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, two facilities in Lynchburg, Virginia and a facility in Norristown, Pennsylvania are owned by the Company.
(2) Includes the acquisitions of Professional Insurance Company in March 1999 and The Signature Group in July 1999 and inclusion of a full year of operating results in 1999 for GE Edison versus eight months of operations in 1998.
On December 28, 2000, an affinity partner, Montgomery Wards LLC ("Wards") filed for bankruptcy protection and began liquidation proceedings. Net earnings for the year 2000 include a charge, primarily to amortization of intangibles and other expenses, of $82 million ($53 million, after tax) to recognize the additional losses resulting from the loss of strategic marketing rights and access to Wards customers.
Premiums. Premiums, which include premium revenues from traditional life, health and automobile insurance and life contingent annuity contracts increased $1,923 million, or 54.3%, to $5,465 million in 2000 from $3,542 million in 1999. This increase was primarily a result of (i) the Toho Transfer; (ii) the acquisition of Phoenix American Life in April 2000 and (iii) growth in certain of the Company's life and long-term care products. Premiums increased $335 million, or 10.4%, to $3,542 million in 1999 from $3,207 million in 1998. This increase was as a result of (i) a full year of operating results in 1999 relating to the operations of GE Edison (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.
Surrender fee income. Surrender fee income increased $1,197 million to $1,253 million in 2000 from $56 million in 1999. The increase in surrender fee income primarily relates to amounts retained by the Company resulting from the surrender of policyholder contracts assumed as part of the Toho Transfer. As discussed earlier, these policies became subject to surrender charges under the terms of the restructuring of Toho's in-force insurance contracts. The surrender rates for the insurance policies assumed from Toho were significantly greater than historical averages. The Company believes that this unusual surrender activity was in response to the Toho insolvency, in particular the fact that the former Toho policyholders were not permitted to surrender policies from the date of the issuance of the business suspension order to Toho through the date of the Transfer. Surrender fee income increased $10 million or 21.7%, to $56 million in 1999 from $46 million in 1998. The increase was primarily a result of a full year of operating results in 1999 relating to the GE Edison (which initiated operations in April 1998).
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 increased $264 million, or 39.6%, to $930 million in 2000 from $666 million in 1999. This increase was a result of (i) a full year of operating results of The Signature Group (acquired July 1999) (primarily club membership revenues); (ii) the acquisition of Phoenix American Life in April 2000, and (iii) fee income on variable annuity products. Policy fees and other income increased $259 million, or 63.6%, to $666 million in 1999 from $407 million in 1998. This increase was a result of (i) the acquisition of The Signature Group in July 1999 (primarily club membership revenues) and (ii) a full year of operating results in 1999 relating to GE Edison Life Insurance Company (which initiated operations in April 1998).
The Company's weighted average crediting rates for annuities decreased to 6.14% in 2000 from 6.15% in 1999, which had decreased from 6.27% in 1998. However, the Company's weighted average crediting rates for interest-sensitive life products increased to 5.35% in 2000 from 5.31% in 1999, which had decreased from 5.32% in 1998. Changes in the Company's base crediting rates are implemented in response to changes in market conditions, the prevailing interest rate environment, contractual provisions, and other factors. The Company monitors market conditions closely and resets interest crediting rates as deemed appropriate in accordance with the terms of the underlying contracts.
General Expenses. General expenses increased $657 million, or 48.7%, to $2,005 million in 2000 from $1,348 million in 1999. This increase was primarily a result of (i) a full year of operating results of The Signature Group, acquired in July 1999, (ii) the Toho Transfer, (iii) increases in compensation and advertising expenses, commensurate with the Company's growth in revenues and to support the Company's core growth initiatives and (iv) the charges discussed previously for Wards. 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 compensation and advertising expenses to support the Company's continued growth in revenues and core growth initiatives.
Amortization of Intangibles, Net. The Company's significant intangible assets consist of three components which result from acquisition activities -- PVFP representing the estimated future gross profits in acquired insurance and annuity contracts, value of consumer club business ("VOBA") acquired representing the estimated future gross profits of acquired club membership 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 $882 million, or 259.4%, to $1,222 million in 2000 from $340 million in 1999. Amortization expense in 2000 includes charges of $46 million as discussed previously for Wards. Amortization of intangibles increased $54 million, or 18.9%, to $340 million in 1999 from $286 million in 1998.
Amortization of intangibles due to acquisitions and other transactions (primarily the Toho Transfer) in 2000 and 1999 totaled $910 and $70 million, respectively. Amortization of intangibles for companies acquired before 1998 declined by $18 million in 2000, $16 million in 1999 and $19 million in 1998 due to lower amortization of PVFP.
Change in Deferred Acquisition Costs, Net. Deferred 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. Under U.S. GAAP, 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 $358 million, or 46.3%, to $1,132 million in 2000 from $774 million in 1999. This increase was related to an increase in deferral of acquisition costs arising from increased product sales as a 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. 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 primarily due to increased deferral of acquisition costs due to increased product sales, 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.
Interest Expense. Interest expense increased $48 million, or 50.5%, to $143 million in 2000 from $95 million in each of the years ended December 31, 1999 and 1998. 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 $154 million or 62.1% to $402 million in 2000 from $248 million in 1999. The Company's effective tax rate of 34.2% in 2000 was 5.5 percentage points higher than the effective tax rate of 28.7% in 1999. The effective tax rate in 1999 was 9.3% lower than the effective tax rate in 1998 due primarily to 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 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) including funding agreements and (iv) mutual funds and retirement plans. 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.
Total revenues in this segment have increased primarily due to the Toho Transfer. In addition to the Toho Transfer and acquisition related growth, the Company benefited from increased demand for certain annuity, guaranteed investment and life insurance contracts. Sales of deferred fixed annuities grew 74.3% to $2,229 million in 2000 from $1,279 million in 1999. The higher sales in 2000 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 15.4% in 2000 to $3,071 million from $2,662 million in 1999. Sales of guaranteed investment contracts and funding agreements increased 16.6% in 2000 to $2,395 from $2,054 in 1999. These increases were largely due to increased consumer demand for variable annuities and other products that 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 92.8%, 89.8% and 84.4% of the Company's total operating income for the years ended December 31, 2000, 1999, and 1998, respectively. The shift in the percentage of operating income derived from this segment in 2000 and 1999 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 and other transactions made in the respective periods. The Company's operating income from the Wealth Accumulation and Transfer segment increased 40.4% in 2000 to $1,091 million, and 16.1% in 1999 to $777 million from $669 million in 1998. These increases were driven primarily by the Toho Transfer and acquisitions, 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 Lifestyle Protection and Enhancement segment for the years ended December 31, 2000, 1999, and 1998.
Total Assets. Total assets increased $23.0 billion, or 35.6%, to $87.6 billion at December 31, 2000 from $64.6 billion at December 31, 1999. Assets acquired in connection with the Toho Transfer net of amounts eliminated in consolidation, approximated $21.9 billion.
Deferred Acquisition Costs (DAC). DAC increased $1.0 billion, or 44.8%, to $3.3 billion at December 31, 2000 from $2.3 billion at December 31, 1999. This increase was primarily related to an increase in deferral of acquisition costs arising from increased product sales primarily on life and annuity products and the current year change in net unrealized investment gains, partially offset by amortization of previously capitalized acquisition costs.
Other Assets. Other assets increased $0.3 billion, or 13.5%, to $2.9 billion at December 31, 2000 from $2.5 billion at December 31, 1999. This increase was primarily as a result of $0.5 billion in other assets acquired as part of the Toho Transfer and increased balances due from brokers relating to investment transactions, offset by decreases in other assets acquired as a result of the Toho Transfer of $0.3 billion and normal business activity.
Future Annuity and Contract Benefits. Future annuity and contract benefits increased $17.7 billion, or 44.7%, to $57.3 billion at December 31, 2000 from $39.6 billion at December 31, 1999. The increase resulted primarily from (i) the transfer of insurance policies of $20.6 billion as a result of the Toho Transfer and (ii) growth in reserves due to sales of certain of the Company's life, annuity, and long-term care business, offset by surrender payments made to former Toho policyholders subsequent to the Toho Transfer.
Separate Account Liabilities. The separate account liabilities represent the liability associated with the separate account assets. As discussed above, the $1.3 billion increase to $10.6 billion at December 31, 2000 is related to increased sales of variable annuity products and overall increased market value of the underlying investment funds.
The principal liquidity requirements for GE Financial Assurance's insurance operations are its contractual obligations to policyholders and annuitants. Contractual obligations include payments of surrender benefits, contract withdrawals, claims under outstanding insurance policies and annuities, and policy loans. The primary sources for meeting these contractual requirements are investment income, scheduled principal repayments from its investment portfolio, and a portion of its premium income. To provide for additional liquidity to meet normal variations in contract obligations, GE Financial Assurance maintains cash and short-term investments. The Company has placed commercial paper in the U.S. market as a vehicle to fund certain of the Company's acquisitions.
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. Dividends in excess of the prescribed limits or the Company's earned surplus are deemed extraordinary and require formal state insurance department approval. GE Financial Assurance's insurance company subsidiaries may pay $290 million in dividends to GE Financial Assurance in 2001 without obtaining regulatory approval. See "Insurance Regulation -- General Regulation at State Level."
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 raise certain crediting rates on their lines 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 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, 2000, the Company held $57.2 billion, or 92.6% 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. The Company also invests in common and preferred stock, policy loans, short-term securities and other investments, which comprised the remaining 7.4% of its investment portfolio at December 31, 2000. More detailed information on investments contained in Note 3 to the Consolidated Financial Statements.
We have audited the accompanying consolidated balance sheets of GE Financial Assurance Holdings, Inc. and subsidiaries as of December 31, 2000 and 1999, 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, 2000. 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.
As discussed in Note 12 to the consolidated financial statements, the Company changed its method of accounting for insurance-related assessments in 1999.
The accompanying consolidated financial statements include the historical operations and accounts of GE Financial Assurance Holdings, Inc. and its subsidiaries (collectively, the Company). Operating subsidiaries of the Company include General Electric Capital Assurance Company, 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 ("GE Edison"), Colonial Penn Insurance Company, and Signature Financial/Marketing Inc., ("The Signature Group"). All significant intercompany accounts and transactions have been eliminated in consolidation.
All of the outstanding common stock of GE Financial Assurance Holdings, Inc. ("GE Financial Assurance") is owned by General Electric Capital Corporation ("GE Capital"), a wholly-owned subsidiary of General Electric Capital Services, Inc. ("GE Capital Services"), which in turn is wholly-owned, directly or indirectly, by General Electric Company.
GE Financial Assurance is an insurance holding company that, through its subsidiaries, sells a variety of insurance and investment-related products almost entirely in North America and Asia. The Company's operations are in two business segments: (i) Wealth Accumulation and Transfer, and (ii) Lifestyle Protection and Enhancement.
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), funding agreements, and mutual funds.
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; marketing through businesses; and direct and affinity based marketing through e-commerce, telemarketing and direct mail.
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 original maturities greater than 90 days are included in short-term investments.
Long-duration contracts -- Acquisition costs include first-year commissions in excess of recurring renewal commissions, certain solicitation and printing costs, and certain support costs such as underwriting and policy issue expenses. For investment and universal life type contracts, amortization is based on the present value of anticipated gross profits from investments, interest credited, surrender and other policy charges, and mortality and maintenance expenses. Amortization is adjusted retroactively when current estimates of future gross profits to be realized are revised. For other long-duration insurance contracts, the acquisition costs are amortized in relation to the estimated benefit payments or the present value of expected future premiums.
Short-duration contracts -- Acquisition costs consist primarily of commissions and premium taxes and are amortized ratably over the terms of the underlying policies. Direct response marketing costs are amortized ratably over the expected life of the respective customer relationship.
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.
Value of Business Acquired ("VOBA") -- VOBA reflects the estimated fair value of the Company's active auto club memberships and represents the present value of the expected future cash flows from active auto club memberships existing at the date of the acquisition. VOBA is amortized over the estimated life of the memberships of the business acquired in relation to the present value of the estimated gross profits.
The Company has not established any deferred income taxes on temporary differences related to the financial statement carrying amounts and tax bases of investments in significant foreign subsidiaries. The Company has elected to permanently reinvest the earnings of its material foreign subsidiaries.
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.
The Financial Accounting Standards Board ("FASB") has issued, then subsequently amended, Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, effective for GE Financial Assurance on January 1, 2001. Upon adoption, all derivative instruments (including certain derivative instruments embedded in other contracts) will be recognized in the balance sheet at their fair values; changes in such fair values must be recognized immediately in earnings unless specific hedging criteria are met. Effects of qualifying changes in fair value will be recorded in equity pending recognition in earnings as offsets to the related earnings effects of the hedged items. Management estimates that, at January 1, 2001, the effects on the Company's Consolidated Financial Statements of adopting SFAS No. 133, as amended, will be a one-time reduction of net earnings of less than $20 million, and a one-time reduction of shareholder's interest, excluding the net earnings effect, of less than $375 million. The precise transition effect is uncertain because the accounting for certain derivatives and hedging relationships in accordance with SFAS No. 133 is subject to further interpretation by the FASB.
As disclosed below, GE Edison had previously acquired Toho's operating infrastructure in March 1998. In June 1999, the Financial Services Agency ("FSA") of Japan determined that Toho's continued operation was not in the best interest of its policyholders given its weak financial position. As a result, the FSA issued a partial business suspension order to Toho on June 4, 1999. In connection with such suspension order, the FSA appointed two independent individuals from the Japanese insurance industry and the Life Insurance Association of Japan as administrators of Toho (collectively, "the Administrator").
At that time, the sole means for rehabilitating an insolvent insurer under the IBL was through a comprehensive transfer of the insurer's insurance policies and assets to a rescuing company. On December 22, 1999, the Administrator entered into an agreement with GE Edison, acting as the rescuing company, for the comprehensive transfer of Toho's insurance contracts. The restructured insurance contracts have surrender charges, reduced benefits and lower policy guarantees. As an inducement for GE Edison to become the rescuing company, Japan's Policyholder Protection Corporation contributed approximately $3.6 billion as part of the assets supporting Toho's restructured policies.
In March 1998, the Company and Toho jointly capitalized a new insurance company, GE Edison, to sell 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 remained 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. Additionally, in 1998, 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. Also in 1998, GE Edison 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 April 2000, the Company acquired Phoenix American Life Insurance Company, a subsidiary of Phoenix Home Life Mutual Insurance Company. The purchase price of $281, including PVFP, has been allocated to the assets acquired and the liabilities assumed based upon their respective fair value at the date of the acquisition.
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.
The change in the net unrealized gains (losses) on investment securities reported in accumulated non-owner changes in equity is as follows:
Years Ended December 31, 2000, 1999 and 1998 (Dollar amounts in millions)
The scheduled maturity distribution of the fixed maturity portfolio at December 31, 2000 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 of December 31, 2000 and 1999, the Company was committed to fund $103 and $156, respectively, in U. S. mortgage loans.
In December 2000, an affinity partner, Montgomery Wards LLC ("Wards") filed for bankruptcy. As a result, the Company recognized a charge to earnings related to the write-off of certain intangibles of $54 and other expenses of $28.
At December 31, 2000 and 1999, total unamortized goodwill was $2,437 and $2,422, respectively, which is presented net of accumulated amortization of $350 and $249, respectively. Goodwill amortization was $104, $84, and $68 for the years ended December 31, 2000, 1999 and 1998, respectively. Goodwill in excess of associated expected operating cash flows is considered to be impaired and is written down to fair value (no such write-downs have been made).
In order to limit the amount of loss retention, certain policy risks are reinsured with other insurance companies. The maximum amount of individual ordinary life insurance normally retained by the Company on any one life policy is $1. Reinsurance contracts do not relieve the Company from its obligations to policyholders. In the event that the reinsurers would be unable to meet their obligations, the Company is liable for the reinsured claims. The Company monitors both the financial condition of individual reinsurers and risk concentrations arising from similar geographic regions, activities and economic characteristics of reinsurers to lessen the risk of default by such reinsurers. The Company does not have significant concentrations of reinsurance with any one reinsurer that could have a material impact on its results of operations.
Reinsurance recoveries recognized as a reduction of benefits amounted to $394, $300 and $336 during 2000, 1999 and 1998, respectively.
(c) The 1958 and 1980 Commissioner's Standard Ordinary Tables, 1964 modified and 1987
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, 2000, 1999 and 1998 was $12.
In connection with GE Edison's March 1998 transaction with Toho (See Note 2-Acquisitions and Transfers), a subsidiary of the Company entered into certain long-term note agreements in the amount of (Yen)6.5 billion ($58, $63 and $56 at December 31, 2000, 1999 and 1998, respectively), at 2.25%, due April 2008. In addition, two subsidiaries of the Company entered into similar long-term note agreements, having the same interest rate and maturity, in the amount of (Yen)3.5 billion ($27 at December 31, 2000, 1999 and 1998), with certain affiliates of the Company. A guarantee fee of 0.50%, relating to the above long- term notes, is being paid annually to GE Capital as guarantor.
Short-term borrowings includes commercial paper issued of $2,013 and $987, net of discount of $8 and $10 at December 31, 2000 and 1999, respectively, with an average interest rate of 6.50% and 5.91% at December 31, 2000 and 1999, respectively.
At December 31, 2000, interest rate swap maturities with a notional amount of $1,669 ranged from 2002 to 2012, and average interest rates for these "synthetic" fixed-rate borrowings were 5.28% (4.80% at December 31, 1999). These swaps were employed to achieve a synthetic fixed rate on commercial paper borrowings in connection with various Company initiatives.
The Company received a refund of federal and state taxes in 2000 of $82 and paid $371 and $188, for federal and state income taxes during the years 1999 and 1998, respectively.
At December 31, 2000 and 1999, fixed maturities included a note payable to GE Capital with a balance of $27. The note bears interest at 2.25% and matures in April 2008. In addition, a guarantee fee of 0.50% is being paid annually to GE Capital as guarantor.
At December 31, 2000 and 1999, fixed maturities 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, 2000 and 1999, the Company had a line of credit with GE Capital that has an aggregate borrowing line of $2,500 with balances of $291 and $49, respectively.
During 2000, 1999 and 1998, the Company paid $32, $23 and $15, 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 made net assessment payments of $4, $2 and $12 to various state guaranty associations during the years 2000, 1999 and 1998, respectively.
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, 2000.
This note discloses the fair value information about certain of the Company's financial instruments, whether or not recognized in the balance sheet. No attempt has been made to estimate the value of anticipated future business or the value of assets or liabilities that are not considered financial instruments. Fair value estimates are made at a specific point in time based on relevant market information and valuation methodologies considered appropriate by management. These estimates may be subjective in nature and involve uncertainties and significant judgment in the interpretation of current market data. Therefore, the fair values presented are not necessarily indicative of amounts the Company could realize or settle currently. Changes in the assumptions could significantly affect the estimates. As such, the derived fair value estimates cannot necessarily be substantiated by comparison to independent markets and may differ from the amounts that might be involved in an immediate settlement of the instrument. The Company does not necessarily intend to dispose of or liquidate such instruments prior to maturity. Fair value disclosures are not required for certain financial instruments; the most significant of these for the Company are the insurance liabilities and related assets, other than financial guarantees and investment deposits.
Financial instruments that, as a matter of accounting policy, are reflected in the accompanying consolidated financial statements at fair value are not included in the following disclosures. Such items include fixed maturities, equity securities and certain other invested assets. The carrying value of policy loans, short-term investments, certain other invested assets, and long- term debt approximates fair value at December 31, 2000 and 1999, respectively.
Investment contract deposits. Based on expected future cash flows, discounted at currently offered discount rates for immediate annuity contracts or cash surrender values for single premium deferred annuities.
Financial guarantees and credit life. Based on future cash flows, considering expected renewal premiums, claims, refunds and servicing costs, discounted at a market rate.
All other instruments. Based on comparable transactions, market comparables, discounted future cash flows, quoted market prices, and/or estimates of the cost to terminate or otherwise settle obligations to counterparties.
Currency forwards are employed by the Company to manage exposures to changes in currency exchange rates and to optimize borrowing costs as discussed in Note 9. These financial instruments generally are used to fix the local currency cost denominated in currencies other than the functional currency. Currency exposures that result from net investments in affiliates are managed principally by funding assets denominated in local currency with debt denominated in those same currencies. In certain circumstances, net investment exposures are managed using currency forwards and currency swaps.
Swaps of interest rates and currencies are used by the Company to optimize funding costs for a particular funding strategy (see Note 9) or to hedge interest rate and currency risk exposure associated with the Company's business activities, such as debt securities. On a limited basis, and as part of ongoing business activities, the Company utilizes interest rate swaps to minimize its exposure to movements in interest rates and financial markets that have a direct correlation with certain of its insurance products.
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 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 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, 2000 and 1999, each of the Company's insurance subsidiaries exceeded the minimum required RBC levels.
The following is a summary of industry segment activity for 2000, 1999 and 1998:
The following is a summary of geographic region activity for 2000 and 1999.
The notes to the GE Financial Assurance Holdings, Inc. and subsidiaries consolidated financial statements are an integral part of this schedule.