UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
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.
(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)
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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 8, 2002, 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 8, 2002. 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
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PART I
Item 1. Business .................................................................................. 1
Item 2. Properties ................................................................................ 21
Item 3. Legal Proceedings ......................................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders ....................................... 21
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................. 21
Item 6. Selected Financial Data ................................................................... 22
Item 7. Management's Discussion and Analysis of Results of Operations and Financial
Condition................................................................................. 23
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ................................ 37
Item 8. Financial Statements and Supplementary Data ............................................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ..................................................................... 83
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................ 83
Item 11. Executive Compensation .................................................................... 83
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................ 83
Item 13. Certain Relationships and Related Transactions ............................................ 83
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 84
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 helping consumers accumulate wealth, achieve
dependable income distribution, transfer wealth, and protect their lifestyles
and assets. The Company does this through a family of regulated insurance
subsidiaries that focuses on providing annuities, life insurance, retirement
plans, investment contracts, long-term care insurance, mortgage insurance,
income protection packages, and property and casualty insurance almost entirely
in North America and Japan.
On June 1, 2001, GE Financial Assurance 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 GE
Financial Assurance. GE Financial Assurance, in turn, contributed the shares to
GE Mortgage Holdings, LLC, a North Carolina limited liability company, of which
GE Financial Assurance is the sole member. The transaction was accounted for in
a manner similar to a pooling-of-interests. All financial information contained
herein has been restated to give retroactive effect to the contribution. This
transaction resulted in the creation of a new operating segment, Mortgage
Insurance.
Ownership of the Company
All the outstanding common stock of GE Financial Assurance is owned by 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 Rating Services ("S&P") and "Aaa" by Moody's Investors
Services, Inc. ("Moody's"). GE Financial Assurance's segments operate within the
Consumer Services and Specialty Insurance segments of GE Capital.
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 healthy lifestyles and medical advances, the reduction in
government and employer-sponsored benefit programs, increased home ownership 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 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
sections related to Marketing and Distribution.
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 to help consumers invest, protect, and retire.
Most of the Company's financial services products are targeted at middle to
upper income consumers, individuals employed by small to mid-sized companies and
first-time home buyers.
The Company's strategy is to be a consumer financial solutions provider
through (i) intense customer focus, (ii) the expansion of product and
distribution channels through core business growth and acquisitions, and (iii)
cost and speed competitiveness. 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.
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The Company focuses on three sets of customers: (i) consumers, (ii)
distribution partners/producers and (iii) mortgage originators. 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 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
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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 that 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 services industry. As such, the Company actively promotes
the GE brand, which is highly attractive to consumers and
distributors.
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) worksites and (iv) direct and affinity based marketing through
direct mail, telemarketing, and the Internet. 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
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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 products and service capabilities or processes to reach
consumers and distributors.
The Company has acquired a number of organizations that offer a broad
array of products and services designed to meet the needs of
consumers. While the Company's primary focus will be on increasing
sales of existing products; enhancing its marketing, sales, new
product development and service capabilities; and driving distribution
efficiency, 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 and (4) alliances with, or
acquisition of, entities with a presence in attractive 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 evaluates
opportunities to participate in these markets. The Company believes
that deregulation, consolidation, the growth of the new middle income
classes, and the shift towards consumers taking control of their own
investment, retirement and protection needs will create additional
opportunities for growth.
. Cost and Speed Competitiveness. The Company recognizes that
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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, reduce its expenses through areas such as eliminating
duplicate functions, utilizing affiliates in lower cost locations
(such as India) to centralize back office processes, leveraging buying
power and the use of enhanced technology. In addition, the Company
believes the speed and responsiveness of business processes is
critical to being competitive. The Company's continued commitment to
bring together its 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 integrate its acquisitions, many of which have enhanced
existing or added new distribution channels. 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
processes and transactions with its financial intermediaries and sales
agents 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
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success will be predicated upon its ability to achieve game-changing
efficiencies through the use of new technologies, digital processes,
and the Internet. The Company believes that its commitment to
technology, as demonstrated by the 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.
. Strong Foundation of Operating Fundamentals. The Company's dedication
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to providing quality products to its customers rests on maintaining a
strong risk management, compliance, and controllership focus. 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 maintains a dynamic system of
internal financial controls designed to ensure accurate financial
record-keeping, protection of physical and intellectual property and
efficient use of resources.
Acquisitions and Other Transactions
The Company has continued to broaden its operations through a series of
acquisitions and other transactions. The following table sets forth the primary
acquisitions and other transactions (excluding the contribution of the Mortgage
Insurers in 2001), as previously discussed, that the Company has completed over
the last three years with a brief description of the new products and principal
distribution channels each has brought to the Company.
Principal
Transaction Date Principal Products Distribution Channels
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Centurion Capital Group December 2001 Asset management services Dedicated sales
force/intermediaries
The Travelers Transaction July 2000 Long-term care insurance products Intermediaries
Phoenix American Life Insurance April 2000 Life insurance, disability and Dedicated sales force
Company dental products
Toho Mutual Life Insurance Company March 2000 Life insurance, health, and Acquired block of
(insurance policies and related annuity products business
assets)
The Signature Group July 1999 Income protection packages, life Affinity and direct
insurance, accident and health marketing
and credit products
On December 17, 2001, GE Financial Assurance acquired Centurion Capital
Group for approximately $90 million. Centurion Capital Group is a West Coast
based asset management company.
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.
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On April 1, 2000, the Company acquired Phoenix American Life Insurance
Company, a subsidiary of Phoenix Home Mutual Life Insurance Company, and certain
related companies for approximately $284 million. Phoenix American Life
Insurance Company, subsequently renamed GE Group Life Assurance Company,
provides insurance and administrative services 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,
the restructured insurance policies and selected assets of Toho Mutual Life
Insurance Company, a Japanese life insurer ("Toho"). Toho's operations had been
suspended by the Japanese Financial Services Agency ("FSA") in June 1999. In
connection with this transaction, GE Edison (i) assumed approximately $21.9
billion of restructured policyholder liabilities (new surrender charges, reduced
benefits and lower policy guarantees) and other obligations, (ii) received $20.3
billion of cash (including $3.6 billion from Japan's Policyholder Protection
Corporation) and certain invested assets, (iii) acquired the common stock of GE
Edison held by Toho, and (iv) terminated its reinsurance arrangements with Toho.
The difference between the policyholder liabilities assumed and the cash and
invested assets received is attributable to the present value of future profits
on the transferred insurance policies. GE Edison had previously acquired Toho's
operating infrastructure in March 1998.
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" or
"Signature") 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 The
Signature Group 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.
The Company accounted for the above referenced acquisitions and 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 their respective effective dates.
Operating Segments
The Company's product offerings are divided along three major segments of
consumer needs: (i) Wealth Accumulation and Transfer, (ii) Mortgage Insurance,
and (iii) Lifestyle Protection and Enhancement. These operating segments,
including their principal products and methods of distribution, are discussed
below.
Wealth Accumulation and Transfer
The Wealth Accumulation and Transfer segment is designed to provide
customers with investment vehicles to accumulate wealth, (often on a
tax-deferred basis), achieve dependable income streams, and transfer wealth to
beneficiaries or replace the insured's income in the event of premature death.
The Company's principal product lines under this segment marketed in North
America and Japan are (i) annuities, (ii) guaranteed investment contracts (GICs)
and funding agreements, (iii) life insurance, and (iv) mutual funds. Wealth
Accumulation and Transfer products generated premiums and deposits of $11,026
million, $9,434 million and $7,719 million in 2001, 2000 and 1999, respectively.
The Wealth Accumulation and Transfer segment, accounted for $1,012 million (52%)
of the Company's operating income before income taxes, minority interest and
cumulative effect of change in accounting principle for 2001.
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Principal Products
Annuities
Single and Flexible Premium Deferred Annuities - North America
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 owner'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 owner. After the number of years
specified in the annuity contract, the owner may elect to take the proceeds of
the annuity as a single payment, a specified annuity income for life, or a
specified annuity income for a fixed number of years or a specified income for a
fixed number of years and for life thereafter. The policy owner 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 2001,
issued policies imposed surrender charges which varied from 6.0% to 7.0% 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 owner 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 or the guarantee period which ever is
greater. Thereafter, the Company may adjust the crediting rate not more
frequently than once per year for a given SPDA or FPDA policy. All of the
Company's fixed annuity products have minimum guaranteed crediting rates ranging
from 3.0% to 5.5% for the life of the policy.
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 many 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 separate account.
Fixed Single Premium Deferred Annuities - Japan
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 applicant must select either a yen or
dollar-denominated 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 policyholder. After the number of years specified in
the annuity contract, the policyholder may elect to take the proceeds of the
annuity as a single payment or a
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specified income payment for a fixed number of years. The policyholder 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. Policies
issued impose surrender charges that 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 rates on new
policies are determined based on the previous month's 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.
Single Premium Immediate Annuities
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
settlements and retirement.
SPIAs differ from deferred annuities in that they generally provide for the
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 SPIA's 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 credit and,
in some cases, mortality risk.
Structured Settlements. 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 Life Insurance Company ("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. Some
structured settlement contracts provide for guaranteed payments for a
predetermined period only and do not depend on the survival of the annuitant.
Such contracts have no mortality risk element. Other structured settlement
contracts provide for payments dependent on the survival of the annuitant. The
mortality risk portion of the Company's liability with respect to such policies
is included in future annuity and contract benefit liabilities.
Retirement. SPIAs used for dependable retirement income 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.
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GICs and Funding Agreements
GICs are deposit-type products that provide a guaranteed return to the
contractholder. 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 and have a fixed
maturity ranging from two to six years. A small percentage of GICs (based on
dollar amount) use an index instead of a fixed rate. 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 contractholder, 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 U.S. Dollar
LIBOR (London Interbank Offered Rate) or that is fixed at time of purchase.
Indexed Funding Agreements are typically renewed annually, however, a majority
of these contracts contain a "put" provision through which 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). As of year-end, the aggregate amount of the Company's outstanding Funding
Agreements with put option features is approximately $3.0 billion. Non-putable
Funding Agreements total $0.4 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 $1.8
billion of longer term Funding Agreements that contain no early termination
provision. Of these Funding Agreements, $1.5 billion are indexed to LIBOR and
$0.3 billion are fixed rate.
The Company has a rigorous risk management process established for each of
its products, including periodic inforce reviews with management and monthly
reports on risk triggers. The risk management process for Funding Agreements
requires controls on both the liabilities and the assets supporting this
product. The liabilities have limits on exposure to a customer, on "put"
exposure to individual customers and on the overall portfolio put exposure. For
asset liability management purposes, the Company segregates the assets that
support the Funding Agreement within the insurance company's general accounts.
The Company maintains a portfolio of floating rate assets within each legal
entity segregated to support its short term floating rate funding agreement
business. Further, the Company has established limits for exposure to asset
types, maturity terms, index mismatch and quality ratings.
Life Insurance - North America
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.
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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, universal
life and variable universal life insurance, and employee plans/salary savings
products.
Life Insurance - Japan
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 or 15 years
and are now only sold as non-participating (non-profit sharing) policies.
Attached riders provide coverage including, but not limited to, accident and
health insurance.
Whole Life Insurance. Whole 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 including, but not limited to, hospitalization, accident and
health insurance, and certain diseases.
Endowment Insurance. Endowment insurance provides life insurance protection
for a limited time and a maturity benefit. Attached riders provide coverage
including, but not limited to, term insurance and accident and health insurance.
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.
Methods of Distribution
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)
worksites. See sections related to Marketing and Distribution.
MORTGAGE INSURANCE
The Mortgage Insurance segment sells mortgage insurance products to expand
home ownership opportunities by providing coverage on residential first
mortgages when individuals purchase homes with less than a 20% down payment. The
Company's mortgage insurance products are marketed in the United States and are
designed to protect mortgage lenders and secondary market participants against
loss in the event of default on first lien residential loans. Mortgage insurance
also facilitates the sale of mortgage loans in the secondary mortgage market,
principally to Federal National Mortgage Corporation and Federal Home Loan
Mortgage Corporation, providing increased liquidity to mortgage originators. If
the homeowner defaults, mortgage insurance reduces and in some instances,
eliminates the loss to the insured institution. Mortgage Insurance products
generated premiums of $600 million, $587 million, and $600 million for 2001,
2000 and 1999, respectively. The Mortgage Insurance segment accounted for $578
million (29%) of the
9
Company's operating income before income taxes, minority interest and cumulative
effect of change in accounting principle for 2001.
Principal Products
The majority of mortgage insurance policies issued provide coverage on a
monthly basis, insuring only a portion (normally 15% - 30%) of the mortgage loan
balance. Mortgage insurance policies are non-cancelable by the insurer, except
for non-payment of premium. These policies remain renewable at the option of the
insured at the renewal rate determined when the loan was initially insured.
Methods of Distribution
The Company's distribution of Mortgage Insurance is accomplished through a
dedicated sales force that markets to financial institutions and mortgage
originators. See "Marketing and Distribution - North America".
Lifestyle Protection and Enhancement
The Lifestyle Protection and Enhancement segment sells a variety of
products primarily in North America including (i) long-term care insurance, (ii)
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, dental care,
etc.). Lifestyle Protection and Enhancement products generated premiums of
$2,970 million, $2,593 million, and $1,884 million for 2001, 2000 and 1999,
respectively. The Company is among the leading companies in the sale of
individual long-term care insurance policies when measured by first-year
annualized premiums and policies in force. The Lifestyle Protection and
Enhancement segment, accounted for $380 million (19%) of the Company's operating
income before income taxes, minority interest and cumulative effect of change in
accounting principle for 2001.
Principal Products - North America
Long-Term Care Insurance
Long-term care insurance 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.
Since these policies are long duration policies, future experience may be
different than expected. The Company will continue to closely monitor trends and
developments that 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
10
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 benefits
levels. The Company's policies are guaranteed renewable and, consequently, the
Company reserves the right to raise future premiums for all policyholders by
state and class. Premiums will not increase due to changes in an individual's
health status or age.
Accident and Health
The Company offers accident, health and disability products to employers,
associations, affinity groups and certain individuals. The Company believes that
offering a broad range of products is essential to being a preferred financial
services provider of benefits effectively meeting the needs of employers and
consumers. The Company's products include a variety of coverages such as dental,
disability, medical stop loss, fully insured medical and accidental death
policies. These policies pay benefits upon the occurrence of a covered event, or
in the case of disability income, provide continuous payments to an insured
during periods of disability. Medical stop loss policies allow employers to self
fund medical programs providing improved cash flows and plan administration
services. Medical stop loss and fully insured policies pay covered medical
claims when they are incurred and approved. To mitigate risks in the Company's
accident and health products, defined benefit limits are generally incorporated
in product design.
Automobile and Homeowners Insurance
The Company primarily writes private passenger 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 private passenger automobile insurance policies
are written for a term of one year. The Company also writes a small amount of
homeowners insurance.
Income Protection Packages
The Company is a provider of membership-based products and services,
including auto clubs, discount dental and legal service plans and other
membership-related clubs. 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 compensation for marketing
rights.
Principal Products - Japan
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, 124 or 1,000 days per stay and up to a cumulative maximum of 500
or 1,000 days per policy.
Methods of Distribution
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)
worksites, and (iv) direct and affinity based marketing through direct mail
telemarketing, and the Internet. See sections related to Marketing and
Distribution.
Additional information related to the Company's operating segments is
included in Note 17 to the Consolidated Financial Statements and Financial
Statement Schedule III.
11
Ratings
Ratings with respect to financial strength have become an important factor
in establishing the competitive position of insurance companies. Ratings are
important to maintaining public confidence in the Company and its ability to
market its products. Rating organizations continually review the financial
performance and condition of insurers, including the Company. The following
ratings reflect each rating agency's opinion of the Company's financial
strength, operating performance and ability to meet its obligations to
policyholders.
GE Financial Assurance's principal insurance subsidiaries (based upon at
least 10% of consolidated net assets or at least 10% of consolidated net
profits) are rated by A.M. Best Company (A.M. Best), 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) Api (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)
GE Edison Life Insurance Company ................. Not Rated AA (very strong) Aa2 (excellent)
General Electric Mortgage Insurance Corporation .. Not Rated AAA(extremely Aaa (exceptional)
strong)
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, affluent
market producers, and specialized brokers;
. Dedicated sales forces and financial advisors;
. Worksites; and
. Direct and affinity based marketing principally through direct mail,
telemarketing and the Internet.
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 Internet.
Additionally, the Company has developed GEFinancialService.com for the Company's
intermediaries and consumers. GE Financial Service provides similar life
simplification services for these consumers, giving them the ability to change
information ranging from 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, immediate annuities, and accident
and health insurance) through more than 200 independent insurance brokerage
firms located throughout the United States. These BGAs market the Company's
products through
12
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. Of the Company's 18 leading BGAs
in 2001, no individual general agency accounted for more than 16% of total BGA
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 and life insurance products. 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. Of the Company's 11 leading
banks and securities brokerage firms in 2001, no individual bank or securities
brokerage firm accounted for more than 13% of combined bank and securities
brokerage firm premiums. The Company believes the loss of any one bank or
securities brokerage firm relationship in any given year would not materially
impact the Company's financial results.
Financial Planners, Accountants, and Affluent Market Producer Groups. The
Company sells some of its products in 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
intermediaries 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 through specialized brokers as well
as to 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, 401(k), life insurance, long-term care insurance, and 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
13
targeted promotions linked to the Company's national advertising campaigns.
The Company distributes its mortgage insurance products through a dedicated
sales force of company employees located throughout the United States. This
sales force markets to financial institutions and mortgage originators, which in
turn offer mortgage insurance products to borrowers. The dedicated sales force
is compensated through a base salary with incentive compensation tied to certain
performance objectives.
Worksites
The Company sells accident and health insurance and group term life
products through employer-sponsored payroll deduction programs. These typically
are small to medium sized businesses with fewer than 1000 employees. 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.
Direct and Affinity Based Marketing, Direct Mail and Telemarketing
Direct marketing allows a company to offer consumers products and services
directly. In affinity marketing, a company contacts consumers who already have
relationships with an organization and offers its products and services with the
consent of that organization. In both cases, the sales process bypasses a
financial intermediary or agent. As a direct and affinity based marketer, the
Company deals directly with the public. The Company endeavors to offer valuable
products and be the lowest cost provider in this market. While the Company
relies heavily on direct mail and telemarketing, the Company also provides
access to Internet sites and uses Internet sites of affinity partners to offer
products directly to consumers.
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 86% of
total Company sales in Japan. The dedicated sales forces consist of
approximately 4,435 employees in 283 sales offices throughout Japan selling GE
Edison's products on an exclusive basis. Approximately 8% of the sales force
serves the Japanese Defense Agency ("JDA") where GE Edison has sales force
employees on JDA bases throughout Japan. The sales force is compensated
primarily on a commission basis.
GE Edison has a network of specialized financial advisors who develop
customized financial services solutions tailored to a customer's future
financial requirements using annuity, life insurance, and 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.
14
Intermediaries
GE Edison also distributes its products in Japan through more than 1,000
insurance agents located throughout Japan, 45% of whom work exclusively for GE
Edison. A captive field force of about 90 professionals supports the agency
sales channel. GE Edison endeavors to be placed at the top of the agent's list
of sources of insurance products and services that they provide to their
customers. 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 as well as some GE training.
Competition
The Company operates in a highly competitive environment. While the Company
believes it has assembled a diverse 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, insurer financial strength 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, and mortgage
originators. However, the Company believes that it competes primarily on the
basis of its high level of customer focus, its brand and financial strength and
its competitively priced products.
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 processes, compliance and controllership processes include 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 committed to engrain compliance into each and every
business function that touches its customers. The Company's compliance is not
just complying with rules and regulations but also demonstrating a level of
business integrity that instills consumer trust in its products and in the
insurance industry generally. The Company was recently awarded the American
Council of Life Insurers highest award for integrity, the ACLI Integrity First
Award, for its efforts in compliance-consumer education.
The Company maintains a dynamic system of internal financial controls
designed to ensure accurate financial record-keeping, protection of physical and
intellectual property and efficient use of resources. Through its ultimate
parent, GE, the Company has access to more than 450 internal auditors who
conduct audits each year in every geographic area and every GE business. Senior
management oversees the scope and results of these reviews. The Company
reinforces key employee responsibilities around the world through GE's integrity
policies, which require compliance with law and policy, including financial
integrity and avoiding conflicts of interest. These integrity policies,
published in 27 languages, are provided to each employee. The team of internal
auditors conducts extensive inquiries into compliance with these policies. A
strong compliance culture requires employees to raise any concerns and prohibits
retribution for doing so. All employees, including top management, are
accountable for compliance with integrity policies.
15
Underwriting
Applications for most of the Company's underwritten life, long-term care
and other 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.
Applications for the Company's mortgage insurance products are underwritten
on either a loan-by-loan basis or are delegated to qualified mortgage lenders.
The delegated program allows mortgage lenders to commit the Company to insure
loans that meet its underwriting guidelines and underwriting evaluation. The
Company audits on a regular basis the loans insured under the delegated program
to ensure compliance with underwriting guidelines.
Reserves
The Company establishes and carries as liabilities actuarially determined
reserves that are calculated to meet the Company's future obligations. Reserves
for life insurance policies 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.
For the Company's long-term care insurance and accident and health
policies, the level of reserves is based on a variety of factors including
particular diagnoses, termination rates and benefit payments. For the Company's
mortgage insurance policies, the level of reserves is based on historical loss
experience adjusted for the anticipated effect of current economic conditions
and projected economic trends. Reserve liabilities for property and casualty
products represent estimates of ultimate unpaid losses and loss adjustment
expenses incurred. Reserves include unearned premiums, premium deposits, loss
adjustment expenses, claims reported but not yet paid, and claims incurred but
not reported.
The liability for policy benefits for universal life-type contracts and
interest-sensitive whole life policies is equal to the balance that accrues to
the benefit of policyholders, including credited interest, amounts that have
been assessed to compensate the Company for services to be performed over future
periods, and any amounts previously assessed against policyholders that are
refundable on termination of the contract. For investment contracts (such as
variable and fixed annuities, GICs, and funding agreements) policyholder
liabilities are equal to the accumulated policy account values, which consist of
an accumulation of deposit payments plus credited interest, less withdrawals and
amounts assessed through the end of the period.
The stability of the Company's annuity and interest-sensitive life
insurance reserves is enhanced by policy restrictions on the withdrawal of
funds. Withdrawals in excess of allowable penalty-free amounts are assessed a
surrender charge during a penalty period ranging up to ten 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.
16
Reinsurance
The Company follows the usual industry practice of reinsuring (ceding)
portions of its insurance risks with reinsurance 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 accident and health, long-term care insurance, property and casualty
insurance and mortgage insurance policies are reinsured on either a quota share
or excess of loss 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.
The Company participates in the Special Pool Risk Administrators "SPRA
Pool" which covers individual life and accidental death exposures. The pool
covers the Company's exposure with one insurance subsidiary acting as the agent
for a group of eight of the Company's other insurance subsidiaries. The
Company's participation in the Pool is calculated Quarterly by the SPRA and
losses are calculated as a percentage of the Pool's maximum loss of $125 million
on a per event basis. The Company's overall exposure to pool losses is not
significant.
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.
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.
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.
17
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 principal 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 materially adverse
impact on the Company.
The Mortgage Insurers are not subject to the NAIC's RBC requirements as a
result of other capital requirements that are placed directly on mortgage
insurers. Generally, mortgage insurers are required by certain states and other
regulators to maintain a risk in force to capital ratio not to exceed 25:1.
Currently, the Mortgage Insurers have a risk in force to capital ratio of 8.5:1.
In addition, mortgage insurers are required to establish a contingency reserve
in their statutory financial statements to provide for losses in the event of
significant economic declines. This reserve serves to reduce the mortgage
insurers ability to pay dividends as it is a direct reduction to policyholders'
surplus. The statutory contingency reserve at December 31, 2001 for the Mortgage
Insurers was $2.3 billion.
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.
18
The NAIC has adopted model statutory accounting which became effective
January 1, 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. However, efforts are continuing by insurance regulators and the
insurance industry to develop interpretations of the NAIC model. The impact of
adoption increased statutory capital and surplus by $214 million primarily
related to the recognition of certain deferred tax assets.
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 adopted this
regulation in 2000 and is undertaking a number of initiatives to address the
financial and operational impact of this regulation.
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 federal government has from time to time considered
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. The privacy
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 privacy regulations is April 2003. 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.
The Company's Mortgage Insurance business, as a credit enhancement provider
in the residential mortgage lending industry, is subject to compliance with
various federal consumer protection laws, including the Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Housing Act, Homeowners
Protection Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act,
and others. These laws prohibit payments for referrals of settlement service
business, require fairness and non-discrimination in granting or facilitating
the granting of credit, require cancellation of insurance and refund of unearned
premiums under certain circumstances, govern the circumstances under which
consumer credit information may be obtained and used, and define the manner in
which collection activities are carried out.
19
Regulation in Foreign Countries
The Company's business in Japan, which is conducted through GE Edison, is
subject to regulation by the 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 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 by a guaranty
fund, the Policyholders Protection Corporation, the 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, 2001.
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 U.S. 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 U.S.
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.
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.
Some of our products are purchased by employee welfare benefit plans. 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 that would be expected
to significantly affect our business have been defeated.
20
Forward Looking Statements
This document includes certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on management's current expectation 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.
Item 2. Properties.
The Company conducts its business 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. The Company
believes that its present facilities are adequate for the anticipated needs of
the Company.
Item 3. Legal Proceedings.
The Company is a defendant in various 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).
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. GE Financial Assurance
declared approximately $25 million in dividends to GE Capital during 2001 and
declared and paid $23 million in dividends in 2000. GE Financial Assurance does
not have a formal dividend policy.
Reference is made to Note 15 of the Consolidated Financial Statements for
information regarding dividend restrictions.
21
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.
In addition, the contribution of the Mortgage Insurers was accounted for in a
manner similar to a pooling of interests. Accordingly, all financial information
have been restated to reflect this transaction.
December 31,(1)
---------------
(Dollars in Millions)
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
At End of Year
Total Investments ............ $70,986 $65,357 $45,506 $45,511 $42,475
Total Assets ................. 96,938 92,104 68,486 60,765 54,765
Policyholder Liabilities(2)... 75,450 72,287 52,841 45,740 42,345
Debt Outstanding ............. 2,941 3,003 1,741 2,028 1,337
Shareholder's Interest ....... 12,775 11,720 9,942 10,126 9,265
For the Year Then Ended
Premiums ..................... 6,551 6,052 4,142 3,870 3,020
Total Revenues ............... 12,241 12,363 8,363 7,563 6,476
Income Before Cumulative
Effect of Change in
Accounting Principle(3) ..... 1,315 1,243 1,034 866 723
Net Income(3) ................ 1,300 1,243 1,059 866 723
- -----------
(1) Comparability of financial information is affected by acquisitions and
other transactions by the Company in the periods presented. For
acquisitions and other transactions completed in the last three years see
"Acquisitions and Other Transactions."
(2) Includes future annuity and contract benefits, liability for policy and
contract claims, unearned premiums, other policyholder liabilities and
separate account liabilities.
(3) See Note 1(o) to the Consolidated Financial Statements.
22
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 the Company should be read in conjunction with the Consolidated
Financial Statements and the notes thereto included herein.
Overview
The Company's income before cumulative effect of change in accounting
principle was $1,315 million in 2001 reflecting a 5.8% or $72 million increase
compared to $1,243 million in 2000. Income before cumulative effect of change in
accounting principle of $1,243 million in 2000 increased $209 million or 20.2%
from 1999. The 2001 results were impacted by several factors, including a weak
U.S. economy and the normalization of the block of business acquired in the Toho
Transfer following the significant surrender activity experienced in 2000. In
addition, the Company incurred approximately $25 million in losses related to
the events of September 11th.
The 2001 U.S. economic performance included sharp declines in interest
rates and volatile equity markets, which adversely impacted production on
variable annuity products. In addition, the number of corporations defaulting on
debt obligations increased dramatically throughout the year.
To overcome these economic challenges and the anticipated reduction of
surrender fee income from the block of business acquired through the Toho
Transfer, the Company aggressively managed operating expenses and relied on its
investment portfolio to minimize the impact of external economic factors on its
results. The Company's diverse product offering drove core growth during the
difficult 2001 economic environment. This growth was attributable to the
Company's ability to match customers' shifting preferences by offering
traditional insurance products.
In addition, 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 2001 which was accounted for in a manner similar to a
pooling of interests.
Operating Results for the Years Ended December 31, 2001, 2000 and 1999
Premiums. Premiums, which include premium revenues from life contingent annuity
contracts, health insurance, traditional life, mortgage insurance and automobile
insurance, were $6,551 million in 2001 an increase of $499 million from $6,052
million in 2000. Premiums in 2000 increased by $1,910 million from $4,142
million in 1999. The 2001 increase primarily resulted from growth in the
Company's structured settlement contracts, long-term care insurance and certain
accident and health insurance products. These increases were partially offset by
decreased premiums from the anticipated run-off of policies assumed as part of
the Toho Transfer. Surrender activity in this block of business in 2000 resulted
in a substantial reduction of 2001 premiums. The 2000 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.
Net Investment Income. Net investment income increased $307 million to $4,201
million in 2001 from $3,894 million in 2000. The increase was primarily
attributable to higher levels of average invested assets ($69.3 billion in 2001
vs. $63.7 billion in 2000). The weighted average yield on these investments was
6.05% in 2001. Net investment income increased $628 million to $3,894 million
in 2000 from $3,266 million in 1999. The increase was primarily attributable to
higher levels of average invested assets ($63.7 billion in 2000 vs. $46.1
billion in 1999), due to investments relating to the Toho Transfer
23
and growth in core invested assets. This increase was partially offset by a
decrease in weighted average yields to 6.09% in 2000 from 7.08% in 1999,
primarily due to lower yields on investment activity related to the Company's
Japanese operations.
Surrender Fee Income. Surrender fee income decreased $895 million in 2001 to
$358 million compared to $1,253 million in 2000. Surrender fee income increased
by $1,197 million from $56 million in 1999. The decrease in 2001 reflects the
normalization of the block of business acquired in the Toho Transfer following
the significant surrender activity experienced in 2000. 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 Toho
Transfer.
Net Realized Investment Gains. Net realized investment gains were $300 million
in 2001, $233 million in 2000, and $232 million in 1999. Net investment gains
are comprised of gross investment gains and gross investment (losses),
respectively, of $830 million and $(530) million in 2001, $425 million and
$(192) million in 2000, and $413 million and $(181) million in 1999. These
changes in gross realized investment gains and losses are related to the
Company's ongoing review of its investment portfolio positions which vary with
market and economic conditions. The Company seeks to offset investment losses
realized from other than temporary impairments and portfolio repositioning with
investment gains.
Included in the gross realized investment gains are $145 million, $67 million
and $38 million in 2001, 2000 and 1999, respectively, resulting from the
securitization of certain financial assets. Included in the gross realized
investment losses are other than temporary declines in value of $277 million,
$77 million and $53 million in 2001, 2000 and 1999, respectively, (including
$94 million related to Enron in 2001).
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 decreased $100 million to $831
million compared to $931 million in 2000. The 2000 amount increased $264 million
from $667 million in 1999. The 2001 decrease is primarily a result of a decline
in club membership revenues and to a lesser extent to lower fee income assessed
on variable annuity account values. This decrease was partially offset by an
increase in fees earned on universal life contracts. The 2000 increase was a
result of (i) the inclusion of a full year of operating results of The Signature
Group (primarily club membership revenues); (ii) the acquisition of Phoenix
American Life in April 2000, and (iii) fee income on variable annuity products.
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, health, property and casualty and mortgage insurance
products as well as claim costs incurred during the year under such contracts.
These amounts increased $367 million in 2001 to $5,785 million from $5,418
million in 2000. These amounts increased by $1,811 million in 2000 from $3,607
million in 1999. The 2001 change in reserves is primarily a result of increased
benefit liabilities and claims paid related to additional sales of structured
settlements and long-term care insurance policies partially offset by a decrease
in reserves related to the anticipated runoff of the block of business assumed
in the Toho Transfer. Additional reserves were established by the Mortgage
Insurers for deteriorating economic conditions and the increased number of
delinquencies for mortgage insurance policies. The 2000 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 and (iv)
additional benefits incurred arising from core growth.
24
Interest Credited. Interest credited increased $174 million in 2001 to $1,671
million from $1,497 million in 2000. Interest credited increased $199 million in
2000 from $1,298 million in 1999. The 2001 increase was primarily attributable
to an increase in annuity deposits. The 2000 increase was a result of the
increase in underlying reserves arising primarily from sales of fixed annuity
products. The increased sales resulted from higher crediting rates that the
Company implemented in response to changes in market conditions and other
factors.
The Company's weighted average crediting rates for annuities decreased to 5.51%
in 2001 from 6.14% in 2000, which was relatively unchanged from 6.15% in 1999.
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 decreased $98 million in 2001 to $1,138
million from $1,236 million in 2000. Commission expense increased $378 million
in 2000 from $858 million in 1999. The overall decrease in 2001 is primarily a
result of lower sales of variable annuities as a result of market volatility in
addition to lower production on new term life sales. These decreases are
partially offset by commissions associated with additional sales of long-term
care insurance and certain fixed annuities. The increase in long-term care
insurance commissions resulted from core growth and the Travelers Transaction.
Fixed annuity commissions increased as a result of the change in product mix
from variable to fixed annuity products. The 2000 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.
General Expenses. General expenses decreased $190 million in 2001 to $1,928
million from $2,118 million in 2000. General expenses increased $660 million in
2000 from $1,458 million in 1999. The decrease in 2001 primarily relates to
reduced compensation and benefit costs and other cost savings initiatives
resulting from integration and consolidation activities. The 2000 increase was
primarily a result of (i) a full year of operating results of The Signature
Group; (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.
Amortization of Intangibles, Net. The Company's significant intangible assets
consist primarily of two components which result from acquisition activities --
PVFP and goodwill, representing the excess of purchase price over the fair value
of identified net assets of the acquired entities. Amortization of intangibles
decreased $738 million in 2001 to $489 million from $1,227 million in 2000.
Amortization increased $882 million in 2000 from $345 million in 1999. The
decrease in amortization expense in 2001 is primarily a result of the
significant surrender activity experienced in 2000 associated with the Toho
Transfer.
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 ultimate 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 net deferred
acquisition costs decreased $236 million in 2001 to $886 million from $1,122
million in 2000. The change in net deferred acquisition costs increased $356
million in 2000 from $766 million in 1999. The decrease in 2001 is a result of
lower new term life sales and lower production from variable annuities, offset
by increased long-term care insurance production. The increase in 2000 compared
to 1999 was related to an increase in deferral of acquisition costs arising from
increased product sales as a
25
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.
Interest Expense. Interest expense increased $3 million in 2001 to $146 million
from $143 million in 2000. This increase relates primarily to higher average
debt outstanding as a result of the Toho Transfer and the Travelers Transaction.
This increase was partially offset by lower interest rates on commercial paper.
Interest expense increased $48 million, or 50.5%, to $143 million in 2000 from
$95 million in 1999. 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
$53 million to $650 million from $597 million in 2000. Income tax expense
increased $167 million in 2000 from $430 million in 1999. The Company's
effective tax rates were 33.0%, 32.3%, 29.3% in 2001, 2000 and 1999,
respectively. The lower effective tax rate in 1999 was primarily the result of
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 following table sets forth certain summarized financial data for the
Company's Wealth Accumulation and Transfer segment for the years ended December
31, 2001, 2000, and 1999.
Years Ended December 31,
------------------------
2001 2000 1999
------ ------ ------
(Dollars in Millions)
Revenues:
Premiums ...................................................................... $2,981 $2,872 $1,658
Net investment income ......................................................... 3,493 3,317 2,773
Surrender fee income .......................................................... 358 1,253 56
Net realized investment gains ................................................. 248 162 149
Other income .................................................................. 476 510 427
------------------------
Total revenues ................................................................ 7,556 8,114 5,063
------------------------
Benefits and expenses:
Benefits and other changes in policy reserves ................................. 3,462 3,496 2,128
Interest credited ............................................................. 1,671 1,497 1,298
Other income .................................................................. 1,411 2,163 858
------------------------
Total benefits and expenses ................................................... 6,544 7,156 4,284
------------------------
Income before income taxes, minority interest and cumulative effect of change in
accounting principle (operating income) ...................................... $1,012 $ 958 $ 779
========================
26
Total revenues in this segment decreased in 2001 and increased in 2000
primarily as a result of the large number of surrenders from the whole life and
deferred annuity policies assumed as part of the Toho Transfer in 2000. However,
this decrease was partially offset, by the Company's growth in structured
settlement products and increased demand for certain annuity products and
guaranteed investment contracts and funding agreements. Sales of deferred fixed
annuities grew 41.2% to $3,147 million in 2001 from $2,229 million in 2000. The
higher sales in 2001 were primarily attributable to a shift in product mix from
variable to fixed products. Sales of guaranteed investment contracts and funding
agreements increased 44.6% in 2001 to $3,464 from $2,395 in 2000. Sales of
variable annuities decreased 26.0% in 2001 to $2,272 million from $3,071 million
in 2000.
Operating income from this segment represented 51.4%, 51.9% and 53.0% of
the Company's total operating income for the years ended December 31, 2001,
2000, and 1999, respectively. The Company's operating income from the Wealth
Accumulation and Transfer segment increased 5.6% in 2001 to $1,012 million, and
23.0% in 2000 to $958 million from $779 million in 1999. These increases were
primarily attributable to growth in aforementioned products, the Toho Transfer
and lower operating expenses.
Mortgage Insurance
The following table sets forth certain summarized financial data for the
Company's Mortgage Insurance segment for the years ended December 31, 2001,
2000, and 1999.
Years Ended December 31,
------------------------
2001 2000 1999
------ ------ ------
(Dollars in Millions)
Revenues:
Premiums ...................................................................... $ 600 $ 587 $ 600
Net investment income ......................................................... 177 165 144
Net realized investment gains ................................................. 52 71 67
Other income .................................................................. -- 1 --
------------------------
Total revenues ................................................................ 829 824 811
------------------------
Benefits and expenses:
Benefits and other changes in policy reserves ................................. 126 40 85
Other expenses ................................................................ 125 114 123
------------------------
Total benefits and expenses ................................................... 251 154 208
------------------------
Income before income taxes, minority interest and cumulative effect of change in
accounting principle (operating income) ...................................... $ 578 $ 670 $ 603
========================
Total revenues for this segment have remained relatively constant from 2000
to 2001. Benefits and changes in reserves are influenced by benefit payments,
the reserve per policy and the number of mortgage delinquencies. The increase in
these expenses during 2001 is a result of deteriorating economic conditions and
an increase in the number of delinquencies.
Operating income from this segment represented 29.4%, 36.3% and 41.1% of
total operating income for the years ended December 31, 2001, 2000 and 1999,
respectively. The Company's operating income for the Mortgage Insurance segment
decreased 13.7% to $578 million in 2001, and increased 11.1% to $670 million in
2000 from $603 million in 1999.
Lifestyle Protection and Enhancement
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, 2001, 2000, and 1999.
Years Ended December 31,
------------------------
2001 2000 1999
------ ------ ------
(Dollars in Millions)
Revenues:
Premiums ...................................................................... $2,970 $2,593 $1,884
Net investment income ......................................................... 531 412 350
Net realized investment gains ................................................. -- -- 16
Other income.. ................................................................ 355 420 239
------------------------
Total revenues ................................................................ 3,856 3,425 2,489
------------------------
Benefits and expenses:
Benefits and other changes in policy reserves ................................. 2,197 1,882 1,394
Other expenses ................................................................ 1,279 1,325 1,009
------------------------
Total benefits and expenses ................................................... 3,476 3,207 2,403
------------------------
Income before income taxes, minority interest and cumulative effect of change in
accounting principle (operating income) ...................................... $ 380 $ 218 $ 86
========================
Revenues increased in 2001 and 2000 primarily as a result of increased
demand for its long-term care insurance and accident and health products. Sales
of long-term care insurance policies grew 23.6% in 2001 to $251 million from
$203 million in 2000, and 28.5% in 2000 from $158 million in 1999. The higher
sales were primarily attributable to 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.
27
Sales of accident and health insurance grew 8.1% in 2001 to $241 million
from $223 million in 2000, primarily attributable to growth in the medical stop
loss contracts in addition to the acquisition of Phoenix American Life in April
2000. These increases were partially offset by decreased automobile insurance
sales, declined club memberships in income protection packages and run-off or
exit of certain lines of business. Automobile insurance sales decreased 50.0% to
$42 million in 2001 from $84 million in 2000, primarily attributable to certain
competitive factors currently existing within the automobile insurance industry.
Sales of club memberships declined primarily as a result of lower demand for
income protection packages in general, which reduced revenue earned by 23.7% to
$277 million in 2001 from $363 million in 2000.
Operating income from this segment represented 19.2%, 11.8%, and 5.9%, of
the Company's total results for the years ended December 31, 2001, 2000, and
1999, respectively. The Company's operating income from the Lifestyle Protection
and Enhancement segment increased 74.3% in 2001 to $380 million, and increased
153.5% in 2000 from $86 million in 1999. The 2001 and 2000 increase is primarily
attributable to growth in the aforementioned products offset by increased
benefits and expenses.
28
Capital Resources and Liquidity
Statement of Financial Position
Total Investments. Total investments increased $5.6 billion or 8.6% to $71.0
billion at December 31, 2001 from $65.4 billion at December 31, 2000. This
increase is primarily a result of net purchases of securities associated with
operating cash flows and net cash provided by financing activities relating to
investment contract issuances and redemptions including net investment income
and other investing activities offset by a decrease in mortgage and other policy
loans repayments and securitizations of certain financial assets as well as
other decreases in short-term investments. See Note 3 to the Consolidated
Financial Statements.
Separate Accounts Assets and Liabilities. Separate account assets and
liabilities represent funds held and the related liabilities for the exclusive
benefit of variable annuity and variable life contract holders. As of December
31, 2001, the Company held $9.2 billion of separate account assets. The
decrease of $1.4 billion or 13.2%, from $10.6 billion at December 31, 2000 is
primarily related to a decrease in overall market value of the underlying
investment funds.
Future Annuity and Contract Benefits. Future annuity and contract benefits
increased $4.5 billion or 7.8% to $62.2 billion at December 31, 2001 from $57.7
billion in December 31, 2000. The increase primarily resulted from growth in
reserves related to sales of investment contracts, including GICs, funding
agreements, and deferred annuities, partially offset by a reduction in future
annuity and contract benefits as a result of the anticipated Toho surrenders.
Interest Rate and Currency Risk Management
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 adjust certain crediting
rates on their lines of products in order to meet competitive pressures. The
Company constantly monitors interest earnings on existing assets and yields
available on new investments and sells policies and annuities that permit
flexible and timely responses to interest rate changes as part of its management
of interest spreads.
Interest rate and currency risk management is important in the normal
business activities of the Company. Derivative financial instruments are used by
the Company to mitigate or eliminate certain financial and market risks,
including those related to changes in interest rates and currency exchange
rates. As a matter of policy, the Company does not engage in derivatives
trading, derivatives market-making, or other speculative activities. 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.
29
The Company manages its exposure to changes in interest rates, in part, by
funding its acquisitions 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. It uses
interest rate and currency swaps, swaptions, options and currency forwards to
achieve lower borrowing costs. Substantially all of these derivatives have been
designated as modifying interest rates and/or currencies associated with
specific debt instruments.
The Company is exposed to prepayment risk in certain of its business
activities, such as in its investment portfolio and annuities activities. The
Company uses interest rate swaps, swaptions and option-based financial
instruments to mitigate prepayment risks. These instruments generally behave
based on limits ("floors") on interest rate environment. These swaps, swaptions
and option-based financial instruments are governed by the credit risk policies
described below and are transacted in either exchange-traded or over-the-counter
markets.
The Company's established practices require that derivative financial
instruments relate to specific asset, liability or equity transactions or to
currency exposures. Substantially all derivative transactions are centrally
executed by GE Capital's Treasury Department on the Company's behalf, which
maintains controls on all exposures, adheres to stringent counterparty credit
standards and actively monitors marketplace exposures.
Counterparty credit risk is managed on an individual counterparty basis,
which means that gains and losses are netted for each counterparty to determine
the amount at risk. When a counterparty exceeds credit exposure limits in terms
of amounts due to the Company, typically as a result of changes in market
conditions (see table below), no additional transactions are executed until the
exposure with that counterparty is reduced to an amount that is within the
established limit. 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-.
All swaps, purchased options and forwards with contractual maturities
longer than one year are conducted within the credit policy constraints provided
in the table below. Foreign exchange forwards with contractual maturities
shorter than one year must be executed with counterparties having an A-1/P-1
credit rating and the credit limit for these transactions is $150 million.
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
The conversion of interest rate and currency risk into credit risk results
in a need to monitor counterparty credit risk actively. At December 31, 2001 and
December 31, 2000, there were no notional amounts of long-term derivatives for
which the counterparty credit criteria was rated below Aa3/AA-.
30
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 2001 2000 1999
- ------------------------- ---- ---- ----
Aaa/AAA .................................................. 99% 99% 89%
Aa/AA .................................................... 1% 1% 11%
A/A and below ............................................ --% --% --%
The U.S. Securities and Exchange Commission requires that registrants
provide 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 changes in interest rates and currency exchange rates
may 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 decrease in interest rates of 100 basis
points across all maturities. Under this model, with all else constant, it
is estimated that such a decrease, including repricing effects in the
securities portfolio, would decrease the 2002 net earnings of the Company
based on year-end 2001 positions by approximately $5.0 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
2001 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 2001 positions by an
insignificant amount because the Company hedges substantially all of its
foreign currency exchange exposures.
Statement of Changes in Shareholder's Interest
Shareholder's interest increased $1.1 billion to $12.8 billion at December
31, 2001 from $11.7 billion at December 31, 2000. This increase was largely
attributed to net income during the year of $1.3 billion partially offset by
dividends declared of $25 million.
Foreign currency translations adjustments decreased equity by $73 million
in 2001. Changes in the foreign currency translation adjustment reflect the
effects of changes in currency exchange rates on the Company's net investment in
non-U.S. subsidiaries that have functional currencies other than the U.S.
dollar.
Adoption of SFAS No. 133 reduced equity by $148 million for the year ended
December 31, 2001, including $351 million at the date of adoption. Further
information about this accounting change is provided in Note 1 to the
Consolidated Financial Statements.
31
Statement of Cash Flows
The Company's cash and cash equivalents aggregated $1.7 billion at the end
of 2001, up from $1.2 billion at year-end 2000. The Company generated $3.9
billion from operating activities, primarily as a result of an increase in
future annuity and contract benefits. The Company also generated $2.8 billion in
cash from financing activities primarily as a result of net proceeds from the
issuance of investment contracts of $2.7 billion.
The principal use of cash by the Company has been investing in assets to
grow its business. These purchases of investments 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.
Liquidity
The major debt rating agencies evaluate the financial condition of GE
Financial Assurance by analyzing the Company's cash generating ability among
other factors. The rating agencies continue to give GE Financial Assurance a
long term credit rating of Aa3/A+ and a short term credit rating of A-1 / P-1.
The major rating agencies also evaluate the insurer financial strength of
GE Financial Assurance's insurance companies by analyzing cash generating
ability to meet contractual obligations to policyholders and annuitants.
Contractual obligations include payments of claims under outstanding insurance
policies and annuities, contract withdrawals, and surrender benefits. The
primary sources for meeting these contractual obligations are investment
activities and cash generated from operating activities. In addition, to meet
short-term variations in contractual obligations, the Company maintains cash and
short-term investments. For insurer financial strength ratings of principal
insurance subsidiaries see "Ratings".
For the years ended December 31, 2001, 2000, and 1999 cash flows provided
by (used in) operating and certain financing activities were $6,560 million,
$(2,140) million, and $3,369 million, respectively. These amounts include net
cash provided by financing activities relating to investment contract issuances
accounted for as deposit liabilities under U. S. GAAP and redemptions of $2,667
million, $2,617 million, and $2,708 million, for the years ended December 31,
2001, 2000, and 1999, respectively.
The nature and quality of the various types of investments purchased by an
insurance company must comply with the statutes and regulations imposed by the
various jurisdictions in which those entities are incorporated. Following is a
breakdown of the credit quality of the Company's fixed maturity portfolio at
December 31, 2001.
BBB/Baa or above 87.6%
BB/Ba and below 3.4%
Not rated 9.0%
------
Total Portfolio 100.0%
======
Certain securities, such as private placements, have not been assigned a
rating by any rating service and are, therefore, categorized as "not rated."
Certain of the Company's products contain provisions for penalty charges
for surrender of the policy. These charges range from 6.0% to 10.5% at policy
origination and decrease to zero over predetermined periods ranging up to ten
years. Certain of the Company's funding agreements have termination provisions.
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.
32
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 U.S. insurance company
subsidiaries may pay $542 million in dividends to GE Financial Assurance in 2002
without obtaining regulatory approval. See "Insurance Regulation -- General
Regulation at State Level."
Off-balance sheet arrangements are used by the Company to improve liquidity
and optimize allocation of the Company's investment portfolio. One of the most
common forms of off-balance sheet arrangements is asset securitization. The
Company uses GE Capital sponsored and third party entities to facilitate asset
securitizations. As part of this strategy, management considers the relative
risks and returns of its alternatives and predominately uses GE Capital
sponsored entities. Management believes these transactions could be readily
executed through third party entities at insignificant incremental cost.
The discussion below describes GE Capital sponsored and qualifying special
purpose entities.
Structure. The Company's current securitization process uses entities that
meet the accounting criteria for Qualifying Special Purpose Entities
("qualifying entities"). Among other criteria, a qualifying entity's activities
must be restricted to passive investment in financial assets and issuance of
beneficial interests in those assets. Under U.S. GAAP, entities meeting these
criteria are not consolidated in the sponsor's financial statements. The Company
sells selected financial assets to the qualifying entities. Examples to date
have included policy loans and commercial mortgage loans. On the whole, the
credit quality of such assets is equal to or higher than the credit quality of
similar assets owned by the Company.
Qualifying entities raise cash by issuing beneficial interests (rights to
cash flows from the assets) primarily to GE Capital-sponsored special purpose
entities that issue highly-rated commercial paper to third-party large
institutional investors. GE Capital's sponsored special purpose entities use
commercial paper proceeds to obtain beneficial interests in the financial assets
of qualifying entities, including qualifying entities that have acquired
financial assets from the Company, as well as financial assets originated by
multiple third parties.
33
In accordance with its contractual commitments to the qualifying entities, the
Company thoroughly underwrites and services the associated assets transferred by
the Company. Support activities include ongoing review, credit monitoring and
collection activities to ensure that the financial assets meet strict investment
risk criteria the same support activities that the Company employs for its own
assets.
The following table summarizes the current balance of assets sold to
qualifying entities by the Company.
December 31 (In millions) 2001 2000
---- ----
Receivables-secured by:
Commercial Mortgage Loans $ 492 $ -
Other receivables 824 540
-------------
Total receivables $1,316 $540
-------------
Each of the categories of assets shown in the table above represents
portfolios of assets that are highly-rated. Examples of each category follow:
commercial mortgage loans - loans on diversified commercial
property; other receivable - primarily policy loans.
None of these GE Capital sponsored special purpose entities or qualifying
entities are permitted to hold GE stock and there are no commitments or
guarantees that provide for the potential purchase of GE stock. These entities
do not engage in speculative activities of any description and are not used to
hedge any GE positions. Under GE integrity policies, no Company employee or an
employee of any other GE company is permitted to invest in any GE Capital
sponsored or qualifying entity.
Support. Financial support for certain qualifying entities is provided
under credit support agreements, in which GE Financial Assurance provides
limited recourse for a maximum of $42 million of credit losses in qualifying
entities. Assets with credit support are funded by demand notes that are further
enhanced with support provided by GE Capital.
Management has extensive experience in evaluating economic, liquidity and
credit risk. In view of this experience, the high quality of assets in these
qualifying entities, the historically robust quality of commercial paper
markets, the historical reliability of controls applied both to asset servicing
and to activities in the credit markets, management believes that, under any
reasonable future economic developments, the likelihood is remote that any such
arrangements could have other than an inconsequential negative effect on the
Company's operations, cash flows or financial position.
Sales of securitized assets to qualifying entities may result in a gain or
loss based on the difference between sale proceeds, the allocated carrying
amount of net assets sold, the fair value of any servicing rights and an
allowance for losses. Sales resulted in net gains on securitizations of
approximately $145 million, $67 million, and $36 million in 2001, 2000, and
1999, respectively, and are included in net realized gains within the Company's
consolidated statements of income.
34
Accounting outlook. U.S. GAAP specifies the conditions that the Company
observes in not consolidating qualifying entities. Accounting for special
purpose entities is under review by the Financial Accounting Standards Board,
and their non-consolidated status may change as a result of these reviews.
Summary. The special purpose entities described above meet the Company's
economic objectives for their use while complying with U.S. GAAP. In the event
that accounting rules change in a way that adversely affects sponsored entities,
alternative securitization techniques would likely serve as a substitute at
insignificant incremental cost.
Timing of contractual commitments at the Company, related to leases and
debt, follow.
- --------------------------------------------------------------------------------
($ In millions) 2002 2003 2004 2005 2006
- --------------------------------------------------------------------------------
Commercial paper $1,463 $ - $ - $ - $ -
Other 37 210 32 26 22
35
Critical Accounting Policies
High-quality financial statements require rigorous application of high-quality
accounting policies. The policies discussed below are considered by management
to be critical to an understanding of the Company's financial statements because
their application places the most significant demands on management's judgment,
with financial reporting results relying on estimation about the effect of
matters that are inherently uncertain. Refer to Note 1 in the accompanying
consolidated financial statements for discussion regarding the Company's
accounting policies as they relate to the types of products offered. Specific
risks for these critical accounting policies are described in the following
paragraphs. For all these policies, management cautions that future events
rarely develop exactly as forecast, and the best estimates routinely require
adjustment.
Impairment of investment securities results in a charge to operations when a
market decline below cost is other than temporary. Management regularly reviews
each investment security for impairment based on criteria that include the
extent to which cost exceeds market value, the duration of that market decline
and analysis on the financial health of and specific prospects for the issuer.
The Company's debt and equity securities amounted to approximately $62 billion
at year-end 2001. Gross unrealized gains and losses included in that carrying
amount related to debt securities were $1,281 million and $1,711 million,
respectively. Gross unrealized gains and losses of equity securities were $83
million and $102 million, respectively. Of those securities whose carrying
amount exceeds fair value at year-end 2001, and based on application of the
Company's accounting policy for impairments, approximately $400 million of
portfolio value is at risk of being charged to earnings in 2002. The Company's
actively performs comprehensive market research, monitors market conditions and
segments its investments by credit risk in order to minimize impairment risks.
Further information is provided in Notes 1 and 3 to the Consolidated Financial
Statements.
Deferred acquisition costs and other intangible assets represent costs that are
deferred or assets that are acquired and charged to expense in relation to the
anticipated emergence of profits over the estimated lives of the underlying
insurance contracts. Other intangible assets include assets acquired in purchase
business combinations; principally, PVFP. As of year-end 2001, the Company has
$8.9 billion in deferred acquisition costs and other intangible assets.
Measurement of amortization expense for both deferred acquisition costs and
other intangible assets is based on accepted actuarial methodologies and
assumptions about mortality, morbidity, lapse rates and future yield on related
investments. Management regularly reviews the potential for changes in these
estimates, both positive and negative, and uses the results of these evaluations
both to adjust recorded amortization expense and to adjust underwriting
criteria, product offerings, and compensation to the various channels of
distribution. Further information on these assets is provided in Notes 1, 4 and
5 to the Consolidated Financial Statements.
Insurance liabilities and reserves differ for long and short duration insurance
contracts. Measurement of long-duration insurance liabilities (such as term,
whole life and long-term care insurance policies) is based on accepted actuarial
techniques, which include required assumptions about mortality, lapse rates and
future yield on related investments. Short duration contracts such as property
and casualty policies are accounted for based on actuarial estimates of the
amount of loss inherent in that period's claims, including losses for which
claims have not been reported. Short duration contracts loss estimates rely on
actuarial observations of ultimate loss experience for similar historical
events. The Company's insurance liabilities, reserves and policyholder benefits
totaled approximately $66 billion at year-end 2001. Management continually
evaluates the potential changes in benefits and loss estimates, both positive
and negative, and uses the results of these evaluations both to adjust recorded
provisions and to adjust underwriting criteria and product offerings. Further
information about insurance liabilities is provided in Notes 7 and 8 to the
Consolidated Financial Statements.
36
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. Policies related to revenue
recognition, financial instruments and consolidation policy require difficult
judgments on complex matters that are often subject to multiple sources of
authoritative guidance. Certain of these matters are among topics currently
under reexamination by accounting standard setters and regulators. Although no
specific conclusion reached by these standard setters appear likely to cause a
material change in the Company's accounting policies, outcomes cannot be
predicted with confidence. Also see Note 1 to the Consolidated Financial
Statements, Significant Accounting Policies, which discusses significant
accounting policies that must be selected by management when there are
acceptable alternatives.
New Accounting Standards
See Note 1 (p) to the Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information about potential effects of changes in interest rates and
currency exchange on the Company is discussed in the Interest Rate and Currency
Risk Management section of Item 7.
37
Item 8
Financial Statements and Supplementary Data
Contents
GE Financial Assurance Holdings, Inc. and Subsidiaries
Consolidated Financial Statements
Page
----
Independent Auditors' Report.......................................................... 39
Consolidated Balance Sheets........................................................... 40
Consolidated Statements of Income .................................................... 41
Consolidated Statements of Shareholder's Interest..................................... 42
Consolidated Statements of Cash Flows................................................. 43
Notes to Consolidated Financial Statements............................................ 44
Independent Auditors' Report on Financial Statement Schedules......................... 77
Schedule II, Condensed Financial Information (Parent Company)......................... 78
Schedule III, Supplemental Insurance Information...................................... 82
38
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, 2001 and
2000, 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,
2001. 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, 2001 and 2000, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Notes 1 and 14 to the consolidated financial
statements, the Company changed its method of accounting for derivatives in
2001.
As discussed in Notes 1 and 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 15, 2002, except for Note 18 which is dated February 2, 2002
39
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar amounts in millions, except per share amounts)
December 31,
2001 2000
-------- --------
Assets
Investments:
Fixed maturities available-for-sale, at fair value $ 60,968 $ 52,468
Equity securities available-for-sale, at fair value
Common stock 702 809
Preferred stock, non-redeemable 376 228
Mortgage and other loans, net of valuation allowance of $144 and
$164 at December 31, 2001 and 2000, respectively 6,055 7,734
Policy loans 1,151 1,194
Short-term investments 389 1,693
Other invested assets 1,345 1,231
-------- --------
Total investments 70,986 65,357
Cash and cash equivalents 1,741 1,163
Accrued investment income 1,384 1,179
Deferred acquisition costs 4,265 3,446
Intangible assets 4,684 5,289
Reinsurance recoverable 1,950 1,396
Other assets 2,756 3,668
Separate account assets 9,172 10,606
-------- --------
Total assets $ 96,938 $ 92,104
======== ========
Liabilities and Shareholder's Interest
Liabilities:
Future annuity and contract benefits $ 62,247 $ 57,705
Liability for policy and contract claims 2,887 2,597
Unearned premiums 837 878
Other policyholder liabilities 307 501
Accounts payable and accrued expenses 5,539 5,043
Short-term borrowings 1,798 2,304
Long-term debt 1,143 699
Separate account liabilities 9,172 10,606
-------- --------
Total liabilities 83,930 80,333
Minority interest in and equity of consolidated subsidiaries 253 51
Shareholder's interest:
Net unrealized investment losses (297) (298)
Derivatives qualifying as hedges (168) --
Foreign currency translation adjustments (28) 45
-------- --------
Accumulated non-owner changes in equity (493) (253)
Common stock ($1 par value, 1,000 shares authorized, issued and
outstanding) -- --
Additional paid-in capital 6,953 6,953
Retained earnings 6,295 5,020
-------- --------
Total shareholder's interest 12,755 11,720
-------- --------
Total liabilities and shareholder's interest $ 96,938 $ 92,104
======== ========
See Notes to Consolidated Financial Statements.
40
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollar amounts in millions)
Years Ended December 31,
-------------------------------
2001 2000 1999
-------- -------- -------
Revenues:
Premiums $ 6,551 $ 6,052 $ 4,142
Net investment income 4,201 3,894 3,266
Surrender fee income 358 1,253 56
Net realized investment gains 300 233 232
Policy fees and other income 831 931 667
-------- -------- -------
Total revenues 12,241 12,363 8,363
-------- -------- -------
Benefits and expenses:
Benefits and other changes in policy reserves 5,785 5,418 3,607
Interest credited 1,671 1,497 1,298
Commissions 1,138 1,236 858
General expenses 1,928 2,118 1,458
Amortization of intangibles, net 489 1,227 345
Change in deferred acquisition costs, net (886) (1,122) (766)
Interest expense 146 143 95
-------- -------- -------
Total benefits and expenses 10,271 10,517 6,895
-------- -------- -------
Income before income taxes, minority interest and
cumulative effect of change in accounting
principle 1,970 1,846 1,468
Provision for income taxes 650 597 430
-------- -------- -------
Income before minority interest and cumulative effect
of change in accounting principle 1,320 1,249 1,038
Minority interest 5 6 4
-------- -------- -------
Income before cumulative effect of change in
accounting principle 1,315 1,243 1,034
Cumulative effect of change in accounting principle,
net of tax (15) -- 25
-------- -------- -------
Net income $ 1,300 $ 1,243 $ 1,059
======== ======== =======
See Notes to Consolidated Financial Statements.
41
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholder's Interest
(Dollar amounts in millions, except per share amounts)
Accumulated
Additional Non-owner Total
Common Stock Paid-in Changes Retained Shareholder's
Shares Amount Capital In Equity Earnings Interest
----------------------------------------------------------------------
Balances at January 1, 1999(a) 1,000 $-- $6,058 $ 925 $ 3,142 $ 10,125
Changes other than transactions with shareholder:
Net income -- -- -- -- 1,059 1,059
Net unrealized (losses) on investment securities(b) -- -- -- (1,873) -- (1,873)
Foreign currency translation adjustments -- -- -- 147 -- 147
--------
Total changes other than transactions with
shareholder (667)
--------
Contribution of The Signature Group -- -- 885 -- -- 885
--------
Dividends declared -- -- -- -- (401) (401)
-------------------------------------------------------------------
Balances at December 31, 1999 1,000 -- 6,943 (801) 3,800 9,942
Changes other than transactions with shareholder:
Net income -- -- -- -- 1,243 1,243
Net unrealized gains on investment securities(b) -- -- -- 723 -- 723
Foreign currency translation adjustments -- -- -- (175) -- (175)
Total changes other than transactions with
shareholder 1,791
--------
Contributed capital -- -- 10 -- -- 10
--------
Dividends declared -- -- -- -- (23) (23)
-------------------------------------------------------------------
Balances at December 31, 2000 1,000 -- 6,953 (253) 5,020 11,720
Changes other than transactions with shareholder:
Net income -- -- -- -- 1,300 1,300
Net unrealized gains on investment securities(b) -- -- -- 1 -- 1
Cumulative effect on shareholder's interest of
adopting SFAS 133(c) -- -- -- (351) -- (351)
Derivatives qualifying as hedges -- -- -- 183 -- 183
Foreign currency translation adjustments -- -- -- (73) -- (73)
--------
Total changes other than transactions with
shareholder 1,060
--------
Dividends declared -- -- -- -- (25) (25)
-------------------------------------------------------------------
Balances at December 31, 2001 1,000 $-- $6,953 $ (493) $ 6,295 $ 12,755
===================================================================
(a) These amounts have been restated to reflect the capital contribution of the
Mortgage Insurers to the Company as more fully discussed in Note 1(a).
(b) Presented net of deferred taxes of $(27), $(304) and $926 in 2001, 2000 and
1999, respectively.
(c) Presented net of deferred taxes of $204
See Notes to Consolidated Financial Statements.
42
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar amounts in millions)
Years ended December 31
--------------------------------
2001 2000 1999
--------------------------------
Cash flows from operating activities:
Net income $ 1,300 $ 1,243 $ 1,059
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Change in reserves 3,268 (6,670) 626
Charges assessed to policyholders (312) (247) (208)
Net realized investment gains (300) (233) (232)
Cumulative effect of change in accounting principle, net of tax 15 -- (25)
Amortization of investment premiums and discounts (80) (63) (113)
Amortization of intangibles, net 489 1,227 345
Deferred income tax expense 484 415 130
Change in certain assets and liabilities:
Deferred acquisition costs (886) (1,122) (766)
Accrued investment income and other assets, net 64 (111) (832)
Accounts payable, accrued expenses and other
policy-related balances (149) 804 677
--------------------------------
Total Adjustments 2,593 (6,000) (398)
--------------------------------
Net cash provided by (used in) operating activities 3,893 (4,757) 661
--------------------------------
Cash flows from investing activities:
Short term investment activity, net 1,304 (1,692) 4
Proceeds from sales and maturities of investment securities and
other invested assets 22,019 10,987 10,082
Principal collected on and securitizations of mortgage and policy
loans 2,470 1,455 424
Purchases of investment securities and other invested assets (30,546) (21,517) (12,649)
Mortgage and policy loan originations (1,079) (1,192) (644)
Payments for principal businesses purchased, net of cash acquired (90) (516) 83
--------------------------------
Net cash used in investing activities (5,922) (12,475) (2,700)
--------------------------------
Cash flows from financing activities:
Proceeds from issuance of investment contracts 8,562 8,628 7,007
Redemption and benefit payments on investment contracts (5,895) (6,011) (4,299)
Proceeds from short-term borrowings 2,834 3,410 2,639
Payments on short-term borrowings (2,794) (3,168) (2,916)
Proceeds from long-term debt 488 -- --
Net commercial paper borrowings (repayments) (551) 1,026 (17)
Cash received upon completion of Toho Transfer -- 13,176 --
Proceeds from issuance by subsidiary of preferred stock 200 -- --
Dividend paid to shareholder, net of capital contribution -- (13) (379)
--------------------------------
Net cash provided by financing activities 2,844 17,048 2,035
--------------------------------
Effect of exchange rate changes on cash (237) 686 72
--------------------------------
Net increase in cash and equivalents 578 502 68
Cash and equivalents at beginning of year 1,163 661 593
--------------------------------
Cash and equivalents at end of year $ 1,741 $ 1,163 $ 661
================================
See Notes to Consolidated Financial Statements.
43
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(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. ("GE Financial
Assurance") and its subsidiaries (together with GE Financial Assurance, the
"Company"). Principal operating subsidiaries of the Company include General
Electric Capital Assurance Company, First Colony Life Insurance Company, Federal
Home Life Insurance Company, GE Life and Annuity Assurance Company, GE Edison
Life Insurance Company ("GE Edison"), and GE Mortgage Insurance Company. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
On June 1, 2001, GE Financial Assurance 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 Insurance 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 GE
Financial Assurance. GE Financial Assurance, in turn, contributed the shares to
GE Mortgage Holdings, LLC, a North Carolina limited liability company, of which
GE Financial Assurance is the sole member.
Since GE Financial Assurance and the Mortgage Insurers were under control
of their common owner, GE Capital, the transaction has been accounted for in a
manner similar to a pooling of interests. Accordingly, the Company's
Consolidated Financial Statements have been restated for all periods presented
to include the results of operations, financial position and cash flows of the
Mortgage Insurers as though they had always been a part of GE Financial
Assurance.
All of the outstanding common stock of the Company is owned by 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.
44
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
(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 Japan. The Company's operations are in
three business segments: (i) Wealth Accumulation and Transfer, (ii) Mortgage
Insurance, and (iii) 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), and funding agreements.
The Company's Mortgage Insurance product expands homeownership
opportunities by providing coverage on residential first mortgages when
individuals purchase homes with less than 20% down payment. Mortgage insurance
also facilitates the sale of mortgage loans in the secondary mortgage market,
providing increased liquidity to mortgage originators. If the homeowner
defaults, mortgage insurance reduces and, in some instances, eliminates the loss
to the insured institution.
Lifestyle Protection and Enhancement products are intended to protect
accumulated wealth and income from the financial drain of unforeseen events. The
Company's principal product lines under the Lifestyle Protection and Enhancement
segment are long-term care insurance, accident and health insurance, personal
lines of automobile insurance and income protection packages.
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; worksites; 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 U.S. 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
45
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
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. Mortgage insurance
policies are amortized over the policy life in accordance with the expiration of
risk. Surrender fee income consists of charges recognized as income when the
policy is surrendered. Policy fees and other income consists primarily of
insurance charges made against universal life contracts, club membership
revenues, fees assessed against policyholder account values and commission
income. 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 and 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 maturities greater than 90 days are included in short-term investments.
(f) Investment Securities
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.
46
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
Changes in the fair values of investments available-for-sale, net of the
effect on deferred acquisition costs, present value of future profits, and
deferred 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. Investment securities are regularly received for impairment based
on criteria that include the extent to which cost exceeds market value, the
duration of the market decline, and the financial health of and specific
prospects for the issuer. 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 fair 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 th
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.
47
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
(h) Intangible Assets
Present Value of Future Profits - In conjunction with the acquisition 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.
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.
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 that allocates tax on a
separate company basis, but provides group benefit for current utilization of
losses and credits. The Company's U.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 group benefit for
current utilization of losses and credits.
U.S. deferred taxes are allocated to individual subsidiaries by applying
the asset and liability method of accounting for deferred income taxes.
Intercompany balances are settled at least annually.
The Company has not established any U.S. 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. The
Company's foreign subsidiaries record foreign income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109 Accounting for
Income Taxes.
48
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
(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.
(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, and the
related liabilities for, the exclusive benefit of the variable annuity and
variable life contract holders. 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 in and Equity of Consolidated Subsidiaries
Minority interest in and equity of consolidated subsidiaries includes $200
representing 200,000 shares of non-redeemable, cumulative preferred stock and
certain ownership interests held by unrelated parties 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%.
49
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
(o) Accounting Changes
At January 1, 2001, the Company adopted SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities, as amended. Under SFAS 133 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 hedges is
reported in earnings as it occurs. Further information about derivative
instruments is provided in Note 14.
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.
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.
In November 2000, the Emerging Issues Task Force of the Financial
Accounting Standards Board (FASB) reached a consensus on accounting for
impairment of retained beneficial interests (EITF 99-20). Under this consensus,
impairment of 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.
See Note 12 for Change in Accounting for Insurance & Related Assessments
in 1999.
(p) Accounting Pronouncements Not Yet Adopted
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets, modify the accounting for business combinations, goodwill and
identifiable intangible assets. As of January 1, 2002, all goodwill and
indefinite-lived intangible assets must be tested for impairment and a
transition adjustment will be recognized. Management has not yet determined the
exact amount of goodwill impairment under these new standards, but believes the
non-cash transition charge to earnings will be approximately $400 related to the
Company's auto businesses and recognized in the first quarter of 2002.
Amortization of goodwill will cease as of January 1, 2002, and thereafter, all
goodwill and any indefinite-lived intangible assets must be tested at least
annually for impairment. The effect of the non-amortization provisions on 2002
operations will be affected by 2002 acquisitions and cannot be forecast, but if
these rules had applied to goodwill in 2001, management believes that full-year
2001 net earnings would have increased by approximately $95.
(2) Acquisitions and Transfers
On December 17, 2001, GE Financial Assurance acquired Centurion Capital
Group ("Centurion") for approximately $90. Centurion is a west coast based asset
management company.
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.
50
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
In April 2000, the Company acquired Phoenix American Life Insurance
Company, a subsidiary of Phoenix Home Life Mutual Insurance Company for
approximately $284. Phoenix American Life Insurance Company, subsequently
renamed GE Group Life Assurance Company, provides insurance and administrative
services to small companies.
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. 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.
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.
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 (or date of the Transfer). 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 valuation is finalized.
51
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
(3) Investment Securities
(a) General
For the years ended December 31, the sources of investment income of the
Company were as follows:
2001 2000 1999
-------- ------- -------
Fixed maturities $ 3,571 $ 3,267 $ 2,873
Equity securities 35 26 28
Mortgage loans 470 448 260
Policy loans 73 93 102
Other 67 81 16
-------------------------------------
Gross investment income 4,216 3,915 3,279
Investment expenses (15) (21) (13)
-------------------------------------
Net investment income $ 4,201 $ 3,894 $ 3,266
=====================================
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:
2001 2000 1999
-------- ------- -------
Sales proceeds $ 17,280 $ 7,018 $ 5,425
=====================================
Gross realized investment:
Gains 830 425 413
Losses (530) (192) (181)
-------------------------------------
Net realized investment gains $ 300 $ 233 $ 232
=====================================
52
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
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.
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:
2001 2000 1999
----- ----- -------
Net unrealized gains (losses) on available-for-sale investment securities before
adjustments:
Fixed maturities $(430) $(631) $(1,931)
Equity securities (19) 98 118
Other invested assets (72) (25) 1
-------------------------
Subtotal (521) (558) (1,812)
Adjustments to the present value of future profits and deferred acquisition costs 60 69 234
Deferred income taxes, net 164 191 557
-------------------------
Net unrealized losses on available-for-sale investment securities $(297) $(298) $(1,021)
=========================
The change in the net unrealized gains (losses) on investment securities
reported in the accumulated non-owner changes in equity is as follows:
2001 2000 1999
----- ------- -------
Net unrealized gains (losses) on investment securities - beginning of year $(298) $(1,021) $ 852
Unrealized gains (losses) on investment securities - net of deferred taxes of
$(137), $(386), and $845 205 782 (1,810)
Reclassification adjustments - net of deferred taxes of $110, $82, and $81 (204) (59) (63)
---------------------------
Net unrealized loss on investment securities - end of year $(297) $ (298) $(1,021)
===========================
53
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
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
--------- ---------- ---------- -------
2001
- ----
Fixed maturities:
U.S. government and agencies $ 933 $ 14 $ (30) $ 917
State and municipal 3,652 99 (35) 3,716
Foreign government 1,418 45 (20) 1,443
Foreign corporate 6,367 125 (168) 6,324
U.S. corporate 38,343 739 (1,414) 37,668
Mortgage and asset-backed 10,685 259 (44) 10,900
---------------------------------------------
Total fixed maturities 61,398 1,281 (1,711) 60,968
Common and non-redeemable preferred stock 1,097 83 (102) 1,078
---------------------------------------------
Total available-for-sale securities $62,495 $1,364 $(1,813) $62,046
=============================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
2000
- ----
Fixed maturities:
U.S. government and agencies $ 1,530 $ 9 $ (38) $ 1,501
State and municipal 3,376 109 (31) 3,454
Foreign government 1,386 49 (68) 1,367
Foreign corporate 5,328 149 (95) 5,382
U.S. corporate 33,152 371 (1,308) 32,215
Mortgage and asset-backed 8,327 231 (9) 8,549
---------------------------------------------
Total fixed maturities 53,099 918 (1,549) 52,468
Common and non-redeemable preferred stock 939 217 (119) 1,037
---------------------------------------------
Total available-for-sale securities $54,038 $1,135 $(1,668) $53,505
=============================================
The scheduled maturity distribution of the fixed maturity portfolio at
December 31, 2001 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
--------- -------
54
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
Due in one year or less $ 624 $ 624
Due one year through five years 8,585 8,686
Due five years through ten years 15,092 15,217
Due after ten years 26,412 25,541
----------------------
Subtotal 50,713 50,068
Mortgage and asset-backed securities 10,685 10,900
----------------------
Totals $61,398 $60,968
======================
At December 31, 2001, $9,193 of the Company's investments (excluding
mortgage and asset-backed securities) were subject to certain call provisions.
At December 31, 2001, approximately 24%, 19% and 14% 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. 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, 2001, the Company did not hold any fixed maturity
securities in any single issuer, 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.
2001 2000
---- ----
Fair Value Percent Fair Value Percent
---------- ------- ---------- -------
Agencies and treasuries $ 2,599 4.3% $ 4,076 7.8%
AAA/Aaa 11,919 19.5% 9,757 18.6%
AA/Aa 8,721 14.3% 6,920 13.2%
A/A 16,089 26.4% 12,199 23.3%
BBB/Baa 14,072 23.1% 12,212 23.3%
BB/Ba 1,446 2.4% 1,500 2.8%
B/B 510 0.8% 684 1.3%
CCC/Caa 135 0.2% 21 --%
Not rated 5,477 9.0% 5,099 9.7%
-------------------------------------------
Totals $60,968 100.0% $52,468 100.0%
===========================================
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
55
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
the value of the security.
At December 31, 2001 and 2000, there were fixed maturities in default
(issuer has missed a coupon payment or entered bankruptcy) with a fair value of
$86 and $65, respectively.
(b) Mortgage and Other Loans
At December 31, 2001 and 2000, the Company's U.S. mortgage loan portfolio
consisted of first mortgage loans on commercial real estate properties of 1,731
and 1,714, 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, 2001 and 2000, respectively, the Company held $1,011 and
$1,001 in U.S. mortgages secured by real estate in California, comprising 17%
and 13% of the total mortgage portfolio. For the years ended December 31, 2001,
2000 and 1999, respectively, the Company originated $237, $267 and $201 of
mortgages secured by real estate in California, which represent 22%, 19% and 23%
of the Company's total U. S. originations for those years.
As of December 31, 2001 and 2000, the Company was committed to fund $120
and $103, respectively, in U. S. mortgage loans.
As a part of the comprehensive transfer the assets of Toho to GE Edison in
March 2000, the Company acquired certain individual and corporate loans having a
value of $1,643 and $3,328 at December 31, 2001 and 2000, respectively. The
loan portfolio consisted of 89% and 68% of loans to banks, large listed
companies, and local or foreign governments at December 31, 2001 and 2000,
respectively. Of these loans, 10% and 26% were with Japan's four largest banks
at December 31, 2001 and 2000, respectively.
"Impaired" loans are defined under 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 may have two types of "impaired" loans:
loans requiring allowances for losses (none as of December 31, 2001 and 2000)
and loans expected to be fully recoverable because the carrying amount has been
reduced previously through charge-offs or deferral of income recognition ($11
and $12, as of December 31, 2001 and 2000, respectively). Average investment in
impaired loans during 2001, 2000 and 1999 was $12, $17 and $15, respectively and
interest income recognized on these loans while they were considered impaired
was $1, $1 and $3, respectively.
56
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
The following table presents the activity in the allowance for losses
during the years ended December 31:
2001 2000 1999
------ ------ -----
Balance at January 1 $ 164 $ 71 $ 65
Transfers (14) 122 --
Provision (benefit) charged (credited) to operations 9 (26) 7
Amounts written off, net of recoveries (2) (3) (1)
Impact of foreign currency translation (13) -- --
-----------------------
Balance at December 31 $ 144 $ 164 $ 71
=======================
During 2000, as part of its ongoing analysis of exposure to losses arising
from mortgage loans, the Company recognized a $33 reduction in its allowance for
losses.
(4) Deferred Acquisition Costs
Activity impacting deferred acquisition costs for the years ended December
31, was as follows:
2001 2000 1999
------- ------- -------
Unamortized balance at January 1 $ 3,408 $ 2,318 $ 1,524
Impact of foreign currency translation (50) (32) 28
Costs deferred 1,393 1,674 1,107
Amortization, net (507) (552) (341)
-----------------------------
Unamortized balance at December 31 4,244 3,408 2,318
Cumulative effect of net unrealized investment losses 21 38 105
-----------------------------
Balance at December 31 $ 4,265 $ 3,446 $ 2,423
=============================
(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.
57
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
The following table presents the activity in PVFP for the years ended
December 31:
2001 2000 1999
------- ------- -------
Unamortized balance at January 1 $ 2,531 $ 1,518 $ 1,608
Acquisitions (154) 1,985 134
Impact of foreign currency translation (81) 37 --
Interest accreted at 3.4% in 2001, 4.9% in 2000 and 4.9% in 1999 76 88 78
Amortization (400) (1,097) (302)
-----------------------------
Unamortized balance at December 31 1,972 2,531 1,518
Cumulative effect of net unrealized investment losses 39 31 129
-----------------------------
Balance at December 31 $ 2,011 $ 2,562 $ 1,647
=============================
The estimated percentage of the December 31, 2001 balance, before the
effect of unrealized investment gains or losses, to be amortized over each of
the next five years is as follows:
2002 13.5%
2003 10.8%
2004 9.0%
2005 7.6%
2006 6.3%
Goodwill
At December 31, 2001 and 2000, total unamortized goodwill was $2,421 and
$2,464, respectively, which is presented net of accumulated amortization of $506
and $389, respectively. Goodwill amortization was $122, $108, and $88 for the
years ended December 31, 2001, 2000 and 1999, respectively.
(6) Reinsurance
Certain policy risks are reinsured with other insurance companies to limit
the amount of loss exposure and to comply with regulatory requirements.
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 remains 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
58
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
does not have significant concentrations of reinsurance with any one reinsurer
that could have a material impact on its results of operations.
The Company participates in the Special Pool Risk Administrators "SPRA
Pool" which covers individual life and accidental death exposures. The pool
covers the Company's exposure with one insurance subsidiary acting as the agent
for a group of six of the Company's other insurance subsidiaries. The Company
has an 8.2% overall participation in the SPRA Pool which could result in a
maximum loss to the Company of approximately $10 million on a per event basis.
The maximum amount of individual ordinary life insurance normally retained
by the Company on any one life policy is $1. Net life insurance in force as of
December 31 is summarized as follows:
2001 2000 1999
-------- --------- -----------
Direct life insurance in force $ 534,369 $ 515,742 $ 337,892
Amounts ceded to other companies (111,989) (113,866) (111,193)
Amounts assumed from other companies 39,578 30,751 28,345
---------------------------------------
Net life insurance in force $ 461,958 $ 432,627 $ 255,044
=======================================
Percentage of amount assumed to net 9% 7% 11%
=======================================
The effects of reinsurance on premiums written and earned for the years
ended December 31 were as follows:
Written Earned
------- ------
2001 2000 1999 2001 2000 1999
------- ------- ------- ------- ------- -------
Direct $ 6,177 $ 5,752 $ 4,239 $ 6,222 $ 5,822 $ 4,232
Assumed 947 738 392 951 722 399
Ceded (610) (468) (448) (622) (492) (489)
----------------------------- -----------------------------
Net premiums $ 6,514 $ 6,022 $ 4,183 $ 6,551 $ 6,052 $ 4,142
============================= =============================
Percentage of amount assumed to net 15% 12% 10%
=============================
Reinsurance recoveries recognized as a reduction of benefits amounted to
$451, $394 and $300 during 2001, 2000 and 1999, 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.
59
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(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:
December 31,
Mortality/ ------------
Withdrawal Morbidity Interest Rate
Assumption Assumption Assumption 2001 2000
---------- ---------- --------------- -------- --------
Investment contracts N/A N/A N/A $ 29,299 $ 24,475
Limited-payment contracts None (a) 3.3% - 11.3% 11,024 10,145
Traditional life insurance contracts Company
experience (b) 5.5% - 7.5%(e) 11,903 14,128
Universal life-type contracts N/A N/A N/A 5,280 4,557
Accident and health Company 7.5% grading to
experience (c) 4.75% 336 630
Long-term care Company
experience (d) 4.5% - 7.0% 4,027 3,415
Mortgage insurance(f) N/A N/A N/A 378 355
-------------------
Total future annuity and contract
benefits $ 62,247 $ 57,705
===================
- -----------
(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 Commissioner's Disability Tables and Company experience.
60
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
(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% to 2.4%.
(f) Mortgage Insurance contract liabilities are based on the estimated
frequency and severity of known and unreported loan delinquencies.
(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:
2001 2000 1999
------- ------- ------
Balance at January 1 $ 2,597 $ 1,886 $ 1,697
Less reinsurance recoverables (234) (223) (221)
-----------------------------
Net balance at January 1 2,363 1,663 1,476
-----------------------------
Balances from Acquisitions and Transfers -- 219 154
Incurred related to insured events of:
Current year 4,978 3,552 1,932
Prior years (35) (42) (27)
-----------------------------
Total incurred 4,943 3,510 1,905
-----------------------------
Paid related to insured events of:
Current year (3,719) (2,046) (1,049)
Prior years (987) (902) (829)
-----------------------------
Total paid (4,706) (2,948) (1,878)
-----------------------------
Foreign currency translation (48) (81) 6
-----------------------------
Net balance at December 31 2,552 2,363 1,663
Add reinsurance recoverables 335 234 223
-----------------------------
Balance at December 31 $ 2,887 $ 2,597 $ 1,886
=============================
For each of the three years presented above, the change in prior years incurred
liabilities primarily relates to positive development in claims incurred but not
reported for private passenger automobile insurance. In general, the Company's
insurance contracts are not subject to premiums experience adjustments as a
result of prior-year effects.
61
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
(9) Borrowings
(a) Long-Term Debt
Total long-term borrowings at December 31, 2001 and 2000 were as follows:
2001
Average
Rate Maturities 2001 2000
------- ---------- ------ ----
Global Debt (Non-U.S) 2.75% 2011 $ 464 $ --
Guaranteed Notes (Non-U.S) 2.25% 2008 84 84
Subordinated Notes (Non-U.S) 2.64% 2008 440 440
First Colony Life Ins. Co. Senior Notes 6.63% 2003 175 175
------ ----
$1,163 $699
Foreign Currency Loss (20) --
------ ----
Total $1,143 $699
====== ====
(b) Short-Term Borrowings
Total short-term borrowings at December 31, 2001 and 2000, consisted of the
following:
2001 2000
------ ------
Average Average
Amount Rate (a) Amount Rate (a)
------ -------- ------ --------
Commercial Paper $1,463 1.95% $2,013 6.50%
Short term line of credit with GE Capital 285 2.80% 245 6.94%
Other 50 46
------ ------
Total $1,798 $2,304
====== ======
(a) Based on year-end balances and year-end local currency rates
(c) General
Borrowings of the Company are addressed as follows from two perspectives -
liquidity and interest rate risk management.
Liquidity
Liquidity requirements of GE Financial Assurance are principally met
through dividends from its insurance subsidiaries, the Commercial Paper program
and credit line. At December 31, 2001, the Company has a credit line of $2,500
with GE Capital.
62
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
Interest rate risk
A variety of instruments, including interest rate and currency swaps and
currency forwards (for further discussion see Note 14), 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.
The following table shows the Company's borrowing positions at December 31,
2001 and 2000, considering the effects of swaps.
2001 2000
-------------------------- ------
Amount Average Rate (c) Amount
---------------------------------------
Short term (a) $ 690 2.19% $ 635
Long term (b) 2,251 4.55% 2,368
------ ------
Total $2,941 $3,003
====== ======
(a) Includes commercial paper and other short term debt.
(b) Includes fixed rate borrowings and $1.1 billion ($1.7 billion in 2000)
notional long-term interest rate swaps that effectively convert the
floating-rate nature of short term borrowings into fixed rate borrowings.
(c) Based on year-end balances and year-end local currency rates.
At December 31, 2001 swap maturities ranged from 2002 to 2012.
(10) Income Taxes
The total provision for income taxes for the years ended December 31
consisted of the following components:
2001 2000 1999
----- ----- -----
Current federal income tax provision $ 249 $ 31 $ 299
Deferred federal income tax provision 313 484 132
-------------------------
Subtotal - federal provision 562 515 431
-------------------------
Current state income tax benefit (6) (7) (2)
Deferred state income tax provision 1 3 1
-------------------------
Subtotal - state benefit (5) (4) (1)
-------------------------
Current foreign income tax provision (77) 158 3
Deferred foreign income tax (benefit) 170 (72) (3)
-------------------------
Subtotal--Foreign income tax provision (benefit) 93 86 --
-------------------------
Total income tax provision $ 650 $ 597 $ 430
=========================
63
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
The reconciliation of the federal statutory tax rate to the effective
income tax rate is as follows:
2001 2000 1999
---- ---- -----
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal income tax effect (0.2) (0.1) (0.1)
Non-deductible goodwill amortization 1.0 1.0 1.0
Sale of minority interest -- -- (3.5)
Tax exempt income (2.7) (2.8) (3.1)
Other, net (0.1) (0.8) --
-----------------------
Effective rate 33.0% 32.3% 29.3%
=======================
The components of the net deferred income tax liability at December 31 are
as follows:
2001 2000
------- --------
Assets:
Net unrealized losses on investment securities $ 164 $ 191
Future annuity and contract benefits 1,368 1,313
Guaranty association (refunds) assessments -- (3)
Net operating loss carryforwards -- 8
Net unrealized losses on derivatives 92 --
Other 103 95
--------------------
Total deferred income tax assets 1,727 1,604
--------------------
Liabilities:
Investments (82) (217)
Present value of future profits (464) (376)
Deferred acquisition costs (1,135) (629)
Statutory contingency reserve (652) (521)
Other (87) (142)
--------------------
Total deferred income tax liabilities (2,420) (1,885)
--------------------
Net deferred income tax liability $ (693) $ (281)
====================
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.
64
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
Federal income tax law allows mortgage guaranty insurance companies to
deduct from current taxable income amounts added to statutory contingency loss
reserves required by state law or regulation, subject to certain limitations.
This federal tax deduction is permitted only to the extent that U.S. Mortgage
Guaranty Insurance Company Tax and Loss Bonds ("Tax and Loss Bonds") are
purchased in the amount of the tax benefit attributable to the deduction. Tax
and Loss Bonds are non-interest bearing and mature ten years from the designated
issue date. Unrecaptured amounts previously deducted for statutory contingency
loss reserves must be included in federal taxable income in the tenth subsequent
tax year.
The Company paid $140 and $35 for federal and state taxes in 2001 and 1999
and received a refund of $(57) for federal and state income taxes during 2000.
(11) Related Party Transactions
At December 31, 2001 and 2000, long term debt 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, 2001 and 2000, long term debt included a note payable to
affiliates 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, 2001 and 2000, long-term debt 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, 2001 and 2000, the Company had a line of credit with GE
Capital that has an aggregate borrowing line of $2,500 with balances of $332
and $291, 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 $0, $3
and $1 for the years ended December 31, 2001, 2000 and 1999, respectively. There
were no investments in short-term notes at December 31, 2001, and investments
were $97 and $0 at December 31, 2001 and 2000, respectively.
During 2001, 2000 and 1999, the Company paid $24, $36 and $2,
respectively, to GE Capital for certain computer services fees.
During 2001, 2000 and 1999, the Company received $21, $21 and $3 of
premiums from various GE affiliates for providing long-term-care insurance.
Under an agreement with a non-consolidated affiliate, the Company's
Mortgage Insurance segment sells properties acquired through claim settlement at
a price equal to the property's fair value times an agreed upon price factor.
During the years ended 2001 and 2000, proceeds from these transactions were $11
and $17, respectively.
The Company's Mortgage Insurance segment provides primary mortgage
insurance coverage and other services to a non-consolidated affiliate. During
the years ended 2001, 2000 and 1999, proceeds from these services were $14, $18
and $22, respectively.
65
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(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.
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, 2001.
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 is a defendant in various 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
Assets and liabilities that are reflected in the Consolidated Financial
Statements at fair value are not included in the following disclosures; such
items include cash and cash equivalents, investment securities, separate
accounts and beginning in 2001, derivative financial instruments. Other assets
and liabilities - those not carried at fair value - are discussed in the
following pages. Apart from certain borrowings and certain marketable
securities, few of the instruments discussed below are actively traded and their
fair values must often be determined using models. Although management has made
every effort to develop the fairest representation of fair value for this
section, it would be unusual if the estimates could actually have been realized
at December 31, 2001 or 2000.
A description of how fair values are estimated follows:
Borrowings. Based on market quotes or comparables.
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.
66
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
Investment contract benefits. 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.
Insurance - credit life. Based on future cash flows, considering expected
renewal premiums, claims, refunds and servicing costs, discounted at a current
market rate.
All other instruments. Based on comparable market transactions, discounted
future cash flows, quoted market prices, and/or estimates of the cost to
terminate or otherwise settle obligations.
Information about certain financial instruments that were not carried at
fair value at December 31, 2001 and 2000, is summarized as follows:
December 31, 2001 December 31, 2000
-------------------------------- --------------------------------
Assets(Liabilities) Assets(Liabilities)
--------------------- ---------------------
Notional Carrying Estimated Notional Carrying Estimated
(in millions) Amount Amount Fair Value Amount Amount Fair Value
-------------------------------- --------------------------------
Assets:
Mortgage loans (a) $ 6,055 $ 6,186 (a) $ 7,734 $ 8,025
Other financial instruments (a) 200 200 (a) 19 19
Liabilities:
Borrowings and related instruments:
Borrowings (b)(c) (a) (2,941) (2,940) (a) 3,003 3,004
Investment contract benefits -- (29,299) (29,059) -- (24,475) (23,066)
Insurance - credit life 1,342 (69) (69) 2,152 (110) (110)
Performance guarantees, principally
letters of credit 42 -- -- 6 -- --
Other firm commitments:
Ordinary course of business lending
commitments 120 -- -- 103 -- --
(a) These financial instruments do not have notional amounts.
(b) See Note 9.
(c) Includes effects of interest rate and currency swaps.
67
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
Derivatives and Hedging. The Company's global activities routinely deal with
fluctuations in interest rates, in currency exchange rates and other asset
prices. The Company follows GE and GE Capital's strict policies to managing each
of these risks, including prohibition on derivatives trading, derivatives
market-making or other speculative activities. These policies require the use of
derivative instruments in concert with other techniques to reduce or eliminate
these risks.
On January 1, 2001, the Company adopted SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, as discussed in Note 1. The paragraphs that
follow provide additional information about derivatives and hedging
relationships in accordance with SFAS 133.
Cash flow hedges. Under SFAS 133, cash flow hedges are hedges that use simple
derivatives to offset the variability of expected future cash flows. Variability
can appear in floating rate assets, floating rate liabilities or from certain
types of forecasted transactions, and can arise from changes in interest rates
or currency exchange rates. For example, the Company often borrows funds at a
variable rate of interest. If the Company needs these funds to make a floating
rate loan, there is no exposure to interest rate changes, and no hedge is
necessary. However, if a fixed rate loan is made, the Company will contractually
commit to pay a fixed rate of interest to a counterparty who will pay the
Company a variable rate of interest (an "interest rate swap"). This swap will
then be designated as a cash flow hedge of the associated variable rate
borrowing. If, as would be expected, the derivative is perfectly effective in
offsetting variable in the borrowing, change in its fair value are recorded in a
separate component of equity and released to earnings contemporaneously with the
earnings effects of the hedged item. Further information about hedge
effectiveness is provided below.
The Company uses currency forwards and interest rate and currency swaps, to
optimize investment returns and borrowing costs. For example, currency swaps and
non-functional currency borrowings together provide lower funding costs than
could be achieved by issuing debt directly in a given currency.
Adoption of SFAS 133 resulted in a reduction of shareholder's interest of
$351 at January 1, 2001. Of that amount $183 was transferred to earnings in 2001
along with the earnings effects of the related forecasted transaction for no net
impact on earnings. At December 31, 2001, amounts related to derivatives
qualifying as cash flow hedges amounted to a reduction of equity of $168, of
which $90 was expected to be transferred to earnings in 2002 along with the
earnings effects of the related forecasted transactions in 2002. In 2001, there
were no forecasted transactions that failed to occur. At December 31, 2001, the
term of derivative instruments hedging forecasted transactions except those
related to variable interest on existing financial instruments, was zero.
Fair value hedges. Under SFAS 133, fair value hedges are hedges that eliminate
the risk of changes in the fair values of assets, liabilities and certain types
of firm commitments. For example, the Company will use an interest rate swap in
which it receives a fixed rate of interest and pays a variable rate of interest
to change the cash flow profile of a fixed rate borrowing to match the variable
rate financial asset that it is funding. Changes in fair value of derivatives
designated and effective as fair value hedges are recorded in earnings and are
offset by corresponding changes in the fair value of the hedged item.
The Company uses interest rate swaps, currency swaps and interest rate and
currency forwards to hedge the effect of interest rate and currency exchange
rate changes on local and non functional currency denominated fixed rate
borrowings and certain types of fixed rate assets. Equity options are used to
hedge price changes in the Company's equity indexed annuity liabilities.
Net investment hedges. The net investment hedge designation under SFAS 133
refers to the use of
68
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
derivative contracts or cash instruments to hedge the foreign currency exposure
of a net investment in a foreign operation. Currency exposures that result from
net investments in affiliates are managed principally by funding assets
denominated in local currency with debt denominated in that same currency. In
certain circumstances, such exposures are managed using currency forwards and
currency swaps.
Derivatives not designated as hedges. SFAS 133 specifies criteria that must be
met in order to apply any of the three forms of hedge accounting. For example,
hedge accounting is not permitted for hedged items that are marked to market
through earnings. The Company uses derivatives to hedge exposures when it makes
economic sense to do so, including circumstances in which the hedging
relationship does not qualify for hedge accounting as described in the following
paragraph. The Company also will occasionally receive derivatives, such as
equity warrants, in the ordinary course of business. Under SFAS 133, derivatives
that do not qualify for hedge accounting are marked to market through earnings.
The Company uses option contracts, including floors, as an economic hedge of
changes in interest rates, currency exchange rates and equity prices on certain
types of liabilities. For example, the Company uses equity options to hedge the
risk of changes in equity prices embedded in insurance liabilities associated
with certain annuity contracts. Although these instruments are considered to be
derivatives under SFAS 133, their economic risk is similar to, and managed on
the same basis as other equity instruments held by the Company.
Earnings effects of derivatives. The table that follows provides additional
information about the earnings effects of derivatives. In the context of hedging
relationships, "effectiveness" refers to the degree to which fair value changes
in the hedging instrument offset corresponding fair value changes in the hedged
item. Certain elements of hedge positions cannot qualify for hedge accounting
under SFAS 133 whether effective or not, and must therefore be marked to market
through earnings. Time value of purchased options is the most common example of
such elements in instruments used by the Company. Earnings effects of such items
are shown in the following table as "amounts excluded from the measure of
effectiveness."
December 31, 2001 (In millions) Cash flow Fair value
hedges hedges
--------- ----------
Ineffectiveness...................................... $ 0.3 $ 5.1
Amounts excluded from the measure of effectiveness... - -
At December 31, 2001, the fair value of derivatives in a gain position and
recorded in "All other assets" is $164 and the fair value of derivatives in a
loss position and recorded in "All other liabilities" is $1,202.
The following table provides fair value information about derivative instruments
for the year 2000. Following adoption of SFAS No. 133 on January 1, 2001, all
derivative instruments are reported at fair value in the accompanying
Consolidated Financial Statements and similar disclosures for December 31, 2001,
are not relevant.
December 31, 2000
-----------------------------
Asset (Liabilities)
--------------------
Notional Carrying Estimated
(in millions) Amount Amount Fair Value
-----------------------------
Assets:
Integrated interest rate swaps 5,177 $ (53) $ (680)
Purchased options 7,200 152 174
Interest rate swaps and futures 3,381 - (25)
Liabilities:
Borrowing and related instruments:
Interest rate swaps 1,673 - (85)
Other firm commitments:
Currency forwards 680 - 44
Counterparty credit risk. The risk that counterparties to derivative contracts
will be financially unable to make payments to the Company according to the
terms of the agreements is counterparty credit risk. Counterparty credit risk is
managed on an individual counterparty basis, which means that gains and losses
are netted for each counterparty to determine the amount at risk. When a
counterparty exceeds credit exposure limits in terms of amounts due to the
Company, typically as a result of changes in market conditions (see table
below), no additional transactions are executed until the exposure with that
69
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
counterparty is reduced to an amount that is within the established limit. 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-. If the
downgrade provisions had been triggered at December 31, 2001, the Company could
have been required to disburse up to $1,167 billion and could have claimed $63
from counterparties -- the net fair value losses and gains. At December 31, 2001
and 2000, gross fair value gains amounted to $157 billion and $232 billion,
respectively. At December 31, 2001 and 2000, gross fair value losses amounted to
$1,201 billion and $816 billion, respectively.
Except for such positions, all other swaps, purchased options and forwards with
contractual maturities longer than one year are conducted within the credit
policy constraints provided in the table below. Foreign exchange forwards with
contractual maturities shorter than one year must be executed with
counterparties having an A-1/ P-1 credit rating and the credit limit for these
transactions is $150.
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
(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, 2001, the Company is able to receive $542 in
dividends in 2002 without obtaining regulatory approval.
The Company received dividends from its subsidiaries of $410, $33, and $259
during 2001, 2000, and 1999, respectively. The Company declared dividends of $25
to GE Capital during 2001 for payment in 2002. The Company declared and paid $23
of cash dividends to GE Capital during 2000. In 1999, the Company declared and
paid dividends of $379 of cash and $22 of securities to GE Capital.
70
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
(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. The impact of adoption of
codification increased statutory capital and surplus by $214, primarily related
to the recognition of certain deferred tax assets.
Combined statutory net income for the Company's U.S. domiciled insurance
subsidiaries for the years ended December 31, 2001, 2000 and 1999 was $648, $741
and $629, respectively. The combined statutory capital and surplus as of
December 31, 2001 and 2000 was $5,647 and $5,143, 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,
2001 and 2000, each of the Company's insurance subsidiaries exceeded the minimum
required RBC levels.
For statutory purposes, the Mortgage Insurers are required to maintain a
contingency reserve. Annual additions to the contingency reserve shall equal 50%
of earned premiums to be maintained for ten years.
(17) Operating and Geographic Segments
(a) Operating Segment Information
The Company conducts its operations through three 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, (2)
Mortgage Insurance, which provides insurance coverage on residential
mortgages and (3) 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 three
segments.
71
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
The following is a summary of industry segment activity for 2001, 2000 and
1999:
2001 -- Segment Data
--------------------
Wealth Lifestyle
Accumulation & Mortgage Protection &
Transfer Insurance Enhancement Consolidated
--------------- --------- ------------ ------------
Premiums $ 2,981 $ 600 $ 2,970 $ 6,551
Net investment income 3,493 177 531 4,201
Surrender fee income 358 -- -- 358
Net realized investment gains 248 52 -- 300
Other income 476 -- 355 831
---------------------------------------------------------
Total revenues 7,556 829 3,856 12,241
---------------------------------------------------------
Interest credited, benefits, and other changes
in policy reserves 5,133 126 2,197 7,456
Commissions 665 -- 473 1,138
Amortization of intangibles 303 5 181 489
Other operating costs and expenses, net 443 120 625 1,188
---------------------------------------------------------
Total benefits and expenses 6,544 251 3,476 10,271
---------------------------------------------------------
Income before income taxes, minority interest and
cumulative effect of change in accounting principle $ 1,012 $ 578 $ 380 $ 1,970
=========================================================
Provision for income taxes $ 355 $ 158 $ 137 $ 650
=========================================================
Total assets $79,224 $4,777 $12,937 $96,938
=========================================================
72
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
2000 -- Segment Data
--------------------
Wealth Lifestyle
Accumulation & Mortgage Protection &
Transfer Insurance Enhancement Consolidated
--------------- --------- ------------ ------------
Premiums $ 2,872 $ 587 $ 2,593 $ 6,052
Net investment income 3,317 165 412 3,894
Surrender fee income 1,253 -- -- 1,253
Net realized investment gains 162 71 -- 233
Other income 510 1 420 931
---------------------------------------------------------
Total revenues 8,114 824 3,425 12,363
---------------------------------------------------------
Interest credited, benefits, and other changes
in policy reserves 4,993 40 1,882 6,915
Commissions 770 -- 466 1,236
Amortization of intangibles 951 5 271 1,227
Other operating costs and expenses, net 442 109 588 1,139
---------------------------------------------------------
Total benefits and expenses 7,156 154 3,207 10,517
---------------------------------------------------------
Income before income taxes, minority interest and
cumulative effect of change in accounting
principle $ 958 $ 670 $ 218 $ 1,846
=========================================================
Provision for income taxes $ 328 $ 195 $ 74 $ 597
=========================================================
Total assets $76,057 $4,488 $11,559 $92,104
=========================================================
73
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
1999 -- Segment Data
--------------------
Wealth Lifestyle
Accumulation & Mortgage Protection &
Transfer Insurance Enhancement Consolidated
--------------- --------- ------------ ------------
Premiums $ 1,658 $ 600 $1,884 $ 4,142
Net investment income 2,773 143 350 3,266
Surrender fee income 56 -- -- 56
Net realized investment gains 149 67 16 232
Other income 427 1 239 667
---------------------------------------------------------
Total revenues 5,063 811 2,489 8,363
---------------------------------------------------------
Interest credited, benefits, and other changes
in policy reserves 3,426 85 1,394 4,905
Commissions 506 -- 352 858
Amortization of intangibles 212 5 128 345
Other operating costs and expenses, net 140 118 529 787
---------------------------------------------------------
Total benefits and expenses 4,284 208 2,403 6,895
---------------------------------------------------------
Income before income taxes, minority interest and
cumulative effect of change in accounting principle $ 779 $ 603 $ 86 $ 1,468
=========================================================
Provision for income taxes $ 224 $ 182 $ 24 $ 430
=========================================================
Total assets $57,302 $3,880 $7,304 $68,486
=========================================================
74
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
(b) Geographic Segment Information
The Company conducts its operations almost entirely 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 2001, 2000 and
1999.
2001 North America Japan Consolidated
- ---- ------------- ------- ------------
Total revenues $10,155 $ 2,086 $12,241
Income (loss) before income taxes, minority interest and
cumulative effect of change in accounting principle $ 1,733 $ 237 $ 1,970
Total assets $81,295 $15,643 $96,938
2000 North America Japan Consolidated
- ---- ------------- ------- ------------
Total revenues $ 9,076 $ 3,287 $12,363
Income (loss) before income taxes, minority interest and
cumulative effect of change in accounting principle $ 1,591 $ 255 $ 1,846
Total assets $74,747 $17,357 $92,104
1999 North America Japan Consolidated
- ---- ------------- ------- ------------
Total revenues $ 7,950 $ 413 $ 8,363
Income (loss) before income taxes, minority interest and
cumulative effect of change in accounting principle $ 1,477 $ (9) $ 1,468
Total assets $65,386 $ 3,100 $68,486
75
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
(18) Subsequent Event
On February 2, 2002 GE Edison entered into an agreement to acquire
Saison Life Insurance Company Limited from Credit Saison Co. Ltd, Saison
Group, Ltd. and its other shareholders for 12.8 billion yen, or
approximately $100. The acquisition is subject to regulatory approval and
is expected to close in April 2002.
(19) Quarterly Financial Data (unaudited)
Summarized quarterly financial data were as follows:
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------------------------------------------------------------
2001 2000 2001 2000 2001 2000 2001 2000
------ ------ ------ ------ ------ ------ ------ ------
Premiums 1,540 1,381 1,690 1,571 1,587 1,588 1,734 1,512
Total Revenues $3,039 $2,587 $3,135 $3,472 $2,997 $3,224 $3,070 $3,080
------ ------ ------ ------ ------ ------ ------ ------
Income before cumulative
effect of change in
accounting principle(1) $ 351 $ 286 $ 336 $ 315 $ 317 $ 329 $ 311 $ 313
------ ------ ------ ------ ------ ------ ------ ------
Net Income $ 336 $ 286 $ 336 $ 315 $ 317 $ 329 $ 311 $ 313
------ ------ ------ ------ ------ ------ ------ ------
(1) See Note 1 (o) of the Consolidated Financial Statements.
76
Independent Auditors' Report
The Board of Directors
GE Financial Assurance Holdings, Inc.:
Under date of January 15, 2002, we reported on the consolidated balance
sheets of GE Financial Assurance Holdings, Inc. and subsidiaries as of December
31, 2001 and 2000, 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, 2001, 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 Notes 1 and 14 to the consolidated financial
statements, the Company changed its method of accounting for derivatives in
2001.
As discussed in Notes 1 and 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 15, 2002, except for Note 18 which is dated February 2, 2002
Schedule II
GE FINANCIAL ASSURANCE HOLDINGS, INC.
Condensed Financial Information of Registrant
(Parent Company)
Balance Sheets
(Dollar amounts in millions, except per share amounts)
Assets: December 31
2001 2000
------------------ -----------------
Investment in subsidiaries $ 14,474 $ 13,581
Cash and cash equivalents 3 139
Other assets 1,615 1,944
------------------ -----------------
Total assets $ 16,392 $ 15,664
================== =================
Liabilities and Shareholder's Interest:
Liabilities
Short-term borrowings and long-term debt $ 2,289 $ 2,304
Accounts payable and accrued expenses 1,348 1,640
------------------ -----------------
Total Liabilities 3,637 3,944
------------------ -----------------
Shareholder's interest
Net unrealized investment gains (297) (298)
Derivatives Qualifying as hedges (168) --
Foreign currency translation adjustments (28) 45
------------------ -----------------
Accumulated non-owner changes in equity (493) (253)
Common stock ($1 par value,
1,000 authorized, 1000 shares issued and outstanding) -- --
Additonal paid-in-capital 6,953 6,953
Retained earnings 6,295 5,020
------------------ -----------------
Total shareholder's interest 12,755 11,720
------------------ -----------------
Total liabilities and shareholder's interest $ 16,392 $ 15,664
================== =================
See accompanying note to condensed financial information of registrant.
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,
2001 2000 1999
--------------- ------------ --------------
Revenues:
Equity in undistributed earnings of subsidiaries $ 972 $ 1,348 $ 783
Net investment income 452 60 316
--------------- ------------ --------------
Total revenues 1,424 1,408 1,099
--------------- ------------ --------------
Benefits and expenses
General expenses 45 134 93
Interest expenses 145 124 62
--------------- ------------ --------------
Total benefits and expenses 190 258 155
--------------- ------------ --------------
Income before income taxes and minority 1,234 1,150 944
interest
Income tax benefit 66 93 115
--------------- ------------ --------------
Net income $ 1,300 $ 1,243 $ 1,059
=============== ============ ==============
See accompanying note to condensed financial information of registrant.
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,
2001 2000 1999
---------- --------- ---------
Cash flows from operating activities $ 1,300 $ 1,243 $ 1,059
Net Income
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Equity in undistributed earnings of subsidiaries (972) (1,348) (783)
(Increase) decrease in other assets (329) (1,807) 335
Increase (decrease) in accounts payable and accrued
expenses 199 1,168 80
------- ------- -------
Total adjustments (1,102) (1,987) (368)
------- ------- -------
Net cash (used in) provided by operating
activities 198 (744) 691
------- ------- -------
Cash flows from investing activities
Acquisitions, net of cash acquired (312) (573) 193
------- ------- -------
Net cash used in investing activities (312) (573) 193
------- ------- -------
Cash flows from financing activities
Net commercial paper borrowings (repayments) (551) 1,026 (17)
Proceeds from borrowings 3,323 3,410 2,639
Payments on borrowings (2,794) (3,168) (2,916)
Dividend paid to shareholder -- (23) (379)
------- ------- -------
Net cash provided by (used in) financing
activities (22) 1,245 (673)
------- ------- -------
Net (decrease) increase in cash and cash
equivalents (136) 72 211
------- ------- -------
Cash and cash equivalents at beginning of year 139 211 --
------- ------- -------
Cash and cash equivalents at end of year $ 3 $ 139 $ 211
======= ======= =======
See accompanying note to condensed financial information of registrant
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 GE Financial Assurance Holdings, Inc., and subsidiaries
consolidated financial statements and accompanying notes are an integral
part of this schedule.
Schedule III
GE FINANCIAL ASSURANCE HOLDINGS, INC., AND SUBSIDIARIES
Supplemental Insurance Information
(Dollar amounts in millions)
Future Annuity
And Contract
Benefits &
Deferred Liability Other
Acquisition For Policy and Unearned Policyholder Premium
Costs Contract Claims Premiums Liabilities Revenue
------------- ------------------ ------------ --------------- --------------
Segment
- -------
December 31, 2001
Wealth Accumulation and Transfer $2,975 $58,204 $75 $235 $2,981
Lifestyle Protection and Enhancement 1,194 6,552 692 45 2,970
Mortgage Insurance 96 378 70 27 600
---------- -------------- ------- ----------- --------------
Total $4,265 $65,134 $837 $307 $6,551
========== ============== ======= =========== ==============
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
Mortgage Insurance 106 355 78 -- 587
--------- -------------- ------- ----------- --------------
Total $3,446 $60,302 $878 $501 $6,052
========= ============== ======= =========== ==============
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
Mortgage Insurance 116 454 86 -- 600
--------- -------------- ------- ----------- --------------
Total $2,423 $41,979 $928 $626 $4,142
========= ============== ======= =========== ==============
Change in
Net Benefits and Deferred Other
Investment Other Changes Acquisition Operating Premiums
Income Policy Reserves Costs, Net Expenses Written
-------------- ------------------ ------------- -------------- ------------
Segment
- -------
December 31, 2001
Wealth Accumulation and Transfer $3,493 3,461 $(592) $1,993 $2,918
Lifestyle Protection and Enhancement 531 2,198 (303) 1,582 3,004
Mortgage Insurance 177 126 9 116 592
--------- ------------- --------- ---------- ---------
Total $4,201 5,785 $(886) $3,691 $6,514
========= ============= ========= ========== =========
December 31, 2000
Wealth Accumulation and Transfer $3,317 3,496 $(877) $2,893 $2,847
Lifestyle Protection and Enhancement 412 1,882 (255) 1,713 2,575
Mortgage Insurance 165 40 10 104 600
-------- ------------ --------- ---------- ---------
Total $3,894 5,418 $(1,122) $4,710 $6,022
======== ============ ========= ========== =========
December 31, 1999
Wealth Accumulation and Transfer $2,773 2,128 $(536) $1,394 $1,657
Lifestyle Protection and Enhancement 350 1,394 (238) 1,247 1,942
Mortgage Insurance 143 85 8 115 584
-------- ------------ --------- ---------- ---------
Total $3,266 3,607 $(766) $2,756 $4,183
======== ============ ========= ========== =========
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, 2001 and 2000
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2001
Consolidated Statements of Shareholder's Interest for each of
the years in the three-year period ended December 31, 2001
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended December 31, 2001
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
Independent Auditors' Report
Schedule II. Condensed Financial Information of Registrant
(Parent Company)
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
------ -----------
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.
Incorporated by reference to the Company's Form 10-K for the year
ended December 31, 2000, filed March 23, 2001.
4.1 Indenture, dated as of June 26, 2001, between GE Financial
Assurance Holdings, Inc., and The Chase Manhattan Bank, as Trustee.
Incorporated by reference to the Company's Form 10-Q for the
period ended June 30, 2001, filed August 3, 2001.
4.2 First Supplemental Indenture, dated as of June 26, 2001, among GE
Financial Assurance Holdings, Inc., The Chase Manhattan Bank, as
Trustee, Paying Agent and Exchange Rate Agent, and The Chase
Manhattan Bank, Luxembourg, S.A., as Paying Agent.
Incorporated by reference to the Company's Form 10-Q for the
period ended June 30, 2001, filed August 3, 2001.
Exhibit
Number Description
------ -----------
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.
(b) Reports on Form 8-K
None.
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 8, 2002 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 the date indicated.
Signature Title Date
--------- ----- ----
/s/ Michael D. Fraizer Chairman, President and March 8, 2002
- ------------------------- Chief Executive Officer
(Michael D. Fraizer) (Principal Executive Officer)
/s/ Thomas W. Casey Senior Vice President and March 8, 2002
- ------------------------- Chief Financial Officer
(Thomas W. Casey) (Principal Financial Officer)
/s/ Richard G. Fucci Vice President and Controller March 8, 2002
- ------------------------- (Principal Accounting Officer)
(Richard G. Fucci)
/s/ Leon E. Roday Director, Senior Vice President March 8, 2002
- ------------------------- General Counsel and Secretary
(Leon E. Roday)
/s/ Geoffrey S. Stiff Director and Senior Vice President March 8, 2002
- -------------------------
(Geoffrey S. Stiff)