The Company conducts its business from various facilities, most of which are leased. However, certain of the Company's facilities, including its headquarters campus in Richmond, Virginia, two facilities in Lynchburg, Virginia and a facility in Norristown, Pennsylvania are owned by the Company. The Company believes that its present facilities are adequate for the anticipated needs of the Company.
The following selected financial data should be read in conjunction with the Consolidated Financial Statements of GE Financial Assurance Holdings, Inc. and subsidiaries and the related Notes to the Consolidated Financial Statements. In addition, the contribution of the Mortgage Insurers was accounted for in a manner similar to a pooling of interests. Accordingly, all financial information have been restated to reflect this transaction.
The following analysis of the consolidated financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements and the notes thereto included herein.
Included in the gross realized investment gains are $145 million, $67 million and $38 million in 2001, 2000 and 1999, respectively, resulting from the securitization of certain financial assets. Included in the gross realized investment losses are other than temporary declines in value of $277 million, $77 million and $53 million in 2001, 2000 and 1999, respectively, (including $94 million related to Enron in 2001).
Policy Fees and Other Income. Policy fees and other income is principally comprised of insurance charges made against universal life contracts, club membership revenues, fees assessed against policyholder account values and commission income. Policy fees and other income decreased $100 million to $831 million compared to $931 million in 2000. The 2000 amount increased $264 million from $667 million in 1999. The 2001 decrease is primarily a result of a decline in club membership revenues and to a lesser extent to lower fee income assessed on variable annuity account values. This decrease was partially offset by an increase in fees earned on universal life contracts. The 2000 increase was a result of (i) the inclusion of a full year of operating results of The Signature Group (primarily club membership revenues); (ii) the acquisition of Phoenix American Life in April 2000, and (iii) fee income on variable annuity 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, health, property and casualty and mortgage insurance products as well as claim costs incurred during the year under such contracts. These amounts increased $367 million in 2001 to $5,785 million from $5,418 million in 2000. These amounts increased by $1,811 million in 2000 from $3,607 million in 1999. The 2001 change in reserves is primarily a result of increased benefit liabilities and claims paid related to additional sales of structured settlements and long-term care insurance policies partially offset by a decrease in reserves related to the anticipated runoff of the block of business assumed in the Toho Transfer. Additional reserves were established by the Mortgage Insurers for deteriorating economic conditions and the increased number of delinquencies for mortgage insurance policies. The 2000 increase was a result of (i) the Toho Transfer, (ii) the acquisition of Phoenix American Life in April 2000; (iii) a full year of operating results of The Signature Group and (iv) additional benefits incurred arising from core growth.
Commission Expenses. Commission expense decreased $98 million in 2001 to $1,138 million from $1,236 million in 2000. Commission expense increased $378 million in 2000 from $858 million in 1999. The overall decrease in 2001 is primarily a result of lower sales of variable annuities as a result of market volatility in addition to lower production on new term life sales. These decreases are partially offset by commissions associated with additional sales of long-term care insurance and certain fixed annuities. The increase in long-term care insurance commissions resulted from core growth and the Travelers Transaction. Fixed annuity commissions increased as a result of the change in product mix from variable to fixed annuity products. The 2000 increase was primarily due to (i) commissions incurred as a result of core growth, and (ii) a full year of operating results of The Signature Group.
Amortization of Intangibles, Net. The Company's significant intangible assets consist primarily of two components which result from acquisition activities -- PVFP and goodwill, representing the excess of purchase price over the fair value of identified net assets of the acquired entities. Amortization of intangibles decreased $738 million in 2001 to $489 million from $1,227 million in 2000. Amortization increased $882 million in 2000 from $345 million in 1999. The decrease in amortization expense in 2001 is primarily a result of the significant surrender activity experienced in 2000 associated with the Toho Transfer.
result of acquisitions and growth in existing products and the termination of the Toho reinsurance arrangements, partially offset by amortization of previously capitalized acquisition costs.
Interest Expense. Interest expense increased $3 million in 2001 to $146 million from $143 million in 2000. This increase relates primarily to higher average debt outstanding as a result of the Toho Transfer and the Travelers Transaction. This increase was partially offset by lower interest rates on commercial paper. Interest expense increased $48 million, or 50.5%, to $143 million in 2000 from $95 million in 1999. This increase relates primarily to an increase in weighted average commercial paper borrowings outstanding and an increase in the weighted average interest rate on commercial paper borrowings.
Provision for Income Taxes. The Company's provision for income taxes increased $53 million to $650 million from $597 million in 2000. Income tax expense increased $167 million in 2000 from $430 million in 1999. The Company's effective tax rates were 33.0%, 32.3%, 29.3% in 2001, 2000 and 1999, respectively. The lower effective tax rate in 1999 was primarily the result of the sale of a minority interest in a subsidiary in 1999, which gave rise to the realization of a deferred tax asset not previously allowed to be recorded.
The following table sets forth certain summarized financial data for the Company's Wealth Accumulation and Transfer segment for the years ended December 31, 2001, 2000, and 1999.
Total revenues in this segment decreased in 2001 and increased in 2000 primarily as a result of the large number of surrenders from the whole life and deferred annuity policies assumed as part of the Toho Transfer in 2000. However, this decrease was partially offset, by the Company's growth in structured settlement products and increased demand for certain annuity products and guaranteed investment contracts and funding agreements. Sales of deferred fixed annuities grew 41.2% to $3,147 million in 2001 from $2,229 million in 2000. The higher sales in 2001 were primarily attributable to a shift in product mix from variable to fixed products. Sales of guaranteed investment contracts and funding agreements increased 44.6% in 2001 to $3,464 from $2,395 in 2000. Sales of variable annuities decreased 26.0% in 2001 to $2,272 million from $3,071 million in 2000.
Total revenues for this segment have remained relatively constant from 2000 to 2001. Benefits and changes in reserves are influenced by benefit payments, the reserve per policy and the number of mortgage delinquencies. The increase in these expenses during 2001 is a result of deteriorating economic conditions and an increase in the number of delinquencies.
Operating income from this segment represented 29.4%, 36.3% and 41.1% of total operating income for the years ended December 31, 2001, 2000 and 1999, respectively. The Company's operating income for the Mortgage Insurance segment decreased 13.7% to $578 million in 2001, and increased 11.1% to $670 million in 2000 from $603 million in 1999.
Revenues increased in 2001 and 2000 primarily as a result of increased demand for its long-term care insurance and accident and health products. Sales of long-term care insurance policies grew 23.6% in 2001 to $251 million from $203 million in 2000, and 28.5% in 2000 from $158 million in 1999. The higher sales were primarily attributable to the Travelers Transaction, an increase in the number of dedicated agents selling the product and continued heightened market awareness of the need for this type of insurance coverage.
Total Investments. Total investments increased $5.6 billion or 8.6% to $71.0 billion at December 31, 2001 from $65.4 billion at December 31, 2000. This increase is primarily a result of net purchases of securities associated with operating cash flows and net cash provided by financing activities relating to investment contract issuances and redemptions including net investment income and other investing activities offset by a decrease in mortgage and other policy loans repayments and securitizations of certain financial assets as well as other decreases in short-term investments. See Note 3 to the Consolidated Financial Statements.
Separate Accounts Assets and Liabilities. Separate account assets and liabilities represent funds held and the related liabilities for the exclusive benefit of variable annuity and variable life contract holders. As of December 31, 2001, the Company held $9.2 billion of separate account assets. The decrease of $1.4 billion or 13.2%, from $10.6 billion at December 31, 2000 is primarily related to a decrease in overall market value of the underlying investment funds.
Future Annuity and Contract Benefits. Future annuity and contract benefits increased $4.5 billion or 7.8% to $62.2 billion at December 31, 2001 from $57.7 billion in December 31, 2000. The increase primarily resulted from growth in reserves related to sales of investment contracts, including GICs, funding agreements, and deferred annuities, partially offset by a reduction in future annuity and contract benefits as a result of the anticipated Toho surrenders.
Interest rate changes may have temporary effects on the sale and profitability of the annuity, universal life, and other investment products offered by the Company. For example, if interest rates rise, competing investments (such as annuities or life insurance offered by the Company's competitors, certificates of deposit, mutual funds, and similar instruments) may become more attractive to potential purchasers of the Company's products. Also, the Company's insurance subsidiaries may be forced to adjust certain crediting rates on their lines of products in order to meet competitive pressures. The Company constantly monitors interest earnings on existing assets and yields available on new investments and sells policies and annuities that permit flexible and timely responses to interest rate changes as part of its management of interest spreads.
The Company manages its exposure to changes in interest rates, in part, by funding its acquisitions with an appropriate mix of fixed and variable rate debt and its exposure to currency fluctuations principally by funding local currency denominated assets with debt denominated in those same currencies. It uses interest rate and currency swaps, swaptions, options and currency forwards to achieve lower borrowing costs. Substantially all of these derivatives have been designated as modifying interest rates and/or currencies associated with specific debt instruments.
The Company's established practices require that derivative financial instruments relate to specific asset, liability or equity transactions or to currency exposures. Substantially all derivative transactions are centrally executed by GE Capital's Treasury Department on the Company's behalf, which maintains controls on all exposures, adheres to stringent counterparty credit standards and actively monitors marketplace exposures.
All swaps, purchased options and forwards with contractual maturities longer than one year are conducted within the credit policy constraints provided in the table below. Foreign exchange forwards with contractual maturities shorter than one year must be executed with counterparties having an A-1/P-1 credit rating and the credit limit for these transactions is $150 million.
Counterparty credit criteria Credit rating ------------------- Standard Moody's & Poor's ------- -------- Term of transaction Between one and five years ....................... Aa3 AA- Greater than five years .......................... Aaa AAA Credit exposure limits Up to $50 million ................................ Aa3 AA- Up to $75 million ................................ Aaa AAA
Percentage of Notional Derivative Exposure by Counterparty Credit Rating - ------------------------------------------------------------------------------- Moody's/Standard & Poor's 2001 2000 1999 - ------------------------- ---- ---- ---- Aaa/AAA .................................................. 99% 99% 89% Aa/AA .................................................... 1% 1% 11% A/A and below ............................................ --% --% --%
The U.S. Securities and Exchange Commission requires that registrants provide information about potential effects of changes in interest rates and currency exchange. Although the rules offer alternatives for presenting this information, none of the alternatives is without limitations. The following discussion is based on so-called "shock-tests," which model effects of interest rate and currency shifts on the reporting company. Shock tests, while probably the most meaningful analysis permitted, are constrained by several factors, including the necessity to conduct the analysis based on a single point in time and by their inability to include the extraordinarily complex market reactions that normally would arise from the market shifts modeled. While the following results of shock tests for changes in interest rates and currency exchange rates may have some limited use as benchmarks, they should not be viewed as forecasts.
. One means of assessing exposure to changes in currency exchange rates is to model effects on reported earnings using a sensitivity analysis. Year-end 2001 consolidated currency exposures, including financial instruments designated and effective as hedges, were analyzed to identify Company assets and liabilities denominated in other than their relevant functional currency. It is estimated that changes in currency exchange rates would reduce the 2001 net earnings of the Company based upon 2001 positions by an insignificant amount because the Company hedges substantially all of its foreign currency exchange exposures.
Foreign currency translations adjustments decreased equity by $73 million in 2001. Changes in the foreign currency translation adjustment reflect the effects of changes in currency exchange rates on the Company's net investment in non-U.S. subsidiaries that have functional currencies other than the U.S. dollar.
The Company's cash and cash equivalents aggregated $1.7 billion at the end of 2001, up from $1.2 billion at year-end 2000. The Company generated $3.9 billion from operating activities, primarily as a result of an increase in future annuity and contract benefits. The Company also generated $2.8 billion in cash from financing activities primarily as a result of net proceeds from the issuance of investment contracts of $2.7 billion.
Certain of the Company's products contain provisions for penalty charges for surrender of the policy. These charges range from 6.0% to 10.5% at policy origination and decrease to zero over predetermined periods ranging up to ten years. Certain of the Company's funding agreements have termination provisions. 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.
Off-balance sheet arrangements are used by the Company to improve liquidity and optimize allocation of the Company's investment portfolio. One of the most common forms of off-balance sheet arrangements is asset securitization. The Company uses GE Capital sponsored and third party entities to facilitate asset securitizations. As part of this strategy, management considers the relative risks and returns of its alternatives and predominately uses GE Capital sponsored entities. Management believes these transactions could be readily executed through third party entities at insignificant incremental cost.
Qualifying entities raise cash by issuing beneficial interests (rights to cash flows from the assets) primarily to GE Capital-sponsored special purpose entities that issue highly-rated commercial paper to third-party large institutional investors. GE Capital's sponsored special purpose entities use commercial paper proceeds to obtain beneficial interests in the financial assets of qualifying entities, including qualifying entities that have acquired financial assets from the Company, as well as financial assets originated by multiple third parties.
In accordance with its contractual commitments to the qualifying entities, the Company thoroughly underwrites and services the associated assets transferred by the Company. Support activities include ongoing review, credit monitoring and collection activities to ensure that the financial assets meet strict investment risk criteria the same support activities that the Company employs for its own assets.
Sales of securitized assets to qualifying entities may result in a gain or loss based on the difference between sale proceeds, the allocated carrying amount of net assets sold, the fair value of any servicing rights and an allowance for losses. Sales resulted in net gains on securitizations of approximately $145 million, $67 million, and $36 million in 2001, 2000, and 1999, respectively, and are included in net realized gains within the Company's consolidated statements of income.
Timing of contractual commitments at the Company, related to leases and debt, follow.
High-quality financial statements require rigorous application of high-quality accounting policies. The policies discussed below are considered by management to be critical to an understanding of the Company's financial statements because their application places the most significant demands on management's judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Refer to Note 1 in the accompanying consolidated financial statements for discussion regarding the Company's accounting policies as they relate to the types of products offered. Specific risks for these critical accounting policies are described in the following paragraphs. For all these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.
Impairment of investment securities results in a charge to operations when a market decline below cost is other than temporary. Management regularly reviews each investment security for impairment based on criteria that include the extent to which cost exceeds market value, the duration of that market decline and analysis on the financial health of and specific prospects for the issuer. The Company's debt and equity securities amounted to approximately $62 billion at year-end 2001. Gross unrealized gains and losses included in that carrying amount related to debt securities were $1,281 million and $1,711 million, respectively. Gross unrealized gains and losses of equity securities were $83 million and $102 million, respectively. Of those securities whose carrying amount exceeds fair value at year-end 2001, and based on application of the Company's accounting policy for impairments, approximately $400 million of portfolio value is at risk of being charged to earnings in 2002. The Company's actively performs comprehensive market research, monitors market conditions and segments its investments by credit risk in order to minimize impairment risks. Further information is provided in Notes 1 and 3 to the Consolidated Financial Statements.
Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. Policies related to revenue recognition, financial instruments and consolidation policy require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Certain of these matters are among topics currently under reexamination by accounting standard setters and regulators. Although no specific conclusion reached by these standard setters appear likely to cause a material change in the Company's accounting policies, outcomes cannot be predicted with confidence. Also see Note 1 to the Consolidated Financial Statements, Significant Accounting Policies, which discusses significant accounting policies that must be selected by management when there are acceptable alternatives.
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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements include the historical operations and accounts of GE Financial Assurance Holdings, Inc. ("GE Financial Assurance") and its subsidiaries (together with GE Financial Assurance, the "Company"). Principal operating subsidiaries of the Company include General Electric Capital Assurance Company, First Colony Life Insurance Company, Federal Home Life Insurance Company, GE Life and Annuity Assurance Company, GE Edison Life Insurance Company ("GE Edison"), and GE Mortgage Insurance Company. All significant intercompany accounts and transactions have been eliminated in consolidation.
These consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America ("GAAP"). 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. Certain prior year amounts have been reclassified to conform to the current year presentation.
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 funding agreements.
Lifestyle Protection and Enhancement products are intended to protect accumulated wealth and income from the financial drain of unforeseen events. The Company's principal product lines under the Lifestyle Protection and Enhancement segment are long-term care insurance, accident and health insurance, personal lines of automobile insurance and income protection packages.
The Company distributes its products through four primary channels: intermediaries (such as brokerage general agents ("BGAs"), banks, securities brokerage firms and financial planning firms); dedicated sales forces, who distribute certain of the Company's products on an exclusive basis, some of whom are not employees of the Company; worksites; and direct and affinity based marketing through e-commerce, telemarketing and direct mail.
withdrawals. Other products offer customers numerous investment options, including, but not limited to, purchases of shares of various mutual funds.
Certificates, money market funds, and other time deposits with original maturities of less than 90 days are considered cash equivalents in the Consolidated Balance Sheets and Consolidated Statements of Cash Flows. Items with maturities greater than 90 days are included in short-term 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 regularly traded fixed maturities and equity securities is based on quoted market prices. For fixed maturities not regularly traded, fair values are estimated using values obtained from independent pricing services or are estimated by discounting expected future cash flows using a current market rate applicable to the credit quality, industry sector, call features and maturity of the investments, as applicable.
Investment income on mortgage-backed and asset-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 th 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.
Mortgage and policy loans are stated at the unpaid principal balance of such loans, net of allowances for estimated uncollectable amounts. The allowance for losses is determined primarily on the basis of management's best estimate of probable losses, including specific allowances for known troubled loans, if any.
Acquisition costs include costs and expenses that vary with and are primarily related to the acquisition of insurance and investment contracts and income protection packages. Such costs are deferred and amortized as follows:
Short-duration contracts - Acquisition costs consist primarily of commissions and premium taxes and are amortized ratably over the terms of the underlying policies. Direct response marketing costs are amortized ratably over the expected life of the respective customer relationship.
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 arrangement that allocates tax on a separate company basis, but provides group benefit for current utilization of losses and credits. The Company's U.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, which also allocates tax on a separate Company basis but provides group benefit for current utilization of losses and credits.
At January 1, 2001, the Company adopted SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, as amended. Under SFAS 133 all derivative instruments (including certain derivative instruments embedded in other contracts) are recognized in the balance sheet at their fair values and changes in fair value are recognized immediately in earnings, unless the derivatives qualify as hedges of future cash flows. For derivatives qualifying as hedges of future cash flows, the effective portion of changes in fair value is recorded temporarily in equity, then recognized in earnings along with the related effects of the hedged items. Any ineffective portion of hedges is reported in earnings as it occurs. Further information about derivative instruments is provided in Note 14.
(a) For earnings effect, amount shown is net of adjustment to hedged items.
See Note 12 for Change in Accounting for Insurance & Related Assessments in 1999.
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, modify the accounting for business combinations, goodwill and identifiable intangible assets. As of January 1, 2002, all goodwill and indefinite-lived intangible assets must be tested for impairment and a transition adjustment will be recognized. Management has not yet determined the exact amount of goodwill impairment under these new standards, but believes the non-cash transition charge to earnings will be approximately $400 related to the Company's auto businesses and recognized in the first quarter of 2002. Amortization of goodwill will cease as of January 1, 2002, and thereafter, all goodwill and any indefinite-lived intangible assets must be tested at least annually for impairment. The effect of the non-amortization provisions on 2002 operations will be affected by 2002 acquisitions and cannot be forecast, but if these rules had applied to goodwill in 2001, management believes that full-year 2001 net earnings would have increased by approximately $95.
On December 17, 2001, GE Financial Assurance acquired Centurion Capital Group ("Centurion") for approximately $90. Centurion is a west coast based asset management company.
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. 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 PVFP 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.
Fixed maturities $ 3,571 $ 3,267 $ 2,873 Equity securities 35 26 28 Mortgage loans 470 448 260 Policy loans 73 93 102 Other 67 81 16 -------------------------------------
Gross investment income 4,216 3,915 3,279 Investment expenses (15) (21) (13) -------------------------------------
Sales proceeds $ 17,280 $ 7,018 $ 5,425 ===================================== Gross realized investment: Gains 830 425 413 Losses (530) (192) (181) -------------------------------------
The scheduled maturity distribution of the fixed maturity portfolio at December 31, 2001 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.
At December 31, 2001, approximately 24%, 19% and 14% 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. 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.
2001 2000 ---- ---- Fair Value Percent Fair Value Percent ---------- ------- ---------- -------
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
At December 31, 2001 and 2000, the Company's U.S. mortgage loan portfolio consisted of first mortgage loans on commercial real estate properties of 1,731 and 1,714, respectively. The loans, which are originated by the Company through a network of mortgage bankers, are made on completed, leased properties and generally have a maximum loan-to-value ratio of 75% at the date of origination.
"Impaired" loans are defined under GAAP as loans for which it is probable that the lender will be unable to collect all amounts due according to the original contractual 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.
The estimated percentage of the December 31, 2001 balance, before the effect of unrealized investment gains or losses, to be amortized over each of the next five years is as follows:
Certain policy risks are reinsured with other insurance companies to limit the amount of loss exposure and to comply with regulatory requirements. 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 remains 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. The Company
does not have significant concentrations of reinsurance with any one reinsurer that could have a material impact on its results of operations.
The Company participates in the Special Pool Risk Administrators "SPRA Pool" which covers individual life and accidental death exposures. The pool covers the Company's exposure with one insurance subsidiary acting as the agent for a group of six of the Company's other insurance subsidiaries. The Company has an 8.2% overall participation in the SPRA Pool which could result in a maximum loss to the Company of approximately $10 million on a per event basis.
2001 2000 1999 -------- --------- ----------- Direct life insurance in force $ 534,369 $ 515,742 $ 337,892 Amounts ceded to other companies (111,989) (113,866) (111,193) Amounts assumed from other companies 39,578 30,751 28,345 --------------------------------------- Net life insurance in force $ 461,958 $ 432,627 $ 255,044 ======================================= Percentage of amount assumed to net 9% 7% 11% =======================================
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 less the present value of future net premiums 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.
- ----------- (a) Either the United States Population Table, 1983 Group Annuitant Mortality Table or 1983 Individual Annuitant Mortality Table.
(f) Mortgage Insurance contract liabilities are based on the estimated frequency and severity of known and unreported loan delinquencies.
Changes in the liability for policy and contract claims for the years ended December 31 are summarized as follows:
Balance at January 1 $ 2,597 $ 1,886 $ 1,697 Less reinsurance recoverables (234) (223) (221) ----------------------------- Net balance at January 1 2,363 1,663 1,476 -----------------------------
Balances from Acquisitions and Transfers -- 219 154 Incurred related to insured events of: Current year 4,978 3,552 1,932 Prior years (35) (42) (27) ----------------------------- Total incurred 4,943 3,510 1,905 ----------------------------- Paid related to insured events of: Current year (3,719) (2,046) (1,049) Prior years (987) (902) (829) ----------------------------- Total paid (4,706) (2,948) (1,878) ----------------------------- Foreign currency translation (48) (81) 6 ----------------------------- Net balance at December 31 2,552 2,363 1,663 Add reinsurance recoverables 335 234 223 ----------------------------- Balance at December 31 $ 2,887 $ 2,597 $ 1,886 =============================
Total short-term borrowings at December 31, 2001 and 2000, consisted of the following:
2001 2000 ------ ------ Average Average Amount Rate (a) Amount Rate (a) ------ -------- ------ --------
Short term (a) $ 690 2.19% $ 635 Long term (b) 2,251 4.55% 2,368 ------ ------ Total $2,941 $3,003 ====== ======
At December 31, 2001 swap maturities ranged from 2002 to 2012.
Assets: Net unrealized losses on investment securities $ 164 $ 191 Future annuity and contract benefits 1,368 1,313 Guaranty association (refunds) assessments -- (3) Net operating loss carryforwards -- 8 Net unrealized losses on derivatives 92 -- Other 103 95 -------------------- Total deferred income tax assets 1,727 1,604 --------------------
Federal income tax law allows mortgage guaranty insurance companies to deduct from current taxable income amounts added to statutory contingency loss reserves required by state law or regulation, subject to certain limitations. This federal tax deduction is permitted only to the extent that U.S. Mortgage Guaranty Insurance Company Tax and Loss Bonds ("Tax and Loss Bonds") are purchased in the amount of the tax benefit attributable to the deduction. Tax and Loss Bonds are non-interest bearing and mature ten years from the designated issue date. Unrecaptured amounts previously deducted for statutory contingency loss reserves must be included in federal taxable income in the tenth subsequent tax year.
The Company paid $140 and $35 for federal and state taxes in 2001 and 1999 and received a refund of $(57) for federal and state income taxes during 2000.
At December 31, 2001 and 2000, long-term debt included a note payable to GE Capital with a balance of $440. This note bears interest at an effective fixed rate of 2.64% and matures in March 2008.
At December 31, 2001 and 2000, the Company had a line of credit with GE Capital that has an aggregate borrowing line of $2,500 with balances of $332 and $291, respectively.
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, $3 and $1 for the years ended December 31, 2001, 2000 and 1999, respectively. There were no investments in short-term notes at December 31, 2001, and investments were $97 and $0 at December 31, 2001 and 2000, respectively.
During 2001, 2000 and 1999, the Company received $21, $21 and $3 of premiums from various GE affiliates for providing long-term-care insurance.
Similar to the U.S., Japanese insurers are assessed for expenses relating to the resolution of insolvent insurance companies. In making a determination of its exposure to future insolvency assessments, GE Edison has made an evaluation of the current insolvencies considering information about their resolution which is publicly available. Based upon that assessment, GE Edison has concluded that it has adequately provided for future assessments arising from insolvencies existing at December 31, 2001.
Assets and liabilities that are reflected in the Consolidated Financial Statements at fair value are not included in the following disclosures; such items include cash and cash equivalents, investment securities, separate accounts and beginning in 2001, derivative financial instruments. Other assets and liabilities - those not carried at fair value - are discussed in the following pages. Apart from certain borrowings and certain marketable securities, few of the instruments discussed below are actively traded and their fair values must often be determined using models. Although management has made every effort to develop the fairest representation of fair value for this section, it would be unusual if the estimates could actually have been realized at December 31, 2001 or 2000.
The Company uses currency forwards and interest rate and currency swaps, to optimize investment returns and borrowing costs. For example, currency swaps and non-functional currency borrowings together provide lower funding costs than could be achieved by issuing debt directly in a given currency.
Fair value hedges. Under SFAS 133, fair value hedges are hedges that eliminate the risk of changes in the fair values of assets, liabilities and certain types of firm commitments. For example, the Company will use an interest rate swap in which it receives a fixed rate of interest and pays a variable rate of interest to change the cash flow profile of a fixed rate borrowing to match the variable rate financial asset that it is funding. Changes in fair value of derivatives designated and effective as fair value hedges are recorded in earnings and are offset by corresponding changes in the fair value of the hedged item.
At December 31, 2001, the fair value of derivatives in a gain position and recorded in "All other assets" is $164 and the fair value of derivatives in a loss position and recorded in "All other liabilities" is $1,202.
Counterparty credit risk. The risk that counterparties to derivative contracts will be financially unable to make payments to the Company according to the terms of the agreements is counterparty credit risk. Counterparty credit risk is managed on an individual counterparty basis, which means that gains and losses are netted for each counterparty to determine the amount at risk. When a counterparty exceeds credit exposure limits in terms of amounts due to the Company, typically as a result of changes in market conditions (see table below), no additional transactions are executed until the exposure with that
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, 2001, the Company is able to receive $542 in dividends in 2002 without obtaining regulatory approval.
The Company received dividends from its subsidiaries of $410, $33, and $259 during 2001, 2000, and 1999, respectively. The Company declared dividends of $25 to GE Capital during 2001 for payment in 2002. The Company declared and paid $23 of cash dividends to GE Capital during 2000. In 1999, the Company declared and paid dividends of $379 of cash and $22 of securities to GE Capital.
Combined statutory net income for the Company's U.S. domiciled insurance subsidiaries for the years ended December 31, 2001, 2000 and 1999 was $648, $741 and $629, respectively. The combined statutory capital and surplus as of December 31, 2001 and 2000 was $5,647 and $5,143, respectively.
The Company conducts its operations through three 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, (2) Mortgage Insurance, which provides insurance coverage on residential mortgages and (3) Lifestyle Protection and Enhancement, comprised of products intended to protect accumulated wealth and income from the financial drain of unforeseen events and provide income protection packages. See Note (1)(c) for further discussion of the Company's principal product lines within these three segments.
The following is a summary of industry segment activity for 2001, 2000 and 1999:
The Company conducts its operations almost entirely in two geographic regions: (1) North America and (2) Japan. See Note (1)(c) for further discussion of the Company's principal product lines distributed in these two segments.
The following is a summary of geographic region activity for 2001, 2000 and 1999.
Years Ended December 31, 2001, 2000 and 1999 (Dollar amounts in millions) (18) Subsequent Event
On February 2, 2002 GE Edison entered into an agreement to acquire Saison Life Insurance Company Limited from Credit Saison Co. Ltd, Saison Group, Ltd. and its other shareholders for 12.8 billion yen, or approximately $100. The acquisition is subject to regulatory approval and is expected to close in April 2002.
Under date of January 15, 2002, we reported on the consolidated balance sheets of GE Financial Assurance Holdings, Inc. and subsidiaries as of December 31, 2001 and 2000, 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, 2001, 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.
As discussed in Notes 1 and 12 to the consolidated financial statements, the Company changed its method of accounting for insurance-related assessments in 1999.
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 wholly-owned, directly or indirectly, by General Electric Company.