UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
Commission file number 0-27394
GE Global Insurance Holding Corporation
(Exact name of Registrant as specified in its charter)
Delaware 95-3435367
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5200 Metcalf, Overland Park, Kansas 66201
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (913) 676-5200
Securities registered pursuant to Section 12(b) of the Act:
7% Notes Due February 15, 2026 New York Stock Exchange
(Title of Class) (Name of each exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5,000.00 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 (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the 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]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant at February 28, 1997. None.
At February 28, 1997, 1,000 shares of common stock with a par value of $5,000
were outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND (b)
OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE>
TABLE OF CONTENTS
Page
PART I
Item 1. Business.......................................................1
Item 2. Properties....................................................12
Item 3. Legal Proceedings.............................................12
Item 4. Submission of Matters to a Vote of Security Holders...........12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................12
Item 6. Selected Financial Data.......................................12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................13
Item 8. Financial Statements and Supplementary Data...................20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.................................20
PART III
Item 10. Directors and Executive Officers..............................20
Item 11. Executive Compensation........................................20
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................20
Item 13. Certain Relationships and Related Transactions................20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K..............................................21
<PAGE>
PART I
Item 1. Business.
GE Global Insurance Holding Corporation ("GE Global" and, together with its
subsidiaries, the "Company"), through its direct and indirect subsidiaries, is
principally engaged in the reinsurance business in the United States and
throughout the world. All the outstanding common stock of GE Global is owned by
General Electric Capital Services, Inc. ("GE Capital Services"), formerly
General Electric Financial Services, Inc., which in turn is wholly-owned by
General Electric Company ("GE Company").
Overview of the Reinsurance Industry
Reinsurance is a form of insurance in which a reinsurer indemnifies a
primary insurer against part or all of the liability assumed by the primary
insurer under one or more insurance policies. Reinsurance may provide a primary
insurer with several major benefits: a reduction in net liability of individual
risks, protection against catastrophic losses, reduction of financial leverage
and stabilization of operating results. Reinsurance may also provide a primary
insurer the ability to increase its underwriting capacity by allowing the
primary insurer to accept larger risks and to more rapidly expand its book of
business.
The global reinsurance industry continues to be impacted by industry
consolidation, excess market capacity and primary insurers seeking alternative
forms of risk transfer such as insurance captives, structured securities and
derivative products. Global reinsurers are offering ways to meet the demands of
this changing global market by searching for ways to expand their markets,
entering into new reinsurance niches, offering new reinsurance products and
spreading their risks geographically. This changing reinsurance environment may
affect the industry's profitability which has historically been influenced by
the insurance industry's underwriting cycle, changes in interest rates and
catastrophic events.
General
GE Global's principal subsidiary is Employers Reinsurance Corporation
("ERC"). ERC was established in 1914 and principally writes property and
casualty reinsurance. ERC is the second largest reinsurance company in the
United States, based on 1995 statutory net premiums written, and the third
largest in the world, based on 1994 statutory net premiums written. The Company
is also a provider of life and healthcare reinsurance and writes some lines of
primary health, property and casualty and workers' compensation insurance.
The Company conducts business and services its accounts through a network
of local offices located in cities throughout the world. At December 31, 1996,
the Company had 21 offices in North America, 10 offices in Europe and 8 offices
in the Asia/Pacific region.
As one of the largest direct writers of reinsurance in the world, the
Company works directly with its clients which enhances the Company's ability to
evaluate its clients and their respective risks and allows the Company to be
more responsive to the individual needs of its customers. The Company utilizes
its network of local offices throughout the world to service the particular
needs of its reinsurance clients. This system enables the Company to provide a
wider range of services targeted at the needs of a particular market. To enhance
its responsiveness to customer needs, the Company is continuing to decentralize
underwriting decisions and customer service in its property and casualty
segment.
The Company manages and diversifies its risk through the careful
underwriting of risks, active claims management and the purchase of
retrocessional coverage. The Company monitors adherence to underwriting
guidelines through the use of computer systems and internal audits.
<PAGE>
The Company's business strategy is to continue to increase its reinsurance
market share by expanding its international operations through internal growth,
enhancing the Company's domestic position with the large regional and national
primary insurers while retaining the Company's focus on small and medium
regional customers, by expanding the Company's product lines to take advantage
of market niche opportunities and by selectively acquiring existing businesses.
The Company does not intend, however, to increase market share at the expense of
its underwriting results.
The Company has expanded its global operations in recent years through
acquisitions of both property and casualty and life reinsurance business. In the
third quarter of 1995, the Company acquired over 93% of Frankona
Ruckversicherungs-Aktien-Gesellschaft ("Frankona Re") and certain assets
comprising a majority of the reinsurance business of Aachener
Ruckversicherungs-Gesellschaft-Aktiengesellschaft, two major reinsurance
businesses in Germany. Currently, the Company's ownership percentage of
Frankona Re has increased to approximately 98% through the purchase of
additional shares owned by minority shareholders. The Company also acquired a
large block of life and health reinsurance business from NRG Victory
Reinsurance Limited in the United Kingdom during 1994.
These acquisitions together with existing companies in London and
Copenhagen have been fully integrated and these individual companies together
are marketed as the "ERC Frankona Group." The coordinated activities of the
individual companies of the ERC Frankona Group produce synergies in its global
reinsurance business. In combining and integrating the various businesses, the
ERC Frankona Group has carefully evaluated the resulting mix of business and
accumulation of risks. The accumulation of risks has been proactively managed
through adjustment of the Company's retrocession program and a reduction in ERC
Frankona Group's aggregate exposures on certain reinsurance programs.
Also in recent years, the Company has expanded its global business through
the extension of its local office network. The Company opened offices in Hong
Kong in 1994, Tokyo and Mexico City in 1995 and Sydney, Melbourne, Brisbane and
Auckland in 1996. Consistent with its global expansion strategy, the Company
anticipates further expanding its presence in the Asia/Pacific and Latin America
regions.
Unless otherwise indicated, all financial data has been prepared in
accordance with United States generally accepted accounting principles ("GAAP").
<PAGE>
Lines of Business
The Company's two business segments are (1) property and casualty
insurance/reinsurance and (2) life reinsurance. The Company's principal product
lines under the property and casualty segment are traditional property and
casualty reinsurance, healthcare reinsurance and specialty insurance (generally
primary property and casualty insurance) and its principal product lines under
the life reinsurance segment are traditional life reinsurance and financial
reinsurance. The Company also provides primary insurance products to hospitals,
health maintenance organizations and medical professionals as part of its
healthcare product line and to niche customers as part of its specialty
insurance product line.
Unless otherwise indicated, the Company's domestic results include business
written in the United States (including business written in the United States
where the reinsured is outside the United States) and Canada, and the
international results include all other business written by the Company. The
following table shows the geographic breakdown, based on net premiums written,
of the Company's principal product lines.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------
(In millions) 1996 1995 1994
-----------------------------------------------------
Domestic Int'l Domestic Int'l Domestic Int'l
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Property and Casualty Segment
Property and Casualty..... $1,167 $2,196 $1,421 $1,002 $1,276 $405
Healthcare................ 405 - 522 - 532 -
Specialty................. 169 - 178 - 167 -
Life Segment................. 189 447 116 322 59 134
------ ------ ------ ------ ------ ----
Total..................... $1,930 $2,643 $2,237 $1,324 $2,034 $539
====== ====== ====== ====== ====== ====
</TABLE>
The following is a summary description of the Company's domestic and
international business based on the Company's principal product lines.
Property and Casualty Insurance/Reinsurance Segment
Property and Casualty Reinsurance. The Company's largest product line,
traditional property and casualty reinsurance, accounted for approximately 74%
of the Company's worldwide net premiums written in 1996. The Company's premium
volume in the property and casualty segment is derived principally from treaty
agreements, which enable the Company to maintain lower operating costs because
fewer personnel are required to administer treaty business than facultative
business. Most of the Company's casualty business is written on an excess of
loss basis because it better enables the Company to control its exposure on
business that has a relatively longer "tail".
The Company's property business is written on both an excess of loss and a
proportional basis. Generally, the Company is the lead reinsurer for any
domestic program in which it participates, enabling it to negotiate the terms of
the reinsurance. The Company also acts as the lead reinsurer on a portion of its
international business.
The Company's domestic property and casualty business is conducted
primarily throughout the United States and Canada. For the year ended December
31, 1996, approximately 46% of the Company's domestic net premiums written from
the property and casualty segment were derived from property reinsurance,
approximately 40% from casualty reinsurance, approximately 8% from aviation and
marine reinsurance and approximately 6% from other lines of reinsurance. Based
on 1996 net premiums written, approximately 62% of the Company's domestic
property and casualty reinsurance was written on a direct basis. The Company
writes the remaining property and casualty reinsurance business through
reinsurance brokers.
<PAGE>
The Company's international property and casualty business services
worldwide markets, including Germany, Scandinavia, the United Kingdom, France,
Italy, Spain and countries in the Middle East and Far East. For the year ended
December 31, 1996, based on 1996 net premiums written, 64% of the Company's
international property and casualty business was written on a direct basis with
the remainder written through brokers. Approximately 49% of the Company's
international net premiums written from property and casualty reinsurance was
derived from property reinsurance, approximately 18% from casualty reinsurance
and approximately 22% from aviation and marine reinsurance.
In recent years insurance companies have directed more business to the
better-capitalized, more highly-rated reinsurers, which has led to a
consolidation in the reinsurance industry. Although this consolidation has
decreased the number of reinsurers, it has increased the number of companies
that are competitive with the Company. In competing with a smaller number of
global reinsurers, the Company has found that a number of its global customers
are increasingly demanding that reinsurers provide a broader range of coverages.
In response to this trend, the Company has expanded the property and casualty
risks it reinsures beyond its more traditional property and casualty reinsurance
business to include risks such as errors and omissions, directors and officers,
and long-haul trucking liability. Management believes that the Company is well
positioned to compete on a global basis in these markets.
The property and casualty reinsurance industry has experienced a
significant increase in catastrophic exposure and loss in recent years.
Increased population density, particularly in regions susceptible to tropical
storms or earthquakes, and the higher incidence and greater severity of
catastrophes, has increased the losses incurred in many recent catastrophes. As
a result of these developments, the Company has taken steps to limit its
exposure by carefully monitoring and allocating its property and casualty
exposure to specific geographic zones, both domestically and internationally.
Healthcare. As part of the Company's property and casualty business
segment, the Company provides insurance and reinsurance for the healthcare
industry, also targeting employers, public entities, manufacturers and others
for certain product lines. Coverages include primary insurance and reinsurance
for medical professional liability and reinsurance protecting primary insurers
(including self-insurers) in the healthcare market (i.e., reinsurance of
long-term care, excess workers compensation, stop loss insurance and provider
excess coverages).
The changes in the healthcare delivery systems have led to increased
competition in the healthcare insurance market. Companies that historically
specialized in physician business are now expanding their scope to write
hospital professional liability and companies that specialized in hospital
professional liability are aggressively competing for physician business to
serve the needs of their hospital clients that are purchasing physician
practices.
The Company believes that it is well positioned to compete in the
healthcare market because of its wide range of experience in providing
healthcare liability coverage and accident and health coverage, utilizing
multiple products and disciplines to provide healthcare solutions.
Specialty Insurance. An additional component of the Company's domestic
property and casualty business is its specialty insurance product line, which
generally consists of commercial property and casualty policies written on a
primary basis in niche markets. The Company's specialty business concentrates on
providing commercial insurance products for target markets, usually professional
associations and homogeneous groups. These products include professional
liability programs, communications/media liability coverages and some niche
programs in the general property/casualty area. This coverage provides insurance
for errors and omissions (E&O) arising out of the professional activities of the
insureds. Professional classes underwritten include property and casualty
insurance agents and brokers, life and health insurance agents and brokers, real
estate professionals, educators and school board members, directors and officers
(not-for-profit), and a few miscellaneous classes such as travel agents,
computer consultants, and marketing consultants. The majority of this business
provides coverage to property and casualty and life insurance agents and
brokers, and real estate professionals.
Competition for the classes of business underwritten by the Company's
specialty insurance product line has recently increased as more companies have
redirected their resources to the specialty niche business. In order to compete
for this business, the Company has provided value-added services, including
enhanced underwriting services, to its specialty line customers.
<PAGE>
Life Reinsurance Segment
Life Reinsurance. The Company is engaged in the reinsurance of traditional
life insurance products, including term, whole and universal life, annuities,
group long-term health and health products and the provision of financial
reinsurance to life insurers. Based on net premiums written, life reinsurance
accounted for approximately 14% of the Company's worldwide business in 1996.
With respect to life reinsurance, the Company writes mostly on a direct
basis with primary insurers. The Company's traditional life reinsurance business
consists principally of treaty business and is written generally on an excess of
loss basis. The Company's domestic life reinsurance business is comprised
exclusively of traditional life reinsurance contracts and is written in every
state in the United States. The Company's international life reinsurance
business services worldwide markets, including the United Kingdom, France,
Spain, Scandinavia, Italy, Singapore, Mexico, Israel and Greece. For the year
ended December 31, 1996, 74% of the Company's international life reinsurance net
premiums written were for traditional life reinsurance with the balance for
healthcare reinsurance.
The Company believes that increases in life expectancy, decreases in public
funding for social programs in Europe and deregulation of the life reinsurance
markets in Europe and Japan present increased opportunities for the Company's
life reinsurance business line. In response to these trends, the Company has
expanded its presence in the international life reinsurance market by increasing
its presence in the market for reinsurance of annuity providers.
Financial Reinsurance. Financial reinsurance is primarily designed to
enhance the current statutory surplus of the ceding company while reducing
future statutory earnings as amounts are repaid to the reinsurer. This financial
transaction is effectively collateralized by anticipated future income streams
from selected insurance policies. The Company writes financial reinsurance
through brokers and generally only for companies with credit ratings of not less
than "A" at the inception of the policy and that have a minimum capital and
surplus of $15 million. Financial reinsurance typically has a duration of three
to five years. Historically, fees generated by the Company's financial
reinsurance business have not been a significant contributor to the Company's
consolidated revenues or net income.
Property and Casualty Reserves for Unpaid Claims and Claim Expenses
Domestic. The Company's domestic subsidiaries maintain reserves to cover
their estimated ultimate liability for unpaid claims and claim expenses with
respect to reported and unreported claims incurred as of the end of each
accounting period (net of estimated related salvage and subrogation claims).
These reserves are estimates that involve actuarial and statistical projections
of the expected cost of the ultimate settlement and administration of unpaid
claims based on facts and circumstances then known, estimates of future trends
in claims severity and other variable factors such as inflation and new concepts
of liability. The inherent uncertainties of estimating claim reserves are
exacerbated for reinsurers by the significant periods of time that often elapse
between the occurrence of an insured claim, the reporting of the claim to the
primary insurer and, ultimately, to the reinsurer, and the primary insurer's
payment of that claim and subsequent indemnification by the reinsurer (the
"tail"). As a consequence, actual claims and claim expenses paid may deviate,
perhaps substantially, from estimates reflected in the insurance companies'
reserves in their financial statements. Adjustments to previously reported
reserves for net claims and claim expenses are reflected in the financial
statements in the period in which the adjustment occurs.
When a claim is reported to a ceding company, the ceding company's claims
personnel establish a "case reserve" for the estimated amount of the ultimate
payment. The estimate reflects the informed judgment of such personnel based on
general insurance reserving practices and on the experience and knowledge of
such personnel regarding the nature and value of the specific type of claim. The
Company, in turn, typically establishes a case reserve when it receives notice
of a claim from the ceding company. Such reserves are based on an independent
evaluation by the Company's claims departments, taking into consideration
coverage, liability, severity of injury or damage, jurisdiction, an assessment
of the ceding company's ability to evaluate and handle the claim, and the amount
of reserves recommended by the ceding company. Case reserves are adjusted
periodically by the claims departments of the Company based on subsequent
developments and audits of ceding companies.
<PAGE>
In accordance with industry practice, the Company maintains reserves for
claims incurred but not reported ("IBNR"). Such reserves are established to
provide for future case reserves and loss payments on incurred claims that have
not yet been reported to an insurer or reinsurer. In calculating IBNR reserves,
the Company uses generally accepted actuarial reserving techniques that take
into account quantitative loss experience data, together with, where
appropriate, qualitative factors. IBNR reserves are based on claim experience
and are grouped both by class of business and by accident year. IBNR reserves
are also adjusted to take into account certain additional factors, such as
changes in the volume of business written, reinsurance contract terms and
conditions, the mix of business, claims processing and inflation, that can be
expected to affect the Company's liability for claims over time.
International. The Company's international property and casualty
reinsurance operations establish their reserves using analytical techniques
similar to those utilized by GE Global's domestic subsidiaries. They also
maintain IBNR reserves using actuarial and statistical projections. The
potential for adverse development of the Company's reserves for its
international business, as compared to that of its domestic business, is reduced
because the international operations have a relatively low proportion of longer
tail exposures. As of December 31, 1996, approximately 2% of the Company's net
international reserves ($78 million) related to business acquired by the Company
from Assurance Compagniet Baltica Aktiesellskab ("Baltica") in 1988. At the time
of the acquisition, the Company obtained from Baltica a 90% loss development
guarantee, pursuant to which Baltica is obligated to pay the Company, at
December 31, 1997, 90% of the amount of claim reserve development (adjusted for
certain income and expenses) from 1988 to such date.
Reserve Development. The table that follows presents the development of net
balance sheet liabilities of ERC and subsidiaries for unpaid claims and claim
expenses for 1986 through 1996.
Net Liability. The first row of data shows the estimated net liability for
unpaid claims and claim expenses at December 31 for each year from 1986 to 1996.
The liability includes both case and IBNR reserves as of each year-end date, net
of anticipated recoveries from other reinsurers. The rows immediately following
the first row of data show cumulative paid data at December 31, as of one year,
two years, etc., through up to 10 years of subsequent payments.
Net Liability Re-estimated. The middle rows of data show the re-estimated
amount for previously reported net liability based on experience as of the end
of each subsequent calendar year's results. This estimate is changed as more
information becomes known about the underlying claims for individual years. The
cumulative redundancy (deficiency) shown in the table is the aggregate net
change in estimates over the period of years subsequent to the calendar year
reflected at the top of the respective columns. The amount in the line titled
"Redundancy (Deficiency) at December 31, 1996", represents for each calendar
year (the "Base Year") the aggregate change in (i) the Company's original
estimate of net liability for unpaid claims and claim expenses for all years
prior to and including the Base Year compared to (ii) the Company's re-estimate
as of December 31, 1996, of net liability for unpaid claims and claim expenses
for all years prior to and including the Base Year. A redundancy means that the
original estimate was greater than the re-estimate and a deficiency means that
the original estimate was less than the re-estimate. By way of example, the
deficiency for the year 1994, calculated as of December 31, 1996, represents a
deficiency in the Company's original estimate of unpaid claims and claim
expenses for 1994 and prior years.
The last seven lines of data present the development of reserves on a
"gross of reinsurance" basis, reconciled to the "net of reinsurance basis" shown
in the immediately preceding tables.
<PAGE>
<TABLE>
<CAPTION>
Changes in Historical Reserves for Unpaid Claims and Claim Expenses
For the Last Ten Years - GAAP Basis as of December 31, 1996
Year ended December 31,
----------------------------------------------------------------------------------------------------
(In millions) 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for
unpaid claims and
claim expenses $2,083 $2,620 $3,087 $3,338 $3,579 $3,596 $3,991 $4,525 $5,071 $9,351 $ 9,458
Paid (cumulative) as of:
One year later....... 554 615 681 706 747 665 802 949 1,115 1,964
Two years later...... 899 1,006 1,064 1,125 1,119 1,103 1,274 1,602 1,804 ---
Three years later.... 1,202 1,314 1,432 1,469 1,524 1,499 1,739 2,054 --- ---
Four years later..... 1,429 1,553 1,687 1,746 1,772 1,784 2,036 --- --- ---
Five years later..... 1,612 1,754 1,919 1,929 1,989 2,008 --- --- --- ---
Six years later...... 1,764 1,945 2,065 2,072 2,173 --- --- --- --- ---
Seven years later.... 1,901 2,063 2,221 2,229 --- --- --- --- --- ---
Eight years later.... 1,998 2,181 2,347 --- --- --- --- --- --- ---
Nine years later..... 2,103 2,284 --- --- --- --- --- --- --- ---
Ten years later...... 2,194 --- --- --- --- --- --- --- --- ---
Net liability
re-estimated as of:
One year later....... $2,177 $2,746 $3,134 $3,390 $3,616 $3,625 $3,919 $4,612 $5,173 $9,192
Two years later...... 2,385 2,861 3,220 3,482 3,583 3,587 4,066 4,656 5,313 ---
Three years later.... 2,541 2,941 3,346 3,462 3,564 3,701 4,095 4,793 ---- ---
Four years later..... 2,672 3,057 3,360 3,472 3,654 3,687 4,238 --- ---- ---
Five years later..... 2,807 3,094 3,406 3,537 3,635 3,818 --- --- ---- ---
Six years later...... 2,848 3,151 3,470 3,521 3,758 --- --- --- ---- ---
Seven years later.... 2,916 3,210 3,494 3,626 --- --- --- --- ---- ---
Eight years later.... 2,979 3,259 3,582 --- --- --- --- --- ---- ---
Nine years later..... 3,036 3,324 --- --- --- --- --- --- ---- ---
Ten years later...... 3,098 --- --- --- --- --- --- --- --- ---
Redundancy (Deficiency)
at December 31, 1996 (1,015) (704) (495) (288) (179) (222) (247) (268) (242) 159
Effect of foreign
exchange (1) 16 24 (17) (20) 42 29 (196)
------- ------- ------- ------- ------- ------- ------ -------- ------- -------
Redundancy (Deficiency)
at December 31,
1996, excluding
foreign exchange $(1,015) $ (704) $ (479) $ (264) $ (196) $ (242) $ (247) $ (226) $ (213) $ (37)
======== ======== ======= ======= ======= ======= ======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
(In millions) 1992 1993 1994 1995 1996
------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross liability-end of year................................................... $4,815 $5,312 $6,020 $11,145 $10,869
Reinsurance recoverables on unpaid claims and claim expenses.................. 824 787 949 1,794 1,411
------ ------ ------ ------- -------
Net liability-end of year..................................................... 3,991 4,525 5,071 9,351 9,458
------ ------ ------ ------- =======
Gross re-estimated liability-latest........................................... 5,253 5,813 6,424 11,081
Re-estimated reinsurance recoverables on latest unpaid claims
and claim expenses......................................................... 1,015 1,020 1,111 1,889
------ ------ ------ -------
Net re-estimated liability-latest............................................. 4,238 4,793 5,313 9,192
------ ------ ------ -------
Gross cumulative redundancy (deficiency)...................................... $ (438) $ (501) $ (404) $ 64
====== ====== ====== =======
<FN>
(1) The foreign currency translation impact on the cumulative redundancy
(deficiency) arises from the difference between the net liability for
unpaid claims and claim expenses translated at the exchange rates at the
end of the year in which the liabilities were originally estimated, and
the exchange rates during the years in which such liabilities were paid
or at the end of the year in which the liabilities were re-estimated.
</FN>
</TABLE>
Note: For a description of the purpose of the above table and the various table
sections, please refer to the immediately preceding sections entitled "Reserve
Development."
<PAGE>
A number of major trends that occurred within the insurance industry, the
economy in general and several Company-specific factors have had a significant
effect on the Company's liabilities for unpaid claims and claim expenses during
the period covered by the preceding table. The claims and claim expenses reserve
deficiencies developed to December 31, 1996, as reflected in the preceding
table, included reserve deficiencies of approximately $367 million in 1986, $257
million in 1987, $181 million in 1988, $130 million in 1989 and $98 million in
1990 related to the general liability business on the books of Puritan Excess
and Surplus Lines Insurance Company ("PESLIC") before the Company's acquisition
of PESLIC in 1994. Prior to 1994, PESLIC was owned by GE Capital. Additionally,
beginning in 1985 the Company strengthened the reserves for its excess liability
and workers' compensation business for qualified self-insured employers. Claims
and claim expenses reserve development in the mid 1980's in these businesses
reflected the inadequate premium rates which resulted from intense competition
in the market during that period.
In the late 1980's, the reinsurance market generally reacted to the rate
deficiencies and the resulting claims and claim expenses reserve development by
increasing rates and strengthening claims and claim expenses reserves. This is
reflected, with respect to the Company, in the significant reductions in the
reserve deficiencies in recent years.
To a lesser degree, development of asbestos and environmental claims has
affected the Company's results. Inflation in certain lines of reinsurance
businesses has also had an adverse effect on liabilities for claims and claim
expenses, particularly in excess of loss reinsurance. Also affecting the reserve
structure has been an increase in both frequency and severity of claims.
Partially offsetting the above factors is favorable development in recent years
in medical professional liability and facultative casualty businesses as well as
an increase in net retentions by ceding companies.
The reconciliation of reserves for unpaid claims and claim expenses on a
GAAP basis for each of the years indicated is shown below.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
(In millions) 1996 1995 1994
-----------------------------
<S> <C> <C> <C>
Reserves at beginning of year.......... $11,145 $ 6,020 $5,312
Reinsurance recoverables on unpaid
claims and claim expenses........... 1,794 949 787
------- ------- ------
Net reserves at beginning of year...... 9,351 5,071 4,525
------- ------- ------
Net incurred related to:
Current year........................ 2,763 2,638 1,657
Prior years......................... 106 104 87
------- ------- ------
Total net incurred..................... 2,869 2,742 1,744
------- ------- ------
Net payments related to:
Current year........................ 485 295 374
Prior years......................... 1,990 1,426 949
------- ------- ------
Total net payments..................... 2,475 1,721 1,323
------- ------- ------
Foreign exchange and other............. (287) (54) 125
------- ------- ------
Net reserves at end of year............ 9,458 6,038 5,071
Reinsurance recoverables on unpaid
claims and claim expenses...........
1,411 1,794 949
Acquired businesses unpaid claims
and claim expenses.................. - 3,313 -
------- ------- ------
Reserves at end of year................ $10,869 $11,145 $6,020
======= ======= ======
</TABLE>
<PAGE>
The liabilities for claims and claim expenses in the preceding table
include long-term disability claims that are discounted at a 6% rate. As a
result of discounting the Company's long-term disability claims, the Company's
total liabilities for claims and claim expenses have been reduced by an
estimated 3% at December 31, 1996 and 1995. The amortization of discount is
included in current operating results as part of the development of prior year
liabilities. For the years ended December 31, 1996, 1995 and 1994, long-term
disability discounts accrued as a percentage of claims, claim expenses and
policy benefits were approximately 5%, 5% and 8%, respectively, and discounts
amortized were approximately 2% in 1996 and 1% in 1995 and 1994.
The reconciliation of reserves for unpaid claims and claim expenses between
statutory basis and GAAP basis for each of the years indicated is shown below:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
(In millions) 1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Statutory basis U.S. reserves............. $ 5,875 $ 5,758 $4,966
Adjustments to GAAP basis (1)............. (435) (413) (383)
------- ------- ------
Net GAAP reserves for U.S. companies...... 5,440 5,345 4,583
Net GAAP reserves for non-U.S. companies.. 4,018 4,006 488
------- ------- ------
Net GAAP reserves......................... 9,458 9,351 5,071
Reinsurance recoverables.................. 1,411 1,794 949
------- ------- ------
Gross reserves on a GAAP basis............ $10,869 $11,145 $6,020
======= ======= ======
<FN>
(1) Statutory basis reserves reclassified to other liabilities based on
risk transfer provisions of FAS No. 113.
- -----------------------------------------------------------------------------
</FN>
</TABLE>
Environmental and Asbestos Exposure. Prior to 1986, the Company wrote
domestic property and casualty reinsurance principally for small to medium-sized
primary insurers that did not generally have environmental and asbestos
exposures. Although the Company has in the last few years increased its
marketing efforts with medium to larger-sized primary insurers, since 1986,
primary policies have tended to explicitly exclude environmental and asbestos
risks from coverage. The Company's international property and casualty
reinsurance operations are currently being reviewed to identify environmental
and asbestos exposures. No estimates of these exposures are currently available
although management does not believe the findings will have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
The following table presents three calendar years of development of claims
and claim expenses reserves associated with the Company's asbestos and
environmental claims, including case and IBNR reserves.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
(In millions) 1996 1995 1994
----------------------------------
Gross Basis:
<S> <C> <C> <C>
Reserve balance at January 1......... $436 $317 $309
Incurred claims and claim expenses... (32) 61 25
IBNR allocation (1).................. - 99 -
Claims and claim expenses paid....... 36 41 17
---- ---- ----
Reserve balance at December 31....... $368 $436 $317
==== ==== ====
Net Basis:
Reserve balance at January 1......... $196 $139 $138
Incurred claims and claim expenses... 19 23 9
IBNR allocation (1).................. - 51 -
Claims and claim expenses paid....... 21 17 8
---- ---- ----
Reserve balance at December 31....... $194 $196 $139
==== ==== ====
- --------
<FN>
(1) Prior to 1995, the Company's allocation of asbestos and environmental IBNR
reserves associated with PESLIC was primarily made on a non-specific basis.
As of December 31, 1995, PESLIC specifically allocated IBNR reserves to
asbestos and environmental liabilities from a portion of previously
established IBNR reserves.
</FN>
</TABLE>
<PAGE>
These amounts are management's best estimate, based on currently available
information, of claims and claim expense payments and recoveries that are
expected to develop in future years. The increase in claim payments in 1996 and
1995 and negative incurred claims in 1996 is principally due to the Company
aggressively settling its claims and executing contract commutation provisions
so that possible future adverse claim development is mitigated. The Company
monitors evolving case law and its effect on asbestos-related illness and toxic
waste cleanup claims. Changing domestic and foreign government regulations and
legislation, including continuing congressional consideration of federal
Superfund law, newly reported claims, new contract interpretations and other
factors could significantly affect future claim development. While the Company
has recorded its best estimate of its liabilities for asbestos-related illness
and toxic waste cleanup claims based on currently available information, it is
possible that additional liabilities may arise in the future. It is not possible
to estimate with any certainty the amount of additional net claims and claim
expenses, or the range of net claims and claim expenses, if any, that is
reasonably possible; therefore there can be no assurance that future liabilities
will not materially affect the Company's results of operations, cash flows and
financial position.
Breast Implant Exposure. The Company has minimal exposure to products
liability claims involving silicone breast implants. The Company has, in the
past, generally avoided the products liability reinsurance business,
specifically pharmaceutical and chemical exposures.
Life and Health Reserves for Future Policy Benefits and Accumulated Contract
Values
Future policy benefits for life and health reinsurance contracts are the
present value of such benefits based on mortality and other assumptions which
were appropriate at the time the policies were issued or, in the event the
policies were acquired by the Company from another insurer, at the date of
acquisition. Interest rate assumptions used in calculating the present value
range from 3.0% to 8.5% per annum at December 31, 1996. Payments received from
sales of investment contracts are recognized by providing liabilities equal to
the accumulated contract values of the policyholders' contracts. Interest rates
credited to such investment contracts are guaranteed for the policy terms with
renewal rates determined by the Company. Such crediting interest rates ranged
from 3.25% to 9.00% per annum in 1996.
Regulatory Matters
GE Global and its domestic subsidiaries are subject to regulation under the
insurance statutes, including insurance holding company statutes, of various
states, including Missouri and Kansas, the domiciliary states of GE Global's
principal domestic insurance company subsidiaries. The ERC Frankona Group is
subject to regulation under insurance statutes of various foreign countries.
General. The regulation and supervision to which GE Global's subsidiaries
are subject relate primarily to licensing requirements of reinsurers, the
standards of solvency that must be met and maintained, the amount of dividends
that may be paid by such subsidiaries, the nature of and limitations on
investments, restrictions on the size of risks that may be insured or reinsured,
deposits of securities for the benefit of ceding companies, methods of
accounting, periodic examinations of the financial condition and affairs of
reinsurers, the form and content of financial statements required to be filed
with regulatory authorities and reserves for unearned premiums, losses and other
purposes. In general, such regulation is for the protection of the ceding
companies and, ultimately, their policyholders, rather than securityholders of
the regulated reinsurer. GE Global believes it is, and that its subsidiaries
are, in material compliance with all applicable laws and regulations pertaining
to their business and operations.
U.S. Insurance Regulation. U.S. domestic property and casualty and life
insurers, including reinsurers, are subject to regulation by their states of
domicile and by those states in which they are licensed. The rates and policy
terms of primary insurance policies generally are closely regulated by state
insurance departments. While reinsurance is not regulated as closely as primary
insurance, some states do impose control over certain terms and conditions of
reinsurance agreements by virtue of their authority to grant or deny credit for
ceded reinsurance by its domiciled primary insurers. In addition, as a practical
matter, the rates permitted to be charged by primary insurers can have an effect
on the rates that are charged by reinsurers.
<PAGE>
Risk-Based Capital. The National Association of Insurance Commissioners
("NAIC") has adopted minimum risk-based capital requirements to evaluate the
adequacy of statutory capital and surplus in relation to an insurance company's
risks. Regulatory compliance with risk-based capital requirements is defined by
a ratio of a company's regulatory total adjusted capital to its authorized
control level risk-based capital, as defined by the NAIC. At December 31, 1996,
each of GE Global's domestic insurance subsidiaries exceeds the minimum
risk-based capital requirements.
Insurance Holding Company Regulations. The insurance holding company laws
and regulations vary from state to state, but generally require an insurance
holding company to register with its domiciliary state insurance regulatory
agency and file certain reports that include current information concerning the
capital structure, ownership, management, financial condition and general
business operations of the insurance holding company and its subsidiary insurers
that are licensed in the state. State insurance holding company laws and
regulations, with respect to domestic insurers, also require prior notice or
regulatory approval of changes in control of an insurer or its holding company
and of material inter-affiliate transactions within the holding company
structure.
Dividends by ERC. Because the operations of GE Global are conducted
primarily through ERC, GE Global is dependent upon dividends and tax allocation
and other payments primarily from ERC to service its debt and meet its other
obligations. The payment of dividends and other payments to GE Global by ERC is
subject to limitations imposed by the Missouri Insurance Code. The payment of
dividends to ERC by its principal life reinsurance subsidiaries, Employers
Reassurance Corporation and ERC Life Reinsurance Corporation, are subject to
limitations imposed by the Kansas and Missouri Insurance Codes, respectively. No
prediction can be made as to whether any legislative proposals relating to
dividend rules in Kansas or Missouri will be made, whether any such legislative
proposal will be adopted in the future, or the effect, if any, any such proposal
would have on the Company.
The maximum amount available for the payment of dividends during 1997 by
ERC to GE Global without prior regulatory approval is $297 million through
December 20, 1997, and $420 million thereafter. Of these amounts, $82 million is
committed to pay dividends on preferred stock issued by ERC to a subsidiary of
GE Capital Services.
International Regulations. Approximately 58% of the Company's business is
carried on outside of the United States. The degree of regulation and
supervision in foreign jurisdictions varies from minimal in some to stringent in
others. Licenses issued by foreign authorities to the ERC Frankona Group are
subject to modification or revocation by such authorities, and such subsidiaries
could be prevented from conducting business in certain of the jurisdictions
where they currently operate. In the past, the ERC Frankona Group has been
allowed to modify their operations to conform with new licensing requirements in
all jurisdictions that are material to the Company's international operations.
In addition to licensing requirements, the ERC Frankona Group is regulated
in various jurisdictions with respect to, among other things, currency, policy
language and terms, methods of accounting and auditing, amount and type of
security deposits, amount and type of reserves, amount and type of local
investment and the share of profits to be returned to policyholders on
participant policies. Regulations governing constitution of technical reserves
(including equalization reserves required under German law) and remittance
balances in some countries could hinder the remittance of profits and
repatriation of assets and the payment of dividends; however, the Company does
not believe that these regulations will have a material impact on the ERC
Frankona Group's operations.
Legislative and Regulatory Proposals. From time to time, various regulatory
and legislative changes have been proposed in the insurance and reinsurance
industry that may affect reinsurers. A substantial number of states have
recently adopted, or are considering adopting, laws and regulations that, among
other things, limit the ability of primary insurance companies to effect premium
rate increases or to cancel or not renew existing policies. The Company is
unable to predict whether any of these laws and regulations will be adopted in
additional states, the form in which any such laws and regulations might be
adopted in additional states, or the effect, if any, these developments will
have on the Company.
<PAGE>
Item 2. Properties.
The Company and its subsidiaries conduct their businesses from various
facilities, most of which are leased. In addition, the Company owns its
administrative offices in Overland Park, Kansas, Copenhagen, Denmark and Aachen
and Munich, Germany.
Item 3. Legal Proceedings.
There are no pending legal proceedings beyond the ordinary course of
business that could have a material financial effect on the Company, except for
an action in connection with a dispute under specific retrocession agreements
relating to disability insurance assumed by the Company from various insurers.
The retrocessionaire, St. Paul Fire and Marine Insurance Co., has initiated
legal proceedings in the Southern District of New York against the Company
seeking, alternatively, rescission of the retrocession contracts or indemnity
against loss payable by the retrocessionaire under these retrocession contracts.
The Company's motion to stay proceedings pending arbitration has been granted
and the dispute will be resolved by arbitration. The total amount in dispute is
approximately $50 million. The Company believes the retrocession contracts are
valid and the amounts due under such contracts are recoverable. Accordingly, the
Company has committed no reserves to cover any contingent liabilities.
Management believes that an adverse outcome of this matter would not have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
All of GE Global's Common Stock, its sole class of common equity on the
date hereof, is owned by GE Capital Services. Accordingly, there is no public
trading market for the Company's common equity. GE Global paid dividends on its
Common Stock on December 20, 1996 of $58 million.
Item 6. Selected Financial Data.
<TABLE>
Consolidated Financial Data
<CAPTION>
Year ended December 31,
----------------------------------------------------------
(In millions) 1996 1995 1994 1993 1992
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues................................ $ 5,751 $ 4,798 $ 3,148 $ 2,927 $ 2,396
Net premiums written.......................... 4,573 3,561 2,573 2,413 1,832
Net investment income......................... 837 676 528 465 449
Net realized gains on investments............. 223 191 103 147 158
Earnings before income taxes.................. 780 561 409 395 370
Net earnings.................................. 567 437 358 312 293
Total investments............................. 16,479 15,394 9,850 8,561 6,954
Total assets.................................. 25,388 25,613 14,496 11,928 10,313
Stockholder's equity.......................... $ 4,760 $ 4,191 $ 2,722 $ 2,938 $ 2,521
Return on equity (average).................... 12.7% 12.6% 12.7% 11.4% 11.9%
Stockholder's equity excluding unrealized
gains (losses) on investment securities.... $ 4,260 $ 3,755 $ 2,888 $ 2,635 $ 2,485
Return on equity excluding unrealized gains
(losses) on investment securities
(average).................................. 14.1% 13.2% 13.0% 12.2% 12.0%
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net premiums written in 1996 increased $1.012 billion or 28%, of which
$1.308 billion reflects recording a full year of the operating results
for the 1995 acquisitions of Frankona Re and the Aachen Re Business (the
"Acquired Businesses") in 1996 compared to recording only five months of
operating results in 1995. This 1996 increase in net premiums written
related to the Acquired Businesses was partially offset by a decrease in
domestic property and casualty net written premiums.
Net earnings in 1996 increased $130 million or 30%, including an
increase in after-tax net realized gains on investments of $21 million.
Excluding after-tax net realized gains on investments, 1996 net earnings
increased $109 million or 35%. This 1996 increase was primarily
attributable to the Acquired Businesses reflecting a full year's
operating results in 1996 compared to recording only five months of
operating results in 1995. The remainder of the increase was due to
improvement in the domestic and international property and casualty
underwriting results and growth in the investment portfolio due mostly
from cash flow from international operations. These increases were
partially offset by a 5% increase in the effective tax rate due to a
greater proportion of earnings before taxes provided by operations that
reside in higher income tax jurisdictions.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net premiums written in 1995 increased $988 million, including $561
million related to the operations of the Acquired Businesses. The
remainder of the increase primarily related to the NRG Business acquired
in 1994 and an increase in premiums generated from new and existing
clients in both the domestic and international property and casualty
markets.
Net earnings in 1995 increased $79 million, including an increase in
after-tax net realized gains on investments of $57 million. Excluding
after-tax net realized gains on investments, 1995 net earnings increased
$22 million. This 1995 increase consisted of $40 million from the
Acquired Businesses and $42 million from increased net investment income
resulting from growth in the investment portfolio, due mostly to cash
flow from operations, offset by a $47 million increase in underwriting
losses primarily related to long-term disability business.
<PAGE>
<TABLE>
Domestic Property and Casualty Business
<CAPTION>
Year ended December 31,
----------------------------
(In millions) 1996 1995 1994
----------------------------
<S> <C> <C> <C>
Net premiums written........................... $1,741 $2,121 $1,975
Net underwriting loss.......................... (98) (138) (105)
Net investment income.......................... 390 395 371
Earnings before income taxes................... 415 364 336
Net realized gains on investments.............. 169 135 87
Earnings before income taxes, excluding net
realized gains on investments............... 246 229 249
GAAP ratios (1):
GAAP claims and claim expenses ratio........ 75.7% 79.1% 76.9%
GAAP underwriting expense ratio............. 29.7% 27.4% 28.6%
------ ------ ------
GAAP combined ratio......................... 105.4% 106.5% 105.5%
====== ====== ======
- --------
<FN>
(1) Represents data for the applicable periods calculated in accordance with
GAAP. Claims and claim expenses ratio represents incurred claims and claim
expenses as a percentage of net premiums earned. Underwriting expense ratio
represents acquisition costs and other underwriting expenses (excluding
amortization of intangibles, interest expense and minority interest in net
earnings of consolidated subsidiaries) as a percentage of net premiums
earned. The combined ratio represents the sum of the claims and claim
expenses ratio and the underwriting expense ratio.
</FN>
</TABLE>
Domestic net premiums written decreased $380 million or 18% in 1996,
principally due to management's decision to not renew certain unprofitable
reinsurance contracts and a general decrease in reinsurance premium rates.
Domestic net premiums written increased $146 million in 1995, principally due to
the Acquired Businesses and lower retrocession costs.
The GAAP combined ratio is an indicator of underwriting performance in
property and casualty reinsurance, with a percentage lower than 100% generally
indicating an underwriting profit. While underwriting results expressed as the
combined ratio have been in excess of 100%, indicating an underwriting loss in
all years presented, the operating results of insurance companies include
investment income which generally yields an overall operating profit as
reflected above in the caption "Earnings before income taxes, excluding net
realized gains on investments." The 1996 and 1995 GAAP combined ratios were
moderately impacted by catastrophe costs and certain significant unprofitable
reinsurance contracts that management has elected not to renew. In 1994,
catastrophe costs, principally from the Northridge, California earthquake,
heavily impacted the GAAP combined ratio.
Net investment income decreased $5 million or 1% in 1996. The 1996 decrease
was due primarily to the transfer of significant assets to the ERC Frankona
Group in the second half of 1995 which was substantially offset by investment of
cash flow from operating activites. Net investment income increased $24 million
in 1995, due primarily to the Acquired Businesses and growth in the investment
portfolio caused from cash flow from operating activities.
Earnings before income taxes, excluding net realized gains on investments,
increased $17 million or 7% in 1996, primarily due to a 1.1% improvement in the
GAAP combined ratio as lower catastrophe costs and the non-renewal of certain
unprofitable contracts were partially offset by a slight reduction in
reinsurance premium rates. Improvement in the GAAP combined ratio was partially
offset by a slight decline in net investment income. Earnings before income
taxes, excluding net realized gains on investments, decreased $20 million in
1995, due primarily to an increase in long-term disability losses and moderate
catastrophe losses, partially offset by lower retrocession premiums and an
increase in net investment income.
<PAGE>
<TABLE>
International Property and Casualty Business
<CAPTION>
Year ended December 31,
----------------------------
(In millions) 1996 1995 1994
----------------------------
<S> <C> <C> <C>
Net premiums written........................ $2,196 $1,002 $405
Net underwriting gain (loss)................ 18 (38) (11)
Net investment income....................... 266 125 39
Earnings before income taxes................ 247 107 33
Net realized gains on investments........... 31 27 6
Earnings before income taxes, excluding net
realized gains on investments............ 216 80 27
GAAP ratios (1):
GAAP claims and claim expenses ratio..... 68.0% 73.3% 71.7%
GAAP underwriting expense ratio.......... 31.2% 29.6% 31.3%
----- ------ ------
GAAP combined ratio...................... 99.2% 102.9% 103.0%
===== ====== ======
- --------
<FN>
(1) Represents data for the applicable periods calculated in accordance with
GAAP. Claims and claim expenses ratio represents incurred claims and claim
expenses as a percentage of net premiums earned. Underwriting expense ratio
represents acquisition costs and other underwriting expenses (excluding
amortization of intangibles, interest expense and minority interest in net
earnings of consolidated subsidiaries) as a percentage of net premiums
earned. The combined ratio represents the sum of the claims and claim
expenses ratio and the underwriting expense ratio.
</FN>
</TABLE>
International property and casualty net premiums written increased $1.194
billion or 119% in 1996, of which $1.203 billion reflects recording a full year
of the Acquired Businesses operating results in 1996 compared to recording only
five months of operating results in 1995. This 1996 increase in net premiums
written related to the Acquired Businesses was partially offset by a minor
decrease in other international net premiums written, primarily due to the
integration of international operations. Net written premiums increased $597
million in 1995, including $426 million related to the Acquired Businesses. The
balance of the 1995 increase related to improved market conditions, an increase
in premium rates in Europe and intensified marketing efforts.
The 3.7% improvement in the 1996 GAAP combined ratio was caused by
favorable loss experience and is indicative of improved international premium
rates and market conditions in recent years. The 1996 GAAP combined ratio was
also favorably impacted by a decline in both the frequency and severity of
international catastrophe losses.
Net investment income increased $141 million or 113% in 1996, including
$126 million related to recording a full year of the Acquired Businesses
operating results in 1996 compared to recording only five months of operating
results in 1995. The remaining $15 million 1996 increase was due primarily to
growth in the investment portfolio resulting from cash flow from operating
activities. Net investment income increased $86 million in 1995, due primarily
to the Acquired Businesses.
Earnings before income taxes, excluding net realized gains on investments,
increased $136 million or 170% in 1996 as a result of two major factors: (1)
inclusion of a full year of the Acquired Businesses operating results in 1996
compared to recording only five months of operating results in 1995 and (2) a
significant improvement in the underwriting results, as illustrated by the 3.7%
improvement in the GAAP combined ratio. Earnings before income taxes, excluding
net realized gains on investments, increased $53 million in 1995, due primarily
to the Acquired Businesses.
<PAGE>
<TABLE>
Life Reinsurance Business
<CAPTION>
Year ended December 31,
-----------------------------
(In millions) 1996 1995 1994
-----------------------------
<S> <C> <C> <C>
Revenues............................. $881 $656 $351
Earnings before income taxes......... 118 90 40
</TABLE>
Revenues from the Company's life reinsurance segment include life insurance
premium revenues, net investment income, net realized gains on investments and
income from certain investment related products. The 1996 increase of $225
million or 34% primarily reflects a full year's operating results from the
Acquired Businesses and continued expansion in the domestic and international
life reinsurance business. Revenues increased $305 million or 87% in 1995,
principally as a result of the Acquired Businesses.
Earnings before income taxes increased $28 million or 31% in 1996,
including a $6 million decrease in net realized gains on investments. Excluding
net realized gains on investments, earnings before income taxes increased $34
million due to a full year's operating results from the Acquired Businesses and
continued growth in worldwide life reinsurance business. Earnings before income
taxes increased $50 million in 1995, principally related to the Acquired
Businesses and a $19 million increase in net realized gains on investments.
Liquidity and Capital Resources
GE Global's ability to meet its obligations, including debt service and
operating expenses, and pay dividends to its shareholders depends primarily upon
receiving sufficient funds from its insurance subsidiaries. The payment of
dividends by ERC is subject to restrictions set forth in the insurance laws of
Missouri, as well as other restrictions. Historically, the Company's liquidity
requirements are met by funds provided by operations and from the maturity and
sales of investments.
Cash flows from operating activities primarily consists of premiums
collected during the period in excess of payments made for claims and claim
expenses. The 1996 decrease in cash flows from operating activities is
principally due to a slight increase in claim payments and the timing of
reinsurance settlements. The increase in 1995 cash flows from operating
activities primarily reflects cash flow activity from the Acquired Businesses.
Cash used for investing activities decreased $1.377 billion in 1996,
principally due to the $1.022 billion purchase of the Acquired Businesses in
1995. The purchases of the Acquired Businesses in 1995 were partially funded by
GE Capital Services contributing $300 million to the equity of GE Global and GE
Capital Corporation, an affiliate of GE Global, purchasing 1,500 shares of 5%
cumulative preferred stock issued by GE Global for an aggregate purchase price
of $150 million. The remaining $355 million 1996 decrease in cash used for
investing activities was primarily attributable to a decrease in purchases of
investments, net of sales and maturities, which was caused by a decline in cash
flows from operations.
Cash flows from financing activities decreased $958 million in 1996, due
primarily to the financing and capitalization of the 1995 acquisitions described
above, partially offset by an increase in contract deposits related to the life
financial reinsurance business.
In 1996, GE Global executed a $1 billion shelf registration statement of
senior unsecured debt securities, of which $600 million is outstanding and is
rated AA by Standard & Poor's. The remaining unissued $400 million may be
offered from time to time in the future, the proceeds of which will be added to
the general funds of GE Global and made available to finance its operations,
unless otherwise stated at the time of the offering.
In addition, the Company, as of January 1, 1997, has a one-year $600
million revolving credit agreement with GE Capital Services which enables the
Company to borrow from GE Capital Services at an interest rate per annum equal
to GE Capital Services' cost of funds for a one year period. The agreement shall
be automatically extended for successive terms of one year each unless
terminated in accordance with terms of the agreement.
<PAGE>
Investments
General. The Company follows a conservative investment strategy that
emphasizes maintaining a high quality investment portfolio. The primary goals
include a growing stream of investment income and improving total investment
returns. All investments are administered under guidelines established and
approved by the Company's Board of Directors. The Company's guidelines require
that no more than 2.5% of the Company's bond portfolio may be invested in any
one issue of debt securities and no more than 10% of the stock portfolio may be
invested in the equity securities of any one issuer.
In structuring its fixed maturity portfolios, the Company considers the
duration of its assets and claims and claim expenses reserves. Each fixed
maturity portfolio has a total return benchmark against which relative
performance is measured. The total return benchmark includes investment income
and realized and unrealized gains and losses on investments. Equity funds are
managed for total return, and performance is measured against equity benchmarks.
On a worldwide basis, the Company manages 70% of its investments
internally. General Electric Investment Corporation manages an additional 20% of
the Company's investments, and the balance is managed by unaffiliated outside
managers.
<TABLE>
The following table presents investment results for the Company's business.
<CAPTION>
Year ended December 31,
-------------------------------------------------------
(In millions) 1996 1995 1994 1993 1992
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average invested assets (at cost)........... $15,195 $12,153 $9,020 $7,395 $6,545
Net investment income....................... 837 676 528 465 449
Net effective yield......................... 5.5% 5.6% 5.9% 6.3% 6.9%
Net realized gains on investments........... $ 223 $ 191 $ 103 $ 147 $ 158
Unrealized gains (losses) on investment
securities before deferred income taxes 798 684 (251) 622 333
</TABLE>
The Company continues to seek opportunities to enhance investment yield
through a conservative, primarily fixed maturity investment strategy. Its
current investment strategy does not contemplate material additional investments
in non-investment grade debt securities, commercial real estate, commercial
mortgages, equity securities or derivatives.
Domestic Investment Operations. The Company's domestic property and
casualty investment portfolios are principally invested in tax-exempt state and
municipal bonds, which the Company believes provide the most attractive after
tax yield. Some additional commitment was made to equity securities in 1996 and
1995 to enhance total investment return in the longer term. The Company's
domestic life investment portfolios are largely invested in taxable debt
securities.
<PAGE>
<TABLE>
The following table categorizes the Company's domestic fixed maturity
portfolios by rating based on market values.
<CAPTION>
Domestic Property
and Casualty Domestic Life
-----------------------------------------------
December 31,
-----------------------------------------------
(In millions) 1996 1995 1996 1995
-----------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and government agency securities... 2.6% 3.2% 5.8% 6.9%
Aaa................................................ 45.7 42.1 18.8 18.3
Aa................................................. 26.3 28.3 13.2 16.9
A.................................................. 16.1 19.2 13.6 15.3
Baa................................................ .2 0.3 2.3 5.0
Ba................................................. .1 0.2 .7 1.0
Canadian securities................................ 4.2 3.5 0.0 0.0
Mortgage-backed securities......................... .1 1.1 39.8 33.4
Other.............................................. 4.7 2.1 5.8 3.2
----- ----- ----- -----
Total........................................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
Ratings are as assigned by Moody's when available, or by S&P and converted
to the generally comparable Moody's rating.
The Company's emphasis on investment quality is evidenced by the table
above, which indicates that the bonds in the Company's investment portfolios are
principally invested in either U.S. government and government agency securities
or issues rated "A" or above. The Canadian securities held by the Company were
similar in quality to the other securities held in its domestic property and
casualty portfolio. Bonds held by the Company in its domestic life portfolios
include mortgage-backed securities that are matched to the liability profile of
specific life reinsurance contracts. Investments in mortgage-backed securities
are limited to lower risk tranches and do not include any interest only or
principal only elements. Mortgage-backed securities in the Company's investment
portfolio were principally issued by Federal agencies. The balance of the other
securities held in the domestic life portfolios were principally U.S. government
and government agency securities and bonds with a rating of "A" or higher. The
Company does not contemplate significant investment in non-investment grade
securities in either the property and casualty or life portfolios.
International Investment Operations. The investment portfolios of the
Company's international operations (other than certain equity portfolios, which
are managed by outside managers) are managed by the ERC Frankona Group's
investment personnel based in Munich, within guidelines established by the
management of the ERC Frankona Group and under the overall supervision and
review of the investment department of ERC.
The principal objective of the ERC Frankona Group's investment policy is to
manage the investment portfolios on a total return basis taking into
consideration the duration and currency structure of the ERC Frankona Group's
reinsurance liabilities. The ERC Frankona Group's investment portfolios are
geographically diversified with investments principally from the major European
markets and the United States.
As of December 31, 1996, the ERC Frankona Group's investments totaled $6.2
billion, an increase of $204 million from December 31, 1995. The composition of
ERC Frankona Group's investments was as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
----------------------
<S> <C> <C>
Fixed maturity securities....... 86.4% 86.6%
Equity securities............... 10.4% 10.1%
Other invested assets........... 3.2% 3.3%
----- -----
Total........................... 100.0% 100.0%
===== =====
</TABLE>
<PAGE>
The fixed maturity securities consisted of high credit quality securities.
Almost all bonds are investment grade securities with a comparable average
rating equal to or above a Moody's or S&P "AA" rating. Fixed maturity securities
include German and Danish mortgage-backed securities, although these
mortgage-backed securities have significantly less principal and interest
prepayment risk than typical U.S. mortgage-backed securities, as the German and
Danish tax and social environments are not conducive to risks of prepayment of
interest and principal. Equity securities and other invested assets were
internationally diversified with principal holdings in Germany, the United
Kingdom and the United States.
ERC Frankona Group's foreign exchange risk management program assists in
mitigating its foreign currency exposures. The ERC Frankona Group's investment
portfolios are globally diversified, with most fixed maturities having a term
less than ten years. The currency structure of the investment portfolios is
determined by the underlying reinsurance business and is matched with the
corresponding reinsurance liabilities. Any remaining significant net
asset/liability positions in a given currency are hedged with forward currency
purchase or sale contracts to further mitigate foreign currency exposures.
Cyclicality
The property and casualty reinsurance industry has been highly cyclical.
Demand for reinsurance is significantly influenced by underwriting results of
primary property and casualty insurance companies and prevailing general
economic and reinsurance premium rates. The cyclical trends in the industry and
the industry's profitability can also be affected significantly by volatile and
unpredictable developments, including changes in what the Company believes to be
the propensity of courts to grant large awards, natural disasters and other
catastrophic events (such as hurricanes, windstorms, earthquakes, floods and
fires), fluctuations in interest rates and other changes in the investment
environment which affect inflationary pressures that may tend to affect the size
of losses experienced by ceding primary insurance companies.
New Accounting Standards
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, among other things, distinguishes transfers
of financial assets that are sales from transfers that are secured borrowings,
based on the control of the transferred assets. SFAS No. 125 is effective for
transfers of financial assets occurring after December 31, 1996, and its
adoption will not have an effect on the financial position or results of
operations of the Company.
Effects of Inflation
The Company's ultimate claims and claim expenses costs on claims not yet
settled is increased by the effects of inflation, and changes in the inflation
rate therefore could become a significant factor in determining appropriate
claims and claim expenses reserves, as well as reinsurance premium rates.
Generally, the Company's methods used to estimate claims and claim expenses
reserves and to calculate reinsurance premium rates take into account the
anticipated effects of inflation in estimating the ultimate claims and claim
expenses costs. The Company uses both insurance industry data and government
economic indices in estimating the effects of inflation on reinsurance premium
rates and claims and claim expenses reserves. However, until claims are
ultimately settled, the full effect of inflation on the Company's results cannot
be known.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
The Company's Consolidated Financial Statements and the Reports of
Independent Auditors thereon and the Supplementary Financial Statement Schedules
listed on the accompanying Index to Financial Statements and Financial Statement
Schedules are filed as part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
At a meeting held on September 25, 1995, the Board of Directors of the
Company approved the engagement of KPMG Peat Marwick LLP as its independent
auditors for the fiscal year ending December 31, 1995 to replace the firm of
Ernst & Young, LLP.
The report of Ernst & Young, LLP on the Company's financial statements for
the fiscal year ending December 31, 1994 did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope, or accounting principles, except that reliance has been placed on the
independent audit report of KPMG Peat Marwick LLP on Employers Reassurance
Corporation, Puritan Excess and Surplus Lines Insurance Company and Westport
Insurance Corporation, wholly-owned subsidiaries of ERC.
In connection with the audit of the Company's financial statements for the
fiscal year ended December 31, 1994, and in the subsequent interim period, there
were no disagreements with Ernst & Young, LLP on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedures which, if not resolved to the satisfaction of Ernst & Young, LLP,
would have caused Ernst & Young, LLP to make reference to the matter in their
report.
The Company requested Ernst & Young, LLP to furnish it a letter addressed
to the Securities and Exchange Commission stating whether it agrees with the
above statements. A copy of that letter, dated December 8, 1995 is incorporated
by reference as Exhibit 16 to this Form 10-K.
PART III
Item 10. Directors and Executive Officers.
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>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)1. Financial Statements and Schedules.
The consolidated financial statements of the Company filed as part of
this report are listed in the Index to Consolidated Financial
Statements and Financial Statement Schedules (page 22).
(a)2. Financial Statement Schedules.
The consolidated financial statement schedules of the Company filed
as part of this report are listed in the Index to Consolidated
Financial Statements and Financial Statement Schedules (page 22).
(a)3. Listing of Exhibits.
3.1 A complete copy of the Articles of Incorporation of the
Company, as last amended on August 30, 1995, and currently in
effect. (Incorporated by reference to Exhibit 3.1 of the
Company's Form 10-K for the year ended December 31, 1995.)
3.2 A complete copy of the By-laws of the Company, as last amended
on February 26, 1995, and currently in effect. (Incorporated
by reference to Exhibit 3.2 of the Company's Registration
Statement on Form 10, File No. 0-27394.)
10.1 First Whole Account Aggregate Excess of Loss Retrocession
Agreement (E1), between Employers Reinsurance Corporation and
National Indemnity Company, dated January 1, 1996.
10.2 Second Whole Account Aggregate Excess of Loss Retrocession
Agreement (E2), between Employers Reinsurance Corporation and
Centre Reinsurance Company of New York, Dated January 1, 1996.
10.3 Second Whole Account Aggregate Excess of Loss Retrocession
Agreement (E2), between Employers Reinsurance Corporation and
National Union Fire Insuance Company of Pittsburgh, PA, dated
January 1, 1996.
12 Computation of ratio of earnings to fixed charges.
16 Letter Re Change in Certified Accountant. (Incorporated
by reference to Exhibit 16 of the Company's
Registration Statement on Form 10, File No. 0-27394.)
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Ernst & Young, LLP.
(b) Reports on Form 8-K.
None.
<PAGE>
ITEM 14(a)
GE Global Insurance Holding Corporation
and Subsidiaries
Index to
Consolidated Financial Statements
and
Financial Statement Schedules
Consolidated Financial Statements Page
----
Reports of Independent Auditors...................................23
Consolidated Statement of Earnings................................26
Consolidated Statement of Financial Position......................27
Consolidated Statement of Stockholder's Equity....................29
Consolidated Statement of Cash Flows..............................30
Notes to Consolidated Financial Statements........................31
Financial Statement Schedules
Schedule II - Condensed Financial Information of Registrant.......53
Schedule III - Supplementary Insurance Information................57
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
GE Global Insurance Holding Corporation:
We have audited the accompanying consolidated statements of financial position
of GE Global Insurance Holding Corporation and subsidiaries as of December 31,
1996 and 1995, and the related statements of earnings, stockholder's equity and
cash flows for the years then ended. Our audits also included the financial
statement schedules listed in the Index at Item 14(a) as of December 31, 1996
and 1995 and for the years then ended. These consolidated financial statements
and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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 Global Insurance
Holding Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. Also, in our opinion,
the related 1996 and 1995 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 PEAT MARWICK LLP
Kansas City, Missouri
January 17, 1997
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
GE Global Insurance Holding Corporation:
We have audited the accompanying consolidated statements of earnings,
stockholder's equity and cash flows of GE Global Insurance Holding Corporation
and subsidiaries for the year ended December 31, 1994. Our audit also included
the financial statement schedules listed in the Index at Item 14(a) for the year
ended December 31, 1994. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audit. We did
not audit the financial statements of Employers Reassurance Corporation, Puritan
Excess and Surplus Lines Company and Westport Insurance Corporation,
wholly-owned subsidiaries, which statements reflect earnings before income taxes
constituting 24% of the related 1994 consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us. Our opinion,
insofar as it relates to data included for Employers Reassurance Corporation,
Puritan Excess and Surplus Lines Company and Westport Insurance Corporation, is
based solely on the report of other auditors.
We conducted our audit 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 audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated results of operations and cash flows of GE Global Insurance
Holding Corporation and subsidiaries for the year ended December 31, 1994 in
conformity with generally accepted accounting principles. Also, in our opinion,
based on our audit and the report of other auditors, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
ERNST & YOUNG, LLP
Kansas City, Missouri
January 21, 1995
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Employers Reassurance Corporation,
Westport Insurance Corporation and
Puritan Excess and Surplus Lines Insurance Company:
We have audited the combined statements of earnings, stockholder's equity and
cash flows of Employers Reassurance Corporation (ERAC), Westport Insurance
Corporation (Westport) and Puritan Excess and Surplus Lines Insurance Company
(PESLIC) for the year ended December 31, 1994. These combined financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined results of operations and
combined cash flows of ERAC, Westport and PESLIC for the year ended December 31,
1994 in conformity with generally accepted accounting principles.
As described in Note 1, the combined financial statements of ERAC, Westport and
PESLIC have been prepared to facilitate the preparation of the consolidated
financial statements of GE Global Insurance Holding Corporation.
KPMG PEAT MARWICK LLP
Kansas City, Missouri
January 21, 1995
<PAGE>
<TABLE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Earnings
<CAPTION>
Year ended December 31,
------------------------
(In millions) 1996 1995 1994
------------------------
Revenues
<S> <C> <C> <C>
Net premiums earned (Note 8) $4,648 $3,886 $2,487
Net investment income (Note 4) 837 676 528
Net realized gains on investments (Note 4) 223 191 103
Other revenues 43 45 30
------ ------ ------
Total revenues 5,751 4,798 3,148
------ ------ ------
Costs and Expenses
Claims, claim expenses and policy benefits 3,373 2,994 1,900
Insurance acquisition costs 1,106 847 551
Amortization of intangibles 82 60 36
Interest expense 42 16 -
Other operating costs and expenses 284 225 155
Minority interest in net earnings of consolidated
subsidiaries (Notes 1, 3 and 9) 84 95 97
------- ------ ------
Total costs and expenses 4,971 4,237 2,739
------- ------ ------
Earnings before income taxes 780 561 409
------- ------ ------
Provision for income taxes (Note 6):
Current 207 150 93
Deferred 6 (26) (42)
------- ------ ------
213 124 51
------- ------ ------
Net earnings $ 567 $ 437 $ 358
======= ====== ======
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Financial Position
<CAPTION>
December 31,
-----------------
(In millions) 1996 1995
-----------------
Assets
Investments (Note 4):
<S> <C> <C>
Fixed maturity securities available-for-sale, at fair value $13,572 $12,991
Equity securities, at fair value 2,303 1,822
Short-term investments, at amortized cost 339 312
Other invested assets 265 269
------- -------
Total investments 16,479 15,394
Cash 377 455
Securities and indebtedness of related parties 310 275
Accrued investment income 391 323
Premiums receivable 2,645 3,298
Funds held by reinsured companies 519 665
Reinsurance recoverables 2,358 2,936
Deferred insurance acquisition costs 495 474
Intangible assets 986 967
Other assets 828 826
------- -------
Total assets $25,388 $25,613
======= =======
</TABLE>
<PAGE>
<TABLE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Financial Position (continued)
<CAPTION>
December 31,
-------------------
(In millions) 1996 1995
-------------------
<S> <C> <C>
Liabilities and equity
Claims and claim expenses (Note 5) $10,869 $11,145
Accumulated contract values 1,643 1,809
Future policy benefits for life and health contracts 831 719
Unearned premiums 1,170 1,328
Other reinsurance balances 1,836 2,598
Income taxes payable (Note 6) 173 119
Contract deposit liabilities 1,458 1,055
Other liabilities 612 584
Deferred income taxes (Note 6) 274 254
Short-term borrowings (Note 7) - 600
Long-term borrowings (Note 7) 556 -
------- -------
Total liabilities 19,422 20,211
------- -------
Minority interest in equity of consolidated
subsidiaries (Notes 1, 3 and 9) 1,206 1,211
------- -------
Common stock, $5,000 par value; authorized,
issued and outstanding - 1,000 shares 5 5
Preferred stock, $100,000 par value; authorized,
issued and outstanding - 1,500 shares 150 150
Paid-in capital 845 845
Unrealized gains on investment securities 500 436
Foreign currency translation adjustments 15 12
Retained earnings 3,245 2,743
------- -------
Total stockholder's equity 4,760 4,191
------- -------
Total liabilities and equity $25,388 $25,613
======= =======
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Stockholder's Equity
<CAPTION> Unrealized
Gains
(Losses) Foreign
on Currency
Common Preferred Paid-In Investment Translation Retained
(In millions) Stock Stock Capital Securities Adjustments Earnings Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $5 $ - $520 $303 $(19) $2,129 $2,938
Contribution to capital - - 25 - - - 25
Change in unrealized gains (losses) on
investment securities - - - (469) - - (469)
Change in foreign currency translation
adjustments - - - - 20 - 20
Net earnings - - - - - 358 358
Dividends paid on common stock - - - - - (150) (150)
-- ---- ---- ---- ---- ------ ------
Balance, December 31, 1994 5 - 545 (166) 1 2,337 2,722
Issuance of preferred stock (Note 9) - 150 - - - - 150
Contribution to capital (Note 9) - - 300 - - - 300
Change in unrealized gains (losses) on
investment securities - - - 602 - - 602
Change in foreign currency translation
adjustments - - - - 11 - 11
Net earnings - - - - - 437 437
Dividends paid on common stock - - - - - (29) (29)
Dividends paid on preferred stock - - - - - (2) (2)
-- ---- ---- ---- ---- ------ ------
Balance, December 31, 1995 5 150 845 436 12 2,743 4,191
Change in unrealized gains (losses) on
investment securities - - - 64 - - 64
Change in foreign currency translation
adjustments - - - - 3 - 3
Net earnings - - - - - 567 567
Dividends paid on common stock - - - - - (58) (58)
Dividends paid on preferred stock - - - - - (7) (7)
-- ---- ---- ---- ---- ------ ------
Balance, December 31, 1996 $5 $150 $845 $500 $ 15 $3,245 $4,760
== ==== ==== ==== ==== ====== ======
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
(In millions) 1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net earnings $ 567 $ 437 $ 358
Adjustments to reconcile net earnings to cash
from operating activities:
Claims and claim expenses 489 608 628
Future policy benefits for life and health contracts 157 (45) 108
Unearned premiums 1 (564) 103
Funds held by reinsured companies 104 (10) (19)
Reinsurance recoverables 210 (268) (171)
Deferred income taxes 6 (26) (43)
Income taxes payable 66 12 (26)
Other, net (460) 1,047 162
Amortization of insurance acquisition costs 1,106 847 551
Insurance acquisition costs deferred (1,157) (833) (586)
Net realized gains on investments (223) (191) (103)
------ ------ ------
Cash from operating activities 866 1,014 962
------ ------ ------
Cash Flows From Investing Activities
Fixed maturity securities available-for-sale:
Purchases (6,219) (5,936) (3,842)
Sales 4,896 4,432 2,260
Maturities 610 474 377
Equity securities:
Purchases (1,330) (1,337) (783)
Sales 1,178 1,178 746
Net purchases of short-term investments (28) (50) (9)
Business acquisitions, net of cash acquired (Note 3) - (807) (80)
Other investing activities 106 (118) (16)
------ ------ ------
Cash used for investing activities (787) (2,164) (1,347)
------ ------ ------
Cash Flows From Financing Activities
Change in contract deposits 460 352 133
Net contract accumulation receipts (payments) (161) (223) 299
Proceeds from short-term borrowings (Note 7) - 600 -
Principal payments on short-term borrowings (Note 7) (600) - -
Proceeds from long-term borrowings (Note 7) 556 - -
Contribution to capital (Note 9) - 300 -
Proceeds from issuance of preferred stock (Note 9) - 150 -
Dividends paid (65) (31) (150)
------ ------ ------
Cash from financing activities 190 1,148 282
------ ------ ------
Effect of exchange rate changes on cash (347) 116 72
------ ------ ------
Increase (decrease) in cash (78) 114 (31)
Cash at beginning of year 455 341 372
------ ------ ------
Cash at end of year $ 377 $ 455 $ 341
====== ====== ======
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
Principles of Consolidation
GE Global Insurance Holding Corporation ("GE Global") is a wholly-owned
subsidiary of General Electric Capital Services, Inc. ("GE Capital Services"),
which is a wholly-owned subsidiary of General Electric Company ("GE Company").
The accompanying consolidated financial statements of GE Global include the
accounts and operations, after intercompany eliminations, of GE Global and
Employers Reinsurance Corporation ("ERC"), a property/casualty reinsurance
company with various property/casualty reinsurance, life reinsurance and
insurance intermediary subsidiaries. GE Global owns 100% of the common stock of
ERC, representing 89.5% of ERC's voting rights, and General Electric Capital
Corporation ("GE Capital") owns 100% of ERC's preferred stock, representing
10.5% of ERC's voting rights. GE Global and its consolidated subsidiaries are
collectively referred to as "the Company."
GE Global
During 1995, an inactive, wholly-owned subsidiary of ERC was renamed GE Global
and dividended to GE Capital Services. GE Capital Services then contributed its
100% ownership of the common stock of ERC to GE Global. The consolidated
financial statements of the Company reflect the combination of GE Global and ERC
at historical cost on a basis similar to pooling of interests accounting;
accordingly, the accompanying consolidated financial statements include the
accounts and operations of ERC for all periods presented.
Basis of Accounting
The accompanying consolidated financial statements have been prepared on the
basis of generally accepted accounting principles ("GAAP") which, as to the
insurance company subsidiaries, vary from statutory accounting practices
prescribed or permitted by insurance regulatory authorities. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Actual results could differ from those estimates.
Acquisition of Affiliated Companies
On December 28, 1994, ERC issued 11,673 newly authorized shares of $100,000 par
value, nonredeemable, voting preferred stock to purchase all of the outstanding
capital stock of Employers Reassurance Corporation ("ERAC") and Puritan Excess
and Surplus Lines Insurance Company ("PESLIC") from GE Capital, an affiliate,
the common stock of which is wholly-owned by GE Capital Services. The companies
were acquired for $1.167 billion, which represented book value, as determined in
accordance with generally accepted accounting principles. The consolidated
financial statements of the Company reflect the acquisitions of ERAC and PESLIC
at historical cost on a basis similar to pooling of interests accounting;
accordingly, the accompanying consolidated financial statements include the
accounts and operations of ERAC and PESLIC for all periods presented. The
preferred stock described above had been presented previously as "Preferred
stock of subsidiary" in the consolidated statement of financial position and
excluded from equity due to its similarities to a minority interest. Earnings
prior to 1995 from these acquired affiliates were presented previously as a
charge similar to preferred stock dividends in determining net earnings. Due to
its characteristics, the preferred stock described above has been reclassified
as "Minority interest in equity of consolidated subsidiaries" in the statement
of financial position. Also, the related 1996 and 1995 preferred stock
dividends, as well as the earnings prior to 1995 from acquired subsidiaries,
have been reclassified as "Minority interest in net earnings of consolidated
subsidiaries" in the statement of earnings.
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies
Investments
The Company's fixed maturity and marketable equity securities have been
designated as available-for-sale and are reported at fair value, with net
unrealized gains or (losses) included in stockholder's equity. Realized gains or
(losses) on sales of investments are determined on the specific-identification
method and include adjustments to the net realizable value of investments for
declines in value that are considered to be other than temporary. Investment
income is recognized as earned and includes the accretion of discounts and
amortization of premiums related to fixed maturity securities.
Property and Casualty Insurance/Reinsurance Segment
Premiums are reported as earned over the terms of the related reinsurance
treaties or policies. In general, earned premiums are calculated on a pro rata
basis, are determined based on reports received from reinsureds, or are
estimated if reports are not received timely from reinsureds. Premium
adjustments under retrospectively rated reinsurance contracts are recorded based
on estimated claims and claim expenses, including both case and incurred but not
yet reported liabilities. Assumed foreign reinsurance is accounted for using the
periodic method.
Certain insurance acquisition costs, principally commissions and brokerage
expenses, are deferred and amortized over the contract period in which the
related premiums are earned. Future investment income is considered in
determining the recoverability of deferred insurance acquisition costs.
The value of property and casualty business recorded in connection with the 1984
acquisition of ERC by GE Capital Services is being amortized over 16 years using
the straight-line method. Included in the statement of financial position
caption "Intangible assets" was the value of property and casualty business of
$262 million before accumulated amortization of $202 million and $186 million at
December 31, 1996 and 1995, respectively.
The liabilities for claims and claim expenses represent the estimated
liabilities for reported claims plus those incurred but not yet reported and the
related estimated claim expenses. The liabilities for claims and claim expenses
are determined using case-basis evaluations and statistical analyses and
represent estimates of the ultimate cost of all claims incurred through December
31 of each year. Although considerable variability is inherent in such
estimates, management believes that the liabilities for claims and claim
expenses are adequate. The estimates are continually reviewed and adjusted as
necessary; such adjustments are included in current operations and are accounted
for as changes in estimates. Included in the liabilities for claims and claim
expenses are $1.015 billion and $748 million at December 31, 1996 and 1995,
respectively, of long-term disability claims that are discounted at a 6% rate.
Amounts recoverable from reinsurers related to the liabilities for claims and
claim expenses are estimated in a manner consistent with the related liabilities
associated with the reinsured policies.
Life Reinsurance Segment
The Company provides reinsurance for life and health insurance and annuities.
These products can be classified into two groups, insurance contracts and
investment contracts. Insurance contracts are broadly defined to include
contracts with significant mortality and/or morbidity risk. Investment contracts
are broadly defined to include contracts without significant mortality or
morbidity risk. In addition, the Company participates in financially oriented
reinsurance treaties. Deposits, if any, are carried as assets or liabilities in
the statement of financial position.
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Revenues for insurance contracts are recognized as revenues when due or over the
terms of the policies. Revenues for investment contracts are fees charged
against contract values during the period for insurance, policy administration,
surrenders and other risks.
Future policy benefits for life and health contracts are the present value of
such benefits based on mortality and other assumptions which were appropriate at
the time the policies were issued or at the date of purchase. Interest rate
assumptions used in calculating the present value range from 3.0% to 8.5% at
December 31, 1996, and 2.0% to 8.0% at December 31, 1995. Payments received from
sales of investment contracts are not recognized as revenues, but are recorded
as accumulated contract values of the policyholders' contracts. Interest rates
credited to investment contracts are guaranteed for the policy terms with
renewal rates determined by management. Such crediting interest rates ranged
from 3.25% to 9.00% in 1996, 4.25% to 12.30% in 1995, and 4.25% to 12.80% in
1994.
Acquisition costs include costs and expenses that vary with and are primarily
related to the acquisition of insurance and investment contracts, such as
commissions and certain support costs, such as underwriting and policy issue
expenses. For investment contracts, the amortization is based on the present
value of the anticipated gross profits from investments, surrender and other
charges net of interest credited, mortality and maintenance expenses. As actual
gross profits vary from projected gross profits, the impact on amortization is
included in net income. For insurance contracts, the acquisition costs are
amortized over the premium paying periods using assumptions consistent with
those used in computing future policy benefit reserves.
As a result of acquisitions, the Company has obtained the right to receive
future profits from life reinsurance contracts existing at the date of the
acquisitions. The present value of these future profits (PVFP) has been
actuarially determined based on the projected profits from the contracts
acquired. The calculation of the projected profits includes anticipated future
premiums, benefit payments, lapse rates, expenses and related investment income.
The PVFP was determined using risk adjusted discount rates from 8% to 15% and
the interest rates selected for the valuation were determined based on the
applicable interest rates in the country of risk and the risk inherent in the
realization of the estimated future profits. The PVFP of $164 million and $171
million at December 31, 1996 and 1995, respectively, is included in "Intangible
assets" and is being amortized using the interest method over the duration of
the related life business, approximately 20 years, as the premiums on the books
of business are recognized.
Funds Held by Reinsured Companies
Funds held by reinsured companies represent ceded premiums retained by the
ceding companies according to contractual terms. The Company generally earns
investment income on these balances during the periods that the funds are held.
Allowance for Doubtful Accounts
The Company establishes an allowance for uncollectible reinsurance recoverables,
premiums receivable and other doubtful receivables. The allowance is recorded as
a valuation account that reduces the corresponding asset. The allowance was $47
million and $27 million at December 31, 1996 and 1995, respectively.
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Goodwill
The Company amortizes goodwill recorded in connection with its business
combinations over periods ranging from 20 to 30 years using the straight-line
method. Included in the statement of financial position caption "Intangible
assets" was goodwill of $983 million and $897 million at December 31, 1996 and
1995, respectively. Accumulated amortization was $221 million and $177 million
at December 31, 1996 and 1995, respectively. If goodwill is identified with
long-lived assets that are subject to an impairment loss, and an adjustment is
to be made to reflect fair value, the goodwill shall be reduced or eliminated
before the carrying value of such long-lived assets is written down to fair
value. Goodwill in excess of associated expected operating cash flows is
considered to be impaired and is written down to fair value.
Statement of Cash Flows
Cash includes cash on hand, demand deposits and certificates of deposit. All
highly liquid investments with an original maturity of three months or less are
classified as short-term investments in the statement of financial position, and
transactions as such are considered investing activities in the consolidated
statement of cash flows.
The Company's noncash investing and financing activity in 1994 relates to ERC's
acquisition of all of the outstanding stock of ERAC and PESLIC through issuing
$1.167 billion of preferred stock on December 28, 1994.
Reinsurance
Reinsurance contracts that do not both transfer significant insurance risk and
result in the reasonable possibility that the reinsurer (or retrocessionaire)
may realize a significant loss from the insurance risk assumed are required to
be accounted for as deposits. These contract deposits are included in "Contract
deposit liabilities" and are accounted for as financing transactions with
interest income or expense credited or charged to the contract deposits.
Income Taxes
GE Global, together with its domestic property/casualty insurance subsidiaries
and its parent, GE Capital Services, is included in the consolidated federal
income tax return of GE Company. GE Global's domestic life insurance
subsidiaries are taxed as life insurance companies, and those subsidiaries file
separate federal income tax returns. GE Global's international insurance
subsidiaries file separate income tax returns in the countries that the
subsidiaries are domiciled.
The Company utilizes the liability method, whereby deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws. The Company is required to establish a "valuation allowance" for
any portion of the deferred tax asset that management believes will not be
realized.
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Foreign Currency Translation
The Company operates in a multiple functional currency environment whereby
revenues and expenses in functional currencies are translated using the weighted
average exchange rate during the year and functional currency assets and
liabilities are translated at the rate of exchange in effect at the close of the
year. Gains or losses resulting from translating the functional currencies into
U.S. dollars are accumulated in a separate component of stockholder's equity,
entitled "Foreign currency translation adjustments." The Company hedges its
foreign currency risk on its foreign subsidiary investments by utilizing a cross
currency swap (See Note 12). The gain or loss on the cross currency swap is
included in "Foreign currency translation adjustments" and was a $71 million
gain at December 31, 1996. The net effect of foreign currency transactions on
operating results during 1996, 1995 and 1994 was immaterial.
Benefit Plans
Employees of the Company and its subsidiaries, excluding international
subsidiaries, are covered by a trusteed, noncontributory defined benefit plan
and unfunded postretirement plans that provide medical benefits and life
insurance benefits to substantially all employees and their dependents. Certain
of the Company's international subsidiaries also sponsor noncontributory defined
benefit plans for their employees. The net effect of all benefit plans on the
consolidated statement of financial position and statement of earnings for 1996,
1995 and 1994 was immaterial.
Accounting Change
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, was
adopted in the first quarter of 1996 and did not have a material effect on the
financial position or results of operations of the Company. This statement
requires that certain long-lived assets be reviewed for impairment when events
or circumstances indicate that the carrying amounts of the assets may not be
recoverable. If such review indicates that the carrying amount of an asset
exceeds the sum of its expected future cash flows, the asset's carrying value is
written down to fair value. Long-lived assets to be disposed of are reported at
the lower of carrying amount or fair value less cost to sell.
Reclassifications
Certain reclassifications of prior year balances have been made to conform to
the current year presentation.
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
3. Acquisitions
3. Acquisitions
In July 1995, the Company consummated its purchase of certain assets comprising
a majority of the reinsurance business of Aachener
Ruckversicherungs-Gesellschaft Aktiengesellschaft (the "Aachen Re Business") and
its purchase of over 93% of the outstanding shares of Frankona
Ruckversicherungs-Aktien-Gesellschaft ("Frankona Re"). The Aachen Re Business is
written primarily on a direct basis and principally consists of auto/motor, fire
and life reinsurance of both German and non-German business. Frankona Re also
operates primarily on a direct basis, and its written premium principally
consists of aviation, auto/motor, fire and life reinsurance of both German and
non-German business.
The Aachen Re Business and the Frankona Re shares were purchased for
approximately $143 million and $879 million, respectively, and both transactions
were accounted for as purchases. Accordingly, the purchase prices have been
allocated to assets acquired and liabilities assumed based on estimates of their
fair values as of the dates of the acquisitions and the results of operations
have been included in the statement of earnings since the acquisition dates. The
allocation of the combined purchase price, as finalized in 1996, is summarized
as follows:
(In millions)
Assets acquired, excluding goodwill
and present value of future profits $7,729
Goodwill 583
Present value of future profits 146
Liabilities assumed (7,436)
------
Total purchase price $1,022
======
Goodwill is being amortized using the straight-line method over a 20 year period
and the present value of future profits on the life reinsurance business is
being amortized using the interest method over the duration of the related life
business, approximately 20 years, as the premiums on the life reinsurance
business are recognized. Funding for these acquisitions is described in Note 7.
During 1996, the Company continued to purchase the remaining outstanding shares
of Frankona Re held by minority shareholders. Effective December 7, 1996, an
agreement was entered into with the remaining minority shareholders whereby the
Company offered to purchase the remaining outstanding shares at a stipulated
price and would guarantee a specified compensation payment. Minority
shareholders who do not redeem their outstanding shares under this agreement
will receive a stated future annual dividend and will forfeit their right to
participate in the future net earnings of Frankona Re.
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
4. Investments
The cost, fair value and gross unrealized gains and losses of fixed maturity
securities, equity securities, short-term investments and other invested assets
were as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------
Gross Gross
Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
-----------------------------------------
Fixed maturity securities:
<S> <C> <C> <C> <C>
U.S. government $ 514 $ 3 $ 2 $ 515
International government 2,281 91 1 2,371
Tax-exempt 5,830 279 8 6,101
Corporate 2,541 69 7 2,603
U.S. mortgage-backed 912 18 7 923
International mortgage-backed 1,010 49 - 1,059
------- ---- --- -------
Total fixed maturity securities 13,088 509 25 13,572
Equity securities 1,988 352 37 2,303
Short-term investments 339 - - 339
Other invested assets 265 - - 265
------- ---- --- -------
Total $15,680 $861 $62 $16,479
======= ==== === =======
December 31, 1995
-----------------------------------------
Gross Gross
Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
-----------------------------------------
Fixed maturity securities:
U.S. government $ 507 $ 15 $ - $ 522
International government 2,570 97 3 2,664
Tax-exempt 5,654 375 5 6,024
Corporate 2,216 69 13 2,272
U.S. mortgage-backed 717 20 2 735
International mortgage-backed 752 22 - 774
------- ---- --- -------
Total fixed maturity securities 12,416 598 23 12,991
Equity securities 1,713 155 46 1,822
Short-term investments 312 - - 312
Other invested assets 269 - - 269
------- ---- --- -------
Total $14,710 $753 $69 $15,394
======= ==== === =======
</TABLE>
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
4. Investments (continued)
The amortized cost and estimated fair value of the Company's investments in
available-for-sale, fixed maturity securities at December 31, 1996 are
summarized, by stated maturity, as follows:
<TABLE>
<CAPTION>
Fair
(In millions) Cost Value
------------------
Maturity:
<S> <C> <C>
Due in 1997 $ 714 $ 719
Due in 1998-2001 3,209 3,291
Due in 2002-2006 2,912 3,044
Due after 2006 4,331 4,536
------- -------
Subtotal 11,166 11,590
Mortgage-backed securities 1,922 1,982
------- -------
Total $13,088 $13,572
======= =======
</TABLE>
The foregoing data is based on the stated maturities of the securities. Actual
maturities will differ for some securities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
Major categories of the Company's investment income are summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
(In millions) 1996 1995 1994
------------------------
<S> <C> <C> <C>
Fixed maturity securities $737 $581 $433
Equity securities 45 32 26
Short-term investments 19 28 19
Securities and indebtedness of related parties 21 20 19
Other 35 30 42
---- ---- ----
Gross investment income 857 691 539
Investment expenses 20 15 11
---- ---- ----
Net investment income $837 $676 $528
==== ==== ====
</TABLE>
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
4. Investments (continued)
The Company's sales proceeds and realized gains and losses on securities are
summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
(In millions) 1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Sales proceeds from fixed maturity securities $4,896 $4,432 $2,260
====== ====== ======
Fixed maturity securities:
Gross realized gains $ 108 $ 114 $ 55
Gross realized losses (36) (29) (18)
Equity securities:
Gross realized gains 201 154 96
Gross realized losses (50) (48) (30)
------ ------ ------
Total net realized gains 223 191 103
Income taxes 79 67 36
------ ------- ------
Realized gains on investments, after income taxes $ 144 $ 124 $ 67
====== ====== ======
</TABLE>
The change in the Company's net unrealized gains (losses), before income
tax, on fixed maturity securities was $(91) million, $782 million and
$(770) million in 1996, 1995 and 1994, respectively; the corresponding
amounts for equity securities were $206 million, $153 million and $(103)
million in 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, the Company had investments in fixed maturity
securities with a carrying amount of $.56 billion and $2.06 billion,
respectively, on deposit with state insurance departments to satisfy regulatory
requirements.
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
5. Claims and Claim Expenses
The table below provides a reconciliation of the beginning and ending claims and
claim expense liabilities, net of reinsurance.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
(In millions) 1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Balance at January 1 $11,145 $ 6,020 $5,312
Reinsurance recoverables on unpaid claims and
claim expenses 1,794 949 787
------- ------- ------
Net balance at January 1 9,351 5,071 4,525
------- ------- ------
Incurred claims and claim expenses related to:
Current year 2,763 2,638 1,657
Prior years 106 104 87
------- ------- ------
Total incurred 2,869 2,742 1,744
------- ------- ------
Claims and claim expense payments related to:
Current year 485 295 374
Prior years 1,990 1,426 949
------- ------- ------
Total payments 2,475 1,721 1,323
------- ------- ------
Foreign exchange and other (287) (54) 125
------- ------- ------
Net balance at December 31 9,458 6,038 5,071
Reinsurance recoverables on unpaid claims
and claim expenses 1,411 1,794 949
Acquired businesses unpaid claims
and claim expenses (See Note 3) - 3,313 -
------- ------- ------
Balance at December 31 $10,869 $11,145 $6,020
======= ======= ======
</TABLE>
The Company's liabilities for unpaid claims and claim expenses, net of related
reinsurance recoverables, at December 31, 1995, 1994 and 1993, were increased in
the following year by $106 million, $104 million and $87 million, respectively,
for claims that had occurred on or prior to those balance sheet dates. Those
deficiencies resulted principally from settling claims established in earlier
accident years for amounts that were more than estimated and due to changes in
estimates associated with the lag in receiving underwriting reports from ceding
companies that causes development of both premiums and claims, especially as it
relates to the international operations.
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
5. Claims and Claim Expenses (continued)
In establishing the liabilities for claims and claim expenses related to
asbestos-related illnesses and toxic waste cleanup, management considers facts
currently known and the current state of the law and coverage litigation.
Liabilities are recognized for known claims (including the cost of related
litigation) when sufficient information has been developed to indicate the
involvement of specific insurance or reinsurance contracts, and management can
reasonably estimate its liability. In addition, amounts have been established to
cover additional exposures on both known and unasserted claims, and estimates of
the liabilities are reviewed and updated continually.
The gross liabilities for asbestos-related illness and toxic waste cleanup
claims and claim expenses and the related reinsurance recoverables were $368
million and $174 million, respectively, at December 31, 1996. These amounts are
management's best estimate, based on currently available information, of future
claim and claim expense payments and recoveries that are expected to develop in
future years. The Company monitors evolving case law and its effect on
asbestos-related illness and toxic waste cleanup claims. Changing U.S.
government regulations and legislation, including continuing Congressional
consideration of a Federal Superfund law, newly reported claims, new contract
interpretations and other factors could significantly affect future claim
development. While the Company has recorded its best estimate of its liabilities
for asbestos-related illness and toxic waste cleanup claims based on currently
available information, it is possible that additional liabilities may arise in
the future. It is not possible to estimate with any certainty the amount of
additional net loss, or the range of net loss, that is reasonably possible;
therefore, there can be no assurance that future liabilities will not materially
affect the Company's results of operations, cash flows and financial position.
6. Income Taxes
The Company's provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ----------------------
United Inter- United Inter- United Inter-
(In millions) States national Total States national Total States national Total
--------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current $79 $128 $207 $82 $68 $150 $74 $19 $93
Deferred 7 (1) 6 (22) (4) (26) (39) (3) (42)
--- ---- ---- --- --- ---- --- --- ---
Total $86 $127 $213 $60 $64 $124 $35 $16 $51
=== ==== ==== === === ==== === === ===
</TABLE>
Income taxes paid by the Company totaled $158 million, $114 million and $118
million in 1996, 1995 and 1994, respectively.
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
The Company's effective income tax rate on pre-tax income is lower than the
prevailing U.S. corporate federal income tax rate and is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1996 1995 1994
-----------------------------
<S> <C> <C> <C>
Corporate federal income tax rate 35% 35% 35%
Tax-exempt investment income (14) (19) (27)
Intercompany dividend payment 4 6 8
Decrease in tax reserves - - (3)
Other items, net 2 - (1)
--- --- ---
Effective tax rate 27% 22% 12%
=== === ===
</TABLE>
The significant components of the Company's net deferred tax assets and
liabilities are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------
(In millions) 1996 1995
----------------
<S> <C> <C>
Deferred tax assets:
Claim and claim expenses $ 367 $ 371
Unearned premiums 41 121
Foreign tax credit carryforwards 66 63
Other 222 168
----- -----
Total gross deferred tax assets 696 723
Valuation allowance 66 63
----- -----
Total deferred tax assets 630 660
----- -----
Deferred tax liabilities:
Deferred insurance acquisition costs 153 168
Tax reserves in excess of book reserves 198 189
Net unrealized gains on investment securities 311 244
Contract deposit liabilities 85 123
Present value of future profits 49 65
Other 108 125
----- -----
Total deferred tax liabilities 904 914
----- -----
Net deferred tax liability $(274) $(254)
===== =====
</TABLE>
A valuation allowance is provided when it is more likely than not that deferred
tax assets will not be realized. The Company has established a valuation
allowance for foreign tax credit carryforwards that exceed the projected future
benefit of such foreign tax credits. The valuation allowance for the deferred
tax assets associated with the foreign tax credits increased by $3 million
during 1996.
The Company did not have a payable to (recoverable from) GE Capital
Services for income taxes due at December 31, 1996 and had a payable of
$3 million at December 31, 1995.
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
7. Long-Term and Short-Term Borrowings
On July 27, 1995, the Company entered into short-term borrowing arrangements
totaling $600 million to provide additional funding for the acquisitions of the
Aachen Re Business and Frankona Re. These acquisitions are described in Note 3.
The debt carried a term of one year with interest payments made monthly based on
rates ranging from 6.0% to 6.1%. In addition to these borrowings, the Company
obtained an unsecured line of credit up to $600 million from GE Capital
Services. This line of credit had an interest rate per annum equal to GE Capital
Services' cost of funds and expired on July 24, 1996. No amounts were drawn on
this credit facility.
In February 1996, the Company issued $600 million of senior unsecured debt
securities at 7% per annum, which are not redeemable prior to maturity on
February 15, 2026. The Company received $556 million in proceeds from these
notes (net of original issue discount and costs of an interest rate "lock"
contract) and were used to repay the $600 million of short-term borrowings
described above. Total interest paid in 1996 and 1995 was $29 million and $13
million, respectively.
The Company entered into a revolving credit agreement with GE Capital Services
on January 1, 1997 for an amount up to $600 million. This unsecured line of
credit has an interest rate per annum equal to GE Capital Services' cost of
funds for a one-year period. This agreement is automatically extended for
successive terms of one year each unless terminated in accordance with the terms
of the agreement.
8. Supplemental Financial Statement and Reinsurance Data
Insurance premiums earned in 1996, 1995 and 1994 and life insurance in force as
of December 31, 1996, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
Insurance Premiums Earned
---------------------------------- Life
Property/ Insurance
(In millions) Casualty Life Total In Force
----------------------------------------------
1996:
<S> <C> <C> <C> <C>
Direct $ 339 $ 3 $ 342 $ 1,478
Assumed 4,183 787 4,970 196,250
Ceded (507) (157) (664) (32,445)
------ ---- ------ --------
Net $4,015 $633 $4,648 $165,283
====== ==== ====== ========
1995:
Direct $ 374 $ 3 $ 377 $ 1,076
Assumed 3,586 520 4,106 208,356
Ceded (514) (83) (597) (34,828)
------ ---- ------ --------
Net $3,446 $440 $3,886 $174,604
====== ==== ====== ========
1994:
Direct $ 352 $ 3 $ 355 $ 767
Assumed 2,304 237 2,541 117,695
Ceded (362) (47) (409) (28,885)
------ ---- ------ --------
Net $2,294 $193 $2,487 $ 89,577
====== ==== ====== ========
</TABLE>
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
8. Supplemental Financial Statement and Reinsurance Data (continued)
Claims, claim expenses and policy benefits in 1996, 1995 and 1994 are summarized
as follows:
<TABLE>
<CAPTION>
Property/
(In millions) Casualty Life Total
-----------------------------------------
1996:
<S> <C> <C> <C>
Direct $ 346 $ 3 $ 349
Assumed 3,058 593 3,651
Ceded (535) (92) (627)
------ ---- ------
Net $2,869 $504 $3,373
====== ==== ======
1995:
Direct $ 312 $ 3 $ 315
Assumed 2,673 357 3,030
Ceded (336) (15) (351)
------ ---- ------
Net $2,649 $345 $2,994
====== ==== ======
1994:
Direct $ 328 $ 2 $ 330
Assumed 1,754 109 1,863
Ceded (338) 45 (293)
------ ---- ------
Net $1,744 $156 $1,900
====== ==== ======
</TABLE>
The Company's insurance company subsidiaries both cede reinsurance to and assume
reinsurance from other insurance companies. That portion of the risks exceeding
each subsidiary's retention limit is reinsured with other insurers. The Company
also acquires other reinsurance coverages with retentions and limits that
management believes are appropriate for the circumstances. In the accompanying
consolidated financial statements, premiums, claims, claim expenses and policy
benefits and deferred insurance acquisition costs are reported net of
reinsurance ceded; reinsurance liabilities and accruals are reported gross of
reinsurance ceded.
The Company's insurance company subsidiaries remain liable to their
policyholders if their reinsurers are unable to meet their contractual
obligations under the applicable reinsurance agreements. To minimize its
exposure to significant losses from reinsurance insolvencies, the Company
evaluates the financial condition of its reinsurers and monitors concentrations
of credit risk arising from similar geographic regions, activities or economic
characteristics of the reinsurers. At December 31, 1996, there was no
significant concentration of reinsurance recoverables and prepaid reinsurance
premiums due from any one reinsurer.
For financial reinsurance assumed, the Company reports revenue for the risk fees
charged for those services. At December 31, 1996, statutory policyholder surplus
of the Company's life insurance subsidiaries has been reduced approximately $336
million in connection with financial reinsurance assumed. Such amounts are
secured by future profits on the reinsured business. The Company's life
insurance subsidiaries are also subject to the risk that the ceding companies
may become insolvent, and the right of offset would not be permitted; however,
management does not believe such risk is significant.
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
9. Stockholder's Equity
As described in Note 1, ERC issued 11,673 shares of $100,000 par value,
nonredeemable, voting preferred stock to purchase ERAC and PESLIC from GE
Capital on December 28, 1994. This preferred stock accrues preferential and
cumulative dividends at an annual rate that is the average of the yield on high
grade industrial preferred stock and the yield on medium grade industrial
preferred stock as of the close of the week preceding December 31, as published
by Moody's Investors Service, Inc. ERC may, upon approval by its Board of
Directors, redeem the preferred stock, in whole or in part, at 100% of the par
value of the preferred stock plus all dividends accrued thereon to the date of
redemption. Preferred stock dividends paid by ERC totaled $80 million and $93
million in 1996 and 1995, respectively.
On September 28, 1995, GE Capital Services contributed $300 million to the
equity of the Company, and GE Capital purchased 1,500 newly authorized shares of
$100,000 par value, nonvoting, cumulative preferred stock of the Company for an
aggregate purchase price of $150 million. Dividends on the preferred stock are
paid at a rate of 5% per annum if, as and when declared by the Board of
Directors of the Company and totaled $7 million and $2 million in 1996 and 1995,
respectively.
10. Statutory Accounting Practices
ERC and its domestic insurance subsidiaries are domiciled in Missouri or Kansas
and prepare their statutory-basis financial statements in accordance with
accounting practices prescribed or permitted by the Missouri or Kansas Insurance
Department. "Prescribed" statutory accounting practices include state laws,
regulations and general administrative rules, as well as a variety of
publications of the National Association of Insurance Commissioners ("NAIC").
"Permitted" statutory accounting practices encompass all accounting practices
that are not prescribed; such practices may differ from state to state, may
differ from company to company within a state, and may change in the future. ERC
and its insurance subsidiaries have no significant permitted accounting
practices that vary from prescribed accounting practices, except as noted below.
Stockholder's equity and net income, as reported to the domiciliary state
insurance departments in accordance with its prescribed or permitted statutory
accounting practices, for the Company's domestic insurance subsidiaries are
summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------
(In millions) 1996 1995
----------------
<S> <C> <C>
Stockholder's equity:
ERC $4,309 $3,718
Property and casualty subsidiaries of ERC 657 557
Life and annuity subsidiaries of ERC 2,371 1,913
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
(In millions) 1996 1995 1994
------------------------
Net income:
<S> <C> <C> <C>
ERC $434 $416 $389
Property and casualty subsidiaries of ERC 54 53 26
Life and annuity subsidiaries of ERC 278 108 82
</TABLE>
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
10. Statutory Accounting Practices (continued)
The payment of stockholder dividends by insurance companies without the prior
approval of regulators is limited to formula amounts based on net investment
income and/or net income, capital and surplus determined in accordance with
statutory accounting practices, as well as the timing and amount of dividends
paid in the preceding 12 months. The maximum amount available for the payment of
dividends during 1997 by ERC to the Company without prior regulatory approval is
$297 million through December 20, 1997, and $420 million thereafter. Of these
amounts, $82 million is committed to pay dividends on the preferred stock issued
by ERC to GE Capital.
In 1995, ERC received written approval from the Missouri Department of Insurance
to discount its claim and claim expense liabilities related to long-term
disability business. Prescribed statutory accounting practice does permit claim
and claim expense liabilities associated with long-term disability to be
accounted for on a discounted basis although the Missouri Department of
Insurance requires that insurance companies obtain written permission to
discount certain claim and claim expense liabilities. Included in the discount
recognized for statutory purposes at December 31, 1996 and 1995 is a benefit of
$348 million and $356 million, respectively, for long-term disability claim and
claim expense liabilities.
The National Association of Insurance Commissioners ("NAIC") has adopted minimum
risk-based capital requirements to evaluate the adequacy of statutory capital
and surplus in relation to an insurance company's risks. Regulatory compliance
with risk-based capital requirements is defined by a ratio of a company's
regulatory total adjusted capital to its authorized control level risk-based
capital, as defined by the NAIC. At December 31, 1996, each of GE Global's
domestic insurance subsidiaries exceeds the minimum risk-based capital
requirements.
The Company's international insurance subsidiaries prepare statutory financial
statements based on local laws and regulations. Some jurisdictions, such as the
United Kingdom, impose complex regulatory requirements on reinsurance companies,
while other jurisdictions, such as Germany, impose fewer requirements. Local
reinsurance business conducted by the Company's subsidiaries in some countries
require licenses issued by governmental authorities. These licenses may be
subject to modification or revocation dependent on such factors as amount and
types of reserves and minimum capital and solvency tests. Jurisdictions may
impose fines, censure and/or criminal sanctions for violation of regulatory
requirements.
11. Contingencies
There are no pending legal proceedings beyond the ordinary course of business
that could have a material financial effect on the Company, except that in
connection with a dispute under specific retrocession agreements relating to
disability insurance assumed by the Company from various insurers. The
retrocessionaire has initiated legal proceedings against the Company seeking,
alternatively, rescission of the retrocession contract or indemnity against
losses payable by the retrocessionaire under retrocession contracts. The total
amount in dispute is approximately $50 million. The Company believes the
retrocession contracts are valid and the amounts are recoverable. Accordingly,
the Company has committed no reserves to cover any such contingent liabilities.
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
12. Fair Value of Financial Instruments
This note discloses fair value information about the Company's financial
instruments, whether or not recognized in the balance sheet, for which it is
practical to estimate the value. No attempt has been made to estimate the value
of anticipated future business or the value of assets or liabilities that are
not considered financial instruments. Fair value estimates are made at a
specific point in time based on relevant market information about the financial
instrument. In cases where quoted market prices are not available, fair values
are estimated using discounted cash flow or other valuation techniques. These
estimates may be subjective in nature and involve uncertainties and, therefore,
cannot be determined with precision. Changes in the assumptions could
significantly affect the estimates. As such the derived fair value estimates
cannot necessarily be substantiated by comparison to independent markets and may
differ from the amounts that might be involved in an immediate settlement of the
instrument. Fair value disclosures are not required for certain financial
instruments, the most significant of these for the Company are the insurance
liabilities and related assets, other than financial guarantees and investment
contracts.
Certain financial instruments that are reflected in the accompanying financial
statement at fair value or for which fair values are disclosed elsewhere in the
notes to the financial statements are not included in the following disclosure.
The most significant of which are investments, cash, amounts due from related
parties, accrued investment income and other receivables and payables. Fair
values of other financial instruments have been determined as follows:
Accumulated contract values - Based on expected future cash flows, discounted at
currently offered interest rates for similar contracts with maturities
consistent with those remaining for the contracts being valued.
Financial guaranty reinsurance - Based on estimated premium rates that would be
charged and commissions that would be allowed at the financial statement date.
Borrowings - Based on quoted market prices or market comparables and includes
the effects of counterparty creditworthiness.
All other instruments - Based on comparable transactions, market comparables,
discounted future cash flows, quoted market prices, and/or estimates of the cost
to terminate or otherwise settle obligations to counterparties.
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
12. Fair Value of Financial Instruments (continued)
The following are the estimated fair values of the Company's financial
instruments:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-----------------------------------------------------------------------------------------
Assets(liabilities) Assets(liabilities)
----------------------------- -------------------------------
Notional Carrying Estimated Fair Value Notional Carrying Estimated Fair Value
(In millions) Amount Amount High Low Amount Amount High Low
-----------------------------------------------------------------------------------------
Assets:
Foreign currency forward
<S> <C> <C> <C> <C> <C> <C> <C> <C>
purchase contracts 384 7 7 7 174 1 1 1
Separate account assets (a) 72 72 72 - - - -
Liabilities:
Borrowings (b) (a) (556) (556) (556) (a) (600) (600) (600)
Foreign currency forward sales
contracts 215 (1) (1) (1) 1,294 (13) (13) (13)
Accumulated contract values (a) (1,643) (1,664) (1,664) (a) (1,809) (1,797) (1,797)
Separate account liabilities (a) (69) (69) (69) - - - -
Financial guaranty reinsurance 5,383 (65) (60) (81) 3,741 (48) (59) (44)
Performance guarantees
principally 328 (a) (2) (1) 298 (a) 1 1
letters of credit
Other Firm Commitments:
Cross currency swaps 1,107 (71) (71) (71) - - - -
Letters of credit received 159 (a) (1) - 182 (a) (1) -
(a) Not applicable.
(b) See Note 7.
</TABLE>
Foreign currency forward purchase and sales contracts are employed by the
Company to manage exposures to changes in functional currency exchange rates.
These financial instruments generally are used as hedges of identified assets,
liabilities or net functional currency positions.
A cross currency swap is used by the Company to hedge its exposure to foreign
currency risk on the net investments in foreign subsidiaries resulting from
exchange rate fluctuations in foreign currency denominated assets and
liabilities. The Company is exposed to credit-related losses in the event of
non-performance by the counterparty to the cross currency swap contract, but it
does not expect the counterparty to fail to meet its obligations given their
high credit ratings.
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
13. Segment Information
The Company conducts its operations principally through the following two
business segments:
Property and Casualty Insurance/Reinsurance Segment (Property/Casualty)
The domestic property/casualty operations of the Company include reinsurance of
most property/casualty lines of business, including general liability, property,
workers' compensation and auto liability in the United States, Canada and
business written in the United States where the reinsured is outside the United
States. In addition, the Company provides insurance and reinsurance for the
healthcare industry and conducts excess and surplus lines and direct specialty
insurance business.
International property/casualty operations are conducted through subsidiaries
and local offices located in Australia, Denmark, England, France, Germany, Hong
Kong, Italy, Japan, Lebanon, Mexico, New Zealand, Singapore and Spain, and
include reinsurance of property/casualty business in those countries and
elsewhere outside the United States and Canada.
Life Reinsurance Segment (Life)
The domestic and international life operations of the Company include
reinsurance of life and health insurance and annuity products and participation
in financially oriented reinsurance treaties. The international life operations
are conducted through subsidiaries and local offices as detailed above and
include reinsurance of life business in those countries and elsewhere outside
the United States and Canada.
The following is a summary of industry segment activity:
<TABLE>
<CAPTION>
1996 - Industry Segments
-----------------------------------
Property/
(In millions) Casualty Life Consolidated
-----------------------------------
<S> <C> <C> <C>
Net premiums earned $ 4,015 $ 633 $ 4,648
Net investment income 656 181 837
Net realized gains on investments 200 23 223
Other revenues (1) 44 43
------- ------ -------
Total revenues 4,870 881 5,751
------- ------ -------
Claims, claim expenses and policy benefits 2,869 504 3,373
Insurance acquisition costs 989 117 1,106
Other operating costs and expenses 350 142 492
-------- ------ -------
Total costs and expenses 4,208 763 4,971
------- ------ -------
Earnings before income taxes $ 662 $ 118 $ 780
======= ====== =======
Total assets - December 31 $18,880 $6,508 $25,388
======= ====== =======
</TABLE>
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
<TABLE>
<CAPTION>
1995 - Industry Segments
------------------------------------
Property/
(In millions) Casualty Life Consolidated
------------ --------- -------------
<S> <C> <C> <C>
Net premiums earned $ 3,446 $ 440 $ 3,886
Net investment income 519 157 676
Net realized gains on investments 162 29 191
Other revenues 15 30 45
------- ------ -------
Total revenues 4,142 656 4,798
------- ------ -------
Claims, claim expenses and policy benefits 2,649 345 2,994
Insurance acquisition costs 761 86 847
Other operating costs and expenses 261 135 396
------- ------ -------
Total costs and expenses 3,671 566 4,237
------- ------ -------
Earnings before income taxes $ 471 $ 90 $ 561
======= ====== =======
Total assets - December 31 $19,991 $5,622 $25,613
======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
1994 - Industry Segments
------------------------------------
Property/
(In millions) Casualty Life Consolidated
------------------------------------
<S> <C> <C> <C>
Net premiums earned $ 2,294 $ 193 $ 2,487
Net investment income 410 118 528
Net realized gains on investments 93 10 103
Other revenues - 30 30
------- ------ -------
Total revenues 2,797 351 3,148
------- ------ -------
Claims, claim expenses and policy benefits 1,744 156 1,900
Insurance acquisition costs 501 50 551
Other operating costs and expenses 183 105 288
------- ------ -------
Total costs and expenses 2,428 311 2,739
------- ------ -------
Earnings before income taxes $ 369 $ 40 $ 409
======= ====== =======
Total assets - December 31 $10,102 $4,394 $14,496
======= ====== =======
</TABLE>
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
The following table is a summary of the Company's business by geographic area.
Allocations to the domestic geographic area include business related to the
United States, Canada and business written in the United States where the
reinsured is outside the United States. International business includes business
written by subsidiaries located outside the United States, predominantly in
Europe.
<TABLE>
<CAPTION>
Geographic Area
------------------------------------------
(In millions) United States Europe Consolidated
------------------------------------------
1996:
<S> <C> <C> <C>
Revenues $ 2,692 $ 3,059 $ 5,751
Earnings before income taxes 442 338 780
Identifiable assets at December 31 13,659 11,729 25,388
1995:
Revenues $ 2,936 $ 1,862 $ 4,798
Earnings before income taxes 399 162 561
Identifiable assets at December 31 12,777 12,836 25,613
1994:
Revenues $ 2,574 $ 574 $ 3,148
Earnings before income taxes 358 51 409
Identifiable assets at December 31 10,926 3,570 14,496
</TABLE>
14. Unaudited Quarterly Financial Data
Summarized quarterly financial results and other data were as follows in 1996:
<TABLE>
<CAPTION>
First Second Third Fourth
(in millions) Quarter Quarter Quarter Quarter
-------------------------------------------------
<S> <C> <C> <C> <C>
Net premiums earned $1,236 $1,052 $1,075 $1,285
Net investment income 203 211 206 217
Total costs and expenses 1,331 1,129 1,150 1,361
Net earnings 136 134 146 151
Certain data as presented in the unaudited quarterly financial data has been
reclassified to conform with the consolidated statement of earnings presentation
for the year ended December 31, 1996.
<PAGE>
Financial Statement Schedules
<PAGE>
Schedule II
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Condensed Financial Information of Registrant
(Parent Company)
Statement of Earnings
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
(In millions) 1996 1995 1994
-----------------------------
<S> <C> <C> <C>
Revenues
Net investment income $ - $ 1 $ -
Equity in undistributed earnings 472 384 208
Dividends from subsidiaries 123 63 150
---- ---- ----
Total revenues 595 448 358
---- ---- ----
Costs and Expenses
Interest expense 42 16 -
Other operating costs and expenses 1 - -
---- ---- ----
Total costs and expenses 43 16 -
---- ---- ----
Earnings before income taxes 552 432 358
Provision for income taxes (15) (5) -
---- ---- ----
Net earnings $567 $437 $358
==== ==== ====
See Notes to Condensed Financial Information of Registrant.
</TABLE>
<PAGE>
Schedule II
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Condensed Financial Information of Registrant (continued)
(Parent Company)
Statement of Financial Position
<TABLE>
<CAPTION>
December 31,
-----------------------------
(In millions) 1996 1995
-----------------------------
<S> <C> <C>
Assets
Investments in subsidiaries $5,314 $4,774
Short-term investments, at amortized cost 7 21
Other assets 22 -
------ ------
Total assets $5,343 $4,795
====== ======
Liabilities and equity
Other liabilities $ 27 $ 4
Short-term borrowings - 600
Long-term borrowings 556 -
------ ------
Total liabilities 583 604
------ ------
Common stock, $5,000 par value; authorized,
issued and outstanding - 1,000 shares 5 5
Preferred stock, $100,000 par value; authorized,
issued and outstanding - 1,500 shares 150 150
Paid-in capital 845 845
Unrealized gains on subsidiary's investments 500 436
Foreign currency translation adjustments 15 12
Retained earnings 3,245 2,743
------ ------
Total stockholder's equity 4,760 4,191
------ ------
Total liabilities and equity $5,343 $4,795
====== ======
See Notes to Condensed Financial Information of Registrant.
</TABLE>
<PAGE>
Schedule II
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Condensed Financial Information of Registrant (continued)
(Parent Company)
Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
(In millions) 1996 1995 1994
-----------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net earnings $ 567 $ 437 $358
Adjustments to reconcile net earnings to cash
from operating activities:
Equity in undistributed earnings (472) (384) (208)
Other, net - 4 -
----- ------ ---
Cash from operating activities 95 57 150
----- ------ ---
Cash Flows From Investing Activities
Net (purchases) sales of short-term investments 14 (21) -
Investment in subsidiary - (1,055) -
----- ------ ---
Cash from (used for) investing activities 14 (1,076) -
----- ------ ---
Cash Flows From Financing Activities
Proceeds from short-term borrowings - 600 -
Principal payments on short-term borrowings (600) - -
Proceeds from long-term borrowings 556 - -
Contribution to capital - 300 -
Proceeds from issuance of preferred stock - 150 -
Dividends paid (65) (31) (150)
----- ------ ---
Cash from (used for) financing activities (109) 1,019 (150)
----- ------ ---
Increase (decrease) in cash - - -
Cash at beginning of year - - -
----- ------ ---
Cash at end of year $ - $ - $ -
===== ====== ===
See Notes to Condensed Financial Information of Registrant.
</TABLE>
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Condensed Financial Information of Registrant
(Parent Company)
1. Basis of Presentation
GE Global Insurance Holding Corporation ("GE Global") is a wholly-owned
subsidiary of General Electric Capital Services, Inc. ("GE Capital Services"),
which is a wholly-owned subsidiary of General Electric Company. Subsequent to
December 31, 1994, an inactive, wholly-owned subsidiary of Employers Reinsurance
Corporation ("ERC") was renamed GE Global and dividended to GE Capital Services.
GE Capital Services then contributed its 100% ownership of the common stock of
ERC to GE Global. These parent company financial statements reflect the
combination of GE Global and ERC at historical cost on a basis similar to
pooling of interest accounting; accordingly, the accompanying parent company
financial statements include the accounts and operations of ERC for all periods
presented.
GE Global's primary asset is its 100% investment in the common stock of ERC, a
Missouri-domiciled property/casualty reinsurance company. ERC owns 100% of the
common stock of various other property/casualty reinsurance, life reinsurance
and reinsurance intermediary companies.
<PAGE>
Schedule III
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Supplementary Insurance Information
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- ------------------------------------------------------------------------------------------------------------
Deferred Claims and Claim
Insurance Expenses and Accumulated Net
(In millions) Acquisition Future Policy Unearned Contract Premiums
Costs Benefits Premiums Values Earned
----------------------------------------------------------------------------------
December 31, 1996:
<S> <C> <C> <C> <C> <C>
Property/Casualty $244 $10,869 $1,161 $ - $4,015
Life 251 831 9 1,643 633
---- ------- ------ ------ ------
Total $495 $11,700 $1,170 $1,643 $4,648
==== ======= ====== ====== ======
December 31, 1995:
Property/Casualty $303 $11,145 $1,322 $ - $3,446
Life 171 719 6 1,809 440
---- ------- ------ ------ ------
Total $474 $11,864 $1,328 $1,809 $3,886
==== ======= ====== ====== ======
December 31, 1994:
Property/Casualty $163 $ 6,020 $ 752 $ - $2,294
Life 104 657 - 1,934 193
---- ------- ------ ------ ------
Total $267 $ 6,677 $ 752 $1,934 $2,487
==== ======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Column G Column H Column I Column J Column K
----------------------------------------------------------------------------------
Amortization
of
Deferred Other
Net Claims, Claim Insurance Operating Costs Net
(In millions) Investment Expenses and Acquisition and Premiums
Income Policy Benefits Costs Expenses Written
----------------------------------------------------------------------------------
December 31, 1996:
<S> <C> <C> <C> <C> <C>
Property/Casualty $656 $ 2,869 $ 989 $350 $3,937
Life 181 504 117 142
---- ------- ------ ----
Total $837 $ 3,373 $1,106 $492
==== ======= ====== ====
December 31, 1995:
Property/Casualty $519 $ 2,649 $ 761 $261 $3,123
Life 157 345 86 135
---- ------- ------ ----
Total $676 $ 2,994 $ 847 $396
==== ======= ====== ====
December 31, 1994:
Property/Casualty $410 $ 1,744 $ 501 $183 $2,380
Life 118 156 50 105
---- ------- ------ ----
Total $528 $ 1,900 $ 551 $288
==== ======= ====== ====
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GE GLOBAL INSURANCE HOLDING CORPORATION
March 27, 1997 By: /s/ James F. Dore
------------------------------------
James F. Dore
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the date
indicated.
Signatures Title Date
/s/ KAJ AHLMANN President, Chief Executive Officer and March 27, 1997
- --------------------- Director (Principal Executive Officer)
Kaj Ahlmann
/s/ JAMES F. DORE Vice President, Chief Financial Officer March 27, 1997
- --------------------- and Director (Principal Financial and
James F. Dore Accounting Officer)
/s/ G.C. WENDT Chairman March 27, 1997
- ---------------------
Gary C. Wendt
/s/ JAMES A. PARKE Director March 27, 1997
- ---------------------
James A. Parke
/s/ JOHN M. CONNELLY Senior Vice President, General Counsel March 27, 1997
- --------------------- and Director
John M. Connelly
Exhibit 10.1
FIRST WHOLE ACCOUNT AGGREGATE
EXCESS OF LOSS RETROCESSION AGREEMENT (E1)
for
EMPLOYERS REINSURANCE CORPORATION
Effective January 1, 1996
Prepared by:
BATES TURNER, INC.
5200 Metcalf, P.O. Box 2959
Overland Park, Kansas 66201
Toll Free (800) 465-8072
Phone (913) 676-5920
Fax (913) 676-5940
<PAGE>
CONTENTS
EMPLOYERS REINSURANCE CORPORATION
FIRST WHOLE ACCOUNT AGGREGATE EXCESS OF LOSS
RETROCESSION AGREEMENT (E1)
-------------------------------------
ARTICLE PAGE
------- ----
I APPLICATION OF AGREEMENT...................................1
II BUSINESS RETROCEDED........................................1
III RETENTION AND RETROCESSION.................................2
IV RETROCESSIONAIRE RESERVE DETERMINATION...................2-3
V DEFINITIONS..............................................3-5
VI RETROCESSION PREMIUM AND ADJUSTMENT........................5
VII EXPERIENCE ACCOUNT BALANCE.................................6
VIII LOSS SETTLEMENTS...........................................6
IX COMMUTATION AND EXPERIENCE REFUND........................6-7
X COMMUTATION APPROVAL ON CORPORATION'S POLICIES.............7
XI EXPIRATION DURING LOSS.....................................8
XII STOP LOSS (AGGREGATE) INCLUSION............................8
XIII WARRANTY...................................................8
XIV CURRENCY...................................................8
XV ACCESS TO RECORDS..........................................9
XVI ERRORS AND OMISSIONS.......................................9
XVII TAXES......................................................9
XVIII OFFSET.....................................................9
XIX INSOLVENCY................................................10
XX ARBITRATION...............................................11
XXI NONWAIVER.................................................12
XXII INTERMEDIARY..............................................12
<PAGE>
Employers Reinsurance Corporation
First Whole Account Aggregate XOL Retro Agreement (E1)
FIRST WHOLE ACCOUNT AGGREGATE EXCESS OF LOSS
RETROCESSION AGREEMENT (E1)
entered into by and between
EMPLOYERS REINSURANCE CORPORATION
Overland Park, Kansas
(hereinafter called the "Corporation")
and
NATIONAL INDEMNITY COMPANY
Omaha, Nebraska
(hereinafter called the "Retrocessionaire")
Effective January 1, 1996
---------------------------------------------
WITNESSETH
In consideration of the mutual covenants hereinafter contained and upon the
terms and conditions hereinafter set forth, the parties hereto agree as follows:
ARTICLE I
APPLICATION OF AGREEMENT
This Agreement applies to all in force, new and renewal insurance and
reinsurance written by the Corporation, as respects occurrences taking place
anywhere in the world at or after January 1, 1996, 12:01 a.m., Central Standard
Time, and prior to January 1, 1997, 12:01 a.m., Central Standard Time.
ARTICLE II
BUSINESS RETROCEDED
This Agreement applies to all insurance and reinsurance business written and
classified by the Corporation as property or business written and classified by
the Corporation as other than property, covering in respect of exposures
worldwide, including reinsurance assumed from subsidiary and/or affiliate
companies, excluding life business written as such, but not excluding death
benefits under accident or health Policies or workers' compensation Policies.
<PAGE>
ARTICLE III
RETENTION AND RETROCESSION
The Corporation shall retain for its own account as its own net retention all
Ultimate Net Loss in the aggregate incurred during the term of this Agreement in
respect of its Net Retained Liability up to and including the higher of either:
A) an amount equal to 77% of Subject Gross Net Earned Premium Income
(hereinafter "SGNEPI"), or
B) the total Ultimate Net Loss in the aggregate not exceeding an amount
equal to 107% of SGNEPI minus the limit ceded hereunder.
The Retrocessionaire shall indemnify the Corporation in respect of its Net
Retained Liability for all Ultimate Net Loss in the aggregate incurred during
the term of this Agreement in excess of the Corporation's own net retention.
The Retrocessionaire's annual limit of liability shall not exceed the lesser of
an amount equal to 25% of SGNEPI, or $500,000,000.
Notwithstanding the above, the liability of the Retrocessionaire shall not
exceed the aggregate amount of ceded Ultimate Net Loss incurred and reported by
the Corporation to the Retrocessionaire as of February 1, 1997.
ARTICLE IV
RETROCESSIONAIRE RESERVE DETERMINATION
A) The Corporation shall determine the level of total reserves for
Ultimate Net Loss for the term of this Agreement and shall revise those
reserves from time to time as subsequent events require. Should the
Retrocessionaire disagree with the reserves posted by the Corporation
for the term of this Agreement, the Retrocessionaire shall select a
firm, acceptable to the Corporation, to perform an independent reserve
analysis. In the event the Retrocessionaire elects to have an
independent reserve analysis conducted, the loss settlement date on
which the Corporation seeks payment shall be delayed until completion of
the analysis, or six months past the loss settlement date, whichever
first occurs. The results of the independent reserve analysis shall be
binding in establishing the retention amount for this cover until such
time as a subsequent study is conducted or the Retrocessionaire and the
Corporation mutually agree to changes in the retention. The cost of
such study shall be borne by the Retrocessionaire. In no event shall
the retention be less than provided under Article III of this Agreement.
<PAGE>
RETROCESSIONAIRE RESERVE DETERMINATION
(continued)
B) If, subsequent to the Retrocessionaire making any payments under this
Agreement, the reserves for the term of this Agreement are increased,
either by action of the Corporation or in accordance with paragraph A
of this Article, then the Corporation shall refund to the
Retrocessionaire the excess amount paid by the Retrocessionaire as
determined using the revised retention, if any, plus the Interest
Credit calculated in accordance with this Article. The Interest Credit
is payable immediately for the number of days beginning with the
date(s) of premature payment(s) by the Retrocessionaire and ending at
the date the Retrocessionaire is reimbursed for such premature
payment(s) and/or paid the Interest Credit due.
C) The Interest Credit shall be the average of the three month U.S.
Treasury Bill rate plus 200 basis points applied against the refund due
to the Retrocessionaire.
ARTICLE V
DEFINITIONS
As used in this Agreement:
A) The term "Ultimate Net Loss" shall mean the actual loss or losses paid
or payable by the Corporation in settlement of claims or in
satisfaction of awards or judgments (including prejudgment interest and
plaintiff's costs included in the judgment) plus losses Incurred But
Not Reported (hereinafter "IBNR") for all lines of business covered
under this Agreement, subject however to an aggregate limit for
Catastrophe Losses of $500,000,000 within such Ultimate Net Loss.
Subject to the limits of this Agreement, "Ultimate Net Loss" also
includes Loss In Excess Of Policy Limits and Extra Contractual
Obligations losses which are incurred as a result of the Corporation's
participation in any Original Policy which provides coverage for such
losses, on the condition that the Corporation has, in advance of any
conduct by the Original Insured in connection with the investigation,
trial or settlement of any claim or failure to pay or delay in payment
of any benefits under any Original Policy, counseled with the Original
Insured and concurred in the Original Insured's course of conduct.
The amount of loss paid or payable by the Corporation shall include all
claim expenses covered under the Original Policy, but shall not include
the Corporation's own claim expenses. Salvages and recoveries,
including recoveries under all other reinsurances, whether collected or
not, are to be first deducted from the amount of the loss paid or
payable to arrive at the amount of liability, if any, attaching
hereunder.
<PAGE>
DEFINITIONS
(continued)
B) The term "Extra Contractual Obligations" shall mean:
1) Eighty percent of any amount paid or payable by the
Corporation in excess of its Policy limits (limited to within
the limit of this Agreement however), but otherwise within the
terms of its Policy (hereinafter called "Loss In Excess Of
Policy Limits"), as a result of an action against it by its
Insured, or its Insured's assignee, to recover damages the
Corporation is legally obligated to pay because of the
Corporation's alleged or actual negligence or bad faith in
rejecting a settlement within its Policy limits, or in
discharging its duty to defend or prepare the defense in the
trial of any action against its Insured, or in discharging its
duty to prepare or prosecute an appeal consequent upon such an
action.
2) Eighty percent of any punitive, exemplary, compensatory or
consequential damages (limited to within the limit of this
Agreement however), other than Loss In Excess Of Policy
Limits, paid or payable by the Corporation as a result of an
action against it by its Insured, its Insured's assignee, or a
third party claimant, which action alleges negligence or bad
faith on the part of the Corporation in handling a claim under
a Policy subject to this Agreement.
The term "Extra Contractual Obligations" shall not include any amount
paid or payable by the Corporation where such amount has been incurred
by the Corporation due to the fraud of a member of the board of
directors, a corporate officer of the Corporation or any other employee
with claims settlement authority, acting individually or collectively
or in collusion with any individual or corporation or any other
organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
C) The term "Net Retained Liability" shall mean that portion of any Policy
which the Corporation retains net for its own account, and in
calculating the amount of Ultimate Net Loss hereunder, only loss in
respect of that portion of any Policy which the Corporation retains net
for its own account shall be included.
The amount of the Retrocessionaire's liability under this Agreement
shall not be increased by reason of the inability of the Corporation to
collect from any other Retrocessionaire(s), whether specific or
general, any amounts which may have become due from such
Retrocessionaire(s), whether such inability arises from the insolvency
of such other Retrocessionaire(s) or otherwise.
<PAGE>
DEFINITIONS
(continued)
D) The term "Subject Gross Net Earned Premium Income" or "SGNEPI" shall
mean the Corporation's subject gross premium income written less
premiums paid for cancellations and reductions of rates and for other
reinsurance carried by the Corporation, recoveries under which inure to
the benefit of this Agreement, plus the subject gross net unearned
premium at the beginning of the term, less the subject gross net
unearned premium at the end of the term, said unearned premium being
calculated on a monthly pro rata basis.
E) The term "Catastrophe Losses" shall mean property losses recorded by
the Corporation which involve two or more Policies and total more than
$7,500,000 of incurred loss net of inuring protection(s).
F) The unqualified term "Policy" shall mean all binders, policies,
certificates, agreements, treaties, bonds or contracts of insurance,
reinsurance or retrocession accepted or held covered provisionally or
otherwise underwritten by the Corporation.
G) The term "Original Policy" shall mean the initial binder, policy,
certificate, agreement, bond or contract of insurance that is
subsequently reinsured.
H) The unqualified term "Insured" when used as a noun shall mean the
person who obtained or is otherwise covered by insurance issued by the
Corporation, or the reinsured who obtained reinsurance from the
Corporation, or the retrocedent who obtained retrocession from the
Corporation, as the context so requires.
I) The term "Original Insured" shall mean the entity who obtained or is
otherwise covered by insurance that is subsequently reinsured or
retroceded under this Agreement.
ARTICLE VI
RETROCESSION PREMIUM AND ADJUSTMENT
A minimum and deposit premium of $50,000,000 is due and payable at the inception
of the term of this Agreement.
The retrocession premium shall be an amount equal to the amount of Ultimate Net
Loss ceded under this Agreement as reported by the Corporation as of February 1,
1997, divided by (1 + i)10, where i is the yield on the bond maturing on
February 15, 2007 as of February 15, 1997. The retrocession premium, after
deduction of the minimum and deposit premium previously paid, shall be due and
payable on February 15, 1997.
<PAGE>
ARTICLE VII
EXPERIENCE ACCOUNT BALANCE
The Retrocessionaire shall calculate a notional Experience Account Balance at
the end of each quarter year until expiration of all of the Retrocessionaire's
obligations under this Agreement. The Experience Account Balance shall equal:
The minimum and deposit premium received by the Retrocessionaire at inception
less $17,000,000
plus
98% of the retrocession premium due hereon, if any, at February 1, 1997
plus
interest credited by applying the average of the three-month
U.S. Treasury Bill rate less 60 basis points against the
Experience Account Balance for the quarter, calculated daily
less
Ultimate Net Loss paid by the Retrocessionaire for the quarter.
The "average of the three-month U.S. Treasury Bill rate" shall equal the sum of
the three rates as published in the Wall Street Journal on the last business day
of each month in the quarter, divided by three.
ARTICLE VIII
LOSS SETTLEMENTS
The Corporation shall report quarterly to the Retrocessionaire the development
of the incurred Ultimate Net Loss ceded by a report showing in summary format
the percentage and dollar amount of Ultimate Net Loss for the term, as advised
at February 1, 1997, which has been paid by the Corporation. At such time as the
amount of paid Ultimate Net Loss exceeds the retention under this Agreement, the
Retrocessionaire shall reimburse the Corporation by payment within 60 days of
the advice of amounts becoming due.
ARTICLE IX
COMMUTATION AND EXPERIENCE REFUND
This Agreement may be commuted at the Corporation's sole option in the event of
no Ultimate Net Loss being ceded hereunder by giving 90 days advance notice at
any time of its intent to so commute after expiration of the term. In the event
of ceded Ultimate Net Loss hereunder, the Corporation may still, at its sole
option, commute by giving 90 days advance notice, but not prior to December 31,
2006.
<PAGE>
COMMUTATION AND EXPERIENCE REFUND
(continued)
If at the time of commutation the amount of unpaid Ultimate Net Loss is less
than or equal to the Experience Account Balance, the Retrocessionaire agrees to
pay all unpaid Ultimate Net Loss as of the date of commutation.
If at the time of commutation the amount of unpaid Ultimate Net Loss is greater
than the Experience Account Balance, the unpaid Ultimate Net Loss shall be
commuted at an amount to be mutually agreed. If mutual agreement is not reached,
then no commutation shall be permitted.
In the event that unpaid Ultimate Net Loss is commuted, the Retrocessionaire
agrees to pay an experience refund equal to the positive difference, if any,
between the Experience Account Balance and the commuted value of unpaid Ultimate
Net Loss.
Payment by the Retrocessionaire of the commuted unpaid Ultimate Net Loss and the
experience refund, if any, shall constitute a complete and final release of the
Retrocessionaire in respect of its obligations under this Agreement.
Any amount due to the Corporation as calculated above shall be payable by the
Retrocessionaire within 30 days following the date of commutation.
ARTICLE X
COMMUTATION APPROVAL ON CORPORATION'S POLICIES
In the event of a commutation of any Policy resulting in the payment of Ultimate
Net Loss in excess of $5,000,000 prior to the time required under the
Corporation's Policies for the term of this Agreement, then the retention under
this Agreement shall be determined as if such commutation or other arrangement
had not occurred. The analysis to determine both the ultimate reserve amount and
the payout pattern which would have occurred on a commuted Policy shall, unless
waived in writing by the Retrocessionaire, be made on the basis of an
independent reserve analysis. The Retrocessionaire will select a firm acceptable
to the Corporation to conduct the analysis. The Retrocessionaire shall bear the
cost of such analysis and the results of such analysis shall be binding in
determining the ultimate reserve amount and payout pattern for the commuted
reinsurance contract.
<PAGE>
ARTICLE XI
EXPIRATION DURING LOSS
(This article applies only to property insurance and reinsurance.)
If this Agreement expires while an occurrence covered hereunder is in progress,
the Retrocessionaire's liability hereunder shall, subject to the other terms and
conditions of this Agreement, be determined as if the entire occurrence had
taken place prior to the expiration of this Agreement, provided that no part of
such occurrence is claimed against any renewal or replacement of this Agreement.
ARTICLE XII
STOP LOSS (AGGREGATE) INCLUSION
All aggregate Policies coming within the scope of this Agreement shall be
covered on a risks attaching basis rather than on an occurrence basis. An
aggregate Policy issued for a period of more than 12 months shall be considered
as attaching at each anniversary date of such Policy while such Policy is in
force.
ARTICLE XIII
WARRANTY
The Corporation shall not introduce any change in its generally established
practices, including but not limited to accounting, acceptance and underwriting
policies, in respect of the business which is the subject of this Agreement
without the prior approval of the Retrocessionaire, and such approval shall not
be unreasonably withheld by the Retrocessionaire. The Corporation specifically
warrants that it will not change its gross line guide nor inuring protections
without prior advice to and approval from the Retrocessionaire, and such
approval shall not be unreasonably withheld by the Retrocessionaire.
ARTICLE XIV
CURRENCY
All financial transactions contemplated by this Agreement shall be in the
currency of the United States of America.
<PAGE>
ARTICLE XV
ACCESS TO RECORDS
At any reasonable time, the Retrocessionaire or its designated representatives
shall have free access to all records of the Corporation which pertain to this
Agreement.
ARTICLE XVI
ERRORS AND OMISSIONS
Any inadvertent delays, omissions or errors shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made, provided such delay, omission or
error is rectified upon discovery, and does not impose any greater liability
upon the other party than would have attached hereunder if the delay, omission
or error had not occurred.
ARTICLE XVII
TAXES
In consideration of the terms under which this Agreement is entered into, the
Corporation will not claim a deduction in respect of the premium hereon when
making tax returns, other than income or profits tax returns, to any state or
territory of the United States of America, the District of Columbia or Canada,
and the Corporation will be liable for payment of all premium taxes on premium
ceded under this Agreement.
ARTICLE XVIII
OFFSET
The Corporation and the Retrocessionaire shall have the right to offset any
balance(s) due from one to the other under this Agreement. The party asserting
the right of offset may exercise such right any time whether the balance(s) due
are on account of premiums or losses or otherwise. In the event of the
insolvency of a party hereto, offset shall only be allowed in accordance with
the provision of Section 7427 of the Insurance Law of the State of New York.
<PAGE>
ARTICLE XIX
INSOLVENCY
In the event of the insolvency of the Corporation, the retrocession under this
Agreement shall be payable directly to the Corporation or to its liquidator,
receiver, conservator or statutory successor on the basis of the liability of
the Corporation without diminution because of the insolvency of the Corporation
or because the liquidator, receiver, conservator or statutory successor of the
Corporation has failed to pay all or a portion of any claim. It is agreed,
however, that the liquidator, receiver, conservator or statutory successor of
the Corporation shall give written notice to the Retrocessionaire of the
pendency of a claim against the Corporation indicating the Policy reinsured
which claim would involve a possible liability on the part of the
Retrocessionaire within a reasonable time after such claim is filed in the
conservation or liquidation proceeding or in the receivership, and that during
the pendency of such claim, the Retrocessionaire may investigate such claim and
interpose, at its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses that it may deem available to the
Corporation or its liquidator, receiver, conservator or statutory successor. The
expense thus incurred by the Retrocessionaire shall be chargeable, subject to
the approval of the Court, against the Corporation as part of the expenses of
conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to the Corporation solely as a result of the defense undertaken
by the Retrocessionaire.
Where two or more Retrocessionaires are involved in the same claim and a
majority in interest elect to interpose defense of such claim, the expense shall
be apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the Corporation.
It is further understood and agreed that, in the event of the insolvency of the
Corporation, the retrocession under this Agreement shall be payable directly by
the Retrocessionaire to the Corporation or to its liquidator, receiver,
conservator or statutory successor, except as provided by Section 4118(a) of the
New York Insurance Law or except (a) where the Agreement specifically provides
another payee of such retrocession in the event of the insolvency of the
Corporation and (b) where the Retrocessionaire with the consent of the direct
Insured or Insureds has assumed such Policy obligations of the Corporation as
direct obligations of the Retrocessionaire to the payees under such Policies and
in substitution for the obligations of the Corporation to such payees.
<PAGE>
ARTICLE XX
ARBITRATION
As a condition precedent to any right of action hereunder, any dispute arising
out of this Agreement shall be submitted to the decision of a board of
arbitration composed of two arbitrators and an umpire, meeting in Overland Park,
Kansas, unless otherwise mutually agreed by the Corporation and the
Retrocessionaire.
The members of the board of arbitration shall be active or retired disinterested
officials of insurance or reinsurance companies, or underwriters at Lloyd's,
London. Each party shall appoint its arbitrator and the two arbitrators shall
choose an umpire before instituting the hearing. In the event that either party
should fail to choose an arbitrator within 30 days following a written request
by the other party to enter upon arbitration, the requesting party may choose
two arbitrators who shall in turn choose an umpire before entering upon
arbitration. In the event the two arbitrators fail to agree on an umpire either
party shall have the right to submit the matter to the American Arbitration
Association in effect at that time to name an umpire in accordance with the
qualifications provided hereinabove.
Each party shall present its case to the arbitrators within 60 days following
the date of their appointment. The board shall make its decision with regard to
the custom and usage of the insurance and reinsurance business. The board shall
issue its decision in writing based upon a hearing in which evidence may be
introduced without following strict rules of evidence but in which cross
examination and rebuttal shall be allowed. The board shall make its decision
within 60 days following the termination of the hearings unless the parties
consent to an extension. The majority decision of the board shall be final and
binding upon all parties to the proceeding. Judgment upon the final decision of
the board may be entered in any court of competent jurisdiction.
If more than one Retrocessionaire is involved in the same dispute, all such
Retrocessionaires shall constitute and act as one party for purposes of this
Article and communications shall be made by the Corporation to each of the
Retrocessionaires constituting the one party, provided, however, that nothing
shall impair the rights of such Retrocessionaires to assert several, rather than
joint, defenses or claims, nor be construed as changing the liability of the
Retrocessionaires under the terms of this Agreement from several to joint.
Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the expense of the umpire. In the event both
arbitrators are chosen by one party, the expense of the arbitrators and the
umpire shall be jointly and equally borne between the parties. The remaining
costs of the arbitration proceedings shall be allocated by the board.
This Article shall survive the termination of this Agreement.
<PAGE>
ARTICLE XXI
NONWAIVER
The failure of the Corporation or the Retrocessionaire to insist on compliance
with this Agreement or to exercise any right or remedy hereunder shall not
constitute a waiver of any rights or remedies contained herein, nor estop either
party from thereafter demanding full and complete compliance nor prevent either
party from exercising such rights or remedies in the future.
ARTICLE XXII
INTERMEDIARY
Bates Turner, Inc. is hereby recognized as the Intermediary negotiating this
Agreement for business hereunder. All communications (including, but not limited
to, notices, statements, premiums, return premiums, commissions, taxes, losses,
loss adjustment expenses, salvages and loss settlements) relating hereto shall
be transmitted to the Corporation or the Retrocessionaire through Bates Turner,
Inc., 5200 Metcalf, P.O. Box 2959, Overland Park, Kansas, 66201. Payments by the
Corporation to the Intermediary shall constitute payment to the Retrocessionaire
to the extent of such payments. Payments by the Retrocessionaire to the
Intermediary shall only constitute payment to the Corporation to the extent that
such payments are actually received by the Corporation.
IN WITNESS WHEREOF, the parties hereto by their duly authorized officers have
executed this Agreement in triplicate.
At Overland Park, Kansas, this 16th day of February, 1996.
EMPLOYERS REINSURANCE CORPORATION
By: /s/ Joseph W. Levin
Attest: /s/ Hoyt H. Wood, Jr.
At Stamford, Connecticut, this 27th day of September, 1996.
NATIONAL INDEMNITY COMPANY
By: /s/ Ajit Jain
Attest: /s/ Brian Garrison
Exhibit 10.2
SECOND WHOLE ACCOUNT AGGREGATE
EXCESS OF LOSS RETROCESSION AGREEMENT (E2)
for
EMPLOYERS REINSURANCE CORPORATION
Effective January 1, 1996
Prepared by:
BATES TURNER, INC.
5200 Metcalf, P.O. Box 2959
Overland Park, Kansas 66201
Toll Free (800) 465-8072
Phone (913) 676-5920
Fax (913) 676-5940
<PAGE>
CONTENTS
EMPLOYERS REINSURANCE CORPORATION
SECOND WHOLE ACCOUNT AGGREGATE EXCESS OF LOSS
RETROCESSION AGREEMENT (E2)
-------------------------------------
ARTICLE PAGE
------- ----
I APPLICATION OF AGREEMENT...................................1
II BUSINESS RETROCEDED........................................1
III RETENTION AND RETROCESSION.................................2
IV RETROCESSIONAIRE RESERVE DETERMINATION...................2-3
V DEFINITIONS..............................................3-5
VI RETROCESSION PREMIUM AND ADJUSTMENT......................5-6
VII EXPERIENCE ACCOUNT BALANCE.................................6
VIII LOSS SETTLEMENTS...........................................7
IX COMMUTATION AND EXPERIENCE REFUND........................7-8
X COMMUTATION APPROVAL ON CORPORATION'S POLICIES.............8
XI EXPIRATION DURING LOSS.....................................8
XII STOP LOSS (AGGREGATE) INCLUSION............................9
XIII WARRANTY...................................................9
XIV CURRENCY...................................................9
XV ACCESS TO RECORDS..........................................9
XVI ERRORS AND OMISSIONS.......................................9
XVII TAXES.....................................................10
XVIII OFFSET....................................................10
XIX INSOLVENCY.............................................10-11
XX ARBITRATION............................................11-12
XXI NONWAIVER.................................................12
XXII INTERMEDIARY..............................................12
XXIII PARTICIPATION AND SIGNATURES..............................13
<PAGE>
Employers Reinsurance Corporation
Second Whole Account Aggregate XOL Retro Agreement (E2)
96573
07/09/96
SECOND WHOLE ACCOUNT AGGREGATE EXCESS OF LOSS
RETROCESSION AGREEMENT (E2)
entered into by and between
EMPLOYERS REINSURANCE CORPORATION
Overland Park, Kansas
(hereinafter called the "Corporation")
and
the Retrocessionaire specifically identified on the
signature page attached hereto
(hereinafter called the "Retrocessionaire")
Effective January 1, 1996
---------------------------------------------
WITNESSETH
In consideration of the mutual covenants hereinafter contained and upon the
terms and conditions hereinafter set forth, the parties hereto agree as follows:
ARTICLE I
APPLICATION OF AGREEMENT
This Agreement applies to all in force, new and renewal insurance and
reinsurance written by the Corporation, as respects occurrences taking place
anywhere in the world at or after January 1, 1996, 12:01 a.m., Central Standard
Time, and prior to January 1, 1997, 12:01 a.m., Central Standard Time.
ARTICLE II
BUSINESS RETROCEDED
This Agreement applies to all insurance and reinsurance business written and
classified by the Corporation as property or business written and classified by
the Corporation as other than property, covering in respect of exposures
worldwide, including reinsurance assumed from subsidiary and/or affiliate
companies, excluding life business written as such, but not excluding death
benefits under accident or health Policies or workers' compensation Policies.
<PAGE>
ARTICLE III
RETENTION AND RETROCESSION
The Corporation shall retain for its own account as its own net retention,
subject to the First Whole Account Aggregate Excess of Loss Retrocession
Agreement (E1), all Ultimate Net Loss in the aggregate incurred during the term
of this Agreement in respect of its Net Retained Liability up to and including
an amount equal to 77% of Subject Gross Net Earned Premium Income (hereinafter
"SGNEPI").
The Retrocessionaire shall indemnify the Corporation in respect of its Net
Retained Liability for all Ultimate Net Loss in the aggregate incurred during
the term of this Agreement in excess of the Corporation's own net retention, up
to:
A) an amount equal to the first 5% of SGNEPI excess of an amount equal to
77% of SGNEPI provided that the total Ultimate Net Loss incurred by the
Corporation exceeds an amount equal to 102% of SGNEPI and that the
First Whole Account Aggregate Excess of Loss Retrocession Agreement
(E1) does not provide protection for an amount equal to this first 5%
of SGNEPI, and
B) an amount equal to 25% of SGNEPI excess of the sum of an amount equal
to 102% of SGNEPI plus the amount recoverable under Part A of this
Article III.
The Retrocessionaire's annual limit of liability in respect of Part A and Part B
of this Article III combined shall not exceed the lesser of an amount equal to
25% of SGNEPI, or $500,000,000.
Notwithstanding the above, the liability of the Retrocessionaire shall not
exceed the aggregate amount of ceded Ultimate Net Loss incurred and reported by
the Corporation to the Retrocessionaire as of February 1, 1997.
ARTICLE IV
RETROCESSIONAIRE RESERVE DETERMINATION
A) The Corporation shall determine the level of total reserves for
Ultimate Net Loss for the term of this Agreement and shall revise those
reserves from time to time as subsequent events require. Should the
Retrocessionaire disagree with the reserves posted by the Corporation
for the term of this Agreement, the Retrocessionaire shall select a
firm, acceptable to the Corporation, to perform an independent reserve
analysis. In the event the Retrocessionaire elects to have an
independent reserve analysis conducted, the loss settlement date on
which the Corporation seeks payment shall be delayed until completion of
the analysis, or six months past the loss settlement date, whichever
first occurs. The results of the independent reserve analysis shall be
binding in establishing the reserve amount for this cover until such
time as a subsequent study is conducted or the Retrocessionaire and the
Corporation mutually agree to changes in the reserves. The cost of such
study shall be borne by the Retrocessionaire.
<PAGE>
RETROCESSIONAIRE RESERVE DETERMINATION
(continued)
B) If, subsequent to the Retrocessionaire making any payments under this
Agreement, the reserves for the term of this Agreement are decreased,
either by action of the Corporation or in accordance with paragraph A
of this Article, then the Corporation shall refund to the
Retrocessionaire the excess amount paid by the Retrocessionaire as
determined using the revised reserves, if any, plus the Interest Credit
calculated in accordance with this Article. The Interest Credit is
payable immediately for the number of days beginning with the date(s)
such excess amounts were paid by the Retrocessionaire and ending at the
date the Retrocessionaire is reimbursed for such excess amount paid
and/or is paid the Interest Credit due.
C) The Interest Credit shall be the average of the three month
U.S. Treasury Bill rate plus 200 basis points applied against the
refund due to the Retrocessionaire.
ARTICLE V
DEFINITIONS
As used in this Agreement:
A) The term "Ultimate Net Loss" shall mean the actual loss or losses paid
or payable by the Corporation in settlement of claims or in
satisfaction of awards or judgments (including prejudgment interest and
plaintiff's costs included in the judgment) plus losses Incurred But
Not Reported (hereinafter "IBNR") for all lines of business covered
under this Agreement, subject however to the following limits within
such Ultimate Net Loss:
1) an aggregate limit for all Catastrophe Losses of
$1,000,000,000 ($500,000,000 with respect to recoveries due
under Part A of Article III);
2) an aggregate sublimit for Catastrophe Losses occurring outside
of the United States of America, its territories and
possessions and Canada of $750,000,000; and
3) a per Occurrence limit of $800,000,000.
Subject to the limits of this Agreement, "Ultimate Net Loss" also
includes Loss In Excess Of Policy Limits and Extra Contractual
Obligations losses which are incurred as a result of the Corporation's
participation in any Original Policy which provides coverage for such
losses, on the condition that the Corporation has, in advance of any
conduct by the Original Insured in connection with the investigation,
trial or settlement of any claim or failure to pay or delay in payment
of any benefits under any Original Policy, counseled with the Original
Insured and concurred in the Original Insured's course of conduct.
<PAGE>
DEFINITIONS
(continued)
The amount of loss paid or payable by the Corporation shall include all
claim expenses covered under the Original Policy, but shall not include
the Corporation's own claim expenses. Salvages and recoveries,
including recoveries under all other reinsurances, whether collected or
not, are to be first deducted from the amount of the loss paid or
payable to arrive at the amount of liability, if any, attaching
hereunder.
B) The term "Extra Contractual Obligations" shall mean:
1) Eighty percent of any amount paid or payable by the
Corporation in excess of its Policy limits (limited to within
the limit of this Agreement however), but otherwise within the
terms of its Policy (hereinafter called "Loss In Excess Of
Policy Limits"), as a result of an action against it by its
Insured, or its Insured's assignee, to recover damages the
Corporation is legally obligated to pay because of the
Corporation's alleged or actual negligence or bad faith in
rejecting a settlement within its Policy limits, or in
discharging its duty to defend or prepare the defense in the
trial of any action against its Insured, or in discharging its
duty to prepare or prosecute an appeal consequent upon such an
action.
2) Eighty percent of any punitive, exemplary, compensatory or
consequential damages (limited to within the limit of this
Agreement however), other than Loss In Excess Of Policy
Limits, paid or payable by the Corporation as a result of an
action against it by its Insured, its Insured's assignee, or a
third party claimant, which action alleges negligence or bad
faith on the part of the Corporation in handling a claim under
a Policy subject to this Agreement.
The term "Extra Contractual Obligations" shall not include any amount
paid or payable by the Corporation where such amount has been incurred
by the Corporation due to the fraud of a member of the board of
directors, a corporate officer of the Corporation or any other employee
with claims settlement authority, acting individually or collectively
or in collusion with any individual or corporation or any other
organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
C) The term "Net Retained Liability" shall mean that portion of any Policy
which the Corporation retains net for its own account, however gross of
recoveries from the underlying First Whole Account Aggregate Excess of
Loss Retrocession Agreement (E1), and in calculating the amount of
Ultimate Net Loss hereunder, only loss in respect of that portion of
any Policy which the Corporation retains net for its own account shall
be included.
<PAGE>
DEFINITIONS
(continued)
The amount of the Retrocessionaire's liability under this Agreement
shall not be increased by reason of the inability of the Corporation to
collect from any other Retrocessionaire(s), whether specific or
general, any amounts which may have become due from such
Retrocessionaire(s), whether such inability arises from the insolvency
of such other Retrocessionaire(s) or otherwise.
D) The term "Subject Gross Net Earned Premium Income" or "SGNEPI" shall
mean the Corporation's subject gross premium income written less
premiums paid for cancellations and reductions of rates and for other
reinsurance carried by the Corporation, recoveries under which inure to
the benefit of this Agreement, plus the subject gross net unearned
premium at the beginning of the term, less the subject gross net
unearned premium at the end of the term, said unearned premium being
calculated on a monthly pro rata basis.
E) The term "Catastrophe Losses" shall mean property losses recorded by
the Corporation which involve two or more Policies and total more than
$7,500,000 of incurred loss net of inuring protection(s).
F) The unqualified term "Policy" shall mean all binders, policies,
certificates, agreements, treaties, bonds or contracts of insurance,
reinsurance or retrocession accepted or held covered provisionally or
otherwise underwritten by the Corporation.
G) The term "Original Policy" shall mean the initial binder, policy,
certificate, agreement, bond or contract of insurance that
is subsequently reinsured.
H) The unqualified term "Insured" when used as a noun shall mean the
person who obtained or is otherwise covered by insurance issued by the
Corporation, or the reinsured who obtained reinsurance from the
Corporation, or the retrocedent who obtained retrocession from the
Corporation, as the context so requires.
I) The term "Original Insured" shall mean the entity who obtained or is
otherwise covered by insurance that is subsequently reinsured or
retroceded under this Agreement.
ARTICLE VI
RETROCESSION PREMIUM AND ADJUSTMENT
A minimum and deposit premium of $25,000,000 is due at January 1, 1996. The
retrocession premium shall be an amount equal to 49% of the amount of Ultimate
Net Loss ceded under this Agreement as reported by the Corporation as of
February 1, 1997. The retrocession premium, after deduction of the minimum and
deposit premium previously paid, shall be due at February 15, 1997.
<PAGE>
RETROCESSION PREMIUM AND ADJUSTMENT
(continued)
The Corporation shall pay to the Retrocessionaire $9,500,000 of the minimum and
deposit premium at January 1, 1996. The balance of all premium, including
retrocession premium due February 15, 1997, if any, shall be withheld by the
Corporation in an Experience Account for the purpose of subsequent loss payments
and profit sharing.
ARTICLE VII
EXPERIENCE ACCOUNT BALANCE
The Corporation shall calculate a notional Experience Account Balance at the end
of each quarter year until expiration of all of the Retrocessionaire's
obligations under this Agreement. At January 1, 1996 the Experience Account
Balance shall be zero. The Experience Account Balance thereafter shall equal:
The Experience Account Balance at the
inception of the quarter plus the minimum and
deposit premium, if any, due during the quarter
less $9,500,000 and Federal Excise Tax, if applicable
plus the retrocession premium due hereon, if any, during the quarter
less Federal Excise Tax, if applicable
plus interest credited by applying a rate of 1.875% against the average
positive Experience Account Balance for the quarter, calculated daily
less the Spread paid to the Retrocessionaire for the quarter
less Ultimate Net Loss paid by the Retrocessionaire for the quarter.
"Spread" shall mean the amount equal to the following percentages of the average
positive Experience Account Balance for the quarter during the following
calendar years, respectively:
A) 0.00% during calendar year 1996;
B) 0.25% during calendar years 1997, 1998 and 1999;
C) 0.625% during calendar years 2000, 2001 and 2002; and
D) 1.00% during calendar year 2003 and all calendar years thereafter.
At the option of the Retrocessionaire, the accrued Spread shall be paid to the
Retrocessionaire at the end of any quarter in cash or withheld in the Experience
Account.
<PAGE>
ARTICLE VIII
LOSS SETTLEMENTS
The Corporation shall report quarterly to the Retrocessionaire the development
of the incurred Ultimate Net Loss ceded by a report showing in summary format
the percentage and dollar amount of Ultimate Net Loss for the term, as advised
at February 1, 1997, which has been paid by the Corporation. At such time as the
amount of paid Ultimate Net Loss exceeds the retention under this Agreement, the
Retrocessionaire shall reimburse the Corporation for such paid Ultimate Net Loss
by payment within 30 days of the advice of amounts becoming due. To the extent
the Experience Account is sufficient, the Retrocessionaire may reimburse the
Corporation by consenting to the Corporation retaining for its own account from
the Experience Account the amount of such paid Ultimate Net Loss.
Notwithstanding the above, the Retrocessionaire shall have no obligation to pay
any part of any loss which would cause the Experience Account to be less than
the product of negative 30% and the total premium ceded. Nothing set forth above
shall be construed as prohibiting the Corporation from taking credit for
Ultimate Net Loss ceded as the above is only applicable to cash transactions
under this Agreement.
ARTICLE IX
COMMUTATION AND EXPERIENCE REFUND
This Agreement may be commuted at the Corporation's sole option by giving 90
days advance written notice at any time of its intent to so commute after
expiration of the term.
If at the time of commutation the amount of unpaid Ultimate Net Loss is less
than or equal to the Experience Account Balance, the Retrocessionaire agrees to
pay all unpaid Ultimate Net Loss as of the date of commutation.
If at the time of commutation the amount of unpaid Ultimate Net Loss is greater
than the Experience Account Balance, the unpaid Ultimate Net Loss shall be
commuted at an amount to be mutually agreed. If mutual agreement is not reached,
then no commutation shall be permitted.
In the event that unpaid Ultimate Net Loss is commuted, the Retrocessionaire
agrees to pay an experience refund equal to the positive difference, if any,
between the Experience Account Balance after deduction of the accrued Spread due
the Retrocessionaire, if any, which shall be paid to the Retrocessionaire at
that time, and the commuted value of unpaid Ultimate Net Loss. Such payment of
an experience refund shall be made by the Corporation's retention for its own
account from the Experience Account.
<PAGE>
COMMUTATION AND EXPERIENCE REFUND
(continued)
Payment by the Retrocessionaire of the commuted unpaid Ultimate Net Loss and the
experience refund, if any, shall constitute a complete and final release of the
Retrocessionaire in respect of its obligations under this Agreement.
Any amount due to the Corporation as calculated above shall be payable by the
Retrocessionaire within 30 days following the date of commutation.
ARTICLE X
COMMUTATION APPROVAL ON CORPORATION'S POLICIES
In the event of a commutation of any Policy resulting in the payment of Ultimate
Net Loss in excess of $5,000,000 prior to the time required under the
Corporation's Policies for the term of this Agreement, then the paid Ultimate
Net Loss under this Agreement shall be determined as if such commutation or
other arrangement had not occurred. The analysis to determine both the ultimate
reserve amount and the payout pattern which would have occurred on a commuted
Policy shall, unless waived in writing by the Retrocessionaire, be made on the
basis of an independent reserve analysis. The Retrocessionaire will select a
firm acceptable to the Corporation to conduct the analysis. The Retrocessionaire
shall bear the cost of such analysis and the results of such analysis shall be
binding in determining the ultimate reserve amount and payout pattern for the
commuted reinsurance contract.
ARTICLE XI
EXPIRATION DURING LOSS
(This article applies only to property insurance and reinsurance.)
If this Agreement expires while an occurrence covered hereunder is in progress,
the Retrocessionaire's liability hereunder shall, subject to the other terms and
conditions of this Agreement, be determined as if the entire occurrence had
taken place prior to the expiration of this Agreement, provided that no part of
such occurrence is claimed against any renewal or replacement of this Agreement.
<PAGE>
ARTICLE XII
STOP LOSS (AGGREGATE) INCLUSION
All aggregate Policies coming within the scope of this Agreement shall be
covered on a risks attaching basis rather than on an occurrence basis. An
aggregate Policy issued for a period of more than 12 months shall be considered
as attaching at each anniversary date of such Policy while such Policy is in
force.
ARTICLE XIII
WARRANTY
The Corporation shall not introduce any change in its generally established
practices, including but not limited to accounting, claims, acceptance and
underwriting policies, in respect of the business which is the subject of this
Agreement without the prior approval of the Retrocessionaire, and such approval
shall not be unreasonably withheld by the Retrocessionaire. The Corporation
specifically warrants that it will not change its gross line guide nor inuring
protections without prior advice to and approval from the Retrocessionaire, and
such approval shall not be unreasonably withheld by the Retrocessionaire.
ARTICLE XIV
CURRENCY
All financial transactions contemplated by this Agreement shall be in the
currency of the United States of America.
ARTICLE XV
ACCESS TO RECORDS
At any reasonable time, the Retrocessionaire or its designated representatives
shall have free access to all records of the Corporation which pertain to this
Agreement.
ARTICLE XVI
ERRORS AND OMISSIONS
Any inadvertent delays, omissions or errors shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made, provided such delay, omission or
error is rectified upon discovery, and does not impose any greater liability
upon the other party than would have attached hereunder if the delay, omission
or error had not occurred.
<PAGE>
ARTICLE XVII
TAXES
In consideration of the terms under which this Agreement is entered into, the
Corporation will not claim a deduction in respect of the premium hereon when
making tax returns, other than income or profits tax returns, to any state or
territory of the United States of America, the District of Columbia or Canada,
and the Corporation will be liable for payment of all premium taxes on premium
ceded under this Agreement.
ARTICLE XVIII
OFFSET
The Corporation and the Retrocessionaire shall have the right to offset any
balance(s) due from one to the other under this Agreement. The party asserting
the right of offset may exercise such right any time whether the balance(s) due
are on account of premiums or losses or otherwise. In the event of the
insolvency of a party hereto, offset shall only be allowed in accordance with
the provision of Section 7427 of the Insurance Law of the State of New York.
ARTICLE XIX
INSOLVENCY
In the event of the insolvency of the Corporation, the retrocession under this
Agreement shall be payable directly to the Corporation or to its liquidator,
receiver, conservator or statutory successor on the basis of the liability of
the Corporation without diminution because of the insolvency of the Corporation
or because the liquidator, receiver, conservator or statutory successor of the
Corporation has failed to pay all or a portion of any claim. It is agreed,
however, that the liquidator, receiver, conservator or statutory successor of
the Corporation shall give written notice to the Retrocessionaire of the
pendency of a claim against the Corporation indicating the Policy reinsured
which claim would involve a possible liability on the part of the
Retrocessionaire within a reasonable time after such claim is filed in the
conservation or liquidation proceeding or in the receivership, and that during
the pendency of such claim, the Retrocessionaire may investigate such claim and
interpose, at its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses that it may deem available to the
Corporation or its liquidator, receiver, conservator or statutory successor. The
expense thus incurred by the Retrocessionaire shall be chargeable, subject to
the approval of the Court, against the Corporation as part of the expenses of
conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to the Corporation solely as a result of the defense undertaken
by the Retrocessionaire.
<PAGE>
INSOLVENCY
(continued)
Where two or more Retrocessionaires are involved in the same claim and a
majority in interest elect to interpose defense of such claim, the expense shall
be apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the Corporation.
It is further understood and agreed that, in the event of the insolvency of the
Corporation, the retrocession under this Agreement shall be payable directly by
the Retrocessionaire to the Corporation or to its liquidator, receiver,
conservator or statutory successor, except as provided by Section 4118(a) of the
New York Insurance Law or except (a) where the Agreement specifically provides
another payee of such retrocession in the event of the insolvency of the
Corporation and (b) where the Retrocessionaire with the consent of the direct
Insured or Insureds has assumed such Policy obligations of the Corporation as
direct obligations of the Retrocessionaire to the payees under such Policies and
in substitution for the obligations of the Corporation to such payees.
ARTICLE XX
ARBITRATION
As a condition precedent to any right of action hereunder, any dispute arising
out of this Agreement shall be submitted to the decision of a board of
arbitration composed of two arbitrators and an umpire, meeting in Overland Park,
Kansas, unless otherwise mutually agreed by the Corporation and the
Retrocessionaire.
The members of the board of arbitration shall be active or retired disinterested
officials of insurance or reinsurance companies, or underwriters at Lloyd's,
London. Each party shall appoint its arbitrator and the two arbitrators shall
choose an umpire before instituting the hearing. In the event that either party
should fail to choose an arbitrator within 30 days following a written request
by the other party to enter upon arbitration, the requesting party may choose
two arbitrators who shall in turn choose an umpire before entering upon
arbitration. In the event the two arbitrators fail to agree on an umpire either
party shall have the right to submit the matter to the American Arbitration
Association in effect at that time to name an umpire in accordance with the
qualifications provided hereinabove.
Each party shall present its case to the arbitrators within 60 days following
the date of their appointment. The board shall make its decision with regard to
the custom and usage of the insurance and reinsurance business. The board shall
issue its decision in writing based upon a hearing in which evidence may be
introduced without following strict rules of evidence but in which cross
examination and rebuttal shall be allowed. The board shall make its decision
within 60 days following the termination of the hearings unless the parties
consent to an extension. The majority decision of the board shall be final and
binding upon all parties to the proceeding. Judgment upon the final decision of
the board may be entered in any court of competent jurisdiction.
<PAGE>
ARBITRATION
(continued)
If more than one Retrocessionaire is involved in the same dispute, all such
Retrocessionaires shall constitute and act as one party for purposes of this
Article and communications shall be made by the Corporation to each of the
Retrocessionaires constituting the one party, provided, however, that nothing
shall impair the rights of such Retrocessionaires to assert several, rather than
joint, defenses or claims, nor be construed as changing the liability of the
Retrocessionaires under the terms of this Agreement from several to joint.
Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the expense of the umpire. In the event both
arbitrators are chosen by one party, the expense of the arbitrators and the
umpire shall be jointly and equally borne between the parties. The remaining
costs of the arbitration proceedings shall be allocated by the board.
This Article shall survive the termination of this Agreement.
ARTICLE XXI
NONWAIVER
The failure of the Corporation or the Retrocessionaire to insist on compliance
with this Agreement or to exercise any right or remedy hereunder shall not
constitute a waiver of any rights or remedies contained herein, nor estop either
party from thereafter demanding full and complete compliance nor prevent either
party from exercising such rights or remedies in the future.
ARTICLE XXII
INTERMEDIARY
Bates Turner, Inc. is hereby recognized as the Intermediary negotiating this
Agreement for business hereunder. All communications (including, but not limited
to, notices, statements, premiums, return premiums, commissions, taxes, losses,
loss adjustment expenses, salvages and loss settlements) relating hereto shall
be transmitted to the Corporation or the Retrocessionaire through Bates Turner,
Inc., 5200 Metcalf, P.O. Box 2959, Overland Park, Kansas, 66201. Payments by the
Corporation to the Intermediary shall constitute payment to the Retrocessionaire
to the extent of such payments. Payments by the Retrocessionaire to the
Intermediary shall only constitute payment to the Corporation to the extent that
such payments are actually received by the Corporation.
<PAGE>
ARTICLE XXIII
PARTICIPATION AND SIGNATURES
This Agreement obligates the Retrocessionaire specifically identified below
("Subscribing Retrocessionaire") for 50.00% of the liability and amounts set
forth under this Agreement and the Subscribing Retrocessionaire is entitled to a
corresponding part of the premiums set forth under this Agreement.
The share of the Subscribing Retrocessionaire in the interests and liabilities
of all retrocessionaires in respect of this Agreement shall be separate and
apart from the shares of the other retrocessionaires to this Agreement, and the
interests and liabilities of the Subscribing Retrocessionaire shall be several
and not joint with those of the other retrocessionaires and in no event shall
the Subscribing Retrocessionaire participate in the interests and liabilities of
the other retrocessionaires.
IN WITNESS WHEREOF, the parties hereto by their duly authorized officers have
executed this Agreement in triplicate.
At Overland Park, Kansas, this 19th day of August, 1996.
EMPLOYERS REINSURANCE CORPORATION
By: /s/ Joseph W. Levin
Attest: /s/ Hoyt H. Wood, Jr.
At New York, New York, this 23 day of August,1996.
CENTRE REINSURANCE COMPANY OF NEW YORK
By: /s/ William D. Scaldaferri
Attest: /s/ Mark S. Baker
Exhibit 10.3
SECOND WHOLE ACCOUNT AGGREGATE
EXCESS OF LOSS RETROCESSION AGREEMENT (E2)
for
EMPLOYERS REINSURANCE CORPORATION
Effective January 1, 1996
Prepared by:
BATES TURNER, INC.
5200 Metcalf, P.O. Box 2959
Overland Park, Kansas 66201
Toll Free (800) 465-8072
Phone (913) 676-5920
Fax (913) 676-5940
<PAGE>
CONTENTS
EMPLOYERS REINSURANCE CORPORATION
SECOND WHOLE ACCOUNT AGGREGATE EXCESS OF LOSS
RETROCESSION AGREEMENT (E2)
-------------------------------------
ARTICLE PAGE
------- ----
I APPLICATION OF AGREEMENT...................................1
II BUSINESS RETROCEDED........................................1
III RETENTION AND RETROCESSION.................................2
IV RETROCESSIONAIRE RESERVE DETERMINATION...................2-3
V DEFINITIONS..............................................3-5
VI RETROCESSION PREMIUM AND ADJUSTMENT......................5-6
VII EXPERIENCE ACCOUNT BALANCE.................................6
VIII LOSS SETTLEMENTS...........................................7
IX COMMUTATION AND EXPERIENCE REFUND........................7-8
X COMMUTATION APPROVAL ON CORPORATION'S POLICIES.............8
XI EXPIRATION DURING LOSS.....................................8
XII STOP LOSS (AGGREGATE) INCLUSION............................9
XIII WARRANTY...................................................9
XIV CURRENCY...................................................9
XV ACCESS TO RECORDS..........................................9
XVI ERRORS AND OMISSIONS.......................................9
XVII TAXES.....................................................10
XVIII OFFSET....................................................10
XIX INSOLVENCY.............................................10-11
XX ARBITRATION............................................11-12
XXI NONWAIVER.................................................12
XXII INTERMEDIARY..............................................12
XXIII PARTICIPATION AND SIGNATURES..............................13
<PAGE>
Employers Reinsurance Corporation
Second Whole Account Aggregate XOL Retro Agreement (E2)
96573
07/09/96
SECOND WHOLE ACCOUNT AGGREGATE EXCESS OF LOSS
RETROCESSION AGREEMENT (E2)
entered into by and between
EMPLOYERS REINSURANCE CORPORATION
Overland Park, Kansas
(hereinafter called the "Corporation")
and
the Retrocessionaire specifically identified on the
signature page attached hereto
(hereinafter called the "Retrocessionaire")
Effective January 1, 1996
---------------------------------------------
WITNESSETH
In consideration of the mutual covenants hereinafter contained and upon the
terms and conditions hereinafter set forth, the parties hereto agree as follows:
ARTICLE I
APPLICATION OF AGREEMENT
This Agreement applies to all in force, new and renewal insurance and
reinsurance written by the Corporation, as respects occurrences taking place
anywhere in the world at or after January 1, 1996, 12:01 a.m., Central Standard
Time, and prior to January 1, 1997, 12:01 a.m., Central Standard Time.
ARTICLE II
BUSINESS RETROCEDED
This Agreement applies to all insurance and reinsurance business written and
classified by the Corporation as property or business written and classified by
the Corporation as other than property, covering in respect of exposures
worldwide, including reinsurance assumed from subsidiary and/or affiliate
companies, excluding life business written as such, but not excluding death
benefits under accident or health Policies or workers' compensation Policies.
<PAGE>
ARTICLE III
RETENTION AND RETROCESSION
The Corporation shall retain for its own account as its own net retention,
subject to the First Whole Account Aggregate Excess of Loss Retrocession
Agreement (E1), all Ultimate Net Loss in the aggregate incurred during the term
of this Agreement in respect of its Net Retained Liability up to and including
an amount equal to 77% of Subject Gross Net Earned Premium Income (hereinafter
"SGNEPI").
The Retrocessionaire shall indemnify the Corporation in respect of its Net
Retained Liability for all Ultimate Net Loss in the aggregate incurred during
the term of this Agreement in excess of the Corporation's own net retention, up
to:
A) an amount equal to the first 5% of SGNEPI excess of an amount equal to
77% of SGNEPI provided that the total Ultimate Net Loss incurred by the
Corporation exceeds an amount equal to 102% of SGNEPI and that the
First Whole Account Aggregate Excess of Loss Retrocession Agreement
(E1) does not provide protection for an amount equal to this first 5%
of SGNEPI, and
B) an amount equal to 25% of SGNEPI excess of the sum of an amount equal
to 102% of SGNEPI plus the amount recoverable under Part A of this
Article III.
The Retrocessionaire's annual limit of liability in respect of Part A and Part B
of this Article III combined shall not exceed the lesser of an amount equal to
25% of SGNEPI, or $500,000,000.
Notwithstanding the above, the liability of the Retrocessionaire shall not
exceed the aggregate amount of ceded Ultimate Net Loss incurred and reported by
the Corporation to the Retrocessionaire as of February 1, 1997.
ARTICLE IV
RETROCESSIONAIRE RESERVE DETERMINATION
A) The Corporation shall determine the level of total reserves for
Ultimate Net Loss for the term of this Agreement and shall revise those
reserves from time to time as subsequent events require. Should the
Retrocessionaire disagree with the reserves posted by the Corporation
for the term of this Agreement, the Retrocessionaire shall select a
firm, acceptable to the Corporation, to perform an independent reserve
analysis. In the event the Retrocessionaire elects to have an
independent reserve analysis conducted, the loss settlement date on
which the Corporation seeks payment shall be delayed until completion of
the analysis, or six months past the loss settlement date, whichever
first occurs. The results of the independent reserve analysis shall be
binding in establishing the reserve amount for this cover until such
time as a subsequent study is conducted or the Retrocessionaire and the
Corporation mutually agree to changes in the reserves. The cost of such
study shall be borne by the Retrocessionaire.
<PAGE>
RETROCESSIONAIRE RESERVE DETERMINATION
(continued)
B) If, subsequent to the Retrocessionaire making any payments under this
Agreement, the reserves for the term of this Agreement are decreased,
either by action of the Corporation or in accordance with paragraph A
of this Article, then the Corporation shall refund to the
Retrocessionaire the excess amount paid by the Retrocessionaire as
determined using the revised reserves, if any, plus the Interest Credit
calculated in accordance with this Article. The Interest Credit is
payable immediately for the number of days beginning with the date(s)
such excess amounts were paid by the Retrocessionaire and ending at the
date the Retrocessionaire is reimbursed for such excess amount paid
and/or is paid the Interest Credit due.
C) The Interest Credit shall be the average of the three month
U.S. Treasury Bill rate plus 200 basis points applied against the
refund due to the Retrocessionaire.
ARTICLE V
DEFINITIONS
As used in this Agreement:
A) The term "Ultimate Net Loss" shall mean the actual loss or losses paid
or payable by the Corporation in settlement of claims or in
satisfaction of awards or judgments (including prejudgment interest and
plaintiff's costs included in the judgment) plus losses Incurred But
Not Reported (hereinafter "IBNR") for all lines of business covered
under this Agreement, subject however to the following limits within
such Ultimate Net Loss:
1) an aggregate limit for all Catastrophe Losses of
$1,000,000,000 ($500,000,000 with respect to recoveries due
under Part A of Article III);
2) an aggregate sublimit for Catastrophe Losses occurring outside
of the United States of America, its territories and
possessions and Canada of $750,000,000; and
3) a per Occurrence limit of $800,000,000.
Subject to the limits of this Agreement, "Ultimate Net Loss" also
includes Loss In Excess Of Policy Limits and Extra Contractual
Obligations losses which are incurred as a result of the Corporation's
participation in any Original Policy which provides coverage for such
losses, on the condition that the Corporation has, in advance of any
conduct by the Original Insured in connection with the investigation,
trial or settlement of any claim or failure to pay or delay in payment
of any benefits under any Original Policy, counseled with the Original
Insured and concurred in the Original Insured's course of conduct.
<PAGE>
DEFINITIONS
(continued)
The amount of loss paid or payable by the Corporation shall include all
claim expenses covered under the Original Policy, but shall not include
the Corporation's own claim expenses. Salvages and recoveries,
including recoveries under all other reinsurances, whether collected or
not, are to be first deducted from the amount of the loss paid or
payable to arrive at the amount of liability, if any, attaching
hereunder.
B) The term "Extra Contractual Obligations" shall mean:
1) Eighty percent of any amount paid or payable by the
Corporation in excess of its Policy limits (limited to within
the limit of this Agreement however), but otherwise within the
terms of its Policy (hereinafter called "Loss In Excess Of
Policy Limits"), as a result of an action against it by its
Insured, or its Insured's assignee, to recover damages the
Corporation is legally obligated to pay because of the
Corporation's alleged or actual negligence or bad faith in
rejecting a settlement within its Policy limits, or in
discharging its duty to defend or prepare the defense in the
trial of any action against its Insured, or in discharging its
duty to prepare or prosecute an appeal consequent upon such an
action.
2) Eighty percent of any punitive, exemplary, compensatory or
consequential damages (limited to within the limit of this
Agreement however), other than Loss In Excess Of Policy
Limits, paid or payable by the Corporation as a result of an
action against it by its Insured, its Insured's assignee, or a
third party claimant, which action alleges negligence or bad
faith on the part of the Corporation in handling a claim under
a Policy subject to this Agreement.
The term "Extra Contractual Obligations" shall not include any amount
paid or payable by the Corporation where such amount has been incurred
by the Corporation due to the fraud of a member of the board of
directors, a corporate officer of the Corporation or any other employee
with claims settlement authority, acting individually or collectively
or in collusion with any individual or corporation or any other
organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
C) The term "Net Retained Liability" shall mean that portion of any Policy
which the Corporation retains net for its own account, however gross of
recoveries from the underlying First Whole Account Aggregate Excess of
Loss Retrocession Agreement (E1), and in calculating the amount of
Ultimate Net Loss hereunder, only loss in respect of that portion of
any Policy which the Corporation retains net for its own account shall
be included.
<PAGE>
DEFINITIONS
(continued)
The amount of the Retrocessionaire's liability under this Agreement
shall not be increased by reason of the inability of the Corporation to
collect from any other Retrocessionaire(s), whether specific or
general, any amounts which may have become due from such
Retrocessionaire(s), whether such inability arises from the insolvency
of such other Retrocessionaire(s) or otherwise.
D) The term "Subject Gross Net Earned Premium Income" or "SGNEPI" shall
mean the Corporation's subject gross premium income written less
premiums paid for cancellations and reductions of rates and for other
reinsurance carried by the Corporation, recoveries under which inure to
the benefit of this Agreement, plus the subject gross net unearned
premium at the beginning of the term, less the subject gross net
unearned premium at the end of the term, said unearned premium being
calculated on a monthly pro rata basis.
E) The term "Catastrophe Losses" shall mean property losses recorded by
the Corporation which involve two or more Policies and total more than
$7,500,000 of incurred loss net of inuring protection(s).
F) The unqualified term "Policy" shall mean all binders, policies,
certificates, agreements, treaties, bonds or contracts of insurance,
reinsurance or retrocession accepted or held covered provisionally or
otherwise underwritten by the Corporation.
G) The term "Original Policy" shall mean the initial binder, policy,
certificate, agreement, bond or contract of insurance that
is subsequently reinsured.
H) The unqualified term "Insured" when used as a noun shall mean the
person who obtained or is otherwise covered by insurance issued by the
Corporation, or the reinsured who obtained reinsurance from the
Corporation, or the retrocedent who obtained retrocession from the
Corporation, as the context so requires.
I) The term "Original Insured" shall mean the entity who obtained or is
otherwise covered by insurance that is subsequently reinsured or
retroceded under this Agreement.
ARTICLE VI
RETROCESSION PREMIUM AND ADJUSTMENT
A minimum and deposit premium of $25,000,000 is due at January 1, 1996. The
retrocession premium shall be an amount equal to 49% of the amount of Ultimate
Net Loss ceded under this Agreement as reported by the Corporation as of
February 1, 1997. The retrocession premium, after deduction of the minimum and
deposit premium previously paid, shall be due at February 15, 1997.
<PAGE>
RETROCESSION PREMIUM AND ADJUSTMENT
(continued)
The Corporation shall pay to the Retrocessionaire $9,500,000 of the minimum and
deposit premium at January 1, 1996. The balance of all premium, including
retrocession premium due February 15, 1997, if any, shall be withheld by the
Corporation in an Experience Account for the purpose of subsequent loss payments
and profit sharing.
ARTICLE VII
EXPERIENCE ACCOUNT BALANCE
The Corporation shall calculate a notional Experience Account Balance at the end
of each quarter year until expiration of all of the Retrocessionaire's
obligations under this Agreement. At January 1, 1996 the Experience Account
Balance shall be zero. The Experience Account Balance thereafter shall equal:
The Experience Account Balance at the
inception of the quarter plus the minimum and
deposit premium, if any, due during the quarter
less $9,500,000 and Federal Excise Tax, if applicable
plus the retrocession premium due hereon, if any, during the quarter
less Federal Excise Tax, if applicable
plus interest credited by applying a rate of 1.875% against the average
positive Experience Account Balance for the quarter, calculated daily
less the Spread paid to the Retrocessionaire for the quarter
less Ultimate Net Loss paid by the Retrocessionaire for the quarter.
"Spread" shall mean the amount equal to the following percentages of the average
positive Experience Account Balance for the quarter during the following
calendar years, respectively:
A) 0.00% during calendar year 1996;
B) 0.25% during calendar years 1997, 1998 and 1999;
C) 0.625% during calendar years 2000, 2001 and 2002; and
D) 1.00% during calendar year 2003 and all calendar years thereafter.
At the option of the Retrocessionaire, the accrued Spread shall be paid to the
Retrocessionaire at the end of any quarter in cash or withheld in the Experience
Account.
<PAGE>
ARTICLE VIII
LOSS SETTLEMENTS
The Corporation shall report quarterly to the Retrocessionaire the development
of the incurred Ultimate Net Loss ceded by a report showing in summary format
the percentage and dollar amount of Ultimate Net Loss for the term, as advised
at February 1, 1997, which has been paid by the Corporation. At such time as the
amount of paid Ultimate Net Loss exceeds the retention under this Agreement, the
Retrocessionaire shall reimburse the Corporation for such paid Ultimate Net Loss
by payment within 30 days of the advice of amounts becoming due. To the extent
the Experience Account is sufficient, the Retrocessionaire may reimburse the
Corporation by consenting to the Corporation retaining for its own account from
the Experience Account the amount of such paid Ultimate Net Loss.
Notwithstanding the above, the Retrocessionaire shall have no obligation to pay
any part of any loss which would cause the Experience Account to be less than
the product of negative 30% and the total premium ceded. Nothing set forth above
shall be construed as prohibiting the Corporation from taking credit for
Ultimate Net Loss ceded as the above is only applicable to cash transactions
under this Agreement.
ARTICLE IX
COMMUTATION AND EXPERIENCE REFUND
This Agreement may be commuted at the Corporation's sole option by giving 90
days advance written notice at any time of its intent to so commute after
expiration of the term.
If at the time of commutation the amount of unpaid Ultimate Net Loss is less
than or equal to the Experience Account Balance, the Retrocessionaire agrees to
pay all unpaid Ultimate Net Loss as of the date of commutation.
If at the time of commutation the amount of unpaid Ultimate Net Loss is greater
than the Experience Account Balance, the unpaid Ultimate Net Loss shall be
commuted at an amount to be mutually agreed. If mutual agreement is not reached,
then no commutation shall be permitted.
In the event that unpaid Ultimate Net Loss is commuted, the Retrocessionaire
agrees to pay an experience refund equal to the positive difference, if any,
between the Experience Account Balance after deduction of the accrued Spread due
the Retrocessionaire, if any, which shall be paid to the Retrocessionaire at
that time, and the commuted value of unpaid Ultimate Net Loss. Such payment of
an experience refund shall be made by the Corporation's retention for its own
account from the Experience Account.
<PAGE>
COMMUTATION AND EXPERIENCE REFUND
(continued)
Payment by the Retrocessionaire of the commuted unpaid Ultimate Net Loss and the
experience refund, if any, shall constitute a complete and final release of the
Retrocessionaire in respect of its obligations under this Agreement.
Any amount due to the Corporation as calculated above shall be payable by the
Retrocessionaire within 30 days following the date of commutation.
ARTICLE X
COMMUTATION APPROVAL ON CORPORATION'S POLICIES
In the event of a commutation of any Policy resulting in the payment of Ultimate
Net Loss in excess of $5,000,000 prior to the time required under the
Corporation's Policies for the term of this Agreement, then the paid Ultimate
Net Loss under this Agreement shall be determined as if such commutation or
other arrangement had not occurred. The analysis to determine both the ultimate
reserve amount and the payout pattern which would have occurred on a commuted
Policy shall, unless waived in writing by the Retrocessionaire, be made on the
basis of an independent reserve analysis. The Retrocessionaire will select a
firm acceptable to the Corporation to conduct the analysis. The Retrocessionaire
shall bear the cost of such analysis and the results of such analysis shall be
binding in determining the ultimate reserve amount and payout pattern for the
commuted reinsurance contract.
ARTICLE XI
EXPIRATION DURING LOSS
(This article applies only to property insurance and reinsurance.)
If this Agreement expires while an occurrence covered hereunder is in progress,
the Retrocessionaire's liability hereunder shall, subject to the other terms and
conditions of this Agreement, be determined as if the entire occurrence had
taken place prior to the expiration of this Agreement, provided that no part of
such occurrence is claimed against any renewal or replacement of this Agreement.
<PAGE>
ARTICLE XII
STOP LOSS (AGGREGATE) INCLUSION
All aggregate Policies coming within the scope of this Agreement shall be
covered on a risks attaching basis rather than on an occurrence basis. An
aggregate Policy issued for a period of more than 12 months shall be considered
as attaching at each anniversary date of such Policy while such Policy is in
force.
ARTICLE XIII
WARRANTY
The Corporation shall not introduce any change in its generally established
practices, including but not limited to accounting, claims, acceptance and
underwriting policies, in respect of the business which is the subject of this
Agreement without the prior approval of the Retrocessionaire, and such approval
shall not be unreasonably withheld by the Retrocessionaire. The Corporation
specifically warrants that it will not change its gross line guide nor inuring
protections without prior advice to and approval from the Retrocessionaire, and
such approval shall not be unreasonably withheld by the Retrocessionaire.
ARTICLE XIV
CURRENCY
All financial transactions contemplated by this Agreement shall be in the
currency of the United States of America.
ARTICLE XV
ACCESS TO RECORDS
At any reasonable time, the Retrocessionaire or its designated representatives
shall have free access to all records of the Corporation which pertain to this
Agreement.
ARTICLE XVI
ERRORS AND OMISSIONS
Any inadvertent delays, omissions or errors shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made, provided such delay, omission or
error is rectified upon discovery, and does not impose any greater liability
upon the other party than would have attached hereunder if the delay, omission
or error had not occurred.
<PAGE>
ARTICLE XVII
TAXES
In consideration of the terms under which this Agreement is entered into, the
Corporation will not claim a deduction in respect of the premium hereon when
making tax returns, other than income or profits tax returns, to any state or
territory of the United States of America, the District of Columbia or Canada,
and the Corporation will be liable for payment of all premium taxes on premium
ceded under this Agreement.
ARTICLE XVIII
OFFSET
The Corporation and the Retrocessionaire shall have the right to offset any
balance(s) due from one to the other under this Agreement. The party asserting
the right of offset may exercise such right any time whether the balance(s) due
are on account of premiums or losses or otherwise. In the event of the
insolvency of a party hereto, offset shall only be allowed in accordance with
the provision of Section 7427 of the Insurance Law of the State of New York.
ARTICLE XIX
INSOLVENCY
In the event of the insolvency of the Corporation, the retrocession under this
Agreement shall be payable directly to the Corporation or to its liquidator,
receiver, conservator or statutory successor on the basis of the liability of
the Corporation without diminution because of the insolvency of the Corporation
or because the liquidator, receiver, conservator or statutory successor of the
Corporation has failed to pay all or a portion of any claim. It is agreed,
however, that the liquidator, receiver, conservator or statutory successor of
the Corporation shall give written notice to the Retrocessionaire of the
pendency of a claim against the Corporation indicating the Policy reinsured
which claim would involve a possible liability on the part of the
Retrocessionaire within a reasonable time after such claim is filed in the
conservation or liquidation proceeding or in the receivership, and that during
the pendency of such claim, the Retrocessionaire may investigate such claim and
interpose, at its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses that it may deem available to the
Corporation or its liquidator, receiver, conservator or statutory successor. The
expense thus incurred by the Retrocessionaire shall be chargeable, subject to
the approval of the Court, against the Corporation as part of the expenses of
conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to the Corporation solely as a result of the defense undertaken
by the Retrocessionaire.
<PAGE>
INSOLVENCY
(continued)
Where two or more Retrocessionaires are involved in the same claim and a
majority in interest elect to interpose defense of such claim, the expense shall
be apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the Corporation.
It is further understood and agreed that, in the event of the insolvency of the
Corporation, the retrocession under this Agreement shall be payable directly by
the Retrocessionaire to the Corporation or to its liquidator, receiver,
conservator or statutory successor, except as provided by Section 4118(a) of the
New York Insurance Law or except (a) where the Agreement specifically provides
another payee of such retrocession in the event of the insolvency of the
Corporation and (b) where the Retrocessionaire with the consent of the direct
Insured or Insureds has assumed such Policy obligations of the Corporation as
direct obligations of the Retrocessionaire to the payees under such Policies and
in substitution for the obligations of the Corporation to such payees.
ARTICLE XX
ARBITRATION
As a condition precedent to any right of action hereunder, any dispute arising
out of this Agreement shall be submitted to the decision of a board of
arbitration composed of two arbitrators and an umpire, meeting in Overland Park,
Kansas, unless otherwise mutually agreed by the Corporation and the
Retrocessionaire.
The members of the board of arbitration shall be active or retired disinterested
officials of insurance or reinsurance companies, or underwriters at Lloyd's,
London. Each party shall appoint its arbitrator and the two arbitrators shall
choose an umpire before instituting the hearing. In the event that either party
should fail to choose an arbitrator within 30 days following a written request
by the other party to enter upon arbitration, the requesting party may choose
two arbitrators who shall in turn choose an umpire before entering upon
arbitration. In the event the two arbitrators fail to agree on an umpire either
party shall have the right to submit the matter to the American Arbitration
Association in effect at that time to name an umpire in accordance with the
qualifications provided hereinabove.
Each party shall present its case to the arbitrators within 60 days following
the date of their appointment. The board shall make its decision with regard to
the custom and usage of the insurance and reinsurance business. The board shall
issue its decision in writing based upon a hearing in which evidence may be
introduced without following strict rules of evidence but in which cross
examination and rebuttal shall be allowed. The board shall make its decision
within 60 days following the termination of the hearings unless the parties
consent to an extension. The majority decision of the board shall be final and
binding upon all parties to the proceeding. Judgment upon the final decision of
the board may be entered in any court of competent jurisdiction.
<PAGE>
ARBITRATION
(continued)
If more than one Retrocessionaire is involved in the same dispute, all such
Retrocessionaires shall constitute and act as one party for purposes of this
Article and communications shall be made by the Corporation to each of the
Retrocessionaires constituting the one party, provided, however, that nothing
shall impair the rights of such Retrocessionaires to assert several, rather than
joint, defenses or claims, nor be construed as changing the liability of the
Retrocessionaires under the terms of this Agreement from several to joint.
Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the expense of the umpire. In the event both
arbitrators are chosen by one party, the expense of the arbitrators and the
umpire shall be jointly and equally borne between the parties. The remaining
costs of the arbitration proceedings shall be allocated by the board.
This Article shall survive the termination of this Agreement.
ARTICLE XXI
NONWAIVER
The failure of the Corporation or the Retrocessionaire to insist on compliance
with this Agreement or to exercise any right or remedy hereunder shall not
constitute a waiver of any rights or remedies contained herein, nor estop either
party from thereafter demanding full and complete compliance nor prevent either
party from exercising such rights or remedies in the future.
ARTICLE XXII
INTERMEDIARY
Bates Turner, Inc. is hereby recognized as the Intermediary negotiating this
Agreement for business hereunder. All communications (including, but not limited
to, notices, statements, premiums, return premiums, commissions, taxes, losses,
loss adjustment expenses, salvages and loss settlements) relating hereto shall
be transmitted to the Corporation or the Retrocessionaire through Bates Turner,
Inc., 5200 Metcalf, P.O. Box 2959, Overland Park, Kansas, 66201. Payments by the
Corporation to the Intermediary shall constitute payment to the Retrocessionaire
to the extent of such payments. Payments by the Retrocessionaire to the
Intermediary shall only constitute payment to the Corporation to the extent that
such payments are actually received by the Corporation.
<PAGE>
ARTICLE XXIII
PARTICIPATION AND SIGNATURES
This Agreement obligates the Retrocessionaire specifically identified below
("Subscribing Retrocessionaire") for 50.00% of the liability and amounts set
forth under this Agreement and the Subscribing Retrocessionaire is entitled to a
corresponding part of the premiums set forth under this Agreement.
The share of the Subscribing Retrocessionaire in the interests and liabilities
of all retrocessionaires in respect of this Agreement shall be separate and
apart from the shares of the other retrocessionaires to this Agreement, and the
interests and liabilities of the Subscribing Retrocessionaire shall be several
and not joint with those of the other retrocessionaires and in no event shall
the Subscribing Retrocessionaire participate in the interests and liabilities of
the other retrocessionaires.
IN WITNESS WHEREOF, the parties hereto by their duly authorized officers have
executed this Agreement in triplicate.
At Overland Park, Kansas, this 19th day of August, 1996.
EMPLOYERS REINSURANCE CORPORATION
By: /s/ Joseph W. Levin
Attest: /s/ Hoyt H. Wood, Jr.
At New York, New York, this 23 day of August,1996.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA
Per AIG Reinsurance Advisors, Inc.
By: /s/ Joseph Umansky - Attorney in fact
Attest: /s/ Robert J. Coords
Exhibit 12
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
(In millions) 1996 1995 1994 1993 1992
--------------------------------------------
Earnings:
<S> <C> <C> <C> <C> <C>
Earnings before income taxes $780 $561 $409 $395 $370
Add: Minority interest in net earnings
of consolidated subsidiaries (1) 84 95 97 92 94
Fixed charges 47 20 3 2 1
---- ---- ---- ---- ----
$911 $676 $509 $489 $465
==== ==== ==== ==== ====
Fixed charges:
Minority interest in net earnings of
consolidated subsidiaries (2) $110 $115 $108 $111 $113
Interest expense 47 20 3 2 1
---- ---- ---- ---- ----
$157 $135 $111 $113 $114
==== ==== ==== ==== ====
Ratio of earnings to fixed charges 5.80 5.01 4.59 4.33 4.08
==== ==== ==== ==== ====
<FN>
(1) Minority interest in net earnings of consolidated subsidiaries includes
earnings from purchased affiliates and dividends on subsidiary's preferred
stock.
(2) The fixed charges amounts for minority interest in net earnings of
consolidated subsidiaries represent the pretax earnings amounts which would
be required to cover such fixed charges as calculated below:
</FN>
</TABLE>
Earnings From Purchased Affiliates or
Subsidiary's Preferred Stock Dividend Requirement
---------------------------------------------------
100% - Income Tax Rate
The income tax rate is based on the relationship of the provision for
income tax expense to earnings before income taxes for the respective
period.
Exhibit 23.1
The Board of Directors
GE Global Insurance Holding Corporation
We consent to incorporation by reference in the registration statement
(No. 33-80193) on Form S-3 of GE Global Insurance Holding Corporation of
our report dated January 17, 1997, relating to the consolidated
statements of financial position of GE Global Insurance Holding
Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, stockholder's equity and
cash flows for the years then ended, and all related schedules, which
report appears in the December 31, 1996, annual report on form 10-K of
GE Global Insurance Holding Corporation.
Also, we consent to incorporation by reference in the registration
statement (No. 33-80193) on Form S-3 of GE Global Insurance Holding
Corporation of our report dated January 21, 1995, with respect to the
combined statements of earnings, stockholder's equity and cash flows of
Employers Reassurance Corporation, Westport Insurance Corporation and
Puritan Excess and Surplus Lines Insurance Company for the year ended
December 31, 1994, which report appears in the December 31, 1996, annual
report on Form 10-K of GE Global Insurance Holding Corporation. Our
report states that the combined financial statements have been prepared
to facilitate the preparation of the consolidated financial statements
of GE Global Insurance Holding Corporation.
KPMG Peat Marwick LLP
Kansas City, Missouri
March 27, 1997
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statement (Form S-3 No. 33-80193) of GE Global Insurance Holding
Corporation and in the related Prospectus of our report dated January 21,
1995, with respect to the consolidated financial statements and
schedules of GE Global Insurance Holding Corporation included in this
Annual Report (Form 10-K) for the year ended December 31, 1996.
Ernst & Young LLP
Kansas City, Missouri
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 13,572
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,303
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 16,479
<CASH> 377
<RECOVER-REINSURE> 2,358
<DEFERRED-ACQUISITION> 495
<TOTAL-ASSETS> 25,388
<POLICY-LOSSES> 13,343
<UNEARNED-PREMIUMS> 1,170
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,836
<NOTES-PAYABLE> 556
0
150
<COMMON> 5
<OTHER-SE> 4,605
<TOTAL-LIABILITY-AND-EQUITY> 25,388
4,648
<INVESTMENT-INCOME> 837
<INVESTMENT-GAINS> 223
<OTHER-INCOME> 43
<BENEFITS> 3,373
<UNDERWRITING-AMORTIZATION> 1,106
<UNDERWRITING-OTHER> 492
<INCOME-PRETAX> 780
<INCOME-TAX> 213
<INCOME-CONTINUING> 567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 567
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 9351
<PROVISION-CURRENT> 2763
<PROVISION-PRIOR> 106
<PAYMENTS-CURRENT> 485
<PAYMENTS-PRIOR> 1990
<RESERVE-CLOSE> 9458
<CUMULATIVE-DEFICIENCY> (159)
</TABLE>
