The Company and its subsidiaries conduct their businesses from various facilities, most of which are leased. However, certain of the Company's facilities, including its headquarters campus in Richmond, Virginia, a facility in Lynchburg, Virginia and a facility in Valley Forge, Pennsylvania are owned by the Company.
OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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.
NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS. Net investment income increased $141 million, or 5.1%, to $2,896 in 1998 from $2,755 million in 1997. The increase was due to the combination of higher levels of average invested assets ($39.5 billion in 1998 vs. $36.7 billion in 1997) resulting from the Colonial Penn acquisition, growth in core invested assets and new investments relating to the Company's operations in Japan commencing in April 1998, offset by a decrease in weighted average yield from 7.8% in 1997 to 7.6% in 1998 due to a decline in prevailing interest rates. Net investment income increased $982 million, or 55.4%, to $2,755 million in 1997 from $1,773 million in 1996. The increase was due to the combination of higher levels of average invested assets ($36.7 billion in 1997 vs. $24.1 billion in 1996) resulting from the 1996 acquisitions, and increased weighted average yields from 7.6% in 1996 to 7.8% in 1997. Net realized investment gains were $116 in 1998, $77 million in 1997 and $15 million in 1996. These changes are related to the Company's asset/liability risk management policies and vary with market and economic conditions.
OTHER INCOME. Other income is principally comprised of surrender fees, insurance charges made against universal life contracts and other specified transaction fees assessed to policyholders. Other income increased $18 million, or 4.4%, to $426 million in 1998 from $408 million in 1997. This increase was as a result of: (i) a full year of operating results in 1998 relating to the 1997 acquisition of Colonial Penn and (ii) the initial operations of GE Edison Life Insurance Company commencing in April 1998 partially offset by (iii) decreased transaction fee income due to a reduction in the balance of certain underlying reserve balances. Other income increased $230 million, or 129.2%, to $408 million in 1997 from $178 million in 1996. Substantially all of the increase resulted from a full year inclusion in 1997 of the 1996 Acquisitions discussed above.
INTEREST CREDITED. Interest credited decreased $21 million, or 1.6%, in 1998 to $1,260 million from $1,281 million in 1997. This decrease was driven by the reduction of the Company's crediting rates due to changes in market conditions and other factors. Interest credited increased $359 million, or 38.9%, to $1,281 million in 1997 from $922 million in 1996. This increase was primarily due to inclusion of a full year of operations in 1997 relating to the 1996 Acquisitions.
COMMISSION EXPENSES. Commission expense decreased $18 million, or 3.2%, to $541 million in 1998, from $559 million in 1997. This decrease was attributable to (i) the November 1997 acquisition of LTC, Inc. (previously an independent entity providing certain services to the Company for which commissions were paid) and (ii) a change in the Company's commission based product mix toward increased sales of certain products having lower commission rates. Commission expense in relation to premiums revenue decreased primarily due to the acquisition of Colonial Penn, a direct marketer of personal lines of automobile insurance. Commission expense increased $192 million, or 52.3%, to $559 million in 1997 from $367 million in 1996. This increase was attributable to inclusion of a full year of operating results in 1997 relating to the 1996 Acquisitions.
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 $10 million, or 3.6%, to $286 million in 1998 from $276 million in 1997. Amortization of intangibles increased $61 million, or 28.4%, to $276 million in 1997 from $215 million in 1996. Amortization of intangibles due to acquisitions in 1998 and 1997 totalled $29 million and $100 million, respectively.
year of operating results in 1998 relating to the 1997 acquisition offset by lower deferrable acquisition costs, primarily commissions, due to the acquisition of LTC, Inc. in November, 1997 (previously an independent entity providing certain services to the Company for which commissions were paid) and lower production associated with certain of the Company's existing products. The change in net deferred acquisition costs increased $153 million, or 54.3%, to $435 million in 1997 from $282 million in 1996. This increase was primarily attributable to inclusion of a full year of operating results in 1997 relating to the 1996 Acquisitions. The change in deferred acquisition costs related to amortization of costs previously deferred increased $55 million in 1997 to $114 million from $59 million in 1996. This increase was primarily attributable to inclusion of a full year of operating results in 1997 relating to the 1996 Acquisitions.
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.
Revenues: Premiums .......................................... $1,557 $1,192 $465 Net investment income.............................. 2,631 2,578 1,626 Net realized investment gains...................... 116 77 13 Other revenues..................................... 395 411 186 --------------------------
Benefits and expenses: Interest credited.................................. 1,260 1,281 837 Benefits and other changes in policy reserves ..... 2,040 1,720 809 Other expenses .................................... 730 668 374 --------------------------
Operating income from this segment represented 84.4%, 85.9% and 73.0% of the Company's total operating income for the years ended December 31, 1998, 1997 and 1996, respectively. The 1998 decrease was driven primarily by the full year impact of the Colonial Penn purchase in November 1997. This acquisition caused net income to grow within the Wealth and Lifestyle Protection segment at a faster rate during 1998 than net income grew in the Wealth Accumulation and Transfer segment. The 1997 increase was driven primarily by the full year impact of the 1996 acquisitions. These acquisitions caused net income to grow within the Wealth Accumulation and Transfer segment at a faster rate during this period than net income grew in the Wealth and Lifestyle Protection segment. The Company's operating income from the Wealth Accumulation and Transfer segment increased 13.6% in 1998 to $669 million, and 118.1% in 1997, to $589 million from $270 million in 1996. These increases were driven primarily by higher levels of invested assets and life insurance policies in force.
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, 1998, 1997 and 1996.
YEARS ENDED DECEMBER 31, 1998 1997 1996 ---- ---- ---- (DOLLARS IN MILLIONS) Revenues: Premiums............................................. $1,650 $1,122 $921 Net investment income................................ 265 177 147 Net realized investment gains........................ --- --- 2 Other revenues....................................... 58 10 6 ------------------------
Benefits and expenses: Interest credited.................................... --- --- 85 Benefits and other changes in policy reserves........ 1,189 772 538 Other expenses....................................... 660 440 353 ------------------------
Operating income from this segment represented 15.6%, 14.1%, and 27.0% of the Company's total results for the years ended December 31, 1998, 1997 and 1996, respectively. The Company's operating income from the Wealth and Lifestyle Protection segment increased 27.8% in 1998 to $124 million, after a 3.0% decrease in 1997 to $97 million from $100 million in 1996. Premiums and investment income increased in 1998 and 1997 due to the impact of the acquisition of Colonial Penn in November 1997 and the full year impact in 1997 of the 1996 acquisition of Union Fidelity (April 1996) and growth in sales of long-term care policies.
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 to 2.8% in 1998 to $112 million, and 31.3% in 1997 to $109 million from $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.
TOTAL ASSETS. Total assets increased $5.6 billion, or 11.0%, to $56.7 billion at December 31, 1998 from $51.1 billion at December 31, 1997. The increase resulted primarily from the initial operations of GE Edison Life Insurance Company and growth in existing insurance and investment products. The majority of the increase in total assets occurred in the investments and separate account asset categories that are discussed in more detail below.
TOTAL INVESTMENTS. Total investments increased $2.8 billion, or 7.1%, to $42.3 billion at December 31, 1998 from $39.5 billion at December 31, 1997. Consistent with the increase in total assets, total investments increased primarily from the initial operations of GE Edison Life Insurance Company and investment income of $2.9 billion, net of cash outflows from other investing activities.
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, 1998, the Company held $5.6 billion of separate account assets. The increase in such balances of $1.5 billion from $4.1 billion at December 31, 1997 relates almost entirely to increased sales and unrealized market value gains.
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, 1998, $32.6 billion, or 88.5%, 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 $4.3 billion, or 11.5%, was comprised primarily of private
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, 1998, approximately 81% of the Company's annuity contracts were subject to surrender penalties or contained non-surrender provisions.
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 subsidiaries. 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.
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 securities, and mortgage loans on real estate. At December 31, 1998, the Company held $39.9 billion, or 94.3% 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 5.7% of its investment portfolio at December 31, 1998.
At December 31, 1998, the Company's investments in equity securities totalled $361 million, of which $314 million was preferred stock and $47 million was common stock. The investments in preferred stock generally pay dividends on a quarterly basis at yields comparable to bonds.
The Company's mortgage loan portfolio consisted of 1,878 loans at December 31, 1998. The loans, which are originated through a network of mortgage bankers, are made only on completed, leased properties and generally have a maximum loan-to-value ratio of 75% at the date of origination. Commercial loans comprise the majority of the portfolio, with 42.4%, 22.3% and 17.6% attributable to the retail, industrial and office sectors, respectively. The remainder of the loans, 17.7%, 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 (32.7%) and the South Atlantic region (23.9%).
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, 1998, the outstanding loans of $1,156 million bore interest at an average rate of 8.7%, which is determined by the terms of the policy.
Fixed Maturity Securities -- Available-For-Sale(1) U.S. Government and Agencies........................... $ 1,603 3.8% State and Municipal ................................... 662 1.6 Foreign Government..................................... 179 .4 Foreign Corporate ..................................... 2,220 5.3 U.S. Corporate......................................... 24,331 57.5 Mortgage-Backed(2)..................................... 7,903 18.7 ---------------------
Mortgage Loans on Real Estate, Net....................... 2,960 7.0 Policy Loans ............................................ 1,156 2.7 Short Term Investments .................................. 164 .4 Other Invested Assets Mutual Funds........................................... 151 .4 Limited Partnerships................................... 444 1.1 European Style Call Options............................ 71 .2 Interest Rate Swaps and Floors......................... 58 .1 Real Estate Owned ..................................... 8 --- Other ................................................. 16 --- ---------------------
- ----------- (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, 1998 was $35,568 million, representing net unrealized gains of $1,330 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, but is shown as a separate component of accumulated non-owner changes in equity.
(3) Equity securities available-for-sale are stated at current market values. The cost basis of equity securities available-for-sale at December 31, 1998 was $340 million, representing net unrealized gains of $21 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, but is shown as a separate component of accumulated non-owner changes in equity.
YEARS ENDED DECEMBER 31, 1998 1997 1996 ---- ---- ---- (DOLLARS IN MILLIONS)
(2) Net investment income is net of investment expenses and excludes capital gains or losses or provision for income taxes.
Agencies and Treasuries..................... $ 4,953 13.4% AAA/Aaa..................................... 5,003 13.6 AA/Aa....................................... 2,541 6.9 A/A......................................... 9,586 26.0 BBB/Baa..................................... 8,700 23.6 BB/Ba....................................... 1,294 3.5 B/B......................................... 565 1.5 CCC/Caa..................................... 2 --- Not Rated................................... 4,254 11.5 ---------------------------
As of December 31, 1998, 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.
At December 31, 1998 and 1997, there were fixed maturity securities in default with a fair value of $11 million and $8 million, respectively.
(a) Presented net of deferred taxes of $(29) million, $(450) million and $215 million in 1998, 1997, and 1996, respectively
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Dollar amounts in millions)
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.
Effective November 1997, the Company completed the acquisition of 100% of the capital stock of Colonial Penn Insurance Company (Colonial Penn) and LTC Inc. (LTC) for purchase prices of $1,015 and $59, respectively. The results of Colonial Penn and LTC are included in the accompanying consolidated financial statements effective November 4 and November 7, 1997, respectively.
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, 1997 as if the acquisitions of Colonial Penn and LTC had occurred on January 1, 1997.
GE Financial Assurance is an insurance holding company that, through its subsidiaries, sells a variety of insurance and investment-related products primarily in North America and Asia. 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 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.
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.
Investment income is recorded when earned. Realized 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 liabilities for 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.
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.
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.
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.
Fixed maturities $2,527 $2,429 $1,518 Equity securities 24 30 14 Mortgage loans 234 214 188 Policy loans 96 88 64 Other 23 13 7 -------------------------- Gross investment income 2,904 2,774 1,791 Investment expenses (8) (19) (18) -------------------------- Net investment income $2,896 $2,755 $1,773 ==========================
The additional proceeds from investments presented in the consolidated statements of cash flows result from principal collected on mortgage-backed securities, maturities, calls and sinking fund payments.
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 at December 31, are summarized as follows:
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:
The scheduled maturity distribution of the fixed maturity portfolio at December 31, 1998 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.
1998 1997 ---- ---- FAIR VALUE PERCENT FAIR VALUE PERCENT ---------- ------- ---------- ------- Agencies and treasuries $ 4,953 13.4% $ 5,847 16.9% AAA/Aaa 5,003 13.6 4,102 11.9 AA/Aa 2,541 6.9 2,183 6.3 A/A 9,586 26.0 8,831 25.6 BBB/Baa 8,700 23.6 8,345 24.2 BB/Ba 1,294 3.5 979 2.8 B/B 565 1.5 297 .9 CCC/Caa 2 --- 2 --- D/D --- --- --- --- Not rated 4,254 11.5 3,951 11.4 ---------------------------------------------- Totals $36,898 100.0% $34,537 100.0% ==============================================
At December 31, 1998 and 1997, there were fixed maturities in default with a fair value of $11 and $8, respectively.
The following table shows the activity in the allowance for losses during the years ended December 31:
Balance at January 1 $57 $58 $36 Balance from Life of Virginia, purchased April 1996 --- --- 21 Provision charged to operations 6 5 3 Amounts written off, net of recoveries 2 (6) (2) --------------------
Activity impacting deferred acquisition costs for the years ended December 31, was as follows:
The estimated percentage of the December 31, 1998 balance, before the effect of unrealized investment gains or losses, to be amortized over each of the next five years is as follows:
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).
Reinsurance recoveries recognized as a reduction of benefits amounted to $336, $263 and $264 during 1998, 1997 and 1996, respectively. These recoveries were partially offset by certain changes in benefits and other policy reserves.
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.
(b) Principally modifications of the 1965-70 or 1975-80 Select and Ultimate Tables.
(c) The 1958 Commissioner's Standard Ordinary Table and 1964 modified and 1987 Commissioner's Disability Tables.
Activity in the liability for policy and contract claims for the years ended December 31 is summarized as follows:
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 periods ended December 31, 1998 and 1997 was $12 and $12, respectively.
Short-term borrowings includes commercial paper issued of $1,004 and $436, net of discount of $8 and $3 at December 31, 1998 and 1997, respectively, with an average interest rate of 5.25% at December 31, 1998.
The Company has a line of credit with GE Capital that has an aggregate borrowing line of $500, of which a maximum of $446 and $234 was used during the years 1998 and 1997, respectively. At December 31, 1998 and 1997, the balance outstanding was $326 and $146, respectively.
In connection with the acquisition of Colonial Penn, the Company entered into an additional line of credit with GE Capital, with an aggregate borrowing line of $1,015 of which a maximum of $580 and $1,015 was used during the years 1998 and 1997, respectively. At December 31, 1998 and 1997, the balance outstanding was $0 and $580, respectively.
At December 31, 1998, interest rate swaps maturities with a notional amount of $1,142 ranged from 2002 to 2012, and average interest rates for these "synthetic" fixed-rate borrowings were 4.92% (6.46% at December 31, 1997). These swaps were employed to achieve a synthetic fixed rate on certain floating rate borrowings in connection with the acquisition of Colonial Penn and initiation of operations at GE Edison Life Insurance Company, including commercial paper, and the long term note with GE Capital. The average floating interest rate for these borrowings was 3.61% as of December 31, 1998 (5.88% at December 31, 1997).
Current federal income tax provision $245 $250 $142 Deferred federal income tax provision (benefit) 53 8 (4) ------------------------- Subtotal -- federal provision 298 258 138 ------------------------- Current state income tax provision 5 4 2 Deferred state income tax provision (benefit) --- (1) --- ------------------------- Subtotal -- state provision 5 3 2 ------------------------- Foreign income tax provision (benefit) (2) --- --- ------------------------- Total income tax provision $301 $261 $140 =========================
Assets: Future annuity and contract benefits $ 1,129 $ 1,081 Guaranty association assessments 43 42 Mortgage loans and real estate owned --- 3 Net operating loss carryforwards 36 --- Other 58 28 -------------------- Total deferred income tax assets 1,266 1,154 -------------------- Liabilities: Net unrealized gains on investment securities (382) (356) Investments (262) (321) Present value of future profits (419) (478) Deferred acquisition costs (224) (39) Mortgage loans and real estate owned (2) --- Other (32) (4) -------------------- Total deferred income tax liabilities (1,321) (1,198) -------------------- Net deferred income tax liability $ (55) $ (44) ====================
The Company paid $188, $270 and $137, for federal and state income taxes during the years 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, 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.
The Company also invests in certain short-term notes issued by GE Capital. These investments yield market rates. Interest earned on these notes was $3, $2 and $1 for the years ended December 31, 1998, 1997 and 1996, respectively. Short-term investments include $15 and $56 of these securities at December 31, 1998 and 1997, 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 1998, 1997 and 1996, the Company paid $15, $14 and $7, respectively, to GE Capital for certain computer services fees.
As of December 31, 1998 and 1997, the Company was committed to fund $408 and $264, respectively, in mortgage loans.
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.
In conjunction with the acquisition of LTC, Inc. in November 1997, the Company agreed to pay the sellers up to $33 over a five-year period. These payments are contingent upon certain performance measurements. The contingent consideration is being accounted for prospectively, as additional purchase price, which will result in amortization over the remaining goodwill life. During 1998, approximately $7 was paid to the sellers relating to this agreement.
The Company and certain of its subsidiaries are defendants in various cases of litigation considered to be in the normal course of business. The Company believes that the outcome of such litigation will not have a material effect on its financial position or results of operations.
The Company's derivative financial instruments at December 31, 1998, consisted of mortgage loan commitments of $408, European style call options of $71, interest rate floors of $46 and various swap options of $12. The notional value of the European style call options at December 31, 1998 was $212 and the options expire from June 1999 to October 2008. The options are used to hedge market risk associated with the Company's S&P 500 indexed annuity product. The notional value of the interest rate floors at December 31, 1998 was $6,100 and the floors have expiration dates from September 2002 to October 2003. The notional value of the swap options at December 31, 1998 was $3,700 and they have expiration dates from December 2008 to December 2029.
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 require formal state insurance commission approval. Based on statutory results as of December 31, 1998, the Company is able to receive $241 in dividends in 1999 without obtaining regulatory approval.
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 or permitted 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.
The Company conducts its operations primarily in two geographic regions: (1) North America and (2) Asia. See Note (1)(d) for further discussion of the Company's principal product lines distributed in these two segments.
Prior to 1998, the Company's operations were entirely within the North American geographic region.
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.
GE FINANCIAL ASSURANCE HOLDINGS, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)