dividends to the Company by its insurance
subsidiaries. Efforts are continuing by insurance regulators and the insurance
industry to develop interpretations of the NAIC model. The estimated impact of
adoption is expected to increase statutory capital and surplus by $150 to $170
million.
In addition, the NAIC has issued the Valuation of Life Insurance Policies
Model Regulation, which establishes new minimum reserve requirements for
individual life insurance policies. The majority of the states have enacted the
model regulation for statutory reporting purposes. The Company is undertaking a
number of initiatives to address the financial and operational impact of this
regulation.
28
Assessments Against Insurers
Under the insurance guaranty fund laws existing in each state, the District
of Columbia and Puerto Rico, licensed insurers can be assessed by state
insurance guaranty associations for certain obligations of insolvent insurance
companies to policyholders and claimants. Recent regulatory actions against
certain large life insurers encountering financial difficulty have prompted
various state insurance guaranty associations to begin assessing life insurance
companies for the deemed losses. Most of these states do provide, however, that
an assessment may be excused or deferred if it would threaten an insurer's
solvency and further provide for annual limits on such assessments. A large part
of the assessments paid by the Company's insurance subsidiaries pursuant to
these laws may be used as credits for a portion of the Company's domestic
insurance subsidiaries' premium taxes in future years. The Company's insurance
subsidiaries paid assessments of $4 million, $2 million and $12 million in 2000,
1999 and 1998, respectively. Since such assessments are typically not made for
several years after an insurer fails and depend upon the final outcome of
liquidation or rehabilitation proceedings, the Company cannot accurately
determine the ultimate amount or timing of any future assessment on the
Company's domestic insurance subsidiaries. However, based on the best
information presently available, management believes the Company's accrued
amounts are sufficient.
Regulation at Federal Level
Although the federal government does not directly regulate the business of
insurance, federal legislation and administrative policies in several areas,
including financial services regulation, pension regulation and federal
taxation, can significantly and adversely affect the insurance industry and thus
the Company. For example, the recently enacted Gramm-Leach-Bliley Act will
permit mergers that combine commercial banks, insurers and securities firms
under one holding company. Prior to passage of the Gramm-Leach-Bliley Act, the
Bank Holding Company Act of 1956, as amended, had restricted banks from being
affiliated with insurance companies. With the passage of the Gramm-Leach-Bliley
Act, bank holding companies may acquire insurers, and insurance holding
companies may acquire banks. Although the effect of the Gramm-Leach-Bliley Act
on the Company is uncertain, the ability of banks to affiliate with insurance
companies could materially and adversely affect sales of the Company's products
by substantially increasing the number and financial strength of potential
competitors.
Furthermore, the federal government has from time to time considered other
legislative or regulatory changes that could affect the Company. Examples
include legislation relating to the deferral of taxation on the accretion of
value within certain annuities and life insurance products, changes in ERISA
regulations, the alteration of the federal income tax structure and the
availability of Section 401(k) and individual retirement accounts. Although the
ultimate effect of any such changes, if implemented, is uncertain, both the
persistency of the Company's existing products and the Company's ability to sell
products may be materially impacted in the future.
Another recent example is the implementation of the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"). HIPAA established various
requirements related to health benefit plans including, medical, dental and
long-term care insurance plans. It generally applies to insurers, providers and
employers. When enacted in 1996, its initial focus was on health benefit plan
portability. HIPAA also contains administrative simplification and privacy
provisions that were designed to encourage the electronic exchange of health
care information and the protection of personal health information. These
provisions are to be implemented through regulations issued by the Secretary of
Health and Human Services, which regulations were issued in December 2000. The
earliest compliance date for the new regulations is October 2002. HIPAA provides
for significant fines and other penalties for wrongful disclosure of protected
health information. The Company anticipates that it will have to modify certain
of its infrastructure and procedures to comply with the new requirements, but it
does not expect such changes to have a material impact on its business.
29
Regulation in Foreign Countries
The Company's business in Japan, which is conducted through GE Edison, is
subject to regulation by the Japanese Financial Services Agency ("FSA"), which
imposes (i) certain solvency standards that represent a form of risk-based
capital requirements and (ii) filing of annual reports and financial statements
prepared in accordance with Japanese regulatory accounting practices prescribed
or permitted by the FSA. These regulations and solvency standards are similar to
the regulation and supervision in the United States as described under "General
Regulation at State Level". However, Japanese solvency margin requirements
differ from U.S. solvency requirements primarily due to differences between U.S.
statutory basis accounting and Japanese GAAP. These differences are primarily
related to policy reserve valuation methods, goodwill, deferred taxes and mark-
to-market on bonds. GE Edison's solvency margin is significantly in excess of
the minimum requirements.
Similar to the United States, Japanese insurers are assessed for expenses
relating to the resolution of insolvent insurance companies. In making a
determination of its exposure to future insolvency assessments, GE Edison has
made an evaluation of the current insolvencies taking into account publicly
available information relating to these insolvencies. Based upon this
assessment, GE Edison has concluded that it has adequately provided for future
assessments arising from insolvencies existing as of December 31, 2000.
E-Commerce Regulation
The Company has become extensively involved in e-commerce activities. E-
commerce is subject to a new and rapidly evolving regulatory environment.
Regulation occurs at the state and federal levels in the United States, as well
as internationally. The scope and interaction of these various levels of
regulation are unclear at this time, and many new regulations are being proposed
and adopted. It is difficult to predict precisely how this evolving area of
regulation may affect the Company's current and planned e-commerce activities.
Securities Laws
Certain of the Company's subsidiaries and certain policies and contracts
offered by them are subject to regulation under the federal securities laws
administered by the Securities and Exchange Commission and certain state
insurance laws. Separate accounts of the Company's insurance subsidiaries are
registered as investment companies under the Investment Company Act of 1940, as
amended (the Investment Company Act). Certain variable annuity contracts and
certain variable life insurance policies issued by the Company's insurance
subsidiaries are registered under the Securities Act of 1933. Certain other
subsidiaries of the Company are registered as broker-dealers under the
Securities Exchange Act of 1934 and are members of, and subject, to regulation
by the National Association of Securities Dealers, Inc.
The Company also has subsidiaries that are registered under the Investment
Advisers Act of 1940, as amended, as investment advisors. The investment
companies managed by such subsidiaries are registered with the Commission under
the Investment Company Act and the shares of certain of these entities are
qualified for sale in certain states in the United States as well as the
District of Columbia. Certain subsidiaries of the Company are also subject to
the Commission's net capital rules.
30
All aspects of the Company's investment advisory activities are subject
to various federal and state laws and regulations. These laws and regulations
are primarily intended to benefit investment advisory clients and investment
company stockholders and generally grant supervisory agencies broad
administrative powers, including the power to limit or restrict the carrying on
of business for failure to comply with such laws and regulations. In such event,
the possible sanctions which may be imposed include suspension of individual
employees, limitations on the activities in which the investment advisor may
engage, suspension or revocation of the investment advisor's registration as an
advisor, censure and fines.
ERISA Considerations
Enacted into law on August 20, 1996, the Small Business Protection Job
Act (the SBPJA) offered insurers protection from potential litigation exposure
prompted by the 1993 U.S. Supreme Court decision in John Hancock Mutual Life
Insurance Company v. Harris Trust & Savings Bank (the Harris Trust Decision) in
which the Court held that, with respect to a portion of the funds held under
certain general account group annuity contracts, an insurer is subject to the
fiduciary requirements of ERISA. The pertinent SBPJA provisions provide that
generally all persons are protected from liability under the fiduciary
responsibility provisions of ERISA and the prohibited transactions provisions of
the Code, on the basis of a claim that the assets of an insurer (other than Plan
assets held in separate accounts) constitute assets of the Plan, for conduct
which occurs before July 5, 2000, the effective date of recently enacted
Department of Labor regulations (the Effective Date). However, insurers remain
subject to federal criminal law and liable for actions brought by the Secretary
of Labor alleging breaches of fiduciary duties that also constitute a violation
of federal or state criminal law. The SBPJA also provides that, from and after
the Effective Date, with respect to contracts issued from an insurer's general
account on or before December 31, 1998, that are not guaranteed benefit
policies, the insurer will be deemed to be in compliance with the provisions of
Sections 404, 406, and 407 of ERISA (relating to fiduciary duties, prohibited
transactions, and limitations relating to the acquisition and holding of
employer securities) if the insurer meets the requirements of the regulations of
the Department of Labor. The SBPJA further provides that contracts issued from
an insurer's general account after December 31, 1998, that are not guaranteed
benefit policies, will continue to be subject to the applicable provisions of
ERISA. Although the Company does not believe that the Harris Trust Decision had
a material adverse effect on its business, financial condition or results of
operations, the Company supported and welcomed the enactment of the
aforementioned provisions of the SBPJA as a means to remove an area of potential
exposure for the insurance industry generally.
With respect to employee welfare benefit plans subject to ERISA,
Congress periodically has considered amendments to the law's federal preemption
provision, which would expose the Company, and the insurance industry generally,
to state law causes of action, and accompanying extra-contractual (e.g.,
punitive) damages in lawsuits involving, for example, group life and group
disability claims. To date, all such amendments to ERISA have been defeated.
Item 2. Properties.
The Company and its subsidiaries conduct their businesses from various
facilities, most of which are leased. However, certain of the Company's
facilities, including its headquarters campus in Richmond, Virginia, two
facilities in Lynchburg, Virginia and a facility in Norristown, Pennsylvania are
owned by the Company.
31
Item 3. Legal Proceedings.
The Company and certain of its subsidiaries are defendants in various
cases of litigation considered to be in the normal course of business. The
Company believes that the outcome of such litigation will not have a material
effect on its financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Information omitted in accordance with General Instruction I (2)(c).
32
PART II
Item 5. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
All of GE Financial Assurance's Common Stock, its sole class of common
equity on the date hereof, is owned by GE Capital. Accordingly, there is no
public trading market for the Company's common equity.
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the
consolidated financial statements of GE Financial Assurance Holdings, Inc. and
subsidiaries and the related Notes to the Consolidated Financial Statements.
December 31,(1)
---------------
(Dollars in Millions)
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
At End of Year
Invested Assets................................. $61,764 $42,288 $42,287 $39,469 $35,810
Total Assets.................................... 87,616 64,606 56,727 51,092 45,361
Policyholder Liabilities(2)..................... 61,248 42,993 39,505 37,380 35,493
Debt Outstanding................................ 3,003 1,741 2,028 1,337 278
Shareholder's Interest.......................... 8,414 7,156 7,455 6,958 5,721
For the Year Then Ended
Premiums........................................ 5,465 3,542 3,207 2,314 1,386
Total Revenues.................................. 11,525 7,552 6,672 5,567 3,366
Income Before Cumulative Effect of
Accounting Change(3).......................... 768 613 492 425 229
Net Income(3)................................... 768 638 492 425 229
__________________________
(1) Comparability of financial information is affected by acquisitions and
other transactions by the Company in the periods presented. See
"Acquisitions and Other Transactions."
(2) Includes future annuity and contract benefits, liability for policy and
contract claims, unearned premiums, and other policyholder liabilities
and excludes separate account liabilities.
(3) Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position No. 97-3, Accounting
by Insurance and Other Enterprises for Insurance-Related Assessments.
The Company has reported the effect of this adoption as a cumulative
effect of a change in accounting principle, which served to increase
1999 net income by $25 million (net of income taxes of $14 million).
33
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following analysis of the consolidated financial condition and
results of operations of GE Financial Assurance should be read in conjunction
with the consolidated financial statements and the notes thereto included
herein.
Background
GE Financial Assurance is a holding company that, through its
subsidiaries, provides consumers financial security solutions by selling a wide
variety of insurance, investment and retirement products and income protection
packages almost entirely in North America and Asia. The Company believes that
changes in demographics such as the increased number of baby boomers entering
middle and late middle age, longer life expectancies due to medical advances,
the reduction in government- and employer-sponsored benefit programs and the
increased need for estate planning for the most affluent group of retirees in
history, have, and will continue to increase, the demand for innovative products
and services to solve individual financial challenges. The Company's strategy is
designed to take advantage of these trends by offering a broad array of products
and services. The Company's product offerings are divided along two major
segments of consumer needs: (1) Wealth Accumulation and Transfer and (2)
Lifestyle Protection and Enhancement.
The Company effectively began operations in 1993 with the acquisition
of GNA Corporation. The Company has continued to broaden its operations through
a series of acquisitions and other transactions. Certain of these acquisitions
and transactions have been significant to the Company in terms of their impact
on the Company's consolidated results of operations.
The following table sets forth the significant acquisitions and other
transactions made in 1998 and thereafter that impact the financial comparisons
of operating results for 2000 as compared to 1999 and 1999 as compared to 1998.
Transaction Date Principal Products
----------- ---- -------------------
GE Edison Life Insurance Company March 1998 Life insurance, health and annuity products
The Signature Group July 1999 Income protection packages, life insurance, and
accident and health products
Toho Mutual Life Insurance Company March 2000 Life insurance, health and annuity products
In April 2000, the Company acquired Phoenix American Life Insurance
Company. In July 2000, the Company also acquired 90% of the long-term care
insurance portfolio of Citigroup's Travelers Life and Annuity unit and certain
assets related thereto. These two transactions are collectively referred as
"2000 North American Acquisitions." See "Recent Transactions".
34
Due to the strategic nature of these acquisitions and other transactions,
the operations of the acquired entities, other than GE Edison are generally
being absorbed within the overall operations of the Company as opposed to being
operated on a stand-alone basis.
The table that follows summarizes the impact of these acquisitions and
other transactions on operating results in 2000 and 1999. For purposes of this
analysis, the column "Amount Due to 2000 Transactions" includes those
acquisitions and other transactions that occurred during 2000 and the increase
in 2000 resulting from the inclusion of a full year of operations with respect
to acquisitions consummated in 1999 as compared with the inclusion of a partial
year of operations in 1999. The column "Amount Due to 1999 Acquisitions"
includes those acquistions that occurred during 1999 and the increase in 1999
resulting from the inclusion of a full year of operations with respect to
acquisitions consummated in 1998 as compared with the inclusion of a partial
year of operations in 1998. The column "Consolidated Change" includes the
total increase in the specified line item as compared with the prior period.
(Dollars in Millions)
Year Ended December 31, 2000 Year Ended December 31, 1999
---------------------------- ----------------------------
Consolidated Amount Due to 2000 Consolidated Amount Due to 1999
Change Transactions(1) Change Acquisitions(2)
------ ------------------ ------ ---------------
Revenues:
Premiums...................................... $ 1,923 $1,448 $ 335 $ 223
Net investment income......................... 592 398 227 42
Surrender fee income.......................... 1,197 1,193 10 9
Net realized investment gains................. (3) 16 49 13
Policy fees and other income.................. 264 251 259 182
---------------------------------------------------------------------------
Total revenues................................ 3,973 3,306 880 469
---------------------------------------------------------------------------
Benefits and expenses:
Benefits and other changes in policy reserves. 1,856 1,552 293 139
Interest credited............................. 199 23 38 7
Commission expenses........................... 378 88 317 98
General expenses.............................. 657 488 434 243
Amortization of intangibles, net.............. 882 910 54 70
Change in deferred acquisition costs, net..... (358) (20) (328) (114)
Interest expense.............................. 48 --- --- 5
---------------------------------------------------------------------------
Total benefits and expenses................... 3,662 3,041 808 448
---------------------------------------------------------------------------
Income before income taxes, minority interest
and cumulative effect of accounting change.... $ 311 $ 265 $ 72 $ 21
===========================================================================
35
_____________________
(1) Includes the comprehensive transfer of Toho Mutual Life Insurance Company's
insurance liabilities and assets in March 2000, the acquisition of Phoenix
American Life Insurance Company in April 2000 and The Traveler's
Transaction in July 2000, and inclusion of a full year of operating results
in 2000 for Professional Insurance Company and The Signature Group versus
nine months and six months of operations in 1999, respectively.
(2) Includes the acquisitions of Professional Insurance Company in March 1999
and The Signature Group in July 1999 and inclusion of a full year of
operating results in 1999 for GE Edison versus eight months of operations
in 1998.
Overview
Net earnings before cumulative effect of accounting change were $768
million in 2000, a $155 million, or 25.3% increase from 1999. Net earnings
before cumulative effect of accounting change increased 24.6% in 1999 from 1998.
The 2000 increase was driven largely by increased investment income, premiums
earned, and surrender fee income due to the Toho Transfer and growth in sales of
certain existing products, partially offset by increased benefits and other
changes in policy reserves, amortization of present value of future profits
("PVFP") primarily as a result of the Toho Transfer and subsequent surrenders
thereof, as well as increased general expenses principally relating to recent
acquisitions and the Company's core growth initiatives.
On December 28, 2000, an affinity partner, Montgomery Wards LLC ("Wards")
filed for bankruptcy protection and began liquidation proceedings. Net earnings
for the year 2000 include a charge, primarily to amortization of intangibles and
other expenses, of $82 million ($53 million, after tax) to recognize the
additional losses resulting from the loss of strategic marketing rights and
access to Wards customers.
Operating Results for the Years Ended December 31, 2000, 1999 and 1998
Premiums. Premiums, which include premium revenues from traditional life,
health and automobile insurance and life contingent annuity contracts increased
$1,923 million, or 54.3%, to $5,465 million in 2000 from $3,542 million in 1999.
This increase was primarily a result of (i) the Toho Transfer; (ii) the
acquisition of Phoenix American Life in April 2000 and (iii) growth in certain
of the Company's life and long-term care products. Premiums increased $335
million, or 10.4%, to $3,542 million in 1999 from $3,207 million in 1998. This
increase was as a result of (i) a full year of operating results in 1999
relating to the operations of GE Edison (ii) the acquisition of The Signature
Group in July 1999 and (iii) growth in certain of the Company's life, auto,
accident and health, and structured settlement products.
Net Investment Income and Net Realized Investment Gains. Net investment income
increased $592 million, or 19.0%, to $3,715 million in 2000 from $3,123 million
in 1999. The increase was primarily due to the higher levels of average invested
assets ($53.9 billion in 2000 vs. $42.7 billion in 1999) due to investments
relating to the Toho Transfer, the 2000 North American Acquisitions, and growth
in core invested assets. This increase was partially offset by a decrease in
weighted average yields to 7.14% in 2000 from 7.59% in 1999 due to lower yields
on investment activity related to the Company's Japanese operations. Excluding
the Japanese operations, the weighted average yield in 2000 would have been
7.48%. Net investment income increased $227 million, or 7.8%, to $3,123 million
in 1999 from $2,896 million in 1998. The increase was due to the combination of
higher levels of average invested assets ($42.7 billion in
36
1999 vs. $39.5 billion in 1998) resulting from the acquisition of The Signature
Group in July 1999 and growth in core invested assets.
Net realized investment gains were $162 million in 2000, $165 million in 1999
and $116 million in 1998. These changes are related to the Company's
asset/liability risk management policies and associated ongoing review of its
investment portfolio positions which vary with market and economic conditions.
They also include net realized gains as a result of securitization of certain
financial assets.
Surrender fee income. Surrender fee income increased $1,197 million to $1,253
million in 2000 from $56 million in 1999. The increase in surrender fee income
primarily relates to amounts retained by the Company resulting from the
surrender of policyholder contracts assumed as part of the Toho Transfer. As
discussed earlier, these policies became subject to surrender charges under the
terms of the restructuring of Toho's in-force insurance contracts. The surrender
rates for the insurance policies assumed from Toho were significantly greater
than historical averages. The Company believes that this unusual surrender
activity was in response to the Toho insolvency, in particular the fact that the
former Toho policyholders were not permitted to surrender policies from the date
of the issuance of the business suspension order to Toho through the date of the
Transfer. Surrender fee income increased $10 million or 21.7%, to $56 million in
1999 from $46 million in 1998. The increase was primarily a result of a full
year of operating results in 1999 relating to the GE Edison (which initiated
operations in April 1998).
Policy Fees and Other Income. Policy fees and other income is principally
comprised of insurance charges made against universal life contracts, club
membership revenues, fees assessed against policyholder account values and
commission income. Policy fees and other income increased $264 million, or
39.6%, to $930 million in 2000 from $666 million in 1999. This increase was a
result of (i) a full year of operating results of The Signature Group (acquired
July 1999) (primarily club membership revenues); (ii) the acquisition of Phoenix
American Life in April 2000, and (iii) fee income on variable annuity products.
Policy fees and other income increased $259 million, or 63.6%, to $666 million
in 1999 from $407 million in 1998. This increase was a result of (i) the
acquisition of The Signature Group in July 1999 (primarily club membership
revenues) and (ii) a full year of operating results in 1999 relating to GE
Edison Life Insurance Company (which initiated operations in April 1998).
Benefits and Other Changes in Policy Reserves. 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 such contracts. These amounts increased $1,856 million, or
52.7%, to $5,378 million in 2000 from $3,522 million in 1999. This increase was
a result of (i) the Toho Transfer (ii) the acquisition of Phoenix American Life
in April 2000 (iii) a full year of operating results of The Signature Group
(acquired in July 1999) and (iv) additional benefits incurred arising from core
growth. Benefits and other changes in policy reserves increased $293 million, or
9.1%, to $3,522 million in 1999 from $3,229 million in 1998. This increase was
as a result of (i) a full year of operating results in 1999 relating to the
April 1998 initiation of operations at GE Edison; (ii) the acquisition of The
Signature Group in July 1999 and (iii) growth in certain of the Company's life,
accident and health, and structured settlement products.
Interest Credited. Interest credited increased $199 million, or 15.3%, to
$1,497 million in 2000 from $1,298 million in 1999. This increase was a result
of the increase in 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. Interest credited increased $38 million, or 3.0%, in 1999 to $1,298
million from $1,260 million in 1998. This increase was a result of the increase
in underlying reserves arising from sales of guaranteed investment contracts and
single premium
37
annuities.
The Company's weighted average crediting rates for annuities decreased to 6.14%
in 2000 from 6.15% in 1999, which had decreased from 6.27% in 1998. However, the
Company's weighted average crediting rates for interest-sensitive life products
increased to 5.35% in 2000 from 5.31% in 1999, which had decreased from 5.32% in
1998. Changes in the Company's base crediting rates are implemented in response
to changes in market conditions, the prevailing interest rate environment,
contractual provisions, and other factors. The Company monitors market
conditions closely and resets interest crediting rates as deemed appropriate in
accordance with the terms of the underlying contracts.
Commission Expenses. Commission expense increased $378 million, or 44.1%, to
$1,236 million in 2000, from $858 million in 1999. This increase was primarily
due to (i) commissions incurred as a result of core growth and (ii) a full year
of operating results of The Signature Group (acquired in July 1999). Commission
expense increased $317 million, or 58.6%, to $858 million in 1999 from $541
million in 1998. This increase was attributable to higher production levels on
certain of the Company's existing products, the full year operations of GE
Edison and the acquisition of the Signature Group in July 1999.
General Expenses. General expenses increased $657 million, or 48.7%, to $2,005
million in 2000 from $1,348 million in 1999. This increase was primarily a
result of (i) a full year of operating results of The Signature Group, acquired
in July 1999, (ii) the Toho Transfer, (iii) increases in compensation and
advertising expenses, commensurate with the Company's growth in revenues and to
support the Company's core growth initiatives and (iv) the charges discussed
previously for Wards. General expenses increased $434 million, or 47.5%, to
$1,348 million in 1999 from $914 million in 1998. This increase was primarily a
result of the acquisition of the Signature Group in July 1999, a full year of GE
Edison operations and increases in compensation and advertising expenses to
support the Company's continued growth in revenues and core growth initiatives.
Amortization of Intangibles, Net. The Company's significant intangible assets
consist of three components which result from acquisition activities -- PVFP
representing the estimated future gross profits in acquired insurance and
annuity contracts, value of consumer club business ("VOBA") acquired
representing the estimated future gross profits of acquired club membership
contracts, and goodwill, representing the excess of purchase price over the fair
value of identified net assets of the acquired entities. Amortization of
intangibles increased $882 million, or 259.4%, to $1,222 million in 2000 from
$340 million in 1999. Amortization expense in 2000 includes charges of $46
million as discussed previously for Wards. Amortization of intangibles increased
$54 million, or 18.9%, to $340 million in 1999 from $286 million in 1998.
Amortization of intangibles due to acquisitions and other transactions
(primarily the Toho Transfer) in 2000 and 1999 totaled $910 and $70 million,
respectively. Amortization of intangibles for companies acquired before 1998
declined by $18 million in 2000, $16 million in 1999 and $19 million in 1998 due
to lower amortization of PVFP.
Change in Deferred Acquisition Costs, Net. Deferred acquisition costs include
costs and expenses which vary with and are primarily related to the acquisition
of insurance and investment contracts, such as first year commissions in excess
of renewal commissions, direct advertising and printing costs, and certain
support costs such as underwriting and policy issue expenses. Under U.S. GAAP,
these costs are deferred and recognized in relation to either the premiums or
gross profits from the underlying contracts. The change in
38
net deferred acquisition costs increased $358 million, or 46.3%, to $1,132
million in 2000 from $774 million in 1999. This increase was related to an
increase in deferral of acquisition costs arising from increased product sales
as a result of acquisitions and growth in existing products and the termination
of the Toho reinsurance arrangements, partially offset by amortization of
previously capitalized acquisition costs. The change in net deferred acquisition
costs increased $328 million, or 73.5%, to $774 million in 1999 from $446
million in 1998. This increase was primarily due to increased deferral of
acquisition costs due to increased product sales, the operations of GE Edison
(which commenced in April 1998) and the acquisition of The Signature Group in
July 1999, partially offset by amortization of previously capitalized
acquisition costs.
Interest Expense. Interest expense increased $48 million, or 50.5%, to $143
million in 2000 from $95 million in each of the years ended December 31, 1999
and 1998. This increase relates primarily to an increase in weighted average
commercial paper borrowings outstanding and an increase in the weighted average
interest rate on commercial paper borrowings.
Provision for Income Taxes. The Company's provision for income taxes increased
$154 million or 62.1% to $402 million in 2000 from $248 million in 1999. The
Company's effective tax rate of 34.2% in 2000 was 5.5 percentage points higher
than the effective tax rate of 28.7% in 1999. The effective tax rate in 1999 was
9.3% lower than the effective tax rate in 1998 due primarily to the sale of a
minority interest in a subsidiary in 1999, which gave rise to the realization of
a deferred tax asset not previously allowed to be recorded.
Segment Operations
Wealth Accumulation and Transfer
The Company's principal product lines under the Wealth Accumulation and
Transfer segment are (i) annuities (deferred, and immediate; either fixed or
variable), (ii) life insurance (universal, term, ordinary and group), (iii)
guaranteed investment contracts (GICs) including funding agreements and (iv)
mutual funds and retirement plans. Wealth Accumulation and Transfer products are
used by customers as vehicles for accumulating wealth, often on a tax-deferred
basis, transferring wealth to beneficiaries, or providing a means to replace the
insured's income in the event of premature death.
39
The following table sets forth certain summarized financial data for GE
Financial Assurance's Wealth Accumulation and Transfer segment for the years
ended December 31, 2000, 1999, and 1998.
Years Ended December 31,
-----------------------
2000 1999 1998
------ ------ ------
(Dollars in Millions)
Revenues:
Premiums........................................................................... $2,872 $1,658 $1,557
Net investment income.............................................................. 3,303 2,773 2,631
Surrender fee income............................................................... 1,253 56 46
Net realized investment gains...................................................... 162 149 116
Other revenues..................................................................... 510 427 349
------------------------------
Total revenues..................................................................... 8,100 5,063 4,699
------------------------------
Benefits and expenses:
Benefits and other changes in policy reserves...................................... 3,496 2,128 2,040
Interest credited.................................................................. 1,497 1,298 1,260
Other expenses..................................................................... 2,016 860 730
------------------------------
Total benefits and expenses........................................................ 7,009 4,286 4,030
------------------------------
Income before income taxes, minority interest and cumulative effect of
accounting change (operating income)............................................... $1,091 $ 777 $ 669
==============================
Total revenues in this segment have increased primarily due to the Toho
Transfer. In addition to the Toho Transfer and acquisition related growth, the
Company benefited from increased demand for certain annuity, guaranteed
investment and life insurance contracts. Sales of deferred fixed annuities grew
74.3% to $2,229 million in 2000 from $1,279 million in 1999. The higher sales in
2000 were primarily driven by competitive yields offered to customers on fixed
annuities as a result of increasing interest rates and the introduction of new
products. Sales of deferred variable annuities increased 15.4% in 2000 to $3,071
million from $2,662 million in 1999. Sales of guaranteed investment contracts
and funding agreements increased 16.6% in 2000 to $2,395 from $2,054 in 1999.
These increases were largely due to increased consumer demand for variable
annuities and other products that allow consumers to participate in the strong
capital markets, and the introduction of certain new products by the Company.
40
Operating income from this segment represented 92.8%, 89.8% and 84.4%
of the Company's total operating income for the years ended December 31, 2000,
1999, and 1998, respectively. The shift in the percentage of operating income
derived from this segment in 2000 and 1999 was primarily driven by the higher
percentage increases in sales of products distributed (noted above) versus the
Lifestyle Protection and Enhancement segment as a result of the acquisitions and
other transactions made in the respective periods. The Company's operating
income from the Wealth Accumulation and Transfer segment increased 40.4% in 2000
to $1,091 million, and 16.1% in 1999 to $777 million from $669 million in 1998.
These increases were driven primarily by the Toho Transfer and acquisitions,
higher levels of invested assets and life insurance policies in force.
Lifestyle Protection and Enhancement
The Company's principal product lines under the Lifestyle Protection and
Enhancement segment are (i) long-term care insurance, (ii) supplemental accident
and health insurance, (iii) personal lines of automobile insurance and (iv)
income protection packages. Lifestyle Protection and Enhancement products are
used by customers to protect their income and assets from the adverse economic
impacts of significant health care costs, unanticipated events that cause
temporary or permanent loss of earnings capabilities and automobile accidents
and related liabilities. The Company also provides consumers with club
membership opportunities which are primarily income protection packages allowing
coverage of, or discounts on, certain personal expenses (auto towing, vision
care, etc.)
The following table sets forth certain summarized financial data for GE
Financial Assurance's Lifestyle Protection and Enhancement segment for the years
ended December 31, 2000, 1999, and 1998.
Years Ended December 31,
--------------------------
2000 1999 1998
---- ---- ----
(Dollars in Millions)
Revenues:
Premiums................................................................................. $2,593 $1,884 $1,650
Net investment income.................................................................... 412 350 265
Net realized investment gains............................................................ --- 16 ---
Other revenues........................................................................... 420 239 58
---------------------------
Total revenues........................................................................... 3,425 2,489 1,973
---------------------------
Benefits and expenses:
Benefits and other changes in policy reserves............................................ 1,882 1,394 1,189
Other expenses........................................................................... 1,458 1,007 660
---------------------------
Total benefits and expenses.............................................................. 3,340 2,401 1,849
---------------------------
Income before income taxes, minority interest and cumulative effect of
accounting change (operating income)................................................... $ 85 $ 88 $ 124
===========================
41
Revenues increased in 2000 and 1999 due to the impact of the Travelers
Transaction and the acquisition of The Signature Group in July 1999. In addition
to acquisition related growth, the Company benefited from increased demand for
its long-term care and group disability products. Sales of long-term care
policies grew 28.5% in 2000 to $203 million from $158 million in 1999, and 41.1%
in 1999 from $112 million in 1998. The higher sales were driven by The Travelers
Transaction, an increase in the number of dedicated agents selling the product
and continued heightened market awareness of the need for this type of insurance
coverage. This market awareness was driven by the passage of the Health
Insurance Portability and Accountability Act of 1996 by Congress. Sales of
supplemental accident and health insurance grew 85.8% in 2000 to $223 million
from $120 million in 1999, driven primarily by the Toho Transfer and the
acquisition of Phoenix American Life in April 2000. These increases were
partially offset by decreased automobile insurance sales and run-off or exit of
certain lines of business. Automobile insurance sales decreased 35.4% to $84
million in 2000 from $130 million in 1999, primarily attributable to certain
competitive factors currently existing within the automobile insurance industry.
Operating income from this segment represented 7.2%, 10.2%, and 15.6%, of
the Company's total results for the years ended December 31, 2000, 1999, and
1998, respectively. The Company's operating income from the Lifestyle Protection
and Enhancement segment decreased 3.4% in 2000 to $85 million, and decreased
29.0% in 1999 from $124 million in 1998. The 2000 decrease is primarily
attributable to certain competitive factors currently existing within the
automobile insurance industry, the charges related to the Ward's bankruptcy,
and the 2000 North American Transactions. The 1999 decrease is primarily
attributable to certain competitive factors that existed within the automobile
insurance industry, partially offset by the impact from the acquisition of The
Signature Group in 1999.
Financial Condition
Total Assets. Total assets increased $23.0 billion, or 35.6%, to $87.6 billion
at December 31, 2000 from $64.6 billion at December 31, 1999. Assets acquired in
connection with the Toho Transfer net of amounts eliminated in consolidation,
approximated $21.9 billion.
Total Investments. Total investments increased $19.5 billion, or 46.1%, to $61.8
billion at December 31, 2000 from $42.3 billion at December 31, 1999. The
increase is primarily a result of (i) investments acquired from Toho of $6.4
billion; (ii) purchases of fixed securities of $8.3 billion as a result of the
deployment of cash acquired as a result of the Toho Transfer; (iii) investments
received related to other acquisitions in 2000; (iv) investment growth in core
operations; and (v) investment income of $3.7 billion, offset by cash outflows
for other investing activities.
Deferred Acquisition Costs (DAC). DAC increased $1.0 billion, or 44.8%, to $3.3
billion at December 31, 2000 from $2.3 billion at December 31, 1999. This
increase was primarily related to an increase in deferral of acquisition costs
arising from increased product sales primarily on life and annuity products and
the current year change in net unrealized investment gains, partially offset by
amortization of previously capitalized acquisition costs.
Intangible Assets. Intangible assets, which primarily includes PVFP, goodwill,
and VOBA increased $1.0 billion, or 21.1%, to $5.3 billion at December 31, 2000
from $4.3 billion at December 31, 1999. This decrease primarily relates to PVFP
recorded as a result of the Toho Transfer of $1.6 billion, offset by (i) the
subsequent surrenders of certain contracts by Toho policyholders, (ii) the
42
write-off of goodwill, PVFP and VOBA related to the Wards restructuring as
already discussed, and (iii) amortization of previously capitalized costs.
Deferred Taxes. Deferred taxes decreased $0.5 billion to a deferred tax asset
balance of $0.3 billion at December 31, 2000 from $0.8 at December 31, 1999,
primarily due to the utilization of net operating loss carryforwards and the
current year change in net unrealized losses on the Company's investment
portfolio.
Other Assets. Other assets increased $0.3 billion, or 13.5%, to $2.9 billion at
December 31, 2000 from $2.5 billion at December 31, 1999. This increase was
primarily as a result of $0.5 billion in other assets acquired as part of the
Toho Transfer and increased balances due from brokers relating to investment
transactions, offset by decreases in other assets acquired as a result of the
Toho Transfer of $0.3 billion and normal business activity.
Separate Account Assets. Separate account assets represent funds held for the
exclusive benefit of variable annuity and variable life contract holders. As of
December 31, 2000, the Company held $10.6 billion of separate account assets.
The increase of $1.3 billion, or 13.9%, from $9.3 billion at December 31, 1999
is related primarily to increased sales of variable annuity products and overall
increased market value of the underlying investment funds.
Total Liabilities. Total liabilities increased $22.1 billion, or 38.9%, to
$79.1 billion at December 31, 2000 from $57.0 billion at December 31, 1999.
Liabilities assumed in connection with the Toho Transfer, net of amounts
eliminated in consolidation, approximated $21.9 billion. Various fluctuations
in core operations and changes in liabilities are discussed in more detail
below.
Future Annuity and Contract Benefits. Future annuity and contract benefits
increased $17.7 billion, or 44.7%, to $57.3 billion at December 31, 2000 from
$39.6 billion at December 31, 1999. The increase resulted primarily from (i) the
transfer of insurance policies of $20.6 billion as a result of the Toho Transfer
and (ii) growth in reserves due to sales of certain of the Company's life,
annuity, and long-term care business, offset by surrender payments made to
former Toho policyholders subsequent to the Toho Transfer.
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses
increased $1.4 billion, or 46.4%, to $4.3 billion at December 31, 2000 from $2.9
billion at December 31, 1999. The increase is due primarily to (i) the timing of
net payments and receipts related to the Company's investment portfolio; (ii)
increases in liabilities of GE Edison subsequent to the Toho Transfer; and (iii)
normal business activity associated with core growth in certain of the Company's
product lines.
Separate Account Liabilities. The separate account liabilities represent the
liability associated with the separate account assets. As discussed above, the
$1.3 billion increase to $10.6 billion at December 31, 2000 is related to
increased sales of variable annuity products and overall increased market value
of the underlying investment funds.
Minority Interest. Minority interest decreased $424 million at December 31,
2000 to $51 million from $475 million at December 31, 1999, primarily as a
result of the elimination of minority interest in GE Edison upon the acquisition
of Toho in March 2000.
43
Liquidity and Capital Resources
The principal liquidity requirements for GE Financial Assurance's
insurance operations are its contractual obligations to policyholders and
annuitants. Contractual obligations include payments of surrender benefits,
contract withdrawals, claims under outstanding insurance policies and annuities,
and policy loans. The primary sources for meeting these contractual requirements
are investment income, scheduled principal repayments from its investment
portfolio, and a portion of its premium income. To provide for additional
liquidity to meet normal variations in contract obligations, GE Financial
Assurance maintains cash and short-term investments. The Company has placed
commercial paper in the U.S. market as a vehicle to fund certain of the
Company's acquisitions.
The Company maintains committed back-up credit lines with third-party banks
to support its commercial paper program and maintains committed credit lines
with GE Capital to provide interim funding for the Company's acquisition
activity and to provide liquidity to meet normal variation in contract
obligations.
For the years ended December 31, 2000, 1999, and 1998 cash flows from (used
in) operating and certain financing activities were $(2,449) million, $3,180
million, and $2,117 million, respectively. These amounts include net cash
provided by financing activities relating to investment contract issues and
redemptions of $2,617 million, $2,708 million, and $(703) million for the years
ended December 31, 2000, 1999, and 1998, respectively.
The nature and quality of the various types of investments purchased by a
life insurance company must comply with the statutes and regulations imposed by
the various jurisdictions in which those entities are incorporated. The Company
primarily purchases investment-grade (BBB-/Baa3 or above) bonds. At December 31,
2000, $44.4 billion, or 89.9%, of the fixed maturity securities held by the
Company were bonds rated by a rating agency (S&P or Moody's), or were
government/agency bonds. The remaining $5.0 billion, or 10.1% was comprised
primarily of private placement bonds not rated by either rating agency. At
December 31, 2000, the Company held $4.5 billion of bonds rated below investment
grade. In addition, the Company held $0.2 billion of "not-rated" bonds which the
Company believes are below investment grade. Below investment grade bonds
include those bonds originally purchased as investment grade but subsequently
downgraded in rating, as well as bonds purchased as below investment grade.
Certain of the Company's products contain provisions for penalty charges
for surrender of the policy. These charges range from 6% to 10.5 % at policy
origination and grade to zero over predetermined periods ranging up to twenty
years. At December 31, 2000, approximately 77.7% of the Company's annuity
contracts were subject to surrender penalties or contained non-surrender
provisions. Certain of the Company's funding agreements may be terminated early
by the contractholders. The Company has established a line of credit with its
parent in an amount sufficient to provide liquidity in the event of an unusual
level of early terminations.
44
GE Financial Assurance's ability to pay dividends to its shareholder and
meet its obligations, including debt service and operating expenses, primarily
depends on receiving sufficient funds from its insurance subsidiaries. Insurance
companies are restricted by states as to the aggregate amount of dividends they
may pay to their parent in any consecutive twelve-month period without
regulatory approval. Dividends in excess of the prescribed limits or the
Company's earned surplus are deemed extraordinary and require formal state
insurance department approval. GE Financial Assurance's insurance company
subsidiaries may pay $290 million in dividends to GE Financial Assurance in 2001
without obtaining regulatory approval. See "Insurance Regulation -- General
Regulation at State Level."
Interest Rate Changes
Interest rate changes may have temporary effects on the sale and
profitability of the annuity, universal life, and other investment products
offered by the Company. For example, if interest rates rise, competing
investments (such as annuities or life insurance offered by the Company's
competitors, certificates of deposit, mutual funds, and similar instruments) may
become more attractive to potential purchasers of the Company's products. Also,
the Company's insurance subsidiaries may be forced to raise certain crediting
rates on their lines of products in order to meet competitive pressures. GE
Financial Assurance constantly monitors interest earnings on existing assets and
yields available on new investments and sells policies and annuities that permit
flexible responses to interest rate changes as part of its management of
interest spreads.
Investments
The Company manages its investment portfolio to meet the diversification,
credit quality, yield and liquidity requirements of its policy liabilities by
investing primarily in fixed maturity instruments, including government and
corporate bonds, mortgage-backed securities, and mortgage loans on real estate.
At December 31, 2000, the Company held $57.2 billion, or 92.6% of its investment
portfolio, in fixed maturity instruments and mortgage loans. The Company's
investment philosophy focuses on purchasing assets the durations of which
approximate policyholder obligations. The Company also invests in common and
preferred stock, policy loans, short-term securities and other investments,
which comprised the remaining 7.4% of its investment portfolio at December 31,
2000. More detailed information on investments contained in Note 3 to the
Consolidated Financial Statements.
45
Investment Portfolio
December 31, 2000
-----------------
Fair Value Percentage of
----------- -------------
Total
-----
(Dollars in Millions)
Fixed Maturity Securities - Available-For-Sale(1)
U.S. Government and Agencies............................................................... $ 1,471 2.4%
State and Municipal........................................................................ 633 1.0
Foreign Government......................................................................... 1,367 2.2
Foreign Corporate.......................................................................... 5,382 8.7
U.S. Corporate............................................................................. 32,095 52.0
Mortgage and Asset-Backed(2)............................................................... 8,502 13.8
------------------------
Total Fixed Maturity Securities.......................................................... 49,450 80.1
------------------------
Equity Securities -- Available-For-Sale(3).................................................. 237 .4
Common Stock
Preferred Stock, Non-Redeemable........................................................... 228 .4
------------------------
Total Equity Securities.................................................................. 465 .8
------------------------
Mortgage Loans on Real Estate, Net.......................................................... 7,734 12.5
Policy Loans................................................................................ 1,194 1.9
Short Term Investments...................................................................... 1,690 2.7
Other Invested Assets
Mutual Funds............................................................................... 506 .8
Limited Partnerships....................................................................... 183 .3
European Style Call Options................................................................ 81 .1
Interest Rate Swaps and Floors............................................................. 70 .1
Real Estate Owned.......................................................................... 373 .6
Other...................................................................................... 18 .1
------------------------
Total Other Invested Assets.............................................................. 1,231 2.0
------------------------
Total Investments........................................................................... $61,764 100.0%
========================
___________
(1) Fixed maturity securities available-for-sale are stated at fair values.
Amortized cost of fixed maturity securities available-for-sale at December
31, 2000 was $50,188 million, representing net unrealized losses of $738
million. Changes in fair value, net of the effect on present value of
future profits, deferred acquisition costs and deferred federal income
taxes, are reflected as unrealized appreciation or depreciation directly in
shareholder's interest and, accordingly, have no effect on net income, but
is shown as a separate component of accumulated non-owner changes in
equity.
(2) Mortgage and asset-backed securities are comprised of CMOs ($4,594
million), asset-backed securities ($3,020 million) and pass-through
securities ($888 million).
(3) Equity securities available-for-sale are stated at fair market values. The
cost basis of equity securities available-for-sale at December 31, 2000 was
$438 million, representing net unrealized gains of $27 million. Changes in
market value, net of the effect on present value of future profits,
46
deferred policy acquisition costs and deferred federal income taxes, are
reflected as unrealized appreciation or depreciation directly in
shareholder's interest and, accordingly, have no effect on net income, but
are shown as a separate component of accumulated non-owner changes in
equity.
The following table summarizes the Company's investment results for the periods
indicated.
Investment Results
Years ended December 31,
------------------------
2000 1999 1998
------- ------- -------
(Dollars in Millions)
Total Average Invested Assets (1)......................................... $53,859 $42,691 $39,544
Net Investment Income (2)................................................. $ 3,715 $ 3,123 $ 2,896
Effective Yield (3)....................................................... 7.14% 7.59% 7.60%
Net Realized Investment Gains (4)......................................... $ 162 $ 165 $ 116
___________
(1) Average of cash and total invested assets on an amortized cost basis,
adjusted for impact of timing on acquired companies.
(2) Net investment income is net of investment expenses and excludes capital
gains or losses or provision for income taxes.
(3) Net investment income divided by the sum of the (i) average cash and total
invested assets minus (ii) one-half of net investment income.
(4) Excludes provision for income taxes.
New Accounting Standards
The Financial Accounting Standards Board ("FASB") has issued, then subsequently
amended, Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, effective for GE
Financial Assurance on January 1, 2001. Upon adoption, all derivative
instruments (including certain derivative instruments embedded in other
contracts) will be recognized in the balance sheet at their fair values; changes
in such fair values must be recognized immediately in earnings unless specific
hedging criteria are met. Effects of qualifying changes in fair value will be
recorded in equity pending recognition in earnings as offsets to the related
earnings effects of the hedged items. Management estimates that, at January 1,
2001, the effects on the Company's consolidated financial statements of adopting
SFAS No. 133, as amended, will be a one-time reduction of net earnings of less
than $20 million, and a one-time reduction of shareholder's interest, excluding
the net earnings effect, of less than $375 million. The precise transition
effect is uncertain because the accounting for certain derivatives and hedging
relationships in accordance with SFAS No. 133 is subject to further
interpretation by the FASB.
47
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate and Currency Risk Management
In normal operations, the Company must deal with effects of changes in
interest rates and currency exchange rates. The following discussion presents
an overview of how such changes are managed and a view of their potential
effects.
The Company uses various financial instruments, particularly interest rate
and currency swaps, but also futures, options and currency forwards, to manage
interest rate and currency exchange risks. The Company is exclusively an end
user of these instruments, which are commonly referred to as derivatives. The
Company does not engage in any derivatives trading, market-making or other
speculative activities in the derivative markets. More detailed information
regarding these financial instruments, as well as the strategies and policies
for their use, is contained in Notes 1, 9 and 14 to the Consolidated Financial
Statements.
The Company manages its exposure to changes in interest rates, in part, by
funding its assets with an appropriate mix of fixed and variable rate debt and
its exposure to currency fluctuations principally by funding local currency
denominated assets with debt denominated in those same currencies.
The Company is exposed to prepayment risk in certain of its business
activities, such as in its investment portfolio, mortgage and annuities
activities. In order to hedge those exposures, the Company uses swaps, futures,
and option-based financial instruments. These instruments generally behave
based on limits ("caps", "floors" or "collars") on interest rate movement.
These swaps, futures and option-based instruments are governed by the credit
risk policies described below and are transacted in either exchange-traded or
over-the-counter markets.
Established practices require that derivative financial instruments relate
to specific asset, liability or equity transactions or to currency exposures.
Substantially all treasury actions are centrally executed by the Company's
Treasury Department, which maintains controls on all exposures, adheres to
stringent counterparty credit standards and actively monitors marketplace
exposures.
As a result of the Company's use of swaps, purchased options and forwards,
the principal risk is credit risk - risk that counterparties will be financially
unable to make payments in accordance with the agreements. Associated market
risk is meaningful only as it relates to how changes in the market value affect
credit exposure to individual counterparties. Except as noted above for
positions that are integrated into financings, all swaps, purchased options and
forwards are carried out within the following credit policy constraints.
48
Once a counterparty reaches a credit exposure limit (see table below), no
additional transactions are permitted until the exposure with that counterparty
is reduced to an amount that is within the established limit. Open contracts
remain in force.
Counterparty credit criteria Credit rating
--------------------------
Standard &
Moody's Poor's
------- ----------
Term of transaction
Between one and five years......................................... Aa3 AA-
Greater than five years............................................ Aaa AAA
Credit exposure limits
Up to $50 million.................................................. Aa3 AA-
Up to $75 million.................................................. Aaa AAA
All swaps are executed under master swap agreements containing mutual
credit downgrade provisions that provide the ability to require assignment or
termination in the event either party is downgraded below A3 or A-.
More credit latitude is permitted for transactions having original
maturities shorter than one year because of their lower risk.
The conversion of interest rate and currency risk into credit risk results
in a need to monitor counterparty credit risk actively. At December 31, 2000,
there were no notional amounts of long-term derivatives for which the
counterparty credit criteria was rated below A3/AA- compared to $23 million in
1999. These amounts are the result of (1) counterparty downgrades, (2)
transactions executed prior to the adoption of the Company's current
counterparty credit standards, and (3) transactions relating to acquired assets
or businesses.
Following is an analysis of credit risk exposures as of December 31:
Percentage of Notional Derivative Exposure by Counterparty Credit Rating
- ---------------------------------------------------------------------------------------------
Moody's/Standard & Poor's 2000 1999 1998
- ------------------------- -------------- -------------- -----------
Aaa/AAA.................................... 99% 89% 90%
Aa/AA...................................... 1% 11% 10%
A/A and below.............................. ---% --% --%
The Securities and Exchange Commission requires that registrants disclose
information about potential effects of changes in interest rates and currency
exchange. Although the rules offer alternatives for presenting this
information, none of the alternatives is without limitations. The following
discussion is based on so-called "shock-tests," which model effects of interest
rate and currency shifts on the reporting company. Shock tests, while probably
the most meaningful analysis permitted, are constrained by several factors,
including the necessity to conduct the analysis based on a single point in time
and by their inability to include the extraordinarily complex market reactions
that normally would arise from the market shifts modeled. While the following
results of shock tests for interest rates and currencies may
49
have some limited use as benchmarks, they should not be viewed as forecasts.
. One means of assessing exposure to interest rate changes is a duration-based
analysis that measures the potential loss in net earnings resulting from a
hypothetical increase in interest rates of 100 basis points across all
maturities (sometimes referred to as a "parallel shift in the yield curve").
Under this model, it is estimated that, all else constant, such an increase,
including repricing effects in the securities portfolio, would increase the
2001 net earnings of the Company based on year-end 2000 positions by
approximately $15 million.
. One means of assessing exposure to changes in currency exchange rates is to
model effects on reported earnings using a sensitivity analysis. Year-end
2000 consolidated currency exposures, including financial instruments
designated and effective as hedges, were analyzed to identify Company assets
and liabilities denominated in other than their relevant functional currency.
It is estimated that changes in currency exchange rates would reduce the 2001
net earnings of the Company based upon 2000 positions by an insignificant
amount because the Company hedges substantially all of its foreign currency
exchange exposures.
50
Item 8
Financial Statements and Supplementary Data
Contents
GE Financial Assurance Holdings, Inc. and Subsidiaries
Consolidated Financial Statements
Page
Independent Auditors' Report........................................... 52
Consolidated Balance Sheets............................................ 53
Consolidated Statements of Income...................................... 54
Consolidated Statements of Shareholder's Interest...................... 55
Consolidated Statements of Cash Flows.................................. 56
Notes to Consolidated Financial Statements............................. 57
Independent Auditors' Report on Financial Statement Schedules.......... 84
Schedule II, Condensed Financial Information (Parent Company).......... 85
Schedule III, Supplemental Insurance Information....................... 89
51
Independent Auditor's Report
----------------------------
The Board of Directors
GE Financial Assurance Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of GE
Financial Assurance Holdings, Inc. and subsidiaries as of December 31, 2000 and
1999, and the related consolidated statements of income, shareholder's interest,
and cash flows for each of the years in the three-year period ended December 31,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GE Financial
Assurance Holdings, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 12 to the consolidated financial statements, the
Company changed its method of accounting for insurance-related assessments in
1999.
/s/ KPMG LLP
Richmond, Virginia
January 22, 2001
52
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar amounts in millions, except per share amounts)
December 31,
---------------------------------------
Assets 2000 1999
---------------- -----------------
Investments:
Fixed maturities available-for-sale, at fair value $ 49,450 $ 36,932
Equity securities available-for-sale, at fair value:
Common stocks 237 130
Preferred stocks, non-redeemable 228 215
Mortgage and other loans, net of valuation allowance of
$164 and $71 at December 31, 2000 and 1999, respectively 7,734 3,414
Policy loans 1,194 945
Short-term investments 1,690 -
Other invested assets 1,231 652
---------------- ----------------
Total investments 61,764 42,288
---------------- ----------------
Cash and cash equivalents 951 532
Accrued investment income 1,133 961
Deferred acquisition costs 3,340 2,307
Intangible assets 5,260 4,345
Reinsurance recoverable 1,388 1,537
Deferred tax assets 319 813
Other assets 2,855 2,515
Separate account assets 10,606 9,308
---------------- ----------------
Total assets $ 87,616 $ 64,606
================ ================
Liabilities and Shareholder's Interest
Liabilities:
Future annuity and contract benefits $ 57,350 $ 39,639
Liability for policy and contract claims 2,597 1,886
Unearned premiums 800 842
Other policyholder liabilities 501 626
Accounts payable and accrued expenses 4,294 2,933
Short-term borrowings 2,304 1,036
Separate account liabilities 10,606 9,308
Long-term debt 699 705
---------------- ----------------
Total liabilities 79,151 56,975
---------------- ----------------
Minority interest 51 475
Shareholder's interest:
Net unrealized investment losses (414) (1,079)
Foreign currency translation adjustments 45 220
---------------- ----------------
Accumulated non-owner changes in equity (369) (859)
Common stock ($1 par value, 1,000 shares authorized,
issued and outstanding) - -
Additional paid-in capital 6,320 6,320
Retained earnings 2,463 1,695
---------------- ----------------
Total shareholder's interest 8,414 7,156
---------------- ----------------
Total liabilities and shareholder's interest $ 87,616 $ 64,606
================ ================
See accompanying notes to consolidated financial statements.
53
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollar amounts in millions)
Years Ended December 31,
-----------------------
2000 1999 1998
-------- -------- --------
Revenues:
Premiums $ 5,465 $ 3,542 $ 3,207
Net investment income 3,715 3,123 2,896
Surrender fee income 1,253 56 46
Net realized investment gains 162 165 116
Policy fees and other income 930 666 407
-------- -------- --------
Total revenues 11,525 7,552 6,672
-------- -------- --------
Benefits and expenses:
Benefits and other changes in policy reserves 5,378 3,522 3,229
Interest credited 1,497 1,298 1,260
Commissions 1,236 858 541
General expenses 2,005 1,348 914
Amortization of intangibles, net 1,222 340 286
Change in deferred acquisition costs, net (1,132) (774) (446)
Interest expense 143 95 95
-------- -------- --------
Total benefits and expenses 10,349 6,687 5,879
-------- -------- --------
Income before income taxes, minority interest
and cumulative effect of accounting change 1,176 865 793
Provision for income taxes 402 248 301
-------- -------- --------
Income before minority interest and cumulative
effect of accounting change 774 617 492
Minority interest 6 4 -
-------- -------- --------
Income before cumulative effect of
accounting change 768 613 492
Cumulative effect of accounting change, net of tax - 25 -
-------- -------- --------
Net income $ 768 $ 638 $ 492
======== ======== ========
See accompanying notes to consolidated financial statements.
54
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholder's Interest
(Dollar amounts in millions, except share amounts)
Accumulated
Common Stock Additional Non-owner Total
------------------ Paid-In Changes Retained Shareholder's
Shares Amount Capital In Equity Earnings Interest
-------- -------- --------- ----------- ---------- ----------
Balances at January 1, 1998 1,000 - 5,435 661 862 6,958
Changes other than transactions with shareholder:
Net income - - - - 492 492
Net unrealized gains on investment securities (a) - - - 52 - 52
Foreign currency translation adjustments - - - 73 - 73
-------
Total changes other than transactions with shareholder 617
-------
Dividends declared - - - - (120) (120)
------- ------- -------- ------- ------- -------
Balances at December 31, 1998 1,000 - 5,435 786 1,234 7,455
Changes other than transactions with shareholder:
Net income - - - - 638 638
Net unrealized losses on investment securities (a) - - - (1,792) - (1,792)
Foreign currency translation adjustments - - - 147 - 147
-------
Total changes other than transactions with shareholder (1,007)
-------
Contribution of The Signature Group - - 885 - - 885
Dividends declared - - - - (177) (177)
------- ------- -------- ------- ------- -------
Balances at December 31, 1999 1,000 $ - $ 6,320 $ (859) $ 1,695 $ 7,156
Changes other than transactions with shareholder:
Net income - - - - 768 768
Net unrealized gains on investment securities (a) - - - 665 - 665
Foreign currency translation adjustments - - - (175) - (175)
-------
Total changes other than transactions with shareholder 1,258
------- ------- -------- ------- ------- -------
Balances at December 31, 2000 1,000 $ - $ 6,320 $ (369) $ 2,463 $ 8,414
======= ======= ======== ======= ======= =======
(a) Presented net of deferred taxes of $(335), $970, and $(26) in 2000, 1999,
and 1998, respectively.
See accompanying notes to consolidated financial statements.
55
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar amounts in millions)
Years Ended December 31,
------------------------
2000 1999 1998
------- -------- ---------
Cash flows from operating activities:
Net income $ 768 $ 638 $ 492
------- -------- ---------
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Changes in reserves (6,670) 626 2,601
Charges assessed to policyholders (247) (208) (282)
Net realized investment gains (162) (165) (116)
Amortization of investment premiums and discounts (61) (112) (50)
Amortization of intangibles, net 1,222 340 286
Deferred income tax expense 228 128 53
Change in certain assets and liabilities:
Deferred acquisition costs (1,073) (774) (446)
Accrued investment income and other assets, net 50 (899) (593)
Accounts payable, accrued expenses and other policy-related
balances 879 898 875
------- -------- ---------
Total adjustments (5,834) (166) 2,328
------- -------- ---------
Net cash (used in) provided by operating activities (5,066) 472 2,820
------- -------- ---------
Cash flows from investing activities:
Short-term investment activity, net (1,690) - -
Proceeds from sales and maturities of investment securities
and other invested assets 9,821 8,332 8,320
Principal collected on mortgage and policy loans 1,455 424 471
Purchase of investment securities and other invested assets (20,140) (10,844) (10,542)
Mortgage and policy loan originations (1,192) (644) (859)
Purchase of Professional Insurance Company - (46) -
Purchase of Phoenix American Life, net of cash acquired (222) - -
The Travelers Transaction, net of cash acquired (294) - -
Purchase of GE Edison Life Insurance Company, net of cash acquired - - (572)
------- -------- ---------
Net cash used in investing activities (12,262) (2,778) (3,182)
------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of investment contracts 8,628 7,007 3,652
Redemption and benefit payments on investment contracts (6,011) (4,299) (4,355)
Proceeds from short-term borrowings 3,410 2,639 3,303
Payments on short-term borrowings (3,168) (2,916) (3,703)
Proceeds from long-term debt - - 515
Net commercial paper borrowings (repayments) 1,026 (17) 568
Borrowings from minority interest holder - - 556
Cash received upon acquisition of The Signature Group - 129 -
Cash received upon acquisition of Toho Mutual Life 13,176
Dividend paid to shareholder - (155) (120)
------- -------- ---------
Net cash provided by financing activities 17,061 2,388 416
------- -------- ---------
Effect of exchange rate changes on cash 686 72 (6)
Net increase in cash and cash equivalents 419 154 48
Cash and cash equivalents at beginning of year 532 378 330
------- -------- ---------
Cash and cash equivalents at end of year $ 951 $ 532 $ 378
======= ======== =========
See accompanying notes to consolidated financial statements.
56
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the historical
operations and accounts of GE Financial Assurance Holdings, Inc. and its
subsidiaries (collectively, the Company). Operating subsidiaries of the Company
include General Electric Capital Assurance Company, Federal Home Life Insurance
Company, GE Life and Annuity Assurance Company, First Colony Life Insurance
Company and subsidiaries, Union Fidelity Life Insurance Company, GE Edison Life
Insurance Company ("GE Edison"), Colonial Penn Insurance Company, and Signature
Financial/Marketing Inc., ("The Signature Group"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
All of the outstanding common stock of GE Financial Assurance Holdings,
Inc. ("GE Financial Assurance") is owned by General Electric Capital Corporation
("GE Capital"), a wholly-owned subsidiary of General Electric Capital Services,
Inc. ("GE Capital Services"), which in turn is wholly-owned, directly or
indirectly, by General Electric Company.
(b) Basis of Presentation
These consolidated financial statements have been prepared on the basis of
accounting principles generally accepted in the United States of America
("GAAP"). The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts and related disclosures. Actual results could differ from those
estimates. Certain prior year amounts have been reclassified to conform to the
current year presentation.
(c) Products
GE Financial Assurance is an insurance holding company that, through its
subsidiaries, sells a variety of insurance and investment-related products
almost entirely in North America and Asia. The Company's operations are in two
business segments: (i) Wealth Accumulation and Transfer, and (ii) Lifestyle
Protection and Enhancement.
Wealth Accumulation and Transfer products are investment vehicles and
insurance contracts 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. The Company's principal product lines
under the Wealth Accumulation and Transfer segment are deferred annuities (fixed
and variable), immediate annuities (structured settlements and retirement), life
insurance (universal, term, ordinary and group), guaranteed investment contracts
(GICs), funding agreements, and mutual funds.
Lifestyle Protection and Enhancement products are products intended to
protect accumulated wealth and income from the financial drain of unforeseen
events and provide income protection packages. The Company's principal product
lines under the Lifestyle Protection and Enhancement segment are long-term care,
supplementary accident and health insurance, personal lines of automobile
insurance and income protection packages.
57
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
The Company distributes its products through four primary channels:
intermediaries (such as brokerage general agents ("BGAs"), banks, securities
brokerage firms and financial planning firms); dedicated sales forces, who
distribute certain of the Company's products on an exclusive basis, some of whom
are not employees of the Company; marketing through businesses; and direct and
affinity based marketing through e-commerce, telemarketing and direct mail.
Certain of the Company's subsidiaries and certain policies and contracts
offered by them are subject to regulation under the federal securities laws
administered by the Securities and Exchange Commission and certain state
securities laws. Certain of these products offer customers a guaranteed interest
rate for a predetermined time period and subject customers to a market value
adjustment on early withdrawals. Other products offer customers numerous
investment options, including, but not limited to, purchases of shares of
various mutual funds.
(d) Revenues
Investment income is recorded when earned. Realized investment gains and
losses are calculated on the basis of specific identification. Premiums on
short-duration insurance contracts are reported as revenue over the terms of the
related insurance policies. In general, earned premiums are calculated on a pro-
rata basis or are recognized in proportion to expected claims. Premiums on long-
duration insurance products are recognized as earned when due or, in the case of
life contingent immediate annuities, when the contracts are issued. Premiums
received under annuity contracts without significant mortality risk and premiums
received on universal life products are not reported as revenues but as
liabilities for future annuity and contract benefits. Other income consists
primarily of surrender charges on certain policies, income protection package
revenues and charges to policyholder account values for universal life, variable
life and variable annuity policies. Surrender charges are recognized as income
when the policy is surrendered. Income protection package dues are recognized as
income over the membership period. Charges to policyholder accounts for
universal life cost of insurance is recognized as revenue when due. Variable
product fees are charged to variable annuity and variable life policyholders
based upon the daily net assets of the policyholder's account values and are
recognized as revenue when charged.
(e) Cash Equivalents
Certificates, money market funds and other time deposits with original
maturities of less than 90 days are considered cash equivalents in the
Consolidated Balance Sheets and Consolidated Statements of Cash Flows. Items
with original maturities greater than 90 days are included in short-term
investments.
(f) Investments
The Company has designated its fixed maturities (bonds, notes, and
redeemable preferred stock) and its equity securities (common and non-redeemable
preferred stock) as available-for-sale. The fair value for regularly traded
fixed maturities and equity securities is based on quoted market prices. For
fixed maturities not regularly traded, fair values are estimated using values
obtained from independent pricing services or are estimated by discounting
expected future cash flows using a current market rate applicable to the credit
quality, industry sector, call features and maturity of the investments, as
applicable.
58
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
Changes in the market values of investments available-for-sale, net of the
effect on deferred acquisition costs, present value of future profits, and
deferred federal income taxes, are reflected as unrealized investment gains or
losses in a separate component of shareholder's interest and, accordingly, have
no effect on net income. Unrealized losses that are considered other than
temporary are recognized in earnings through an adjustment to the amortized cost
basis of the underlying securities. The Company engages in certain securities
lending transactions, which require the borrower to provide collateral,
primarily consisting of cash and government securities, on a daily basis, in
amounts equal to or exceeding 102% of the market value of the applicable
securities loaned.
Investment income on mortgage-backed and asset-backed securities is
initially based upon yield, cash flow, and prepayment assumptions at the date of
purchase. Subsequent revisions in those assumptions are recorded using the
retrospective method, whereby the amortized cost of the securities is adjusted
to the amount that would have existed had the revised assumptions been in place
at the date of purchase. The adjustments to amortized cost are recorded as a
charge or credit to investment income.
Mortgage and policy loans are stated at the unpaid principal balance of
such loans, net of allowances for estimated uncollectable amounts. The allowance
for losses is determined primarily on the basis of management's best estimate of
probable losses, including specific allowances for known troubled loans, if any.
(g) Deferred Acquisition Costs
Acquisition costs include costs and expenses that vary with and are
primarily related to the acquisition of insurance and investment contracts and
income protection packages. Such costs are deferred and amortized as follows:
Long-duration contracts -- Acquisition costs include first-year commissions
in excess of recurring renewal commissions, certain solicitation and printing
costs, and certain support costs such as underwriting and policy issue expenses.
For investment and universal life type contracts, amortization is based on the
present value of anticipated gross profits from investments, interest credited,
surrender and other policy charges, and mortality and maintenance expenses.
Amortization is adjusted retroactively when current estimates of future gross
profits to be realized are revised. For other long-duration insurance contracts,
the acquisition costs are amortized in relation to the estimated benefit
payments or the present value of expected future premiums.
Short-duration contracts -- Acquisition costs consist primarily of
commissions and premium taxes and are amortized ratably over the terms of the
underlying policies. Direct response marketing costs are amortized ratably over
the expected life of the respective customer relationship.
Income protection packages -- Acquisition costs consist primarily of
marketing costs and are amortized in proportion to the anticipated revenue to be
recognized from club memberships.
Deferred acquisition costs are reviewed to determine if they are
recoverable from future income, including investment income, and, if not
considered recoverable, are charged to expense.
59
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
(h) Intangible Assets
Present Value of Future Profits -- In conjunction with the acquisitions of
life insurance subsidiaries, a portion of the purchase price is assigned to the
right to receive future gross profits arising from existing 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 cash flows from the acquired policies.
Value of Business Acquired ("VOBA") -- VOBA reflects the estimated fair
value of the Company's active auto club memberships and represents the present
value of the expected future cash flows from active auto club memberships
existing at the date of the acquisition. VOBA is amortized over the estimated
life of the memberships of the business acquired in relation to the present
value of the estimated gross profits.
Goodwill -- Goodwill is amortized over its estimated period of benefit on
the straight-line method. No amortization period exceeds 40 years. Goodwill in
excess of associated expected operating cash flows is considered to be impaired
and is written down to fair value.
(i) Federal Income Taxes
The Company's non-life insurance subsidiaries are included in the
consolidated federal income tax return of General Electric Company. These
subsidiaries are subject to a tax-sharing arrangement which allocates tax on a
separate company basis, but provides group benefit for current utilization of
losses and credits. The Company's life insurance subsidiaries file a
consolidated life insurance federal income tax return and are also subject to a
separate tax-sharing agreement, as approved by state insurance regulators, which
also allocates tax on a separate Company basis but provides for current
utilization of losses and credits.
Deferred taxes are allocated to individual subsidiaries by applying the
asset and liability method of accounting for deferred income taxes. Intercompany
balances are settled annually.
The Company has not established any deferred income taxes on temporary
differences related to the financial statement carrying amounts and tax bases of
investments in significant foreign subsidiaries. The Company has elected to
permanently reinvest the earnings of its material foreign subsidiaries.
(j) Reinsurance
Premium revenue, benefits, underwriting, acquisition and insurance expenses
are reported net of the amounts relating to reinsurance ceded to other
companies. Amounts due from reinsurers for incurred and estimated future claims
are reflected in the reinsurance recoverable asset. The cost of reinsurance is
accounted for over the terms of the related treaties using assumptions
consistent with those used to account for the underlying reinsured policies.
(k) Future Annuity and Contract Benefits
Future annuity and contract benefits consist of the liability for
investment contracts, insurance contracts and accident and health contracts.
Investment contract liabilities are generally equal to the policyholder's
current account value. The liability for insurance and accident and health
contracts is calculated based upon actuarial assumptions as to mortality,
morbidity, interest, expense and withdrawals, with experience adjustments for
adverse deviation where appropriate.
60
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
(l) Liability for Policy and Contract Claims
The liability for policy and contract claims represents the amount needed
to provide for the estimated ultimate cost of settling claims relating to
insured events that have occurred on or before the end of the respective
reporting period. The estimated liability includes requirements for future
payments of (a) claims that have been reported to the insurer, (b) claims
related to insured events that have occurred but that have not been reported to
the insurer as of the date the liability is estimated, and (c) claim adjustment
expenses. Claim adjustment expenses include costs incurred in the claim
settlement process such as legal fees and costs to record, process, and adjust
claims.
(m) Separate Accounts
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity contract owners and variable life
policyholders. The Company receives mortality risk fees and administration
charges from the variable mutual fund portfolios. The separate account assets
are carried at fair value and are equal to the liabilities that represent the
policyholders' equity in those assets.
(n) Minority Interest
Minority interest primarily relates to certain ownership interests in GE
Life and Annuity Assurance Company and Phoenix American Life Insurance Company.
Prior to 2000, minority interest included certain ownership interests in GE
Edison.
(o) Interest Rate and Currency Risk Management
As a matter of policy, the Company does not engage in derivative trading,
market-making or other speculative activities.
The Company uses swaps primarily to optimize funding costs. Interest rate
and currency swaps that modify borrowings or designated assets, including swaps
associated with forecasted commercial paper renewals, are accounted for on an
accrual basis. The Company requires all other swaps, as well as futures,
interest rate floors, swap options, options, and currency forwards to be
designated and accounted for as hedges of specific assets, liabilities or
committed transactions; resulting payments and receipts are recognized
contemporaneously with effects of hedged transactions. A payment or receipt
arising from early termination of an effective hedge is accounted for as an
adjustment to the basis of the hedged transaction.
Instruments used as hedges must be effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge at
the inception of the contract. Accordingly, changes in market values of hedged
instruments must be highly correlated with changes in market values of
underlying hedged items both at inception of the hedge and over the life of the
hedge contract. Any instrument designated but ineffective as a hedge would be
marked to market and recognized in operations immediately.
(p) Accounting Pronouncement Not Yet Adopted
The Financial Accounting Standards Board ("FASB") has issued, then
subsequently amended, Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities, effective for
GE Financial Assurance on January 1, 2001. Upon adoption, all derivative
instruments (including certain derivative instruments embedded in other
contracts) will be recognized in the balance sheet at their fair values; changes
in such fair values must be recognized immediately in earnings unless specific
hedging criteria are met. Effects of qualifying changes in fair value will be
recorded in equity pending recognition in earnings as offsets to the related
earnings effects of the hedged items. Management estimates that, at January 1,
2001, the effects on the Company's Consolidated Financial Statements of adopting
SFAS No. 133, as amended, will be a one-time reduction of net earnings of less
than $20 million, and a one-time reduction of shareholder's interest, excluding
the net earnings effect, of less than $375 million. The precise transition
effect is uncertain because the accounting for certain derivatives and hedging
relationships in accordance with SFAS No. 133 is subject to further
interpretation by the FASB.
61
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
(2) Acquisitions and Transfers
In March 2000, 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 $21.6 billion of
policyholder liabilities, $0.3 billion of accounts payable and accrued expenses,
and acquired $20.3 billion of cash, investments and other tangible assets. The
$1.6 billion difference between acquired assets and assumed liabilities
represents 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 subsidiary of the Company. The redeemable preferred
stock and warrants have been eliminated in the accompanying Consolidated Balance
Sheets as of December 31, 2000. The corresponding amount eliminates the minority
interest in the Company previously held by Toho.
As disclosed below, GE Edison had previously acquired Toho's operating
infrastructure in March 1998. In June 1999, the Financial Services Agency
("FSA") of Japan determined that Toho's continued operation was not in the best
interest 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").
At that time, the sole means for rehabilitating an insolvent insurer under
the IBL was 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 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.
In connection with the Transfer, the Company terminated reinsurance
arrangements it had with Toho. Certain amounts in the Consolidated Statements of
Income for the year ended December 31, 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 year ended December
31, 2000. Toho, which continues to exist as a separate and independent entity,
will fully liquidate its remaining assets and liabilities following the
comprehensive transfer. Such liquidation is not expected to have any impact on
the Company's financial position or results of operations.
62
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
In March 1998, the Company and Toho jointly capitalized a new insurance
company, GE Edison, to sell life, health and annuity products in the Japanese
market. In connection with this agreement, the Company paid Toho $547 in
exchange for the operating infrastructure and $13 in exchange for certain
tangible assets. GE Edison originates and underwrites all of the new business
activity. Existing Toho business remained with Toho with the exception of
certain term life insurance business ceded to GE Edison as described below. The
Company's investment in GE Edison includes 100% of the entity's voting interest
following the Company's acquisition in December 1999 of the 10% voting interest
previously held by Toho. Additionally, in 1998, the Company paid Toho a ceding
commission of $400 in exchange for Toho transferring 50% of certain term life
insurance reserves and certain other liquid assets approximating $391. Also in
1998, GE Edison entered into an agreement with Toho, which contains certain
modified coinsurance arrangements. These blocks of existing term life insurance
provided an initial operations base for GE Edison.
In conjunction with the 1998 acquisition of the infrastructure and
capitalization of GE Edison, a subsidiary of the Company agreed to issue certain
subsidiary preferred stock to the sellers in an amount up to (Yen)56.0 billion
through 2004, contingent upon certain performance measurements. In accordance
with such agreement, the Company issued certain subsidiary preferred stock to
the sellers in an amount of $19 in 1999. The subsidiary preferred stock issued
during 1999 has been accounted for as additional purchase consideration and the
additional goodwill is being amortized over the remaining goodwill life.
In April 2000, the Company acquired Phoenix American Life Insurance
Company, a subsidiary of Phoenix Home Life Mutual Insurance Company. The
purchase price of $281, including PVFP, has been allocated to the assets
acquired and the liabilities assumed based upon their respective fair value at
the date of the acquisition.
In July 2000, the Company acquired 90% of the long-term care insurance
portfolio of Citigroup's Travelers Life and Annuity unit and certain assets
related thereto for $411 ("the Travelers Transaction"). In addition, the Company
and certain Citigroup companies entered into agreements to underwrite and
distribute long-term care insurance through a long-term strategic alliance.
Under this agreement, the Company will market to the distribution channels of
Citigroup, including Travelers.
In July 1999, in connection with Montgomery Ward Holding Corp.'s plan of
reorganization under chapter 11 of the federal bankruptcy laws, GE Capital
acquired The Signature Group (Signature) from Montgomery Ward & Co.
Incorporated. The acquisition was completed through a series of mergers
involving various Signature companies and subsidiaries of the Company with the
Company's subsidiaries being the surviving company in such mergers. The effect
of the mergers was to cause Signature to become a subsidiary of GE Financial
Assurance. The aggregate purchase price of $885 has been allocated to Signature
assets acquired, including PVFP and value of consumer club business acquired of
$122 and $297, respectively, and to liabilities assumed, including liability for
policy and contract claims of $144, based upon their respective fair values at
the date of the acquisition, and a corresponding amount has been recorded as an
increase to additional paid in capital, reflecting the mergers of the Signature
companies into subsidiaries of the Company.
63
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
Each of the above referenced acquisitions has been accounted for using the
purchase method of accounting and, accordingly, the accompanying consolidated
financial statements reflect the corresponding results of operations from the
respective dates of acquisition. The Company has reflected its initial
allocation of purchase price based on their estimated fair values according to
preliminary valuations. Such estimated values may change as additional
information is obtained and the valuations finalized.
(3) Investments
(a) General
For the years ended December 31, the sources of investment income of the
Company were as follows:
2000 1999 1998
---- ---- ----
Fixed maturities $3,141 $2,758 $2,527
Equity securities --- --- 24
Mortgage loans 448 260 234
Policy loans 93 102 96
Other 63 9 23
------------------------------
Gross investment income 3,745 3,129 2,904
Investment expenses (30) (6) (8)
------------------------------
Net investment income $3,715 $3,123 $2,896
==============================
For the years ended December 31, sales proceeds and gross realized
investment gains and losses resulting from the sales of investment securities
available-for-sale were as follows:
2000 1999 1998
---- ---- ----
Sales proceeds $5,852 $3,675 $4,668
==============================
Gross realized investment:
Gains $ 257 $ 251 $ 211
Losses (95) (86) (95)
------------------------------
Net realized investment gains $ 162 $ 165 $ 116
==============================
The additional proceeds from investments presented in the Company's
Consolidated Statements of Cash Flows result from principal collected on
mortgage and asset-backed securities, maturities, calls and sinking fund
payments.
64
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
Net unrealized gains and losses on investment securities classified as
available-for-sale are reduced by deferred income taxes and adjustments to PVFP
and deferred acquisition costs that would have resulted had such gains and
losses been realized. Net unrealized gains and losses on available-for-sale
investment securities reflected as a separate component of shareholder's
interest at December 31 are summarized as follows:
2000 1999 1998
---- ---- ----
Net unrealized (losses) gains on available-for-sale investment securities
before adjustments:
Fixed maturities $(738) $(1,911) $1,330
Equity securities 27 9 21
Other invested assets (25) 1 5
-----------------------------
Subtotal (736) (1,901) 1,356
Adjustments to the present value of future profits and deferred acquisition 69 234 (261)
costs
Deferred income taxes 253 588 (382)
-----------------------------
Net unrealized (losses) gains on available-for-sale investment securities $(414) $(1,079) $ 713
=============================
The change in the net unrealized gains (losses) on investment securities
reported in accumulated non-owner changes in equity is as follows:
2000 1999 1998
--------- -------- -------
Net unrealized gains (losses) on investment securities - beginning of year $ (1,079) $ 713 $ 661
Unrealized gains (losses) on investment securities - net of deferred taxes of
$(392), $912, and $(67) 770 (1,685) 127
Reclassification adjustments - net of deferred taxes of $57, $58, and $41 (105) (107) (75)
--------- ------- -------
Net unrealized gain (loss) on investment securities - end of year $ (414) $(1,079) $ 713
========= ======= =======
At December 31, the amortized cost, gross unrealized gains and losses, and
fair value of the Company's fixed maturities and equity securities available-
for-sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
2000
- -----
Fixed maturities
U.S. government and agencies $ 1,502 $ 7 $ (38) $ 1,471
State and municipal 659 1 (27) 633
Foreign government 1,386 49 (68) 1,367
Foreign corporate 5,328 149 (95) 5,382
U.S. corporate 33,034 369 (1,308) 32,095
Mortgage and asset-backed 8,279 230 (7) 8,502
------------------------------------------------------
Total fixed maturities 50,188 805 (1,543) 49,450
Common and non-redeemable preferred stock 438 72 (45) 465
------------------------------------------------------
Total available-for-sale securities $50,626 $877 $(1,588) $ 49,915
======================================================
65
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1999
- ----
Fixed maturities:
U.S. government and agencies $ 1,500 $ 3 $ (141) $ 1,362
State and municipal 652 1 (76) 577
Foreign government 194 2 (8) 188
Foreign corporate 3,248 28 (154) 3,122
U.S. corporate 25,248 105 (1,568) 23,785
Mortgage and asset-backed 8,001 58 (161) 7,898
----------------------------------------------------
Total fixed maturities 38,843 197 (2,108) 36,932
Common and non-redeemable preferred stock 336 30 (21) 345
----------------------------------------------------
Total available-for-sale securities $39,179 $227 $(2,129) $37,277
====================================================
The scheduled maturity distribution of the fixed maturity portfolio at
December 31, 2000 follows. Expected maturities may differ from scheduled
contractual maturities because issuers of securities may have the right to call
or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
---- -----
Due in one year or less $ 964 $ 1,634
Due one year through five years 8,971 8,539
Due five years through ten years 10,954 10,841
Due after ten years 21,020 19,934
--------------------
Subtotal 41,909 40,948
Mortgage and asset-backed securities 8,279 8,502
--------------------
Totals $50,188 $49,450
====================
At December 31, 2000, $6,645 of the Company's investments (excluding
mortgage and asset-backed securities) were subject to certain call provisions.
As required by law, the Company has investments on deposit with
governmental authorities and banks for the protection of policyholders of $108
and $106 at December 31, 2000 and 1999, respectively.
66
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
At December 31, 2000, approximately 28.3%, 16.1% and 13.5% of the Company's
investment portfolio is comprised of securities issued by the manufacturing,
utility and financial industries, respectively, the vast majority of which are
rated investment grade, and which are senior secured bonds. No other industry
group comprises more than 10% of the Company's investment portfolio. This
portfolio is widely diversified among various geographic regions in the United
States, and is not dependent on the economic stability of one particular region.
At December 31, 2000, the Company did not hold any fixed maturity
securities, other than securities issued or guaranteed by the U.S. government,
which exceeded 10% of shareholder's interest.
The credit quality of the fixed maturity portfolio at December 31 follows.
The categories are based on the higher of the ratings published by Standard &
Poor's or Moody's.
2000 1999
----- ----
Fair Value Percent Fair Value Percent
---------- ------- ---------- -------
Agencies and treasuries $ 4,016 8.1% $ 3,458 9.4%
AAA/Aaa 7,935 16.1 5,937 16.1
AA/Aa 5,963 12.1 3,032 8.2
A/A 12,154 24.6 9,078 24.6
BBB/Baa 12,157 24.6 8,678 23.5
BB/Ba 1,500 3.0 1,337 3.6
B/B 684 1.4 802 2.2
CCC/Caa 21 --- 9 ---
Not rated 5,020 10.1 4,601 12.4
------------------------------------------------
Totals $49,450 100.0% $36,932 100.0%
================================================
Bonds with ratings ranging from AAA/Aaa to BBB-/Baa3 are generally regarded
as investment grade securities. Some agencies and treasuries (that is, those
securities issued by the United States government or an agency thereof) are not
rated, but all are considered to be investment grade securities. Finally, some
securities, such as private placements, have not been assigned a rating by any
rating service and are therefore categorized as "not rated." This has neither
positive nor negative implications regarding the value of the security.
At December 31, 2000 and 1999, there were fixed maturities in default with
a fair value of $65 and $10, respectively.
67
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
(b) Mortgage and Other Loans
At December 31, 2000 and 1999, the Company's U.S. mortgage loan portfolio
consisted of first mortgage loans on commercial real estate properties of 1,714
and 2,065, respectively. The loans, which are originated by the Company through
a network of mortgage bankers, are made on completed, leased properties and
generally have a maximum loan-to-value ratio of 75% at the date of origination.
At December 31, 2000 and 1999, respectively, the Company held $1,001 and
$854 in U.S. mortgages secured by real estate in California, comprising 13% and
25% of the total mortgage portfolio. For the years ended December 31, 2000, 1999
and 1998, respectively, the Company originated $267, $201 and $222 of mortgages
secured by real estate in California, which represent 19%, 23% and 29% of the
respective total U. S. originations for those years.
As of December 31, 2000 and 1999, the Company was committed to fund $103
and $156, respectively, in U. S. mortgage loans.
As a part of the comprehensive transfer of the assets of Toho to GE Edison
in March 2000, the Company acquired certain individual and corporate loans
having a value of $3,328 at December 31, 2000. At December 31, 2000, 68% of the
loan portfolio consisted of loans to banks, large listed companies, and local or
foreign governments. At December 31, 2000, 26% of these loans were with Japan's
4 largest banks.
"Impaired" loans are defined under U.S. GAAP as loans for which it is
probable that the lender will be unable to collect all amounts due according to
the original contractual terms of the loan agreement. That definition excludes,
among other things, leases, or large groups of smaller-balance homogeneous
loans, and therefore applies principally to the Company's commercial loans.
Under these principles, the Company has two types of "impaired" loans:
loans requiring allowances for losses (none as of December 31, 2000 and 1999)
and loans expected to be fully recoverable because the carrying amount has been
reduced previously through charge-offs or deferral of income recognition ($12
and $19, as of December 31, 2000 and 1999, respectively). Average investment in
impaired loans during 2000, 1999 and 1998 was $17, $15 and $26, respectively and
interest income recognized on these loans while they were considered impaired
was $1, $3 and $2, respectively.
The following table presents the activity in the allowance for losses
during the years ended December 31:
2000 1999 1998
----- ----- -----
Balance at January 1 $ 71 $ 65 $ 57
Transfers in 122 -- --
Provision charged to operations (26) 7 6
Amounts written off, net of recoveries (3) (1) 2
---------------------------
Balance at December 31 $ 164 $ 71 $ 65
===========================
During 2000, as part of its on-going analysis of exposure to losses arising
from mortgage loans, the Company recognized a $33 reduction in its allowance for
losses.
68
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
(4) Deferred Acquisition Costs
Activity impacting deferred acquisition costs for the years ended December
31, was as follows:
2000 1999 1998
---- ---- ----
Unamortized balance at January 1 $2,202 $1,400 $ 945
Impact of foreign currency translation (32) 28 9
Costs deferred 1,649 1,078 637
Amortization, net (517) (304) (191)
----------------------------
Unamortized balance at December 31 3,302 2,202 1,400
Cumulative effect of net unrealized investment losses (gains) 38 105 (82)
----------------------------
Balance at December 31 $3,340 $2,307 $1,318
============================
(5) Intangible Assets
Present Value of Future Profits
The method used by the Company to value PVFP in connection with
acquisitions of life insurance entities is summarized as follows: (1) identify
the future gross profits attributable to certain lines of business, (2) identify
the risks inherent in realizing those gross profits, and (3) discount those
gross profits at the rate of return that the Company must earn in order to
accept the inherent risks.
PVFP is amortized, net of accreted interest, in a manner similar to the
amortization of deferred acquisition costs. Interest accretes at rates credited
to policyholders on underlying contracts.
Recoverability of PVFP is evaluated periodically by comparing the current
estimate of expected future gross profits to the unamortized asset balance. If
such comparison indicates that the expected gross profits will not be sufficient
to recover PVFP, the difference is charged to expense.
The following table presents the activity in PVFP for the years ended
December 31:
2000 1999 1998
---- ---- ----
Unamortized balance at January 1 $ 1,518 $1,608 $1,824
Acquisitions 1,985 134 ---
Impact of foreign currency translation 37 --- ---
Interest accreted at 4.9% in 2000, 4.9% in 1999 and 4.8% in 1998 88 78 87
Amortization (1,097) (302) (303)
-------------------------------
Unamortized balance at December 31 2,531 1,518 1,608
Cumulative effect of net unrealized investment losses (gains) 31 129 (179)
-------------------------------
Balance at December 31 $ 2,562 $1,647 $1,429
===============================
69
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
The estimated percentage of the December 31, 2000 balance, before the
effect of unrealized investment gains or losses, to be amortized over each of
the next five years is as follows:
2001 17.7%
2002 12.8%
2003 10.5%
2004 8.7%
2005 7.4%
In December 2000, an affinity partner, Montgomery Wards LLC ("Wards") filed
for bankruptcy. As a result, the Company recognized a charge to earnings related
to the write-off of certain intangibles of $54 and other expenses of $28.
Goodwill
At December 31, 2000 and 1999, total unamortized goodwill was $2,437 and
$2,422, respectively, which is presented net of accumulated amortization of $350
and $249, respectively. Goodwill amortization was $104, $84, and $68 for the
years ended December 31, 2000, 1999 and 1998, respectively. Goodwill in excess
of associated expected operating cash flows is considered to be impaired and is
written down to fair value (no such write-downs have been made).
(6) Reinsurance
In order to limit the amount of loss retention, certain policy risks are
reinsured with other insurance companies. The maximum amount of individual
ordinary life insurance normally retained by the Company on any one life policy
is $1. Reinsurance contracts do not relieve the Company from its obligations to
policyholders. In the event that the reinsurers would be unable to meet their
obligations, the Company is liable for the reinsured claims. The Company
monitors both the financial condition of individual reinsurers and risk
concentrations arising from similar geographic regions, activities and economic
characteristics of reinsurers to lessen the risk of default by such reinsurers.
The Company does not have significant concentrations of reinsurance with any one
reinsurer that could have a material impact on its results of operations.
70
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
Net life insurance in force as of December 31 is summarized as follows:
2000 1999 1998
----- ---- ----
Direct life insurance in force $ 515,742 $ 337,892 $306,566
Amounts ceded to other companies (113,866) (111,193) (96,931)
Amounts assumed from other companies 30,751 28,345 40,290
-------------------------------------------
Net life insurance in force $ 432,627 $ 255,044 $249,925
===========================================
Percentage of amount assumed to net 7% 11% 16%
===========================================
The effects of reinsurance on premiums written and earned for the years
ended December 31 were as follows:
Written Earned
------- ------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Direct $5,115 $3,636 $3,217 $5,176 $3,603 $3,218
Assumed 771 407 489 755 414 477
Ceded (464) (443) (464) (466) (475) (488)
-------------------------- -------------------------
Net premiums $5,422 $3,600 $3,242 $5,465 $3,542 $3,207
========================== ==========================
Percentage of amount assumed to net 14% 12% 15%
==========================
Reinsurance recoveries recognized as a reduction of benefits amounted to
$394, $300 and $336 during 2000, 1999 and 1998, respectively.
(7) Future Annuity and Contract Benefits
Investment Contracts
Investment contracts are broadly defined to include contracts without
significant mortality or morbidity risk. Payments received from sales of
investment contracts are recognized by providing a liability equal to the
current account value of the policyholder's contracts. Interest rates credited
to investment contracts are guaranteed for the initial policy term with renewal
rates determined as necessary by management.
71
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
Traditional Life Insurance Contracts
Insurance contracts are broadly defined to include contracts with
significant mortality and/or morbidity risk. The liability for future benefits
of insurance contracts is the present value of such benefits less the present
value of future net premiums based on mortality, morbidity, and other
assumptions which were appropriate at the time the policies were issued or
acquired. These assumptions are periodically evaluated for potential premium
deficiencies. Reserves for cancelable accident and health insurance are based
upon unearned premiums, claims incurred but not reported, and claims in the
process of settlement. This estimate is based on the experience of the insurance
industry and the Company, adjusted for current trends. Any changes in the
estimated liability are reflected in income as the estimates are revised.
The following chart summarizes the major assumptions underlying the
Company's recorded liabilities for future annuity and contract benefits:
Mortality/ December 31,
Withdrawal Morbidity Interest Rate ------------
Assumption Assumption Assumption 2000 1999
------------ ---------- ----------- ---- ----
Investment contracts N/A N/A N/A $24,475 $21,250
Limited-payment contracts None (a) 3.3%-11.3% 10,145 9,643
Traditional life insurance Company
contracts experience (b) 5.5%-7.5%(e) 14,128 1,896
Universal life-type contracts N/A N/A N/A 4,557 4,485
Accident and health Company
experience (c) 7.5% Grading To 5.5% 630 131
Long-term care Company
experience (d) 4.5%-7.0% 3,415 2,234
-----------------
Total future annuity and contract $57,350 $39,639
benefits =================
____________
(a) Either the United States Population Table, 1983 Group Annuitant Mortality
Table or 1983 Individual Annuitant Mortality Table.
(b) Principally modifications of the 1965-70 or 1975-80 Select and Ultimate
Tables, 1958 and 1980 Commissioner's Standard Ordinary Tables or Fifth
Japanese Experience Table.
(c) The 1958 and 1980 Commissioner's Standard Ordinary Tables, 1964 modified
and 1987
72
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
Commissioner's Disability Tables and Company experience.
(d) The 1983 Individual Annuitant Mortality Table or 1980 Commissioner's
Standard Ordinary Table and the 1985 National Nursing Home Study and
Company experience.
(e) Interest rate assumptions for the Company's Japanese operations range from
1.5%-2.4%.
(8) Liability for Policy and Contract Claims
Changes in the liability for policy and contract claims for the years ended
December 31 are summarized as follows:
2000 1999 1998
---- ---- ----
Balance at January 1 $ 1,886 $ 1,697 $ 1,521
Less reinsurance recoverables (223) (221) (130)
-------------------------------------
Net balance at January 1 1,663 1,476 1,391
-------------------------------------
Balances from Acquisitions and Transfers 219 154 ---
Incurred related to insured events of:
Current year 3,552 1,932 1,731
Prior years (42) (27) (51)
-------------------------------------
Total incurred 3,510 1,905 1,680
-------------------------------------
Paid related to insured events of:
Current year (2,046) (1,049) (947)
Prior years (902) (829) (651)
-------------------------------------
Total paid (2,948) (1,878) (1,598)
-------------------------------------
Foreign currency translation (81) 6 3
-------------------------------------
Net balance at December 31 2,363 1,663 1,476
Add reinsurance recoverables 234 223 221
-------------------------------------
Balance at December 31 $ 2,597 $ 1,886 $ 1,697
=====================================
(9) Borrowings
(a) Long-Term Debt
The Company has an unsecured senior long-term note outstanding in the
amount of $175, at 6.625%, due August 2003. The senior note indenture contains
certain covenants that, among other things, limit the Company's ability to
dispose of, or allow liens to be placed against, the capital stock of First
Colony. Interest expense in each of the years ended December 31, 2000, 1999 and
1998 was $12.
73
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
In connection with GE Edison's March 1998 transaction with Toho (See Note
2-Acquisitions and Transfers), a subsidiary of the Company entered into certain
long-term note agreements in the amount of (Yen)6.5 billion ($58, $63 and $56 at
December 31, 2000, 1999 and 1998, respectively), at 2.25%, due April 2008. In
addition, two subsidiaries of the Company entered into similar long-term note
agreements, having the same interest rate and maturity, in the amount of
(Yen)3.5 billion ($27 at December 31, 2000, 1999 and 1998), with certain
affiliates of the Company. A guarantee fee of 0.50%, relating to the above long-
term notes, is being paid annually to GE Capital as guarantor.
Additional financing for the March 1998 GE Edison transaction was obtained
by the issuance of a long-term note of the Company to GE Capital. The long-term
note in the amount of (Yen)57.25 billion ($440 at December 31, 2000, 1999 and
1998) was scheduled to mature in March 2008. The note was issued with a floating
interest rate based on a spread above the three-month Japanese Yen LIBOR London
Inter-Bank offered rate (JPY LIBOR), or a total rate of 0.89% and 0.93% at
December 31, 1999 and 1998, respectively. In December 2000 the note was
refinanced at an effective fixed rate of 2.64%.
(b) Short-Term Borrowings
Short-term borrowings includes commercial paper issued of $2,013 and $987,
net of discount of $8 and $10 at December 31, 2000 and 1999, respectively, with
an average interest rate of 6.50% and 5.91% at December 31, 2000 and 1999,
respectively.
The Company has a line of credit with GE Capital that has an aggregate
borrowing line of $2,500, of which a maximum of $532 and $497 was used during
the years 2000 and 1999, respectively. At December 31, 2000 and 1999, the
balance outstanding was $291 and $49, respectively.
Interest rates are managed by the Company in light of the anticipated
behavior, including prepayment behavior, of assets in which debt proceeds are
invested. Interest rate swaps are employed to achieve management's interest rate
objectives. Effective interest rates are lower under these "synthetic" positions
than could have been achieved by issuing debt directly.
At December 31, 2000, interest rate swap maturities with a notional amount
of $1,669 ranged from 2002 to 2012, and average interest rates for these
"synthetic" fixed-rate borrowings were 5.28% (4.80% at December 31, 1999). These
swaps were employed to achieve a synthetic fixed rate on commercial paper
borrowings in connection with various Company initiatives.
74
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
(10) Income Taxes
The total provision for income taxes for the years ended December 31
consisted of the following components:
2000 1999 1998
---- ---- ----
Current federal income tax provision $ 24 $ 130 $ 245
Deferred federal income tax provision 297 127 53
-----------------------------
Subtotal - federal provision 321 257 298
-----------------------------
Current state income tax (benefit) provision (8) (10) 5
Deferred state income tax provision 3 1 ---
-----------------------------
Subtotal - state (benefit) provision (5) (9) 5
-----------------------------
Current Foreign Income Tax Provision 158 3 2
Deferred Foreign Income Tax Benefit (72) (3) (4)
-----------------------------
Subtotal - Foreign Income Tax Provision (Benefit) 86 --- (2)
-----------------------------
Total income tax provision $ 402 $ 248 $ 301
=============================
The reconciliation of the federal statutory tax rate to the effective
income tax rate is as follows:
2000 1999 1998
---- ---- ----
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal income tax effect (0.2) (0.7) 0.4
Non-deductible goodwill amortization 1.5 1.5 1.6
Sale of minority interest --- (6.1) ---
Other, net (2.1) (1.0) 1.0
---------------------------
Effective rate 34.2% 28.7% 38.0%
===========================
75
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
The components of the net deferred income tax asset (liability) at December 31
are as follows:
2000 1999
---- ----
Assets:
Net unrealized losses on investment securities $ 253 $ 588
Future annuity and contract benefits 1,299 977
Guaranty association (refunds) assessments (3) 7
Net operating loss carryforwards 8 208
Other 79 12
------------------------
Total deferred income tax assets 1,636 1,792
------------------------
Liabilities:
Investments (232) (201)
Present value of future profits (376) (349)
Deferred acquisition costs (592) (429)
Other (117) ---
------------------------
Total deferred income tax liabilities (1,317) (979)
------------------------
Net deferred income tax asset $ 319 $ 813
========================
Based on an analysis of the Company's tax position, management believes it
is more likely than not that the results of future operations and implementation
of tax planning strategies will generate sufficient taxable income enabling the
Company to realize remaining deferred tax assets. Accordingly, no valuation
allowance for deferred tax assets is deemed necessary.
The Company received a refund of federal and state taxes in 2000 of $82 and
paid $371 and $188, for federal and state income taxes during the years 1999
and 1998, respectively.
(11) Related Party Transactions
At December 31, 2000 and 1999, fixed maturities included a note receivable
from GE Capital with a balance of $175. This note bears interest at 6.625% and
matures in August 2003.
At December 31, 2000 and 1999, fixed maturities included a note payable to
GE Capital with a balance of $27. The note bears interest at 2.25% and matures
in April 2008. In addition, a guarantee fee of 0.50% is being paid annually to
GE Capital as guarantor.
At December 31, 2000 and 1999, fixed maturities included a note payable to
GE Capital with a balance of $440. This note bears interest at an effective
fixed rate of 2.64% and matures in March 2008.
At December 31, 2000 and 1999, the Company had a line of credit with GE
Capital that has an aggregate borrowing line of $2,500 with balances of $291 and
$49, respectively.
The Company also invests in certain short-term notes issued by GE Capital.
These investments yield market rates. Interest earned on these notes was $3, $1
and $3 for the years ended December 31, 2000, 1999 and 1998, respectively. There
were no investments in short-term notes at December 31, 2000, and investments
were $63 at December 31, 1999.
During 2000, 1999 and 1998, the Company paid $32, $23 and $15,
respectively, to GE Capital for certain computer services fees.
76
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
(12) Guaranty Association Assessments
The Company's insurance subsidiaries are required by law to participate
in the guaranty associations of the various states in which they do business.
The state guaranty associations ensure payment of guaranteed benefits, with
certain restrictions, to policyholders of impaired or insolvent insurance
companies by assessing all other companies involved in similar lines of
business.
There are currently several unrelated insurance companies which had
substantial amounts of annuity and insurance business in the process of
liquidation or rehabilitation. The Company's insurance subsidiaries made net
assessment payments of $4, $2 and $12 to various state guaranty associations
during the years 2000, 1999 and 1998, respectively.
Similar to the U.S., Japanese insurers are assessed for expenses relating
to the resolution of insolvent insurance companies. In making a determination of
its exposure to future insolvency assessments, GE Edison has made an evaluation
of the current insolvencies considering information about their resolution which
is publicly available. Based upon that assessment, GE Edison has concluded that
it has adequately provided for future assessments arising from insolvencies
existing at December 31, 2000.
The American Institute of Certified Public Accountants has issued
Statement of Position (SOP) No. 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments. This SOP provides guidance on
accounting by insurance and other enterprises for guaranty-fund and certain
other insurance related assessments. The SOP requires enterprises to recognize
(1) a liability for assessments when (a) an assessment has been asserted or
information available prior to issuance of the financial statements indicates it
is probable that an assessment will be asserted, (b) the underlying cause of the
asserted or probable assessment has occurred on or before the date of the
financial statements, and (c) the amount of the loss can be reasonably
estimated, and (2) an asset for an amount when it is probable that a paid or
accrued assessment will result in an amount that is recoverable from premium tax
offsets or policy surcharges from in-force policies.
Effective January 1, 1999, the Company adopted SOP No. 97-3 and has
reported the effect of this adoption as a cumulative effect of a change in
accounting principle, which served to increase 1999 net income by $25 (net of
income taxes of $14).
(13) Litigation
The Company and certain of its subsidiaries are defendants in various
cases of litigation considered to be in the normal course of business. The
Company believes that the outcome of such litigation will not have a material
effect on its financial position or results of operations.
(14) Fair Value of Financial Instruments
This note discloses the fair value information about certain of the
Company's financial instruments, whether or not recognized in the balance sheet.
No attempt has been made to estimate the value of anticipated future business or
the value of assets or liabilities that are not considered financial
instruments. Fair value estimates are made at a specific point in time based on
relevant market information and valuation methodologies considered appropriate
by management. These estimates may be subjective in nature and involve
uncertainties and significant judgment in the interpretation of current market
data. Therefore, the fair values presented are not necessarily indicative of
amounts the Company could realize or settle currently. Changes in the
assumptions could significantly affect the estimates. As such, the derived fair
value estimates cannot necessarily be substantiated by comparison to independent
markets and may differ from the amounts that might be involved in an immediate
settlement of the instrument. The Company does not necessarily intend to dispose
of or liquidate such instruments prior to maturity. Fair value disclosures are
not required for certain financial instruments; the most significant of these
for the Company are the insurance liabilities and related assets, other than
financial guarantees and investment deposits.
77
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
Financial instruments that, as a matter of accounting policy, are reflected
in the accompanying consolidated financial statements at fair value are not
included in the following disclosures. Such items include fixed maturities,
equity securities and certain other invested assets. The carrying value of
policy loans, short-term investments, certain other invested assets, and long-
term debt approximates fair value at December 31, 2000 and 1999, respectively.
A description of how values are estimated follows.
Borrowings. Based on quoted market prices or market comparables. Fair values of
interest rate and currency swaps on borrowings are based on quoted market prices
and include the effects of counterparty creditworthiness.
Mortgage loans. Based on quoted market prices, recent transactions and/or
discounted future cash flows, using rates at which similar loans would have been
made to similar borrowers.
Investment contract deposits. Based on expected future cash flows, discounted at
currently offered discount rates for immediate annuity contracts or cash
surrender values for single premium deferred annuities.
Financial guarantees and credit life. Based on future cash flows, considering
expected renewal premiums, claims, refunds and servicing costs, discounted at a
market rate.
All other instruments. Based on comparable transactions, market comparables,
discounted future cash flows, quoted market prices, and/or estimates of the cost
to terminate or otherwise settle obligations to counterparties.
78
GE FINANCIAL ASSURANCE HOLDINGS, INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
Information about certain financial instruments that were not carried at fair value at December 31, 2000 and 1999, is
summarized as follows:
December 31, 2000 December 31, 1999
---------------------------------------- -------------------------------------
Assets(Liabilities) Assets(Liabilities)
-------------------------- -------------------------
Notional Carrying Estimated Notional Carrying Estimated
(in millions) Amount Amount Fair Value Amount Amount Fair Value
---------------------------------------- -------------------------------------
Assets:
Mortgage loans $ (a) $ 7,734 $ 8,025 $ (a) $ 3,414 $ 3,309
Integrated interest rate swaps 5,177 (53) (680) 1,709 11 99
Purchased options 7,200 152 174 7,998 140 126
Interest rate swaps and futures 3,381 - (25) 525 - (106)
Other financial instruments (a) 19 19 (a) 16 16
Liabilities:
Borrowings and related instruments:
Borrowings (a) (2,304) (2,306) (a) (1,036) (1,037)
Interest rate swaps 1,673 - (85) 2,665 - 29
Investment contract deposits - (24,475) (23,066) - (21,250) (20,746)
Financial guarantees and credit life 2,152 (110) (110) 4,567 (104) (104)
Credit and liquidity support
securitizations (b) 594 - - - - -
Performance guarantees, principally
letters of credit 6 - - 4 - -
Other firm commitments:
Currency forwards 680 - 44 261 - (4)
Ordinary course of business lending
commitments 103 - - 304 - -
(a) Not Applicable
(b) Net realized gains on sales of financial assets through securitizations
amounted to $67 million and $36 million during 2000 and 1999, respectively.
Additional information about certain financial instruments in the above
table follows.
Currency forwards are employed by the Company to manage exposures to changes in
currency exchange rates and to optimize borrowing costs as discussed in Note 9.
These financial instruments generally are used to fix the local currency cost
denominated in currencies other than the functional currency. Currency exposures
that result from net investments in affiliates are managed principally by
funding assets denominated in local currency with debt denominated in those same
currencies. In certain circumstances, net investment exposures are managed using
currency forwards and currency swaps.
Options and instruments containing option features that behave based on limits
(primarily "floors", "S&P call options" or "Bermudan swaptions") on interest
rate and S&P index movements are used primarily to hedge prepayment risk in
certain of the Company's business activities, such as annuity liabilities and
debt securities.
79
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
Swaps of interest rates and currencies are used by the Company to optimize
funding costs for a particular funding strategy (see Note 9) or to hedge
interest rate and currency risk exposure associated with the Company's business
activities, such as debt securities. On a limited basis, and as part of ongoing
business activities, the Company utilizes interest rate swaps to minimize its
exposure to movements in interest rates and financial markets that have a direct
correlation with certain of its insurance products.
(15) Restrictions on Dividends
Insurance companies are restricted by states as to the aggregate amount of
dividends they may pay to their parent in any consecutive twelve-month period
without regulatory approval. Generally, dividends may be paid out of earned
surplus without approval with thirty days prior written notice within certain
limits. The limits are generally based on 10% of the prior year surplus (net of
adjustments in some cases) and prior year statutory income (net gain from
operations, net income adjusted for realized capital gains, or net investment
income). Dividends in excess of the prescribed limits or the Company's earned
surplus require formal state insurance commission approval. Based on statutory
results as of December 31, 2000, the Company is able to receive $290 in
dividends in 2001 without obtaining regulatory approval.
The Company did not receive dividends from its subsidiaries during 2000 and
received $259 and $120 of cash dividends from its subsidiaries during 1999 and
1998, respectively. The Company did not pay cash dividends to its parent, GE
Capital during 2000 and paid $155 and $120 of cash dividends during 1999 and
1998, respectively.
(16) Supplementary Financial Data
The Company's insurance subsidiaries file financial statements with state
insurance regulatory authorities and the National Association of Insurance
Commissioners ("NAIC") that are prepared on an accounting basis prescribed or
permitted by such authorities (statutory basis). Statutory accounting practices
differ from GAAP in several respects, causing differences in reported net income
and shareholder's interest. Permitted statutory accounting practices encompass
all accounting practices not so prescribed but that have been specifically
allowed by state insurance authorities. The Company's insurance subsidiaries
have no significant permitted accounting practices.
Combined statutory net income for the Company's U.S. domiciled insurance
subsidiaries for the years ended December 31, 2000, 1999 and 1998 was $42, $291
and $431, respectively. The combined statutory capital and surplus as of
December 31, 2000 and 1999 was $5,490 and $3,179, respectively.
The NAIC has adopted Risk-Based Capital (RBC) requirements to evaluate the
adequacy of statutory capital and surplus in relation to risks associated with:
(i) asset risk, (ii) insurance risk, (iii) interest rate risk, and (iv) business
risk. The RBC formula is designated as an early warning tool for the states to
identify possible under-capitalized companies for the purpose of initiating
regulatory action. In the course of operations, the Company periodically
monitors the RBC level of each of its insurance subsidiaries. At December 31,
2000 and 1999, each of the Company's insurance subsidiaries exceeded the minimum
required RBC levels.
80
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
(17) Operating and Geographic Segments
(a) Operating Segment Information
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 income protection packages. See Note (1)(c) for further discussion of
the Company's principal product lines within these two segments.
The following is a summary of industry segment activity for 2000, 1999 and
1998:
2000 -- Segment Data
- --------------------
Wealth Lifestyle
Accumulation & Protection &
Transfer Enhancement Consolidated
-------- ----------- ------------
Premiums $ 2,872 $ 2,593 $ 5,465
Net investment income 3,303 412 3,715
Surrender fee income 1,253 --- 1,253
Net realized investment gains 162 --- 162
Other income 510 420 930
------------------------------------------
Total revenues 8,100 3,425 11,525
------------------------------------------
Interest credited, benefits, and other changes in
policy reserves 4,993 1,882 6,875
Commissions 770 466 1,236
Amortization of intangibles 951 271 1,222
Other operating costs and expenses, net 295 721 1,016
------------------------------------------
Total benefits and expenses 7,009 3,340 10,349
------------------------------------------
Income before income taxes, minority interest and
cumulative effect of accounting change $ 1,091 $ 85 $ 1,176
==========================================
Provision for income taxes $ 373 $ 29 $ 402
==========================================
Total assets $76,057 $11,559 $87,616
==========================================
81
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
1999 -- Segment Data
- --------------------
Wealth Lifestyle
Accumulation & Protection &
Transfer Enhancement Consolidated
-------- ----------- ------------
Premiums $ 1,658 $1,884 $ 3,542
Net investment income 2,773 350 3,123
Surrender fee income 56 --- 56
Net realized investment gains 149 16 165
Other income 427 239 666
------------------------------------------
Total revenues 5,063 2,489 7,552
------------------------------------------
Interest credited, benefits, and other changes
in policy reserves 3,426 1,394 4,820
Commissions 506 352 858
Amortization of intangibles 212 128 340
Other operating costs and expenses, net 142 527 669
------------------------------------------
Total benefits and expenses 4,286 2,401 6,687
------------------------------------------
Income before income taxes, minority interest and
cumulative effect of accounting change $ 777 $ 88 $ 865
==========================================
Provision for income taxes $ 223 $ 25 $ 248
==========================================
Total assets $57,302 $7,304 $64,606
==========================================
1998 -- Segment Data
- --------------------
Wealth Lifestyle
Accumulation & Protection &
Transfer Enhancement Consolidated
-------- ----------- ------------
Premiums $ 1,557 $1,650 $ 3,207
Net investment income 2,631 265 2,896
Surrender fee income 46 --- 46
Net realized investment gains 116 --- 116
Other income 349 58 407
------------------------------------------
Total revenues 4,699 1,973 6,672
------------------------------------------
Interest credited, benefits and other changes
in policy reserves 3,300 1,189 4,489
Commissions 283 258 541
Amortization of intangibles 205 81 286
Other operating costs and expenses, net 242 321 563
------------------------------------------
Total benefits and expenses 4,030 1,849 5,879
------------------------------------------
Income before income taxes, minority interest and
cumulative effect of accounting change $ 669 $ 124 $ 793
==========================================
Provision for income taxes $ 254 $ 47 $ 301
==========================================
Total assets $50,269 $6,458 $56,727
==========================================
82
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
(b) Geographic Segment Information
The Company conducts its operations primarily in two geographic regions:
(1) North America and (2) Japan. See Note (1)(c) for further discussion of the
Company's principal product lines distributed in these two segments.
The following is a summary of geographic region activity for 2000 and 1999.
2000 North America Japan Consolidated
- ---- ------------- ----- ------------
Total revenues $ 8,238 $ 3,287 $11,525
Income (loss) before income taxes, minority interest and
cumulative effect of accounting change $ 921 $ 255 $ 1,176
Total assets $70,259 $17,357 $87,616
1999 North America Japan Consolidated
- ---- ------------- ----- --------------
Total revenues $ 7,139 $ 413 $ 7,552
Income (loss) before income taxes, minority interest and
cumulative effect of accounting change $ 874 $ (9) $ 865
Total assets $61,506 $ 3,100 $64,606
Prior to 1998, the Company's operations were entirely within the North
American geographic region.
(18) Quarterly Financial Data (Unaudited)
Summarized quarterly financial data were as follows:
First Quarter Second Quarter Third Quarter Fourth Quarter
------------------ ------------------ ----------------- ----------------
2000 1999 2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- ------- ------- -------- -----
Premiums $1,229 $ 839 $1,436 $ 842 $1,430 $ 896 $1,370 965
------ ------ ------ ------ ------ ------ ------ ------
Total Revenues $2,370 $1,723 $3,236 $1,778 $3,030 $1,907 $2,889 $2,144
------ ------ ------ ------ ------ ------ ------ ------
Income before Cumulative Effect
of Accounting Change (1) $ 160 $ 117 $ 181 $ 152 $ 229 $ 180 $ 198 $ 164
------ ------ ------ ------ ------ ------ ------ ------
Net Income (1) $ 160 $ 142 $ 181 $ 152 $ 229 $ 180 $ 198 $ 164
------ ------ ------ ------ ------ ------ ------ ------
(1) Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Financial Position No. 97-3,
Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments. The Company has reported the effect of this adoption as a
cumulative effect of a change in the accounting principle, which served to
increase first quarter of 1999 net income by $25 million (net of income
taxes of $14 million).
83
Independent Auditors' Report
----------------------------
The Board of Directors
GE Financial Assurance Holdings, Inc.:
Under date of January 22, 2001, we reported on the consolidated balance
sheets of GE Financial Assurance Holdings, Inc. and subsidiaries as of December
31, 2000 and 1999, and the related consolidated statements of income,
shareholder's interest, and cash flows for each of the years in the three-year
period ended December 31, 2000, which are included herein. In connection with
our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedules included herein.
These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in Note 12 to the consolidated financial statements, the
Company changed its method of accounting for insurance-related assessments in
1999.
/s/ KPMG LLP
Richmond, Virginia
January 22, 2001
84
Schedule II
GE FINANCIAL ASSURANCE HOLDINGS, INC.
Condensed Financial Information of Registrant
(Parent Company)
Balance Sheets
(Dollar amounts in millions, except per share amounts)
December 31,
----------------------------------
Assets: 2000 1999
----------------- ------------
Investment in subsidiaries $ 10,275 $ 8,316
Cash and cash equivalents 139 211
Other assets 1,944 137
--------- --------
Total assets $ 12,358 $ 8,664
========= ========
Liabilities and Shareholder's Interest:
Liabilities:
Short-term borrowings $ 2,304 $ 1,036
Accounts payable and accrued expenses 1,640 472
--------- --------
Total liabilities 3,944 1,508
--------- --------
Shareholder's interest:
Net unrealized investment gains (414) (1,079)
Foreign currency translation adjustments 45 220
--------- --------
Accumulated non-owner changes in equity (369) (859)
Common stock ($1 par value, 1,000 authorized,
1,000 shares issued and outstanding) - -
Additional paid-in capital 6,320 6,320
Retained earnings 2,463 1,695
--------- --------
Total shareholder's interest 8,414 7,156
--------- --------
Total liabilities and shareholder's interest $ 12,358 $ 8,664
========= ========
See accompanying note to condensed financial information of registrant.
85
Schedule II
GE FINANCIAL ASSURANCE HOLDINGS, INC.
Condensed Financial Information of Registrant (continued)
(Parent Company)
Statements of Income
(Dollar amounts in millions)
Years Ended December 31,
-----------------------
2000 1999 1998
------------------- -------------------- -------------------
Revenues:
Equity in undistributed earnings of subsidiaries $ 873 $ 362 $ 429
Net investment income 60 316 133
---------- ---------- ----------
Total revenues 933 678 562
---------- ---------- ----------
Benefits and expenses:
General expenses 134 93 39
Interest expense 124 62 63
---------- ---------- ----------
Total benefits and expenses 258 155 102
---------- ---------- ----------
Income before income taxes
675 523 460
Income tax benefit 93 115 32
---------- ---------- ----------
Net income $ 768 $ 638 $ 492
========== ========== ==========
See accompanying note to condensed financial information of registrant.
86
Schedule II
GE FINANCIAL ASSURANCE HOLDINGS, INC.
Condensed Financial Information of Registrant (continued)
(Parent Company)
Statements of Cash Flows
(Dollar amounts in millions)
Years Ended December 31,
------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 768 $ 638 $ 492
------------ ------------ ------------
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Equity in undistributed earnings of subsidiaries (873) (362) (429)
(Increase) decrease in other assets (1,807) 335 (356)
Increase (decrease) in accounts payable and accrued expenses 1,168 80 340
------------ ------------ ------------
Total adjustments (1,512) 53 (445)
------------ ------------ ------------
Net cash (used in) provided by operating activities (744) 691 47
------------ ------------ ------------
Cash flows from investing activities:
Acquisitions, net of cash acquired (596) (31) (95)
------------ ------------ ------------
Net cash used in investing activities (596) (31) (95)
------------ ------------ ------------
Cash flows from financing activities:
Net commercial paper borrowings (repayments) 1,026 (17) 568
Proceeds from short-term borrowings 3,410 2,639 3,303
Payments on short-term borrowings (3,168) (2,916) (3,703)
Dividend paid to shareholder - (155) (120)
------------ ------------ ------------
Net cash provided by (used in) financing activities 1,268 (449) 48
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (72) 211 -
Cash and cash equivalents at beginning of year 211 - -
------------ ------------ ------------
Cash and cash equivalents at end of year $ 139 $ 211 $ -
============ ============ ============
See accompanying note to condensed financial information of registrant.
87
Schedule II
GE FINANCIAL ASSURANCE HOLDINGS, INC.
Note to Condensed Financial Information of Registrant
(Parent Company)
(1) Basis of Presentation
All of the outstanding common stock of GE Financial Assurance Holdings,
Inc. ("GE Financial Assurance") is owned by General Electric Capital Corporation
("GE Capital"), a wholly-owned subsidiary of General Electric Capital Services,
Inc., which in turn is wholly-owned, directly or indirectly, by General Electric
Company.
GE Financial Assurance's primary asset is its 100% investment in the
common stock of GNA Corporation. GNA Corporation owns 100% of the common stock
of various other life and non-life insurance companies.
The notes to the GE Financial Assurance Holdings, Inc. and subsidiaries
consolidated financial statements are an integral part of this schedule.
88
Schedule III
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Supplemental Insurance Information
(Dollar amounts in millions)
Future Annuity
and Contract
Deferred Benefits and Liability Other
Acquisition for Policy and Unearned Policyholder Premium
Segment Costs Contract Claims Premiums Liabilities Revenue
- ------- --------------- ---------------------- ---------------- --------------- -------------
December 31, 2000:
Wealth Accumulation and Transfer $ 2,386 $ 54,000 $ 104 $ 441 $ 2,872
Lifestyle Protection and Enhancement 954 5,947 696 60 2,593
--------------- --------------------- ---------------- --------------- --------------
Total $ 3,340 $ 59,947 $ 800 $ 501 $ 5,465
=============== ===================== ================ =============== ==============
December 31, 1999:
Wealth Accumulation and Transfer $ 1,630 $ 37,534 $ 191 $ 578 $ 1,658
Lifestyle Protection and Enhancement 677 3,991 651 48 1,884
--------------- --------------------- ---------------- --------------- --------------
Total $ 2,307 $ 41,525 $ 842 $ 626 $ 3,542
=============== ===================== ================ =============== ==============
December 31, 1998:
Wealth Accumulation and Transfer $ 874 $ 34,723 $ 212 $ 542 $ 1,557
Lifestyle Protection and Enhancement 444 3,246 754 28 1,650
--------------- -------------------- ---------------- --------------- --------------
Total $ 1,318 $ 37,969 $ 966 $ 570 $ 3,207
=============== ==================== ================ =============== ==============
Change in
Net Benefits and Deferred Other
Investment Other Changes in Acquisition Operating Premiums
Segment Income Policy Reserves Costs, Net Expenses Written
- ------- ---------------- ------------------------ ------------- -------------- --------------
December 31, 2000:
Wealth Accumulation and Transfer $ 3,303 $ 3,496 $ (877) $ 2,893 $ 2,847
Lifestyle Protection and Enhancement 412 1,882 (255) 1,713 2,575
---------------- ------------------------ ------------- -------------- --------------
Total $ 3,715 $ 5,378 $ (1,132) $ 4,606 $ 5,422
================ ======================== ============= ============== ==============
December 31, 1999:
Wealth Accumulation and Transfer $ 2,773 $ 2,128 $ (536) $ 1,394 $ 1,658
Lifestyle Protection and Enhancement 350 1,394 (238) 1,247 1,942
---------------- ----------------------- ------------- -------------- --------------
Total $ 3,123 $ 3,522 $ (774) $ 2,641 $ 3,600
================ ======================= ============= ============== ==============
December 31, 1998:
Wealth Accumulation and Transfer $ 2,631 $ 2,040 $ (303) $ 1,033 $ 1,557
Lifestyle Protection and Enhancement 265 1,189 (143) 803 1,685
---------------- ----------------------- ------------- -------------- --------------
$ 2,896 $ 3,229 $ (446) $ 1,836 $ 3,242
================ ======================= ============= ============== ==============
89
Item 9. Disagreements with Accountants on Accounting and Financial Disclosures.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information omitted in accordance with General Instruction I (2)(c).
Item 11. Executive Compensation.
Information omitted in accordance with General Instruction I (2)(c).
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information omitted in accordance with General Instruction I (2)(c).
Item 13. Certain Relationships and Related Transactions.
Information omitted in accordance with General Instruction I (2)(c).
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements
Included in Part II of this report:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Income for each of the years
in the three-year period ended December 31, 2000
Consolidated Statements of Shareholder's Interest for each
of the years in the three-year period ended December 31, 2000
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2000
Notes to Consolidated Financial Statements
90
(a) 2. Financial Statement Schedules
Independent Auditors' Report
Schedule II. Condensed Financial Information of Registrant.
Schedule III. Supplemental Insurance Information
All other schedules are omitted because of the absence of conditions
under which they are required or because the required information is
shown in the financial statements or notes thereto.
(a) 3. Exhibit Index
The exhibits listed below, as part of Form 10-K, are numbered in
conformity with the numbering used in Item 601 of Regulation S-K of
the Securities and Exchange Commission.
Exhibit
Number Description
- ------- -----------
2.1 AGREEMENT ON THE TRANSFER OF INSURANCE CONTRACTS, ETC.
(English translation of the agreement executed on December 22, 1999 by
and between Toho Mutual Life Insurance Company and GE Edison Life
Insurance Company).
Incorporated by reference to the Company's Current Report on Form 8-K
filed March 16, 2000 (Commission File No. 0-23375).
The Registrant agrees to furnish supplementally to the Securities and
Exchange Commission, upon request, copies of any schedules and
exhibits to the foregoing exhibits that are not filed herewith in
accordance with Item 601(b)(2) of Regulation S-K.
3.1 Articles of Incorporation of the Company, and all amendments thereto.
Incorporated by reference to the Company's Form 10 filed November 13,
1997 (Commission File No. 0-23375).
3.2 By-Laws of the Company, as amended.
12.1 Computation of ratio of earnings to fixed charges.
21.1 Subsidiaries of the Company.
Information omitted in accordance with General Instruction I (2)(b).
23.1 Consent of KPMG LLP.
91
(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 insurance policies and
related assets of Toho Mutual Life Insurance Company to GE Edison Life Insurance
Company.
The Company filed a Current Report on Form 8-K/A, dated May 15, 2000, reporting
(under Item 2 thereof) additional information related to the comprehensive
transfer of the insurance policies and related assets thereof of Toho Mutual
Life Insurance Company to GE Edison Life Insurance Company.
92
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 23, 2001 By /s/ Richard G. Fucci
--------------------------
Richard G. Fucci
Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Michael D. Fraizer Chairman, President and March 23, 2001
- --------------------------- Chief Executive Officer
(Michael D. Fraizer) (Principal Executive Officer)
/s/ Thomas W. Casey Senior Vice President and March 23, 2001
- --------------------------- Chief Financial Officer
(Thomas W. Casey) (Principal Financial Officer)
/s/ Richard G. Fucci Vice President and Controller March 23, 2001
- --------------------------- (Principal Accounting Officer)
(Richard G. Fucci)
- ---------------------------
/s/ Leon E. Roday Director, Senior Vice President, March 23, 2001
- --------------------------- General Counsel and Secretary
(Leon E. Roday)
/s/ Geoffrey S. Stiff Director and Senior Vice President March 23, 2001
- ---------------------------
(Geoffrey S. Stiff)