As filed with the Securities and Exchange Commission on April 19, 2002
Registration No. 333-67902
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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GE LIFE AND ANNUITY ASSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Virginia 54-0283385 63
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(State or other (I.R.S. Employer (Primary Standard Industrial
jurisdiction Identification Number) Classification Code)
of incorporation
or organization)
6610 W. Broad Street
Richmond, Virginia 23230
(804) 281-6000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
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Heather Harker
Vice President, Associate General Counsel, and Assistant Secretary
GE Life and Annuity Assurance Company
6610 W. Broad Street
Richmond, Virginia 23230
(804) 281-6000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of the registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Title of each
Class of Amount Proposed maximum Proposed maximum Amount of
Securities to be to be offering price aggregate registration
Registered registered per unit* offering price fee**
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Scheduled Purchase
Payment Deferred
Variable Annuity
Contracts N/A N/A $11,640,000 N/A
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* The proposed maximum aggregate offering price is estimated solely for the
purposes of determining the registration fee. The amount to be registered
and the proposed maximum offering price per unit are not applicable since
these securities are not issued in predetermined amounts or units.
** Fees for registration were paid with Pre-Effective Amendment No. 1 to the
Registration Statement.
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The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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GE Life and Annuity Assurance Company
BUSINESS
We are a stock life insurance company operating under a charter granted by the
Commonwealth of Virginia on March 21, 1871 to The Life Insurance Company of
Virginia. General Electric Capital Corporation ("GE Capital") acquired us from
Aon Corporation on April 1, 1996. GE Capital subsequently contributed the
Company to its wholly owned subsidiary, GE Financial Assurance Holdings, Inc.
("GE Financial Assurance") and ultimately the majority of the outstanding
common stock to General Electric Capital Assurance Company ("GECA"). As part of
an internal reorganization of GE Financial Assurance's insurance subsidiaries,
The Harvest Life Insurance Company ("Harvest") merged into the Company on
January 1, 1999. At this time we were renamed GE Life and Annuity Assurance
Company. Harvest's former parent, Federal Home Life Insurance Company
("Federal"), received common stock of the Company in exchange for its interest
in Harvest.
We principally offer annuity contracts, GICs and funding agreements, and life
insurance. We do business in the District of Columbia and all states except New
York. Our principal offices are at 6610 West Broad Street, Richmond, Virginia
23230.
We are one of a number of subsidiaries of GE Financial Assurance, a holding
company that, through its subsidiaries, provides consumers financial security
solutions by selling a wide variety of insurance, investment and retirement
products and income protection packages in North America and Asia. GE Financial
Assurance's product offerings are divided along four major segments of consumer
needs:
(1) Wealth Accumulation and Transfer,
(2) Mortgage Insurance,
(3) Lifestyle Protection and Enhancement, and
(4) Auto and Home Insurance.
As an integral part of GE Financial Assurance, we are able to leverage the
strengths of a global organization. We do so to offer consumers a wide variety
of products through the convenience of diverse distribution channels. In
addition, we are able to utilize GE Financial Assurance's centers of excellence
to provide world class customer service within a competitive cost structure.
OWNERSHIP
GE Financial Assurance indirectly owns approximately ninety-seven percent of
our outstanding common stock. The stock is owned directly by General Electric
Capital Assurance Company ("GE Capital Assurance") and by Federal. Both GE
Capital Assurance, which directly owns approximately eighty-five percent of our
outstanding common stock, and Federal, which owns approximately twelve percent
of our outstanding common stock, are indirectly owned by GE Financial
Assurance. The
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remaining shares of our outstanding common stock are owned by Phoenix Home Life
Mutual Insurance Company, Inc. ("Phoenix"). All of our outstanding non-voting
preferred stock is owned by GE Financial Assurance. GE Financial Assurance is a
wholly-owned subsidiary of GE Capital which in turn is wholly owned, directly
or indirectly, by General Electric Company ("GE").
None of GE Capital Assurance, Federal, Phoenix, GE Financial Assurance, GE
Capital, or GE guarantees the Contract.
GENERAL
Our products are divided along two of GE Financial Assurance's four major
segments of consumer needs:
. Wealth Accumulation and Transfer, and
. Lifestyle Protection and Enhancement.
Our principal product lines under the Wealth Accumulation and Transfer segment
are:
. deferred annuities (variable and fixed);
. guaranteed investment contracts, or GICs, and funding agreements; and
. life insurance (universal, variable, and ordinary).
Customers use Wealth Accumulation and Transfer products as vehicles for
accumulating wealth, often on a tax-deferred basis, providing income during
retirement, transferring wealth to beneficiaries, or providing a means to
replace the insured's income in the event of premature death.
Our principal product line under the Lifestyle Protection and Enhancement
segment is accident and health insurance. Customers use Lifestyle Protection
and Enhancement products to protect their income and assets from the adverse
economic impacts of significant health care costs or other unanticipated events
that cause temporary or permanent loss of earnings capabilities.
We currently distribute our products through two primary distribution channels:
. intermediaries; and
. career or dedicated sales forces.
STRATEGY
We believe that the following trends have increased and will continue to
increase the demand for innovative products and services to solve individual
financial challenges:
. changes in demographics such as the increased number of baby boomers
entering middle and late middle age;
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. longer life expectancies due to healthy lifestyles and medical advances;
. the reduction in government- and employer-sponsored benefit programs; and
. the continuing need for estate planning for the most affluent group of
retirees in history.
Our strategy, which is integrated with the strategy of GE Financial Assurance's
other insurance companies, is designed to meet the financial needs of these
trends by offering a broad array of products and services through our two
primary channels of distribution.
Our approach to this opportunity is to maintain product and distribution
capabilities designed to deliver innovative products and services to help
consumers invest, protect and retire. Most of our products are targeted at
middle- to upper-income consumers. To date, we have operated entirely in the
United States.
Our strategy is to be a consumer financial solutions provider through:
. intense customer focus;
. expansion of product and distribution channels through core business
growth and acquisitions; and
. cost and speed competitiveness.
These elements are further supported by a strong foundation of operating
fundamentals. Our strategy consists of the following four elements:
Customer Focus. We focus on two sets of customers on two fronts:
(1)consumers, and
(2)distribution partners/producers.
Our core concept is to be customer needs driven and to simplify consumers'
financial lives. To accomplish this, we offer not only products but also
financial planning tools and education to enable personalized solutions that
provide options and choices for consumers and their advisors. By providing
financial solutions for every stage of a consumer's life, either directly or
through our affiliates, we believe we will differentiate ourselves from our
competitors and create an affinity with customers that will translate into
lifetime relationships. In addition, we focus on continuously expanding the
support services and technology offered to our distribution channels.
Growth. This element begins with our focus on driving core business growth,
building our distribution capabilities, and maintaining a broad range of fresh,
innovative products and services. We focus on key customer groups and
distribution channels that are well positioned to maximize marketplace
penetration. We believe
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that our customers are becoming increasingly sophisticated in assessing their
needs for savings, insurance and retirement. Our products and services are
designed to meet needs based on input from consumers and the distributors who
service them. To enable us to obtain this input, we endeavor to create and
maintain direct contact with our key consumer groups, as well as the
distributors who service them. We see branding as increasingly important in the
competitive financial security industry. We therefore actively promote the GE
brand, which is highly attractive to consumers and distributors.
Our distribution strategy is focused on penetrating our targeted markets
through two types of distribution methods:
. intermediaries; and
. career or dedicated sales forces.
Through each distribution method, we believe core growth will be driven by the
following factors:
. strong product development;
. disciplined marketing and sales;
. expansion of specific distribution relationships; and
. selective cross-marketing of products.
In addition, we believe our commitment to e-commerce has allowed us to
capitalize on two fundamental opportunities to further accelerate our growth:
(1) making our existing businesses and ways of serving consumers more
effective by being faster and more cost efficient; and
(2) creating entirely new product and service capabilities or processes to
build new ways of reaching consumers and our distributors.
Although our primary focus will be on increasing our sales of existing products
by enhancing our marketing, sales, new product development and service
capabilities, and driving distribution efficiency, we will continue to consider
opportunities to enter new markets. We believe entry into these new markets
will be accomplished through:
. development of new products for sale through existing channels;
. development of new products to serve new channels;
. creation of new distribution segments; and
. alliances with entities with presence in attractive markets or
distribution channels.
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Cost and Speed Competitiveness. We recognize that consolidation in the
financial services industry will create fewer, but larger, competitors. Our
ability to effectively compete will be dependent upon many factors, including
our ability to maintain operating scale and reduce our 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, we believe the
speed and responsiveness of business processes is critical to being
competitive. Our continued commitment to integrating GE Financial Assurance's
life insurance and other financial institution acquisitions into platforms with
common information systems is designed to create a competitive advantage in the
marketplace. While we believe that the diversity of GE Financial Assurance's
distribution channels is also a competitive advantage, we recognize the need to
coordinate our efforts with our affiliates to provide a unified face to our
customers and distributors. We are 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. In addition,
we are continuously analyzing means by which we can digitize and e-enable
processes. We believe the benefits from this initiative include improved
customer service, expanded product and service offerings, and increased
operating efficiency for both our customers and us. We believe that our
continued success will be predicated upon our ability to achieve game-changing
efficiencies through the use of new technologies, digital processes and the
Internet.
Strong Foundation of Operating Fundamentals. Our dedication to providing
quality products to our customers rests on maintaining a strong risk
management, compliance, and controllership focus. We believe this focus
provides a solid foundation for our successful execution of our business
strategy. We believe risk management, compliance, and controllership processes
and practices have been a long-standing strength of ours. We have developed
processes and practices appropriate for our operating businesses by leveraging
the experience of the GE system.
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Products
WEALTH ACCUMULATION AND TRANSFER PRODUCTS
Deferred Annuities
Premiums related to single and flexible premium deferred annuities are reported
as deposit liabilities in accordance with U.S. generally accepted accounting
principles ("GAAP").
Fixed Annuities. Our deposit liabilities for fixed annuities for the years
ended December 31, 2001, 2000, and 1999 were $1,030 million, $1,158 million,
and $1.537 million, respectively. Our deposits received for these same periods
were $99.2 million, $1.2 million and $5.5 million, respectively. 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. Initially,
we credit 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. After this period, the crediting rate is subject to change based on
prevailing market rates and product profitability. Each contract also has a
minimum guaranteed rate. The accrual of interest during the accumulation period
is on a tax-deferred basis to the contractholder. After the number of years
specified in the annuity contract, the annuitant may elect to take the proceeds
of the annuity as a single payment, a specified income for life, or a specified
income for a fixed number of years. The owner is permitted at any time during
the accumulation period to withdraw all or part of the premium paid plus the
amount credited to his account subject to contract provisions.
At least once each month, we establish an interest-crediting rate for our new
fixed SPDA policies and new deposits into FPDA policies. In determining our
interest-crediting rate on new deposits, management considers our competitive
position, prevailing market rates, and the profitability of the annuity
product. After contract issue, we maintain the initial crediting rate for a
minimum period of one year. Thereafter, we may adjust the crediting rate not
more frequently than once per year for a given contract. Interest rates
credited on our in-force SPDA and FPDA policies ranged from 3.5% to 6.1% during
2001. All of our annuity products have minimum guaranteed crediting rates
ranging from 3.5% to 4.0% for the life of the contract.
Variable Annuities. A variable annuity has an accumulation period and a payout
period. The main difference from fixed annuities is that the contractholder can
place all or a portion of their premiums in a separate account maintained for
variable
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annuities. These accounts are distinct from our general assets and liabilities.
Assets held in separate accounts supporting variable annuity contracts, as well
as variable life insurance policies, aggregated $8,994 million, $10,393 million
and $9,246 million, at December 31, 2001, 2000, and 1999, respectively. Our
deposit liabilities not held in the separate account for variable annuities
(i.e., amounts included in future annuity and contract benefits on the
Consolidated Balance Sheets) were $1,319 million, $541 million and $673 million
for December 31, 2001, 2000 and 1999, respectively. Our deposits received for
variable annuities during these same periods were $2,279 million, $3,152
million, and $2,442 million, respectively.
Variable contractholders may elect to allocate their premiums among several
investment subaccounts with varying degrees of risk and investment objectives.
The cash surrender value of a variable annuity contract depends on the age of
the policy and the performance of these subaccounts, which the contractholder
may reallocate from time to time. There is no guaranteed minimum rate in the
subaccount components of variable annuity contracts. Similarly, during the
variable annuity's payout period, the payments distributed to the annuitant may
fluctuate with the performance of the subaccounts selected by the owner. A
fixed payout may also be available depending upon individual contract
provisions. Variable annuities provide us with fee-based revenue in the form of
mortality and expense fees charged to the contractholder's account.
GICs and Funding Agreements
Our deposit liabilities for GICs and funding agreements for the years ended
December 31, 2001, 2000, and 1999 were $5,960 million, $5,568 million, and
$4,174 million, respectively. Our deposits received for these same periods were
$1,547 million, $1,904 million, and $2,057 million, respectively.
GICs are deposit-type products that provide a guaranteed return on a fixed or
indexed basis to the contractholder. GICs are purchased by Employee Retirement
Income Security Act ("ERISA") qualified defined contribution plans. These plans
include 401(k) plans where plan participants elect a stable value option.
Funding agreements operate substantially similarly to GICs. Funding agreements
are purchased by institutional accredited investors for various kinds of funds
and accounts that are not ERISA qualified. Money market funds, bank common
trust funds, and other corporate and trust accounts are examples of purchasers
of funding agreements. Nearly all of our funding agreements are on a floating-
rate basis, which means interest is credited to them on an indexed basis.
GICs typically credit interest at a fixed interest rate that is determined by
market conditions. GICs also have a fixed maturity typically ranging from 2 to
6 years. Both rates and maturities are set at the time of sale. Substantially
all GICs allow for the payment of benefits at contract value to ERISA plan
participants in the event of death, disability, retirement, or change in
investment election. We underwrite these risks before issuing a GIC to a plan.
In addition, we require plans buying our GICs to
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have certain restrictions on participant transfers to money market and similar
funds in order to reduce disintermediation risk. Contractholders can also
terminate our GICs prior to their maturity. However, they can only be
terminated after an adjustment to the contract value for changes in the level
of interest rates and the application of a significant penalty.
Our floating-rate funding agreements credit interest at a rate that is indexed
to an external index typically the London Interbank Offered Rate. These
contracts are typically renewed annually. However, we can terminate the funding
agreement after giving notice within the contract's specified notice period.
Contractholders are also able to terminate after giving notice within the
specified notice period. This notice period is generally 90 days or less. The
aggregate amount of our outstanding funding agreements with put option features
was approximately $2,325 million as of December 31, 2001. We have established a
line of credit with GNA Corporation, an indirect parent, to provide liquidity
in the event of an unusual level of early terminations. We also have issued
$685 million of longer term funding agreements. These contracts have maturities
of 2 to 7 years from time of placement and contain no early termination
provision.
Life Insurance
Our annualized premiums of life insurance in-force for the years ended December
31, 2001, 2000, and 1999 were $238.8 million, $265.9 million, and $271.5
million, respectively. First year premiums received for these same periods were
$37.5 million, $47.3 million, and $37.2 million, respectively. We predominantly
offer "permanent" life insurance as opposed to "term" life insurance. Term life
insurance provides life insurance protection for a limited time, and a death
benefit is paid only if the insured dies during the specified term. Our
permanent life insurance products provide protection for the entire life of the
insured and allow for cash value accumulation. These products include variable
life, interest-sensitive whole life insurance ("ISWL"), and universal life
insurance ("UL").
Our life insurance policies provide a death benefit payable upon death of the
insured. Owners of permanent insurance pay premiums that are applied to account
value, net of any expense charges. We deduct cost of insurance charges, which
vary by age, gender, plan and class of insurance from the account value. We
determine our cost of insurance each year in advance, which is subject to a
maximum stated in each policy. The owner may access account value through
policy loans, partial withdrawals, and full surrender of the policy. Some
withdrawals and surrenders are subject to surrender charges.
We credit the account value for ISWL and UL policies with interest at an
interest rate we determine in advance and generally guarantee for a policy year
at a time. Policies have a minimum credited interest rate, which varies by
policy and ranges from 4.0% to 5.5%. ISWL and UL differ in two major ways. ISWL
requires the contractholder to
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pay a fixed premium we determine each year, while UL allows a contractholder to
determine the amount of premium to be paid, subject to certain minimum and
maximum values. Also, the ISWL death benefit is fixed at issue, while the
contractholder may decrease and (subject to evidence of good health) increase
the death benefit on a UL policy.
The main difference between variable life insurance and variable UL from non-
variable life insurance is that the policyholder can place all or a portion of
their premiums in a separate account that is maintained for the relevant
variable life insurance policies and that is distinct from our general assets
and liabilities. Policyholders may elect to allocate their premiums among
several investment subaccounts with varying degrees of risk and investment
objectives. A variable life insurance policy's cash surrender value depends on
the policy's age and the performance of these underlying funds. There is no
guaranteed minimum rate in the subaccount components of variable life
insurance. Variable life insurance policies provide us with fee-based revenue
in the form of mortality and expense fees charged to the policyholder's
separate account.
LIFESTYLE PROTECTION AND ENHANCEMENT PRODUCTS
Our principal product line under the Lifestyle Protection and Enhancement
segment is accident and health insurance. Our annualized premiums for accident
and health insurance for the years ended December 31, 2001, 2000, and 1999 were
$60.2 million, $61.0 million, and $56.1 million, respectively.
We offer accident and health insurance products to individuals. We market
accident and health products because we believe that offering a broad range of
products is essential in order to be a preferred provider of benefits and to
effectively meet the needs of employers and consumers.
PRODUCT/SERVICE CENTERS
Our primary product service centers for creating and servicing our products are
as follows:
. the annuity and GIC and funding agreement businesses operate primarily in
Richmond, Virginia;
. the life business operates primarily in Lynchburg, Virginia; and
. the accident and health business operates primarily in Schaumburg,
Illinois.
We leverage GE Financial Assurance's global presence to support these service
centers through an affiliate's operations in India. The Indian operations
provide call center support, internet assistance, and new business
administration to promote cost efficiencies and to enhance customer service.
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Marketing and Distribution
We currently distribute our products through two primary channels:
. intermediaries, such as brokerage general agencies ("BGAs"), banks,
securities brokerage firms, financial planning firms, accountants,
affluent market producers, and specialized brokers; and
. career or dedicated sales forces.
GE Financial Assurance has developed a web portal called GEFinancialPro.com for
our distribution channels and for those of our affiliates. This web portal
improves productivity for financial intermediaries and agents by enabling
business submissions, account tracking, and status updates through the
Internet. In addition, GE Financial Assurance has developed The GE Financial
Service site, GEFinancialService.com, for intermediaries and consumers. The GE
Financial Service site provides similar services for these customers, giving
them the ability to change everything from addresses to investment accounts
online.
INTERMEDIARIES
Banks and Securities Brokerages. Banks and securities brokerage firms are a
significant and growing distribution channel for our fixed and variable
annuities, and life insurance products. Over the last few years, distribution
of our products through securities brokerage firms has substantially increased
primarily due to our distribution of variable annuity products through a large
network of securities brokerage firms.
Approximately 30% of our variable product sales in 2001 were through two
national stock brokerage firms. However, we do not believe that the loss of
such business would have a long-term adverse effect on our business and
operations due to our competitive position in the marketplace, the availability
of business from other distributors, the growth of the independent broker-
dealer and financial planner channels, and our mix and penetration of other
products.
BGAs. We, as well as our affiliates, distribute many of our products through
more than 200 independent insurance brokerage firms located throughout the
United States. These BGAs market our products through approximately 135,000
licensed insurance agents or brokers, who also represent other companies. We
believe our consistent commitment to this system has helped us earn a
reputation as a leading provider of insurance products among BGAs.
Financial Planners, Accountants, and Affluent Market Producer Groups. We sell
some of our products through financial planners, accountants, and affluent
market producer groups. These groups emphasize providing investment and
insurance products to one of our target customer groups. We believe that
financial planners, accountants, and producer groups present an opportunity for
growth within the intermediary distribution channel.
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Specialized Brokers. We also sell GICs and funding agreements through
specialized GIC brokers, fund managers, employee benefit investment advisors,
and directly to large employee benefit plans. We sell funding agreements
directly, as well as through brokers, institutional accredited investors, and
banks acting in a fiduciary capacity.
CAREER OR DEDICATED SALES FORCES
Our career or dedicated sales forces consist primarily of non-employees who
sell our products on an exclusive basis. All non-employee dedicated sales force
agents are affiliated with an insurance agency. We compensate dedicated sales
forces primarily on a commission basis.
These agents develop customized solutions for customers' future financial
requirements by using our annuity and life insurance products. They offer
customers financial profiles to assist their understanding and development of
financial objectives. They identify prospective customers through:
. direct mail solicitation;
. educational seminars;
. policyholder referrals; and
. targeted promotions linked to our national advertising campaigns.
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Competition
We operate in a highly competitive environment. We believe GE Financial
Assurance has assembled a unique collection of products and distribution
channels. However, there are competitors that also have assembled a similar
array of financial products and have similar strategic goals. We believe that
the principal competitive factors in the sale of insurance and annuity products
are:
. product features;
. commission structure;
. perceived stability of the insurer;
. issuer financial strength ratings;
. service;
. name recognition;
. price; and
. cost efficiency.
Many other companies are capable of competing for sales in our target markets.
Our ability to compete is affected in part by our ability to provide
competitive products and quality service to the consumer, general agents,
licensed insurance agents, and brokers. However, we believe that we compete
primarily on the basis of our high level of customer focus, our brand and
financial strength, and our competitively priced products.
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Risk Management, Compliance, and Controllership
We maintain a strong commitment to risk management, compliance, and
controllership. We avail ourselves of the long-standing strength and experience
of GE Capital and GE. The commitment to risk management, compliance, and
controllership begins with the initial sales contact and extends through
ongoing policy servicing at the customer level. Formal internal reviews of our
product performance, administrative processes, pricing strategy, and
competitive position are conducted on a periodic basis, occurring at least once
a year. These reviews are completed by cross-functional teams and formally
presented to senior management. We have obtained membership in Insurance
Marketplace Standards Association, a voluntary membership organization
dedicated to promoting high ethical standards in the sale of individual life
insurance, long-term care insurance, and annuities. We have instituted company-
wide compliance initiatives such as centralized complaint databases and agent
complaint tracking and licensing. We are periodically examined by the insurance
department of our domiciliary state (Virginia), by certain other states where
we sell our products, and by the U.S. Securities and Exchange Commission. Where
necessary, we respond to the relevant examination reports by implementing
recommended changes.
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Underwriting
Our dedicated underwriting staff reviews and analyzes applications for most of
our underwritten life insurance related products individually. The review and
analysis is conducted 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 our own sales staff do not retain
any underwriting authority.
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Reserves
We establish and carry as liabilities actuarially determined reserves that are
calculated to meet our future obligations. These reserves are based on
actuarially recognized methods using prescribed morbidity and mortality tables
in general use in the United States modified to reflect our 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 our
policy obligations. Reserves include:
. unearned premiums;
. premium deposits;
. claims reported but not yet paid; and
. claims incurred but not reported.
For interest-sensitive life and annuity policies, reserves are set according to
premiums collected, plus interest, less charges. Reserves for fixed life and
accident and health policies are based on:
. assumed investment yield;
. persistency;
. mortality and morbidity as per commonly used actuarial tables;
. expenses; and
. margins for adverse deviations.
The stability of our annuity and life insurance reserves is enhanced by policy
restrictions on the withdrawal of funds. Withdrawals in excess of allowable
penalty-free amounts are generally assessed a surrender charge during a penalty
period ranging up to 10 years. The basis for surrender charges varies by
product and can be either a percentage of premium, of accumulation value, or
related to face amount of insurance, and generally decreases gradually during
the penalty period. Surrender charges are set at levels to protect us from loss
on early terminations. This lengthens the effective duration of policy
liabilities and improves our ability to maintain profitability on such
policies.
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Reinsurance
We follow the usual industry practice of reinsuring (ceding) portions of our
insurance risks with reinsurance companies. The use of reinsurance permits us
to write policies in amounts larger than the risk we are willing to retain on
any one life, and also to continue writing a larger volume of new business. The
maximum amount of individual life insurance we normally retain on any one
insured is $1 million. Certain accident and health insurance policies are
reinsured on either a quota share or excess of loss basis. We cede 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, we cede insurance risks on a
"facultative" basis, under which the reinsurer's prior approval is required on
each risk reinsured. The types of reinsurance we use do not discharge us from
liability on the insurance ceded. We are required to pay the full amount of our
insurance obligations regardless of whether we are entitled or able to receive
payments from the reinsurer. We do not have significant concentrations of
reinsurance risk with any one reinsurer.
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Regulation
GENERAL REGULATION AT STATE LEVEL
Our insurance business is subject to comprehensive state 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.
State statutory and regulatory restrictions limit the amount of dividends or
distributions an insurance company may pay to its shareholders without
regulatory approval.
Virginia, our state of domicile, allows insurance companies domiciled in the
state to pay dividends up to the lesser of 10% of prior year statutory surplus
or 100% of prior year statutory net gain from operations. However, dividends
paid or distributed within any twelve consecutive months in excess of the
prescribed limits are deemed extraordinary and require formal approval by the
Virginia State Corporation Commission, Bureau of Insurance (the "Commission").
Virginia insurance laws provide that no person may acquire control of us
without the prior approval of the Commission. Any person who acquires
beneficial ownership of 10% or more of our voting securities would be presumed
to have acquired control. However, the Commission may, upon application,
determine otherwise.
We are required to file detailed annual reports with the Commission and with
insurance supervisory departments in each of the jurisdictions in which we do
business. Our operations and accounts are subject to examination by these
departments at regular intervals. We prepare statutory financial statements in
accordance with accounting practices prescribed or permitted by the Commission,
our principal insurance regulator. Prescribed statutory accounting practices
include
58
publications of the National Association of Insurance Commissioners ("NAIC"),
as well as state laws, regulations, and general administrative rules.
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. The RBC standards take into account the risk characteristics
of the insurance 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. The
factor will be higher for items with greater underlying risk and lower for
items with less risk. Insurance regulators use the formula 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. A company must
submit a comprehensive plan to the regulatory authority that discusses proposed
corrective actions to improve its capital position if:
. the 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.
If a company's total adjusted capital is less than 150% of its ACL but greater
than or equal to 100% of its ACL, then the regulatory authority will perform a
special examination of the company and issue an order specifying corrective
actions that must be followed. In addition, the company must undertake the
actions described above. If a company's total adjusted capital is less than
100% of its ACL but greater than or equal to 70% of its ACL, then the
regulatory authority may take any action it deems necessary, including placing
the company under its control. In addition, in this circumstance, the company
must undertake the actions described above. If a company's total adjusted
capital is less than 70% of its ACL, the regulatory authority
59
is mandated to place the company under its control. Our total adjusted capital
is in excess of 250% of our ACL at December 31, 2001.
In addition, as part of their routine regulatory oversight process, state
insurance departments conduct detailed examinations periodically of the books,
records, accounts and market conduct of insurance companies doing business in
their states. These examinations generally occur once every three to five
years. Our most recent regulatory examination did not disclose any findings
that would have a material adverse impact on us.
REGULATORY INITIATIVES
State insurance regulators and the NAIC are continually re-examining existing
laws and regulations, with a specific focus 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 we are
licensed. However, 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 our operations. In addition, there can be no assurance that
existing or future insurance-related laws and regulations will not become more
restrictive.
STATUTORY ACCOUNTING CHANGES
The NAIC adopted model statutory accounting practices 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 we can pay as dividends to our shareholders. Insurance regulators
and the insurance industry are continuing to develop interpretations of the
NAIC model. Adoption of the statutory accounting practices increased statutory
capital and surplus by $15.9 million as of January 1, 2001.
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
60
services regulation, pension regulation, and federal taxation, can
significantly and adversely affect the insurance industry and our business.
For example, the federal government has from time to time considered other
legislative or regulatory changes that could affect us. This includes:
. legislation relating to the deferral of taxation on the accretion of value
within certain annuities and life insurance products;
. changes in ERISA regulations; and
. the alteration of the federal income tax structure.
The ultimate effect of any of these changes, if implemented, is uncertain.
However, both the persistency of our existing products and our 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 regulations is April 2003. HIPAA provides
for significant fines and other penalties for wrongful disclosure of protected
health information. We anticipate that we will have to modify certain of our
infrastructure and procedures to comply with the new requirements. However, we
do not expect these changes to have a material impact on our business.
Securities Laws
Some of our policies and contracts are subject to regulation under the federal
securities laws administered by the U.S. Securities and Exchange Commission
("SEC") and certain state insurance laws. Some of our separate accounts are
registered as unit investment trusts under the Investment Company Act of 1940,
as amended. Some of our annuity contracts and all of our variable life
insurance policies are registered under the Securities Act of 1933.
Distribution of our variable products is subject to broker-dealer regulation by
the SEC and the National Association of Securities Dealers, Inc.
Federal and state securities laws and regulations are primarily intended to
benefit owners of our variable annuity and variable life insurance products.
These laws and regulations generally grant supervisory agencies broad
administrative powers, including the power to limit or restrict the carrying on
of business for failure to
61
comply with these laws and regulations. In such event, the possible sanctions
that may be imposed include suspension of individual employees, suspension or
revocation of one or more registered separate account's registration as an
investment company, 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 us, 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.
62
Properties
We conduct our business from various facilities, all of which are leased except
for one building in Richmond, Virginia, which we own.
63
Market Price of and Dividends on the Registrant's Common Equity and Related
Stockholder Matters
All of our common stock, our sole class of common equity on the date hereof, is
owned by GE Capital Assurance, Federal, and Phoenix. Accordingly, there is no
public trading market for our common equity.
As previously discussed, our ability to pay dividends is restricted by state
insurance law. (See "Regulation, General Regulation at State Level.")
64
Risk Factors
The operating results of companies in the insurance industry have historically
been subject to significant fluctuations. The factors that could affect our
future results include, but are not limited to, general economic conditions and
certain known trends and uncertainties that are discussed more fully below.
We are exposed to many types of risks that could negatively affect our
business. There are many types of risks that all companies are exposed to in
their businesses. For example, companies are exposed to the risks of natural
disasters, malicious acts, computer viruses, and other perils. While we have
obtained insurance, implemented risk management and contingency plans, and
taken preventive measures and other precautions, no assurance can be given that
there are not scenarios that could have an adverse effect on us.
We operate in a mature, highly competitive industry, which could limit our
ability to gain or maintain market share in the industry. Life and health
insurance is a mature industry. In recent years, the industry has experienced
little growth in life insurance sales, though the aging population has
increased the demand for retirement savings products. Life and health insurance
is a highly competitive industry. We encounter significant competition in all
lines of business from other insurance companies, many of which have greater
financial resources than we do, as well as competition from other providers of
financial services. Competition could result in, among other things, lower
sales or higher lapses of existing products.
The life and health insurance industry is consolidating with larger,
potentially more efficient organizations emerging from consolidation. Also,
some mutual insurance companies are converting to stock ownership, which will
give them greater access to capital markets. Additionally, commercial banks,
insurance companies, and investment banks may now combine, provided certain
requirements are satisfied.
Our ability to compete is dependent upon, among other things, our ability to
attract and retain distribution channels to market our insurance and investment
products, our ability to develop competitive and profitable products, our
ability to maintain low unit costs, and our maintenance of strong ratings from
rating agencies. A ratings downgrade could adversely affect our ability to
compete. Ratings are an important factor in our competitive position. Rating
organizations periodically review the financial performance and condition of
insurers, including us. A downgrade in our ratings could adversely affect our
ability to sell our products and retain existing business.
For the past several years rating downgrades in the industry have exceeded
upgrades. Rating organizations assign ratings based upon several factors. While
most of the factors relate to the rated company, some of the factors relate to
the views of the rating organization, general economic conditions, and
circumstances outside the rated company's control. We cannot predict what
actions the rating organizations may
65
take, or what actions we may be required to take in response to the actions of
the rating organizations, which could adversely affect us.
We could be forced to sell investments at a loss to cover policyholder
withdrawals. Many of the products we offer, including funding agreements with
put options, allow policyholders and contractholders to withdraw their funds
under defined circumstances. We manage liabilities and configure our investment
portfolios so as to provide and maintain sufficient liquidity to support
anticipated withdrawal demands and contract benefits and maturities. While we
own a significant amount of liquid assets, a certain portion of our assets is
relatively illiquid. Unanticipated withdrawal or surrender activity could,
under some circumstances, compel us to dispose of assets on unfavorable terms,
which could have an adverse effect on us. We have established a line of credit
with GNA Corporation, an indirect parent, to provide liquidity in the event of
an unusual level of early terminations. However, this line of credit may not
provide sufficient liquidity in the event that extraordinary circumstances
cause a significant amount of unanticipated early withdrawals.
Market fluctuations could negatively affect our business. Significant changes
in market conditions expose insurance companies to the risk of not earning
anticipated policy fees from variable products affected by the performance of
the equity markets. Market fluctuations may also increase trade volumes that
could expose insurers to gains or losses in traded securities underlying its
separate accounts. Declining market returns may result in lower sales of
certain of our variable products.
Interest-rate fluctuations could negatively affect our spread income or
otherwise impact our business. Significant changes in interest rates expose
insurance companies to the risk of not earning anticipated spreads between the
interest rate earned on investments and the credited interest rates paid on in-
force policies. Both rising and declining interest rates can negatively affect
our spread income. While we develop and maintain asset/liability management
programs and procedures designed to preserve spread income in rising or falling
interest rate environments, no assurance can be given that changes in interest
rates will not affect such spreads.
Changes in interest rates may also impact our business in other ways. Interest
rate changes may have temporary effects on the sale and profitability of our
annuity, universal life, and other investment products. For example, if
interest rates rise, competing investments (such as annuities or life insurance
offered by our competitors, certificates of deposit, mutual funds, and similar
instruments) may become more attractive to potential purchasers of our
products. Competing investments may also become more attractive to existing
contractholders and policyholders, resulting in contract and policy surrenders.
We may be forced to raise certain crediting rates on our line of products in
order to meet competitive pressures.
66
If interest rates decrease, we may experience lower sales of certain of our
insurance and investment products. We constantly monitor our investment income
on existing assets and yields available on new investments and sell policies
and annuities that permit flexible responses to interest rate changes as part
of our management of interest spreads. In addition, certain of our insurance
and investment products guarantee a minimum credited interest rate.
Higher interest rates may create a less favorable environment for the
origination of mortgage loans and decrease the investment income we receive in
the form of prepayment fees, make-whole payments, and mortgage participation
income. Higher interest rates may also increase the cost of debt and other
obligations having floating rate or rate reset provisions, and may result in
lower sales of variable products.
Additionally, our asset/liability management programs and procedures
incorporate assumptions about the relationship between short-term and long-term
interest rates (i.e., the slope of the yield curve), relationships between
risk-adjusted and risk-free interest rates, market liquidity, and other
factors. The effectiveness of our asset/liability management programs and
procedures may be negatively affected whenever actual results differ from these
assumptions.
Insurance companies are highly regulated. We are subject to government
regulation in each of the states in which we conduct business. Such regulation
is vested in state agencies having broad administrative power dealing with many
aspects of the insurance business, which may include premium rates, marketing
practices, advertising, policy forms, and capital adequacy, and is concerned
primarily with the protection of contractholders rather than share owners. We
cannot predict what regulatory initiatives may be enacted which could adversely
affect us.
We may be subject to regulation by the United States Department of Labor when
providing a variety of products and services to employee benefit plans governed
by ERISA. Such regulation seeks to protect the retirement and welfare benefits
of workers, primarily by imposing duties on fiduciaries to prudently manage
benefit plans. Severe civil and criminal penalties may be imposed for breach of
duties under ERISA.
Certain policies, contracts, and annuities we offer are subject to regulation
under the federal securities laws administered by the SEC. The federal
securities laws contain regulatory restrictions and criminal, administrative,
and private remedial provisions.
Tax law changes could adversely affect our ability to compete with non-
insurance products or reduce the demand for certain insurance products. Under
the Code, income tax payable by contractholders on investment earnings is
deferred during the accumulation period of certain life insurance and annuity
products. This favorable tax
67
treatment may give certain of our products a competitive advantage over certain
investment-oriented products that do not qualify as insurance. To the extent
that the Code is revised to reduce the tax-deferred status of life insurance
and annuity products, or to increase the tax-deferred status of competing
products, the entire life insurance industry could be adversely affected and
lose market share. In addition, life insurance and annuity products are
potentially affected by changes in the federal estate tax. Recently enacted
changes -- gradually reducing estate tax rates until the estate tax is repealed
in 2010, for one year only -- have created uncertainty regarding the final
status of the estate tax. The changes, and the uncertainty itself, may reduce
demand for certain life insurance products. Finally, we cannot predict what
other tax law changes with adverse effects may be enacted by Congress or
promulgated by the Internal Revenue Service and Treasury.
Financial services companies are frequently the targets of litigation,
including class action litigation, which could result in substantial
judgments. A number of civil jury verdicts have been returned against insurers
and other providers of financial services involving sales practices, alleged
agent misconduct, failure to properly supervise representatives, and other
matters. Increasingly these lawsuits have resulted in the award of substantial
judgments that are disproportionate to the actual damages, including material
amounts of punitive damages. In some states, juries have substantial discretion
in awarding punitive and non-economic compensatory damages, which creates the
potential for unpredictable material adverse judgments in any given lawsuit. In
addition, in some class action and other lawsuits, companies have made material
settlement payments. We, like other financial services companies, in the
ordinary course of business, are involved in such litigation or, alternatively,
in arbitration. We cannot predict the outcome of any such litigation or
arbitration.
A decrease in sales or persistency could negatively affect our results. Our
ability to maintain low unit costs is dependent upon the level of sales and
persistency. A decrease in sales or persistency without a corresponding
reduction in expenses will result in higher unit costs.
Additionally, a decrease in persistency may result in higher amortization of
deferred policy acquisition costs and the present value of future profits.
Although many of our products contain surrender charges, the charges decrease
over time and may not be sufficient to cover the unamortized deferred policy
acquisition costs with respect to the insurance policy or annuity contract
being surrendered.
Our investments are subject to risks. Our invested assets are subject to
customary risks of credit defaults and changes in market values. The value of
our commercial mortgage loan portfolio depends in part on the financial
condition of the tenants occupying the properties that we have financed.
Factors that may affect the overall
68
default rate on, and market value of, our invested assets and mortgage loans
include interest rate levels, financial market performance, and general
economic conditions as well as particular circumstances affecting the
businesses of individual borrowers and tenants.
We are dependent on the performance of others. Our results may be affected by
the performance of others because we have entered into various arrangements
involving other parties. Examples include, but are not limited to, the
following: many of our products are sold through independent distribution
channels; and the variable annuity deposits are invested in funds managed by
third parties. We may also use third-party administrators to collect premiums,
pay claims, and/or perform customer service functions. Additionally, our
operations are dependent on various technologies, some of which are provided
and/or maintained by other parties.
As with all financial services companies, our ability to conduct business is
dependent upon consumer confidence in the industry and its products. Actions of
competitors, and financial difficulties of other companies in the industry,
could undermine consumer confidence and adversely affect us.
Our reinsurance program involves risks. We cede insurance to other insurance
companies through reinsurance. However, we remain liable with respect to ceded
insurance should any reinsurer fail to meet the obligations assumed by it.
The cost of reinsurance is, in some cases, reflected in the premium rates we
charge. Under certain reinsurance agreements, the reinsurer may increase the
rate it charges us for the reinsurance, though we do not anticipate increases
to occur. Therefore, if the cost of reinsurance were to increase or if
reinsurance were to become unavailable, we could be adversely affected.
Additionally, we may assume policies of other insurers. Any regulatory or other
adverse development affecting the ceding insurer could also have an adverse
effect on us.
69
Selected Financial Data
The following selected financial data should be read in conjunction with our
consolidated financial statements and the related notes to these financial
statements. Our consolidated financial statements include the historical
operations and accounts of our subsidiary, Assigned Settlements Inc. In
addition, the merger of Harvest into the Company was accounted for in a manner
similar to a pooling of interests. Accordingly, 1997 and 1998 financial
information has been restated to reflect this transaction.
Years Ended December 31,
-------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Total Investments $11,779.1 $10,655.4 $ 9,033.6 $ 8,163.3 $ 7,672.1
Separate Account Assets 8,994.3 10,393.2 9,245.8 5,528.7 4,066.4
Total Assets 22,456.6 22,612.5 19,957.3 14,760.9 12,727.1
Policyholder
Liabilities(/1/) 20,250.0 20,631.9 18,558.3 13,339.9 11,158.1
Shareholders' Interest 1,582.2 1,474.7 1,205.7 1,293.8 1,329.8
Total Revenues 1,134.4 1,153.4 1,017.9 939.0 974.4
Income Before Cumulative
Effect of Change in
Accounting Principle 129.6 163.1 107.9 105.8 107.4
Net Income(/2/) 123.9 163.1 112.9 105.8 107.4
- ---------------------------------------------------------------------------
(/1/)Policyholder liabilities consist of future annuity and contract benefits,
liability for policy and contract claims, other policyholder liabilities
and separate account liabilities.
(/2/)See Note 1(n) to the Consolidated Financial Statements.
70
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This prospectus and information incorporated by reference includes "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are based on management's current
expectations and are subject to uncertainty and changes in circumstances.
Actual results may differ materially from these expectations as a result of
changes in global economic, business, competitive market and regulatory
factors.
The following analysis of the consolidated financial condition and results of
our operations should be read in conjunction with our Consolidated Financial
Statements and the notes thereto included herein.
OPERATING RESULTS
Year Ended December 31, 2001 Compared to
Year Ended December 31, 2000
Net Investment Income. Net investment income decreased $10.0 million, or 1.4%,
to $698.9 million in 2001 from $708.9 million in 2000. The decrease was
primarily a result of a decrease in weighted average yield rates to 6.51% in
2001 from 7.47% in 2000. This decrease was partially offset by higher levels of
average invested assets ($11,031 million at year end 2001 as compared to $9,842
million at year end 2000).
Net Realized Investment Gains. Net realized investment gains were $29.1 million
in 2001 and $4.3 million in 2000. Net investment gains are comprised of gross
investment gains and gross investment (losses), respectively, of $100.5 million
and $(71.4) million in 2001 and $29.3 million and $(25.0) million in 2000.
These changes in gross realized investment gains and losses are related to our
ongoing review of our investment portfolio positions which vary with market and
economic conditions. We seek to offset investment losses realized from other
than temporary impairments and portfolio repositioning with investment gains.
Included in the 2001 gross realized investment gains is $17.0 million resulting
from the securitization of certain financial assets. Included in the gross
realized investment losses are other than temporary declines in value of $24.1
million and $12.6 million in 2001 and 2000, respectively (including $15.4
million related to Enron in 2001).
Premiums. Premiums, which include premium revenues from traditional life, life
contingent annuity contracts, and accident and health policies decreased $7.9
million or 6.8% to $108.4 million in 2001 from $116.3 million in 2000. This
decrease was primarily a result of lower levels of renewal premiums on term and
whole life policies.
Variable Product Fees. Variable product fees decreased $17.6 million to $131.1
million in 2001 from $148.7 million in 2000. The decrease in variable product
fees
71
primarily resulted from a decline in separate account values as a result of
unfavorable conditions in the equity markets in 2001.
Other Income. Other income, which includes surrender fee income, decreased $8.4
million, or 17.1%, to $40.8 million in 2001 from $49.2 million in 2000. This
decrease primarily relates to the recapture of certain credit accident and
health reinsurance policies upon termination of a reinsurance arrangement with
an affiliate, which resulted in a significant, non-recurring increase in other
income in the 2000 period.
Interest Credited. Interest credited increased $1.2 million, or 0.2%, to $533.8
million in 2001 from $532.6 in 2000. This increase was a result of additional
sales of GICs and funding agreements, life products and annuity products. The
growth in interest credited reflected the increase in policy reserves for these
products and higher average crediting rates.
Our weighted average crediting rates for annuities increased to 4.73% in 2001
from 4.69% in 2000. Our weighted average crediting rates for interest-sensitive
life products increased to 5.75% in 2001 from 5.68% in 2000. Changes in our
base crediting rates are implemented in response to changes in market
conditions, the prevailing interest rate environment, contractual provisions
and other factors. We monitor market conditions closely and reset interest
crediting rates as deemed appropriate in accordance with the terms of the
underlying contracts.
Benefits and Other Changes in Policy Reserves. Benefits and other changes in
policy reserves include both activity related to future policy benefits on
long-duration life products and health products as well as claim costs incurred
during the year under such contracts. In addition, the bonus feature of our
bonus variable annuity products is initially accounted for as a benefit.
Benefits and other changes in policy reserves decreased $41.3 million to $182.3
million in 2001 from $223.6 million in 2000. This decrease was a result of
lower sales of our bonus variable annuity products as well as a decline in
whole life and term life sales.
Commission Expenses. Commission expense decreased $66.6 million, or 29.0%, to
$162.7 million in 2001 from $229.3 million in 2000. This decrease was primarily
a result of a decline in variable annuity sales. This decline in sales was
attributable to unfavorable conditions in the equity markets which generally
lowered demand for variable products.
General Expenses. General expenses increased $4.2 million, or 3.4%, to $129.0
million in 2001 from $124.8 million in 2000. This increase was primarily a
result of increases in sales related expenses and certain training costs
associated with our productivity initiatives.
72
Amortization of Intangibles, Net. Our intangible assets consist primarily of
two components which result from our acquisition by GE Capital and the Harvest
merger --
(1) present value of future profits ("PVFP"), representing the estimated
future gross profits in acquired insurance and investment contracts, and
(2) goodwill, representing the excess of purchase price over the fair value
of identified net assets.
Amortization of intangibles increased $6.3 million, or 14.4%, to $50.0 million
in 2001 from $43.7 million in 2000. The increase primarily resulted from an
adjustment to the PVFP amortization in 2000 to reflect an anticipated change in
underlying gross profits of the variable annuity business. Adjustment to PVFP
amortization occurs in the ordinary course of business.
Change in Deferred Acquisition Costs, Net. Deferred acquisition costs include
costs and expenses that vary with and are primarily related to the acquisition
of insurance and investment contracts. These costs and expenses include
commissions, printing, underwriting, policy issuance costs and the bonus
feature of certain variable annuity products. Under GAAP, these costs are
deferred and recognized, over time, in relation to either the premiums or gross
profits from the underlying contracts. The change in net deferred acquisition
costs decreased $112.4 million, or 47.3%, to $125.3 million in 2001 from $237.7
million in 2000. This decrease is primarily a result of lower variable annuity
sales.
Interest Expense. Interest expense increased $1.1 million, to $2.2 million in
2001 from $1.1 million in 2000. This increase related primarily to obligations
to a third party reinsurer for payment of transferred assets. The effective
date of this reinsurance transaction was retroactive, which required us to pay
interest to the reinsurer on the value of assets transferred for the period
from July 1, 2000 to the date of the transfer.
Provision for Income Taxes. Our provision for income taxes decreased $2.8
million or 3.8% to $70.1 million from $72.9 million in 2000. Our effective tax
rate of 35.1% in 2001 was 4.2 percentage points higher than the effective tax
rate of 30.9% in 2000. The higher effective tax rate in 2001 was primarily the
result of an intercompany agreement with an affiliate which assumed, on a non-
recourse basis, the liability for certain tax exposure items in 2000.
Net Income. Net income before cumulative effect of change in accounting
principle was $129.6 million in 2001, a $33.5 million, or 20.5% decrease from
2000. The largest factor contributing to this decrease was the decline in fee
revenue from our variable annuity product line. We did not experience material
losses in connection with the events of September 11th.
73
Year Ended December 31, 2000 Compared to
Year Ended December 31, 1999
Net Investment Income. Net investment income increased $70.7 million, or 11.1%,
to $708.9 million in 2000 from $638.2 million in 1999. The increase was
primarily attributable to higher levels of average invested assets ($9,842
million at year end 2000 as compared to $8,690 million at year end 1999). This
increase was partially offset by a decrease in weighted average yields to 7.47%
in 2000 from 7.62% in 1999.
Net Realized Investment Gains. Net realized investment gains were $4.3 million
in 2000 and $12.0 million in 1999. Net investment gains are comprised of gross
investment gains and gross investment (losses), respectively, of $29.3 million
and $(25.0) million in 2000 and $28.6 million and $(16.6) million in 1999.
These changes in gross realized investment gains and losses are related to our
ongoing review of our investment portfolio positions which vary with market and
economic conditions. We seek to offset investment losses realized from other
than temporary impairments and portfolio repositioning with investment gains.
Included in the gross realized investment losses are other than temporary
declines in value of $12.6 million and $10.9 million in 2000 and 1999,
respectively. Also included in the 1999 gross realized investment losses is
$2.0 million resulting from the securitization of certain financial assets.
Premiums. Premiums, which include premium revenues from traditional life, life
contingent annuity contracts, and accident and health policies decreased $7.6
million, or 6.1%, to $116.3 million in 2000 from $123.9 million in 1999. This
decrease was primarily a result of a decline in whole life and group life sales
resulting from the termination of two large accounts.
Variable Product Fees. Variable product fees increased $58.5 million to $148.7
million in 2000 from $90.2 million in 1999. This increase was primarily a
result of growth in variable annuity fees attributable to the increase in
separate account assets under management.
Other Income. Other income, which includes surrender fee income, increased
$24.6 million, or 100.0%, to $49.2 million in 2000 from $24.6 million in 1999.
This increase primarily relates to the recapture in 2000 of certain credit
accident and health reinsurance upon termination of a reinsurance arrangement
with an affiliate, the renegotiation of fee share agreements with mutual fund
companies, and increased surrenders of our variable annuity products.
Interest Credited. Interest credited increased $91.8 million, or 20.8%, to
$532.6 million in 2000 from $440.8 million in 1999. This increase was a result
of additional sales of GICs and funding agreements, life products and annuity
products. The growth
74
in interest credited reflects the increase in policy reserves for these
products and higher average crediting rates.
Our weighted average crediting rates for annuities increased to 4.69% in 2000
from 4.61% in 1999. Our weighted average crediting rates for interest-sensitive
life products increased to 5.68% in 2000 from 5.61% in 1999. Changes in our
base crediting rates are implemented in response to changes in market
conditions, the prevailing interest rate environment, contractual provisions,
and other factors. We monitor market conditions closely and reset interest
crediting rates as deemed appropriate in accordance with the terms of the
underlying contracts.
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 products and health products as well as claim costs incurred
during the year under such contracts. In addition, the bonus feature of our
bonus variable annuity products is initially accounted for as a benefit.
Benefits and other changes in policy reserves. These amounts increased $8.9
million, or 4.1%, to $223.6 million in 2000 from $214.7 million in 1999,
primarily as a result of an increase in sales of our bonus variable annuity
products as well as a decline in whole life and term life sales.
Commission Expenses. Commission expense increased $37.2 million, or 19.4%, to
$229.3 million in 2000, from $192.1 million in 1999. This increase was
primarily a result of an increase in variable annuity sales attributable to the
favorable conditions in the equity markets during the first part of 2000.
Amortization of Intangibles, Net. Our intangible assets consist primarily of
two components which result from our acquisition by GE Capital and the
Harvestmerger --
(1) present value of future profits ("PVFP"), representing the estimated
future gross profits in acquired insurance and investment contracts, and
(2) goodwill, representing the excess of purchase price over the fair value
of identified net assets.
Amortization of intangibles decreased $14.6 million, or 25.0%, to $43.7 million
in 2000 from $58.3 million in 1999. The decrease primarily resulted from an
adjustment to the PVFP amortization to reflect an anticipated change in
underlying gross profits of the related business. Adjustment to PVFP
amortization occurs in the ordinary course of business.
Change in Deferred Acquisition Costs, Net. Deferred acquisition costs include
costs and expenses that vary with and are primarily related to the acquisition
of insurance and investment contracts. These costs and expenses include
commissions, printing,
75
underwriting, policy issuance costs and the bonus feature of certain variable
annuity products. The change in net deferred acquisition costs increased $58.6
million, or 32.7%, to $237.7 million in 2000 from $179.1 million in 1999. This
increase was primarily a result of an increase in product sales of variable
annuity products.
Interest Expense. Interest expense decreased $0.8 million, or 42.1%, to $1.1
million in 2000 from $1.9 million in 1999. This decrease related primarily to
lower outstanding balances under our credit line with GNA Corporation.
Provision for Income Taxes. Our provision for income taxes increased $16.3
million, or 28.8% to $72.9 million in 2000 from $56.6 million in 1999. Our
effective tax rate of 30.9% in 2000 was 3.5 percentage points lower than the
effective tax rate of 34.4% in 1999. The lower effective tax rate in 2000 was
primarily the result of an intercompany agreement with an affiliate which
assumed, on a non-recourse basis, the liability for certain tax exposure items.
Accordingly, the previously held reserves were no longer required.
Net Income. Net income before cumulative effect of change in accounting
principal was $163.1 million in 2000, a $55.2 million, or 51.2% increase from
1999. The largest factor contributing to the increase was the higher fees
earned in connection with our variable annuity products.
SEGMENT OPERATIONS
Wealth Accumulation and Transfer
The following table sets forth certain summarized financial data for our Wealth
Accumulation and Transfer segment for the years ended December 31, 2001, 2000
and 1999.
For the Years Ended
December 31,
------------------------
2001 2000 1999
-------- -------- ------
Revenues:
Net investment income $ 695.8 $ 703.5 $634.2
Net realized investment gains 29.1 4.3 12.0
Premiums 48.2 55.3 67.8
Other revenues 297.8 316.2 243.6
-------- -------- ------
Total revenues 1,070.9 1,079.3 957.6
-------- -------- ------
Benefits and expenses:
Interest Credited 533.8 532.6 440.8
Benefits and other changes in policy reserves 140.3 182.7 176.2
Other operating costs and expenses 195.4 134.6 180.8
-------- -------- ------
Total benefits and expenses 869.5 849.9 797.8
-------- -------- ------
Income before income taxes, and cumulative effect of
change in accounting principle (operating income) $ 201.4 $ 229.4 $159.8
======== ======== ======
- ------------------------------------------------------------------------------
76
Year Ended December 31, 2001 Compared to
Year Ended December 31, 2000
Total revenues in this segment decreased $8.4 million to $1,070.9 million for
2001 from $1,079.3 million in 2000. This decrease was primarily a result of
lower fee income from our variable products. Among our principal product lines
in this segment, sales of deferred variable annuities decreased 27.7% in 2001
to $2,279 million from $3,152 million in 2000. This decrease was primarily
attributable to the unfavorable equity market performance in 2001. Sales of
GICs and funding agreements decreased 18.8% to $1,547 million in 2001 from
$1,904 million in 2000. This decrease was primarily a result of our reaching
internal underwriting limits with some of our major customers. Sales of
deferred fixed annuities increased to $99.2 million in 2001 from $1.2 million
in 2000. The higher sales of deferred fixed annuities in 2001 were primarily
attributable to sales of products designed for two national stock brokerage
firms through which we had not previously sold fixed annuities.
Operating income from this segment represented 100.9% and 97.2% of our total
operating income for the years ended December 31, 2001 and 2000, respectively.
Our operating income from the Wealth Accumulation and Transfer segment
decreased 12.2% in 2001 to $201.4 million from $229.4 million in 2000. These
changes were attributable primarily to declining variable product fees earned
on separate account assets as a result of the unfavorable conditions in the
equity markets.
Year Ended December 31, 2000 Compared to
Year Ended December 31, 1999
Total revenues in the Wealth Accumulation and Transfer segment increased to
$1,079.3 million in 2000 from $957.6 million in 1999, an increase of $121.7
million, primarily as a result of increases in net investment income and
variable product fees. Among our principal product lines in this segment, sales
of deferred variable annuities increased 29.1% in 2000 to $3,152 million from
$2,442 million in 1999. This increase was primarily a result of the favorable
conditions in the equity markets in the first part 2000 and higher demand for
our bonus variable annuity product. Sales of GICs and funding agreements
decreased 7.4% in 2000 to $1,904 million from $2,057 million in 1999. This
decrease was a result of a general decline in demand for funding agreements.
Sales of deferred fixed annuities declined 78.2% to $1.2 million in 2000 from
$5.5 million in 1999. We did not actively market deferred fixed annuity
products during these periods.
Operating income from this segment represented 97.2% and 97.1% of our total
operating income for the years ended December 31, 2000 and 1999, respectively.
Our operating income from this segment increased 43.6% in 2000 to $229.4
million
77
from $159.8 million in 1999. The increase in 2000 was primarily attributable to
increased fee income from our variable annuity products.
Lifestyle Protection and Enhancement
The following table sets forth certain summarized financial data for our
Lifestyle Protection and Enhancement segment for the years ended December 31,
2001, 2000 and 1999.
For the Years Ended
December 31,
----------------------
2001 2000 1999
------- ------ ------
Revenues:
Net investment income $ 3.1 $ 5.4 $ 4.0
Premiums 60.2 61.0 56.1
Other revenues 0.2 7.7 0.2
------- ------ ------
Total revenues 63.5 74.1 60.3
------- ------ ------
Benefits and expenses:
Interest credited, benefits and other changes in policy
reserves 42.0 40.9 38.5
Other operating costs and expenses 23.2 26.6 17.1
------- ------ ------
Total benefits and expenses 65.2 67.5 55.6
------- ------ ------
Income (loss) before income taxes, and cumulative
effect of change in accounting principle (operating
income (loss)) $ (1.7) $ 6.6 $ 4.7
======= ====== ======
- --------------------------------------------------------------------------------
Year Ended December 31, 2001 Compared to
Year Ended December 31, 2000
Total revenues decreased in the Lifestyle Protection and Enhancement segment
decreased $10.6 million, or 14.3% in 2001 to $63.5 million from $74.1 million
in 2000. This decrease resulted from a decline in other revenues caused by the
recapture in 2000 of certain credit accident and health reinsurance previously
ceded to an affiliate which resulted in a significant, non-recurring increase
in other income in the 2000 period.
Operating (loss) income from this segment represented (0.9)% and 2.8% of our
total results for the years ended December 31, 2001 and 2000, respectively. Our
operating income (loss) from this segment decreased 125.8% in 2001 to $(1.7)
million from $6.6 in 2000. This decrease resulted from a decline in other
revenues caused by the recapture of credit accident and health reinsurance as
described above, which resulted in a significant, non-recurring increase in
other income in the 2000 period.
Year Ended December 31, 2000 Compared to
Year Ended December 31, 1999
Revenues increased for the Lifestyle Protection and Enhancement segment in 2000
to $74.1 million from $60.3 million in 1999, a 22.9% increase, primarily as a
result of an increase in accident and health sales and the recapture in 2000 of
certain
78
credit accident and health reinsurance previously ceded to an affiliate, which
resulted in a significant, non-recurring increase in other income in 2000.
Operating income from this segment represented 2.8% and 2.9% of our total
results for the years ended December 31, 2000 and 1999, respectively. Our
operating income from this segment increased 40.4% in 2000 to $6.6 million from
$4.7 million in 1999. The increase is primarily a result of the recapture of
certain credit accident and health reinsurance in 2000 described above, offset
by an increase in commissions paid associated with our Medicare supplement
product line.
79
Capital Resources and Liquidity
STATEMENT OF FINANCIAL POSITION
Total Investments. Total investments increased $1,123.7 million, or 10.5%, to
$11,779.1 million at December 31, 2001 from $10,655.4 million at December 31,
2000. The increase is primarily a result of growth in invested assets from
additional sales of GICs and funding agreements.
Separate Account Assets and Liabilities. Separate account assets and
liabilities represent funds held for the exclusive benefit of variable annuity
and variable life contractholders. As of December 31, 2001, we held $8,994.3
million of separate account assets. The decrease of $1,398.9 million, or 13.5%,
from $10,393.2 million at December 31, 2000 was related primarily to lower
sales and the overall decreased market value of the underlying investment
funds.
Future Annuity and Contract Benefits. Future annuity and contract benefits
increased $1,041.0 million, or 10.5%, to $10,975.3 million at December 31, 2001
from $9,934.3 million at December 31, 2000. The increase resulted primarily
from growth in reserves as a result of increased sales of GICs and funding
agreements.
INTEREST RATE MANAGEMENT
Interest rate changes may have temporary effects on the sale and profitability
of our annuity, universal life, and other investment products. For example, if
interest rates rise, competing investments (such as annuities or life insurance
offered by our competitors, certificates of deposit, mutual funds and similar
instruments) may become more attractive to potential purchasers of our
products. We may be forced to adjust certain crediting rates on our line of
products in order to meet competitive pressures. We constantly monitor interest
earnings on existing assets and yields available on new investments and sell
policies and annuities that permit flexible responses to interest rate changes
as part of our management of interest spreads.
Interest rate and currency risk management is important in our normal business
activities. We use derivative financial instruments 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, we do 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 and
11 to the Consolidated Financial Statements.
We manage our exposure to changes in interest rates, in part, by matching the
duration of our investment portfolio with our liabilities. Established
practices require that derivative financial instruments relate to specific
asset or liability transactions or to currency exposure, if any.
80
We are exposed to prepayment risk in certain of our business activities, such
as in our investment portfolio and annuities activities. We use interest rate
swaps, swaptions and option-based financial instruments to mitigate prepayment
risk. These instruments generally behave based on limits ("floors") on interest
rate environment. These swaps, swaptions and option-based instruments are
governed by the credit risk policies described below and are transacted in
either exchange-traded or over-the-counter markets.
Counterparty credit risk is managed at our parent company's level, 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.
Credit rating
Counterparty Credit Criteria Standard & Poor's
---------------------------- -----------------
Term of transaction
Between one and five years............ AA-
Greater than five years............... AAA
Credit exposure limits
Up to $50 million..................... AA-
Up to $75 million..................... 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
2000, there were no notional amounts of long-term derivatives for which the
counterparty credit criteria was rated below A3/AA-.
Following is an analysis of credit risk exposures as of December 31:
Percentage or Notional Derivative Exposure by Counterparty Credit Rating
Standard & Poor's 2001
----------------- ----
AAA................................................. 100%
AA.................................................. 0%
- --------------------------------------------------------------
The U.S. Securities and Exchange Commission requires that registrants provide
information about potential effects of changes in interest rates. Although the
rules
81
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 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 not
significantly impact 2002 earnings based on our current derivative positions.
STATEMENT OF CHANGES IN SHAREHOLDERS' INTEREST
Shareholders' interest increased $107.5 million to $1,582.2 million at December
31, 2001 from $1,474.7 million at December 31, 2000. This increase was largely
attributed to net income during the year of $123.9 million partially offset by
dividends declared and paid of $9.6 million.
Adoption of SFAS No. 133 reduced equity by $8.1 million for the year ended
December 31, 2001, including $7.8 million at the date of adoption. Further
information about this accounting change is provided in Notes 1 and 11 to the
Consolidated Financial Statements.
LIQUIDITY
The principal liquidity requirements for our insurance operations are our
contractual obligations to contractholders 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, we maintain cash and short-term investments. We
also maintain a credit line with an indirect parent, GNA Corporation, to
provide liquidity to meet normal variation in cash requirements.
For the years ended December 31, 2001, 2000 and 1999 cash flows provided by
operating and certain financing activities were $1,075.1 million, $1,414.1
million, and $1,325.7 million, respectively. These amounts include net cash
provided by financing activities relating to investment contract issuances
accounted for as deposit
82
liabilities under U.S. GAAP and redemptions of $554.9 million, $327.6 million
and $1,124.2 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
The nature and quality of the various types of investments purchased by a life
insurance company must comply with the statutes and regulations imposed by the
various jurisdictions in which those entities are incorporated. Following is a
breakdown of the credit quality of the our fixed maturity portfolio at December
31, 2001.
BBB/Baa or above 86.6%
BB/Ba and below 4.2%
Not rated 9.2%
-----
Total portfolio 100%
=====
- ----------------------------
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 our products contain provisions for penalty charges for surrender of
the policy. At December 31, 2001 and 2000, approximately 74% and 80%,
respectively, of our annuity contracts were subject to surrender penalties or
contained non-surrender provisions. Certain of our funding agreements have
termination provisions. We have established a line of credit with GNA
Corporation to provide liquidity in the event of an unusual level of early
terminations.
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 earned surplus are deemed extraordinary and require formal state insurance
department approval. We are able to pay $58.4 million in dividends in 2002
without obtaining regulatory approval. See "Insurance Regulation -- Regulation
at State Level."
Off-balance sheet arrangements are used to improve liquidity and optimize
allocation of the our investment portfolio. One of the most common forms of
off-balance sheet arrangements is asset securitization. We use 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. Our current securitization process uses entities that meet the
accounting criteria for Qualifying Special Purpose Entities ("qualifying
entities"). Among other
83
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. We sell 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 in which we own.
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 us, as well as financial assets originated by multiple
third parties.
In accordance with its contractual commitments to the qualifying entities, we
thoroughly underwrite and service the associated assets which we transfer.
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 we employ for our own assets.
The following table summarizes the current balance of assets which we have sold
to qualifying entities.
December 31
---------------
2001 2000
------- -------
(in millions)
Receivables-secured by:
Commercial Mortgage Loans $186.80 $ --
Other receivables 126.60 137.50
------- -------
Total receivables $313.40 $137.50
======= =======
- ------------------------------------------------
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
receivables -- 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, none of our employees or
an employee of any other GE company is permitted to invest in any GE Capital
sponsored or qualifying entity.
84
Support. Financial support for certain qualifying entities, including those
involving us, is provided under credit support agreements, in which our direct
parent, GE Financial Assurance, provides limited recourse for a maximum of
$42.0 million of credit losses in such qualifying entities. We do not provide
any such recourse. 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 our
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 $17
million in 2001. There were no net realized gains or losses in 2000. The sale
in 1999 resulted in a net realized loss of $2 million. The net realized gains
and losses are included in net realized gains within our Consolidated
Statements of Income.
Accounting outlook. U.S. GAAP specifies the conditions that we observe 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 our 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 our contractual commitments (in millions) related to leases follow.
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
$0.5 $0.4 $0.2 $0.1 $--
- ------------------------------------------------------------------------------------------------------------
85
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
judgement, 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 $10,577.4 million at year-
end 2001. Gross unrealized gains and losses included in that carrying amount
related to debt securities were $186.8 million and $228.0 million,
respectively. Gross unrealized gains and losses of equity securities were $4.8
million and $0.2 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 $64 million of
portfolio value is at risk of being charged to earnings in 2002. The Company
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 2 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 $1,206.7 million 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
86
channels of distribution. Further information on these assets is provided in
Notes 1, 3 and 4 to the Consolidated Financial Statements.
Measurement of long-duration insurance liabilities (such as accident and
health and whole life policies) is based on accepted actuarial techniques,
which include required assumptions about mortality, lapse rates and future
yield on related investments. The Company's insurance liabilities, reserves
and policyholder benefits totaled approximately $11,255.7 million 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 Note 6 to the Consolidated Financial Statements.
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
judgements 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.
87
New Accounting Standards
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, if
necessary, a transition adjustment will be recognized. Management does not
believe there will be any goodwill impairment under these new standards.
Amortization of goodwill will cease as of January 1, 2002, and thereafter, all
goodwill must be tested at least annually for impairment. The effect of the
non-amortization provision on 2002 operations will be affected by 2002
acquisitions, if any, 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 $7 million.
88
Quantitative and Qualitative Disclosures About Market Risk, Interest Rate and
Currency Risk Management
Information about potential effects of changes in interest rates on the Company
is discussed in the Interest Rate Management section.
89
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below are the names and addresses of the persons who beneficially own
more than 5% of the Company's common or preferred stock.
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
-------------- --------------------------- ------------------------------------ --------
Common Stock, General Electric Company/1/ 24,851 shares/2/ 96.9%
par value $1,000 owned beneficially through two
per share wholly-owned subsidiaries
- --------------------------------------------------------------------------------------------
Series A General Electric Company/1/ 120,000 shares/3/ 100%
Preferred Stock, owned beneficially through a wholly-
par value $1,000 owned subsidiary
per share
- --------------------------------------------------------------------------------------------
/1/ The address of GE is 3135 Easton Turnpike, Fairfield, CT 06431.
/2/ The shares of the Company's common stock listed above are owned directly
by two indirect wholly-owned subsidiaries of GE, GE Capital Assurance and
Federal. GE Capital Assurance owns approximately 85.2% of the outstanding
shares of the Company and Federal owns approximately 11.7% of the
outstanding shares of the Company. Together, GE Capital Assurance and
Federal have complete voting and investment power with respect to the
shares listed above.
/3/ All of the issued and outstanding shares of preferred stock are owned
directly by an indirect wholly-owned subsidiary of GE, GE Financial
Assurance Holdings, Inc., which has sole investment control over the
shares listed above. Shares of the Company's preferred stock have no
voting rights.
90
Employees
At December 31, 2001 we had approximately 845 employees. Most employees are
covered by contributory medical and long-term disability insurance plans.
Company paid dental and group life are also available. In addition,
substantially all of the employees are covered by a pension plan, as discussed
below, and a 401(k) Plan. We also match a portion of contributions to our
401(k) Plan.
EXECUTIVE OFFICERS AND DIRECTORS
We are managed by a board of directors. The following table sets forth the
name, age (as of January 4, 2002), and principal occupations during the past
five years of each of our executive officers and directors.
Frank T. Gencarelli 47 Executive Vice President, Retirement Services Group,
GE Life and Annuity Assurance Company since January
2002; President of Income Distribution Group 2000-
2001; BGA Channel Leader, IBG 1997-2000; Senior Vice
President, Sales and Marketing, First Colony Life
1992-1997; President AON Financial Institution
Services 1991-1992.
Kelly L. Groh 33 Senior Vice President and Chief Financial Officer of
GE Life and Annuity Assurance Company since January
2002; Business Planning and Analysis Manager, March
2001-December 2001; Vice President and Controller,
August 1998-March 2001; Senior Analyst, March 1996-
August 1998; Manager at PricewaterhouseCoopers, 1990-
1996.
Paul A. Haley 44 Senior Vice President and Chief Actuary since November
2001; Vice President Product Development, October
1999-November 2001; Vice President and Chief Actuary,
Colonial Life and Accident Insurance Company, August
1997-July 1999; Vice President and Assistant Actuary,
Prudential Insurance Company of America, October 1991-
July 1997; Actuarial Director, Prudential Insurance
Company of America, December 1988-September 1991.
Rose A. Hampton 53 Senior Vice President and Servicing Leader, GE Life
and Annuity Assurance Company since August 1999; Vice
President of GE Financial Assurance Quality, October
1997-August 1999; Quality Leader of GEC Auto Dealers
Services, January 1996-September 1997; Manager
Operations, Insurance Services Group, November 1992-
January 1996; Manager, Collateral Protection Programs,
GEC Insurance Services, September 1990-November 1992.
Donita M. King 47 Senior Vice President, General Counsel and Secretary,
GE Life and Annuity Assurance Company since March
1999; Associate General Counsel, Prudential Insurance
Company of America, March 1989-March 1999.
Susan M. Mann 45 Vice President and Controller, GE Life and Annuity
Assurance Company since April 2001; Vice President and
Controller, AMF Bowling, Inc. July 1998-December 2000;
Chief Financial Officer, World Access, Inc. (provider
of travel insurance, assistance and financial market
enhancement related products and services) April 1991-
July 1998.
Gary T. Prizzia(1) 39 Treasurer, GE Life and Annuity Assurance Company since
January 2000; Assistant Treasurer GE Financial
Assurance Holdings, Inc. (an affiliate) since January
2000; Treasurer/Risk Manager, Budapest Bank, October
1996-January 2000.
Elliot A. Rosenthal 50 Director, GE Life and Annuity Assurance Company since
June 2000; Senior Vice President of GE Life and
Annuity Assurance Company since 1996.
91
Leon E. Roday(2) 47 Director, GE Life and Annuity Assurance Company since
June 1999; Senior Vice President, GE Life and Annuity
Assurance Company since May 1998; Director, Senior
Vice President, General Counsel and Secretary, GE
Financial Assurance Holdings, Inc. (an affiliate)
since 1996.
Pamela S. Schutz 47 Director and President, GE Life and Annuity Life
Assurance Company since May 1998; Chief Executive
Officer, GE Life and Annuity Assurance Company since
June 2000; President, The Harvest Life Insurance
Company May 1997-November 1998; President, GE Capital
Commercial Real Estate (an affiliate) May 1994-
November 1998.
Geoffrey S. Stiff 49 Director, GE Life and Annuity Assurance Company since
May 1996; Senior Vice President, GE Life and Annuity
Assurance Company since March 1999; Vice President,
GE Life and Annuity Assurance Company May 1996-March
1999; Director and Chief Executive Officer of General
Electric Capital Assurance Company (an affiliate)
since 1996.
Thomas M. Stinson(3) 38 Director and Senior Vice President, GE Life and
Annuity Assurance Company since April 2000;
President, Personal Financial Services of GE Life and
Annuity Assurance Company since 1998 and Long Term
Care (2001) of GE Life and Annuity Assurance Company;
General Manager of Home Depot Credit Services
Account, GE Card Services (an affiliate) 1993-1998.
The principal business address of each person listed, unless otherwise
indicated, is GE Life and Annuity Assurance Company, 6610 W. Broad Street,
Richmond, Virginia 23230.
(1) The principal business address for Mr. Prizzia is GE Financial Assurance
Holdings, Inc., 6620 W. Broad Street, Richmond, Virginia 23230.
(2) The principal business address for Mr. Roday is GE Financial Assurance
Holdings, Inc., 6620 W. Broad Street, Richmond, Virginia 23230.
(3) The principal business address for Mr. Stinson is GE Financial Assurance,
1650 Los Gamos Drive, San Rafael, CA 94903.
Executive officers serve at the pleasure of the Board of Directors and
directors are elected annually by GE Life and Annuity Assurance Company's
shareholders.
92
MANAGEMENT OWNERSHIP OF GENERAL ELECTRIC COMPANY STOCK
None of our directors or Named Executives (as defined under "Executive
Compensation," below) owns any shares of common stock, preferred stock or other
equity securities issued by us or by any of our affiliates, other than GE. Set
forth below are the shares of GE common stock and restricted stock (including
stock, restricted stock and deferred stock "units") beneficially owned by the
directors and Named Executives of the Company, as defined below, and by all
directors and executive officers as a group, in each case as of January 4,
2002, along with a description of the nature of such beneficial ownership:
Security Ownership of
Directors and Executive Officers
Amount of
GE Common Stock and
Nature of Beneficial Percentage of Outstanding
Name Ownership/1/ GE Stock/6/
- ---------------------------------------------------------------------------
Frank T. Gencarelli 21,912 --
Kelly L. Groh 5,097 --
Paul A. Haley 4,120 --
Rose A. Hampton 16,220 --
Donita M. King 3,790 --
Gary T. Prizzia 9,450 --
Leon E. Roday 73,228/2/ --
Elliot A. Rosenthal 12,111/5/ --
Pamela S. Schutz 250,553/3/ --
Geoffrey S. Stiff 259,024/4/ --
Thomas M. Stinson 51,289 --
All Directors and Executive
Officers as a Group -- 12
total 706,866 --
- ---------------------------------------------------------------------------
/1/ As to shares beneficially owned, each person has sole voting and
investment power. This table includes the following shares which are
subject to acquisition within 60 days of January 4, 2002 by the exercise
of outstanding stock options: Ms. King, 600 shares; Mr. Roday, 6000
shares; Mr. Rosenthal, 1,875 shares; Ms. Schutz, 57,750 shares; Mr. Stiff,
211,500 shares and Mr. Stinson, 24,750 shares; Mr. Gencarelli, 3,000
shares; Mr. Haley, 600 shares; Ms. Hampton, 4,125 shares; Mr. Prizzia,
2,400 shares; and Ms. Groh, 450 shares.
Where applicable, "share" amounts include deferred stock units, stock
units, and restricted stock units (i.e., still subject to certain lapse-
of-time and continued service restrictions). Stock units, restricted stock
units and deferred stock units are non-transferable accounting-entry
"units," the value of which is the same as the value of the corresponding
number of shares of GE common stock.
/2/ Of the amounts shown for Mr. Roday, 15,000 are restricted stock. Mr. Roday
has no voting or investment power as to the restricted stock units listed
above.
/3/ Of the amounts shown for Ms. Schutz, 5,143 shares are deferred stock
units, 6,000 are vested stock units, and 55,000 are restricted stock. Ms.
Schutz has no voting or investment power as to the stock units, restricted
stock units and deferred stock units listed above.
/4/ Of the amounts shown for Mr. Stiff, 6,825 shares are deferred stock units.
Mr. Stiff has no voting or investment power as to the deferred stock units
listed above.
/5/ Of the amounts shown for Mr. Rosenthal, 1,403 shares are personal stock
units.
/6/ Each of these amounts represents less than 1% of the outstanding shares of
common stock of GE as of January 4, 2002.
93
Executive Compensation
Our executive officers also serve as executive officers and/or directors of one
or more affiliate companies of GE Financial Assurance. Compensation allocations
are made as to each individual's time devoted to duties as an executive officer
of our affiliates and us. All of our directors are also employees of one or
more affiliates of GE Financial Assurance and receive no compensation in
addition to their compensation as employees. We participate in GE's deferred
compensation plan whereby our directors and Named Executives, among others may
voluntarily elect to defer to a specified date receipt of a portion of their
earned income.
The following table sets forth certain information regarding the portion of
compensation paid to the Chief Executive Officer and our four most highly
compensated executive officers (collectively, the "Named Executives") for
services provided to the Company during or with respect to fiscal year 2001.
SUMMARY COMPENSATION TABLE/1/
Long-Term Compensation
-------------------------------
Annual Compensation Awards Payout
------------------------- --------------------- ---------
Other Securities All
Annual Restricted Underlying Other
Compen- Stock Options/ LTIP Compen-
Name and Salary Bonus sation Awards SARs Payout(s) sation
Principal Position Year ($) ($)/2/ ($)/3/ ($)/4/ (#)/5/ ($) ($)/6/
- ------------------------------------------------------------------------------------------------
Frank T. Gencarelli
Senior Vice President 2001 $103,740 $ 70,300 0 0 2,850 0 $ 3,093
Paul A. Haley
Senior Vice President 2001 $ 88,433 $ 42,000 0 0 700 0 $ 3,332
Rose A. Hampton
Senior Vice President 2001 $103,684 $ 50,400 0 0 2,520 0 $ 4,794
Pamela S. Schutz
Chairman, President and
Chief Executive Officer 2001 $217,600 $329,800 0 $668,950 28,560 0 $12,812
Geoffrey S. Stiff
Senior Vice President 2001 $104,276 $ 92,250 0 0 2,025 0 $12,232
- ------------------------------------------------------------------------------------------------
/1/ All amounts shown on this table have been prorated to account for the
amount of the relevant Named Executive's time that is allocable to
performing services for the Company.
/2/ Includes amounts deferred at the election of the relevant Named Executive
as follows: Ms. Schutz, $82,450 and Mr. Stiff, $46,125.
94
/3/ The perquisites or other benefits received by each of the Named Executives
did not exceed the lesser of $50,000 or 10% of his or her base salary and
annual bonus during the period reported and, therefore, are not required
to be reported in the table.
/4/ This column shows the market value of restricted stock unit (RSU) awards
on the date of grant. The Compensation Committee of GE periodically grants
restricted stock or RSUs to executives of the Company. The restrictions on
the RSUs awarded to Ms. Schutz lapse as follows: restrictions on 25% of
the RSUs awarded lapse after 3 years from the date of the award;
restrictions on an additional 25% of the RSUs awarded lapse after 7 years
from the date of the award; and the restrictions on the remaining 50% of
the RSUs awarded lapse upon age 65. Regular quarterly dividends or
dividend equivalents are paid on restricted stock and RSUs during the
period of restriction. As of December 31, 2002, Ms. Schutz owned 55,000
RSUs with a value of $2,204,400.
/5/ Options allow the holder to purchase shares of GE common stock at an
exercise price equal to the fair market value of GE common stock on the
date of grant. Options typically have a ten-year term and vest according
to the following schedule: 50% of the options vest after three years from
the date of grant; the remaining 50% of the options vest after five years
from the date of grant.
/6/ Includes amounts contributed to employee benefit plans by the registrant
on behalf of the Named Executive as follows: Ms. Schutz, $4,046; Mr.
Stiff, $2,677, Mr. Gencarelli, $2,261; Ms. Hampton, $3,332; and Mr. Haley
$3,332. Also includes above-market interest calculated with respect to
compensation deferred at the election of the Named Executives as follows:
Ms. Schutz, $6,069; and Mr. Stiff, $8,382. The remaining amounts represent
premiums paid by us under insurance policies covering the relevant Named
Executive as follows: Ms. Schutz, $2,696; Mr. Stiff, $1,172;
Mr. Gencarelli, $832; and Mr. Hampton $1,462.
95
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding the stock options granted
to Named Executives during 2001. We do not grant any stock appreciation rights.
Potential
Realizable Value at
Assumed Annual
Rates of Stock
Price Appreciation
for
Individual Grants Option Term
- -------------------------------------------------------------------- -------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees in or Base
Granted/1/ Fiscal Price Expiration
Name (#) Year/2/ ($/Shares) Date/3/ 5%($) 10%($)
- ----------------------------------------------------------------------------------------
Frank T. Gencarelli 1,900 0.0047% $43.75 7/26/11 $ 52,269 $ 132,487
950 $35.48 9/26/11 $ 21,195 $ 53,723
Paul A. Haley 840 0.0021% $43.75 7/26/11 $ 23,108 $ 58,573
420 $35.48 9/26/11 $ 9,370 $ 23,751
Rose A. Hampton 1,680 0.0042% $43.75 7/26/11 $ 46,217 $ 117,146
840 $35.48 9/26/11 $ 18,740 $ 47,502
19,040
Pamela S. Schutz 0.0470% $43.75 7/26/11 $523,790 $1,327,659
9,520 $35.48 9/26/11 $212,391 $ 538,356
Geoffrey S. Stiff 1,350 0.0033% $43.75 7/26/11 $ 37,139 $ 94,136
670 $35.48 9/26/11 $ 15,059 $ 38,171
- ----------------------------------------------------------------------------------------
/1/ The options listed above have been pro-rated according to the amount of
the Named Executive's time allocable to performing services for the
Company.
/2/ GE granted options and SARs representing 60,776,827 shares to employees in
fiscal year 2001.
/3/ Options typically have a ten-year term and vest according to the following
schedule: 50% of the options vest after three years from the date of
grant; the remaining 50% of the options vest after five years from the
date of grant.
96
AGGREGATED OPTION/SAR EXERCISES IN 2001 AND YEAR-END OPTION/SAR VALUES
As noted above, none of the Named Executives own any stock appreciation rights.
The following table sets forth the value of the stock options held by the Named
Executives based upon the value of GE's common stock as of December 31, 2001.
Value of
Number of Unexercised
Unexercised In-the-Money
Options Held at Options Held at
December 31, December 31,
2001 2001/1/
---------------- -------------------
Shares
Acquired Value Exercis- Unexer- Exercis- Unexer-
Name on Exercise Realized ($) able cisable able cisable
- ----------------------------------------------------------------------------------
Frank T. Gencarelli -- -- 3,000 18,500 $ 30,427 $ 41,927
Paul A. Haley -- -- 600 3,150 $ 0 $ 3,450
Rose A. Hampton -- -- 4,125 10,125 $ 68,720 $ 35,719
Pamela S. Schutz 21,000 $716,570 57,750 93,750 $1,620,434 $211,986
Geoffrey S. Stiff -- -- 211,500 30,000 $6,306,869 $228,066
- ----------------------------------------------------------------------------------
/1/ Based on the closing price on the New York Stock Exchange Composite
Transactions ("NYSE") of GE's Common Stock. On December 31, 2001 the
closing price was $40.08. The options and potential realizable value of
those options have not been adjusted to account for the percentage of the
relevant Named Executive's time allocable to performing services for the
Company.
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
None of the Named Executives received any payment during 2001 under any long-
term incentive plan maintained by us or our affiliates with respect to a
performance period longer than one year.
OTHER PLANS AND ARRANGEMENTS
Retirement Benefits. The table below illustrates the annual pension benefits
payable to executive officers under the GE Pension Plan. The table also
reflects the Excess Benefit Plan that we have established to provide retirement
benefits over the Code limitations and the GE Supplementary Pension Plan that
provides supplementary benefits to longer-service, higher level employees.
Benefits in the table are not reduced by social security or other offset
amounts. Since the benefits shown in the table reflect a straight life form of
annuity benefit, if the payment is made in the form of a joint and survivor
annuity, the annual amounts of benefit could be substantially below those
illustrated.
97
Employees are generally eligible to retire with unreduced benefits under
Company retirement plans at age 60 or later, and with social security benefits
at age 62 or later. The approximate annual retirement benefits provided under
Company retirement plans for GE employees retiring directly from the Company at
age 60 or later are shown in the table below.
PENSION PLAN TABLE
Estimated Annual Retirement Benefit for Credited
Years of Service/1/
------------------------------------------------------------
Final Average Salary 20 Years 25 Years 30 Years 35 Years 40 Years
- ------------------------------------------------------------------------------------
$ 100,000 30,000 38,750 47,500 56,250 65,000
$ 200,000 65,000 82,500 100,000 117,500 135,000
$ 300,000 100,000 126,250 152,500 178,750 205,000
$ 400,000 135,000 170,000 205,000 240,000 275,000
$ 500,000 170,000 213,750 257,500 301,250 345,000
$ 600,000 205,000 257,500 310,000 362,500 415,000
$ 700,000 240,000 301,250 362,500 423,750 485,000
$ 800,000 275,000 345,000 415,000 485,000 555,000
$ 900,000 310,000 388,750 467,500 546,250 625,000
$1,000,000 345,000 432,500 520,000 607,500 695,000
- ------------------------------------------------------------------------------------
/1/ Retirement benefits under the GE Pension Plan are determined based on the
greater of a formula recognizing career earnings or a formula recognizing
length of service and final average earnings. GE Supplementary Pension
Plan benefits are calculated as the excess of the amount determined under
a formula recognizing length of service and final average earnings over
the GE Pension Plan benefit.
Compensation covered by the GE Pension Plan (for purposes of pension benefits)
excludes commissions and performance share awards and generally corresponds to
that shown in the "Salary" and Bonus" columns in the Summary Compensation
Table. Compensation is calculated based on the average of the highest level of
compensation paid during a period of 36 consecutive whole months. Only three
Annual Incentive Plan bonuses (whether paid or deferred) may be included in
obtaining the average compensation.
The Named Executives and their credited years of service as of January 4, 2002
are provided in the following table.
Named Executive Years of Credited Service
-----------------------------------------------
Frank T. Gencarelli 12 years
Paul A. Haley 2 years
Rose A. Hampton 33 years
Pamela S. Schutz 23 years
Geoffrey S. Stiff 21 years
-----------------------------------------------
98
Legal Matters
We, like other insurance companies, are involved in lawsuits, including class
action lawsuits. In some class action and other lawsuits involving insurance
companies, substantial damages have been sought and/or material settlement
payments have been made. Except for the McBride case described below, which is
still in its preliminary stages, and its ultimate outcome, and any effect on
the Company, cannot be determined at this time, we believe that at the present
time there are no pending or threatened lawsuits that are reasonably likely to
have a material adverse impact on our Consolidated Financial Statements.
On November 1, 2000, we were named as a defendant in a lawsuit filed in Georgia
state court related to the sale of universal life insurance policies (McBride
v. Life Insurance Co. of Virginia dba GE Life and Annuity Assurance Co.). On
December 1, 2000, we successfully removed the case to the United States
District Court for the Middle District of Georgia. The complaint is brought as
a class action on behalf of all persons who purchased certain universal life
insurance policies from us and alleges improper sales practices in connection
with the sale of universal life policies. No class has been certified. On
February 27, 2002, the Court denied our motion for summary judgment. The
McBride litigation is still in its preliminary stages, and its ultimate
outcome, and any effect on the Company, cannot be determined at this time. We
intend to defend this lawsuit, including plaintiff's efforts to certify a
nationwide class action, vigorously.
99
GE LIFE AND ANNUITY ASSURANCE COMPANY
Financial Statements
Year ended December 31, 2001
(With Independent Auditors' Report Thereon)
GE LIFE AND ANNUITY ASSURANCE COMPANY
Table of Contents
December 31, 2001
Page
----
Financial Statements:
Consolidated Balance Sheets.............................................. F-2
Consolidated Statements of Income........................................ F-3
Consolidated Statements of Shareholders' Interest........................ F-4
Consolidated Statements of Cash Flows.................................... F-6
Notes to the Consolidated Financial Statements........................... F-7
Independent Auditors' Report
The Board of Directors
GE Life and Annuity Assurance Company:
We have audited the accompanying consolidated balance sheets of GE Life
and Annuity Assurance Company and subsidiary as of December 31, 2001 and 2000,
and the related consolidated statements of income, shareholders' 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 Life
and Annuity Assurance Company and subsidiary 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 11 to the consolidated financial statements,
the Company changed its method of accounting for derivatives in 2001.
As discussed in notes 1 and 9 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
F-1
GE LIFE AND ANNUITY ASSURANCE COMPANY
AND SUBSIDIARY
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..... $10,539.6 $ 9,260.5
Equity securities available-for-sale, at fair value:
Common stocks........................................ 20.6 15.3
Preferred stocks, non-redeemable..................... 17.2 20.8
Investment in affiliate................................ 2.6 2.6
Mortgage loans, net of valuation allowance of $18.2 and
$14.3 at December 31, 2001 and 2000, respectively..... 938.8 1,130.0
Policy loans........................................... 109.4 89.0
Real estate owned...................................... 3.5 2.5
Other invested assets.................................. 147.4 134.7
--------- ---------
Total investments.................................... 11,779.1 10,655.4
--------- ---------
Cash and cash equivalents.............................. -- 71.4
Accrued investment income.............................. 208.4 215.9
Deferred acquisition costs............................. 853.8 715.7
Intangible assets...................................... 352.9 400.4
Reinsurance recoverable................................ 151.1 90.6
Other assets........................................... 117.0 69.9
Separate account assets................................ 8,994.3 10,393.2
--------- ---------
Total assets......................................... $22,456.6 $22,612.5
========= =========
Liabilities and Shareholders' Interest
Liabilities:
Future annuity and contract benefits................... $10,975.3 $ 9,934.3
Liability for policy and contract claims............... 189.0 140.4
Other policyholder liabilities......................... 91.4 164.0
Accounts payable and accrued expenses.................. 548.9 473.9
Deferred income tax liability.......................... 75.5 32.0
Separate account liabilities........................... 8,994.3 10,393.2
--------- ---------
Total liabilities.................................... 20,874.4 21,137.8
--------- ---------
Shareholders' interest:
Net unrealized investment losses....................... (17.4) (18.7)
Derivatives qualifying as hedges....................... (8.1) --
--------- ---------
Accumulated non-owner changes in equity................ (25.5) (18.7)
Preferred stock, Series A ($1,000 par value, $1,000
redemption and liquidation value, 200,000 shares
authorized, 120,000 shares issued and outstanding).... 120.0 120.0
Common stock ($1,000 par value, 50,000 authorized,
25,651 shares issued and outstanding)................. 25.6 25.6
Additional paid-in capital............................. 1,050.7 1,050.7
Retained earnings...................................... 411.4 297.1
--------- ---------
Total shareholders' interest......................... 1,582.2 1,474.7
--------- ---------
Total liabilities and shareholders' interest......... $22,456.6 $22,612.5
========= =========
See accompanying Notes to Consolidated Financial Statements.
F-2
GE LIFE AND ANNUITY ASSURANCE COMPANY
AND SUBSIDIARY
Consolidated Statements of Income
(Dollar amounts in millions)
Years Ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
Revenues:
Net investment income.......................... $ 698.9 $ 708.9 $ 638.2
Net realized investment gains.................. 29.1 4.3 12.0
Premiums....................................... 108.4 116.3 123.9
Cost of insurance.............................. 126.1 126.0 129.0
Variable product fees.......................... 131.1 148.7 90.2
Other income................................... 40.8 49.2 24.6
-------- -------- --------
Total revenues............................... 1,134.4 1,153.4 1,017.9
-------- -------- --------
Benefits and expenses:
Interest credited.............................. 533.8 532.6 440.8
Benefits and other changes in policy reserves.. 182.3 223.6 214.7
Commissions.................................... 162.7 229.3 192.1
General expenses............................... 129.0 124.8 124.7
Amortization of intangibles, net............... 50.0 43.7 58.3
Change in deferred acquisition costs, net...... (125.3) (237.7) (179.1)
Interest expense............................... 2.2 1.1 1.9
-------- -------- --------
Total benefits and expenses.................. 934.7 917.4 853.4
-------- -------- --------
Income before income taxes and cumulative
effect of change in accounting principle.... 199.7 236.0 164.5
Provision for income taxes....................... 70.1 72.9 56.6
-------- -------- --------
Income before cumulative effect of change in
accounting principle.......................... 129.6 163.1 107.9
-------- -------- --------
Cumulative effect of change in accounting
principle, net of tax........................... (5.7) -- 5.0
-------- -------- --------
Net income..................................... $ 123.9 $ 163.1 $ 112.9
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
F-3
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Consolidated Statements of Shareholders' Interest
(Dollar amounts in millions)
Common Stock
Preferred Declared
Stock Common Stock but not Issued
-------------- ------------- ---------------
Shares Amount Shares Amount Shares Amount
------- ------ ------ ------ ------- ------
Balances at December 31, 1998.... 120,000 $120.0 7,010 $ 7.0 18,641 $ 18.6
Changes other than transactions
with shareholders:
Net income...................... -- -- -- -- -- --
Net unrealized losses on
investment securities (a)...... -- -- -- -- -- --
Total changes other than
transactions with
shareholders...................
Cash dividend declared and paid.. -- -- -- -- -- --
Common stock issued.............. -- -- 18,641 18.6 (18,641) (18.6)
Adjustment to reflect purchase
method.......................... -- -- -- -- -- --
------- ------ ------ ----- ------- ------
Balances at December 31, 1999.... 120,000 120.0 25,651 25.6 -- --
Changes other than transactions
with shareholders:
Net income...................... -- -- -- -- -- --
Net unrealized gains on
investment securities (a)...... -- -- -- -- -- --
Total changes other than
transactions with
shareholders...................
Cash dividend declared and paid.. -- -- -- -- -- --
------- ------ ------ ----- ------- ------
Balances at December 31, 2000.... 120,000 120.0 25,651 25.6 -- --
Changes other than transactions
with shareholders:
Net income...................... -- -- -- -- -- --
Net unrealized gains on
investment securities (a)...... -- -- -- -- -- --
Cumulative effect on
shareholders' interest of
adopting SFAS 133 (b).......... -- -- -- -- -- --
Derivatives qualifying as
hedges......................... -- -- -- -- -- --
Total changes other than
transactions with
shareholders...................
Cash dividend declared and paid.. -- -- -- -- -- --
------- ------ ------ ----- ------- ------
Balances at December 31, 2001.... 120,000 $120.0 25,651 $25.6 -- $ --
======= ====== ====== ===== ======= ======
(a) Presented net of deferred taxes of $0, $(61.8) and $103.6 in 2001, 2000 and
1999, respectively.
(b) Presented net of deferred taxes of $4.4.
See accompanying Notes to Consolidated Financial Statements.
F-4
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Consolidated Statements of Shareholders' Interest
(Dollar amounts in millions)
Accumulated
Additional Non-owner Total
Paid-In Changes in Retained Shareholders'
Capital Equity Earnings Interest
---------- ----------- -------- -------------
Balances at December 31, 1998.... $1,050.1 $ 57.8 $ 40.3 $1,293.8
Changes other than transactions
with shareholders:
Net income...................... -- -- 112.9 112.9
Net unrealized losses on
investment securities (a)...... -- (192.0) -- (192.0)
--------
Total changes other than
transactions with
shareholders................... (79.1)
Cash dividend declared and paid.. -- -- (9.6) (9.6)
Common stock issued.............. -- -- -- -
Adjustment to reflect purchase
method.......................... 0.6 -- -- 0.6
-------- ------- ------ --------
Balances at December 31, 1999.... 1,050.7 (134.2) 143.6 1,205.7
Changes other than transactions
with shareholders:
Net income...................... -- -- 163.1 163.1
Net unrealized gains on
investment securities (a)...... -- 115.5 -- 115.5
--------
Total changes other than
transactions with
shareholders................... 278.6
Cash dividend declared and paid.. -- -- (9.6) (9.6)
-------- ------- ------ --------
Balances at December 31, 2000.... 1,050.7 (18.7) 297.1 1,474.7
Changes other than transactions
with shareholders:
Net income...................... -- -- 123.9 123.9
Net unrealized gains on
investment securities (a)...... -- 1.3 -- 1.3
Cumulative effect on
shareholders' interest of
adopting SFAS 133 (b).......... -- (7.8) -- (7.8)
Derivatives qualifying as
hedges......................... -- (0.3) -- (0.3)
--------
Total changes other than
transactions with
shareholders................... 117.1
Cash dividend declared and paid.. -- -- (9.6) (9.6)
-------- ------- ------ --------
Balances at December 31, 2001.... $1,050.7 $ (25.5) $411.4 $1,582.2
======== ======= ====== ========
(a) Presented net of deferred taxes of $0, $(61.8) and $103.6 in 2001, 2000 and
1999, respectively.
(b) Presented net of deferred taxes of $4.4.
See accompanying Notes to Consolidated Financial Statements.
F-5
GE LIFE AND ANNUITY ASSURANCE COMPANY
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In millions)
Years Ended December 31,
-------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income.................................... $ 123.9 $ 163.1 $ 112.9
--------- --------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in accounting
principle, net of tax...................... 5.7 -- (5.0)
Cost of insurance and surrender fees........ (155.9) (149.3) (169.5)
Decrease in future policy benefits.......... 589.9 688.9 565.5
Net realized investment gains............... (29.1) (4.3) (12.0)
Amortization of investment premiums and
discounts.................................. 6.8 (3.4) (1.3)
Amortization of intangibles................. 50.0 43.7 58.3
Deferred income tax expense................. 51.1 94.5 25.0
Change in certain assets and liabilities:
Decrease (increase) in:
Accrued investment income................. 7.5 (25.7) (48.6)
Deferred acquisition costs................ (125.3) (237.7) (179.1)
Other assets, net......................... (45.0) 188.2 (195.1)
Increase (decrease) in:
Policy and contract claims................ 39.7 25.5 (43.4)
Other policyholder liabilities............ (71.5) 26.8 20.0
Accounts payable and accrued expenses..... 72.4 276.2 73.8
--------- --------- ---------
Total adjustments....................... 396.3 923.4 88.6
--------- --------- ---------
Net cash provided by operating
activities............................. 520.2 1,086.5 201.5
--------- --------- ---------
Cash flows from investing activities:
Short-term investment activity, net......... (22.9) (17.6) --
Proceeds from sales and maturities of
investment securities and other invested
assets..................................... 3,904.1 1,997.0 1,702.2
Principal collected on mortgage and policy
loans...................................... 332.6 102.1 103.3
Proceeds collected from policy loan
securitization............................. -- -- 145.1
Purchases of investment securities and other
invested assets............................ (5,182.8) (3,047.2) (3,037.4)
Mortgage loan originations and increase in
policy loans............................... (167.9) (437.4) (170.4)
--------- --------- ---------
Net cash used in investing activities... (1,136.9) (1,403.1) (1,257.2)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issue of investment
contracts.................................. 4,120.9 5,274.4 4,717.6
Redemption and benefit payments on
investment contracts....................... (3,566.0) (4,946.8) (3,593.4)
Cash dividends to shareholders.............. (9.6) (9.6) (9.6)
--------- --------- ---------
Net cash provided by financing
activities............................. 545.3 318.0 1,114.6
--------- --------- ---------
Net increase (decrease) in cash and
equivalents............................ (71.4) 1.4 58.9
Cash and cash equivalents at beginning of
year......................................... 71.4 70.0 11.1
--------- --------- ---------
Cash and cash equivalents at end of year...... $ -- $ 71.4 $ 70.0
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
F-6
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 Life and Annuity Assurance Company and its
subsidiary, Assigned Settlements Inc. (collectively the "Company" or
"GELAAC"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
The majority of GELAAC's outstanding common stock is owned by General
Electric Capital Assurance Company ("GECA"). GECA is an indirect wholly-owned
subsidiary of GE Financial Assurance Holdings, Inc. ("GEFAHI"), which is an
indirect wholly-owned subsidiary of General Electric Capital Corporation
("GECC"). GECC is a wholly-owned subsidiary of General Electric Capital
Services, Inc. ("GE Capital Services"), which in turn is wholly-owned,
directly or indirectly, by General Electric Company.
(b) Basis of Presentation
These consolidated financial statements have been prepared on the basis of
accounting principles generally accepted in the United States of America
("U.S. GAAP"). The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the
reported amounts and related disclosures. Actual results could differ from
those estimates. Certain prior year amounts have been reclassified to conform
to the current year presentation.
(c) Products
The Company's product offerings are divided along two major segments of
consumer needs: (i) Wealth Accumulation and Transfer and (ii) Lifestyle
Protection and Enhancement.
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 annuities (deferred and
immediate; either fixed or variable), life insurance (universal, variable,
ordinary and group) and guaranteed investment contracts ("GICs") including
funding agreements.
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 line under the Lifestyle Protection and
Enhancement segment is accident and health insurance.
The Company distributes its products through two primary channels:
intermediaries (such as brokerage general agents, banks, securities brokerage
firms, financial planning firms, accountants, affluent market producers and
specialized brokers) and career or dedicated sales forces, who distribute
certain of the Company's products on an exclusive basis, some of whom are not
employees of the Company. Approximately 30%, 25% and 28% of the Company's
sales of variable products in 2001, 2000 and 1999, respectively, have been
through two specific national stockbrokerage firms. Loss of all or a
substantial portion of the business provided by these stockbrokerage firms
could have a material adverse effect on the business and operations of the
Company. The Company does not believe, however, that the loss of such business
would have a long-term adverse effect because of the Company's competitive
position in the marketplace, the availability of business from other
distributors, and the Company's mix of other products.
F-7
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
The Company offers insurance products throughout the United States of
America (except New York). Approximately 17%, 18% and 17% of premium and
annuity consideration collected, in 2001, 2000 and 1999, respectively, came
from customers residing in the South Atlantic region of the United States,
approximately 23%, 24% and 17% of premium and annuity consideration collected,
in 2001, 2000 and 1999, respectively, came from customers residing in the Mid-
Atlantic region of the United States and approximately 13%, 9% and 11% of
premium and annuity consideration collected, in 2001, 2000 and 1999,
respectively, came from customers residing in California.
(d) Revenues
Investment income is recorded when earned. Realized investment gains and
losses are calculated on the basis of specific identification. 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. Cost of insurance
is charged to universal life policyholders based upon at risk amounts, and 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
policyholders' account values, and are recognized as revenue when charged.
Other income consists primarily of surrender charges on certain policies.
Surrender charges are recognized as income when the policy is surrendered.
(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 other invested assets.
(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.
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 shareholders' interest and, accordingly, have no
effect on net income. Investment securities are regularly reviewed 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
F-8
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
using the retrospective method, whereby the amortized cost of the securities
is adjusted to the amount that would have existed had the revised assumptions
been in place at the date of purchase. The adjustments to amortized cost are
recorded as a charge or credit to investment income.
Mortgage and policy loans are stated at their unpaid principal balance, net
of allowances for estimated uncollectible 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 credits, if any.
Write-downs and the change in reserves are included in net realized investment
gains and losses in the Consolidated Statements of Income.
Short-term investments, if any, are stated at amortized cost which
approximates fair value. Equity securities (including seed money for new
mutual fund portfolios) are stated at fair value. Investments in limited
partnerships are generally accounted for under the equity method of
accounting. Real estate is stated, generally, at cost less accumulated
depreciation. Other long-term investments are stated generally at amortized
cost.
(g) Deferred Acquisition Costs
Acquisition costs include costs and expenses which vary with and are
primarily related to the acquisition of insurance and investment contracts.
Acquisition costs include first-year commissions in excess of recurring
renewal commissions, and certain support costs such as underwriting and policy
issue costs. 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.
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.
(h) Intangible Assets
Present Value of Future Profits -- In conjunction with the acquisition of
the Company, a portion of the purchase price was assigned to the right to
receive future gross profits arising from existing insurance and investment
contracts. This intangible asset, called 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 a comparison indicates
that the expected gross profits will not be sufficient to recover PVFP, the
difference is charged to expense.
PVFP is further adjusted to reflect the impact of unrealized gains or
losses on fixed maturities classified as available for sale in the investment
portfolios. Such adjustments are not recorded in the Company's net income but
rather as a credit or charge to shareholders' interest, net of applicable
income tax.
F-9
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
Goodwill - Goodwill is amortized over a period of 20 years on the straight-
line method. 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 files a consolidated life insurance federal income tax return
with its parent, GECA and its life insurance affiliates. The method of income
tax allocation is subject to written agreement authorized by the Board of
Directors. Allocation is based on the separate return liabilities with offsets
for losses and credits utilized to reduce current consolidated tax liability.
Intercompany tax balances are settled quarterly, with a final settlement after
filing of the federal income tax return.
Deferred income taxes have been provided for the effects of temporary
differences between financial reporting and tax bases of assets and
liabilities and have been measured using the enacted marginal tax rates and
laws that are currently in effect.
(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, and (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.
(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.
The Company has periodically transferred capital to the separate accounts
to provide for the initial purchase of investments in new mutual fund
portfolios. As of December 31, 2001, approximately $55.9 of the Company's
other invested assets related to its capital investments is in the separate
accounts.
F-10
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
(n) 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 11.
At January 1, 2001, the Company's consolidated financial statements were
adjusted to record a cumulative effect of adopting this accounting change, as
follows:
Shareholders'
Earnings Interest
-------- -------------
Adjustment to fair value of derivatives (a)........... $(8.7) $(12.2)
Income tax effects.................................... 3.0 4.4
----- ------
Totals................................................ $(5.7) $ (7.8)
===== ======
- --------
(a) For earnings effect, amount shown is net of hedged items.
The cumulative effect on shareholders' interest was primarily attributable
to marking to market swap contracts used to hedge variable-rate investments.
Decreases in the fair values of these instruments were attributable to changes
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 9 for Change in Accounting for Insurance-Related Assessments in
1999.
(o) Accounting Pronouncement 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, if
necessary, a transition adjustment will be recognized. Management does not
believe there will be any goodwill impairment under these new standards.
Amortization of goodwill will cease as of January 1, 2002, and thereafter, all
goodwill and any
F-11
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
indefinite-lived intangible assets must be tested at least annually for
impairment. The effect of the non-amortization provision on 2002 operations
will be affected by 2002 acquisitions, if any, 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 $7.
(2) 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..................................... $615.2 $623.1 $557.9
Equity securities.................................... 1.7 1.8 2.2
Mortgage loans....................................... 80.9 80.0 66.9
Policy loans......................................... 7.1 4.6 14.0
Other investments.................................... 1.8 6.7 2.5
------ ------ ------
Gross investment income.............................. 706.7 716.2 643.5
Investment expenses.................................. (7.8) (7.3) (5.3)
------ ------ ------
Net investment income................................ $698.9 $708.9 $638.2
====== ====== ======
For the years ended December 31, sales proceeds and gross realized
investment gains and losses from the sales of investment securities available-
for-sale were as follows:
2001 2000 1999
-------- ------ ------
Sales proceeds..................................... $2,663.3 $874.2 $590.3
======== ====== ======
Gross realized investment:
Gains............................................ 100.5 29.3 28.6
Losses........................................... (71.4) (25.0) (16.6)
-------- ------ ------
Net realized investment gains...................... $ 29.1 $ 4.3 $ 12.0
======== ====== ======
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 and other invested
assets 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 and other invested assets
reflected as a separate component of shareholders' interest as of December 31
are summarized as follows:
F-12
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
2001 2000 1999
------ ------ -------
Net unrealized gains (losses) on available-for-
sale investment securities and other invested
assets before adjustments:
Fixed maturities............................... $(41.2) $(34.4) $(245.0)
Equity securities.............................. 4.6 (1.6) (0.4)
Other invested assets.......................... (16.4) (3.2) (4.1)
------ ------ -------
Subtotal..................................... (53.0) (39.2) (249.5)
====== ====== =======
Adjustments to the present value of future
profits and deferred acquisition costs.......... 25.2 10.1 43.1
Deferred income taxes............................ 10.4 10.4 72.2
------ ------ -------
Net unrealized losses on available-for-sale
investment securities....................... $(17.4) $(18.7) $(134.2)
====== ====== =======
The change in the net unrealized gains (losses) on investment securities
reported in accumulated non-owner changes in equity is as follows:
2001 2000 1999
------ ------- -------
Net unrealized gains (losses) on investment
securities --beginning of year................... $(18.7) $(134.2) $ 57.8
Unrealized gains (losses) on investment
securities -- net of deferred taxes of ($5.1),
($63.3) and $99.1................................ 10.8 118.3 (184.2)
Reclassification adjustments -- net of deferred
taxes of $5.1, $1.5 and $4.5..................... (9.5) (2.8) (7.8)
------ ------- -------
Net unrealized losses on investment securities --
end of year..................................... $(17.4) $ (18.7) $(134.2)
====== ======= =======
At December 31, the amortized cost, gross unrealized gains and losses, and
fair values of the Company's fixed maturities and equity securities available-
for-sale were as follows:
Gross Gross
Amortized unrealized unrealized Fair
2001 cost gains losses value
---- --------- ---------- ---------- ---------
Fixed maturities:
U.S. government and agency....... $ 5.1 $ 0.1 $ -- $ 5.2
State and municipal.............. 1.2 -- -- 1.2
Non-U.S. government ............. 37.0 0.2 (0.5) 36.7
U.S. corporate................... 5,976.7 93.6 (199.4) 5,870.9
Non-U.S. corporate............... 819.5 10.5 (18.0) 812.0
Mortgage-backed.................. 2,217.3 50.9 (7.3) 2,260.9
Asset-backed..................... 1,524.0 31.5 (2.8) 1,552.7
--------- ------ ------- ---------
Total fixed maturities......... 10,580.8 186.8 (228.0) 10,539.6
Common stocks and non-redeemable
preferred stocks................ 33.2 4.8 (0.2) 37.8
--------- ------ ------- ---------
Total available-for-sale
securities...................... $10,614.0 $191.6 $(228.2) $10,577.4
========= ====== ======= =========
F-13
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
Gross Gross
Amortized unrealized unrealized Fair
2000 cost gains losses value
- ---- --------- ---------- ---------- --------
Fixed maturities:
U.S. government and agency........... $ 10.3 $ 0.3 $ -- $ 10.6
State and municipal.................. 1.3 -- -- 1.3
Non-U.S. government.................. 3.0 -- -- 3.0
U.S. corporate....................... 5,705.5 24.2 (148.8) 5,580.9
Non-U.S. corporate................... 851.2 35.3 (2.2) 884.3
Mortgage-backed...................... 1,762.2 44.0 -- 1,806.2
Asset-backed......................... 961.4 12.8 -- 974.2
-------- ------ ------- --------
Total fixed maturities............. 9,294.9 116.6 (151.0) 9,260.5
Common stocks and non-redeemable
preferred stocks.................... 37.7 0.9 (2.5) 36.1
-------- ------ ------- --------
Total available-for-sale securities.. $9,332.6 $117.5 $(153.5) $9,296.6
======== ====== ======= ========
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
--------- ---------
Due in one year or less.................................... $ 131.3 $ 131.3
Due one year through five years............................ 2,518.4 2,524.6
Due five years through ten years........................... 2,570.8 2,524.9
Due after ten years........................................ 1,619.0 1,545.2
--------- ---------
Subtotals................................................ 6,839.5 6,726.0
Mortgage-backed securities................................. 2,217.3 2,260.9
Asset-backed securities.................................... 1,524.0 1,552.7
--------- ---------
Totals................................................... $10,580.8 $10,539.6
========= =========
As of December 31, 2001, $1,175.0 of the Company's investments (excluding
mortgage and asset-backed securities) were subject to certain call provisions.
As required by law, the Company has investments on deposit with
governmental authorities and banks for the protection of policyholders of $5.5
and $5.6 as of December 31, 2001 and 2000, respectively.
As of December 31, 2001, approximately 20.7%, 17.2% and 14.3% of the
Company's investment portfolio is comprised of securities issued by the
manufacturing, financial and utilities industries, respectively, the vast
majority of which are rated investment grade, and which are senior secured
bonds. No other industry group comprises more than 10% of the Company's
investment portfolio. This portfolio is widely diversified among various
geographic regions in the United States, and is not dependent on the economic
stability of one particular region.
As of December 31, 2001 the Company did not hold any fixed maturity
securities which exceeded 10% of shareholders' interest.
F-14
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
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 &
Poors or Moody's.
2001 2000
----------------- ------------------
Fair
value Percent Fair value Percent
--------- ------- ---------- -------
Agencies and treasuries................. $ 250.5 2.4% $ 226.8 2.5%
AAA/Aaa................................. 3,232.4 30.7 2,406.5 26.0
AA/Aa................................... 841.9 8.0 645.7 7.0
A/A..................................... 2,432.5 23.1 2,161.3 23.3
BBB/Baa................................. 2,366.6 22.4 2,259.4 24.4
BB/Ba................................... 346.2 3.3 365.9 4.0
B/B..................................... 95.6 0.9 168.0 1.8
CCC/Ca.................................. 10.0 0.1 10.1 0.1
Not rated............................... 963.9 9.1 1,016.8 11.0
--------- ----- -------- -----
Totals.................................. $10,539.6 100.0% $9,260.5 100.1%
========= ===== ======== =====
Bonds with ratings ranging from AAA/Aaa to BBB-/Baa3 are generally regarded
as investment grade securities. Some agencies and treasuries (that is, those
securities issued by the United States government or an agency thereof) are
not rated, but all are considered to be investment grade securities. Finally,
some securities, such as private placements, have not been assigned a rating
by any rating service and are therefore categorized as "not rated." This has
neither positive nor negative implications regarding the value of the
security.
At December 31, 2001 and 2000, there were fixed maturities in default
(issuer has missed a coupon payment or entered bankruptcy) with a fair value
of $11.7 and $6.4, respectively.
The Company has limited partnership commitments outstanding of $16.0 and
$51.5 at December 31, 2001 and 2000, respectively.
(b) Mortgage and Real Estate Portfolio
The Company's mortgage and real estate portfolio is distributed by
geographic location and type. However, the Company has concentration exposures
in certain regions and in certain types as shown in the following two tables.
Geographic distribution as of December 31, 2001:
Mortgage Real Estate
-------- -----------
South Atlantic.......................................... 26.8% 100.0%
Mid Atlantic............................................ 10.3 --
Pacific................................................. 30.7 --
East North Central...................................... 10.0 --
West South Central...................................... 4.6 --
Mountain................................................ 9.8 --
Other................................................... 7.8 --
----- -----
Totals.................................................. 100.0% 100.0%
===== =====
F-15
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
Type distribution as of December 31, 2001:
Mortgage Real Estate
-------- -----------
Office Building......................................... 27.6% -- %
Retail.................................................. 26.1 100.0
Industrial.............................................. 28.0 --
Apartments.............................................. 12.9 --
Other................................................... 5.4 --
----- -----
Totals.................................................. 100.0% 100.0%
===== =====
For the years ended December 31, 2001 and 2000, respectively, the Company
originated $36.0 and $96.6 of mortgages secured by real estate in California,
which represents 25% and 22% of the Company's total U.S. originations for
those years.
GELAAC has certain investment commitments to provide fixed-rate loans. The
investment commitments, which would be collateralized by related properties of
the underlying investments, involve varying elements of credit and market
risk. Investment commitments outstanding as of December 31, 2001 and 2000,
totaled $6.7 and $3.6 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 homogenous
loans, and therefore applies principally to the Company's commercial loans.
Under these principles, the Company has two types of "impaired" loans:
loans requiring allowances for losses (none as of December 31, 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
($7.6 and $6.3, as of December 31, 2001 and 2000, respectively). Average
investment in impaired loans during 2001, 2000 and 1999 was $6.8, $11.5 and
$15.0 and interest income earned on these loans while they were considered
impaired was $0.9, $0.8 and $2.6 for the years ended 2001, 2000 and 1999,
respectively.
The following table presents the activity in the allowance for losses
during the years ended December 31:
2001 2000 1999
----- ----- -----
Balance at January 1..................................... $14.3 $23.3 $20.9
Provision (benefit) charged (credited) to operations..... 2.3 (11.1) 1.6
Amounts written off, net of recoveries................... 1.6 2.1 0.8
----- ----- -----
Balance at December 31................................... $18.2 $14.3 $23.3
===== ===== =====
During 2000, as part of its on-going analysis of exposure to losses arising
from mortgage loans, the Company recognized a $12.7 reduction in its allowance
for losses.
The allowance for losses on mortgage loans at December 31, 2001, 2000 and
1999 represented 1.9%, 1.3% and 2.8% of gross mortgage loans, respectively.
The Company had $5.0 and $4.5 of non-income producing mortgage loans as of
December 31, 2000 and 1999, respectively. There were no non-income producing
mortgage loans as of December 31, 2001.
F-16
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
(3) Deferred Acquisition Costs
Activity impacting deferred policy acquisition costs for the years ended
December 31, was as follows:
2001 2000 1999
------ ------ ------
Unamortized balance at January 1................... $712.9 $475.2 $296.1
Costs deferred..................................... 204.1 304.4 218.9
Amortization, net.................................. (78.8) (66.7) (39.8)
------ ------ ------
Unamortized balance at December 31................. 838.2 712.9 475.2
Cumulative effect of net unrealized investment
losses............................................ 15.6 2.8 7.3
------ ------ ------
Financial statement balance at December 31......... $853.8 $715.7 $482.5
====== ====== ======
(4) Intangible Assets
(a) 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.
The following table presents the activity in PVFP for the years ended
December 31:
2001 2000 1999
------ ------ ------
Unamortized balance at January 1................... $278.1 $314.8 $367.0
Interest accreted at 6.57%, 5.94% and 6.64% for
2001, 2000 and 1999, respectively................. 16.3 17.1 21.9
Amortization....................................... (59.3) (53.8) (74.1)
------ ------ ------
Unamortized balance at December 31................. 235.1 278.1 314.8
Cumulative effect of net unrealized investment
losses............................................ 9.6 7.3 35.8
------ ------ ------
Financial statement balance at December 31......... $244.7 $285.4 $350.6
====== ====== ======
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................................... 11.8%
2003................................... 9.7
2004................................... 8.4
2005................................... 7.3
2006................................... 6.5
(b) Goodwill
At December 31, 2001 and 2000, total unamortized goodwill was $107.4 and
$114.4, respectively, which is shown net of accumulated amortization and
adjustments of $43.3 and $36.3 for the years ended December 31,
F-17
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
2001 and 2000, respectively. Goodwill amortization was $7.0, $7.0 and $6.0 for
the years ending December 31, 2001, 2000 and 1999, respectively.
(5) Reinsurance
GELAAC is involved in both the cession and assumption of reinsurance with
other companies. GELAAC's reinsurance consists primarily of long-duration
contracts that are entered into with financial institutions and related party
reinsurance companies. Although these reinsurance agreements contractually
obligate the reinsurers to reimburse the Company, they do not discharge the
Company from its primary liabilities and the Company remains liable to the
extent that the reinsuring companies are unable to meet their obligations.
In order to limit the amount of loss retention, certain policy risks are
reinsured with other insurance companies. The maximum of individual ordinary
life insurance normally retained by the Company on any one life policy is $1.
The Company does not have significant reinsurance contracts with any one
reinsurer that could have a material impact on its results of operations.
The effects of reinsurance on premiums earned for the years ended December
31 were as follows:
2001 2000 1999
------ ------ ------
Direct............................................... $128.8 $145.6 $166.6
Assumed.............................................. 3.3 3.3 3.0
Ceded................................................ (23.7) (32.5) (45.7)
------ ------ ------
Net premiums earned.................................. $108.4 $116.4 $123.9
------ ------ ------
Percentage of amount assumed to net.................. 3% 3% 2%
====== ====== ======
Due to the nature of the Company's insurance contracts, premiums earned
approximate premiums written.
Reinsurance recoveries recognized as a reduction of benefits amounted to
$58.0, $54.3 and $68.2 for the years ended December 31, 2001, 2000 and 1999,
respectively.
(6) Future Annuity and Contract Benefits
(a) 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.
(b) 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.
F-18
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
The following chart summarizes the major assumptions underlying the
Company's recorded liabilities for future annuity and contract benefits:
Mortality/ Interest December 31,
Withdrawal Morbidity Rate ------------------
Assumption Assumption Assumption 2001 2000
---------- ---------- ------------ --------- --------
Investment contracts.... N/A N/A N/A $ 8,788.6 $7,759.7
Limited-payment
contracts.............. None (a) 3.5-10.0% 17.9 17.4
Traditional life
insurance contracts.... Company (b) 7.0% grading 344.2 362.3
Experience to 6.5%
Universal life-type
contracts.............. N/A N/A N/A 1,774.9 1,747.5
Accident and health..... Company (c) 7.5% grading 49.7 47.4
Experience to 4.75%
--------- --------
Total future annuity and
contract benefits...... $10,975.3 $9,934.3
========= ========
- --------
(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.
(c) The 1958 Commissioner's Standard Ordinary Table, 1964 modified and 1987
Commissioner's Disability Tables, and Company experience.
(7) 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 (benefit).......... $18.2 $(20.8) $29.3
Deferred federal income tax provision................... 49.1 90.5 24.9
----- ------ -----
Subtotal-federal provision............................ 67.3 69.7 54.2
----- ------ -----
Current state income tax provision (benefit)............ 0.8 (0.8) 2.3
Deferred state income tax provision..................... 2.0 4.0 0.1
----- ------ -----
Subtotal-state provision.............................. 2.8 3.2 2.4
----- ------ -----
Total income tax provision............................ $70.1 $ 72.9 $56.6
===== ====== =====
The reconciliation of the federal statutory rate to the effective income
tax rate at December 31 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 benefit........ 0.5 0.5 0.5
Non-deductible goodwill amortization....................... 1.2 1.0 1.2
Dividends-received deduction............................... (2.9) (1.7) (1.6)
Other, net................................................. 1.3 (3.9) (0.7)
---- ---- ----
Effective rate........................................... 35.1% 30.9% 34.4%
==== ==== ====
F-19
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
The components of the net deferred tax liability at December 31 are as
follows:
2001 2000
------ ------
Assets:
Insurance reserve amounts................................... $161.8 $165.6
Net unrealized losses on investment securities.............. 10.4 10.4
Net unrealized loss on derivatives.......................... 5.0 --
------ ------
Total deferred income tax assets.......................... 177.2 176.0
------ ------
Liabilities:
Investments................................................. 1.6 5.3
Present value of future profits............................. 47.3 50.3
Deferred acquisition costs.................................. 194.6 149.6
Other....................................................... 9.2 2.8
------ ------
Total deferred income tax liabilities..................... 252.7 208.0
------ ------
Net deferred income tax liability......................... $ 75.5 $ 32.0
====== ======
Based on an analysis of the Company's tax position, management believes it
is more likely than not that the results of future operations and
implementation of tax planning strategies will generate sufficient taxable
income enabling the Company to realize remaining deferred tax assets.
Accordingly, no valuation allowance for deferred tax assets is deemed
necessary.
The Company received a refund of federal and state taxes for the year ended
December 31, 2001 of $23.9, and paid $41.1 and $41.8, for federal and state
income taxes for the years ended December 31, 2000 and 1999, respectively.
(8) Related Party Transactions
GELAAC pays investment advisory fees and other fees to affiliates. Amounts
incurred for these items aggregated $18.3, $11.1 and $14.8 for the years ended
December 31, 2001, 2000 and 1999, respectively. GELAAC charges affiliates for
certain services and for the use of facilities and equipment which aggregated
$68.1, $55.2 and $45.1, for the years ended December 31, 2001, 2000 and 1999,
respectively.
GELAAC pays interest on outstanding amounts under a credit funding
agreement with GNA Corporation, the parent company of GECA. Interest expense
under this agreement was $0.6, $1.1 and $1.9 for the years ended December 31,
2001, 2000 and 1999, respectively. The Company pays interest at the cost of
funds of GNA Corporation, which was 2.8%, 6.9% and 5.9% as of December 31,
2001, 2000 and 1999, respectively. The amounts outstanding as of December 31,
2001 and 2000 were $50.5 and $85.7, respectively, and are included with
accounts payable and accrued expenses in the Consolidated Balance Sheets.
(9) Guaranty Association Assessments
The Company is required by state 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.
F-20
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
There are currently several unrelated insurance companies which had
substantial amounts of annuity business in the process of liquidation or
rehabilitation. The Company paid assessments of $0.1, $0.5, and $0.1 to
various state guaranty associations during 2001, 2000 and 1999, respectively.
At December 31, 2001 and 2000, accounts payable and accrued expenses include
$4.7 and $4.6, respectively, related to estimated future payments.
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 $5.0 (net of
income taxes of $2.8).
(10) Litigation
The Company, like other insurance companies, is involved in lawsuits,
including class action lawsuits. In some class action and other lawsuits
involving insurance companies, substantial damages have been sought and/or
material settlement payments have been made. Except for the McBride case
described below, which is still in its preliminary stages, and its ultimate
outcome, and any effect on the Company, cannot be determined at this time,
management believes that at the present time there are no pending or
threatened lawsuits that are reasonably likely to have a material adverse
impact on the Company's Consolidated Financial Statements.
On November 1, 2000, the Company was named as a defendant in a lawsuit
filed in Georgia state court related to the sale of universal life insurance
policies (McBride v. Life Insurance Co. of Virginia dba GE Life and Annuity
Assurance Co.). On December 1, 2000, the Company successfully removed the case
to the United States District Court for the Middle District of Georgia. The
complaint is brought as a class action on behalf of all persons who purchased
certain universal life insurance policies from the Company and alleges
improper sales practices in connection with the sale of universal life
insurance policies. No class has been certified. On February 27, 2002, the
Court denied the Company's motion for summary judgment. The McBride litigation
is still in its preliminary stages, and its ultimate outcome, and any effect
on the Company, cannot be determined at this time. The Company intends to
defend this lawsuit, including plaintiff's efforts to certify a nationwide
class action, vigorously.
(11) 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 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.
Investment contract benefits. Based on expected 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.
F-21
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
Information about certain financial instruments that were not carried at
fair value at December 31, 2001 and 2000, is summarized as follows:
2001 2000
----------------------------- -----------------------------
Assets (Liabilities) Assets (Liabilities)
----------------------------- -----------------------------
Notional Carrying Fair Notional Carrying Fair
Amount amount value Amount amount value
-------- --------- --------- -------- --------- ---------
Assets:
Mortgage loans......... (a) $ 938.8 $ 978.4 (a) $ 1,130.0 $ 1,174.0
Other financial
instruments........... (a) 17.8 17.8 (a) 9.3 9.3
Liabilities:
Borrowings and related
instruments:
Borrowings............. (a) (50.5) (50.5) (a) (85.7) (85.7)
Investment contract
benefits.............. -- (8,788.6) (8,812.3) -- (7,759.7) (7,339.5)
Other firm commitments:
Ordinary course of
business lending
commitments........... 6.7 -- -- 3.6 -- --
- --------
(a) These financial instruments do not have notional amounts.
On January 1, 2001 GELAAC 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.
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 a hedge is reported in earnings as it occurs.
The nature of the Company's business activities necessarily involves the
management of various financial and market risks, including those related to
changes in interest rates. As discussed more fully in Note 1 of the 2001
audited financial statements, the Company uses derivative financial
instruments to mitigate or eliminate certain of those risks. The January 1,
2001, accounting change previously described affected only the pattern and
timing of non-cash accounting recognition.
At January 1, 2001, the Company's financial statements were adjusted to
record a cumulative effect of adopting this accounting change, as follows:
Shareholders'
Earnings Interest
-------- -------------
Adjustment to fair value of derivatives (a)........... $(8.7) $(12.2)
Income tax effects.................................... 3.0 4.4
----- ------
Totals................................................ $(5.7) $ (7.8)
===== ======
--------
(a) For earnings effect, amount shown is net of hedged items.
F-22
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
A reconciliation of current period changes for the twelve months ended
December 31, 2001, net of applicable income taxes in the separate component of
shareholders' interest labeled "derivatives qualifying as hedges", follows:
Transition adjustment as of January 1, 2001.......................... $(7.8)
Current period decreases in fair value -- net........................ (0.1)
Reclassification to earnings, net.................................... (0.2)
-----
Balance at December 31, 2001......................................... $(8.1)
=====
The cumulative effect on shareholders' interest was primarily attributable
to marking to market swap contracts used to hedge interest rate risk on
variable-rate investments. Decreases in the fair value of these instruments
are attributable to changes in interest rates. Additional disclosures required
by SFAS No. 133, as amended, are provided in the following paragraphs.
Hedges of Future Cash Flows
There was less than $0.1 of ineffectiveness reported in the twelve months
ended December 31, 2001 in fair values of hedge positions. There were no
amounts excluded from the measure of effectiveness in the twelve months ended
December 31, 2001 related to the hedge of future cash flows.
Of the $(7.8) transition adjustment recorded in shareholders' interest at
January 1, 2001, $(0.2), net of income taxes, was reclassified to income
during the twelve month period ended December 31, 2001. The $(8.1), net of
taxes, recorded in shareholders' interest at December 31, 2001 is expected to
be reclassified to future income, contemporaneously with and primarily
offsetting changes in interest income on floating-rate instruments. Of this
amount $(0.2), net of income taxes, are expected to be reclassified to
earnings over the twelve-month period ended December 31, 2002. The actual
amounts that will be reclassified to income over the next twelve months will
vary from this amount as a result of market conditions. No amounts were
reclassified to income during the twelve months ended December 31, 2001 in
connection with forecasted transactions that were no longer considered
probable of occurring.
At December 31, 2001, there were derivative instruments hedging the
reinvestment risk of forecasted purchases of bonds that would occur within one
month of year end.
Hedges of Recognized Assets, Liabilities and Firm Commitments
The ineffective portion of changes in fair values of hedge positions,
reported in the twelve month period ended December 31, 2001 operations,
amounted to $0.1 million, before income taxes. These amounts were included in
net realized investment gains. There were no amounts excluded from the measure
of effectiveness.
Derivatives Not Designated as Hedges
At December 31, 2001, there were no derivatives that do not qualify for
hedge accounting under SFAS 133, as amended.
(12) 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, based on the
lesser of 10% of the
F-23
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
prior year statutory surplus and 100% of prior year statutory net gain from
operations. 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 distribute
$58.4 in dividends in 2002 without obtaining regulatory approval.
The Company declared and paid dividends of $9.6 for the years ended
December 31, 2001, 2000 and 1999.
(13) Supplementary Financial Data
The Company files financial statements with state insurance regulatory
authorities and the National Association of Insurance Commissioners ("NAIC")
that are prepared on an accounting basis prescribed by such authorities
(statutory basis). Statutory accounting practices differ from GAAP in several
respects, causing differences in reported net income and shareholders'
interest. Permitted statutory accounting practices encompass all accounting
practices not so prescribed but that have been specifically allowed by state
insurance authorities. The Company has no significant permitted accounting
practices. The impact of adoption of codification increased statutory capital
and surplus by $16.6, primarily related to the recognition of certain deferred
tax assets.
For the years ended December 31, statutory net income (loss) and statutory
capital and surplus is summarized below (unaudited):
2001 2000 1999
------ ------ ------
Statutory net income (loss)........................... $(20.5) $ 68.0 $ 70.8
Statutory capital and surplus......................... $584.4 $593.5 $542.5
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 risks. 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 its RBC level. At December 31, 2001 and 2000, the
Company exceeded the minimum required RBC levels.
(14) Operating Segment Information
The Company conducts its operations through two business segments: (1)
Wealth Accumulation and Transfer, comprised of products intended to increase
the policyholder's wealth, transfer wealth to beneficiaries or provide a means
for replacing the income of the insured in the event of premature death, and
(2) Lifestyle Protection and Enhancement, comprised of products intended to
protect accumulated wealth and income from the financial drain of unforeseen
events. See Note (1)(c) for further discussion of the Company's principal
product lines within these two segments.
F-24
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
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
Lifestyle
Wealth Protection
Accumulation &
& Transfer Enhancement Consolidated
------------ ----------- ------------
Net investment income................. $ 695.8 $ 3.1 $ 698.9
Net realized investment gains......... 29.1 -- 29.1
Premiums.............................. 48.2 60.2 108.4
Other revenues........................ 297.8 0.2 298.0
--------- ------ ---------
Total revenues...................... 1,070.9 63.5 1,134.4
--------- ------ ---------
Interest credited, benefits, and other
changes in policy reserves........... 674.1 42.0 716.1
Commissions........................... 146.8 15.9 162.7
Amortization of intangibles........... 47.9 2.1 50.0
Other operating costs and expenses.... 0.7 5.2 5.9
--------- ------ ---------
Total benefits and expenses......... 869.5 65.2 934.7
--------- ------ ---------
Income (loss) before income taxes
and cumulative effect of change in
accounting principle............... $ 201.4 $ (1.7) $ 199.7
========= ====== =========
Total Assets.......................... $22,288.6 $168.0 $22,456.6
========= ====== =========
2000 -- Segment Data
Lifestyle
Wealth Protection
Accumulation &
& Transfer Enhancement Consolidated
------------ ----------- ------------
Net investment income................ $ 703.5 $ 5.4 $ 708.9
Net realized investment gains........ 4.3 -- 4.3
Premiums............................. 55.3 61.0 116.3
Other revenues....................... 316.2 7.7 323.9
--------- ------ ---------
Total revenues..................... 1,079.3 74.1 1,153.4
--------- ------ ---------
Interest credited, benefits, and
other changes in policy reserves ... 715.3 40.9 756.2
Commissions.......................... 212.8 16.5 229.3
Amortization of intangibles.......... 41.5 2.2 43.7
Other operating costs and expenses... (119.7) 7.9 (111.8)
--------- ------ ---------
Total benefits and expenses........ 849.9 67.5 917.4
--------- ------ ---------
Income before income taxes......... $ 229.4 $ 6.6 $ 236.0
========= ====== =========
Total Assets......................... $22,440.7 $171.8 $22,612.5
========= ====== =========
F-25
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2001, 2000 and 1999
(Dollar amounts in millions)
1999 -- Segment Data
Lifestyle
Wealth Protection
Accumulation &
& Transfer Enhancement Consolidated
------------ ----------- ------------
Net investment income................. $ 634.2 $ 4.0 $ 638.2
Net realized investment gains......... 12.0 -- 12.0
Premiums.............................. 67.8 56.1 123.9
Other revenues........................ 243.6 0.2 243.8
--------- ------ ---------
Total revenues...................... 957.6 60.3 1,017.9
--------- ------ ---------
Interest credited, benefits, and other
changes in policy reserves........... 617.0 38.5 655.5
Commissions........................... 179.7 12.4 192.1
Amortization of intangibles........... 56.2 2.1 58.3
Other operating costs and expenses.... (55.1) 2.6 (52.5)
--------- ------ ---------
Total benefits and expenses......... 797.8 55.6 853.4
--------- ------ ---------
Income before income taxes and
cumulative effect of change in
accounting principle............... $ 159.8 $ 4.7 $ 164.5
========= ====== =========
Total Assets.......................... $19,774.2 $183.1 $19,957.3
========= ====== =========
F-26
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The expenses in connection with the issuance and distribution of the
Contract, other than any underwriting discounts and commissions, are as
follows:
Securities and Exchange Commission
Registration Fees (approximate amount we
will wire).............................. $ 11,711.00 (based on a total of 50,000,000
Proposed Maximum Aggregate Offering)
Printing and engraving................... 12,500.00
Accounting fees and expenses............. 3,500.00
Legal fees and expenses.................. 35,500.00
Miscellaneous............................ 2,500.00
----------
Total expenses (approximate).......... $54,011.00
==========
Item 14. Indemnification of Directors and Officers.
Sections 13.1-697, 13.1-698 and 13.1-702 of the Code of Virginia, in brief,
allow a corporation to indemnify any person made party to a proceeding because
such person is or was a director, officer, employee, or agent of the
corporation, against liability incurred in the proceeding if: (1) he conducted
himself in good faith; and (2) he believed that (a) in the case of conduct in
his official capacity with the corporation, his conduct was in its best
interests; and (b) in all other cases, his conduct was at least not opposed to
the corporation's best interests and (3) in the case of any criminal
proceeding, he had no reasonable cause to believe his conduct was unlawful.
The termination of a proceeding by judgment, order, settlement or conviction
is not, of itself, determinative that the director, officer, employee, or
agent of the corporation did not meet the standard of conduct described. A
corporation may not indemnify a director, officer, employee, or agent of the
corporation in connection with a proceeding by or in the right of the
corporation, in which such person was adjudged liable to the corporation, or
in connection with any other proceeding charging improper personal benefit to
such person, whether or not involving action in his official capacity, in
which such person was adjudged liable on the basis that personal benefit was
improperly received by him. Indemnification permitted under these sections of
the Code of Virginia in connection with a proceeding by or in the right of the
corporation is limited to reasonable expenses incurred in connection with the
proceeding.
General Electric Company's insurance program extends directors' and
officers' liability insurance coverage to the directors and officers of its
subsidiary companies, including GE Life and Annuity Assurance Company. In
addition, Section V of the Amended and Restated Articles of Incorporation of
GE Life and Annuity Assurance Company further provide that:
A. In this Article:
"applicant" means the person seeking indemnification pursuant to this
Article;
"expenses" includes counsel fees;
"liability" means the obligation to pay a judgment, settlement, penalty,
fine, including any excise tax assessed with respect to an employee benefit
plan, or reasonable expenses incurred with respect to a proceeding;
"party" includes an individual who was, is, or is threatened to be made a
named defendant or respondent in a proceeding; and
"proceeding" means any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative or investigative and
whether formal or informal.
B. In any proceeding brought by or in the right of the Corporation or
brought by or on behalf of shareholders of the Corporation, no director or
officer of the Corporation shall be liable to the Corporation or
1
its shareholders for monetary damages with respect to any transaction,
occurrence or course of conduct, whether prior or subsequent to the effective
date of this Article, except for liability resulting from such person's having
engaged in willful misconduct or a knowing violation of the criminal law or any
federal or state securities law.
C. The Corporation shall indemnify (i) any person who was or is a party to
any proceeding, including a proceeding brought by a shareholder in the right of
the Corporation or brought by or on behalf of shareholders of the Corporation,
by reason of the fact that he or she is or was a director or officer of the
Corporation, or (ii) any director or officer who is or was serving at the
request of the Corporation as a director, trustee, partner or officer of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, against any liability incurred by him or her in connection
with such proceeding unless he or she engaged in willful misconduct or a
knowing violation of the criminal law. A person is considered to be serving an
employee benefit plan at the Corporation's request if his or her duties to the
Corporation also impose duties on, or otherwise involve services by, him or her
to the plan or to participants in or beneficiaries of the plan. The Board of
Directors is hereby empowered, by a majority vote of a quorum of disinterested
directors, to enter into a contract to indemnify any director or officer in
respect of any proceedings arising from any act or omission, whether occurring
before or after the execution of such contract.
D. No amendment or repeal of this Article shall have any effect on the
rights provided under this Article with respect to any act or omission
occurring prior to such amendment or repeal. The Corporation shall promptly
take all such actions, and make all such determinations, as shall be necessary
or appropriate to comply with its obligation to make any indemnity under this
Article and shall promptly pay or reimburse all reasonable expenses, including
attorneys' fees, incurred by any such director, officer, employee or agent in
connection with such actions and determinations or proceedings of any kind
arising therefrom.
E. The termination of any proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not of
itself create a presumption that the applicant did not meet the standard of
conduct described in Section (B) or (C) of this Article.
F. Any indemnification under Section (C) of this Article (unless ordered by
a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the applicant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in Section (C).
The determination shall be made:
(1) By the Board of Directors by a majority vote of a quorum consisting of
directors not at the time parties to the proceeding;
(2) If a quorum cannot be obtained under subsection (1) of this Section, by
majority vote of a committee duly designated by the Board of Directors (in
which designation directors who are parties may participate), consisting solely
of two or more directors not at the time parties to the proceeding;
(3) By special legal counsel
(a) Selected by the Board of Directors or its committee in the manner
prescribed in subsection (1) or (2) of this Section; or
(b) If a quorum of the Board of Directors cannot be obtained under
subsection (1) of this Section and a committee cannot be designated under
subsection (2) of this Section, selected by majority vote of the full Board of
Directors, in which selection directors who are parties may participate; or
(4) By the shareholders, but shares owned by or voted under the control of
directors who are at the time parties to the proceeding may not be voted on the
determination.
Any evaluation as to reasonableness of expenses shall be made in the same
manner as the determination that indemnification is appropriate, except that if
the determination is made by special legal counsel, such evaluation as to
reasonableness of expenses shall be made by those entitled under subsection (3)
of this Section (F) to select counsel.
2
Notwithstanding the foregoing, in the event there has been a change in the
composition of a majority of the Board of Directors after the date of the
alleged act or omission with respect to which indemnification is claimed, any
determination as to indemnification and advancement of expenses with respect
to any claim for indemnification made pursuant to this Article shall be made
by special legal counsel agreed upon by the Board of Directors and the
applicant. If the Board of Directors and the applicant are unable to agree
upon such special legal counsel the Board of Directors and the applicant each
shall select a nominee, and the nominees shall select such special legal
counsel.
G. (1) The Corporation shall pay for or reimburse the reasonable expenses
incurred by any applicant who is a party to a proceeding in advance of final
disposition of the proceeding or the making of any determination under Section
(C) if the applicant furnishes the Corporation:
(a) a written statement of his or her good faith belief that he or she has
met the standard of conduct described in Section (C); and
(b) a written undertaking, executed personally or on his or her behalf, to
repay the advance if it is ultimately determined that he or she did not meet
such standard of conduct.
(2) The undertaking required by paragraph (b) of subsection (1) of this
Section shall be an unlimited general obligation of the applicant but need not
be secured and may be accepted without reference to financial ability to make
repayment.
(3) Authorizations of payments under this section shall be made by the
persons specified in Section (F).
H. The Board of Directors is hereby empowered, by majority vote of a quorum
consisting of disinterested directors, to cause the Corporation to indemnify
or contract to indemnify any person not specified in Section (B) or (C) of
this Article who was, is or may become a party to any proceeding, by reason of
the fact that he or she is or was an employee or agent of the Corporation, or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, to the same extent as if such
person were specified as one to whom indemnification is granted in Section
(C). The provisions of Sections (D) through (G) of this Article shall be
applicable to any indemnification provided hereafter pursuant to this S ection
(H).
I. The Corporation may purchase and maintain insurance to indemnify it
against the whole or any portion of the liability assumed by it in accordance
with this Article and may also procure insurance, in such amounts as the Board
of Directors may determine, on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, against any liability asserted against or incurred by him
or her in any such capacity or arising from his or her status as such, whether
or not the Corporation would have power to indemnify him or her against such
liability under the provisions of this Article.
J. Every reference herein to directors, officers, employees or agents shall
include former directors, officers, employees and agents and their respective
heirs, executors and administrators. The indemnification hereby provided and
provided hereafter pursuant to the power hereby conferred by this Article on
the Board of Directors shall not be exclusive of any other rights to which any
person may be entitled, including any right under policies of insurance that
may be purchased and maintained by the Corporation or others, with respect to
claims, issues or matters in relation to which the Corporation would not have
the power to indemnify such person under the provisions of this Article. Such
rights shall not prevent or restrict the power of the Corporation to make or
provide for any further indemnity, or provisions for determining entitlement
to indemnity, pursuant to one or more indemnification agreements, bylaws, or
other arrangements (including, without limitation, creation of trust funds or
security interests funded by letters of credit or other means) approved by the
Board of Directors (whether or not any of the directors of the Corporation
shall be a party to or beneficiary of any such agreements, bylaws or
arrangements); provided, however, that any provision of such agreements,
bylaws or other arrangements shall not be effective if and to the extent that
it is determined to be contrary to this Article or applicable laws of the
Commonwealth of Virginia.
3
K. Each provision of this Article shall be severable, and an adverse
determination as to any such provision shall in no way affect the validity of
any other provision.
* * *
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
depositor pursuant to the foregoing provisions, or otherwise, the depositor
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the depositor of expenses
incurred or paid by a director, officer or controlling person of the depositor
in successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the depositor will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
Item 15. Recent Sales of Unregistered Securities.
Not applicable.
4
Item 16. Exhibits.
(1)(a) Underwriting Agreement.(5)
(1)(b) Broker-Dealer Sales Agreement.(5)
(2) Not applicable.
(3)(a) Certificate of Incorporation of The Life Insurance Company of
Virginia.(1)
(3)(a)(i) Amended and Restated Articles of Incorporation of GE Life and
Annuity Assurance Company.(2)
(3)(b) Bylaws of The Life Insurance Company of Virginia.(1)
(3)(b)(i) Amended and Restated By-Laws of GE Life and Annuity Assurance
Company.(2)
(4)(a) Contract.(4)
(4)(b) SEP Endorsements, Form P5090 7/97 and Form P5094 7/98.(1)
(4)(b)(i) Individual Retirement Annuity Endorsement, Form P5090 7/97.(1)
(4)(b)(ii) Roth Individual Retirement Annuity Endorsement, Form P5133
11/00.(4)
(4)(b)(iii) Section 403b Annuity Endorsement, Form P5145 12/00.(4)
(4)(c) Application.(5)
(5) Opinion and Consent of Counsel.(6)
(6) Not applicable.
(7) Not applicable.
(8) Not applicable.
(9) Not applicable.
(10) Not applicable.
(11) Not applicable.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Not applicable.
(16) Not applicable.
(17) Not applicable.
(18) Not applicable.
(19) Not applicable.
(20) Not applicable.
(21) Not applicable.
(22) Not applicable.
(23) Consent of Independent Auditors.(6)
5
(24) Power of Attorney dated December 1, 2001.(6)
(25) Not applicable.
(26) Not applicable.
(27) Not applicable.
(99) Resolution of Board of Directors of GE Life and Annuity Assurance Company
authorizing the establishment of the Guarantee Account.(3)
- --------
(1) Incorporated herein by reference to Post-Effective Amendment No. 9 to
the Registrant's Registration Statement on Form N-4, File No. 33-76334,
filed with the Securities and Exchange Commission on May 1, 1998.
(2) Incorporated herein by reference to Post-Effective Amendment No. 1 to
the Registrant's Registration Statement on Form N-4, File No. 332-31172,
filed with the Securities and Exchange Commission on September 1, 2000.
(3) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1, File No. 333-67902, filed with the Securities and
Exchange Commission on August 20, 2001.
(4) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1, File No. 333-69620, filed with the Securities and
Exchange Commission on September 19, 2001.
(5) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1, File No. 333-67902, filed with the Securities and
Exchange Commission on August 20, 2001.
(6) Filed herein.
6
Item 17. Undertakings.
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(B) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable: In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officers or, controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such-
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
7
SIGNATURES
As required by the Securities Act of 1933, the Registrant has duly caused
this Post-Effective No. 1 to the Registration Statement on Form S-1 to be
signed on its behalf by the undersigned thereunto duly authorized, and its
seal to be hereunto affixed and attested, in the County of Henrico in the
Commonwealth of Virginia, on the 18th day of April, 2002.
GE Life and Annuity Assurance Company
(Registrant)
/s/ Heather C. Harker
By: _________________________________
Heather C. Harker
Vice President
As required by the Securities Act of 1933, this Post-Effective Amendment
No. 1 to the Registration Statement on Form S-1 has been signed by the
following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
* President and Chief April 18, 2002
______________________________________ Executive Officer
Pamela S. Schultz
* Director, Senior Vice April 18, 2002
______________________________________ President
Paul A. Haley
* Director, Senior Vice April 18, 2002
______________________________________ President
Thomas M. Stinson
* Senior Vice President, April 18, 2002
______________________________________ Chief Financial Officer
Kelly L. Groh
* Vice President and April 18, 2002
______________________________________ Controller
Susan M. Mann
* Vice President, Associate April 18, 2002
______________________________________ General Counsel and
Heather C. Harker Assistant Secretary
* Director, Senior Vice April 18, 2002
______________________________________ President
Geoffrey S. Stiff
*By Heather C. Harker Pursuant To Power of Attorney Executed On January 2,
2002.
8
EXHIBIT LIST
(5) Opinion and Consent of Counsel
(23) Consent of Independent Auditors
(24) Power of Attorney
9