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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
[_] 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 333-69620
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GE Life and Annuity Assurance Company
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(Exact name of registrant as specified in its charter)
Virginia 54-0283385
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6610 West Broad Street, Richmond, Virginia 23230
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(804) 281-6000
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(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, 25,651 shares of common stock with a par value of $1,000.00
were outstanding. The common stock of GE Life and Annuity Assurance Company is
not publicly traded.
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 ............................................ 8
Item 3. Quantitative and Qualitative Disclosure about Market Risk .......... 11
PART II-OTHER INFORMATION
Item 1. Legal Proceedings .................................................. 13
Item 6. Exhibits and Reports on Form 8-K ................................... 13
Signatures ..................................................................... 14
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
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:
Net investment income $ 150.4 $ 174.3 $ 305.1 $ 362.4
Net realized investment gains/(losses) (38.4) 14.1 (25.0) 21.6
Premiums 26.1 25.7 51.3 55.0
Cost of insurance 31.2 33.2 62.8 66.1
Variable product fees 30.6 35.0 62.2 68.0
Other income 11.0 9.4 21.7 21.2
---------- ---------- ---------- ----------
Total revenues 210.9 291.7 478.1 594.3
---------- ---------- ---------- ----------
Benefits and expenses:
Interest credited 116.4 135.0 234.9 278.2
Benefits and other changes in policy reserves 50.8 47.9 100.7 100.3
Commission expense 29.3 36.4 57.5 79.0
General expenses 19.8 32.2 41.7 64.2
Amortization of intangibles 6.5 13.0 14.3 24.2
Change in deferred acquisition costs, net (6.5) (31.7) (14.7) (63.7)
Interest expense -- 0.3 -- 2.2
---------- ---------- ---------- ----------
Total benefits and expenses 216.3 233.1 434.4 484.4
---------- ---------- ---------- ----------
Earnings (loss) before income taxes and cumulative effect
of change in accounting principle (5.4) 58.6 43.7 109.9
(Benefit) provision for income taxes (5.0) 20.3 11.4 38.5
---------- ---------- ---------- ----------
Earnings (loss) before cumulative effect of change in
accounting principle (0.4) 38.3 32.3 71.4
Cumulative effect of change in accounting principle, net
of tax -- -- -- (5.7)
---------- ---------- ---------- ----------
Net earnings (loss) (0.4) 38.3 32.3 65.7
Retained earnings at beginning of period 444.1 324.5 411.4 297.1
---------- ---------- ---------- ----------
Retained earnings at end of period $ 443.7 $ 362.8 $ 443.7 $ 362.8
========== ========== ========== ==========
See Notes to Condensed, Consolidated Financial Statements.
1
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Condensed, Consolidated Statements of Financial Position
(Dollar amounts in millions except per share amounts)
(Unaudited)
June 29, December 31,
2002 2001
-------------------- --------------------
Assets
Investments:
Fixed maturities available-for-sale, at fair value $ 10,299.6 $ 10,539.6
Equity securities available-for-sale, at fair value
Common stocks 21.1 20.6
Preferred stocks, non-redeemable 3.6 17.2
Mortgage loans, net of valuation allowance 936.5 938.8
Policy loans 115.8 109.4
Short-term investments 17.3 40.5
Other invested assets 86.7 113.0
-------------------- --------------------
Total investments 11,480.6 11,779.1
Cash and cash equivalents 52.7 -
Accrued investment income 167.7 208.4
Deferred acquisition costs 826.7 853.8
Goodwill 107.4 107.4
Intangible assets 215.7 255.9
Reinsurance recoverable 156.4 151.1
Other assets 165.8 112.7
Separate account assets 8,173.2 8,994.3
-------------------- --------------------
Total assets $ 21,346.2 $ 22,462.7
==================== ====================
Liabilities and Shareholders' Interest
Liabilities:
Future annuity and contract benefits $ 10,848.7 $ 10,975.3
Liability for policy and contract claims 135.6 189.0
Other policyholder liabilities 228.8 91.4
Other liabilities 303.4 555.0
Deferred income tax liability 57.1 75.5
Separate account liabilities 8,173.2 8,994.3
-------------------- --------------------
Total liabilities 19,746.8 20,880.5
-------------------- --------------------
Shareholders' interest:
Net unrealized investment losses (39.2) (17.4)
Derivatives qualifying as hedges (1.4) (8.1)
-------------------- --------------------
Accumulated non-owner changes in equity (40.6) (25.5)
Preferred stock, Series A ($1,000 par value, $1,000 redemption and liquidation
value, 200,000 shares authorized, 120,000 shares issued and outstanding) 120.0 120.0
Common stock ($1,000 par value, 50,000 shares authorized, 25,651 shares
issued and outstanding) 25.6 25.6
Additional paid-in capital 1,050.7 1,050.7
Retained earnings 443.7 411.4
-------------------- --------------------
Total shareholders' interest 1,599.4 1,582.2
-------------------- --------------------
Total liabilities and shareholders' interest $ 21,346.2 $ 22,462.7
==================== ====================
See Notes to Condensed, Consolidated Financial Statements.
2
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
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 $ 32.3 $ 65.7
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Change in reserves 287.9 271.2
Cumulative effect of change in accounting principle, net of tax - 5.7
Other, net (223.6) (338.8)
------------ ------------
Net cash provided by operating activities 96.6 3.8
------------ ------------
Cash Flows From Investing Activities
Short-term investment activity, net 23.2 3.6
Proceeds from sales, securitizations and maturities of investment
securities and other invested assets 2,339.0 1,584.2
Principal collected on mortgage and policy loans 63.8 283.3
Purchases of investment securities and other invested assets (2,050.5) (1,813.9)
Mortgage and policy loan originations (67.6) (100.6)
------------ ------------
Net cash provided by (used in) investing activities 307.9 (43.4)
------------ ------------
Cash Flows From Financing Activities
Proceeds from issuance of investment contracts 1,895.3 1,803.6
Redemption and benefit payments on investment contracts (2,247.1) (1,723.1)
------------ ------------
Net cash provided by (used in) financing activities (351.8) 80.5
------------ ------------
Increase in Cash and Cash Equivalents 52.7 40.9
Cash and Cash Equivalents at Beginning of Period - 71.4
------------ ------------
Cash and Cash Equivalents at End of Period $ 52.7 $ 112.3
============ ============
See Notes to Condensed, Consolidated Financial Statements.
3
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Condensed, Consolidated Financial Statements
(Dollar amounts in millions)
(Unaudited)
1. The accompanying condensed, consolidated quarterly financial statements
represent the consolidation of GE Life and Annuity Assurance Company and
its subsidiary, Assigned Settlement, Inc. (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
these 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 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 Current
Report on Form 8-K, dated April 19, 2002.
3. A summary of changes in shareholders' interest that do not result directly
from transactions with the Company's shareholders follows:
Three Months Ended
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June 29, 2002 June 30, 2001
--------------------- ---------------------
Net earnings (loss) $ (0.4) $ 38.3
Unrealized gains (losses) on investment securities - net changes in value (10.3) (68.4)
Derivatives qualifying as hedges, net changes in value 5.9 2.8
--------------------- ---------------------
Total $ (4.8) $ (27.3)
===================== =====================
Six Months Ended
-------------------------------------------
June 29, 2002 June 30, 2001
--------------------- ---------------------
Net earnings $ 32.3 $ 65.7
Unrealized gains (losses) on investment securities - net changes in value (21.8) (4.4)
Derivatives qualifying as hedges, net changes in value 6.7 (7.8)
Cumulative effect on shareholders' interest of adopting SFAS 133 --- (0.4)
--------------------- ---------------------
Total $ 17.2 $ 53.1
===================== =====================
4
4. The Company conducts its operations through two 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; and (2) Lifestyle Protection and Enhancement, comprised
of products intended to protect accumulated wealth and income from the
financial drain of unforeseen events.
For comparative purposes, the information presented below for the periods
ended June 30, 2001 have been adjusted to reflect the elimination of
goodwill amortization as discussed in Note 5.
The following is a summary of operating segment activity for the three and
six month periods ended June 29, 2002 and June 30, 2001:
Three Months Ended
-------------------------------------------
June 29, 2002 June 30, 2001
-------------------- --------------------
Revenues
Wealth Accumulation and Transfer ......................................... $ 195.6 $ 275.8
Lifestyle Protection and Enhancement ..................................... 15.3 15.9
-------------------- --------------------
Total revenues ..................................................... $ 210.9 $ 291.7
==================== ====================
Earnings (loss) before income taxes and cumulative effect of
change in accounting principle
Wealth Accumulation and Transfer ......................................... $ (1.5) $ 57.6
Lifestyle Protection and Enhancement ..................................... (3.9) 2.7
-------------------- --------------------
Total earnings (loss) before income taxes and cumulative
effect of change in accounting principle ...................... $ (5.4) $ 60.3
==================== ====================
Six Months Ended
--------------------------------------------
June 29, 2002 June 30, 2001
-------------------- --------------------
Revenues
Wealth Accumulation and Transfer .......................................... $ 446.2 $ 561.8
Lifestyle Protection and Enhancement ...................................... 31.9 32.5
-------------------- --------------------
Total revenues ...................................................... $ 478.1 $ 594.3
==================== ====================
Earnings before income taxes and cumulative effect of change in
accounting principle
Wealth Accumulation and Transfer ......................................... $ 40.2 $ 107.7
Lifestyle Protection and Enhancement ..................................... 3.5 5.6
-------------------- --------------------
Total earnings before income taxes and cumulative effect of
change in accounting principle ................................ $ 43.7 $ 113.3
==================== ====================
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 ............................... $ 21,171.3 $ 22,294.7
Lifestyle Protection and Enhancement ........................... 174.9 168.0
-------------------- --------------------
Total assets ............................................. $ 21,346.2 $ 22,462.7
==================== ====================
5
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. Non tax-deductible goodwill amortization expense for the three
and six months ended June 30, 2001, was $1.7 million and $3.4 million,
respectively. The effect on earnings of excluding such goodwill
amortization from the three and six months ended June 30, 2001 follows:
Three Months Ended
--------------------------------------------
June 29, 2002 June 30, 2001
-------------------- -------------------
Earnings (loss) before cumulative effect of change in accounting
principle $ (0.4) $ 38.3
-------------------- -------------------
Earnings (loss) before cumulative effect of change in accounting
principle excluding 2001 goodwill amortization $ (0.4) $ 40.0
-------------------- -------------------
Net earnings (loss) $ (0.4) $ 38.3
-------------------- ------------------
Net earnings (loss), excluding goodwill amortization $ (0.4) $ 40.0
-------------------- -------------------
Six Months Ended
--------------------------------------------
June 29, 2002 June 30, 2001
-------------------- -------------------
Earnings before cumulative effect of change in accounting principle $ 32.3 $ 71.4
-------------------- -------------------
Earnings before cumulative effect of change in accounting principle
excluding 2001 goodwill amortization $ 32.3 $ 74.8
-------------------- -------------------
Net earnings $ 32.3 $ 65.7
-------------------- -------------------
Net earnings, excluding goodwill amortization $ 32.3 $ 69.1
-------------------- -------------------
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 the 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 such
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
No goodwill impairment charge was taken as a result of the Company's
testing goodwill for impairment in accordance with SFAS 142, as of
January 1, 2002.
At June 29, 2002 At December 31, 2001
---------------------------------- ---------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Intangibles Subject to Amortization Amount Amortization Amount Amortization
----------------------------------- ------------- ----------------- ------------ ----------------
Present Value of Future Profits ("PVFP") $ 538.1 $ (336.6) $ 568.1 $ (323.3)
Capitalized software 20.3 (6.9) 16.2 (5.9)
All other 1.1 (0.3) 1.1 (0.3)
------------- ----------------- ------------ ----------------
Total $ 559.5 $ (343.8) $ 585.4 $ (329.5)
============= ================= ============ ================
Amortization expense related to intangible assets, excluding goodwill, for
the second quarter of 2002 and 2001 was $6.5 million and $11.3 million,
respectively and for the first six months of 2002 and 2001 was $14.3
million and $20.8 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 ................................... 11.8%
2003 ................................... 9.7%
2004 ................................... 8.4%
2005 ................................... 7.3%
2006 ................................... 6.5%
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
There have been no changes in goodwill since December 31, 2001. As of June
29, 2002 goodwill was comprised of the following:
Wealth Accumulation and Transfer $ 85.5
Lifestyle Protection and Enhancement 21.9
-------
Total $ 107.4
=======
6. At January 1, 2001, the Company adopted SFAS 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 of net earnings in the first quarter of
2001 of $5.7 million and comprised a portion of the effect of marking to
market options used for hedging.
7
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
Net loss for the three month period ended June 29, 2002 was $0.4 million, a
$38.7 million decrease from the three month period ended June 30, 2001. This
decrease was primarily attributable to a decline in investment income and an
increase in net realized investment losses (including a $29.5 million ($18.6
million, net of tax) impairment on securities issued by WorldCom, Inc. and its
affiliates), partially offset by a decrease in interest credited and decreased
general expenses resulting from cost savings initiatives.
Operating Results
Net investment income decreased $23.9 million, or 13.7%, to $150.4 million for
the three months ended June 29, 2002 from $174.3 million for the comparable 2001
period. This decrease is primarily a result of a decrease in weighted average
investment yields to 5.19% for the three month period ended June 29, 2002 from
6.51% for the three month period ended June 30, 2001 due to the overall
declining interest rate environment. This decrease was partially offset by
higher levels of average invested assets ($11,657 million in the three months
ended June 29, 2002 as compared to $10,798 million in the three months ended
June 30, 2001).
Net realized investment gains/(losses) decreased $52.5 million to a loss of
$(38.4) million for the three months ended June 29, 2002 from a gain of $14.1
million for the comparable 2001 period. Net investment gains/(losses) are
comprised of gross investment gains and gross investment (losses), respectively,
of $26.7 million and $(65.1) million for the three months ended June 29, 2002,
and $21.5 million and $(7.4) million for the three months ended June 30, 2001.
The realized losses in the second quarter of 2002 includes the Company's losses
on securities issued by WorldCom, Inc. and its affiliates of $29.5 million
($18.6 million, net of tax). The company's remaining exposure to WorldCom, Inc.
is $7.4 million. In the comparable 2001 period, realized gains included $15.2
million from the securitization of certain financial assets.
Interest credited decreased $18.6 million, or 13.8%, to $116.4 million for the
three months ended June 29, 2002 from $135.0 million in the comparable 2001
period. This decrease was a result of the lower average crediting rates, as well
as a decline in Guaranteed Investment Contract ("GIC") and funding agreement
liabilities.
Commission expense decreased $7.1 million, or 19.5%, to $29.3 million for the
three months ended June 29, 2002 from $36.4 million for the comparable 2001
period. This decrease was primarily a result of a decline in variable annuity
sales attributable to unfavorable conditions in the equity markets.
General expenses were $19.8 million for the three months ended June 29, 2002, a
decrease of $12.4 million, or 38.5%, from the comparable 2001 period expense of
$32.2 million. This decrease is primarily the result of reduced compensation and
benefit costs and other cost savings initiatives.
Amortization of intangibles decreased $6.5 million, or 50.0%, to $6.5 million
for the three months ended June 29, 2002 from $13.0 million for the comparable
2001 period. The Company's significant intangible assets consist of 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.
Amortization of intangibles decreased as a result of goodwill no longer being
amortized after January 1, 2002 upon the adoption of SFAS 142, Goodwill and
Other Intangible Assets.
Change in deferred acquisition costs, net decreased $25.2 million, or 79.5%, to
$6.5 million for the three months ended June 29, 2002 from $31.7 million for the
comparable 2001 period. Deferred acquisition costs include costs and expenses
which vary with and are primarily related to the acquisition of insurance and
investment contracts. These costs and expenses include commissions, printing,
underwriting, policy issuance costs and the bonus feature of certain variable
annuity products. Under U.S. GAAP, these costs are deferred and recognized in
relation to either premiums or gross profits underlying the contracts. This
decrease is primarily a result of a decrease in commission expense resulting
from a decline in variable annuity sales and other sales related expenses.
Interest expense decreased $0.3 million to zero for the three months ended June
29, 2002 from $0.3 million for the first three months of 2001. This decrease
primarily relates to the payment of all outstanding balances under our credit
line with GNA Corporation.
8
(Benefit) provision for income taxes decreased $25.3 million to a benefit of
$5.0 million for the three months ended June 29, 2002 from a provision of $20.3
million for the comparable 2001 period. The Company's effective tax rate of
92.6% for the three months ended June 29, 2002 was 58.1 percentage points higher
than the effective tax rate of 34.5% for the three months ended June 30, 2001.
This increase in the effective tax rate is attributable primarily to the impact
of recurring permanent tax items on a net pre-tax loss.
SIX MONTHS ENDED JUNE 29, 2002 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2001
Net earnings before cumulative effect of change in accounting principle for the
first six months of 2002 were $32.3 million, a $39.1 million, or 54.8%, decrease
from the first six months of 2001. This decrease was primarily attributable to a
decline in investment income and an increase in net realized investment losses
(including a $29.5 million ($18.6 million, net of tax) impairment on securities
issued by WorldCom, Inc. and its affiliates), partially offset by a decrease in
interest credited, decreased general expenses resulting from cost savings
initiatives and decreased commission expenses.
Operating Results
Net investment income decreased $57.3 million, or 15.8%, to $305.1 million for
the first six months of 2002 from $362.4 million in the prior year period. These
decreases are primarily a result of a decrease in weighted average investment
yields to 5.28% for the first six months of 2002 from 6.85% for the first six
months of 2001 due to the overall declining interest rate environment. This
decrease was partially offset by higher levels of average invested assets
($11,716 million in the first six months of 2002 as compared to $10,763 million
in the first six months of 2001).
Net realized investment gains/(losses) decreased $46.6 million to a loss of
$(25.0) million for the first six months of 2002 from a gain of $21.6 million
for the first six months of 2001. Net investment gains/(losses) are comprised of
gross investment gains and gross investment (losses), respectively, of $55.5
million and $(80.5) million for the first six months of 2002, and $44.5 million
and $(22.9) million for the first six months of 2001. The realized losses in
2002 includes the Company's losses on securities issued by WorldCom, Inc. and
its affiliates of $29.5 million ($18.6 million, net of tax). The Company's
remaining exposure to WorldCom, Inc. is $7.4 million. Included in the gross
realized investment gains is $5.8 million and $15.2 million in the first six
months of 2002 and 2001, respectively, resulting from the securitization of
certain financial assets.
Premiums, which include premium revenues from traditional life and life
contingent annuity contracts, decreased $3.7 million or 6.7%, to $51.3 million
for the first six month of 2002 from $55.0 million in the first six months of
2001. This decrease was primarily a result of lower levels of renewal premiums
on whole life policies.
Variable product fees decreased $5.8 million or 8.5%, to $62.2 million for the
first six months of 2002 from $68.0 million for the first six months of 2001.
The decrease in variable product fees primarily resulted from a decline in the
average separate account values as a result of the unfavorable conditions in the
equity markets.
Interest credited decreased $43.3 million, or 15.6%, to $234.9 million in the
first six months of 2002 from $278.2 million in the first six months of 2001.
This decrease was a result of the lower average crediting rates as well as a
decline in GIC and funding agreement liabilities.
Commission expense decreased $21.5 million, or 27.2%, to $57.5 million in the
first six months of 2002 from $79.0 million in the first six months of 2001.
This decrease was primarily a result of a decline in variable annuity sales
attributable to unfavorable conditions in the equity markets, as well as a
decline in whole life renewal premiums.
General expenses were $41.7 million for the first six months of 2002, a decrease
of $22.5 million or 35.0% over the first six months of 2001 expense of $64.2
million. The decrease is primarily the result of reduced compensation and
benefit costs and other cost savings initiatives.
Amortization of intangibles decreased $9.9 million, or 40.9%, to $14.3 million
for the first six months of 2002 from $24.2 million for the first six months of
2001. Amortization of intangibles decreased primarily from the amortization
expense related to goodwill. In accordance with SFAS 142 the Company ceased
amortizing goodwill effective January 1, 2002.
Change in deferred acquisition costs, net decreased $49.0 million, or 76.9%, to
$14.7 million for the first six months of 2002 from $63.7 million for the first
six months of 2001. This decrease is primarily a result of a decrease in
commission expense resulting from a decline in variable annuity sales and other
sales related expenses.
9
Interest expense decreased $2.2 million to zero for the first six months of 2002
from $2.2 million for the first six months of 2001. This decrease primarily
relates to obligations to a third party reinsurer for payment of transferred
assets in the comparable 2001 period.
Provision for income taxes decreased $27.1 million, or 70.4%, to $11.4 million
for the first six months of 2002 from $38.5 million for the first six months of
2001. The Company's effective tax rate of 26.1% for the first six months of 2002
was 8.9 percentage points lower than the effective tax rate of 35.0% for the
first six months of 2001. This decrease in the effective tax rate is
attributable to the impact of recurring permanent items on lower pre-tax net
income.
Financial Condition
Total assets decreased $1,116.5 million, or 5.0%, at June 29, 2002 from December
31, 2001. Total investments decreased $298.5 million, or 2.5%, at June 29, 2002
from December 31, 2001. This decrease was primarily a result of net sales of
securities and other invested assets. Assets invested in separate accounts
decreased $821.1 million, or 9.1%, at June 29, 2002 from December 31, 2001
primarily related to the overall decreased market value of the underlying
investment funds.
Total Liabilities decreased $1,128.9 million, or 5.4%, at June 29, 2002 from
December 31, 2001. Future annuity and contract benefits decreased $126.6
million, or 1.2%, at June 29, 2002 from December 31, 2001. This decrease
resulted primarily from a decrease in reserves related to GICs and funding
agreements as a result of normal contract maturities. Other policyholder
liabilities increased $137.4 million, or 150.3%, at June 29, 2002 from December
31, 2001 primarily related to timing of transaction settlements and normal
business activity. Other liabilities decreased $246.8 million, or 44.5%, at June
29, 2002 from December 31, 2001 primarily resulting from the timing of
settlement of trades related to investments and decreased balances payable to
brokers and affiliates. Separate account liabilities decreased $821.1 million,
or 9.1%, primarily as a result of the decline in market values.
For the six months ended June 29, 2002 and June 30, 2001 cash flows provided by
(used in) operating and certain financing activities were $(255.2) million and
$84.3 million, respectively. These amounts include net cash provided by (used
in) financing activities relating to investment contract issuances accounted for
as deposit liabilities under U.S. GAAP and redemptions of $(351.8) million and
$80.5 million, respectively.
Portfolio Quality
The Company principally invests in investment grade debt and equity securities.
The aggregate value of the Company's investments was $10,324.3 million,
including gross unrealized gains and (losses) of $165.2 million and $(144.8)
million, respectively, at June 29, 2002 as compared to $10,577.4 million,
including gross unrealized gains and (losses) of $191.6 million and $(228.2)
million, respectively, as of December 31, 2001. The Company regularly reviews
the investment securities in its investment 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 $44.1 million 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 $54.1 million, including $37.0 million ($23.3 million net of
tax) from the telecommunications and cable industries, of which $29.5 million
($18.6 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 $233.9
million 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 economic, business, competitive
market and regulatory factors.
10
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest rate changes may have temporary effects on the sale and profitability
of the Company's annuity, universal life, and other investment products. For
example, if interest rates rise, competing investments (such as annuities or
life insurance offered by the Company's competitors, certificates of deposit,
mutual funds and similar instruments) may become more attractive to potential
purchasers of the Company's products. The Company may be forced to adjust
certain crediting rates on its line of products in order to meet competitive
pressures. The Company constantly monitors interest earnings on existing assets
and yields available on new investments and sells policies and annuities that
permit flexible responses to interest rate changes as part of its management of
interest spreads.
Interest rate and currency risk management is important in the normal business
activities of the Company. Derivative financial instruments are used by the
Company to mitigate or eliminate certain financial and market risks, including
those related to changes in interest rates and currency exchange rates. As a
matter of policy, the Company does not engage in derivatives transactions for
purposes other than hedging.
The Company manages exposure to changes in interest rates, in part, by matching
the duration of its investment portfolio with its liabilities. Established
practices require that derivative financial instruments relate to specific asset
or liability transactions or to currency exposure, if any.
Market fluctuations could negatively affect our business. Significant changes in
equity market performance expose insurance companies to the risk of not earning
anticipated policy fees from variable products, accelerating amortization of
deferred acquisition costs, or requiring additional liabilities for death
benefits exceeding the separate account balances. Market fluctuations may also
increase trade volumes that could expose insurers to gains or losses in traded
securities underlying its separate accounts. Declining market returns may result
in lower sales of certain of our variable products.
The Company is exposed to prepayment risk in certain of its business activities,
such as in its investment portfolio and annuities activities. The Company uses
interest rate swaps, swaptions and option-based financial instruments to
mitigate prepayment risk. These instruments generally behave based on limits
("floors") on interest rate environment. These swaps, swaptions and option-based
instruments are governed by the credit risk policies described below and are
transacted in either exchange-traded or over-the-counter markets.
Counterparty credit risk is managed at our parent company's level on an
individual counterparty basis, which means that gains and losses are netted for
each counterparty to determine the amount at risk. When a counterparty exceeds
credit exposure limits in terms of amounts due to the Company, typically as a
result of changes in market conditions (see table below), no additional
transactions are executed until the exposure with that counterparty is reduced
to an amount that is within the established limit. All swaps are executed under
master swap agreements containing mutual credit downgrade provisions that
provide the ability to require assignment or termination in the event either
party is downgraded below A3 or A-.
All swaps, purchased options and forwards with contractual maturities longer
than one year are conducted within the credit policy constraints provided in the
table below.
Counterparty Credit Criteria Credit rating
Standard & Poor's
-----------------
Term of transaction
Between one and five years ........... AA-
Greater than five years .............. AAA
Credit exposure limits
Up to $50 million .................... AA-
Up to $75 million .................... AAA
The conversion of interest rate and currency risk into credit risk results in a
need to monitor counterparty credit risk actively. At June 29, 2002 and June 30,
2001, there were no notional amounts of long-term derivatives for which the
counterparty credit criteria was rated below A3/AA-.
Following is an analysis of credit risk exposures as of June 29, 2002:
Percentage or Notional Derivative Exposure by Counterparty
Credit Rating
Standard & Poor's
-----------------
AAA .............................................. 100%
AA ............................................... 0%
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The U.S. Securities and Exchange Commission requires that registrants provide
information about potential effects of changes in interest rates. Although the
rules offer alternatives for presenting this information, none of the
alternatives are without limitations. The following discussion is based on
so-called "shock-tests," which model effects of interest rate and currency
shifts on the reporting company. Shock tests, while probably the most meaningful
analysis permitted, are constrained by several factors, including the necessity
to conduct the analysis based on a single point in time and by their inability
to include the extraordinarily complex market reactions that normally would
arise from the market shifts modeled. While the following results of shock tests
for changes in interest rates may have some limited use as benchmarks, they
should not be viewed as forecasts.
One means of assessing exposure to interest rate changes is a duration-based
analysis that measures the potential loss in net earnings resulting from a
hypothetical decrease in interest rates of 100 basis points across all
maturities. Under this model, with all else constant, it is estimated that such
a decrease, including repricing effects in the securities portfolio, would not
significantly impact 2002 earnings based on the Company's current positions.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company, like other 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, the Company 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, the Company 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 the Company 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 the Company'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. The Company 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
The Company filed a report on Form 8-K on April 19, 2002 reporting the
Company's results for the fiscal year ended December 31, 2001.
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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 LIFE AND ANNUITY ASSURANCE COMPANY
-------------------------------------
(Registrant)
Date: July 31, 2002 By: /s/ Kelly L. Groh
-----------------------------------------
Kelly L. Groh,
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
Date: July 31, 2002 By: /s/ Susan M. Mann
------------------------------------------
Susan M. Mann,
Vice President and Controller
(Principal Accounting Officer)
14