<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1998
------------------
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 No.)
5200 Metcalf, Overland Park, Kansas 66201
(Address of principal executive offices) (Zip Code)
(913) 676-5200
(Registrant's telephone number, including area code)
---------------
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[ ]
At October 31, 1998, 1,000 shares of common stock with a par value of $5,000
were outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION.
Item 1. Financial Statements..........................................................................................1
Item 2. Management's Discussion and Analysis of Results of Operations.................................................6
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges.............................................................9
PART II - OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K.............................................................................10
Signatures. .............................................................................................................11
Index to Exhibits. .............................................................................................................12
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Condensed, Consolidated Statement of Current and Retained Earnings
(Unaudited)
Three months ended Nine months ended
--------------------------------- ---------------------------------
(In millions) Sept. 26, 1998 Sept. 27, 1997 Sept. 26, 1998 Sept. 27, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues
Net premiums written $1,398 $1,016 $4,238 $3,608
====== ====== ====== ======
Net premiums earned $1,269 $ 996 $3,910 $3,554
Net investment income 250 242 720 677
Net realized gains on investments 158 74 374 262
Other revenues 35 49 96 84
------ ------ ------ ------
Total revenues 1,712 1,361 5,100 4,577
------ ------ ------ ------
Costs and Expenses
Claims, claim expenses and policy benefits 902 729 2,775 2,663
Insurance acquisition costs 329 271 991 823
Other operating costs and expenses 137 123 390 360
Minority interest in net earnings of
consolidated subsidiaries 21 20 64 62
------ ------ ------ ------
Total costs and expenses 1,389 1,143 4,220 3,908
------ ------ ------ ------
Earnings before income taxes 323 218 880 669
Provision for income taxes 95 51 251 189
------ ------ ------ ------
Net earnings 228 167 629 480
Dividends on preferred stock (2) (2) (6) (6)
Retained earnings at beginning of period 4,057 3,554 3,660 3,245
------ ------ ------ ------
Retained earnings at end of period $4,283 $3,719 $4,283 $3,719
====== ====== ====== ======
</TABLE>
See Notes to Condensed, Consolidated Financial Statements.
1
<PAGE>
Item 1. Financial Statements (Continued).
<TABLE>
<CAPTION>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Condensed, Consolidated Statement of Financial Position
(In millions) September 26, 1998 December 31, 1997
------------------ -----------------
(Unaudited)
<S> <C> <C>
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value $14,994 $14,816
Equity securities, at fair value 2,457 2,513
Other invested assets 1,046 1,014
------- -------
Total investments 18,497 18,343
Cash 328 269
Premiums receivable 2,520 2,279
Other receivables 1,260 1,189
Reinsurance recoverables 3,326 2,791
Deferred insurance acquisition costs 1,090 844
Other assets 2,075 1,817
------- -------
Total assets $29,096 $27,532
======= =======
Liabilities and equity
Claims and claim expenses $11,475 $10,961
Accumulated contract values 2,304 2,305
Future policy benefits for life and health contracts 1,708 1,604
Unearned premiums 1,839 1,244
Other reinsurance balances 1,229 1,125
Other liabilities 2,927 3,186
Long-term borrowings 557 556
------- -------
Total liabilities 22,039 20,981
------- -------
Minority interest in equity of consolidated subsidiaries 1,176 1,177
------- -------
Accumulated non-owner changes in equity:
Unrealized gains on investment securities 703 746
Foreign currency translation adjustments (105) (32)
------- -------
Total accumulated non-owner changes in equity 598 714
Common stock 5 5
Preferred stock 150 150
Paid-in capital 845 845
Retained earnings 4,283 3,660
------- -------
Total stockholder's equity 5,881 5,374
------- -------
Total liabilities and equity $29,096 $27,532
======= =======
</TABLE>
See Notes to Condensed, Consolidated Financial Statements.
2
<PAGE>
Item 1. Financial Statements (Continued).
<TABLE>
<CAPTION>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Condensed, Consolidated Statement of Cash Flows
(Unaudited)
Nine months ended
-----------------------------------------
(In millions) September 26, 1998 September 27, 1997
------------------ ------------------
<S> <C> <C>
Cash from operating activities $ 380 $ 494
------- -------
Cash Flows From Investing Activities
Fixed maturity securities available-for-sale:
Purchases (3,479) (4,654)
Sales 2,816 3,556
Maturities 590 511
Equity securities:
Purchases (1,080) (940)
Sales 1,206 794
Net (purchases) sales of short-term investments 81 (169)
Cash paid for acquisitions and in force
reinsurance transactions (143) -
Other investing activities (111) (57)
------- -------
Cash used for investing activities (120) (959)
------- -------
Cash Flows From Financing Activities
Change in contract deposits (328) 505
Net contract accumulation receipts (payments) 6 (1)
Proceeds from short-term borrowings 168 -
Dividends paid (6) (6)
------- -------
Cash from (used for) financing activities (160) 498
------- -------
Effect of exchange rate changes on cash (41) (98)
------- -------
Increase (decrease) in cash 59 (65)
Cash at beginning of period 269 377
------- -------
Cash at end of period $ 328 $ 312
======= =======
</TABLE>
See Notes to Condensed, Consolidated Financial Statements.
3
<PAGE>
Item 1. Financial Statements (Continued).
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
(Unaudited)
1. The accompanying condensed, consolidated quarterly financial statements
represent the adding together of GE Global Insurance Holding Corporation and
its wholly-owned subsidiary, Employers Reinsurance Corporation and its
consolidated subsidiaries (collectively referred to as "the Company"). All
significant intercompany transactions have been eliminated. Certain prior
period data have been reclassified to conform to the current presentation.
2. The condensed, consolidated quarterly financial statements are unaudited.
These statements include all adjustments (consisting of normal recurring
accruals) considered necessary by management to present a fair statement of
the results of operations, financial position and cash flows. The results
reported in these condensed, consolidated quarterly financial statements
should not be regarded as necessarily indicative of results that may be
expected for the entire year.
3. Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, was adopted as of January 1, 1998. This statement requires reporting
of changes in share owners' equity that do not result directly from
transactions with share owners. An analysis of these changes follows:
Three months ended
-----------------------------------------
(In millions) September 26, 1998 September 27, 1997
------------------ ------------------
Net earnings $228 $167
Unrealized gains (losses) on
investment securities (217) 128
Foreign currency translation
adjustments (64) (35)
---- ----
Total $(53) $260
==== ====
Nine months ended
-----------------------------------------
(In millions) September 26, 1998 September 27, 1997
------------------ ------------------
Net earnings $629 $480
Unrealized gains (losses) on
investment securities (43) 234
Foreign currency translation
adjustments (73) (80)
---- ----
Total $513 $634
==== ====
4
<PAGE>
Item 1. Financial Statements (Continued).
4. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This Statement
requires that, upon adoption, all derivative instruments (including certain
derivative instruments embedded in other contracts) be recognized in the
balance sheet at fair value, and that changes in such fair values be
recognized in earnings unless specific hedging criteria are met. Changes in
the values of derivatives that meet these hedging criteria will ultimately
offset related earnings effects of the hedged items; effects of certain
changes in fair value are recorded in other comprehensive income pending
recognition in earnings. The Company will not adopt the Statement until
required to do so on January 1, 2000.
5. On October 15, 1998, the Company completed the acquisition of Medical
Protective Corporation, the oldest medical professional liability insurer of
physicians and dentists in the United States. The cash consideration of $625
million was financed by General Electric Capital Corporation, a wholly-owned
subsidiary of General Electric Company, via an interim loan agreement. The
acquisition will be accounted for as a purchase; accordingly, the purchase
price will be allocated to the underlying assets and liabilities based on
their respective estimated fair values at the date of the acquisition.
On October 27, 1998, the Company completed the acquisition of Kemper
Reinsurance Company, a property and casualty reinsurance company principally
doing business through intermediaries. The cash consideration of $463
million was financed by utilizing existing credit facilities. The
acquisition will be accounted for as a purchase; accordingly, the purchase
price will be allocated to the underlying assets and liabilities based on
their respective estimated fair values at the date of the acquisition.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations.
Overview
Net earnings for the first nine months of 1998 was $629 million, a $149 million
increase over the first nine months of 1997, reflecting growth in underwriting
origination volume, increased investment income due to continued growth in the
investment portfolios and a higher level of net realized gains on investments.
The Company's two primary business segments are property and casualty
insurance/reinsurance and life reinsurance. Business is conducted throughout the
world utilizing the Company's network of local offices. As reflected below, the
continued strengthening of the U.S. dollar during 1998 impacted individual
operating line items, however, the overall impact on net earnings was not
significant.
Property and casualty insurance/reinsurance (P&C) is the larger of the two
business segments. Typically, the underwriting performance of P&C business is
measured in terms of a combined ratio and earnings before income taxes. The
combined ratio is the sum of the loss ratio and the underwriting expense ratio.
For the first nine months of 1998, the P&C combined ratio was 100.0% compared to
105.0% for the same period in 1997. The lower combined ratio primarily reflects
a general reduction in incurred losses caused by a decline in both the frequency
and severity of claims. Earnings before income taxes from P&C operations
increased $236 million in the first nine months of 1998, primarily due to the
decrease in the combined ratio and an increase in net realized gains on
investments.
The life reinsurance segment typically measures performance based on revenues
and earnings before income taxes. Revenues include life insurance premiums, net
investment income, net realized gains on investments and fee income from certain
investment-related products. For the first nine months of 1998, the life
operations generated revenues and earnings before income taxes of $1,085 million
and $96 million, respectively, compared to $1,169 million and $121 million,
respectively, for the same period in 1997. The decrease in both revenues and
earnings before income taxes primarily reflects three significant quota share
reinsurance contracts entered into in 1997 that did not recur in 1998.
Operating Results
Net premiums written increased $630 million or 17% over the first nine months of
1997, primarily attributable to growth in various product lines, including new
P&C business associated with the acquisition of the renewal rights of business
from Industrial Risk Insurers ("IRI") and Coregis Insurance Company ("Coregis").
This increase was partially offset by three significant quota share life
reinsurance contracts obtained in 1997 that did not recur in 1998 and the impact
of foreign currency translation.
Net premiums earned increased $356 million or 10% over the first nine months of
1997, primarily attributable to growth in various product lines, including new
P&C business associated with IRI and Coregis. This increase was partially offset
by three significant quota share life reinsurance contracts obtained in 1997
that did not recur in 1998 and the impact of foreign currency translation. The
resulting change in product mix creates a lower proportion of premiums earned to
premiums written due to the fundamental difference in the earned premium
recognition policies between P&C and life business.
Net investment income increased $43 million or 6% over the first nine months of
1997, primarily attributable to the continued growth in the investment
portfolios, partially offset by the impact of foreign currency translation.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations (cont'd).
Net realized gains on investments increased $112 million or 43% over the first
nine months of 1997, primarily due to restructuring certain investment
portfolios and capitalizing on favorable market conditions that existed in 1998.
Other revenues increased $12 million or 14% over the first nine months of 1997,
primarily attributable to fees generated from investment-related life
reinsurance products and financial reinsurance transactions.
Claims, claim expenses and policy benefits increased $112 million or 4% over the
first nine months of 1997, which is less than the corresponding 10% increase in
net premiums earned discussed above. This condition is primarily due to the
change in product mix related to the decrease in life reinsurance business which
incorporated a high loss ratio and a low commission ratio, coupled with
favorable loss development in certain P&C product lines.
Insurance acquisition costs increased $168 million or 20% over the first nine
months of 1997, which exceeded the 10% increase in net premiums earned discussed
above primarily due to the change in life reinsurance product mix toward higher
commission business. In addition, as discussed above, the 1997 period included a
relatively higher proportion of life reinsurance business which incorporated a
high loss ratio and a low commission ratio.
Other operating costs and expenses increased $30 million or 8% over the first
nine months of 1997. The increase primarily reflects operating costs associated
with the Company's acquisition of the business related to IRI and Coregis,
partially offset by the impact of foreign currency translation.
Provision for income taxes was $251 million for the first nine months of 1998
(an effective tax rate of 28.5%), compared to $189 million for the first nine
months of 1997 (an effective tax rate of 28.3%). The slightly higher effective
tax rate primarily reflects increased taxes on domestic earnings as a result of
less tax-exempt net investment income due to restructuring certain investment
portfolios, mostly offset by decreased taxes on foreign earnings as a result of
additional foreign tax credit capacity attributable to the Company's life
insurance subsidiary's inclusion in the consolidated federal income tax return
of General Electric Company beginning in the fourth quarter of 1997.
Other Matters
Year 2000
The inability of business processes to continue to function correctly after the
beginning of the Year 2000 could have serious adverse effects on companies and
entities throughout the world. The Company has undertaken a global effort to
identify and mitigate Year 2000 issues in its information systems, products and
services, facilities and suppliers as well as to assess the extent to which Year
2000 issues will impact its customers. A Year 2000 leader oversees a
multi-functional remediation project team responsible for applying a Six Sigma
quality approach in four phases: (1) define/measure - identify and inventory
possible sources of Year 2000 issues; (2) analyze - determine the nature and
extent of Year 2000 issues and develop project plans to address those issues;
(3) improve - execute project plans and perform a majority of the testing; and
(4) control - complete testing, continue monitoring readiness and complete
necessary contingency plans. The progress of this program is monitored, and
company-wide reviews with senior management are conducted monthly. Management
plans to have completed the first three phases of the program for a substantial
majority of mission-critical systems by the end of 1998 and to have nearly all
significant information systems, products and services, facilities and suppliers
in the control phase of the program by mid-1999.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations (cont'd).
The scope of the global Year 2000 effort emcompasses many thousands of
applications and computer programs; products and services; facilities and
facilities-related equipment; suppliers; and, customers. Business operations are
also dependent on the Year 2000 readiness of infrastructure suppliers in areas
such as utility, communications, transportation and other services. In this
environment, there will likely be instances of failure that could cause
disruptions in business processes or that could affect customers' ability to
report and pay amounts owed to the Company. The likelihood and effects of
failures in infrastructure systems and in the supply chain cannot be estimated.
However, with respect to operations under its direct control, management does
not expect, in view of its Year 2000 program efforts, the diversity of its
suppliers and customers and the alternative processes which can be utilized,
that occurrences of Year 2000 failures will have a material adverse effect on
the financial position, results of operations or liquidity of the Company.
Total Year 2000 remediation expenditures are expected to be approximately $4
million, of which more than two-thirds is expected to be spent by the end of
1998. Substantially all of the remainder is expected to be spent in 1999. Most
of these costs are not likely to be incremental costs, but rather will represent
the redeployment of existing resources.
The activities involved in the Year 2000 effort necessarily involve estimates
and projections of activities and resources that will be required in the future.
These estimates and projections could change as work progresses.
Subsequent Events
As more fully described in Note 5 of the Notes to Condensed, Consolidated
Financial Statements, on October 15, 1998 and October 27, 1998, the Company
completed the acquisitions of Medical Protective Corporation and Kemper
Reinsurance Company, respectively.
8
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
Exhibit 12. Computation of ratio of earnings to fixed charges
Exhibit 27. Financial Data Schedule (filed electronically only)
b. Reports on Form 8-K.
None.
10
<PAGE>
SIGNATURES
Pursuant to the requirements 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
---------------------------------------
(Registrant)
Date: November 10, 1998 By: /s/ ROBERT J. DELLINGER
-------------------------------------------------
Robert J. Dellinger
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
11
<PAGE>
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Index to Exhibits
Exhibit No. Page
- ----------- ----
12 Computation of ratio of earnings to fixed charges................9
27 Financial Data Schedule (filed electronically only)
12
<PAGE>
EXHIBIT 12
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
Nine months ended September 26, 1998
(Unaudited)
(In millions)
Earnings:
Earnings before income taxes $880
Fixed charges:
Minority interest in net earnings of
consolidated subsidiaries (1) 64
Interest expense (2) 37
----
$981
====
Fixed charges:
Minority interest in net earnings of
consolidated subsidiaries (3) $ 90
Interest expense (2) 37
----
$127
====
Ratio of earnings to fixed charges 7.72
====
(1) Minority interest in net earnings of consolidated subsidiaries includes
dividends on subsidiary's preferred stock.
(2) Interest expense includes an amount for one-third of the rental expense,
which the Company believes is a reasonable approximation of the interest
factor for such rentals.
(3) The fixed charges amount for minority interest in net earnings of
consolidated subsidiaries represents the pretax earnings amount which would
be required to cover such fixed charges as calculated below:
Subsidiary's Preferred Stock Dividend Requirement
-------------------------------------------------
100% - Income Tax Rate
The income tax rate is based on the relationship of the provision for
income taxes to earnings before income taxes for the respective period.
9
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-26-1998
<DEBT-HELD-FOR-SALE> 14,994
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,457
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 18,497
<CASH> 328
<RECOVER-REINSURE> 3,326
<DEFERRED-ACQUISITION> 1,090
<TOTAL-ASSETS> 29,096
<POLICY-LOSSES> 15,487
<UNEARNED-PREMIUMS> 1,839
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,229
<NOTES-PAYABLE> 557
0
150
<COMMON> 5
<OTHER-SE> 5,726
<TOTAL-LIABILITY-AND-EQUITY> 29,096
3,910
<INVESTMENT-INCOME> 720
<INVESTMENT-GAINS> 374
<OTHER-INCOME> 96
<BENEFITS> 2,775
<UNDERWRITING-AMORTIZATION> 991
<UNDERWRITING-OTHER> 390
<INCOME-PRETAX> 880
<INCOME-TAX> 251
<INCOME-CONTINUING> 629
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 629
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
