(1) Comparability of financial information is affected by acquisitions and other transactions by the Company in the periods presented. See "Acquisitions and Other Transactions."
(2) Includes future annuity and contract benefits, liability for policy and contract claims, unearned premiums, and other policyholder liabilities and excludes separate account liabilities.
(3) Effective January 1, 1999, the Company adopted the American Institute of Certified Public Accountants' Statement of Position No. 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments. The Company 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 million (net of income taxes of $14 million).
GE Financial Assurance is a holding company that, through its subsidiaries, provides consumers financial security solutions by selling a wide variety of insurance, investment and retirement products and income protection packages almost entirely in North America and Asia. The Company believes that changes in demographics such as the increased number of baby boomers entering middle and late middle age, longer life expectancies due to medical advances, the reduction in government- and employer-sponsored benefit programs and the increased need for estate planning for the most affluent group of retirees in history, have, and will continue to increase, the demand for innovative products and services to solve individual financial challenges. The Company's strategy is designed to take advantage of these trends by offering a broad array of products and services. The Company's product offerings are divided along two major segments of consumer needs: (1) Wealth Accumulation and Transfer and (2) Lifestyle Protection and Enhancement.
The Company effectively began operations in 1993 with the acquisition of GNA Corporation. The Company has continued to broaden its operations through a series of acquisitions and other transactions. Certain of these acquisitions and transactions have been significant to the Company in terms of their impact on the Company's consolidated results of operations.
The following table sets forth the significant acquisitions and other transactions made in 1998 and thereafter that impact the financial comparisons of operating results for 2000 as compared to 1999 and 1999 as compared to 1998.
In April 2000, the Company acquired Phoenix American Life Insurance Company. In July 2000, the Company also acquired 90% of the long-term care insurance portfolio of Citigroup's Travelers Life and Annuity unit and certain assets related thereto. These two transactions are collectively referred as "2000 North American Acquisitions." See "Recent Transactions".
The table that follows summarizes the impact of these acquisitions and other transactions on operating results in 2000 and 1999. For purposes of this analysis, the column "Amount Due to 2000 Transactions" includes those acquisitions and other transactions that occurred during 2000 and the increase in 2000 resulting from the inclusion of a full year of operations with respect to acquisitions consummated in 1999 as compared with the inclusion of a partial year of operations in 1999. The column "Amount Due to 1999 Acquisitions" includes those acquistions that occurred during 1999 and the increase in 1999 resulting from the inclusion of a full year of operations with respect to acquisitions consummated in 1998 as compared with the inclusion of a partial year of operations in 1998. The column "Consolidated Change" includes the total increase in the specified line item as compared with the prior period.
(1) Includes the comprehensive transfer of Toho Mutual Life Insurance Company's insurance liabilities and assets in March 2000, the acquisition of Phoenix American Life Insurance Company in April 2000 and The Traveler's Transaction in July 2000, and inclusion of a full year of operating results in 2000 for Professional Insurance Company and The Signature Group versus nine months and six months of operations in 1999, respectively.
Net earnings before cumulative effect of accounting change were $768 million in 2000, a $155 million, or 25.3% increase from 1999. Net earnings before cumulative effect of accounting change increased 24.6% in 1999 from 1998. The 2000 increase was driven largely by increased investment income, premiums earned, and surrender fee income due to the Toho Transfer and growth in sales of certain existing products, partially offset by increased benefits and other changes in policy reserves, amortization of present value of future profits ("PVFP") primarily as a result of the Toho Transfer and subsequent surrenders thereof, as well as increased general expenses principally relating to recent acquisitions and the Company's core growth initiatives.
Operating Results for the Years Ended December 31, 2000, 1999 and 1998
Net Investment Income and Net Realized Investment Gains. Net investment income increased $592 million, or 19.0%, to $3,715 million in 2000 from $3,123 million in 1999. The increase was primarily due to the higher levels of average invested assets ($53.9 billion in 2000 vs. $42.7 billion in 1999) due to investments relating to the Toho Transfer, the 2000 North American Acquisitions, and growth in core invested assets. This increase was partially offset by a decrease in weighted average yields to 7.14% in 2000 from 7.59% in 1999 due to lower yields on investment activity related to the Company's Japanese operations. Excluding the Japanese operations, the weighted average yield in 2000 would have been 7.48%. Net investment income increased $227 million, or 7.8%, to $3,123 million in 1999 from $2,896 million in 1998. The increase was due to the combination of higher levels of average invested assets ($42.7 billion in
1999 vs. $39.5 billion in 1998) resulting from the acquisition of The Signature Group in July 1999 and growth in core invested assets.
Benefits and Other Changes in Policy Reserves. Benefits and other changes in policy reserves includes both activity related to future policy benefits on long-duration life and health insurance products as well as claim costs incurred during the year under such contracts. These amounts increased $1,856 million, or 52.7%, to $5,378 million in 2000 from $3,522 million in 1999. This 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 (acquired in July 1999) and (iv) additional benefits incurred arising from core growth. Benefits and other changes in policy reserves increased $293 million, or 9.1%, to $3,522 million in 1999 from $3,229 million in 1998. This increase was as a result of (i) a full year of operating results in 1999 relating to the April 1998 initiation of operations at GE Edison; (ii) the acquisition of The Signature Group in July 1999 and (iii) growth in certain of the Company's life, accident and health, and structured settlement products.
Interest Credited. Interest credited increased $199 million, or 15.3%, to $1,497 million in 2000 from $1,298 million in 1999. This increase was a result of the increase in underlying reserves arising primarily from sales of annuity products. The increased sales resulted from higher crediting rates that the Company implemented in response to changes in market conditions and other factors. Interest credited increased $38 million, or 3.0%, in 1999 to $1,298 million from $1,260 million in 1998. This increase was a result of the increase in underlying reserves arising from sales of guaranteed investment contracts and single premium
Commission Expenses. Commission expense increased $378 million, or 44.1%, to $1,236 million in 2000, from $858 million in 1999. This 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 (acquired in July 1999). Commission expense increased $317 million, or 58.6%, to $858 million in 1999 from $541 million in 1998. This increase was attributable to higher production levels on certain of the Company's existing products, the full year operations of GE Edison and the acquisition of the Signature Group in July 1999.
The following table sets forth certain summarized financial data for GE Financial Assurance's Wealth Accumulation and Transfer segment for the years ended December 31, 2000, 1999, and 1998.
The Company's principal product lines under the Lifestyle Protection and Enhancement segment are (i) long-term care insurance, (ii) supplemental accident and health insurance, (iii) personal lines of automobile insurance and (iv) income protection packages. Lifestyle Protection and Enhancement products are used by customers to protect their income and assets from the adverse economic impacts of significant health care costs, unanticipated events that cause temporary or permanent loss of earnings capabilities and automobile accidents and related liabilities. The Company also provides consumers with club membership opportunities which are primarily income protection packages allowing coverage of, or discounts on, certain personal expenses (auto towing, vision care, etc.)
Revenues increased in 2000 and 1999 due to the impact of the Travelers Transaction and the acquisition of The Signature Group in July 1999. In addition to acquisition related growth, the Company benefited from increased demand for its long-term care and group disability products. Sales of long-term care policies grew 28.5% in 2000 to $203 million from $158 million in 1999, and 41.1% in 1999 from $112 million in 1998. The higher sales were driven by 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. This market awareness was driven by the passage of the Health Insurance Portability and Accountability Act of 1996 by Congress. Sales of supplemental accident and health insurance grew 85.8% in 2000 to $223 million from $120 million in 1999, driven primarily by the Toho Transfer and the acquisition of Phoenix American Life in April 2000. These increases were partially offset by decreased automobile insurance sales and run-off or exit of certain lines of business. Automobile insurance sales decreased 35.4% to $84 million in 2000 from $130 million in 1999, primarily attributable to certain competitive factors currently existing within the automobile insurance industry.
Operating income from this segment represented 7.2%, 10.2%, and 15.6%, of the Company's total results for the years ended December 31, 2000, 1999, and 1998, respectively. The Company's operating income from the Lifestyle Protection and Enhancement segment decreased 3.4% in 2000 to $85 million, and decreased 29.0% in 1999 from $124 million in 1998. The 2000 decrease is primarily attributable to certain competitive factors currently existing within the automobile insurance industry, the charges related to the Ward's bankruptcy, and the 2000 North American Transactions. The 1999 decrease is primarily attributable to certain competitive factors that existed within the automobile insurance industry, partially offset by the impact from the acquisition of The Signature Group in 1999.
Intangible Assets. Intangible assets, which primarily includes PVFP, goodwill, and VOBA increased $1.0 billion, or 21.1%, to $5.3 billion at December 31, 2000 from $4.3 billion at December 31, 1999. This decrease primarily relates to PVFP recorded as a result of the Toho Transfer of $1.6 billion, offset by (i) the subsequent surrenders of certain contracts by Toho policyholders, (ii) the
write-off of goodwill, PVFP and VOBA related to the Wards restructuring as already discussed, and (iii) amortization of previously capitalized costs.
Deferred Taxes. Deferred taxes decreased $0.5 billion to a deferred tax asset balance of $0.3 billion at December 31, 2000 from $0.8 at December 31, 1999, primarily due to the utilization of net operating loss carryforwards and the current year change in net unrealized losses on the Company's investment portfolio.
Separate Account Assets. Separate account assets represent funds held for the exclusive benefit of variable annuity and variable life contract holders. As of December 31, 2000, the Company held $10.6 billion of separate account assets. The increase of $1.3 billion, or 13.9%, from $9.3 billion at December 31, 1999 is related primarily to increased sales of variable annuity products and overall increased market value of the underlying investment funds.
Total Liabilities. Total liabilities increased $22.1 billion, or 38.9%, to $79.1 billion at December 31, 2000 from $57.0 billion at December 31, 1999. Liabilities assumed in connection with the Toho Transfer, net of amounts eliminated in consolidation, approximated $21.9 billion. Various fluctuations in core operations and changes in liabilities are discussed in more detail below.
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses increased $1.4 billion, or 46.4%, to $4.3 billion at December 31, 2000 from $2.9 billion at December 31, 1999. The increase is due primarily to (i) the timing of net payments and receipts related to the Company's investment portfolio; (ii) increases in liabilities of GE Edison subsequent to the Toho Transfer; and (iii) normal business activity associated with core growth in certain of the Company's product lines.
Minority Interest. Minority interest decreased $424 million at December 31, 2000 to $51 million from $475 million at December 31, 1999, primarily as a result of the elimination of minority interest in GE Edison upon the acquisition of Toho in March 2000.
The nature and quality of the various types of investments purchased by a life insurance company must comply with the statutes and regulations imposed by the various jurisdictions in which those entities are incorporated. The Company primarily purchases investment-grade (BBB-/Baa3 or above) bonds. At December 31, 2000, $44.4 billion, or 89.9%, of the fixed maturity securities held by the Company were bonds rated by a rating agency (S&P or Moody's), or were government/agency bonds. The remaining $5.0 billion, or 10.1% was comprised primarily of private placement bonds not rated by either rating agency. At December 31, 2000, the Company held $4.5 billion of bonds rated below investment grade. In addition, the Company held $0.2 billion of "not-rated" bonds which the Company believes are below investment grade. Below investment grade bonds include those bonds originally purchased as investment grade but subsequently downgraded in rating, as well as bonds purchased as below investment grade.
Certain of the Company's products contain provisions for penalty charges for surrender of the policy. These charges range from 6% to 10.5 % at policy origination and grade to zero over predetermined periods ranging up to twenty years. At December 31, 2000, approximately 77.7% of the Company's annuity contracts were subject to surrender penalties or contained non-surrender provisions. Certain of the Company's funding agreements may be terminated early by the contractholders. The Company has established a line of credit with its parent in an amount sufficient to provide liquidity in the event of an unusual level of early terminations.
___________ (1) Fixed maturity securities available-for-sale are stated at fair values. Amortized cost of fixed maturity securities available-for-sale at December 31, 2000 was $50,188 million, representing net unrealized losses of $738 million. Changes in fair value, net of the effect on present value of future profits, deferred acquisition costs and deferred federal income taxes, are reflected as unrealized appreciation or depreciation directly in shareholder's interest and, accordingly, have no effect on net income, but is shown as a separate component of accumulated non-owner changes in equity.
(2) Mortgage and asset-backed securities are comprised of CMOs ($4,594 million), asset-backed securities ($3,020 million) and pass-through securities ($888 million).
(3) Equity securities available-for-sale are stated at fair market values. The cost basis of equity securities available-for-sale at December 31, 2000 was $438 million, representing net unrealized gains of $27 million. Changes in market value, net of the effect on present value of future profits,
___________ (1) Average of cash and total invested assets on an amortized cost basis, adjusted for impact of timing on acquired companies.
(3) Net investment income divided by the sum of the (i) average cash and total invested assets minus (ii) one-half of net investment income.
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.
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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
Lifestyle Protection and Enhancement products are products intended to protect accumulated wealth and income from the financial drain of unforeseen events and provide income protection packages. The Company's principal product lines under the Lifestyle Protection and Enhancement segment are long-term care, supplementary accident and health insurance, personal lines of automobile insurance and income protection packages.
Investment income is recorded when earned. Realized investment gains and losses are calculated on the basis of specific identification. Premiums on short-duration insurance contracts are reported as revenue over the terms of the related insurance policies. In general, earned premiums are calculated on a pro- rata basis or are recognized in proportion to expected claims. Premiums on long- duration insurance products are recognized as earned when due or, in the case of life contingent immediate annuities, when the contracts are issued. Premiums received under annuity contracts without significant mortality risk and premiums received on universal life products are not reported as revenues but as liabilities for future annuity and contract benefits. Other income consists primarily of surrender charges on certain policies, income protection package revenues and charges to policyholder account values for universal life, variable life and variable annuity policies. Surrender charges are recognized as income when the policy is surrendered. Income protection package dues are recognized as income over the membership period. Charges to policyholder accounts for universal life cost of insurance is recognized as revenue when due. Variable product fees are charged to variable annuity and variable life policyholders based upon the daily net assets of the policyholder's account values and are recognized as revenue when charged.
Income protection packages -- Acquisition costs consist primarily of marketing costs and are amortized in proportion to the anticipated revenue to be recognized from club memberships.
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 which allocates tax on a separate company basis, but provides group benefit for current utilization of losses and credits. The Company's life insurance subsidiaries file a consolidated life insurance federal income tax return and are also subject to a separate tax-sharing agreement, as approved by state insurance regulators, which also allocates tax on a separate Company basis but provides for current utilization of losses and credits.
Future annuity and contract benefits consist of the liability for investment contracts, insurance contracts and accident and health contracts. Investment contract liabilities are generally equal to the policyholder's current account value. The liability for insurance and accident and health contracts is calculated based upon actuarial assumptions as to mortality, morbidity, interest, expense and withdrawals, with experience adjustments for adverse deviation where appropriate.
Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract. Accordingly, changes in market values of hedged instruments must be highly correlated with changes in market values of underlying hedged items both at inception of the hedge and over the life of the hedge contract. Any instrument designated but ineffective as a hedge would be marked to market and recognized in operations immediately.
In connection with the Transfer, the Company terminated reinsurance arrangements it had with Toho. Certain amounts in the Consolidated Statements of Income for the year ended December 31, 2000 reflect the impact of terminating such reinsurance arrangements. The termination of the reinsurance arrangements did not have a significant effect on net earnings for the year ended December 31, 2000. Toho, which continues to exist as a separate and independent entity, will fully liquidate its remaining assets and liabilities following the comprehensive transfer. Such liquidation is not expected to have any impact on the Company's financial position or results of operations.
In conjunction with the 1998 acquisition of the infrastructure and capitalization of GE Edison, a subsidiary of the Company agreed to issue certain subsidiary preferred stock to the sellers in an amount up to (Yen)56.0 billion through 2004, contingent upon certain performance measurements. In accordance with such agreement, the Company issued certain subsidiary preferred stock to the sellers in an amount of $19 in 1999. The subsidiary preferred stock issued during 1999 has been accounted for as additional purchase consideration and the additional goodwill is being amortized over the remaining goodwill life.
In July 2000, the Company 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, the Company and certain Citigroup companies entered into agreements to underwrite and distribute long-term care insurance through a long-term strategic alliance. Under this agreement, the Company will market to the distribution channels of Citigroup, including Travelers.
Each of the above referenced 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. The Company has reflected its initial allocation of purchase price based on their estimated fair values according to preliminary valuations. Such estimated values may change as additional information is obtained and the valuations finalized.
The additional proceeds from investments presented in the Company's Consolidated Statements of Cash Flows result from principal collected on mortgage and asset-backed securities, maturities, calls and sinking fund payments.
Net unrealized gains and losses on investment securities classified as available-for-sale are reduced by deferred income taxes and adjustments to PVFP and deferred acquisition costs that would have resulted had such gains and losses been realized. Net unrealized gains and losses on available-for-sale investment securities reflected as a separate component of shareholder's interest at December 31 are summarized as follows:
At December 31, the amortized cost, gross unrealized gains and losses, and fair value of the Company's fixed maturities and equity securities available- for-sale were as follows:
At December 31, 2000, $6,645 of the Company's investments (excluding mortgage and asset-backed securities) were subject to certain call provisions.
As required by law, the Company has investments on deposit with governmental authorities and banks for the protection of policyholders of $108 and $106 at December 31, 2000 and 1999, respectively.
At December 31, 2000, approximately 28.3%, 16.1% and 13.5% 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, and which are senior secured bonds. 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.
At December 31, 2000, the Company did not hold any fixed maturity securities, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of shareholder's interest.
The credit quality of the fixed maturity portfolio at December 31 follows. The categories are based on the higher of the ratings published by Standard & Poor's or Moody's.
2000 1999 ----- ---- Fair Value Percent Fair Value Percent ---------- ------- ---------- ------- Agencies and treasuries $ 4,016 8.1% $ 3,458 9.4% AAA/Aaa 7,935 16.1 5,937 16.1 AA/Aa 5,963 12.1 3,032 8.2 A/A 12,154 24.6 9,078 24.6 BBB/Baa 12,157 24.6 8,678 23.5 BB/Ba 1,500 3.0 1,337 3.6 B/B 684 1.4 802 2.2 CCC/Caa 21 --- 9 --- Not rated 5,020 10.1 4,601 12.4 ------------------------------------------------ Totals $49,450 100.0% $36,932 100.0% ================================================
At December 31, 2000 and 1999, there were fixed maturities in default with a fair value of $65 and $10, respectively.
At December 31, 2000 and 1999, respectively, the Company held $1,001 and $854 in U.S. mortgages secured by real estate in California, comprising 13% and 25% of the total mortgage portfolio. For the years ended December 31, 2000, 1999 and 1998, respectively, the Company originated $267, $201 and $222 of mortgages secured by real estate in California, which represent 19%, 23% and 29% of the respective total U. S. originations for those years.
As a part of the comprehensive transfer of the assets of Toho to GE Edison in March 2000, the Company acquired certain individual and corporate loans having a value of $3,328 at December 31, 2000. At December 31, 2000, 68% of the loan portfolio consisted of loans to banks, large listed companies, and local or foreign governments. At December 31, 2000, 26% of these loans were with Japan's 4 largest banks.
"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 the Company's commercial loans.
Under these principles, the Company has two types of "impaired" loans: loans requiring allowances for losses (none as of December 31, 2000 and 1999) and loans expected to be fully recoverable because the carrying amount has been reduced previously through charge-offs or deferral of income recognition ($12 and $19, as of December 31, 2000 and 1999, respectively). Average investment in impaired loans during 2000, 1999 and 1998 was $17, $15 and $26, respectively and interest income recognized on these loans while they were considered impaired was $1, $3 and $2, respectively.
During 2000, as part of its on-going analysis of exposure to losses arising from mortgage loans, the Company recognized a $33 reduction in its allowance for losses.
The estimated percentage of the December 31, 2000 balance, before the effect of unrealized investment gains or losses, to be amortized over each of the next five years is as follows:
(b) Principally modifications of the 1965-70 or 1975-80 Select and Ultimate Tables, 1958 and 1980 Commissioner's Standard Ordinary Tables or Fifth Japanese Experience Table.
(d) The 1983 Individual Annuitant Mortality Table or 1980 Commissioner's Standard Ordinary Table and the 1985 National Nursing Home Study and Company experience. (e) Interest rate assumptions for the Company's Japanese operations range from 1.5%-2.4%.
Additional financing for the March 1998 GE Edison transaction was obtained by the issuance of a long-term note of the Company to GE Capital. The long-term note in the amount of (Yen)57.25 billion ($440 at December 31, 2000, 1999 and 1998) was scheduled to mature in March 2008. The note was issued with a floating interest rate based on a spread above the three-month Japanese Yen LIBOR London Inter-Bank offered rate (JPY LIBOR), or a total rate of 0.89% and 0.93% at December 31, 1999 and 1998, respectively. In December 2000 the note was refinanced at an effective fixed rate of 2.64%.
The Company has a line of credit with GE Capital that has an aggregate borrowing line of $2,500, of which a maximum of $532 and $497 was used during the years 2000 and 1999, respectively. At December 31, 2000 and 1999, the balance outstanding was $291 and $49, respectively.
The components of the net deferred income tax asset (liability) at December 31 are as follows:
At December 31, 2000 and 1999, fixed maturities included a note receivable from GE Capital with a balance of $175. This note bears interest at 6.625% and matures in August 2003.
The Company also invests in certain short-term notes issued by GE Capital. These investments yield market rates. Interest earned on these notes was $3, $1 and $3 for the years ended December 31, 2000, 1999 and 1998, respectively. There were no investments in short-term notes at December 31, 2000, and investments were $63 at December 31, 1999.
The Company's insurance subsidiaries are required by law to participate in the guaranty associations of the various states in which they do business. The state guaranty associations ensure payment of guaranteed benefits, with certain restrictions, to policyholders of impaired or insolvent insurance companies by assessing all other companies involved in similar lines of business.
The American Institute of Certified Public Accountants has issued Statement of Position (SOP) No. 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments. This SOP provides guidance on accounting by insurance and other enterprises for guaranty-fund and certain other insurance related assessments. The SOP requires enterprises to recognize (1) a liability for assessments when (a) an assessment has been asserted or information available prior to issuance of the financial statements indicates it is probable that an assessment will be asserted, (b) the underlying cause of the asserted or probable assessment has occurred on or before the date of the financial statements, and (c) the amount of the loss can be reasonably estimated, and (2) an asset for an amount when it is probable that a paid or accrued assessment will result in an amount that is recoverable from premium tax offsets or policy surcharges from in-force policies.
Borrowings. Based on quoted market prices or market comparables. Fair values of interest rate and currency swaps on borrowings are based on quoted market prices and include the effects of counterparty creditworthiness.
(b) Net realized gains on sales of financial assets through securitizations amounted to $67 million and $36 million during 2000 and 1999, respectively.
Additional information about certain financial instruments in the above table follows.
Insurance companies are restricted by states as to the aggregate amount of dividends they may pay to their parent in any consecutive twelve-month period without regulatory approval. Generally, dividends may be paid out of earned surplus without approval with thirty days prior written notice within certain limits. The limits are generally based on 10% of the prior year surplus (net of adjustments in some cases) and prior year statutory income (net gain from operations, net income adjusted for realized capital gains, or net investment income). Dividends in excess of the prescribed limits or the Company's earned surplus require formal state insurance commission approval. Based on statutory results as of December 31, 2000, the Company is able to receive $290 in dividends in 2001 without obtaining regulatory approval.
The Company did not receive dividends from its subsidiaries during 2000 and received $259 and $120 of cash dividends from its subsidiaries during 1999 and 1998, respectively. The Company did not pay cash dividends to its parent, GE Capital during 2000 and paid $155 and $120 of cash dividends during 1999 and 1998, respectively.
Combined statutory net income for the Company's U.S. domiciled insurance subsidiaries for the years ended December 31, 2000, 1999 and 1998 was $42, $291 and $431, respectively. The combined statutory capital and surplus as of December 31, 2000 and 1999 was $5,490 and $3,179, respectively.
The Company conducts its operations through two 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, and (2) 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 two segments.
The Company conducts its operations primarily 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.
(1) Effective January 1, 1999, the Company adopted the American Institute of Certified Public Accountants' Statement of Financial Position No. 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments. The Company has reported the effect of this adoption as a cumulative effect of a change in the accounting principle, which served to increase first quarter of 1999 net income by $25 million (net of income taxes of $14 million).
Under date of January 22, 2001, we reported on the 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, 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.
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.
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.