(1) Comparability of financial information is affected by acquisitions by the Company in the periods presented. See "Business -- Significant Acquisitions."
(2) Includes future annuity and contract benefits, unearned premiums, liability for policy and contract claims, and other policyholder liabilities and excludes separate account liabilities.
The Company effectively began operations in 1993 with the acquisition of GNA Corporation. The Company has continued to broaden its operations through a series of acquisitions. 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 in 1997 and thereafter that impact the financial comparisons of operating results for 1999 as compared to 1998 and 1998 as compared to 1997.
The table that follows summarizes the impact of these acquisitions on operating results in 1999 and 1998. 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 preceding year (e.g., the "Amount Due to Acquisitions" column for the year ended December 31, 1999 includes acquisitions that were completed during 1999 and the increase in 1999 resulting from the inclusion of a full year of operations with respect to acquisitions consummated in 1998 as compared with the inclusion of a partial year of operations in 1998) and the column "Consolidated Change" includes the total increase in the specified line item as compared with the prior period.
(2) Primarily includes the initiation of operations of GE Edison Life Insurance Company in April 1998 and inclusion of a full year of operating results in 1998 for Colonial Penn (acquired in November 1997) versus one and one-half months in 1997.
Premiums. Premiums, which include premium revenues from traditional life, health and automobile insurance and life contingent annuity contracts, increased $335 million, or 10.4%, to $3,542 million in 1999 from $3,207 million in 1998. This increase was a result of (i) a full year of operating results in 1999 relating to the operations of GE Edison Life Insurance Company, (ii) the acquisition of The Signature Group in July 1999 and (iii) growth in certain of the Company's life, auto, accident and health and structured settlement products. Premiums increased $893 million, or 38.6%, to $3,207 million in 1998 from $2,314 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, (ii) the initial operations of GE Edison Life Insurance Company commencing in April 1998 and (iii) growth in certain of the Company's life, accident and health and structured settlement products.
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 $293 million, or 9.1%, to $3,522 million in 1999 from $3,229 million in 1998. This increase was a result of (i) a full year of operating results in 1999 relating to the April 1998 initiation of operations at GE Edison Life Insurance Company, (ii) the acquisition of The Signature Group in July 1999 and (iii) growth in certain of the Company's life, auto, accident and health and structured settlement products. Benefits and other changes in policy reserves increased $737 million, or 29.6%, to $3,229 million in 1998 from $2,492 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, (ii) the initial operations of GE Edison Life Insurance Company commencing in April 1998 and (iii) growth in certain of the Company's life, accident and health and structured settlement products.
Commission Expenses. Commission expense increased $317 million, or 58.6%, to $858 million in 1999, from $541 million in 1998. This increase was primarily due to higher production levels on certain of the Company's existing products, the full year of operations of GE Edison Life Insurance Company and the acquisition of The Signature Group in July 1999. 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 1998 versus 1997 in relation to premiums revenue decreased primarily due to the acquisition of Colonial Penn, a direct marketer of personal lines of automobile insurance.
General Expenses. General expenses increased $434 million, or 47.5%, to $1,348 million in 1999 from $914 million in 1998. This increase was primarily a result of the acquisition of The Signature Group in July 1999, a full year of GE Edison operations and increases in certain compensation and sales and advertising expenses in support of the Company's core growth initiatives. General expenses increased $229 million, or 33.4%, to $914 million in 1998 from $685 million in 1997. This increase was primarily a result of acquisitions, including Colonial Penn and LTC, Inc., and expenses related to the Company's GE Edison operations.
Amortization of intangibles due to acquisitions in 1999 and 1998 totaled $60 and $29 million, respectively. Amortization of intangibles for companies acquired before 1997 declined by $6 million in 1999 and $19 million in 1998 and $39 million in 1997 due to lower amortization of 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, Net. 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. The change in net deferred acquisition costs increased $328 million, or 73.5%, to $774 million in 1999 from $446 million in 1998. This increase was related to an increase in deferral of acquisition costs arising from the increased product sales noted above as well as the operations of GE Edison (which commenced in April 1998) and the acquisition of The Signature Group in July 1999, partially offset by amortization of previously capitalized acquisition costs. The change in net deferred acquisition costs increased $11 million, or 2.5%, to $446 million in 1998 from $435 million in 1997. This increase was primarily due to inclusion of a full 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 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 funding agreements 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 in this segment have increased due to the full year impact in 1999 and the partial year impact in 1998 of the initiation of GE Edison operations in April 1998. In addition to acquisition related growth, the Company benefited from increased demand for certain annuity and guaranteed investment contract products. Sales of deferred fixed annuities grew 81.7% in 1999 to $1,279 million from $704 million in 1998. The higher sales in 1999 were primarily driven by competitive yields offered to customers on fixed annuities as a result of increasing interest rates and the introduction of new products. Sales of deferred variable annuities increased 193.2% in 1999 to $2,662 million from $908 million in 1998. Sales of guaranteed investment contracts increased 89.0% in 1999 to $2,054 million and 99.8% in 1998 to $1,087 million from $544 million in 1997. These increases were largely due to increased consumer demand for variable annuities and other products which allow consumers to participate in the strong capital markets, and the introduction of certain new products by the Company.
Operating income from this segment represented 89.8%, 84.4% and 85.9% of the Company's total operating income for the years ended December 31, 1999, 1998 and 1997, respectively. The shift in the percentage of operating income derived from this segment in 1999 and 1998 was primarily driven by the higher percentage increases in sales of products distributed (noted above) versus the lifestyle protection and enhancement segment as a result of the acquisitions made in the respective periods. The Company's operating income from the Wealth Accumulation and Transfer segment increased 16.1% in 1999 to $777 million, and 13.6% in 1998 to $669 million, from $589 million in 1997. These increases were driven primarily by higher levels of invested assets and life insurance policies in force.
The Company's principal product lines under the Lifestyle Protection and Enhancement segment are (i) long-term care insurance, (ii) supplemental accident and health insurance, (iii) personal lines of automobile insurance and (iv) consumer club memberships. Lifestyle Protection and Enhancement 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) and provide for consumer club membership opportunities.
Premiums and investment income increased in 1999 and 1998 due to the impact of the acquisition of The Signature Group in 1999 and the full year impact in 1998 of the acquisition of Colonial Penn in November 1997. In addition to acquisition related growth, the Company benefited from increased demand for its long-term care and auto products. Sales of long-term care policies grew 41.1% in 1999 to $158 million and 2.8% in 1998 to $112 million, from $109 million in 1997. The higher sales were driven by an increase in the number of dedicated 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. Automobile insurance sales increased 22.6% to $130 million in 1999 from $106 million in 1998.
Intangible Assets. Intangible assets increased $1.1 billion, or 34.0%, to $4.3 billion at December 31, 1999 from $3.2 billion at December 31, 1998. This increase primarily relates to a $0.6 billion increase in goodwill, which primarily results from the payment of contingent purchase price relating to the acquisition of the infrastructure and initial capitalization of the GE Edison Life Insurance Company operations (see minority interests below and Note 2 to the Consolidated Financial Statements) and the acquisition of The Signature Group in July1999, partially offset by 1999 goodwill amortization. The remaining $0.5 billion increase in intangible assets relates primarily to increases in the present value of future profits and certain intangible assets related to club memberships in force as a result of the acquisition of The Signature Group in July 1999 and the effects of the current year change in net unrealized investment losses, partially offset by amortization of previously capitalized costs.
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, 1999, the Company held $9.3 billion of separate account assets. The increase in such balances of $3.7 billion from $5.6 billion at December 31, 1998 related to increased sales of variable insurance products and overall increased market value of the underlying investment funds.
Total Liabilities. Total liabilities increased $7.8 billion, or 15.9%, to $57.0 billion at December 31, 1999 from $49.1 billion at December 31, 1998. The increase resulted primarily from the acquisition of The Signature Group in July 1999 and growth in existing insurance and investment products. The majority of the overall increase in total liabilities occurred in the future annuity and contract benefits, accounts payable and accrued expenses and separate account liability categories, which are discussed in further detail below.
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses increased $0.9 billion, or 47.3%, to $2.9 billion at December 31, 1999 from $2.0 billion at December 31, 1998. This increase is due primarily to the acquisition of The Signature Group in July 1999, the timing of net payments and receipts related to the investment portfolio and normal business activity associated with growth in certain 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 $3.7 billion increase in such balances to $9.3 billion at December 31, 1999 related to increased sales of variable insurance products and overall increased market value of the underlying investment funds.
Minority Interest. Minority interest increased $352 million at December 31, 1999 to $475 million from $123 million at December 31, 1998, primarily as a result of the issuance of preferred stock in one of the Company's subsidiaries as contingent purchase price in accordance with the acquisition of the infrastructure and capitalization of the GE Edison operations.
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, 1999, $32.3 billion, or 87.6%, of the fixed maturity securities held by the Company were bonds rated by a rating agency (S&P or Moody's), or were government/agency bonds. The remaining $4.6 billion, or 12.4%, was comprised primarily of private placement bonds not rated by either rating agency. At December 31, 1999, the Company held $2.1 billion of bonds rated below investment grade (excluding split-rated bonds). In addition, the Company held $0.3 billion 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.
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, 1999, approximately 81% of the Company's annuity contracts were subject to surrender penalties or contained non-surrender provisions. Certain of the Company's funding agreements may be terminated early by the contractholders. The Company has established a line of credit with its parent in an amount sufficient to provide liquidity in the event of an unusual level of early terminations.
GE Financial Assurance's ability to pay dividends to its shareholder and meet its obligations, including debt service and operating expenses, primarily depends on receiving sufficient funds from its insurance subsidiaries. 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 department approval. Based on statutory results as of December 31, 1999, GE Financial Assurance is able to receive $248 million in dividends in 2000 from its subsidiaries without obtaining regulatory approval. See "Insurance Regulation -- General Regulation at State Level."
The NAIC has also recently adopted model statutory accounting practices to take effect in 2001. Statutory accounting practices determine, among other things, the statutory surplus of an insurance company and, therefore, the amount of funds that can be paid as dividends to the Company by its insurance subsidiaries. Each state must adopt the NAIC model before it becomes the prescribed statutory basis of accounting for insurance companies domesticated in that state. At this time, the impact of the new accounting practices on the Company is not expected to be material. However, efforts are continuing by insurance regulators, public accounting firms, and the insurance industry to develop interpretations of the NAIC model.
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. Also, the Company's insurance subsidiaries may be forced to raise certain crediting rates on its line of products in order to meet competitive pressures. 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 has classified all of its fixed maturity and equity securities as available-for-sale. Therefore, these securities are carried on the balance sheet at fair values and marked to market. 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, but is shown as a separate component of accumulated non-owner changes in equity. At December 31, 1999, the amortized cost basis of the Company's fixed maturity securities was $38.8 billion, representing net unrealized losses of $1.9 billion, while the cost basis of equity securities was $336 million, representing net unrealized gains of $9 million.
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, 1999, the outstanding loans of $0.9 billion bore interest at an average rate of 8.8%, which is determined by the terms of the policy.
Other invested assets of $0.7 billion at December 31, 1999 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 ($0.3 billion) 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 ($0.2 billion) and real estate and other properties ($22 million) in order to achieve higher investment returns on an incremental portion of the portfolio.
(1) Average of cash and total invested assets on an amortized cost basis, adjusted for impact of timing on acquired companies.
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.
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 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.
The following table sets forth scheduled maturities for the Company's investments in fixed maturities at December 31, 1999.
We have audited the accompanying consolidated balance sheets of GE Financial Assurance Holdings, Inc. and subsidiaries as of December 31, 1999 and 1998, 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, 1999. 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.
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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements include the historical operations and accounts of GE Financial Assurance Holdings, Inc. and its subsidiaries (collectively the Company). Significant operating subsidiaries of the Company include General Electric Capital Assurance Company, GE Capital Life Assurance Company of New York, Federal Home Life Insurance Company, GE Life and Annuity Assurance Company, First Colony Life Insurance Company and subsidiaries, Union Fidelity Life Insurance Company, GE Edison Life Insurance Company, Colonial Penn Insurance Company and The Signature Group. All significant intercompany accounts and transactions have been eliminated in consolidation.
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), floating rate funding agreements and mutual funds.
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, consumer club membership revenues 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. Consumer club membership dues are recognized as income when earned. Charges to policyholder accounts for universal life cost of insurance is recognized as revenue when due. Variable product fees are charged to variable annuity and variable life policyholders based upon the daily net assets of the policyholder's account values, and are recognized as revenue when charged.
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.
Acquisition costs include costs and expenses that vary with and are primarily related to the acquisition of insurance and investment contracts and consumer club memberships. Such costs are deferred and amortized as follows:
The separate account assets and liabilities represent funds held for the exclusive benefit of the variable annuity contract owners and variable life policyholders. 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 equal to the liabilities that represent the policyholders' equity in those assets.
Minority interest primarily relates to a certain ownership interest in GE Edison Life Insurance Company and GE Life and Annuity Assurance Company. See Note 18 - Subsequent Event.
The Company uses swaps primarily to optimize funding costs. Interest rate and currency swaps that modify borrowings or designated assets, including swaps associated with forecasted commercial paper renewals, are accounted for on an accrual basis. The Company requires all other swaps, as well as futures, interest rate floors, swap options, options and currency forwards, 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. 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.
In July 1999, in connection with Montgomery Ward Holding Corp.'s plan of reorganization under chapter 11 of the federal bankruptcy laws, GE Capital acquired The Signature Group (Signature) from Montgomery Ward & Co. Incorporated for an aggregate purchase price of $885. The acquisition was completed through a series of mergers involving various Signature companies and subsidiaries of the Company with the Company's subsidiaries being the surviving company in such mergers. The effect of the mergers was to cause Signature to become a subsidiary of GE Financial Assurance. The aggregate purchase price of $885 has been allocated to Signature assets acquired, including present value of future profits and value of consumer club business acquired of $122 and $297, respectively, and to liabilities assumed, including liability for policy and contract claims of $144, based upon their respective fair values at the date of the acquisition, and a corresponding amount has been recorded as an increase to additional paid in capital, reflecting the mergers of the Signature companies into subsidiaries of the Company.
In March 1999, the Company acquired Professional Insurance Company from Pacific Life and Accident Insurance Company, a subsidiary of PennCorp Financial Group. The purchase price of $46 has been allocated to the assets acquired and liabilities assumed based upon their respective fair values at the date of the acquisition.
In March 1998, the Company and Toho Mutual Life Insurance Company (Toho), a Japanese insurer jointly capitalized a new insurance company, GE Edison Life Insurance Company (GE Edison), that sells life, health and annuity products in the Japanese market. In connection with this agreement, the Company paid Toho $547 in exchange for the operating infrastructure and $13 in exchange for certain tangible assets. GE Edison originates and underwrites all of the new business activity. Existing Toho business remains with Toho with the exception of certain term life insurance business ceded to GE Edison as described below. The Company's investment in GE Edison includes 100% of the entity's voting interest following the Company's acquisition in December 1999 of the 10% voting interest previously held by Toho. (see Note 18 - Subsequent Event). Additionally, the Company paid Toho a ceding commission of $400 in exchange for Toho transferring 50% of certain term life insurance reserves and certain other liquid assets approximating $391. GE Edison also entered into an agreement with Toho, which contains certain modified coinsurance arrangements. These blocks of existing term life insurance provided an initial operations base for GE Edison.
In conjunction with the acquisition of the infrastructure and capitalization of GE Edison, a subsidiary of the Company agreed to issue certain subsidiary preferred stock to the sellers in an amount up to (Yen)56.0 billion through 2004, contingent upon certain performance measurements. In accordance with such agreement, the Company issued certain subsidiary preferred stock to the sellers in an amount of $19 in 1999. The subsidiary preferred stock issued during 1999 has been accounted for as additional purchase consideration and the additional goodwill is being amortized over the remaining goodwill life. See Note 18 -Subsequent Event.
For the years ended December 31, the sources of investment income of the Company were as follows:
The additional proceeds from investments presented in the consolidated statements of cash flows result from principal collected on mortgage and asset- backed securities, maturities, calls and sinking fund payments.
The scheduled maturity distribution of the fixed maturity portfolio at December 31, 1999 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.
As required by law, the Company has investments on deposit with governmental authorities and banks for the protection of policyholders of $106 and $80 at December 31, 1999 and 1998, respectively.
At December 31, 1999, 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.
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.
At December 31, 1999 and 1998, there were fixed maturities in default with a fair value of $10 and $11, respectively.
At December 31, 1999 and 1998, respectively, the Company held $854 and $773 in mortgages secured by real estate in California, comprising 25% and 26% of the respective total mortgage portfolio. For the years ended December 31, 1999, 1998 and 1997, respectively, the Company originated $201, $222 and $160 of mortgages secured by real estate in California, which represent 23%, 29% and 29% of the respective total originations for those years.
As of December 31, 1999 and 1998, the Company was committed to fund $156 and $408, respectively, in mortgage loans.
Under these principles, the Company has two types of "impaired" loans: loans requiring allowances for losses (none as of December 31, 1999 and 1998) and loans expected to be fully recoverable because the carrying amount has been reduced previously through charge-offs or deferral of income recognition ($19 and $21, as of December 31, 1999 and 1998, respectively). The Company had no allowance for losses on these loans as of December 31, 1999 and 1998. Average investment in impaired loans during 1999, 1998 and 1997 was $15, $26 and $29, respectively and interest income earned on these loans while they were considered impaired was $3, $2 and $3, respectively.
PVFP is amortized, net of accreted interest, in a manner similar to the amortization of deferred acquisition costs. Interest accretes at rates credited to policyholders on underlying contracts.
(b) Principally modifications of the 1965-70 or 1975-80 Select and Ultimate Tables or 1958 and 1980 Commissioner's Standard Ordinary Tables.
The Company has an unsecured senior long-term note 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 in each of the years ended December 31, 1999, 1998 and 1997 was $12.
Interest rates are managed by the Company in light of the anticipated behavior, including prepayment behavior, of assets in which debt proceeds are invested. Interest rate swaps are employed to achieve management's interest rate objectives. Effective interest rates are lower under these "synthetic" positions than could have been achieved by issuing debt directly.
At December 31, 1999, interest rate swaps maturities with a notional amount of $1,194 ranged from 2002 to 2012, and average interest rates for these "synthetic" fixed-rate borrowings were 4.80% (4.92% at December 31, 1998). 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, including commercial paper, and the long term note with GE Capital. The average floating interest rate for these borrowings was 3.90% as of December 31, 1999 (3.61% at December 31, 1998).
At December 31, 1999 and 1998, 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 $1, $3 and $2 for the years ended December 31, 1999, 1998 and 1997, respectively. Short-term investments include $63 and $15 of these securities at December 31, 1999 and 1998, respectively.
During 1999, 1998 and 1997, the Company paid $23, $15 and $14, respectively, to GE Capital for certain computer services fees.
There are currently several unrelated insurance companies which had substantial amounts of annuity and insurance business in the process of liquidation or rehabilitation. The Company's insurance subsidiaries paid assessments of $2, $12 and $14 to various state guaranty associations during the years 1999, 1998 and 1997, respectively.
The American Institute of Certified Public Accountants has issued Statement of Position (SOP) No. 97-3, Accounting by Insurance and Other Enterprises for 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 (1) a liability for assessments when (a) an assessment has been asserted or information available prior to issuance of the financial statements indicates it is probable that an assessment will be asserted, (b) the underlying cause of the asserted or probable assessment has occurred on or before the date of the financial statements, and (c) the amount of the loss can be reasonably estimated and (2) an asset for an amount when it is probable that a paid or accrued assessment will result in an amount that is recoverable from premium tax offsets or policy surcharges from in-force policies.
The Company's derivative financial instruments at December 31, 1999, consisted of mortgage loan commitments of $156, European style call options of $97, interest rate floors of $37 and various swap options of $6. The notional value of the European style call options at December 31, 1999 was $299 and the options expire from January 2000 to April 2009. 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, 1999 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, 1999 was $1,600 and they expire in December 2008.
At December 31, the carrying amounts and fair values of the Company's financial instruments were as follows:
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, 1999, the Company is able to receive $248 in dividends in 2000 without obtaining regulatory approval.
The Company received $259 and $120 of cash dividends from its subsidiaries during 1999 and 1998, respectively. The Company paid $155 and $120 of cash dividends to its parent, GE Capital, during 1999 and 1998, respectively.
Combined statutory net income for the Company's U.S. domiciled insurance subsidiaries for the years ended December 31, 1999, 1998 and 1997 was $291, $431 and $412, respectively. The combined statutory capital and surplus as of December 31, 1999 and 1998 was $3,179 and $3,268, 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 risk, (ii) insurance risk, (iii) interest rate risk, and (iv) business risk . 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, 1999 and 1998, each of the Company's insurance subsidiaries exceeded the minimum required RBC levels.
The following is a summary of geographic region activity for 1999 and 1998.
The Company will account for the comprehensive transfer under the purchase method of accounting in 2000.