UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
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Commission file number 0-23375
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GE Financial Assurance Holdings, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 54-1829180
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6604 West Broad Street, Richmond, Virginia 23230
(Address of principal executive offices) (Zip Code)
(804) 281-6000
(Registrant's telephone number, including area code)
____________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
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At May 1, 2001 1,000 shares of common stock with a par value of $1.00 were
outstanding. The common stock of GE Financial Assurance Holdings, Inc. is not
publicly traded.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE
FORMAT.
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION.
Item 1. Financial Statements............................................. 1
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition............................ 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 9
Signatures................................................................... 10
Index to Exhibits............................................................ 11
PART I - FINANCIAL INFORMATION.
Item 1. Financial Statements.
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Condensed, Consolidated Statements of Current and Retained Earnings
(Dollar amounts in millions)
(Unaudited)
Three Months Ended
--------------------------
March 31, April 1,
2001 2000
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Revenues:
Premiums $ 1,386 $ 1,229
Net investment income 982 854
Surrender fee income 106 38
Net realized investment gains 110 21
Policy fees and other income 224 228
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Total revenues 2,808 2,370
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Benefits and expenses:
Benefits and other changes in policy reserves 1,349 995
Interest credited 406 341
Commissions 285 325
General expenses 472 560
Amortization of intangibles, net 84 198
Change in deferred acquisition costs, net (190) (331)
Interest expense 43 27
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Total benefits and expenses 2,449 2,115
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Earnings before income taxes, minority interest and
cumulative effect of change in accounting principle 359 255
Provision for income taxes 131 94
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Earnings before minority interest and cumulative
effect of change in accounting principle 228 161
Minority interest 1 1
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Earnings before cumulative effect of change in
accounting principle 227 160
Cumulative effect of change in accounting principle,
net of tax 15 ---
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Net earnings 212 160
Retained earnings at beginning of period 2,463 1,695
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Retained earnings at end of period $ 2,675 $ 1,855
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See Notes to Condensed, Consolidated Financial Statements.
1
Item 1. Financial Statements (Continued).
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Condensed, Consolidated Statements of Financial Position
(Dollar amounts in millions, except per share amounts)
March 31, December 31,
2001 2000
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Assets (Unaudited)
Investments:
Fixed maturities available-for-sale, at fair value $50,130 $49,450
Equity securities available-for-sale, at fair value 502 465
Mortgage and other loans 7,528 7,734
Policy loans 1,162 1,194
Short-term investments 1,751 1,690
Other invested assets 2,339 1,231
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Total investments 63,412 61,764
Cash and cash equivalents 1,106 951
Accrued investment income 1,002 1,133
Deferred acquisition costs 3,456 3,340
Intangible assets 4,971 5,260
Reinsurance recoverable 1,507 1,388
Other assets 2,565 3,174
Separate account assets 9,089 10,606
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Total assets $87,108 $87,616
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Liabilities and Shareholder's Interest
Liabilities:
Future annuity and contract benefits $57,035 $57,350
Liability for policy and contract claims 2,481 2,597
Other policyholder liabilities 1,291 1,301
Accounts payable and accrued expenses 5,241 4,294
Short-term borrowings 2,142 2,304
Separate account liabilities 9,089 10,606
Long-term debt 695 699
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Total liabilities 77,974 79,151
Minority interest 56 51
Shareholder's interest:
Net unrealized investment gains (losses) 387 (414)
Derivatives qualifying as hedges (281) ---
Foreign currency translation adjustments (23) 45
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Accumulated non-owner changes in equity 83 (369)
Common stock ($1 par value, 1,000 shares authorized, issued
and outstanding) --- ---
Additional paid-in capital 6,320 6,320
Retained earnings 2,675 2,463
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Total shareholder's interest 9,078 8,414
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Total liabilities and shareholder's interest $87,108 $87,616
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See Notes to Condensed, Consolidated Financial Statements.
2
Item 1. Financial Statements (Continued).
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Condensed, Consolidated Statements of Cash Flows
(Dollar amounts in millions)
(Unaudited)
Three Months Ended
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March 31, April 1,
2001 2000
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Cash Flows From Operating Activities
Net earnings $ 212 $ 160
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Change in reserves 608 (1,050)
Cumulative effect of change in accounting principle, net of tax 15 ---
Other - net (348) 394
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Net cash provided by (used in) operating activities 487 (496)
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Cash Flows From Investing Activities
Short-term investment activity, net (60) ---
Proceeds from sales and maturities of investment securities and
other invested assets 5,673 1,595
Principal collected on mortgage and policy loans 265 155
Purchases of investment securities and other invested assets (6,314) (3,872)
Mortgage and policy loan originations (269) (429)
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Net cash used in investing activities (705) (2,551)
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Cash Flows From Financing Activities
Proceeds from issuance of investment contracts 1,672 2,091
Redemption and benefit payments on investment contracts (1,475) (1,441)
Net commercial paper (repayments) borrowings (20) 616
Proceeds from other borrowings 399 187
Payments on other borrowings (542) (141)
Cash received upon assumption of Toho Mutual Life Insurance
Company insurance liabilities --- 13,177
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Net cash provided by financing activities 34 14,489
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Effect of Exchange Rate Changes on Cash 339 68
Increase in Cash and Cash Equivalents 155 11,510
Cash and Cash Equivalents at Beginning of Period 951 532
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Cash and Cash Equivalents at End of Period $ 1,106 $12,042
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See Notes to Condensed, Consolidated Financial Statements.
3
Item 1. Financial Statements (Continued).
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
(Dollar amounts in millions)
(Unaudited)
1. The accompanying condensed, consolidated quarterly financial statements
represent GE Financial Assurance Holdings, Inc. and its consolidated
subsidiaries (collectively, "the Company"). All significant intercompany
transactions have been eliminated. Certain prior year amounts have been
reclassified to conform to the current year presentation.
2. The condensed, consolidated quarterly financial statements are unaudited.
These statements include all adjustments (consisting of normal recurring
accruals) considered necessary by management to present a fair statement of
the results of operations, financial position and cash flows. The results
reported in these condensed, consolidated financial statements should not be
regarded as necessarily indicative of results that may be expected for the
entire year.
3. The Financial Accounting Standards Board ("FASB") issued, then subsequently
amended, Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting For Derivatives Instruments and Hedging Activities, which became
effective for the Company on January 1, 2001. Under SFAS No. 133, as amended,
all derivative instruments (including certain derivative instruments embedded
in other contracts) are recognized in the balance sheet at their fair values
and changes in fair value are recognized immediately in earnings, unless
derivatives qualify as hedges of future cash flows. For derivatives
qualifying as hedges of future cash flows, the effective portion of changes
in fair value is recorded temporarily in equity, then recognized in earnings
along with the related effects of the hedged items. Any ineffective portion
of a hedge is reported in earnings as it occurs.
The nature of the Company's business activities necessarily involves the
management of various financial and market risks, including those related to
changes in interest rates, equity prices, and currency exchange rates. As
discussed more fully in Notes 1, 9, and 14 of the 2000 Form 10-K, the Company
uses derivative financial instruments to mitigate or eliminate certain of
those risks. The January 1, 2001 accounting change described above affected
only the pattern and timing of non-cash accounting recognition.
At January 1, 2001, the Company's financial statements were adjusted to
record the cumulative effect of adopting this accounting change, as follows:
Earnings Equity
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Adjustments to fair value derivatives (a) $ (23) $(555)
Income tax effects 8 204
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Total $ (15) $(351)
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(a) For earnings effect amount is shown net of adjustment to hedged items.
A reconciliation of current period changes, net of applicable income taxes in
the separate component of shareholder's interest labeled "derivatives
qualifying as hedges", follows:
Transition adjustment as of January 1, 2001 $(351)
Current period increases in fair value 110
Reclassifications to earnings - net (40)
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Balance at March 31, 2001 $(281)
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Additional disclosures required by SFAS No. 133, as amended, are provided in
the following paragraphs.
4
Hedges of Future Cash Flows
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The ineffective portion of changes in fair values of hedge positions,
reported in first quarter earnings, amounted to $(0.5) million, before
income taxes and is recorded in net realized investment gains. There were
no amounts excluded from the measure of effectiveness in the first quarter
related to the hedge of future cash flows.
Of the $(351) million transition adjustment recorded in equity at January
1, 2001, $(40) million, net of income taxes, was reclassified to earnings
during the first quarter of 2001. The $(281) million recorded in equity at
March 31, 2001 is expected to be reclassified to future earnings,
contemporaneously with and primarily offsetting changes in interest expense
and income on floating-rate instruments and foreign currency changes on
certain financial instruments. Of this amount $(128) million, net of income
taxes, are expected to be reclassified to earnings over the twelve-month
period ended March 31, 2002. The actual amounts that will be reclassified
to earnings over the next twelve months will vary from this amount as a
result of market conditions. No amounts were reclassified to earnings
during the first quarter in connection with forecasted transactions that
were no longer considered probable of occurring.
At March 31, 2001 the term of derivative instruments hedging forecasted
transactions, except those related to payment of variable interest on
existing financial instruments, was zero.
Hedges of Recognized Assets, Liabilities and Firm Commitments
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The ineffective portion of changes in fair values of hedge positions,
reported in first quarter 2001 operations, amounted to $4 million, before
income taxes. These amounts were included in net realized investment gains.
There were no amounts excluded from the measure of effectiveness.
Hedges of Net Investments in Foreign Subsidiaries
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Of the $(23) million reported in the separate component of equity related
to currency translation adjustments, $12 million, net of income taxes, was
attributable to gains on derivative instruments designated and effective as
net investment hedges. In addition, amounts excluded from the measure of
effectiveness on these net investment hedges of $6 million, before income
taxes, are reflected in interest expense.
Derivatives Not Designated as Hedges
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Derivatives not designated as hedges primarily consist of options and
instruments that behave based on limits (such as "floors"). These
instruments are used to hedge risks associated with interest rate and
equity movements in certain investments, as well as risks in certain
insurance business activities. Although these instruments are effective
hedges from an economic perspective, they do not qualify for hedge
accounting under SFAS No. 133, as amended.
4. A summary of changes in shareholder's interest that do not result directly
from transactions with the Company's shareholder follows:
Three Months Ended
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March 31, 2001 April 1, 2000
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Net earnings $ 212 $ 160
Unrealized gains on investment securities - net 801 102
Foreign currency translation adjustments (68) (96)
Derivatives qualifying as hedges 70 ---
Cumulative effect on shareholder's interest of adopting SFAS 133 (351) ---
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Total $ 664 $ 166
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5
5. The Company conducts its operations through two operating 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.
The following is a summary of operating segment activity for the three
month periods ended March 31, 2001 and April 1, 2000:
Three Months Ended
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March 31, 2001 April 1, 2000
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Revenues
Wealth Accumulation and Transfer................................... $1,852 $1,650
Lifestyle Protection and Enhancement............................... 956 720
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Total revenues................................................. $2,808 $2,370
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Earnings before income taxes, minority interest and cumulative
effect of change in accounting principle
Wealth Accumulation and Transfer................................... $ 281 $ 252
Lifestyle Protection and Enhancement............................... 78 3
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Total earnings before income taxes, minority interest and
cumulative effect of change in accounting principle $ 359 $ 255
====== ======
The following is a summary of assets by operating segment as of March 31,
2001 and December 31, 2000:
March 31, December 31,
2001 2000
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Assets
Wealth Accumulation and Transfer........... $74,920 $76,057
Lifestyle Protection and Enhancement....... 12,188 11,559
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Total assets........................... $87,108 $87,616
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6. In November 2000, the Emerging Issues Task Force of the FASB reached a
consensus on impairment accounting for retained beneficial interests ("EITF
99-20"). Under this consensus, impairment on certain beneficial interests
in securitized assets must be recognized when (1) the asset's fair value is
below its carrying value, and (2) it is probable that there has been an
adverse change in estimated cash flows. Previously, impairment on such
assets was recognized when the asset's carrying value exceeded estimated
cash flows discounted at a risk free rate of return. The effect of adopting
EITF 99-20 at January 1, 2001 was not significant to the Company's
operating results.
6
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Analysis.
Overview
Net earnings for the first three months of 2001 before cumulative effect of
change in accounting principle (as discussed in Note 3) were $227 million, a $67
million, or 41.9%, increase over the first three months of 2000. This increase
was driven primarily by increased premiums, investment income, and net realized
investment gains, partially offset by increased benefits and other changes in
policy reserves, interest credited, and charges related to the termination of
reinsurance arrangements as a result of the comprehensive transfer of Toho
Mutual Life Insurance Company's ("Toho"), insurance policies and related assets
to GE Edison Life Insurance Company (the "Toho Transfer").
Operating Results
Premiums increased $157 million, or 12.8%, to $1,386 million for the first three
months of 2001 from $1,229 million for the first three months of 2000. The
increase primarily relates to the growth in the Company's life, long-term care
and supplemental accident and health insurance products. This growth in long-
term care and supplemental accident and health insurance premiums were favorably
impacted by the acquisition of GE Group Life Assurance Company (formerly,
Phoenix American Life Insurance Company) in April 2000 and the acquisition of
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 to as the "2000 North American Acquisitions" and are
discussed more fully in the Company's 2000 Form 10-K. This increase was
partially offset by decreases in premiums on accident and health products and
the cession of a certain life block of business no longer actively marketed by
the Company.
Net investment income increased $128 million, or 15.0%, to $982 million for the
first three months of 2001 from $854 million for the first three months of 2000.
The increase was primarily attributable to higher levels of average invested
assets ($62.6 billion in first three months of 2001 vs. $50.6 billion in first
three months of 2000), partially offset by a decrease in weighted average yields
to 6.32% for the first three months of 2001 from 6.80% for the first three
months of 2000 due to lower yields on investment activity related to the
Company's Japanese operations. Excluding the Japanese operations, the weighted
average yields for the first three months of 2001 would have been 7.48%.
Surrender Fee Income increased $68 million to $106 million for the first three
months of 2001 from $38 million in the first three months of 2000. The increase
in surrender fee income relates to amounts retained by the Company from the
surrender of policyholder contracts assumed as part of the Toho Transfer in
March 2000. 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 insolvency of Toho, in particular the fact that the
former Toho policyholders were not permitted to surrender policies until the
consummation of the Toho Transfer.
Net realized investment gains increased $89 million to $110 million for the
first three months of 2001 from $21 million for the first three months of 2000.
This increase arises from the decision to sell certain invested assets in
connection with the Company's asset/liability risk management policies and
associated ongoing review of its investment portfolio positions which vary with
market and economic conditions.
Policy fees and other income decreased $4 million, or 1.8%, to $224 million in
the first three months of 2001 from $228 million in the first three months of
2000. Other income is principally comprised of insurance charges made against
universal life contracts, revenues from sales of income protection packages,
fees assessed against policyholder account values, other fee income and
commission income. The decrease in the first three months of 2001 was primarily
due to a general decline in income protection package revenues, partially offset
by an increase in insurance charges made against universal life contracts and
administration generated by a third party administrator acquired as part of the
2000 North American Acquisitions.
Benefits and other changes in policy reserves includes both activity related to
future policy benefits on long-duration life and health insurance products as
well as claim costs incurred during the year under these contracts and property
and casualty products. These amounts increased $354 million, or 35.6%, to $1,349
million in the first three months of 2001 from $995 million in the first three
months of 2000. The increase primarily relates to the growth in the Company's
Japanese operations, growth in certain of the Company's life and long-term care
insurance business as well as the impact of the 2000 North American
Transactions.
Interest credited increased $65 million, or 19.1%, to $406 million in the first
three months of 2001 from $341 million in the first three months of 2000. This
increase was a result of the increase in the underlying reserves arising
primarily from sales of Guaranteed Investment Contracts (GICs) and certain
universal life and annuity products.
Commission expenses decreased $40 million, or 12.3%, to $285 million in the
first three months of 2001 from $325 million in the first three months of 2000
primarily due to higher contract renewals on certain of the Company's life
products which are associated with lower commission rates, partially offset by
higher first-year premiums on long-term care insurance contracts. In addition,
the prior year includes charges related to the termination of reinsurance
arrangements in connection with the Toho Transfer in March 2000.
General expenses were $472 million for the first three months of 2001, a
decrease of $88 million or 15.7% over the first three months of 2000 expense of
$560 million. The decrease is primarily the result of prior year charges related
to the termination of reinsurance arrangements in connection with the Toho
Transfer and decreases in advertising and marketing expenses in certain lines of
business.
Amortization of intangibles, net decreased $114 million, or 57.6%, to $84
million for the first three months of 2001 from $198 million for the first three
months of 2000. The Company's significant intangible assets consist of two
components which both result from acquisition activities - the present value of
future profits (PVFP), representing the estimated future gross profit in
acquired insurance and annuity contracts, and goodwill, representing the excess
of purchase price over the fair value of identified net assets of the acquired
entities. Amortization of intangibles decreased due primarily to lower PVFP
amortization associated with the run-off of the insurance policies assumed in
the Toho Transfer.
Change in deferred acquisition costs, net decreased $141 million, or 42.6%, to
$190 million for the first three months of 2001 from $331 million for the first
three months of 2000. Deferred acquisition costs include costs and expenses
which vary with and are primarily related to the acquisition of insurance and
investment contracts, such as direct advertising and printing costs and certain
support costs such as underwriting and policy issue costs. Under U.S. GAAP,
these costs are deferred and recognized in relation to either premiums or gross
profits underlying the contracts. Amortization of deferred acquisition costs
decreased primarily as a result of the termination of reinsurance arrangements
as part of the Toho Transfer in March 2000 and a decrease in commission and
other advertising expenses, partially offset by an increase in deferred
acquisition costs associated with increased long-term care insurance product
sales.
7
Interest expense increased $16 million, or 59.3%, to $43 million for the first
three months of 2001 from $27 million for the first three months of 2000. This
increase relates to an increase in weighted average commercial paper borrowings
outstanding for the first quarter of 2001 compared to the first quarter of the
prior year.
Financial Condition
Total assets decreased $0.5 billion, or 0.6% at March 31, 2001 from December
31, 2000. Total investments increased approximately $1.6 billion, or 2.7% at
March 31, 2001 from December 31, 2000. This increase was primarily driven by net
investment income of approximately $982 million and an increase in other
invested assets as a result of the implementation of SFAS No. 133 (as discussed
in Note 3). Assets invested in separate accounts decreased by approximately $1.5
billion, or 14.3%, at March 31, 2001 from December 31, 2000 primarily due to an
overall decrease in the market value of the underlying investment funds. All
other assets decreased by $0.6 billion primarily as a result of decreases is
amounts due from brokers related to investment transactions and decreases in
intangible assets and reinsurance recoverable.
Total liabilities decreased $1.2 billion, or 1.5%, at March 31, 2001 from
December 31, 2000. Future annuity and contract benefits decreased approximately
$0.3 billion, or 0.6%, at March 31, 2001 from December 31, 2000. This decrease
resulted primarily from surrender payments made to former Toho policyholders
subsequent to the Toho Transfer in March 2000, partially offset by growth in
reserves due to the sales of certain of the Company's life, annuity and
long-term care business. Separate account liabilities decreased by approximately
$1.5 billion, or 14.3%, at March 31, 2001 from December 31, 2000 primarily due
to overall decreased market value of the underlying investment funds. Accounts
payable and accrued other expenses increased $0.7 billion, or 15.4%, due
primarily to the timing of net payments and receipts related to the investment
portfolio and normal business activity. All other liabilities decreased by
$0.1 billion primarily as a result of net repayments on short-term borrowings.
8
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibit.
Exhibit 12 Computation of ratio of earnings to fixed charges.
b. Reports on Form 8-K.
None.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GE FINANCIAL ASSURANCE HOLDINGS, INC.
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(Registrant)
Date: May 1, 2001 By: /s/ Thomas W. Casey
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Thomas W. Casey,
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
Date: May 1, 2001 By: /s/ Richard G. Fucci
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Richard G. Fucci,
Vice President and Controller
(Principal Accounting Officer)
10
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Index to Exhibits
Exhibit No. Page
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12 Computation of ratio of earnings to fixed charges
11