UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-Q
___________
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 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 _________
___________
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 November 6, 2001, 1,000 shares of common stock with a par value of $1.00 were
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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. Condensed, Consolidated Financial Statements ...................................... 1
Item 2. Management's Discussion and Analysis of Results of Financial Condition
and Results of Operations ......................................................... 8
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges ................................. 13
PART II - OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K .................................................. 14
Signatures .................................................................................... 15
Index to Exhibits ............................................................................. 16
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 Nine Months Ended
---------------------------------------------
Sept 29, Sept 30, Sept 29, Sept 30,
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Premiums $ 1,587 $ 1,588 $ 4,817 $ 4,539
Net investment income 1,052 966 3,113 2,836
Surrender fee income 88 391 286 1,057
Net realized investment gains 67 43 311 162
Policy fees and other income 203 236 644 689
-------- -------- -------- --------
Total revenues 2,997 3,224 9,171 9,283
-------- -------- -------- --------
Benefits and expenses:
Benefits and other changes in policy reserves 1,396 1,527 4,251 4,188
General expenses 750 791 2,296 2,498
Interest credited 433 384 1,244 1,094
Amortization of intangibles 139 275 380 894
Change in deferred acquisition costs, net (241) (266) (642) (888)
Interest expense 41 35 119 97
-------- -------- -------- --------
Total benefits and expenses 2,518 2,746 7,648 7,883
-------- -------- -------- --------
Earnings before income taxes, minority interest
and cumulative effect of change in accounting
principle 479 478 1,523 1,400
Provision for income taxes 161 147 515 466
-------- -------- -------- --------
Earnings before minority interest and cumulative
effect of change in accounting principle 318 331 1,008 934
Minority interest 1 2 4 4
-------- -------- -------- --------
Earnings before cumulative effect of change in
accounting principle 317 329 1,004 930
Cumulative effect of change in accounting principle,
net of tax -- -- 15 --
-------- -------- -------- --------
Net earnings 317 329 989 930
Retained earnings at beginning of period 5,692 4,401 5,020 3,800
-------- -------- -------- --------
Retained earnings at end of period $ 6,009 $ 4,730 $ 6,009 $ 4,730
======== ======== ======== ========
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)
September 29, December 31,
2001 2000
------------- ------------
(Unaudited)
Assets
Investments:
Fixed maturities available-for-sale, at fair value $ 60,291 $ 52,468
Equity securities available-for-sale, at fair value 911 1,037
Mortgage and other loans, net of valuation allowance 6,288 7,734
Policy loans 1,172 1,194
Short-term investments 1,065 1,706
Other invested assets 1,210 1,231
------------- ---------
Total investments 70,937 65,370
Cash and cash equivalents 2,266 1,150
Accrued investment income 1,221 1,179
Deferred acquisition costs 4,005 3,446
Intangible assets 4,703 5,289
Reinsurance recoverable 1,448 1,396
Other assets 2,453 3,668
Separate account assets 8,343 10,606
------------- ---------
Total assets $ 95,376 $ 92,104
============= =========
Liabilities and Shareholder's Interest
Liabilities:
Future annuity and contract benefits $ 60,863 $ 57,705
Liability for policy and contract claims 2,541 2,597
Other policyholder liabilities 1,621 1,379
Separate account liabilities 8,343 10,606
Accounts payable and accrued expenses 5,599 5,043
Short-term borrowings 1,982 2,304
Long-term debt 1,186 699
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Total liabilities 82,135 80,333
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Minority interest in equity of consolidated subsidiaries 254 51
Shareholder's interest:
Net unrealized investment gains (losses) 272 (298)
Derivatives qualifying as hedges (296) --
Foreign currency translation adjustments 49 45
------------- ---------
Accumulated non-owner changes in equity 25 (253)
Common stock -- --
Additional paid-in capital 6,953 6,953
Retained earnings 6,009 5,020
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Totals shareholder's interest 12,987 11,720
------------- ---------
Total liabilities and shareholder's interest $ 95,376 $ 92,104
============= =========
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)
Nine Months Ended
---------------------------------
September 29, September 30,
2001 2000
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Cash Flows From Operating Activities
Net earnings $ 989 $ 930
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Change in reserves 2,755 (5,461)
Cumulative effect of change in accounting principle, net of tax 15 --
Other - net 174 481
-------- --------
Net cash provided by (used in) operating activities 3,933 (4,050)
-------- --------
Cash Flows From Investing Activities
Short term investment activity, net 641 (1,615)
Proceeds from sales and maturities of investment securities and
other invested assets 13,800 6,492
Principal collected on and securitizations of mortgage and policy 2,220 789
loans
Purchases of investment securities and other invested assets (20,187) (14,271)
Mortgage and policy loan originations (946) (1,059)
Acquisitions, net of cash acquired -- (519)
-------- --------
Net cash used in investing activities (4,472) (10,183)
-------- --------
Cash Flows From Financing Activities
Proceeds from issuance of investment contracts 5,675 6,492
Redemption and benefit payments on investment contracts (4,361) (4,642)
Net commercial paper (repayments) borrowings (570) 883
Proceeds from other borrowings 2,220 2,530
Proceeds from subsidiary issuance of preferred stock 200 --
Payments on other borrowings (1,485) (2,368)
Cash received from assumption of Toho Mutual Life Insurance
Company insurance liabilities -- 13,177
-------- --------
Net cash provided by financing activities 1,679 16,072
-------- --------
Effect of Exchange Rate Changes on Cash (24) 72
-------- --------
Increase in Cash and Equivalents 1,116 1,911
Cash and Equivalents at Beginning of Period 1,150 627
-------- --------
Cash and Equivalents at End of Period $ 2,266 $ 2,538
======== ========
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.
On June 1, 2001, the Company acquired through a capital contribution made
by its sole shareholder, General Electric Capital Corporation ("GE
Capital"), all of the outstanding voting securities of the following
mortgage insurance companies: General Electric Mortgage Insurance
Corporation, General Electric Mortgage Insurance Corporation of North
Carolina, Private Residential Mortgage Insurance Corporation, GE
Residential Mortgage Insurance Corporation of North Carolina, GE Mortgage
Reinsurance Corporation of North Carolina, Sponsored Captive Re, Inc., and
Verex Assurance, Inc. (together, the "Mortgage Insurers"). GE Residential
Mortgage Corporation of North Carolina's wholly owned subsidiary, General
Electric Home Equity Insurance Corporation of North Carolina, as an asset
of its parent, was indirectly contributed.
The contribution was made following the dissolution of GE Capital Mortgage
Corporation ("GECMC"), the Mortgage Insurers' former parent company. GECMC
was dissolved on June 1, 2001 in a tax-free liquidation under Section 332
of the Internal Revenue Code. In accordance with GECMC's Articles of
Dissolution, the Mortgage Insurers, along with other former subsidiaries of
GECMC, were distributed to GE Capital, GECMC's sole shareholder.
Immediately following receipt of the distribution, GE Capital contributed
the Mortgage Insurers to the Company. The Company, in turn, contributed the
shares to GE Mortgage Holdings, LLC, a North Carolina limited liability
company, of which the Company is the sole member. The transaction was
accounted for in a manner similar to a pooling-of-interests. The condensed,
consolidated financial statements contained herein have been restated to
give retroactive effect to the contribution. This transaction resulted in
the creation of a new operating segment, Mortgage Insurance.
2. These financial statements have been prepared on the basis of accounting
principles generally accepted in the United States of America ("U.S.
GAAP"). The preparation of financial statements in conformity with U.S.
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.
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 current and retained earnings, 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. The condensed, consolidated financial
statements included herein should be read in conjunction with the audited
consolidated financial statements and related notes contained in the
Company's annual report on Form 10-K for the fiscal year ended
December 31, 2000, and Current Report on Form 8-K, dated June 8, 2001.
3. A summary of changes in shareholder's interest that do not result directly
from transactions with the shareholder follows:
Three Months Ended
-------------------------------
September 29, September 30,
2001 2000
--------------- ---------------
Net earnings $ 317 $ 329
Unrealized gains on investment securities - net 411 260
Foreign currency translation adjustments 44 (16)
Derivatives qualifying as hedges (195) --
--------------- ---------------
Total $ 577 $ 573
=============== ===============
4
Nine Months Ended
-------------------------------
September 29, September 30,
2001 2000
-------------- ---------------
Net earnings $ 989 $ 930
Cumulative effect on shareholder's interest of adopting SFAS
133 (351) ---
Derivatives qualifying as hedges 55 ---
Unrealized gains on investment securities - net 570 155
Foreign currency translation adjustments 4 (120)
-------------- ---------------
Total $ 1,267 $ 965
============== ===============
4. The Company conducts its operations through three 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, (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, and (3) Mortgage Insurance, comprised of products intended to
protect mortgage lenders against losses caused by mortgage defaults.
The following is a summary of operating segment activity for the three and
nine month periods ended September 29, 2001 and September 30, 2000:
Three Months Ended
-------------------------------
September 29, September 30,
2001 2000
-------------- --------------
Revenues
Wealth Accumulation and Transfer ............................... $ 1,817 $ 2,103
Lifestyle Protection and Enhancement ........................... 988 927
Mortgage Insurance ............................................. 192 194
-------------- ---------------
Total revenues ............................................. $ 2,997 $ 3,224
============== ===============
Earnings before income taxes, minority interest and
cumulative effect of change in accounting principle
Wealth Accumulation and Transfer ............................... $ 264 $ 277
Lifestyle Protection and Enhancement ........................... 87 65
Mortgage Insurance ............................................. 128 136
-------------- ---------------
Total earnings before income taxes, minority interest
and cumulative effect of change in accounting principle .... $ 479 $ 478
============== ===============
5
Nine Months Ended
-------------------------------
September 29, September 30,
2001 2000
-------------- ---------------
Revenues
Wealth Accumulation and Transfer ...................................... $ 5,615 $ 6,100
Lifestyle Protection and Enhancement .................................. 2,913 2,536
Mortgage Insurance .................................................... 643 647
-------------- ---------------
Total revenues .................................................... $ 9,171 $ 9,283
============== ===============
Earnings before income taxes, minority interest and
cumulative effect of change in accounting principle
Wealth Accumulation and Transfer ...................................... $ 841 $ 754
Lifestyle Protection and Enhancement .................................. 223 135
Mortgage Insurance .................................................... 459 511
-------------- ---------------
Total earnings before income taxes, minority interest and
cumulative effect of change in accounting principle ............... $ 1,523 $ 1,400
============== ===============
The Company has changed its method of allocating interest expense between
segments. This change impacts segment presentation only and did not impact the
Company's results of operations.
The following is a summary of assets by operating segment as of September 29,
2001 and December 31, 2000:
September 29, September 30,
2001 2000
-------------- ---------------
Assets
Wealth Accumulation and Transfer ...................................... $ 76,869 $ 76,057
Lifestyle Protection and Enhancement .................................. 13,724 11,559
Mortgage Insurance .................................................... 4,783 4,488
-------------- ---------------
Total assets ...................................................... $ 95,376 92,104
============== ===============
5. On June 26, 2001, the Company issued 60 billion yen (approximately $0.5
billion) of 10 year senior global debt due in 2011 under a $1 billion
universal shelf registration statement. The net proceeds from the issuance
were approximately $0.5 billion and were used to reduce commercial paper
borrowings. This debt has a 1.6% semi-annual coupon rate, with the first
payment to be made on December 20, 2001.
6. Minority interest in equity of consolidated subsidiaries includes 200,000
shares of $1,000 par value non-redeemable, cumulative preferred stock and
certain ownership interests in other consolidated subsidiaries. The
preferred stock, issued by a subsidiary to a related party in September
2001, has an annual dividend rate of 7.25%.
7. The Financial Accounting Standards Board ("FASB") issued, then subsequently
amended, Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative 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 the 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 Form 10-K for the fiscal
year ended December 31, 2000, 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.
6
At January 1, 2001, the Company's financial statements were adjusted to
record a cumulative effect of adopting this accounting change, as follows:
Shareholder's
Earnings Interest
---------- -------------
Adjustment to fair value of derivatives (a) $ (23) $ (555)
Income tax effects 8 204
---------- -------------
Total $ (15) $ (351)
========== =============
(a) For earnings effect, amount shown is net of adjustment to hedged
items.
A reconciliation of current period changes for the first nine months of
2001, 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 - net 23
Reclassifications to earnings - net 32
-------------
Balance at September 29, 2001 $ (296)
=============
The cumulative effect on shareholder's interest was primarily attributable
to marking to market currency swap contracts used to hedge non-functional
currency investments and swap contracts used to hedge variable-rate
borrowings. Decreases in the fair values of these instruments were
attributable to declines in interest rates since inception of the hedging
arrangement. As a matter of policy, the Company ensures that funding,
including the effect of derivatives, of its investment and other financial
asset positions are substantially matched in character (e.g., fixed vs.
floating) and duration. As a result, declines in the fair values of these
effective derivatives are offset by unrecognized gains on the related
financing assets and hedged items, and future net earnings will not be
subject to volatility arising from interest rate changes.
8. 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.
9. SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets, modify the accounting for business combinations. All
business combinations initiated after June 30, 2001, must be accounted for
by the purchase method. Goodwill in such acquisitions will not be
amortized, but will be written down when specified tests indicate that the
goodwill is impaired, that is, fair value is lower than carrying value.
Certain intangible assets will be required to be recognized separately from
goodwill, and will be amortized over their useful lives. As of January 1,
2002, all goodwill must be tested for impairment and a transition
adjustment recognized at that time. Goodwill amortization will also cease
at that date and, thereafter, all goodwill will be tested at least annually
for impairment. If these rules had applied to goodwill for 2001, management
believes that full year 2001 net earnings would have increased by
approximately $94 million. Management has not yet determined the extent of
impaired goodwill, if any, that will be recognized as of January 1, 2002.
7
Item 2. Management's Discussion and Analysis of Results of Operations.
Overview
All historical financial information contained herein has been restated to
reflect the contribution of the Mortgage Insurers to the Company in the second
quarter of fiscal 2001 which was accounted for in a manner similar to a
pooling-of-interests.
THREE MONTHS ENDED SEPTEMBER 29, 2001 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
Net earnings before cumulative effect of change in accounting principle for the
three month period ended September 29, 2001 were $317 million, a $12 million, or
3.7%, decrease over the three month period ending September 30, 2000. Earnings
before income taxes, minority interest, and cumulative effect of a change in
accounting principle for the three month period ended September 29, 2001 were
$479 million, nearly unchanged from $478 million in the comparable 2000 period.
Operating Results
Premiums for the three month period ended September 29, 2001 were $1,587 million
compared to $1,588 million for the comparable 2000 period. The Company has
experienced double-digit growth in its long-term care insurance and certain
fixed annuity products. The increase in premiums generated by this growth was
offset by decreased premiums from the policies assumed as part of the
comprehensive transfer of Toho Mutual Life Insurance Company's assets and
liabilities to the Company in March 2000 (the "Toho Transfer"). The decreased
premiums were primarily the result of surrenders in this block of business.
Net investment income increased $86 million, or 8.9%, to $1,052 million for the
three month period ended September 29, 2001 from $966 million for the comparable
2000 period. The increase was primarily attributable to higher levels of average
invested assets ($70.1 billion for the three month period ended September 29,
2001 vs. $65.1 billion for the three month period ended September 30, 2000) and
an increase in weighted average yields to 6.05% for the three month period ended
September 29, 2001 from 5.98% for the three month period ended September 30,
2000. This increase was partially offset by lower yields on investment activity
primarily related to the Company's Japanese operations, as well as the overall
declining interest rate environment.
Surrender fee income decreased $303 million to $88 million for the three
months ended September 29, 2001 from $391 million for the comparable 2000
period. The Company's surrender fee income is primarily attributable to amounts
retained by the Company from the surrender of policyholder contracts assumed as
part of the Toho Transfer. Under the terms of the restructuring of Toho's in-
force insurance contracts these policies became subject to surrender charges
that decline annually. As management expected, there has been a significant
decrease in the number of policyholder contracts surrendered during the three
months ended September 29, 2001 as compared to the same 2000 period. In addition
to the decrease in the number of surrenders, surrender fee income was also
impacted by the decline from the prior year in the amount of the surrender
charge applicable to each surrendered policy.
Net realized investment gains increased $24 million to $67 million for the three
month period ended September 29, 2001 from $43 million for the comparable 2000
period. This increase arises primarily from the securitization of certain
financial assets. Net realized gains are also impacted by the Company's decision
to sell certain assets in connection with the Company's credit and
asset/liability risk management policies. The Company continues to monitor
events affecting the underlying value of its investment portfolio and recognizes
adjustments to reflect other than temporary declines in book value, as needed.
Policy fees and other income decreased $33 million, or 14.0%, to $203 million
for the three month period ended September 29, 2001 from $236 million for the
comparable 2000 period. Policy fees and 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, and commission income. This decrease was primarily the result of a
decline in club revenue on income protection packages and a decrease in fees
associated with a decline in policyholder account values. This decrease was
partially offset by an increase in charges on certain universal life insurance
products.
8
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 decreased $131 million, or 8.6%, to $1,396
million in the three month period ended September 29, 2001 from $1,527 million
for the comparable 2000 period. The decrease is primarily caused by the
reduction in future policy benefits associated with the surrenders in the block
of policies assumed as part of the Toho Transfer. The impact of the surrenders
in this block is partially offset by increases in reserves of $25 million
established for expected insurance losses associated with the events of
September 11th and increases in the future policy benefits associated with
growth in the Company's long-term care insurance and certain fixed annuity
products.
General expenses, including commission expense, were $750 million for the three
months ended September 29, 2001, a decrease of $41 million or 5.2% over the
comparable 2000 period expense of $791 million. The decrease is primarily the
result of decreases in commission and other production related expenses
associated with declines in new business production, primarily in certain life
insurance products. The decrease was partially offset by increases in production
related expenses on long-term care insurance and renewal commissions on certain
life insurance products.
Interest credited increased $49 million, or 12.8%, to $433 million in the three
month period ended September 29, 2001 from $384 million for the comparable 2000
period primarily resulting from strong production in Guaranteed Investment
Contracts ("GICs") and funding agreements. The growth in interest credited
reflects the increase in policy reserves for these products, partially offset by
lower crediting rates.
Amortization of intangibles decreased $136 million, or 49.5%, to $139 million
for the three month period ended September 29, 2001 from $275 million for the
comparable 2000 period. The Company's significant intangible assets consist of
two components which 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 the surrender
of insurance policies assumed in the Toho Transfer, which lowered the PVFP
amortization for this block of business.
Change in deferred acquisition costs, net decreased $25 million, or 9.4%, to
$241 million for the three months ended September 29, 2001 from $266 million for
the comparable 2000 period. Deferred acquisition costs include costs and
expenses which vary with and are primarily related to the acquisition of
insurance and investment contracts, such as commissions, printing, underwriting,
and policy issuance costs. Under U.S. GAAP, these costs are deferred and
recognized in relation to either premiums or gross profits underlying the
contracts. The change in deferred acquisition costs, net is primarily due to a
decrease in commission expense and other production related expenses.
Interest expense increased $6 million, or 17.1%, to $41 million for the three
months ended September 29, 2001 from $35 million for the comparable 2000 period.
This increase relates primarily to an increase in total debt outstanding and to
a lesser extent interest expense associated with a tax indemnification agreement
with the former owner of certain of our subsidiaries. These factors were
partially offset by a reduction in floating interest rates on commercial paper.
Provision for income taxes increased $14 million, or 9.5%, to $161 million for
the three month period ended September 29, 2001 from $147 million for the
comparable 2000 period. The increase is primarily a result of favorable prior
year foreign tax adjustments in the three month period ended September 30, 2000.
9
NINE MONTHS ENDED SEPTEMBER 29, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Net earnings before cumulative effect of change in accounting principle for
the first nine months of 2001 were $1,004 million, a $74 million, or 8.0%,
increase over the first nine months of 2000. Earnings before income taxes,
minority interest, and cumulative effect of a change in accounting principle for
the nine month period ended September 29, 2001 were $1,523 million, a $123
million, or 8.8% increase from $1,400 million for the comparable 2000 period.
Operating Results
Premiums increased $278 million, or 6.1%, to $4,817 million for the first nine
months of 2001 from $4,539 million for the first nine months of 2000. The
increase primarily relates to double-digit growth in the Company's long-term
care insurance and supplemental accident and health insurance products and
certain annuity products. Growth in long-term care and supplemental accident and
health insurance premiums was primarily attributable to the acquisition of 90%
of the long-term care insurance portfolio of Citigroup's Travelers Life and
Annuity unit and certain assets related thereto in July 2000 and the acquisition
of GE Group Life Assurance Company (formerly, Phoenix American Life Insurance
Company) in April 2000. These two transactions are collectively referred to as
the "2000 North American Acquisitions." The increase in premiums generated by
this growth was partially offset by decreases in premiums from the cession of a
block of life business no longer actively marketed by the Company, termination
of reinsurance arrangements as part of the Toho Transfer, and the surrender of
certain policies assumed as part of the Toho Transfer.
Net investment income increased $277 million, or 9.8%, to $3,113 million for the
first nine months of 2001 from $2,836 million for the first nine months of 2000.
The increase was primarily attributable to higher levels of average invested
assets ($68.5 billion in first nine months of 2001 vs. $57.9 billion in first
nine months of 2000). The impact of the higher levels of average invested assets
was partially offset by a decrease in weighted average yields to 6.06% for the
first nine months of 2001 from 6.53% for the first nine months of 2000. Lower
yields on investment activity is primarily related to the Company's Japanese
operations, as well as the overall declining interest rate environment.
Surrender fee income decreased $771 million to $286 million for the first nine
months of 2001 from $1,057 million in the first nine months of 2000. Surrender
fee income for the first nine months of 2001 and 2000 is primarily attributable
to amounts retained by the Company from the surrender of policyholder contracts
assumed as part of the Toho Transfer. Under the terms of the restructuring of
Toho's in-force insurance contracts, these policies became subject to surrender
charges that decline annually. As management expected, there has been a
significant decrease in the number of policyholder contracts surrendered during
the nine months ended September 29, 2001 as compared to the same period in
2000. In addition, to the decrease in the number of surrenders, surrender fee
income was also impacted by the decline from the prior year in the amount of the
surrender charge applicable to each surrendered policy.
Net realized investment gains increased $149 million to $311 million for the
first nine months of 2001 from $162 million for the first nine months of 2000.
This increase arises from the securitization of certain financial assets. Net
realized gains are also impacted by the Company's decision to sell certain
assets in connection with the Company's credit and asset/liability risk
management policies. The Company continues to monitor events affecting the
underlying value of its investment portfolio and recognizes adjustments to
reflect other than temporary declines in book value, as needed.
Policy fees and other income decreased $45 million, or 6.5%, to $644 million
in the first nine months of 2001 from $689 million in the first nine months of
2000. Policy fees and 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, and
commission income. The decrease in the first nine months of 2001 was primarily
the result of a decline in club memberships in income protection packages and a
decrease in fees associated with a decline in policyholder account values,
partially offset by an increase in insurance charges made against certain
universal life contracts and administration revenues 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 as well as
property and casualty products. These amounts increased $63 million, or 1.5%, to
$4,251 million in the first nine months of 2001 from $4,188 million in the first
nine months of 2000. The increase primarily relates to the growth in the
Company's long-term care insurance and supplemental accident and health
insurance products, which is attributable in part to the 2000 North American
Acquisitions, as well as growth in fixed annuity products. The increase is also
related to insurance reserves of $25 million established for expected insurance
losses associated with the events of September 11th and an increase in mortgage
insurance loss and loss adjustment expenses as a result of slowing economic
conditions. These factors were partially offset primarily by the lower surrender
rate associated with the policies assumed as part of the Toho Transfer and the
cession of a certain life block of business no longer actively marketed by the
Company.
10
General expenses, including commission expense, were $2,296 million for the
first nine months of 2001, a decrease of $202 million or 8.1% over the first
nine months of 2000 expense of $2,498 million. The decrease primarily results
from decreases in certain production related expenses, including commission
expenses, on certain life insurance products, and a reduction in expenses
related to the Company's productivity initiatives. In addition, prior year
general expenses had been increased by the termination of reinsurance
arrangements in connection with the Toho Transfer. These decreases are partially
offset by higher commissions and production related expenses for long-term care
insurance.
Interest credited increased $150 million, or 13.7%, to $1,244 million in the
first nine months of 2001 from $1,094 million in the first nine months of 2000
primarily resulting from strong production in GICs and funding agreements, fixed
annuities, and certain universal life insurance products. The growth in interest
credited reflects the increase in policy reserves for these products, partially
offset by lower crediting rates.
Amortization of intangibles decreased $514 million, or 57.5%, to $380 million
for the first nine months of 2001 from $894 million for the first nine months of
2000. Amortization of intangibles decreased due primarily to surrenders of
insurance policies assumed in the Toho Transfer, which lowered the PVFP
amortization for this block of business.
Change in deferred acquisition costs, net decreased $246 million, or 27.7%, to
$642 million for the first nine months of 2001 from $888 million for the first
nine 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 commissions, printing, 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. The
change in deferred acquisition costs, net is primarily a result of decreases in
commission expense and other production related expenses, related to lower
production in certain lines of business.
Interest expense increased $22 million, or 22.7%, to $119 million for the first
nine months of 2001 from $97 million for the first nine months of 2000. This
increase relates primarily to an increase in total debt outstanding and to a
lesser extent interest expense associated with a tax indemnification agreement
with the former owner of certain of our subsidiaries. These factors were
partially offset by a reduction in floating interest rates on commercial paper.
Financial Condition
Total assets increased $3.3 billion, or 3.6%, at September 29, 2001 from
December 31, 2000. Total investments increased $5.6 billion or 8.5% to $70.9
billion. The increase in total investments is primarily due to net purchases of
securities driven by operating cash flows and net investment income, partially
offset by mortgage and policy loans repayments and securitizations of certain
financial assets as well as other decreases in short-term investments. Assets
invested in separate accounts decreased by approximately $2.3 billion, or 21.3%,
at September 29, 2001 from December 31, 2000 primarily due to an overall
decrease in market value of the underlying investment funds.
Total liabilities increased $1.8 billion, or 2.2%, at September 29, 2001 from
December 31, 2000. Future annuity and contract benefits increased approximately
$3.2 billion, or 5.5%, at September 29, 2001 from December 31, 2000. This
increase resulted primarily from the growth in the Company's investment-type
contracts (primarily GICs and funding agreements). This increase was offset by
separate account liabilities, which decreased by approximately $2.3 billion, or
21.3%, at September 29, 2001 from December 31, 2000 primarily due to an overall
decrease in market value of the underlying investment funds. Short-term
borrowings decreased by $0.3 billion as a result of net repayments on commercial
paper. Long-term debt increased by $0.5 billion as the result of the issuance of
60 billion yen of 10 year senior global debt.
11
Forward Looking Statements
This document may include certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on management's current expectations and are subject to
uncertainty and changes in circumstances. Actual results may differ materially
from these expectations due to changes in global economic, business, competitive
market and regulatory factors.
12
EXHIBIT 12
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in millions)
Nine Months Ended September 29, 2001
(Unaudited)
Ratio of Earnings to
Fixed Charges
-------------
Net earnings $1,004
Provision for income taxes 515
Minority Interest 4
-------------
Earnings before income taxes and minority interest 1,523
-------------
Fixed charges:
Interest expense 119
Interest portion of net rentals 21
-------------
Total fixed charges 140
-------------
Less interest capitalized, net of amortization --
-------------
Earnings before income taxes and minority interest, plus fixed charges $1,663
=============
Ratio of earnings to fixed charges 11.9
=============
For purposes of computing the ratios, fixed charges consist of interest on all
indebtedness and one-third of rentals, which management believes is a reasonable
approximation of the interest factor of such rentals.
13
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
Exhibit 12 Computation of ratio of earnings to fixed charges.
b. Reports on Form 8-K.
None
14
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.
-----------------------------------------------------
(Registrant)
Date: November 6, 2001 By: /s/ Thomas W. Casey
--------------------------------------------------
Thomas W. Casey,
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: November 6, 2001 By: /s/ Richard G. Fucci
--------------------------------------------------
Richard G. Fucci,
Vice President and Controller
(Principal Accounting Officer)
15
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Index to Exhibits
Exhibit No. Page
----------- ----
12 Computation of ratio of earnings to fixed charges 13
16