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 June 30, 2001
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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
At August 3, 2001, 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. Condensed, Consolidated Financial Statements .................................. 1
Item 2. Management's Discussion and Analysis of Results of Financial Condition and
Results of Operations ........................................................ 8
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges ............................. 10
PART II - OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K .............................................. 11
Signatures .................................................................................. 12
Index to Exhibits ........................................................................... 13
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 Six Months Ended
--------------------------- -------------------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
---------- ----------- ------------- -----------
Revenues:
Premiums $ 1,690 $ 1,571 $ 3,230 $ 2,951
Net investment income 1,037 979 2,061 1,870
Surrender fee income 92 627 198 666
Net realized investment gains 99 69 244 119
Policy fees and other income 217 226 441 453
---------- ----------- ------------- -----------
Total revenues 3,135 3,472 6,174 6,059
---------- ----------- ------------- -----------
Benefits and expenses:
Benefits and other changes in policy reserves 1,479 1,658 2,855 2,661
General expenses 764 796 1,546 1,707
Interest credited 405 369 811 710
Amortization of intangibles 156 421 241 619
Change in deferred acquisition costs, net (214) (293) (401) (622)
Interest expense 35 35 78 62
---------- ----------- ------------- -----------
Total benefits and expenses 2,625 2,986 5,130 5,137
---------- ----------- ------------- -----------
Earnings before income taxes, minority interest and
cumulative effect of change in accounting principle 510 486 1,044 922
Provision for income taxes 172 170 354 319
---------- ----------- ------------- -----------
Earnings before minority interest and cumulative effect
of change in accounting principle 338 316 690 603
Minority interest 2 1 3 2
---------- ----------- ------------- -----------
Earnings before cumulative effect of change in accounting
principle 336 315 687 601
Cumulative effect of change in accounting principle, net
of tax - - 15 -
---------- ----------- ------------- -----------
Net earnings 336 315 672 601
Retained earnings at beginning of period 5,356 4,086 5,020 3,800
---------- ----------- ------------- -----------
Retained earnings at end of period $ 5,692 $ 4,401 $ 5,692 $ 4,401
========== =========== ============== ===========
See Notes to Condensed, Consolidated Financial Statements.
1
Item 1. Financial Statements (Continued).
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Condensed, Consolidated Statements of Financial Position
(Dollar amounts in millions)
June 30, December 31,
2001 2000
-------------------- --------------------
Assets (Unaudited)
Investments:
Fixed maturities available-for-sale, at fair value $ 56,591 $ 52,468
Equity securities available for sale, at fair value 1,107 1,037
Mortgage and other loans, net of valuation allowance 6,361 7,734
Policy loans 1,084 1,194
Short-term investments 1,082 1,693
Other invested assets 1,189 1,231
-------------------- --------------------
Total investments 67,414 65,357
Cash and cash equivalents 1,685 1,163
Accrued investment income 1,213 1,179
Deferred acquisition costs 3,804 3,446
Intangible assets 4,891 5,289
Reinsurance recoverable 1,591 1,396
Other assets 2,760 3,668
Separate account assets 9,793 10,606
-------------------- --------------------
Total assets $ 93,151 $ 92,104
==================== ====================
Liabilities and Shareholder's Interest
Liabilities:
Future annuity and contract benefits $ 59,029 $ 57,705
Liability for policy and contract claims 2,439 2,597
Other policyholder liabilities 1,088 1,379
Accounts payable and accrued expenses 5,342 5,043
Short-term borrowings 1,817 2,304
Separate account liabilities 9,793 10,606
Long-term debt 1,182 699
-------------------- --------------------
Total liabilities 80,690 80,333
-------------------- --------------------
Minority interest 51 51
Shareholder's interest:
Net unrealized investment losses (139) (298)
Derivatives qualifying as hedges (101) ---
Foreign currency translation adjustments 5 45
-------------------- --------------------
Accumulated non-owner changes in equity (235) (253)
Common stock --- ---
Additional paid-in capital 6,953 6,953
Retained earnings 5,692 5,020
-------------------- --------------------
Total shareholder's interest 12,410 11,720
-------------------- --------------------
Total liabilities and shareholder's interest $ 93,151 $ 92,104
==================== ====================
See Notes to Condensed, Consolidated Financial Statements.
2
Item 1. Financial Statements (Continued).
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Condensed, Consolidated Statements of Cash Flows
(Dollar amounts in millions)
(Unaudited)
Six Months Ended
------------------------------------------
June 30, July 1,
2001 2000
-------------------- --------------------
Cash Flows From Operating Activities
Net earnings $ 672 $ 601
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Change in reserves 1,785 (4,304)
Cumulative effect of change in accounting principle, net of tax 15 --
Other - net (717) 75
-------------------- --------------------
Net cash provided by (used in) operating activities 1,755 (3,628)
-------------------- --------------------
Cash Flows From Investing Activities
Short term investment activity, net 611 (694)
Proceeds from sales and maturities of investment securities and other
invested assets 9,913 3,901
Principal collected on and securitizations of mortgage and policy loans 1,661 400
Purchases of investment securities and other invested assets (13,705) (8,892)
Mortgage and policy loan originations (509) (487)
Acquisitions -- (220)
-------------------- --------------------
Net cash used in investing activities (2,029) (5,992)
-------------------- --------------------
Cash Flows From Financing Activities
Proceeds from issuance of investment contracts 3,567 4,226
Redemption and benefit payments on investment contracts (2,837) (3,095)
Net commercial paper (repayments) borrowings (585) 617
Proceeds from other borrowings 1,583 1,371
Payments on other borrowings (997) (1,183)
Cash received from assumption of Toho Mutual Life Insurance
Company insurance liabilities -- 13,177
-------------------- --------------------
Net cash provided by financing activities 731 15,113
-------------------- --------------------
Effect of Exchange Rate Changes on Cash 65 (84)
-------------------- --------------------
Increase in Cash and Equivalents 522 5,409
Cash and Equivalents at Beginning of Period 1,163 1,351
-------------------- --------------------
Cash and Equivalents at End of Period $ 1,685 $ 6,760
==================== ====================
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
(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 contained herein have been restated to
give retroactive effect to the contribution. This transaction resulted in
the creation of a new 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, 2000 and Current
Report on Form 8-K, dated June 8, 2001.
3. The Financial Accounting Standards Board ("FASB") issued, then subsequently
amended, Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, which became
effective for the Company on January 1, 2001. Under SFAS No. 133, as
amended, 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, equity prices and currency exchange rates. As
discussed more fully in Notes 1, 9 and 14 of the 2000 Form 10-K, the
Company uses derivative financial instruments to mitigate or eliminate
certain of those risks. The January 1, 2001 accounting change described
above affected only the pattern and timing of non-cash accounting
recognition.
4
At January 1, 2001 the Company's financial statements were adjusted to
record a cumulative effect of adopting this accounting change, as follows:
Earnings Shareholder's
Interest
-------------------- ------------------------
Adjustment to fair value of derivatives (a) $ (23) $ (555)
Income tax effects 8 204
-------------------- ------------------------
Total $ (15) $ (351)
==================== ========================
(a) For earnings effect, amount shown is net of adjustment to hedged items.
A reconciliation of current period changes for the first six months of
2001, net of applicable income taxes, in the separate component of
shareholder's interest labeled "derivatives qualifying as hedges" follows.
Transition adjustment as of January 1, 2001 $ (351)
Current period increases in fair value - net 217
Reclassifications to earnings - net 33
--------------------
Balance at June 30, 2001 $ (101)
====================
The cumulative effect on shareholder's interest was primarily attributable
to marking to market currency swap contracts used to hedge non-functional
currency investments and interest rate swap contracts used to hedge
variable-rate borrowings. Decreases in the fair values of these instruments
were attributable to declines in interest rates since inception of the
hedging arrangement. As a matter of policy, the Company ensures that
funding, including the effect of derivatives, of its investment and other
financial asset positions are substantially matched in character (e.g.,
fixed vs. floating) and duration. As a result, declines in the fair values
of these effective derivatives are offset by unrecognized gains on the
related financing assets and hedged items, and future net earnings will not
be subject to volatility arising from interest rate changes.
4. A summary of changes in shareholder's interest that do not result directly
from transactions with the shareholder follows:
Three Months Ended
-------------------------------------------
June 30, 2001 July 1, 2000
--------------------- --------------------
Net earnings $ 336 $ 315
Unrealized losses on investment securities - net (600) (247)
Foreign currency translation adjustments 28 (8)
Derivatives qualifying as hedges 180 ---
--------------------- ---------------------
Total $ (56) $ 60
===================== =====================
Six Months Ended
--------------------------------------------
June 30, 2001 July 1, 2000
--------------------- ---------------------
Net earnings $ 672 $ 601
Cumulative effect on shareholder's interest of adopting SFAS 133 (351) ---
Unrealized losses on investment securities - net 159 (105)
Foreign currency translation adjustments (40) (104)
Derivatives qualifying as hedges 250 ---
--------------------- ---------------------
Total $ 690 $ 392
===================== =====================
5
5. The Company conducts its operations through three 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, and (3) Mortgage Insurance, comprised of products intended to
protect mortgage lenders against losses caused by mortgage defaults.
The following is a summary of operating segment activity for the three and
six month periods ended June 30, 2001 and July 1, 2000:
Three Months Ended
----------------------------------------
June 30, 2001 July 1, 2000
----------------------------------------
Revenues
Wealth Accumulation and Transfer .......................... $ 1,966 $ 2,347
Lifestyle Protection and Enhancement ...................... 949 889
Mortgage Insurance ........................................ 220 236
----------------- ----------------
Total revenues ...................................... $ 3,135 $ 3,472
================= ================
Earnings before income taxes, minority interest and cumulative
effect of change in accounting principle
Wealth Accumulation and Transfer .......................... $ 269 $ 241
Lifestyle Protection and Enhancement....................... 85 51
Mortgage Insurance......................................... 156 194
----------------- ----------------
Total earnings before income taxes, minority interest
and cumulative effect of change in accounting
principle $ 510 $ 486
================= ================
Six Months Ended
----------------------------------------
June 30, 2001 July 1, 2000
----------------- ----------------
Revenues
Wealth Accumulation and Transfer .......................... $ 3,804 $ 3,997
Lifestyle Protection and Enhancement ...................... 1,919 1,609
Mortgage Insurance ........................................ 451 453
----------------- ----------------
Total revenues ...................................... $ 6,174 $ 6,059
================= ================
Earnings before income taxes, minority interest and cumulative
effect of change in accounting principle
Wealth Accumulation and Transfer .......................... $ 557 $ 493
Lifestyle Protection and Enhancement ...................... 156 54
Mortgage Insurance ........................................ 331 375
----------------- ----------------
Total earnings before income taxes, minority interest
and cumulative effect of change in accounting
principle $ 1,044 $ 922
================= ================
The following is a summary of assets by operating segment as of June 30, 2001
and December 31, 2000:
6
June 30, December 31,
2001 2000
-------------------- --------------------
Assets
Wealth Accumulation and Transfer .......................... $ 76,186 $ 76,057
Lifestyle Protection and Enhancement....................... 12,334 11,559
Mortgage Insurance......................................... 4,631 4,488
-------------------- --------------------
Total assets ........................................ $ 93,151 $ 92,104
==================== ====================
6. On June 26, 2001 the Company issued 60 billion yen (approximately $0.5
billion) of 10 year senior global debt due in 2011 under a $1 billion
universal shelf registration statement. The net proceeds from the issuance
were approximately $0.5 billion and were used to reduce commercial paper
borrowings. This debt has a 1.6% semi-annual coupon rate, with the first
payment to be made on December 20, 2001.
7. In November 2000, the Emerging Issues Task Force of the FASB reached a
consensus on impairment accounting for retained beneficial interests ("EITF
99-20"). Under this consensus, impairment on 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.
The FASB has issued two SFAS. SFAS No. 141, Business Combinations, is
effective for business combinations after June 30, 2001; SFAS No. 142,
Goodwill and Other Intangibles, is fully effective on January 1, 2002. It
is unlikely that SFAS No. 141 will have a significant effect on the
Company's financial position or results of operations. Under SFAS No. 142,
amortization of goodwill must cease as of January 1, 2002. Although the
effect of this accounting change on 2002 earnings cannot be determined at
this time, affected amortization is disclosed separately in Note 5 of the
Company's Form 10-K and Note 4 of the Company's Current Report on Form 8-K
as discussed in Note 2 above. Upon adopting SFAS 142, management will also
measure "impaired" goodwill, as defined, any resulting impairment will be
reported as the cumulative effect of a change in accounting principle as of
January 1, 2002. Management has not estimated "impaired" goodwill, and does
not expect to make such an estimate before the end of 2001.
7
Item 2. Management's Discussion and Analysis of Results of Operations.
Overview
All historical financial information contained herein has been restated to
reflect the contribution of the Mortgage Insurers to the Company in the second
quarter of fiscal 2001 which was accounted for in a manner similar to a
pooling-of-interests.
Net earnings before cumulative effect of change in accounting principle for the
first six months of 2001 were $687 million, an $86 million, or 14.3%, increase
over the first six months of 2000. The increase was primarily a result of
increased premiums, investment income, net realized investment gains, and lower
amortization of intangibles and general expenses, partially offset by lower
surrender fee income, increased benefits and other changes in policy reserves,
and higher interest charges.
Operating Results
Premiums increased $279 million, or 9.5%, to $3,230 million for the first six
months of 2001 from $2,951 million for the first six months of 2000. The
increase primarily relates to the growth in the Company's life, long-term care,
supplemental accident and health insurance products, as well as a reduction in
mortgage insurance premiums ceded to external reinsurers. This growth in long-
term care and supplemental accident and health insurance premiums were primarily
impacted by the acquisition of 90% of the long-term care insurance portfolio of
Citigroup's Travelers Life and Annuity unit and certain assets related thereto
in July 2000 and the acquisition of GE Group Life Assurance Company (formerly,
Phoenix American Life Insurance Company) in April 2000. These two transactions
are collectively referred to as the "2000 North American Acquisitions" and are
discussed more fully in the Company's 2000 Form 10-K. This increase was
partially offset by decreases in premiums on individual accident and health
insurance products, the cession of a certain life block of business no longer
actively marketed by the Company, and termination of reinsurance arrangements
and run-off of certain policies assumed as part of the comprehensive transfer
of Toho Mutual Life Insurance Company's assets and liabilities to the Company in
March 2000 (the "Toho Transfer").
Net investment income increased $191 million, or 10.2%, to $2,061 million for
the first six months of 2001 from $1,870 million for the first six months of
2000. The increase was primarily attributable to higher levels of average
invested assets ($67.4 billion in first six months of 2001 vs. $56.4 billion in
first six months of 2000). This increase was partially offset by a decrease in
weighted average yields to 6.20% for the first six months of 2001 from 6.74% for
the first months of 2000 due to lower yields on investment activity related to
the Company's Japanese operations, as well as the overall declining rate
environment. Excluding the Japanese operations, the weighted average yields for
the first six months of 2001 would have been 7.07% versus 7.48% in 2000.
Surrender Fee Income decreased $468 million to $198 million for the first six
months of 2001 from $666 million in the first six months of 2000. Surrender fee
income for the first six months of 2001 and 2000 primarily relates to amounts
retained by the Company from the surrender of policyholder contracts assumed as
part of the Toho Transfer in March 2000. These policies became subject to
surrender charges under the terms of the restructuring of Toho's in-force
insurance contracts. The surrender rates for the insurance policies assumed from
Toho were significantly greater than historical averages. There has been a
significant decrease in the number of policyholder contracts surrendered in the
first six months of 2001, which is consistent with management expectations.
Net realized investment gains increased $125 million to $244 million for the
first six months of 2001 from $119 million for the first six months of 2000.
This increase arises from the decision to sell certain assets in connection with
the Company's asset/liability risk management policies and associated ongoing
review of its investment portfolio positions which vary with market and economic
conditions.
Policy fees and other income decreased $12 million, or 2.6%, to $441 million in
the first six months of 2001 from $453 million in the first six months of 2000.
Other income is principally comprised of insurance charges made against
universal life contracts, revenues from sales of income protection packages,
fees assessed against policyholder account values, other fee income, and
commission income. The decrease in the first six months of 2001 was primarily
due to a general decline in club memberships in income protection packages,
partially offset by an increase in insurance charges made against universal life
contracts, and administration revenues generated by a third party administrator
acquired as part of the 2000 North American Acquisitions.
8
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 $194 million, or 7.3%, to $2,855
million in the first six months of 2001 from $2,661 million in the first six
months of 2000. The increase primarily relates to the growth in the Company's
life, long-term care insurance, mortgage insurance and supplemental accident and
health insurance products. The growth in long-term care and supplemental
accident and health insurance products were favorably impacted by the 2000 North
American Transactions. The increase in mortgage insurance loss and loss
adjustment expenses are a result of slowing economic conditions. Partially
offset by decreases in individual accident and health insurance products, run
off of certain policies assumed as part of the Toho Transfer in March 2000, the
cessions of a certain life block of business no longer actively marketed by the
Company,
General expenses, including commission expense, were $1,546 million for the
first six months of 2001, a decrease of $161 million or 9.4% over the first six
months of 2000 expense of $1,707 million. The decrease is primarily the result
of prior year charges related to the termination of reinsurance arrangements in
connection with the Toho Transfer, decreases in advertising and marketing
expenses in certain lines of business, decreases in commission expenses due to
lower production in certain annuity products and higher contract renewals on
certain of the Company's life products which are associated with lower
commission rates, partially offset by increased core operating expenses in
support of the Company's core growth initiatives.
Interest credited increased $101 million, or 14.2%, to $811 million in the first
six months of 2001 from $710 million in the first six months of 2000. This
increase was a result of the increase in the underlying reserves arising
primarily from sales of Guaranteed Investment Contracts ("GICs"), deferred
annuities, and certain universal life insurance products.
Amortization of intangibles decreased $378 million, or 61.1%, to $241
million for the first six months of 2001 from $619 million for the first six
months of 2000. The Company's significant intangible assets consist of two
components which 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. Amortization of intangibles decreased due primarily to lower PVFP
amortization associated with the run-off of the insurance policies assumed in
the Toho Transfer.
Change in deferred acquisition costs, net decreased $221 million, or 35.5%, to
$401 million for the first six months of 2001 from $622 million for the first
six months of 2000. Deferred acquisition costs include costs and expenses which
vary with and are primarily related to the acquisition of insurance and
investment contracts, such as commissions, printing, underwriting, and policy
issue costs. Under U.S. GAAP, these costs are deferred and recognized in
relation to either premiums or gross profits underlying the contracts.
Amortization of deferred acquisition costs decreased primarily as a result of
the termination of reinsurance arrangements as a part of the Toho Transfer in
March 2000 and a decrease in commission and other advertising expenses,
partially offset by an increase in deferred acquisition costs associated with
long-term care insurance.
Interest expense increased $16 million, or 25.8%, to $78 million for the first
six months of 2001 from $62 million for the first six months of 2000. Of this
increase, $22 million relates primarily to an increase in commercial paper
outstanding, $6 million of which was offset by a reduction of floating interest
rates on commercial paper.
Financial Condition
Total assets increased $1.0 billion, or 1.1%, at June 30, 2001 from December 31,
2000. Total investments increased $2.1 billion or 3.1%. This increase is
primarily due to net purchases of securities driven by operating cash flows and
net investment income, partially offset by mortgage and policy loans repayments
and securitizations as well as other decreases in short-term investments. Assets
invested in separate accounts decreased by approximately $0.8 billion, or 7.7%,
at June 30, 2001 from December 31, 2000 primarily due to an overall decrease in
market value of the underlying investment funds. All other assets decreased by
approximately $0.3 billion as a result of normal business operations.
Total liabilities increased $0.4 billion, or 0.4%, at June 30, 2001 from
December 31, 2000. Future annuity and contract benefits increased approximately
$1.3 billion, or 2.3%, at June 30, 2001 from December 31, 2000. This increase
resulted primarily from the growth in the Company's life insurance products and
investment contracts (primarily GICs). This increase was offset by separate
account liabilities, which decreased by approximately $0.8 billion, or 7.7%, at
June 30, 2001 from December 31, 2000 primarily due to an overall decrease in
market value of the underlying investment funds. Short-term borrowings decreased
by $0.5 billion as a result of net repayments on commercial paper. Long-term
debt increased by $0.5 billion as the result of the issuance of 60 billion yen
of 10 year senior global debt.
Forward Looking Statements
This document may include certain "forward looking statements" within the
meaning of 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.
9
EXHIBIT 12
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in millions)
Six Months Ended June 30, 2001
(Unaudited)
Ratio of Earnings
to Fixed Charges
---------------------
Net earnings $ 672
Provision for income taxes 354
Minority Interest 3
Cumulative effect of change in accounting principle 15
---------------------
Earnings before income taxes and minority interest
1,044
---------------------
Fixed charges:
Interest 78
Interest portion of net rentals 14
---------------------
Total fixed charges 92
---------------------
Less interest capitalized, net of amortization ----
---------------------
Earnings before income taxes and minority interest, plus fixed charges $ 1,136
=====================
Ratio of earnings to fixed charges 12.3
=====================
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.
10
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
Exhibit 4.1 Indenture, dated as of June 26, 2001, between GE
Financial Assurance Holdings, Inc., and The Chase
Manhattan Bank, as Trustee.
Exhibit 4.2 First Supplemental Indenture, dated as of June 26, 2001,
among GE Financial Assurance Holdings, Inc., The Chase
Manhattan Bank, as Trustee, Paying Agent and Exchange
Rate Agent, and The Chase Manhattan Bank, Luxembourg,
S.A., as Paying Agent.
Exhibit 12 Computation of ratio of earnings to fixed charges.
b. Reports on Form 8-K.
The Company filed a Current Report on Form 8-K, dated June 8, 2001,
reporting (under Item 2, thereof) additional information relating to
the contribution of the Mortgage Insurers to the Company.
11
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 3, 2001 By: /s/ Thomas W. Casey
-------------------------------------------------
Thomas W. Casey,
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 3, 2001 By: /s/ Richard G. Fucci
-------------------------------------------------
Richard G. Fucci,
Vice President and Controller
(Principal Accounting Officer)
12
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Index to Exhibits
Exhibit No. Page
- -------------------- -------------------
4.1 Indenture, dated as of June 26, 2001, between GE Financial
Assurance Holdings, Inc. and The Chase Manhattan Bank,
as Trustee
4.2 First Supplemental Indenture, dated as of June 26, 2001,
among GE Financial Assurance Holdings, Inc., The Chase
Manhattan Bank, as Trustee, Paying Agent and Exchange
Rate Agent, and The Chase Manhattan Bank, Luxembourg, S.A,
as Paying Agent
12 Computation of ratio of earnings to fixed charges
13