<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 26, 1999
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OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
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Commission file number 0-27394
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GE Global Insurance Holding Corporation
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(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)
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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 August 10, 1999, 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.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
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<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 Six months ended
------------------------------- -------------------------------
(In millions) June 26, 1999 June 27, 1998 June 26, 1999 June 27, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues
Net premiums written $1,741 $1,396 $3,581 $2,840
====== ====== ====== ======
Net premiums earned $1,722 $1,434 $3,396 $2,641
Net investment income 295 234 573 470
Net realized gains on investments 166 92 336 216
Other revenues 50 33 87 61
------ ------ ------ ------
Total revenues 2,233 1,793 4,392 3,388
------ ------ ------ ------
Costs and Expenses
Claims, claim expenses and policy benefits 1,372 1,025 2,557 1,873
Insurance acquisition costs 428 354 856 662
Other operating costs and expenses 179 126 345 253
Minority interest in net earnings of
consolidated subsidiaries 22 22 44 43
------ ------ ------ ------
Total costs and expenses 2,001 1,527 3,802 2,831
------ ------ ------ ------
Earnings before income taxes 232 266 590 557
Provision for income taxes 58 70 167 156
------ ------ ------ ------
Net earnings 174 196 423 401
Dividends on preferred stock (2) (2) (4) (4)
Retained earnings at beginning of period 4,408 3,863 4,161 3,660
------ ------ ------ ------
Retained earnings at end of period $4,580 $4,057 $4,580 $4,057
====== ====== ====== ======
</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) June 26, 1999 December 31, 1998
------------- -----------------
(Unaudited)
<S> <C> <C>
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value $18,048 $18,161
Equity securities, at fair value 3,101 2,722
Other invested assets 948 1,104
------- -------
Total investments 22,097 21,987
Cash 297 258
Premiums receivable 2,963 2,886
Other receivables 1,571 1,714
Reinsurance recoverables 4,896 3,915
Deferred insurance acquisition costs 1,370 1,203
Other assets 3,222 3,084
------- -------
Total assets $36,416 $35,047
======= =======
Liabilities and equity
Claims and claim expenses $16,887 $15,852
Accumulated contract values 2,181 2,271
Future policy benefits for life and health contracts 1,766 1,664
Unearned premiums 2,385 2,165
Other reinsurance balances 1,749 1,487
Other liabilities 3,347 3,855
Long-term borrowings 956 557
------- -------
Total liabilities 29,271 27,851
------- -------
Minority interest in equity of consolidated subsidiaries 1,179 1,176
------- -------
Accumulated non-owner changes in equity:
Accumulated unrealized gains on investment securities - net 497 932
Accumulated foreign currency translation adjustments (111) (73)
------- -------
Total accumulated non-owner changes in equity 386 859
Preferred stock 150 150
Common stock 5 5
Paid-in capital 845 845
Retained earnings 4,580 4,161
------- -------
Total stockholder's equity 5,966 6,020
------- -------
Total liabilities and equity $36,416 $35,047
======= =======
</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)
Six months ended
-------------------------------
(In millions) June 26, 1999 June 27, 1998
------------- -------------
<S> <C> <C>
Cash from operating activities $ 401 $ 218
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Cash Flows From Investing Activities
Fixed maturity securities available-for-sale:
Purchases (4,206) (2,178)
Sales 3,606 1,720
Maturities 515 379
Equity securities:
Purchases (1,142) (585)
Sales 1,038 676
Net sales of short-term investments 89 251
Cash paid for acquisitions and in force
reinsurance transactions (239) (143)
Other investing activities 69 (9)
------- -------
Cash from (used for) investing activities (270) 111
------- -------
Cash Flows From Financing Activities
Change in contract deposits 45 (367)
Net contract accumulation payments (68) (10)
Proceeds from short-term borrowings 59 15
Principal payments on short-term borrowings (422) -
Proceeds from long-term borrowings 400 -
Dividends paid (4) (4)
------- -------
Cash from (used for) financing activities 10 (366)
------- -------
Effect of exchange rate changes on cash (102) 28
------- -------
Increase (decrease) in cash 39 (9)
Cash at beginning of period 258 269
------- -------
Cash at end of period $ 297 $ 260
======= =======
</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 of
GE Global Insurance Holding Corporation ("GE Global Insurance") include the
accounts and operations, after intercompany eliminations, of GE Global
Insurance and its wholly-owned subsidiaries, Employers Reinsurance
Corporation and GE Reinsurance Corporation (formerly Kemper Reinsurance
Company). GE Global Insurance and its consolidated subsidiaries are
collectively referred to as "the Company."
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. In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (the "Statement"). The
Statement requires that, upon adoption, all derivative instruments
(including certain derivative instruments embedded in other contracts) be
recognized in the balance sheet at fair value, and that changes in such fair
values be recognized in earnings unless specific hedging criteria are met.
Changes in the values of derivatives that meet these hedging criteria will
ultimately offset related earnings effects of the hedged items; effects of
certain changes in fair value are recorded in equity pending recognition in
earnings. In June 1999, the FASB delayed the required effective date of the
new standard to January 1, 2001. The impact of adoption will be determined
by several factors, including the specific hedging instruments in place and
their relationships to hedged items, as well as market conditions.
Management has not estimated the effect of adoption as it believes that such
determination will not be meaningful until closer to the adoption date.
4. Changes in stockholder's equity that did not result directly from
transactions with the share owner were as follows:
Six months ended
-------------------------------
(In millions) June 26, 1999 June 27, 1998
------------- -------------
Net earnings $ 423 $401
Unrealized gains (losses) on
investment securities (435) 174
Foreign currency translation
adjustments (38) (9)
----- ----
Total $ (50) $566
===== ====
4
<PAGE>
Item 1. Financial Statements (Continued).
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements (Continued)
5. The Company's operating segment activity is summarized as follows:
Six months ended
-------------------------------
(In millions) June 26, 1999 June 27, 1998
------------- -------------
Revenues
Property/Casualty $3,585 $2,669
Life 807 719
------ ------
Total revenues $4,392 $3,388
====== ======
Earnings before income taxes
Property/Casualty $ 479 $ 489
Life 111 68
------ ------
Total earnings before income taxes $ 590 $ 557
====== ======
5
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations.
Overview
Net earnings for the first six months of 1999 was $423 million, a $22 million
increase over the first six months of 1998, reflecting increased net investment
income due to continued growth in the investment portfolios and a higher level
of net realized gains on investments, offset by increased frequency and severity
of property losses. These results reflect six months of net earnings for the
Medical Protective Corporation and Kemper Reinsurance Company acquisitions
completed in the fourth quarter of 1998 in addition to approximately four months
of net earnings for the Eagle Star Reinsurance Company Limited acquisition
completed on March 4, 1999.
The Company's two business segments are (1) property and casualty
insurance/reinsurance ("P&C") and (2) life reinsurance. Business is conducted
throughout the world utilizing the Company's network of local offices. Although
the weakening and strengthening of the U.S. dollar during 1999 and 1998,
respectively, had a slight impact on the individual revenue and expense
categories, the overall impact on net earnings was not significant. The
Company's operating segment activity is summarized as follows:
Six months ended
-------------------------------
(In millions) June 26, 1999 June 27, 1998
------------- -------------
Revenues
Property/Casualty $3,585 $2,669
Life 807 719
------ ------
Total revenues $4,392 $3,388
====== ======
Earnings before income taxes
Property/Casualty $ 479 $ 489
Life 111 68
------ ------
Total earnings before income taxes $ 590 $ 557
====== ======
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 six months
of 1999, the P&C combined ratio was 106.1%, compared to 100.0% for the same
period in 1998. The higher combined ratio in 1999 primarily reflects an increase
in both the frequency and severity of property incurred losses. Earnings before
income taxes from P&C operations decreased $10 million or 2% in the first six
months of 1999, primarily attributable to the increase in the combined ratio,
offset by increases in net investment income and net realized gains on
investments.
The life reinsurance segment typically measures performance based on revenues
and earnings before income taxes. Revenues consist of net premiums earned, net
investment income, net realized gains on investments and other revenues,
including fees generated from investment-related life reinsurance products and
financial reinsurance transactions. For the first six months of 1999, the life
operations generated revenues and earnings before income taxes of $807 million
and $111 million, respectively, compared to $719 million and $68 million,
respectively, for the same period in 1998. The increase in both revenues and
earnings before income taxes primarily reflects growth in underwriting
origination volume and increases in net investment income and net realized gains
on investments.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations (Cont'd).
Operating Results
Net premiums written increased $741 million or 26% in 1999, primarily
attributable to growth in various product lines, including new P&C business
associated with acquisitions.
Net premiums earned increased $755 million or 29% in 1999, primarily
attributable to growth in various product lines, including new P&C business
associated with acquisitions.
Net investment income increased $103 million or 22% in 1999, primarily
attributable to acquisitions.
Net realized gains on investments increased $120 million or 56% in 1999,
primarily attributable to capitalizing on favorable market conditions and
restructuring certain investment portfolios.
Other revenues increased $26 million or 43% in 1999, primarily attributable to
acquisitions and increases in revenues generated from investment-related life
reinsurance products and financial reinsurance transactions.
Claims, claim expenses and policy benefits increased $684 million or 37% in
1999, primarily attributable to the corresponding 29% increase in net premiums
earned discussed above and the higher loss ratio caused by an increase in
property incurred losses.
Insurance acquisition costs increased $194 million or 29% in 1999, which is
consistent with the corresponding 29% increase in net premiums earned discussed
above.
Other operating costs and expenses increased $93 million or 31% in 1999,
primarily attributable to the operating costs associated with acquisitions.
Provision for income taxes was $167 million for the first six months of 1999 (an
effective tax rate of 28.3%), compared to $156 million for the first six months
of 1998 (an effective tax rate of 28.0%). The slightly higher effective tax rate
in 1999 primarily reflects increased taxes on foreign earnings as a result of a
reduction in foreign tax credit availability, substantially offset by a one-time
reduction in foreign deferred income taxes resulting from a tax reorganization
completed in the second quarter of 1999.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations (Cont'd).
Other Matters
Year 2000
As discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, the Company, in conjunction with GE Company and GE Capital
Services, is applying a Six Sigma quality approach 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 affect
its customers. Each business within the GE Company structure has a Year 2000
leader who oversees a multi-functional project team responsible for remediation
and contingency planning, 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. As of the end of
June 1999, virtually all significant information systems, products and services,
facilities and suppliers were in the control phase. As a final step in the
control phase, the Company, in conjunction with GE Company and GE Capital
Services, is developing, testing and implementing contingency plans to
ameliorate any potential internal or external disruption of critical business
processes. The specific actions identified in such contingency plans differ
depending on circumstances, but most often include manual work-arounds,
deployment of backup or secondary technologies, rearranging work schedules and
substitution of suppliers, as appropriate. While the Company does not expect
significant disruptions of critical business processes caused by internal Year
2000 issues, the likelihood of externally-caused disruptions and the ability of
the contingency plans to ameliorate the effects of any such externally-caused
disruptions is not determinable. The total estimate of Year 2000 expenditures,
adjusted for increases related to acquired companies, is in line with previous
projections. The activities related to Year 2000 efforts 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.
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: August 10, 1999 By: /s/ ROBERT J. DELLINGER
-------------------------------------------------
Robert J. Dellinger
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 10, 1999 By: /s/ TAMMIE A. WAHAUS
-------------------------------------------------
Tammie A. Wahaus
Second Vice President and Controller
(Principal 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
Six months ended June 26, 1999
(Unaudited)
(In millions)
Earnings:
Earnings before income taxes $590
Fixed charges:
Minority interest in net earnings of
consolidated subsidiaries (1) 44
Interest expense (2) 53
----
$687
====
Fixed charges:
Minority interest in net earnings of
consolidated subsidiaries (3) $ 61
Interest expense (2) 53
----
$114
====
Ratio of earnings to fixed charges 6.03
====
(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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-26-1999
<DEBT-HELD-FOR-SALE> 18,048
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,101
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 22,097
<CASH> 297
<RECOVER-REINSURE> 4,896
<DEFERRED-ACQUISITION> 1,370
<TOTAL-ASSETS> 36,416
<POLICY-LOSSES> 20,834
<UNEARNED-PREMIUMS> 2,385
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,749
<NOTES-PAYABLE> 956
0
150
<COMMON> 5
<OTHER-SE> 5,811
<TOTAL-LIABILITY-AND-EQUITY> 36,416
3,396
<INVESTMENT-INCOME> 573
<INVESTMENT-GAINS> 336
<OTHER-INCOME> 87
<BENEFITS> 2,557
<UNDERWRITING-AMORTIZATION> 856
<UNDERWRITING-OTHER> 345
<INCOME-PRETAX> 590
<INCOME-TAX> 167
<INCOME-CONTINUING> 423
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 423
<EPS-BASIC> 0
<EPS-DILUTED> 0
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<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
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</TABLE>
