The following analysis of the consolidated financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and the Notes hereto included herein.
Interest credited. Interest credited increased $53 million, or 3.2%, to $1,724 million for the year ended December 31, 2002 from $1,671 million for the year ended December 31, 2001. This increase is a result of an increase in underlying reserves arising primarily from sales of fixed annuities and universal life products offset in part by a decline in interest crediting rates on GICs and Funding Agreements.
Net Investment Income. Net investment income increased $307 million to $4,201 million in 2001 from $3,894 million in 2000. The increase was primarily attributable to higher levels of average invested assets ($69.3 billion in 2001 vs. $63.7 billion in 2000). The weighted average yield on these investments was 6.05% in 2001 and 6.09% in 2000.
To convert the assets structure to match the structure of the related liabilities; and
The principal use of cash has been the purchase of investments. These purchases of investments are made pursuant to our asset/liability risk management policies to fund future policyholder benefits.
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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements include the historical operations and accounts of GE Financial Assurance Holdings, Inc. (“GE Financial Assurance”) and its subsidiaries (together with GE Financial Assurance, the “Company”, “we”, “us”, or “our” unless context otherwise requires). Principal operating subsidiaries include General Electric Capital Assurance Company, First Colony Life Insurance Company, GE Life and Annuity Assurance Company, GE Edison Life Insurance Company (“GE Edison”) and General Electric Mortgage Insurance Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation.
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 acquisition 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. PVFP is amortized, net of accreted interest, in a manner similar to the amortization of deferred acquisition costs. Interest accretes at rates credited to policyholders on underlying contracts. Recoverability of PVFP is evaluated periodically by comparing the current estimate of expected future gross profits to the unamortized asset balance. If such comparison indicates that the expected gross profits will not be sufficient to recover PVFP, the difference is charged to expense.
At December 31, 2002 and 2001, there were fixed maturities in default (issuer has missed a coupon payment or entered bankruptcy) with a fair value of $139 and $86, respectively.
At December 31, 2002 and December 31, 2001, total unamortized goodwill was $2,336 and $2,421, respectively. Goodwill amortization was $122 and $108 in 2001 and 2000, respectively.
Interest rate assumptions for our Japanese operations range from 1.19% to 2.4%.
At December 31, 2002, amounts related to derivatives qualifying as cash flow hedges amounted to an increase of equity of $77, of which $38 was expected to be transferred to earnings in 2003 along with the earnings effects of the related forecasted transactions in 2003.
Except for such positions, our other swaps, purchased options and forwards with contractual maturities longer than one year are conducted within the credit policy constraints provided in the table below. We may, however, enter into derivative transactions for durations of five years or longer with lower rated counterparties (Moody’s Aa3 and S&P’s AA-) if the agreements governing such transactions require both us and the counterparties to provide collateral in certain circumstances. Foreign exchange forwards with contractual maturities shorter than one year must be executed with counterparties having an A-1/ P-1 credit rating and the credit limit for these transactions is $150.
Beneficial interest. In certain securitization transactions, we retain an interest in transferred assets. Those interests take various forms and may be subject to credit prepayment and interest rate risks.