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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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
(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 (913) 676-5200
(Address of principal executive offices) (Zip Code) (Registrant's telephone
number, including area code)
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SECURITIES REGISTERED PURSUANT
TO SECTION 12(b) OF THE ACT:
Name of each
Title of each class exchange on which registered
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7% Notes Due February 15, 2026 New York Stock Exchange
6.45% Notes Due March 1, 2019 New York Stock Exchange
SECURITIES REGISTERED PURSUANT
TO SECTION 12(g) OF THE ACT:
Title of each class
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Common Stock, par value $5,000 per share
Indicate by check mark whether the registrant(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant at March 17, 2000. None.
At March 17, 2000, 1,000 shares of common stock with a par value of $5,000 per
share were outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b)
OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE
FORMAT.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business........................................................................1
Item 2. Properties.....................................................................12
Item 3. Legal Proceedings..............................................................12
Item 4. Submission of Matters to a Vote of Security Holders............................12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......12
Item 6. Selected Financial Data........................................................12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................21
Item 8. Financial Statements and Supplementary Data....................................21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................21
PART III
Item 10. Directors and Executive Officers of the Registrant.............................22
Item 11. Executive Compensation.........................................................22
Item 12. Security Ownership of Certain Beneficial Owners and Management.................22
Item 13. Certain Relationships and Related Transactions.................................22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................22
PART I
Item 1. Business.
GE Global Insurance Holding Corporation ("GE Global Insurance" and, together
with its subsidiaries, "the Company"), through its direct and indirect
subsidiaries, is principally engaged in the reinsurance business in the United
States and throughout the world. All outstanding common stock of GE Global
Insurance is owned by General Electric Capital Services, Inc. ("GE Capital
Services"), which in turn is wholly-owned by General Electric Company ("GE
Company").
The principal executive offices of GE Global Insurance are located at 5200
Metcalf, Overland Park, Kansas 66201 (Telephone number (913) 676-5200).
Overview of the Reinsurance Industry
Reinsurance is a form of insurance in which a reinsurer indemnifies a primary
insurer against part or all of the liability assumed by the primary insurer
under one or more insurance policies. Reinsurance may provide a primary insurer
with several major benefits: a reduction in net liability of individual risks,
protection against catastrophic losses, reduction of financial leverage and
stabilization of operating results. Reinsurance may also provide a primary
insurer the ability to increase its underwriting capacity by allowing the
primary insurer to accept larger risks and to more rapidly expand its book of
business.
The global reinsurance industry continues to be impacted by industry
consolidation, excess market capacity and primary insurers seeking alternative
forms of risk transfer such as insurance captives, structured securities and
derivative products. Global reinsurers are offering ways to meet the demands of
this changing global market by expanding their markets, entering into new
reinsurance niches, offering new reinsurance products and spreading their risks
geographically. This changing reinsurance environment may affect the industry's
profitability which has historically been influenced by the insurance industry's
underwriting cycle, changes in interest rates and catastrophic events.
General
GE Global Insurance is one of the largest reinsurance groups in the world, with
subsidiaries providing risk management solutions for well over a century. The
Company writes substantially all types of property and casualty, healthcare and
life reinsurance and some lines of primary health, property and casualty and
excess workers' compensation insurance.
The Company conducts business and services its accounts through a network of
local offices located in cities throughout the world. As of December 31, 1999,
the Company had 19 offices in the North American region, 12 offices in the
European region, 10 offices in the Asia/Pacific region and 4 offices in the
Latin American region.
As one of the largest direct writers of reinsurance in the world, the Company
works directly with its clients which enhances the Company's ability to evaluate
its clients and their respective risks and allows the Company to be more
responsive to the individual needs of its customers. The Company utilizes its
network of local offices throughout the world to service the particular needs of
its reinsurance clients. This system enables the Company to provide a wider
range of services targeted at the needs of a particular market. To enhance its
responsiveness to customer needs in the property and casualty segment, the
Company operates in a decentralized environment with respect to underwriting
decisions and customer service.
The Company also competes in the reinsurance broker market throughout the world.
During 1998 and in early 1999, the Company significantly expanded its presence
in the reinsurance broker market by acquiring Kemper Reinsurance Company
(subsequently renamed GE Reinsurance Corporation - "GE Re") and Eagle Star
Reinsurance Company Limited ("Eagle Star Re") (See Note 3 to the consolidated
financial statements). The acquisitions of GE Re and Eagle Star Re significantly
enhance the Company's distribution channel in the worldwide reinsurance broker
market and further enables the Company to respond to the growing risk management
needs of a wider and more diverse group of customers. The acquisitions of GE Re
and Eagle Star Re position the Company as one of the largest reinsurance broker
writers in the world.
1
The Company manages and diversifies its risk through the careful underwriting of
risks, active claims management and the purchase of retrocessional coverage.
Retrocessional coverage represents a form of secondary reinsurance where a
reinsurer seeks reinsurance coverage on a specified portion of assumed risks.
The Company maintains strict underwriting controls whereby individual
underwriters are assigned maximum levels of underwriting authority based on
specified lines of business. The assumption of risks greater than the specified
maximum amount requires approvals of designated individuals. Adherence to these
underwriting guidelines is monitored though pre-renewal account reviews,
periodic underwriting audits and computer edit controls. In addition to
transactional controls, the Company employs portfolio monitoring of key risks
for all products and controls new product introductions through the use of
required management reviews ("tollgates") to approve such new products and
related underwriting guidelines.
The Company's business strategy is to continue to increase revenues by
concentrating on select profitable customer segments and delivering
comprehensive risk transfer and risk management solutions. The Company does not
intend, however, to increase premium income at the expense of its underwriting
results.
On March 4, 1999, the Company completed the acquisition of Eagle Star Re, a
leading London Market non-life reinsurance company principally doing business
through intermediaries. This acquisition significantly enhanced the Company's
worldwide reinsurance broker distribution channel. The cash consideration of
approximately $346 million was provided through existing funds.
During 1998, the Company, either directly or through its affiliates, acquired
three major property and casualty insurance/reinsurance businesses which
strengthened its global presence in the healthcare product lines, the
broker-serviced markets and the Fortune 1000 commercial property markets.
In the fourth quarter of 1998, the Company completed the acquisitions of Medical
Protective Corporation ("Medical Protective") and GE Re. Medical Protective is
the oldest medical professional liability insurer of physicians and dentists in
the United States. The cash consideration of approximately $628 million was
financed by GE Capital Corporation via an interim loan agreement. GE Re is a
property and casualty reinsurance company principally doing business through
intermediaries. The cash consideration of approximately $468 million was
financed initially in 1998 by utilizing existing credit facilities and
subsequently refinanced in 1999 through additional long-term borrowings.
On January 6, 1998, the Company purchased the assets and assumed the renewal
rights of Industrial Risk Insurers ("IRI"), a leader in providing highly
protected risk property insurance, for a cash consideration of approximately
$235 million. The business underwritten through IRI is managed by a joint
venture formed between the Company and The Hartford Steam Boiler Inspection and
Insurance Company ("HSB") as stipulated by a management agreement. IRI writes
business utilizing the licensing authority of its members and the business
underwritten is subsequently allocated to members in proportion to membership
participation and further allocated in accordance with certain reinsurance
agreements between HSB and the Company.
The Company, as a result of General Electric Capital Corporation's ("GE Capital
Corporation" - a wholly-owned subsidiary of GE Capital Services) acquisition of
Coregis Insurance Company ("Coregis"), acquired the renewal rights of certain
domestic property and casualty business to continue expansion of its specialty
insurance product line in 1997.
The Company has also established a Financial Market Products ("FMP") unit which
will address the needs of customers seeking innovative risk transfer solutions,
globally. FMP will partner with an affiliate, GECC Capital Markets Group, Inc.,
to deliver the full range of services desired by this growing customer segment.
To date, other than start-up administrative expenses, the Company's results do
not reflect any significant revenues or operating results from products and
services provided by this FMP unit.
Also in recent years, the Company has expanded its global business through the
extension of its local office network. The Company opened offices in Rio de
Janeiro and Warsaw in 1999, Kuala Lumpar and Shanghai in 1998 and Buenos Aires
and Montreal in 1997. Consistent with its global expansion strategy, the Company
anticipates further expanding its presence in the Asia/Pacific and Latin
American regions.
Unless otherwise indicated, all financial data has been prepared in accordance
with U.S. generally accepted accounting principles ("GAAP").
2
Lines of Business
The Company's two business segments are (1) property and casualty
insurance/reinsurance and (2) life reinsurance. The Company's principal product
lines under the property and casualty segment are traditional property and
casualty reinsurance, healthcare reinsurance and specialty insurance (generally
primary property and casualty insurance) and its principal product lines under
the life reinsurance segment are traditional life reinsurance and financial
reinsurance. The Company also provides primary insurance products to hospitals,
health maintenance organizations and medical professionals as part of its
healthcare product line and to niche customers as part of its specialty
insurance product line.
Unless otherwise indicated, the Company's domestic results include business
written in the United States (including business written in the United States
where the reinsured is outside the United States) and Canada, and the
international results include all other business written by the Company. The
geographic breakdown, based on net premiums written, of the Company's principal
product lines is summarized as follows:
Year ended December 31,
-------------------------------------------------------------------------
(In millions) 1999 1998 1997
--------------------- --------------------- ---------------------
Inter- Inter- Inter-
Domestic national Domestic national Domestic national
--------------------- --------------------- ---------------------
Property and Casualty Segment
Property and Casualty......... $2,102 $2,470 $1,487 $2,306 $1,038 $1,592
Healthcare.................... 851 43 514 83 432 92
Specialty..................... 417 - 498 - 339 -
Life Segment..................... 615 649 422 674 512 540
------ ------ ------ ------ ------ ------
Total......................... $3,985 $3,162 $2,921 $3,063 $2,321 $2,224
====== ====== ====== ====== ====== ======
The following is a summary description of the Company's domestic and
international business based on principal product lines:
Property and Casualty Insurance/Reinsurance Segment
Property and Casualty Reinsurance. The Company's largest product line,
traditional property and casualty reinsurance, accounted for approximately 64%
of the Company's worldwide net premiums written in 1999. The Company's premium
volume in the property and casualty segment is derived principally from treaty
agreements, which enable the Company to maintain lower operating costs because
fewer personnel are required to administer treaty business than facultative
business. Most of the Company's casualty business is written on an excess of
loss basis because it better enables the Company to control its exposure on
business that has a relatively longer claim settlement pattern (i.e., the
"tail").
The Company's property business is written on both an excess of loss and a
proportional basis. Generally, the Company is the lead reinsurer for any
domestic program in which it participates, enabling it to negotiate the terms of
the reinsurance. The Company also acts as the lead reinsurer on a portion of its
international business.
The Company's international property and casualty business services worldwide
markets, including most European countries and countries in the Middle East, Far
East and Latin America. For the year ended December 31, 1999, approximately 50%
of the Company's international net premiums written from property and casualty
reinsurance was derived from property reinsurance, approximately 24% from
casualty reinsurance, approximately 25% from aviation and marine reinsurance and
approximately 1% from other lines of reinsurance. Based on 1999 net premiums
written, approximately 51% of the Company's international property and casualty
business was written on a direct basis, with the remainder written through
brokers.
3
In recent years, insurance companies have directed more business to the
better-capitalized, more highly-rated reinsurers, which has led to a
consolidation in the reinsurance industry. In competing with a smaller number of
global reinsurers, the Company has found that a number of its global customers
are increasingly demanding that reinsurers provide a broader range of coverages.
In response to this trend, the Company has expanded the property and casualty
risks it reinsures beyond its more traditional property and casualty reinsurance
business to include risks such as errors and omissions, directors and officers
and non-standard auto liability. In addition to the expansion of lines of
business, property and casualty reinsurance has aligned its marketing efforts
with its core expertise in areas such as aviation, national accounts and global
accounts. Management believes that the Company is well positioned to compete on
a global basis in these markets.
The property and casualty reinsurance industry has experienced a significant
increase in catastrophic exposure and loss during the last decade. Increased
population density, particularly in regions susceptible to tropical storms or
earthquakes, and the higher incidence and greater severity of catastrophes, has
increased the losses incurred in many recent catastrophes. As a result of these
developments, the Company has taken steps to limit its exposure by carefully
monitoring and allocating its property and casualty exposure to specific
geographic zones, both domestically and internationally.
Healthcare. As part of the Company's property and casualty business segment, the
Company provides insurance and reinsurance for the healthcare industry, also
targeting employers, public entities, manufacturers and others for certain
product lines. Coverages include primary insurance and reinsurance for medical
professional liability and insurance protecting primary insurers (including
self-insurers) in the healthcare market (i.e., excess workers' compensation,
stop loss insurance, directors and officers liability for non-profit firms and
provider excess coverages).
The healthcare industry continues to change and evolve due to voluntary
healthcare reform, expansion of managed healthcare initiatives, increased
competition and the uncertainty related to the extent of government regulation.
In addition, companies that historically specialized in one line of business
have expanded their lines of business and are now writing multiple lines of
business. The Company, to serve the growing needs of their clients, has
developed new and innovative healthcare products and has expanded coverages to
include various other lines of business.
The Company believes that it is well positioned to compete in the healthcare
market because of its wide range of experience in providing healthcare liability
coverage and excess protection for self-insured employers, leveraging its
acquisition of Medical Protective and utilizing multiple products and
disciplines to provide healthcare solutions.
Specialty Insurance. An additional component of the Company's domestic property
and casualty business is its specialty insurance product line, which generally
consists of commercial property and casualty policies written on a primary basis
in niche markets. The Company's specialty business concentrates on providing
commercial insurance products for target markets, usually professional
associations and homogeneous groups. Specialty products include professional
liability programs and niche programs in the general property and casualty area.
This coverage provides insurance for errors and omissions (E&O) arising out of
the professional activities of the insureds and commercial property and casualty
coverages for niche programs.
Professional classes underwritten include lawyers, property and casualty
insurance agents and brokers, life and health insurance agents and brokers,
accountants and a few miscellaneous classes. The majority of this business
provides coverage to lawyers and property and casualty and life insurance agents
and brokers.
Competition for the classes of business underwritten within the Company's
specialty insurance product line has recently increased as more companies have
redirected their resources to the specialty niche business. In order to compete
for this business, the Company has provided value-added services, including
enhanced underwriting and automated processing services, to its wholesalers and
managing general agents producing such business.
4
Life Reinsurance Segment
Life Reinsurance. The Company is engaged in the reinsurance of various life
insurance products, including term, whole and universal life, annuities, group
long-term health and health products and provides financial reinsurance to life
insurers. Based on net premiums written, life reinsurance accounted for
approximately 18% of the Company's worldwide business in 1999.
With respect to life reinsurance, the Company writes mostly on a direct basis
with primary insurers. The Company's life reinsurance business consists
principally of treaty business and is written generally on a pro-rata basis. The
Company's domestic life reinsurance business is written in every state in the
United States. The Company's international life reinsurance business services
worldwide markets, including France, Germany, Greece, Israel, Italy, Mexico,
Scandinavia, Singapore, Spain and the United Kingdom. For the year ended
December 31, 1999, approximately 66% of the Company's international life
reinsurance net premiums written were for traditional life reinsurance, with the
balance for healthcare reinsurance.
The Company believes that increases in life expectancy, decreases in public
funding for social programs in Europe and deregulation of the life reinsurance
markets in Europe and Japan present increased opportunities for the Company's
life reinsurance business line.
Financial Reinsurance. Financial reinsurance does not transfer significant
underwriting risk to the reinsurer and is designed primarily to enhance the
current statutory surplus of the ceding company while reducing future statutory
earnings as amounts are repaid to the reinsurer. This financial transaction is
effectively collateralized by anticipated future income streams from selected
insurance policies. The Company writes financial reinsurance on a direct basis
and through brokers and generally only for companies with credit ratings of not
less than "A" at the inception of the reinsurance contract and that have a
minimum capital and surplus of $15 million. The two principal categories of
transactions are financial reinsurance and financial risk reinsurance. Financial
reinsurance typically has a duration of three to five years. Financial risk
reinsurance represents a longer term traditional risk sharing arrangement where
reinsurance is provided on existing portfolios of in-force business. The
Company's focus in the past year has been on expanding the financial risk
reinsurance line.
Property and Casualty Reserves for Unpaid Claims and Claim Expenses
The Company's insurance/reinsurance subsidiaries maintain reserves to cover
their estimated ultimate liability for unpaid claims and claim expenses with
respect to reported and unreported claims incurred as of the end of each
accounting period (net of estimated related salvage and subrogation claims).
These reserves are estimates that involve actuarial and statistical projections
of the expected cost of the ultimate settlement and administration of unpaid
claims based on facts and circumstances then known, estimates of future trends
in claims severity and other variable factors such as inflation and new concepts
of liability. The inherent uncertainties of estimating claim reserves are
exacerbated for reinsurers by the significant periods of time that often elapse
between the occurrence of an insured claim, the reporting of the claim to the
primary insurer and, ultimately, to the reinsurer, and the primary insurer's
payment of that claim and subsequent indemnification by the reinsurer (i.e., the
"tail"). As a consequence, actual claims and claim expenses paid may deviate,
perhaps substantially, from estimates reflected in the insurance companies'
reserves in their financial statements. Adjustments to previously reported
reserves for net claims and claim expenses are considered changes in estimates
for accounting purposes and are reflected in the financial statements in the
period in which the adjustment occurs.
5
When a claim is reported to a ceding company, the ceding company's claims
personnel establish a "case reserve" for the estimated amount of the ultimate
payment. The estimate reflects the informed judgment of such personnel based on
general insurance reserving practices and on the experience and knowledge of
such personnel regarding the nature and value of the specific type of claim. The
Company, in turn, typically establishes a case reserve when it receives notice
of a claim from the ceding company. Such reserves are based on an independent
evaluation by the Company's claims departments, taking into consideration
coverage, liability, severity of injury or damage, jurisdiction, an assessment
of the ceding company's ability to evaluate and handle the claim and the amount
of reserves recommended by the ceding company. Case reserves are adjusted
periodically by the claims departments based on subsequent developments and
audits of ceding companies.
In accordance with GAAP, the Company also maintains reserves for claims incurred
but not reported ("IBNR"). Such reserves are established to provide for future
case reserves and loss payments on incurred claims that have not yet been
reported to an insurer or reinsurer. In calculating IBNR reserves, the Company
uses generally accepted actuarial reserving techniques that take into account
quantitative loss experience data, together with, where appropriate, qualitative
factors. IBNR reserves are based on claim experience and are grouped both by
class of business and by accident year. IBNR reserves are also adjusted to take
into account certain additional factors, such as changes in the volume of
business written, reinsurance contract terms and conditions, the mix of
business, claims processing and inflation, that can be expected to affect the
Company's liability for claims over time.
The potential for adverse development of the Company's reserves for its
international business, as compared to that of its domestic business, is reduced
because the international operations have a relatively low proportion of longer
tail exposures.
Reserve Development. The development of the Company's net balance sheet property
and casualty liabilities for unpaid claims and claim expenses for accident years
1989 through 1999 is summarized in the following table.
Net Liability. The first row of data shows the estimated net liability for
unpaid claims and claim expenses at December 31 for each year from 1989 to 1999.
The liability includes both case and IBNR reserves as of each year-end date, net
of anticipated recoveries from other reinsurers. The rows immediately following
the first row of data show cumulative paid data at December 31, as of one year,
two years, ..., 10 years of subsequent payments.
Net Liability Re-estimated. The middle rows of data show the re-estimated amount
for previously reported net liability based on experience as of the end of each
subsequent calendar year's results. This estimate is changed as more information
becomes known about the underlying claims for individual years. The cumulative
redundancy (deficiency) shown in the table is the aggregate net change in
estimates over the period of years subsequent to the calendar year reflected at
the top of the respective columns. The amount in the line titled "Redundancy
(Deficiency) at December 31, 1999," represents for each calendar year (the "Base
Year") the aggregate change in (i) the Company's original estimate of net
liability for unpaid claims and claim expenses for all years prior to and
including the Base Year compared to (ii) the Company's re-estimate as of
December 31, 1999, of net liability for unpaid claims and claim expenses for all
years prior to and including the Base Year. A redundancy means that the original
estimate was greater than the re-estimate and a deficiency means that the
original estimate was less than the re-estimate.
6
Changes in Historical Reserves for Unpaid Claims and Claim Expenses
For the Last Ten Years - GAAP Basis as of December 31, 1999
Year ended December 31,
--------------------------------------------------------------------------------------------------------
(In millions) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
--------------------------------------------------------------------------------------------------------
Net liability for unpaid
claims and claim
expenses $3,338 $3,579 $3,596 $3,991 $4,525 $5,071 $9,351 $9,458 $9,114 $12,495 $13,210
Paid (cumulative) as of:
One year later......... 706 747 665 802 949 1,115 1,964 1,949 2,176 2,867 ---
Two years later........ 1,125 1,119 1,103 1,274 1,602 1,804 3,130 3,189 3,241 --- ---
Three years later...... 1,469 1,524 1,499 1,739 2,054 2,341 3,933 3,881 --- --- ---
Four years later....... 1,746 1,772 1,784 2,036 2,424 2,708 4,464 --- --- --- ---
Five years later....... 1,929 1,989 2,008 2,293 2,690 2,988 --- --- --- --- ---
Six years later........ 2,072 2,173 2,208 2,485 2,952 --- --- --- --- --- ---
Seven years later...... 2,229 2,348 2,362 2,688 --- --- --- --- --- --- ---
Eight years later...... 2,380 2,482 2,531 --- --- --- --- --- --- --- ---
Nine years later....... 2,495 2,630 --- --- --- --- --- --- --- --- ---
Ten years later........ 2,629 --- --- --- --- --- --- --- --- --- ---
Net liability
re-estimated as of:
One year later......... $3,390 $3,616 $3,625 $3,919 $4,612 $5,173 $9,192 $9,229 $9,179 $12,410 ---
Two years later........ 3,482 3,583 3,587 4,066 4,656 5,313 8,959 9,127 8,655 --- ---
Three years later...... 3,462 3,564 3,701 4,095 4,793 5,256 8,907 8,549 --- --- ---
Four years later....... 3,472 3,654 3,687 4,238 4,747 5,155 8,392 --- --- --- ---
Five years later....... 3,537 3,635 3,818 4,154 4,668 4,902 --- --- --- --- ---
Six years later........ 3,521 3,758 3,771 4,075 4,487 --- --- --- --- --- ---
Seven years later...... 3,626 3,734 3,711 3,942 --- --- --- --- --- --- ---
Eight years later...... 3,608 3,674 3,592 --- --- --- --- --- --- --- ---
Nine years later....... 3,567 3,565 --- --- --- --- --- --- --- --- ---
Ten years later........ 3,479 --- --- --- --- --- --- --- --- --- ---
Redundancy (Deficiency)
at December 31, 1999 (141) 14 4 49 38 169 959 909 459 85 ---
Effect of foreign
exchange (1) 6 (38) (41) (14) 12 (36) (467) (402) (122) (323) ---
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Redundancy (Deficiency)
at December 31, 1999,
excluding foreign
exchange $ (135) $ (24) $ (37) $ 35 $ 50 $ 133 $ 492 $ 507 $ 337 $ (238) $ ---
====== ====== ====== ===== ====== ====== ====== ====== ====== ======= =======
(In millions) 1992 1993 1994 1995 1996 1997 1998 1999
-----------------------------------------------------------------------------
Balance at December 31 - gross......................... $4,815 $5,312 $6,020 $11,145 $10,869 $10,936 $15,342 $17,435
Less reinsurance recoverables.......................... (824) (787) (949) (1,794) (1,411) (1,822) (2,847) (4,225)
------ ------ ------ ------- ------- ------- ------- -------
Balance at December 31 - net........................... 3,991 4,525 5,071 9,351 9,458 9,114 12,495 13,210
------ ------ ------ ------- ------- ------- ------- -------
Latest re-estimated liability - gross.................. 4,967 5,471 5,926 9,967 10,044 10,421 15,569 ---
Less re-estimated reinsurance recoverables............. (1,025) (984) (1,024) (1,575) (1,495) (1,766) (3,159) ---
------ ------ ------ ------- ------- ------- ------- -------
Latest re-estimated liability - net.................... 3,942 4,487 4,902 8,392 8,549 8,655 12,410 ---
------ ------ ------ ------- ------- ------- ------- -------
Gross redundancy (deficiency).......................... (152) (159) 94 1,178 825 515 (227) ---
Effect of foreign exchange (1)......................... (14) 13 (37) (576) (487) (157) (473) ---
------ ------ ------ ------- ------- ------- ------- -------
Gross redundancy (deficiency), excluding foreign
exchange............................................... $ (166) $ (146) $ 57 $ 602 $ 338 $ 358 $ (700) $ ---
====== ====== ====== ======= ======= ======= ======= =======
(1) The results of the Company's international operations translated from
functional currencies into U.S. dollars are included with the Company's
U.S. underwriting operations in this table. The foreign currency
translation impact on the cumulative redundancy (deficiency) arises from
the difference between reserve developments translated at the exchange
rates at the end of the year in which the liabilities were originally
estimated and the exchange rates at the end of the year in which the
liabilities were re-estimated.
Note: For a description of the purpose of the above table and the various table
sections, please refer to the immediately preceding section entitled "Reserve
Development."
7
A number of major trends that occurred within the insurance industry, the
economy in general and several Company-specific factors have had a significant
effect on the Company's liabilities for unpaid claims and claim expenses during
the period covered by the preceding table. The claims and claim expense reserve
deficiencies developed to December 31, 1999, as reflected in the preceding
table, included reserve deficiencies of approximately $52 million in 1989 and
$21 million in 1990 related to the general liability business on the books of
Puritan Excess and Surplus Lines Insurance Company ("PESLIC") before the
Company's acquisition of PESLIC in 1994. Prior to 1994, PESLIC was owned by GE
Capital Corporation. Additionally, beginning in 1985, the Company strengthened
the reserves for its excess liability and workers' compensation business for
qualified self-insured employers. Claims and claim expense reserve development
in the mid 1980's in these businesses reflected the inadequate premium rates
which resulted from intense competition in the market during that period.
In the late 1980's, the reinsurance market generally reacted to the rate
deficiencies and the resulting claims and claim expense reserve development by
increasing rates and strengthening claims and claim expense reserves. This is
reflected, with respect to the Company, in the significant improvements in the
overall reserve adequacy in most of the recent years. The increase in reserve
redundancies indicated for 1995 through 1997 is attributable to the favorable
claim environment that existed during that period.
The indicated deficiency in the 1998 reserve position is attributable to higher
than normal claim and claim expense development across a number of lines of
business, including property coverages (which was most highly impacted by much
higher than expected industry-wide losses with respect to Hurricane Georges),
long-term disability and communications/media liability.
To a lesser degree, development of asbestos and environmental claims has
affected the Company's results. Higher than anticipated levels of inflation in
certain lines of reinsurance businesses has also had an adverse effect on
liabilities for claims and claim expenses, particularly in excess of loss
reinsurance. Partially offsetting the above factors is favorable development in
recent years in medical professional liability and facultative casualty
businesses, as well as an increase in net retentions by ceding companies.
The Company's reconciliation of its beginning and ending property and casualty
reserves for unpaid claims and claim expenses on a GAAP basis is summarized as
follows:
Year ended December 31,
----------------------------------
(In millions) 1999 1998 1997
----------------------------------
Balance at January 1 - gross.................... $15,342 $10,936 $10,869
Less reinsurance recoverables................... (2,847) (1,822) (1,411)
------- ------- -------
Balance at January 1 - net...................... 12,495 9,114 9,458
------- ------- -------
Claims and expenses incurred:
Current year................................. 4,162 3,286 2,438
Prior years.................................. 233 (126) 71
------- ------- -------
4,395 3,160 2,509
------- ------- -------
Claims and expenses paid:
Current year................................. (1,228) (1,074) (612)
Prior years.................................. (2,867) (2,176) (1,949)
------- ------- -------
(4,095) (3,250) (2,561)
------- ------- -------
Claim reserves related to acquired companies.... 793 3,470 -
Claim reserves related to disposed companies.... (202) - -
Foreign exchange and other...................... (176) 1 (292)
------- ------- -------
Balance at December 31 - net.................... 13,210 12,495 9,114
Add reinsurance recoverables.................... 4,225 2,847 1,822
------- ------- -------
Balance at December 31 - gross.................. $17,435 $15,342 $10,936
======= ======= =======
The liabilities for claims and claim expenses in the preceding table include
long-term disability claims that are discounted at a 6% rate for all years
presented. As a result of discounting the Company's long-term disability claims,
total liabilities for claims and claim expenses have been reduced by an
estimated 2% at December 31, 1999 and 1998. The amortization of discount is
included in current operating results as part of the development of prior year
liabilities.
8
Long-term disability discounts accrued as a percentage of claims, claim expenses
and policy benefits were less than 1% for the years ended December 31, 1999 and
1998 and approximately 1% for the year ended December 31, 1997. Discounts
amoritized as a percentage of claims, claim expenses and policy benefits were
less than 1% for the years ended December 31, 1999 and 1998 and approximately 1%
for the year ended December 31, 1997.
The Company's reconciliation of its property and casualty reserves for unpaid
claims and claim expenses between statutory basis and GAAP basis is summarized
as follows:
December 31,
---------------------------------
(In millions) 1999 1998 1997
---------------------------------
Statutory basis reserves for U.S. companies - net.... $ 7,204 $ 7,679 $ 5,527
Adjustments to GAAP basis (1)........................ 636 667 (118)
------- ------- -------
GAAP basis reserves for U.S. companies - net......... 7,840 8,346 5,409
GAAP basis reserves for non-U.S. companies - net..... 5,370 4,149 3,705
------- ------- -------
Total GAAP basis reserves - net...................... 13,210 12,495 9,114
Add reinsurance recoverables......................... 4,225 2,847 1,822
------- ------- -------
GAAP basis reserves - gross.......................... $17,435 $15,342 $10,936
======= ======= =======
(1) Statutory basis reserve offsets and reserves reclassified to contract
deposit assets or liabilities based on risk transfer provisions of SFAS
No. 113.
Asbestos and Environmental Exposure. Included in the Company's liability for
claims and claim expenses are liabilities for asbestos and environmental
exposures. These claims and claim expenses are primarily related to policies
written prior to 1986 as the policies written since 1986 have tended to
explicitly exclude asbestos and environmental risks from coverage and most of
the asbestos and environmental exposures arise from risks located in the United
States. During 1997, the Company's international operations completed the
initial process of identifying asbestos and environmental claims that had been
reserved in prior periods but were initially aggregated and coded under other
general lines of business rather than being specifically identified as asbestos
and environmental claims.
The three-year development of claims and claim expense reserves associated with
the Company's asbestos and environmental claims, including case and IBNR
reserves, is summarized as follows:
Year ended December 31,
-------------------------------
(In millions) 1999 1998 1997
-------------------------------
Balance at January 1 - gross.................... $995 $462 $368
Less reinsurance recoverables................... (206) (193) (174)
---- ---- ----
Balance at January 1 - net...................... 789 269 194
Claims and expenses incurred.................... (7) 35 54
Claim identification and IBNR allocation........ - - 43 (1)
Claims and expenses paid........................ (210) (39) (22)
Claim reserves related to acquired companies.... 33 524 -
---- ---- ----
Balance at December 31 - net.................... 605 789 269
Add reinsurance recoverables.................... 195 206 193
---- ---- ----
Balance at December 31 - gross.................. $800 $995 $462
==== ==== ====
(1) Prior to 1997, the Company's international operations were unable to
identify and segregate recorded claim reserves that related to asbestos and
environmental exposures as they were grouped with claim reserves in various
lines of business such as general liability. Beginning in 1997, the Company
began identifying and segregating the asbestos and environmental claims
related to its international operations.
9
The amounts on the preceding page are management's best estimate, based on
currently available information, of claims and claim expense payments and
recoveries that are expected to develop in future years.
The Company monitors evolving case law and its effect on asbestos-related
illness and toxic waste cleanup claims. Changing domestic and foreign government
regulations and legislation, including continuing congressional consideration of
federal Superfund law, newly reported claims, new contract interpretations and
other factors could significantly affect future claim development. While the
Company has recorded its best estimate of its liabilities for asbestos-related
illness and toxic waste cleanup claims based on currently available information,
it is possible that additional liabilities may arise in the future. It is not
possible to estimate with any certainty the amount of additional net claims and
claim expenses, or the range of net claims and claim expenses, if any, that is
reasonably possible; therefore, there can be no assurance that future
liabilities will not materially affect the Company's results of operations,
financial position or cash flows.
Other Mass Tort Exposures. In addition to asbestos and environmental exposures,
the Company also may have exposures to other mass torts involving primarily
product liability issues such as tobacco products, gun manufacturers and
silicone breast implants. The Company has, in the past, generally avoided the
products liability reinsurance business, and, based on currently available
information, future liabilities resulting from these matters are not expected to
be material to the Company's results of operations, financial position or cash
flows.
Life and Health Reserves for Future Policy Benefits and Accumulated Contract
Values
Future policy benefits for traditional life and health reinsurance contracts
represent the present value of such benefits based on mortality and other
assumptions which were appropriate at the time the policies were issued or, in
the event the policies were acquired by the Company from another insurer, at the
date of acquisition. Interest rate assumptions used in calculating the present
value generally ranged from 3.00% to 8.50% per annum at December 31, 1999.
Payments received from sales of universal life and investment contracts are
recognized by providing liabilities equal to the accumulated contract values of
the policyholders' contracts. Interest rates credited to such universal life and
investment contracts are generally guaranteed for a specified time period with
renewal rates determined by the Company. Such crediting interest rates ranged
from 3.00% to 9.00% per annum in 1999.
Regulatory Matters
GE Global Insurance and its domestic subsidiaries are subject to regulation
under the insurance statutes, including insurance holding company statutes, of
various states, including Missouri, Kansas, Illinois and Indiana, the
domiciliary states of GE Global Insurance's principal domestic insurance company
subsidiaries. The international subsidiaries of Employers Reinsurance
Corporation (the "ERC Frankona Group") are subject to regulation under insurance
statutes of various foreign countries.
General. The regulation and supervision to which GE Global Insurance's
subsidiaries are subject relate primarily to licensing requirements of
reinsurers, the standards of solvency that must be met and maintained, the
amount of dividends that may be paid by such subsidiaries, the nature of and
limitations on investments, restrictions on the size of risks that may be
insured or reinsured, deposits of securities for the benefit of ceding
companies, periodic examinations of the financial condition and affairs of
reinsurers, the form and content of financial statements required to be filed
with regulatory authorities and reserves for unearned premiums, losses and other
purposes. In general, such regulation is for the protection of the ceding
companies and, ultimately, their policyholders, rather than security holders of
the regulated reinsurer. GE Global Insurance believes it is, and that its
subsidiaries are, in material compliance with all applicable laws and
regulations pertaining to their business and operations.
U.S. Insurance Regulation. U.S. domestic property and casualty and life
insurers, including reinsurers, are subject to regulation by their states of
domicile and by those states in which they are licensed. The rates and policy
terms of primary insurance policies generally are closely regulated by state
insurance departments. While reinsurance is not regulated as closely as primary
insurance, some states do impose control over certain terms and conditions of
reinsurance agreements by virtue of their authority to grant or deny credit for
ceded reinsurance by its domiciled primary insurers. In addition, as a practical
matter, the rates permitted to be charged by primary insurers can have an effect
on the rates that are charged by reinsurers.
10
Risk-Based Capital. The National Association of Insurance Commissioners ("NAIC")
has adopted minimum risk-based capital requirements to evaluate the adequacy of
statutory capital and surplus in relation to an insurance company's risks.
Regulatory compliance with risk-based capital requirements is defined by a ratio
of a company's regulatory total adjusted capital to its authorized control level
risk-based capital, as defined by the NAIC. At December 31, 1999, each of GE
Global Insurance's domestic insurance company subsidiaries exceeded the minimum
risk-based capital requirements.
Insurance Holding Company Regulations. The insurance holding company laws and
regulations vary from state to state, but generally require an insurance holding
company to register with its domiciliary state insurance regulatory agency and
file certain reports that include current information concerning the capital
structure, ownership, management, financial condition and general business
operations of the insurance holding company and its subsidiary insurers that are
licensed in the state. State insurance holding company laws and regulations,
with respect to domestic insurers, also require prior notice or regulatory
approval of changes in control of an insurer or its holding company and of
material inter-affiliate transactions within the holding company structure.
Dividends by Subsidiaries. Because the operations of GE Global Insurance are
conducted primarily through Employers Reinsurance Corporation ("ERC"), GE Re and
Medical Protective, GE Global Insurance is dependent upon dividends, tax
allocation and other payments primarily from ERC, GE Re and Medical Protective
to service its debt and meet its other obligations. The payment of dividends and
other payments to GE Global Insurance by ERC, GE Re and Medical Protective are
subject to limitations imposed by the Missouri, Illinois and Indiana Insurance
Codes, respectively. The payment of dividends to ERC by its principal life
reinsurance subsidiaries, Employers Reassurance Corporation and ERC Life
Reinsurance Corporation, are subject to limitations imposed by the Kansas and
Missouri Insurance Codes, respectively. No prediction can be made as to whether
any legislative proposals relating to dividend rules in Kansas, Missouri,
Illinois or Indiana will be made, whether any such legislative proposal will be
adopted in the future, or the effect, if any, any such proposal would have on
the Company.
The maximum amount available for the payment of dividends during 2000 by ERC
without prior regulatory approval is $294 million after December 29, 2000. Of
this amount, $88 million is committed to pay dividends on the preferred stock
issued by ERC to GE Capital Corporation. GE Re will not be able to make any
dividend payments during 2000 without the prior approval of the Director of
Insurance for the State of Illinois. The maximum amount available for the
payment of dividends during 2000 by Medical Protective without prior regulatory
approval is $66 million after December 17, 2000.
International Regulations. Based on 1999 net premiums written, approximately 44%
of the Company's business is carried on outside of the United States. The degree
of regulation and supervision in foreign jurisdictions varies from minimal in
some to stringent in others. Licenses issued by foreign authorities to the ERC
Frankona Group are subject to modification or revocation by such authorities,
and such subsidiaries could be prevented from conducting business in certain of
the jurisdictions where they currently operate. In the past, the ERC Frankona
Group has been allowed to modify their operations to conform with new licensing
requirements in all jurisdictions that are material to the Company's
international operations.
In addition to licensing requirements, the ERC Frankona Group is regulated in
various jurisdictions with respect to, among other things, currency, policy
language and terms, methods of accounting and auditing, amount and type of
security deposits, amount and type of reserves, amount and type of local
investment and the share of profits to be returned to policyholders on
participating policies. Regulations governing constitution of technical reserves
(including equalization reserves) in some countries could hinder the remittance
of profits and repatriation of assets and the payment of dividends; however, the
Company does not believe that these regulations will have a material impact on
the ERC Frankona Group's operations.
11
Item 2. Properties.
The Company conducts business from various facilities, most of which are leased.
In addition, the Company owns its administrative offices in Overland Park,
Kansas, Fort Wayne, Indiana, Copenhagen, Denmark and Munich, Germany.
Item 3. Legal Proceedings.
There are no pending legal proceedings beyond the ordinary course of business
that in the opinion of the Company's management, based on information available
at the date of this report, would have a material adverse effect on the
Company's consolidated results of operation or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
All of the common stock of GE Global Insurance, its sole class of common equity
on the date hereof, is owned by GE Capital Services. Accordingly, there is no
public trading market for the Company's common equity. GE Global Insurance paid
dividends on its common stock on December 28, 1999 of $243 million.
Item 6. Selected Financial Data.
Consolidated Financial Data
Year ended December 31,
------------------------------------------------------------
(In millions) 1999 1998 1997 1996 1995
------------------------------------------------------------
Total revenues................................ $ 9,031 $ 7,203 $ 5,784 $ 5,751 $ 4,798
Net premiums written.......................... 7,147 5,984 4,545 4,573 3,561
Net investment income......................... 1,151 985 910 837 676
Net realized gains on investments............. 699 432 303 223 191
Earnings before income taxes.................. 988 1,070 882 780 561
Net earnings.................................. 720 779 648 567 437
Total investments............................. 21,539 21,987 18,343 16,479 15,394
Total assets.................................. 37,561 35,047 27,532 25,388 25,613
Stockholder's equity.......................... $ 5,575 $ 6,020 $ 5,374 $ 4,760 $ 4,191
Return on equity (average).................... 12.4% 13.7% 12.8% 12.7% 12.6%
Stockholder's equity, excluding unrealized
gains (losses) on investment securities.... $ 5,524 $ 5,088 $ 4,628 $ 4,260 $ 3,755
Return on equity (average), excluding
unrealized gains (losses) on investment
securities................................. 13.6% 16.0% 14.6% 14.1% 13.2%
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net premiums written increased $1,163 million or 19% in 1999, primarily
attributable to inclusion of a full year of operating activity for the October
1998 acquisitions of GE Re and Medical Protective, the March 1999 acquisition of
Eagle Star Re and core growth in various product lines. This increase was
partially offset by continued competitive market conditions, an increase in
contingently payable ceded premiums relating to recorded recoveries under
aggregate excess retrocession programs and the impact of foreign currency
translation in connection with the strengthening of the U.S. dollar compared to
most major European currencies.
Net earnings decreased $59 million or 8% in 1999, including an increase in
after-tax net realized gains on investments of $176 million. Excluding after-tax
net realized gains on investments, net earnings decreased $235 million or 46% in
1999. This decrease was primarily attributable to increased property and
casualty-related losses related to the frequency and severity of large loss
events occurring in 1999 as compared to 1998 and, to a lesser extent, adverse
development on prior year recorded losses. Large loss events are individual
events that, after specific reinsurance recoveries and related premium
adjustments, affect operations by $2 million or more, and include losses from
earthquakes, aviation or railroad accidents, fire damage, and weather-related
damage from hurricanes, tornadoes, wind and ice. Large loss events amounted to
approximately $720 million in 1999, as compared to $230 million in 1998. A
portion of the 1999 losses was recovered under aggregate excess retrocession
coverages obtained in the ordinary course of business. This increase in property
and casualty-related losses was partially offset by a $166 million increase in
net investment income, primarily due to growth in the investment portfolio as a
result of acquisitions, and a $134 million increase in other revenues, primarily
due to acquisitions, equity-method investments and a gain on disposition of the
Company's reinsurance brokerage subsidiary. An increase in underwriting and
operating expenses associated with acquisitions and continued competitive market
conditions also contributed to the deterioration in underwriting results.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net premiums written increased $1,439 million or 32% in 1998, primarily
attributable to growth in various product lines, including new property and
casualty business associated with the acquisition of the renewal rights of
business from IRI and Coregis and the acquisitions of Medical Protective and GE
Re. This increase was partially offset by three significant quota share life
reinsurance contracts obtained in 1997 that did not recur in 1998, the impact of
foreign currency translation in association with the strengthening of the U.S.
dollar and continued competitive market conditions.
Net earnings increased $131 million or 20% in 1998, including an increase in
after-tax net realized gains on investments of $75 million. Excluding after-tax
net realized gains on investments, net earnings increased $56 million or 12% in
1998. This increase was primarily attributable to a $75 million increase in net
investment income, primarily due to the acquisitions of Medical Protective and
GE Re and continued growth in the investment portfolios, and a $47 million
increase in other revenues, primarily due to an increase in revenues generated
from investment-related life reinsurance products and financial reinsurance
transactions. These increases were partially offset by a decrease in
underwriting results reflecting increased underwriting and operating expenses
associated with the acquisitions and continued competitive market conditions.
13
Domestic Property and Casualty Business
Year ended December 31,
-------------------------------
(In millions) 1999 1998 1997
-------------------------------
Net premiums written............................ $3,370 $2,499 $1,809
Net underwriting loss........................... (423) (58) (64)
Net investment income........................... 513 419 389
Earnings before income taxes.................... 533 601 489
Net realized gains on investments............... 516 311 212
Earnings before income taxes, excluding
net realized gains on investments............ 17 290 277
GAAP ratios (1):
GAAP claims and claim expense ratio.......... 79.5% 68.9% 70.8%
GAAP underwriting expense ratio.............. 33.6% 33.6% 33.0%
----- ----- -----
GAAP combined ratio.......................... 113.1% 102.5% 103.8%
===== ===== =====
(1) Represents data for the applicable periods calculated in accordance with
GAAP. Claims and claim expense ratio represents incurred claims and claim
expenses as a percentage of net premiums earned. Underwriting expense
ratio represents acquisition costs and other underwriting expenses
(excluding amortization of intangibles, interest expense and minority
interest in net earnings of consolidated subsidiaries) as a percentage of
net premiums earned. The combined ratio represents the sum of the claims
and claim expense ratio and the underwriting expense ratio.
Net premiums written increased $871 million or 35% in 1999, primarily
attributable to the acquisitions of GE Re and Medical Protective and core growth
in various product lines, partially offset by continued competitive market
conditions and an increase in contingently payable ceded premiums relating to
recorded recoveries under aggregate excess retrocession programs. Net premiums
written increased $690 million or 38% in 1998, primarily attributable to growth
in various product lines, including new property and casualty business
associated with the acquisition of the renewal rights of business from IRI and
Coregis and the acquisitions of GE Re and Medical Protective, partially offset
by continued competitive market conditions.
Typically, the underwriting performance of property and casualty business is
measured in terms of a combined ratio. The combined ratio is the sum of the loss
ratio and the underwriting expense ratio, with a ratio lower than 100%
indicating an underwriting profit and a ratio greater than 100% indicating an
underwriting loss. Although the combined ratio has been greater than 100% for
the three years presented above, the operating results of insurance/reinsurance
companies include net investment income which generally yields an overall
operating profit as reflected above in the caption "Earnings before income
taxes, excluding net realized gains on investments."
The significant increase in the combined ratio in 1999 reflects an increase in
the frequency and severity of large loss events occurring in 1999 and, to a
lesser extent, adverse development on prior year recorded losses. The lower
combined ratio in 1998 primarily reflects a general reduction in incurred losses
caused by a decline in both the frequency and overall severity of claims,
partially offset by an increase in hurricane and other weather-related
catastrophe losses.
Net investment income increased $94 million or 22% in 1999, primarily
attributable to inclusion of a full year of investment activity in 1999 for the
1998 GE Re and Medical Protective acquisitions. Net investment income increased
$30 million or 8% in 1998, primarily attributable to the acquisitions of GE Re
and Medical Protective and continued growth in the investment portfolios.
Earnings before income taxes, excluding net realized gains on investments,
decreased $273 million in 1999, primarily attributable to the significant
increase in the combined ratio, partially offset by the increase in net
investment income discussed above. Earnings before income taxes, excluding net
realized gains on investments, increased $13 million or 5% in 1998, primarily
attributable to the decrease in the combined ratio and the increase in net
investment income discussed above.
14
International Property and Casualty Business
Year ended December 31,
-------------------------------
(In millions) 1999 1998 1997
-------------------------------
Net premiums written............................ $2,513 $2,389 $1,684
Net underwriting loss........................... (238) (31) (64)
Net investment income........................... 340 286 292
Earnings before income taxes.................... 211 312 241
Net realized gains on investments............... 101 87 48
Earnings before income taxes, excluding
net realized gains on investments............ 110 225 193
GAAP ratios (1):
GAAP claims and claim expense ratio.......... 76.3% 70.5% 70.1%
GAAP underwriting expense ratio.............. 33.6% 30.9% 33.4%
------ ----- -----
GAAP combined ratio.......................... 109.9% 101.4% 103.5%
====== ===== =====
(1) Represents data for the applicable periods calculated in accordance with
GAAP. Claims and claim expense ratio represents incurred claims and claim
expenses as a percentage of net premiums earned. Underwriting expense ratio
represents acquisition costs and other underwriting expenses (excluding
amortization of intangibles, interest expense and minority interest in net
earnings of consolidated subsidiaries) as a percentage of net premiums
earned. The combined ratio represents the sum of the claims and claim
expense ratio and the underwriting expense ratio.
Net premiums written increased $124 million or 5% in 1999, primarily
attributable to the acquisitions of Eagle Star Re and GE Re and core growth in
various product lines, partially offset by continued competitive market
conditions, an increase in contingently payable ceded premiums relating to
recorded recoveries under aggregate excess retrocession programs and the impact
of foreign currency translation in connection with the strengthening of the U.S.
dollar compared to most major European currencies. Net premiums written
increased $705 million or 42% in 1998, primarily attributable to growth in
various product lines, including new property and casualty business associated
with the acquisition of GE Re, partially offset by the impact of foreign
currency translation in association with the strengthening of the U.S. dollar
and continued competitive market conditions.
Consistent with experience in the domestic property and casualty business, the
significant increase in the combined ratio in 1999 reflects an increase in the
frequency and severity of large loss events occurring in 1999 and, to a lesser
extent, adverse development on prior year recorded losses. The lower combined
ratio in 1998 primarily reflects a general reduction in incurred losses caused
by a decline in both the frequency and overall severity of claims, partially
offset by an increase in aviation, hurricane and other weather-related
catastrophe losses.
Net investment income increased $54 million or 19% in 1999, primarily
attributable to the acquisitions of GE Re and Eagle Star Re. Net investment
income decreased $6 million or 2% in 1998, primarily attributable to market
conditions partially offset by the acquisition of GE Re.
Earnings before income taxes, excluding net realized gains on investments,
decreased $115 million or 51% in 1999, primarily attributable to the significant
increase in the combined ratio, partially offset by the increase in net
investment income discussed above. Earnings before income taxes, excluding net
realized gains on investments, increased $32 million or 17% in 1998, primarily
attributable to the decrease in the combined ratio discussed above.
15
Life Reinsurance Business
Year ended December 31,
--------------------------
(In millions) 1999 1998 1997
--------------------------
Revenues............................................. $1,789 $1,525 $1,283
Earnings before income taxes......................... 244 157 152
Revenues, which 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, increased $264 million or 17% in 1999. This increase was primarily
attributable to growth in the domestic traditional life and credit life
business, an increase in net realized gains on investments and fees generated
from investment-related life reinsurance products and financial reinsurance
transactions. Revenues increased $242 million or 19% in 1998, primarily
attributable to growth in the traditional life and credit life business and fees
generated from investment-related life reinsurance products and financial
reinsurance transactions.
Earnings before income taxes increased $87 million or 55% in 1999, including a
$48 million increase in net realized gains on investments. Excluding net
realized gains on investments, earnings before income taxes increased $39
million or 32% in 1999, primarily attributable to an increase in net investment
income, primarily due to continued growth in the investment portfolios, and fees
generated from investment-related life reinsurance products and financial
reinsurance transactions. Earnings before income taxes increased $5 million or
3% in 1998, including a $9 million decrease in net realized gains on
investments. Excluding net realized gains on investments, earnings before income
taxes increased $14 million or 13% in 1998, primarily attributable to an
increase in net investment income, primarily due to continued growth in the
investment portfolios, and fees generated from investment-related life
reinsurance products and financial reinsurance transactions.
Liquidity and Capital Resources
GE Global Insurance's ability to meet its obligations, including debt service
and operating expenses, and pay dividends to its shareholder depends primarily
upon its receipt of sufficient funds from its insurance subsidiaries. The
payment of dividends by ERC, GE Re and Medical Protective are subject to
restrictions set forth in the insurance laws of Missouri, Illinois and Indiana,
respectively, as well as other restrictions. Historically, the Company's
liquidity requirements have been met by funds provided from operations and from
the maturity and sales of investments.
Cash flows from operating activities, which primarily consists of premiums
collected during the period in excess of payments made for claims and claim
expenses, increased $578 million in 1999. This increase was primarily
attributable to a decrease in claim settlements relative to the collection of
premiums, somewhat offset by an increase in reinsurance recoverables under the
Company's aggregate excess retrocession programs. Cash flows from operating
activities decreased $586 million in 1998, primarily attributable to an increase
in claim settlements relative to the collection of premiums, the timing of
reinsurance settlements in association with catastrophe loss recoverables and an
increase in underwriting and operating cash outlays associated with the
acquisition of the renewal rights of business from IRI and Coregis and the
acquisitions of Medical Protective and GE Re.
Cash flows used for investing activities activities decreased $374 million in
1999, primarily attributable to a reduction in cash used to fund acquisitions in
1999 due to the 1998 acquisitions of Medical Protective and GE Re, somewhat
offset by a net increase in the purchases of investment securities. Cash flows
used for investing activities decreased $423 million in 1998, primarily
attributable to an increase in the maturity and sales of investments, partially
offset by the acquisitions of Medical Protective and GE Re.
Cash flows from financing activities decreased $733 million in 1999, primarily
attributable to the large amount of 1998 proceeds from short-term borrowings
associated with the acquisitions of Medical Protective and GE Re and the change
in contract deposit liabilities resulting from the 1998 commutation of a
significant financial reinsurance treaty. The $395 million of proceeds from
long-term borrowings in 1999 were used largely to repay short-term borrowings
made in 1998 under the Company's revolving credit agreement with GE Capital
Services. Cash flows from financing activities increased $182 million in 1998,
primarily attributable to an increase in the proceeds from short-term borrowings
associated with the acquisitions of Medical Protective and GE Re, partially
16
offset by the change in contract deposits associated with the commutation of a
financial reinsurance treaty and an increase in dividends paid to affiliates.
As of December 31, 1999, the Company had a $625 million note payable to GE
Capital Corporation (which carries an annual interest rate equal to GE Capital
Corporation's cost of funds) under an interim loan agreement that was used to
fund its acquisition of Medical Protective.
In addition, the Company has a one-year $600 million revolving credit agreement
with GE Capital Services which enables the Company to borrow from GE Capital
Services at an interest rate per annum equal to GE Capital Services' cost of
funds for a one year period. The agreement is automatically extended for
successive terms of one year each unless terminated in accordance with terms of
the agreement.
Investments
General. The Company follows a conservative investment strategy that emphasizes
maintaining a high quality investment portfolio. The primary goals include a
growing stream of investment income and improving total investment returns. All
investments are administered under guidelines established and approved by the
Company's Board of Directors. The Company's guidelines specify credit quality
and concentration limits with respect to both fixed maturity and equity
securities.
In structuring its fixed maturity portfolios, the Company considers the duration
of its assets and claims and claim expense reserves. Most fixed maturity
portfolios have total return benchmarks against which relative performance is
measured. The total return benchmarks include investment income and realized and
unrealized gains and losses on investments. Equity funds are managed for total
return and performance is measured against equity benchmarks.
On a worldwide basis, based on data as of December 31, 1999, the Company manages
68% of its investments internally. General Electric Investment Corporation
manages an additional 16% of the Company's investments, and the balance is
managed by unaffiliated outside managers.
The Company's investment results are summarized as follows:
Year ended December 31,
---------------------------------------------------
(In millions) 1999 1998 1997 1996 1995
---------------------------------------------------
Average invested assets (at cost)............. $20,940 $18,794 $16,417 $15,195 $12,153
Net investment income......................... 1,151 985 910 837 676
Net effective yield........................... 5.5% 5.2% 5.5% 5.5% 5.6%
Net realized gains on investments............. $ 699 $ 432 $ 303 $ 223 $ 191
Unrealized gains on investment
securities before deferred income taxes.... 92 1,554 1,189 799 684
The significant decrease in unrealized gains on investment securities before
deferred income taxes in 1999 is primarily due to the concentration of fixed
maturity debt securities held in the investment portfolio and the effects of a
general rise in interest rates which occurred during 1999.
The Company continues to seek opportunities to enhance investment yield through
a conservative, primarily fixed maturity investment strategy. Its current
investment strategy does not contemplate material additional investments in
non-investment grade debt securities, commercial real estate, commercial
mortgages, equity securities or derivatives.
17
Domestic Investment Operations. The Company's domestic property and casualty
investment portfolios are principally invested in tax-exempt state and municipal
bonds, which the Company believes provide the most attractive after-tax yield.
Some additional commitment was made to equity securities in recent years to
enhance total investment returns in the longer term. The Company's domestic life
investment portfolios are largely invested in taxable debt securities.
The Company's domestic fixed maturity portfolios categorized by rating based on
market values are summarized as follows:
Domestic Property
and Casualty Domestic Life
---------------------------------------
December 31,
---------------------------------------
1999 1998 1999 1998
---------------------------------------
U.S. government and government agency securities..... 0.9% 9.0% 7.4% 6.6%
Aaa.................................................. 44.0 39.0 1.6 4.5
Aa................................................... 31.1 26.9 6.2 6.7
A.................................................... 9.7 12.2 21.8 20.9
Baa.................................................. 1.2 1.2 12.9 13.5
Ba................................................... 0.4 0.2 1.5 2.1
Canadian securities.................................. 4.0 2.5 4.8 0.0
Mortgage-backed and other asset-backed securities.... 4.3 3.9 37.8 37.6
Other................................................ 4.4 5.1 6.0 8.1
----- ----- ----- -----
Total............................................. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Ratings are as assigned by Moody's when available, or by S&P and converted to
the generally comparable Moody's rating.
The Company's emphasis on investment quality is evidenced by the preceding
table, which indicates that the bonds in the Company's investment portfolios are
principally invested in either U.S. government and government agency securities
or issues rated "A" or above. The Canadian securities held by the Company are
similar in quality to the other securities held in its domestic property and
casualty portfolio. Fixed maturity securities held by the Company in its
domestic life portfolios include mortgage-backed and other asset-backed
securities that are matched to the liability profile of specific life
reinsurance contracts. Investments in mortgage-backed and other asset-backed
securities are limited to lower risk tranches and do not include any interest
only or principal only elements. Mortgage-backed and other asset-backed
securities in the Company's investment portfolio were principally issued by
Federal agencies. The majority of the balance of other securities held in both
the domestic property and casualty and domestic life portfolios represent
investments in non-rated debt securities. The Company does not contemplate
significant additional investment in non-investment grade securities in either
the property and casualty or life portfolios.
International Investment Operations. The investment portfolios of the Company's
international operations (other than certain equity portfolios, which are
managed by outside managers) are managed by the ERC Frankona Group's investment
personnel based in Munich, within guidelines established by the management of
the ERC Frankona Group and under the overall supervision and review of ERC's
investment department.
The principal objective of the ERC Frankona Group's investment policy is to
manage the investment portfolios on a total return basis taking into
consideration the duration and currency structure of the ERC Frankona Group's
reinsurance liabilities. The ERC Frankona Group's investment portfolios are
geographically diversified with investments principally from the major European
markets and the United States.
18
As of December 31, 1999, the fair value of the ERC Frankona Group's investments
totaled $7,490 million, an increase of $234 million from December 31, 1998. The
composition of ERC Frankona Group's investments is summarized as follows:
December 31,
-----------------
1999 1998
-----------------
Fixed maturity securities......................... 81.8% 81.3%
Equity securities................................. 15.8 12.6%
Other invested assets............................. 2.4 6.1%
----- -----
Total............................................. 100.0% 100.0%
===== =====
Most fixed maturity securities within the ERC Frankona Group's investment
portfolios have a term of less than ten years. The fixed maturity securities
consist of high credit quality securities, and almost all bonds are investment
grade securities with a comparable average rating equal to or above a Moody's or
S&P "AA" rating. Fixed maturity securities include German and Danish
mortgage-backed securities, although these mortgage-backed securities have
significantly less prepayment risk than typical U.S. mortgage-backed securities,
as the German and Danish tax and social environments are not conducive to risks
of prepayment of interest and principal. Equity securities and other invested
assets were internationally diversified with principal holdings in Germany, the
United Kingdom and the United States.
Interest Rate and Currency Risk Management
Interest rate and currency risk management is important in the normal
operations of the Company. The following discussion presents an overview of such
management.
The Company uses various financial instruments, such as currency and interest
rate swaps, options and currency forwards, principally to manage interest rate
and currency risks. The Company is exclusively an end-user of these instruments,
which are commonly referred to as derivatives. The Company does not engage in
trading, market-making or other speculative activities in the derivatives
markets. Management requires that derivative financial instruments relate to
specific asset, liability or equity transactions or to currency exposures. More
detailed information about these financial instruments, as well as the
strategies and policies for their use, is provided in Notes 2 and 14 to the
consolidated financial statements.
The Company manages its exposure to currency principally by matching the
underlying reinsurance liabilities with the corresponding assets. Any remaining
significant net asset/liability positions in a given currency are hedged with
forward currency purchase or sale contracts to further mitigate currency
exposures. The Company also hedges its currency risk on a portion of its foreign
subsidiary investments by utilizing currency swaps that have been designated to
modify currency exposure associated with specific debt instruments.
On a limited basis, and as part of ongoing customer activities, the Company uses
interest rate swaps and options to minimize its exposure to movements in
interest rates and financial markets that have a direct correlation with certain
of its reinsurance products.
Substantially all derivative transactions are executed by the Company's Treasury
Department, which works closely with GE Capital Treasury personnel to maintain
controls on all exposures, adhere to stringent counterparty credit standards and
actively monitor marketplace exposures. Although the Company is exposed to
credit risk that the counterparty may not be able to comply with the terms and
conditions of the contracts, the Company uses only highly rated institutions as
counterparties to the derivative transactions.
19
The U.S. Securities and Exchange Commission requires that registrants provide
information about potential effects of changes in interest rates and currency
exchange. Although the rules offer alternatives for presenting this information,
none of the alternatives is 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 complex market reactions that normally would arise from
the market shifts modeled. While the following results of shock tests for
interest rates and currencies 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 (sometimes referred to as a "parallel shift in
the yield curve"). Under this model, it is estimated that, all else
constant, such a decrease, including repricing effects in the securities
portfolio, would reduce the 2000 net earnings of the Company based on
year-end 1999 positions by an insignificant amount. Based on positions at
year-end 1998, the pro forma effect on 1999 net earnings of such a decrease
in interest rates was also estimated to be an insignificant amount.
One means of assessing exposure to changes in currency exchange rates is to
model effects on reported earnings using a sensitivity analysis. Year-end
1999 consolidated currency exposures, including financial instruments
designated and effective as hedges, were analyzed to identify Company
assets and liabilities denominated in other than their relevant functional
currency. Net unhedged exposures in each currency were then remeasured
assuming a 10 percent decrease (20 percent for hyperinflationary economies)
in currency exchange rates compared with the U.S. dollar. Under this model,
it is estimated that, all else constant, such a decrease would have had an
insignificant effect on the 2000 net earnings of the Company based on
year-end 1999 positions. Based on conditions at year-end 1998, the effect
on 1999 net earnings of such a decrease in exchange rates was also
estimated to be an insignificant amount.
Cyclicality
The property and casualty reinsurance industry has been highly cyclical.
Underwriting results of primary property and casualty insurance companies and
prevailing general economic and reinsurance premium rates significantly
influences demand for reinsurance. The cyclical trends in the industry and the
industry's profitability can also be affected significantly by volatile and
unpredictable developments, including changes in what the Company believes to be
the propensity of courts to grant large awards, natural disasters and other
catastrophic events (such as hurricanes, windstorms, earthquakes, floods and
fires), fluctuations in interest rates and other changes in the investment
environment which affect inflationary pressures that may tend to affect the size
of losses experienced by ceding primary insurance companies.
20
New Accounting Standards
Two changes in accounting standards may affect future financial statements. The
Financial Accounting Standards Board ("FASB") has issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (Statement 133), effective for the Company on January 1, 2001. Upon
adoption, all derivative instruments (including certain derivative instruments
embedded in other contracts) will be recognized in balance sheets at fair value,
and changes in such fair values must be recognized immediately in earnings
unless specific hedging criteria are met. Changes in the values of derivatives
meeting these hedging criteria will ultimately offset related earnings effects
of the hedged items; effects of qualifying changes in fair value are to be
recorded in equity pending recognition in earnings. Certain significant
refinements and interpretations of Statement 133 are being deliberated by the
FASB, and the effects on accounting for the Company's financial instruments will
depend to some degree on the results of such deliberations. Management has not
determined the total probable effects on its financial statements of adopting
Statement 133, and does not believe that an estimate of such effects would be
meaningful at this time.
The FASB has also proposed new accounting for business combinations that, among
other things, would change the accounting for and display of goodwill and other
intangibles recorded in business acquisitions for transactions after January 1,
2001. An important aspect of the proposal is that goodwill amortization would be
displayed as a separate element in the Statement of Earnings. Management
believes that this proposal represents a useful approach to understanding
financial performance, but believes that the utility of this information would
be materially enhanced if the proposed approach for goodwill were applied to all
intangible assets acquired with a business.
Effects of Inflation
The Company's ultimate claims and claim expense costs on claims not yet settled
is increased by the effects of inflation, and changes in the inflation rate
therefore could become a significant factor in determining appropriate claims
and claim expense reserves, as well as reinsurance premium rates. Generally, the
Company's methods used to estimate claims and claim expense reserves and to
calculate reinsurance premium rates take into account the anticipated effects of
inflation in estimating the ultimate claims and claim expense costs. The Company
uses both insurance industry data and government economic indices in estimating
the effects of inflation on reinsurance premium rates and claims and claim
expense reserves. However, until claims are ultimately settled, the full effect
of inflation on the Company's results cannot be known.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information about potential effects of changes in interest rates and currency
exchange on the Company is discussed on pages 19-20.
Item 8. Financial Statements and Supplementary Data.
The Company's Consolidated Financial Statements and the Independent Auditors'
Report thereon and the Supplementary Financial Statement Schedules listed on the
accompanying Index to Financial Statements and Financial Statement Schedules are
filed as part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable
21
PART III
Item 10. Directors and Executive Officers of the Registrant.
Omitted
Item 11. Executive Compensation.
Omitted
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted
Item 13. Certain Relationships and Related Transactions.
Omitted
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements and Schedules.
The consolidated financial statements of the Company filed as part of
this report are listed in the Index to Consolidated Financial
Statements and Financial Statement Schedules (page 24).
(a) 2. Financial Statement Schedules.
The consolidated financial statement schedules of the Company filed
as part of this report are listed in the Index to Consolidated
Financial Statements and Financial Statement Schedules (page 24).
(a) 3. Listing of Exhibits.
3.1 A complete copy of the Articles of Incorporation of the
Company, as last amended on August 30, 1995, and currently in
effect. (Incorporated by reference to Exhibit 3.1 of the
Company's Form 10-K for the year ended December 31, 1995.)
3.2 A complete copy of the By-laws of the Company, as last amended
on February 26, 1995, and currently in effect. (Incorporated
by reference to Exhibit 3.2 of the Company's Registration
Statement on Form 10, File No. 0-27394.)
10.1 First Whole Account Aggregate Excess of Loss Retrocession
Agreement (E1), between Employers Reinsurance Corporation and
National Indemnity Company, dated January 1, 1999 (portions
redacted in accordance with application for confidentiality
previously filed).
10.2 Second Whole Account Aggregate Excess of Loss Retrocession
Agreement (E2), between Employers Reinsurance Corporation and
Centre Insurance Company, dated January 1, 1999 (portions
redacted in accordance with application for confidentiality
previously filed).
22
10.3 Second Whole Account Aggregate Excess of Loss Retrocession
Agreement (E2), between Employers Reinsurance Corporation and
National Union Fire Insurance Company of Pittsburgh, PA, dated
January 1, 1999 (portions redacted in accordance with
application for confidentiality previously filed).
10.4 Second Whole Account Aggregate Excess of Loss Retrocession
Agreement (E2), between Employers Reinsurance Corporation and
Federal Insurance Company, dated January 1, 1999 (portions
redacted in accordance with application for confidentiality
previously filed).
12 Computation of ratio of earnings to fixed charges.
(b) Reports on Form 8-K.
None.
23
ITEM 14(a)
GE Global Insurance Holding Corporation
and Subsidiaries
Index to
Consolidated Financial Statements
and
Financial Statement Schedules
Page
----
Consolidated Financial Statements
Independent Auditors' Report..............................................25
Consolidated Statement of Earnings........................................26
Consolidated Statement of Financial Position..............................27
Consolidated Statement of Stockholder's Equity............................29
Consolidated Statement of Cash Flows......................................30
Notes to Consolidated Financial Statements................................31
Financial Statement Schedules
Schedule II - Condensed Financial Information of Registrant...............56
Schedule III - Supplementary Insurance Information........................60
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
GE Global Insurance Holding Corporation:
We have audited the accompanying consolidated statements of financial position
of GE Global Insurance Holding Corporation and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of earnings,
stockholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1999. Our audits also included the financial statement
schedules listed in the Index at Item 14(a) as of December 31, 1999 and 1998 and
for each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GE Global Insurance
Holding Corporation and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
KPMG LLP
Kansas City, Missouri
January 21, 2000
25
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Earnings
Year ended December 31,
------------------------------
(In millions) 1999 1998 1997
------------------------------
Revenues
Net premiums written (Note 10) $7,147 $5,984 $4,545
====== ====== ======
Net premiums earned (Note 10) $6,896 $5,635 $4,467
Net investment income (Note 4) 1,151 985 910
Net realized gains on investments (Note 4) 699 432 303
Other revenues 285 151 104
------ ------ ------
Total revenues 9,031 7,203 5,784
------ ------ ------
Costs and Expenses
Claims, claim expenses and policy benefits 5,385 4,103 3,260
Insurance acquisition costs 1,839 1,357 1,073
Amortization of intangibles 111 89 78
Interest expense 102 55 42
Other operating costs and expenses 518 444 366
Minority interest in net earnings of consolidated
subsidiaries (Notes 3 and 11) 88 85 83
------ ------ ------
Total costs and expenses 8,043 6,133 4,902
------ ------ ------
Earnings before income taxes 988 1,070 882
------ ------ ------
Provision for income taxes (Note 7):
Current 216 324 (37)
Deferred 52 (33) 271
------ ------ ------
268 291 234
------ ------ ------
Net earnings $ 720 $ 779 $ 648
====== ====== ======
See Notes to Consolidated Financial Statements.
26
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Financial Position
December 31,
---------------------
(In millions) 1999 1998
---------------------
Assets
Investments (Note 4):
Fixed maturity securities available-for-sale, at fair value $17,268 $18,161
Equity securities, at fair value 3,104 2,722
Short-term investments, at amortized cost 788 596
Other invested assets 379 508
------- -------
Total investments 21,539 21,987
Cash 359 258
Securities and indebtedness of related parties 299 564
Accrued investment income 419 424
Premiums receivable 3,580 2,886
Funds held by reinsured companies 717 726
Reinsurance recoverables 6,029 3,915
Deferred insurance acquisition costs 1,418 1,203
Intangible assets (Note 5) 1,516 1,492
Other assets 1,685 1,592
------- -------
Total assets $37,561 $35,047
======= =======
27
December 31,
---------------------
(In millions) 1999 1998
---------------------
Liabilities and equity
Claims and claim expenses (Note 6) $18,134 $15,852
Accumulated contract values 2,164 2,271
Future policy benefits for life and health contracts 2,230 1,664
Unearned premiums 2,534 2,165
Other reinsurance balances 1,874 1,487
Income taxes payable (Note 7) 136 138
Contract deposit liabilities 1,223 1,485
Other liabilities 756 635
Deferred income taxes (Note 7) 21 539
Long-term borrowings (Note 9) 956 557
Indebtedness to related parties (Note 8) 779 1,058
------- -------
Total liabilities 30,807 27,851
------- -------
Minority interest in equity of consolidated
subsidiaries (Notes 3 and 11) 1,179 1,176
------- -------
Preferred stock, $100,000 par value; authorized,
issued and outstanding - 1,500 shares 150 150
Common stock, $5,000 par value; authorized,
issued and outstanding - 1,000 shares 5 5
Paid-in capital 845 845
Retained earnings 4,630 4,161
Accumulated unrealized gains on investment securities - net (a) 51 932
Accumulated foreign currency translation adjustments (a) (106) (73)
------- -------
Total stockholder's equity 5,575 6,020
------- -------
Total liabilities and equity $37,561 $35,047
======= =======
(a) The sum of accumulated unrealized gains on investment securities and
accumulated foreign currency translation adjustments constitutes
"Accumulated nonowner changes other than earnings," as shown in the
Consolidated Statement of Stockholder's Equity, and was $(55) million and
$859 million at year-end 1999 and 1998, respectively.
See Notes to Consolidated Financial Statements.
28
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Stockholder's Equity
Accumulated
Nonowner
Changes
Preferred Common Paid-In Retained Other Than
(In millions) Stock Stock Capital Earnings Earnings Total
---------------------------------------------------------------
Balances, January 1, 1997 $150 $5 $845 $3,245 $515 $4,760
------
Changes other than transactions with share owner:
Net earnings - - - 648 - 648
Net unrealized gains on investment securities (a) - - - - 246 246
Foreign currency translation adjustments (b) - - - - (47) (47)
------
Total changes other than transactions with share owner 847
------
Dividends paid on preferred stock - - - (8) - (8)
Dividends paid on common stock - - - (225) - (225)
---- -- ---- ------ ---- -----
Balances, December 31, 1997 150 5 845 3,660 714 5,374
------
Changes other than transactions with share owner:
Net earnings - - - 779 - 779
Net unrealized gains on investment securities (a) - - - - 454 454
Foreign currency translation adjustments (b) - - - - (41) (41)
Reclassification adjustments (c) - - - - (268) (268)
------
Total changes other than transactions with share owner 924
------
Dividends paid on preferred stock - - - (8) - (8)
Dividends paid on common stock - - - (270) - (270)
---- -- ---- ------ ---- ------
Balances, December 31, 1998 150 5 845 4,161 859 6,020
------
Changes other than transactions with share owner:
Net earnings - - - 720 - 720
Net unrealized losses on investment securities (a) - - - - (408) (408)
Foreign currency translation adjustments (b) - - - - (33) (33)
Reclassification adjustments (c) - - - - (473) (473)
------
Total changes other than transactions with share owner (194)
------
Dividends paid on preferred stock - - - (8) - (8)
Dividends paid on common stock - - - (243) - (243)
---- -- ---- ------ ---- ------
Balances, December 31, 1999 $150 $5 $845 $4,630 $(55) $5,575
==== == ==== ====== ==== ======
(a) Presented net of taxes of $233 million, $(305) million and $(146)
million in 1999, 1998 and 1997, respectively.
(b) Presented net of taxes of $17 million, $20 million and $17 million in 1999,
1998 and 1997, respectively.
(c) Presented net of taxes of $274 million and $164 million in 1999 and 1998,
respectively. (Note: In addition to net realized gains on investment
securities, the 1999 reclassification adjustment includes $48 million
in pre-tax gains related to available-for-sale investment securities held
by an investee accounted for under the equity method; these gains were
included in other revenues in the accompanying consolidated statement of
earnings.)
See Notes to Consolidated Financial Statements.
29
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Year ended December 31,
----------------------------------
(In millions) 1999 1998 1997
----------------------------------
Cash Flows From Operating Activities
Net earnings $ 720 $ 779 $ 648
Adjustments to reconcile net earnings to cash
from operating activities:
Claims and claim expenses 1,574 732 621
Future policy benefits for life and health contracts 182 161 211
Unearned premiums 400 245 137
Funds held by reinsured companies 5 (118) (5)
Reinsurance recoverables (1,409) (689) 103
Deferred income taxes 52 (33) 271
Income taxes payable (receivable) 10 (116) 25
Amortization of insurance acquisition costs 1,839 1,357 1,073
Insurance acquisition costs deferred (1,915) (1,606) (1,374)
Net realized gains on investments (699) (432) (303)
Other, net 130 31 (510)
------- ------- -------
Cash from operating activities 889 311 897
------- ------- -------
Cash Flows From Investing Activities
Fixed maturity securities available-for-sale:
Purchases (7,995) (4,788) (6,058)
Sales 6,399 3,963 4,494
Maturities 1,566 843 734
Equity securities:
Purchases (2,812) (1,331) (1,240)
Sales 2,812 1,602 1,383
Net (purchases) sales of short-term investments (216) 236 (231)
Net cash paid for acquisitions and in-force reinsurance
transactions (Note 3) (258) (1,018) (89)
Net cash received from dispositions 88 - -
Other investing activities 136 (161) (70)
------- ------- -------
Cash used for investing activities (280) (654) (1,077)
------- ------- -------
Cash Flows From Financing Activities
Change in contract deposits (171) (362) 513
Net contract accumulation payments (87) (42) (160)
Proceeds from short-term borrowings (Note 8) 132 1,061 23
Principal payments on short-term borrowings (Note 8) (426) (54) -
Proceeds from long-term borrowings (Note 9) 395 - -
Dividends paid (251) (278) (233)
------- ------- -------
Cash from (used for) financing activities (408) 325 143
------- ------- -------
Effect of exchange rate changes on cash (100) 7 (71)
------- ------- -------
Increase (decrease) in cash 101 (11) (108)
Cash at beginning of year 258 269 377
------- ------- -------
Cash at end of year $ 359 $ 258 $ 269
======= ======= =======
See Notes to Consolidated Financial Statements.
30
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
Principles of Consolidation
GE Global Insurance Holding Corporation ("GE Global Insurance") is a
wholly-owned subsidiary of General Electric Capital Services, Inc. ("GE Capital
Services"), which is a wholly-owned subsidiary of General Electric Company ("GE
Company"). The accompanying consolidated financial statements of GE Global
Insurance include the accounts and operations, after intercompany eliminations,
of GE Global Insurance, Employers Reinsurance Corporation ("ERC"), GE
Reinsurance Corporation ("GE Re" - formerly Kemper Reinsurance Company) and
Medical Protective Corporation ("Medical Protective"). ERC and GE Re are
reinsurance companies and Medical Protective is an insurance company, with each
having various property and casualty insurance/reinsurance and life reinsurance
subsidiaries. GE Global Insurance owns 100% of the common stock of ERC, GE Re
and Medical Protective, representing 89.5%, 100% and 100% of ERC's, GE Re's and
Medical Protective's voting rights, respectively. General Electric Capital
Corporation ("GE Capital Corporation" - a wholly-owned subsidiary of GE Capital
Services) owns 100% of ERC's preferred stock, representing 10.5% of ERC's voting
rights. GE Global Insurance and its consolidated subsidiaries are collectively
referred to as "the Company."
Other affiliates, generally companies in which the Company owns 20 to 50 percent
of the voting rights or otherwise has significant influence, are included in
other invested assets and valued at the appropriate share of equity plus loans
and advances.
Basis of Accounting
The accompanying consolidated financial statements have been prepared on the
basis of U.S. generally accepted accounting principles ("GAAP"), which, as to
the insurance company subsidiaries, vary from statutory accounting practices
prescribed or permitted by insurance regulatory authorities. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Actual results could differ from those estimates.
2. Summary of Significant Accounting Policies
Investments
The Company's fixed maturity and marketable equity securities have been
designated as available-for-sale, and are reported at fair value with net
unrealized gains or (losses) included in stockholder's equity, net of applicable
taxes and certain other adjustments. Such reported fair values are based
primarily on quoted market prices, or if quoted prices are not available, are
valued by third party pricing vendors. Realized gains or (losses) on sales of
investments are determined on the specific-identification method and include
adjustments to the net realizable value of investments for declines in value
that are considered to be other than temporary. Investment income is recognized
as earned and includes the accretion of discounts and amortization of premiums
related to fixed maturity securities.
Property and Casualty Insurance/Reinsurance Segment
Premiums are reported as earned over the terms of the related
insurance/reinsurance treaties or policies. In general, earned premiums are
calculated on a pro rata basis, are determined based on reports received from
reinsureds or are estimated if reports are not received timely from reinsureds.
Premium adjustments under retrospectively rated reinsurance contracts are
recorded based on estimated claims and claim expenses, including both case and
incurred but not yet reported liabilities. Assumed foreign reinsurance is
accounted for using the periodic method.
Certain insurance acquisition costs, principally commissions and brokerage
expenses, are deferred and amortized over the contract period in which the
related premiums are earned. Future investment income is considered in
determining the recoverability of deferred insurance acquisition costs.
31
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
The liabilities for claims and claim expenses represent the estimated
liabilities for reported claims plus those incurred but not yet reported and the
related estimated claim expenses. The liabilities for claims and claim expenses
are determined using case-basis evaluations and statistical analyses and
represent estimates of the ultimate cost of all claims incurred through December
31 of each year. Although considerable variability is inherent in such
estimates, management believes that the liabilities for claims and claim
expenses are adequate. The estimates are continually reviewed and adjusted as
necessary; such adjustments are included in current operations and are accounted
for as changes in estimates. Included in the liabilities for claims and claim
expenses are $887 million and $940 million at December 31, 1999 and 1998,
respectively, of long-term disability claims that are discounted at a 6% rate
(See Note 12).
Amounts recoverable from reinsurers related to the liabilities for claims and
claim expenses are estimated in a manner consistent with the related liabilities
associated with the reinsured policies.
Life Reinsurance Segment
The Company provides reinsurance for life and health insurance and annuities.
These products can be classified into three groups: traditional insurance
contracts, universal life insurance contracts and investment contracts.
Insurance contracts are broadly defined to include contracts with significant
mortality and/or morbidity risk, while investment contracts are broadly defined
to include contracts without significant mortality or morbidity risk. Universal
life insurance contracts are insurance contracts with terms that are not fixed
and guaranteed.
Revenues from traditional insurance contracts are recognized as revenues when
due or over the terms of the policies. For universal life contracts and
investment contracts, premiums received are reported as liabilities
("accumulated contract values"), not as revenues. Revenues from universal life
contracts and investment contracts are recognized for assessments made against
the policyholder's accumulated contract values for insurance, policy
administration, surrenders and other authorized charges.
Future policy benefits for traditional life and health contracts represent the
present value of such benefits based on mortality and other assumptions which
were appropriate at the time the policies were issued or at the date of
purchase. Interest rate assumptions used in calculating the present value
generally ranged from 3.00% to 8.50% at December 31, 1999 and 1998. Interest
rates credited to universal life contracts and investment contracts are
generally guaranteed for a specified time period with renewal rates determined
by management. Such crediting interest rates ranged from 3.00% to 9.00% in 1999
and 1998 and 3.75% to 9.00% in 1997.
Acquisition costs include costs and expenses that vary with, and are primarily
related to, the acquisition of insurance and investment contracts, such as
commissions and certain support costs, such as underwriting and policy issuance
expenses. For universal life contracts and investment contracts, the
amortization is based on the anticipated gross profits from investments,
surrender and other charges net of interest credited, mortality and maintenance
expenses. As actual gross profits vary from projected gross profits, the impact
on amortization is included in net income. For traditional insurance contracts,
the acquisition costs are amortized over the premium paying periods or, in the
case of limited payment contracts, over the estimated benefit payment periods
using assumptions consistent with those used in computing future policy benefit
reserves.
The actuarially determined present value of anticipated net cash flows to be
realized from insurance, annuity and investment contracts in force at the date
of acquisition of life insurance enterprises is recorded as the present value of
future profits and is amortized over the respective policy terms in a manner
similar to deferred insurance acquisition costs. Unamortized balances are
adjusted to reflect experience and impairment, if any.
32
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Funds Held by Reinsured Companies
Funds held by reinsured companies represent ceded premiums retained by the
ceding companies according to contractual terms. The Company generally earns
investment income on these balances during the periods that the funds are held.
Allowance for Doubtful Accounts
The Company establishes an allowance for uncollectible premiums receivable,
reinsurance recoverables and other doubtful receivables. The allowance is
recorded as a valuation account that reduces the corresponding asset. The
allowance totaled $79 million and $80 million at December 31, 1999 and 1998,
respectively.
Goodwill
The Company amortizes goodwill recorded in connection with its business
combinations over periods ranging from 15 to 30 years using the straight-line
method. If goodwill is identified with long-lived assets that are subject to an
impairment loss, and an adjustment is to be made to reflect fair value, the
goodwill shall be reduced or eliminated before the carrying value of such
long-lived assets is written down to fair value. Goodwill in excess of
associated expected operating cash flows is considered to be impaired and is
written down to fair value.
Statement of Cash Flows
Cash includes cash on hand, demand deposits and certificates of deposit. All
highly liquid investments with an original maturity of three months or less are
classified as short-term investments in the consolidated statement of financial
position, and transactions as such are considered investing activities in the
consolidated statement of cash flows.
Reinsurance
Reinsurance contracts that do not both transfer significant insurance risk and
result in the reasonable possibility that the reinsurer (or retrocessionaire)
may realize a significant loss from the transaction are required to be accounted
for as deposits. These contract deposits are classified as contract deposit
assets (included in "other assets") or "contract deposit liabilities" and are
accounted for as financing transactions with interest income or expense credited
or charged to the contract deposits.
Income Taxes
GE Global Insurance, together with its domestic property and casualty
insurance/reinsurance company subsidiaries, one domestic life insurance company
subsidiary and its parent, GE Capital Services, are included in the consolidated
federal income tax return of GE Company. GE Global Insurance's other domestic
life insurance company subsidiary is taxed as a life insurance company, and that
subsidiary files a separate federal income tax return.
The international insurance company subsidiaries of GE Global Insurance file
separate income tax returns in the countries where the subsidiaries are
domiciled or operate.
The Company utilizes the liability method, whereby deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws. The Company is required to establish a "valuation allowance" for
any portion of the deferred tax asset that management believes will not be
realized.
33
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Interest Rate and Currency Risk Management
As a matter of policy, the Company does not engage in any trading, market-making
or other speculative activities in the derivative markets. The Company uses
various financial instruments, such as currency and interest rate swaps, options
and currency forwards principally to lessen its exposure to movements in
interest rates and foreign currency exchange rates.
Designated interest rate and currency swaps that modify borrowings or certain
assets are accounted for on an accrual basis. The Company requires all other
derivative instruments, such as options and forwards, to be designated and
accounted for as hedges of specific assets, liabilities or committed
transactions; resulting payments and receipts are recognized contemporaneously
with effects of hedged transactions. A payment or receipt arising from early
termination of an effective hedge is accounted for as an adjustment to the basis
of the hedged transaction.
Instruments used as hedges must be effective at reducing the risk associated
with the exposure being hedged and must be designated as a hedge at the
inception of the contract. Accordingly, changes in market values of hedged
instruments must be highly correlated with changes in market values of
underlying hedged items, both at inception of the hedge and over the life of the
hedge contract. Any derivative that is either not designated as a hedge, or is
so designated but is ineffective, is marked to market and recognized in
operations immediately.
Foreign Currency Translation
The Company operates in a multiple functional currency environment whereby
revenues and expenses in functional currencies are translated using periodic
weighted average exchange rates during the year and functional currency assets
and liabilities are translated at the rates of exchange in effect at the close
of the year. Gains or losses resulting from translating the functional
currencies into U.S. dollars are accumulated in a separate component of
stockholder's equity, entitled "accumulated foreign currency translation
adjustments." The Company partially hedges its foreign currency risk on its
foreign subsidiary investments by utilizing a cross currency swap (See Note 14).
The gain on the cross currency swap, which is included in "accumulated foreign
currency translation adjustments," was $237 million and $124 million at December
31, 1999 and 1998, respectively. The net effect of foreign currency transactions
on operating results during 1999, 1998 and 1997 was immaterial.
Benefit Plans
Prior to September 30, 1999, employees of the Company and its domestic
subsidiaries were covered by trusteed, noncontributory defined benefit pension
plans and unfunded postretirement plans that provided medical benefits and life
insurance benefits to substantially all employees and their dependents.
Effective October 1, 1999, the majority of the Company's domestic employees
began participating in a trusteed, contributory defined benefit pension plan
sponsored by the Company's ultimate parent, GE Company. Additionally, effective
September 30, 1999, the Company terminated substantially all of its domestic
postretirement plans, with covered employees becoming participants in similar
plans sponsored by GE Company. The existing accumulated postretirement benefit
obligations under the terminated plans were also transferred to GE Company, with
no gain or loss resulting from this transaction. GE Company charges the Company,
in turn, for its relative share of the costs associated with the overall GE
Company Group Pension and Postretirement Plans. Certain of the Company's
international subsidiaries also sponsor noncontributory defined benefit pension
plans for their employees. The net effect of all benefit plans on the
consolidated statement of financial position and statement of earnings for 1999,
1998 and 1997 was immaterial.
Reclassifications
Certain reclassifications of prior year balances have been made to conform to
the current year presentation.
34
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
3. Acquisitions and Dispositions
On March 4, 1999, the Company completed the acquisition of Eagle Star
Reinsurance Company Limited ("Eagle Star Re") from Zurich Financial Services for
a cash consideration of approximately $346 million. The cash consideration was
provided through existing funds. Eagle Star Re is a leading London Market
non-life reinsurance company principally doing business through intermediaries.
The transaction excludes substantially all business written by Eagle Star Re
before 1993. The acquisition has been accounted for as a purchase; accordingly,
the operating results of Eagle Star Re have been included in the Company's
consolidated financial statements since the date of acquisition.
On October 27, 1998, the Company completed the acquisition of Kemper Reinsurance
Company (subsequently renamed GE Reinsurance Corporation - "GE Re") for a cash
consideration of approximately $468 million. The cash consideration was
initially financed by utilizing existing unused credit facilities and
subsequently refinanced in 1999 through additional long-term borrowings (See
Note 9). GE Re is a property and casualty reinsurance company principally doing
business through intermediaries. The acquisition has been accounted for as a
purchase; accordingly, the operating results of GE Re have been included in the
Company's consolidated financial statements since the date of acquisition.
On October 15, 1998, the Company completed the acquisition of Medical Protective
Corporation ("Medical Protective") for a cash consideration of approximately
$628 million. The cash consideration was financed by GE Capital Corporation via
an interim loan agreement. Medical Protective is the oldest medical professional
liability insurer of physicians and dentists in the United States. The
acquisition has been accounted for as a purchase; accordingly, the operating
results of Medical Protective have been included in the Company's consolidated
financial statements since the date of acquisition.
On January 6, 1998, the Company purchased the assets and assumed the renewal
rights of Industrial Risk Insurers ("IRI"), a leader in providing highly
protected risk property insurance, for a cash consideration of approximately
$235 million. The business underwritten through IRI is managed by a joint
venture formed between the Company and the Hartford Steam Boiler Inspection and
Insurance Company ("HSB") as stipulated by a management agreement. IRI writes
business utilizing the licensing authority of its members and the business
underwritten is subsequently allocated to members in proportion to membership
participation and further allocated in accordance with certain reinsurance
agreements between HSB and the Company. In conjunction with this acquisition,
the Company purchased $300 million of 7% convertible capital securities from a
Delaware business trust formed by HSB's parent, HSB Group, Inc., to provide
capital for HSB to support the anticipated increase in gross premiums written
associated with the IRI business. The acquisition has been accounted for as a
purchase; accordingly, the operating results of IRI have been included in the
Company's consolidated financial statements since the date of acquisition.
Subsequent to the Company's acquisition of over 93% of the outstanding shares of
Frankona Ruckversicherungs-Aktiengesellschaft ("Frankona Re") in July, 1995, the
Company continued to purchase the remaining outstanding shares held by minority
shareholders. The majority of this activity occurred during 1997 as a result of
entering into an agreement with the remaining minority shareholders on December
7, 1996, whereby the Company offered to purchase the remaining outstanding
shares at a stipulated price and guaranteed a specific compensation payment.
Specifically, the Company paid cash of approximately $69 million in 1997 for
shares acquired from the minority shareholders, and the purchase of these shares
was accounted for using the purchase method of accounting. The excess of the
purchase price over the fair market value of the net assets acquired of
approximately $40 million was recognized as goodwill and is being amortized over
the remaining initial goodwill amortization period. Minority shareholders who
elected not to redeem their outstanding shares under this agreement will receive
a stated future annual dividend and forfeited their right to participate in the
future net earnings of Frankona Re. As of December 31, 1999, the Company owns
approximately 99% of the outstanding shares of Frankona Re.
35
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
3. Acquisitions and Dispositions (continued)
The allocations of the purchase price for Medical Protective and GE Re are
summarized as follows:
Medical
(In millions) Protective GE Re Total
---------- ----- -----
Assets acquired, excluding goodwill $1,612 $3,239 $4,851
Goodwill 178 276 454
Liabilities assumed (1,162) (3,047) (4,209)
------ ------ ------
Total purchase price $ 628 $ 468 $1,096
====== ====== ======
The following unaudited pro forma information has been prepared as if the
acquisitions of Medical Protective and GE Re had occurred on January 1, 1997.
The pro forma information includes all significant adjustments to the historical
results that were directly attributable to the transactions and were expected to
have a continuing effect on the Company.
Year ended December 31,
-------------------------------------------------------
1999 1998
------------------------- -------------------------
(In millions) As Reported Pro Forma As Reported Pro Forma
------------------------- -------------------------
Revenues $7,203 $8,098 $5,784 $6,944
Net earnings 779 812 648 704
In late 1999, the Company sold its reinsurance brokerage subsidiary. The
resulting gain from this transaction was not material to the 1999 consolidated
statement of earnings.
36
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
4. Investments
The amortized cost, estimated fair value and gross unrealized gains and losses
of fixed maturity securities, equity securities, short-term investments and
other invested assets are summarized as follows:
December 31, 1999
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
-----------------------------------------------------
Fixed maturity securities:
U.S. government $ 842 $ 1 $ (28) $ 815
International government 2,432 92 (61) 2,463
Tax-exempt 6,392 94 (196) 6,290
Corporate 5,484 55 (215) 5,324
U.S. mortgage-backed and other asset-backed 1,642 5 (49) 1,598
International mortgage-backed and other asset-backed 772 17 (11) 778
------- ---- ----- -------
Total fixed maturity securities 17,564 264 (560) 17,268
Equity securities 2,745 521 (162) 3,104
Short-term investments 788 - - 788
Other invested assets 350 29 - 379
------- ---- ----- -------
Total investments $21,447 $814 $(722) $21,539
======= ==== ===== =======
December 31, 1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
-----------------------------------------------------
Fixed maturity securities:
U.S. government $ 1,160 $ 21 $ (3) $ 1,178
International government 2,877 217 (2) 3,092
Tax-exempt 6,138 389 (1) 6,526
Corporate 4,694 198 (25) 4,867
U.S. mortgage-backed and other asset-backed 1,588 46 (4) 1,630
International mortgage-backed and other asset-backed 821 47 - 868
------- ------ ----- -------
Total fixed maturity securities 17,278 918 (35) 18,161
Equity securities 2,154 640 (72) 2,722
Short-term investments 596 - - 596
Other invested assets 405 103 - 508
------- ------ ----- -------
Total investments $20,433 $1,661 $(107) $21,987
======= ====== ===== =======
37
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
4. Investments (continued)
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1999 are summarized, by stated maturity, as follows:
Estimated
Amortized Fair
(In millions) Cost Value
-----------------------
Maturity:
Due in 2000 $ 514 $ 508
Due in 2001-2004 3,119 3,129
Due in 2005-2009 5,048 4,959
Due after 2009 6,469 6,296
------- -------
15,150 14,892
Mortgage-backed and other asset-backed securities 2,414 2,376
------- -------
Total fixed maturity securities $17,564 $17,268
======= =======
The foregoing data is based on the stated maturities of the securities. Actual
maturities will differ for some securities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
Major categories of investment income are summarized as follows:
Year ended December 31,
-----------------------------
(In millions) 1999 1998 1997
-----------------------------
Gross investment income:
Fixed maturity securities $ 997 $853 $773
Equity securities 58 59 63
Short-term investments 45 32 28
Securities and indebtedness of related parties 21 19 18
Other 47 33 41
------ ---- ----
1,168 996 923
Investment expenses (17) (11) (13)
------ ---- ----
Net investment income $1,151 $985 $910
====== ==== ====
38
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
4. Investments (continued)
The Company's sales proceeds and realized gains and losses on investment
securities are summarized as follows:
Year ended December 31,
-------------------------------
(In millions) 1999 1998 1997
-------------------------------
Sales proceeds from investment securities $9,211 $5,565 $5,877
====== ====== ======
Net realized gains on investments before income taxes:
Fixed maturity securities:
Gross realized gains $119 $124 $119
Gross realized losses (87) (15) (18)
Equity securities:
Gross realized gains 734 412 285
Gross realized losses (67) (89) (83)
---- ---- ----
Total net realized gains before income taxes 699 432 303
Provision for income taxes (255) (164) (110)
---- ---- ----
Net realized gains on investments, after income taxes $444 $268 $193
==== ==== ====
The change in net unrealized gains (losses), before income taxes, on fixed
maturity securities was $(1,179) million, $225 million and $174 million in 1999,
1998 and 1997, respectively; the corresponding amounts for equity securities
were $(209) million, $37 million and $216 million in 1999, 1998 and 1997,
respectively; and the corresponding amounts for other invested assets were $(74)
million and $103 million in 1999 and 1998, respectively.
The Company had investments in fixed maturity securities with a carrying amount
of $768 million and $475 million at December 31, 1999 and 1998, respectively, on
deposit with state insurance departments to satisfy regulatory requirements.
39
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
5. Intangible Assets
The Company's intangible assets are summarized as follows:
December 31,
---------------
(In millions) 1999 1998
---------------
Goodwill $1,266 $1,212
Present value of future profits ("PVFP") 107 128
Value of insurance in-force 26 28
Customer list 117 124
------ ------
$1,516 $1,492
====== ======
The Company's intangible assets are shown net of accumulated amortization of
$721 million and $628 million at December 31, 1999 and 1998, respectively.
The PVFP was determined using risk adjusted discount rates from 8% to 15% and
the interest rates selected for the valuation were determined based on the
applicable interest rates in the country of risk inherent in the realization of
the estimated future profits. PVFP is being amortized using the interest method
over the duration of the related life business, approximately 20 years, as the
premiums on the books of business are recognized.
The Company's intangible assets other than goodwill and PVPF include the value
of property and casualty business recorded in connection with GE Capital
Services' acquisition of ERC in 1984 and the value of a customer list recorded
in connection with the acquisition of the IRI business in 1998 (See Note 3).
These items are being amortized using the straight-line method over a 16 year
period and a 20 year period, respectively.
40
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
6. Claims and Claim Expenses
The Company's reconciliation of its beginning and ending claims and claim
expense liabilities, net of reinsurance, is summarized as follows:
Year ended December 31,
----------------------------------
(In millions) 1999 1998 1997
----------------------------------
Balance at January 1 - gross $15,852 $10,961 $10,869
Less reinsurance recoverables (2,936) (1,822) (1,411)
------- ------- -------
Balance at January 1 - net 12,916 9,139 9,458
------- ------- -------
Claims and expenses incurred:
Current year 4,789 3,904 2,449
Prior years 340 (56) 71
------- ------- -------
5,129 3,848 2,520
------- ------- -------
Claims and expenses paid:
Current year (1,672) (1,387) (626)
Prior years (2,997) (2,309) (1,949)
------- ------- -------
(4,669) (3,696) (2,575)
------- ------- -------
Claim reserves related to acquired companies (See Note 3) 793 3,470 -
Claim reserves related to disposed companies (202) - -
Foreign exchange and other (147) 155 (264)
------- ------- -------
Balance at December 31 - net 13,820 12,916 9,139
Add reinsurance recoverables 4,314 2,936 1,822
------- ------- -------
Balance at December 31 - gross $18,134 $15,852 $10,961
======= ======= =======
Prior-year claims and expenses incurred in the preceding table resulted
principally from settling claims established in earlier accident years for
amounts that differed from expectations and due to changes in estimates
associated with a lag in receiving underwriting reports from ceding companies
that causes development of both premiums and claims, especially as it relates to
the international operations.
The increase in 1999 claims and expenses incurred related to prior years is
attributable to higher than normal claim and expense development across a number
of lines of business, including property coverages (which was most highly
impacted by much higher than expected industry-wide losses with respect to
Hurricane Georges), long-term disability and communications/media liability.
41
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
6. Claims and Claim Expenses (continued)
In establishing the liabilities for claims and claim expenses related to
asbestos-related illnesses and toxic waste cleanup, management considers facts
currently known and the current state of the law and coverage litigation.
Liabilities are recognized for known claims (including the cost of related
litigation) when sufficient information has been developed to indicate the
involvement of specific insurance or reinsurance contracts and management can
reasonably estimate its liability. In addition, amounts have been established to
cover additional exposures on both known and unasserted claims, and estimates of
the liabilities are reviewed and updated continually.
The gross liabilities for asbestos-related illness and toxic waste cleanup
claims and claim expenses and the related reinsurance recoverables were $800
million and $195 million, respectively, at December 31, 1999. These amounts are
management's best estimate, based on currently available information, of future
claim and claim expense payments and recoveries that are expected to develop in
future years. The Company monitors evolving case law and its effect on
asbestos-related illness and toxic waste cleanup claims. Changing U.S.
government regulations and legislation, including continuing Congressional
consideration of a Federal Superfund law, newly reported claims, new contract
interpretations and other factors could significantly affect future claim
development. While the Company has recorded its best estimate of its liabilities
for asbestos-related illness and toxic waste cleanup claims based on currently
available information, it is possible that additional liabilities may arise in
the future. It is not possible to estimate with any certainty the amount of
additional net loss, or the range of net loss, that is reasonably possible;
therefore, there can be no assurance that future liabilities will not materially
affect the Company's results of operations, financial position or cash flows.
7. Income Taxes
The Company's provision for income taxes is summarized as follows:
Year ended December 31,
-------------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- -------------------------
United Inter- United Inter- United Inter-
(In millions) States national Total States national Total States national Total
------------------------- ------------------------- -------------------------
Current $138 $ 78 $216 $210 $114 $324 $(77) $ 40 $(37)
Deferred 27 25 52 (93) 60 (33) 172 99 271
---- ---- ---- ---- ---- ---- ---- ---- ----
Total $165 $103 $268 $117 $174 $291 $ 95 $139 $234
==== ==== ==== ==== ==== ==== ==== ==== ====
Income taxes paid (recovered) by the Company totaled $244 million, $390 million
and $(53) million in 1999, 1998 and 1997, respectively.
42
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
The Company's effective income tax rate on pre-tax income is lower than the
prevailing U.S. corporate federal income tax rate and is summarized as follows:
Year ended December 31,
-------------------------
1999 1998 1997
-------------------------
Corporate federal income tax rate 35% 35% 35%
Tax-exempt investment income (12) (10) (11)
Intercompany dividend payment 3 3 3
Other items, net 1 (1) -
-- -- --
Effective tax rate 27% 27% 27%
== == ==
The significant components of the Company's net deferred tax assets and
liabilities are summarized as follows:
December 31,
-------------------
(In millions) 1999 1998
-------------------
Deferred tax assets:
Claims and claim expenses $352 $ 259
Unearned premiums 123 106
Foreign tax credit carryforwards 130 153
Foreign currency translation 81 63
Contract deposit assets 118 110
Other 112 108
---- ------
Total gross deferred tax assets 916 799
Valuation allowance (55) (55)
---- ------
Total deferred tax assets 861 744
---- ------
Deferred tax liabilities:
Deferred insurance acquisition costs 465 339
Net unrealized gains on investment securities 57 597
Contract deposit liabilities 92 126
Other 268 221
---- ------
Total deferred tax liabilities 882 1,283
---- ------
Net deferred tax liability $(21) $ (539)
==== ======
A valuation allowance is provided when it is more likely than not that certain
deferred tax assets will not be realized. The Company has established a
valuation allowance for deferred tax assets associated with foreign tax credit
carryforwards that exceed the projected future benefit of such foreign tax
credits.
The Company did not have a payable to (recoverable from) GE Capital Services for
income taxes due at December 31, 1999 or 1998.
43
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
8. Indebtedness to/from Related Parties
The Company and GE Capital Corporation are participants in a revolving credit
agreement that involves an international cash pooling arrangement on behalf of
certain European affiliates of the Company. In such roles, either participant
may make short-term loans to the other as part of the cash pooling arrangement.
Each such borrowing shall be repayable upon demand, but not to exceed 364 days.
This unsecured line of credit has an interest rate per annum equal to GE Capital
Services' cost of funds for the currency in which such borrowing is denominated
and is available for an initial term of five years expiring October 21, 2002,
and shall be automatically extended for successive terms of one year each,
unless terminated in accordance with the terms of the agreement. The total
amount drawn (loaned) on this credit facility by the Company was $53 million and
$(265) million as of December 31, 1999 and 1998, respectively.
The Company has in place a revolving credit agreement with GE Capital Services
for an amount up to $600 million that expires January 1, 2001, with an interest
rate per annum equal to GE Capital Services' cost of funds. This agreement is
automatically extended for successive terms of one year each, unless terminated
in accordance with the terms of the agreement. The total amount drawn on this
credit facility, including accrued interest payable, was $42 million and $426
million as of December 31, 1999 and 1998, respectively. During 1998, the Company
utilized this credit facility primarily to fund its acquisition of GE Re (See
Note 3), with such amounts being repaid in 1999 using proceeds from long-term
borrowings (See Note 9). Interest accrued on such borrowings at an annual
weighted-average interest rate of 5.18% and 5.41% for the years ended December
31, 1999 and 1998, respectively. Total interest paid in 1999 was $9 million,
with no interest paid in 1998 or 1997.
In October 1998, the Company entered into an interim loan agreement with GE
Capital Corporation for $625 million to fund its acquisition of Medical
Protective (See Note 3). This interim loan agreement has an interest rate per
annum equal to GE Capital Corporation's cost of funds. The total balance
outstanding under this interim loan agreement, including accrued interest
payable, was $666 million and $632 million as of December 31, 1999 and 1998,
respectively. Interest accrued on such borrowings at an annual weighted-average
interest rate of 5.26% and 5.34% for the years ended December 31, 1999 and 1998,
respectively, with no interest paid in either year.
9. Borrowings
In February 1996, the Company issued $600 million of senior unsecured debt
securities at 7% per annum, which are not redeemable prior to maturity on
February 15, 2026. The Company received $556 million in net proceeds from these
notes (after deduction of underwriting discounts and commissions and the
original issue discount and cost of an interest rate "lock" contract) which was
used to repay short-term borrowings.
In March 1999, the Company issued $400 million of redeemable senior unsecured
debt securities at 6.45% per annum, that are scheduled to mature on March 1,
2019. The Company received $395 million in net proceeds from the issuance of
these notes (after deduction of underwriting discounts and commissions) which
was used to repay outstanding short-term borrowings under the intercompany
revolving credit agreement with GE Capital Services (See Note 8).
Total interest paid on borrowings was $55 million, $42 million and $42 million
in 1999, 1998 and 1997, respectively.
44
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
10. Supplemental Financial Statement and Reinsurance Data
Insurance premiums written and earned in 1999, 1998 and 1997 and life insurance
in force as of December 31, 1999, 1998 and 1997 are summarized as follows:
Insurance Premiums Written
-----------------------------------
Property/
(In millions) Casualty Life Total
-----------------------------------
1999:
Direct $ 999 $ 5 $1,004
Assumed 6,373 1,525 7,898
Ceded (1,489) (266) (1,755)
------ ------ ------
Net $5,883 $1,264 $7,147
====== ====== ======
1998:
Direct $ 535 $ 4 $ 539
Assumed 5,300 1,314 6,614
Ceded (947) (222) (1,169)
------ ------ ------
Net $4,888 $1,096 $5,984
====== ====== ======
1997:
Direct $ 392 $ 4 $ 396
Assumed 3,778 1,170 4,948
Ceded (677) (122) (799)
------ ------ ------
Net $3,493 $1,052 $4,545
====== ====== ======
Insurance Premiums Earned
----------------------------------- Life
Property/ Insurance
(In millions) Casualty Life Total In-Force
-------------------------------------------------
1999:
Direct $ 890 $ 5 $ 895 $ 2,724
Assumed 6,285 1,534 7,819 500,568
Ceded (1,553) (265) (1,818) (165,094)
------ ------ ------ --------
Net $5,622 $1,274 $6,896 $338,198
====== ====== ====== ========
1998:
Direct $ 509 $ 4 $ 513 $ 2,291
Assumed 4,911 1,322 6,233 317,571
Ceded (888) (223) (1,111) (56,378)
------ ------ ------ --------
Net $4,532 $1,103 $5,635 $263,484
====== ====== ====== ========
1997:
Direct $ 369 $ 3 $ 372 $ 1,865
Assumed 3,815 1,058 4,873 266,840
Ceded (661) (117) (778) (54,870)
------ ------ ------ --------
Net $3,523 $ 944 $4,467 $213,835
====== ====== ====== ========
45
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
10. Supplemental Financial Statement and Reinsurance Data (continued)
Claims, claim expenses and policy benefits incurred in 1999, 1998 and 1997 are
summarized as follows:
Property/
(In millions) Casualty Life Total
--------------------------------
1999:
Direct $ 279 $ - $ 279
Assumed 6,075 1,289 7,364
Ceded (1,960) (298) (2,258)
------ ------ ------
Net $4,394 $ 991 $5,385
====== ====== ======
1998:
Direct $ 377 $ 3 $ 380
Assumed 3,761 1,169 4,930
Ceded (978) (229) (1,207)
------ ------ ------
Net $3,160 $ 943 $4,103
====== ====== ======
1997:
Direct $ 390 $ 2 $ 392
Assumed 2,611 818 3,429
Ceded (520) (41) (561)
------ ------ ------
Net $2,481 $ 779 $3,260
====== ====== ======
The Company's insurance company subsidiaries both assume reinsurance from and
cede reinsurance to other insurance companies. That portion of the risks
exceeding each subsidiary's retention limit is reinsured with other insurers.
The Company also acquires other reinsurance coverages with retentions and limits
that management believes are appropriate for the circumstances. In the
accompanying consolidated financial statements, premiums, claims, claim expenses
and policy benefits and deferred insurance acquisition costs are reported net of
reinsurance ceded; reinsurance liabilities, unearned premiums and accruals are
reported gross of reinsurance ceded.
The Company's retrocession program includes aggregate excess of loss coverages
in which accident year losses exceeding a specified loss ratio are ceded to
retrocessionaires. These contracts also contain contingent premium provisions
whereby the Company is required to cede additional premiums equal to a specified
portion of the covered losses. In 1999, the accident year losses incurred
exceeded the specified loss ratio and, accordingly, accruals for reinsurance
recoverables and ceded premium payables were reflected in the accompanying
consolidated financial statements in accordance with the terms of the underlying
retrocession contracts.
The Company's insurance company subsidiaries remain liable to their
policyholders if the reinsurers they cede to are unable to meet their
contractual obligations under the applicable reinsurance agreements. To minimize
its exposure to significant losses from reinsurance insolvencies, the Company
evaluates the financial condition of its reinsurers and monitors concentrations
of credit risk arising from similar geographic regions, activities or economic
characteristics of the reinsurers. There was no significant concentration of
reinsurance recoverables and prepaid reinsurance premiums due from any one
reinsurer at December 31, 1999, with the exception of approximately $500 million
of accrued reinsurance recoverables from National Indemnity Company (currently
rated A++ (Superior) by A.M. Best Company) in connection with the Company's
aggregate excess retrocession program.
46
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
10. Supplemental Financial Statement and Reinsurance Data (continued)
For financial reinsurance assumed, premiums received are reported as contract
deposit liabilities, not as revenues-the Company reports revenue for the risk
fees charged for those services. Statutory policyholder's surplus of the life
insurance company subsidiaries has been reduced approximately $288 million at
December 31, 1999 in connection with financial reinsurance assumed. Such amounts
are secured by future profits on the reinsured business. The Company's life
insurance subsidiaries are also subject to the risk that the ceding companies
may become insolvent and the right of offset would not be permitted; however,
management does not believe such risk is significant.
11. Stockholder's Equity
ERC has issued 11,673 shares of $100,000 par value, nonredeemable, voting
preferred stock to GE Capital Corporation. This preferred stock accrues
preferential and cumulative dividends at an annual rate of 7.5% (prior to 1999,
the dividend rate was a variable rate). ERC may, upon approval by its Board of
Directors, redeem the preferred stock, in whole or in part, at 100% of the par
value of the preferred stock plus all dividends accrued thereon to the date of
redemption. Preferred stock dividends paid by ERC totaled $88 million, $85
million and $82 million in 1999, 1998 and 1997, respectively.
GE Global Insurance has issued 1,500 shares of $100,000 par value, nonvoting,
cumulative preferred stock to GE Capital Corporation. Dividends on the preferred
stock are paid at a rate of 5% per annum if, as and when declared by the Board
of Directors of the Company, and totaled $8 million in 1999, 1998 and 1997.
12. Statutory Accounting Practices
ERC and its domestic insurance company subsidiaries are domiciled in Missouri
and Kansas, GE Re is domiciled in Illinois and Medical Protective is domiciled
in Indiana. Statutory-basis financial statements are prepared in accordance with
accounting practices prescribed or permitted by the respective state insurance
departments. "Prescribed" statutory accounting practices include state laws,
regulations and general administrative rules, as well as a variety of
publications of the National Association of Insurance Commissioners ("NAIC").
"Permitted" statutory accounting practices encompass all accounting practices
that are not prescribed; such practices may differ from state to state, may
differ from company to company within a state and may change in the future.
There are no significant permitted accounting practices that vary from
prescribed accounting practices being utilized by the Company's domestic
insurance company subsidiaries, except as noted on the following page.
47
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
12. Statutory Accounting Practices (continued)
Stockholder's equity and net income, as reported to the domiciliary state
insurance departments in accordance with its prescribed or permitted statutory
accounting practices, for the Company's domestic insurance company subsidiaries
are summarized as follows:
December 31,
-----------------
(In millions) 1999 1998
-----------------
Stockholder's equity:
ERC $4,270 $4,099
Property and casualty subsidiaries of ERC 231 569
Life and annuity subsidiaries of ERC 2,554 2,213
GE Re 755 755
Property and casualty subsidiary of GE Re - 373
Medical Protective 358 -
Year ended December 31,
--------------------------
(In millions) 1999 1998 1997
--------------------------
Net income (loss):
ERC $349 $671 $533
Property and casualty subsidiaries of ERC 22 112 62
Life and annuity subsidiaries of ERC (9) 168 (285)
GE Re 40 (146) -
Property and casualty subsidiary of GE Re - 40 -
Medical Protective 66 - -
The comparability of the 1999 and 1998 amounts in the above tables is impacted
by the following two 1999 transactions: (1) the merger of GE Re and its property
and casualty subsidiary and (2) the assignment by ERC of its investment in
Medical Protective to GE Global Insurance. The comparability of the 1998 and
1997 amounts in the above table is impacted by the 1998 dividend by ERC of a
property and casualty subsidiary to GE Global Insurance, who in turn contributed
such subsidiary to GE Re.
48
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
12. Statutory Accounting Practices (continued)
The payment of stockholder dividends by domestic insurance companies without the
prior approval of regulators is limited to formula amounts based on net
investment income and/or net income, capital and surplus determined in
accordance with statutory accounting practices, as well as the timing and amount
of dividends paid in the preceding 12 months. The maximum amount available for
the payment of dividends during 2000 by ERC without prior regulatory approval is
$294 million after December 29, 2000. Of this amount, $88 million is committed
to pay dividends on the preferred stock issued by ERC to GE Capital Corporation.
GE Re will not be able to make any dividend payments during 2000 without the
prior approval of the Director of Insurance for the State of Illinois. The
maximum amount available for the payment of dividends during 2000 by Medical
Protective without prior regulatory approval is $66 million after December 17,
2000.
ERC has received written approval from the Missouri Department of Insurance to
discount its claims and claim expense liabilities related to long-term
disability business. Prescribed statutory accounting practice does permit claims
and claim expense liabilities associated with long-term disability to be
accounted for on a discounted basis although the Missouri Department of
Insurance requires that insurance companies obtain written permission to
discount certain claims and claim expense liabilities. The total discount
recognized for statutory purposes was $302 million and $327 million at December
31, 1999 and 1998, respectively.
ERC has also received written approval from the Missouri Department of Insurance
to take credit for certain unauthorized reinsurance by obtaining a parental
guarantee from GE Global Insurance.
The NAIC has adopted minimum risk-based capital requirements to evaluate the
adequacy of statutory capital and surplus in relation to an insurance company's
risks. Regulatory compliance with risk-based capital requirements is defined by
a ratio of a company's regulatory total adjusted capital to its authorized
control level risk-based capital, as defined by the NAIC. Each of GE Global
Insurance's domestic insurance company subsidiaries exceeded the minimum
risk-based capital requirements at December 31, 1999.
The Company's international insurance company subsidiaries prepare statutory
financial statements based on local laws and regulations. Some jurisdictions,
such as the United Kingdom, impose complex regulatory requirements on
reinsurance companies, while other jurisdictions, such as Germany, impose fewer
requirements. Local reinsurance business conducted by the Company's insurance
company subsidiaries in some countries require licenses issued by governmental
authorities. These licenses may be subject to modification or revocation
dependent on such factors as amount and types of reserves and minimum capital
and solvency tests. Jurisdictions may also impose fines, censure and/or criminal
sanctions for violation of regulatory requirements.
49
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
13. Contingencies
There are no pending legal proceedings beyond the ordinary course of business
that in the opinion of the Company's management, based on information available
at the date of this report, would have a material adverse effect on the
Company's consolidated results of operation or financial condition.
14. Fair Value of Financial Instruments
This note discloses fair value information about certain of the Company's
financial instruments, whether or not recognized in the balance sheet. No
attempt has been made to estimate the value of anticipated future business or
the value of assets or liabilities that are not considered financial
instruments. Fair value estimates are made at a specific point in time based on
relevant market information about the financial instrument. In cases where
quoted market prices are not available, fair values are estimated using
discounted cash flow or other valuation techniques. These estimates may be
subjective in nature and involve uncertainties and, therefore, cannot be
determined with precision. Changes in the assumptions could significantly affect
the estimates. As such, the derived fair value estimates cannot necessarily be
substantiated by comparison to independent markets and may differ from the
amounts that might be involved in an immediate settlement of the instrument.
Fair value disclosures are not required for certain financial instruments, the
most significant of these for the Company are the insurance liabilities and
related assets, other than financial guarantees and investment contracts.
Financial instruments that are reflected in the accompanying financial statement
at fair value or for which fair values are disclosed elsewhere in the notes to
the financial statements are not included in the following disclosure. The most
significant of which are investments, cash, amounts due from related parties,
accrued investment income, separate accounts and other receivables and payables.
Fair values of other financial instruments have been determined as follows:
Accumulated contract values - Based on expected future cash flows, discounted at
currently offered interest rates for similar contracts with maturities
consistent with those remaining for the contracts being valued.
Financial guaranty reinsurance - Based on estimated premium rates that would be
charged and commissions that would be allowed at the financial statement date.
Borrowings - Based on quoted market prices or market comparables and includes
the effects of counterparty creditworthiness.
All other instruments - Based on comparable transactions, market comparables,
discounted future cash flows, quoted market prices and/or estimates of the cost
to terminate or otherwise settle obligations to counterparties.
50
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
14. Fair Value of Financial Instruments (continued)
Information about certain financial instruments that were not carried at fair
value at December 31, 1999 and 1998, is summarized as follows:
December 31, 1999 December 31, 1998
------------------------------------------ ------------------------------------------
Assets (liabilities) Assets (liabilities)
------------------------------- -------------------------------
Estimated Fair Value Estimated Fair Value
Notional Carrying -------------------- Notional Carrying --------------------
(In millions) Amount Amount High Low Amount Amount High Low
------------------------------------------ ------------------------------------------
Assets:
Purchased options $ - $ - $ - $ - $ 15 $ 10 $ 38 $ 29
Options, including "floors" 52 7 13 13 27 4 5 5
Other cash financial instruments (a) 70 70 70 (a) 114 114 114
Liabilities:
Borrowings and related instruments:
Borrowings (b) (a) (956) (898) (898) (a) (557) (557) (557)
Interest rate swaps - - - - 25 - (1) (1)
Currency forwards 270 - - - 617 - (1) (1)
Investment contract benefits (a) (1,145) (1,125) (1,125) (a) (1,284) (1,270) (1,270)
Financial guaranty reinsurance 4,132 (34) (32) (43) 4,425 (44) (41) (56)
Performance guarantees,
principally letters of credit 549 (a) 3 1 193 (a) - -
Other firm commitments:
Cross currency swaps 1,004 238 200 200 1,039 59 183 183
(a) Not applicable.
(b) See Note 9.
The Company uses S&P 500 indexed call options to hedge the equity index
component of several single-premium equity-indexed annuities reinsured. The
Company, having paid a premium for these options, has the right to purchase a
notional investment in the S&P 500 index at a fixed price on a specific date.
Foreign currency forward purchase contracts are employed to manage exposures to
changes in currency exchange rates. These financial instruments generally are
used as hedges of identified assets, liabilities or net functional currency
positions.
Cross currency swaps are used by the Company to hedge foreign currency risk on
net investment exposure resulting from exchange rate fluctuations in foreign
currency denominated assets and liabilities. On a limited basis, and as part of
ongoing customer activities, the Company utilizes interest rate swaps and
options to minimize its exposure to movements in interest rates and financial
markets that have a direct correlation with certain of its reinsurance products.
The Company is exposed to credit-related losses in the event of non-performance
by the counterparties to various contracts, but it does not expect the
counterparties to fail to meet their obligations due to rigid counterparty
credit exposure policies employed.
51
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
15. Segment Information
The Company conducts its operations principally through the following two
business segments:
Property and Casualty Insurance/Reinsurance Segment (Property/Casualty)
The domestic property/casualty operations of the Company include reinsurance of
most property/casualty lines of business, including general liability, property,
excess workers' compensation and auto liability in the United States, Canada and
business written in the United States where the reinsured is outside the United
States. In addition, the Company provides insurance and reinsurance for the
healthcare industry, conducts excess and surplus lines and direct specialty
insurance business and participates in financially oriented reinsurance
treaties.
International property/casualty operations are conducted through subsidiaries
and branch offices located in Australia, Brazil, Denmark, England, France,
Germany, Hong Kong, Ireland, Italy, Japan, Lebanon, Luxembourg, Malaysia,
Mexico, New Zealand, Poland, Singapore and Spain, and include reinsurance of
property/casualty business in those countries and elsewhere outside the United
States and Canada.
Life Reinsurance Segment (Life)
The domestic and international life operations of the Company include
reinsurance of life and health insurance and annuity products and participation
in financially oriented reinsurance treaties. The international life operations
are conducted through subsidiaries and branch offices as detailed above and
include reinsurance of life business in those countries and elsewhere outside
the United States and Canada.
The Company's industry segment activity is summarized as follows:
1999 - Industry Segments
------------------------------------
Property/
(In millions) Casualty Life Consolidated
------------------------------------
Net premiums written $ 5,883 $1,264 $ 7,147
======= ====== =======
Net premiums earned $ 5,622 $1,274 $ 6,896
Net investment income 853 298 1,151
Net realized gains on investments 617 82 699
Other revenues 150 135 285
------- ------ -------
Total revenues 7,242 1,789 9,031
------- ------ -------
Claims, claim expenses and policy benefits 4,394 991 5,385
Insurance acquisition costs 1,467 372 1,839
Other operating costs and expenses 637 182 819
------- ------ -------
Total costs and expenses 6,498 1,545 8,043
------- ------ -------
Earnings before income taxes $ 744 $ 244 $ 988
======= ====== =======
Total assets at December 31 $28,203 $9,358 $37,561
======= ====== =======
52
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
15. Segment Information (continued)
1998 - Industry Segments
------------------------------------
Property/
(In millions) Casualty Life Consolidated
------------------------------------
Net premiums written $ 4,888 $1,096 $ 5,984
======= ====== =======
Net premiums earned $ 4,532 $1,103 $ 5,635
Net investment income 705 280 985
Net realized gains on investments 398 34 432
Other revenues 43 108 151
------- ------ -------
Total revenues 5,678 1,525 7,203
------- ------ -------
Claims, claim expenses and policy benefits 3,160 943 4,103
Insurance acquisition costs 1,095 262 1,357
Other operating costs and expenses 510 163 673
------- ------ -------
Total costs and expenses 4,765 1,368 6,133
------- ------ -------
Earnings before income taxes $ 913 $ 157 $ 1,070
======= ====== =======
Total assets at December 31 $25,754 $9,293 $35,047
======= ====== =======
1997 - Industry Segments
------------------------------------
Property/
(In millions) Casualty Life Consolidated
------------------------------------
Net premiums written $ 3,493 $1,052 $ 4,545
======= ====== =======
Net premiums earned $ 3,523 $ 944 $ 4,467
Net investment income 681 229 910
Net realized gains on investments 260 43 303
Other revenues 37 67 104
------- ------ -------
Total revenues 4,501 1,283 5,784
------- ------ -------
Claims, claim expenses and policy benefits 2,481 779 3,260
Insurance acquisition costs 883 190 1,073
Other operating costs and expenses 407 162 569
------- ------ -------
Total costs and expenses 3,771 1,131 4,902
------- ------ -------
Earnings before income taxes $ 730 $ 152 $ 882
======= ====== =======
Total assets at December 31 $19,356 $8,176 $27,532
======= ====== =======
53
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
15. Segment Information (continued)
The Company's business by geographic area is summarized in the following table.
Allocations to the domestic geographic area include business related to the
United States and Canada, as well as business written in the United States where
the reinsured is outside the United States. International business includes
business written by subsidiaries located outside the United States,
predominantly in Europe.
Geographic Area
-------------------------------------------
(In millions) Domestic International Consolidated
-------------------------------------------
1999:
Revenues $ 5,301 $ 3,730 $ 9,031
Earnings before income taxes 667 321 988
Identifiable assets at December 31 22,043 15,518 37,561
1998:
Revenues $ 3,808 $ 3,395 $ 7,203
Earnings before income taxes 674 396 1,070
Identifiable assets at December 31 21,475 13,572 35,047
1997:
Revenues $ 2,943 $ 2,841 $ 5,784
Earnings before income taxes 566 316 882
Identifiable assets at December 31 16,622 10,910 27,532
16. Unaudited Quarterly Financial Data
The Company's quarterly financial results and other data in 1999 and 1998 are
summarized as follows:
Year ended December 31, 1999
-------------------------------------------
First Second Third Fourth
(In millions) Quarter Quarter Quarter Quarter
-------------------------------------------
Net premiums earned $1,674 $1,722 $1,622 $1,878
Net investment income 278 295 294 284
Total costs and expenses 1,801 2,001 1,946 2,295
Net earnings 249 174 220 77
Year ended December 31, 1998
-------------------------------------------
First Second Third Fourth
(In millions) Quarter Quarter Quarter Quarter
-------------------------------------------
Net premiums earned $1,207 $1,434 $1,269 $1,725
Net investment income 236 234 250 265
Total costs and expenses 1,304 1,527 1,389 1,913
Net earnings 205 196 228 150
54
Financial Statement Schedules
55
Schedule II
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Condensed Financial Information of Registrant
(Parent Company)
Statement of Earnings
Year ended December 31,
-------------------------
(In millions) 1999 1998 1997
-------------------------
Revenues
Net investment income $ 1 $ 2 $ -
Equity in undistributed earnings 393 168 387
Dividends from subsidiaries 387 654 298
---- ---- ----
Total revenues 781 824 685
---- ---- ----
Costs and Expenses
Interest expense 68 49 42
Other operating costs and expenses 26 20 15
---- ---- ----
Total costs and expenses 94 69 57
---- ---- ----
Earnings before income taxes 687 755 628
Provision for income taxes (33) (24) (20)
---- ---- ----
Net earnings $720 $779 $648
==== ==== ====
See Notes to Condensed Financial Information of Registrant.
56
Schedule II
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Condensed Financial Information of Registrant (continued)
(Parent Company)
Statement of Financial Position
December 31,
-------------------
(In millions) 1999 1998
-------------------
Assets
Cash $ 4 $ -
Investment in subsidiaries 7,074 6,943
Short-term investments, at amortized cost 85 50
Indebtedness of related parties 113 -
Other assets 11 30
------ ------
Total assets $7,287 $7,023
====== ======
Liabilities and equity
Other liabilities $ 31 $ 20
Long-term borrowings 956 557
Indebtedness to related parties 725 426
------ ------
Total liabilities 1,712 1,003
------ ------
Preferred stock, $100,000 par value; authorized,
issued and outstanding - 1,500 shares 150 150
Common stock, $5,000 par value; authorized,
issued and outstanding - 1,000 shares 5 5
Paid-in capital 845 845
Retained earnings 4,630 4,161
Accumulated unrealized gains on investment securities - net (a) 51 932
Accumulated foreign currency translation adjustments (a) (106) (73)
------ ------
Total stockholder's equity 5,575 6,020
------ ------
Total liabilities and equity $7,287 $7,023
====== ======
(a) The sum of accumulated unrealized gains on investment securities and
accumulated foreign currency translation adjustments constitutes
"Accumulated nonowner changes other than earnings," as shown in the
Consolidated Statement of Stockholder's Equity, and was $(55) million and
$859 million at year-end 1999 and 1998, respectively.
See Notes to Condensed Financial Information of Registrant.
57
Schedule II
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Condensed Financial Information of Registrant (continued)
(Parent Company)
Statement of Cash Flows
Year ended December 31,
----------------------------
(In millions) 1999 1998 1997
----------------------------
Cash Flows From Operating Activities
Net earnings $720 $779 $648
Adjustments to reconcile net earnings to cash
from operating activities:
Equity in undistributed earnings (393) (432) (387)
Other, net (7) (22) 5
---- ---- ----
Cash from operating activities 320 325 266
---- ---- ----
Cash Flows From Investing Activities
Net purchases of short-term investments (34) (10) (33)
Investment in subsidiaries (694) (463) -
---- ---- ----
Cash used for investing activities (728) (473) (33)
---- ---- ----
Cash Flows From Financing Activities
Proceeds from short-term borrowings 694 426 -
Payments on short-term borrowings (426) - -
Proceeds from long-term borrowings 395 - -
Dividends paid (251) (278) (233)
---- ---- ----
Cash from (used for) financing activities 412 148 (233)
---- ---- ----
Increase (decrease) in cash 4 - -
Cash at beginning of year - - -
---- ---- ----
Cash at end of year $ 4 $ - $ -
==== ==== ====
See Notes to Condensed Financial Information of Registrant.
58
Schedule II
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Condensed Financial Information of Registrant
(Parent Company)
1. Basis of Presentation
GE Global Insurance Holding Corporation ("GE Global Insurance") is a
wholly-owned subsidiary of General Electric Capital Services, Inc. ("GE Capital
Services"), which is a wholly-owned subsidiary of General Electric Company.
GE Global Insurance's primary assets are its 100% investment in the common stock
of ERC, a Missouri-domiciled property and casualty reinsurance company, GE Re,
an Illinois-domiciled property and casualty reinsurance company principally
doing business through intermediaries and Medical Protective, an
Indiana-domiciled property and casualty insurance company. The common stock of
Medical Protective was assigned by ERC to GE Global Insurance effective December
31, 1999. ERC, GE Re and Medical Protective own 100% of the common stock of
various other property and casualty insurance/reinsurance and life reinsurance
companies.
In accordance with the requirements of Regulation S-X of the Securities and
Exchange Commission, the financial statements of the registrant are condensed
and omit many disclosures presented in the consolidated financial statements and
the notes thereto.
2. Dividends from Subsidiaries
Cash dividends paid to GE Global Insurance by its consolidated subsidiaries were
$323 million, $390 million and $298 million in 1999, 1998 and 1997,
respectively. Dividends declared but not yet paid to GE Global Insurance by its
consolidated subsidiaries were $64 million at December 31, 1999.
On December 31, 1998, ERC transferred to GE Global Insurance, as a non-cash
dividend, 100% of its $264 million investment in the common stock of First
Excess Reinsurance Corporation ("First Excess"). GE Global Insurance then
contributed the common stock of First Excess to GE Re on that same date.
59
Schedule III
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Supplementary Insurance Information
Column A Column B Column C Column D Column E Column F
- ----------------------------------------------------------------------------------------------------------
Deferred Claims and Claim
Insurance Expenses and Future Accumulated Net
Acquisition Policy Benefit Unearned Contract Premiums
(In millions) Costs Reserves Premiums Values Earned
---------------------------------------------------------------------------------
December 31, 1999:
Property/Casualty $ 410 $17,435 $2,326 $ - $5,622
Life 1,008 2,929 208 2,164 1,274
------ ------- ------ ------ ------
Total $1,418 $20,364 $2,534 $2,164 $6,896
====== ======= ====== ====== ======
December 31, 1998:
Property/Casualty $ 459 $15,342 $1,934 $ - $4,532
Life 744 2,174 231 2,271 1,103
------ ------- ------ ------ ------
Total $1,203 $17,516 $2,165 $2,271 $5,635
====== ======= ====== ====== ======
December 31, 1997:
Property/Casualty $ 266 $10,936 $1,126 $ - $3,523
Life 578 1,629 118 2,305 944
------ ------- ------ ------ ------
Total $ 844 $12,565 $1,244 $2,305 $4,467
====== ======= ====== ====== ======
Column G Column H Column I Column J Column K
---------------------------------------------------------------------------------
Amortization Other
Claims, Claim of Deferred Operating
Net Expenses and Policy Insurance Costs Net
(In millions) Investment Benefits Acquisition and Premiums
Income Incurred Costs Expenses Written
---------------------------------------------------------------------------------
December 31, 1999:
Property/Casualty $ 853 $4,394 $1,467 $ 637 $5,883
Life 298 991 372 182
------ ------ ------ ------
Total $1,151 $5,385 $1,839 $ 819
====== ====== ====== ======
December 31, 1998:
Property/Casualty $ 705 $3,160 $1,095 $ 510 $4,888
Life 280 943 262 163
------ ------ ------ ------
Total $ 985 $4,103 $1,357 $ 673
====== ====== ====== ======
December 31, 1997:
Property/Casualty $ 681 $2,481 $ 883 $ 407 $3,493
Life 229 779 190 162
------ ------ ------ ------
Total $ 910 $3,260 $1,073 $ 569
====== ====== ====== ======
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GE GLOBAL INSURANCE HOLDING CORPORATION
March 17, 2000 By: /s/ Robert J. Dellinger
------------------------------------------------------------
Robert J. Dellinger
Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the date
indicated.
Signatures Title Date
---------- ----- ----
/s/ DAVID L. CALHOUN President, Chief Executive Officer and Director March 17, 2000
- ---------------------------------------
David L. Calhoun (Principal Executive Officer)
/s/ ROBERT J. DELLINGER Senior Vice President, Chief Financial Officer and Director March 17, 2000
- ---------------------------------------
Robert J. Dellinger (Principal Financial Officer)
/s/ DENNIS D. DAMMERMAN Chairman March 17, 2000
- ---------------------------------------
Dennis D. Dammerman
/s/ JAMES A. PARKE Director March 17, 2000
- ---------------------------------------
James A. Parke
/s/ JOHN M. CONNELLY Senior Vice President, General Counsel and Director March 17, 2000
- ---------------------------------------
John M. Connelly
/s/ WILLIAM J. STEILEN Vice President and Controller March 17, 2000
- ---------------------------------------
William J. Steilen (Principal Accounting Officer)
61