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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 333-40159
GE FINANCIAL ASSURANCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1829180
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6604 WEST BROAD STREET, RICHMOND, VIRGINIA 23230
(Address of principal executive offices)
(Zip Code)
(804) 281-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |qc No
At August 7, 1998, 1,000 shares of common stock with a par value of $1,000 were
outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(A) AND
(B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT.
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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 ... 5
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges ............ 7
PART II - OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K ................................ 8
Signatures ................................................................ 9
Index to Exhibits ......................................................... 10
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENT OF CURRENT AND RETAINED EARNINGS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX
ENDED MONTHS ENDED
----------------------- ----------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
(In millions) ---------- ---------- ---------- ---------
REVENUES:
Net investment income ................................. $ 737 $ 678 $1,456 $1,352
Net realized investment gains ......................... 21 -- 28 28
Premiums .............................................. 782 532 1,511 1,013
Policy fees and other income .......................... 121 108 228 212
------ ------ ------ ------
Total revenues ...................................... 1,661 1,318 3,223 2,605
------ ------ ------ ------
BENEFITS AND EXPENSES:
Interest credited ..................................... 311 322 632 641
Benefits and other changes in policy reserves ......... 805 569 1,548 1,097
Commissions ........................................... 117 153 247 295
General expenses ...................................... 268 158 457 313
Amortization of intangibles, net ...................... 73 68 142 149
Change in deferred acquisition costs, net ............. (112) (113) (201) (227)
Interest expense ...................................... 22 3 40 6
------ ------ ------ ------
Total benefits and expenses ......................... 1,484 1,160 2,865 2,274
------ ------ ------ ------
Earnings before income taxes ........................... 177 158 358 331
Provision for income taxes ............................. 64 61 133 128
------ ------ ------ ------
NET EARNINGS ........................................... 113 97 225 203
Retained earnings at beginning of period ............... 974 543 862 437
------ ------ ------ ------
Retained earnings at end of period ..................... $1,087 $ 640 $1,087 $ 640
====== ====== ====== ======
See Notes to Condensed, Consolidated Financial Statements.
1
ITEM 1. FINANCIAL STATEMENTS (Continued)
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENT OF FINANCIAL POSITION
JUNE 27, DECEMBER 31,
1998 1997
------------- -------------
(In millions) (UNAUDITED)
ASSETS
INVESTMENTS:
Fixed maturities available-for-sale, at fair value ......... $35,976 $34,537
Mortgage loans, net of valuation allowance ................. 2,781 2,667
Policy loans ............................................... 1,082 1,066
Short-term investments ..................................... 115 286
Other invested assets ...................................... 964 913
------- -------
TOTAL INVESTMENTS ........................................ 40,918 39,469
------- -------
Cash ........................................................ 65 44
Accrued investment income ................................... 803 750
Deferred acquisition costs .................................. 1,062 863
Intangible assets ........................................... 3,374 3,354
Reinsurance recoverable ..................................... 1,667 1,725
Other assets ................................................ 1,341 781
Separate account assets ..................................... 4,918 4,106
------- -------
TOTAL ASSETS ............................................. $54,148 $51,092
======= =======
LIABILITIES AND SHAREHOLDER'S INTEREST
LIABILITIES:
Future annuity and contract benefits ....................... $34,941 $34,258
Unearned premiums .......................................... 1,087 1,121
Liability for policy and contract claims ................... 1,535 1,521
Other policyholder liabilities ............................. 534 480
Accounts payable and accrued expenses ...................... 1,609 1,264
Deferred income tax liability .............................. 114 44
Short-term borrowings ...................................... 1,831 1,162
Separate account liabilities ............................... 4,918 4,106
Long-term debt ............................................. 175 175
------- -------
TOTAL LIABILITIES ........................................ 46,744 44,131
------- -------
Minority interest ........................................... 118 3
SHAREHOLDER'S INTEREST:
Net unrealized investment gains ............................ 826 661
Foreign currency translation adjustments ................... (62) --
------- -------
Accumulated non-owner changes in equity .................... 764 661
Common stock ............................................... -- --
Additional paid-in capital ................................. 5,435 5,435
Retained earnings .......................................... 1,087 862
------- -------
TOTAL SHAREHOLDER'S INTEREST ............................. 7,286 6,958
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S INTEREST ............. $54,148 $51,092
======= =======
See Notes to Condensed, Consolidated Financial Statements.
2
ITEM 1. FINANCIAL STATEMENTS (Continued).
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
------------------------
JUNE 27, JUNE 28,
1998 1997
(In millions) ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ............................................................................ $ 225 $ 203
Adjustments to reconcile net earnings to net cash provided from operating activities:
Increase in future policy benefits .................................................... 1,200 1,064
Other - net ........................................................................... (162) (291)
-------- --------
Net cash provided from operating activities ........................................... 1,263 976
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and sales of investment securities and other invested assets ... 3,530 2,340
Principal collected on mortgage and policy loans ........................................ 226 151
Purchases of investment securities and other invested assets ............................ (4,737) (2,939)
Mortgage and policy loan originations ................................................... (359) (223)
Purchase of GE Edison Life Insurance Company, net of cash acquired ...................... (560) --
-------- --------
Net cash used for investing activities ................................................ (1,900) (671)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of investment contracts ............................................. 1,595 1,792
Redemption and benefit payments on investment contracts ................................. (2,302) (2,179)
Net commercial paper borrowings (maturities of 90 days or less) ......................... 570 --
Proceeds from minority interest holder .................................................. 556 --
Proceeds from short-term borrowings ..................................................... 2,238 596
Payments on short-term borrowings ....................................................... (2,139) (575)
-------- --------
Net cash (used for) provided by financing activities .................................. 518 (366)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................................................. (31) --
DECREASE IN CASH AND EQUIVALENTS ........................................................ (150) (61)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD ............................................. 330 285
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD ................................................... $ 180 $ 224
======== ========
See Notes to Condensed, Consolidated Financial Statements.
3
ITEM 1. FINANCIAL STATEMENTS (Continued).
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed, consolidated quarterly financial statements
represent GE Financial Assurance Holdings, Inc. and its consolidated
subsidiaries (collectively the "Company"). All significant intercompany
transactions have been eliminated. Certain prior period data have been
reclassified to conform to the current period presentation.
2. The condensed, consolidated quarterly financial statements are unaudited.
These statements include all adjustments (consisting of normal recurring
accruals) considered necessary by management to fairly present the
Company's results of operations, financial position and cash flows. The
results reported in these condensed, consolidated financial statements
should not be regarded as necessarily indicative of results that may be
expected for the entire year.
3. Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, was adopted as of January 1, 1998. This Statement requires
reporting of changes in shareholder's interest that do not result directly
from transactions with shareholders. An analysis of these changes follows:
SIX MONTHS ENDED
--------------------------------
JUNE 27, 1998 JUNE 28, 1997
(in millions) --------------- --------------
Net earnings ........................................... $ 225 $203
Unrealized gains on investments securities-net ......... 165 169
Foreign currency translation adjustments ............... (62) --
----- ----
Total ................................................ $ 328 $372
===== ====
THREE MONTHS ENDED
--------------------------------
JUNE 27, 1998 JUNE 28, 1997
(in millions) --------------- --------------
Net earnings ........................................... $ 113 $ 97
Unrealized gains on investments securities-net ......... 174 479
Foreign currency translation adjustments ............... (62) --
----- ----
Total ................................................ $ 225 $576
===== ====
4. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (the
"Statement"). The Statement requires that, upon adoption, all derivative
instruments (including certain derivative instruments embedded in other
contracts) be recognized in the balance sheet at fair value, and that
changes in such fair values be recognized in earnings unless specific
hedging criteria are met. Changes in the values of derivatives that meet
these hedging criteria will ultimately offset related earnings effects of
the hedged items; effects of certain changes in fair value are recorded in
other comprehensive income pending recognition in earnings. The Corporation
will not adopt the Statement until required to do so on January 1, 2000.
4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS.
OVERVIEW
Net earnings for the first six months of 1998 were $225 million, a $22 million
(10.8%) increase over the first six months of 1997. This increase was driven
largely by the November, 1997 acquisition of Colonial Penn Insurance Company
("Colonial Penn") and growth in sales of certain existing products.
OPERATING RESULTS
NET INVESTMENT INCOME increased $104 million or 7.7% to $1,456 million for
the first six months of 1998 from $1,352 million for the first six months of
1997. The increase was primarily attributable to higher levels of average
invested assets ($38.8 billion in first six months of 1998 vs. $36.3 billion in
first six months of 1997) due to the Colonial Penn acquisition, growth in core
invested assets and new investments relating to the Company's operations in
Japan commencing in April 1998 and, to a lesser extent, the impact of increased
in weighted average yields to 7.7% for the first six months of 1998 from 7.6%
for the first six months of 1997.
PREMIUMS for the first six months of 1998 were $1,511 million, 49.2% or
$498 million higher than for the first six months of 1997. The increase is a
result of acquisitions ($311 million), including Colonial Penn, and initial
operations of GE Edison Life Insurance Company ("GE Edison") commencing in
April 1998; and growth in the Company's life and structured settlement
businesses.
OTHER INCOME increased $16 million to $256 million in the first six months
of 1998 from $240 million in the first six months of 1997. Other income is
principally comprised of surrender fees, insurance charges made against
universal life contracts and other specified transaction fees assessed to
policyholders, commission income, and net realized investment gains or losses.
The increase in the first six months of 1998 was primarily due to an increase
in service contract fees charged on certain company products.
INTEREST CREDITED decreased $9 million, or 1.4% to $632 million in the
first six months of 1998 from $641 million in the first six months of 1997.
This decrease was driven by the reduction of the Company's base crediting rates
due to changes in market conditions and other factors, net of the effects of
the continued issuance of certain products with bonus crediting rates. The
Company monitors market conditions closely and resets interest crediting rates
as allowed by the terms of the underlying contracts.
BENEFITS AND OTHER CHANGES IN POLICY RESERVES includes both activity
related to future policy benefits on long-duration life and health insurance
products as well as claim costs incurred during the year under these contracts
and property and casualty products. These amounts increased $451 million, or
41.1%, to $1,548 million in the first six months of 1998 from $1,097 million in
the first six months of 1997. This increase was a result of acquisitions ($244
million), including Colonial Penn, initial operations of GE Edison, as well as
increased benefit payments and other changes in policy reserves on existing
life insurance policies, annuity contracts and accident and health insurance
policies.
COMMISSIONS of $247 million for the first six months of 1998 decreased $48
million, or 16.3%, from $295 million in the first six months of 1997 primarily
due to the acquisition of LTC, Inc. in November 1997 (previously an independent
entity providing certain services to the Company for which commissions were
paid) and lower production on certain of the Company's existing products.
Commissions related to LTC, Inc. approximated $15 million for the first six
months of 1997.
GENERAL EXPENSES were $457 million for the first six months of 1998, an
increase of $144 million or a 46.0% over the first six months of 1997 expense
of $313 million. The increase was primarily a result of acquisitions ($121
million), including Colonial Penn and LTC, Inc., and expenses related to the
Company's GE Edison operations; and growth in sales of certain existing
products.
AMORTIZATION OF INTANGIBLES, NET decreased $7 million, or 4.7%, to $142
million for the first six months of 1998 from $149 million for the first six
months of 1997. The Company's significant intangible assets consist of two
components which both result from acquisition activities - the present value
of future profits ("PVFP"), representing the estimated future gross profit in
acquired insurance contracts, and goodwill, representing the excess of purchase
price over the fair value of identified net assets of the acquired entities. A
$16 million increase in the amortization of goodwill during the first six
months of 1998 partially offset a reduction in the amortization of PVFP of $20
million.
CHANGE IN DEFERRED ACQUISITION COSTS, NET decreased $26 million, or 11.5%,
to $201 million for the first six months of 1998 from $227 million for the
first six months of 1997. Acquisition costs include costs and expenses which
vary with and are primarily related to the acquisition of insurance and
investment contracts, such as first year commissions in excess of renewal
commissions, direct advertising and printing costs, and certain support costs
such as underwriting and policy issue
5
expenses. For accounting purposes, these costs are deferred and recognized in
relation to either the premiums or gross profits from the underlying contracts.
Negative amounts represent the excess of commission and acquisition costs
deferred, offset by amortization of costs previously deferred on the balance
sheet. The reduction in deferred acquisition costs, net was related to an
increase in amortization of previously capitalized acquisition costs partially
offset by an increase in deferral of capitalization costs.
INTEREST EXPENSE increased $34 million to $40 million for the first six
months of 1998 from $6 million for the first six months of 1997. This increase
was related to interest costs incurred on borrowings in connection with the
November, 1997 acquisition of Colonial Penn and the commencement of GE Edison
operations in April 1998.
FINANCIAL CONDITION
TOTAL ASSETS increased $3,056 million, or 6.0%, at June 27, 1998 from
December 31, 1997. Total investments increased $1,449 million, or 3.7%, at June
27, 1998 from December 31, 1997. This increase was primarily driven by invested
operating cash flows of $1,340 million, excluding acquisitions. Other assets
increased $560 million, or 71.7%, at June 27, 1998 from December 31, 1997
primarily due to assets acquired during the initiation of the Company's GE
Edison operations. Assets invested in separate accounts increased by $812
million, or 19.8%, at June 27, 1998 from December 31, 1997 primarily due to
continued sales of variable annuity products.
TOTAL LIABILITIES increased $2,613 million, or 5.9%, at June 27, 1998 from
December 31, 1997. Future annuity and contract benefits increased $683 million,
or 2.0%, at June 27, 1998 from December 31, 1997. This increase resulted
primarily from the initiation of operations at GE Edison and growth in existing
insurance and investment products. Liabilities under the separate accounts
increased $812 million due to continued sales of variable annuity products.
Borrowings (including short-term borrowings and long-term debt) increased $669
million primarily as a result of $569 million in borrowings related to the
Company's investment in GE Edison. Accounts payable and accrued expenses
increased $345 million due primarily to liabilities associated with the
operations of GE Edison and timing of net payments and receipts related to
unsettled investment portfolio trades as well as normal business activity.
MINORITY INTEREST increased $115 million at June 27, 1998 from December
31, 1997 as a result of the establishment of minority interest relating to GE
Edison.
6
EXHIBIT 12
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
SIX MONTHS ENDED JUNE 27, 1998
(UNAUDITED)
RATIO OF EARNINGS
TO FIXED CHARGES
(Dollar amounts in millions) ------------------
Net earnings ............................................................................. $ 225
Provision for income taxes ............................................................... 133
Minority interest ........................................................................ --
-----
Earnings before provision for income taxes and minority interest ......................... 358
-----
Fixed charges:
Interest ................................................................................ 40
One-third of rentals .................................................................... 8
-----
Total fixed charges ...................................................................... 48
-----
Less interest capitalized, net of amortization ........................................... --
-----
Earnings before provision for income taxes and minority interest, plus fixed charges ..... $ 406
=====
Ratio of earnings to fixed charges ....................................................... 8.5
======
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.
7
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.
Exhibit 27. Financial Data Schedule (filed electronically only).
B. REPORTS ON FORM 8-K.
None.
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GE FINANCIAL ASSURANCE HOLDINGS, INC.
(Registrant)
Date: August 10, 1998 By: /s/ THOMAS W. CASEY
------------------------------------
THOMAS W. CASEY,
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Date: August 10, 1998 By: /s/ STEPHEN N. DEVOS
-------------------------------------
STEPHEN N. DEVOS,
VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
9
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT NO. PAGE
- ------------- -----
12 Computation of Ratio of Earnings to Fixed Charges 7
27 Financial Data Schedule (filed electronically only)
10