FILE NO.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G)
OF THE SECURITIES EXCHANGE ACT OF 1934
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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 Number)
6604 WEST BROAD STREET
RICHMOND, VIRGINIA 23230
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (804) 281-6000
Securities to be registered pursuant to Section 12(b) of the Act:
NONE
Securities to be registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class)
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TO THE EXTENT THE ITEMS IN FORM 10 ARE IDENTICAL TO ITEMS IN FORM 10-K, THIS
REGISTRATION STATEMENT ON FORM 10 HAS BEEN PREPARED ON THE REDUCED DISCLOSURE
FORMAT SPECIFIED IN INSTRUCTION I TO FORM 10-K. SPECIFICALLY, ITEMS 1, 2, 3 AND
15(B) HAVE BEEN PREPARED IN ACCORDANCE WITH SUCH INSTRUCTION I, AND ITEMS 4, 5,
6 AND 7 HAVE BEEN OMITTED IN ACCORDANCE WITH SUCH INSTRUCTION I.
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ITEM 1. BUSINESS.
GE Financial Assurance Holdings, Inc. ("GE Financial Assurance," together
with its subsidiaries, the "Company"), through its direct and indirect
subsidiaries, is principally engaged in the life insurance and annuity business
primarily in the United States and increasingly abroad. All the outstanding
common stock of GE Financial Assurance is owned by General Electric Capital
Corporation ("GE Capital"), a wholly owned subsidiary of General Electric
Capital Services, Inc. The Company's principal executive offices are located at
6604 West Broad Street, Richmond, Virginia 23230 (telephone (804) 281-6000).
OWNERSHIP OF THE COMPANY
GE Capital operates in four financing industry segments and in a specialty
insurance industry segment. GE Capital's financing activities include a full
range of middle-market leasing and lending, equipment management sales and
services, specialized financing and consumer services. GE Capital's specialty
insurance activities include providing financial guaranty insurance, principally
on municipal bonds and structured finance issues, private mortgage insurance and
creditor insurance covering international customer loan repayments. The
long-term debt obligations of GE Capital are rated "AAA" by Standard & Poor's
Corporation ("S&P") and "Aaa" by Moody's Investors Services, Inc. ("Moody's").
GENERAL DESCRIPTION OF BUSINESS
GE Financial Assurance is a holding company that through its subsidiaries
provides consumers financial security solutions by selling a wide variety of
insurance, investment and retirement products primarily in the United States.
The Company effectively began operations in April 1993 with the acquisition of
GNA Corporation and its principal operating company, Great Northern Insured
Annuity Corporation. The Company has continued to broaden its operations through
a series of acquisitions consummated since 1993. See "The Company--Significant
Acquisitions." The Company's product offerings are divided along two major
segments of consumer needs: (i) Wealth Accumulation and Transfer and (ii) Wealth
and Lifestyle Protection.
The Company's principal product lines under the Wealth Accumulation and
Transfer segment are (i) annuities (deferred and immediate; either fixed or
variable), (ii) life insurance (universal, term, ordinary and group), (iii)
guaranteed investment contracts ("GICs") and (iv) mutual funds. Wealth
Accumulation and Transfer products are used by customers as vehicles for
accumulating wealth, often on a tax-deferred basis, transferring wealth to
beneficiaries, or providing a means to replace the insured's income in the event
of premature death. The Company's distribution of Wealth Accumulation and
Transfer products is accomplished through three distribution methods: (i)
intermediaries, (ii) career or dedicated sales forces and (iii) marketing
through businesses and affinity groups.
The Company's principal product lines under the Wealth and Lifestyle
Protection segment are (i) long-term care insurance, (ii) supplemental accident
and health insurance, (iii) personal lines of automobile insurance and (iv)
credit insurance. Wealth and Lifestyle Protection products are used by customers
as vehicles to protect their income and assets from the adverse economic impacts
of automobile accidents and related liabilities or significant health care costs
or other unanticipated events that cause temporary or permanent loss of earnings
capabilities (including the ability to repay certain indebtedness). The
Company's distribution of Wealth and Lifestyle Protection products is
accomplished through four distribution methods: (i) intermediaries, (ii) career
or dedicated sales forces, (iii) marketing through businesses and affinity
groups and (iv) direct marketing.
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The following table sets forth selected information regarding the Company
presented on a basis consistent with generally accepted accounting principles
("GAAP").
SELECTED FINANCIAL DATA
DECEMBER 31,
------------------------------------------ JUNE 30,
1993* 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
AT END OF PERIOD
Invested Assets................................ $ 12,256 $ 14,845 $ 18,470 $ 35,810 $ 36,737
Total Assets................................... 13,243 16,852 21,820 45,361 47,014
Policyholder Liabilities(1).................... 11,907 15,611 19,094 35,493 36,233
Debt Outstanding............................... -- -- -- 175 175
Shareholder's Interest......................... 1,127 992 2,319 5,721 6,093
FOR THE PERIOD THEN ENDED
Premiums....................................... 23 149 485 1,386 1,013
Total Revenues................................. 574 1,091 1,749 3,366 2,605
Net Income..................................... 35 72 101 229 203
Investment Contracts Issued.................... 490 1,064 1,239 1,998 1,792
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(1) Includes future annuity and contract benefits, unearned premiums, liability
for policy and contract claims, and other policyholder liabilities.
* Represents the period from the date of acquisition, April 1, 1993 through
December 31, 1993.
RECENT TRANSACTION
The Company acquired Colonial Penn Insurance Company and its subsidiaries
("Colonial Penn") from Leucadia Corporation on November 4, 1997. Colonial Penn
is a low-cost direct marketer of personal lines of automobile insurance.
Colonial Penn is included in the Company's Wealth and Lifestyle Protection
segment. The Company believes that the acquisition of Colonial Penn will
significantly increase its direct marketing capability.
STRATEGY
The Company believes that changes in demographics such as the increased
number of baby boomers entering middle and late middle age, longer life
expectancies due to medical advances, the reduction in government- and
employer-sponsored benefit programs and the increased need for estate planning
for the most affluent group of retirees in history, have and will continue to
increase the demand for innovative products and services to solve individual
financial challenges. The Company's strategy is designed to take advantage of
these trends by offering a broad array of products and services through the
Company's four major channels of distribution. See "Marketing and Distribution."
The Company's approach to this opportunity is to accumulate a number of
businesses with unique product and distribution capabilities designed to deliver
innovative products and services associated with accumulating, transferring and
protecting the consumer's wealth and lifestyle. Most of the Company's products
are targeted at middle to upper income consumers and individuals employed by
small to mid-sized companies. To date, the Company has operated primarily in the
United States and to a lesser extent in selected international markets. The
Company's strategy consists of the following seven elements:
- MARKETPLACE FOCUS. The Company's business units focus on key customer
groups and distribution channels which are well positioned to maximize
penetration into these groups. The Company believes that its customers are
becoming increasingly sophisticated in assessing their needs for savings,
insurance and retirement. The Company's products and services are designed
to meet
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needs based on input from customers and the distributors who service them.
To enable the Company to obtain this input, it endeavors to create and
maintain direct contact with its key customer groups, as well as the
distributors who service them.
- COST LEADERSHIP. The Company recognizes that consolidation in the
financial services industry will create fewer, but larger competitors.
Effective competition will be dependent upon, among other things, the
Company's ability to reduce its expenses through the elimination of
duplicate functions and the use of enhanced technology. The Company's
continued commitment to bring together its recent acquisitions into an
integrated platform with common information systems is designed to create
a competitive advantage in the marketplace.
- GROW CAPABILITIES AND ENTER NEW MARKETS. GE Financial Assurance has
acquired a number of companies which offer a broad array of products and
services designed to address the wealth accumulation and transfer and
wealth and lifestyle protection needs of consumers. While the Company's
primary focus will be on increasing its sales of existing products by
enhancing its marketing and sales, product development and service
capabilities, the Company will continue to consider opportunities to enter
new markets. Entry into these new markets will be accomplished through (1)
development of new products for sale through existing channels, (2)
development of new products to serve new channels, (3) creation of new
distribution segments within established channels and (4) acquisition of
entities with an established presence in existing markets or distribution
channels.
- LEVERAGE EXISTING DISTRIBUTION. GE Financial Assurance's distribution
strategy is focused on penetrating its targeted consumers through four
types of distribution methods: (i) intermediaries, (ii) career or
dedicated sales forces, (iii) marketing through businesses and affinity
groups and (iv) direct marketing. In each distribution type, internal
growth will be driven by the effective cross-marketing of selected
products, and enhancing the presence, effectiveness, and loyalty of the
distributors. While the Company believes that the diversity of its
distribution channels is a competitive advantage, it recognizes the need
to coordinate its efforts to provide a unified face to its customers and
distributors. The Company has worked, and will continue to work, to
promptly integrate its recent acquisitions, many of which have enhanced
existing distribution channels or added new ones. See--"Marketing and
Distribution."
- PURSUE NEW DISTRIBUTION. A key component of GE Financial Assurance's
strategy is to continue to diversify its distribution channels. Many of
the Company's acquisitions have provided new distribution channels. The
Company believes that its multiplicity of distribution channels will
continue to be an important competitive advantage as the financial
services industry becomes less regulated and the Company is faced with
increased competition. New distribution opportunities could arise in many
forms resulting in a variety of new relationships (i.e. acquisitions,
alliances, partnering, reinsurance and de novo operations).
- INTERNATIONAL EXPANSION. The Company recognizes that demographic trends
similar to those existing in the United States are also emerging in other
developed countries. Additionally, other markets are in the process of
developing financial services capabilities currently available in the
United States. The Company continually monitors these developments and
considers opportunities to participate in these markets. GE Financial
Assurance believes that industrialization and expansion of the middle
class in Asia and Latin America and the consolidation of the financial
services industry in Europe will create opportunities for international
expansion in the future.
- STRONG OPERATING FUNDAMENTALS. The Company's dedication to providing
quality products to its customers, maintaining strong risk management and
compliance and utilizing technology for competitive advantage all provide
a solid foundation for the Company's successful execution of its business
strategy. Risk management and compliance have been a long-standing
strength of GE Capital, and the Company has developed processes and
practices appropriate for its operating businesses using GE Capital's
practices and experience as a guide. The Company believes that its
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commitment to technology, as demonstrated by its upgrading of its life
insurance administration and underwriting systems and its development of
integrated computer systems which propose, issue and administer various
types of complex contracts, will enable the Company and its distributors
to be increasingly more productive and thus provide competitive advantages
in the marketplace.
SIGNIFICANT ACQUISITIONS
The Company effectively began operations in April 1993 with the acquisition
of GNA Corporation and its principal operating company Great Northern Insured
Annuity Corporation. The Company has continued to broaden its operations through
a series of acquisitions since 1993. The following table sets forth the primary
acquisitions that GE Financial Assurance has made over the last few years with a
brief description of the new products and principal distribution channels each
acquisition brought to GE Financial Assurance.
PRINCIPAL
ACQUISITION DATE PRINCIPAL PRODUCTS DISTRIBUTION CHANNEL
- ------------------------ -------------- ------------------------ ------------------------
GNA Corporation April 1993 Deferred annuities and Intermediaries
mutual funds
United Pacific Life July 1993 Deferred annuities and Intermediaries
Insurance Co. structured settlements
(subsequently renamed
General Electric Capital
Assurance Company)
The Federal Home Life November 1994 Annuities, supplemental Career or dedicated
Companies accident and health and sales force and
credit products intermediaries
AMEX Life Assurance October 1995 Long-term care and Career or dedicated
Company (subsequently corporate-owned life sales force
merged into General insurance
Electric Capital
Assurance Company)
Union Fidelity Life April 1996 Credit products and Direct marketing and
Insurance Company supplemental accident marketing through
and health products businesses and affinity
groups
The Life Insurance April 1996 Variable annuities, Intermediaries and
Company of Virginia universal life insurance career or dedicated
and GICs sales force
First Colony Life December 1996 Life insurance, Intermediaries
Insurance Company retirement annuities and
structured settlements
Colonial Penn Insurance November 1997 Personal lines of Direct marketing
Company automobile insurance
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RATINGS
GE Financial Assurance's principal subsidiaries are rated by A.M. Best
Company, an independent rating agency ("A.M. Best"), as follows:
COMPANY RATING
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First Colony Life Insurance Company........................................ A++ (superior)
General Electric Capital Assurance Company................................. A+ (superior)
GE Capital Life Assurance Company of New York.............................. A+ (superior)
American Mayflower Life Insurance Company of New York...................... A+ (superior)
Federal Home Life Insurance Company........................................ A+ (superior)
The Harvest Life Insurance Company......................................... A+ (superior)
The Life Insurance Company of Virginia..................................... A+ (superior)
Great Northern Insured Annuity Corporation................................. A+ (superior)
Union Fidelity Life Insurance Company...................................... A (excellent)
Colonial Penn Insurance Company............................................ A-(excellent)
PHF Life Insurance Company................................................. B+ (very good)
A.M. Best's ratings for insurance companies currently range from A++ to F,
and some companies are not rated. A.M. Best's ratings are based upon an
evaluation of a company's: (i) financial strength (leverage/ capitalization,
capital structure/holding company, quality and appropriateness of reinsurance
program, adequacy of loss/policy reserves, quality and diversification of
assets, and liquidity); (ii) operating performance (profitability, revenue
composition, and management experience and objectives) and (iii) market profile
(market risk, competitive market position, spread of risk, and event risk).
"A++" and "A+" ratings are assigned to those companies that in A.M. Best's
opinion have, on balance, superior financial strength, operating performance and
market profile when compared to the standards established by A.M. Best and have
a very strong ability to meet their ongoing obligations to policyholders. "A"
and "A-" ratings are assigned to those companies that in A.M. Best's opinion
have, on balance, excellent financial strength, operating performance and market
profile when compared to the standards established by A.M. Best and have a
strong ability to meet their ongoing obligations to policyholders. "B+" ratings
are assigned to those companies that in A.M. Best's opinion have, on balance,
very good financial strength, operating performance and market profile when
compared to the standards established by A.M. Best and have a good ability to
meet their ongoing obligations to policyholders. A.M. Best's ratings are based
upon factors of concern to policyholders, agents and intermediaries and are not
directed toward the protection of investors.
PRODUCTS
WEALTH ACCUMULATION AND TRANSFER PRODUCTS
ANNUAL LIFE INSURANCE
The following table presents the aggregate amount of annual life insurance
the Company had in force as of the dates indicated.
ANNUAL LIFE INSURANCE IN FORCE
AS OF DECEMBER 31,
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1994 1995 1996
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(DOLLARS IN MILLIONS)
Annualized Premiums of Life Insurance in Force:
Term...................................................................................... $ 1 $ 4 $ 109
Permanent................................................................................. 9 45 322
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Total................................................................................... $ 10 $ 49 $ 431
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The following table presents total sales of the Company's annual life
insurance products for the periods presented.
DISTRIBUTION OF ANNUAL LIFE INSURANCE POLICIES
YEARS ENDED DECEMBER 31,
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1994 1995 1996
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(DOLLARS IN MILLIONS)
Annual Life Insurance:
Term...................................................................................... $ -- $ -- $ 7
Permanent................................................................................. 4 32 105
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Total................................................................................... $ 4 $ 32 $ 112
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TERM LIFE INSURANCE. Term life insurance provides life insurance protection
for a limited time: a death benefit is paid only if the insured dies during the
specified term. The Company's term life insurance products include competitively
priced graded premium whole life insurance products that offer low cost
insurance protection. These products generally have level premiums for initial
terms of 1, 5, 10, 15, 20 or 30 years and give the policyholder the contractual
right to continue coverage for life.
PERMANENT LIFE INSURANCE. Permanent life insurance provides life insurance
protection for the entire life of the insured and, unlike term life insurance,
has an investment component. The Company's permanent life insurance products
include a variety of guaranteed premium interest-sensitive whole life insurance,
universal life insurance, and employee plans/salary savings products.
IMPAIRED RISK UNDERWRITING. An insured who is an impaired risk has a
shorter life expectancy than one who is accepted on a standard or preferred
basis at normal rates; for this reason the insured pays a higher premium for the
same coverage. During 1996, approximately 8% of the Company's life insurance
premiums and 6% of the face amount of its new business was underwritten on an
impaired risk basis. The Company's impaired risk underwriting capability was
acquired as part of the Life of Virginia and First Colony acquisitions in 1996.
Prior to that date, the amount of the Company's life insurance premiums
represented by impaired risk business was not material.
The following table identifies those states that accounted for 5% or more of
the Company's annual life insurance premiums collected during 1996 (includes a
small amount of single premium life insurance).
ANNUAL LIFE INSURANCE PREMIUMS PRODUCED BY STATE
YEAR ENDED
STATE DECEMBER 31, 1996
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(PERCENT OF TOTAL PREMIUMS)
California........................................................ 11%
Virginia.......................................................... 10
Florida........................................................... 6
New York.......................................................... 6
Texas............................................................. 5
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SINGLE PREMIUM IMMEDIATE ANNUITIES
The following table presents the aggregate amount of single premium
immediate annuities ("SPIAs") in force measured by reserves as of the dates
indicated.
SINGLE PREMIUM IMMEDIATE ANNUITIES IN FORCE
AS OF DECEMBER 31,
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1994 1995 1996
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(DOLLARS IN MILLIONS)
Single Premium Immediate Annuities:
Structured settlement............................................................. $ 2,274 $ 2,426 $ 8,041
Retirement........................................................................ 1,569 1,615 2,617
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Total........................................................................... $ 3,843 $ 4,041 $ 10,658
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SPIAs provide long-term guaranteed benefit payment streams utilizing a fixed
interest assumption. SPIAs guarantee a stream of payments beginning immediately
and continuing over a future period of years and, in some cases, for the life of
the annuitant. The Company's SPIAs fall into two categories: structured
settlement and retirement.
SPIAs differ from deferred annuities in that they generally provide for
payments to begin immediately, are not subject to surrender or borrowing by the
policyholder and the payment stream is contractually guaranteed. The implicit
interest rate on SPIAs is based on market conditions when the policy is issued
and is guaranteed for the term of the annuity. Since immediate annuities are not
subject to surrender or borrowing by the policyholder, they provide the
opportunity for an insurance company to match closely the underlying investment
of premium received to the cash benefits to be paid under a policy, thereby
providing an anticipated margin for expenses and profit, subject to mortality
risk. The Company is one of the few companies that offers medically underwritten
annuities. This allows retirees with medical conditions that could shorten their
life expectancies to purchase annuities at lower prices or higher payouts which
reflect their individual life expectancies.
The following table presents total sales of the Company's single premium
immediate annuity products for the periods presented. Premiums related to single
premium immediate annuity contracts without life contingencies are reported as
deposit liabilities under GAAP.
DISTRIBUTION OF SINGLE PREMIUM IMMEDIATE ANNUITIES
YEARS ENDED DECEMBER 31,
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1994 1995 1996
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(DOLLARS IN MILLIONS)
Single Premium Immediate Annuities:
Structured Settlement................................................................ $ 101 $ 188 $ 303
Retirement........................................................................... 19 19 39
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Total.............................................................................. $ 120 $ 207 $ 342
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SINGLE PREMIUM IMMEDIATE ANNUITIES--STRUCTURED SETTLEMENT. Structured
settlements provide an alternative to a lump sum settlement in a personal injury
case and are generally purchased by property and casualty insurance companies
for the benefit of an injured claimant with benefits scheduled over a fixed
period and/or for the life of the claimant thereafter. Structured settlements
offer tax advantaged long-range financial security to the injured party and
facilitate claim settlement for the casualty insurance carrier. First Colony
Life Insurance Company ("First Colony") was a pioneer in this business in the
late
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1970's and early 1980's and has consistently been a significant provider since
the market's inception. GE Capital Assurance has been a significant provider
since 1993.
Structured settlement contracts are long-term in nature, guarantee a fixed
benefit stream and generally cannot be surrendered or borrowed against. Since
many structured settlement contracts generally provide for guaranteed payments
for a predetermined period that do not depend on the survival of the annuitant,
the mortality risk portion of the Company's liability with respect to such
policies is relatively small.
SINGLE PREMIUM IMMEDIATE ANNUITIES--RETIREMENT. SPIAs used for retirement
purposes are identical to those used to facilitate structured settlements in
that payments begin immediately, cannot be surrendered or borrowed against and
guarantee a fixed stream of benefits. Retirement annuities are typically sold to
older annuitants and therefore are somewhat shorter in average contract life
than structured settlement annuities.
The Company has been able to use much of the technology it developed in the
structured settlement annuity market to its advantage in the retirement annuity
market. Its software allows agents to design and quote innovative and customized
income patterns for their clients.
SINGLE PREMIUM LIFE INSURANCE, SINGLE PREMIUM DEFERRED ANNUITIES AND GICS
The following table presents Company's single premium life insurance, single
premium deferred annuities and GICs in force for the periods presented. Premiums
related to these products are reported as deposit liabilities under GAAP.
SINGLE PREMIUM LIFE INSURANCE,
SINGLE PREMIUM DEFERRED ANNUITIES AND GICS IN FORCE
AS OF DECEMBER 31,
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1994 1995 1996
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(DOLLARS IN MILLIONS)
Single Premium Life Insurance.................................................... $ 714 $ 657 $ 2,812
Single Premium Deferred Annuities
Fixed.......................................................................... 10,596 10,434 13,277
Variable....................................................................... -- 18 3,167
GICs............................................................................. -- -- 1,341
Other............................................................................ 18 15 145
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Total........................................................................ $ 11,328 $ 11,124 $ 20,742
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DISTRIBUTION OF SINGLE PREMIUM LIFE INSURANCE AND
SINGLE PREMIUM DEFERRED ANNUITY AND GIC SALES
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
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(DOLLARS IN MILLIONS)
Single Premium Life Insurance..................................................... $ 4 $ 4 $ 25
Single Premium Deferred Annuities
Fixed........................................................................... 1,026 1,060 756
Variable........................................................................ -- 17 796
GICs.............................................................................. -- -- 245
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Total......................................................................... $ 1,030 $ 1,081 $ 1,822
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The following table identifies those states that accounted for 5% or more of
the Company's 1996 production of annuities.
ANNUITY PRODUCTION BY STATE
YEAR ENDED
STATE DECEMBER 31, 1996
- ------------------------------------------------- -------------------------------
(PERCENT OF TOTAL PREMIUMS)
Virginia......................................... 11%
California....................................... 10
Washington....................................... 8
New York......................................... 7
Florida.......................................... 6
Michigan......................................... 6
Connecticut...................................... 6
Illinois......................................... 5
SINGLE PREMIUM LIFE INSURANCE
The Company's single premium life insurance products are interest
rate-sensitive policies that, for a single payment, provide the insured with
non-participating life insurance with a guaranteed cash value and death benefit.
Current interest is credited to the policy's cash values based upon interest
rates that are revised periodically by the Company to reflect current economic
conditions. In most cases, this accrual of interest during the accumulation
period is on a tax-deferred basis to the insured. The Company guarantees that in
no event will the interest rate credited on cash values be less than the
guaranteed rate specified in the policy. The policy owner is permitted to take
loans and withdrawals against the cash value. Withdrawals in the early years of
the contract are subject to a significant surrender charge. In 1997, most
policies being issued provide surrender charges which are 8% for the first six
policy years and decrease to zero over the subsequent 10-year period. The
product permits up to a 10% annual withdrawal without penalty.
SINGLE PREMIUM DEFERRED ANNUITIES
FIXED ANNUITIES. A fixed single premium deferred annuity (an "SPDA")
provides for a single premium payment at time of issue, an accumulation period
and an annuity payout period at some future date. During the accumulation
period, the insurance company credits the account value of the annuitant with
interest earnings at a current interest rate (the "crediting rate") that is
guaranteed for a period of one to five years, at the annuitant's option, and,
thereafter, is subject to change based on prevailing market rates and product
profitability. Each contract also has a minimum guaranteed rate. This accrual of
interest during the accumulation period is on a tax deferred basis to the policy
owner. After the number of years specified in the annuity contract, the owner
may elect to take the proceeds of the annuity as a single payment, a specified
income for life or a specified income for a fixed number of years. The policy
owner is permitted at any time during the accumulation period to withdraw all or
part of the single premium paid plus the amount credited to his account.
Withdrawals in the early years of the contract are subject to a significant
surrender charge. In 1997, policies being issued provide surrender charges which
vary from 5-8% of the account value starting in the year of policy issue and
decrease to zero over a five to nine year period. SPDAs permit up to a 10%
annual withdrawal after the first twelve months without penalty.
At least once each month the Company establishes an interest crediting rate
for its new fixed SPDA policies. In determining the Company's interest crediting
rate on new policies, management considers the competitive position of the
Company, prevailing market rates and the profitability of the annuity product.
The Company maintains the initial crediting rate for a minimum period of one
year. Thereafter, the Company may adjust the crediting rate not more frequently
than once per year for a given SPDA policy.
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Interest rates credited on the Company's in-force SPDA policies ranged from 4.7%
to 8.7% at June 30, 1997. All of the Company's annuity products have minimum
guaranteed crediting rates ranging from 3.0% to 5.5% for the life of the policy.
The Company offers an SPDA product where the amount of interest credited is
linked to the S&P 500 Index. This indexed annuity allows customers to
participate in the growth in the S&P 500 while providing protection of principal
and a guaranteed return. The guaranteed minimum crediting rate on the product is
3% per annum. The product has a ten-year surrender charge period with surrender
charges of 8%. The Company earns an annual administrative fee on the product
which is computed based on the policy's accumulated value.
VARIABLE ANNUITIES. A variable annuity incorporates all the features of a
fixed SPDA, but also involves maintaining a portion of the policyholders'
premiums in a separate account maintained for variable annuities, distinct from
the Company's general assets and liabilities. Policyholders have discretion to
allocate their premiums among several available fund options (mutual funds and
other investment funds, including a fixed account, which is held by the
Company). The cash surrender value of a variable annuity policy depends on the
performance of these underlying funds, which the policyholder may reallocate
from time to time. There is no guaranteed minimum rate in the mutual fund
components of variable annuity policies. Similarly, during the variable
annuity's payout period, the payments distributed to the annuitant fluctuate
with the performance of the underlying funds selected by the annuitant. Variable
annuities provide the Company with fee based revenue in the form of management
and administrative fees charged to the policyholder's account.
GICS
GICs are deposit-type products that provide a guaranteed return (on a fixed
or indexed basis) to the contract holder. GICs are purchased by ERISA qualified
defined contribution plans, including but not limited to, 401(k) plans where
plan participants elect a stable value option. Funding Agreements, which operate
substantially similarly to GICs, are purchased by institutional accredited
investors for various kinds of plans and programs that are not ERISA qualified.
Examples of such agreements include money market funds, bank common trust funds
and other corporate and trust accounts.
GICs credit interest at fixed or indexed interest rates (determined by
market conditions) and fixed GICs have a fixed maturity ranging from three to
five years, both of which are set at the time of sale. Substantially all GICs
allow for the payment of benefits at contract value to ERISA plan participants
in the event of death, disability, retirement or change in investment election.
The Company underwrites these risks before placing a GIC with a plan. In
addition, the Company requires plans buying its GICs to have certain
restrictions on participant transfers to money market and similar funds in order
to reduce disintermediation risk. The Company's GICs can also be terminated
prior to their maturity by the contract holder, but only after an adjustment to
the contract value for changes in the level of interest rates and the
application of a significant penalty (net payment amount may not exceed contract
value). Funding Agreements credit interest at a rate that is indexed to LIBOR
(London Interbank Offered Rate). These contracts are renewed annually, however,
either the Company or the contract holders can terminate the Funding Agreement
with seven days' notice.
MUTUAL FUNDS
Since 1987, a predecessor to the Company has marketed and managed mutual
funds under the Investors Trust name. On September 26, 1997, the various
Investors Trust mutual funds were merged into mutual funds (the "GE Funds") with
similar investment composition and objectives managed by General Electric
Investment Management Incorporated ("GEIM"), a wholly owned subsidiary of
General Electric Company and an affiliate of the Company. The Company offers the
GE Funds to retail customers through its bank and other distribution channels.
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In addition, the Company markets GE Investments Funds, Inc. ("GEI Funds"), a
family of mutual funds also managed by GEIM and offered exclusively as
investment vehicles for certain variable annuity contracts and variable life
insurance contracts issued by the Company or by other insurers, and for
qualified pension and retirement plans.
WEALTH AND LIFESTYLE PROTECTION PRODUCTS
The Company's Wealth and Lifestyle Protection product lines include
long-term care insurance, supplemental accident and health, medicare supplement,
credit insurance and automobile insurance.
The following table presents total sales of the Company's Wealth and
Lifestyle Protection products for the periods presented.
DISTRIBUTION OF WEALTH AND LIFESTYLE PROTECTION PRODUCTS
YEARS ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
----- --------- ---------
(DOLLARS IN MILLIONS)
Long-Term Care......................................................................... $ 1 $ 27 $ 83
Supplemental Accident and Health (including Medicare Supplement)....................... 9 41 123
Credit Insurance....................................................................... 6 39 48
--- --------- ---------
Total.............................................................................. $ 16 $ 107 $ 254
--- --------- ---------
--- --------- ---------
LONG-TERM CARE INSURANCE
The Company is one of two leading companies in the sale of individual
long-term care insurance policies when measured by first-year annualized premium
and policies in force. Such policies provide coverage within prescribed limits,
for nursing home, community and in-home care. The long-term care insurance plans
are sold to senior citizens (primarily 60 years of age or older). Long-term care
insurance policies are expected to account for an increasing percentage of the
Company's wealth and lifestyle protection premiums because of the growing demand
for such products among senior citizens, especially in the area of home health
care.
Current nursing home coverages in force include both expense incurred and
daily fixed dollar benefit policies. Currently, only expense incurred policies
are being sold, with an elimination period (which, similar to a deductible,
requires the insured to pay for a certain number of days of nursing home care
before the insurance coverage begins) and a maximum benefit period. Home health
care benefits also have an elimination period, and pay covered charges, after
Medicare coordination, subject to a daily or weekly maximum dollar limit and an
overall maximum. The applicant may select from one of several available benefits
levels.
The Company's policies are guaranteed renewable and, consequently, the
Company has the right to change premiums by policy class, but not based on age
or health of any individual.
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SUPPLEMENTAL ACCIDENT AND HEALTH
The Company offers supplemental accident, health and disability products to
employer and employee groups, associations and other affinity groups and
residents of farm and rural communities. The Company markets supplemental
accident and health products because it believes that offering a broad range of
products is essential in order to be a preferred provider of benefits
effectively meeting the needs of employers and consumers. The Company's
supplemental accident and health products include a variety of coverages such as
medicare supplement products (described below), specified disease policies,
hospital indemnity coverages, accident policies and disability income policies.
These policies pay for the policyholder's medical costs directly (after certain
deductibles or co-payment arrangements have been met), pay a lump sum upon the
occurrence of a covered event, or in the case of disability income, provide
continuous payments to insureds during periods of disability. Many of the
Company's supplemental accident and health products have defined benefit limits.
The Company has a maximum retention of risk per any single case or individual
which limits risk in the event that its claims experience deviates from the
assumptions used in setting premium rates.
MEDICARE SUPPLEMENT
Medicare supplement policies provide coverage for many of the medical
expenses which the Medicare program does not cover, such as the deductible and
coinsurance costs (in which the insured and Medicare share the costs of medical
expenses) and specified losses which exceed the federal program's maximum
benefits. In marketing these products, the Company concentrates on individuals
who have just reached the age of 65 and, thus, have become eligible for
Medicare. Approximately one-half of the Company's new sales of Medicare
supplement policies are to individuals who have just reached age 65. The
Company's Medicare supplement plans automatically adjust coverages to reflect
changes in Medicare benefits. Premium increases on the Company's Medicare
supplement policies must be approved by the insurance departments of each state
in which the Company sells such products.
CREDIT INSURANCE
The Company's credit insurance operations consist of life and accident and
health insurance coverages offered to consumer debtors, chiefly through banks
and finance companies. Typically, this insurance will pay outstanding loan
obligations in the event of an insured loss. This coverage is issued on either
the single-premium or outstanding loan balance basis. Credit life is sold on a
reducing or level-term basis and is available on a single-life or, if permitted
by state law, on a joint-life basis where the related loan is co-signed. Credit
accident and health insurance will normally only be written by the Company in
conjunction with credit life insurance. The maximum term is generally 10 years
for credit life insurance and five to six years for credit accident and health
insurance. During 1997, maximum issue age for credit life and credit accident
and health insurance is 70 and 66, respectively. All of the foregoing terms and
limits are subject to statutory requirements which may vary from state to state.
The Company currently reinsures a portion of its credit insurance risk
through an affiliate, which also offers reinsurance to third parties.
AUTOMOBILE INSURANCE
The Company, through its recent acquisition of Colonial Penn, primarily
writes personal automobile insurance which covers the legal liability of
individuals arising out of the ownership or operation of an automobile and also
provides physical damage insurance on the automobile, medical payments insurance
and protection against uninsured motorists. All of the Company's personal
automobile insurance policies are written for a term of one year. In many
states, however, the Company offers a "guaranteed lifetime protection" provision
to certain qualifying policyholders that ensures their policies will be renewed
at rates then in effect for their classification.
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PRODUCT/SERVICE CENTERS
The Company has established four primary product/service centers for
creating and servicing its products (prior to the acquisition of Colonial Penn)
for its businesses as follows: (i) the fixed life and annuities business
primarily operates in Lynchburg, Virginia; (ii) the variable life and annuities
business primarily operates in Richmond, Virginia; (iii) the long-term care
insurance business primarily operates in San Rafael, California; and (iv) the
supplemental accident and health insurance and credit insurance business
primarily operates in Trevose, Pennsylvania.
MARKETING AND DISTRIBUTION
The Company distributes its products through four primary channels:
- Intermediaries, such as brokerage general agents ("BGAs"), banks,
securities brokerage firms, personal producing general agents ("PPGAs")
and specialized brokers;
- Career or dedicated sales forces;
- Marketing through businesses and affinity groups; and
- Direct marketing.
INTERMEDIARIES
BGAS. The Company distributes many of its products (including fixed and
variable annuities and life products, long term care, universal and term life
insurance (including impaired risk underwriting), and immediate annuities)
through more than 250 independent insurance brokerage firms located throughout
the United States. These BGAs market the Company's products through
approximately 150,000 licensed insurance agents or brokers, who also represent
other companies. The Company believes its consistent commitment to this system
has helped earn it a reputation as a leading provider of life insurance among
BGAs. The Company endeavors to be placed at the top of the BGAs' list of sources
of insurance products and services in which the Company specializes. To achieve
this objective the Company seeks to provide innovative and competitive products
and services for BGA and end-customer needs, personalized quality service for
the BGAs' agents and brokers and competitive pricing. Service offered by the
Company to the BGAs' agents and brokers includes the opportunity to participate
in the Company's First Colony University, an integrated insurance training
curriculum which is recognized for its excellence throughout the industry. The
Company also offers agents and brokers access to its automated PDQ system, a
computer-based data access system which gives the agents and brokers instant
access to data regarding their customers' policies and applications with the
Company and information systems to run their businesses.
The Company's commitment to the independent general agency system has
allowed it to develop a loyal relationship with these general agencies. Of the
Company's 20 leading BGAs in 1996 on the basis of commissions earned, most were
among the leading general agents of the Company 10 years before. No individual
general agency accounted for more than 9% of premiums produced in the first six
months of 1997, and the top ten general agencies collectively produced almost
35% of the Company's ordinary life insurance premiums by BGAs. The Company
believes the loss of any one BGA relationship in any given year would not
materially impact the Company's financial results.
BANKS AND SECURITIES BROKERAGES. Banks are a significant distribution
channel for the Company's fixed and variable annuities, life insurance products
and mutual funds. The Company's credit life and credit accident and health
insurance is also distributed primarily through banks, credit unions, and
finance companies. Bank of America and The Chase Manhattan Bank are currently
the largest bank distributors of the Company's products. During 1996, these
banks generated 12% of the Company's annuity sales. While the loss of these two
banks would not materially impact the Company's financial results, it could
potentially reduce annual annuity sales by a material amount.
Over the last few years distribution of the Company's products through
securities brokerages has substantially increased, primarily due to the
Company's acquisition of The Life Insurance Company of
14
Virginia ("Life of Virginia") which distributed its variable annuity products
through a large network of securities brokerage firms. In addition, a
significant percentage of the Company's single premium immediate annuities are
sold through major stock brokerage firms and banks.
PPGAS. The Company sells through PPGAs some of its products under the
Wealth Accumulation and Transfer segment, such as fixed and variable annuities
and universal and term life insurance. PPGAs primarily include personal
financial planners whose emphasis is on providing investment and insurance
products to one of the Company's target customer groups. The Company believes
that this segment presents an opportunity for growth within the intermediary
distribution channel.
SPECIALIZED BROKERS AND OTHER DISTRIBUTION. The Company's single premium
immediate annuities used to facilitate structured settlements are sold through a
network of specialized independent brokers. These brokers are skilled in claims
negotiation and experts in the creation of benefit plans tailored to the needs
of individual claimants and their families. As a pioneer in this industry, the
Company has the oldest and largest distribution system in this market. Its
products are sold through approximately 350 specialized brokers located
throughout the United States. The Company's relationship with many of these
specialized brokers dates back to the inception of this market. The Company
believes, due to its position in this market, new brokers could be added.
The Company sells GICs through specialized GIC brokers, fund managers,
employee benefit investment advisors and directly to large employee benefit
plans. The Company sells Funding Agreements through institutional accredited
investors or banks acting in a fiduciary capacity.
CAREER OR DEDICATED SALES FORCES
Career or dedicated sales forces consist primarily of non-employees who sell
products of the Company on an exclusive basis and to a lesser extent, a sales
force employed directly by the Company. All non-employee career or dedicated
sales force agents are affiliated with an insurance agency. Career or dedicated
sales forces are compensated by the Company primarily on a commission basis.
The Company's long-term care insurance policies are sold through a network
of specialized career agents who sell these products exclusively. The Company
believes that long-term care insurance policies will account for an increasing
percentage of the Company's premiums due to the growing demand for such products
among senior citizens. Prospective customers are reached through direct mail
advertising and referrals. The Company contributes leads generated through these
advertising campaigns to agents.
The Company has another group of non-employee career agents who specialize
in selling the Company's annuity, life insurance and supplemental accident and
health insurance products to residents of farm and rural communities.
Prospective customers are reached through direct mail, policyholder referrals
and advertising in controlled circulation farming and ranching magazines. In
1991, a predecessor to the Company entered into an agreement with The Farm
Progress Companies, Inc. ("Farm Progress," a wholly owned subsidiary of ABC/Cap
Cities, Inc.) under which Farm Progress agreed to exclusively advertise certain
of the Company's products in its magazines until 2016.
The Company's subsidiary, Life of Virginia, has an employee career agent
force which specializes in selling life insurance products and annuities. This
career force is heavily concentrated in the mid-Atlantic states.
The Company provides certain of its career agents with sales leads generated
through direct mail advertising campaigns. These campaigns target subscribers of
certain publications or those with demographic characteristics that indicate a
possible need for specific products and services. The Company believes that its
lead generation programs provide its sales forces opportunities to increase
their sales effectiveness.
15
MARKETING THROUGH BUSINESSES AND AFFINITY GROUPS
In 1996, the Company began selling supplemental accident and health
insurance and universal life products through payroll deduction
employer-sponsored programs. Under these programs, the Company enters into a
contractual arrangement with a corporate customer permitting agents of the
Company to market these products directly to the corporate customers' employees
on site. Employees are able to pay premiums on products they purchase by means
of automatic deductions from their paychecks.
DIRECT MARKETING
The Company's acquisition of Colonial Penn provides the Company with a
substantial direct marketing distribution channel for personal automobile
insurance. Direct marketing is a form of marketing in which a company and a
customer deal directly with each other, rather than through an insurance agent.
As a direct marketer, the Company deals directly with the public and endeavors
to be the lowest cost provider in this market. The Company also uses direct mail
and telemarketing to generate qualified leads for agents selling other products
of the Company. Within the bank channel this approach has created new sales
opportunities with bank customers.
Direct marketing is also an additional distribution channel for the
Company's credit-related products and supplemental accident and health insurance
products, primarily through Union Fidelity Life Insurance Company ("Union
Fidelity").
COMPETITION
The Company operates in a highly competitive environment. While the Company
believes it has assembled a unique collection of products and distribution
channels, there are competitors that have also assembled a similar array of
financial products and have similar strategic goals. The Company believes that
the principal competitive factors in the sale of insurance are product features,
commission structure, perceived stability of the insurer, claims paying ability
ratings, service, name recognition and price. Many other insurance companies are
capable of competing for sales in the Company's target markets. The Company's
ability to compete is affected in part by its ability to provide competitive
products and quality service to the insurance consumer, general agents, licensed
insurance agents and brokers. However, the Company believes that it competes
primarily on the basis of its high level of customer service, its financial
strength and its competitively priced products.
The Company's competition from banks and other financial institutions is
likely to increase as the regulations currently in existence are revised by
legislation, judicial determinations or administrative rulings. Although the
effect of these developments on GE Financial Assurance and its subsidiaries and
their competitors is uncertain, both the persistency of the Company's existing
products and the Company's ability to sell products could be materially impacted
in the future. Also, several proposals to repeal or modify the Glass-Steagall
Act and the Bank Holding Company Act have been made by members of Congress and
the Executive Branch. Certain of these proposals would repeal or modify the
current restrictions that prevent banks from being affiliated with insurance
companies. None of these proposals has yet been enacted, and it is not possible
to predict whether any of these proposals will be enacted or, if enacted, what
their potential effect on the Company or its competitors would be.
RISK MANAGEMENT AND COMPLIANCE
During the last few years GE Financial Assurance has grown rapidly through
acquisitions. See "The Company--Significant Acquisitions." In an effort to
integrate each acquired business, GE Financial Assurance maintains a strong
commitment to risk management and compliance, and avails itself of GE Capital's
long-standing strength and experience in risk management. For example, the
Company's commitment to risk management processes and compliance includes
requiring underwriting of all new products and reviews of all existing product
performance, both of which are reviewed by a team of risk managers and
actuaries. In addition, both internal and external periodic reviews of the
Company's products, internal processes and pricing strategy are conducted. The
Company also has committed to meeting Insurance
16
Marketplace Standards Association (IMSA) certification and has instituted
company-wide compliance initiatives such as centralized complaint databases and
agent tracking and licensing.
UNDERWRITING
Applications for most of the Company's underwritten insurance related
products are individually reviewed and analyzed by the Company's dedicated
underwriting staff based on standardized underwriting guidelines and procedures.
After initial processing, each file is reviewed and additional information (such
as medical examinations, attending physician's statements and special medical
tests, if applicable) is obtained to make an underwriting decision. The
independent sales agents and the Company's own sales staff do not retain any
underwriting authority. The Company employs a professional underwriting staff of
approximately 205 persons who collectively have an average of 17 years of
experience in the insurance industry.
RESERVES
In accordance with applicable insurance regulations, the Company establishes
and carries as liabilities actuarially determined reserves which are calculated
to meet the Company's future obligations. The reserves are based on actuarially
recognized methods using prescribed morbidity and mortality tables in general
use in the United States modified to reflect the Company's actual experience
when appropriate. These reserves are computed at amounts that, with additions
from premiums to be received and with interest on such reserves compounded
annually at certain assumed rates, are expected to be sufficient to meet the
Company's policy obligations at their maturities or in the event of an insured's
death. Reserves include unearned premiums, premium deposits, claims reported but
not yet paid, claims incurred but not reported and claims in the process of
settlement.
For the Company's individual life policies, universal life and
interest-sensitive whole life policies, reserves are set according to premiums
collected, plus interest, less charges. Reserves for other fixed death benefit
and supplemental accident and health policies are based on assumed investment
yield, persistency, mortality and morbidity as per commonly used actuarial
tables, expenses and margins for adverse deviations. For the Company's accident
and health policies, the level of reserves is based on a variety of factors
including particular diagnoses, termination rates and benefit payments.
The stability of the Company's annuity and other interest-sensitive life
insurance reserves is enhanced by policy restrictions on withdrawal of funds.
Withdrawals in excess of allowable penalty-free amounts are assessed a surrender
charge during a penalty period ranging from five years to twenty years. Such
surrender charge is initially a percentage of the accumulation value, which
varies by product, and generally decreases gradually during the penalty period.
Surrender charges are set at levels to protect the Company from loss on early
terminations and to reduce the likelihood of policyholders terminating their
policies during periods of increasing interest rates, thereby lengthening the
effective duration of policy liabilities and improving the Company's ability to
maintain profitability on such policies. The Company's reserves comply in all
material respects with state insurance department statutory requirements;
however, in the Consolidated Financial Statements, insurance reserves are
determined in accordance with GAAP, which may vary from statutory requirements.
REINSURANCE
The Company follows the usual industry practice of reinsuring ("ceding")
portions of its life insurance risks with other companies, a practice that
permits it to write policies in amounts larger than the risk it is willing to
retain on any one life, and also to continue writing a larger volume of new
business. The maximum amount of individual ordinary life insurance normally
retained by the Company on any one life policy is $1,000,000. Certain
supplemental accident and health and long-term care policies are reinsured on
either a quota share or excess of risk basis. The Company cedes insurance
primarily on a treaty basis, under which risks are ceded to a reinsurer on
specific blocks of business where the underlying risks meet certain
predetermined criteria, and, to a lesser extent, on a facultative basis, under
which the reinsurer's
17
prior approval is required on each risk reinsured. Use of reinsurance does not
discharge an insurer from liability on the insurance ceded. An insurer is
required to pay the full amount of its insurance obligations regardless of
whether it is entitled or able to receive payments from its reinsurer. The
principal reinsuring companies (and their corresponding A.M. Best ratings) at
December 31, 1996 were: Employers Reassurance Corporation, whose parent, GE
Global Insurance Holding Corporation, is an affiliate of the Company, rated A++;
UNUM, rated A++; Combined Insurance Company of America, rated A+; American
United Life Insurance Company, rated A+; IDS Life Insurance Company, rated A+;
The Lincoln National Life Insurance Company, rated A+; Reinsurance Group of
America, rated A+; Transamerica Occidental Life Insurance Company, rated A+;
Phoenix Home Life Mutual Insurance Company, rated A; and Swiss Re Life Company
of America, rated A.
INSURANCE REGULATION
GENERAL REGULATION AT STATE LEVEL
The insurance business of the Company is subject to comprehensive state and
federal regulation and supervision throughout the United States. The laws of the
various jurisdictions establish supervisory agencies with broad administrative
powers with respect to, among other things, licensing to transact business,
licensing agents, admittance of assets, regulating premium rates, approving
policy forms, regulating unfair trade and claims practices, establishing reserve
requirements and solvency standards, fixing maximum interest rates on life
insurance policy loans and minimum rates for accumulation of surrender values,
restricting certain transactions between affiliates and regulating the type,
amounts and valuations of investments permitted.
As a holding company with no significant business operations of its own, the
Company relies on dividends from its subsidiaries as the principal source of
cash to meet its obligations, including the payment of principal and interest on
the Debt Securities. The Company's insurance subsidiaries are subject to various
state statutory and regulatory restrictions, applicable generally to each
insurance company in its state of domicile, which limit the amount of dividends
or distributions an insurance company may pay to its shareholders without
regulatory approval.
The Company's principal insurance subsidiaries are domiciled in the states
of Delaware, Florida, Illinois, Indiana, New York, Ohio, Pennsylvania, Virginia
and Washington. Each of these states has laws and regulations which govern the
parameters for approval and payment of dividends.
Generally, dividends may be paid out of earned surplus without approval with
thirty days prior written notice within certain limits. The limits are generally
based on 10% of the prior year surplus (net of adjustments in some cases) and
prior year statutory income (net gain from operations, net income adjusted for
realized capital gains, or net investment income). Dividends paid or distributed
within any twelve consecutive months in excess of the prescribed limits or the
company's earned surplus are deemed extraordinary and require formal state
insurance commission approval.
Delaware (GE Capital Assurance), Washington (Great Northern Insured Annuity
Corporation), Indiana (Federal Home Life Insurance Company), Ohio (The Harvest
Life Insurance Company), Illinois (Union Fidelity) and Pennsylvania (Colonial
Penn) allow companies to pay dividends up to the greater of 10% of prior year
surplus or 100% of prior year statutory net gain from operations to the extent
of their earned surplus; however, Ohio requires companies to adjust the net gain
from operations to include realized investment gains in the computation of prior
year statutory net income. Florida (PHF Life Insurance Company) allows companies
to pay dividends up to the greater of 10% of prior year surplus adjusted for
unrealized gains or 100% of prior year statutory net income (including realized
capital gains). Virginia (Life of Virginia, First Colony) allows companies to
pay dividends up to the lesser of 10% of prior year surplus or 100% of prior
year statutory net gain from operations, to the extent of earned surplus. New
York (GE Capital Life Assurance of New York, American Mayflower Life Insurance
Company of New York) requires regulatory approval for the payment of any
dividends.
18
Each insurance subsidiary's dividend capacity is calculated separately;
therefore, total dividend capacity for the Company is driven in part by its
legal structure. Union Fidelity and Colonial Penn are owned directly by the
Company and GE Capital Assurance is owned directly by GNA Corporation which is,
in turn, owned 100% by GE Financial Assurance. All other insurance subsidiaries
are 100% owned by GE Capital Assurance, except for Life of Virginia and First
Colony which are owned 80% by GE Capital Assurance and 20% by GE Financial
Assurance. Thus, the Company's dividend capacity is the sum of capacity for GE
Capital Assurance, Union Fidelity, Colonial Penn and 20% of First Colony and
Life of Virginia. GNA Corporation, which is a holding company, is not subject to
the regulatory restrictions on dividends imposed on the Company's insurance
subsidiaries.
Insurance laws of the states in which the Company's insurance subsidiaries
are domiciled generally provide that no person may acquire control of the
Company, and thus indirect control of these insurance company subsidiaries,
without the prior approval of the appropriate insurance regulators. In general,
any person who acquires beneficial ownership of 10% (5% in Florida) or more of
the voting securities of the Company would be presumed to have acquired such
control, although the appropriate insurance regulators, upon application, may
determine otherwise.
Each insurance company is required to file detailed annual reports with
supervisory departments in each of the jurisdictions in which it does business
and its operations and accounts are subject to examination by such departments
at regular intervals. Each of the Company's life insurance subsidiaries prepares
statutory financial statements in accordance with accounting practices
prescribed or permitted by the insurance departments of their respective states
of domicile. Prescribed statutory accounting practices include publications of
the NAIC, as well as state laws, regulations and general administrative rules.
Life insurance companies are required to establish an Asset Valuation
Reserve ("AVR") consisting of two components: (i) a "default component" which
provides for future credit-related losses on fixed maturity investments and (ii)
an "equity component" which provides for losses on all types of equity
investments, including real estate. Insurers are also required to establish an
Interest Maintenance Reserve ("IMR") for fixed maturity net realized capital
gains and losses, net of tax, related to changes in interest rates. The IMR is
required to be amortized into statutory earnings on a basis reflecting the
remaining period to maturity of the fixed maturity securities sold. These
reserves are required by state insurance regulatory authorities to be
established as a liability on a life insurer's statutory financial statements,
but do not affect financial statements of the Company prepared in accordance
with GAAP. Although future additions to AVR will reduce the future statutory
surplus of the Company's insurance subsidiaries, the Company does not believe
that the impact under current regulations of such reserve requirements will
materially affect the ability of its insurance subsidiaries to grow their
statutory surplus and pay dividends to the Company in the future.
The NAIC has adopted risk-based capital ("RBC") standards, which are used to
determine the amount of Total Adjusted Capital (as defined by the NAIC) that a
life insurance company must have, taking into account the risk characteristics
of such company's investments and liabilities. The formula establishes a
standard of capital adequacy that is related to risk. The RBC formula
establishes capital requirements for four categories of risk: asset risk,
insurance risk, interest rate risk and business risk. For each category, the
capital requirements are determined by applying specified factors to various
asset, premium, reserve and other items, with the factor being higher for items
with greater underlying risk and lower for items with less risk. The formula is
used by insurance regulators as an early warning tool to identify deteriorating
or weakly capitalized companies for the purpose of initiating regulatory action.
The NAIC's RBC requirements provide for four levels of regulatory attention
depending on the ratio of the company's Total Adjusted Capital to its Authorized
Control Level RBC ("ACL") (as defined by the NAIC). If a company's Total
Adjusted Capital is less than 200% of its ACL but greater than or equal to 150%
of its ACL, or if a negative trend has occurred (as defined by the NAIC) and
Total Adjusted Capital is less than 250% of its ACL, the company must submit a
comprehensive plan to the regulatory authority which discusses proposed
corrective actions to improve its capital position. If a company's Total
Adjusted Capital is less than 150% of its ACL but greater than or equal to 100%
of its ACL, in addition to the above
19
required actions, the regulatory authority will perform a special examination of
the company and issue an order specifying corrective actions that must be
followed. If a company's Total Adjusted Capital is less than 100% of its ACL but
greater than or equal to 70% of its ACL, in addition to the above required
actions, the regulatory authority may take any action it deems necessary,
including placing the company under its control. If a company's Total Adjusted
Capital is less than 70% of its ACL, the regulatory authority is mandated to
place the company under its control. The Total Adjusted Capital for each of the
Company's insurance subsidiaries is in excess of 250% of their respective ACL.
In addition, as part of their routine regulatory oversight process, state
insurance departments conduct detailed examinations periodically (generally once
every three to five years) of the books, records, accounts and market conduct of
insurance companies domiciled in their states. Such examinations are generally
conducted in cooperation with the departments of two or three other states under
guidelines promulgated by the NAIC. None of the recent regulatory examinations
have disclosed any findings that would have a material adverse impact on the
Company.
REGULATORY INITIATIVES
State insurance regulators and the NAIC are continually re-examining
existing laws and regulations, specifically focusing on insurance company
investments and solvency issues, risk-adjusted capital guidelines,
interpretations of existing laws, the development of new laws, the
implementation of non-statutory guidelines and the circumstances under which
dividends may be paid. These initiatives may be adopted by the various states in
which the Company's insurance subsidiaries are licensed, but the ultimate
content and timing of any statutes and regulations adopted by the states cannot
be determined at this time. It is impossible to predict the future impact of
changing state and federal regulations on the Company's operations, and there
can be no assurance that existing or future insurance-related laws and
regulations will not become more restrictive.
Recently, state regulatory authorities, industry groups and rating agencies
have developed several initiatives regarding market conduct. For example, the
NAIC has adopted the NAIC Model Life Insurance Illustrations Regulation, which
applies to group and individual life insurance policies and certificates, and
the Market Conduct Examiners Handbook which sets out required parameters for
such examinations. State regulators have imposed significant fines on various
insurers for improper market conduct. The American Council on Life Insurance is
establishing the Insurance Market Place Standards Association, a self-regulatory
organization, to implement its Principles and Code of Ethical Life Insurance
Market Conduct, which includes a third-party assessment procedure. Market
conduct also has become one of the criteria used to establish the ratings of an
insurance company. For example, A.M. Best's ratings analysis now includes a
review of the insurer's compliance program. Management does not believe that
these market conduct initiatives will have a material adverse effect on its
business, financial condition or results of operation.
In addition, the NAIC has issued the Valuation of Life Insurance Policies
Model Regulation, which would establish new minimum reserve requirements for
individual life insurance policies written in the future. Before the new reserve
standards can become effective, individual states must enact the model
regulation. If these reserve standards were adopted in their current form,
companies selling certain individual life insurance products such as term life
products with guaranteed premium periods and universal life products with
no-lapse guarantees would be required to adjust reserves for policies issued
after the respective state-by-state effective dates. It is impossible at this
time to predict if the model regulation will be enacted and, if enacted, when it
will become applicable, in any of the states in which the Company's insurance
subsidiaries are domiciled. However, the Company anticipates no material impact
as a result of the enactment of this regulation.
ASSESSMENTS AGAINST INSURERS
Under the insurance guaranty fund laws existing in each state, the District
of Columbia and Puerto Rico, licensed insurers can be assessed by state
insurance guaranty associations for certain obligations of
20
insolvent insurance companies to policyholders and claimants. Recent regulatory
actions against certain large life insurers encountering financial difficulty
have prompted various state insurance guaranty associations to begin assessing
life insurance companies for the deemed losses. Most of these states do provide,
however, that an assessment may be excused or deferred if it would threaten an
insurer's solvency and further provide for annual limits on such assessments. A
large part of the assessments paid by the Company's insurance subsidiaries
pursuant to these laws may be used as credits for a portion of the Company's
insurance subsidiaries' premium taxes. The Company's insurance subsidiaries paid
assessments of $11 million, $11 million and $9 million in 1994, 1995 and 1996,
respectively. Since such assessments are typically not made for several years
after an insurer fails and depend upon the final outcome of liquidation or
rehabilitation proceedings, the Company cannot accurately determine the amount
or timing of any future assessment on the Company's insurance subsidiaries.
However, based on the best information presently available, management believes
the Company's total future assessments will not be material to its business,
financial condition or results of operation.
REGULATION AT FEDERAL LEVEL
Although the federal government does not directly regulate the business of
insurance, federal legislation and administrative policies in several areas,
including pension regulation, financial services regulation and federal
taxation, can significantly and adversely affect the insurance industry and thus
the Company. For example, Congress has from time to time considered legislation
relating to the deferral of taxation on the accretion of value within certain
annuities and life insurance products, the removal of barriers preventing banks
from engaging in the insurance business, changes in ERISA regulations, the
alteration of the federal income tax structure and the availability of Section
401(k) or individual retirement accounts. In particular, Congress has reviewed
various proposals to repeal or modify the McCarran-Ferguson Act (which exempts
the insurance industry from certain federal laws), the Glass-Steagall Act (which
restricts banks from engaging in the securities-related business) and the Bank
Holding Company Act (which prohibits banks from being affiliated with insurance
companies).
Moreover, the United States Supreme Court held on January 18, 1995 in
NATIONSBANK OF NORTH CAROLINA V. VARIABLE ANNUITY LIFE INSURANCE COMPANY that
annuities are not insurance for purposes of the National Bank Act. In addition,
the Supreme Court also held on March 26, 1996 in BARNETT BANK OF MARION COUNTY
V. NELSON that state laws prohibiting national banks from selling insurance in
small town locations are preempted by federal law. The Office of the Comptroller
of the Currency also adopted a ruling in November 1996 that permits national
banks, under certain circumstances, to expand into other financial services,
thereby increasing competition for the Company. At present, the extent to which
banks can sell insurance and annuities without regulation by state insurance
departments is being litigated in various courts in the United States. Although
the effect of these recent developments on the Company and its competitors is
uncertain, both the persistency of the Company's existing products and the
Company's ability to sell products may be materially impacted in the future.
SECURITIES LAWS
Certain of the Company's subsidiaries and certain policies and contracts
offered by them are subject to regulation under the federal securities laws
administered by the Commission and certain state securities laws. Certain
separate accounts of the Company's insurance subsidiaries are registered as
investment companies under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). Separate accounts through which certain variable
annuity contracts and certain variable insurance policies issued by the
Company's insurance subsidiaries are made available are also registered under
the Securities Act. Certain other subsidiaries of the Company are registered as
broker-dealers under the Exchange Act and are members of, and subject to
regulation by, the National Association of Securities Dealers, Inc.
Certain of the Company's subsidiaries are investment advisors registered
under the Investment Advisers Act of 1940, as amended. The investment companies
managed by such subsidiaries are registered with the Commission under the
Investment Company Act and the shares of certain of these entities are
21
qualified for sale in certain states in the United States and the District of
Columbia. Certain subsidiaries of the Company are also subject to the
Commission's net capital rules.
In October 1996, the National Securities Markets Improvements Act of 1996
was enacted into law. Of particular interest to the variable products industry
are the provisions establishing a new "reasonableness standard" for all fees and
charges in variable annuity and variable life insurance policies. Because
insurers no longer will have to explain each and every component of their fees
and charges to the Commission, and instead will be subject to an overall
reasonableness standard for aggregate fees and charges, the Company believes the
legislative changes will provide the industry with greater flexibility in
product design. However, given the significant barriers to market entry, such as
entering into relationships with broker-dealers and systems constraints, the
Company believes that the legislation overall will have a minimal competitive
impact.
All aspects of the Company's investment advisory activities are subject to
various federal and state laws and regulations. These laws and regulations are
primarily intended to benefit investment advisory clients and investment company
stockholders and generally grant supervisory agencies broad administrative
powers, including the power to limit or restrict the carrying on of business for
failure to comply with such laws and regulations. In such event, the possible
sanctions which may be imposed include the suspension of individual employees,
limitations on the activities in which the investment advisor may engage,
suspension or revocation of the investment advisor's registration as an advisor,
censure and fines.
ERISA CONSIDERATIONS
Enacted into law on August 20, 1996, the Small Business Protection Job Act
(the "SBPJA") offered insurers protection from potential litigation exposure
prompted by the 1993 U.S. Supreme Court decision in JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY V. HARRIS TRUST & SAVINGS BANK (the "Harris Trust Decision")
in which the Court held that, with respect to a portion of the funds held under
certain general account group annuity contracts, an insurer is subject to the
fiduciary requirements of ERISA. The pertinent SBPJA provisions provide that
generally all persons are protected from liability in connection with prohibited
transactions on the basis of a claim that the assets of an insurer constitute
the assets of a plan for conduct occurring prior to 18 months following the
Department of Labor's issuance of proposed regulations. However, insurers remain
subject to federal criminal law and liable for actions brought by the Secretary
of Labor alleging breaches of fiduciary duties that also constitute a violation
of federal or state criminal law. The SBPJA also provides that contracts issued
from an insurer's general account on or before December 31, 1998, that are not
guaranteed benefit policies, will be permanently grandfathered if they meet the
requirements of regulations the United States Department of Labor has to issue
by December 31, 1997. The SBPJA further provides that contracts issued from an
insurer's general account after December 31, 1998, that are not guaranteed
benefit policies, will be subject to ERISA. Although the Company does not
believe that the Harris Trust Decision had a material adverse effect on its
business, financial condition or results of operations, the Company supported
and welcomed the enactment of the aforementioned provisions of the SBPJA as a
means to remove an area of potential exposure for the insurance industry
generally.
With respect to employee welfare benefit plans subject to ERISA, Congress
periodically has considered amendments to the law's federal preemption
provision, which would expose the Company, and the insurance industry generally,
to state law causes of action, and accompanying extra-contractual (e.g.,
punitive) damages in lawsuits involving, for example, group life and group
disability claims. To date, all such amendments to ERISA have been defeated.
22
ITEM 2. FINANCIAL INFORMATION.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following analysis of the consolidated financial condition and results
of operations of GE Financial Assurance should be read in conjunction with the
consolidated financial statements and the notes thereto included herein.
OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
BACKGROUND
GE Financial Assurance is a holding company that, through its subsidiaries,
provides consumers financial security solutions by selling a wide variety of
insurance, investment and retirement products primarily in the United States.
The Company believes that changes in demographics such as the increased number
of baby boomers entering middle and late middle age, longer life expectancies
due to medical advances, the reduction in government- and employer-sponsored
benefit programs and the increased need for estate planning for the most
affluent group of retirees in history, have and will continue to increase the
demand for innovative products and services to solve individual financial
challenges. The Company's strategy is designed to take advantage of these trends
by offering a broad array of products and services. The Company's product
offerings are divided along two major segments of consumer needs: (1) Wealth
Accumulation and Transfer and (2) Wealth and Lifestyle Protection.
The Company effectively began operations in 1993 with the acquisition of GNA
Corporation and its principal operating company, Great Northern Insured Annuity
Corporation. The Company has continued to broaden its operations through a
series of acquisitions since 1993. Certain of these acquisitions have been
significant to the Company in terms of their impact on the Company's
consolidated results of operations.
The following table sets forth the significant acquisitions made since 1994
that impact the financial comparisons of operating results for 1996 as compared
to 1995 and 1995 as compared to 1994.
ACQUISITION DATE PRINCIPAL PRODUCTS
- ------------------------------------- -------------- -------------------------------------
The Federal Home Life Companies November 1994 Annuities, supplemental accident and
health and credit products
AMEX Life Assurance Company October 1995 Long-term care
Union Fidelity Life Insurance Company April 1996 Credit products and supplemental
accident and health products
The Life Insurance Company of April 1996 Variable annuities, universal life
Virginia insurance and GICs
First Colony Life Insurance Company December 1996 Life insurance, retirement annuities
and structured settlements
Colonial Penn Insurance Company November 1997 Personal lines of automobile
insurance
Due to the strategic nature of these acquisitions, the operations of the
acquired entities are generally being absorbed within the overall operations of
the Company as opposed to being operated on a stand-alone basis. For example,
significant efforts have been made to centralize responsibility for specific
insurance products that were formerly marketed and sold by more than one of the
Company's subsidiaries.
23
The chart that follows summarizes the impact of these acquisitions on
operating results in 1996 and 1995. For purposes of this analysis, the column
"Amount Due to Acquisitions" for each year includes those acquisitions that
occurred during that particular year and the acquisitions that occurred in the
immediately prior year (e.g., the "Amount Due to Acquisitions" column for the
year ended December 31, 1996 includes acquisitions that were completed during
1996 and the increase in 1996 resulting from the inclusion of a full year of
operations with respect to acquisitions consummated in 1995 as compared with the
inclusion of a partial year of operations in 1995) and the column "Consolidated
Increase" includes the total increase in the specified line item as compared
with the prior period.
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
------------------------------ ----------------------------------
AMOUNT DUE AMOUNT DUE
CONSOLIDATED TO CONSOLIDATED TO
INCREASE ACQUISITIONS(1) INCREASE ACQUISITIONS(2)
------------- --------------- --------------- -----------------
(DOLLARS IN MILLIONS)
Revenues:
Premiums........................................... $ 901 $ 800 $ 336 $ 260
Net investment income.............................. 579 543 313 227
Net realized investment gains...................... 9 7 (1) 24
Net commission income.............................. 3 4 (19) 2
Policy fees and other income....................... 125 132 29 20
------ ------ ----- -----
Total revenues..................................... 1,617 1,486 658 533
------ ------ ----- -----
Benefits and expenses:
Interest credited.................................. 250 283 157 118
Benefits and other changes in
policy reserves.................................. 739 613 302 215
Commission expenses................................ 236 233 68 78
General expenses................................... 255 232 80 61
Amortization of intangibles, net................... 99 123 51 38
Change in deferred acquisition costs............... (165) (186) (45) (57)
Interest expense................................... 1 1 -- --
------ ------ ----- -----
Total benefits and expenses........................ 1,415 1,299 613 453
------ ------ ----- -----
Operating income..................................... $ 202 $ 187 $ 45 $ 80
------ ------ ----- -----
------ ------ ----- -----
- ------------------------
(1) Includes the 1996 acquisitions of Life of Virginia, Union Fidelity and First
Colony and inclusion of a full year of operating results in 1996 for AMEX
Life versus three months in 1995.
(2) Includes the 1995 acquisition of AMEX Life and inclusion of a full year of
operating results for the Federal Home Life companies versus two months in
1994.
PREMIUMS. Premiums, which include both premium revenues from traditional
life, health insurance and life contingent annuity contracts, increased $901
million, or 185.8%, to $1,386 million in 1996 from $485 million in 1995. The
increase in premium volume resulted primarily from the 1996 acquisitions, the
inclusion of a full year of operating results in 1996 relating to the 1995
acquisition of AMEX Life and growth in core premiums due to sales of structured
settlement annuities. Premiums increased $336 million, or 225.5% to $485 million
in 1995 from $149 million in 1994. This increase was driven by a combination of:
(i) the 1995 acquisition of AMEX Life, (ii) inclusion of a full year of
operating results in 1995 relating to the 1994 acquisition of the Federal Home
Life companies and (iii) growth in core premiums due to sales of structured
settlement annuities.
NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS. Net investment
income increased $579 million, or 48.5%, to $1,773 million in 1996 from $1,194
million in 1995. The increase is primarily attributable to higher levels of
average invested assets ($24.1 billion in 1996 vs. $16.4 billion in 1995) due to
the 1996 acquisitions, inclusion of a full year of investment income in 1996
relating to the 1995 acquisition
24
of AMEX Life, and, to a lesser extent, the impact of increased weighted average
yields from 7.5% in 1995 to 7.6% in 1996. Net investment income increased $313
million, or 35.5%, to $1,194 million in 1995 from $881 million in 1994. The
inclusion of a full year of investment income in 1995 as compared with two
months of investment income in 1994 ($251 million in 1995 vs. $42 million in
1994) relating to the 1994 acquisition of the Federal Home Life companies was
the largest factor contributing to this increase. The remaining increase was due
to the combination of higher levels of average invested assets ($16.4 billion in
1995 vs. $13.2 billion in 1994) resulting from the 1995 acquisition of AMEX
Life, cash flows generated from the distribution of existing products and
increased weighted average yields from 6.9% in 1994 to 7.5% in 1995. Net
realized investment gains were $15 million during 1996, compared to $6 million
in 1995. This change is related to the Company's asset/liability risk management
and varies with market and economic conditions.
NET COMMISSION INCOME. Net commission income increased $3 million or 27.3%
to $14 million in 1996 from $11 million in 1995. The increase is primarily
attributable to the 1996 acquisitions. Net commission income decreased $19
million or 63.3% to $11 million in 1995 from $30 million in 1994. The decrease
was due to lower sales of the Company's mutual funds, which was due in part to
increased competition from banks that previously had distributed the Company's
mutual funds and, in part, to a decline in performance at the Company's largest
fund.
POLICY FEES AND OTHER INCOME. Other income increased $125 million, or
235.8%, to $178 million in 1996 from $53 million in 1995. Other income is
principally comprised of surrender fees, insurance charges made against
universal life contracts and other specified transaction fees assessed to
policyholders. Substantially all of the increase resulted from the 1996
acquisitions discussed above. Other income increased $29 million, or 120.8%, to
$53 million in 1995 from $24 million in 1994. This increase was primarily due to
inclusion of a full year of fee income in 1995 relating to the 1994 acquisition
of the Federal Home Life companies.
INTEREST CREDITED. Interest credited increased $250 million, or 37.2%, to
$922 million in 1996 from $672 million in 1995. The majority of the increase
resulted from the 1996 acquisitions, with a substantial portion being attributed
to the acquisition of Life of Virginia as a result of its concentration in
universal life and other investment products for which interest credited is the
major benefit provided to policyholders. Interest credited increased $157
million, or 30.5%, to $672 million in 1995 from $515 million in 1994. This
increase was primarily due to inclusion of a full year of operations in 1995
relating to the 1994 acquisition of the Federal Home Life companies. The 1995
acquisition of AMEX Life did not have a significant impact on interest credited
due to the nature of its principal long-term care product which does not contain
a significant investment component to which interest is credited.
The Company's weighted average crediting rates for annuities increased from
5.40% in 1994 to 6.09% in 1995 and declined to 5.74% in 1996. Similarly, the
Company's weighted average crediting rates for interest-sensitive life products
declined from 6.80% in 1995 to 5.83% in 1996. These changes in crediting rates
are driven by fluctuation in market interest rates. The Company monitors market
interest rates closely and resets interest crediting rates at least monthly. The
increase in rates on annuities in 1995 was driven in part by an increase in the
Company's offering of products with bonus crediting rates while the decline in
1996 reflects falling market rates, net of the effects of bonus crediting rates.
BENEFITS AND OTHER CHANGES IN POLICY RESERVES. Benefits and other changes
in policy reserves includes both activity related to future policy benefits on
long-duration life and health insurance products as well as claim costs incurred
during the year under such contracts. These amounts increased $739 million, or
121.5%, to $1,347 million in 1996 from $608 million in 1995. The increase
resulted primarily from the 1996 acquisitions, the inclusion of a full year of
operating results in 1996 relating to the 1995 acquisition of AMEX Life and
increased benefit payments on existing life contingent structured settlement and
immediate annuities. Benefits and other changes in policy reserves increased
$302 million, or 98.7%, to $608 million in 1995 from $306 million in 1994. This
increase resulted from a combination of: (i) the acquisition
25
of AMEX Life, (ii) inclusion of a full year of operating results in 1995
relating to the 1994 acquisition of the Federal Home Life companies, and (iii)
increased benefit payments on existing life contingent structured settlement and
immediate annuities.
COMMISSION EXPENSES. Commission expense increased $236 million, or 180.2%,
to $367 million in 1996 from $131 million in 1995. Consistent with the changes
in premium revenues, the increase resulted almost entirely from the 1996
acquisitions and the inclusion of a full year of operating results in 1996
relating to the 1995 acquisition of AMEX Life. Commission expense increased $68
million, or 107.9%, to $131 million in 1995 from $63 million in 1994. This
increase was attributable to inclusion of a full year of operating results in
1995 relating to the 1994 acquisition of the Federal Home Life companies and the
1995 acquisition of AMEX Life, offset by a decrease in commission expense in the
Company's mutual fund business.
GENERAL EXPENSES. General expenses increased $255 million, or 149.1%, to
$426 million in 1996 from $171 million in 1995 principally due to the 1996
acquisitions and the inclusion of a full year of operating results in 1996
relating to the 1995 acquisition of AMEX Life. General expenses increased $80
million, or 87.9%, to $171 million in 1995 from $91 million in 1994. This
increase resulted from a combination of: (i) the acquisition of AMEX Life, (ii)
inclusion of a full year of operating results in 1995 relating to the 1994
acquisition of the Federal Home Life companies and (iii) growth related to
existing insurance products.
AMORTIZATION OF INTANGIBLES, NET. 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 profits in acquired insurance contracts, and goodwill,
representing the excess of purchase price over the fair value of identified net
assets of the acquired entities. Amortization of intangibles increased $99
million, or 85.3%, to $215 million in 1996 from $116 million in 1995.
Amortization of intangibles increased $51 million, or 78.5%, to $116 million in
1995 from $65 million in 1994. Amortization of intangibles due to acquisitions
totalled $123 million and $38 million in 1996 and 1995, respectively.
Amortization of intangibles for companies acquired before 1995 declined by
$24 million in 1996 due to lower amortization of the present value of future
profits (PVFP). PVFP is amortized, net of accreted interest, based on the
incidence of gross profits for interest-sensitive life and annuity policies and
gross premiums on non-interest-sensitive life and accident and health products.
CHANGE IN DEFERRED ACQUISITION COSTS. 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 expenses. For accounting purposes,
these costs are deferred and recognized in relation to either the premiums or
gross profits from the underlying contracts. Net deferred acquisition costs
increased $165 million, or 141.0%, to $282 million in 1996 from $117 million in
1995 principally due to the 1996 acquisitions and the inclusion of a full year
of operating results in 1996 relating to the 1995 acquisition of AMEX Life. Net
deferred acquisition costs increased $45 million, or 62.5%, to $117 million in
1995 from $72 million in 1994. This increase was primarily attributable to
inclusion of a full year of operating results in 1995 relating to the 1994
acquisition of the Federal Home Life companies and the 1995 acquisition of AMEX
Life. Negative amounts represent the excess of commission and acquisition costs
deferred, offset by amortization of costs previously deferred on the balance
sheet.
WEALTH ACCUMULATION AND TRANSFER
The Company's principal product lines under the Wealth Accumulation and
Transfer segment are (i) annuities (deferred, and immediate; either fixed or
variable), (ii) life insurance (universal, term, ordinary and group), (iii)
guaranteed investment contracts ("GICs") and (iv) mutual funds. Wealth
26
Accumulation and Transfer products are used by customers as vehicles for
accumulating wealth, often on a tax-deferred basis, transferring wealth to
beneficiaries, or providing a means to replace the insured's income in the event
of premature death.
The following table sets forth certain summarized financial data for GE
Financial Assurance's Wealth Accumulation and Transfer segment for the years
ended December 31, 1996, 1995, and 1994.
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN MILLIONS)
Revenues:
Premiums........................................................................ $ 465 $ 341 $ 140
Net investment income........................................................... 1,626 1,122 871
Net realized investment gains................................................... 13 4 7
Other revenues.................................................................. 186 55 52
--------- --------- ---------
Total revenues.................................................................. 2,290 1,522 1,070
--------- --------- ---------
Benefits and expenses:
Interest credited............................................................... 837 672 515
Benefits and other changes in policy reserves................................... 809 465 294
Other expenses.................................................................. 374 239 141
--------- --------- ---------
Total benefits and expenses..................................................... 2,020 1,376 950
--------- --------- ---------
Operating income.................................................................. $ 270 $ 146 $ 120
--------- --------- ---------
--------- --------- ---------
Operating income from this segment represented 73%, 87% and 98% of the
Company's total operating income for the years ended December 31, 1996, 1995 and
1994, respectively. This decline was caused predominantly by the inclusion of
operating income from three significant acquisitions the Company made in its
Wealth and Lifestyle Protection segment during this period: the Federal Home
Life companies (November 1994), AMEX Life (October 1995) and Union Fidelity
(April 1996). These acquisitions caused net income to grow within the Wealth and
Lifestyle Protection segment at a faster rate during this period than net income
grew in the Wealth Accumulation and Transfer segment. The Company's operating
income from the Wealth Accumulation and Transfer segment increased 84.9% in
1996, to $270 million and 21.7% in 1995 to $146 million from $120 million in
1994. These increases were driven primarily by higher levels of invested assets
and life insurance policies in force. During the periods ended December 31, 1996
and 1995, invested assets increased 97.8% and 15.1%, respectively, while policy
and other reserves for annuity and life policies in force increased 85.8% and
14.5% respectively. These increases were driven primarily by the acquisitions of
Life of Virginia and First Colony and the full year impact of AMEX Life in 1996,
and by the acquisition of AMEX Life and the full year impact of the Federal Home
Life companies in 1995.
Despite these acquisitions, the Company's sales of deferred annuities
declined 3.1% in 1995 and 9.0% in 1996. The decline was largely due to the low
interest rate environment that existed in 1995 and 1996, the termination of
certain exclusive annuity marketing arrangements with banks and the increased
demand for variable annuities and other products which allow consumers to
participate in the strong capital markets. During 1995 and 1996, the Company
experienced significant growth in sales of immediate annuities and life
products. Sales of variable annuities also increased in 1996.
WEALTH AND LIFESTYLE PROTECTION
The Company's principal product lines under the Wealth and Lifestyle
Protection segment are (i) long-term care, (ii) supplemental accident and health
insurance, (iii) personal lines of automobile insurance and (iv) credit
insurance. Wealth and Lifestyle Protection products are used by customers as
27
vehicles to protect their income and assets from the adverse economic impacts of
automobile accidents and related liabilities or significant health care costs or
other unanticipated events that cause temporary or permanent loss of earnings
capabilities (including the ability to repay certain indebtedness).
The following table sets forth certain summarized financial data for GE
Financial Assurance's Wealth and Lifestyle Protection segment for the years
ended December 31, 1996, 1995 and 1994.
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- -----------
(DOLLARS IN MILLIONS)
Revenues:
Premiums............................................................................ $ 921 $ 144 $ 9
Net investment income............................................................... 147 72 10
Net realized investment gains....................................................... 2 2 --
Other revenues...................................................................... 6 9 2
--------- --------- ---
Total revenues...................................................................... 1,076 227 21
--------- --------- ---
Benefits and expenses:
Interest credited................................................................... 85 -- --
Benefits and other changes in policy reserves....................................... 538 143 12
Other expenses...................................................................... 353 62 6
--------- --------- ---
Total benefits and expenses......................................................... 976 205 18
--------- --------- ---
Operating income...................................................................... $ 100 $ 22 $ 3
--------- --------- ---
--------- --------- ---
Operating income from this segment represented 27%, 13% and 2% of the
Company's total results for the years ended December 31, 1996, 1995 and 1994,
respectively. The Company's operating income from the Wealth and Lifestyle
Protection segment increased from $3 million in 1994 to $22 million in 1995 to
$100 million in 1996. Premiums and investment income increased in 1996 due to
the full year impact of the acquisition of AMEX Life, the acquisition of Union
Fidelity and growth in sales of long-term care policies. The 1995 increase was
driven by premium growth associated with the full year impact of the acquisition
of the Federal Home Life companies and the fourth quarter acquisition of AMEX
Life.
In addition to acquisition related growth, the Company benefited from
increased demand for its long-term care products. Sales of long-term care
policies grew by 207% from $27 million of annualized premium in 1995 to $83
million in 1996. The higher sales were driven by an increase in the number of
career agents selling the product and heightened market awareness of the need
for this type of insurance coverage. This market awareness was driven by the
passage of the Health Insurance Portability and Accountability Act of 1996 by
Congress.
FINANCIAL CONDITION
TOTAL ASSETS. Total assets increased $23.5 billion, or 107.9%, to $45.4
billion at December 31, 1996 from $21.8 billion at December 31, 1995. The
increase resulted primarily from the acquisition of First Colony and Life of
Virginia and, to a lesser extent, the acquisition of Union Fidelity and growth
in existing insurance and investment products. A significant majority of the
increase in total assets occurred in the investments, intangible assets, and
separate account asset categories that are discussed in more detail below.
TOTAL INVESTMENTS. Total investments increased $17.3 billion, or 93.9%, to
$35.8 billion at December 31, 1996 from $18.5 billion at December 31, 1995.
Consistent with the increase in total assets, total investments increased
primarily from the acquisitions of First Colony and Life of Virginia and, to a
lesser extent, the acquisition of Union Fidelity and investment income of $1.8
billion, net of cash outflows from
28
other investing activities of $1.1 billion. In addition, the net unrealized
gains (losses) on the available for-sale portfolio declined by $778 million from
a net gain of $583 in 1995 to a net loss of $195 million in 1996.
INTANGIBLE ASSETS. Intangible assets increased $2.5 billion, or 306.3%, to
$3.3 billion at December 31, 1996 from $.8 billion at December 31, 1995. Of the
$2.5 billion increase, $1.8 billion relates to an increase in the present value
of future profits, with the remaining increase of $.7 billion being attributable
to increased goodwill. Substantially all of the increases resulted from the
acquisitions of First Colony, Life of Virginia, and Union Fidelity that were
completed in 1996.
SEPARATE ACCOUNT ASSETS. The separate account assets represent funds held
for the exclusive benefit of variable annuity and variable life contract
holders. As of December 31, 1995, the Company held only insignificant amounts of
separate account assets. The increase in such balances to $2.8 billion at
December 31, 1996 relates almost entirely to the new product lines acquired as
part of the Life of Virginia acquisition.
TOTAL LIABILITIES. Total liabilities increased $20.1 billion, or 103.3%, to
$39.6 billion at December 31, 1996 from $19.5 billion at December 31, 1995. The
increase resulted primarily from the acquisitions of First Colony and Life of
Virginia and, to a lesser extent, the acquisition of Union Fidelity and growth
in existing insurance and investment products. Approximately 90% of the overall
increase in total liabilities occurred in the future annuity and contract
benefits and separate account liability categories that are discussed in more
detail below.
FUTURE ANNUITY AND CONTRACT BENEFITS. Future annuity and contract benefits
increased $15.2 billion, or 83.7%, to $33.4 billion at December 31, 1996 from
$18.2 billion at December 31, 1995. Consistent with the increase in total
liabilities, the increase resulted primarily from the acquisitions of First
Colony and Life of Virginia and, to a lesser extent, the acquisition of Union
Fidelity and growth in existing insurance and investment products.
SEPARATE ACCOUNT LIABILITIES. The separate account liabilities represent
the liability associated with the separate account assets. As discussed above,
the increase in such balances to $2.8 billion at December 31, 1996 relates
almost entirely to the new product lines acquired as part of the Life of
Virginia acquisition.
OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
PREMIUMS. Total premiums increased $432 million, or 74.4%, to $1,013
million for the six months ended June 30, 1997 from $581 million for the six
months ended June 30, 1996. The increase resulted primarily from the acquisition
of First Colony and, to a lesser extent, growth in premium volumes of existing
insurance products and the inclusion of six months of operating results in 1997
relating to the 1996 acquisitions of Life of Virginia and Union Fidelity as
compared to only three months of operating results being included in the
comparable 1996 reporting period.
NET INVESTMENT INCOME. Net investment income increased $567 million, or
72.2%, to $1,352 million for the six months ended June 30, 1997 from $785
million for the six months ended June 30, 1996. The increase is primarily
attributable to higher levels of average invested assets due to the acquisition
of First Colony and, to a lesser extent, the inclusion of six months of net
investment income in 1997 relating to the 1996 acquisitions of Life of Virginia
and Union Fidelity as compared to only three months of net investment income
being included in the comparable 1996 reporting period.
POLICY FEES AND OTHER INCOME. Other income increased $145 million, or
241.7%, to $205 million for the six months ended June 30, 1997 from $60 million
for the six months ended June 30, 1996. The increase resulted from the
acquisition of First Colony, the inclusion of six months of fee income in 1997
relating to the 1996 acquisition of Life of Virginia, and, to a lesser extent,
growth in fee income from existing insurance and investment business.
29
INTEREST CREDITED. Interest credited increased $236 million, or 58.3%, to
$641 million for the six months ended June 30, 1997 from $405 million for the
six months ended June 30, 1996. The majority of the increase resulted from the
acquisition of First Colony and the inclusion of six months of net activity in
1997 relating to the 1996 acquisition of Life of Virginia as compared to only
three months of activity being included in the comparable 1996 reporting period.
BENEFITS AND OTHER CHANGES IN POLICY RESERVES. Benefits and other changes
in policy reserves increased $518 million, or 89.5%, to $1,097 million for the
six months ended June 30, 1997 from $579 million for the six months ended June
30, 1996. The increase resulted primarily from the acquisition of First Colony
and, to a lesser extent, growth in volumes of existing insurance products and
the inclusion of six months of operating results in 1997 relating to the 1996
acquisitions of Life of Virginia and Union Fidelity as compared to only three
months of operating results being included in the comparable 1996 reporting
period.
COMMISSION EXPENSE. Commission expense increased $141 million, or 91.6%, to
$295 million for the six months ended June 30, 1997 from $154 million for the
six months ended June 30, 1996. The increase in commission expense resulted
primarily from the acquisition of First Colony and, to a lesser extent, growth
in commission expense relating to existing insurance products and the inclusion
of six months of operating results in 1997 relating to the 1996 acquisitions of
Life of Virginia and Union Fidelity as compared to only three months of
operating results being included in the comparable 1996 reporting period.
GENERAL EXPENSES. General expenses increased $153 million, or 95.6%, to
$313 million for the six months ended June 30, 1997 from $160 million for the
six months ended June 30, 1996. The increase in general expenses resulted from a
combination of the following factors: (i) acquisition of First Colony, (ii)
inclusion of six months of general expenses in 1997 relating to the 1996
acquisitions of Life of Virginia and Union Fidelity as compared to only three
months of general expenses being included in the comparable 1996 reporting
period, and (iii) growth in general expenses resulting from increases in core
business volumes.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased $53
million, or 55.2%, to $149 million for the six months ended June 30, 1997 from
$96 million for the six months ended June 30, 1996. Substantially all of the
increases in amortization resulted directly from the acquisition of First Colony
and the inclusion of six months of amortization expense in 1997 relating to the
1996 acquisitions of Life of Virginia and Union Fidelity as compared to only
three months of amortization expense being included in the comparable 1996
reporting period.
CHANGE IN DEFERRED ACQUISITION COSTS. Net deferred acquisition costs
increased $119 million, or 110.2%, to $227 million for the six months ended June
30, 1997 from $108 million for the six months ended June 30, 1996, principally
due to the acquisition of First Colony and the inclusion of six months of
deferral activity in 1997 relating to the 1996 acquisitions of Life of Virginia
and Union Fidelity as compared to only three months deferral activity being
included in the comparable 1996 reporting period.
FINANCIAL CONDITION
TOTAL ASSETS. Total assets increased $1,653 million, or 3.6%, at June 30,
1997 from December 31, 1996. Total investments increased $927 million, or 2.6%,
at June 30, 1997 from December 31, 1996. This increase was driven by invested
operating cash flows of $671 million and an increase in unrealized gain of $256
million. Accrued investment income increased $86 million to $747 million due to
timing of receipts on bond payments and increases in the size of the portfolio.
Assets invested in separate accounts increased by $589 million, or 21.1%, at
June 30, 1997 from December 31, 1996 primarily due to new variable annuity
sales.
TOTAL LIABILITIES. Total liabilities increased $1,281 million, or 3.2%, at
June 30, 1997 from December 31, 1996. Liabilities relating to annuity
policyholder and contract liabilities increased $740 million, or
30
2.1%, at June 30, 1997 from December 31, 1996 due to normal sales increases.
Liabilities under the separate account increased $589 million at June 30, 1997
from December 31, 1996 due to additional sales of variable annuities.
LIQUIDITY AND CAPITAL RESOURCES
The principal liquidity requirements for GE Financial Assurance's insurance
operations are its contractual obligations to policyholders and annuitants and
its payment of dividends to policyholders. Contractual obligations include
payments of surrender benefits, contract withdrawals, claims under outstanding
insurance policies and annuities, and policy loans. The primary sources for
meeting these contractual requirements are investment income and scheduled
principal repayments from its total investment portfolio, and a portion of its
premium income. To provide for additional liquidity to meet normal variations in
contract obligations, GE Financial Assurance maintains cash and short-term
investments, privately places commercial paper in the U.S. market, maintains
committed back-up credit lines with third-party banks to support its commercial
paper program, maintains committed credit lines with General Electric Capital
Corporation and maintains a portfolio of publicly traded fixed-maturity and, to
a much lesser extent, equity securities.
Historically, GE Financial Assurance has, through its operating companies,
generated positive cash flows from operating and certain financing activities
(including net cash provided by operating activities and cash used by
redemptions and benefit payments on investment contracts, net of proceeds from
issue of investment contracts). For the years ended December 31, 1996, 1995, and
1994, cash flows from operating and certain financing activities were $895
million, $326 million, and $710 million, respectively. These amounts include net
cash used in investing activities relating to investment contract issues and
redemptions of $1,012 million, $751 million, and $211 million for the years
ended December 31, 1996, 1995, and 1994, respectively. These net uses of cash
reflect a continued shift in customer preferences away from fixed rate
investment products to investment products which include participation in the
capital markets.
The nature and quality of the various types of investments purchased by a
U.S. life insurance company must comply with the statutes and regulations
imposed by the various states in which those entities are licensed to market and
sell insurance and investment products. The Company primarily purchases
investment-grade (BBB-/Baa3 or above) bonds. At December 31, 1996, $27.9
billion, or 88.7%, of the fixed maturity securities held by the Company were
bonds rated by a rating agency (S&P's or Moody's), or were government/agency
bonds. The remaining $3.6 billion, or 11.3%, was comprised primarily of private
placement bonds not rated by either rating agency. At December 31, 1996, the
Company held $764 million of bonds rated below investment grade (excluding
split-rated bonds). In addition, the Company held $193 million of "not-rated"
bonds which the Company believes are below investment grade. Below investment
grade bonds include those bonds originally purchased as investment grade but
subsequently downgraded in rating, as well as bonds purchased as below
investment grade. The Company holds this small percentage of below investment
grade bonds in order to enhance the yield on its investment portfolio. During
1997, the Company plans to purchase approximately $900 million of below
investment grade bonds, in order to further enhance the yield on its investment
portfolio, while still maintaining adequate quality, diversification and
liquidity characteristics.
Certain of the Company's products contain provisions for penalty charges for
surrender of the policy. These charges range from 5% to 8% at policy origination
and grade to zero over predetermined periods ranging from five to twenty years.
At December 31, 1996, approximately 80% of the Company's annuity contracts were
subject to surrender penalties or contained non-surrender provisions.
GE Financial Assurance's ability to pay dividends to its stockholder and
meet its obligations, including debt service and operating expenses, primarily
depends on receiving sufficient funds from its insurance subsidiaries. The
payment of dividends by these insurance subsidiaries is subject to restrictions
set forth in the insurance laws and regulations of the states in which these
insurance subsidiaries are domiciled.
31
However, it is expected that laws and regulations will not restrict the
Company's insurance subsidiaries from paying dividends to GE Financial Assurance
in amounts necessary to meet its operating requirements.
COMPUTER SYSTEMS CONVERSION
The Company has formed a special project team to consider the impact of the
Year 2000 issue on its computer systems and applications and developed a
remediation plan. Conversion activities are in process and the Company expects
conversion and testing to be completed in the middle of 1999. However, if such
activities or the remedial activities of other companies on which the Company's
systems rely are not timely completed, the Year 2000 issue may have a
significant impact on the Company.
The Company expects that completion of the Year 2000 project will result in
additional expenditures of approximately $18 million.
PROPOSED REPORTING CHANGES
The NAIC currently has a project under way to codify statutory accounting
principles ("SAP"), as existing SAP does not address all accounting issues and
may differ from state to state. Upon completion, the codification is expected to
replace prescribed or permitted SAP in each state as the new comprehensive
statutory basis of accounting for insurance companies. The final format of the
codification is uncertain at this time, yet implementation could be required as
early as January 1, 1999. Due to the project's uncertainty, the Company has not
yet quantified the impact any such changes would have on the statutory capital
and surplus or results of operations of its subsidiaries. While significant
uncertainties surrounding the ultimate outcome of the codification remains,
management currently believes adoption of such standards would not have a
material impact on the statutory capital and surplus or results of operations of
its subsidiaries.
INTEREST RATE CHANGES
Interest rate changes may have temporary effects on the sale and
profitability of the annuity, universal life, and other investment products
offered by GE Financial Assurance's insurance operations. For example, if
interest rates rise, competing investments (such as annuities or life insurance
offered by GE Financial Assurance's competitors, certificates of deposit, mutual
funds, and similar instruments) may become more attractive to potential
purchasers of GE Financial Assurance's products until GE Financial Assurance
increases the rate credited to holders of its annuity, universal life, and other
investment products. GE Financial Assurance constantly monitors interest
earnings on existing assets and yields available on new investments and sells
policies and annuities that permit flexible responses to interest rate changes
as part of its management of interest spreads.
INVESTMENTS
The Company manages its investment portfolio to meet the diversification,
credit quality, yield and liquidity requirements of its policy liabilities by
investing primarily in fixed maturity instruments, including government and
corporate bonds, mortgage backed bonds, and mortgage loans on real estate. At
December 31, 1996, the Company held $33.9 billion, or 94.7% of its investment
portfolio, in fixed maturity instruments and mortgage loans. The Company's
investment philosophy focuses on purchasing assets the durations of which
approximate policyholder obligations. To match some of its longer term policy
liabilities, the Company has followed a strategy of buying bonds with adequate
call protection. The Company also invests in preferred stock, policy loans,
short-term securities and other investments, which comprised the remaining 5.3%
of its investment portfolio at December 31, 1996.
The Company primarily purchases investment-grade (BBB-/Baa3 or above) bonds.
At December 31, 1996, $27.9 billion, or 88.7%, of the fixed maturity securities
held by the Company were bonds rated by a
32
rating agency (S&P or Moody's), or were government/agency bonds. The remaining
$3.6 billion, or 11.3%, was comprised primarily of private placement bonds not
rated by either rating agency. At December 31, 1996, the Company held $763
million of bonds rated below investment grade (excluding split-rated bonds). In
addition, the Company held $193 million of "not-rated" bonds which the Company
believes are below investment grade. Below investment grade bonds include those
bonds originally purchased as investment grade but subsequently downgraded in
rating, as well as bonds purchased as below investment grade. The Company holds
this small percentage of below investment grade bonds in order to enhance the
yield on its investment portfolio. During 1997, the Company plans to purchase
approximately $900 million of below investment grade bonds, in order to further
enhance the yield on its investment portfolio, while still maintaining adequate
quality, diversification and liquidity characteristics.
Investments in mortgage backed bonds include $6,714 million in
collateralized mortgage obligations (CMOs) and asset-backed securities and
$1,355 million of pass-through securities. These bonds are secured primarily by
pools of residential mortgages and generally carry high credit ratings.
Approximately 58% of the mortgage-backed bonds are backed by securities issued
by Government National Mortgage Association, Federal Home Loan Mortgage
Corporation, or Federal National Mortgage Association. In the aggregate, the
mortgage-backed bonds had an average rating of AAA/Aaa at December 31, 1996.
Most CMO and pass-through securities are subject to prepayment and extension
risk (i.e. principal can be received earlier or later than anticipated, based on
the rate of mortgage prepayments in the underlying residential mortgage pools).
At December 31, 1996, the Company's investments in equity securities
totalled $494 million, of which $478 million was preferred stock and $16 million
was common stock. The investments in preferred stock generally pay dividends on
a quarterly basis at yields comparable to bonds.
The Company has classified all of its fixed maturity and equity securities
as available-for-sale. Therefore, these securities are carried on the balance
sheet at current fair values and marked to market quarterly. Changes in market
value, net of the effect on present value of future profits, deferred policy
acquisition costs and deferred income taxes, are recorded as unrealized
appreciation or depreciation directly in shareholder's interest and,
accordingly, have no effect on net income. At December 31, 1996, the amortized
cost basis of the Company's fixed maturity securities was $31,717 million,
representing net unrealized losses of $215 million, while the cost basis of
equity securities was $485 million, representing net unrealized gains of $9
million.
The Company's mortgage loan portfolio consisted of 1,917 loans at December
31, 1996. The loans, which are originated through a network of mortgage bankers,
are made only on completed, leased properties and have a maximum loan-to-value
ratio of 75% at the date of origination. Commercial loans comprise the majority
of the portfolio, with $1,165 million (46.9%), $565 million (22.8%) and $373
million (15.0%) attributable to the retail, industrial and office sectors,
respectively. The remainder of the loans, $381 million (15.3%), are attributable
to the residential and other miscellaneous sectors. The mortgage loans are
secured by property throughout the U.S., with concentrations in the Pacific
region (32.3%) and the South Atlantic region (27.8%).
Certain policies issued by the Company allow the policyholders to borrow
against the policy. These loans are classified in the asset side of the balance
sheet as Policy Loans. At December 31, 1996, the outstanding loans of $971
million bore interest at an average rate of 8.6%, which is determined by the
terms of the policy.
Other invested assets of $182 million at December 31, 1996 were comprised of
several types of assets. The Company has made investments in mutual funds
offered by the Company's mutual fund and variable annuity distribution channels
of $101 million in order to provide seed money for these funds. Pursuant to a
periodic review of its asset allocation strategy, the Company has also made
investments in limited partnerships ($34 million) and real estate and other
properties ($19 million) in order to achieve higher investment returns on an
incremental portion of the portfolio.
33
INVESTMENT PORTFOLIO
DECEMBER 31, 1996
------------------------
FAIR MARKET PERCENTAGE
VALUE OF TOTAL
----------- -----------
(DOLLARS IN MILLIONS)
Fixed Maturity Securities--Available For Sale(1)
U.S. Government and Agencies.......................................................... $ 1,591 4.4%
State and Municipal................................................................... 38 0.1
Foreign Government.................................................................... 132 0.4
Foreign Corporate..................................................................... 1,392 4.0
U.S. Corporate........................................................................ 20,280 56.6
Mortgage Backed(2).................................................................... 8,069 22.5
----------- -----
Total Fixed Maturity Securities..................................................... 31,502 88.0
----------- -----
Equity Securities--Available For Sale(3)
Common Stock.......................................................................... 16 0.0
Preferred Stock, Non-Redeemable....................................................... 478 1.3
----------- -----
Total Equity Securities............................................................. 494 1.3
----------- -----
Mortgage Loans on Real Estate........................................................... 2,426 6.8
Policy Loans............................................................................ 971 2.7
Short Term Investments.................................................................. 235 0.7
Other Invested Assets
Mutual Funds.......................................................................... 101 0.3
Limited Partnerships.................................................................. 34 0.1
Properties Held For Investment........................................................ 19 0.1
Real Estate Owned..................................................................... 12 0.0
Other Assets.......................................................................... 16 0.0
----------- -----
Total Other Invested Assets......................................................... 182 0.5
----------- -----
Total Investments....................................................................... $ 35,810 100.0%
----------- -----
----------- -----
- ------------------------
(1) Fixed maturity securities available-for-sale are stated at current market
values. Amortized cost of fixed maturity securities available-for-sale at
December 31, 1996 was $31,717 million, representing net unrealized losses of
$215 million. Changes in market value, net of the effect on present value of
future profits, deferred policy acquisition costs and deferred federal
income taxes, are reflected as unrealized appreciation or depreciation
directly in shareholder's interest and, accordingly, have no effect on net
income.
(2) Mortgage Backed Securities are comprised of CMOs ($6,714 million) and
Pass-throughs ($1,355 million).
(3) Equity securities available-for-sale are stated at current market values.
The cost basis of equity securities available-for-sale at December 31, 1996
was $485 million, representing net unrealized gains of $9 million. Changes
in market value, net of the effect on present value of future profits,
deferred policy acquisition costs and deferred federal income taxes, are
reflected as unrealized appreciation or depreciation directly in
shareholder's interest and, accordingly, have no effect on net income.
34
The following table summarizes the Company's investment results for the
periods indicated.
INVESTMENT RESULTS
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(DOLLARS IN MILLIONS)
Total Invested Assets(1)......................................................... $ 13,175 $ 16,417 $ 24,144
Net Investment Income(2)......................................................... $ 881 $ 1,194 $ 1,773
Effective Yield(3)............................................................... 6.9% 7.5% 7.6%
Net Realized Investment Gains (4)................................................ $ 7 $ 6 $ 15
- ------------------------
(1) Average of cash and total invested assets on an amortized cost basis,
adjusted for impact of timing on acquired companies.
(2) Net investment income is net of investment expenses and excludes capital
gains or losses or provision for income taxes.
(3) Net investment income divided by the sum of the (i) average cash and total
invested assets minus (ii) one-half of net investment income.
(4) Excludes provision for income taxes.
The credit quality of the Company's bond portfolio as stated below is based
upon the higher of the ratings published by S&P or Moody's.
PORTFOLIO CREDIT QUALITY
DECEMBER 31, 1996
------------------------
FAIR MARKET PERCENTAGE
VALUE OF TOTAL
----------- -----------
(DOLLARS IN MILLIONS)
Agencies and Treasuries................................................................. $ 5,739 18.2%
AAA/Aaa................................................................................. 3,664 11.6
AA/Aa................................................................................... 1,960 6.2
A/A..................................................................................... 8,112 25.8
BBB/Baa................................................................................. 7,706 24.5
BB/Ba................................................................................... 703 2.2
B/B..................................................................................... 53 0.2
CCC/Caa................................................................................. 1 0.0
D/D..................................................................................... 6 0.0
Not Rated............................................................................... 3,558 11.3
----------- -----
Total................................................................................. $ 31,502 100.0%
----------- -----
----------- -----
As of December 31, 1996, the Company's bond portfolio had an average rating
of A+/A1. According to S&P and Moody's, bonds which are rated "A" possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. S&P applies "+" and "-" modifiers in each generic rating
classification from AA to CCC. Moody's applies numerical modifiers "1", "2" and
"3" in each generic rating classification from Aa to B. Modifier "1" indicates a
bond in the higher end of a generic rating classification.
Fixed maturity securities with ratings ranging from AAA/Aaa to BBB-/Baa3 are
generally regarded as investment grade. Some agencies and treasuries (that is,
those securities issued by the U.S. Government or
35
an agency thereof) are not rated, but are considered to be investment grade
securities. Finally, some securities, such as private placements, have not been
assigned a rating by any rating service and are therefore categorized as "not
rated". This has neither positive nor negative implications regarding the credit
quality of the security.
At December 31, 1996, there were fixed maturity securities in default with a
fair value of $14 million. There were no fixed maturity securities in default at
December 31, 1995.
The following table sets forth scheduled maturities for the Company's
investments in fixed maturities at December 31, 1996.
SCHEDULED MATURITIES
DECEMBER 31, 1996
------------------------
FAIR MARKET PERCENTAGE
VALUES OF TOTAL
----------- -----------
(DOLLARS IN MILLIONS)
Due in one year or less................................................................. $ 890 2.8%
Due after one year through five years................................................... 4,636 14.7
Due after five years through 10 years................................................... 6,036 19.2
Due after 10 years...................................................................... 11,871 37.7
Mortgage-Backed Bonds................................................................... 8,069 25.6
----------- -----
Total................................................................................. $ 31,502 100.0%
----------- -----
----------- -----
Expected maturities may differ from scheduled maturities because issuers of
securities may have the right to call or prepay obligations with or without call
or prepayment penalties. At December 31, 1996, $6,117 million of the Company's
investments (excluding mortgage-backed bonds) were subject to certain call
provisions.
NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 125, ACCOUNTING FOR
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES.
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS No. 125 is required to be adopted by
the Company in 1997, except for certain sections which were deferred in
accordance with SFAS 127. The adoption of the applicable provisions of SFAS No.
125 in 1997 did not have a material impact on the Company's financial statements
and management of the Company does not expect that adoption of the remaining
provisions of SFAS No. 125 will have a material impact on the Company's 1998
financial position, results of operations, or liquidity.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME.
This Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income includes all changes in equity from
nonowner sources; investments by and distributions to owners are excluded. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997. The
Company will include this new reporting information in its 1998 consolidated
financial statements as required.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 is effective for disclosures
about segments of an enterprise and related
36
information for periods beginning after December 15, 1997. This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. Management has not yet determined the impact, if any, of this
Statement on the Company's future disclosures.
The American Institute of Certified Public Accountants has released an
exposure draft of a new Statement of Position (SOP), ACCOUNTING BY INSURANCE AND
OTHER ENTERPRISES FOR GUARANTY- FUND AND CERTAIN OTHER INSURANCE-RELATED
ASSESSMENTS. This SOP provides guidance on accounting by insurance and other
enterprises for guaranty-fund and certain other insurance related assessments.
The SOP requires enterprises to recognize 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. This SOP is expected to be effective
for financial statements for fiscal years beginning after December 15, 1997 and
will be reported in a manner similar to a cumulative effect of a change in
accounting principle in the initial year of adoption. Management of the Company
does not expect that this SOP will have a material impact on the Company's
financial position, results of operations, or liquidity.
ITEM 3. PROPERTIES.
The Company and its subsidiaries conduct their businesses from various
facilities, most of which are leased. However, the Company's two largest
facilities, including its headquarters campus in Richmond, Virginia, and another
facility in Lynchburg, Virginia are owned by the Company.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
Omitted
ITEM 6. EXECUTIVE COMPENSATION.
Omitted
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted
ITEM 8. LEGAL PROCEEDINGS.
There are no pending legal proceedings beyond the ordinary course of
business that could have a material financial effect on the Company.
37
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
All of the Company's Common Stock, its sole class of common equity on the
date hereof, is owned by GE Capital Corporation. Accordingly, there is no public
trading market for the Company's common equity.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
On November 10, 1996, GE Capital purchased 1,000 shares of Common Stock
issued by the Company in exchange for a capital contribution of GNA Corporation.
Such transaction was exempt from the registration requirements of the Securities
Act of 1933 pursuant to Section 4(2) thereunder.
ITEM 11. DESCRIPTIONS OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The class of securities of the Company to be registered hereby consists of
its Common Stock, par value $1.00 per share, of which 1000 shares are authorized
and 1000 shares are issued and outstanding. All outstanding shares are duly and
validly authorized and issued and fully paid and nonassessable. The holder of
the shares of Common Stock of the Company is entitled to receive dividends if,
as and when declared payable by the Board of Directors of the Company out of
funds legally available for such payment. The holder of Common Stock of the
Company is entitled to one vote for each share held, has no conversion or
redemption rights, is not liable for further calls or assessments, and, upon
liquidation, is entitled, after payment of all liabilities, to receive the
assets of the Company, either in cash or in kind, on a pro rata basis.
All of the outstanding shares of Common Stock of the Company are held by GE
Capital Corporation.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware provides
that in certain circumstances a corporation may indemnify directors and officers
against the reasonable expenses (including attorney's fees), judgments, fines
and amounts paid in settlement, actually and reasonably incurred by them in
connection with any action, suit or proceeding by reason of being or having been
directors or officers, if such person shall have acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, except that if such action, suit or proceeding shall be in the
right of the corporation, indemnification shall be provided only against
reasonable expenses (including attorney's fees) and no such indemnification
shall be provided as to any claim, issue or matter as to which such person shall
have been judged to have been liable to the corporation, unless and to the
extent that the Court of Chancery of the State of Delaware or any other court in
which the suit was brought shall determine upon application that, in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity. A corporation shall be required to indemnify against reasonable
expenses (including attorney's fees) any director or officer who successfully
defends any such actions. The foregoing statements are subject to the detailed
provisions of Section 145 of the General Corporation Law of the State of
Delaware.
The By-Laws of GE Financial Assurance provide that each person who at any
time is or shall have been a director, officer, employee or agent of GE
Financial Assurance, or is or shall have been serving at the request of GE
Financial Assurance as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, and his
heirs, executors and administrators, shall be indemnified by GE Financial
Assurance in accordance with and to the full extent permitted by the General
Corporation Law of the State of Delaware.
38
GE Financial Assurance intends to enter into one or more underwriting
agreements which will include provisions regarding the indemnification of GE
Financial Assurance and its officers and directors by one or more underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended.
The directors of GE Financial Assurance are insured under officers and
directors liability insurance policies purchased by GE Company. The directors,
officers and employees of GE Company are also insured against fiduciary
liabilities under the Employee Retirement Income Security Act of 1974.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
This Registration Statement on Form 10 includes the financial statements
described in Item 15(a).
ITEM 14. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements and Schedules.
Separate historical financial statements for AMEX Life, Life of Virginia and
First Colony are presented as required by Regulation S-X due to the significance
of the respective acquisitions of such entities to GE Financial Assurance.
39
ITEM 15(A)
CONTENTS
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
------
Independent Auditors' Report........................................................................ 42
Consolidated Balance Sheets......................................................................... 43
Consolidated Statements of Income................................................................... 44
Consolidated Statements of Shareholder's Interest................................................... 45
Consolidated Statements of Cash Flows............................................................... 46
Notes to Consolidated Financial Statements.......................................................... 47
Independent Auditors' Report........................................................................ 71
Schedule II, Condensed Financial Information (Parent Company)....................................... 72
Schedule III, Supplemental Insurance Information.................................................... 76
AMEX LIFE ASSURANCE COMPANY
FINANCIAL STATEMENTS
Report of Independent Auditors...................................................................... 77
Balance Sheet....................................................................................... 78
Statement of Income................................................................................. 79
Statement of Changes in Stockholder's Equity........................................................ 80
Statement of Cash Flows............................................................................. 81
Notes to Financial Statements....................................................................... 82
THE LIFE INSURANCE COMPANY OF
VIRGINIA AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report........................................................................ 93
Report of Independent Auditors...................................................................... 94
Consolidated Balance Sheets......................................................................... 95
Consolidated Statements of Income................................................................... 96
Consolidated Statements of Stockholders' Equity..................................................... 97
Consolidated Statements of Cash Flows............................................................... 98
Notes to Consolidated Financial Statements.......................................................... 99
FIRST COLONY LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants................................................................... 120
Consolidated Balance Sheets......................................................................... 121
Consolidated Statements of Income................................................................... 122
Consolidated Statements of Changes in Shareholders' Equity.......................................... 123
Consolidated Statements of Cash Flows............................................................... 124
Notes to Consolidated Financial Statements.......................................................... 125
40
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED,
COMBINED FINANCIAL INFORMATION
Introduction........................................................................................ 144
Unaudited Pro Forma Condensed, Combined Balance Sheet as of June 30, 1997 and Accompanying Notes.... 145
Unaudited Pro Forma Condensed, Combined Statement of Income for the Six Months Ended June 30, 1997
and Accompanying Notes............................................................................ 147
Unaudited Pro Forma Condensed, Combined Statement of Income for the Year Ended December 31, 1996 and
Accompanying Notes................................................................................ 149
41
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GE Financial Assurance Holdings, Inc.
We have audited the accompanying consolidated balance sheets of GE Financial
Assurance Holdings, Inc. and subsidiaries as of December 31, 1995 and 1996, and
the related consolidated statements of income, shareholder's interest, and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reaonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GE Financial
Assurance Holdings, Inc. and subsidiaries as of December 31, 1995 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
January 17, 1997 (except as to note 16, which is as of June 30, 1997)
42
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in millions, except per share amounts)
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- ------------
(UNAUDITED)
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value $ 16,160 $ 31,502 $ 32,501
Equity securities available-for-sale, at fair value:
Common stock 4 16 24
Preferred stock, non-redeemable 29 478 363
Mortgage loans, net of valuation allowance of $36, $58 and $55 (unaudited)
at December 31, 1995 and 1996 and June 30, 1997, respectively 1,565 2,426 2,477
Policy loans 522 971 986
Short-term investments 128 235 181
Other invested assets 62 182 205
--------- --------- ------------
Total investments 18,470 35,810 36,737
Cash 19 50 43
Accrued investment income 282 661 747
Deferred acquisition costs 180 488 697
Intangible assets 815 3,311 3,155
Reinsurance recoverable 1,738 1,674 1,696
Deferred income tax benefit 176 293 277
Other assets 122 279 278
Separate account assets 18 2,795 3,384
--------- --------- ------------
Total assets $ 21,820 $ 45,361 $ 47,014
--------- --------- ------------
--------- --------- ------------
LIABILITIES AND SHAREHOLDER'S INTEREST
Liabilities:
Future annuity and contract benefits $ 18,211 $ 33,449 $ 34,075
Unearned premiums 267 813 841
Liability for policy and contract claims 503 879 867
Other policyholder liabilities 113 352 450
Accounts payable and accrued expenses 377 1,072 1,002
Short-term borrowings 12 103 125
Separate account liabilities 18 2,795 3,384
Long-term debt -- 175 175
--------- --------- ------------
Total liabilities 19,501 39,638 40,919
--------- --------- ------------
Minority interest -- 2 2
Shareholder's interest:
Common stock ($1 par value, 1,000 shares authorized, 1,000 shares issued and
outstanding) -- -- --
Additional paid-in capital 1,874 5,435 5,435
Net unrealized investment gains (losses) 237 (151) 18
Retained earnings 208 437 640
--------- --------- ------------
Total shareholder's interest 2,319 5,721 6,093
--------- --------- ------------
Total liabilities and shareholder's interest $ 21,820 $ 45,361 $ 47,014
--------- --------- ------------
--------- --------- ------------
See accompanying notes to consolidated financial statements.
43
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in millions)
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------- --------------------------
1994 1995 1996 1996 1997
------ -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues:
Net investment income $ 881 $1,194 $1,773 $ 785 $1,352
Net realized investment gains 7 6 15 7 28
Premiums 149 485 1,386 581 1,013
Net commission income 30 11 14 7 7
Policy fees and other income 24 53 178 60 205
------ -------- -------- ----------- -----------
Total revenues 1,091 1,749 3,366 1,440 2,605
------ -------- -------- ----------- -----------
Benefits and expenses:
Interest credited 515 672 922 405 641
Benefits and other changes in policy reserves 306 608 1,347 579 1,097
Commissions 63 131 367 154 295
General expenses 91 171 426 160 313
Amortization of intangibles, net 65 116 215 96 149
Change in deferred acquisition costs, net (72) (117) (282) (108) (227)
Interest expense -- -- 1 -- 6
------ -------- -------- ----------- -----------
Total benefits and expenses 968 1,581 2,996 1,286 2,274
------ -------- -------- ----------- -----------
Income before income taxes and minority interest 123 168 370 154 331
Provision for income taxes 51 67 140 59 128
------ -------- -------- ----------- -----------
Income before minority interest 72 101 230 95 203
Minority interest -- -- 1 -- --
------ -------- -------- ----------- -----------
Net income $ 72 $ 101 $ 229 $ 95 $ 203
------ -------- -------- ----------- -----------
------ -------- -------- ----------- -----------
See accompanying notes to consolidated financial statements.
44
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S INTEREST
(Dollar amount in millions, except share amounts)
UNREALIZED
COMMON STOCK ADDITIONAL INVESTMENT
------------------------ PAID-IN GAINS RETAINED
SHARES AMOUNT CAPITAL (LOSSES) EARNINGS
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1993 1,000 $ -- $ 1,113 $ (21) $ 35
Net income -- -- -- -- 72
Contribution of HGI, Inc. -- -- 412 -- --
Purchase price settlement -- -- (16) -- --
Net unrealized investment losses -- -- -- (603) --
----- ----- ----------- ----- -----
Balances at December 31, 1994 1,000 -- 1,509 (624) 107
Net income -- -- -- -- 101
Contribution of AMEX Life -- -- 369 -- --
Purchase price settlement -- -- (4) -- --
Net unrealized investment gains -- -- -- 861 --
----- ----- ----------- ----- -----
Balances at December 31, 1995 1,000 -- 1,874 237 208
Net income -- -- -- -- 229
Contribution of Life of Virginia -- -- 964 -- --
Contribution of UFLIC -- -- 425 -- --
Cash contribution for acquisition of First Colony -- -- 2,172 -- --
Net unrealized investment losses -- -- -- (388) --
----- ----- ----------- ----- -----
Balances at December 31, 1996 1,000 -- 5,435 (151) 437
Net income (unaudited) -- -- -- -- 203
Net unrealized investment gains (unaudited) -- -- -- 169 --
----- ----- ----------- ----- -----
Balances at June 30, 1997 (unaudited) 1,000 $ -- $ 5,435 $ 18 $ 640
----- ----- ----------- ----- -----
----- ----- ----------- ----- -----
Balances at December 31, 1995 1,000 $ -- $ 1,874 $ 237 $ 208
Net income (unaudited) -- -- -- -- 95
Contribution of Life of Virginia -- -- 964 -- --
Contribution of UFLIC -- -- 425 -- --
Net unrealized investment losses (unaudited) -- -- -- (382) --
----- ----- ----------- ----- -----
Balances at June 30, 1996 (unaudited) 1,000 $ -- $ 3,263 $ (145) $ 303
----- ----- ----------- ----- -----
----- ----- ----------- ----- -----
TOTAL
SHAREHOLDER'S
INTEREST
-------------
Balances at December 31, 1993 $ 1,127
Net income 72
Contribution of HGI, Inc. 412
Purchase price settlement (16)
Net unrealized investment losses (603)
------
Balances at December 31, 1994 992
Net income 101
Contribution of AMEX Life 369
Purchase price settlement (4)
Net unrealized investment gains 861
------
Balances at December 31, 1995 2,319
Net income 229
Contribution of Life of Virginia 964
Contribution of UFLIC 425
Cash contribution for acquisition of First Colony 2,172
Net unrealized investment losses (388)
------
Balances at December 31, 1996 5,721
Net income (unaudited) 203
Net unrealized investment gains (unaudited) 169
------
Balances at June 30, 1997 (unaudited) $ 6,093
------
------
Balances at December 31, 1995 $ 2,319
Net income (unaudited) 95
Contribution of Life of Virginia 964
Contribution of UFLIC 425
Net unrealized investment losses (unaudited) (382)
------
Balances at June 30, 1996 (unaudited) $ 3,421
------
------
See accompanying notes to consolidated financial statements.
45
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in millions)
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
------------------------------- ------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income $ 72 $ 101 $ 229 $ 95 $ 203
--------- --------- --------- ----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest -- -- 1 -- --
Increase in future policy benefits 634 907 1,504 653 1,064
Charges assessed -- -- (97) (27) (84)
Net realized investment gains (7) (6) (15) (7) (28)
Amortization of investment premiums and
discounts 82 51 23 12 10
Amortization of intangibles 65 116 215 96 149
Deferred income tax expense (benefit) 33 (23) (4) (13) (44)
Change in certain assets and liabilities:
Decrease (increase) in:
Accrued investment income 9 (8) (109) (88) (86)
Deferred acquisition costs (72) (117) (282) (108) (227)
Other assets, net (11) 62 17 1 13
Increase (decrease) in:
Other policy-related balances 119 1 190 164 88
Accounts payable and accrued expenses (3) (7) 235 188 (82)
--------- --------- --------- ----------- -----------
Total adjustments 849 976 1,678 871 773
--------- --------- --------- ----------- -----------
Net cash provided by operating
activities 921 1,077 1,907 966 976
--------- --------- --------- ----------- -----------
Cash flows from investing activities:
Proceeds from investments in fixed maturities
and real estate 2,150 3,567 3,849 1,280 2,340
Principal collected on mortgage and policy
loans 93 131 236 119 151
Purchases of fixed maturities (2,646) (3,679) (4,602) (1,409) (2,939)
Mortgage and policy loan originations (393) (338) (542) (274) (223)
Purchase of First Colony, net of cash acquired -- -- (1,869) -- --
Purchase of note from GE Capital -- -- (175) -- --
--------- --------- --------- ----------- -----------
Net cash used in investing activities (796) (319) (3,103) (284) (671)
--------- --------- --------- ----------- -----------
Cash flows from financing activities:
Proceeds from issue of investment contracts 1,064 1,239 1,998 612 1,792
Redemption and benefit payments on investment
contracts (1,275) (1,990) (3,010) (1,317) (2,179)
Proceeds from short-term borrowings 12 187 574 237 596
Payments on short-term borrowings (5) (214) (482) (212) (575)
Capital contribution from GE Capital -- -- 2,172 -- --
Cash received upon acquisition of HGI, Inc.,
AMEX Life, Life of Virginia, and UFLIC 18 34 82 82 --
--------- --------- --------- ----------- -----------
Net cash provided by (used in)
financing activities (186) (744) 1,334 (598) (366)
--------- --------- --------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (61) 14 138 84 (61)
Cash and cash equivalents at beginning of year 194 133 147 147 285
--------- --------- --------- ----------- -----------
Cash and cash equivalents at end of year $ 133 $ 147 $ 285 $ 231 $ 224
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
See accompanying notes to consolidated financial statements.
46
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1997
(SIX-MONTH PERIODS ARE UNAUDITED)
(Dollar amounts in millions)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the historical
operations and accounts of GE Financial Assurance Holdings, Inc. and all
significant subsidiaries (collectively the "Company"). Significant subsidiaries
of the Company include General Electric Capital Assurance Company (whose
significant subsidiaries include Great Northern Insured Annuity Corporation, GE
Capital Life Assurance Company of New York, Federal Home Life Insurance Company
and subsidiaries, the Life Insurance Company of Virginia and subsidiaries, and
First Colony Life Insurance Company and subsidiaries), GNA Corporation and Union
Fidelity Life Insurance Company. All significant intercompany accounts and
transactions have been eliminated in consolidation.
All of the outstanding common stock of GE Financial Assurance Holdings, Inc.
(GE Financial Assurance) is owned by General Electric Capital Corporation (GE
Capital), a wholly-owned subsidiary of General Electric Capital Services, Inc.
(GE Capital Services), which in turn is a wholly-owned subsidiary of General
Electric Company. GE Financial Assurance was formed by GE Capital in October
1996. GE Capital subsequently contributed its wholly-owned subsidiary, GNA
Corporation, to GE Financial Assurance. These consolidated financial statements
reflect the combination of GE Financial Assurance and GNA Corporation at
historical cost on an as-if-pooled basis; accordingly, the accompanying
consolidated financial statements include the accounts and operations of GNA
Corporation for all periods presented.
(b) BASIS OF PRESENTATION
These consolidated financial statements have been prepared on the basis of
generally accepted accounting principles (GAAP) for stock life insurance
companies, which vary in several respects from accounting practices prescribed
or permitted by the Insurance Commissioners of the states where the Company's
insurance subsidiaries are domiciled. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts and related disclosures. Actual results could differ
from those estimates.
The consolidated financial statements of the Company included herein as of
and for the six months ended June 30, 1996 and 1997, have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. All adjustments, consisting of normal recurring
accruals, have been made which the Company believes are necessary for a fair
presentation of the Company's financial position and results of operations for
such interim periods. Certain information and disclosures related to the
unaudited interim periods ended June 30, 1996 and 1997, normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the interim period information presented herein not misleading.
(c) ACQUISITIONS
GE Capital completed the acquisition of 100% of GNA Corporation's capital
stock effective April 1993 for a purchase price of $577 and subsequently
acquired 100% of the capital stock of the
47
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1997
(SIX-MONTH PERIODS ARE UNAUDITED)
(Dollar amounts in millions)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
following companies. Concurrent with each acquisition, GE Capital contributed
its ownership to the Company.
EFFECTIVE DATE COMPANY PURCHASE PRICE
- ------------------------ ----------------------------------------------------------------------- -----------------
July 1993 United Pacific Life Insurance Company (subsequently renamed General $ 515
Electric Capital Assurance Company (GECA))
November 1994 The Federal Home Life Companies $ 412
October 1995 AMEX Life Assurance Company (AMEX Life, subsequently merged into GECA) $ 369
April 1996 The Life Insurance Company of Virginia (Life of Virginia) $ 964
April 1996 Union Fidelity Life Insurance Company (UFLIC) $ 425
The results of the acquired companies are included in the accompanying
consolidated financial statements from each respective date of acquisition.
Effective December 1996, the Company completed the acquisition of 100% of
the capital stock of First Colony Life Insurance Company (First Colony) for a
purchase price of $1,897. GE Capital contributed the purchase price for this
acquisition. The results of First Colony are included in the accompanying
consolidated financial statements effective December 1, 1996.
Each of the above referenced acquisitions has been accounted for using the
purchase method of accounting. Accordingly, the purchase price has been
allocated to the assets acquired and the liabilities assumed based on their
estimated fair values as of the respective acquisition dates.
Following are the pro-forma results of operations of the Company for the
year ended December 31, 1995 as if the acquisitions of AMEX Life, Life of
Virginia, UFLIC and First Colony had occurred on January 1, 1995, and the
pro-forma results of operations of the Company for the year ended December 31,
1996 as if the acquisitions of Life of Virginia, UFLIC and First Colony had
occurred on January 1, 1996.
1995 1996
--------- ---------
(UNAUDITED)
Total revenues............................................................. $ 4,825 $ 4,914
Net income................................................................. 333 361
The pro-forma information has been prepared based upon assumptions
management deems appropriate and the results are not necessarily indicative of
those that might have occurred had the transactions become effective at the
beginning of each respective year.
(d) PRODUCTS
GE Financial Assurance is an insurance holding company that, through its
subsidiaries, sells a variety of insurance and investment-related products
primarily in the United States. The Company's operations are in two business
segments: Wealth Accumulation and Transfer and Wealth and Lifestyle Protection.
Wealth Accumulation and Transfer products are investment vehicles and
insurance contracts intended to increase the policyholder's wealth, transfer
wealth to beneficiaries or provide a means for replacing the
48
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1997
(SIX-MONTH PERIODS ARE UNAUDITED)
(Dollar amounts in millions)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income of the insured in the event of premature death. The Company's principal
product lines under the Wealth Accumulation and Transfer segment are deferred
annuities (fixed and variable), immediate annuities (structured settlements and
retirement), life insurance (universal, term, ordinary and group), guaranteed
investment contracts (GICs) and mutual funds.
Wealth and Lifestyle Protection products are products intended to protect
accumulated wealth and income from the financial drain of unforeseen events. The
Company's principal product lines under the Wealth and Lifestyle Protection
segment are long-term care, supplementary accident and health insurance and
credit insurance (life and health).
The Company distributes its products through four primary channels:
intermediaries (such as brokerage general agents (BGAs), financial planners,
banks, securities brokerage firms and personal producing general agents
(PPGAs)); career agents, who distribute certain of the Company's products on an
exclusive basis, some of whom are not employees of the Company; marketing
through businesses and affinity groups; and direct marketing.
Certain of the Company's subsidiaries and certain policies and contracts
offered by them are subject to regulation under the federal securities laws
administered by the Securities and Exchange Commission and certain state
securities laws. Certain of these products offer customers a guaranteed interest
rate for a predetermined time period and subject customers to a market value
adjustment on early withdrawals. Other products offer customers numerous
investment options, including, but not limited to, purchases of shares of
various mutual funds.
(e) REVENUES
Investment income is recorded when earned. Investment gains and losses are
calculated on the basis of specific identification. Premiums on short duration
insurance contracts are reported as revenue over the terms of the related
insurance policies. In general, earned premiums are calculated on a pro-rata
basis or are recognized in proportion to expected claims. Premiums on
long-duration insurance products are recognized as earned when due or, in the
case of life contingent immediate annuities, when the contracts are issued.
Premiums received under annuity contracts without significant mortality risk and
premiums received on universal life products are not reported as revenues but as
future annuity and contract benefits. Other income consists primarily of
surrender charges on certain policies and charges to policyholder account values
for universal life, variable life and variable annuity policies. Surrender
charges are recognized as income when the policy is surrendered.
(f) STATEMENTS OF CASH FLOWS
Certificates and other time deposits are classified as short-term
investments on the consolidated balance sheets and considered cash equivalents
in the consolidated statements of cash flows.
(g) INVESTMENTS
The Company has designated its fixed maturities (bonds, notes, and
redeemable preferred stock) and its equity securities (common and non-redeemable
preferred stock) as available-for-sale. The fair value for fixed maturities and
equity securities is based on quoted market prices, where available. For fixed
maturities not actively traded, fair values are estimated using values obtained
from independent pricing
49
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1997
(SIX-MONTH PERIODS ARE UNAUDITED)
(Dollar amounts in millions)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
services or, in the case of private placements, are estimated by discounting
expected future cash flows using a current market rate applicable to the credit
quality, call features and maturity of the investments, as applicable.
Changes in the market values of investments available-for-sale, net of the
effect on deferred policy acquisition costs, present value of future profits and
deferred federal income taxes are reflected as unrealized investment gains or
losses in a separate component of shareholder's interest and, accordingly, have
no effect on net income. Unrealized losses that are considered other than
temporary are recognized in earnings through an adjustment to the amortized cost
basis of the underlying securities.
Investment income on mortgage-backed securities is initially based upon
yield, cash flow and prepayment assumptions at the date of purchase. Subsequent
revisions in those assumptions are recorded using the retrospective method,
whereby the amortized cost of the securities is adjusted to the amount that
would have existed had the revised assumptions been in place at the date of
purchase. The adjustments to amortized cost are recorded as a charge or credit
to investment income.
The Company does not engage in derivatives trading, market-making or other
speculative activities. The Company requires all options to be designated and
accounted for as hedges of specific assets, liabilities or committed
transactions; resulting payments and receipts are recognized contemporaneously
with effects of hedged transactions. Any instrument designated but ineffective
as a hedge is marked to market and recognized in operations immediately. A
payment or receipt arising from early termination of an effective hedge is
accounted for as an adjustment to the basis of the hedged transaction.
Mortgage and policy loans are stated at the unpaid principal balance of such
loans, net of allowances for estimated uncollectable amounts.
(h) DEFERRED ACQUISITION COSTS
Acquisition costs include costs and expenses which vary with and are
primarily related to the acquisition of insurance and investment contracts. Such
costs are deferred and amortized as follows:
LONG-DURATION CONTRACTS-Acquisition costs include first-year commissions in
excess of recurring renewal commissions, direct mail solicitation and printing
costs, and certain support costs such as underwriting and policy issue expenses.
For investment and universal life type contracts, amortization is based on the
present value of anticipated gross profits from investments, interest credited,
surrender and other policy charges, and mortality and maintenance expenses.
Amortization is adjusted retroactively when current or estimates of future gross
profits to be realized are revised. For other long-duration insurance contracts,
the acquisition costs are amortized in relation to the estimated benefit
payments or the present value of expected future premiums.
SHORT-DURATION CONTRACTS-Acquisition costs consist primarily of commissions
and premium taxes and are amortized ratably over the terms of the underlying
policies.
Deferred acquisition costs are reviewed to determine if they are recoverable
from future income, including investment income, and, if not considered
recoverable, are charged to expense. All other acquisition-related expenses are
charged to operations as incurred.
50
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1997
(SIX-MONTH PERIODS ARE UNAUDITED)
(Dollar amounts in millions)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) INTANGIBLE ASSETS
PRESENT VALUE OF FUTURE PROFITS-In conjunction with the acquisitions of life
insurance subsidiaries, a portion of the purchase price is assigned to the right
to receive future gross profits arising from existing insurance and investment
contracts. This intangible asset, called the present value of future profits
(PVFP), represents the actuarially determined present value of the projected
future cash flows from the acquired policies.
GOODWILL-Goodwill is amortized over its estimated period of benefit on the
straight-line method. No amortization period exceeds 40 years. Goodwill in
excess of associated expected operating cash flows is considered to be impaired
and is written down to fair value.
(j) FEDERAL INCOME TAXES
The Company's non-life insurance subsidiaries are included in the
consolidated federal income tax return of General Electric Company. These
subsidiaries are subject to a tax-sharing agreement with GE Capital which
allocates tax on a separate company basis, but provides benefit for current
utilization of losses and credits. The Company's life insurance subsidiaries
file a consolidated life insurance federal income tax return and are also
subject to a separate tax-sharing agreement, as approved by state insurance
regulators, the provisions of which are substantially the same as the
tax-sharing agreement with GE Capital.
Deferred taxes are allocated to individual subsidiaries by applying the
asset and liability method of accounting for deferred income taxes. Intercompany
balances are settled annually.
(k) REINSURANCE
Premium revenue, benefits, underwriting, acquisition and insurance expenses
are reported net of the amounts relating to reinsurance ceded to other
companies. Amounts due from reinsurers for incurred and estimated future claims
are reflected in the reinsurance recoverable asset. The cost of reinsurance is
accounted for over the terms of the related treaties using assumptions
consistent with those used to account for the underlying reinsured policies.
(l) FUTURE ANNUITY AND CONTRACT BENEFITS
Future annuity and contract benefits consists of the liability for
investment contracts, insurance contracts and accident and health contracts.
Investment contract liabilities are generally equal to the policyholder's
current account value. The liability for insurance and accident and health
contracts is calculated based upon actuarial assumptions as to mortality,
morbidity, interest, expense and withdrawals, with experience adjustments for
adverse deviation where appropriate.
(m) LIABILITY FOR POLICY AND CONTRACT CLAIMS
The liability for policy and contract claims represents the amount needed to
provide for the estimated ultimate cost of settling claims relating to insured
events that have occurred on or before the end of the respective reporting
period. The estimated liability includes requirements for future payments of (a)
claims that have been reported to the insurer, (b) claims related to insured
events that have occurred but that have not been reported to the insurer as of
the date the liability is estimated, and (c) claim adjustment
51
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1997
(SIX-MONTH PERIODS ARE UNAUDITED)
(Dollar amounts in millions)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
expenses. Claim adjustment expenses include costs incurred in the claim
settlement process such as legal fees and costs to record, process, and adjust
claims.
(n) SEPARATE ACCOUNTS
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity and variable life contract owners. The
Company receives mortality risk fees and administration charges from the
variable mutual fund portfolios. The separate account assets are carried at fair
value and are equivalent to the liabilities that represent the policyholders'
equity in those assets.
(o) MINORITY INTEREST
Minority interest relates to a certain ownership interest in a reinsurance
subsidiary of Life of Virginia, acquired in 1996. Such amounts are immaterial to
an understanding of the accompanying consolidated financial statements.
(2) INVESTMENTS
(a) GENERAL
For the years ended December 31, the sources of investment income of the
Company were as follows:
1994 1995 1996
--------- --------- ---------
Fixed maturities $ 765 $ 1,054 $ 1,518
Equity securities 1 3 14
Mortgage loans 106 132 188
Policy loans 6 18 64
Other 10 1 7
--------- --------- ---------
Gross investment income 888 1,208 1,791
Investment expenses (7) (14) (18)
--------- --------- ---------
Net investment income $ 881 $ 1,194 $ 1,773
--------- --------- ---------
--------- --------- ---------
52
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(2) INVESTMENTS (CONTINUED)
For the years ended December 31, sales proceeds and gross realized
investment gains and losses resulting from the sales of investment securities
available-for-sale were as follows:
1994 1995 1996
--------- --------- ---------
Sales proceeds $ 1,011 $ 2,508 $ 2,144
--------- --------- ---------
--------- --------- ---------
Gross realized investment:
Gains 18 52 53
Losses (11) (46) (38)
--------- --------- ---------
Net realized investment gains $ 7 $ 6 $ 15
--------- --------- ---------
--------- --------- ---------
The additional proceeds from investments presented in the statements of cash
flows result from principal collected on mortgage-backed securities, maturities,
calls and sinking payments.
In accordance with SFAS No. 115, net unrealized gains and losses on
investment securities classified as available-for-sale are reduced by deferred
income taxes and adjustments to the present value of future profits and deferred
acquisition costs that would have resulted had such gains and losses been
realized. Net unrealized gains and losses on available-for-sale investment
securities reflected as a separate component of shareholder's interest are
summarized as follows:
1995 1996
--------- ---------
Net unrealized gains (losses) on available-for-sale investment securities before adjustments:
Fixed maturities $ 575 $ (215)
Equity securities 3 9
Other invested assets 5 11
--------- ---------
Sub-total 583 (195)
Adjustments to the present value of future profits and deferred acquisition costs (218) (39)
Deferred income taxes (128) 83
--------- ---------
Net unrealized gains (losses) on available-for-sale investment securities $ 237 $ (151)
--------- ---------
--------- ---------
53
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(2) INVESTMENTS (CONTINUED)
At December 31, the amortized cost, gross unrealized gains and losses, and
fair values of the Company's fixed maturities and equity securities
available-for-sale were as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
1995 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------- ----------- ------------- ----------- ---------
Fixed maturities:
U.S. government and agency $ 951 $ 59 $ (1) $ 1,009
State and municipal 12 1 -- 13
Non-U.S. government 52 3 -- 55
Non-U.S. corporate 803 18 (5) 816
U.S. corporate 9,511 400 (46) 9,865
Mortgage-backed 4,256 186 (40) 4,402
----------- ----- ----------- ---------
Total fixed maturities 15,585 667 (92) 16,160
Common stock and non-redeemable preferred stock 30 4 (1) 33
----------- ----- ----------- ---------
Total available-for-sale securities $ 15,615 $ 671 $ (93) $ 16,193
----------- ----- ----------- ---------
----------- ----- ----------- ---------
1996
- -------------------------------------------------------------------
Fixed maturities:
U.S. government and agency $ 1,565 $ 30 $ (4) $ 1,591
State and municipal 38 -- -- 38
Non-U.S. government 130 3 (1) 132
Non-U.S. corporate 1,376 25 (9) 1,392
U.S. corporate 20,668 183 (571) 20,280
Mortgage-backed 7,940 165 (36) 8,069
----------- ----- ----------- ---------
Total fixed maturities 31,717 406 (621) 31,502
Common stock and non-redeemable preferred stock 485 10 (1) 494
----------- ----- ----------- ---------
Total available-for-sale securities $ 32,202 $ 416 $ (622) $ 31,996
----------- ----- ----------- ---------
----------- ----- ----------- ---------
54
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(2) INVESTMENTS (CONTINUED)
The scheduled maturity distribution of the fixed maturity portfolio at
December 31 follows. Expected maturities may differ from scheduled contractual
maturities because issuers of securities may have the right to call or prepay
obligations with or without call or prepayment penalties.
1995 1996
---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- --------- ----------- ---------
Due in one year or less $ 489 $ 490 $ 888 $ 890
Due one year through five years 3,966 4,080 5,228 4,636
Due five years through ten years 3,179 3,318 5,931 6,036
Due after ten years 3,695 3,870 11,730 11,871
----------- --------- ----------- ---------
Subtotals 11,329 11,758 23,777 23,433
Mortgage-backed securities 4,256 4,402 7,940 8,069
----------- --------- ----------- ---------
Totals $ 15,585 $ 16,160 $ 31,717 $ 31,502
----------- --------- ----------- ---------
----------- --------- ----------- ---------
As required by law, the Company has investments on deposit with governmental
authorities and banks for the protection of policyholders of $37 and $54 at
December 31, 1995 and 1996, respectively.
At December 31, 1996, approximately 23.4%, 17.3% and 10.0% of the Company's
investment portfolio is comprised of securities issued by the manufacturing,
utility and financial industries, respectively, the vast majority of which are
rated investment grade, and which are senior secured bonds. No other industry
group comprises more than 10% of the Company's investment portfolio. This
portfolio is widely diversified among various geographic regions in the United
States, and is not dependent on the economic stability of one particular region.
At December 31, 1996, the Company did not hold any fixed maturity
securities, other than securities issued or guaranteed by the U.S. government,
which exceeded 10% of shareholder's interest.
55
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(2) INVESTMENTS (CONTINUED)
The credit quality of the fixed maturity portfolio at December 31 follows.
The categories are based on the higher of the ratings published by Standard &
Poors or Moody's.
1995 1996
------------------------ ------------------------
FAIR VALUE PERCENT FAIR VALUE PERCENT
----------- ----------- ----------- -----------
Agencies and treasuries $ 4,180 26.0% $ 5,739 18.2%
AAA/Aaa 1,008 6.2 3,664 11.6
AA/Aa 972 6.0 1,960 6.2
A/A 4,674 28.9 8,112 25.8
BBB/Baa 4,258 26.3 7,706 24.5
BB/Ba 421 2.6 703 2.2
B/B 62 0.4 53 .2
CCC/Caa -- -- 1 --
D/D -- -- 6 --
Not rated 585 3.6 3,558 11.3
----------- ----- ----------- -----
Totals $ 16,160 100.0% $ 31,502 100.0%
----------- ----- ----------- -----
----------- ----- ----------- -----
Bonds with ratings ranging from AAA/Aaa to BBB-/Baa3 are generally regarded
as investment grade securities. Some agencies and treasuries (that is, those
securities issued by the United States government or an agency thereof) are not
rated, but all are considered to be investment grade securities. Finally, some
securities, such as private placements, have not been assigned a rating by any
rating service and are therefore categorized as "not rated." This has neither
positive nor negative implications regarding the value of the security.
There were no fixed maturities in default at December 31, 1995. At December
31, 1996, there were fixed maturities in default with a fair value of $14.
(b) MORTGAGE LOANS
At December 31, 1995 and 1996, the Company's mortgage loan portfolio
consisted of 1,425 and 1,917, respectively, first mortgage loans on commercial
real estate properties. The loans, which are originated by the Company through a
network of mortgage bankers, are made only on completed, leased properties and
have a maximum loan-to-value ratio of 75% at the date of origination.
At December 31, 1995 and 1996, respectively, the Company held $566 and $622
in mortgages secured by real estate in California, comprising 36% and 25% of the
respective total mortgage portfolio. For the years ended December 31, 1994, 1995
and 1996, respectively, the Company originated $66, $50 and $103 of mortgages
secured by real estate in California, which represent 17%, 15%, and 21%, of the
respective total originations for those years.
"Impaired" loans are defined under generally accepted accounting principles
as loans for which it is probable that the lender will be unable to collect all
amounts due according to the original contractual
56
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(2) INVESTMENTS (CONTINUED)
terms of the loan agreement. That definition excludes, among other things,
leases, or large groups of smaller-balance homogeneous loans, and therefore
applies principally to the Company's commercial loans.
Under these principles, the Company has two types of "impaired" loans as of
December 31, 1995 and 1996: loans requiring allowances for losses ($3 and $7,
respectively) and loans expected to be fully recoverable because the carrying
amount has been reduced previously through charge-offs or deferral of income
recognition ($13 and $14, respectively). Allowance for losses on these loans as
of December 31, 1995 and 1996 were $0 and $2, respectively. Average investment
in impaired loans during 1995 and 1996 was $11 and $34, respectively and
interest income earned on these loans while they were considered impaired was $1
and $1, respectively.
The following table shows the activity in the allowance for losses during
the years ended December 31:
1994 1995 1996
----- ----- -----
Balance at January 1 $ 30 $ 32 $ 36
Balance from Life of Virginia, purchased April 1996 -- -- 21
Provision charged to operations 3 3 3
Amounts written off, net of recoveries (1) 1 (2)
--- --- ---
Balance at December 31 $ 32 $ 36 $ 58
--- --- ---
--- --- ---
The write-offs represented 0.07%, 0.14% and 0.11% of average mortgage loans
outstanding during 1994, 1995 and 1996, respectively.
The allowance for losses on mortgage loans at December 31, 1995 and 1996
represented 2.2% and 2.3% of gross mortgage loans, respectively.
(3) DEFERRED ACQUISITION COSTS
Activity impacting deferred acquisition costs for the years ended December
31, was as follows:
1994 1995 1996
--------- --------- ---------
Unamortized balance at January 1 $ 28 $ 99 $ 216
Costs deferred 72 131 341
Amortization, net (1) (14) (59)
--------- --------- ---------
Unamortized balance at December 31 99 216 498
Cumulative effect of net unrealized investment (gains) losses 2 (36) (10)
--------- --------- ---------
Recorded balance $ 101 $ 180 $ 488
--------- --------- ---------
--------- --------- ---------
57
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(4) INTANGIBLE ASSETS
PRESENT VALUE OF FUTURE PROFITS (PVFP)
The method used by the Company to value PVFP in connection with acquisitions
of life insurance entities is summarized as follows: (1) identify the future
gross profits attributable to certain lines of business, (2) identify the risks
inherent in realizing those gross profits, and (3) discount these gross profits
at the rate of return that the Company must earn in order to accept the inherent
risks.
After PVFP is determined, the amount is amortized, net of accreted interest,
based on the incidence of the expected gross profits. Interest accretes at rates
credited to policyholders on underlying contracts. As actual gross profits vary
from projected amounts, the impact on amortization is included in net income.
Recoverability of PVFP is evaluated periodically by comparing the current
estimate of expected future gross profits to the unamortized asset balance. If
such comparison indicates that the expected gross profits will not be sufficient
to recover PVFP, the difference is charged to expense.
The following table presents the activity in PVFP for the years ended
December 31:
1994 1995 1996
--------- --------- ---------
Unamortized balance at January 1 $ 364 $ 530 $ 615
Acquisition of HGI, Inc., November 1994 221 -- --
Acquisition of AMEX Life, October 1995 -- 189 --
Acquisition of Life of Virginia, April 1996 -- -- 484
Acquisition of UFLIC, April 1996 -- -- 253
Acquisition of First Colony, December 1996 -- -- 1,051
Purchase accounting adjustments -- (3) 79
Interest accrued at 5.7% in 1994, 5.4% in 1995 and 6.1% in 1996 21 26 43
Amortization (76) (127) (233)
--------- --------- ---------
Unamortized balance at December 31 530 615 2,292
Cumulative effect of net unrealized investment (gains) losses 101 (182) (29)
--------- --------- ---------
Recorded balance $ 631 $ 433 $ 2,263
--------- --------- ---------
--------- --------- ---------
The estimated percentage of the December 31, 1996 balance, before the effect
of unrealized investment gains or losses, to be amortized over each of the next
five years is as follows:
1997 11.5%
1998 10.3
1999 9.3
2000 8.5
2001 7.6
58
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(4) INTANGIBLE ASSETS (CONTINUED)
GOODWILL
At December 31, 1995 and 1996, total unamortized goodwill was $377 and
$1,042, respectively, which is shown net of accumulated amortization of $25 and
$50, respectively. Goodwill amortization was $9, $14 and $25 for the years ended
December 31, 1994, 1995 and 1996, respectively. Goodwill in excess of associated
expected operating cash flows is considered to be impaired and is written down
to fair value (no such charges have been made).
(5) REINSURANCE
In order to limit the amount of loss retention, certain policy risks are
reinsured with other insurance companies. The maximum amount of individual
ordinary life insurance normally retained by the Company on any one life policy
is $1. Reinsurance contracts do not relieve the Company from its obligations to
policyholders. In the event that the reinsurers would be unable to meet their
obligations, the Company is liable for the reinsured claims. The Company
monitors both the financial condition of individual reinsurers and risk
concentrations arising from similar geographic regions, activities and economic
characteristics of reinsurers to lessen the risk of default by such reinsurers.
As a condition to the AMEX Life acquisition, certain specified classes of
business continue to be underwritten by GECA, but are fully reinsured on an
indemnity basis to IDS Life Insurance Company, an insurance subsidiary of
American Express Company (former parent of AMEX Life).
As a condition to the UFLIC acquisition, certain credit life insurance and
accident and health insurance policies continue to be underwritten by UFLIC, but
are fully reinsured on an indemnity basis to Combined Insurance Company of
America, a subsidiary of Aon Corporation (former parent of UFLIC).
Net life insurance in force as of December 31 are summarized as follows:
1994 1995 1996
--------- --------- ----------
Direct life insurance in force $ 8,928 $ 12,245 $ 268,307
Amounts ceded to other companies (1,667) (3,821) (78,107)
Amounts assumed from other companies 2 22 29,973
--------- --------- ----------
Net life insurance in force $ 7,263 $ 8,446 $ 220,173
--------- --------- ----------
--------- --------- ----------
Percentage of amount assumed to net --% --% 14%
--------- --------- ----------
--------- --------- ----------
59
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(5) REINSURANCE (CONTINUED)
The effects of reinsurance on premiums written and earned for the years
ended December 31 were as follows:
WRITTEN EARNED
------------------------------- --------------------
1994 1995 1996 1994 1995
--------- --------- --------- --------- ---------
Direct $ 162 $ 559 $ 1,328 $ 158 $ 564
Assumed -- 15 236 -- 14
Ceded (13) (93) (198) (9) (93)
--------- --------- --------- --------- ---------
Net premiums $ 149 $ 481 $ 1,366 $ 149 $ 485
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Percentage of amount assumed to net --% 3%
--------- ---------
--------- ---------
1996
---------
Direct $ 1,337
Assumed 238
Ceded (189)
---------
Net premiums $ 1,386
---------
---------
Percentage of amount assumed to net 17%
---------
---------
Reinsurance recoveries recognized as a reduction of benefits amounted to $5,
$86 and $264 during 1994, 1995 and 1996, respectively. These recoveries were
partially offset by certain changes in benefits and other policy reserves.
(6) FUTURE ANNUITY AND CONTRACT BENEFITS
INVESTMENT CONTRACTS
Investment contracts are broadly defined to include contracts without
significant mortality or morbidity risk. Payments received from sales of
investment contracts are recognized by providing a liability equal to the
current account value of the policyholder's contracts. Interest rates credited
to investment contracts are guaranteed for the initial policy term with renewal
rates determined as necessary by management.
INSURANCE CONTRACTS
Insurance contracts are broadly defined to include contracts with
significant mortality and/or morbidity risk. The liability for future benefits
of insurance contracts is the present value of such benefits based on mortality,
morbidity, and other assumptions which were appropriate at the time the policies
were issued or acquired. These assumptions are periodically evaluated for
potential premium deficiencies. Reserves for cancelable accident and health
insurance are based upon unearned premiums, claims incurred but not reported,
and claims in the process of settlement. This estimate is based on the
experience of the insurance industry and the Company, adjusted for current
trends. Any changes in the estimated liability are reflected in income as the
estimates are revised.
60
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(6) FUTURE ANNUITY AND CONTRACT BENEFITS (CONTINUED)
The following chart summarizes the major assumptions underlying the
Company's recorded liabilities for future annuity and contract benefits:
MORTALITY/ DECEMBER 31,
WITHDRAWAL MORBIDITY INTEREST RATE --------------------
ASSUMPTION ASSUMPTION ASSUMPTION 1995 1996
------------ ----------- --------------- --------- ---------
Investment Contracts N/A N/A N/A $ 13,508 $ 18,917
Limited-payment contracts None (a) 6.0%-10.1% 3,042 8,088
Traditional life insurance contracts Company (b) 8.0% grading to 180 1,046
experience 6.0%
Universal life-type contracts N/A N/A N/A 595 4,045
Accident and health Company (c) 5.0% 18 156
experience
Long-term care Company (d) 6.5%-7.5% 868 1,197
experience
--------- ---------
Total future annuity and contract benefits $ 18,211 $ 33,449
--------- ---------
--------- ---------
- ------------------------
(a) Either the United States Population Table or 1983 Group Annuitant Mortality
Table.
(b) Principally modifications of the 1965-70 or 1975-80 Select and Ultimate
Tables.
(c) The 1958 Commissioner's Standard Ordinary Table and 1964 Commissioner's
Disability Table.
(d) The 1983 Individual Annuitant Mortality Table or 1980 Commissioner's
Standard Ordinary Table and the 1985 National Nursing Home Study or Company
experience.
61
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(7) LIABILITY FOR POLICY AND CONTRACT CLAIMS
Activity in the liability for policy and contract claims for the years ended
December 31 is summarized as follows:
1994 1995 1996
--------- --------- ---------
Balance at January 1 $ -- $ 121 $ 503
Less reinsurance recoverables -- (24) (45)
--------- --------- ---------
Net balance at January 1 -- 97 458
--------- --------- ---------
Balance from acquisition of HGI, Inc., November 1994 95 -- --
Balance from acquisition of AMEX Life, October 1995 -- 341 --
Balance from acquisition of Life of Virginia, April 1996 -- -- 36
Balance from acquisition of UFLIC, April 1996 -- -- 173
Balance from acquisition of First Colony, December 1996 -- -- 55
Incurred related to insured events of:
Current year 14 129 593
Prior year 5 27 --
--------- --------- ---------
Total incurred 19 156 593
--------- --------- ---------
Paid related to insured events of:
Current year (13) (96) (316)
Prior year (4) (40) (193)
--------- --------- ---------
Total paid (17) (136) (509)
--------- --------- ---------
Net balance at December 31 97 458 806
Add reinsurance recoverables 24 45 73
--------- --------- ---------
Balance at December 31 $ 121 $ 503 $ 879
--------- --------- ---------
--------- --------- ---------
(8) LONG-TERM DEBT
In connection with the acquisition of First Colony, the Company assumed
unsecured senior long-term notes outstanding in the amount of $175, at 6.625%,
due August 2003. The senior note indenture contains certain covenants that,
among other things, limit the Company's ability to dispose of, or allow liens to
be placed against, the capital stock of First Colony. Interest expense for the
period ended December 31, 1996 was $1.
62
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(9) INCOME TAXES
The total provision for income taxes for the years ended December 31
consisted of the following components:
1994 1995 1996
----- ----- ---------
Current federal income tax provision $ 15 $ 84 $ 142
Deferred federal income tax provision (benefit) 32 (21) (4)
--- --- ---------
Subtotal--federal provision 47 63 138
--- --- ---------
Current state income tax provision 3 6 2
Deferred state income tax provision (benefit) 1 (2) --
--- --- ---------
Subtotal--state provision 4 4 2
--- --- ---------
Total income tax provision $ 51 $ 67 $ 140
--- --- ---------
--- --- ---------
The reconciliation of the federal statutory tax rate to the effective income
tax rate is as follows:
1994 1995 1996
--------- --------- ---------
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income tax 2.1 1.6 0.4
Goodwill amortization 2.5 3.0 2.2
Other, net 1.9 0.3 0.2
--- --- ---
Effective rate 41.5% 39.9% 37.8%
--- --- ---
--- --- ---
63
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(9) INCOME TAXES (CONTINUED)
The components of the net deferred income tax benefit at December 31 are as
follows:
1995 1996
--------- ---------
Assets:
Net unrealized losses on investment securities $ -- $ 83
Future annuity and contract benefits 494 989
Net operating loss carryforwards 55 21
Guaranty association assessments 36 46
Mortgage loans and real estate owned 6 7
Other 28 31
--- ---------
Total deferred tax assets 619 1,177
Valuation allowance for net operating loss carryforwards (55) (21)
--- ---------
Net deferred tax assets 564 1,156
--- ---------
Liabilities:
Net unrealized gains on investment securities (128) --
Investments (96) (301)
Present value of future profits (113) (477)
Deferred acquisition costs (46) (59)
Other (5) (26)
--- ---------
Total deferred tax liabilities (388) (863)
--- ---------
Net deferred income tax benefit $ 176 $ 293
--- ---------
--- ---------
At December 31, 1996, the Company had federal income tax net operating loss
carryforwards of $61 which expire in the year 2008. The Company has recorded a
valuation allowance of $21 representing the entire balance of the deferred tax
asset related to these net operating loss carryforwards.
Based on an analysis of the Company's tax position, management believes it
is more likely than not that the results of future operations and implementation
of tax planning strategies will generate sufficient taxable income enabling the
Company to realize remaining deferred tax assets. Accordingly, no additional
valuation allowance for deferred tax assets is deemed necessary.
The Company paid $7, $18 and $137, for federal and state income taxes during
the years 1994, 1995 and 1996, respectively.
(10) RELATED PARTY TRANSACTIONS
At December 31, 1996, fixed maturities included a note receivable from GE
Capital with a balance of $175. This note bears interest at 6.625% and matures
in August 2003.
64
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(10) RELATED PARTY TRANSACTIONS (CONTINUED)
The Company also invests in certain short-term notes issued by GE Capital.
These investments yield market rates. Interest earned on these notes was $0, $0
and $1 for the years ended December 31, 1994, 1995 and 1996. Short-term
investments include $20 and $18 of these securities at December 31, 1995 and
1996, respectively.
During 1995, GECA entered into $500 million notional amount of option and
swap option contracts designed to hedge interest rate risk on certain identified
future annuity and contract benefits. These hedge transactions were executed by
GE Capital on behalf of GECA. GE Capital's Treasury Department maintains
controls on all exposures, adheres to stringent counterparty credit standards
and actively monitors marketplace exposures. The gain of $9 resulting from the
sale of these instruments has been deferred and will be recognized in income in
a manner consistent with the accounting for the hedged liability.
During 1995 and 1996, the Company paid $3 and $7, respectively, to GE
Capital for computer processing fees.
The Company has a line of credit with its parent, GE Capital, with an
aggregate borrowing line of $300, of which a maximum of $144 and $103 was used
during the years 1995 and 1996, respectively. At December 31, 1995 and 1996, the
balance outstanding was $12 and $103, respectively.
(11) COMMITMENTS AND CONTINGENCIES
(a) MORTGAGE LOAN COMMITMENTS
As of December 31, 1995 and 1996, the Company was committed to fund $191 and
$187, respectively, in mortgage loans.
(b) GUARANTY ASSOCIATION ASSESSMENTS
The Company's insurance subsidiaries are required by law to participate in
the guaranty associations of the various states in which they do business. The
state guaranty associations ensure payment of guaranteed benefits, with certain
restrictions, to policyholders of impaired or insolvent insurance companies by
assessing all other companies involved in similar lines of business.
There are currently several unrelated insurance companies which had
substantial amounts of annuity business in the process of liquidation or
rehabilitation. The Company's insurance subsidiaries paid assessments of $11,
$11 and $9 to various state guaranty associations during the years 1994, 1995
and 1996, respectively. At December 31, 1995 and 1996, accounts payable and
accrued expenses include $92 and $113, respectively, related to estimated future
assessments.
(c) LEASES
The Company leases a portion of the office space used in its operations
under operating lease arrangements. Lease expense for the years ended December
31, 1994, 1995 and 1996 amounted to $4, $8 and $13, respectively.
65
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum commitments under operating leases as of December 31, 1996
are summarized as follows:
1997 $ 14
1998 12
1999 10
2000 4
2001 3
Thereafter 9
---
Total $ 52
---
---
Rates for certain office space leases are subject to inflationary increases.
The effect of such inflationary increases has not been reflected in the future
minimum commitments.
(d) LITIGATION
There is no material pending litigation to which the Company is a party or
of which any of the Company's property is the subject, and there are no legal
proceedings contemplated by any governmental authorities against the Company of
which management has any knowledge.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
On December 31, 1995, the Company adopted SFAS No. 119, DISCLOSURES ABOUT
DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS. This
statement requires disclosures about the amounts, nature and terms of derivative
financial instruments and modifies existing disclosure requirements for other
financial instruments.
The Company has no derivative financial instruments as defined by SFAS No.
119 at December 31, 1996, other than mortgage loan commitments of $187 and $3 in
European style call options. The notional value of these options at December 31,
1996 was $18 and options expire from September 1998 to December 2006. The
options are used to hedge market risk associated with the Company's S&P 500
indexed annuity product.
The fair values of financial instruments presented in the applicable notes
to the Company's consolidated financial statements are estimates of the fair
values at a specific point in time using available market information and
valuation methodologies considered appropriate by management. These estimates
are subjective in nature and involve uncertainties and significant judgment in
the interpretation of current market data. Therefore, the fair values presented
are not necessarily indicative of amounts the Company could realize or settle
currently. The Company does not necessarily intend to dispose of or liquidate
such instruments prior to maturity.
Financial instruments that, as a matter of accounting policy, are reflected
in the accompanying consolidated financial statements at fair value are not
included in the following disclosures. Such items
66
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
include fixed maturities, equity securities and certain other invested assets.
The carrying value of policy loans, short-term investments and long-term debt
approximates fair value at December 31, 1995 and 1996, respectively.
At December 31, the carrying amounts and fair values of the Company's
financial instruments were as follows:
1995 1996
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
FINANCIAL INSTRUMENTS AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------- --------- --------- --------- ---------
Mortgage loans $ 1,565 $ 1,632 $ 2,426 $ 2,484
Investment contracts $ 13,508 $ 13,261 $ 18,917 $ 18,645
The fair value of mortgage loans is estimated by discounting the estimated
future cash flows using interest rates applicable to current loan origination,
adjusted for credit risks.
The estimated fair value of investment contracts is the amount payable on
demand (cash surrender value) for deferred annuities and the net present value
based on interest rates currently offered on similar contracts for non-life
contingent immediate annuities. Fair value disclosures are not required for
insurance contracts.
(13) RESTRICTIONS ON DIVIDENDS
Insurance companies are restricted by states as to the aggregate amount of
dividends they may pay to their parent in any consecutive twelve month period
without regulatory approval. Generally, dividends may be paid out of earned
surplus without approval with thirty days prior written notice within certain
limits. The limits are generally based on 10% of the prior year surplus (net of
adjustments in some cases) and prior year statutory income (net gain from
operations, net income adjusted for realized capital gains, or net investment
income). Dividends in excess of the prescribed limits or the company's earned
surplus are deemed extraordinary and require formal state insurance commission
approval. Based on statutory results as of December 31, 1996, the Company is
able to receive $223 in dividends in 1997 without obtaining regulatory approval.
(14) SUPPLEMENTARY FINANCIAL DATA
The Company's insurance subsidiaries file financial statements with state
insurance regulatory authorities and the National Association of Insurance
Commissioners (NAIC) that are prepared on an accounting basis prescribed by such
authorities (statutory basis). Statutory accounting practices differ from
generally accepted accounting principles (GAAP) in several respects, causing
differences in reported net income and shareholder's interest. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed but that have been specifically allowed by state insurance
authorities. The Company's insurance subsidiaries have no significant permitted
accounting practices.
67
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(14) SUPPLEMENTARY FINANCIAL DATA (CONTINUED)
Combined statutory net income for the Company's insurance subsidiaries for
the years ended December 31, 1994, 1995 and 1996 was $100, $195 and $255,
respectively. The combined statutory capital and surplus as of December 31, 1995
and 1996 was $1,040 and $2,186, respectively.
The NAIC has adopted Risk-Based Capital (RBC) requirements to evaluate the
adequacy of statutory capital and surplus in relation to risks associated with:
(i) asset quality, (ii) insurance risk, (iii) interest rate risk, and (iv) other
business factors. The RBC formula is designated as an early warning tool for the
states to identify possible under-capitalized companies for the purpose of
initiating regulatory action. In the course of operations, the Company
periodically monitors the RBC level of each of its insurance subsidiaries. At
December 31, 1995 and 1996, each of the Company's insurance subsidiaries
exceeded the minimum required RBC levels.
(15) BUSINESS SEGMENTS
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. See
Note (1)(d) for further discussion of the Company's principal product lines
under these two segments.
The following is a summary of industry segment activity for 1994, 1995 and
1996:
1994 - Segment Data
WEALTH
ACCUMULATION WEALTH &
AND LIFESTYLE
TRANSFER PROTECTION CONSOLIDATED
------------ ----------- ------------
Net investment income $ 871 $ 10 $ 881
Net realized investment gains 7 -- 7
Premiums 140 9 149
Other revenues 52 2 54
------------ ----- ------------
Total revenues 1,070 21 1,091
------------ ----- ------------
Interest credited, benefits, and other changes in policy reserves 809 12 821
Commissions 60 3 63
Amortization of intangibles 63 2 65
Other operating costs and expenses 18 1 19
------------ ----- ------------
Total benefits and expenses 950 18 968
------------ ----- ------------
Income before income taxes $ 120 $ 3 $ 123
------------ ----- ------------
------------ ----- ------------
Total assets $ 16,648 $ 204 $ 16,852
------------ ----- ------------
------------ ----- ------------
68
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(15) BUSINESS SEGMENTS (CONTINUED)
1995 - Segment Data
WEALTH
ACCUMULATION WEALTH &
AND LIFESTYLE
TRANSFER PROTECTION CONSOLIDATED
------------ ----------- ------------
Net investment income $ 1,122 $ 72 $ 1,194
Net realized investment gains 4 2 6
Premiums 341 144 485
Other revenues 55 9 64
------------ ----------- ------------
Total revenues 1,522 227 1,749
------------ ----------- ------------
Interest credited, benefits, and other changes in policy reserves 1,137 143 1,280
Commissions 87 44 131
Amortization of intangibles 103 13 116
Other operating costs and expenses 49 5 54
------------ ----------- ------------
Total benefits and expenses 1,376 205 1,581
------------ ----------- ------------
Income before income taxes $ 146 $ 22 $ 168
------------ ----------- ------------
------------ ----------- ------------
Total assets $ 19,843 $ 1,977 $ 21,820
------------ ----------- ------------
------------ ----------- ------------
1996 - Segment Data
WEALTH
ACCUMULATION WEALTH &
AND LIFESTYLE
TRANSFER PROTECTION CONSOLIDATED
------------ ----------- ------------
Net investment income $ 1,626 $ 147 $ 1,773
Net realized investment gains 13 2 15
Premiums 465 921 1,386
Other revenues 186 6 192
------------ ----------- ------------
Total revenues 2,290 1,076 3,366
------------ ----------- ------------
Interest credited, benefits and other changes in policy reserves 1,646 623 2,269
Commissions 161 206 367
Amortization of intangibles 138 77 215
Other operating costs and expenses 75 70 145
------------ ----------- ------------
Total benefits and expenses 2,020 976 2,996
------------ ----------- ------------
Income before income taxes and minority interests $ 270 $ 100 $ 370
------------ ----------- ------------
------------ ----------- ------------
Total assets $ 41,491 $ 3,870 $ 45,361
------------ ----------- ------------
------------ ----------- ------------
69
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1994, 1995 and 1996
and Six-Month Periods Ended June 30, 1996 and 1997
(Six-Month Periods are Unaudited)
(Dollar amounts in millions)
(16) SUBSEQUENT EVENT
On June 30, 1997, GE Capital and Leucadia National Corporation (Leucadia)
signed an agreement pursuant to which GE Capital agreed to purchase the Colonial
Penn Insurance Company (Colonial Penn) from Leucadia for $950. At closing, which
is subject to regulatory approval, the Company will purchase Colonial Penn from
GE Capital.
70
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GE Financial Assurance Holdings, Inc.:
Under date of January 17, 1997 (except as to note 16, which is as of June
30, 1997), we reported on the consolidated balance sheets of GE Financial
Assurance Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, shareholder's interest, and cash
flows for each of the years in the three-year period ended December 31, 1996,
which are included herein. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedules included herein. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
January 17, 1997
71
SCHEDULE II
GE FINANCIAL ASSURANCE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
BALANCE SHEETS
(Dollar amounts in millions, except per share amounts)
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Assets:
Investment in subsidiaries $ 2,319 $ 5,724
Short-term investments -- 72
--------- ---------
Total assets $ 2,319 $ 5,796
--------- ---------
--------- ---------
Liabilities and Shareholder's Interest:
Accounts payable and accrued expenses $ -- $ 75
--------- ---------
Total liabilities -- 75
--------- ---------
Shareholder's interest:
Common stock ($1 par value, 1,000 shares authorized, 1,000 shares issued
and outstanding) -- --
Additional paid-in capital 1,874 5,435
Net unrealized investment gains (losses) 237 (151)
Retained earnings 208 437
--------- ---------
Total shareholder's interest 2,319 5,721
--------- ---------
Total liabilities and shareholder's interest $ 2,319 $ 5,796
--------- ---------
--------- ---------
See accompanying note to condensed financial information of registrant.
72
SCHEDULE II
GE FINANCIAL ASSURANCE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
(PARENT COMPANY)
STATEMENTS OF INCOME
(Dollar amounts in millions)
YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
Revenues:
Equity in undistributed earnings of subsidiaries $ 72 $ 101 $ 231
--- ----- -----
Total revenues 72 101 231
--- ----- -----
Benefits and expenses:
General expenses -- -- 3
--- ----- -----
Total benefits and expenses -- -- 3
--- ----- -----
Income before income taxes 72 101 228
Income tax benefit -- -- 1
--- ----- -----
Net income $ 72 $ 101 $ 229
--- ----- -----
--- ----- -----
See accompanying note to condensed financial information of registrant.
73
SCHEDULE II
GE FINANCIAL ASSURANCE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
(Dollar amounts in millions)
YEARS ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
----- --------- ---------
Cash flows from operating activities:
Net income $ 72 $ 101 $ 229
--- --------- ---------
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (72) (101) (231)
Increase in accounts payable and accrued expenses -- -- 74
--- --------- ---------
Total adjustments (72) (101) (157)
--- --------- ---------
Net cash provided by operating activities -- -- 72
--- --------- ---------
Cash flows from investing activities:
Purchase of First Colony -- -- (1,897)
Purchase of note from GE Capital -- -- (175)
Capital contribution to First Colony -- -- (100)
--- --------- ---------
Net cash used in investing activities -- -- (2,172)
--- --------- ---------
Cash flows from financing activities:
Capital contribution from GE Capital -- -- 2,172
--- --------- ---------
Net cash provided by financing activities -- -- 2,172
--- --------- ---------
Net increase in cash and cash equivalents -- -- 72
Cash and cash equivalents at beginning of year -- -- --
--- --------- ---------
Cash and cash equivalents at end of year $ -- $ -- $ 72
--- --------- ---------
--- --------- ---------
See accompanying note to condensed financial information of registrant.
74
SCHEDULE II
GE FINANCIAL ASSURANCE HOLDINGS, INC.
NOTE TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
(1) BASIS OF PRESENTATION
All of the outstanding common stock of GE Financial Assurance Holdings, Inc.
(GE Financial Assurance) is owned by General Electric Capital Corporation (GE
Capital), a wholly-owned subsidiary of General Electric Capital Services, Inc.,
which in turn is a wholly-owned subsidiary of General Electric Company. GE
Financial Assurance was formed by GE Capital in October 1996. GE Capital
subsequently contributed its wholly-owned subsidiary, GNA Corporation, to GE
Financial Assurance. These parent company financial statements reflect the
combination of GE Financial Assurance and GNA Corporation at historical cost on
an as-if-pooled basis; accordingly, the accompanying parent company financial
statements include the accounts and operations of GNA Corporation for all
periods presented.
GE Financial Assurance's primary asset is its 100% investment in the common
stock of GNA Corporation. GNA Corporation owns 100% of the common stock of
various other life and non-life insurance companies.
75
SCHEDULE III
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(Dollar amounts in millions)
FUTURE ANNUITY
AND CONTRACT
BENEFITS,
DEFERRED LIABILITY OTHER
ACQUISITION FOR POLICY AND UNEARNED POLICYHOLDER
SEGMENT COSTS CONTRACT CLAIMS PREMIUMS LIABILITIES
- ------------------------------------------------------- ------------- ----------------- ------------- ---------------
December 31, 1994:
Wealth Accumulation and Transfer $ 100 $ 15,089 $ 117 $ 230
Wealth and Lifestyle Protection 1 125 50 --
----- ------- ----- -----
Total 101 15,214 167 230
----- ------- ----- -----
December 31, 1995:
Wealth Accumulation and Transfer 159 17,364 117 98
Wealth and Lifestyle Protection 21 1,350 150 15
----- ------- ----- -----
Total 180 18,714 267 113
----- ------- ----- -----
December 31, 1996:
Wealth Accumulation and Transfer 320 32,232 90 336
Wealth and Lifestyle Protection 168 2,096 723 16
----- ------- ----- -----
Total $ 488 $ 34,328 $ 813 $ 352
----- ------- ----- -----
PREMIUM
SEGMENT REVENUE
- ------------------------------------------------------- -----------
December 31, 1994:
Wealth Accumulation and Transfer $ 140
Wealth and Lifestyle Protection 9
-----------
Total 149
-----------
December 31, 1995:
Wealth Accumulation and Transfer 341
Wealth and Lifestyle Protection 144
-----------
Total 485
-----------
December 31, 1996:
Wealth Accumulation and Transfer 465
Wealth and Lifestyle Protection 921
-----------
Total $ 1,386
-----------
CHANGE IN
NET BENEFITS AND DEFERRED OTHER
INVESTMENT OTHER CHANGES IN ACQUISITION OPERATING PREMIUMS
SEGMENT INCOME POLICY RESERVES COSTS, NET EXPENSES WRITTEN
- ------------------------------------------------------- ------------- ------------------- ------------- ----------- -----------
December 31, 1994:
Wealth Accumulation and Transfer $ 871 $ 294 $ (71) $ 212 $ 140
Wealth and Lifestyle Protection 10 12 (1) 7 9
------ ------ ----- ----------- -----------
Total 881 306 (72) 219 149
------ ------ ----- ----------- -----------
December 31, 1995:
Wealth Accumulation and Transfer 1,122 465 (88) 327 341
Wealth and Lifestyle Protection 72 143 (29) 91 140
------ ------ ----- ----------- -----------
Total 1,194 608 (117) 418 481
------ ------ ----- ----------- -----------
December 31, 1996:
Wealth Accumulation and Transfer 1,626 809 (144) 517 465
Wealth and Lifestyle Protection 147 538 (138) 491 901
------ ------ ----- ----------- -----------
Total $ 1,773 $ 1,347 $ (282) $ 1,008 $ 1,366
------ ------ ----- ----------- -----------
76
REPORT OF INDEPENDENT AUDITORS
Board of Directors
GE Capital Assurance
We have audited the accompanying balance sheet of AMEX Life Assurance
Company as of October 2, 1995 and the related statements of income, changes in
stockholder's equity, and cash flows for the period from January 1, 1995 to
October 2, 1995. These financial statements are the responsibility of the
management of AMEX Life Assurance Company. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of AMEX Life Assurance Company at
October 2, 1995, and the results of its operations and its cash flows for the
period from January 1, 1995 to October 2, 1995 in accordance with generally
accepted accounting principles.
/s/ Ernst & Young LLP
December 15, 1995
77
AMEX LIFE ASSURANCE COMPANY
BALANCE SHEET
(IN THOUSANDS)
OCTOBER 2, 1995
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $ 886,775
Equity securities 14,111
Fixed maturity securities held-to-maturity, at amortized cost 360,394
Policy loans 411,577
Short-term investments 26,895
---------
Total investments 1,699,752
Cash 6,626
Accrued investment income 30,018
Premiums and accounts receivable 39,096
Reinsurance recoverable 1,603,768
Deferred policy acquisition costs 220,676
Deferred income tax 79,841
Other assets 6,692
Due from American Express Travel Related Services Company, Inc. for income taxes 1,613
Due from American Express Travel Related Services Company, Inc. 1,560
Due from IDS Life Insurance Company (including $7,201 related to guaranty fund
assessments related to Excluded Business) 7,837
---------
Total assets $3,697,479
---------
---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Policy liabilities:
Benefit reserves and deposits $2,747,590
Unpaid claims and claim adjustment expenses 340,953
Unearned premium reserves 109,312
---------
Total policy liabilities 3,197,855
Accounts payable and other liabilities (including $7,201 of guaranty fund
assessments related to Excluded Business) 83,385
Due to American Express Travel Related Services Company, Inc. 3,885
Dividend payable 15,155
---------
Total liabilities 3,300,280
Commitments and contingencies
Stockholder's equity:
Common stock, $1.50 par value per share, authorized, issued and outstanding --
2,000,000 shares 3,000
Additional paid-in capital 77,455
Unrealized appreciation of available-for-sale securities 17,733
Retained earnings 299,011
---------
Total stockholder's equity 397,199
---------
Total liabilities and stockholder's equity $3,697,479
---------
---------
SEE ACCOMPANYING NOTES.
78
AMEX LIFE ASSURANCE COMPANY
STATEMENT OF INCOME
(IN THOUSANDS)
PERIOD FROM JANUARY 1, 1995 TO OCTOBER 2, 1995
Revenue:
Premiums $ 410,879
Net investment income 147,054
Realized capital gains 25,372
---------
Total revenue 583,305
Expenses:
Policy benefits paid or provided 317,886
Commissions 74,501
Decrease in deferred acquisition costs (34,374)
General, administrative, marketing and other 104,210
Taxes other than income taxes 11,276
---------
Total expenses 473,499
---------
Income before income taxes 109,806
Provision for income taxes 32,991
---------
Net income $ 76,815
---------
---------
SEE ACCOMPANYING NOTES.
79
AMEX LIFE ASSURANCE COMPANY
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS)
PERIOD FROM JANUARY 1, 1995 TO OCTOBER 2, 1995
UNREALIZED
APPRECIATION
(DEPRECIATION)
OF
ADDITIONAL AVAILABLE-
COMMON PAID-IN FOR-SALE RETAINED
STOCK CAPITAL SECURITIES EARNINGS TOTAL
----------- ----------- ----------- ---------- ----------
Balance at January 1, 1995 $ 3,000 $ 77,455 $ (37,305) $ 406,462 $ 449,612
Net income for the period from January 1, 1995 to
October 2, 1995 -- -- -- 76,815 76,815
Net unrealized appreciation of available-for-sale
securities -- -- 55,038 -- 55,038
Dividends to stockholder -- -- -- (184,266) (184,266)
----------- ----------- ----------- ---------- ----------
Balance at October 2, 1995 $ 3,000 $ 77,455 $ 17,733 $ 299,011 $ 397,199
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
SEE ACCOMPANYING NOTES.
80
AMEX LIFE ASSURANCE COMPANY
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 76,815
Adjustments to reconcile net income to cash used in operations:
Net realized gains on investment transactions (25,372)
Depreciation and amortization 1,004
Net loss from accretion of discount and premium on investments (3,461)
Changes in operating assets and liabilities:
Reinsurance recoverable and accounts receivable (756,714)
Accrued investment income 14,930
Issuance of policy loans, net (61,511)
Policyholder liabilities 236,594
Other receivables, accounts payable, and other liabilities (31,076)
Deferred policy acquisition costs (34,625)
---------
Net cash used in operating activities (583,416)
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases - fixed maturities (478,051)
Sales and maturities - fixed maturities 243,607
Purchases - equities (2,108)
Sales - equities 13,860
Transfer of investments in reinsurance transaction 789,565
Securities held-to-maturity:
Purchases - fixed maturities (447)
Sales and maturities - fixed maturities 23,980
Net decrease in short-term investments 28,247
Other 24,895
---------
Net cash provided by investing activities 643,548
FINANCING ACTIVITIES
Receipts from interest sensitive policies credited to policyholder account
balances 169,651
Return of policyholder balances on interest sensitive policies (85,762)
Dividends paid to stockholder (125,600)
---------
Net cash used in financing activities (41,711)
---------
Increase in cash 18,421
Cash (overdraft) at January 1, 1995 (11,795)
---------
Cash at October 2, 1995 $ 6,626
---------
---------
SEE ACCOMPANYING NOTES.
81
AMEX LIFE ASSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 2, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying financial statements of AMEX Life Assurance Company (ALAC)
have been prepared in accordance with generally accepted accounting principles
in connection with the Stock Purchase Agreement (Purchase Agreement), dated June
8, 1995, by and among American Express Travel Related Services Company, Inc.
(TRS), and General Electric Capital Corporation (GECC), in which American
Express Company (AEC) through its subsidiary, TRS sold ALAC to GECC effective on
the close of business on October 2, 1995. Certain product groups in ALAC were
acquired by GECC, with other business written on a direct basis by ALAC not
being acquired pursuant to the Purchase Agreement (the Excluded Business). The
Excluded Business was reinsured from ALAC on an indemnity basis, or cancelled
and rewritten into a subsidiary of AEC, at the time of the closing. The
accompanying financial statements represent the final financial statements of
ALAC prior to the sale to GECC.
The following describes the product groups that comprise the business units
acquired by GECC. See Note 6 with respect to business that has been reinsured to
AEC affiliated companies and other insurance companies.
PRODUCT GROUP PRODUCT DESCRIPTION
- --------------------------------------------- ---------------------------------------------
Long-Term Care (LTC) Insurance coverage that pays for a portion of
the expenses of an individual's long-term
care. The care is usually required because of
disability, chronic illness or other
debilitating condition lasting over months or
years.
Long-Term Disability (LTD) Insurance coverage, written on a group basis,
which provides benefits that are intended to
help replace a stream of income that has been
lost because of total disability.
Corporate Owned Life Insurance (COLI) An interest-sensitive whole life insurance
policy issued on an individual basis but
owned by the corporation that assists in
funding the corporation's nonqualified
deferred compensation obligation to
employees.
Other Product Groups Various insurance products issued on a group
basis that provide such coverage as
accidental death and term life.
ALAC was through October 2, 1995, a wholly owned subsidiary of TRS which is
a wholly owned subsidiary of AEC. The financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) which vary in
certain respects from statutory accounting practices (SAP) for insurance
companies.
82
AMEX LIFE ASSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 2, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EXCLUDED BUSINESS
Certain business that was written on a direct basis by ALAC is not being
sold pursuant to the Purchase Agreement. This business was reinsured from ALAC
on an indemnity basis, or cancelled and rewritten into a subsidiary of AEC, at
the time of closing. The reserves for future benefits for business units not
acquired by GECC are included within the financial statements offset by a
reinsurance recoverable (see Note 6).
INVESTMENTS
In 1993, the Financial Accounting Standards Board issued Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (Statement
No. 115). Statement No. 115 requires that fixed maturity investments are to be
classified as either held-to-maturity, available-for-sale, or trading. Although,
ALAC believes that it has the ability and intent to hold to maturity its fixed
maturity investments that are classified as held-to-maturity, ALAC also
recognizes that there may be circumstances where it may be appropriate to sell a
security prior to maturity in response to unforeseen changes in circumstances
such as business acquisition or disposition. Recognizing the need for the
ability to respond to changes in market conditions and in tax position, ALAC has
designated a portion of its investment portfolio as available-for-sale. As
required by Statement No. 115, ALAC adjusts the carrying value of its fixed
maturity investments that are classified as available-for-sale to fair value.
Changes in fair values of available-to-sale securities, after adjustment for
deferred income taxes, are reported as unrealized appreciation or depreciation
directly in equity and, accordingly, have no effect on net income.
The amortized cost of fixed maturity investments is adjusted for
amortization of premiums and accretion of discounts. For the mortgage-backed
bond portion of the fixed maturity securities portfolio, ALAC adjusts book value
using a constant effective yield based on anticipated prepayments and the
estimated economic life of the securities. When actual prepayments differ
significantly from anticipated prepayments, the effective yield is recalculated
to reflect actual payments to date and anticipated future payments. The net
investment in the security is adjusted to the amount that would have existed had
the new effective yield been applied since the acquisition of the security. That
adjustment is included in net investment income.
Policy loans are carried at the aggregate unpaid balances. Short-term
investments are carried at cost, which approximates fair value.
RESERVES FOR FUTURE BENEFITS
The reserve for future policy benefits has been provided on a net-level
premium method based upon estimated investment yields, withdrawals, mortality,
morbidity, and other assumptions which were appropriate at the time the policies
were issued. Such estimates are based upon past experience and future
projections with a margin for adverse deviation from the estimates.
83
AMEX LIFE ASSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 2, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
POLICY DEPOSITS
Amounts received from policyholders for universal life type contracts are
recorded as a liability at the account value of the contract rather than as a
component of revenue. Such liabilities relate primarily to the COLI, deferred
annuity, and single premium life product groups.
UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims include losses and loss adjustment expenses which represent
the estimated ultimate net cost of all reported and unreported losses incurred
through the balance sheet date. The liability for reported and unreported unpaid
claims is estimated using individual case-basis valuations and statistical
analysis. These estimates are subject to the effects of trends in loss severity
and frequency. Although considerable variability is inherent in such estimates,
management believes that the reserves for unpaid claims are adequate. The
estimates are continually reviewed and adjusted as necessary as experience
develops or new information becomes known; such adjustments are included in
current operations.
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring new and renewal insurance contracts, principally
commissions, medical examination and inspection report fees, and certain
variable underwriting and field office expenses, all of which vary with and are
primarily related to the production of such business, have been deferred. For
traditional insurance products, deferred policy acquisition costs are being
amortized over the premium-paying period of the related policies in proportion
to premium revenue recognized, using principally the same assumptions used for
computing future benefit reserves. For universal life type contracts and
investment contracts, deferred policy acquisition costs are being amortized in
proportion to the gross margins arising under such contracts.
REINSURANCE
Reinsurance premiums, claims and benefit expenses are accounted for on bases
consistent with those used in accounting for the original policies issued.
Premiums, benefits, and claims are reported net of reinsured amounts in the
special-purpose statement of income; however, pursuant to Financial Accounting
Standards Board Statement No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts," reinsurance recoverable amounts are
shown as an asset and the corresponding reserves for policy and contract claims
are shown as liabilities.
INCOME TAXES
Federal income taxes are accounted for as required under Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes."
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and are measured
using the enacted tax rates and laws currently in effect.
CREDIT RISK
Financial instruments which potentially subject ALAC to concentrations of
credit risk consist principally of short-term investments, fixed maturity
securities and amounts due from reinsurers. ALAC's short-
84
AMEX LIFE ASSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 2, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
term investments are in high credit quality financial and other institutions.
Concentrations of credit risk with respect to investments in fixed maturities
are limited due to the large number of such investments and their distribution
across many different industries and geographic areas. Other than business that
is presently within ALAC that is not being sold pursuant to the Purchase
Agreement, other amounts due from reinsurers are with highly rated insurance
companies and with affiliated companies.
CASH
Cash includes cash on hand and demand deposits.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by ALAC on estimating its
fair value disclosures for financial instruments:
SHORT-TERM INVESTMENTS: The carrying amounts reported in the balance sheet
for these instruments approximate their fair values.
INVESTMENT SECURITIES: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where available.
For fixed maturity securities not actively traded, fair values are estimated
using values obtained from independent pricing services or, in the case of
private placements, are estimated by discounting expected future cash flows
using a current market rate applicable to the yield, credit quality, and
maturity of the investments. The fair values for equity securities are based on
quoted market prices and are recognized in the balance sheet.
POLICY LOANS: The carrying value of policy loans is deemed to approximate
fair value.
OTHER: For reinsurance recoverables, including the Excluded Business, other
reinsurance balances receivable, and funds withheld from reinsurers (all
classified as reinsurance recoverables), fair values are deemed to approximate
carrying values.
85
AMEX LIFE ASSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 2, 1995
3. INVESTMENTS
The amortized cost and estimated fair value of investments in fixed maturity
securities at October 2, 1995 are as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- ----------
(IN THOUSANDS)
Available-for-sale:
U.S. Treasury securities and obligations $ 108,081 $ 1,381 $ 73 $ 109,389
Obligations of states and political subdivisions 39,647 2,619 -- 42,266
Debt securities issued by foreign governments 12,658 163 328 12,493
Corporate securities 236,667 15,255 108 251,814
Mortgage-backed securities 405,759 7,490 4,773 408,476
Redeemable preferred stocks 58,800 3,641 104 62,337
---------- ----------- ----------- ----------
Total $ 861,612 $ 30,549 $ 5,386 $ 886,775
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Held-to-maturity:
U.S. Treasury securities and obligations $ 4,082 $ 476 $ -- $ 4,558
Obligations of states and political subdivisions 41,656 3,125 1 44,780
Debt securities issued by foreign governments 28,737 1,935 56 30,616
Corporate securities 270,233 14,375 2,791 281,817
Mortgage-backed securities 15,686 476 -- 16,162
---------- ----------- ----------- ----------
Total $ 360,394 $ 20,387 $ 2,848 $ 377,933
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
The amortized cost and estimated fair values of fixed maturities at October
2, 1995, by contractual maturity, are as follows. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without penalties.
HELD-TO-MATURITY AVAILABLE-FOR-SALE
---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Bonds
Years to maturity:
One year or less $ 1,105 $ 1,113 $ 199 $ 203
After one year through five years 51,157 53,395 64,487 68,092
After five years through ten years 233,704 246,416 237,209 249,551
After ten years 58,742 60,847 95,158 98,116
---------- ---------- ---------- ----------
Subtotal 344,708 361,771 397,053 415,962
Redeemable preferred stocks 58,800 62,337
Mortgage-backed securities 15,686 16,162 405,759 408,476
---------- ---------- ---------- ----------
Total $ 360,394 $ 377,933 $ 861,612 $ 886,775
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
86
AMEX LIFE ASSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 2, 1995
3. INVESTMENTS (CONTINUED)
Unrealized gains and losses on investments in equity securities
available-for-sale are reported as a component of equity, net of deferred tax,
and do not affect net income. The gross unrealized gains and gross unrealized
losses on, and the cost and fair value of, those investments at October 2, 1995
are summarized below:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----------- ----------- -----------
(IN THOUSANDS)
Nonredeemable preferred stocks $ 11,993 $ 2,118 $ -- $ 14,111
--------- ----------- ----------- -----------
Total $ 11,993 $ 2,118 $ -- $ 14,111
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
As required by statutes, ALAC has investments on deposit with state
insurance authorities and various banks for protection of policyholders with a
statement value of $11,322,000 at October 2, 1995.
For the period from January 1, 1995 to October 2, 1995, the sources of net
investment income of the ALAC were as follows (in thousands):
Bonds $ 114,182
Mortgage loans 2,089
Policy loans 31,222
Other 424
---------
Gross investment income 147,917
Investment expense 863
---------
Net investment income $ 147,054
---------
---------
For the period from January 1, 1995 to October 2, 1995, the ALAC realized
gross capital gains and losses as follows (in thousands):
Gross realized capital gains (losses) on securities sold or
transferred:
Gains $ 36,709
Losses (11,337)
---------
Total $ 25,372
---------
---------
Proceeds from the sale, maturity, or repayment of investments, and the
transfer of investments in the reinsurance transaction were $1,071,012 during
the period from January 1, 1995 to October 2, 1995. Sales of held-to-maturity
securities resulted from the need to facilitate the Purchase Agreement.
87
AMEX LIFE ASSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 2, 1995
4. DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs for the period from January 1,
1995 to October 2, 1995 are as follows (in thousands):
Deferred policy acquisition costs at January 1, 1995 $ 269,003
Deferral of acquisition costs during the period from January 1,
1995 to October 2, 1995 54,230
Amortization of deferred costs (19,605)
Transfer of deferred policy acquisition costs related to the
Excluded Business (77,343)
Adjustment related to fair value of investments (5,609)
---------
Deferred policy acquisition costs at October 2, 1995 $ 220,676
---------
---------
5. POLICY LIABILITIES
The following table provides a reconciliation of the beginning and ending
accident and health reserve balances included within the unpaid loss and loss
adjustment expense claim reserves for the period from January 1, 1995 to October
2, 1995 (in thousands):
Reserve for unpaid claims and claim adjustment expenses, net of
related reinsurance recoverables, at January 1, 1995 $ 314,053
Add:
Provision for unpaid claim and claim adjustment expenses
occurring in the current year, net of reinsurance 128,461
Decrease in estimated claim and claim adjustment expenses
occurring in the prior year, net of reinsurance (14,998)
---------
Incurred claims during the current year, net of reinsurance 113,463
Deduct:
Claim and claim adjustment expenses payments, net of
reinsurance, occurring during:
Current year 9,496
Prior years 80,056
---------
89,552
---------
Reserve for unpaid claims and claims adjustment expenses, net of
related reinsurance recoverables, at October 2, 1995 $ 337,964
---------
---------
The reduction in the amounts incurred related to prior years resulted
primarily from lower than previously expected claim frequency and severity on
claims incurred in 1994 and prior. Additionally, the above table does not
include life claim reserves totaling $2,989,000 at October 2, 1995, which are
reported in the unpaid claims and claims adjustment expenses in the balance
sheet.
88
AMEX LIFE ASSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 2, 1995
6. REINSURANCE
ALAC is involved in the cession of reinsurance with other companies. The
general policy is to reinsure that portion of any risk in excess of $150,000 to
$300,000 on any one individual, depending on specific underwriting criteria.
These reinsured risks are treated as though, to the extent of the reinsurance,
they are risks for which ALAC is not liable. However, ALAC remains liable to the
extent the reinsuring companies do not meet their obligations under these
reinsurance agreements.
Additionally, certain business that was written on a direct basis by ALAC is
not being sold (Excluded Business) pursuant to the Purchase Agreement. This
business was reinsured from ALAC on an indemnity basis, or canceled and
rewritten into a subsidiary of AEC, at the time of the closing on October 2,
1995. The following describes the underlying product groups that represent the
Excluded Business:
PRODUCT GROUP PRODUCT DESCRIPTION
- --------------------------------------------- ---------------------------------------------
Privileged Assets A deferred annuity product sold through the
American Express Card. This is ceded 100% to
IDS Life Insurance Company (IDSLIC).
Air Flight Travel accident insurance coverage purchased
through the American Express Card. This was
canceled and rewritten into a subsidiary of
AEC.
Premiums and benefits paid or provided are summarized as follows:
BENEFITS
PAID OR
PREMIUMS PROVIDED
---------- ----------
(IN THOUSANDS)
Acquired product lines:
Direct $ 335,422 $ 307,685
Assumed 48,325 42,182
Ceded (19,536) (36,006)
---------- ----------
Total acquired product lines 364,211 313,861
---------- ----------
Excluded Business product lines:
Direct 47,726 791,693
Ceded (1,058) (787,668)
---------- ----------
Total Excluded Business product lines 46,668 4,025
---------- ----------
Total $ 410,879 $ 317,886
---------- ----------
---------- ----------
The policy liabilities reported within the financial statements at October
2, 1995 include $787,478,000 of reserves for future benefits and are offset by a
reinsurance recoverable. ALAC is party to an indemnity reinsurance agreement
with IDSLIC, whereby ALAC agrees to reinsure for IDSLIC on an indemnity basis
50% of certain long-term care insurance business and provide certain
administrative services to IDSLIC. Under this agreement, premiums on reinsurance
assumed amounted to $30,647,000 for the period from January 1, 1995 to October
2, 1995, and reserves on reinsurance assumed were $89,324,000 at October 2,
1995.
89
AMEX LIFE ASSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 2, 1995
6. REINSURANCE (CONTINUED)
Reinsured products include closed blocks of business reinsured on an
indemnity basis with IDSLIC (single premium life), and non-affiliates American
Merchants Life (universal life) and Life Investors Insurance Company of America
(life, accident and health and annuities).
7. FEDERAL INCOME TAXES
The provision for federal income taxes is as follows (in thousands):
Current $ 28,173
Deferred 4,818
---------
$ 32,991
---------
---------
Income taxes paid by ALAC to TRS totaled $41,200,000 in the period from
January 1, 1995 to October 2, 1995.
ALAC's effective income tax rate on pre-tax income is lower than the
prevailing corporate federal income tax rate and is summarized as follows:
Corporate federal income tax rate 35%
Tax-exempt interest income (1)
Release of tax adequacy reserves (4)
--
Effective tax rate 30%
--
--
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for federal income tax purposes. Significant components
of the deferred tax assets and liabilities at October 2, 1995 are as follows (in
thousands):
Deferred tax assets:
Difference in benefit reserves and deposits $ 131,876
Other 4,142
---------
Total deferred tax assets 136,018
Deferred tax liabilities:
Acquisition cost 46,629
Net unrealized gain on available-for-sale securities 9,548
---------
Total deferred tax liabilities 56,177
---------
Net deferred tax assets $ 79,841
---------
---------
There is no valuation allowance at October 2, 1995.
Through October 2, 1995, ALAC was included in the consolidated federal
income tax return of AEC. In accordance with a tax-sharing agreement, the
federal income tax provision was computed on the
90
AMEX LIFE ASSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 2, 1995
7. FEDERAL INCOME TAXES (CONTINUED)
separate taxable income of ALAC except that a benefit is recognized for
operating losses, if any, expected to be used on the consolidated return.
Prior to 1984, certain deductions allowable in computing the liability for
federal income taxes of a life insurance company were accumulated in a
policyholder surplus account and would become taxable only in certain
circumstances, principally as distributions are made to the parent. The balance
of the policyholder surplus account of ALAC at October 2, 1995 is $5,623,000.
8. DIVIDEND RESTRICTIONS AND STATUTORY CAPITAL
Under California insurance regulations, ALAC is required to maintain minimum
capital of $2,500,000 and minimum surplus of $2,500,000. The payment of
dividends by ALAC to its stockholder is limited and cannot be made except from
earned profits of ALAC and, in certain circumstances, without prior approval of
the Insurance Department of the State of California. ALAC must notify the
Insurance Department of the State of California ten business days prior to the
payment of any dividend.
On January 1, 1995, ALAC dividended its one subsidiary, American Centurion
Life Assurance Company to TRS. The dividend amounted to $15,384,000. The total
dividend paid and accrued was $184,266,000 (of which $43,360,000 was deferred
acquisition costs) related to the business that is not being acquired by GECC,
with $15,155,000 payable at October 2, 1995. ALAC has received appropriate
approvals for all dividends.
Total statutory-basis capital and surplus of ALAC was $192,171,000 at
October 2, 1995.
9. RELATED PARTY TRANSACTIONS
ALAC had, through October 2, 1995, an investment management agreement with
American Express Financial Corporation (AEFC), whereby AEFC provided investment
management services for the assets of ALAC. ALAC also had an investment
accounting agreement with IDSLIC, whereby IDSLIC provided investment accounting
services for the assets of ALAC covered under the above investment management.
The costs to ALAC that were allocated and included in the accompanying statement
of income for the period from January 1, 1995 to October 2, 1995 were $776,000.
These agreements were terminated on October 2, 1995.
Certain insurance contracts (COLI contracts), with policy liabilities of
$97,490,000 have been issued to affiliates of AEC.
10. RETIREMENT PLANS
Through October 2, 1995, substantially all of the ALAC employees were
(subject to certain eligibility requirements) covered, through October 2, 1995,
by AEC retirement plans for which benefits are measured by length of service,
compensation and other factors and are currently funded through trusts
established under such plans. Funding of retirement costs for these plans
complies with the applicable minimum funding requirements specified by the
Employee Retirement Income Security Act of 1974, as amended. Pursuant to the
Purchase Agreement, the obligations associated with the retirement plans will
remain with AEC.
91
AMEX LIFE ASSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 2, 1995
11. POSTRETIREMENT BENEFITS
Through October 2, 1995, ALAC sponsored, along with AEC, postretirement
benefit plans that provide health care, life insurance and other postretirement
benefits to retired employees. The health care plans generally include
participant contributions, deductibles, co-insurance provisions, limitations on
AEC's obligation and service-related eligibility requirements. The amounts
related to these benefits are immaterial and any obligation for such benefits
will remain with AEC pursuant to the Purchase Agreement.
12. LEASE COMMITMENTS
ALAC leases its home office facility and certain computer equipment under
operating leases. The home office lease expired in 1995, but ALAC extended the
lease through December 31, 1996. For the period from January 1, 1995 to October
2, 1995, ALAC incurred expenses of $1,664,000 related to these leases.
13. GUARANTY FUND ASSESSMENTS
Periodically, ALAC is assessed by various state guaranty associations as
part of those association's activities to collect funds from solvent insurance
companies to cover certain losses to policyholders that resulted from the
insolvency or rehabilitation of other insurance companies. Each state guaranty
association operates independently of any other state guaranty association; as
such, the methods by which assessments are levied against ALAC vary from state
to state. Also, some states permit guaranty fund assessments to be partially
recovered through reductions in future premium taxes. At October 2, 1995, ALAC
reported an estimated liability for guaranty association assessments of
$7,401,000 ($7,201,000 related to Excluded Business) for those insolvencies or
rehabilitations that have actually occurred prior to that date. The estimated
liability is determined using preliminary information received from the various
state guaranty associations and the National Organization of Life and Health
Insurance Guaranty Associations. Assessments expensed in the period from January
1, 1995 to October 2, 1995 were $1,424,000.
14. CONTINGENCIES
ALAC is named as a defendant in various legal actions arising principally
from claims made under insurance policies and contracts. Those actions are
considered by ALAC in estimating the policy and contract liabilities. ALAC's
management believes that the resolution of those actions will not have a
material effect on ALAC's financial position or results of operations.
92
INDEPENDENT AUDITORS' REPORT
Board of Directors
The Life Insurance Company of Virginia
We have audited the accompanying consolidated balance sheets of The Life
Insurance Company of Virginia (an indirect wholly-owned subsidiary of General
Electric Capital Corporation) and subsidiaries as of December 31, 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the nine months ended December 31, 1996. We have also audited the
preacquisition statements of income, stockholders' equity and cash flows for the
three months ended March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Life
Insurance Company of Virginia and subsidiaries as of December 31, 1996, and the
results of their operations and their cash flows for the nine month period ended
December 31, 1996 and the preacquisition three month period ended March 31, 1996
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective April
1, 1996, General Electric Capital Corporation acquired all of the outstanding
stock of The Life Insurance Company of Virginia in a business combination
accounted for as a purchase. As a result of the acquisition, the consolidated
financial information for the periods after the acquisition is presented on a
different cost basis than that for the periods before the acquisition and,
therefore, is not comparable.
/s/ KPMG Peat Marwick LLP
January 15, 1997
93
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Life Insurance Company of Virginia
We have audited the accompanying consolidated statement of financial position of
The Life Insurance Company of Virginia and subsidiaries as of December 31, 1995,
and the related consolidated statements of income, stockholder's equity, and
cash flows for each of the two years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Life Insurance
Company of Virginia and subsidiaries at December 31, 1995, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 2, the Company changed its method of accounting for certain
investments in 1994.
/s/ Ernst & Young, LLP
Richmond, Virginia
February 8, 1996
94
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(in millions)
PREACQUISITION
-------------
ASSETS 1996 1995
--------- -------------
Investments:
Fixed maturities:
Available for sale-at fair value: (amortized cost: December 31, 1996-$5,102.2;
1995-$4,267.2 $ 5,142.7 4,411.0
Equity securities-at fair value
Common stocks (cost: December 31, 1996-$31.6; 1995-$31.5) 34.7 35.4
Preferred stocks (cost: December 31, 1996-$123.5; 1995-$102.2) 130.8 121.5
Mortgage loans on real estate (net of reserve for losses: December 31, 1996-$20.8;
1995-$23.6) 585.4 592.5
Real estate (net of accumulated depreciation: December 31, 1996-$4.4; 1995-$5.6) 19.4 36.6
Policy loans 179.5 151.7
Short-term investments 42.4 81.7
--------- -------------
Total investments 6,134.9 5,430.4
--------- -------------
Cash 6.4 1.6
Receivables:
Premiums and other 21.0 13.5
Accrued investment income 116.6 72.3
Receivable from affiliates, net -- 558.4
--------- -------------
Total receivables 137.6 644.2
Deferred policy acquisition costs 70.3 363.9
Goodwill (net of accumulated amortization: December 31, 1996-$5.0) 125.4 --
Present value of future profits
(net of accumulated amortization: December 31, 1996-$45.2; 1995-$32.5) 419.2 32.6
Property and equipment at cost
(net of accumulated depreciation: December 31, 1996-$1.7; 1995-$18.4) 1.7 3.7
Deferred income tax benefit 72.9 --
Other assets 12.3 65.9
Assets held in separate accounts 2,762.7 2,019.6
--------- -------------
Total assets $ 9,743.4 8,561.9
--------- -------------
--------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities:
Future policy benefits $ 518.3 472.4
Policy and contract claims 69.1 31.7
Unearned and advance premiums 0.1 0.3
Other policyholder funds 5,094.4 5,013.9
--------- -------------
Total policy liabilities 5,681.9 5,518.3
General liabilities:
Payable to affiliate, net 8.8 --
Commissions and general expenses 46.8 12.8
Current income taxes 45.4 9.5
Deferred income taxes -- 75.5
Other liabilities 192.2 104.3
Liabilities related to separate accounts 2,762.7 2,019.6
--------- -------------
Total liabilities 8,737.8 7,740.0
--------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES
Stockholders' equity:
Common stock-$1,000 par value:
Authorized, issued and outstanding: 4,000 shares 4.0 4.0
Paid-in additional capital 928.1 749.1
Net unrealized investment gains 19.4 103.1
Retained earnings (deficit) 54.1 (34.3)
--------- -------------
Total stockholders' equity 1,005.6 821.9
--------- -------------
Total liabilities and stockholders' equity $ 9,743.4 8,561.9
--------- -------------
--------- -------------
See accompanying notes to consolidated financial statements.
95
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS FROM APRIL 1, 1996 TO DECEMBER 31, 1996 AND
FROM JANUARY 1, 1996 TO MARCH 31, 1996, AND THE YEARS ENDED
DECEMBER 31, 1995 AND 1994
(in millions)
PREACQUISITION
-----------------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1994
------------- ------------- --------------- ---------------
REVENUE
Premium and policy fees $ 154.7 92.4 179.3 218.8
Separate account fees 23.1 5.9 17.7 11.3
Net investment income (note 2) 334.4 112.0 402.1 490.6
Realized investment gains (losses)(note 2) 6.0 9.0 (76.5) (25.8)
Other income 0.6 1.0 2.8 8.5
------ ------ ----- -----
Total revenue earned 518.8 220.3 525.4 703.4
------ ------ ----- -----
BENEFITS AND EXPENSES
Benefits to policyholders 326.4 166.0 372.9 477.1
Commissions and general expenses 53.2 28.8 43.7 75.7
Amortization of intangibles 50.1 0.6 3.2 5.1
Amortization of deferred policy acquisition costs 3.2 6.0 39.3 57.1
------ ------ ----- -----
Total benefits and expenses 432.9 201.4 459.1 615.0
INCOME BEFORE INCOME TAX 85.9 18.9 66.3 88.4
Provision for income tax (note 3)
Current expense (benefit) 39.7 (3.8) 37.9 21.0
Deferred expense (benefit) (7.9) 10.8 (10.8) (5.7)
------ ------ ----- -----
31.8 7.0 27.1 15.3
NET INCOME $ 54.1 11.9 39.2 73.1
------ ------ ----- -----
------ ------ ----- -----
See accompanying notes to consolidated financial statements.
96
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIODS FROM APRIL 1, 1996 TO DECEMBER 31, 1996
AND FROM JANUARY 1, 1996 TO MARCH 31, 1996
AND THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(in millions)
PREACQUISITION
---------------------------------------
NINE MONTHS
ENDED THREE MONTHS YEAR ENDED YEAR ENDED
DECEMBER ENDED MARCH DECEMBER DECEMBER
31, 1996 31, 1996 31, 1995 31, 1994
----------- ------------- ----------- -----------
COMMON STOCK
$1,000 par value common stock, authorized,
issued and outstanding 4,000 in 1996,
1995 and 1994
Balance at beginning and end of period $ 4.0 $ 4.0 $ 4.0 $ 4.0
PAID-IN ADDITIONAL CAPITAL
Balance at beginning of period 818.4 749.1 704.1 704.1
Adjustment to reflect purchase method
(note 1) 109.7 -- -- --
Capital contribution from parent (notes
4, 7) -- 69.3 45.0 --
----------- ------ ----------- -----------
Balance at end of period 928.1 818.4 749.1 704.1
NET UNREALIZED INVESTMENT GAINS (LOSSES)
Balance at beginning of period 11.9 103.1 (97.5) 23.6
Adjustment to reflect purchase method
(note 1) (11.9) -- -- --
Effect of change in accounting
principles at January 1 (note 2) -- -- -- 25.1
Net unrealized investment gains (losses) 19.4 (91.2) 200.6 (146.2)
----------- ------ ----------- -----------
Balance at end of period 19.4 11.9 103.1 (97.5)
NET FOREIGN EXCHANGE GAINS (LOSSES)
Balance at beginning of period -- -- (3.0) (2.3)
Net foreign exchange gains (losses) -- -- 3.0 (0.7)
----------- ------ ----------- -----------
Balance at end of period -- -- -- (3.0)
RETAINED EARNINGS (DEFICIT)
Balance at beginning of period (22.4) (34.3) 159.8 126.7
Adjustment to reflect purchase method
(note 1) 22.4 -- -- --
Net income 54.1 11.9 39.2 73.1
Dividends to stockholder -- -- (40.0) (40.0)
Stock dividend to affiliate (note 7) -- -- (193.3) --
----------- ------ ----------- -----------
Balance at end of period 54.1 (22.4) (34.3) 159.8
----------- ------ ----------- -----------
Stockholders' equity at end of period $ 1,005.6 $ 811.9 $ 821.9 $ 767.4
----------- ------ ----------- -----------
----------- ------ ----------- -----------
See accompanying notes to consolidated financial statements.
97
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS FROM APRIL 1, 1996 TO DECEMBER 31, 1996
AND FROM JANUARY 1, 1996 TO MARCH 31, 1996, AND THE YEARS ENDED
DECEMBER 31, 1995 AND 1994
(in millions)
PREACQUISITION
--------------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1994
------------- --------------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 54.1 11.9 39.2 73.1
Adjustments to reconcile net income to cash provided
by (used in) operating activities:
Change in policy liabilities 53.5 (32.8) 114.2 331.4
Change in accrued investment income (37.6) 4.1 (2.1) 1.8
Deferred policy acquisition costs (74.9) (22.2) (76.1) (91.8)
Amortization of deferred policy acquisition costs 3.2 6.0 39.3 57.1
Amortization of intangibles 50.1 0.6 3.2 5.1
Other amortization and depreciation 7.3 1.4 (1.2) 2.3
Premiums and operating receivables, commissions
and general expenses, income taxes, other
assets and other liabilities 77.8 22.9 (65.7) (139.7)
Realized investment (gains) losses (6.0) (9.0) 76.5 25.8
------------- ------ ------------ -------------
Cash provided by (used in) operating activities 127.5 (17.1) 127.3 265.1
------------- ------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments-net 49.4 (10.1) (18.8) (0.3)
Sale or maturity of investments
Fixed maturities-held to maturity:
Maturities -- -- 3.9 50.8
Calls and prepayments -- -- 60.9 727.5
Sales -- -- -- --
Fixed maturities-available for sale
Maturities 201.5 46.1 35.0 50.4
Calls and prepayments 353.5 101.0 58.6 269.1
Sales 452.0 115.8 1,700.3 444.7
All other investments 177.3 44.9 124.6 231.1
Purchase of investments:
Fixed maturities-held to maturity -- -- -- (734.0)
Fixed maturities-available for sale (1,279.5) (144.1) (1,950.7) (1,018.5)
All other investments (39.5) (65.5) (183.5) (357.1)
Sale (purchase) of property and equipment -- (0.2) (0.8) (1.8)
------------- ------ ------------ -------------
Cash provided by (used in) investing activities (85.3) 87.9 (170.5) (338.1)
------------- ------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution -- 2.8 -- --
Cash dividends to stockholder -- (40.0) (6.0) (20.0)
Change in cash overdrafts (12.7) 28.8 -- --
Interest sensitive life, annuity and investment
contract deposits 1,275.4 301.9 1,059.5 1,455.5
Interest sensitive life, annuity and investment
contract withdrawals (1,305.6) (358.8) (1,031.7) (1,362.6)
------------- ------ ------------ -------------
Cash provided by (used in) financing activities (42.9) (65.3) 21.8 72.9
------------- ------ ------------ -------------
Increase (decrease) in cash (0.7) 5.5 (21.4) (0.1)
Cash at beginning of period 7.1 1.6 23.0 23.1
------------- ------ ------------ -------------
Cash at end of period $ 6.4 7.1 1.6 23.0
------------- ------ ------------ -------------
------------- ------ ------------ -------------
See accompanying notes to consolidated financial statements.
98
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP) and include the
accounts of The Life Insurance Company of Virginia and its subsidiaries ("Life
of Virginia" or "Company"). Subsidiaries include Globe Life Insurance Company
and Assigned Settlements Inc. at December 31, 1994 and only Assigned Settlements
Inc. at December 31, 1996 and 1995. All material intercompany accounts and
transactions have been eliminated.
Prior to April 1, 1996 Combined Insurance Company of America ("CICA") owned
100% or 4,000 shares of Life of Virginia. CICA is a wholly-owned subsidiary of
AON Corporation (AON). On April 1, 1996, CICA sold 100% of the issued and
outstanding shares of Life of Virginia to General Electric Capital Corporation
("GE Capital"). Immediately thereafter, 80% was contributed to General Electric
Capital Assurance Company (the "Parent"). On December 31, 1996, the remaining
20% was contributed to General Electric Life Insurance Group, Inc. ("GELIG").
Life of Virginia primarily sells variable annuities and universal life
insurance to customers throughout most of the United States. Life of Virginia
distributes variable annuities primarily through stockbrokers and universal life
insurance primarily through career agents and independent brokers. Life of
Virginia is also engaged in the sale of traditional individual and group life
products and guaranteed investment contracts. Approximately 34%, 43% and 46% of
premium and annuity consideration collected, in 1996, 1995, and 1994,
respectively, came from customers residing in the South Atlantic region of the
United States.
Although the Company markets its products through numerous distributors,
approximately 21.2% and 13.8% of the Company's sales in 1996 and 1995,
respectively, have been through two specific national stockbrokers. Loss of all
or a substantial portion of the business provided by these stockbrokers could
have a material adverse effect on the business and operations of the Company.
The Company does not believe, however, that the loss of such business would have
a long-term adverse effect because of the Company's competitive position in the
marketplace and the availability of business from other distributors.
Certain 1995 and 1994 amounts have been reclassified to conform to 1996
presentation.
PURCHASE ACCOUNTING METHOD
Upon acquisition of Life of Virginia by GE Capital, Life of Virginia
restated its financial statements in accordance with the purchase method of
accounting which allocates the net purchase price for Life of Virginia and its
subsidiaries of $932.1 million according to the fair values of the acquired
assets and liabilities, including the estimated present value of future profits.
These allocated values were dependent upon policies in force and market
conditions at the time of closing.
99
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES (CONTINUED)
These allocations are summarized below:
APRIL 1,
(IN MILLIONS) 1996
- -------------------------------------------------------------------------------- ------------
Assets acquired:
Cash and investments (including mortgages) $ 6,006.2
Goodwill 130.3
Present value of future profits 484.1
Assets held in separate accounts 2,096.6
Other assets 194.2
------------
Total $ 8,911.4
------------
Liabilities assumed:
Policyholder liabilities $ 5,658.7
Other liabilities 224.0
Liabilities related to separate accounts 2,096.6
------------
Total 7,979.3
------------
Adjusted purchase price $ 932.1
------------
------------
In addition to revaluing all material tangible assets and liabilities to
their respective estimated market values as of the closing date of the sale,
Life of Virginia also recorded in its financial statements the excess of cost
over fair value of net assets acquired (goodwill) as well as the present value
of future profits to be derived from the purchased business. These amounts were
determined in accordance with the purchase method of accounting. This new basis
of accounting resulted in an increase in stockholders' equity of $120.2 million
in 1996 reflecting the application of the purchase method of accounting. The
Company's consolidated financial statements subsequent to April 1, 1996 reflect
this new basis of accounting.
All amounts for periods ended before April 1, 1996 are labeled
"Preacquisition" and are based on the preacquisition historical costs in
accordance with generally accepted accounting principles. The periods ending
after such date are based on fair values at April 1, 1996 and subsequent costs
in accordance with the purchase method of accounting.
PRESENT VALUE OF FUTURE PROFITS
As of April 1, 1996 Life of Virginia established an intangible asset which
represents the "present value of future profits" (PVFP). PVFP reflects the
estimated fair value of the Company's life insurance business in-force and
represents the portion of the cost to acquire the Company that is allocated to
the value of the right to receive future cash flows from insurance contracts
existing at the date of acquisition. Such value is the present value of the
actuarially determined projected cash flows for the acquired policies discounted
at a rate of 15%, the rate of return required by the Parent to invest in the
business being acquired.
PVFP is amortized over the estimated contract life of the business acquired
in relation to the present value of estimated gross profits. The estimated gross
profit streams are periodically reevaluated and the unamortized balance of PVFP
adjusted to the amount that would have existed had the actual experience and
revised estimates been known and applied since inception. The amortization
period is the remaining life of the policies, which ranges from 10 to 30 years
from the date of original policy issue. Based on
100
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES (CONTINUED)
current assumptions, net amortization of the PVFP asset, expressed as a
percentage, is projected to be 13.3%, 12.1%, 10.9%, 9.7% and 8.3% for the years
ended December 31, 1997 through 2001, respectively. Actual amortization incurred
during these years may vary as assumptions are modified to incorporate actual
results.
Prior to April 1, 1996, Life of Virginia's PVFP was calculated in a similar
manner as the PVFP discussed above and related to policies in-force on April 30,
1986, the date the Company was acquired by Aon. Under purchase accounting this
PVFP was removed.
The projected ending balance of PVFP will be further adjusted to reflect the
impact of unrealized gains or losses on fixed maturities held as available for
sale in the investment portfolios. Such adjustments are not recorded in the
Company's net income but rather as a credit or charge to stockholders' equity,
net of income tax. The components of PVFP are as follows:
PREACQUISITION
-------------------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
(MILLIONS) 1996 1996 1995 1994
- ------------------------------------------------------- ------------- --------------- --------------- ---------------
PVFP -- beginning of period $ -- 32.6 48.6 53.7
Adjustment related to the purchase method of accounting 484.0 -- -- --
Interest added 22.4 0.5 2.1 3.2
Gross amortization, excluding interest (67.5) (1.1) (5.3) (8.3)
Dividend of Globe Life Insurance Company (note 7) -- -- (12.8) --
PVFP attributable to unrealized gains (19.7) -- -- --
------ --- ----- -----
PVFP -- end of period $ 419.2 32.0 32.6 48.6
------ --- ----- -----
------ --- ----- -----
GOODWILL
Under the purchase method of accounting, the excess of purchase price over
the fair value of assets and liabilities acquired and PVFP is established as an
asset and referred to as "goodwill." The Company has elected to amortize
goodwill on the straight line basis over a 20 year period.
The Company reviews goodwill to determine if events or changes in
circumstances may have affected the recoverability of the outstanding goodwill
as of each reporting period. In the event that the Company determined that
goodwill was not recoverable it would amortize such amounts as additional
goodwill expense in the accompanying financial statements. As of December 31,
1996, the Company believes that no such adjustment is necessary.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that could affect the reported amounts of assets and liabilities as
well as the disclosure of contingent assets or liabilities at the date of the
financial
101
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES (CONTINUED)
statements. As a result, actual results reported as revenue and expenses could
differ from the estimates reported in the accompanying financial statements. As
further discussed in the accompanying notes to the consolidated financial
statements, significant estimates and assumptions affect deferred acquisition
costs, PVFP, future life policy benefits, provisions for real estate-related
losses and related reserves, other-than-temporary declines in values for fixed
maturities, the valuation allowance for deferred income taxes and the
calculation of fair value disclosures for certain financial instruments.
DEFERRED TAX ASSETS AND LIABILITIES
Pursuant to the acquisition on April 1, 1996, GE Capital, the Company's
ultimate parent, and Aon Corporation, the Company's previous ultimate parent,
agreed to file an election to treat the acquisition of Life of Virginia as an
asset acquisition under the provisions of Internal Revenue Code Section
338(h)(10). As a result of that election, the tax basis of the Company's assets
as of the date of acquisition were revalued based upon fair market values. The
principal effect of the election was to establish a tax basis of intangibles of
approximately $348 million for the value of the business acquired that is
amortizable for tax purposes over 10-15 years.
Deferred income taxes have been provided for the effects of temporary
differences between financial reporting and tax bases of assets and liabilities
and have been measured using the enacted marginal tax rates and laws that are
currently in effect.
RECOGNITION OF PREMIUM REVENUE AND RELATED EXPENSES
For universal life-type and investment products, generally there is no
requirement for payment of premium other than to maintain account values at a
level sufficient to pay mortality and expense charges. Consequently, premiums
for universal life-type policies and investment products are not reported as
revenue, but as deposits. Policy fee revenue for universal life-type policies
and investment products consists of charges for the cost of insurance, policy
administration, and surrenders assessed during the period. Expenses include
interest credited to policy account balances and benefit claims incurred in
excess of policy account balances.
In general, for accident and health products, premiums collected are
reported as earned proportionately over the period covered by the policies. For
all other life products, premiums are recognized as revenue when due. Benefits
and related expenses associated with the premium revenues are charged to expense
proportionately over the lives of the policies through a provision for future
policy benefit liabilities and through deferral and amortization of deferred
policy acquisition costs.
REINSURANCE
Reinsurance premiums, commissions, and expense reimbursements on reinsured
business are accounted for on a basis consistent with those used in accounting
for the original policies issued and the terms of the reinsurance contracts.
Premiums and benefits ceded to other companies have been reported as a reduction
of premium revenue and benefits. Expense reimbursements received in connection
with reinsurance ceded have been accounted for as a reduction of the related
policy acquisition costs or, to the extent such reimbursements exceed the
related acquisition costs, as other revenue. All reinsurance receivables and
prepaid reinsurance premium amounts are reported as assets.
102
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES (CONTINUED)
INVESTMENTS
Fixed maturities are carried at fair value. The amortized cost of fixed
maturities is adjusted for amortization of premiums and accretion of discounts
to maturity that are included in net investment income. Included in fixed
maturities are investments in collateralized mortgage obligations ("CMOs").
Premiums and discounts arising from the purchase of CMOs are treated as yield
adjustments and included in net investment income. Prepayment assumptions are
obtained from dealer surveys. The retrospective adjustment method is used to
adjust for prepayment activity.
Short-term investments are carried at amortized cost which approximates
market value. Equity securities are valued at fair value. Mortgage loans are
carried at their unpaid balance, net of unamortized discounts and reserves. Real
estate is carried generally at cost less accumulated depreciation. Policy loans
are carried at unpaid principal balance. Other long-term investments are carried
generally at cost.
Realized investment gains or losses are computed using specific costs of
securities sold. Unrealized gains and temporary unrealized losses on fixed
maturities available for sale and equity securities are excluded from income and
are recorded directly to stockholders' equity, net of related deferred income
taxes and adjustments to amortization of deferred policy acquisition costs and
present value of future profits.
Investments that have declines in fair value below cost, that are judged to
be other than temporary, are written down to estimated fair values and reported
as realized investment losses. Additionally, reserves for mortgage loans and
certain other long-term investments are established based on an evaluation of
the respective investment portfolio, past credit loss experience, and current
economic conditions. Writedowns and the change in reserves are included in
realized investment gains and losses in the statements of income. In general,
the Company ceases to accrue investment income when interest or dividend
payments are in arrears.
Life of Virginia measures "impaired" loans at the present value of the loans
discounted cash flow using the effective interest rate of the original loan as
the discount rate. Impaired loans are loans for which it is probable that the
Company will be unable to collect all amounts due according to terms of the
original contractual terms of the loan agreement. This definition includes,
among other things, leases, or larger groups of small-homogenous loans, and
therefore applies principally to the Company's commercial loans.
Accounting policies relating to interest rate swaps are discussed in Note 9.
DEFERRED POLICY ACQUISITION COSTS
Costs of acquiring new business, principally commissions, underwriting and
sales expenses that vary with and are primarily related to the production of new
business, are deferred. For non-universal life-type products, amortization of
deferred acquisition costs are related to and based on the present value of
expected premium revenues on the policies. Periodically amortization is adjusted
to reflect current withdrawal experience. Expected premium revenues are
estimated by using the same assumptions used in estimating future policy
benefits.
Deferred policy acquisition costs related to universal life-type policies
and investment products are amortized in relation to the present value of
expected gross profits on the policies. Such amortization is adjusted
periodically to reflect differences in actual and assumed gross profits.
103
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES (CONTINUED)
To the extent that unrealized gains or losses on available for sale
securities would result in an adjustment to deferred policy acquisition costs
amortization, had those gains or losses actually been realized, the related
deferred policy acquisition cost adjustments are recorded along with the
unrealized gains or losses included in stockholders' equity with no effect on
net income.
The components of deferred acquisition costs are as follows:
PREACQUISITION
-----------------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
(MILLIONS) 1996 1996 1995 1994
- ------------------------------------------------------- --------------- --------------- --------------- -------------
Deferred acquisition costs -- beginning of period $ -- 363.9 388.1 413.2
Commissions and expenses deferred 74.9 22.2 76.1 108.8
Amortization (3.2) (6.0) (39.3) (57.1)
Credit Life and Health cession (note 4) -- -- -- (107.0)
Dividend of Globe Life Insurance Company (note 7) -- -- (22.8) --
Deferred acquisition costs attributable to unrealized
gains (losses) (1.4) 17.9 (38.2) 30.2
----- ----- ----- ------
Deferred acquisition costs -- end of period $ 70.3 398.0 363.9 388.1
----- ----- ----- ------
----- ----- ----- ------
PROPERTY AND EQUIPMENT
Property and equipment are generally depreciated using the straight- line
method over their estimated useful lives. As a result of purchase accounting
fully depreciated property and equipment were removed.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amounts in the consolidated statements of
financial position for cash and short-term investments approximate their fair
values. Fair values for fixed maturity securities and equity securities are
based on quoted market prices or, if they are not actively traded, on estimated
values obtained from independent pricing services or in the case of private
placements, are estimated by discounted expected future cash flows using a
current market rate applicable to the yield credit quality, call features and
maturity of the investments, as applicable. The fair values for mortgage loans
and policy loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for similar loans to borrowers with
similar credit ratings. Fair values of derivatives are based on quoted prices
for exchange-traded instruments or the cost to terminate or offset with other
contracts.
Fair values for liabilities for investment-type contracts are estimated
using discounted cash flow calculations based on interest rates currently being
offered for similar contracts with maturities consistent with those remaining
for the contracts being valued.
104
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES (CONTINUED)
SEPARATE ACCOUNT BUSINESS
The assets and liabilities of the separate accounts represent designated
funds of group pension, variable life and annuity policyholders and are not
guaranteed or supported by other general investments of the Company. The Company
earns mortality and expense risk fees from the separate accounts and assesses
withdrawal charges in the event of early withdrawals. The assets are carried at
fair value and are offset by liabilities that represent such policyholders'
equity in those assets. The net investment income generated from these assets is
not included in the consolidated statements of income.
The Company has periodically transferred capital to the separate accounts to
provide for the initial purchase of investments in the new portfolios. As of
December 31, 1996, approximately $29.3 million of the Company's common stock
investment related to its capital investments in the separate accounts.
FUTURE POLICY BENEFIT LIABILITIES AND UNEARNED PREMIUMS AND POLICY AND CONTRACT
CLAIMS
Future policy benefit liabilities on non-universal life-type and accident
and health products have been provided on the net level premium method. The
liabilities are calculated based on assumptions as to investment yield,
mortality, morbidity and withdrawal rates that were determined at the date of
issue or acquisition of Life of Virginia by the Parent, and provide for possible
adverse deviations. Interest assumptions are graded and range from 7.4% to 6.5%.
Withdrawal assumptions are based principally on experience and vary by plan,
year of issue, and duration.
Policyholder liabilities on universal life-type and investment products are
generally based on policy account values. Interest crediting rates for these
products range from 8.6% to 4.5%.
Unearned premiums generally are calculated using the pro rata method based
on gross premiums. However, in the case of credit life and credit accident and
health, the unearned premiums are calculated such that the premiums are earned
over the period of risk in a reasonable relationship to anticipated claims.
Policy and contract claim liabilities represent estimates for reported
claims, as well as provisions for losses incurred, but not yet reported. These
claim liabilities are based on historical experience and are estimates of the
ultimate amount to be paid when the claims are settled. Changes in the estimated
liability are reflected in income as the estimates are revised.
FOREIGN CURRENCY TRANSLATION
Foreign revenues and expenses are translated at average exchange rates.
Foreign assets and liabilities are translated at year-end exchange rates.
Unrealized foreign exchange gains or losses on translation are generally
reported in stockholders' equity. No tax effect was taken into consideration for
unrealized losses.
(2) INVESTED ASSETS AND RELATED INCOME
Under purchase accounting, the market value of Life of Virginia's fixed
maturity investments as of April 1, 1996, became Life of Virginia's new cost
basis in such investments. The difference between the new cost basis and
original par is then amortized against investment income over the remaining
effective
105
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(2) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
lives of the fixed maturity investments. As a result of the interest rate
environment as of April 1, 1996, the market value of Life of Virginia's fixed
maturity investments was approximately $37.4 million lower than original
amortized cost.
The Company's investments in debt and equity securities are considered
available for sale and are carried at estimated fair value, with the aggregate
unrealized appreciation or depreciation being recorded as a separate component
of stockholders' equity. The carrying value and amortized cost of investments at
December 31, 1996 and 1995 were as follows:
DECEMBER 31, 1996
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(MILLIONS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------- ----------- ------------- ----------- ---------
Available for sale:
U.S. government and agencies $ 65.5 2.1 -- 67.6
States and political subdivisions 2.1 -- -- 2.1
Foreign governments 178.2 5.6 -- 183.8
Corporate securities 3,092.1 29.0 (19.6) 3,101.5
Mortgage-backed securities 1,764.3 29.7 (6.3) 1,787.7
----------- --- ----- ---------
Total fixed maturities 5,102.2 66.4 (25.9) 5,142.7
Total equity securities 155.1 11.2 (0.8) 165.5
----------- --- ----- ---------
Total available for sale $ 5,257.3 77.6 (26.7) 5,308.2
----------- --- ----- ---------
----------- --- ----- ---------
PREACQUISITION
--------------------------------------------------
DECEMBER 31, 1995
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(MILLIONS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------- ----------- ----------- ------------- ---------
Available for sale:
U.S. government and agencies $ 60.7 1.5 -- 62.2
States and political subdivisions 2.2 0.2 -- 2.4
Foreign governments 18.6 0.6 -- 19.2
Corporate securities 2,478.6 140.2 (9.9) 2,608.9
Mortgage-backed securities 1,596.3 19.6 (16.9) 1,599.0
Other fixed maturities 110.8 8.5 -- 119.3
----------- ----- ----- ---------
Total fixed maturities 4,267.2 170.6 (26.8) 4,411.0
Total equity securities 133.7 26.2 (3.0) 156.9
----------- ----- ----- ---------
Total available for sale $ 4,400.9 196.8 (29.8) 4,567.9
----------- ----- ----- ---------
----------- ----- ----- ---------
106
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(2) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
The amortized cost and fair value of fixed maturities, by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
DECEMBER 31, 1996
----------------------
AMORTIZED FAIR
(MILLIONS) COST VALUE
- ------------------------------------------------------------------------ ----------- ---------
Due in one year or less $ 82.1 82.5
Due after one year through five years 961.8 902.8
Due after five years through ten years 1,626.5 1,671.5
Due after ten years 667.5 698.2
Mortgage-backed securities 1,764.3 1,787.7
----------- ---------
$ 5,102.2 5,142.7
----------- ---------
----------- ---------
The cumulative effect on January 1, 1994 of adopting Statement No. 115
increased stockholders equity by $25.1 million (net of adjustments to deferred
policy acquisition costs of $14.0 million and deferred income taxes of $20.2
million) to reflect the net unrealized fixed maturities holding gains on
securities previously carried at amortized cost; there was no effect on net
income as a result of the adoption.
On November 30, 1995, Life of Virginia reclassified all held to maturity
securities to available for sale. The amortized cost and related unrealized
gains for the securities reclassified was $2,698.3 million and $50.9 million,
respectively.
Securities on deposit for regulatory authorities as required by law amounted
to $4.5 million at December 31, 1996 and 1995.
Life of Virginia had $12.6 million and $34.2 million of non-income producing
investments on December 31, 1996 and December 31, 1995, respectively.
Life of Virginia's "impaired" loans consist of loans requiring allowances
for loan losses of .2 and 12.2 as of December 31, 1996 and 1995, respectively.
Interest income earned on these loans while they were considered impaired was
1.2 and 5.5 as of December 31, 1996 and 1995, respectively.
Life of Virginia's mortgage and real estate portfolio is distributed by
geographic location and type. However, Life of Virginia has concentration
exposures in certain regions and in certain types as shown in the following two
tables.
107
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(2) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Geographic distribution as of December 31, 1996:
MORTGAGE REAL ESTATE
----------- -----------
South Atlantic 48.3% 75.2%
East North Central 14.6% 1.4%
Mountain 12.7% --
West South Central 11.2% --
Pacific 7.3% 8.1%
Middle Atlantic 4.5% 15.3%
East South Central 1.4% --
----------- -----------
Total 100.0% 100.0%
----------- -----------
----------- -----------
Type distribution as of December 31, 1996:
MORTGAGE REAL ESTATE
----------- -----------
Office building 23.7% 66.4%
Retail 22.8% 18.4%
Industrial 21.9% --
Apartments 19.2% --
Other commercial 8.2% 15.2%
Hotel/motel 4.2% --
----------- -----------
Total 100.0% 100.0%
----------- -----------
----------- -----------
The components of net unrealized investment gains (losses) are as follows:
PREACQUISITION
-----------------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
(MILLIONS) 1996 1996 1995 1994
- ------------------------------------------------------- ------------- --------------- --------------- -------------
Gross unrealized investment gains (losses)
Fixed maturities available for sale $ 40.5 2.8 143.8 (154.9)
Equity securities 10.4 5.8 23.2 (2.9)
PVFP (19.7) -- -- --
Deferred policy acquisition costs (1.4) 9.9 (8.0) 30.2
------ --- ----- ------
Net unrealized before deferred tax $ 29.8 18.5 159.0 (127.6)
Unrealized income tax benefit (expense) (10.4) (6.6) (55.9) 30.1
------ --- ----- ------
Net unrealized $ 19.4 11.9 103.1 (97.5)
------ --- ----- ------
------ --- ----- ------
108
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(2) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
The components of net investment income are as follows:
PREACQUISITION
-------------------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
(MILLIONS) 1996 1996 1995 1994
- ------------------------------------------------------- ------------- --------------- --------------- ---------------
Fixed maturities $ 276.8 93.1 332.8 404.1
Equity securities 8.7 4.2 10.8 25.2
Mortgage loans on real estate 41.3 13.5 49.8 49.9
Short-term investments 3.1 0.5 3.5 3.8
Other investments 9.9 3.0 13.2 18.0
------ ----- ----- -----
Gross investment income 339.8 114.3 410.1 501.0
Investment expenses (5.4) (2.3) (8.0) (10.4)
------ ----- ----- -----
Net investment income $ 334.4 112.0 402.1 490.6
------ ----- ----- -----
------ ----- ----- -----
Realized gains (losses) on investments are as follows:
PREACQUISITION
-------------------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
(MILLIONS) 1996 1996 1995 1994
- ------------------------------------------------------- --------------- --------------- --------------- ---------------
Fixed maturities:
Gross gains $ 0.6 0.5 12.9 8.6
Gross losses (0.7) (1.4) (90.2) (39.2)
Fixed maturities held to maturity:
Gross gains -- -- 1.1 11.3
Gross losses -- -- (13.8) (9.8)
Equity securities 6.0 10.3 5.6 (1.9)
Mortgage loans on real estate -- (0.4) 2.3 9.6
Other 0.1 -- 5.6 (4.4)
----- ----- ----- -----
Total before tax 6.0 9.0 (76.5) (25.8)
Less applicable tax (2.3) (1.9) 26.8 9.0
----- ----- ----- -----
Total $ 3.7 7.1 (49.7) (16.8)
----- ----- ----- -----
----- ----- ----- -----
109
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(2) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
The changes in net unrealized gains (losses) on fixed maturities and equity
security investments are as follows:
PREACQUISITION
---------------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
(MILLIONS) 1996 1996 1995 1994
- ------------------------------------------------------- --------------- ------------- --------------- -------------
Fixed maturities:
Available for sale $ 40.5 (141.0) 298.7 (214.2)
Held to maturity -- -- 233.7 (351.0)
Equity securities 10.4 (17.4) 26.1 (38.8)
----- ------ ----- ------
Net unrealized investment gains (losses) $ 50.9 (158.4) 558.5 (604.0)
----- ------ ----- ------
----- ------ ----- ------
(3) INCOME TAX
Beginning April 1, 1996, Life of Virginia and its subsidiary will be
included in the life insurance company consolidated Federal income tax return of
GECA. Prior to the April 1, 1996, Life of Virginia was included in the
consolidated federal income tax return of Aon and its principal domestic
subsidiaries and in accordance with intercompany policy, provided taxes on
income based on a separate company basis. Amounts payable or recoverable related
to periods before April 1, 1996, are subject to an indemnification agreement
with Aon. As such the Company is not at risk for any income taxes nor entitled
to recoveries related to those periods.
Income taxes are recorded in the statements of income and directly in
stockholders' equity accounts. Income tax expense (benefit) for the years ending
December 31 was allocated as follows:
PREACQUISITION
-------------------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
(MILLIONS) 1996 1996 1995 1994
- ------------------------------------------------------- --------------- --------------- --------------- ---------------
Statement of income:
Operating income (excluding realized investment gains
and losses) $ 29.5 5.1 53.9 24.3
Realized investment gains/losses 2.3 1.9 (26.8) (9.0)
Income tax expense/(benefit) included in the
statement of income 31.8 7.0 27.1 15.3
Stockholders' equity:
Unrealized gains/(losses) on securities available for
sale 10.4 (49.3) 86.0 (42.4)
----- ----- ----- -----
Total income tax expense/(benefit) $ 42.2 (42.3) 113.1 (27.1)
----- ----- ----- -----
----- ----- ----- -----
110
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(3) INCOME TAX (CONTINUED)
The actual Federal income tax expense differed from the expected tax expense
computed by applying the U.S. Federal statutory rate to income before income tax
expense. A reconciliation of the income tax provisions based on the statutory
corporate tax rate to the provisions reflected in the consolidated financial
statements is as follows:
PREACQUISITION
----------------------------------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
(MILLIONS) 1996 1996 1995 1994
- -------------------------------------- -------------------- -------------------- -------------------- --------------------
Statutory tax rate $ 30.1 35.0% $ 6.6 35.0% $ 23.2 35.0% $ 31.0 35.0%
Tax-exempt investment income
deductions (1.0) (1.2) -- (0.1) (0.1) (0.1) (0.8) (0.9)
Adjustment of prior year taxes -- -- -- -- 3.5 5.3 (11.8) (13.3)
Other - net 2.7 3.2 0.4 2.1 0.5 0.7 (3.1) (3.5)
--------- --------- --- --------- --------- --------- --------- ---------
Effective tax rate $ 31.8 37.0% $ 7.0 37.0% $ 27.1 40.9% $ 15.3 17.3%
--------- --------- --- --------- --------- --------- --------- ---------
--------- --------- --- --------- --------- --------- --------- ---------
Significant components of Life of Virginia's deferred tax liabilities and
assets are as follows (in millions):
PREACQUISITION
---------------
DECEMBER 31, DECEMBER 31,
1996 1995
------------- ---------------
Deferred tax liabilities:
Present value of future profits $ 89.8 --
Policy acquisition costs -- 96.9
Employee benefits -- 11.0
Unrealized investment gains 10.4 58.7
Other 6.5 35.2
------ -----
Total deferred tax liabilities 106.7 201.8
------ -----
Deferred tax assets:
Insurance reserve amounts 120.4 78.2
Policy acquisition costs 34.3 --
Guaranty fund amounts 10.8 --
Other 14.1 48.1
------ -----
Total deferred tax assets 179.6 126.3
------ -----
Net deferred tax liabilities (assets) $ (72.9) 75.5
------ -----
------ -----
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management believes the
deferred tax assets will be fully realized in the future based on the
expectation of the reversal of existing temporary differences, anticipated
future earnings, and consideration of all other available evidence. Accordingly,
no valuation allowance is established.
111
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(3) INCOME TAX (CONTINUED)
The amount of income taxes paid (refund) for nine months ended December 31,
1996, three months ended March 31, 1996, the years ended December 31, 1995 and
1994 was $38.6 million, $(2.4) million, $44.9 million, and $56.7 million,
respectively.
(4) REINSURANCE AND CLAIM RESERVES
Life of Virginia is involved in both the cession and assumption of
reinsurance with other companies. In 1996 and 1995, Life of Virginia's
reinsurance consists primarily of long-duration contracts that are entered into
with financial institutions and related party reinsurance. In 1994, Life of
Virginia's reinsurance consisted primarily of short-duration contracts that were
entered into with numerous automobile dealerships, financial institutions, and
related party reinsurance. Although these reinsurance agreements contractually
obligate the reinsurers to reimburse the Company, they do not discharge the
Company from its primary liabilities and the Company remains liable to the
extent that the reinsuring companies are unable to meet their obligations.
A summary of reinsurance activity is as follows:
PREACQUISITION
-----------------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1994
------------- --------------- --------------- -------------
EARNED EARNED EARNED EARNED
------------- --------------- --------------- -------------
Direct $ 210.5 77.2 261.5 404.2
Assumed 6.6 35.0 4.3 8.3
Ceded (62.4) (19.8) (86.5) (193.7)
------ ----- ----- ------
Net premiums $ 154.7 92.4 179.3 218.8
------ ----- ----- ------
------ ----- ----- ------
Due to the nature of the Company's reinsurance contracts, premiums earned
approximate premiums written.
A significant portion of Life of Virginia's ceded premiums relates to group
life and health premiums. Life of Virginia is the primary carrier for the State
of Virginia employees group life and health plan. By statute, Life of Virginia
must reinsure these risks with other Virginia domiciled companies who wish to
participate.
Incurred losses and loss adjustment expenses are net of reinsurance of $60.5
million, $17.2 million, $63.1 million and $102.1 million for the nine months
ended December 31, 1996, three months ended March 31, 1996 and the years ended
December 31, 1995 and 1994, respectively.
In December 1994, Life of Virginia ceded to CICA $406.6 million of its
guaranteed investment contract liabilities. In conjunction with the liability
cession, Life of Virginia transferred to CICA available for sale fixed
maturities with a fair value of $278.1 million and a cost of $287.2 million and
preferred stock with a fair value of $110.5 million and a cost of $119.7
million. Included in receivable from affiliates at December 31, 1995 is $212.6
million which represents the remaining ceded guaranty investment contract
liability.
112
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(4) REINSURANCE AND CLAIM RESERVES (CONTINUED)
In July 1994, Life of Virginia ceded to Union Fidelity Life Insurance
Company ("UFLIC") $280.7 million of its credit life and health reserves and
associated acquisition costs of $107.0 million. In conjunction with the
liability cession, Life of Virginia recognized a $29.1 million loss which is
reflected as a $20.8 million premium ceded and $8.3 million realized loss on
investments.
Premiums, benefits to policyholders, and commissions and general expenses
ceded to UFLIC during the second six months of 1994 amounted to $35.0 million,
$14.4 million, and $14.2 million, respectively.
In January 1995, Life of Virginia ceded to CICA $600 million of its single
premium deferred annuity liabilities. In conjunction with the liability cession,
Life of Virginia transferred to CICA available for sale fixed maturities with a
fair value of $436.1 million and cost of $501.4 million and held to maturity
fixed maturities with a fair value of $81.4 million and a cost of $95.1 million.
In addition, $5.5 million of accrued income related to the assets above was
transferred to CICA. This transaction resulted in a deferred reinsurance gain of
$77.0 million, $24 million of which was recognized in 1995. Additionally, Life
of Virginia recognized a $79.0 million realized investment loss. Included in
receivable from affiliates at December 31, 1995 is $357.5 million which
represents the ceded single premium deferred annuity liability of $410.5 million
less a deferred reinsurance gain of $53 million.
In connection with the sale of the Company, the following transactions
occurred effective January 1, 1996: single premium deferred annuity liabilities
reinsured with CICA in 1995 were recaptured, guaranteed investment contract
liabilities reinsured with CICA in 1994 were recaptured, other lines of CICA
insurance business inforce were assumed, and other related liabilities of CICA
were assumed. In conjunction with the recapture and assumption, CICA transferred
to Life of Virginia assets with a fair market value totaling $842.6 million. For
the three months ended March 31, 1996, premiums of $33.9 million, benefits of
$46.7 million, commission expense of $10.2 million and a capital contribution of
$69.3 million as a result of various reinsurance transactions. The $53 million
deferred reinsurance gain remaining at December 31, 1995 from the January 1995
single premium deferred annuity cession to CICA was
113
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(4) REINSURANCE AND CLAIM RESERVES (CONTINUED)
recognized as a capital contribution. The tables below summarize the assets and
liabilities transferred from CICA to the Company.
MILLIONS FAIR MARKET VALUE
- --------------------------------------------------------------------------- -----------------
Assets transferred:
Fixed maturity $ 727.4
Preferred stock 88.2
Policy loans 14.2
Accrued investment income 10.0
Cash 2.8
------
Total $ 842.6
------
------
Liabilities recaptured and assumed:
Single premium deferred annuity $ 410.5
Guaranteed investment contracts 212.6
Universal life contracts 156.6
Individual traditional contracts 33.2
Other lines of business inforce 19.9
Other liabilities 16.5
------
Total $ 849.3
------
------
(5) EMPLOYEE BENEFITS
SAVINGS PLAN
Beginning April 1, 1996, Life of Virginia's salaried and commissioned
employee's participated in a General Electric contributory savings plan.
Provisions made for the savings plan were $.6 million for the nine months ended
December 31, 1996.
Prior to the acquisition on April 1, 1996, Life of Virginia participated in
Aon's contributory savings plan for the benefit of salaried and commissioned
employees. Provisions made for the savings plan were $.3 million, $.8 million
and $1.2 million for the three months ended March 31, 1996, and the years ended
December 31, 1995 and 1994, respectively. This plan terminated upon the
acquisition of Life of Virginia by GE Capital.
EMPLOYEE STOCK OWNERSHIP PLAN
Prior to the acquisition on April 1, 1996, Life of Virginia participated in
Aon's leveraged ESOP for the benefit of salaried and certain commissioned
employees. Contributions to the ESOP for the three months ended March 31, 1996
and the years ended December 31, 1995 and 1994 charged to Life of Virginia's
operations amounted to $.1 million, $.5 million and $.6 million, respectively.
This plan terminated upon the acquisition of Life of Virginia by GE Capital.
114
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(5) EMPLOYEE BENEFITS (CONTINUED)
PENSION PLAN
Beginning April 1, 1996, Life of Virginia's salaried and commissioned
employee's participated in a General Electric contributory defined benefit
pension plan. Generally, benefits are based on the greater of a formula
recognizing career earnings or a formula recognizing length of service and final
average earnings. Benefit provisions are subject to collective bargaining.
General Electric's funding policy is to contribute amounts sufficient to meet
minimum funding requirements as set forth in employee benefit and tax laws plus
such additional amounts as determined appropriate. The components of net
periodic pension cost and benefit obligations of the General Electric defined
benefit plan are not separately available for Life of Virginia. In connection
with Life of Virginia's participation in the General Electric contributory
defined benefit pension plan a $.4 million expense was incurred for the nine
months ended December 31, 1996.
Prior to the acquisition on April 1, 1996, Life of Virginia participated in
Aon's non-contributory defined benefit pension plan providing retirement
benefits for salaried employees and certain commissioned employees based on
years of service and salary. Aon's funding policy was to contribute amounts to
the plan sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional amounts as
Aon determines to be appropriate from time to time. The components of net
periodic pension cost and benefit obligations of the Aon defined benefit plan
were not separately available for Life of Virginia. In connection with Life of
Virginia's participation in the Aon defined benefit plan, net pension credits of
$1.2 million, $3.8 million and $3.1 million in the three months ended March 31,
1996 and the years ended December 31, 1995 and 1994. This plan terminated upon
the acquisition of Life of Virginia by GE Capital.
During 1993, the Aon Pension Plan was amended to include certain additional
amounts of compensation in determining plan benefits and in 1994 to reduce the
maximum amount of compensation that can be considered under the plan as required
by law. Further, the Pension Plan was amended in 1994 to provide increases in
benefits to current pensioners.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Beginning April 1, 1996, Life of Virginia's salaried and commissioned
employee's participated in a General Electric retiree health and life insurance
benefit plan. The plan's principally provide health and life insurance benefits
to employees who retire under the General Electric pension plan with 10 or more
years of service. Retirees share in the cost of their health care benefits. The
funding policy for retiree health benefits is generally to pay covered expenses
as they are incurred. Expenses incurred by Life of Virginia for the nine months
ended December 31, 1996 for the retiree health and life insurance benefit plan
were $1.3 million.
Prior to the acquisition on April 1, 1996, Aon sponsored two defined benefit
postretirement health and welfare plans in which Life of Virginia participated
that cover both salaried and nonsalaried employees. One plan provides medical
benefits, prior to and subsequent to Medicare eligibility, and the other
provides life insurance benefits. The postretirement health care plan is
contributory, with retiree contributions adjusted annually; the life insurance
plan is noncontributory. Both plans are funded on a pay-as-you-go basis. These
plans terminated upon the acquisition of Life of Virginia by GE Capital.
115
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(6) LEASE COMMITMENTS
Life of Virginia has noncancelable operating leases for certain office
space, equipment and automobiles. Future minimum rental payments required under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year at December 31, 1996 are as follows:
(MILLIONS) MINIMUM LEASE PAYMENTS
- --------------------------------------------------------------------- ---------------------------
1997 $ 1.1
1998 0.8
1999 0.4
2000 0.2
2001 0.1
Later years --
---
Total minimum payments required $ 2.6
---
---
MINIMUM LEASE PAYMENTS
Rental expenses for all operating leases for the nine months ended December
31, 1996, the three months ended March 31, 1996 and the years ended December 31,
1995 and 1994 amounted to $2.5 million, $.8 million, $3.6 million and $5.1
million, respectively.
(7) RELATED PARTY TRANSACTIONS
Life of Virginia pays investment advisory fees and other fees to affiliates;
Parent after April 1, 1996 and Aon previous to that date. Amounts incurred for
these items aggregated $3.2 million, $3.5 million, $5.8 million and $37.8
million for nine months ended December 31, 1996, the three months ended March
31, 1996 and the years ended December 31, 1995 and 1994, respectively. Life of
Virginia charges affiliates for certain services and for the use of facilities
and equipment which aggregated $2.0 million, $1.0 million, $10.0 million and
$101.2 million for the nine months ended December 31, 1996, the three months
ended March 31, 1996 and the years ended December 31, 1995, and 1994,
respectively.
At December 31, 1996 and 1995, Life of Virginia held investments in
securities of certain affiliates amounting to $2.6 million and $12.6 million,
respectively. Amounts included in net investment income related to these
holdings totaled $0.1 million, $0.2 million, $1.0 million and $3.5 million for
the nine months ended December 31, 1996, the three months ended March 31, 1996
and the years ended December 31, 1995 and 1994, respectively.
In January 1995, Life of Virginia dividended 100% of its Globe Life
Insurance Company ("Globe") common stock to CICA, a subsidiary of Aon. At
December 31, 1994, Globe had assets of $954.9 million, liabilities of $765.7
million and stockholders' equity of $189.2 million. The fair market value of
this dividend was $193.3 million.
In 1995, Life of Virginia received from CICA, in the form of a capital
contribution, fixed maturities with a fair value of $45.0 million.
In January 1995, Life of Virginia transferred limited partnership
investments with a fair value of $8.0 million and cost of $7.5 million, common
stocks with a fair value of $5.6 million and cost of $3.4 million,
116
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(7) RELATED PARTY TRANSACTIONS (CONTINUED)
and cash of $6.4 million to pay a $20.0 million dividend declared but not paid
in 1994. A $2.7 million realized investment gain was recorded on this transfer.
In December 1994, Life of Virginia exchanged common stocks with a fair value
of $61.4 million and cost of $67.1 million for CICA's available for sale fixed
maturities and related accrued income with fair values of $60.9 million and $.5
million, respectively. Life of Virginia recorded the fixed maturity securities
at CICA's fair value of $60.9 million resulting in a $5.7 million realized loss
that is reflected in the statement of income.
(8) LITIGATION
Life of Virginia is subject to numerous claims and lawsuits that arise in
the ordinary course of business. In some of these cases the remedies that may be
sought or damages claimed are substantial, including cases that seek punitive or
extraordinary damages. Accruals for these lawsuits have been provided to the
extent that losses are deemed probable and are estimable. Although the ultimate
outcome of these suits cannot be ascertained and liabilities in indeterminate
amounts may be imposed on Life of Virginia, on the basis of present information,
availability of insurance coverage, and advice received from counsel, it is the
opinion of management that the disposition or ultimate determination of such
claims and lawsuits will not have a material adverse effect on the consolidated
financial position or results of operations of Life of Virginia.
(9) FINANCIAL INSTRUMENTS
INTEREST RATE RISK MANAGEMENT
Life of Virginia used interest rate swap agreements to manage asset and
liability durations relating to its capital accumulation annuity business. As of
December 31, 1995 and 1994, these swap agreements had the net effect of
lengthening liability durations. Variable rates received on interest rate swap
agreements correlate with crediting rates paid on outstanding liabilities. The
net effect of swap payments is settled periodically and reported in income.
There was no settlement of underlying notional amounts.
Life of Virginia performed frequent analyses to measure the degree of
correlation associated with its derivative program. Life of Virginia assessed
the adequacy of the correlation analyses results in determining whether the
derivatives qualify for hedge accounting. Realized gains and losses on
derivatives that qualify as hedges were deferred and reported as an adjustment
of the cost basis of the hedged item. Deferred gains and losses were amortized
into income over the life of the hedged item. The fair value of swap agreements
hedging liabilities were not recognized in the consolidated statements of
financial position.
These interest rate swaps gave rise to credit risks due to possible
non-performance by counterparties. The credit risk was generally limited to the
fair value of those contracts that were favorable to Life of Virginia. Life of
Virginia limited its credit risk by restricting investments in derivative
contracts to a diverse group of highly rated major financial institutions. Life
of Virginia closely monitored the credit worthiness of, and exposure to, its
counterparties and considered its credit risk to be minimal.
Life of Virginia had $0.0 million and $250.0 million notional amount of
interest rate swaps outstanding at December 31, 1996 and 1995, respectively.
117
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(9) FINANCIAL INSTRUMENTS (CONTINUED)
During the three months ended March 31, 1996 and the year ended December 31,
1995 Life of Virginia amortized $.6 million and $1.4 million, respectively, of
net deferred losses relating to interest rate swaps into income.
The interest rates on Life of Virginia's principal outstanding swaps at
December 31, are presented below:
PAY RECEIVE
FIXED VARIABLE
------------ -----------
1995 7.9 - 8.3% 5.40%
------------ -----------
------------ -----------
As of December 31, 1995, the principal swaps have maturities ranging from
September 1999 to October 2000 and variable rates based on five year treasury
rates. These swaps were terminated prior to March 31, 1996 resulting in a $1.1
million gain which was deferred.
OTHER FINANCIAL INSTRUMENTS
Life of Virginia has certain investment commitments to provide fixed-rate
loans. The investment commitments, which would be collateralized by related
properties of the underlying investments, involve varying elements of credit and
market risk. Investment commitments outstanding at December 31, 1996 and
December 31, 1995, totaled $1.7 million and $21.7 million, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting standards require the disclosure of fair values for certain
financial instruments. The fair value disclosures are not intended to encompass
the majority of policy liabilities, various other non-financial instruments, or
other intangible items related to Life of Virginia's business. Accordingly, care
should be exercised in deriving conclusions about Life of Virginia's business or
financial condition based on the fair value disclosures.
118
THE LIFE INSURANCE COMPANY OF VIRGINIA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(9) FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amount and fair value of certain of Life of Virginia's
financial instruments are as follows:
PREACQUISITION
----------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------- ----------------------
CARRYING FAIR CARRYING FAIR
(MILLIONS) AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------- --------- --------- ----------- ---------
Assets:
Fixed maturities and equity securities (note 2) $ 5,308.2 5,308.2 4,567.9 4,567.9
Mortgage loans on real estate 585.4 622.6 592.5 638.2
Policy loans 179.5 179.5 151.7 150.2
Cash, short-term investments and receivables 186.4 186.4 727.5 727.5
Assets held in separate accounts 2,762.7 2,762.7 2,019.6 2,019.6
Liabilities:
Investment type insurance contracts 3,055.0 3,027.6 2,769.7 2,796.9
Commissions and general expenses 46.8 46.8 12.8 12.8
Interest rate swaps -- -- -- 24.1
Liabilities related to separate accounts 2,762.7 2,762.7 2,019.6 2,019.6
See Note 1 regarding the method used to estimate fair values.
(10) STOCKHOLDERS' EQUITY
Generally, the capital and surplus of Life of Virginia available for
transfer to the Parent are limited to the amounts that the statutory capital and
surplus exceed minimum statutory capital requirements; however, payments of the
amounts as dividends may be subject to approval by regulatory authorities. The
maximum amount of dividends which can be paid by the Company without prior
approval at December 31, 1996, is $41.9 million.
Statutory net income (loss) and stockholders' equity is summarized below:
PREACQUISITION
-------------------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
(MILLIONS) 1996 1996 1995 1994
- ------------------------------------------------------- ------------- --------------- --------------- ---------------
Statutory net income $ 69.7 (8.3) 53.9 58.2
Statutory stockholders' equity 419.1 360.5 364.2 400.6
The National Association of Insurance Commissioners has developed certain
Risk Based Capital (RBC) requirements for life insurers. If prescribed levels of
RBC are not maintained, certain actions may be required on the part of the
Company or its regulators. At December 31, 1996 the Company's Total Adjusted
Capital and Authoritized Control Level -- RBC were, $504.6 million and $78.6
million, respectively. This level of adjusted capital qualifies under all tests.
119
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First Colony Corporation:
We have audited the accompanying consolidated balance sheets of First Colony
Corporation and Subsidiaries (the "Company") as of November 30, 1996 and
December 31, 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for the period from January 1 to November
30, 1996, and the years ended December 31, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First Colony
Corporation and Subsidiaries as of November 30, 1996 and December 31, 1995, and
the consolidated results of their operations and their cash flows for the period
from January 1 to November 30, 1996, and the years ended December 31, 1995 and
1994, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for certain investment securities in 1994 to
conform with a new pronouncement of the Financial Accounting Standards Board.
/s/ Coopers & Lybrand LLP
Richmond, Virginia
May 20, 1997
120
FIRST COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1996 AND DECEMBER 31, 1995
(IN MILLIONS)
1996 1995
---------- ----------
ASSETS
Investments:
Fixed maturities, held-to-maturity at amortized cost (fair value: 1996, $4,429.7;
1995, $4,660.9) $ 4,027.3 $ 4,070.5
Fixed maturities, available-for-sale, at fair value (amortized cost: 1996, $4,920.2;
1995, $4,319.8) 5,160.1 4,698.8
Equity securities, at market value (cost: 1996, $219.3, 1995, $302.8) 255.8 354.0
Policy loans 219.2 207.9
Other long-term investments 38.3 40.6
Short-term investments (cost: 1996, $50.0; 1995, $14.0) 50.7 14.2
---------- ----------
Total investments 9,751.4 9,386.0
Cash and cash equivalents 128.6 46.1
Accrued investment income 179.5 161.7
Deferred policy acquisition costs 1,000.2 874.6
Reinsurance recoverable 137.5 115.3
Accounts receivable 58.8 50.6
Debt issuance cost 3.3 3.8
Property and equipment less accumulated depreciation (1996, $17.7; 1995, $13.4) 45.1 44.7
Value of insurance in force at acquisition date 5.0 5.8
Goodwill, less accumulated amortization (1996, $17.3; 1995, $16.3) 30.3 31.4
Other assets 1.1 0.6
---------- ----------
Total assets $ 11,340.8 $ 10,720.6
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits $ 6,374.0 $ 5,932.3
Claims 55.9 52.6
---------- ----------
Total policy liabilities and accruals 6,429.9 5,984.9
Deposits on investment contracts 2,653.3 2,521.6
Other policyholder funds 147.4 132.7
Long-term debt 174.9 174.8
Other Liabilities 158.6 94.0
Deferred income taxes 243.2 328.2
---------- ----------
Total liabilities 9,807.3 9,236.2
---------- ----------
Shareholders' equity:
Variable term preferred stock, no par value; authorized 15.0 shares; issued and
outstanding 3.2 shares 80.0 80.0
Common stock, no par value; authorized 150.0 shares; issued and outstanding 49.8
shares and 49.3 shares, respectively 324.2 312.9
Unrealized appreciation of fixed maturities, less applicable deferred tax of $72.4 in
1996 and $112.1 in 1995 and deferred policy acquisition costs of $28.0 in 1996 $48.8
in 1995 134.5 208.3
Unrealized appreciation of equity securities less applicable deferred income taxes of
$11.4 in 1996 and $16.6 in 1995 25.0 34.6
Retained earnings 969.8 848.6
---------- ----------
Total shareholders' equity 1,533.5 1,484.4
---------- ----------
Total liabilities and shareholders' equity $ 11,340.8 $ 10,720.6
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
121
FIRST COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED NOVEMBER 30, 1996, DECEMBER 31, 1995 AND 1994
(IN MILLIONS)
1996 1995 1994
--------- --------- ---------
Revenues:
Premiums $ 598.3 $ 746.6 $ 619.8
Net investment income 729.3 747.0 675.1
Mortality, surrender and administrative charges 106.8 105.9 93.0
Net realized gains on investments 17.7 58.9 (12.1)
--------- --------- ---------
Total revenues 1,452.1 1,658.4 1,375.8
--------- --------- ---------
Benefits:
Life and annuity benefits paid 491.1 492.4 424.8
Increase in reserves 599.0 773.2 667.4
--------- --------- ---------
Total benefits 1,090.1 1,265.6 1,092.2
--------- --------- ---------
Expenses:
Commissions 30.1 38.8 38.4
General and administrative and other expenses 65.4 67.2 56.1
Amortization of intangible assets 55.0 41.0 13.1
Debt service cost 11.2 12.1 12.0
--------- --------- ---------
Total expenses 161.7 159.1 119.6
--------- --------- ---------
Total benefits and expenses 1,251.8 1,424.7 1,211.8
--------- --------- ---------
Income before income taxes 200.3 233.7 164.0
Income taxes 58.9 82.3 57.1
--------- --------- ---------
Net income $ 141.4 $ 151.4 $ 106.9
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements.
122
FIRST COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIODS ENDED NOVEMBER 30, 1996, DECEMBER 31, 1995 AND 1994
(IN MILLIONS)
1996 1995 1994
---------------------- ---------------------- ----------------------
SHARES AMOUNTS SHARES AMOUNTS SHARES AMOUNTS
----------- --------- ----------- --------- ----------- ---------
Variable term preferred stock, no par value
(authorized 15.0 shares):
Beginning and ending balance 3.2 $ 80.0 3.2 $ 80.0 3.2 $ 80.0
--- --------- --- --------- --- ---------
Common stock, no par value (authorized 150.0
shares):
Beginning 49.3 312.9 49.3 312.9 49.3 312.9
Options exercised 0.5 11.3
--- --------- --- --------- --- ---------
Ending balance 49.8 324.2 49.3 312.9 49.3 312.9
--- --------- --- --------- --- ---------
Unrealized appreciation (depreciation) of fixed
maturities:
Beginning balance 208.3 (114.9) --
Change in net unrealized gains (73.8) 323.2 (114.9)
--------- --------- ---------
Ending balance 134.5 208.3 (114.9)
--------- --------- ---------
Unrealized appreciation of equity securities:
Beginning balance 34.6 16.3 70.6
Change in net unrealized gains (9.6) 18.3 (54.3)
--------- --------- ---------
Ending balance 25.0 34.6 16.3
--------- --------- ---------
Retained earnings:
Beginning balance 848.6 720.3 631.1
Net income 141.4 151.4 106.9
Cash dividends:
Common dividend (17.0) (19.7) (14.3)
Preferred dividend (3.2) (3.4) (3.4)
--------- --------- ---------
Ending balance 969.8 848.6 720.3
--------- --------- ---------
Total shareholders' equity $ 1,533.5 $ 1,484.4 $ 1,014.6
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements.
123
FIRST COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED NOVEMBER 30, 1996, DECEMBER 31, 1995 AND 1994
(IN MILLIONS)
1996 1995 1994
--------- --------- ---------
Cash and cash equivalents at beginning of year $ 46.1 $ 54.8 $ 60.4
Cash flows from (used in ) operating activities:
Net income 141.4 151.4 106.9
Adjustments to reconcile net income to cash provided from operating activities:
Increase in policy liabilities and accruals 353.0 510.5 428.1
Depreciation, depletion and amortization 60.2 46.5 18.2
(Increase) decrease in income taxes accrued (13.2) 30.2 (6.0)
Change in other policyholder funds (other than investment contracts) 12.8 3.1 61.5
Accrued investment income (17.8) (6.1) (13.8)
Accrual of discounts on fixed maturities (93.1) (99.9) (105.1)
Deferred policy acquisition costs (158.1) (190.1) (154.3)
Change in reinsurance recoverable (22.2) (29.1) (20.4)
Realized gains on sale of investments (17.7) (58.9) 12.1
Other items, net 14.9 21.9 18.0
--------- --------- ---------
Net cash provided from operating activities 260.2 379.5 345.2
--------- --------- ---------
Cash flows from (used in) investing activities:
Fixed maturities available-for-sale:
Purchases (1,281.1) (1,199.5) (913.7)
Sales 442.0 350.2 507.7
Maturities, calls and redemptions 274.4 149.9 306.8
Fixed maturities held-to-maturity:
Purchases (117.3) (381.5) (879.1)
Sales 14.3 5.5 --
Maturities, calls and redemptions 230.9 189.6 237.5
Other investments:
Purchases (3.2) (42.0) (61.4)
Sales or maturities 115.0 147.1 115.0
Other (51.9) (34.0) (9.2)
--------- --------- ---------
Net cash used in investing activities (376.9) (814.7) (696.4)
--------- --------- ---------
Cash flows from (used in) financing activities:
Investment and universal life contracts:
Amounts received 626.5 663.4 484.3
Interest credited 256.8 275.6 246.6
Benefit payments (569.1) (384.6) (272.7)
Charges assessed (106.1) (104.7) (92.3)
Common stock issuance 11.3 -- --
Regular dividends paid (20.2) (23.2) (20.3)
--------- --------- ---------
Net cash provided from financing activities 199.2 426.5 345.6
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 82.5 (8.7) (5.6)
--------- --------- ---------
Cash and cash equivalents at end of year $ 128.6 $ 46.1 $ 54.8
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements.
124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements of First Colony
Corporation and Subsidiaries (First Colony or the Company) include the accounts
of the Company and its wholly-owned subsidiaries: First Colony Life Insurance
Company (First Colony Life), American Mayflower Life Insurance Company of New
York (American Mayflower) and Jamestown Life Insurance Company. All significant
intercompany accounts and transactions have been eliminated.
As of December 1, 1996, First Colony Corporation was acquired by General
Electric Capital Corporation (GE Capital). These financial statements do not
reflect any adjustments made for purchase accounting in connection with this
acquisition. See Note 14.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP). These
principles are established primarily by the Financial Accounting Standards Board
(FASB) and the American Institute of Certified Public Accountants. The
preparation of financial statements in conformity with GAAP requires management
to make informed judgments and estimates that affect the reported amounts of
assets and liabilities (including disclosure of contingent assets and
liabilities) at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
GAAP principles differ in some respects from statutory accounting practices
required by regulatory authorities for life insurance companies. These
differences are set forth in Note 13 of the "Notes to Consolidated Financial
Statements."
Certain amounts in the accompanying financial statements and the notes
thereto have been reclassified to conform to the current year's presentation.
CASH AND CASH EQUIVALENTS
Cash equivalents are short-term investments having an original maturity of
less than 90 days (e.g., repurchase agreements, overnight sweep accounts and
loan participation notes).
INVESTMENTS
Investments in fixed maturities (bonds, notes and redeemable preferred
stocks) are assigned to the held-to-maturity portfolio if the Company has the
positive intent and ability to hold such securities to maturity. Equity
securities (common and non-redeemable preferred stocks) and other fixed
maturities are classified as available-for-sale. Securities classified as
held-to-maturity and policy loans are stated at cost, adjusted where appropriate
for amortization of premium or accrual of discount ("amortized cost");
securities classified as as available-for-sale, equity securities and short-term
investments are stated at current market values; other long-term investments are
principally investments in limited partnerships which are carried on the equity
basis. Short term investments consist primarily of long- term bonds maturing
within one year. For investments subject to significant prepayment or extension
risk, principally collateralized mortgage obligations (CMOs) in the bond
portfolio, adjustments to the amortization of book values are calculated to
generate a constant yield based on the current and projected cash flows from the
purchase date to anticipated maturity. Actual prepayments for CMOs may indicate
the need for a change to original assumptions if actual cash flows differ
significantly from original estimates. The Company has never invested in
interest-only or principal-only CMOs, nor does the Company have any derivative
financial instruments in its investment portfolio as of November 30, 1996 or
December 31, 1995.
125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The fair value for fixed maturities and equity securities is based on quoted
market prices, where available. For securities not actively traded, fair values
are estimated using values obtained from independent pricing services or, in the
case of private placements, are estimated by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality, call
features and maturity of the investments, as applicable. Changes in the market
values of fixed maturities available-for-sale, net of the effect of deferred
policy acquisition cost amortization and deferred federal income taxes, are
reflected as unrealized appreciation and depreciation in a separate component of
shareholder's equity and accordingly have no effect on net income.
Realized investment gains and losses are calculated on the specific
identification basis. A decline in the value of an investment in a fixed
maturity or an equity security below book value that is considered to be other
than temporary is recorded as a realized loss in the income statement.
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring new business, principally commissions, certain
expenses of the policy issue and underwriting departments and certain variable
sales expenses, have been deferred. Deferred policy acquisition costs (DAC) are
amortized in proportion to anticipated premium revenues for traditional life
policies and increased for interest and amortized in proportion to estimated
gross profits for universal life-type policies. Estimated gross profits include
mortality and expense margins, surrender and contract administrative charges and
excess investment earnings, which include realized gains on investments and
unrealized gains on fixed maturities available-for-sale when appropriate, and
accelerated CMO income. Actual experience for universal life-type products may
indicate the need for a change in the estimated gross profits used to calculate
DAC amortization. Accordingly, the Company periodically unlocks its assumptions
on the estimated gross profits of these products and the cumulative amortization
for the books of business are re-estimated and adjusted by a cumulative charge
or credit to the statement of income.
REVENUE AND EXPENSE RECOGNITION
Premiums for traditional life insurance are reported as revenues for the
entire policy year at the beginning of the policy year or, for short duration
contracts (principally accident and health), over the contract period. Benefits,
claims and expenses are associated with earned revenues in order to recognize
profits over the lives of the contracts. This association is accomplished by
provisions for future policy benefits and the deferral and amortization of
deferred policy acquisition costs.
Deposits on universal life contracts are credited to the policyholder
account, which is part of the liability for future policy benefits. Revenues
consist of amounts assessed against the policyholder's account value, including
mortality, contract initiation, contract administrative and surrender charges.
Surrender benefits are treated as reductions of the policyholder account. Death
benefits, net of the policyholder account, are expensed when incurred. Expenses
are associated with gross profit in order to recognize profit over the life of
the book of business. This association is accomplished by deferral and
amortization of policy acquisition costs.
Deposits on investment contracts, such as single premium immediate annuity
contracts (SPIAs) without life contingencies and single premium deferred
annuities (SPDAs), are accounted for as policyholder deposits and are credited
to deposits on investment contracts. Revenues consist primarily of the
investment income earned on the deposits. Expenses include primarily the
interest credited to the policyholder deposits. Benefit payments for such
contracts are treated as reductions of the policyholder account.
126
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SPIAs with life contingencies are accounted for as limited-payment
contracts. Premiums for such products are reported as revenue when collected and
a corresponding liability for future policy benefits is charged to operations.
GOODWILL AND VALUE OF ACQUIRED INSURANCE IN FORCE
Goodwill is being amortized over 40 years on a straight-line basis.
The value of acquired insurance in force at acquisition date (VOB)
represents the present value of the unamortized remaining amount of the
anticipated annual profits of the business in force (principally life insurance
products and structured settlement annuities) on May 14, 1982 (the date Ethyl
Corporation acquired the Company).
INCOME TAXES
First Colony Corporation will file its final consolidated federal income tax
return with its subsidiaries, for the period ended November 30, 1996, consistent
with prior years.
A tax allocation agreement exists between First Colony Corporation and its
subsidiaries, allocating consolidated federal income tax to the individual
companies based on their separate company taxable income.
The Company uses the FASB 109 asset and liability approach to account for
income taxes. The asset and liability approach requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of other
assets and liabilities.
REINSURANCE
Premium revenue, benefits, underwriting, acquisition and insurance expenses
are reported net of the amounts relating to reinsurance ceded to other
companies, except for reinsurance costs for universal life products. Amounts due
from reinsurers for incurred and estimated future claims are reflected in the
reinsurance recoverable asset. The cost of reinsurance is accounted for over the
life of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies.
FUTURE POLICY BENEFITS, DEPOSITS ON INVESTMENT CONTRACTS AND OTHER POLICYHOLDER
FUNDS
Future policy benefits are composed primarily of the liabilities for life
insurance policies and limited-payment contracts (SPIAs with life
contingencies). Future policy benefits are calculated based on actuarial
assumptions as to mortality, interest, expense and withdrawals, with provisions
for adverse deviation, where appropriate. Actual experience may vary from
original estimates. Deposits on investment contracts represent the liability
held for principally SPIAs without life contingencies and SPDAs. Other
policyholder funds represent deposits on unissued policies and contracts.
127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
FASB Statement No. 123--"Accounting for Stock-Based Compensation" (FASB
123). The new standard, issued in October 1995, became effective for fiscal
years beginning after December 15, 1995, and encourages, but does not require,
companies to adopt a fair-value based method of accounting for stock-based
compensation. However, in the event fair-value based accounting is not adopted,
the new standard requires pro forma disclosures of net income and earnings per
share, as if the fair-value based method of accounting had been applied. The
Company did not adopt fair-value based accounting but has made the required
disclosure in its 1996 financial statements (see Note 6).
2. INVESTMENTS
The following tables summarize the components of net investment income and
realized investment gains (losses) for the periods ended November 30, 1996 and
December 31, 1995.
NET INVESTMENT INCOME
1996 1995 1994
--------- --------- ---------
Gross investment income:
Interest on fixed maturities $ 696.9 $ 705.1 $ 630.5
Dividends on equity securities 21.3 30.2 33.0
Policy loan interest 11.3 11.8 10.1
Other investment income 5.5 6.0 7.3
--------- --------- ---------
Total investment income 735.0 753.1 680.9
Investment expenses (5.7) (6.1) (5.8)
--------- --------- ---------
Net investment income $ 729.3 $ 747.0 $ 675.1
--------- --------- ---------
--------- --------- ---------
REALIZED INVESTMENT GAINS (LOSSES)
1996 1995 1994
--------- --------- ---------
Fixed maturities:
Held-to-maturity $ 14.2 $ 20.0 $ 22.3
Available-for-sale (22.0) (4.6) (57.7)
Equity securities 18.6 42.9 23.3
Other investments 6.9 0.6
--------- --------- ---------
Realized investment gains (losses) $ 17.7 $ 58.9 $ (12.1)
--------- --------- ---------
--------- --------- ---------
Effective for the year beginning January 1, 1994, the Company adopted FASB
No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Accordingly, the Company reclassified certain securities from the
held-to-maturity portfolio to the available-for-sale portfolio. The unrealized
gain or loss, net of tax, for fixed maturities classified as available-for-sale
was recorded as a separate component of shareholders' equity in the balance
sheet. There was no cumulative effect on beginning retained earnings.
128
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
The proceeds, gross realized gains and gross realized losses of fixed
maturities are as follows for the periods ended November 30, 1996, December 31,
1995 and 1994:
FIXED MATURITIES HELD-TO-MATURITY
GROSS GROSS
PROCEEDS GAINS LOSSES
----------- --------- -----------
(IN MILLIONS)
1996:
Sales $ 14.3 -- $ (1.9)
Maturities, Calls and Redemptions 230.9 $ 16.9 (0.8)
1995:
Sales 5.5 -- (1.5)
Maturities, Calls and Redemptions 189.6 21.5 --
1994:
Sales -- -- --
Maturities, Calls and Redemptions 237.5 22.3 --
FIXED MATURITIES AVAILABLE-FOR-SALE
GROSS GROSS
PROCEEDS GAINS LOSSES
----------- ----------- ---------
(IN MILLIONS)
1996:
Sales $ 442.0 $ 2.4 $ (28.6)
Maturities, Calls and Redemptions 274.4 4.2 --
1995:
Sales 350.2 5.3 (12.9)
Maturities, Calls and Redemptions 149.9 3.4 (0.4)
1994:
Sales 507.7 3.1 (69.9)
Maturities, Calls and Redemptions 306.8 9.7 (0.6)
One security was sold during 1996 from the fixed maturities held-to-maturity
portfolio with a total book value of $16.3 million resulting in a realized loss
of $1.9 million. Two securities were sold during 1995 from the fixed maturities
held-to-maturity portfolio with a total book value of $7.0 million resulting in
a realized loss of $1.5 million. Prior to sale, these issuers experienced
significant deterioration of creditworthiness.
The change in unrealized investment gains (losses) for the periods ended
November 30, 1996, December 31, 1995 and 1994 is as follows:
CHANGE IN UNREALIZED INVESTMENT GAINS (LOSSES)
1996 1995 1994
--------- --------- ---------
(IN MILLIONS)
Fixed maturities available-for-sale $ (134.3) $ 573.1 $ (203.8)
Equity securities (14.8) 28.2 (83.6)
--------- --------- ---------
Change in unrealized investment gains (losses) $ (149.1) $ 601.3 $ (287.4)
129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
The fixed maturities available-for-sale portfolio as of November 30, 1996
and December 31, 1995 had gross unrealized appreciation of $270.8 million and
$398.8 million and gross unrealized depreciation of $129.6 million and $19.5
million, respectively.
On December 22, 1995, the Company elected to make a one-time reassessment of
the fixed maturities held-to-maturity portfolio in accordance with the FASB's
Special Report: "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities" issued in November 1995.
Fixed investments with an amortized cost of $632.1 million were transferred from
the held-to-maturity portfolio to the available-for-sale portfolio. The
unrealized appreciation or depreciation resulting from carrying these securities
at market value is included in a separate component of stockholders' equity net
of deferred income taxes and the effect of deferred policy acquisition cost
amortization.
The amortized cost of fixed maturities held-to-maturity as of November 30,
1996 and December 31, 1995 reflects $5.8 million and $9.9 million, respectively,
of unrealized losses recognized on transfers from fixed maturities
available-for-sale to fixed maturities held-to-maturity during 1994. The market
value at the time of transfer totaled $163.5 million. The unrealized loss, net
of deferred federal income taxes, is: (i) included with the net unrealized loss
on fixed maturities available-for-sale in a separate component of stockholders'
equity and had no effect on net income; and (ii) is being amortized over the
remaining life of the fixed maturities using the interest method.
Gross unrealized appreciation pertaining to equity securities at November
30, 1996 and December 31, 1995 was $39.4 million and $55.7 million,
respectively. Gross unrealized depreciation of equity securities was $2.9
million and $4.5 million at November 30, 1996 and December 31, 1995,
respectively.
The amortized cost and estimated market values of investments in fixed
maturities, including short-term investments, are as follows:
FIXED MATURITIES HELD-TO-MATURITY
NOVEMBER 30, 1996
----------------------------------------------
GROSS
UNREALIZED ESTIMATED
AMORTIZED -------------------- MARKET
COST GAINS LOSSES VALUE
----------- --------- --------- -----------
(IN MILLIONS)
U.S. Government $ 155.9 $ 26.9 $ (0.4) $ 182.4
State 15.1 1.5 -- 16.6
Foreign government 14.1 2.1 -- 16.2
Corporate securities 3,674.9 404.2 (40.1) 4,039.0
Mortgage-backed securities 167.3 8.8 (0.6) 175.5
----------- --------- --------- -----------
Total $ 4,027.3 $ 443.5 $ (41.1) $ 4,429.7
----------- --------- --------- -----------
----------- --------- --------- -----------
130
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
FIXED MATURITIES AVAILABLE-FOR-SALE
NOVEMBER 30, 1996
----------------------------------------------
GROSS
UNREALIZED ESTIMATED
AMORTIZED -------------------- MARKET
COST GAINS LOSSES VALUE
----------- --------- --------- -----------
(IN MILLIONS)
U.S. Government $ 340.2 $ 27.5 $ (0.5) $ 367.2
State 11.1 0.7 -- 11.8
Foreign government 33.2 6.2 -- 39.4
Corporate securities 3,331.6 177.1 (23.0) 3,485.7
Mortgage-backed securities 1,327.7 50.1 (5.0) 1,372.8
Other debt securities 66.0 9.2 (1.1) 74.1
----------- --------- --------- -----------
Total $ 5,109.8 $ 270.8 $ (29.6) $ 5,351.0
----------- --------- --------- -----------
----------- --------- --------- -----------
FIXED MATURITIES HELD-TO-MATURITY
DECEMBER 31, 1995
----------------------------------------------
GROSS
UNREALIZED ESTIMATED
AMORTIZED -------------------- MARKET
COST GAINS LOSSES VALUE
----------- --------- --------- -----------
(IN MILLIONS)
U.S. Government $ 130.4 $ 33.4 $ (0.2) $ 163.6
State 12.0 0.6 -- 12.6
Foreign government 14.1 2.5 -- 16.6
Corporate securities 3,725.9 575.3 (39.1) 4,262.1
Mortgage-backed securities 188.1 18.7 (0.8) 206.0
----------- --------- --------- -----------
Total $ 4,070.5 $ 630.5 $ (40.1) $ 4,660.9
----------- --------- --------- -----------
----------- --------- --------- -----------
FIXED MATURITIES AVAILABLE-FOR-SALE
DECEMBER 31, 1995
----------------------------------------------
GROSS
UNREALIZED ESTIMATED
AMORTIZED -------------------- MARKET
COST GAINS LOSSES VALUE
----------- --------- --------- -----------
(IN MILLIONS)
U.S. Government $ 228.7 $ 45.3 $ (0.1) $ 273.9
State 9.4 1.7 -- 11.1
Foreign government 32.3 7.7 -- 40.0
Corporate securities 2,681.0 245.3 (14.2) 2,912.1
Mortgage-backed securities 1,338.7 79.2 (4.6) 1,413.3
Other debt securities 77.5 19.6 (0.6) 96.5
----------- --------- --------- -----------
Total $ 4,367.6 $ 398.8 $ (19.5) $ 4,746.9
----------- --------- --------- -----------
----------- --------- --------- -----------
131
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
The amortized cost and estimated market value of fixed maturities and
short-term investments at November 30, 1996, by contractual maturity, are shown
on the following page. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or pre-payment penalties.
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------
(IN MILLIONS)
Fixed maturities held-to-maturity
Due in one year or less $ -- $ --
Due after one year through five years 131.4 142.7
Due after five years through ten years 361.3 402.7
Due after ten years 3,367.3 3,708.8
Mortgage-backed securities 167.3 175.5
----------- -----------
Total $ 4,027.3 $ 4,429.7
----------- -----------
----------- -----------
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------
(IN MILLIONS)
Fixed maturities held-to-maturity
Due in one year or less $ 183.3 $ 184.4
Due after one year through five years 153.0 162.5
Due after five years through ten years 339.7 353.9
Due after ten years 3,097.1 3,268.4
Mortgage-backed securities 1,327.7 1,372.8
----------- -----------
Total $ 5,100.8 $ 5,342.0
----------- -----------
----------- -----------
At November 30, 1996, fixed maturity investments having an amortized value
of $8.3 million were on deposit with regulatory authorities as required by law.
No investment in any person or its affiliates exceeded 10% of shareholders'
equity of $1,533.5 million at November 30, 1996. See Note 14 regarding the bond
received from GE Capital subsequent to November 30, 1996.
At December 31, 1995, the Company held four investments with a total book
value of $15.2 million which were non-income producing during the eleven months
ended November 30, 1996.
132
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LIABILITY FOR FUTURE POLICY BENEFITS AND DEPOSITS ON INVESTMENT CONTRACTS
Future policy benefits for substantially all traditional life insurance
plans have been computed on a net level premium method based on estimated
investment yields, withdrawal and mortality assumptions as follows:
For policies issued prior to May 1982, principal assumptions are:
Interest rates at 10% level; mortality at 85% graded to 100% of the
1965-1970 Select and Ultimate Basic Table depending on duration; and withdrawals
based on actual experience.
For policies issued after April 1982, principal assumptions are:
Interest rates ranging from 8% to 12% grading to 5% to 6.75% over 20 to 25
years, and for 1993 and later issues 7.5% level; mortality at varying
percentages of the 1965-1970 or 1975-1980 Select and Ultimate Basic Table
depending on age, duration and the underwriting classification; and withdrawals
based on actual experience.
Future policy benefits for universal life plans are calculated at the
policyholder account values plus the unearned mortality and expense charges.
Future policy benefits for limited-payment contracts issued prior to May
1982 are principally valued at 12.50% using the 1971 Individual Annuity
Mortality Table ("1971 IAM Table"). For such contracts issued after April 1982,
future policy benefits have been computed on the basis of various interest rates
ranging from 6.5% to 13.75% for the first 20 years, 5.25% to 8.5% for the next
10 to 20 years and 5% thereafter, using the Company's pricing tables based on
the underlying mortality experience such that the initial reserve is equal to
the consideration less applicable costs of acquisition.
Where substandard risks are involved, assumptions as to mortality are
increased in proportion to the substandard rating assigned to each risk.
Deposits on investment contracts (principally single premium deferred and
single premium immediate annuities without life contingencies) consist of the
payments received for such contracts plus earnings credited thereon less annuity
payments to contract holders.
133
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LIABILITY FOR FUTURE POLICY BENEFITS AND DEPOSITS ON INVESTMENT CONTRACTS
(CONTINUED)
A breakdown of the liability for future policy benefits and deposits on
investment contracts as of November 30, 1996 and December 31, 1995 follows (in
millions):
CALENDAR
YEARS OF
1996 1995 ISSUE
--------- --------- ---------
Liability for Future Policy Benefits:
Traditional life $ 75.4 $ 76.9 1956-82
446.9 364.4 1982-96
--------- ---------
Total traditional life 522.3 441.3
Universal life annual 904.4 811.9 1981-96
Universal life single 992.4 986.4 1981-96
--------- ---------
Limited payment contracts (annuities with life contingencies) 213.7 206.2 1978-82
3,713.1 3,461.8 1982-96
--------- ---------
Total limited payment contracts 3,926.8 3,668.0
Other 28.1 24.7
--------- ---------
Total $ 6,374.0 $ 5,932.3
--------- ---------
Deposits on Investment Contracts:
Single premium immediate annuities without life contingencies $ 1,155.9 $ 985.1 1981-96
Single premium deferred annuities 1,497.4 1,536.5 1986-96
--------- ---------
Total $ 2,653.3 $ 2,521.6
--------- ---------
--------- ---------
4. REINSURANCE
In order to limit the amount of loss retention, certain policy risks are
reinsured with other insurance companies. The maximum amounts of life insurance
retained by the insurance companies on any one life may not exceed $500,000 for
ordinary life or $650,000 for combined ordinary and salary savings universal
life. Amounts in excess of these maximums are reinsured with other insurance
companies. Reinsurance contracts do not relieve First Colony from its
obligations to policyholders. In the unlikely event that the reinsurers would be
unable to meet their obligations, First Colony is liable for the reinsured
claims. First Colony evaluates the financial condition of its reinsurers
annually for potential credit risks in order to minimize its exposure to
significant losses from reinsurer insolvencies. All of First Colony's reinsurers
are rated "A-" or better by A.M. Best.
Policy risks reinsured as of November 30, 1996 and December 31, 1995 are
summarized as follows:
1996 1995
--------- ---------
(IN BILLIONS)
Gross life insurance in force (including amounts assumed) $ 198.1 $ 176.9
Amounts ceded to other companies 37.5 33.8
Percent of ceded to gross 19% 19%
134
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. REINSURANCE (CONTINUED)
The effect of reinsurance on premiums and expenses is as follows:
NOVEMBER 30, DECEMBER 31,
1996 1995
------------- -------------
(IN MILLIONS)
Direct premiums $ 607.5 $ 739.1
Reinsurance assumed 73.8 85.5
Reinsurance ceded (83.0) (78.0)
------ ------
Total net premiums $ 598.3 $ 746.6
------ ------
------ ------
Ceded reinsurance netted against benefits and expenses $ 107.1 $ 130.4
Net reinsurance (costs) for universal life contracts $ (17.4) $ (16.9)
Components of the reinsurance recoverable asset as of December 31 are as
follows:
NOVEMBER 30, DECEMBER 31,
1996 1995
------------- -------------
(IN MILLIONS)
Ceded reserves $ 117.1 $ 94.1
Ceded claims liability 11.8 12.5
Ceded--other 8.6 8.7
------ ------
Total $ 137.5 $ 115.3
------ ------
------ ------
5. COMMITMENTS AND CONTINGENCIES
The Company has a line of credit arrangement with three banks to provide
short-term liquidity. The maximum borrowing allowed under this facility is $25
million for an individual lending institution and $50 million in aggregate.
The Company also has a five year credit facility in the amount of $65
million which was established in 1995 to be used for general corporate purposes.
There were no amounts outstanding at November 30, 1996 and December 31,
1995. All credit facility and line of credit arrangements were terminated with
the acquisition of the Company by GE Capital on December 1, 1996.
STATE GUARANTY FUND ASSESSMENTS
State guaranty funds provide payments for policyholders of insolvent life
insurance companies. These guaranty funds are financed by assessments to solvent
insurance companies based on location, volume and types of their business. The
Company estimates its liability for future state guaranty fund assessments, net
of amounts expected to be recovered through future premium tax credits, based on
data received from the National Organization of Life and Health Insurance
Guaranty Associations. Management believes the reserve is adequate for all
anticipated payments for known insolvencies.
LEASES AND OTHER CONTRACTUAL COMMITMENTS
The Company's lease and other contractual commitments, rental expenses and
contingent liabilities are not material.
135
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan covering
substantially all of its employees. Plan benefits are based on years of service
and compensation. Annual retirement costs are actuarially determined and the
Company's policy is to fund the pension cost accrued.
The components of pension cost for the period ended November 30, 1996 and
for the years ended December 31, 1995 and 1994 are as follows:
1996 1995 1994
--------- --------- ---------
(IN MILLIONS)
Service Cost $ 1.9 $ 1.6 $ 1.6
Interest cost 1.6 1.4 1.2
Return on plan assets (1.2) (1.2) (1.0)
Amortization and deferral (net) 0.3 0.2 0.2
--------- --------- ---------
Pension cost $ 2.6 $ 2.0 $ 2.0
--------- --------- ---------
--------- --------- ---------
The following rates were used in computing the pension cost as of November
30, 1996 and December 31, 1995:
1996 1995 1994
--------- --------- ---------
Discount rates used to determine expense 7.25% 7.75% 7.25%
Assumed rates of compensation increases 6.00% 6.00% 6.00%
Expected long-term rates of return 8.00% 8.75% 8.75%
Plan assets are invested in a deposit administration group annuity policy
with First Colony Life. Plan contributions are accumulated in a deposit
administration fund, which is part of the general investment portfolio of First
Colony Life.
The following sets forth the funded status of the plan and the amounts for
the actuarial present value of benefit obligations shown in the accompanying
balance sheet at November 30, 1996 and December 31, 1995:
1996 1995
--------- ---------
(IN MILLIONS)
Accumulated benefit obligation:
Vested $ 12.2 $ 10.6
Non-vested 1.4 1.3
Projected compensation increase 13.1 11.6
--------- ---------
Projected benefit obligation 26.7 23.5
Less plan assets (16.6) (14.2)
--------- ---------
Projected benefit obligation in excess of plan assets 10.1 9.3
Unrecognized net loss (6.9) (6.8)
Unrecognized prior service cost (0.8) (0.6)
Unrecognized transition obligation (0.1) (0.1)
--------- ---------
Accrued pension cost included in other liabilities $ 2.3 $ 1.8
--------- ---------
--------- ---------
136
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BENEFIT PLANS (CONTINUED)
The following rates were used in computing the funded status for the plan:
1996 1995
--------- ---------
Discount rates used for obligations 7.25% 7.25%
Assumed rates of compensation increases 6.00% 6.00%
A non-qualified unfunded supplemental pension plan provides for incremental
benefits that have been reduced due to legislative actions. The Company's
projected benefit obligation for this plan was $4.3 million at November 30, 1996
and $3.8 million at December 31, 1995, and expenses were $1.5 million, $0.7
million, and $0.5 million in 1996, 1995 and 1994, respectively.
POSTRETIREMENT BENEFIT PLAN
Postretirement medical and life insurance benefits are provided for certain
groups of retired workers and active employees who are eligible for coverage.
The benefits are not prefunded.
The amount of net periodic postretirement benefit cost was $0.5 million and
$0.4 million for November 30, 1996 and December 31, 1995, respectively. The
accrued postretirement benefit liability was $3.1 million at November 30, 1996,
and $2.7 million at December 31, 1995.
The weighted average of the assumed discount rate was 7.25%, the weighted
average for rate of compensation increase was 6.0% and a general inflation rate
of 3.75% was used to measure the postretirement benefit obligation. It is
assumed that the medical cost trend will increase to 7.0% in 1997 and grade
downward to an ultimate 6.0% by 2000. The effect of a one percentage point
increase in the assumed health care cost trend on service cost and interest cost
is less than $0.1 million.
SAVINGS PLAN
The Thrift and Savings plan was amended and restated April 1, 1994, to
become the Savings Plan, a defined contribution plan qualified under Internal
Revenue Code Section 401 (k). Prior to the first full payroll period beginning
on or after April 1, 1994, participants of the plan could make after-tax
contributions ranging from 2% to 10% of their base salary. After that time,
employees may continue to contribute 2% to 10% of their base salary on a pretax
basis, subject to IRS limitation, to the plan. First Colony contributes 50% of
eligible participants' contributions, in the form of the Company's common stock,
plus such amounts as may be specified by the Board of Directors. For the periods
ended November 30, 1996 and December 31, 1995, First Colony's matching
contributions were $0.9 million and $1.0 million, respectively.
STOCK OPTION PLAN
The Company has a stock incentive plan, whereby incentive stock options
(ISOs) and nonqualified stock options may be granted to employees to purchase a
specified number of shares of common stock at a price set by the plan
administrator and for a term not to exceed 10 years. In addition to the stock
options, the optionee may also be granted a stock appreciation right (SAR) and
restricted stock. The plan was approved by the Company's Board of Directors and
its sole shareholder on November 17, 1992. The stock option plan was terminated
in conjunction with the sale of the Company to GE Capital on December 1, 1996,
at a cost of $8.7 million.
137
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BENEFIT PLANS (CONTINUED)
The Company applies APB Opinion 25 and related interpretations in accounting
for the stock option plan. Accordingly, no compensation expense has been
recognized for the plan. Had compensation expense for the Company's stock option
plan been determined based on the fair value at the grant date consistent with
FASB No. 123, the Company's net income for 1995 would have been reduced from
$151.4 million to $149.3 million. There were no options granted in 1996.
Activity in the plan for 1995 through 1996 is shown below:
NO. OF EXERCISE WEIGHTED
SHARES PRICE PER SHARE AVERAGE
---------- --------------- -----------
RANGE
Outstanding at January 1, 1995 1,065,707 $ 18.41-$28.87 $ 24.52
Granted during 1995 346,000 26.13- 26.13 26.13
Exercised (140) 18.41- 18.41 18.41
Surrendered upon exercise of SARs (6,084) 18.41- 23.95 22.45
Lapsed/Surrendered/Other (27,238) 19.13- 28.00 26.73
---------- --------------- -----------
Outstanding at December 31, 1995 1,378,245 18.41- 28.87 24.89
Granted during 1996 6,000 26.13- 26.13 26.13
Exercised (499,550) 18.41- 28.87 24.89
Surrendered upon exercise of SARs (3,295) 18.41- 26.25 23.05
Lapsed/Surrendered/Other (9,220) 25.50- 28.00 27.34
---------- --------------- -----------
Outstanding at November 30, 1996 872,180 $ 18.41-$28.87 $ 26.20
---------- --------------- -----------
Exercisable at:
December 31, 1994 253,831
December 31, 1995 853,817
November 30, 1996 872,180
On December 1, 1996, as part of the purchase of First Colony by GE Capital,
all 872,180 options outstanding were exercised or settled, and the stock option
plan terminated.
138
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES
An analysis of underwriting, acquisition and insurance expenses for the
years ended November 30, 1996 and December 31, 1995 is as follows:
1996 1995 1994
--------- --------- ---------
Amortization of:
Deferred policy acquisition costs $ 53.2 $ 38.9 $ 10.9
Value of insurance in force 0.7 0.9 1.0
Goodwill 1.1 1.2 1.2
Commissions 30.1 38.8 38.4
Salaries 20.8 23.1 20.4
Other costs and expenses 44.6 44.1 35.7
--------- --------- ---------
Total $ 150.5 $ 147.0 $ 107.6
--------- --------- ---------
--------- --------- ---------
DAC amortization relates principally to anticipated revenues and gross
profits as explained on page 8 of the "Notes to Consolidated Financial
Statements." The decline in 1994 relates principally to realized investment
losses taken in the period.
8. FEDERAL INCOME TAXES
The components of the provision at November 30, 1996, and December 31, 1995
and 1994 are as follows:
1996 1995 1994
--------- --------- ---------
(IN MILLIONS)
Current tax expense $ 57.0 $ 76.2 $ 40.3
Deferred tax expense 1.9 6.1 16.8
--------- --------- ---------
Total tax expense $ 58.9 $ 82.3 $ 57.1
--------- --------- ---------
--------- --------- ---------
139
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. FEDERAL INCOME TAXES (CONTINUED)
Deferred tax liabilities and assets at November 30, 1996 and December 31,
1995 are comprised of the following:
1996 1995
--------- ---------
(IN MILLIONS)
DEFERRED TAX LIABILITIES
Investments $ 14.6 $ 11.0
Deferred policy acquisition costs 359.9 323.2
Depreciable and other amortizable assets 8.9 54.5
Unrealized gains on investments 85.2 130.1
Other 0.2 0.1
--------- ---------
Total deferred tax liabilities $ 468.8 $ 518.9
--------- ---------
--------- ---------
DEFERRED TAX ASSETS
Policy liabilities $ 138.0 $ 114.8
Capitalization of policy acquisition costs 65.7 55.6
Other deferred tax assets 21.9 20.3
--------- ---------
Total deferred tax assets 225.6 190.7
--------- ---------
Net deferred tax liability (asset) $ 243.2 $ 328.2
--------- ---------
--------- ---------
There was a current tax payable of $36.0 million at November 30, 1996, and
$9.1 million at December 31, 1995.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pretax income as a result of the following differences for the periods ended
November 30, 1996 and December 31, 1995 and 1994:
1996 1995 1994
-------------------- -------------------- --------------------
(IN MILLIONS)
Tax based on statutory rate $ 70.1 35.0% $ 81.8 35.0% $ 57.4 35.0%
Increase (decrease):
Dividends received deduction (0.4) (0.2) (0.6) (0.4) (0.6) (0.3)
Tax settlements (12.0) (6.0)
Other 1.2 0.6 1.1 0.6 0.3 0.1
--------- --- --------- --- --------- ---
Tax & effective rate $ 58.9 29.4 $ 82.3 35.2 $ 57.1 34.8
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
The Company is required to establish a valuation allowance for any portion
of the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will realize
the benefit of the deferred tax assets and, therefore, no such valuation
allowance has been established.
The Internal Revenue Service has examined the First Colony consolidated
returns through 1990 and is currently examining the years 1991 through 1994.
First Colony has reached a settlement on the tax years 1984 - 1987 for all but
three of the disputed tax issues, which First Colony is vigorously contesting.
An adverse outcome of the three issues would have no material effect on the
financial statements of First Colony. The tax settlement allowed First Colony to
reduce its federal income tax liability by $12 million in 1996. The Service has
proposed assessments for 1988 - 1990. First Colony disagrees with the proposed
140
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. FEDERAL INCOME TAXES (CONTINUED)
assessments and is vigorously contesting them. In the opinion of management, the
additional income taxes ultimately paid, if any, will not have a material effect
on First Colony's financial statements.
Income taxes paid in 1996 and 1995 were $72.1 million and $52.1 million,
respectively.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The following table
presents the carrying amounts and fair values of the Company's financial
instruments at November 30, 1996 and December 31, 1995 (in millions):
1996 1995
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
Financial assets:
Fixed maturities held-to-maturity $ 4,027.3 $ 4,429.8 $ 4,070.5 $ 4,660.9
Fixed maturities available-for-sale 5,160.1 5,160.1 4,698.8 4,698.8
Equity Securities 255.8 255.8 354.0 354.0
Financial liabilities:
Investment contracts:
SPIAs without life contingencies 1,155.9 1,177.7 985.1 1,111.1
SPDAs 1,497.4 1,497.4 1,536.5 1,556.0
The carrying amounts shown in the table are included in the balance sheets
found on pages 2 and 3.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
FIXED MATURITIES--Refer to the investments section of Note 1 of the "Notes
to Consolidated Financial Statements," found on page 7. Fixed maturities
available-for-sale included in the table above, do not include short-term
investments, cash and cash equivalents whose carrying value approximate fair
value.
OTHER FINANCIAL INSTRUMENTS--The carrying value of other financial
instruments approximates fair value (principally policy loans and cash and cash
equivalents.)
INVESTMENT CONTRACTS--Fair values for principally all investment contract
liabilities are estimated using discounted cash flow calculations, based on
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.
The Company's financial instruments are held or issued for purposes other
than trading.
10. NATURE OF OPERATIONS
The Company operates principally in a single business segment with three
primary lines of business: annual life insurance, accumulation products and
single premium immediate annuities. The Company's assets, investment income,
realized gains (net) and certain expense elements are allocated on a basis that
management considered reasonable under the circumstances. The distribution
system for these products is comprised of a nationwide General Agent/Independent
Broker network. The Company has been increasing its presence in alternative
distribution sources such as banks, securities firms and direct marketers.
141
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. LONG-TERM DEBT
Long-term debt consists of the following at November 30, 1996 and December
31, 1995:
1996 1995
--------- ---------
(IN MILLIONS)
Senior Term Loan
6 5/8% Senior Notes due 2003 $ 175.0 $ 175.0
Less: unamortized discount (0.1) (0.2)
--------- ---------
Total $ 174.9 $ 174.8
--------- ---------
--------- ---------
The senior note indenture contains certain covenants that, among other
things, limit the Company's ability to dispose of, or allow liens to be placed
against, the capital stock of First Colony Life.
Interest paid in 1996 and 1995 was $11.6 million, respectively.
12. CAPITAL STOCK
SHAREHOLDER RIGHTS PLAN
In 1992, the Company adopted a Shareholder Rights Plan (Rights Plan) which
entitles the registered holder to purchase from the Company one one-hundredth of
a share of Participating Cumulative Preferred Stock, Series A, with each right
structured to be equivalent to one share of common stock. One right is attached
to each share of common stock.
The exercise price of the right will be $85.00, subject to adjustment. The
rights will be exercisable, if not earlier redeemed, only if a person or group
acquires 10% or more of the Company's common stock, announces a tender offer of
30% or more of the common stock or upon the occurrence of certain other events.
Each holder of a right, upon occurrence of certain events, will be entitled
to receive, upon exercise and payment of the purchase price, preferred stock (or
in certain circumstances, cash, property or other securities of the Company)
having a value equal to twice the amount of the purchase price.
The plan was terminated with the acquisition of the Company by GE Capital on
December 1, 1996.
VARIABLE TERM CUMQULATIVE PREFERRED STOCK
On August 4, 1993, the Company issued 3,200,000 shares of variable term
cumulative preferred stock with a liquidation value of $25 per share. The shares
were issued in two series (Series B and Series C) of $40 million each. Dividend
rates are reset via an auction process, generally every 49 days. In 1996, the
weighted average dividend rate for each series was 4.2%. The preferred stock is
non-voting and redeemable solely at the option of the Company. Each series of
the preferred stock represents a perpetual equity interest in the Company, and
does not give rise to a claim for payment of principal amount at a particular
date. As such, it ranks behind all indebtedness and other non-equity claims with
respect to assets available to satisfy claims against the Company. The
outstanding Series B shares were liquidated on December 23, 1996, and the
outstanding Series C shares were liquidated on December 26, 1996. Both series
were liquidated at their liquidation value of $25 per share.
142
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CAPITAL STOCK (CONTINUED)
PARTICIPATING CUMULATIVE PREFERRED STOCK
The Company's Board of Directors has authorized a series of Participating
Cumulative Preferred Stock, Series A, for issuance in connection with the
Shareholder Rights Plan. No shares have been issued and the plan was terminated
with the acquisition of the Company by GE Capital on December 1, 1996.
13. SUPPLEMENTARY FINANCIAL DATA
State insurance departments which regulate life insurance companies
recognize only statutory accounting practices for determining and reporting the
financial condition and results of operations of an insurance company, for
determining its solvency under law and for determining whether its financial
condition warrants the payment of a dividend to its shareholders. Under Virginia
statutes, an insurance company may pay a dividend without prior permission of
the State Corporation Commission to the extent that such dividend together with
other dividends or distributions within the preceding 12 months does not exceed
the lesser of: a) 10% of statutory policyholders' surplus as of December 31 next
preceding; or b) the net statutory gain from operations (excluding realized
gains on investments) for the 12-month period ended the preceding December 31.
New York insurance statutes also limit dividends by American Mayflower Life.
Dividends, if any, would not increase the amount of dividends that would
otherwise be payable by First Colony Life.
The statutory capital and surplus of First Colony Life and its wholly-owned
subsidiaries; American Mayflower and Jamestown Life, was $499.7 million and
$394.3 million at November 30, 1996 and December 31, 1995, respectively.
Statutory net income was $112.0 million, $63.5 million and $46.1 million for the
periods ended November 30, 1996, and December 31, 1995 and 1994, respectively.
14. SUBSEQUENT EVENTS
The Company was acquired 80% by General Electric Capital Assurance Company
and 20% by General Electric Life Insurance Group, Inc., an insurance holding
company domiciled in Delaware, (collectively referred to as "GE Capital")
effective December 1, 1996, upon approval by its shareholders and applicable
regulatory agencies. The cash purchase price was $36.15 per share of the
Company's common stock for a total value to its shareholders of approximately
$1.8 billion.
As stated in Note 1, these financial statements do not reflect any
adjustments made for purchase accounting in connection with the acquisition. The
financial statements also do not include certain acquisition-related costs which
were contingent upon consummation of the GE Capital acquisition and incurred on
December 1, 1996, including certain investment banking fees and employee-related
expenses.
Following the acquisition, GE Capital contributed $275.0 million in bonds
and cash to the Company, including a $175.0 million, 6 5/8% Senior Note payable
(NAIC-1 designation) to GE Capital. On December 31, 1996, the Company was merged
with First Colony Life Insurance Company with First Colony Life being the
surviving company.
143
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED, COMBINED FINANCIAL INFORMATION
INTRODUCTION
The accompanying unaudited pro forma condensed, combined financial
information gives effect to the acquisition of First Colony Life Insurance
Company (First Colony) by GE Financial Assurance Holdings, Inc. and subsidiaries
(the Company) effective December 1, 1996 and GE Capital's definitive agreement,
signed June 30, 1997, to purchase the Colonial Penn Insurance Company (Colonial
Penn). The Company will purchase Colonial Penn from GE Capital at closing.
The unaudited pro forma condensed, combined balance sheet as of June 30,
1997, combines the historical consolidated balance sheet of the Company and
Colonial Penn as if the acquisition of Colonial Penn had been effective on June
30, 1997.
The unaudited pro forma condensed, combined statement of income for the year
ended December 31, 1996, and for the six-month period ended June 30, 1997,
combine the historical consolidated statement of income of the Company for the
year ended December 31, 1996 and First Colony and Colonial Penn, as if the
acquisitions of First Colony and Colonial Penn had been effective on January 1,
1996.
The unaudited pro forma condensed, combined financial information has been
prepared by the Company's management based upon the principles of the purchase
method of accounting and the assumptions and adjustments described in the
accompanying notes.
The Company continues to obtain detailed information in order to
appropriately allocate the cost of the acquisitions to the fair values of the
acquired company's assets and liabilities. The allocation of the cost of the
acquisitions reflected in the pro forma data has been made based on available
information or assumptions management believes to be reasonable. The excess of
the purchase price over the estimated fair value of the net assets acquired has
been treated as goodwill. Actual adjustments may differ based on the results of
further evaluation of the fair values of the assets and liabilities of the
acquired companies. Certain amounts relating to the unaudited pro forma
condensed, combined financial information of the acquired companies have been
reclassified to conform to the Company's presentation. It is possible that a
more detailed evaluation of the acquired companies may result in additional
reclassifications or adjustments of accounts or result in changes to accounting
principles of the acquired companies.
The pro forma information does not purport to be indicative of the financial
condition that might have existed had the acquisition of Colonial Penn occurred
at June 30, 1997 or the results of operations that might have occurred had the
acquisitions of First Colony and Colonial Penn occurred on January 1, 1996, nor
does it purport to indicate the results of future operations of the Company. The
pro forma information should be read in conjunction with the notes thereto and
the consolidated financial statements of the Company included elsewhere herein.
144
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED, COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
(DOLLAR AMOUNTS IN MILLIONS)
COLONIAL PRO FORMA
COMPANY PENN ADJUSTMENTS PRO FORMA
------- -------- ----------- ---------
ASSETS:
Investments $36,737 $1,077 $ (20)(A) $37,794
Cash 43 7 -- 50
Accrued investment income 747 11 -- 758
Deferred acquisition costs 697 15 -- 712
Intangible assets 3,155 1 616(B) 3,772
Reinsurance recoverable 1,696 62 -- 1,758
Deferred income tax benefit 277 55 (4)(B) 328
Other assets 278 182 -- 460
Separate account assets 3,384 -- -- 3,384
------- -------- ----- ---------
Total assets $47,014 $1,410 $ 592 $49,016
------- -------- ----- ---------
------- -------- ----- ---------
LIABILITIES AND SHAREHOLDER'S INTEREST:
Liabilities:
Future annuity and contract benefits $34,075 $ -- $ -- $34,075
Unearned premiums 841 304 -- 1,145
Liability for policy and contract claims 867 583 -- 1,450
Other policyholder liabilities 450 -- -- 450
Accounts payable and accrued expenses 1,127 115 5(B) 1,247
Separate account liabilities 3,384 -- -- 3,384
Long term debt 175 -- 995(B) 1,170
------- -------- ----- ---------
Total liabilities 40,919 1,002 1,000 42,921
------- -------- ----- ---------
Minority interest 2 -- -- 2
Shareholder's interest:
Common stock -- 4 (4)(B) --
Other shareholder's interest 6,093 404 (404)(A)(B) 6,093
------- -------- ----- ---------
Total shareholder's interest 6,093 408 (408) 6,093
------- -------- ----- ---------
Total liabilities and shareholder's interest $47,014 $1,410 $ 592 $49,016
------- -------- ----- ---------
------- -------- ----- ---------
See accompanying notes to Unaudited Pro Forma Condensed, Combined Balance Sheet.
145
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED, COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
(DOLLAR AMOUNTS IN MILLIONS)
Pro forma adjustments and eliminations are as follows:
(A) Record dividend which will be paid by Colonial Penn to its parent prior to
closing.
(B) Record the estimated purchase price, adjust the assets and liabilities to
fair value and reflect the funding of the acquisition of Colonial Penn.
Goodwill arising as a result of this acquisition is estimated to be
approximately $616.
146
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED, COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(DOLLAR AMOUNTS IN MILLIONS)
COMPANY COLONIAL PRO FORMA
(A) PENN ADJUSTMENTS PRO FORMA
----------- ----------- --------------- -----------
Revenues:
Net investment income $ 1,352 $ 45 $ (1)(B) $ 1,396
Net realized investment gains 28 1 -- 29
Premiums 1,013 256 -- 1,269
Other income 212 -- -- 212
----------- ----- --- -----------
Total revenues 2,605 302 (1) 2,906
----------- ----- --- -----------
Benefits and expenses:
Benefits, claims, losses and settlement expenses 1,738 218 -- 1,956
Underwriting, acquisition and insurance expenses 223 4 45(C) 272
General expenses 313 47 -- 360
----------- ----- --- -----------
Total benefits and expenses 2,274 269 45 2,588
----------- ----- --- -----------
Income before income taxes and minority interest 331 33 (46) 318
Provision for income taxes 128 12 (15)(D) 125
----------- ----- --- -----------
Income before minority interest 203 21 (31) 193
Minority interest -- -- -- --
----------- ----- --- -----------
Net income $ 203 $ 21 $ (31) $ 193
----------- ----- --- -----------
----------- ----- --- -----------
See accompanying notes to Unaudited Pro Forma Condensed, Combined Statement of
Income.
147
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED, COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
Pro forma adjustments and eliminations are as follows:
(A) Includes the results of operations of First Colony.
(B) Elimination of investment income as a result of recording investments at
fair value assuming the acquisitions were effected at January 1, 1996.
(C) Includes interest expense on indebtedness and amortization of goodwill
offset by the elimination of amortization of historical deferred
acquisition costs, which would not have been expensed during 1997 had the
acquisitions been effected on January 1, 1996.
(D) Estimated tax effect of the pro forma adjustments.
148
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED, COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLAR AMOUNTS IN MILLIONS)
FIRST
COLONY COLONIAL PRO FORMA
COMPANY (A) PENN ADJUSTMENTS PRO FORMA
------- ------ -------- ----------- ---------
Revenues:
Net investment income $1,773 $ 729 $ 90 $ (31)(B) $2,561
Net realized investment gains (losses) 15 18 7 (22)(C) 18
Premiums 1,386 598 497 (94)(D) 2,387
Other income 192 107 -- -- 299
------- ------ -------- ----- ---------
Total revenues 3,366 1,452 594 (147) 5,265
------- ------ -------- ----- ---------
Benefits and expenses:
Benefits, claims, losses and settlement expenses 2,269 1,090 422 (176)(E) 3,605
Underwriting, acquisition and insurance expenses 301 44 13 142(F) 500
General expenses 426 117 82 -- 625
------- ------ -------- ----- ---------
Total benefits and expenses 2,996 1,251 517 (34) 4,730
------- ------ -------- ----- ---------
Income before income taxes and minority interest 370 201 77 (113) 535
Provision for income taxes 140 59 26 (19)(G) 206
------- ------ -------- ----- ---------
Income before minority interest 230 142 51 (94) 329
Minority interest 1 -- -- -- 1
------- ------ -------- ----- ---------
Net income $ 229 $ 142 $ 51 $ (94) $ 328
------- ------ -------- ----- ---------
------- ------ -------- ----- ---------
149
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED, COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
Pro forma adjustments and eliminations are as follows:
(A) Represents historical balances for First Colony for the period January 1,
1996 to November 30, 1996.
(B) Elimination of investment income as a result of recording investments at
fair value assuming the acquisitions were effected at January 1, 1996.
(C) Elimination of net realized gains on sales of securities. Such gains would
not have been recognized if the acquisitions had been effective January 1,
1996, as such investments would have been recorded at fair value as a
result of purchase business combination accounting.
(D) Elimination of deferred premiums due to applying the Company's methodology
for calculating reserves to the acquired companies.
(E) Elimination of deferred premiums due to applying the Company's methodology
for calculating reserves to the acquired companies and reduction of change
in reserves due to the use of a lower discount rate for immediate annuities
in force at date of acquisition.
(F) Includes interest expense on indebtedness and amortization of goodwill and
assumed net amortization of the present value of future profits offset by
the elimination of amortization of historical goodwill and deferred
acquisition costs which would not have been expensed during 1996 had the
acquisitions been effected on January 1, 1996.
(G) Estimated tax effect of the pro forma adjustments.
150
SEQUENTIAL
EXHIBIT NUMBERED PAGE
- --------- -------------------
3.1. Articles of Incorporation of the Company, and all amendments thereto.
3.2. By-laws of the Company, as amended.
12. Computation of Ratios of Earnings to Fixed Charges.
21. Subsidiaries of the Company.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
GE FINANCIAL ASSURANCE HOLDINGS, INC.
By /s/ MICHAEL D. FRAIZER
------------------------------------------
Name: Michael D. Fraizer
Title:President, Chief Executive Officer
and Chairman
Date: November 13, 1997
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT NUMBERED PAGE
- ----------- -------------------
3.1. Articles of Incorporation of the Company, and all amendments thereto.
3.2. By-laws of the Company, as amended.
12. Computation of Ratios of Earnings to Fixed Charges.
21. Subsidiaries of the Company.