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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 29, 2002
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------ SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-23375
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GE Financial Assurance Holdings, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 54-1829180
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6604 West Broad Street, Richmond, Virginia 23230
(Address of principal executive offices) (Zip Code)
(804) 281-6000
(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 July 31, 2002, 1,000 shares of common stock with a par value of $1.00 were
outstanding. The common stock of GE Financial Assurance Holdings, Inc. is not
publicly traded.
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.
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION.
Item 1. Financial Statements................................. 1
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition................... 9
PART II - OTHER INFORMATION.
Item 1. Legal Proceedings.................................... 12
Item 6. Exhibits and Reports on Form 8-K..................... 12
Signatures......................................................... 13
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Condensed, Consolidated Statements of Current and Retained Earnings
(Dollar amounts in millions)
(Unaudited)
Three Months Ended Six Months Ended
--------------------- --------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Revenues:
Premiums $1,618 $1,690 $3,174 $3,230
Net investment income 1,088 1,037 2,140 2,061
Surrender fee income 55 92 102 198
Net realized investment gains/(losses) (211) 99 (57) 244
Policy fees and other income 179 217 396 441
------ ------ ------ ------
Total revenues 2,729 3,135 5,755 6,174
------ ------ ------ ------
Benefits and expenses:
Benefits and other changes in policy reserves 1,383 1,479 2,761 2,855
General expenses 731 758 1,473 1,534
Interest credited 429 405 850 811
Amortization of intangibles 64 162 133 253
Change in deferred acquisition costs, net (208) (214) (388) (401)
Interest expense 37 35 67 78
------ ------ ------ ------
Total benefits and expenses 2,436 2,625 4,896 5,130
------ ------ ------ ------
Earnings before income taxes, minority interest and
cumulative effect of accounting changes 293 510 859 1,044
Provision for income taxes 63 172 253 354
------ ------ ------ ------
Earnings before minority interest and cumulative effect
of accounting changes 230 338 606 690
Minority interest 1 2 3 3
------ ------ ------ ------
Earnings before cumulative effect of accounting changes 229 336 603 687
Cumulative effect of accounting changes, net of tax --- --- (380) (15)
------ ------ ------ ------
Net earnings 229 336 223 672
Retained earnings at beginning of period 6,289 5,356 6,295 5,020
------ ------ ------ ------
Retained earnings at end of period $6,518 $5,692 $6,518 $5,692
====== ====== ====== ======
See Notes to Condensed, Consolidated Financial Statements.
1
Item 1. Financial Statements (Continued).
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Condensed, Consolidated Statements of Financial Position
(Dollar amounts in millions)
(Unaudited)
June 29, December 31,
2002 2001
-------- ------------
Assets
Investments:
Fixed maturities available-for-sale, at fair value $ 66,760 $60,968
Equity securities available-for-sale, at fair value 1,045 1,078
Mortgage and other loans, net of valuation allowance 6,759 6,055
Policy loans 1,316 1,151
Short-term investments 141 389
Other invested assets 1,333 1,345
-------- -------
Total investments 77,354 70,986
Cash and cash equivalents 4,017 1,741
Accrued investment income 1,381 1,384
Deferred acquisition costs 4,423 4,265
Goodwill 2,268 2,421
Other intangibles 2,346 2,410
Reinsurance recoverable 2,117 1,950
Other assets 2,596 2,609
Separate account assets 8,355 9,172
-------- -------
Total assets $104,857 $96,938
======== =======
Liabilities and Shareholder's Interest
Liabilities:
Future annuity and contract benefits 69,789 62,247
Liability for policy and contract claims 2,826 2,887
Other policyholder liabilities 1,580 1,144
Other liabilities 5,140 5,539
Short-term borrowings 2,283 1,798
Separate account liabilities 8,355 9,172
Long-term debt 1,160 1,143
-------- -------
Total liabilities 91,133 83,930
-------- -------
Minority interest in and equity of consolidated subsidiaries 255 253
Shareholder's interest:
Net unrealized investment gains/(losses) 125 (297)
Derivatives qualifying as hedges (83) (168)
Foreign currency translation adjustments (44) (28)
-------- -------
Accumulated non-owner changes in equity (2) (493)
Common stock --- ---
Additional paid-in capital 6,953 6,953
Retained earnings 6,518 6,295
-------- -------
Total shareholder's interest 13,469 12,755
-------- -------
Total liabilities and shareholder's interest $104,857 $96,938
======== =======
See Notes to Condensed, Consolidated Financial Statements.
2
Item 1. Financial Statements (Continued).
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Condensed, Consolidated Statements of Cash Flows
(Dollar amounts in millions)
(Unaudited)
Six Months Ended
----------------------
June 29, June 30,
2002 2001
-------- --------
Cash Flows From Operating Activities
Net earnings $ 223 $ 672
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Change in reserves 1,619 1,785
Cumulative effect of accounting changes, net of tax 380 15
Other - net (238) (717)
-------- --------
Net cash provided by operating activities 1,984 1,755
-------- --------
Cash Flows From Investing Activities
Short term investment activity, net 248 611
Proceeds from sales, securitizations and maturities of investment
securities and other invested assets 9,518 9,913
Principal collected on and securitizations of mortgage and
policy loans 498 1,661
Purchases of investment securities and other invested assets (13,704) (13,705)
Mortgage and policy loan originations (576) (509)
-------- --------
Net cash used in investing activities (4,016) (2,029)
-------- --------
Cash Flows From Financing Activities
Proceeds from issuance of investment contracts 5,372 3,567
Redemption and benefit payments on investment contracts (3,797) (2,837)
Net commercial paper borrowings (repayments) 197 (585)
Proceeds from other short-term borrowings 1,131 1,583
Payments on other short-term borrowings (843) (997)
Cash received from acquisition of Saison Life Insurance Company
Limited 2,406 ---
-------- --------
Net cash provided by financing activities 4,466 731
-------- --------
Effect of Exchange Rate Changes on Cash (158) 65
-------- --------
Increase in Cash and Equivalents 2,276 522
Cash and Equivalents at Beginning of Period 1,741 1,163
-------- --------
Cash and Equivalents at End of Period $ 4,017 $ 1,685
======== ========
See Notes to Condensed, Consolidated Financial Statements.
3
Item 1. Financial Statements (Continued).
GE FINANCIAL ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
(Dollar amounts in millions)
(Unaudited)
1. The accompanying condensed, consolidated quarterly financial statements
represent the consolidation of GE Financial Assurance Holdings, Inc. and
its subsidiaries (collectively "the Company"). All significant intercompany
transactions have been eliminated.
2. These financial statements have been prepared on the basis of accounting
principles generally accepted in the United States of America ("U.S.
GAAP"). The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the
reported amounts and related disclosures. Actual results could differ from
those estimates. Certain prior year amounts have been reclassified to
conform to the current year presentation.
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 financial statements should not
be regarded as necessarily indicative of results that may be expected for
the entire year. The condensed, consolidated financial statements included
herein should be read in conjunction with the audited consolidated
financial statements and related notes contained in the Company's annual
report on Form 10-K for the fiscal year ended December 31, 2001.
3. A summary of changes in shareholder's interest that do not result directly
from transactions with the shareholder follows:
Three Months Ended
------------------------------
June 29, 2002 June 30, 2001
------------- -------------
Net earnings $ 229 $ 336
Unrealized gains (losses) on investment securities - net
changes in value 742 (600)
Foreign currency translation adjustments 40 28
Derivatives qualifying as hedges - net changes in value (124) 180
----- -----
Total $ 887 $ (56)
===== =====
Six Months Ended
-------------------------------
June 29, 2002 June 30, 2001
-------------- --------------
Net earnings $223 $ 672
Unrealized gains on investment securities - net changes
in value 422 159
Foreign currency translation adjustments (16) (40)
Derivatives qualifying as hedges - net changes in value 85 250
Cumulative effect on shareholder's interest of adopting
SFAS 133 -- (351)
---- -----
Total $714 $ 690
==== =====
4. Effective January 1, 2002, the Company redefined its operating segments. As
a result, the Company now reports four operating segments: (1) Wealth
Accumulation and Transfer, comprised of products intended to increase the
policyholder's wealth, transfer wealth to beneficiaries or provide a means
for replacing the income of the insured in the event of premature death,
(2) Lifestyle Protection and Enhancement, comprised of products intended to
protect accumulated wealth and income from the financial drain of
unforeseen events and provide income protection packages, (3) Mortgage
Insurance, comprised of products intended to protect mortgage lenders
against losses caused by mortgage defaults, and (4) Auto and Home
Insurance, comprised of products intended to protect against damage to
property or injury to the insured or third parties.
4
For comparative purposes, the information presented below for the periods
ended June 30, 2001 has been reclassified to reflect the Company's
redefined operating segments and adjusted to reflect the elimination of
goodwill amortization as discussed in Note 5.
The following is a summary of operating segment activity:
Three Months Ended
------------------------------
June 29, 2002 June 30, 2001
------------------------------
Revenues
Wealth Accumulation and Transfer $1,561 $1,964
Lifestyle Protection and Enhancement 823 786
Mortgage Insurance 186 219
Auto and Home Insurance 159 166
------ ------
Total revenues $2,729 $3,135
====== ======
Earnings before income taxes, minority interest and cumulative
effect of accounting changes
Wealth Accumulation and Transfer $ 33 $ 293
Lifestyle Protection and Enhancement 72 65
Mortgage Insurance 168 157
Auto and Home Insurance 20 23
------ ------
Total earnings before income taxes, minority interest
and cumulative effect of accounting changes $ 293 $ 538
====== ======
Six Months Ended
-----------------------------
June 29, 2002 June 30, 2001
------------- -------------
Revenues
Wealth Accumulation and Transfer $3,399 $3,813
Lifestyle Protection and Enhancement 1,643 1,577
Mortgage Insurance 400 450
Auto and Home Insurance 313 334
------ ------
Total revenues $5,755 $6,174
====== ======
Earnings before income taxes, minority interest and cumulative
effect of accounting changes
Wealth Accumulation and Transfer $ 343 $ 597
Lifestyle Protection and Enhancement 159 133
Mortgage Insurance 320 333
Auto and Home Insurance 37 37
------ ------
Total earnings before income taxes, minority interest
and cumulative effect of accounting changes $ 859 $1,100
====== ======
5
The following is a summary of assets by operating segment as of June 29,
2002 and December 31, 2001:
June 29, December 31,
2002 2001
-------- ------------
Assets
Wealth Accumulation and Transfer $ 87,393 $79,672
Lifestyle Protection and Enhancement 10,534 10,305
Mortgage Insurance 5,253 4,777
Auto and Home Insurance 1,677 2,184
-------- -------
Total assets $104,857 $96,938
======== =======
5. The Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards (SFAS) 142, "Goodwill and Other Intangible Assets",
generally became effective on January 1, 2002. Under SFAS 142, goodwill is
no longer amortized but is tested for impairment using a fair value
methodology.
The Company ceased amortizing goodwill effective January 1, 2002.
Simultaneously, to maintain a consistent basis for its measurement of
performance, management revised previously reported segment information to
correspond to the earnings measurements by which businesses were to be
evaluated. Goodwill amortization expense for the quarter and the first six
months ended June 30, 2001, was $28 million ($22 million after tax) and $56
million ($43 million after tax), respectively. The effect on earnings of
excluding such goodwill amortization from the second quarter and the first
six months of 2001 follow:
Three Months Ended
-----------------------------
June 29, 2002 June 30, 2001
------------- ------------
Earnings before cumulative effect of accounting changes $229 $336
---- ----
Earnings before cumulative effect of accounting changes
excluding 2001 goodwill amortization $229 $358
---- ----
Net earnings $229 $336
---- ----
Net earnings, excluding 2001 goodwill amortization $229 $358
---- ----
Six Months Ended
-----------------------------
June 29, 2002 June 30, 2001
------------- -------------
Earnings before cumulative effect of accounting changes $603 $687
---- ----
Earnings before cumulative effect of accounting changes
excluding 2001 goodwill amortization $603 $730
---- ----
Net earnings $223 $672
---- ----
Net earnings, excluding 2001 goodwill amortization $223 $715
---- ----
Under SFAS 142, the Company was required to test all existing goodwill for
impairment as of January 1, 2002, on a "reporting unit" basis. A reporting
unit is an operating segment unless, at businesses one level below that
operating segment (the "component" level), discrete financial information
is prepared and regularly reviewed by management, in which case the
component is the reporting unit.
A fair value approach is used to test goodwill for impairment. An
impairment charge is recognized for the amount, if any, by which the
carrying amount of goodwill exceeds its fair value. Fair values were
established using discounted cash flows. When available and as appropriate,
comparative market multiples were used to corroborate discounted cash flow
results.
6
The result of testing goodwill of the Company for impairment in accordance
with SFAS 142, as of January 1, 2002, was a non-cash charge of $539 million
($380 million after tax), which is reported in the caption "Cumulative
effect of accounting changes, net of tax". All of the charges relate to the
Auto and Home Insurance segment. The primary factor resulting in the
impairment charge was increased price competition in the auto insurance
industry. No impairment charge was appropriate under the FASB's previous
goodwill impairment standard, which was based on undiscounted cash flows.
Intangibles Subject to Amortization
At June 29, 2002 At December 31, 2001
------------------------------- -------------------------------
Gross Accumulated Gross Accumulated
Carrying Amount Amortization Carrying Amount Amortization
--------------- ------------ --------------- ------------
Present Value of Future Profits ("PVFP") $5,326 $(3,253) $5,148 $(3,137)
Capitalized software 230 (81) 217 (70)
All other 272 (148) 463 (211)
------ ------- ------ -------
Total $5,828 $(3,482) $5,828 $(3,418)
====== ======= ====== =======
Amortization expense related to intangible assets, excluding goodwill, for
the second quarter of 2002 and 2001 was $64 million and $134 million,
respectively, and for the first six months of 2002 and 2001 was $133
million and $198 million, respectively. The estimated percentage of the
December 31, 2001 net PVFP balance before the effect of unrealized
investment gains or losses, to be amortized over each of the next five
years, is as follows:
2002 13.5%
2003 10.8%
2004 9.0%
2005 7.6%
2006 6.3%
Amortization expense for PVFP in future periods will be affected by
acquisitions, realized capital gains/losses or other factors affecting the
ultimate amount of gross profits realized from certain lines of business.
Similarly, future amortization expense for other intangibles will depend on
future acquisitions, dispositions and other business transactions.
Goodwill
--------
Lifestyle
Wealth Protection Auto &
Accumulation and Home Mortgage
and Transfer Enhancement Insurance Insurance Total
-----------------------------------------------------------
Balance, December 31, 2001 $1,169 $690 $539 $23 $2,421
Acquisitions 278 20 --- --- 298
Transition Impaired (pre-tax) --- --- (539) --- (539)
All other (a) 10 78 --- --- 88
-----------------------------------------------------------
Balance, June 29, 2002 $1,457 $788 $--- $23 $2,268
-----------------------------------------------------------
(a) Other adjustments include the reclassification of certain intangible
assets into goodwill upon the adoption of SFAS 142 and the impact of
foreign exchange translation adjustments.
7
6. At January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended. Under SFAS 133,
all derivative instruments are recognized in the statement of financial
position at their fair values. The cumulative effect of adopting this
standard was a one-time reduction to net earnings in the first quarter of
2001 amounting to $15 million and comprised a portion of the effect of
marking to market options and currency contracts used for hedging.
7. On April 1, 2002, GE Edison Life Insurance Company acquired Saison Life
Insurance Company Limited from Credit Saison Co., Ltd, Saison Group, Ltd.
and its other shareholders for 12.8 billion yen, or approximately $100
million. On the date of the acquisition, Saison Life had approximately $4.3
billion of assets, including $2.4 billion of cash, $1.3 billion of
investments, $0.2 billion of goodwill, $0.3 billion of other intangibles
and $4.3 billion of liabilities and equity. The Company has reflected its
initial allocation of purchase price based on the estimated fair values
according to preliminary valuations. Such estimated values may change as
additional information is obtained and the valuation is finalized.
8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
THREE MONTHS ENDED JUNE 29, 2002 COMPARED WITH THE THREE MONTHS ENDED
JUNE 30, 2001
Overview
Net earnings for the three month period ended June 29, 2002 was $229 million, a
$107 million, or 31.9%, decrease from the three month period ended June 30,
2001. Excluding the effect of losses incurred in the Company's investment
portfolio, results for the second quarter of 2002 were relatively unchanged from
the comparable period in 2001. Lower premium levels in the second quarter of
2002 were more than offset by lower benefits and general expenses and lower
expenses related to amortization of intangibles. However, the Company
experienced net losses in its investment portfolio (including an approximate
$167 million ($110 million net of tax) impairment on securities issued by
WorldCom, Inc. and its affiliates) compared to a net gain position in the
comparable 2001 period, resulting in an overall decrease in earnings.
Operating Results
Premiums decreased $72 million, or 4.3%, to $1,618 million for the three month
period ended June 29, 2002 from $1,690 million for the three month period ended
June 30, 2001. The decrease is primarily a result of a decline in new sales of
certain of the Company's annuity contracts offset in part by higher renewal
premiums generated by the Company's growing block of long term care and term
life insurance policies. The acquisition of Saison Life contributed
approximately $79 million of premium in the second quarter of 2002.
Net investment income increased $51 million, or 4.9%, to $1,088 million for the
three month period ended June 29, 2002 from $1,037 million for the three month
period ended June 30, 2001. The increase was primarily attributable to higher
levels of average invested assets ($76.8 billion for the three month period
ended June 29, 2002 vs. $67.9 billion for the three month period ended June 30,
2001). This increase was partially offset by a decrease in weighted average
yields to 5.45% for the three month period ended June 29, 2002 from 5.95% for
the three month period ended June 30, 2001 due to the overall declining interest
rate environment.
Surrender fee income decreased $37 million to $55 million for the three month
period ended June 29, 2002 from $92 million for the period ended June 30, 2001.
The decrease primarily resulted from lower surrender fee income from the
continued decline in the expected number of surrenders of policies assumed as
part of the comprehensive transfer of assets and liabilities of Toho Mutual Life
Insurance Company to GE Edison Life Insurance Company (the "Toho Transfer").
Net realized investment gains/(losses) decreased $310 million to a loss of
$(211) million for the three month period ended June 29, 2002. Investment gains
are comprised of gross investment gains and gross investment (losses). For the
three month period ended June 29, 2002, gross gains and (losses) were $219
million and $(430) million, respectively. For the three month period ended June
30, 2001, gross gains and (losses) were $160 million and $(61) million,
respectively. The realized losses in the second quarter of 2002 includes the
Company's portfolio losses on securities issued by WorldCom, Inc. and its
affiliates of $167 million ($110 million net of tax). The Company's remaining
exposure to WorldCom, Inc. is $42 million. In the comparable 2001 period,
realized gains included $59 million from the securitization of certain financial
assets.
Policy fees and other income decreased $38 million, or 17.5%, to $179 million
for the three month period ended June 29, 2002 from $217 million for the three
month period ended June 30, 2001. Other income is principally comprised of
insurance charges made against universal life contracts, revenues from sales of
income protection packages, fees assessed against policyholder account values,
other fee income, and commission income. The decrease in the three month period
ended June 29, 2002 was primarily attributable to lower fees earned on variable
annuity and interest sensitive life products, reflecting a decline in the market
values of assets underlying the contracts, and a decline in club membership
revenues.
Benefits and other changes in policy reserves includes both activity related to
future policy benefits on long-duration life and health insurance products as
well as claim costs incurred during the year under these contracts and mortgage
insurance and property and casualty products. These amounts decreased $96
million, or 6.5%, to $1,383 million for the three month period ended June 29,
2002 from $1,479 million for the three month period ended June 30, 2001. The
decrease primarily relates to the lower level of reserves required to be
established as a result of the decline in new sales of certain of the Company's
annuity contracts and favorable development on mortgage insurance prior year
loss reserves. These amounts were offset in part by an increase in benefits and
reserves for long term care and term life policies as a result of the continued
growth in these blocks of business. In addition, the acquisition of Saison Life
increased benefits and policy reserves in the second quarter of 2002 by
approximately $68 million.
9
Interest credited increased $24 million, or 5.9%, to $429 million for the three
month period ended June 29, 2002 from $405 million for the three month period
ended June 30, 2001. This increase was a result of an increase in contract
liabilities subject to interest crediting arising primarily from sales of
deferred annuities and certain universal life insurance products offset in part
by a decline in Guaranteed Investment Contracts ("GICs") and funding agreement.
Amortization of intangibles decreased $98 million, or 60.5%, to $64 million for
the three month period ended June 29, 2002 from $162 million for the three month
period ended June 30, 2001. The Company's significant intangible assets consist
of two components which result from acquisition activities - the present value
of future profits ("PVFP"), representing the estimated future gross profit in
acquired insurance and annuity contracts, and goodwill, representing the excess
of purchase price over the fair value of identified net assets of the acquired
entities. Other intangibles subject to amortization include software and
licenses. Amortization of intangibles decreased primarily from the run off of
insurance policies assumed in the Toho Transfer and the amortization expense
related to goodwill, as in accordance with SFAS 142 the Company ceased
amortizing goodwill effective January, 1, 2002.
Provision for income taxes decreased $109 million or 63.4% to $63 million for
the three month period ended June 29, 2002 from $172 million for the comparable
period ended June 30, 2001. The Company's effective tax rate of 21.5% for the
three month period ended June 29, 2002 was 12.2 percentage points lower than the
effective tax rate of 33.7% for the comparable period ended June 30, 2001. The
decrease in the effective tax rate is attributable to the tax impact in 2002 of
discontinued amortization of tax-deductible goodwill and the reduction of
certain deferred tax liabilities.
SIX MONTHS ENDED JUNE 29, 2002 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2001
Overview
Earnings before cumulative effect of accounting changes for the first six months
of 2002 were $603 million, an $84 million, or 12.2%, decrease from the first six
months of 2001. Excluding the losses incurred in the Company's investment
portfolio, the Company's results for the first six months of 2002 were
relatively unchanged from the comparable period in 2001. The decrease in the
Company's premiums, surrender fee income and policy fees and other income was
more than offset by lower benefits and general expenses and lower expenses
related to the amortization of intangibles. However, the Company experienced net
losses in its investment portfolio (including an approximate $167 million ($110
million net of tax) impairment on securities issued by WorldCom, Inc. and its
affiliates) compared to a net gain position in the comparable 2001 period
resulting in an overall decrease in earnings. Net earnings for the first six
months of 2002 were $223 million, a $449 million decrease from the first six
months of 2001. Of this decrease, $380 million was attributable to the
cumulative effect of accounting changes.
Operating Results
Premiums decreased $56 million, or 1.7%, to $3,174 million for the first six
months of 2002 from $3,230 million for the first six months of 2001. The
decrease is a result of a decline in new sales of certain of the Company's
annuity contracts offset in part by higher renewal premiums from the Company's
growing block of long term care and term life insurance policies. The
acquisition of Saison Life contributed approximately $79 million of premium in
the first six months of 2002.
Net investment income increased $79 million, or 3.8%, to $2,140 million for the
first six months of 2002 from $2,061 million for the first six months of 2001.
The increase was primarily attributable to higher levels of average invested
assets ($75.4 billion in first six months of 2002 vs. $67.4 billion in first six
months of 2001). This increase was partially offset by a decrease in weighted
average yields to 5.57% for the first six months of 2002 from 6.00% for the
first six months of 2001 due to the overall declining interest rate environment.
Surrender fee income decreased $96 million to $102 million for the first six
months of 2002 from $198 million in the first six months of 2001. The decrease
primarily resulted from lower surrender fee income from the continued decline in
the expected number of surrenders of the policies assumed as part of the Toho
Transfer.
Net realized investment gains/(losses) decreased $301 million to a loss of $(57)
million for the first six months of 2002. Investment gains are comprised of
gross investment gains and gross investment (losses). For the first six months
of 2002, gross gains and (losses) were $530 million and $(587) million,
respectively. For the first six months of 2001, gross gains and (losses) were
$387 million and $(143) million, respectively. The realized losses in 2002
includes the Company's portfolio losses on securities issued by WorldCom, Inc.
and its affiliates of $167 million ($110 million net of tax). The Company's
remaining exposure to WorldCom, Inc. is $42 million. These portfolio losses are
partially offset by realized gains on the securitization of certain financial
assets of $29 million and a gain on certain real estate held for investment of
$24 million. In 2001, realized gains included $59 million from the
securitization of certain financial assets.
Provision for income taxes decreased $101 million or 28.5% to $253 million
for the first six months of 2002 from $354 million for the comparable period
in 2001. The Company's effective tax rate of 29.5% for the first six months
of 2002 was 4.4 percentage points lower than the effective tax rate of 33.9%
for the comparable period in 2001. The decrease in the effective tax rate is
attributable to the tax impact in 2002 of discontinued amortization of
tax-deductible goodwill and the reduction of certain deferred tax liabilities.
10
Policy fees and other income decreased $45 million, or 10.2%, to $396 million in
the first six months of 2002 from $441 million in the first six months of 2001.
The decrease in the first six months of 2002 was primarily attributable to a
decline in club membership revenue and lower fees earned on variable annuity
contracts, reflecting a decline in the market values of the assets underlying
the contracts.
Interest credited increased $39 million, or 4.8%, to $850 million in the first
six months of 2002 from $811 million in the first six months of 2001. This
increase was a result of the increase in the contract liabilities subject to
interest crediting arising primarily from sales of deferred annuities and
certain universal life insurance products offset in part by a decline in GIC and
funding agreement.
Amortization of intangibles decreased $120 million, or 47.4%, to $133 million
for the first six months of 2002 from $253 million for the first six months of
2001. Amortization of intangibles decreased primarily from the amortization
expense related to goodwill, as in accordance with SFAS 142 the Company ceased
amortizing goodwill effective January, 1, 2002. A decrease also resulted from
the run off of the insurance policies assumed in the Toho Transfer.
Interest expense decreased $11 million, or 14.1%, to $67 million for the first
six months of 2002 from $78 million for the first six months of 2001. The
decrease is a result of reduced interest rates partially offset by an increase
in debt outstanding.
Financial Condition
Total assets increased $7.9 billion, or 8.2%, at June 29, 2002 from December 31,
2001. Total investments increased $6.4 billion or 9.0%. This increase is
primarily due to the acquisition of Saison Life Insurance Company Limited and
net purchases of securities driven by operating cash flows and net investment
income. Assets other than investments increased $1.5 billion. This increase was
primarily the result of cash received from the acquisition of Saison offset by
the reduction in separate account assets.
Total liabilities increased $7.2 billion, or 8.6%, at June 29, 2002 from
December 31, 2001. Future annuity and contract benefits increased approximately
$7.5 billion, or 12.1%, at June 29, 2002 from December 31, 2001. This increase
resulted primarily from the acquisition of Saison Life Insurance Company Limited
and the growth in the Company's life insurance and fixed annuity products.
Portfolio Quality
The Company principally invests in investment grade debt and equity securities.
The aggregate value of the Company's investments was $67.8 billion, including
gross unrealized gains and (losses) of $1.7 billion and $(1.2) billion,
respectively, at June 29, 2002 as compared to $62.0 billion, including gross
unrealized gains and (losses) of $1.4 billion and $(1.8) billion, respectively,
as of December 31, 2001. The Company regularly reviews the investment securities
in its portfolio for impairment based on criteria that include the extent to
which cost exceeds market value, the duration of that market decline and the
financial health and specific prospects for the issuer. Of those securities
whose carrying amount exceeds fair value at June 29, 2002, and based upon
application of the Company's accounting policy for impairment, approximately
$366 million of portfolio value is at risk of being charged to earnings in the
second half of 2002. Impairment losses recognized for the first six months of
2002 were $308 million, including $218 million ($144 million net of tax) from
the telecommunications and cable industries, of which $167 million ($110 million
net of tax) was recognized in the second quarter of 2002 due to the events
relating to WorldCom, Inc.
In recent periods the telecommunications and cable industries have experienced
significant volatility. The Company holds aggregate investments of $3.1 billion
in these industries as of June 29, 2002. These investments are subject to the
Company's policies for other than temporary impairment. Any future losses on the
Company's investments in these industries will depend upon the associated
business and economic conditions.
Forward Looking Statements
This document may include certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on management's current expectations and are subject to
uncertainty and changes in circumstances. Actual results may differ materially
from these expectations due to changes in global, political, economic, business,
competitive market and regulatory factors.
11
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
The Company, like other groups of insurance companies, is involved in lawsuits,
including class action lawsuits. In some class action and other lawsuits
involving insurance companies, substantial damages have been sought and/or
material settlement payments have been made. Except for the McBride case
described below, which is still in its preliminary stages, and its ultimate
outcome, and any effect on the Company, cannot be determined at this time,
management believes that at the present time there are no pending or threatened
lawsuits that are reasonably likely to have a material adverse impact on the
Company's Consolidated Financial Statements.
On November 1, 2000, GE Life and Annuity Assurance Company ("GE Life"), a
subsidiary of GE Financial Assurance Holdings, Inc., was named as a defendant in
a lawsuit filed in Georgia state court related to the sale of universal life
insurance policies (McBride v. Life Insurance Co. of Virginia dba GE Life and
Annuity Assurance Co.). On December 1, 2000, GE Life successfully removed the
case to the United States District Court for the Middle District of Georgia. The
complaint is brought as a class action on behalf of all persons who purchased
certain universal life insurance policies from GE Life and alleges improper
sales practices in connection with the sale of universal life policies. No class
has been certified. On February 27, 2002, the Court denied GE Life's motion for
summary judgment. The McBride litigation is still in its preliminary stages, and
its ultimate outcome, and any effect on the Company, cannot be determined at
this time. GE Life intends to defend this lawsuit, including plaintiff's efforts
to certify a nationwide class action, vigorously.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
Exhibit 12 Computation of ratio of earnings to fixed charges.
Exhibit 99.1 Certification of Chief Executive Officer.
Exhibit 99.2 Certification of Chief Financial Officer.
b. Reports on Form 8-K.
None.
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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 FINANCIAL ASSURANCE HOLDINGS, INC.
-------------------------------------
(Registrant)
Date: July 31, 2002 By: /s/ Thomas W. Casey
-------------------------------------------------
Thomas W. Casey,
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: July 31, 2002 By: /s/ Richard G. Fucci
-------------------------------------------------
Richard G. Fucci,
Vice President and Controller
(Principal Accounting Officer)
13