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 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from________ to_________
Commission file number 0-23375
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)
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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
At May 11, 1999, 1,000 shares of common stock with a par value of $1.00 were
outstanding.
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 ................ 6
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges ............................ 8
PART II - OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K ............................................. 9
Signatures .............................................................................. 10
Index to Exhibits ....................................................................... 11
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENT OF CURRENT AND RETAINED EARNINGS
(UNAUDITED)
THREE MONTHS
ENDED
-------------------------
(In millions) MARCH 27, MARCH 28,
1999 1998
REVENUES:
Net investment income $ 748 $ 719
Net realized investment gains 16 7
Premiums 839 729
Policy fees and other income 120 107
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TOTAL REVENUES 1,723 1,562
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BENEFITS AND EXPENSES:
Interest credited 314 321
Benefits and other changes in policy 849 743
reserves
Commissions 159 130
General expenses 260 189
Amortization of intangibles, net 65 69
Change in deferred acquisition costs, net (136) (89)
Interest expense 23 18
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TOTAL BENEFITS AND EXPENSES 1,534 1,381
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EARNINGS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 189 181
Provision for income taxes 72 69
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EARNINGS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 117 112
Cumulative effect of accounting change, net of tax 25 --
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NET EARNINGS 142 112
Retained earnings at beginning of period 1,234 862
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RETAINED EARNINGS AT END OF PERIOD $ 1,376 $ 974
========== ============
See Notes to Condensed, Consolidated Financial Statements.
1
ITEM 1. FINANCIAL STATEMENTS (CONTINUED).
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUSIDIARIES
CONDENSED, CONSOLIDATED STATEMENT OF FINANCIAL POSITION
MARCH 27, December 31,
(In millions) 1999 1998
----------------- -----------------
ASSETS (UNAUDITED)
Investments:
Fixed maturities available-for-sale, at fair value $ 36,567 $ 36,898
Mortgage loans, net of valuation allowance 3,146 2,960
Policy loans 1,166 1,156
Short-term investments 130 164
Other invested assets 1,152 1,109
----------------- -----------------
Total investments 42,161 42,287
Cash 156 214
Accrued investment income 827 789
Deferred acquisition costs 1,491 1,318
Intangible assets 3,290 3,243
Reinsurance recoverable 1,545 1,634
Other assets 1,566 1,673
Separate account assets 5,929 5,569
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TOTAL ASSETS $ 56,965 $ 56,727
================= =================
LIABILITIES AND SHAREHOLDER'S INTEREST
Liabilities:
Future annuity and contract benefits $ 36,851 $ 36,272
Unearned premiums 891 966
Liability for policy and contract claims 1,797 1,697
Other policyholder liabilities 527 570
Accounts payable and accrued expenses 1,713 2,047
Short-term borrowings 1,172 1,330
Separate account liabilities 5,929 5,569
Long-term debt 697 698
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Total liabilities 49,577 49,149
Minority interest 123 123
Shareholder's interest:
Net unrealized investment gains 386 713
Foreign currency translation adjustments 68 73
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Accumulated non-owner changes in equity 454 786
Common stock --- ---
Additional paid-in capital 5,435 5,435
Retained earnings 1,376 1,234
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Total shareholder's interest 7,265 7,455
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TOTAL LIABILITIES AND SHAREHOLDER'S INTEREST $ 56,965 $ 56,727
================= =================
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)
THREE MONTHS ENDED
----------------------------------
MARCH 27, MARCH 28,
(In millions) 1999 1998
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 142 $ 112
Adjustments to reconcile net earnings to net cash provided
from operating activities:
Increase in future policy benefits 299 575
Cumulative effect of accounting change, net of tax (25) ---
Other - net (167) 42
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Net cash provided from operating activities 249 729
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investment securities and other invested 1,375 1,740
assets
Principal collected on mortgage and policy loans 129 128
Purchases of investment securities and other invested (1,685) (2,274)
assets
Mortgage and policy loan originations (326) (245)
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Net cash used for investing activities (507) (651)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of investment contracts 1,330 760
Redemption and benefit payments on investment contracts (1,007) (1,081)
Net commercial paper borrowings (maturities of 90 days or 4 571
less)
Borrowings from minority interest holder --- 562
Proceeds from other borrowings 306 1,368
Payments on other borrowings (469) (1,311)
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Net cash provided by financing activities 164 869
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EFFECT OF EXCHANGE RATE CHANGES ON CASH 2 ---
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (92) 947
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 378 330
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CASH AND EQUIVALENTS AT END OF PERIOD $ 286 $ 1,277
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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, except as discussed in Note 5) 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.
3. A summary of changes in shareholder's interest that did not result directly
from transactions with the share owner follows:
THREE MONTHS ENDED
-----------------------------------
(In millions) MARCH 27, 1999 MARCH 28, 1998
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Net earnings $ 142 $ 112
Unrealized losses on investment securities - net (327) (9)
Foreign currency translation adjustments (5) ---
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Total $ (190) $ 103
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4. 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) Wealth and Lifestyle Protection, comprised of
products intended to protect accumulated wealth and income from the
financial drain of unforeseen events.
The following is a summary of operating segment activity for the three
month periods ended March 27, 1999 and March 28, 1998:
THREE MONTHS ENDED
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(In millions) MARCH 27, 1999 MARCH 28, 1998
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REVENUES
Wealth Accumulation & Transfer ................. $ 1,212 $ 1,072
Wealth & Lifestyle Protection .................. 511 490
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Total revenues ............................. $ 1,723 $ 1,562
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EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
Wealth Accumulation & Transfer ................. $ 154 $ 152
Wealth & Lifestyle Protection .................. 35 29
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Total earnings before income taxes and cumulative
effect of accounting change .......... $ 189 $ 181
================= =================
4
The Company conducts its operations primarily in two geographic regions: (1)
North America and (2) Asia. The following is a summary of geographic region
activity for the three month period ending March 27, 1999.
(in millions) NORTH AMERICA ASIA CONSOLIDATED
------------- ---- ------------
Total revenues $ 1,620 $ 103 $1,723
Earnings before income taxes and cumulative $ 185 $ 4 $ 189
effect of accounting change
Prior to April, 1998 the Company's operations were entirely within the North
American geographic region.
5. In 1997, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 97-3, ACCOUNTING BY INSURANCE AND OTHER
ENTERPRISES FOR INSURANCE-RELATED ASSESSMENTS. This SOP provided guidance on
accounting by insurance and other enterprises for guaranty-fund and certain
other insurance related assessments. The SOP requires enterprises to
recognize (1) a liability for assessments when (a) an assessment has been
asserted or information available prior to issuance of the financial
statements indicates it is probable that an assessment will be asserted, (b)
the underlying cause of the asserted or probable assessment has occurred on
or before the date of the financial statements, and (c) the amount of the
loss can be reasonably estimated and (2) an asset for an amount when it is
probable that a paid or accrued assessment will result in an amount that is
recoverable from premium tax offsets or policy surcharges from in-force
policies.
Effective January 1, 1999, the Company adopted SOP 97-3 and has reported the
effect of this adoption as a cumulative effect of a change in accounting
principle amounting to $25 million (net of tax of $14 million).
6. During 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
equity pending recognition in earnings. The Company expects to adopt the
Statement on January 1, 2000. The impact of adoption will be determined
by several factors, including the specific hedging instruments in place
and their relationships to hedged items, as well as market conditions.
Management had not estimated the effects of adoption, as it believes
that such determination will not be meaningful until closer to the
adoption date.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS.
OVERVIEW
Net earnings before cumulative effect of accounting change for the first three
months of 1999 were $117 million, a $5 million, or 4.5%, increase over the first
three months of 1998. This increase was driven largely by increased investment
income and premiums earned due to the Company's GE Edison Life Insurance Company
("GE Edison") operations which commenced in April, 1998 and growth in sales of
certain existing products, partially offset by increased benefits and other
changes in policy reserves as well as increased general expenses principally
relating to GE Edison operations.
OPERATING RESULTS
NET INVESTMENT INCOME increased $29 million, or 4.0%, to $748 million for the
first three months of 1999 from $719 million for the first three months of
1998. The increase was primarily attributable to higher levels of average
invested assets ($41.2 billion in first three months of 1999 vs. $38.4 billion
in first three months of 1998) due to growth in core invested assets and
investments relating to the Company's GE Edison operations commencing in April
1998, partially offset by a decrease in weighted average yields to 7.3% for the
first three months of 1999 from 7.6% for the first three months of 1998.
PREMIUMS increased $110 million, or 15.1%, to $839 million for the first three
months of 1999 from $729 million for the first three months of 1998. The
increase is a result of the operations of GE Edison, which commenced in April
1998, and growth in the Company's life and accident and health businesses.
POLICY FEES AND OTHER INCOME increased $13 million, or 12.1%, to $120 million in
the first three months of 1999 from $107 million in the first three months of
1998. Other income is principally comprised of surrender fees, insurance charges
made against universal life contracts and other specified transaction fees
assessed to policyholders and commission income. The increase in the first three
months of 1999 was primarily due to an increase in transaction fee income as a
result of an increase in the balance of certain underlying reserve balances.
INTEREST CREDITED decreased $7 million, or 2.2%, to $314 million in the first
three months of 1999 from $321 million in the first three months of 1998. This
decrease was driven by (1) the reduction of the Company's crediting rates due to
changes in market conditions and (2) customer redemption of certain products and
the corresponding reduction in the applicable underlying reserves, being
partially offset by the increase in issuance of guaranteed investment contracts.
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 policies. These amounts increased $106 million, or 14.3%, to $849
million in the first three months of 1999 from $743 million in the first three
months of 1998. This increase was a result of the operations of GE Edison and
increased benefit payments and other changes in policy reserves.
COMMISSION EXPENSES increased $29 million, or 22.3%, to $159 million in the
first three months of 1999 from $130 million in the first three months of 1998
primarily due to GE Edison's operations and higher production on certain of the
Company's existing products.
GENERAL EXPENSES were $260 million for the first three months of 1999, an
increase of $71 million or 37.6% over the first three months of 1998 expense of
$189 million. The increase was primarily a result of expenses related to the
Company's GE Edison operations and increases in sales and advertising expenses
in support of the Company's core growth initiatives.
6
Item 2. Management's Discussion and Analysis of Results of Operations
(Continued).
Amortization of intangibles, net decreased $4 million, or 5.8%, to $65 million
for the first three months of 1999 from $69 million for the first three months
of 1998. 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 and annuity contracts, and goodwill, representing the excess of
purchase price over the fair value of identified net assets of the acquired
entities. An increase in amortization of goodwill, resulting from GE Edison was
offset by a reduction in the amortization of PVFP of $6 million.
Change in deferred acquisition costs, net increased $47 million, or 52.8%, to
$136 million for the first three months of 1999 from $89 million for the first
three months of 1998. The increase in change in deferred acquisition costs, net
was related to an increase in deferral of capitalization costs due to GE
Edison's operations, which commenced in April 1998, and increased product sales
noted above, partially offset by amortization of previously capitalized
acquisition costs.
Interest expense increased $5 million, or 27.8%, to $23 million for the first
three months of 1999 from $18 million for the first three months of 1998. This
increase was related to interest costs incurred on borrowings in connection with
the commencement of GE Edison operations in April 1998.
Financial Condition
Total assets increased $238 million, or 0.4%, at March 27, 1999 from December
31, 1998. Assets invested in separate accounts increased by $360 million, or
6.5% at March 27, 1999 from December 31, 1998 primarily due to continued sales
of variable annuity products and gains in the underlying investment funds. Total
investments decreased $126 million, or 0.3%, at March 27, 1999 from December 31,
1998. This decrease was primarily driven by net unrealized losses within the
Company's investment portfolio of $646 million, partially offset by invested
operating cash flows of $507 million.
Total liabilities increased $428 million, or 0.9%, at March 27, 1999 from
December 31, 1998. Future annuity and contract benefits increased $579 million,
or 1.6%, at March 27, 1999 from December 31, 1998. This increase resulted
primarily from the growth in existing insurance and investment products.
Separate account liabilities increased $360 million, or 6.5%, due to continued
sales of variable annuity products and gains in the underlying investment funds.
Borrowings (including short-term and long-term debt) decreased $159 million, or
7.8%, primarily as a result of normal line of credit activity during the first
quarter. Accounts payable and accrued other expenses decreased $334 million, or
16.3%, due primarily to timing of net payments and receipts related to
investment portfolio and normal business activity.
Year 2000
As discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, the Company is applying a Six Sigma quality approach to
identify and mitigate Year 2000 issues in their information systems, products
and services, facilities and suppliers, as well as to assess the extent to which
Year 2000 issues will affect its customers. That approach includes a fourth and
final phase - the control phase - for the completion, testing and continued
monitoring of Year 2000 readiness and the completion of necessary contingency
plans. The Company is developing, testing and implementing contingency plans to
ameliorate any potential internal or external disruption of critical business
processes. The specific actions identified in such contingency plans differ
depending on circumstances, but most often include manual work-arounds,
deployment of backup or secondary technologies, rearranging work schedules, and
substitution of suppliers, as appropriate. While the Company does not expect
significant disruptions of critical business processes caused by Year 2000
issues, the likelihood of externally-caused disruptions and the ability of the
contingency plans to ameliorate the effects of any such externally-caused
disruptions is not determinable. The total estimate of Year 2000 expenditures is
in line with previous projections. The activities related to Year 2000 efforts
necessarily involve estimates and projections of activities and resources that
will be required in the future. These estimates and projections could change as
work progresses.
7