UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
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Commission file number 0-23375
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GE Financial Assurance Holdings, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 54-1829180
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6604 West Broad Street, Richmond, Virginia 23230
(Address of principal executive offices) (Zip Code)
(804) 281-6000
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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At May 13, 2002, 1,000 shares of common stock with a par value of $1.00 were
outstanding. The common stock of GE Financial Assurance Holdings, Inc. is not
publicly traded.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE
FORMAT.
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION.
Item 1. Financial Statements........................................... 1
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition........................................ 8
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges.............. 9
PART II - OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K............................... 10
Signatures.................................................................. 11
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Condensed, Consolidated Statements of Current and Retained Earnings
(Dollar amounts in millions)
(Unaudited)
Three Months Ended
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March 30, March 31,
2002 2001
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Revenues:
Premiums $ 1,556 $ 1,540
Net investment income 1,061 1,024
Policy fees and other income 208 224
Net realized investment gains 154 145
Surrender fee income 47 106
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Total revenues 3,026 3,039
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Benefits and expenses:
Benefits and other changes in policy reserves 1,378 1,376
General expenses 749 782
Interest credited 421 406
Amortization of intangibles 62 85
Change in deferred acquisition costs, net (180) (187)
Interest expense 30 43
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Total benefits and expenses 2,460 2,505
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Earnings before income taxes, minority interest and cumulative
effect of accounting changes 566 534
Provision for income taxes 190 182
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Earnings before minority interest and cumulative effect of
accounting changes 376 352
Minority interest 2 1
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Earnings before cumulative effect of accounting changes 374 351
Cumulative effect of accounting changes, net of tax (380) (15)
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Net (loss) earnings (6) 336
Retained earnings at beginning of period 6,295 5,020
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Retained earnings at end of period $ 6,289 $ 5,356
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See Notes to Condensed, Consolidated Financial Statements.
1
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Condensed, Consolidated Statements of Financial Position
(Dollar amounts in millions)
(Unaudited)
March 30, December 31,
2002 2001
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Assets
Investments:
Fixed maturities available-for-sale, at fair value $62,803 $60,968
Equity securities available-for-sale, at fair value 1,145 1,078
Mortgage and other loans, net of valuation allowance 6,181 6,055
Policy loans 1,159 1,151
Other invested assets 1,180 1,345
Short-term investments 503 389
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Total investments 72,971 70,986
Cash and cash equivalents 2,420 1,741
Accrued investment income 1,383 1,384
Deferred acquisition costs 4,483 4,265
Goodwill 1,995 2,421
Intangible assets 2,033 2,263
Reinsurance recoverable 2,037 1,950
Other assets 2,155 2,756
Separate account assets 9,236 9,172
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Total assets $98,713 $96,938
=========== ===========
Liabilities and Shareholder's Interest
Liabilities:
Future annuity and contract benefits $63,474 $62,247
Liability for policy and contract claims 2,884 2,887
Other policyholder liabilities 1,147 1,144
Other liabilities 6,009 5,539
Short-term borrowings 1,985 1,798
Long-term debt 1,139 1,143
Separate account liabilities 9,236 9,172
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Total liabilities 85,874 83,930
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Minority interest in and equity of consolidated
subsidiaries 257 253
Shareholder's interest:
Net unrealized investment losses (617) (297)
Derivatives qualifying as hedges 41 (168)
Foreign currency translation adjustments (84) (28)
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Accumulated non-owner changes in equity (660) (493)
Common stock - -
Additional paid-in capital 6,953 6,953
Retained earnings 6,289 6,295
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Total shareholder's interest 12,582 12,755
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Total liabilities and shareholder's interest $98,713 $96,938
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See Notes to Condensed, Consolidated Financial Statements.
2
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Condensed, Consolidated Statements of Cash Flows
(Dollar amounts in millions)
(Unaudited)
Three Months Ended
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March 30, March 31,
2002 2001
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Cash Flows From Operating Activities
Net (loss) earnings $ (6) $ 336
Adjustments to reconcile net (loss) earnings to net cash provided by
operating activities:
Change in reserves 1,767 609
Cumulative effect of accounting changes, net of tax 380 15
Other, net 944 (348)
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Net cash provided by operating activities 3,085 612
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Cash Flows From Investing Activities
Short-term investment activity, net (113) (58)
Proceeds from sales, securitizations and maturities of investment
securities and other invested assets 6,112 6,130
Principal collected on and securitizations of mortgage and policy
loans 230 265
Purchases of investment securities and other invested assets (7,899) (6,947)
Mortgage and policy loan originations (325) (269)
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Net cash used in investing activities (1,995) (879)
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Cash Flows From Financing Activities
Proceeds from issuance of investment contracts 2,312 1,672
Redemption and benefit payments on investment contracts (2,874) (1,475)
Net commercial paper borrowings 8 (20)
Proceeds from other short-term borrowings 678 399
Payments on other short-term borrowings (499) (542)
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Net cash (used in) provided by financing activities (375) 34
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Effect of Exchange Rate Changes on Cash (36) 339
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Increase in Cash and Equivalents 679 106
Cash and Equivalents at Beginning of Period 1,741 1,163
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Cash and Equivalents at End of Period $ 2,420 $ 1,269
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See Notes to Condensed, Consolidated Financial Statements.
3
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
(Dollar amounts in millions)
(Unaudited)
1. The accompanying condensed, consolidated quarterly financial statements
represent GE Financial Assurance Holdings, Inc. and its consolidated
subsidiaries (collectively "the Company"). All significant intercompany
transactions have been eliminated.
On June 1, 2001, the Company acquired through a capital contribution made by
its sole shareholder, General Electric Capital Corporation ("GE Capital"),
all of the outstanding voting securities of the following mortgage insurance
companies: General Electric Mortgage Insurance Corporation, General Electric
Mortgage Insurance Corporation of North Carolina, Private Residential
Mortgage Insurance Corporation, GE Residential Mortgage Insurance
Corporation of North Carolina, GE Mortgage Reinsurance Corporation of North
Carolina, Sponsored Captive Re, Inc., and Verex Assurance, Inc. (together,
the "Mortgage Insurers"). GE Residential Mortgage Corporation of North
Carolina's wholly owned subsidiary, General Electric Home Equity Insurance
Corporation of North Carolina, as an asset of its parent, was indirectly
contributed.
The contribution was made following the dissolution of GE Capital Mortgage
Corporation ("GECMC"), the Mortgage Insurers former parent company. GECMC
was dissolved on June 1, 2001 in a tax-free liquidation under Section 332 of
the Internal Revenue Code. In accordance with GECMC's Articles of
Dissolution, the Mortgage Insurers, along with other former subsidiaries of
GECMC, were distributed to GE Capital, GECMC's sole shareholder. Immediately
following receipt of the distribution, GE Capital contributed the Mortgage
Insurers to the Company. The Company, in turn, contributed the shares to GE
Mortgage Holdings, LLC, a North Carolina limited liability company, of which
the Company is the sole member. The transaction was accounted for in a
manner similar to a pooling-of-interests. The condensed, consolidated
financial statements for the three months ended March 31, 2001, have been
restated to give retroactive effect to the contribution. This transaction
resulted in the creation of a separate operating segment, Mortgage
Insurance.
2. These financial statements have been prepared on the basis of accounting
principles generally accepted in the United States of America ("U.S. GAAP").
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the
reported amounts and related disclosures. Actual results could differ from
those estimates. Certain prior year amounts have been reclassified to
conform to the current year presentation.
The condensed, consolidated quarterly financial statements are unaudited.
These statements include all adjustments (consisting of normal recurring
accruals) considered necessary by management to present a fair statement of
the results of operations, financial position and cash flows. The results
reported in these condensed, consolidated financial statements should not be
regarded as necessarily indicative of results that may be expected for the
entire year. The condensed, consolidated financial statements included
herein should be read in conjunction with the audited consolidated financial
statements and related notes contained in the Company's annual report on
Form 10-K for the fiscal year ended December 31, 2001.
3. A summary of changes in shareholder's interest that do not result directly
from transactions with the shareholder follows:
Three Months Ended
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March 30, March 31,
2002 2001
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Net (loss) earnings $ (6) $ 336
Unrealized (losses) gains on investment securities - net (320) 759
Foreign currency translation adjustments (56) (68)
Derivatives qualifying as hedges 209 70
Cumulative effect on shareholder's interest of adopting SFAS 133 --- (351)
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Total $ (173) $ 746
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4
4. Effective January, 1, 2002, the Company redefined its business segments.
As a result, the Company now reports four operating segments: (1) Wealth
Accumulation and Transfer, comprised of products intended to increase the
policyholder's wealth, transfer wealth to beneficiaries or provide a means
for replacing the income of the insured in the event of premature death, (2)
Lifestyle Protection and Enhancement, comprised of products intended to
protect accumulated wealth and income from the financial drain of unforeseen
events and provide income protection packages, (3) Mortgage Insurance,
comprised of products intended to protect mortgage lenders against losses
caused by mortgage defaults, a nd (4) Auto and Home Insurance, comprised of
products intended to protect against damage to property or injury to the
insured or third parties.
March 31, 2001 amounts have been reclassified to conform to the March 30,
2002 presentation, and reflect the elimination of goodwill amortization as
discussed in Note 5.
The following is a summary of operating segment activity:
Three Months Ended
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March 30, March 31,
(In millions) 2002 2001
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Revenues
Wealth Accumulation and Transfer............................... $1,838 $1,849
Lifestyle Protection and Enhancement........................... 820 791
Mortgage Insurance............................................. 214 231
Auto and Home Insurance........................................ 154 168
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Total revenues............................................. $3,026 $3,039
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Earnings before income taxes, minority interest
and cumulative effect of accounting changes
Wealth Accumulation and Transfer............................... $ 310 $ 304
Lifestyle Protection and Enhancement........................... 87 68
Mortgage Insurance............................................. 152 176
Auto and Home Insurance........................................ 17 14
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Total earnings before income taxes, minority interest and
cumulative effect of accounting changes $ 566 $ 562
======== =========
The following is a summary of assets by operating segment:
March 30, December 31,
(In millions) 2002 2001
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Assets
Wealth Accumulation and Transfer............................... $81,432 $79,672
Lifestyle Protection and Enhancement........................... 10,536 10,305
Mortgage Insurance............................................. 4,984 4,777
Auto and Home Insurance........................................ 1,761 2,184
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Total assets............................................... $98,713 $96,938
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5. The Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards (SFAS) 142, "Goodwill and Other Intangible Assets",
generally became effective on January 1, 2002. Under SFAS 142, goodwill
is no longer amortized but is tested for impairment using a fair value
methodology.
5
The Company ceased amortizing goodwill effective January 1, 2002.
Simultaneously, to maintain a consistent basis for its measurement of
performance, management revised previously reported segment information to
correspond to the earnings measurements by which businesses will be evaluated.
Goodwill amortization expense for the three months ended March 31, 2001, was
$28 million ($21 million after tax). The effect on earnings of excluding such
goodwill amortization expense from the first three months of 2001 follows:
Three months ended
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March 30, 2002 March 31, 2001
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(In millions)
Earnings before cumulative effect of accounting changes $ 374 $ 351
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Earnings before cumulative effect of accounting changes
excluding 2001 goodwill amortization $ 374 $ 372
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Net (loss) earnings $ (6) $ 336
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Net (loss) earnings, excluding 2001 goodwill amortization $ (6) $ 357
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Under SFAS 142, the Company was required to test all existing goodwill for
impairment as of January 1, 2002, on a "reporting unit" basis. A reporting
unit is an operating segment unless, at businesses one level below that
operating segment (the "component" level), discrete financial information is
prepared and regularly reviewed by management, in which case such component is
the reporting unit. SFAS 142 requires that two or more component-level
reporting units with similar economic characteristics be combined into a
single reporting unit.
A fair value approach is used to test goodwill for impairment. An impairment
charge is recognized for the amount, if any, by which the carrying amount of
goodwill exceeds its implied fair value. Fair values of reporting units and
the related implied fair values of their respective goodwill were established
using discounted cash flows. When available and as appropriate, comparative
market multiples were used to corroborate results of the discounted cash
flows.
The result of testing goodwill of the Company for impairment in accordance
with SFAS 142, as of January 1, 2002, was a non-cash charge of $539 million
($380 million after tax), which is reported in the caption "Cumulative effect
of accounting changes, net of tax". All of the charges relate to the Auto and
Home Insurance segment. The primary factor resulting in the impairment
charge was increased price competition in the auto insurance industry. No
impairment charge was appropriate under the FASB's previous goodwill
impairment standard, which was based on undiscounted cash flows.
Intangibles Subject to Amortization
(in millions) At March 30, 2002 At December 31, 2001
--------------------------------- ------------------------------------
Gross Accumulated Gross Accumulated
Carrying Amount Amortization Carrying Amount Amortization
------------------- ------------ ------------------- ---------------
Present Value of Future Profits ("PVFP") $5,087 $(3,192) $5,148 $(3,137)
All Other 356 (218) 463 (211)
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Total $5,443 $(3,410) $5,611 $(3,348)
====== ======= ======= =======
Amortization expense related to intangible assets, excluding goodwill, for the
first quarter of 2002 and 2001 was $62 million and $57 million, respectively.
The estimated percentage of the December 31, 2001 net PVFP balance before the
effect of unrealized investment gains or losses, to be amortized over each
of the next five years is as follows:
2002 .................................... 13.5%
2003 .................................... 10.8%
2004 .................................... 9.0%
2005 .................................... 7.6%
2006 .................................... 6.3%
Amortization expense for PVFP in future periods will be affected by
acquisitions, realized capital gains/losses or other factors affecting the
ultimate amount of gross profits realized from certain lines of business.
Similarly, future amortization expense for other intangibles will depend on
future acquisitions, dispositions and other business transactions.
In addition, the Company had capitalized software (net of accumulated
amortization) of $143 million and $142 million at March 30, 2002 and December
31, 2001, respectively. Amortization expense related to the capitalized
software was approximately $8 million and $6 million in the first quarter of
2002 and 2001, respectively. Capitalized software is included in other assets.
6
Goodwill
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(In millions)
Wealth Lifestyle
Accumulation and Protection and Auto and Home Mortgage
Transfer Enhancement Insurance Insurance Total
Balance, December 31, 2001 $1,169 $690 $ 539 $23 $2,421
Acquisitions 21 20 --- --- 41
Transition Impairment (pre-tax) --- --- (539) --- (539)
All other (6) 78 --- --- 72
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Balance, March 30, 2002 $1,184 $788 $ --- $23 $1,995
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Other adjustments include the reclassification of certain intangible assets
into goodwill with the adoption of SFAS 142.
6. At January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended. Under SFAS 133, all
derivative instruments are recognized in the balance sheet at their fair
values. The cumulative effect of adopting this standard was a one-time
reduction of net earnings in the first quarter of 2001 of $15 million.
7. On April 1, 2002, GE Edison Life Insurance Company acquired Saison Life
Insurance Company Limited from Credit Saison Co., Ltd, Saison Group, Ltd.
and its other shareholders for 12.8 billion yen, or approximately $100
million.
7
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Overview
The financial information for the three months ended March 31, 2001 contained
herein have been restated to reflect the contribution of the Mortgage Insurers
to the Company which was accounted for in a manner similar to a pooling-of-
interests.
Earnings before income taxes, minority interest and cumulative effect of
accounting changes for the first three months of 2002 was $566 million, a $32
million, or 6.0%, increase over the first three months of 2001. This increase
primarily resulted from the discontinuation of goodwill amortization in 2002
resulting for the adoption of SFAS 142.
The total net loss of $6 million includes a $380 million charge related to the
adoption of SFAS 142.
Operating Results
Total revenues decreased $13 million to $3,026 million for the first three
months of 2002, compared with $3,039 million for the first three months of 2001.
The decrease primarily resulted from lower surrender fee income from the
continued decline in the number of surrenders related to the Toho Transfer and a
decline in weighted average investment yields (5.72% in 2002 compared to 6.13%
in 2001). This decrease was partially offset by increases in investment income
earned on higher levels of average invested assets and gross realized gains and
(losses) [$290 million and ($136 million) at March 30, 2002 compared to $231
million and ($86 million) at March 31, 2001]. Gross realized gains at March 30,
2002 include $29 million from securitizations of certain financial assets and
$24 million from a gain on sale of certain real estate held for investment.
Total expenses decreased $45 million to $2,460 million for the first three
months of 2002, compared with $2,505 million for the first three months of 2001.
Excluding the effect of prior year goodwill amortization of $28 million, total
benefits and expenses decreased by $17 million.
Financial Condition
Total assets increased $1.8 billion, or 1.8%, at March 30, 2002 from December
31, 2001. Total investments increased $2.0 billion, or 2.8% to $73.0 billion.
The increase in total investments is primarily related to net purchases of
securities funded by operating cash flows and net investment income, partially
offset by mortgage and policy loan repayments and securitizations of certain
financial assets, the proceeds of which were not fully invested as of quarter
end. Assets other than investments decreased $0.2 billion primarily as a result
of goodwill impairment of $0.5 billion related to the implementation of SFAS 142
on January 1, 2002, as discussed in Note 5 of the Condensed, Consolidated
Financial Statements.
Total liabilities increased $1.9 billion, or 2.3% at March 30, 2002 from
December 31, 2001. Future annuity and contract benefits increased approximately
$1.2 billion or 2.0% at March 30, 2002 from December 31, 2001. This increase
resulted primarily from continued growth of the Company's investment-type
contracts. In addition, all other liabilities increased $0.7 billion related to
an increase in other liabilities and other short-term borrowings.
Forward Looking Statements
This document may include certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on management's current expectations and are subject to
uncertainty and changes in circumstances. Actual results may differ materially
from these expectations due to changes in global economic, business, competitive
market and regulatory factors.
8
EXHIBIT 12
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
Three Months Ended March 30, 2002
(Dollar amounts in millions)
(Unaudited)
Ratio of Earnings
to Fixed Charges
-----------------
Net loss $ (6)
Provision for income taxes 190
Minority Interest 2
Cumulative effect of accounting changes 380
-----------------
Earnings before income taxes, minority interest and cumulative
effect of accounting changes 566
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Fixed charges:
Interest 30
Interest portion of net rentals 7
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Total fixed charges 37
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Less interest capitalized, net of amortization 2
-----------------
Earnings before income taxes, minority interest and cumulative
effect of accounting changes, plus fixed charges $ 601
=================
Ratio of earnings to fixed charges 16.2
=================
For purposes of computing the ratios, fixed charges consist of interest on all
indebtedness and one-third of rentals, which management believes is a reasonable
approximation of the interest factor of such rentals.
9
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges.
b. Reports on Form 8-K.
None.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GE FINANCIAL ASSURANCE HOLDINGS, INC.
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(Registrant)
Date: May 13, 2002 By: /s/ Thomas W. Casey
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Thomas W. Casey,
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: May 13, 2002 By: /s/ Richard G. Fucci
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Richard G. Fucci,
Vice President and Controller
11