We conduct our business from various facilities, most of which are leased. However, certain of our facilities, including our headquarters campus in Richmond, Virginia, two facilities in Lynchburg, Virginia and a facility in Norristown, Pennsylvania are owned by us. We believe that our present facilities are adequate for our anticipated needs.
The following selected financial data should be read in conjunction with our Consolidated Financial Statements and the related Notes to the Consolidated Financial Statements. Our Consolidated Financial Statements include the historical operations and accounts of our subsidiaries.
Includes future annuity and contract benefits, liability for policy and contract claims, unearned premiums, other policyholder liabilities and separate account liabilities.
See Note 1 (o) to the Consolidated Financial Statements for 2002 and 2001 accounting changes. Effective January 1, 1999, the Company adopted SOP No. 97-3 and has reported the effect of this adoption as a cumulative effect of a change in accounting principle, which served to increase 1999 net income by $25 (net of income taxes of $14).
Net earnings were $1,077 million in 2002, a $223 million decrease from the year ended December 31, 2001. Contributing to this decrease were $380 million (net of tax) of charges related to the cumulative effect of change in accounting principle associated with the implementation of FAS 142. Total revenues were relatively flat as increased premium revenue and net realized gains were more than offset by a decrease in surrender fee and other income. Total benefits and expenses were slightly higher primarily as a result of increased benefits and changes in policy reserves partially offset by a decline in amortization of intangibles and general expenses. In addition, we recognized a $152 million benefit from recognition of a favorable tax settlement with the Internal Revenue Service.
Premiums. Premiums, which include premium revenues from life contingent annuity contracts, health insurance, traditional life, mortgage insurance and automobile insurance, increased $111 million, or 1.7%, to $6,662 million for the year ended December 31, 2002 from $6,551 million for the year ended December 31, 2001. The increase is primarily related to premiums from Saison Life, which contributed $259 million in premiums for the year ended December 31, 2002. In addition, new sales of certain of our life contingent immediate annuity contracts and higher renewal premiums generated by our growing block of long-term care insurance partially offset the decline in sales of structured settlement contracts and declines in whole life premiums related to the planned run-off of the insurance policies acquired in the Toho Transfer.
Net realized investment gains. Net realized investment gains increased $147 million to $447 million for the year ended December 31, 2002 from $300 million in 2001. Investment gains are comprised of gross investment gains and gross investment (losses). For 2002, gross gains and (losses) were $1,211 million and $(764) million, respectively. Included in the losses were impairment losses of $416 million including losses on securities issued by WorldCom, Inc. and its affiliates of $167 million ($110 million net of tax). Included in the gains were $114 million related to our sales of assets in connection with a securitization transaction conducted by our parent. In 2002, realized gains included $29 million from the securitization of certain assets (not including the gains associated with our sales of assets in connection with the securitization transaction conducted by our parent) compared to the realized gains of $145 million from the securitization of certain financial assets in 2001.
Policy fees and other income. Policy fees and other income are 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 $25 million, or 3.0%, to $806 million for the year ended December 31, 2002 from $831 million for the year ended December 31, 2001. The 2002 decrease was primarily attributable to a decline in sales of consumer protection packages, lower fees earned on variable annuity contracts, reflecting a decline in the market values of the assets underlying the contracts, and lower fees on universal life contracts. These decreases were partially offset by fees earned on an increased portfolio of managed assets.
Benefits and other changes in policy reserves. Benefits and other changes in policy reserves includes reserve activity related to future policy benefits on long-duration life, health, and property and casualty insurance policies and claim costs incurred during the year related to mortgage insurance products. These costs increased $164 million, or 2.8%, to $5,949 million for the year ended December 31, 2002 from $5,785 million for the year ended December 31, 2001. The increase is primarily related to the acquisition of Saison Life, which added approximately $220 million of reserves during 2002. Excluding Saison Life, benefits and other changes in policy reserves decreased as a result of a decline in sales of structured settlement contracts, a decrease in reserves related to the policies assumed in the Toho Transfer, which continued to run-off, and to mortgage insurance policies, due to favorable development on prior year loss reserves. This was offset in part by increased reserves associated with growth in our fixed annuity and long-term care blocks of business.
Interest expense. Interest expense decreased $8 million, or 5.5%, to $138 million for year ended December 31, 2002 from $146 million for year ended December 31, 2001. The decrease is primarily a result of lower interest rates on borrowings partially offset by an increase in average debt outstanding.
Surrender Fee Income. Surrender fee income decreased $895 million in 2001 to $358 million compared to $1,253 million in 2000. The decrease in 2001 reflects the normalization of the block of business acquired in the Toho Transfer following the significant surrender activity experienced in 2000.
Policy Fees and Other Income. Policy fees and other income decreased $100 million to $831 million in 2001 compared to $931 million in 2000. 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 and earned on universal life contracts.
Benefits and Other Changes in Policy Reserves. Benefits and other changes in policy reserves increased $367 million in 2001 to $5,785 million from $5,418 million in 2000. 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 run-off of the block of business assumed in the Toho Transfer. Additional reserves were established by the Mortgage Insurance segment for deteriorating economic conditions and the increased number of delinquencies for mortgages insurance policies.
Interest Credited. Interest credited increased $174 million in 2001 to $1,671 million from $1,497 million in 2000. The 2001 increase was primarily attributable to an increase in annuity deposits.
General Expenses. General expenses decreased $197 million in 2001 to $1,901 million from $2,098 million in 2000. The decrease in 2001 primarily relates to reduced compensation and benefit costs and other cost savings initiatives resulting from integration and consolidation activities.
Change in Deferred Acquisition Costs, Net. The change in net deferred acquisition costs decreased $236 million in 2001 to $(886) million from $(1,122) million in 2000. The decrease in 2001 is a result of lower new term life sales and lower sales of variable annuities, offset by increased long-term care insurance sales.
The following table sets forth certain summarized financial data for our Wealth Accumulation and Transfer segment for the years ended December 31:
Revenues in this segment decreased in 2001 as compared to 2000 primarily as a result of the lower surrender fee income related to the run-off of policies assumed as part of the Toho Transfer. However, this decrease was partially offset by growth in our structured settlement business and increased demand for certain life contingent annuity products and GICs and Funding Agreements.
The following table sets forth certain summarized financial data for our Mortgage Insurance segment for the years ended December 31.
Revenue for year ended December 31, 2002 decreased slightly for this segment from the prior year primarily as a result of our pricing and underwriting decisions on private passenger auto insurance. Our strategy results in selectively writing new business in markets where pricing allows us to achieve our targeted returns, and seeking rate increases in markets that are not priced appropriately. In 2002, our rate increases averaged 9.9% in our private passenger auto insurance. However, in 2002 some markets were not attractively priced. We did not aggressively pursue business in these markets resulting in lower sales and a decline in premiums.
Total assets increased $12.6 billion, or 13.0%, at December 31, 2002 from December 31, 2001. Total investments increased $13.4 billion or 18.9%. The increase in investments primarily relates to investment of premiums received, reinvestment of investment income, addition of securities as a result of the acquisition of Saison Life, and increases in fair value, partially offset by sales and maturities as well as impairment and losses on certain debt and equity securities. Excluding investments, all other assets decreased $0.8 billion, primarily resulting from a reduction in separate account assets, resulting from the overall decreased market value of the underlying investment funds partially offset by an increase in sales of variable contracts.
Total liabilities increased $10.0 billion, or 12.0%, at December 31, 2002 from December 31, 2001. Future annuity and contract benefits increased approximately $11.0 billion, or 17.7%. This increase resulted primarily from the acquisition of Saison Life and the growth in our long-term care and fixed annuity products, partially offset by a decline in sales of structured settlements.
Investment securities comprise mainly investment grade debt securities. Investment securities were $73.6 billion, including gross unrealized gains and losses of $3.5 billion and $1.5 billion, respectively, at December 31, 2002 ($62.0 billion, including gross unrealized gains and losses of $1.4 billion and $1.8 billion, respectively, as of December 31, 2001). Market value for these purposes is defined by relevant accounting standards and should not be viewed as a forecast of future gains or losses. We estimate that available gains, net of hedging positions and estimated impairment of intangible and other assets, could be as much as $700 million.
We regularly review investment securities for impairment based on criteria that include the extent to which cost exceeds market value, the duration of that market decline and the financial health and specific prospects for the issuer. Of securities with unrealized losses at December 31, 2002, approximately $550 million is at risk of being charged to earnings in the succeeding twelve months. Impairment losses recognized for 2002 were $416 million ($270 million after tax), primarily related to the telecommunications and cable industries, of which $167 million ($110 million after tax) was recognized in the second quarter of 2002 following the WorldCom, Inc. bankruptcy.
Interest rate and currency risk management is important to us in our normal business activities. As interest rates change over time, the value of the invested assets and the liabilities they support also change. We endeavor to closely match the expected cash flows of assets and liabilities and monitor differences in such cash flows using various models and projection tools. We use the results of this analysis to keep any differences within established risk tolerances
In connection with our interest rate and currency risk management strategy, we use derivative financial instruments to mitigate or eliminate certain financial and market risks. These financial instruments include interest rate and currency swaps, currency forwards and option-based financial instruments. We use these derivatives to mitigate interest rate and currency risk in four general areas:
To reduce the risk between the timing of receipt of cash and its investment in the market;
The conversion of interest rate and currency risk into credit risk results in a need to monitor counterparty credit risk actively. At December 31, 2002 and December 31, 2001, there were no notional amounts of long-term derivatives for which the counterparty credit criteria was rated below Aa3.
One means of assessing exposure to changes in currency exchange rates is to model effects on reported earnings using a sensitivity analysis. We analyzed the year-end 2002 consolidated currency exposures, including financial instruments designated and effective as hedges, to identify assets and liabilities denominated in other than their relevant functional currency. It is estimated that changes in currency exchange rates would reduce our 2003 net earnings based upon 2002 positions by an insignificant amount because we hedge substantially all of our foreign currency exchange exposures.
Shareholder’s interest increased $2.5 billion to $15.3 billion at December 31, 2002 from $12.8 billion at December 31, 2001. This increase was largely attributed to net unrealized gains on investment securities during the period of $1.5 billion and net income during the period of $1.1 billion.
Foreign currency translation adjustments decreased equity by $142 million in 2002. Changes in the foreign currency translation adjustment reflect the effects of changes in currency exchange rates on our net investment in non-U.S. subsidiaries that have functional currencies other than the U.S. dollar.
Derivatives qualifying as hedges under SFAS 133 increased equity by $70 million for the year ended December 31, 2002.
The major debt rating agencies continue to give GE Financial Assurance a long-term credit rating of Aa3/A+ and a short-term credit rating of A-1/P-1.
Certain 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.
Our ability to pay dividends to our shareholder and meet our obligations, including debt service and operating expenses, primarily depends on receiving sufficient funds from our 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 earned surplus are deemed extraordinary and require formal state insurance department approval. Our U.S. insurance company subsidiaries may pay $446 million in dividends to GE Financial Assurance in 2003 without obtaining regulatory approval. See “Insurance Regulation-General Regulation at State Level.”
Structure. Our current securitization process uses entities that meet the accounting criteria for Qualifying Special Purpose Entities (“QSPE’s”). Among other criteria, a QSPE’s activities must be restricted to passive investment in financial assets and issuance of beneficial interests in those assets. Under U.S. GAAP, entities meeting these criteria are not consolidated in the sponsor’s financial statements. We sell selected financial assets to the QSPE’s. Examples to date have included commercial mortgage loans, fixed maturities and policy loans. On the whole, the credit quality of such assets is equal to or higher than the credit quality of similar assets owned by us.
Sales of securitized assets to QSPE’s 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 $29 million, $145 million, and $67 million for the years ended December 31, 2002, 2001 and 2000, respectively, and are included in net realized gains within our consolidated statements of income. In addition, we also recognized a gain of $114 million in 2002 related to our sales of assets in connection with a securitization transaction conducted by our parent.
Support. Financial support for certain QSPE’s is provided under credit support agreements, in which GE Financial Assurance provides limited recourse for a maximum of $119 million of credit losses in qualifying entities. To date, no SPE has incurred a credit loss. Assets with credit support are funded by demand notes that are further enhanced with support provided by GE Capital.
Impairment of investment securities results in a charge to operations when a market decline below cost is other than temporary. In accordance with GE policy, we regularly review 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 the financial health of and specific prospects for the issuer. Our debt and equity securities amounted to approximately $73.6 billion at year-end 2002. Values for actively traded securities are obtained from external pricing services. For private placement and infrequently traded securities, we estimate values using internally developed pricing models. These models are based on common valuation techniques and require us to make judgments related to a security’s credit quality. For all securities at December 31, 2002, gross unrealized gains and losses included in the carrying amount were $3.5 billion and $1.5 billion, respectively. Of those securities with unrealized losses at year-end 2002, and based on application of our accounting policy for impairment, approximately $550 million of portfolio value, including approximately $130 million from the telecommunications and cable industries, is at risk of being charged to earnings in 2003. We actively perform comprehensive market research, monitor market conditions and segment our investments by credit risk in order to minimize impairment risks. Further information is provided in Notes 1 and 3.
This amortization is based on commonly accepted actuarial methods and reasonable assumptions about mortality, morbidity, lapse rates, future yield on related investments and, in the case of our variable products, long-term market appreciation. The DAC amortization methodology for our variable products (variable annuity and variable universal life) includes a long-term market average appreciation assumption of 8.5%. When actual returns vary from the expected 8.5%, we assume a reversion to this mean over a three to twelve year period, subject to the imposition of ceilings and floors. The assumed returns over this reversion period are currently 9.7% to 15.9%, limited to the 85th percentile of 65 years of historical performance.
We regularly review all of these assumptions and periodically test DAC and other intangible assets for recoverability. For deposit products, if the current present value of estimated future gross profits is less than the unamortized DAC for a line of business, a charge to income is recorded for additional DAC amortization. For other products, if the benefit reserves plus anticipated future premiums and interest earnings, for a line of business, are less than the current estimate of future benefits and expenses (including any unamortized DAC or other intangible assets), a charge to income is recorded for additional DAC amortization or for increased benefit reserves.
Insurance liabilities and reserves differ for long- and short-duration insurance contracts. Measurement of long-duration insurance liabilities (such as term, whole life and long-term care insurance policies) is based on approved actuarial techniques, but necessarily includes assumptions about mortality, lapse rates and future yield on related investments. Short duration contracts such as property and casualty policies are accounted for based on actuarial estimates of the amount of loss inherent in that period’s claims, including losses for which claims have not been reported. Short-duration contracts loss estimates rely on actuarial observations of ultimate loss experience for similar historical events. Our insurance liabilities, reserves and annuity benefits totaled approximately $76.4 billion at December 31, 2002. We continually evaluate the potential changes in loss estimates, both positive and negative, and use the results of these evaluations both to adjust recorded provisions and to adjust underwriting criteria and product offerings. Further information about insurance liabilities is provided in Notes 7 and 8.
See Note 1(p) to the Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
As discussed in Notes 1 and 5 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets in 2002.
Presented net of deferred taxes of $(824), $(27), and $(304) in 2002, 2001 and 2000, respectively.
Mortgage Insurance products expand homeownership opportunities by providing coverage on residential first mortgages when individuals purchase homes with less than 20% down payment. Mortgage insurance also facilitates the sale of mortgage loans in the secondary mortgage market, providing increased liquidity to mortgage originators. If the homeowner defaults, mortgage insurance reduces and, in some instances, eliminates the loss to the insured institution.
Lifestyle Protection and Enhancement products are intended to protect accumulated wealth and income from the financial drain of unforeseen events. Our principal product lines under the Lifestyle Protection and Enhancement segment are long-term care insurance and consumer protection packages.
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 but less than one year at acquisition are included in short-term investments.
Changes in the fair values of investments available-for-sale, net of the effect on deferred acquisition costs, present value of future profits, and deferred income taxes, are reflected as unrealized investment gains or losses in a separate component of shareholder’s interest and, accordingly, have no effect on net income. Investment securities are regularly reviewed for impairment based on criteria that include the extent to which cost exceeds market value, the duration of the market decline, and the financial health of and specific prospects for the issuer. Unrealized losses that are considered other than temporary are recognized in earnings through an adjustment to the amortized cost basis of the underlying securities. We engage in certain securities lending transactions, which require the borrower to provide collateral, primarily consisting of cash and government securities, on a daily basis, in amounts equal to or exceeding 102% of the fair value of the applicable securities loaned.
Mortgage and policy loans are stated at the unpaid principal balance of such loans, net of allowances for estimated uncollectible 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 consumer protection packages. Such costs are deferred and amortized as follows:
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.
U.S. deferred taxes are allocated to individual subsidiaries by applying the asset and liability method of accounting for deferred income taxes. Intercompany balances are settled at least annually.
Under SFAS 142, we were required to test all existing goodwill for impairment as of January 1, 2002, on a reporting unit basis, and recorded a non-cash charge of $539 million ($380 million after tax), which is reported in the caption “Cumulative effect of change in accounting principle”. All of the charge relates to the Auto & Home Insurance segment, primarily as of the result of heightened price competition in the auto insurance industry. No impairment charge had been required under our previous goodwill impairment policy, which was based on undiscounted cash flows. Further information about goodwill is provided in Note 5.
At January 1, 2001, we adopted SFAS 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, in which case 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 derivatives and hedging is provided in Note 12.
The cumulative effect of adopting this accounting change at January 1, 2001, was as follows:
For earnings effect, amount shown is net of adjustment to hedged items.
The cumulative effect on earnings of adopting SFAS 133 comprised two significant elements. One element represented the fair value of equity options embedded in loans that provided both us and the borrower the right, but not the obligation, to convert the loans into shares of the borrower’s stock. The second element of the transition effect was a portion of the effect of marking to market options and currency contracts used for hedging. The cumulative effect on shareholder’s interest was primarily attributable to marking to market forward and swap contracts used to hedge variable-rate borrowings. Decreases in the fair values of these instruments were attributable to declines in interest rates since inception of the hedging arrangements.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities, which we intend to adopt on July 1, 2003. FIN 46’s consolidation criteria are based on analysis of risks and rewards, not control, and represent a significant and complex modification of previous accounting principles. FIN 46 represents an accounting change, not a change in the underlying economics of asset sales. Under its provisions, certain assets previously sold to our special purpose entities (SPEs) could be consolidated on our books, and, if consolidated, any assets and liabilities now on our books related to those SPEs would be removed. In the event we consolidated these assets, we would not reacquire their legal ownership, nor would our legal rights and obligations change. Any consolidated assets would earn returns substantially like the returns we would have earned had we never sold them. Even assuming the legal provisions controlling these SPEs are not changed between now and the July 1 effective date of FIN 46, the very complexity of the new consolidation rules and their evolving clarification make forecasting that July 1 effect impracticable. It is also clear that many alternative structures for sales of financial assets would continue to be reported as sales under FIN 46 with the assets qualifying for sale not consolidated. We and GE Capital are evaluating whether characteristics of those structures can cost-beneficially be applied to our arrangements before the July 1 effective date. Further information about entities that potentially fall within the scope of FIN 46 is provided in Note 13.
Each of the following acquisitions has been accounted for using the purchase method of accounting and, accordingly, the accompanying Consolidated Financial Statements reflect the corresponding results of operations from the respective dates of acquisition (or date of the Transfer).
In December 2001, we acquired Centurion Capital Group, subsequently renamed GE Private Asset Management (“GEPAM”), for approximately $90. GEPAM is a West Coast based asset management company.
In July 2000, we acquired 90% of the long-term care insurance portfolio of Citigroup’s Travelers Life and Annuity unit and certain assets related thereto for $411 (“the Travelers Transaction”). In addition, we entered into agreements to underwrite and distribute long-term care insurance with certain Citigroup companies through a long-term strategic alliance. Under this agreement, we will market to the distribution channels of Citigroup, including Travelers.
In April 2000, we acquired Phoenix American Life Insurance Company, a subsidiary of Phoenix Home Life Mutual Insurance Company, for approximately $284. Phoenix American Life Insurance Company, subsequently renamed GE Group Life Assurance Company, provides insurance and administrative services to small and mid-size companies.
The additional proceeds from investments presented in our 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, 2002 follows. Expected maturities may differ from 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, 2002, approximately 25%, 16% and 16% of our investment portfolio is comprised of securities issued by the manufacturing, utility and financial industries, respectively, 83% of which are rated investment grade. No other industry group comprises more than 10% of our investment portfolio. This portfolio is widely diversified among various geographic regions in the United States, and is not dependent on the economic stability of one particular region.
At December 31, 2002 and 2001, respectively, we held $1,214 and $1,011 in U.S. mortgages secured by real estate in California, comprising 16.8% and 16.7% of the total mortgage portfolio. For the years ended December 31, 2002, 2001 and 2000, respectively, we originated $308, $237 and $267 of mortgages secured by real estate in California, which represent 25%, 22% and 19% of our total U.S. originations for those years.
As of December 31, 2002 and 2001, we were committed to fund $163 and $120, respectively, in U.S. mortgage loans.
“Impaired” loans are defined under U.S. 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 our commercial loans.
Under these principles, we may have two types of “impaired” loans: loans requiring allowances for losses (none as of December 31, 2002 and 2001) and loans expected to be fully recoverable because the carrying amount has been reduced previously through charge-offs or deferral of income recognition ($4 and $11, as of December 31, 2002 and 2001, respectively). Average investment in impaired loans during 2002, 2001 and 2000 was $7, $12 and $17, respectively and interest income recognized on these loans while they were considered impaired was $1 in each of the three years.
The following table presents the activity in the allowance for losses during the years ended December 31:
During 2002 and 2000, as part of our ongoing analysis of exposure to losses arising from mortgage loans, we recognized reductions of $92 and $33, respectively, in our allowance for losses.
Reinsurance recoveries recognized as a reduction of benefits amounted to $671, $451 and $394 during 2002, 2001 and 2000, respectively.
Either the United States Population Table, 1983 Group Annuitant Mortality Table or 1983 Individual Annuitant Mortality Table.
The 1958 and 1980 Commissioner’s Standard Ordinary Tables, 1964 modified and 1987 Commissioner’s Disability Tables and Company experience.
The 1983 Individual Annuitant Mortality Table or 1980 Commissioner’s Standard Ordinary Table and the 1985 National Nursing Home Study and Company experience.
Mortgage insurance contract liabilities are based on the estimated frequency and severity of known and unreported loan delinquencies.
Our borrowings are addressed as follows from two perspectives-liquidity and interest rate risk management.
Liquidity requirements of GE Financial Assurance are principally met through dividends from its insurance subsidiaries, the Commercial Paper program and the credit line with GE Capital. At December 31, 2002, we have an unused credit line of $2,500 with GE Capital.
Includes the unhedged portion of commercial paper and other short-term debt.
At December 31, 2002, swap maturities ranged from 2007 to 2017.
The reconciliation of the federal statutory tax rate to the effective income tax rate is as follows:
The components of the net deferred income tax liability at December 31 are as follows:
Based on an analysis of our tax position, management believes it is more likely than not that the results of future operations and implementation of tax planning strategies will generate sufficient taxable income to enable us to realize all of our deferred tax assets. Accordingly, no valuation allowance for deferred tax assets has been established.
We paid $253 and $59 for federal and state taxes in 2002 and 2001, respectively, and received a refund of $(266) for income taxes during 2000.
At December 31, 2002 and 2001, our deferred income tax liability was $2,928 and $2,420, respectively. At December 31, 2002 and 2001, our current income tax liability was $469 and $232, respectively.
We also invest in certain short-term notes issued by GE Capital. These investments yield market rates. Interest earned on these notes was $0, $0 and $3 for the years ended December 31, 2002, 2001 and 2000, respectively. There were no investments in short-term notes at December 31, 2002, and $97 at December 31, 2001.
During 2002, 2001 and 2000, we paid $19, $24 and $36, respectively, to GE Capital for certain computer services fees.
The Mortgage Insurance segment provides primary mortgage insurance coverage and other services to a non-consolidated affiliate. During 2002, 2001 and 2000, proceeds from these services were $7, $14 and $18, respectively.
During 2002, we sold certain securities to an affiliate at a fair value established as if it were an arms-length, third party transaction, which resulted in a gain of $114 million.
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 derivative financial instruments. Other financial 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 we have 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, 2002.
The nature of our business activities necessarily involves the management of various financial and market risks, including those related to changes in interest rates. As discussed more fully in Note 1 of the consolidated financial statements, we use derivative financial instruments to mitigate or eliminate certain of those risks. The January 1, 2001, accounting change previously described affected only the pattern and timing of non-cash accounting recognition.
(an “interest rate swap”). This swap will then be designated as a cash flow hedge of the associated variable rate borrowing. If, as would be expected, the derivative is highly effective in offsetting variable rates in the borrowing, change in its fair value are recorded in a separate component of equity and released to earnings contemporaneously with the earnings effects of the hedged item. Further information about hedge effectiveness is provided below.
We use 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.
Net investment hedges. The net investment hedge designation under SFAS 133 refers to the use of derivative contracts or cash instruments to hedge the foreign currency exposure of a net investment in a foreign operation. Currency exposures that result from net investments in affiliates are managed principally by funding assets denominated in local currency with debt denominated in that same currency. In certain circumstances, such exposures are managed using currency forwards and currency swaps.
Derivatives not designated as hedges. SFAS 133 specifies criteria that must be met in order to apply any of the three forms of hedge accounting. For example, hedge accounting is not permitted for hedged items that are marked to market through earnings. We use derivatives to hedge exposures when it makes economic sense to do so, including circumstances in which the hedging relationship does not qualify for hedge accounting as described in the following paragraph. We will also occasionally receive derivatives, such as equity warrants, in the ordinary course of business. Under SFAS 133, derivatives that do not qualify for hedge accounting are marked to market through earnings.
Earnings effects of derivatives. The table that follows provides additional information about the earnings effects of derivatives. In the context of hedging relationships, “effectiveness” refers to the degree to which fair value changes in the hedging instrument offset corresponding fair value changes in the hedged item. Certain elements of hedge positions cannot qualify for hedge accounting under SFAS 133 whether effective or not, and must therefore be marked to market through earnings. Time value of purchased options is the most common example of such elements in instruments we use. Earnings effects of such items are shown in the following table as “amounts excluded from the measure of effectiveness.”
Counterparty credit risk. The risk that counterparties to derivative contracts will be financially unable to make payments to us according to the terms of the agreements is counterparty credit risk. We manage counterparty credit risk on an individual counterparty basis, which means that we net gains and losses for each counterparty to determine the amount at risk. When a counterparty exceeds credit exposure limits in terms of amounts, typically as a result of changes in market conditions (see table below), we will not execute any additional transactions until the exposure with that counterparty is reduced to an amount that is within the established limit. All swaps are executed under master swap agreements containing mutual credit downgrade provisions that provide the ability to require assignment or termination in the event either party is downgraded below A3 or A-. If the downgrade provisions had been triggered at December 31, 2002, we could have been required to disburse up to $1,082 million and could have claimed $87 from counterparties-the net fair value losses and gains. At December 31, 2002 and 2001, gross fair value gains amounted to $339 and $157, respectively. At December 31, 2002 and 2001, gross fair value losses amounted to $1,334 and $1,201, respectively.
One of the most common forms of off-balance sheet arrangements is asset securitization. We use GE Capital sponsored and third party entities to facilitate asset securitizations. As part of this strategy, management considers the relative risks and returns of our alternatives and predominately uses GE Capital sponsored entities. Management believes these transactions could be readily executed through third party entities at insignificant incremental cost.
We received dividends from our subsidiaries of $778 ($375 of which were deemed “extraordinary”), $410, and $33 during 2002, 2001, and 2000, respectively. We declared dividends of $25 to GE Capital during 2001 for which payment was made in 2002. No other dividends were declared or paid by us in 2002 and 2001. We declared and paid $23 of cash dividends to GE Capital during 2000.
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 undercapitalized companies for the purpose of initiating regulatory action. In the course of operations, we periodically monitor the RBC level of each of our insurance subsidiaries. At December 31, 2002 and 2001, each of our insurance subsidiaries exceeded the minimum required RBC levels.
For statutory purposes, our mortgage insurance subsidiaries are required to maintain a contingency reserve. Annual additions to the contingency reserve shall equal 50% of earned premiums to be maintained for ten years.
We conduct our operations through four 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 (3) Lifestyle Protection and Enhancement comprised of products intended to protect accumulated wealth and income from the financial drain of unforeseen events and provide consumer protection packages, and (4) Auto and Home, comprised of products intended to provide insurance coverage for damage to property or injury. See Note (1)(c) for further discussion of our principal product lines within these four segments.
The following is a summary of geographic region activity as of and for the years ended December 31, 2002, 2001 and 2000.
On November 1, 2000 we were named as a defendant in a lawsuit filed in Georgia state court related to the sale of universal life insurance policies (McBride v. Life Insurance Co. of Virginia dba GE Life and Annuity Assurance Co.). On December 1, 2000, we successfully removed the case to the United States District Court for the Middle District of Georgia. The complaint is brought as a class action on behalf of all persons who purchased certain universal life insurance policies from us and alleges improper sales practices in connection with the sale of universal life policies. No class has been certified. On February 27, 2002, the court denied our motion for summary judgment. We have vigorously denied liability with respect to the plaintiff’s allegations and the ultimate outcome, and any effect on us, of the McBride litigation cannot be determined at this time.
GE Financial Assurance’s primary asset is its 100% investment in the common stock of GNA Corporation. GNA Corporation owns 100% of the common stock of various other life and non-life insurance companies. Net investment income primarily includes cash dividends received from its subsidiaries.
The consolidated financial statements and accompanying notes of GE Financial Assurance Holdings, Inc., and subsidiaries are an integral part of this schedule.