UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
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COMMISSION FILE NUMBER 0-23375
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GE FINANCIAL ASSURANCE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 54-1829180
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6604 WEST BROAD STREET
RICHMOND, VIRGINIA 23230 (804) 281-6000
(Address of principal executive offices) (Zip Code) (Registrant's telephone
number,
including area code)
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SECURITIES REGISTERED PURSUANT
TO SECTION 12(B) OF THE ACT:
NONE.
SECURITIES REGISTERED PURSUANT
TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
At March 29, 1999, 1,000 shares of voting common stock, which constitute all of
the outstanding common equity, with a par value of $1.00 were outstanding.
Aggregate market value of the outstanding common equity held by nonaffiliates of
the registrant at March 29, 1999. None.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(A) AND (B)
OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE
FORMAT.
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TABLE OF CONTENTS
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PAGE
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<S> <C>
PART I
Item 1. Business .................................................................. 1
Item 2. Properties ................................................................ 25
Item 3. Legal Proceedings ......................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders ....................... 25
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters . 26
Item 6. Selected Financial Data ................................................... 26
Item 7. Management's Discussion and Analysis of Results of Operations ............. 27
Item 7A.Quantitative and Qualitative Disclosures about Market Risk ................ 41
Item 8. Financial Statements and Supplementary Data ............................... 44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................... 85
PART III
Item 10.Directors and Executive Officers of the Registrant ........................ 85
Item 11.Executive Compensation .................................................... 85
Item 12.Security Ownership of Certain Beneficial Owners and Management ............ 85
Item 13.Certain Relationships and Related Transactions ............................ 85
PART IV
Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......... 87
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
GE Financial Assurance Holdings, Inc. ("GE Financial Assurance,"
together with its subsidiaries, the "Company"), through its direct and indirect
subsidiaries, is principally engaged in the life insurance, annuity and property
and casualty insurance business primarily in North America and Asia. All the
outstanding common stock of GE Financial Assurance is owned by General Electric
Capital Corporation ("GE Capital"), a wholly owned subsidiary of General
Electric Capital Services, Inc. The Company's principal executive offices are
located at 6604 West Broad Street, Richmond, Virginia 23230 (telephone (804)
281-6000).
OWNERSHIP OF THE COMPANY
GE Capital operates in four financing industry segments and in a
specialty insurance industry segment. GE Capital's financing activities include
a full range of middle-market leasing and lending, equipment management sales
and services, specialized financing and consumer savings and insurance services.
GE Capital's specialty insurance activities include providing financial guaranty
insurance, principally on municipal bonds and structured finance issues, private
mortgage insurance and creditor insurance covering international customer loan
repayments. The long-term debt obligations of GE Capital are rated "AAA" by
Standard & Poor's Corporation ("S&P") and "Aaa" by Moody's Investors Services,
Inc. ("Moody's").
GENERAL DESCRIPTION OF BUSINESS
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 primarily in North
America and Asia. The Company effectively began operations in April 1993 with
the acquisition of GNA Corporation and its principal operating company, Great
Northern Insured Annuity Corporation. The Company has continued to broaden its
operations through a series of acquisitions consummated since 1993. See "The
Company -- Significant Acquisitions." The Company's product offerings are
divided along two major segments of consumer needs: (i) Wealth Accumulation and
Transfer and (ii) Wealth and Lifestyle Protection.
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. 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. The Company's distribution of Wealth Accumulation
and Transfer products is accomplished through three distribution methods: (i)
intermediaries, (ii) career or dedicated sales forces, and (iii) marketing
through businesses and affinity groups.
<PAGE>
The Company's principal product lines under the Wealth and Lifestyle
Protection segment are (i) long-term care insurance, (ii) supplemental accident
and health insurance, (iii) personal lines of automobile insurance and (iv)
credit insurance (life and accident and health). Wealth and Lifestyle Protection
products are used by customers as vehicles to protect their income and assets
from the adverse economic impacts of automobile accidents and related
liabilities or significant health care costs or other unanticipated events that
cause temporary or permanent loss of earnings capabilities (including the
ability to repay certain indebtedness). The Company's distribution of Wealth and
Lifestyle Protection products is accomplished through four distribution methods:
(i) intermediaries, (ii) career or dedicated sales forces, (iii) marketing
through businesses and affinity groups and (iv) direct marketing.
RECENT TRANSACTIONS
On December 31, 1998, the Company reached an agreement to acquire
Professional Insurance Company from Pacific Life and Accident Insurance Company,
during 1999, for $48 million. Professional Insurance Company is a work-site
insurance provider based in Raleigh, N.C. The Company believes that the
acquisition of Professional Insurance Company will be a strategic fit into its
work-site distribution network.
On January 1, 1999, Great Northern Insured Annuity Corporation
(previously a wholly owned subsidiary of General Electric Capital Assurance
Company) merged into General Electric Capital Assurance Company and The Harvest
Life Insurance Company (previously a subsidiary of Federal Home Life Insurance
Company) merged into The Life Insurance Company of Virginia. Also, PHF Life
Insurance Company (previously a subsidiary of Federal Home Life Insurance
Company) merged into Union Fidelity Life Insurance Company. Simultaneously with
the aforementioned mergers, The Life Insurance Company of Virginia was renamed
GE Life and Annuity Assurance Company. The mergers and name change were approved
by all applicable state insurance regulatory departments.
On March 30, 1998, the Company and Toho Mutual Life Insurance Company
("Toho"), a Japanese insurer jointly capitalized a new insurance company ("GE
Edison Life Insurance Company") that sells life health and annuity products in
the Japanese market. In connection with this agreement, the Company paid Toho
$547 million to acquire the operating infrastructure and $13 million to purchase
certain tangible assets of Toho. GE Edison Life Insurance Company will originate
and underwrite all of the new business activity. Existing Toho business remains
with Toho with the exception of certain term life insurance business ceded to GE
Edison Life Insurance Company as described below. The Company's investment in GE
Edison Life Insurance Company includes 90% of the entity's voting interest.
Additionally, the Company paid Toho a ceding commission of $400 million in
exchange for Toho transferring 50% of certain term life insurance reserves and
certain other liquid assets approximating $391 million. GE Edison Life Insurance
Company also 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 Life Insurance Company. The
Company believes that the formation of GE Edison Life Insurance Company provided
a significant opportunity to participate in the large Japanese insurance market
and to expand its global marketing capability and presence.
<PAGE>
STRATEGY
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 through the
Company's four major channels of distribution. See "Marketing and Distribution."
The Company's approach to this opportunity is to accumulate a number of
businesses with unique product and distribution capabilities designed to deliver
innovative products and services associated with accumulating, transferring and
protecting the consumer's wealth and lifestyle. Most of the Company's products
are targeted at middle to upper income consumers and individuals employed by
small to mid-sized companies. To date, the Company has operated primarily in
North America and Asia.
The Company's strategy is to be a consumer financial solutions provider
through (i) growth, (ii) identification and development of financial solutions
and (iii) competitive cost leadership. These elements are further supported by a
strong foundation of operating fundamentals. The Company's strategy consists of
the following four elements:
o GROWTH. This element concentrates on the Company's marketplace focus,
acceleration of internal growth, building distribution capabilities,
and rapidly expanding its international presence.
The Company's business units focus on key customer groups and
distribution channels which are well positioned to maximize
marketplace penetration. The Company believes that its customers are
becoming increasingly sophisticated in assessing their needs for
savings, insurance and retirement. The Company's products and
services are designed to meet needs based on input from customers and
the distributors who service them. To enable the Company to obtain
this input, it endeavors to create and maintain direct contact with
its key customer groups, as well as the distributors who service
them.
The Company's distribution strategy is focused on penetrating its
targeted consumers through four types of distribution methods: (i)
intermediaries, (ii) career or dedicated sales forces, (iii)
marketing through businesses and affinity groups and (iv) direct
marketing. In each distribution type, internal growth will be driven
by the effective cross-marketing of selected products, and enhancing
the presence, effectiveness, and loyalty of the distributors. See --
"Marketing and Distribution."
GE Financial Assurance has acquired a number of companies which offer
a broad array of products and services designed to address the wealth
accumulation and transfer and wealth and lifestyle protection needs
of consumers. While the Company's primary focus will be on increasing
its sales of existing products by enhancing its marketing and sales,
product development and service capabilities, the Company will
continue to consider opportunities to enter new markets. Entry into
these new markets will be accomplished through (1) development of new
products for sale through existing channels, (2) development of new
products to serve new channels, (3) creation of new distribution
segments within established channels and (4) acquisition of entities
with an established presence in existing markets or distribution
channels.
<PAGE>
The Company recognizes that demographic trends similar to those
existing in the United States are also emerging in other developed
countries. Additionally, other markets are in the process of
developing financial services capabilities currently available in the
United States. The Company continually monitors these developments
and considers opportunities to participate in these markets. GE
Financial Assurance believes that industrialization and expansion of
the middle class in Asia and Latin America and the consolidation of
the financial services industry in Europe will create opportunities
for international expansion in the future.
o Provider of Financial Solutions. The Company continuously reviews its
products and services as well as the consumer marketplace in order to
identify consumer needs and develop products and services focused on
meeting those needs. These include new products, packaged solutions
and services designed to address the wealth accumulation and transfer
and wealth and lifestyle protection needs of consumers.
o LEADERSHIP IN COST COMPETITIVENESS. The Company recognizes that
consolidation in the financial services industry will create fewer,
but larger competitors. Effective competition will be dependent upon,
among other things, the Company's ability to reduce its expenses
through the elimination of duplicate functions and the use of
enhanced technology. The Company's continued commitment to bring
together its recent acquisitions into an integrated platform with
common information systems is designed to create a competitive
advantage in the marketplace. While the Company believes that the
diversity of its distribution channels is a competitive advantage, it
recognizes the need to coordinate its efforts to provide a unified
face to its customers and distributors. The Company has worked, and
will continue to work, to promptly integrate its recent acquisitions,
many of which have enhanced existing distribution channels or added
new ones. The Company is committed to service excellence through the
implementation of quality initiatives to provide timely efficient
response to all consumer inquiries, needs and requests.
o STRONG FOUNDATION OF OPERATING FUNDAMENTALS. The Company's dedication
to providing quality products to its customers, maintaining strong
risk management and compliance and utilizing technology for
competitive advantage all provide a solid foundation for the
Company's successful execution of its business strategy. Risk
management and compliance processes and practices have been a
long-standing strength of GE Capital, and the Company has developed
processes and practices appropriate for its operating businesses
using GE Capital's practices and experience as a guide. The Company
believes that its commitment to technology, as demonstrated by its
upgrading of its life insurance administration and underwriting
systems and its development of integrated computer systems which
propose, issue and administer various types of complex contracts,
will enable the Company and its distributors to be increasingly more
productive and thus provide competitive advantages in the
marketplace.
<PAGE>
SIGNIFICANT ACQUISITIONS
The Company effectively began operations in April 1993 with the
acquisition of GNA Corporation and its principal operating company, Great
Northern Insured Annuity Corporation. The Company has continued to broaden its
operations through a series of acquisitions since 1993. The following table sets
forth the primary acquisitions that GE Financial Assurance has made over the
last few years with a brief description of the new products and principal
distribution channels each acquisition brought to GE Financial Assurance.
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PRINCIPAL
ACQUISITION DATE PRINCIPAL PRODUCTS DISTRIBUTION CHANNEL
----------- ---- ------------------ --------------------
<S> <C> <C> <C>
GNA Corporation April 1993 Deferred annuities and Intermediaries
mutual funds
United Pacific Life July 1993 Deferred annuities and Intermediaries
Insurance Co. structured settlements
(subsequently renamed
General Electric Capital
Assurance Company)
The Federal Home Life November 1994 Annuities, supplemental Career or
Companies accident and health and dedicated sales
credit products force and
intermediaries
AMEX Life Assurance Company October 1995 Long-term care Career or
(subsequently merged into dedicated sales
General Electric Capital force
Assurance Company)
Union Fidelity Life April 1996 Credit products and Direct marketing
Insurance Company supplemental accident and and marketing
health products through businesses
and affinity groups
The Life Insurance Company April 1996 Variable annuities, Intermediaries and
of Virginia (subsequently universal life insurance career or
renamed GE Life and and GICs dedicated sales
Annuity Assurance Company) force
First Colony Life Insurance December 1996 Life insurance, retirement Intermediaries
Company annuities and structured
settlements
Colonial Penn Insurance November 1997 Personal lines of Direct marketing
Company automobile insurance
GE Edison Life Insurance March 1998 Life insurance, health and Career or
Company (former operating annuity products dedicated sales
infrastructure of Toho force
Mutual Life Insurance Co.)
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<PAGE>
RATINGS
GE Financial Assurance's principal subsidiaries are rated by A.M. Best
Company, an independent rating agency ("A.M. Best"), as follows:
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COMPANY RATING
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<S> <C>
First Colony Life Insurance Company......................................... A++ (superior)
General Electric Capital Assurance Company.................................. A+ (superior)
GE Capital Life Assurance Company of New York .............................. A+ (superior)
American Mayflower Life Insurance Company of New York....................... A+ (superior)
Federal Home Life Insurance Company......................................... A+ (superior)
The Harvest Life Insurance Company.......................................... A+ (superior)
The Life Insurance Company of Virginia...................................... A+ (superior)
Great Northern Insured Annuity Corporation.................................. A+ (superior)
Union Fidelity Life Insurance Company....................................... A+ (superior)
PHF Life Insurance Company.................................................. A+ (superior)
Colonial Penn Insurance Company............................................. A- (excellent)
GE Edison Life Insurance Company............................................ Not Rated
</TABLE>
A.M. Best's ratings for insurance companies currently range from A++ to
F, and some companies are not rated. A.M. Best's ratings are based upon an
evaluation of a company's: (i) financial strength (leverage/capitalization,
capital structure/holding company, quality and appropriateness of reinsurance
program, adequacy of loss/policy reserves, quality and diversification of
assets, and liquidity); (ii) operating performance (profitability, revenue
composition, and management experience and objectives) and (iii) market profile
(market risk, competitive market position, spread of risk, and event risk).
"A++" and "A+" ratings are assigned to those companies that in A.M. Best's
opinion have, on balance, superior financial strength, operating performance and
market profile when compared to the standards established by A.M. Best and have
a very strong ability to meet their ongoing obligations to policyholders. "A"
and "A-" ratings are assigned to those companies that in A.M. Best's opinion
have, on balance, excellent financial strength, operating performance and market
profile when compared to the standards established by A.M. Best and have a
strong ability to meet their ongoing obligations to policyholders. A.M. Best's
ratings are based upon factors of concern to policyholders, agents and
intermediaries and are not directed toward the protection of investors.
<PAGE>
PRODUCTS
WEALTH ACCUMULATION AND TRANSFER PRODUCTS
ANNUAL LIFE INSURANCE
The following table presents the aggregate amount of annual life
insurance the Company had in force as of the dates indicated.
ANNUAL LIFE INSURANCE IN FORCE
AS OF DECEMBER 31,
1998 1997 1996
---- ---- ----
(DOLLARS IN MILLIONS)
Annualized Premiums of Life Insurance in Force:
Term ........................................... $ 503 $ 503 $442
Permanent....................................... 528 503 462
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Total........................................... $1,031 $1,006 $904
========================
The following table presents total sales of the Company's annual life
insurance products for the periods presented.
DISTRIBUTION OF ANNUAL LIFE INSURANCE POLICIES
YEARS ENDED
DECEMBER 31,
1998 1997 1996
---- ---- ----
(DOLLARS IN MILLIONS)
Annual Life Insurance:
Term................................. $106 $100 $ 7
Permanent ........................... 326 194 105
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Total................................ $432 $294 $112
=====================
TERM LIFE INSURANCE. Term life insurance provides life insurance protection for
a limited time: a death benefit is paid only if the insured dies during the
specified term. The Company's term life insurance products include competitively
priced graded premium whole life insurance products that offer low cost
insurance protection. These products generally have level premiums for initial
terms of 1, 5, 10, 15, 20 or 30 years and give the policyholder the contractual
right to continue coverage for life. The Company's Japanese affiliate, GE Edison
Life Insurance Company, sells term insurance products primarily in the form of
riders to semi-participating whole life products. These policies generally have
initial term of 10 and 15 years and policyholders are eligible to receive
dividend payments every five years.
<PAGE>
PERMANENT LIFE INSURANCE. Permanent life insurance provides life insurance
protection for the entire life of the insured and, unlike term life insurance,
has an investment component. The Company's permanent life insurance products
include a variety of guaranteed premium interest-sensitive whole life insurance,
universal life insurance, and employee plans/salary savings products. The
Company's Japanese affiliate, GE Edison Life Insurance Company, sells
semi-participating whole life insurance policies that provide permanent life
insurance protection. Policyholders are eligible to receive dividend payments
every five years. Benefits are paid in the event of death or severe disability.
IMPAIRED RISK UNDERWRITING. An insured who is an impaired risk has a shorter
life expectancy than one who is accepted on a standard or preferred basis at
normal rates; for this reason the insured pays a higher premium for the same
coverage. During 1998, approximately 9% of the Company's life insurance premiums
and 5% of the face amount of its new business was underwritten on an impaired
risk basis. The Company's impaired risk underwriting capability was acquired as
part of The Life Insurance Company of Virginia and First Colony Life Insurance
Company acquisitions in 1996. Prior to that date, the amount of the Company's
life insurance premiums represented by impaired risk business was not material.
The following table identifies those states that accounted for 5% or
more of the Company's annual life insurance premiums collected during 1998
(includes a small amount of single premium life insurance).
ANNUAL LIFE INSURANCE PREMIUMS PRODUCED BY STATE
STATE YEAR ENDED
- ----- DECEMBER 31, 1998
-----------------
(PERCENT OF TOTAL PREMIUMS)
California .......................... 11%
Virginia............................. 11%
Florida.............................. 6%
New York............................. 6%
SINGLE PREMIUM IMMEDIATE ANNUITIES
The following table presents the aggregate amount of single premium
immediate annuities ("SPIAs") in force measured by reserves as of the dates
indicated.
SINGLE PREMIUM IMMEDIATE ANNUITIES IN FORCE
AS OF DECEMBER 31,
1998 1997 1996
---- ---- ----
(DOLLARS IN MILLIONS)
Single Premium Immediate Annuities:
Structured Settlement ..................... $9,102 $8,590 $8,041
Retirement................................. 2,746 2,663 2,617
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Total...................................... $11,848 $11,253 $10,658
=============================
<PAGE>
SPIAs provide long-term guaranteed benefit payment streams utilizing a
fixed interest assumption. SPIAs guarantee a stream of payments beginning
immediately and continuing over a future period of years and, in some cases, for
the life of the annuitant. The Company's SPIAs fall into two categories:
structured settlement and retirement.
SPIAs differ from deferred annuities in that they generally provide for
payments to begin immediately, are not subject to surrender or borrowing by the
policyholder and the payment stream is contractually guaranteed. The implicit
interest rate on SPIAs is based on market conditions when the policy is issued
and is guaranteed for the term of the annuity. Since immediate annuities are not
subject to surrender or borrowing by the policyholder, they provide the
opportunity for an insurance company to match closely the underlying investment
of premium received to the cash benefits to be paid under a policy, thereby
providing an anticipated margin for expenses and profit, subject to mortality
risk. The Company is one of the few companies that offer medically underwritten
annuities. This allows retirees with medical conditions that could shorten their
life expectancies to purchase annuities at lower prices or higher payouts, which
reflect their individual life expectancies.
The following table presents total sales of the Company's single premium
immediate annuity products for the periods presented. Premiums related to single
premium immediate annuity contracts without life contingencies are reported as
deposit liabilities under GAAP.
DISTRIBUTION OF SINGLE PREMIUM IMMEDIATE ANNUITIES
YEARS ENDED
DECEMBER 31,
1998 1997 1996
---- ---- ----
(DOLLARS IN
MILLIONS)
Single Premium Immediate Annuities:
Structured Settlement ....................... $ 827 $676 $303
Retirement................................... 360 213 39
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Total........................................ $1,187 $889 $342
=====================
SINGLE PREMIUM IMMEDIATE ANNUITIES -- STRUCTURED SETTLEMENT. Structured
settlements provide an alternative to a lump sum settlement in a personal injury
case and are generally purchased by property and casualty insurance companies
for the benefit of an injured claimant with benefits scheduled over a fixed
period and/or for the life of the claimant thereafter. Structured settlements
offer tax advantaged long-range financial security to the injured party and
facilitate claim settlement for the casualty insurance carrier. First Colony
Life Insurance Company ("First Colony") was a pioneer in this business in the
late 1970's and early 1980's and has consistently been a significant provider
since the market's inception. GE Capital Assurance has been a significant
provider since 1993.
Structured settlement contracts are long-term in nature, guarantee a
fixed benefit stream and generally cannot be surrendered or borrowed against.
Since many structured settlement contracts generally provide for guaranteed
payments for a predetermined period that do not depend on the survival of the
annuitant, the mortality risk portion of the Company's liability with respect to
such policies is relatively small.
<PAGE>
SINGLE PREMIUM IMMEDIATE ANNUITIES -- RETIREMENT. SPIAs used for retirement
purposes are identical to those used to facilitate structured settlements in
that payments begin immediately, cannot be surrendered or borrowed against and
guarantee a fixed stream of benefits. Retirement annuities are typically sold to
older annuitants and therefore are somewhat shorter in average contract life
than structured settlement annuities.
The Company has been able to use much of the technology it developed in
the structured settlement annuity market to its advantage in the retirement
annuity market. Its software allows agents to design and quote innovative and
customized income patterns for their clients.
SINGLE PREMIUM LIFE INSURANCE, SINGLE PREMIUM DEFERRED ANNUITIES AND GICS
The following table presents Company's single premium life insurance,
single premium deferred annuities and GICs in force for the periods presented.
Premiums related to these products are reported as deposit liabilities under
GAAP.
SINGLE PREMIUM LIFE INSURANCE,
SINGLE PREMIUM DEFERRED ANNUITIES AND GICS IN FORCE
AS OF DECEMBER 31,
1998 1997 1996
---- ---- ----
(DOLLARS IN MILLIONS)
Single Premium Life Insurance............... $2,631 $2,634 $2,551
Single Premium Deferred Annuities
Fixed .................................... 11,976 12,545 13,277
Variable.................................. 5,895 4,590 3,167
GICs ....................................... 2,425 1,606 1,341
Other....................................... 250 143 145
------------------------------
Total..................................... $23,177 $21,518 $20,481
==============================
DISTRIBUTION OF SINGLE PREMIUM LIFE INSURANCE AND
SINGLE PREMIUM DEFERRED ANNUITY AND GIC SALES
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
(DOLLARS IN MILLIONS)
Single Premium Life Insurance.................... $ 23 $ 77 $ 25
Single Premium Deferred Annuities
Fixed ......................................... 688 712 756
Variable....................................... 908 1,032 796
GICs ............................................ 1,087 544 245
--------------------------
Total.......................................... $2,706 $2,365 $1,822
==========================
<PAGE>
The following table identifies those states that accounted for 5% or
more of the Company's 1998 production of annuities.
ANNUITY PRODUCTION BY STATE
STATE YEAR ENDED
- ----- DECEMBER 31, 1998
------------------
(PERCENT OF TOTAL PREMIUMS)
Virginia .................................. 11%
Washington................................. 11%
California................................. 9%
Pennsylvania............................... 9%
Massachusetts.............................. 7%
Illinois................................... 6%
New Jersey................................. 6%
New York................................... 6%
Florida.................................... 5%
SINGLE PREMIUM LIFE INSURANCE
The Company's single premium life insurance products are interest
rate-sensitive policies that, for a single payment, provide the insured with
non-participating life insurance with a guaranteed cash value and death benefit.
Current interest is credited to the policy's cash values based upon interest
rates that are revised periodically by the Company to reflect current economic
conditions. In most cases, this accrual of interest during the accumulation
period is on a tax-deferred basis to the insured. The Company guarantees that in
no event will the interest rate credited on cash values be less than the
guaranteed rate specified in the policy. The policy owner is permitted to take
loans and withdrawals against the cash value. Withdrawals in the early years of
the contract are subject to a significant surrender charge. In 1998, most
policies being issued provide surrender charges which are 8% for the first six
policy years and decrease to zero over the subsequent 10-year period. The
product permits up to a 10% annual withdrawal without penalty.
SINGLE PREMIUM DEFERRED ANNUITIES
FIXED ANNUITIES. A fixed single premium deferred annuity (a "SPDA")
provides for a single premium payment at time of issue, an accumulation period
and an annuity payout period at some future date. During the accumulation
period, the insurance company credits the account value of the annuitant with
interest earnings at a current interest rate (the "crediting rate") that is
guaranteed for a period of one to five years, at the annuitant's option, and,
thereafter, is subject to change based on prevailing market rates and product
profitability. Each contract also has a minimum guaranteed rate. This accrual of
interest during the accumulation period is on a tax-deferred basis to the policy
owner. After the number of years specified in the annuity contract, the owner
may elect to take the proceeds of the annuity as a single payment, a specified
income for life or a specified income for a fixed number of years. The policy
owner is permitted at any time during the accumulation period to withdraw all or
part of the single premium paid plus the amount credited to his account.
Withdrawals in the early years of the contract are subject to a significant
surrender charge. In 1998, policies being issued provide surrender charges which
vary from 5% to 8% of the account value starting in the year of policy issue and
decrease to zero over a five to nine year period. SPDAs permit up to a 10%
annual withdrawal after the first twelve months without penalty.
<PAGE>
At least once each month, the Company establishes an interest crediting
rate for its new fixed SPDA policies. In determining the Company's interest
crediting rate on new policies, management considers the competitive position of
the Company, prevailing market rates and the profitability of the annuity
product. The Company maintains the initial crediting rate for a minimum period
of one year. Thereafter, the Company may adjust the crediting rate not more
frequently than once per year for a given SPDA policy. Interest rates credited
on the Company's in-force SPDA policies ranged from 3.9% to 7.0% at December 31,
1998. All of the Company's annuity products have minimum guaranteed crediting
rates ranging from 3.0% to 5.5% for the life of the policy.
The Company offers an SPDA product where the amount of interest credited
is linked to the S&P 500 Index. This indexed annuity allows customers to
participate in the growth in the S&P 500 while providing protection of principal
and a guaranteed return. The guaranteed minimum crediting rate on the product is
3% per annum. The product has a ten-year surrender charge period with surrender
charges of 8%. The Company earns an annual administrative fee on the product
which is computed based on the policy's accumulated value.
VARIABLE ANNUITIES. A variable annuity incorporates all the features of
a fixed SPDA, but also involves maintaining a portion of the policyholders'
premiums in a separate account maintained for variable annuities, distinct from
the Company's general assets and liabilities. Policyholders have discretion to
allocate their premiums among several available fund options (mutual funds and
other investment funds, including a fixed account, which is held by the
Company). The cash surrender value of a variable annuity policy depends on the
performance of these underlying funds, which the policyholder may reallocate
from time to time. There is no guaranteed minimum rate in the mutual fund
components of variable annuity policies. Similarly, during the variable
annuity's payout period, the payments distributed to the annuitant fluctuate
with the performance of the underlying funds selected by the annuitant. Variable
annuities provide the Company with fee based revenue in the form of management
and administrative fees charged to the policyholder's account.
GICS
GICs are deposit-type products that provide a guaranteed return (on a
fixed or indexed basis) to the contract holder. GICs are purchased by Employee
Retirement Income Security Act ("ERISA") qualified defined contribution plans,
including but not limited to, 401(k) plans where plan participants elect a
stable value option. Funding Agreements, which operate substantially similarly
to GICs, are purchased by institutional accredited investors for various kinds
of plans and programs that are not ERISA qualified. Examples of such agreements
include money market funds, bank common trust funds and other corporate and
trust accounts.
GICs credit interest at fixed or indexed interest rates (determined by
market conditions) and fixed GICs have a fixed maturity ranging from three to
five years, both of which are set at the time of sale. Substantially all GICs
allow for the payment of benefits at contract value to ERISA plan participants
in the event of death, disability, retirement or change in investment election.
The Company underwrites these risks before placing a GIC with a plan. In
addition, the Company requires plans buying its GICs to have certain
restrictions on participant transfers to money market and similar funds in order
to reduce disintermediation risk. The Company's GICs can also be terminated
prior to their maturity by the contract holder, but only after an adjustment to
the contract value for changes in the level of interest rates and the
application of a significant penalty (net payment amount may not exceed contract
value). Funding Agreements credit interest at a rate that is indexed to LIBOR
(London Interbank Offered Rate). These contracts are renewed annually, however,
either the Company or the contract holders can terminate the Funding Agreement
with seven days' notice.
<PAGE>
MUTUAL FUNDS
Since 1987, a predecessor to the Company has marketed and managed mutual
funds under the Investors Trust name. On September 26, 1997, the various
Investors Trust mutual funds were merged into mutual funds (the "GE Funds") with
similar investment composition and objectives managed by General Electric
Investment Management Incorporated ("GEIM"), a wholly owned subsidiary of
General Electric Company and an affiliate of the Company. The Company offers the
GE Funds to retail customers through its bank and other distribution channels.
In addition, the Company markets GE Investments Funds, Inc. ("GEI
Funds"), a family of mutual funds also managed by GEIM and offered exclusively
as investment vehicles for certain variable annuity contracts and variable life
insurance contracts issued by the Company or by other insurers, and for
qualified pension and retirement plans.
WEALTH AND LIFESTYLE PROTECTION PRODUCTS
The Company's Wealth and Lifestyle Protection product lines include
long-term care insurance, supplemental accident and health, Medicare supplement,
credit insurance and automobile insurance.
The following table presents total sales of the Company's Wealth and
Lifestyle Protection products for the periods presented.
DISTRIBUTION OF WEALTH AND LIFESTYLE PROTECTION PRODUCTS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1998 1997 1996
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Long-Term Care .......................................................... $112 $109 $ 83
Supplemental Accident and Health (including Medicare Supplement)......... 90 102 123
Credit Insurance ........................................................ 66 74 48
Automobile Insurance..................................................... 106 17 ---
---------------------
Total.................................................................. $374 $302 $254
=====================
</TABLE>
LONG-TERM CARE INSURANCE
The Company is one of two leading companies in the sale of individual
long-term care insurance policies when measured by first-year annualized premium
and policies in force. Such policies provide coverage within prescribed limits,
for nursing home, community and in-home care. The long-term care insurance plans
are sold to senior citizens (primarily 60 years of age or older). Long-term care
insurance policies are expected to account for an increasing percentage of the
Company's wealth and lifestyle protection premiums because of the growing demand
for such products among senior citizens, especially in the area of home health
care.
Current nursing home coverages in force include both expense incurred
and daily fixed dollar benefit policies. Currently, only expense incurred
policies are being sold, with an elimination period (which, similar to a
deductible, requires the insured to pay for a certain number of days of nursing
<PAGE>
home care before the insurance coverage begins) and a maximum benefit period.
Home health care benefits also have an elimination period, and pay covered
charges, after Medicare coordination, subject to a daily or weekly maximum
dollar limit and an overall maximum. The applicant may select from one of
several available benefits levels.
The Company's policies are guaranteed renewable and, consequently, the
Company has the right to change premiums by policy class, but not based on age
or health of any individual.
SUPPLEMENTAL ACCIDENT AND HEALTH
The Company offers supplemental accident, health and disability products
to employer and employee groups, associations and other affinity groups and
residents of farm and rural communities. The Company markets supplemental
accident and health products because it believes that offering a broad range of
products is essential in order to be a preferred provider of benefits
effectively meeting the needs of employers and consumers. The Company's
supplemental accident and health products include a variety of coverages such as
Medicare supplement products (described below), specified disease policies,
hospital indemnity coverages, accident policies and disability income policies.
These policies pay for the policyholder's medical costs directly (after certain
deductibles or co-payment arrangements have been met), pay a lump sum upon the
occurrence of a covered event, or in the case of disability income, provide
continuous payments to insureds during periods of disability. Many of the
Company's supplemental accident and health products have defined benefit limits.
The Company has a maximum retention of risk per any single case or individual,
which limits risk in the event that its claims experience deviates from the
assumptions used in setting premium rates.
MEDICARE SUPPLEMENT
Medicare supplement policies provide coverage for many of the medical
expenses which the Medicare program does not cover, such as the deductible and
coinsurance costs (in which the insured and Medicare share the costs of medical
expenses) and specified losses which exceed the federal program's maximum
benefits. In marketing these products, the Company concentrates on individuals
who have just reached the age of 65 and, thus, have become eligible for
Medicare. Approximately one-half of the Company's new sales of Medicare
supplement policies are to individuals who have just reached age 65. The
Company's Medicare supplement plans automatically adjust coverages to reflect
changes in Medicare benefits. Premium increases on the Company's Medicare
supplement policies must be approved by the insurance departments of each state
in which the Company sells such products.
CREDIT INSURANCE
The Company's credit insurance operations consist of life and accident
and health insurance coverages offered to consumer debtors, chiefly through
banks and finance companies. Typically, this insurance will pay outstanding loan
obligations in the event of an insured loss. This coverage is issued on either
the single-premium or outstanding loan balance basis. Credit life is sold on a
reducing or level-term basis and is available on a single-life or, if permitted
by state law, on a joint-life basis where the related loan is co-signed. Credit
accident and health insurance will normally only be written by the Company in
conjunction with credit life insurance. The maximum term is generally 10 years
for credit life insurance and five to six years for credit accident and health
insurance. During 1998, maximum issue age for credit life and credit accident
and health insurance is 70 and 66, respectively. All of the foregoing terms and
limits are subject to statutory requirements, which may vary from state to
state.
The Company currently reinsures a portion of its credit insurance risk
through an affiliate, which also offers reinsurance to third parties.
<PAGE>
AUTOMOBILE INSURANCE
The Company, through its acquisition of Colonial Penn, primarily writes
personal automobile insurance which covers the legal liability of individuals
arising out of the ownership or operation of an automobile and also provides
physical damage insurance on the automobile, medical payments insurance and
protection against uninsured motorists. All of the Company's personal automobile
insurance policies are written for a term of one year. In many states, however,
the Company offers a "guaranteed lifetime protection" provision to certain
qualifying policyholders that ensures their policies will be renewed at rates
then in effect for their classification.
PRODUCT/SERVICE CENTERS
The Company has established five primary product/service centers for
creating and servicing its products for its businesses as follows: (i) the fixed
life and annuities business primarily operates in Lynchburg, Virginia; (ii) the
variable life and annuities business primarily operates in Richmond, Virginia;
(iii) the long-term care insurance business primarily operates in San Rafael,
California; (iv) the supplemental accident and health insurance and credit
insurance business primarily operates in Trevose, Pennsylvania; and (v) the
automobile insurance business primarily operates in Valley Forge, Pennsylvania.
MARKETING AND DISTRIBUTION
The Company distributes its products through four primary channels:
o Intermediaries, such as brokerage general agents ("BGAs"), banks,
securities brokerage firms, personal producing general agents
("PPGAs") and specialized brokers;
o Career or dedicated sales forces;
o Marketing through businesses and affinity groups; and
o Direct marketing.
INTERMEDIARIES
BGAS. The Company distributes many of its products (including fixed and
variable annuities and life products, long term care, universal and term life
insurance (including impaired risk underwriting), and immediate annuities)
through more than 250 independent insurance brokerage firms located throughout
the United States. These BGAs market the Company's products through
approximately 150,000 licensed insurance agents or brokers, who also represent
other companies. The Company believes its consistent commitment to this system
has helped earn it a reputation as a leading provider of life insurance among
BGAs. The Company endeavors to be placed at the top of the BGAs' list of sources
of insurance products and services in which the Company specializes. To achieve
this objective, the Company seeks to provide innovative and competitive products
and services for BGA and end-customer needs, personalized quality service for
the BGAs' agents and brokers and competitive pricing. Service offered by the
Company to the BGAs' agents and brokers includes the opportunity to participate
in the Company's First Colony University, an integrated insurance training
curriculum which is recognized for its excellence throughout the industry. The
Company also offers agents and brokers access to its automated PDQ system, a
computer-based data access system which gives the agents and brokers instant
access to data regarding their customers' policies and applications with the
Company and information systems to run their businesses.
<PAGE>
The Company's commitment to the independent general agency system has
allowed it to develop a loyal relationship with these general agencies. Of the
Company's 20 leading BGAs in 1998 on the basis of commissions earned, most were
among the leading general agents of the Company 10 years before. No individual
general agency accounted for more than 8% of premiums produced in 1998, and the
top ten general agencies collectively produced almost 36% of the Company's
ordinary life insurance premiums by BGAs. The Company believes the loss of any
one BGA relationship in any given year would not materially impact the Company's
financial results.
BANKS AND SECURITIES BROKERAGES. Banks are a significant distribution channel
for the Company's fixed and variable annuities, life insurance products and
mutual funds. The Company's credit life and credit accident and health insurance
is also distributed primarily through banks, credit unions, and finance
companies. Bank of America and The Chase Manhattan Bank are currently the
largest bank distributors of the Company's products. During 1998, these banks
generated 19% of the Company's annuity sales. While the loss of these two banks
would not materially impact the Company's financial results, it could
potentially reduce annual annuity sales by a material amount.
Over the last few years distribution of the Company's products through
securities brokerages has substantially increased, primarily due to the
Company's acquisition of The Life Insurance Company of Virginia ("Life of
Virginia", subsequently named "GE Life and Annuity Assurance Company") which
distributed its variable annuity products through a large network of securities
brokerage firms. In addition, a significant percentage of the Company's single
premium immediate annuities are sold through major stock brokerage firms and
banks.
PPGAS. The Company sells through PPGAs some of its products under the Wealth
Accumulation and Transfer segment, such as fixed and variable annuities and
universal and term life insurance. PPGAs primarily include personal financial
planners whose emphasis is on providing investment and insurance products to one
of the Company's target customer groups. The Company believes that this segment
presents an opportunity for growth within the intermediary distribution channel.
SPECIALIZED BROKERS AND OTHER DISTRIBUTION. The Company's single premium
immediate annuities used to facilitate structured settlements are sold through a
network of specialized independent brokers. These brokers are skilled in claims
negotiation and experts in the creation of benefit plans tailored to the needs
of individual claimants and their families. As a pioneer in this industry, the
Company has the oldest and largest distribution system in this market. Its
products are sold through approximately 350 specialized brokers located
throughout the United States. The Company's relationship with many of these
specialized brokers dates back to the inception of this market. The Company
believes, due to its position in this market, new brokers could be added.
The Company sells GICs through specialized GIC brokers, fund managers,
employee benefit investment advisors and directly to large employee benefit
plans. The Company sells Funding Agreements through institutional accredited
investors or banks acting in a fiduciary capacity.
CAREER OR DEDICATED SALES FORCES
Career or dedicated sales forces consist primarily of non-employees who
sell products of the Company on an exclusive basis and to a lesser extent, a
sales force employed directly by the Company. All non-employee career or
dedicated sales force agents are affiliated with an insurance agency. Career or
dedicated sales forces are compensated by the Company primarily on a commission
basis.
<PAGE>
The Company's long-term care insurance policies are sold through a
network of specialized career agents who sell these products exclusively. The
Company believes that long-term care insurance policies will account for an
increasing percentage of the Company's premiums due to the growing demand for
such products among senior citizens. Prospective customers are reached through
direct mail advertising and referrals. The Company contributes leads generated
through these advertising campaigns to agents.
The Company has another group of non-employee career agents who
specialize in selling the Company's annuity, life insurance and supplemental
accident and health insurance products to residents of farm and rural
communities. Prospective customers are reached through direct mail, policyholder
referrals and advertising in controlled circulation farming and ranching
magazines. In 1991, a predecessor to the Company entered into an agreement with
The Farm Progress Companies, Inc. ("Farm Progress," a wholly owned subsidiary of
ABC/Cap Cities, Inc.) under which Farm Progress agreed to exclusively advertise
certain of the Company's products in its magazines until 2016.
The Company's subsidiary, GE Life and Annuity Assurance Company, has an
employee career agent force which specializes in selling life insurance products
and annuities. This career force is heavily concentrated in the Mid-Atlantic
States.
The Company provides certain of its career agents with sales leads
generated through direct mail advertising campaigns. These campaigns target
subscribers of certain publications or those with demographic characteristics
that indicate a possible need for specific products and services. The Company
believes that its lead generation programs provide its sales forces
opportunities to increase their sales effectiveness.
MARKETING THROUGH BUSINESSES AND AFFINITY GROUPS
In 1996, the Company began selling supplemental accident and health
insurance and universal life products through payroll deduction
employer-sponsored programs. Under these programs, the Company enters into a
contractual arrangement with a corporate customer permitting agents of the
Company to market these products directly to the corporate customers' employees
on site. Employees are able to pay premiums on products they purchase by means
of automatic deductions from their paychecks.
DIRECT MARKETING
The Company's acquisition of Colonial Penn provided the Company with a
substantial direct marketing distribution channel for personal automobile
insurance. Direct marketing is a form of marketing in which a company and a
customer deal directly with each other, rather than through an insurance agent.
As a direct marketer, the Company deals directly with the public and endeavors
to be the lowest cost provider in this market. The Company also uses direct mail
and telemarketing to generate qualified leads for agents selling other products
of the Company. Within the bank channel, this approach has created new sales
opportunities with bank customers.
Direct marketing is also an additional distribution channel for the
Company's credit-related products and supplemental accident and health insurance
products, primarily through Union Fidelity Life Insurance Company ("Union
Fidelity").
<PAGE>
COMPETITION
The Company operates in a highly competitive environment. While the
Company believes it has assembled a unique collection of products and
distribution channels, there are competitors that have also assembled a similar
array of financial products and have similar strategic goals. The Company
believes that the principal competitive factors in the sale of insurance are
product features, commission structure, perceived stability of the insurer,
claims paying ability ratings, service, name recognition and price. Many other
insurance companies are capable of competing for sales in the Company's target
markets. The Company's ability to compete is affected in part by its ability to
provide competitive products and quality service to the insurance consumer,
general agents, licensed insurance agents and brokers. However, the Company
believes that it competes primarily on the basis of its high level of customer
service, its financial strength and its competitively priced products.
The Company's competition from banks and other financial institutions is
likely to increase as the regulations currently in existence are revised by
legislation, judicial determinations or administrative rulings. Although the
effect of these developments on GE Financial Assurance and its subsidiaries and
their competitors is uncertain, both the persistency of the Company's existing
products and the Company's ability to sell products could be materially impacted
in the future. Also, several proposals to repeal or modify the Glass-Steagall
Act and the Bank Holding Company Act have been made by members of Congress and
the Executive Branch. Certain of these proposals would repeal or modify the
current restrictions that prevent banks from being affiliated with insurance
companies. None of these proposals has yet been enacted, and it is not possible
to predict whether any of these proposals will be enacted or, if enacted, what
their potential effect on the Company or its competitors would be.
RISK MANAGEMENT AND COMPLIANCE
During the last few years, GE Financial Assurance has grown rapidly
through acquisitions. See "The Company -- Significant Acquisitions." In an
effort to integrate each acquired business, GE Financial Assurance maintains a
strong commitment to risk management and compliance, and avails itself of GE
Capital's long-standing strength and experience in risk management. For example,
the Company's commitment to risk management processes and compliance includes
requiring underwriting of all new products and reviews of all existing product
performance, both of which are reviewed by a team of risk managers and
actuaries. In addition, both internal and external periodic reviews of the
Company's products, internal processes and pricing strategy are conducted. The
Company also has obtained Insurance Marketplace Standards Association (IMSA)
certification and has instituted company-wide compliance initiatives such as
centralized complaint databases and agent tracking and licensing.
UNDERWRITING
Applications for most of the Company's underwritten insurance related
products are individually reviewed and analyzed by the Company's dedicated
underwriting staff based on standardized underwriting guidelines and procedures.
After initial processing, each file is reviewed and additional information (such
as medical examinations, attending physician's statements and special medical
tests, if applicable) is obtained to make an underwriting decision. The
independent sales agents and the Company's own sales staff do not retain any
underwriting authority. The Company employs a professional underwriting staff of
approximately 315 persons at December 31, 1998 who collectively have an average
of 16 years of experience in the insurance industry.
<PAGE>
RESERVES
In accordance with applicable insurance regulations, the Company
establishes and carries as liabilities actuarially determined reserves which are
calculated to meet the Company's future obligations. The reserves are based on
actuarially recognized methods using prescribed morbidity and mortality tables
in general use in the United States modified to reflect the Company's actual
experience when appropriate. These reserves are computed at amounts that, with
additions from premiums to be received and with interest on such reserves
compounded annually at certain assumed rates, are expected to be sufficient to
meet the Company's policy obligations at their maturities or in the event of an
insured's death. Reserves include unearned premiums, premium deposits, claims
reported but not yet paid, claims incurred but not reported and claims in the
process of settlement.
For the Company's individual life policies, universal life and
interest-sensitive whole life policies, reserves are set according to premiums
collected, plus interest, less charges. Reserves for other fixed death benefit
and supplemental accident and health policies are based on assumed investment
yield, persistency, mortality and morbidity as per commonly used actuarial
tables, expenses and margins for adverse deviations. For the Company's accident
and health policies, the level of reserves is based on a variety of factors
including particular diagnoses, termination rates and benefit payments.
The stability of the Company's annuity and other interest-sensitive life
insurance reserves is enhanced by policy restrictions on withdrawal of funds.
Withdrawals in excess of allowable penalty-free amounts are assessed a surrender
charge during a penalty period ranging from five years to twenty years. Such
surrender charge is initially a percentage of the accumulation value, which
varies by product, and generally decreases gradually during the penalty period.
Surrender charges are set at levels to protect the Company from loss on early
terminations and to reduce the likelihood of policyholders terminating their
policies during periods of increasing interest rates, thereby lengthening the
effective duration of policy liabilities and improving the Company's ability to
maintain profitability on such policies. The Company's reserves comply in all
material respects with state insurance department statutory requirements;
however, in the Consolidated Financial Statements, insurance reserves are
determined in accordance with generally accepted accounting principles ("GAAP"),
which may vary from statutory requirements.
REINSURANCE
The Company follows the usual industry practice of reinsuring ("ceding")
portions of its life insurance risks with other companies, a practice that
permits it to write policies in amounts larger than the risk it is willing to
retain on any one life, and also to continue writing a larger volume of new
business. The maximum amount of individual ordinary life insurance normally
retained by the Company on any one life policy is $1,000,000. Certain
supplemental accident and health and long-term care policies are reinsured on
either a quota share or excess of risk basis. The Company cedes insurance
primarily on a treaty basis, under which risks are ceded to a reinsurer on
specific blocks of business where the underlying risks meet certain
predetermined criteria, and, to a lesser extent, on a facultative basis, under
which the reinsurer's prior approval is required on each risk reinsured. Use of
reinsurance does not discharge an insurer from liability on the insurance ceded.
An insurer is required to pay the full amount of its insurance obligations
regardless of whether it is entitled or able to receive payments from its
reinsurer. The principal reinsuring companies (and their corresponding A.M. Best
ratings) at December 31, 1998 were: Employers Reassurance Corporation, whose
parent, GE Global Insurance Holding Corporation, is an affiliate of the Company,
rated A++; UNUM, rated A++; Combined Insurance Company of America, rated A+;
American United Life Insurance Company, rated A+; IDS Life Insurance Company,
rated A+; The Lincoln National Life Insurance Company, rated A+; Reinsurance
Group of America, rated A+; Transamerica Occidental Life Insurance Company,
rated A+; Phoenix Home Life Mutual Insurance Company, rated A; and Swiss Re Life
Company of America, rated A.
<PAGE>
INSURANCE REGULATION
GENERAL REGULATION AT STATE LEVEL
The insurance business of the Company is subject to comprehensive state
and federal regulation and supervision throughout the United States. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to, among other things, licensing to transact
business, licensing agents, admittance of assets, regulating premium rates,
approving policy forms, regulating unfair trade and claims practices,
establishing reserve requirements and solvency standards, fixing maximum
interest rates on life insurance policy loans and minimum rates for accumulation
of surrender values, restricting certain transactions between affiliates and
regulating the type, amounts and valuations of investments permitted.
As a holding company with no significant business operations of its own,
the Company relies on dividends from its subsidiaries as the principal source of
cash to meet its obligations, including the payment of principal and interest on
any debt obligations. The Company's insurance subsidiaries are subject to
various state statutory and regulatory restrictions, applicable generally to
each insurance company in its state of domicile, which limit the amount of
dividends or distributions an insurance company may pay to its shareholders
without regulatory approval.
The Company's principal domestic insurance subsidiaries are domiciled in
the states of Delaware, Florida, Illinois, Indiana, New York, Ohio,
Pennsylvania, Virginia and Washington. Each of these states has laws and
regulations which govern the parameters for approval and payment of dividends.
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 paid
or distributed within any twelve consecutive months in excess of the prescribed
limits or the company's earned surplus are deemed extraordinary and require
formal state insurance commission approval.
Delaware (GE Capital Assurance), Washington (Great Northern Insured
Annuity Corporation), Indiana (Federal Home Life Insurance Company), Ohio (The
Harvest Life Insurance Company), Illinois (Union Fidelity) and Pennsylvania
(Colonial Penn) allow companies to pay dividends up to the greater of 10% of
prior year surplus or 100% of prior year statutory net gain from operations to
the extent of their earned surplus; however, Ohio requires companies to adjust
the net gain from operations to include realized investment gains in the
computation of prior year statutory net income. Florida (PHF Life Insurance
Company) allows companies to pay dividends up to the greater of 10% of prior
year surplus or 100% of prior year statutory net income (including realized
capital gains). Virginia (Life of Virginia, First Colony) allows companies to
pay dividends up to the lesser of 10% of prior year surplus or 100% of prior
year statutory net gain from operations. New York (GE Capital Life Assurance of
New York, American Mayflower Life Insurance Company of New York) requires
regulatory approval for the payment of any dividends.
Each insurance subsidiary's dividend capacity is calculated separately;
therefore, total dividend capacity for the Company is driven in part by its
legal structure. As of December 31, 1998, Union Fidelity and Colonial Penn are
owned directly by the Company and GE Capital Assurance is owned directly by GNA
Corporation which is, in turn, owned 100% by the Company. All other insurance
subsidiaries are 100% owned by GE Capital Assurance, except for Life of Virginia
which is owned 80% by GE Capital Assurance and 20% by GE Financial Assurance and
<PAGE>
First Colony which is owned 80% by GE Capital Assurance and 20% by GE Financial
Assurance. Thus, the Company's dividend capacity is the sum of capacity for GE
Capital Assurance, Union Fidelity, Colonial Penn, 20% of First Colony and 20% of
GE Life and Annuity. GNA Corporation, which is a holding company, is not subject
to the regulatory restrictions on dividends imposed on the Company's insurance
subsidiaries. Subsequent to December 31, 1998, the Company merged certain
entities within its organizational structure. See footnote 18 to the
consolidated financial statements.
Insurance laws of the states in which the Company's insurance
subsidiaries are domiciled generally provide that no person may acquire control
of the Company, and thus indirect control of these insurance company
subsidiaries, without the prior approval of the appropriate insurance
regulators. In general, any person who acquires beneficial ownership of 10% (5%
in Florida) or more of the voting securities of the Company would be presumed to
have acquired such control, although the appropriate insurance regulators, upon
application, may determine otherwise.
Each insurance company is required to file detailed annual reports with
supervisory departments in each of the jurisdictions in which it does business
and its operations and accounts are subject to examination by such departments
at regular intervals. Each of the Company's life insurance and property and
casualty subsidiaries prepare statutory financial statements in accordance with
accounting practices prescribed or permitted by the insurance departments of
their respective states of domicile. Prescribed statutory accounting practices
include publications of the NAIC, as well as state laws, regulations and general
administrative rules.
Life insurance companies are required to establish an Asset Valuation
Reserve ("AVR") consisting of two components: (i) a "default component" which
provides for future credit-related losses on fixed maturity investments and (ii)
an "equity component" which provides for losses on all types of equity
investments, including real estate. The AVR required by the Company's insurance
subsidiaries totaled $386 million and $348 million at December 31, 1998 and
1997, respectively. The default component totaled $334 million and $292 million,
while the equity component totaled $52 million and $56 million at December 31,
1998 and 1997, respectively. Insurers are also required to establish an Interest
Maintenance Reserve ("IMR") for fixed maturity net realized capital gains and
losses, net of tax, related to changes in interest rates. The IMR is required to
be amortized into statutory earnings on a basis reflecting the remaining period
to maturity of the fixed maturity securities sold. The IMR required by the
Company's insurance subsidiaries totaled $355 million and $286 million at
December 31, 1998 and 1997, respectively. This reserve is primarily the deferral
of gains from the sale of bonds in prior periods. These reserves are required by
state insurance regulatory authorities to be established as a liability on a
life insurer's statutory financial statements, but do not affect financial
statements of the Company prepared in accordance with GAAP. Although future
additions to AVR will reduce the future statutory surplus of the Company's
insurance subsidiaries, the Company does not believe that the impact under
current regulations of such reserve requirements will materially affect the
ability of its insurance subsidiaries to grow their statutory surplus and pay
dividends to the Company in the future.
The NAIC's Insurance Regulatory Information System (IRIS) is a series of
12 ratios historically used as an early warning system to help regulators
identify insurance companies experiencing notable changes in its business
operations and financial conditions. Ratio results falling outside of the
established upper or lower limits are designated as unusual ratios. Although the
ratios are calculated and distributed to companies, their usefulness as a
regulatory surveillance tool has diminished in recent years with the calculation
and reporting of risk-based capital described below. Additionally, the IRIS
ratios have not been updated to reflect the changing insurance market,
regulation, and operations for many years.
The NAIC uses risk-based capital ("RBC") standards to determine the
amount of Total Adjusted Capital (as defined by the NAIC) that an insurance
company must have, taking into account the risk characteristics of such
company's investments and liabilities. The formula establishes a standard of
capital adequacy that is related to risk. The RBC formula establishes capital
<PAGE>
requirements for four categories of risk: asset risk, insurance risk, interest
rate risk and business risk. For each category, the capital requirements are
determined by applying specified factors to various asset, premium, reserve and
other items, with the factor being higher for items with greater underlying risk
and lower for items with less risk. The formula is used by insurance regulators
as an early warning tool to identify deteriorating or weakly capitalized
companies for the purpose of initiating regulatory action.
The NAIC's RBC requirements provide for four levels of regulatory
attention depending on the ratio of the company's Total Adjusted Capital to its
Authorized Control Level RBC ("ACL") (as defined by the NAIC). If a company's
Total Adjusted Capital is less than 200% of its ACL but greater than or equal to
150% of its ACL, or if a negative trend has occurred (as defined by the NAIC)
and Total Adjusted Capital is less than 250% of its ACL, the company must submit
a comprehensive plan to the regulatory authority which discusses proposed
corrective actions to improve its capital position. If a company's Total
Adjusted Capital is less than 150% of its ACL but greater than or equal to 100%
of its ACL, in addition to the above required actions, the regulatory authority
will perform a special examination of the company and issue an order specifying
corrective actions that must be followed. If a company's Total Adjusted Capital
is less than 100% of its ACL but greater than or equal to 70% of its ACL, in
addition to the above required actions, the regulatory authority may take any
action it deems necessary, including placing the company under its control. If a
company's Total Adjusted Capital is less than 70% of its ACL, the regulatory
authority is mandated to place the company under its control. The Total Adjusted
Capital for each of the Company's insurance subsidiaries is in excess of 250% of
their respective ACL.
In addition, as part of their routine regulatory oversight process,
state insurance departments conduct detailed examinations periodically
(generally once every three to five years) of the books, records, accounts and
market conduct of insurance companies domiciled in their states. Such
examinations are generally conducted in cooperation with the departments of two
or three other states under guidelines promulgated by the NAIC. None of the
recent regulatory examinations have disclosed any findings that would have a
material adverse impact on the Company.
REGULATORY INITIATIVES
State insurance regulators and the NAIC are continually re-examining
existing laws and regulations, specifically focusing on insurance company
investments and solvency issues, risk-adjusted capital guidelines,
interpretations of existing laws, the development of new laws, the
implementation of non-statutory guidelines and the circumstances under which
dividends may be paid. These initiatives may be adopted by the various states in
which the Company's insurance subsidiaries are licensed, but the ultimate
content and timing of any statutes and regulations adopted by the states cannot
be determined at this time. It is impossible to predict the future impact of
changing state and federal regulations on the Company's operations, and there
can be no assurance that existing or future insurance-related laws and
regulations will not become more restrictive.
Recently, state regulatory authorities, industry groups and rating
agencies have developed several initiatives regarding market conduct. For
example, the NAIC has adopted the NAIC Model Life Insurance Illustrations
Regulation, which applies to group and individual life insurance policies and
certificates, and the Market Conduct Examiners Handbook which sets out required
parameters for such examinations. State regulators have imposed significant
fines on various insurers for improper market conduct. The American Council on
Life Insurance has established the Insurance Market Place Standards Association,
a self-regulatory organization, to implement its Principles and Code of Ethical
Life Insurance Market Conduct, which includes a third-party assessment
<PAGE>
procedure. Market conduct also has become one of the criteria used to establish
the ratings of an insurance company. For example, A.M. Best's ratings analysis
now includes a review of the insurer's compliance program. Management does not
believe that these market conduct initiatives will have a material adverse
effect on its business, financial condition or results of operation.
In addition, the NAIC has issued the Valuation of Life Insurance
Policies Model Regulation, which would establish new minimum reserve
requirements for individual life insurance policies written in the future.
Before the new reserve standards can become effective, individual states must
enact the model regulation. If these reserve standards were adopted in their
current form, companies selling certain individual life insurance products such
as term life products with guaranteed premium periods and universal life
products with no-lapse guarantees would be required to adjust reserves for
policies issued after the respective state-by-state effective dates. It is
impossible at this time to predict if the model regulation will be enacted and,
if enacted, when it will become applicable, in any of the states in which the
Company's insurance subsidiaries are domiciled. However, the Company anticipates
no material impact as a result of the enactment of this regulation.
ASSESSMENTS AGAINST INSURERS
Under the insurance guaranty fund laws existing in each state, the
District of Columbia and Puerto Rico, licensed insurers can be assessed by state
insurance guaranty associations for certain obligations of insolvent insurance
companies to policyholders and claimants. Recent regulatory actions against
certain large life insurers encountering financial difficulty have prompted
various state insurance guaranty associations to begin assessing life insurance
companies for the deemed losses. Most of these states do provide, however, that
an assessment may be excused or deferred if it would threaten an insurer's
solvency and further provide for annual limits on such assessments. A large part
of the assessments paid by the Company's insurance subsidiaries pursuant to
these laws may be used as credits for a portion of the Company's insurance
subsidiaries' premium taxes in future years. The Company's insurance
subsidiaries paid assessments of $12 million, $14 million and $9 million in
1998, 1997 and 1996, respectively. Since such assessments are typically not made
for several years after an insurer fails and depend upon the final outcome of
liquidation or rehabilitation proceedings, the Company cannot accurately
determine the amount or timing of any future assessment on the Company's
insurance subsidiaries. However, based on the best information presently
available, management believes the Company's accrued amounts are sufficient.
REGULATION AT FEDERAL LEVEL
Although the federal government does not directly regulate the business
of insurance, federal legislation and administrative policies in several areas,
including pension regulation, financial services regulation and federal
taxation, can significantly and adversely affect the insurance industry and thus
the Company. For example, Congress has from time to time considered legislation
relating to the deferral of taxation on the accretion of value within certain
annuities and life insurance products, the removal of barriers preventing banks
from engaging in the insurance business, changes in ERISA regulations, the
alteration of the federal income tax structure and the availability of Section
401(k) or individual retirement accounts. In particular, Congress has reviewed
various proposals to repeal or modify the McCarran-Ferguson Act (which exempts
the insurance industry from certain federal laws), the Glass-Steagall Act (which
restricts banks from engaging in the securities-related business) and the Bank
Holding Company Act (which prohibits banks from being affiliated with insurance
companies).
Moreover, the United States Supreme Court held on January 18, 1995 in
NATIONSBANK OF NORTH CAROLINA V. VARIABLE ANNUITY LIFE INSURANCE COMPANY that
annuities are not insurance for purposes of the National Bank Act. In addition,
the Supreme Court also held on March 26, 1996 in BARNETT BANK OF MARION COUNTY
V. NELSON that state laws prohibiting national banks from selling insurance in
small town locations are preempted by federal law. The Office of the Comptroller
<PAGE>
of the Currency also adopted a ruling in November 1996 that permits national
banks, under certain circumstances, to expand into other financial services,
thereby increasing competition for the Company. At present, the extent to which
banks can sell insurance and annuities without regulation by state insurance
departments is being litigated in various courts in the United States. Although
the effect of these recent developments on the Company and its competitors is
uncertain, both the persistency of the Company's existing products and the
Company's ability to sell products may be materially impacted in the future.
SECURITIES LAWS
Certain of the Company's subsidiaries and certain policies and contracts
offered by them are subject to regulation under the federal securities laws
administered by the Commission and certain state securities laws. Certain
separate accounts of the Company's insurance subsidiaries are registered as
investment companies under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). Separate accounts through which certain variable
annuity contracts and certain variable insurance policies issued by the
Company's insurance subsidiaries are made available are also registered under
the Securities Act. Certain other subsidiaries of the Company are registered as
broker-dealers under the Exchange Act and are members of, and subject to
regulation by, the National Association of Securities Dealers, Inc.
Certain of the Company's subsidiaries are investment advisors registered
under the Investment Advisers Act of 1940, as amended. The investment companies
managed by such subsidiaries are registered with the Commission under the
Investment Company Act and the shares of certain of these entities are qualified
for sale in certain states in the United States and the District of Columbia.
Certain subsidiaries of the Company are also subject to the Commission's net
capital rules.
In October 1996, the National Securities Markets Improvements Act of
1996 was enacted into law. Of particular interest to the variable products
industry are the provisions establishing a new "reasonableness standard" for all
fees and charges in variable annuity and variable life insurance policies.
Because insurers no longer will have to explain each and every component of
their fees and charges to the Commission, and instead will be subject to an
overall reasonableness standard for aggregate fees and charges, the Company
believes the legislative changes will provide the industry with greater
flexibility in product design. However, given the significant barriers to market
entry, such as entering into relationships with broker-dealers and systems
constraints, the Company believes that the legislation overall will have a
minimal competitive impact.
All aspects of the Company's investment advisory activities are subject
to various federal and state laws and regulations. These laws and regulations
are primarily intended to benefit investment advisory clients and investment
company stockholders and generally grant supervisory agencies broad
administrative powers, including the power to limit or restrict the carrying on
of business for failure to comply with such laws and regulations. In such event,
the possible sanctions which may be imposed include the suspension of individual
employees, limitations on the activities in which the investment advisor may
engage, suspension or revocation of the investment advisor's registration as an
advisor, censure and fines.
ERISA CONSIDERATIONS
Enacted into law on August 20, 1996, the Small Business Protection Job
Act (the "SBPJA") offered insurers protection from potential litigation exposure
prompted by the 1993 U.S. Supreme Court decision in JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY V. HARRIS TRUST & SAVINGS BANK (the "Harris Trust Decision")
in which the Court held that, with respect to a portion of the funds held under
certain general account group annuity contracts, an insurer is subject to the
fiduciary requirements of ERISA. The pertinent SBPJA provisions provide that
generally all persons are protected from liability in connection with prohibited
transactions on the basis of a claim that the assets of an insurer constitute
<PAGE>
the assets of a plan for conduct occurring prior to 18 months following the
Department of Labor's issuance of proposed regulations. However, insurers remain
subject to federal criminal law and liable for actions brought by the Secretary
of Labor alleging breaches of fiduciary duties that also constitute a violation
of federal or state criminal law. The SBPJA also provides that contracts issued
from an insurer's general account on or before December 31, 1998, that are not
guaranteed benefit policies, will be permanently grandfathered if they meet the
requirements of regulations the United States Department of Labor. The SBPJA
further provides that contracts issued from an insurer's general account after
December 31, 1998, that are not guaranteed benefit policies, will be subject to
ERISA. Although the Company does not believe that the Harris Trust Decision had
a material adverse effect on its business, financial condition or results of
operations, the Company supported and welcomed the enactment of the
aforementioned provisions of the SBPJA as a means to remove an area of potential
exposure for the insurance industry generally.
With respect to employee welfare benefit plans subject to ERISA,
Congress periodically has considered amendments to the law's federal preemption
provision, which would expose the Company, and the insurance industry generally,
to state law causes of action, and accompanying extra-contractual (e.g.,
punitive) damages in lawsuits involving, for example, group life and group
disability claims. To date, all such amendments to ERISA have been defeated.
ITEM 2. PROPERTIES.
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, a facility
in Lynchburg, Virginia and a facility in Valley Forge, Pennsylvania are owned by
the Company.
ITEM 3. LEGAL PROCEEDINGS.
The Company and certain of its subsidiaries are defendants in various
cases of litigation considered to be in the normal course of business. The
Company believes that the outcome of such litigation will not have a material
effect on its financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted
<PAGE>
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
All of the Company's Common Stock, its sole class of common equity on
the date hereof, is owned by GE Capital Corporation. Accordingly, there is no
public trading market for the Company's common equity.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with
the financial statements of GE Financial Assurance Holdings, Inc. and
consolidated subsidiaries and the related Notes to the Consolidated Financial
Statements.
<TABLE>
<CAPTION>
DECEMBER 31,(1)
(DOLLARS IN MILLIONS)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
AT END OF YEAR
Invested Assets............................ $42,287 $39,469 $35,810 $18,470 $14,845
Total Assets .............................. 56,727 51,092 45,361 21,820 16,852
Policyholder Liabilities(2)................ 39,505 37,380 35,493 19,094 15,611
Debt Outstanding .......................... 2,028 1,337 278 12 38
Shareholder's Interest..................... 7,455 6,958 5,721 2,319 992
FOR THE YEAR THEN ENDED
Premiums .................................. 3,207 2,314 1,386 485 149
Total Revenues ............................ 6,672 5,567 3,366 1,749 1,091
Net Income ................................ 492 425 229 101 72
Investment Contracts Issued ............... 3,652 3,430 1,998 1,239 1,064
</TABLE>
- -----------
(1) Comparability of financial information is affected by acquisitions by
the Company in the periods presented. See "The Company -- Significant
Acquisitions."
(2) Includes future annuity and contract benefits, unearned premiums,
liability for policy and contract claims, and other policyholder
liabilities.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS.
The following analysis of the consolidated financial condition and
results of operations of GE Financial Assurance should be read in conjunction
with the consolidated financial statements and the notes thereto included
herein.
OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
BACKGROUND
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 primarily 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) Wealth and Lifestyle Protection.
The Company effectively began operations in 1993 with the acquisition of
GNA Corporation and its principal operating company, Great Northern Insured
Annuity Corporation. The Company has continued to broaden its operations through
a series of acquisitions since 1993. Certain of these acquisitions 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 made since
1996 that impact the financial comparisons of operating results for 1998 as
compared to 1997 and 1997 as compared to 1996.
<TABLE>
<CAPTION>
ACQUISITION DATE PRINCIPAL PRODUCTS
- ------------- ------ ------------------
<S> <C> <C>
Union Fidelity Life Insurance April 1996 Credit products and supplemental accident
Company and health products
The Life Insurance Company of April 1996 Variable annuities, universal life
Virginia insurance and GICs
First Colony Life Insurance December 1996 Life insurance, retirement annuities and
Company structured settlements
Colonial Penn Insurance Company November 1997 Personal lines of automobile insurance
GE Edison Life Insurance Company March 1998 Life insurance, health and annuity products
</TABLE>
Due to the strategic nature of these acquisitions, the operations of the
acquired entities are generally being absorbed within the overall operations of
the Company as opposed to being operated on a stand-alone basis. For example,
significant efforts have been made to centralize responsibility for specific
insurance products that were formerly marketed and sold by more than one of the
Company's subsidiaries.
<PAGE>
The chart that follows summarizes the impact of these acquisitions on
operating results in 1998 and 1997. For purposes of this analysis, the column
"Amount Due to Acquisitions" for each year includes those acquisitions that
occurred during that particular year and the acquisitions that occurred in the
immediately prior year (e.g., the "Amount Due to Acquisitions" column for the
year ended December 31, 1998 includes acquisitions that were completed during
1998 and the increase in 1998 resulting from the inclusion of a full year of
operations with respect to acquisitions consummated in 1997 as compared with the
inclusion of a partial year of operations in 1997) and the column "Consolidated
Change" includes the total increase in the specified line item as compared with
the prior period.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
---------------------------- ----------------------------
CONSOLIDATED AMOUNT DUE TO CONSOLIDATED AMOUNT DUE TO
CHANGE ACQUISITIONS(1) CHANGE ACQUISITIONS(2)
------ -------------- ------ ---------------
<S> <C> <C> <C> <C>
Revenues:
Premiums................... $893 $650 $928 $777
Net investment income ..... 141 66 982 883
Net realized investment 39 3 62 12
gains .....................
Net commission income ..... 14 25 (1) 4
Other income............... 18 44 230 178
---------------------------------------------------------------
Total revenues............. 1,105 788 2,201 1,854
---------------------------------------------------------------
Benefits and expenses:
Interest credited ......... (21) 1 359 341
Benefits and other changes
in policy reserves ........ 737 528 1,145 935
Commission expenses ....... (18) 21 192 165
General expenses........... 229 230 259 211
Amortization of
intangibles, net........... 10 29 61 100
Change in deferred
acquisition costs, net..... (11) (90) (153) (187)
Interest expense........... 72 72 22 22
---------------------------------------------------------------
Total benefits and expenses 998 791 1,885 1,587
---------------------------------------------------------------
Income before income taxes .. $107 $ (3) $316 $267
===============================================================
</TABLE>
- -----------
(1) Includes the initiation of operations of GE Edison Life Insurance
Company in April, 1998 and inclusion of a full year of operating results
in 1998 for Colonial Penn and LTC, Inc. (both acquired in November,
1997) versus one and one-half months in 1997.
(2) Includes the 1997 acquisitions of Colonial Penn and LTC, Inc. and
inclusion of a full year of operating results for Life of Virginia,
Union Fidelity and First Colony (the "1996 Acquisitions") versus nine
months, nine months and one month, respectively, in 1996.
<PAGE>
PREMIUMS. Premiums, which include premium revenues from traditional life, health
insurance, automobile and life contingent annuity contracts, increased $893
million, or 38.6%, to $3,207 million in 1998 from $2,314 million in 1997. This
increase was as a result of: (i) a full year of operating results in 1998
relating to the 1997 acquisition of Colonial Penn, (ii) the initial operations
of GE Edison Life Insurance Company commencing in April 1998 and (iii) growth in
certain of the Company's life, accident and health and structured settlement
products. Premiums increased $928 million, or 67.0%, to $2,314 million in 1997
from $1,386 million in 1996. This increase was driven by: (i) the 1997
acquisition of Colonial Penn, (ii) a full year of operating results in 1997
relating to the 1996 acquisitions of Life of Virginia, Union Fidelity and First
Colony and (iii) growth in core premiums.
NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS. Net investment income
increased $141 million, or 5.1%, to $2,896 in 1998 from $2,755 million in 1997.
The increase was due to the combination of higher levels of average invested
assets ($39.5 billion in 1998 vs. $36.7 billion in 1997) resulting from the
Colonial Penn acquisition, growth in core invested assets and new investments
relating to the Company's operations in Japan commencing in April 1998, offset
by a decrease in weighted average yield from 7.8% in 1997 to 7.6% in 1998 due to
a decline in prevailing interest rates. Net investment income increased $982
million, or 55.4%, to $2,755 million in 1997 from $1,773 million in 1996. The
increase was due to the combination of higher levels of average invested assets
($36.7 billion in 1997 vs. $24.1 billion in 1996) resulting from the 1996
acquisitions, and increased weighted average yields from 7.6% in 1996 to 7.8% in
1997. Net realized investment gains were $116 in 1998, $77 million in 1997 and
$15 million in 1996. These changes are related to the Company's asset/liability
risk management policies and vary with market and economic conditions.
OTHER INCOME. Other income is principally comprised of surrender fees, insurance
charges made against universal life contracts and other specified transaction
fees assessed to policyholders. Other income increased $18 million, or 4.4%, to
$426 million in 1998 from $408 million in 1997. This increase was as a result
of: (i) a full year of operating results in 1998 relating to the 1997
acquisition of Colonial Penn and (ii) the initial operations of GE Edison Life
Insurance Company commencing in April 1998 partially offset by (iii) decreased
transaction fee income due to a reduction in the balance of certain underlying
reserve balances. Other income increased $230 million, or 129.2%, to $408
million in 1997 from $178 million in 1996. Substantially all of the increase
resulted from a full year inclusion in 1997 of the 1996 Acquisitions discussed
above.
INTEREST CREDITED. Interest credited decreased $21 million, or 1.6%, in 1998 to
$1,260 million from $1,281 million in 1997. This decrease was driven by the
reduction of the Company's crediting rates due to changes in market conditions
and other factors. Interest credited increased $359 million, or 38.9%, to $1,281
million in 1997 from $922 million in 1996. This increase was primarily due to
inclusion of a full year of operations in 1997 relating to the 1996
Acquisitions.
The Company's weighted average crediting rates for annuities decreased to 6.27%
in 1998 from 6.46% in 1997, which had increased from 5.68% in 1996. Similarly,
the Company's weighted average crediting rates for interest-sensitive life
products decreased to 5.32% in 1998 from 5.34% in 1997, which had increased from
4.74% in 1996. The decrease in 1998 was driven by reductions in the Company's
base crediting rates due to changes in market conditions. The increase in 1997
reflected the continued issuance of products with bonus crediting rates and
redemptions of certain products with lower crediting rates. The Company monitors
market conditions closely and resets interest crediting rates as deemed
appropriate in accordance with the terms of the underlying contracts.
<PAGE>
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 $737 million, or
29.6%, to $3,229 million in 1998 from $2,492 million in 1997. This increase was
as a result of: (i) a full year of operating results in 1998 relating to the
1997 acquisition of Colonial Penn, (ii) the initial operations of GE Edison Life
Insurance Company commencing in April 1998 and (iii) growth in certain of the
Company's life, accident and health and structured settlement products. Benefits
and other changes in policy reserves increased $1,145 million, or 85.0%, to
$2,492 million in 1997 from $1,347 million in 1996. This increase resulted from:
(i) acquisitions ($935 million, primarily (a) the acquisition of Colonial Penn
and (b) inclusion of a full year of operating results in 1997 relating to the
1996 Acquisitions), and (ii) increased benefit payments and other changes in
policy reserves of $210 million on existing life insurance policies, annuity
contracts and accident and health insurance policies.
COMMISSION EXPENSES. Commission expense decreased $18 million, or 3.2%, to $541
million in 1998, from $559 million in 1997. This decrease was attributable to
(i) the November 1997 acquisition of LTC, Inc. (previously an independent entity
providing certain services to the Company for which commissions were paid) and
(ii) a change in the Company's commission based product mix toward increased
sales of certain products having lower commission rates. Commission expense in
relation to premiums revenue decreased primarily due to the acquisition of
Colonial Penn, a direct marketer of personal lines of automobile insurance.
Commission expense increased $192 million, or 52.3%, to $559 million in 1997
from $367 million in 1996. This increase was attributable to inclusion of a full
year of operating results in 1997 relating to the 1996 Acquisitions.
GENERAL EXPENSES. General expenses increased $229 million, or 33.4%, to $914
million in 1998 from $685 million in 1997. This increase was primarily a result
of acquisitions, including Colonial Penn and LTC, Inc., and expenses related to
the Company's GE Edison operations. General expenses increased $259 million, or
60.8%, to $685 million in 1997 from $426 million in 1996. This increase resulted
from a combination of: (i) the acquisition of Colonial Penn, and (ii) inclusion
of a full year of operating results in 1997 relating to the 1996 Acquisitions.
AMORTIZATION OF INTANGIBLES, NET. The Company's significant intangible assets
consist of two components which both result from acquisition activities -- the
present value of future profits ("PVFP"), representing the estimated future
gross profits in acquired insurance 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 $10 million, or 3.6%,
to $286 million in 1998 from $276 million in 1997. Amortization of intangibles
increased $61 million, or 28.4%, to $276 million in 1997 from $215 million in
1996. Amortization of intangibles due to acquisitions in 1998 and 1997 totalled
$29 million and $100 million, respectively.
Amortization of intangibles for companies acquired before 1996 declined by $19
million in 1998 and $39 million in 1997 due to lower amortization of PVFP. PVFP
is amortized, net of accreted interest, based on the incidence of gross profits
for interest-sensitive life and annuity policies and gross premiums on
non-interest-sensitive life and accident and health products.
CHANGE IN DEFERRED ACQUISITION COSTS, NET. 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. For accounting purposes,
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 $11 million, or 2.5%, to $446 million in 1998 from
$435 million in 1997. This increase was primarily due to inclusion of a full
<PAGE>
year of operating results in 1998 relating to the 1997 acquisition offset by
lower deferrable acquisition costs, primarily commissions, due to the
acquisition of LTC, Inc. in November, 1997 (previously an independent entity
providing certain services to the Company for which commissions were paid) and
lower production associated with certain of the Company's existing products. The
change in net deferred acquisition costs increased $153 million, or 54.3%, to
$435 million in 1997 from $282 million in 1996. This increase was primarily
attributable to inclusion of a full year of operating results in 1997 relating
to the 1996 Acquisitions. The change in deferred acquisition costs related to
amortization of costs previously deferred increased $55 million in 1997 to $114
million from $59 million in 1996. This increase was primarily attributable to
inclusion of a full year of operating results in 1997 relating to the 1996
Acquisitions.
INTEREST EXPENSE. Interest expense increased $72 million to $95 million in 1998
from $23 million in 1997. This increase resulted from the inclusion of a full
year of interest costs in 1998 in connection with the 1997 acquisition of
Colonial Penn and the commencement of GE Edison operations in April 1998.
Interest expense increased $22 million to $23 million in 1997 from $1 million in
1996. This increase resulted from the inclusion of a full year of operating
results in 1997 of First Colony (acquired in 1996) and interest costs incurred
in connection with the 1997 acquisition of Colonial Penn.
SEGMENT OPERATIONS
WEALTH ACCUMULATION AND TRANSFER
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") and (iv) mutual funds. 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.
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, 1998, 1997, and 1996.
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
(DOLLARS IN MILLIONS)
Revenues:
Premiums .......................................... $1,557 $1,192 $465
Net investment income.............................. 2,631 2,578 1,626
Net realized investment gains...................... 116 77 13
Other revenues..................................... 395 411 186
--------------------------
Total revenues .................................... 4,699 4,258 2,290
--------------------------
Benefits and expenses:
Interest credited.................................. 1,260 1,281 837
Benefits and other changes in policy reserves ..... 2,040 1,720 809
Other expenses .................................... 730 668 374
--------------------------
Total benefits and expenses........................ 4,030 3,669 2,020
--------------------------
Income before income taxes........................... $669 $589 $270
==========================
<PAGE>
Operating income from this segment represented 84.4%, 85.9% and 73.0% of
the Company's total operating income for the years ended December 31, 1998, 1997
and 1996, respectively. The 1998 decrease was driven primarily by the full year
impact of the Colonial Penn purchase in November 1997. This acquisition caused
net income to grow within the Wealth and Lifestyle Protection segment at a
faster rate during 1998 than net income grew in the Wealth Accumulation and
Transfer segment. The 1997 increase was driven primarily by the full year impact
of the 1996 acquisitions. These acquisitions caused net income to grow within
the Wealth Accumulation and Transfer segment at a faster rate during this period
than net income grew in the Wealth and Lifestyle Protection segment. The
Company's operating income from the Wealth Accumulation and Transfer segment
increased 13.6% in 1998 to $669 million, and 118.1% in 1997, to $589 million
from $270 million in 1996. These increases were driven primarily by higher
levels of invested assets and life insurance policies in force.
Despite these acquisitions, the Company's sales of deferred fixed
annuities declined 3.4% in 1998 and 5.8% in 1997. These declines were largely
due to the low interest rate environment that existed in 1998 and 1997, the
termination of certain exclusive annuity marketing arrangements with banks and
the increased demand for variable annuities and other products which allow
consumers to participate in the strong capital markets. In 1998 and 1997, the
Company experienced significant growth in sales of certain immediate annuities,
variable annuities and life products. Sales of single premium immediate
annuities increased 33.5% and 159.9% for the year ended December 31, 1998 and
1997, respectively while sales of GICs increased 99.8% and 122.0% for the years
ended December 31, 1998 and 1997. These increases were largely due to the demand
for variable annuities noted above, the 1996 acquisitions and the introduction
of certain new products by the Company.
WEALTH AND LIFESTYLE PROTECTION
The Company's principal product lines under the Wealth and Lifestyle
Protection segment are (i) long-term care, (ii) supplemental accident and health
insurance, (iii) personal lines of automobile insurance and (iv) credit
insurance. Wealth and Lifestyle Protection products are used by customers as
vehicles to protect their income and assets from the adverse economic impacts of
automobile accidents and related liabilities or significant health care costs or
other unanticipated events that cause temporary or permanent loss of earnings
capabilities (including the ability to repay certain indebtedness).
The following table sets forth certain summarized financial data for GE
Financial Assurance's Wealth and Lifestyle Protection segment for the years
ended December 31, 1998, 1997 and 1996.
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
(DOLLARS IN MILLIONS)
Revenues:
Premiums............................................. $1,650 $1,122 $921
Net investment income................................ 265 177 147
Net realized investment gains........................ --- --- 2
Other revenues....................................... 58 10 6
------------------------
Total revenues....................................... 1,973 1,309 1,076
------------------------
Benefits and expenses:
Interest credited.................................... --- --- 85
Benefits and other changes in policy reserves........ 1,189 772 538
Other expenses....................................... 660 440 353
------------------------
Total benefits and expenses.......................... 1,849 1,212 976
------------------------
Income before income taxes............................. $124 $ 97 $100
========================
<PAGE>
Operating income from this segment represented 15.6%, 14.1%, and 27.0%
of the Company's total results for the years ended December 31, 1998, 1997 and
1996, respectively. The Company's operating income from the Wealth and Lifestyle
Protection segment increased 27.8% in 1998 to $124 million, after a 3.0%
decrease in 1997 to $97 million from $100 million in 1996. Premiums and
investment income increased in 1998 and 1997 due to the impact of the
acquisition of Colonial Penn in November 1997 and the full year impact in 1997
of the 1996 acquisition of Union Fidelity (April 1996) and growth in sales of
long-term care policies.
In addition to acquisition related growth, the Company benefited from
increased demand for its long-term care products. Sales of long-term care
policies grew to 2.8% in 1998 to $112 million, and 31.3% in 1997 to $109 million
from $83 million in 1996. The higher sales were driven by an increase in the
number of career agents selling the product and 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.
FINANCIAL CONDITION
TOTAL ASSETS. Total assets increased $5.6 billion, or 11.0%, to $56.7 billion at
December 31, 1998 from $51.1 billion at December 31, 1997. The increase resulted
primarily from the initial operations of GE Edison Life Insurance Company and
growth in existing insurance and investment products. The majority of the
increase in total assets occurred in the investments and separate account asset
categories that are discussed in more detail below.
TOTAL INVESTMENTS. Total investments increased $2.8 billion, or 7.1%, to $42.3
billion at December 31, 1998 from $39.5 billion at December 31, 1997. Consistent
with the increase in total assets, total investments increased primarily from
the initial operations of GE Edison Life Insurance Company and investment income
of $2.9 billion, net of cash outflows from other investing activities.
SEPARATE ACCOUNT ASSETS. The separate account assets represent funds held for
the exclusive benefit of variable annuity and variable life contract holders. As
of December 31, 1998, the Company held $5.6 billion of separate account assets.
The increase in such balances of $1.5 billion from $4.1 billion at December 31,
1997 relates almost entirely to increased sales and unrealized market value
gains.
TOTAL LIABILITIES. Total liabilities increased $5.0 billion, or 11.4%, to $49.1
billion at December 31, 1998 from $44.1 billion at December 31, 1997. The
increase resulted primarily from initial operations at GE Edison Life Insurance
Company and growth in existing insurance and investment products. The majority
of the overall increase in total liabilities occurred in the future annuity and
contract benefits, liability for policy and contract claims, short-term
borrowings and separate account liability categories that are discussed in more
detail below.
FUTURE ANNUITY AND CONTRACT BENEFITS. Future annuity and contract benefits
increased $2.0 billion, or 5.9%, to $36.3 billion at December 31, 1998 from
$34.3 billion at December 31, 1997. The increase resulted primarily from growth
in certain existing insurance and investment products.
LIABILITY FOR POLICY AND CONTRACT CLAIMS. Policy and contract claims increased
$0.2 billion, or 11.6%, to $1.7 billion at December 31, 1998 from $1.5 billion
at December 31, 1997. Consistent with the increase in total liabilities, the
increase resulted primarily from growth in certain existing insurance and
investment products.
<PAGE>
LONG-TERM DEBT. Long-term debt increased $0.5 billion to $0.7 billion at
December 31, 1998 from $0.2 billion at December 31, 1997. The increase resulted
primarily from financing the initial operations of GE Edison Life Insurance
Company.
SEPARATE ACCOUNT LIABILITIES. The separate account liabilities represent the
liability associated with the separate account assets. As discussed above, the
$1.5 billion increase in such balances to $5.6 billion at December 31, 1998
relates almost entirely to increased sales and unrealized market value gains.
MINORITY INTEREST. Minority interest increased $120 million at December 31, 1998
to $123 million from $3 million at December 31, 1997 due to the recording of
minority interest relating to the capitalization of GE Edison Life Insurance
Company.
LIQUIDITY AND CAPITAL RESOURCES
The principal liquidity requirements for GE Financial Assurance's
insurance operations are its contractual obligations to policyholders and
annuitants and its payment of dividends to policyholders. 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
and scheduled principal repayments from its total 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. GE Financial Assurance places commercial paper in
the U.S. market as a vehicle to fund certain of the Company's acquisitions.
In addition, the Company maintains committed back-up credit lines with
third-party banks to support its commercial paper program and maintains
committed credit lines with General Electric Capital Corporation to provide
interim funding for the Company's acquisition activity and to provide liquidity
to meet normal variation in contract obligations.
Historically, GE Financial Assurance has, through its operating
companies, generated positive cash flows from operating and certain financing
activities (including net cash provided by operating activities and cash used by
redemptions and benefit payments on investment contracts, net of proceeds from
issue of investment contracts). For the years ended December 31, 1998, 1997, and
1996, cash flows from operating and certain financing activities were $2,117
million, $1,028 million and $895 million, respectively. These amounts include
net cash used in investing activities relating to investment contract issues and
redemptions of $703 million, $923 million and $1,012 million for the years ended
December 31, 1998, 1997, and 1996, respectively. These net uses of cash reflect
a continued shift in customer preferences away from fixed rate investment
products to investment products which include participation in the capital
markets.
The nature and quality of the various types of investments purchased by
a U.S. life insurance company must comply with the statutes and regulations
imposed by the various states in which those entities are licensed to market and
sell insurance and investment products. The Company primarily purchases
investment-grade (BBB-/Baa3 or above) bonds. At December 31, 1998, $32.6
billion, or 88.5%, of the fixed maturity securities held by the Company were
bonds rated by a rating agency (S&P's or Moody's), or were government/agency
bonds. The remaining $4.3 billion, or 11.5%, was comprised primarily of private
<PAGE>
placement bonds not rated by either rating agency. At December 31, 1998, the
Company held $1,861 million of bonds rated below investment grade (excluding
split-rated bonds). In addition, the Company held $382 million 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. The Company holds this small percentage of below investment
grade bonds in order to enhance the yield on its investment portfolio.
Certain of the Company's products contain provisions for penalty charges
for surrender of the policy. These charges range from 5% to 8% at policy
origination and grade to zero over predetermined periods ranging from five to
twenty years. At December 31, 1998, approximately 81% of the Company's annuity
contracts were subject to surrender penalties or contained non-surrender
provisions.
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. 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 are deemed extraordinary and require formal state insurance commission
approval. Based on statutory results as of December 31, 1998, the Company is
able to receive $241 in dividends in 1999 without obtaining regulatory approval.
See "Insurance Regulation -- General Regulation at State Level."
YEAR 2000
Year 2000 will test the capability of business processes to function
correctly. The Company, with the assistance of its parent, has undertaken an
effort to identify and mitigate Year 2000 issues in its information systems,
products, facilities and suppliers. The Company has a Year 2000 leader who
oversees a multi-functional remediation project team responsible for applying a
Six Sigma quality approach in four phases: (1) define/measure- identify and
inventory possible sources of Year 2000 issues; (2) analyze- determine the
nature and extent of Year 2000 issues and develop project plans to address those
issues; (3) improve- execute project plans and perform a majority of the
testing; and (4) control complete testing, continue monitoring readiness and
complete necessary contingency plans. The progress of this program is monitored
and reviews with senior management are conducted monthly. The first three
phases of the program have been completed for a substantial majority of
mission-critical activities. Management plans to have nearly all significant
information systems, products and facilities through the control phase of the
program by mid-1999.
The scope of the Year 2000 effort encompasses hundreds of applications
and computer programs, as well as products and services, facilities and
facilities-related equipment, and suppliers and customers. Business operations
are also affected by the Year 2000 readiness of customers, distribution channels
and infrastructure suppliers in areas such as utilities, communications and
other services. In this environment, there will likely be instances of failure
that could cause disruptions in business processes for the Company's businesses.
The likelihood and effects of failures in the customer base, infrastructure
systems, distribution channels and in the supply chain cannot be estimated.
However, with respect to operations under its direct control, management does
not expect, in view of its Year 2000 program efforts and the diversity of its
products, distribution channels, suppliers and customers, that occurrences of
Year 2000 failures will have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
Total Year 2000 remediation expenditures to be incurred by the Company
are expected to be approximately $47 million, of which approximately 80% was
spent by the end of 1998. Substantially all of the remainder is expected to be
spent in 1999. Most of these costs are not likely to be incremental costs, but
rather will represent the redeployment of existing resources. The activities
<PAGE>
involved in the Year 2000 effort necessarily involve estimates and projections
of activities and resources that will be required in the future. These estimates
and projections could change as work progresses.
PROPOSED REPORTING CHANGES
The NAIC currently has a project under way to codify statutory
accounting principles ("SAP"), as existing SAP does not address all accounting
issues and may differ from state to state. Upon completion, the codification is
expected to replace prescribed or permitted SAP in each state as the new
comprehensive statutory basis of accounting for insurance companies. The final
format of the codification is uncertain at this time, yet implementation could
be required as early as January 1, 2001. Due to the project's uncertainty, the
Company has not yet quantified the impact any such changes would have on the
statutory capital and surplus or statutory results of operations of its
subsidiaries. While significant uncertainties surrounding the ultimate outcome
of the codification remains, management currently believes adoption of such
standards would not have a material impact on the statutory capital and surplus
or statutory results of operations of its subsidiaries.
INTEREST RATE CHANGES
Interest rate changes may have temporary effects on the sale and
profitability of the annuity, universal life, and other investment products
offered by GE Financial Assurance's insurance subsidiaries. For example, if
interest rates rise, competing investments (such as annuities or life insurance
offered by GE Financial Assurance's competitors, certificates of deposit, mutual
funds, and similar instruments) may become more attractive to potential
purchasers of GE Financial Assurance's products until GE Financial Assurance
increases the rate credited to holders of its annuity, universal life, and other
investment products. 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.
INVESTMENTS
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, 1998, the Company held $39.9 billion, or 94.3%
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. To match some of its longer term
policy liabilities, the Company has followed a strategy of buying bonds with
adequate call protection. The Company also invests in preferred stock, policy
loans, short-term securities and other investments, which comprised the
remaining 5.7% of its investment portfolio at December 31, 1998.
The Company primarily purchases investment-grade (BBB-/Baa3 or above)
bonds. At December 31, 1998, $32.6 billion, or 88.5%, 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 $4.3 billion, or 11.5%,
was comprised primarily of private placement bonds not rated by either rating
agency. At December 31, 1998, the Company held $1,861 million of bonds rated
below investment grade (excluding split-rated bonds). In addition, the Company
held $382 million 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. The Company holds this small
percentage of below investment grade bonds in order to enhance the yield on its
investment portfolio.
<PAGE>
Investments in mortgage-backed securities include $6,965 million in
collateralized mortgage obligations (CMOs) and asset-backed securities and $938
million of pass-through securities. These securities are secured primarily by
pools of residential mortgages and generally carry high credit ratings.
Approximately 32% of the mortgage-backed securities are backed by securities
issued by Government National Mortgage Association, Federal Home Loan Mortgage
Corporation, or Federal National Mortgage Association. In the aggregate, the
mortgage-backed securities had an average rating of AAA/Aaa at December 31,
1998. Most CMO and pass-through securities are subject to prepayment and
extension risk (i.e., principal can be received earlier or later than
anticipated, based on the rate of mortgage prepayments in the underlying
residential mortgage pools).
At December 31, 1998, the Company's investments in equity securities
totalled $361 million, of which $314 million was preferred stock and $47 million
was common stock. The investments in preferred stock generally pay dividends on
a quarterly basis at yields comparable to bonds.
The Company has classified all of its fixed maturity and equity
securities as available-for-sale. Therefore, these securities are carried on the
balance sheet at current fair values and marked to market quarterly. Changes in
market value, net of the effect on present value of future profits, deferred
policy acquisition costs and deferred income taxes, are recorded 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. At December 31, 1998, the amortized
cost basis of the Company's fixed maturity securities was $35,568 million,
representing net unrealized gains of $1,330 million, while the cost basis of
equity securities was $340 million, representing net unrealized gains of
$21 million.
The Company's mortgage loan portfolio consisted of 1,878 loans at December
31, 1998. The loans, which are originated through a network of mortgage bankers,
are made only on completed, leased properties and generally have a maximum
loan-to-value ratio of 75% at the date of origination. Commercial loans comprise
the majority of the portfolio, with 42.4%, 22.3% and 17.6% attributable to the
retail, industrial and office sectors, respectively. The remainder of the loans,
17.7%, are attributable to the residential and other miscellaneous sectors. The
mortgage loans are secured by property throughout the U.S., with concentrations
in the Pacific region (32.7%) and the South Atlantic region (23.9%).
Certain policies issued by the Company allow the policyholders to borrow
against the policy. These loans are classified in the asset side of the balance
sheet as Policy Loans. At December 31, 1998, the outstanding loans of $1,156
million bore interest at an average rate of 8.7%, which is determined by the
terms of the policy.
Other invested assets of $748 million at December 31, 1998 were
comprised of several types of assets. The Company has made investments in mutual
funds offered by the Company's mutual fund and variable annuity distribution
channels of ($151 million) in order to provide seed money for these funds.
Pursuant to a periodic review of its asset allocation strategy, the Company has
also made investments in limited partnerships ($444 million) and real estate and
other properties ($24 million) in order to achieve higher investment returns on
an incremental portion of the portfolio.
<PAGE>
INVESTMENT PORTFOLIO
DECEMBER 31, 1998
FAIR MARKET PERCENTAGE
VALUE OF TOTAL
(DOLLARS IN MILLIONS)
Fixed Maturity Securities -- Available-For-Sale(1)
U.S. Government and Agencies........................... $ 1,603 3.8%
State and Municipal ................................... 662 1.6
Foreign Government..................................... 179 .4
Foreign Corporate ..................................... 2,220 5.3
U.S. Corporate......................................... 24,331 57.5
Mortgage-Backed(2)..................................... 7,903 18.7
---------------------
Total Fixed Maturity Securities........................ 36,898 87.3
---------------------
Equity Securities -- Available-For-Sale(3)
Common Stock........................................... 47 .1
Preferred Stock, Non-Redeemable ....................... 314 .7
---------------------
Total Equity Securities................................ 361 .8
---------------------
Mortgage Loans on Real Estate, Net....................... 2,960 7.0
Policy Loans ............................................ 1,156 2.7
Short Term Investments .................................. 164 .4
Other Invested Assets
Mutual Funds........................................... 151 .4
Limited Partnerships................................... 444 1.1
European Style Call Options............................ 71 .2
Interest Rate Swaps and Floors......................... 58 .1
Real Estate Owned ..................................... 8 ---
Other ................................................. 16 ---
---------------------
Total Other Invested Assets............................ 748 1.8
---------------------
Total Investments........................................ $42,287 100.0%
=====================
- -----------
(1) Fixed maturity securities available-for-sale are stated at current
market values. Amortized cost of fixed maturity securities
available-for-sale at December 31, 1998 was $35,568 million,
representing net unrealized gains of $1,330 million. Changes in market
value, net of the effect on present value of future profits, deferred
policy 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-backed securities are comprised of CMOs ($6,965 million) and
pass-throughs securities ($938 million).
(3) Equity securities available-for-sale are stated at current market
values. The cost basis of equity securities available-for-sale at
December 31, 1998 was $340 million, representing net unrealized gains of
$21 million. Changes in market value, net of the effect on present value
of future profits, deferred policy 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.
<PAGE>
The following table summarizes the Company's investment results for the
periods indicated.
INVESTMENT RESULTS
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
(DOLLARS IN MILLIONS)
Total Average Invested Assets (1) .............. $39,544 $36,641 $24,144
Net Investment Income (2) (4) .................. $2,896 $2,755 $1,773
Effective Yield (3) ............................ 7.6% 7.8% 7.6%
Net Realized Investment Gains (4)............... $116 $77 $15
- -----------
(1) Average of cash and total invested assets on an amortized cost basis,
adjusted for impact of timing on acquired companies.
(2) Net investment income is net of investment expenses and excludes capital
gains or losses or provision for income taxes.
(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.
(4) Excludes provision for income taxes.
The credit quality of the Company's bond portfolio as stated below is
based upon the higher of the ratings published by S&P or Moody's.
PORTFOLIO CREDIT QUALITY
DECEMBER 31, 1998
FAIR MARKET PERCENTAGE
VALUE OF TOTAL
(DOLLARS IN MILLIONS)
Agencies and Treasuries..................... $ 4,953 13.4%
AAA/Aaa..................................... 5,003 13.6
AA/Aa....................................... 2,541 6.9
A/A......................................... 9,586 26.0
BBB/Baa..................................... 8,700 23.6
BB/Ba....................................... 1,294 3.5
B/B......................................... 565 1.5
CCC/Caa..................................... 2 ---
Not Rated................................... 4,254 11.5
---------------------------
Total .................................... $36,898 100.0%
===========================
<PAGE>
As of December 31, 1998, the Company's bond portfolio had an average
rating of A+/A1. According to S&P and Moody's, bonds which are rated "A" possess
many favorable investment attributes and are to be considered as upper medium
grade obligations. S&P applies "+" and "-" modifiers in each generic rating
classification from AA to CCC. Moody's applies numerical modifiers "1", "2" and
"3" in each generic rating classification from Aa to B. Modifier "1" indicates a
bond in the higher end of a generic rating classification.
Fixed maturity securities with ratings ranging from AAA/Aaa to BBB-/Baa3
are generally regarded as investment grade. Some agencies and treasuries (that
is, those securities issued by the U.S. Government or an agency thereof) are not
rated, but are considered to be investment grade securities. Finally, some
securities, such as private placements, have not been assigned a rating by any
rating service and are therefore categorized as "not rated". This has neither
positive nor negative implications regarding the credit quality of the security.
At December 31, 1998 and 1997, there were fixed maturity securities in
default with a fair value of $11 million and $8 million, respectively.
The following table sets forth scheduled maturities for the Company's
investments in fixed maturities at December 31, 1998.
SCHEDULED MATURITIES
DECEMBER 31, 1998
FAIR MARKET PERCENTAGE
VALUE OF TOTAL
(DOLLARS IN MILLIONS)
Due in one year or less ....................... $1,204 3.3%
Due after one year through five years ......... 6,599 17.9
Due after five years through 10 years ......... 5,220 14.1
Due after 10 years............................. 15,972 43.3
Mortgage-backed securities .................... 7,903 21.4
---------------------------
Total........................................ $36,898 100.0%
===========================
Expected maturities may differ from scheduled maturities because issuers
of securities may have the right to call or prepay obligations with or without
call or prepayment penalties. At December 31, 1998, $8,756 million of the
Company's investments (excluding mortgage-backed securities) were subject to
certain call provisions.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE AND CURRENCY RISK MANAGEMENT
In normal operations, the Company must deal with effects of changes in
interest rates and currency exchange rates. The following discussion presents an
overview of how such changes are managed and a view of their potential effects.
The Company uses various financial instruments, particularly interest
rate and currency swaps, but also futures, options and currency forwards, to
manage risks. The Company is exclusively an end user of these instruments, which
are commonly referred to as derivatives. The Company does not engage in any
derivatives trading, market-making or other speculative activities in the
derivative markets. More detailed information regarding these financial
instruments, as well as the strategies and policies for their use, is contained
in notes 1, 8 and 12 to the consolidated financial statements.
The Company manages its exposure to changes in interest rates, in part,
by funding its assets with an appropriate mix of fixed and variable rate debt
and its exposure to currency fluctuations principally by funding local currency
denominated assets with debt denominated in those same currencies.
The Company is exposed to prepayment risk in certain of its business
activities, such as in its investment portfolio, mortgage and annuities
activities. In order to hedge those exposures, the Company uses swaps, futures,
and option-based financial instruments. These instruments generally behave based
on limits ("caps", "floors" or "collars") on interest rate movement. These
swaps, futures and option-based instruments are governed by the credit risk
policies described below and are transacted in either exchange-traded or
over-the-counter markets.
Established practices require that derivative financial instruments
relate to specific asset, liability or equity transactions or to currency
exposures. Substantially all treasury actions are centrally executed by the
Company's Treasury Department, which maintains controls on all exposures,
adheres to stringent counterparty credit standards and actively monitors
marketplace exposures.
As a result of the Company's use of swaps, purchased options and
forwards, the principal risk is credit risk - risk that counterparties will be
financially unable to make payments in accordance with the agreements.
Associated market risk is meaningful only as it relates to how changes in the
market value affect credit exposure to individual counterparties. Except as
noted above for positions that are integrated into financings, all swaps,
purchased options and forwards are carried out within the following credit
policy constraints.
<PAGE>
Once a counterparty reaches a credit exposure limit (see table below),
no additional transactions are permitted until the exposure with that
counterparty is reduced to an amount that is within the established limit. Open
contracts remain in force.
COUNTERPARTY CREDIT CRITERIA CREDIT RATING
-------------------------
STANDARD
MOODY'S & POOR'S
----------- -----------
Term of transaction
Between one and five years ............ Aa3 AA-
Greater than five years ............... Aaa AAA
Credit exposure limits
Up to $50 million ..................... Aa3 AA-
Up to $75 million ..................... Aaa AAA
o 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-.
More credit latitude is permitted for transactions having original
maturities shorter than one year because of their lower risk.
The conversion of interest rate and currency risk into credit risk
results in a need to monitor counterparty credit risk actively. At December 31,
1998, the notional amount of long-term derivatives for which the counterparty
was rated below Aa3/AA- was $10 million. These amounts are the result of (1)
counterparty downgrades, (2) transactions executed prior to the adoption of the
Corporation's current counterparty credit standards, and (3) transactions
relating to acquired assets or businesses.
Following is an analysis of credit risk exposures as of December 31:
PERCENTAGE OF NOTIONAL DERIVATIVE EXPOSURE BY COUNTERPARTY CREDIT RATING
- ----------------------------------------------------------------------------
MOODY'S/STANDARD & POOR'S 1998 1997 1996
------------------------- ------------ ------------- -------------
Aaa/AAA ......................... 90% 47% --%
Aa/AA ........................... 10% 53% 100%
A/A and below ................... --% --% --%
<PAGE>
The Securities and Exchange Commission requires that registrants
disclose information about potential effects of changes in interest rates and
currency exchange. Although the rules offer alternatives for presenting this
information, none of the alternatives is without limitations. The following
discussion is based on so-called "shock-tests," which model effects of interest
rate and currency shifts on the reporting company. Shock tests, while probably
the most meaningful analysis permitted, are constrained by several factors,
including the necessity to conduct the analysis based on a single point in time
and by their inability to include the extraordinarily complex market reactions
that normally would arise from the market shifts modeled. While the following
results of shock tests for interest rates and currencies may have some limited
use as benchmarks, they should not be viewed as forecasts.
o One means of assessing exposure to interest rate changes is a duration-based
analysis that measures the potential loss in net earnings resulting from a
hypothetical increase in interest rates of 100 basis points across all
maturities (sometimes referred to as a "parallel shift in the yield curve").
Under this model, it is estimated that, all else constant, such an increase,
including repricing effects in the securities portfolio, would reduce the
1999 net earnings of the Company based on year-end 1998 positions by
approximately $20 million.
o One means of assessing exposure to changes in currency exchange rates is to
model effects on reported earnings using a sensitivity analysis. Year-end
1998 consolidated currency exposures, including financial instruments
designated and effective as hedges, were analyzed to identify Company assets
and liabilities denominated in other than their relevant functional
currency. Net unhedged exposures in each currency were then remeasured
assuming a 10% decrease (substantially greater decreases for
hyperinflationary currencies) in currency exchange rates compared with the
U.S. dollar. Under this model, it is estimated that, all else constant, such
a decrease would reduce the 1999 net earnings of the Company based on
year-end 1998 positions by an insignificant amount.
<PAGE>
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report......................................... 45
Consolidated Balance Sheets.......................................... 46
Consolidated Statements of Income ................................... 47
Consolidated Statements of Shareholder's Interest.................... 48
Consolidated Statements of Cash Flows................................ 49
Notes to Consolidated Financial Statements........................... 50
Independent Auditors' Report on Financial Statement Schedules........ 79
Schedule II, Condensed Financial Information (Parent Company)........ 80
Schedule III, Supplemental Insurance Information..................... 84
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GE Financial Assurance Holdings, Inc.
We have audited the accompanying consolidated balance sheets of GE
Financial Assurance Holdings, Inc. and subsidiaries as of December 31, 1998 and
1997, 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,
1998. 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
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, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998 in conformity with generally
accepted accounting principles.
KPMG LLP
Richmond, Virginia
January 22, 1999
<PAGE>
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in millions, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-------------------
ASSETS 1998 1997
---- ----
<S> <C> <C>
Investments:
Fixed maturities available-for-sale, at fair value $ 36,898 $ 34,537
Equity securities available-for-sale, at fair value:
Common stocks 47 44
Preferred stocks, non-redeemable 314 372
Mortgage loans, net of valuation allowance of $65 and $57
at December 31, 1998 and 1997, respectively 2,960 2,667
Policy loans 1,156 1,066
Short-term investments 164 286
Other invested assets 748 497
-------- -------
Total investments 42,287 39,469
-------- -------
Cash 214 44
Accrued investment income 789 750
Deferred acquisition costs 1,318 863
Intangible assets 3,243 3,354
Reinsurance recoverable 1,634 1,725
Other assets 1,673 781
Separate account assets 5,569 4,106
-------- --------
Total assets $ 56,727 $ 51,092
======== ========
LIABILITIES AND SHAREHOLDER'S INTEREST
Liabilities:
Future annuity and contract benefits $ 36,272 $ 34,258
Unearned premiums 966 1,121
Liability for policy and contract claims 1,697 1,521
Other policyholder liabilities 570 480
Accounts payable and accrued expenses 1,992 1,264
Deferred income tax liability 55 44
Short-term borrowings 1,330 1,162
Separate account liabilities 5,569 4,106
Long-term debt 698 175
-------- --------
Total liabilities 49,149 44,131
-------- --------
Minority interest 123 3
Shareholder's interest:
Net unrealized investment gains 713 661
Foreign currency translation adjustments 73 -
-------- --------
Accumulated non-owner changes in equity 786 661
Common stock ($1 par value, 1,000 authorized,
1,000 shares issued and outstanding) - -
Additional paid-in capital 5,435 5,435
Retained earnings 1,234 862
-------- --------
Total shareholder's interest 7,455 6,958
-------- --------
Total liabilities and shareholder's interest $ 56,727 $ 51,092
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net investment income $ 2,896 $ 2,755 $ 1,773
Net realized investment gains 116 77 15
Premiums 3,207 2,314 1,386
Net commission income 27 13 14
Other income 426 408 178
-------- ------- -------
Total revenues 6,672 5,567 3,366
-------- ------- -------
Benefits and expenses:
Interest credited 1,260 1,281 922
Benefits and other changes in policy reserves 3,229 2,492 1,347
Commissions 541 559 367
General expenses 914 685 426
Amortization of intangibles, net 286 276 215
Change in deferred acquisition costs, net (446) (435) (282)
Interest expense 95 23 1
-------- ------- -------
Total benefits and expenses 5,879 4,881 2,996
-------- ------- -------
Income before income taxes and
minority interest 793 686 370
Provision for income taxes 301 261 140
-------- ------- -------
Income before minority interest 492 425 230
Minority interest - - 1
-------- ------- -------
Net income $ 492 $ 425 $ 229
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S INTEREST
(Dollar amounts in millions, except share amounts)
<TABLE>
<CAPTION>
Accumulated
Non-owner
Additional Changes Total
Common Stock Paid-In Other Than Retained Shareholder's
Shares Amount Capital Earnings Earnings Interest
------ ------ ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1996 1,000 $ - $ 1,874 $ 237 $ 208 $ 2,319
Changes other than transactions with shareholder:
Net income - - - - 229 229
Net unrealized losses on investment securities(a) - - - (388) - (388)
--------
Total changes other than transactions with shareholder (159)
--------
Contribution of Life of Virginia - - 964 - - 964
Contribution of UFLIC - - 425 - - 425
Cash contribution for acquisition of First Colony - - 2,172 - - 2,172
------- ------- ------- ------ ------ -------
BALANCES AT DECEMBER 31, 1996 1,000 - 5,435 (151) 437 5,721
Changes other than transactions with shareholder:
Net income - - - - 425 425
Net unrealized gains on investment securities(a) - - - 812 - 812
-------
Total changes other than transactions with shareholder 1,237
------- ------- ------- ------ ------ =======
BALANCES AT DECEMBER 31, 1997 1,000 - 5,435 661 862 6,958
Changes other than transactions with shareholder:
Net income - - - - 492 492
Net unrealized gains on investment securities(a) - - - 52 - 52
Foreign currency translation adjustments - - - 73 - 73
-------
Total changes other than transactions with shareholder 617
-------
Dividends declared - - - - (120) (120)
------- ------ ------- ------ ------ -------
BALANCES AT DECEMBER 31, 1998 1,000 $ - $ 5,435 $ 786 $ 1,234 $ 7,455
======= ====== ======= ====== ======= =======
</TABLE>
(a) Presented net of deferred taxes of $(29) million, $(450) million and $215
million in 1998, 1997, and 1996, respectively
See accompanying notes to consolidated financial statements.
<PAGE>
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 492 $ 425 $ 229
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest - - 1
Increase in future policy benefits 2,601 2,195 1,504
Charges assessed to policyholders (282) (289) (97)
Net realized investment gains (116) (77) (15)
Amortization of investment premiums and discounts (50) (6) 23
Amortization of intangibles 286 276 215
Deferred income tax expense (benefit) 53 7 (4)
Change in certain assets and liabilities:
Decrease (increase) in:
Accrued investment income (38) (75) (109)
Deferred acquisition costs (446) (435) (282)
Other assets, net (555) (355) 17
Increase (decrease) in:
Other policy-related balances 91 236 190
Accounts payable and accrued expenses 784 49 235
------ ------ ------
Total adjustments 2,328 1,526 1,678
------ ------ ------
Net cash provided by operating activities 2,820 1,951 1,907
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of investment securities
and other invested assets 8,320 5,049 3,849
Principal collected on mortgage and policy loans 471 284 236
Purchase of investment securities and other invested (10,542) (5,815) (4,602)
Mortgage and policy loan originations (859) (631) (542)
Purchase of First Colony, net of cash acquired - - (1,869)
Purchase of Colonial Penn, net of cash acquired - (869) -
Purchase of LTC, Inc., net of cash acquired - (59) -
Purchase of GE Edison Life Insurance Company, net of cash required (572) - -
Purchase of note from GE Capital - - (175)
------ ------ ------
Net cash used in investing activities (3,182) (2,041) (3,103)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issue of investment contracts 3,652 3,430 1,998
Redemption and benefit payments on investment contracts (4,355) (4,353) (3,010)
Proceeds from short-term borrowings 3,303 2,763 574
Payments on short-term borrowings (3,703) (2,141) (482)
Proceeds from long-term debt 515 - -
Net commercial paper borrowings (maturities 90 days or less) 568 436 -
Borrowings from minority interest holder 556 - -
Capital contribution from GE Capital - - 2,172
Cash received upon acquisition of Life of Virginia and UFLIC - - 82
Dividend paid to shareholder (120) - -
------ ------ ------
Net cash provided by financing activities 416 135 1,334
------ ------ ------
Effect of exchange rate changes on cash (6) - -
Net increase in cash and cash equivalents 48 45 138
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 330 285 147
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 378 $ 330 $ 285
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollar amounts in millions)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
historical operations and accounts of GE Financial Assurance Holdings, Inc. and
its subsidiaries (collectively the "Company"). Significant subsidiaries of the
Company include General Electric Capital Assurance Company (whose significant
subsidiaries include Great Northern Insured Annuity Corporation, GE Capital Life
Assurance Company of New York, Federal Home Life Insurance Company and
subsidiaries, The Life Insurance Company of Virginia and subsidiary, and First
Colony Life Insurance Company and subsidiaries), GNA Corporation, Union Fidelity
Life Insurance Company, GE Edison Life Insurance Company and Colonial Penn
Insurance Company. 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 a wholly-owned subsidiary of
General Electric Company. GE Financial Assurance was formed by GE Capital in
October 1996. GE Capital subsequently contributed its wholly-owned subsidiary,
GNA Corporation, to GE Financial Assurance. These consolidated financial
statements reflect the combination of GE Financial Assurance and GNA Corporation
at historical cost on an as-if-pooled basis; accordingly, the accompanying
consolidated financial statements include the accounts and operations of GNA
Corporation for all periods presented.
(b) BASIS OF PRESENTATION
These consolidated financial statements have been prepared on the basis
of generally accepted accounting principles (GAAP) for insurance companies,
which vary in several respects from accounting practices prescribed or permitted
by the Insurance Commissioners of the states where the Company's insurance
subsidiaries are domiciled. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts and related disclosures. Actual results could differ
from those estimates. Certain prior year amounts have been reclassified to
conform to the current year presentation.
(c) ACQUISITIONS
GE Capital completed the acquisition of 100% of GNA Corporation's
capital stock effective April 1993 for a purchase price of $577 and subsequently
acquired 100% of the capital stock of the following companies. Concurrent with
each acquisition, GE Capital contributed its ownership to the Company.
<PAGE>
<TABLE>
<CAPTION>
INITIAL
PURCHASE
EFFECTIVE DATE COMPANY PRICE
- -------------- ------- ----------
<S> <C> <C>
July 1993 United Pacific Life Insurance Company (subsequently renamed $515
General Electric Capital Assurance Company (GECA))
November 1994 The Federal Home Life Companies $412
October 1995 AMEX Life Assurance Company (AMEX Life, subsequently merged $369
into GECA)
April 1996 The Life Insurance Company of Virginia (Life of Virginia) $964
April 1996 Union Fidelity Life Insurance Company (UFLIC) $425
</TABLE>
The results of the acquired companies are included in the accompanying
consolidated financial statements from each respective date of acquisition.
Effective December 1996, the Company completed the acquisition of 100%
of the capital stock of First Colony Life Insurance Company (First Colony) for a
purchase price of $1,897. GE Capital contributed the purchase price for this
acquisition. The results of First Colony are included in the accompanying
consolidated financial statements effective December 1, 1996.
Effective November 1997, the Company completed the acquisition of 100%
of the capital stock of Colonial Penn Insurance Company (Colonial Penn) and LTC
Inc. (LTC) for purchase prices of $1,015 and $59, respectively. The results of
Colonial Penn and LTC are included in the accompanying consolidated financial
statements effective November 4 and November 7, 1997, respectively.
Each of the above referenced acquisitions has been accounted for using
the purchase method of accounting. Accordingly, the purchase price has been
allocated to the assets acquired and the liabilities assumed based on their
estimated fair values as of the respective acquisition dates.
Following are the pro-forma results of operations of the Company for the
year ended December 31, 1997 as if the acquisitions of Colonial Penn and LTC had
occurred on January 1, 1997.
1997
(unaudited)
Total revenues...................................................... $6,077
Net income.......................................................... 405
The pro-forma information has been prepared based upon assumptions
management deems appropriate and the results are not necessarily indicative of
those that might have occurred had the transactions become effective at the
beginning of each respective year.
<PAGE>
On March 30, 1998, the Company and Toho Mutual Life Insurance Company
("Toho"), a Japanese insurer jointly capitalized a new insurance company ("GE
Edison Life Insurance Company") that sells life, health and annuity products in
the Japanese market. In connection with this agreement, the Company paid Toho
$547 million to acquire the operating infrastructure and $13 million to purchase
certain tangible assets. GE Edison Life Insurance Company will originate and
underwrite all of the new business activity. Existing Toho business remains with
Toho with the exception of certain term life insurance business ceded to GE
Edison Life Insurance Company as described below. The Company's investment in GE
Edison Life Insurance Company includes 90% of the entity's voting interest.
Additionally, the Company paid Toho a ceding commission of $400 million in
exchange for Toho transferring 50% of certain term life insurance reserves and
certain other liquid assets approximating $391 million. GE Edison Life Insurance
Company also 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 Life Insurance Company.
(d) PRODUCTS
GE Financial Assurance is an insurance holding company that, through its
subsidiaries, sells a variety of insurance and investment-related products
primarily in North America and Asia. The Company's operations are in two
business segments: Wealth Accumulation and Transfer and Wealth and Lifestyle
Protection.
Wealth Accumulation and Transfer products are investment vehicles and
insurance contracts intended to increase the policyholder's wealth, transfer
wealth to beneficiaries or provide a means for replacing the income of the
insured in the event of premature death. The Company's principal product lines
under the Wealth Accumulation and Transfer segment are deferred annuities (fixed
and variable), immediate annuities (structured settlements and retirement), life
insurance (universal, term, ordinary and group), guaranteed investment contracts
(GICs) and mutual funds.
Wealth and Lifestyle Protection products are products intended to
protect accumulated wealth and income from the financial drain of unforeseen
events. The Company's principal product lines under the Wealth and Lifestyle
Protection segment are long-term care, supplementary accident and health
insurance, personal lines of automobile insurance and credit insurance (life and
health).
The Company distributes its products through four primary channels:
intermediaries (such as brokerage general agents (BGAs), financial planners,
banks, securities brokerage firms and personal producing general agents
(PPGAs)); career agents, 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 affinity groups; and direct marketing.
<PAGE>
Certain of the Company's subsidiaries and certain policies and contracts
offered by them are subject to regulation under the federal securities laws
administered by the Securities and Exchange Commission and certain state
securities laws. Certain of these products offer customers a guaranteed interest
rate for a predetermined time period and subject customers to a market value
adjustment on early withdrawals. Other products offer customers numerous
investment options, including, but not limited to, purchases of shares of
various mutual funds.
(e) REVENUES
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 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.
(f) STATEMENTS OF CASH FLOWS
Certificates and other time deposits are classified as short-term
investments on the consolidated balance sheets and considered cash equivalents
in the consolidated statements of cash flows.
(g) INVESTMENTS
The Company has designated its fixed maturities (bonds, notes, and
redeemable preferred stock) and its equity securities (common and non-redeemable
preferred stock) as available-for-sale. The fair value for fixed maturities and
equity securities is based on quoted market prices, where available. For fixed
maturities not actively traded, fair values are estimated using values obtained
from independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market rate
applicable to the credit quality, call features and maturity of the investments,
as applicable.
Changes in the market values of investments available-for-sale, net of
the effect on deferred policy acquisition costs, present value of future profits
and deferred federal 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, but are shown as a component of accumulated
non-owner changes in equity. Unrealized losses that are considered other than
temporary are recognized in earnings through an adjustment to the amortized cost
basis of the underlying securities. The Company engages 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 market value of the applicable
securities loaned.
<PAGE>
Investment income on mortgage-backed securities is initially based upon
yield, cash flow and prepayment assumptions at the date of purchase. Subsequent
revisions in those assumptions are recorded using the retrospective method,
whereby the amortized cost of the securities is adjusted to the amount that
would have existed had the revised assumptions been in place at the date of
purchase. The adjustments to amortized cost are recorded as a charge or credit
to investment income.
Mortgage and policy loans are stated at the unpaid principal balance of
such loans, net of allowances for estimated uncollectable amounts.
(h) DEFERRED ACQUISITION COSTS
Acquisition costs include costs and expenses that vary with and are
primarily related to the acquisition of insurance and investment contracts. 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 or
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 on an
accelerated basis over the expected life of the respective customer
relationship.
Deferred acquisition costs are reviewed to determine if they are
recoverable from future income, including investment income, and, if not
considered recoverable, are charged to expense.
(i) INTANGIBLE ASSETS
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.
Goodwill -- Goodwill is amortized over its estimated period of benefit
on the straight-line method. No amortization period exceeds 40 years. Goodwill
in excess of associated expected operating cash flows is considered to be
impaired and is written down to fair value.
<PAGE>
(j) FEDERAL INCOME TAXES
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 agreement with GE Capital which
allocates tax on a separate company basis, but provides 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, the provisions of which are substantially the same as the
tax-sharing agreement with GE Capital.
Deferred taxes are allocated to individual subsidiaries by applying the
asset and liability method of accounting for deferred income taxes. Intercompany
balances are settled annually.
(k) REINSURANCE
Premium revenue, benefits, underwriting, acquisition and insurance
expenses are reported net of the amounts relating to reinsurance ceded to other
companies. Amounts due from reinsurers for incurred and estimated future claims
are reflected in the reinsurance recoverable asset. The cost of reinsurance is
accounted for over the terms of the related treaties using assumptions
consistent with those used to account for the underlying reinsured policies.
(l) FUTURE ANNUITY AND CONTRACT BENEFITS
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.
(m) LIABILITY FOR POLICY AND CONTRACT CLAIMS
The liability for policy and contract claims represents the amount
needed to provide for the estimated ultimate cost of settling claims relating to
insured events that have occurred on or before the end of the respective
reporting period. The estimated liability includes requirements for future
payments of (a) claims that have been reported to the insurer, (b) claims
related to insured events that have occurred but that have not been reported to
the insurer as of the date the liability is estimated, and (c) claim adjustment
expenses. Claim adjustment expenses include costs incurred in the claim
settlement process such as legal fees and costs to record, process, and adjust
claims.
(n) SEPARATE ACCOUNTS
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity and variable life contract owners. The
Company receives mortality risk fees and administration charges from the
variable mutual fund portfolios. The separate account assets are carried at fair
value and are equal to the liabilities that represent the policyholders' equity
in those assets.
<PAGE>
(o) MINORITY INTEREST
Minority interest relates to a certain ownership interest in a
reinsurance subsidiary of the Company, acquired in 1996 and certain ownership
interest in the Company's operations in Japan initiated in 1998.
(p) INTEREST RATE AND CURRENCY RISK MANAGEMENT
As a matter of policy, the Company does not engage in derivative
trading, market-making or other speculative activities.
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, swaptions, 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.
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 is marked
to market and recognized in operations immediately.
(2) INVESTMENTS
(a) GENERAL
For the years ended December 31, the sources of investment income of the
Company were as follows:
1998 1997 1996
---- ---- ----
Fixed maturities $2,527 $2,429 $1,518
Equity securities 24 30 14
Mortgage loans 234 214 188
Policy loans 96 88 64
Other 23 13 7
--------------------------
Gross investment income 2,904 2,774 1,791
Investment expenses (8) (19) (18)
--------------------------
Net investment income $2,896 $2,755 $1,773
==========================
<PAGE>
For the years ended December 31, sales proceeds and gross realized
investment gains and losses resulting from the sales of investment securities
available-for-sale were as follows:
1998 1997 1996
---- ---- ----
Sales proceeds $4,668 $2,680 $2,144
-------------------------
Gross realized investment:
Gains $211 $114 $53
Losses (95) (37) (38)
-------------------------
Net realized investment gains $116 $77 $15
=========================
The additional proceeds from investments presented in the consolidated
statements of cash flows result from principal collected on mortgage-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 the
present value of future profits 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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net unrealized gains (losses) on available-for-sale investment
securities before adjustments:
Fixed maturities $1,330 $1,274 $ (215)
Equity securities 21 30 9
Other invested assets 5 9 11
-------------------------
Sub-total 1,356 1,313 (195)
Adjustments to the present value of future profits and deferred (261) (296) (39)
acquisition costs
Deferred income taxes (382) (356) 83
-------------------------
Net unrealized gains (losses) on available-for-sale investment $ 713 $661 $ (151)
securities
=========================
</TABLE>
<PAGE>
At December 31, the amortized cost, gross unrealized gains and losses,
and fair values of the Company's fixed maturities and equity securities
available-for-sale were as follows:
<TABLE>
<CAPTION>
1998 GROSS GROSS
- ---- AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. government and agency $1,426 $182 $ (5) $ 1,603
State and municipal 651 13 (2) 662
Non-U.S. government 178 9 (8) 179
Non-U.S. corporate 2,173 109 (62) 2,220
U.S. corporate 23,476 1,124 (269) 24,331
Mortgage-backed 7,664 278 (39) 7,903
-------------------------------------------------
Total fixed maturities 35,568 1,715 (385) 36,898
Common and non-redeemable preferred stock 340 32 (11) 361
-------------------------------------------------
Total available-for-sale securities $35,908 $1,747 $(396) $37,259
=================================================
1997
- ----
Fixed maturities:
U.S. government and agency $ 1,624 $ 83 $ (2) $ 1,705
State and municipal 49 4 --- 53
Non-U.S. government 115 5 --- 120
Non-U.S. corporate 1,649 72 (5) 1,716
U.S. corporate 21,500 933 (43) 22,390
Mortgage-backed 8,326 254 (27) 8,553
-------------------------------------------------
Total fixed maturities 33,263 1,351 (77) 34,537
Common and non-redeemable preferred stock 386 36 (6) 416
-------------------------------------------------
Total available-for-sale securities $33,649 $1,387 $(83) $34,953
=================================================
</TABLE>
<PAGE>
The scheduled maturity distribution of the fixed maturity portfolio at
December 31, 1998 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.
AMORTIZED FAIR
COST VALUE
---- -----
Due in one year or less $1,192 $1,204
Due one year through five years 6,412 6,599
Due five years through ten years 5,114 5,220
Due after ten years 15,186 15,972
----------------------
Subtotals 27,904 28,995
Mortgage-backed securities 7,664 7,903
----------------------
Totals $35,568 $36,898
======================
As required by law, the Company has investments on deposit with
governmental authorities and banks for the protection of policyholders of $80
and $74 at December 31, 1998 and 1997, respectively.
At December 31, 1998, approximately 26.1%, 15.2% and 12.0% 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, 1998, 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.
<PAGE>
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 & Poors or Moody's.
1998 1997
---- ----
FAIR VALUE PERCENT FAIR VALUE PERCENT
---------- ------- ---------- -------
Agencies and treasuries $ 4,953 13.4% $ 5,847 16.9%
AAA/Aaa 5,003 13.6 4,102 11.9
AA/Aa 2,541 6.9 2,183 6.3
A/A 9,586 26.0 8,831 25.6
BBB/Baa 8,700 23.6 8,345 24.2
BB/Ba 1,294 3.5 979 2.8
B/B 565 1.5 297 .9
CCC/Caa 2 --- 2 ---
D/D --- --- --- ---
Not rated 4,254 11.5 3,951 11.4
----------------------------------------------
Totals $36,898 100.0% $34,537 100.0%
==============================================
Bonds with ratings ranging from AAA/Aaa to BBB-/Baa3 are generally
regarded as investment grade securities. Some agencies and treasuries (that is,
those securities issued by the United States government or an agency thereof)
are not rated, but all are considered to be investment grade securities.
Finally, some securities, such as private placements, have not been assigned a
rating by any rating service and are therefore categorized as "not rated." This
has neither positive nor negative implications regarding the value of the
security.
At December 31, 1998 and 1997, there were fixed maturities in default
with a fair value of $11 and $8, respectively.
(b) MORTGAGE LOANS
At December 31, 1998 and 1997, the Company's mortgage loan portfolio
consisted of 1,878 and 1,898, respectively, first mortgage loans on commercial
real estate properties. The loans, which are originated by the Company through a
network of mortgage bankers, are made only on completed, leased properties and
generally have a maximum loan-to-value ratio of 75% at the date of origination.
At December 31, 1998 and 1997, respectively, the Company held $773 and
$678 in mortgages secured by real estate in California, comprising 26% and 25%
of the respective total mortgage portfolio. For the years ended December 31,
1998, 1997 and 1996, respectively, the Company originated $222, $160 and $103 of
mortgages secured by real estate in California, which represent 29%, 29% and 21%
of the respective total originations for those years.
<PAGE>
"Impaired" loans are defined under generally accepted accounting
principles 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 ($0 as of December 31, 1998 and 1997) and
loans expected to be fully recoverable because the carrying amount has been
reduced previously through charge-offs or deferral of income recognition ($21
and $30, as of December 31, 1998 and 1997, respectively). The Company had no
allowance for losses on these loans as of December 31, 1998 and 1997. Average
investment in impaired loans during 1998, 1997 and 1996 was $26, $29 and $34,
respectively and interest income earned on these loans while they were
considered impaired was $2, $3 and $1, respectively.
The following table shows the activity in the allowance for losses
during the years ended December 31:
1998 1997 1996
---- ---- ----
Balance at January 1 $57 $58 $36
Balance from Life of Virginia, purchased April 1996 --- --- 21
Provision charged to operations 6 5 3
Amounts written off, net of recoveries 2 (6) (2)
--------------------
Balance at December 31 $65 $57 $58
====================
<PAGE>
(3) DEFERRED ACQUISITION COSTS
Activity impacting deferred acquisition costs for the years ended
December 31, was as follows:
1998 1997 1996
---- ---- ----
Unamortized balance at January 1 $945 $498 $216
Acquisition of Colonial Penn --- 12 ---
Impact of foreign currency translation 9 --- ---
Costs deferred 637 549 341
Amortization, net (191) (114) (59)
------------------------
Unamortized balance at December 31 1,400 945 498
Cumulative effect of net unrealized investment gains (82) (82) (10)
------------------------
Recorded balance $1,318 $863 $488
========================
(4) INTANGIBLE ASSETS
PRESENT VALUE OF FUTURE PROFITS (PVFP)
The method used by the Company to value PVFP in connection with
acquisitions of life insurance entities is summarized as follows: (1) identify
the future gross profits attributable to certain lines of business, (2) identify
the risks inherent in realizing those gross profits, and (3) discount those
gross profits at the rate of return that the Company must earn in order to
accept the inherent risks.
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.
<PAGE>
The following table presents the activity in PVFP for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unamortized balance at January 1 $1,824 $2,292 $615
Acquisition of Life of Virginia, April 1996 --- --- 484
Acquisition of UFLIC, April 1996 --- --- 253
Acquisition of First Colony, December 1996 --- --- 1,051
Purchase accounting adjustments --- (236) 79
Interest accreted at 4.8% in 1998, 5.0% in 1997 and 6.1% in 1996 87 101 43
Amortization (303) (333) (233)
--------------------------
Unamortized balance at December 31 1,608 1,824 2,292
Cumulative effect of net unrealized investment gains (179) (214) (29)
--------------------------
Recorded balance $1,429 $1,610 $2,263
==========================
</TABLE>
The estimated percentage of the December 31, 1998 balance, before the
effect of unrealized investment gains or losses, to be amortized over each of
the next five years is as follows:
1999 13.4%
2000 10.8
2001 9.4
2002 8.0
2003 7.1
GOODWILL
At December 31, 1998 and 1997, total unamortized goodwill was $1,803 and
$1,738, respectively, which is shown net of accumulated amortization of $162 and
$94, respectively. Goodwill amortization was $68, $44 and $25 for the years
ended December 31, 1998, 1997 and 1996, 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).
<PAGE>
(5) REINSURANCE
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 reinsurance contracts with any one
reinsurer that could have a material impact on its results of operations.
As a condition to the AMEX Life acquisition, certain specified classes
of business continue to be underwritten by GECA, but are fully reinsured on an
indemnity basis to IDS Life Insurance Company, an insurance subsidiary of
American Express Company (former parent of AMEX Life).
As a condition to the UFLIC acquisition, certain credit life insurance
and accident and health insurance policies continue to be underwritten by UFLIC,
but are fully reinsured on an indemnity basis to Combined Insurance Company of
America, a subsidiary of Aon Corporation (former parent of UFLIC).
Net life insurance in force as of December 31 are summarized as follows:
1998 1997 1996
---- ---- ----
Direct life insurance in force $306,566 $292,825 $262,576
Amounts ceded to other companies (96,931) (79,656) (77,143)
Amounts assumed from other companies 40,290 38,301 29,974
-------------------------------------
Net life insurance in force $249,925 $251,470 $215,407
=====================================
Percentage of amount assumed to net 16% 15% 14%
=====================================
The effects of reinsurance on premiums written and earned for the years
ended December 31 were as follows:
<TABLE>
<CAPTION>
WRITTEN EARNED
------- ------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Direct $3,217 $2,275 $1,328 $3,218 $2,245 $1,337
Assumed 489 480 236 477 474 238
Ceded (464) (421) (198) (488) (405) (189)
--------------------------------------------------------------
Net premiums $3,242 $2,334 $1,366 $3,207 $2,314 $1,386
==============================================================
Percentage of amount assumed to net 15% 21% 17%
===============================
</TABLE>
<PAGE>
Reinsurance recoveries recognized as a reduction of benefits amounted to
$336, $263 and $264 during 1998, 1997 and 1996, respectively. These recoveries
were partially offset by certain changes in benefits and other policy reserves.
(6) FUTURE ANNUITY AND CONTRACT BENEFITS
INVESTMENT CONTRACTS
Investment contracts are broadly defined to include contracts without
significant mortality or morbidity risk. Payments received from sales of
investment contracts are recognized by providing a liability equal to the
current account value of the policyholder's contracts. Interest rates credited
to investment contracts are guaranteed for the initial policy term with renewal
rates determined as necessary by management.
TRADITIONAL LIFE INSURANCE CONTRACTS
Insurance contracts are broadly defined to include contracts with
significant mortality and/or morbidity risk. The liability for future benefits
of insurance contracts is the present value of such benefits based on mortality,
morbidity, and other assumptions which were appropriate at the time the policies
were issued or acquired. These assumptions are periodically evaluated for
potential premium deficiencies. Reserves for cancelable accident and health
insurance are based upon unearned premiums, claims incurred but not reported,
and claims in the process of settlement. This estimate is based on the
experience of the insurance industry and the Company, adjusted for current
trends. Any changes in the estimated liability are reflected in income as the
estimates are revised.
<PAGE>
The following chart summarizes the major assumptions underlying the
Company's recorded liabilities for future annuity and contract benefits:
<TABLE>
<CAPTION>
MORTALITY/
WITHDRAWAL MORBIDITY INTEREST RATE DECEMBER 31,
ASSUMPTION ASSUMPTION ASSUMPTION 1998 1997
---------- ---------- ---------- ---- ----
<S> <C> <C> <C> <C> <C>
Investment contracts N/A N/A N/A $19,256 $18,861
Limited-payment contracts None (a) 4.0%-10.1% 8,981 8,393
Traditional life insurance Company (b)
contracts experience 7.25%-5.5% 1,764 1,113
Universal life-type contracts N/A N/A N/A 4,386 4,258
Accident and health Company (c) 7.5% grading
experience to 5.5% 90 154
Long-term care Company (d)
experience 5.0%-7.0% 1,795 1,479
--------------------
Total future annuity and
contract benefits $36,272 $34,258
====================
</TABLE>
- -----------
(a) Either the United States Population Table, 1983 Group Annuitant
Mortality Table or 1983 Individual Annuitant Mortality Table.
(b) Principally modifications of the 1965-70 or 1975-80 Select and Ultimate
Tables.
(c) The 1958 Commissioner's Standard Ordinary Table and 1964 modified and
1987 Commissioner's Disability Tables.
(d) The 1983 Individual Annuitant Mortality Table or 1980 Commissioner's
Standard Ordinary Table and the 1985 National Nursing Home Study or
Company experience.
<PAGE>
(7) LIABILITY FOR POLICY AND CONTRACT CLAIMS
Activity in the liability for policy and contract claims for the years
ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $1,521 $879 $503
Less reinsurance recoverables (130) (73) (45)
-----------------------------
Net balance at January 1 1,391 806 458
-----------------------------
Balance from acquisition of Life of Virginia, April 1996 --- --- 36
Balance from acquisition of UFLIC, April 1996 --- --- 173
Balance from acquisition of First Colony, December 1996 --- --- 55
Balance from acquisition of Colonial Penn, November 1997 --- 523 ---
-----------------------------
Total Balances from Acquisitions --- 523 264
-----------------------------
Incurred related to insured events of:
Current year 1,731 1,173 593
Prior years (51) 57 ---
-----------------------------
Total incurred 1,680 1,230 593
-----------------------------
Paid related to insured events of:
Current year (947) (750) (316)
Prior years (651) (418) (193)
-----------------------------
Total paid (1,598) (1,168) (509)
-----------------------------
Foreign currency translation 3 --- ---
-----------------------------
Net balance at December 31 1,476 1,391 806
Add reinsurance recoverables 221 130 73
-----------------------------
Balance at December 31 $1,697 $1,521 $879
=============================
</TABLE>
(8) BORROWINGS
(a) LONG-TERM DEBT
In connection with the acquisition of First Colony, the Company assumed
unsecured senior long-term notes 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 for the
periods ended December 31, 1998 and 1997 was $12 and $12, respectively.
<PAGE>
In connection with the acquisition of the operating infrastructure and
initiation of operations at GE Edison Life Insurance Company, a subsidiary of
the Company entered into certain long-term note agreements in the amount of
(Y)6.5 billion ($56 at December 31, 1998), at 2.25%, due April 2008. In
addition, the subsidiary of the Company entered into similar long-term note
agreements, having the same interest rate and maturity, in the amount of (Y)3.5
billion ($27 at December 31, 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.
Additional financing for the GE Edison Life Insurance Company
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 (Y)57.25 billion ($440 at
December 31, 1998), matures in March 2008 and pays interest at a floating rate
based on a spread above the three month Japanese Yen London Inter-Bank Offered
Rate ("JPY LIBOR"), or a total of 0.93% at December 31, 1998.
(b) SHORT-TERM BORROWINGS
Short-term borrowings includes commercial paper issued of $1,004 and
$436, net of discount of $8 and $3 at December 31, 1998 and 1997, respectively,
with an average interest rate of 5.25% at December 31, 1998.
The Company has a line of credit with GE Capital that has an aggregate
borrowing line of $500, of which a maximum of $446 and $234 was used during the
years 1998 and 1997, respectively. At December 31, 1998 and 1997, the balance
outstanding was $326 and $146, respectively.
In connection with the acquisition of Colonial Penn, the Company entered
into an additional line of credit with GE Capital, with an aggregate borrowing
line of $1,015 of which a maximum of $580 and $1,015 was used during the years
1998 and 1997, respectively. At December 31, 1998 and 1997, the balance
outstanding was $0 and $580, respectively.
Interest rates are managed by the Company in light of the anticipated
behavior, including prepayment behavior, of assets in which debt proceeds are
invested. Interest rate swaps are employed to achieve management's interest rate
objectives. Effective interest rates are lower under these "synthetic" positions
than could have been achieved by issuing debt directly.
At December 31, 1998, interest rate swaps maturities with a notional
amount of $1,142 ranged from 2002 to 2012, and average interest rates for these
"synthetic" fixed-rate borrowings were 4.92% (6.46% at December 31, 1997). These
swaps were employed to achieve a synthetic fixed rate on certain floating rate
borrowings in connection with the acquisition of Colonial Penn and initiation of
operations at GE Edison Life Insurance Company, including commercial paper, and
the long term note with GE Capital. The average floating interest rate for these
borrowings was 3.61% as of December 31, 1998 (5.88% at December 31, 1997).
<PAGE>
The following table shows the Company's borrowing positions at December
31 considering the effects of swaps.
EFFECTIVE BORROWINGS (including swaps) 1998 1997
---- ----
Short-term $ 622 $454
Long-term (including current portion) - fixed rate (a) 1,406 883
- ----------
(a) Includes the notional amount of long-term interest rate swaps that
effectively convert the floating-rate nature of short-term borrowings to
fixed rates of interest.
(9) INCOME TAXES
The total provision for income taxes for the years ended December 31
consisted of the following components:
1998 1997 1996
---- ---- ----
Current federal income tax provision $245 $250 $142
Deferred federal income tax provision (benefit) 53 8 (4)
-------------------------
Subtotal -- federal provision 298 258 138
-------------------------
Current state income tax provision 5 4 2
Deferred state income tax provision (benefit) --- (1) ---
-------------------------
Subtotal -- state provision 5 3 2
-------------------------
Foreign income tax provision (benefit) (2) --- ---
-------------------------
Total income tax provision $301 $261 $140
=========================
The reconciliation of the federal statutory tax rate to the effective
income tax rate is as follows:
1998 1997 1996
---- ---- ----
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income tax 0.4 0.3 0.4
Non-deductible goodwill amortization 1.6 1.9 2.2
Other, net 1.0 0.8 0.2
----------------------
Effective rate 38.0% 38.0% 37.8%
======================
<PAGE>
The components of the net deferred income tax liability at December 31 are as
follows:
1998 1997
Assets:
Future annuity and contract benefits $ 1,129 $ 1,081
Guaranty association assessments 43 42
Mortgage loans and real estate owned --- 3
Net operating loss carryforwards 36 ---
Other 58 28
--------------------
Total deferred income tax assets 1,266 1,154
--------------------
Liabilities:
Net unrealized gains on investment securities (382) (356)
Investments (262) (321)
Present value of future profits (419) (478)
Deferred acquisition costs (224) (39)
Mortgage loans and real estate owned (2) ---
Other (32) (4)
--------------------
Total deferred income tax liabilities (1,321) (1,198)
--------------------
Net deferred income tax liability $ (55) $ (44)
====================
Based on an analysis of the Company's 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 enabling the Company to realize remaining deferred tax assets.
Accordingly, no valuation allowance for deferred tax assets is deemed necessary.
The Company paid $188, $270 and $137, for federal and state income taxes
during the years 1998, 1997 and 1996, respectively.
(10) RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, 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, $2 and $1 for the years ended December 31, 1998, 1997 and 1996,
respectively. Short-term investments include $15 and $56 of these securities at
December 31, 1998 and 1997, respectively.
<PAGE>
During 1995, GECA entered into $500 million notional amount of option
and swap option contracts designed to hedge interest rate risk on certain
identified future annuity and contract benefits. These hedge transactions were
executed by GE Capital on behalf of GECA. GE Capital's Treasury Department
maintains controls on all exposures, adheres to stringent counterparty credit
standards and actively monitors marketplace exposures. The gain of $9 resulting
from the sale of these instruments has been deferred and will be recognized in
income in a manner consistent with the accounting for the hedged liability.
During 1998, 1997 and 1996, the Company paid $15, $14 and $7,
respectively, to GE Capital for certain computer services fees.
(11) COMMITMENTS AND CONTINGENCIES
(a) MORTGAGE LOAN COMMITMENTS
As of December 31, 1998 and 1997, the Company was committed to fund $408
and $264, respectively, in mortgage loans.
(b) GUARANTY ASSOCIATION ASSESSMENTS
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.
There are currently several unrelated insurance companies which had
substantial amounts of annuity business in the process of liquidation or
rehabilitation. The Company's insurance subsidiaries paid assessments of $12,
$14 and $9 to various state guaranty associations during the years 1998, 1997
and 1996, respectively. At December 31, 1998 and 1997, accounts payable and
accrued expenses include $90 and $102, respectively, related to estimated future
assessments.
(c) LEASES
The Company leases a portion of the office space and certain equipment
used in its operations under operating lease arrangements. Lease expense for the
years ended December 31, 1998, 1997 and 1996 amounted to $44, $20 and $13,
respectively.
<PAGE>
Future minimum commitments under operating leases as of December 31,
1998 are summarized as follows:
1999 $17
2000 13
2001 11
2002 9
2003 7
Thereafter 19
----------
Total $76
==========
Rates for certain office space leases are subject to inflationary
increases. The effect of such inflationary increases has not been reflected in
the future minimum commitments.
(d) CONTINGENT PAYMENTS
In conjunction with the acquisition of LTC, Inc. in November 1997, the
Company agreed to pay the sellers up to $33 over a five-year period. These
payments are contingent upon certain performance measurements. The contingent
consideration is being accounted for prospectively, as additional purchase
price, which will result in amortization over the remaining goodwill life.
During 1998, approximately $7 was paid to the sellers relating to this
agreement.
In conjunction with the agreement to purchase the infrastructure and
capitalize GE Edison Life Insurance Company in March 1998, a subsidiary of the
Company has agreed to issue certain subsidiary preferred stock to the sellers in
an amount up to (Y)56.0 billion ($478.6 at December 31, 1998) for a period from
1999 till 2004. These payments are contingent upon certain performance
measurements. The contingent consideration, if any, will be accounted for
prospectively, as additional purchase price, which will result in amortization
over the remaining goodwill life.
(e) LITIGATION
The Company and certain of its subsidiaries are defendants in various
cases of litigation considered to be in the normal course of business. The
Company believes that the outcome of such litigation will not have a material
effect on its financial position or results of operations.
<PAGE>
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's derivative financial instruments at December 31, 1998,
consisted of mortgage loan commitments of $408, European style call options of
$71, interest rate floors of $46 and various swap options of $12. The notional
value of the European style call options at December 31, 1998 was $212 and the
options expire from June 1999 to October 2008. The options are used to hedge
market risk associated with the Company's S&P 500 indexed annuity product. The
notional value of the interest rate floors at December 31, 1998 was $6,100 and
the floors have expiration dates from September 2002 to October 2003. The
notional value of the swap options at December 31, 1998 was $3,700 and they have
expiration dates from December 2008 to December 2029.
The fair values of financial instruments presented in the applicable
notes to the Company's consolidated financial statements are estimates of the
fair values at a specific point in time using available market information and
valuation methodologies considered appropriate by management. These estimates
are 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. The Company does not necessarily intend to dispose of or liquidate
such instruments prior to maturity.
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,
short-term borrowings and long-term debt approximates fair value at December 31,
1998 and 1997, respectively.
At December 31, the carrying amounts and fair values of the Company's
financial instruments were as follows:
1998 1997
---- ----
FINANCIAL INSTRUMENTS CARRYING FAIR CARRYING FAIR
- --------------------- AMOUNT VALUE AMOUNT VALUE
-------- ------- --------- ------
Mortgage loans $2,960 $3,172 $2,667 $2,736
Investment contracts 19,256 19,176 18,861 18,714
European style call options 71 71 25 25
Interest rate floors 46 46 --- ---
Swap options 12 4 --- ---
The fair value of mortgage loans is estimated by discounting the
estimated future cash flows using interest rates applicable to current loan
originations, adjusted for credit risks.
<PAGE>
The estimated fair value of investment contracts is the amount payable
on demand (cash surrender value) for deferred annuities and the net present
value based on interest rates currently offered on similar contracts for
non-life contingent immediate annuities. Fair value disclosures are not required
for insurance contracts.
(13) RESTRICTIONS ON DIVIDENDS
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, 1998, the Company is able to receive $241 in
dividends in 1999 without obtaining regulatory approval.
During 1998, the Company received $120 of cash dividends from one of its
subsidiaries and paid $120 of cash dividends to its parent, GE Capital.
(14) SUPPLEMENTARY FINANCIAL DATA
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 generally accepted accounting principles (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.
Combined statutory net income for the Company's insurance subsidiaries
for the years ended December 31, 1998, 1997 and 1996 was $431, $412 and $255,
respectively. The combined statutory capital and surplus as of December 31, 1998
and 1997 was $3,268 and $3,130, respectively.
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 quality, (ii) insurance risk, (iii) interest rate risk, and (iv)
other business factors. 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, 1998 and 1997, each of the Company's insurance subsidiaries
exceeded the minimum required RBC levels.
<PAGE>
(15) OPERATING AND GEOGRAPHIC SEGMENTS
(a) OPERATING SEGMENT INFORMATION
At year-end 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION, which requires segment data to be measured and analyzed on
a basis that is consistent with how business activities are reported internally
to management.
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)
Wealth and Lifestyle Protection, comprised of products intended to protect
accumulated wealth and income from the financial drain of unforeseen events. See
Note (1)(d) for further discussion of the Company's principal product lines
within these two segments.
The following is a summary of industry segment activity for 1998, 1997
and 1996:
<TABLE>
<CAPTION>
1998 -- Segment Data
- -------------------- WEALTH WEALTH &
ACCUMULATION & LIFESTYLE
TRANSFER PROTECTION CONSOLIDATED
------------ ----------- ------------
<S> <C> <C> <C>
Net investment income $2,631 $265 $2,896
Net realized investment gains 116 --- 116
Premiums 1,557 1,650 3,207
Other revenues 395 58 453
--------------------------------------------
Total revenues 4,699 1,973 6,672
--------------------------------------------
Interest credited, benefits, and other changes
in policy reserves 3,300 1,189 4,489
Commissions 283 258 541
Amortization of intangibles 205 81 286
Other operating costs and expenses 242 321 563
--------------------------------------------
Total benefits and expenses 4,030 1,849 5,879
--------------------------------------------
Income before income taxes $669 $124 $793
============================================
Total assets $50,269 $6,458 $56,727
============================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997 -- Segment Data
- -------------------- WEALTH WEALTH &
ACCUMULATION & LIFESTYLE
TRANSFER PROTECTION CONSOLIDATED
---------- ---------- ------------
<S> <C> <C> <C>
Net investment income $2,578 $177 $2,755
Net realized investment gains 77 --- 77
Premiums 1,192 1,122 2,314
Other revenues 411 10 421
--------------------------------------------
Total revenues 4,258 1,309 5,567
--------------------------------------------
Interest credited, benefits and other changes
in policy reserves 3,001 772 3,773
Commissions 305 254 559
Amortization of intangibles 213 63 276
Other operating costs and expenses 150 123 273
--------------------------------------------
Total benefits and expenses 3,669 1,212 4,881
--------------------------------------------
Income before income taxes $589 $ 97 $686
============================================
Total assets $44,891 $6,201 $51,092
============================================
1996 -- Segment Data
- -------------------- WEALTH WEALTH &
ACCUMULATION & LIFESTYLE
TRANSFER PROTECTION CONSOLIDATED
-------------- ---------- -------------
Net investment income $1,626 $ 147 $1,773
Net realized investment gains 13 2 15
Premiums 465 921 1,386
Other revenues 186 6 192
--------------------------------------------
Total revenues 2,290 1,076 3,366
--------------------------------------------
Interest credited, benefits, and other changes
in policy reserves 1,646 623 2,269
Commissions 161 206 367
Amortization of intangibles 138 77 215
Other operating costs and expenses 75 70 145
--------------------------------------------
Total benefits and expenses 2,020 976 2,996
--------------------------------------------
Income before income taxes and minority interests $270 $ 100 $370
============================================
Total assets $41,491 $3,870 $45,361
============================================
</TABLE>
<PAGE>
(b) GEOGRAPHIC SEGMENT INFORMATION
The Company conducts its operations primarily in two geographic regions:
(1) North America and (2) Asia. See Note (1)(d) for further discussion of the
Company's principal product lines distributed in these two segments.
The following is a summary of geographic region activity for 1998.
NORTH AMERICA ASIA CONSOLIDATED
-------------- ---- --------------
Total revenues $6,437 $235 $6,672
Income before income taxes 802 (9) 793
Total assets 54,776 1,951 56,727
Prior to 1998, the Company's operations were entirely within the North
American geographic region.
(16) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
During 1998, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This Statement requires that,
upon adoption, all derivative instruments (including certain derivative
instruments embedded in other contracts) be recognized in the balance sheet at
fair value, and that changes in such fair values be recognized in earnings
unless specific hedging criteria are met. Changes in the values of derivatives
that meet these hedging criteria will ultimately offset related earnings effects
of the hedged items; effects of certain changes in fair value are recorded in
equity pending recognition in earnings. The Company will adopt the Statement on
January 1, 2000. The impact of adoption will be determined by several factors,
including the specific hedging instruments in place and their relationships to
hedged items, as well as market conditions. Management has not estimated the
effects of adoption, as it believes that such determination will not be
meaningful until closer to the adoption date.
<PAGE>
In December 1997, the American Institute of Certified Public Accountants
issued a new Statement of Position (SOP) 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. This SOP is effective for financial
statements for fiscal years beginning after December 15, 1998 and will be
reported in a manner similar to a cumulative effect of a change in accounting
principle in the initial year of adoption. As a result of the adoption of this
SOP, the Company expects to record an asset of approximately $25, net of tax.
(17) SUBSEQUENT EVENTS
On December 31, 1998, the Company reached an agreement to acquire
Professional Insurance Company from Pacific Life and Accident Insurance Company
during the first quarter of 1999 for approximately $48. Professional Insurance
Company is a worksite insurance provider based in Raleigh, N.C.
On January 1, 1999, Great Northern Insured Annuity Corporation
(previously a wholly owned subsidiary of General Electric Capital Assurance
Company) merged into General Electric Capital Assurance Company and The Harvest
Life Insurance Company (previously a subsidiary of Federal Home Life Insurance
Company) merged into The Life Insurance Company of Virginia. Also, PHF Life
Insurance Company (previously a subsidiary of Federal Home Life Insurance
Company) merged into UFLIC. Simultaneously with the aforementioned mergers, The
Life Insurance Company of Virginia was renamed GE Life and Annuity Assurance
Company. These mergers and name change were approved by all applicable state
insurance regulatory departments.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GE Financial Assurance Holdings, Inc.:
Under date of January 22, 1999, we reported on the consolidated balance
sheets of GE Financial Assurance Holdings, Inc. and subsidiaries as of December
31, 1998 and 1997, 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, 1998, 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.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
KPMG LLP
Richmond, Virginia
January 22, 1999
<PAGE>
SCHEDULE II
GE FINANCIAL ASSURANCE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
BALANCE SHEETS
(Dollar amounts in millions, except per share amounts)
December 31,
ASSETS: 1998 1997
---- ----
Investment in subsidiaries $ 8,705 $ 8,056
Other assets 472 116
------- -------
Total assets $ 9,177 $ 8,172
======= =======
LIABILITIES AND SHAREHOLDER'S INTEREST:
Liabilities:
Short-term borrowings $ 1,330 $ 1,162
Accounts payable and accrued expenses 392 52
------- -------
Total liabilities 1,722 1,214
------- -------
Shareholder's interest:
Net unrealized investment gains 713 661
Foreign currency translation adjustments 73 -
------- -------
Accumulated non-owner changes in equity 786 661
Common stock ($1 par value, 1,000 authorized,
1,000 shares issued and outstanding) - -
Additional paid-in capital 5,435 5,435
Retained earnings 1,234 862
------- -------
Total shareholder's interest 7,455 6,958
------- -------
Total liabilities and shareholder's interest $ 9,177 $ 8,172
======= =======
See accompanying note to condensed financial information of registrant.
<PAGE>
SCHEDULE II
GE FINANCIAL ASSURANCE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
(Parent Company)
Statements of Income
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Equity in undistributed earnings of subsidiaries $ 429 $ 448 $ 231
Net investment income 133 2 -
----- ----- -----
Total revenues 562 450 231
----- ----- -----
Benefits and expenses:
General expenses 39 29 3
Interest expense 63 11 -
----- ----- -----
Total benefits and expenses 102 40 3
----- ----- -----
Income before income taxes 460 410 228
Income tax benefit 32 15 1
----- ----- -----
Net income $ 492 $ 425 $ 229
===== ===== =====
</TABLE>
See accompanying note+A44 to condensed financial information of registrant.
<PAGE>
SCHEDULE II
GE FINANCIAL ASSURANCE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
(Parent Company)
Statements of Cash Flows
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 492 $ 425 $ 229
------ ------ ------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Equity in undistributed earnings of subsidiaries (429) (448) (231)
Increase in other assets (356) (116) -
Increase (decrease) in accounts payable and accrued expenses 340 (21) 74
------ ------ ------
Total adjustments (445) (585) (157)
------ ------ ------
Net cash provided by (used in) operating activities 47 (160) 72
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of First Colony - - (1,897)
Purchase of note from GE Capital - - (175)
Capital contribution to First Colony - - (100)
Purchase of Colonial Penn - (1,015) -
Additional purchase price adjustment for UFLIC and Life of Virginia (37) - -
Purchase of Japanese operations (51) - -
Purchase of LTC, Inc. (7) (59) -
------ ------ ------
Net cash used in investing activities (95) (1,074) (2,172)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from GE Capital - - 2,172
Net commercial paper borrowings (maturities 90 days or less) 568 436
Proceeds from short-term borrowings 3,303 1,968 -
Payments on short-term borrowings (3,703) (1,242) -
Dividend paid to shareholder (120) - -
------ ------ ------
Net cash provided by financing activities 48 1,162 2,172
------ ------ ------
Net increase (decrease) in cash and cash equivalents - (72) 72
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR - 72 -
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ - $ - $ 72
====== ====== ======
</TABLE>
See accompanying note to condensed financial information of registrant.
<PAGE>
SCHEDULE II
GE FINANCIAL ASSURANCE HOLDINGS, INC.
NOTE TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
(1) BASIS OF PRESENTATION
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 a wholly-owned subsidiary of General Electric Company. GE
Financial Assurance was formed by GE Capital in October 1996. GE Capital
subsequently contributed its wholly-owned subsidiary, GNA Corporation, to GE
Financial Assurance. These parent company financial statements reflect the
combination of GE Financial Assurance and GNA Corporation at historical cost on
an as-if-pooled basis; accordingly, the accompanying parent company financial
statements include the accounts and operations of GNA Corporation for all
periods presented.
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.
<PAGE>
<TABLE>
<CAPTION>
FUTURE ANNUITY
AND CONTRACT OTHER
DEFFERED BENEFITS AND LIABILITY UNEARNED POLICYHOLDER PREMIUM
ACQUISITION FOR POLICY AND PREMIUMS LIABILITIES REVENUE
---------- ---------------------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
December 31, 1998:
Wealth Accumulation and Transfer $ 874 $ 34,723 $ 212 $ 542 $ 1,557
Wealth and Lifestyle Protection 444 3,246 754 28 1,650
------- -------- ------ ------ -------
Total $ 1,318 $ 37,969 $ 966 $ 570 $ 3,207
======= ======== ====== ====== =======
December 31, 1997:
Wealth Accumulation and Transfer $ 547 $ 32,801 $ 38 $ 450 $ 1,192
Wealth and Lifestyle Protection 316 2,978 1,083 30 1,122
------- -------- ------ ------ -------
Total $ 863 $ 35,779 $ 1,121 $ 480 $ 2,314
======= ======== ====== ====== =======
December 31, 1996:
Wealth Accumulation and Transfer $ 320 $ 32,232 $ 90 $ 336 $ 465
Wealth and Lifestyle Protection 168 2,096 723 16 921
------- -------- ------ ------ -------
Total $ 488 $ 34,328 $ 813 $ 352 $ 1,386
======= ======== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN
NET BENEFITS AND DEFERRED OTHER
INVESTMENT OTHER CHANGES IN ACQUISITION OPERATING PREMIUMS
INCOME POLICY RESERVES COSTS, NET EXPENSES WRITTEN
---------- ---------------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
December 31, 1998:
Wealth Accumulation and Transfer $ 2,631 $ 2,040 $ (303) $ 1,033 $ 1,557
Wealth and Lifestyle Protection 265 1,189 (143) 803 1,685
------- ------- ------ ------ -------
Total $ 2,896 $ 3,229 $ (446) $ 1,836 $ 3,242
======= ======= ====== ======= =======
December 31, 1997:
Wealth Accumulation and Transfer $ 2,578 $ 1,720 $ (306) $ 974 $ 1,192
Wealth and Lifestyle Protection 177 772 (129) 569 1,142
------- ------- ------ ------ -------
Total $ 2,755 $ 2,492 $ (435) $ 1,543 $ 2,334
======= ======= ====== ======= =======
December 31, 1996:
Wealth Accumulation and Transfer $ 1,626 $ 809 $ (144) $ 518 $ 465
Wealth and Lifestyle Protection 147 538 (138) 491 901
------- ------- ------ ------ -------
Total $ 1,773 $ 1,347 $ (282) $ 1,009 $ 1,366
======= ======= ====== ======= =======
</TABLE>
<PAGE>
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted
ITEM 11. EXECUTIVE COMPENSATION.
Omitted
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBERED PAGE
<S> <C>
*3.1. Articles of Incorporation of the Company, and all amendments thereto.
*3.2. By-laws of the Company, as amended.
12. Computation of Ratios of Earnings to Fixed Charges. 88
* 21. Subsidiaries of the Company.
</TABLE>
- -----------
* Previously filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
GE FINANCIAL ASSURANCE HOLDINGS, INC.
By
Name: Stephen N. DeVos
Title: Vice President and Controller
Date: March 29, 1999
<PAGE>
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedules.
EXHIBIT 12
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
----- ------ ----- ----- ----
<S> <C> <C> <C> <C> <C>
Net earnings $ 492 $ 425 $ 229 $ 101 $ 72
Provision for income taxes 301 261 140 67 51
Minority interest - - 1 - -
------ ----- ------ ------ -----
Earnings before income taxes and
minority interest 793 686 370 168 123
Fixed charges:
Interest 95 23 1 - -
One-third of rentals 15 9 5 3 3
------ ----- ------ ------ -----
Total fixed charges 110 32 6 3 3
Less interest capitalized, net of amortization - - - - -
------ ----- ------ ------ -----
Earnings before income taxes and minority
interest plus fixed charges $ 903 $ 718 $ 376 $ 171 $ 126
====== ===== ====== ====== ======
Ratio of earnings to fixed charges 8.2 22.4 62.7 57.0 42.0
====== ===== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0001049537
<NAME> GE FINANCIAL ASSURANCE HOLDINGS, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 36,898
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 361
<MORTGAGE> 2,960
<REAL-ESTATE> 0
<TOTAL-INVEST> 42,287
<CASH> 214
<RECOVER-REINSURE> 1,634
<DEFERRED-ACQUISITION> 1,318
<TOTAL-ASSETS> 56,727
<POLICY-LOSSES> 36,272
<UNEARNED-PREMIUMS> 966
<POLICY-OTHER> 1,697
<POLICY-HOLDER-FUNDS> 570
<NOTES-PAYABLE> 698
0
0
<COMMON> 0
<OTHER-SE> 7,455
<TOTAL-LIABILITY-AND-EQUITY> 56,727
3,207
<INVESTMENT-INCOME> 2,896
<INVESTMENT-GAINS> 116
<OTHER-INCOME> 453
<BENEFITS> 4,489
<UNDERWRITING-AMORTIZATION> 191
<UNDERWRITING-OTHER> 1,199
<INCOME-PRETAX> 793
<INCOME-TAX> 301
<INCOME-CONTINUING> 492
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 492
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
