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, 2001
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 66202 (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
7.5% Notes Due June 15, 2010 New York Stock Exchange
7.75% Notes Due June 15, 2030 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 8, 2002. None.
At March 8, 2002, 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.................................................................................13
Item 4. Submission of Matters to a Vote of Security Holders...............................................13
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.........................13
Item 6. Selected Financial Data...........................................................................13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................................14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................24
Item 8. Financial Statements and Supplementary Data.......................................................24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................................................24
PART III
Item 10. Directors and Executive Officers of the Registrant................................................24
Item 11. Executive Compensation............................................................................24
Item 12. Security Ownership of Certain Beneficial Owners and Management....................................24
Item 13. Certain Relationships and Related Transactions....................................................24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................25
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 66202 (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 is operating in an unprecedented environment in
the aftermath of the events of September 11. After years of the effect of excess
market capacity, the global market finds itself in a capacity crunch and with
many market participants declining to write coverage that includes terrorism.
The challenges associated with quantifying terrorism risk today are significant.
Primary insurers continue to consider alternatives to traditional risk transfer,
including 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 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.
The Company also competes in the reinsurance broker market throughout the world.
In early 1999, the Company significantly expanded its presence in the
reinsurance broker market by acquiring Eagle Star Reinsurance Company Limited
("Eagle Star Re"). The acquisition of Eagle Star Re significantly enhanced 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 acquisition of Eagle Star Re
positions 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,
including aggregate covers on portions of risk. 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 through 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
(subsequently merged with GE Frankona Reinsurance Limited, an affiliate), 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.
Unless otherwise indicated, all financial data has been prepared in accordance
with accounting principles generally accepted in the United States of America
("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 commercial 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 commercial
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) 2001 2000 1999
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Inter- Inter- Inter-
Domestic national Domestic national Domestic national
------------ ----------- ------------- ---------- ------------ -----------
Property and Casualty Segment
Property and Casualty............. $1,955 $1,797 $2,103 $2,677 $2,102 $2,470
Healthcare........................ 1,383 67 1,294 76 851 43
Commercial........................ 349 - 404 - 417 -
Life Segment......................... 790 1,051 832 805 615 649
------ ------ ------ ------ ------ ------
Total............................. $4,477 $2,915 $4,633 $3,558 $3,985 $3,162
====== ====== ====== ====== ====== ======
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 51%
of the Company's worldwide net premiums written in 2001. 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.
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, 2001, approximately 48%
of the Company's international net premiums written from property and casualty
reinsurance was derived from property reinsurance, approximately 20% from
casualty reinsurance and approximately 32% from aviation and marine reinsurance.
Based on 2001 net premiums written, approximately 45% 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 and directors and
officers exposures. 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, especially the U.S., Europe, Japan and the Carribeans.
The September 11, 2001 attack on America has also had a dramatic affect on the
insurance and reinsurance industry with the tragic loss of more than 1,000
insurance professionals, including many business associates and brokers with
whom the Company worked. None of the Company's staff suffered any injury.
The industry is playing a key role in the recovery and rebuilding effort. It is
estimated that insurers and reinsurers will pay claims of more than $35 billion
during the next several years. The Company estimated that its net pre-tax losses
will be $575 million from that attack. The Company has paid or anticipates that
it will pay claims for coverage on the World Trade Center complex and
surrounding buildings, its portion of aviation coverage for the four aircraft
involved, life reinsurance claims and business interruption claims. The attack
has led to significant changes in underwriting guidelines, and the Company no
longer provides terrorism coverage in many treaties and policies.
Healthcare. As part of the Company's property and casualty business segment, the
Company provides insurance and reinsurance for the healthcare industry and
targets 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 (e.g., excess workers' compensation,
stop loss insurance, HMO reinsurance and provider excess coverages).
The Company is a leader in providing primary medical professional liability
insurance through its subsidiary-Medical Protective Corporation ("Medical
Protective")-one of the oldest professional liability carriers in the United
States. The Company's comprehensive line of medical malpractice insurance,
written on a national basis, covers the needs of individual physicians,
dentists, physician partnerships, corporations and large group practices on an
occurrence and claims-made basis.
The healthcare industry continues to change and evolve due to voluntary
healthcare reform, managed healthcare initiatives, deteriorating profits driven
by the competitive marketplace and the uncertainty related to the extent of
government regulation. In addition, companies that historically specialized in
one line of business and one geographic area have expanded their lines of
business and are now writing multiple lines of business in a broader territory.
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, and utilizing
multiple products and services to provide healthcare solutions.
Commercial Insurance. An additional component of the Company's domestic property
and casualty business is its commercial insurance product line, which generally
consists of primary commercial property and casualty policies written on an
admitted and non-admitted basis in niche markets. Commercial 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.
4
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
commercial insurance product line has recently increased as more companies have
redirected their resources to the targeted niche markets. 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.
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
life, group and individual long-term health and disability products and provides
financial reinsurance to life insurers. Based on net premiums written, life
reinsurance accounted for approximately 25% of the Company's worldwide business
in 2001.
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 with an emphasis in Western Europe. For the year ended
December 31, 2001, approximately 57% of the Company's international life
reinsurance net premiums written were for traditional life reinsurance, with the
balance for health and disability reinsurance.
The Company believes that continued increases in life expectancy, consumer
trends to shift to more investment types of life insurance products, 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. These financial transactions
are effectively collateralized by anticipated future income streams from
selected insurance policies. Financial reinsurance typically has a duration of
three to five years.
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, new concepts of
liability and changes in claim settlement procedures. 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. 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. The Company has reorganized its claim teams into
integrated groups to align with the Company's business structure. In the course
of this reorganization, the team recognized that best practices existed in many
of the original claims teams. In order to leverage these best practices across
the new claims organization, the Global Claims Team launched the Claims Six
Sigma initiative. Claims Six Sigma has focused on establishing common processes
in areas such as claims adjudication, subrogation, auditing, alternative dispute
resolution and use of structured settlements.
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
1991 through 2001 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 1991 to 2001.
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, 2001," 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, 2001, 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, 2001
Year ended December 31,
---------------------------------------------------------------------------------------------------------
(In millions) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
---------------------------------------------------------------------------------------------------------
Net liability for unpaid
claims and claim
expenses $3,596 $3,991 $4,525 $5,071 $9,351 $9,458 $9,114 $12,495 $13,210 $12,202 $12,303
Cumulative paid as of:
One year later....... 665 802 949 1,115 1,964 1,949 2,176 2,867 4,811 4,758 ---
Two years later...... 1,103 1,274 1,602 1,804 3,130 3,189 3,241 5,803 7,782 --- ---
Three years later.... 1,499 1,739 2,054 2,341 3,933 3,881 4,863 7,263 --- --- ---
Four years later..... 1,784 2,036 2,424 2,708 4,464 5,294 5,648 --- --- --- ---
Five years later..... 2,008 2,293 2,690 2,988 5,686 5,919 --- --- --- --- ---
Six years later...... 2,208 2,485 2,952 3,318 6,151 --- --- --- --- --- ---
Seven years later.... 2,362 2,688 3,181 3,540 --- --- --- --- --- --- ---
Eight years later.... 2,531 2,841 3,353 --- --- --- --- --- --- --- ---
Nine years later..... 2,653 2,985 --- --- --- --- --- --- --- --- ---
Ten years later...... 2,772 --- --- --- --- --- --- --- --- --- ---
Net liability
re-estimated
as of:
One year later....... $3,625 $3,919 $4,612 $5,173 $9,192 $9,229 $9,179 $12,410 $13,749 $13,314 ---
Two years later...... 3,587 4,066 4,656 5,313 8,959 9,127 8,655 12,115 14,504 --- ---
Three years later.... 3,701 4,095 4,793 5,256 8,907 8,549 8,453 11,987 --- --- ---
Four years later..... 3,687 4,238 4,747 5,155 8,392 8,252 8,601 --- --- --- ---
Five years later..... 3,818 4,154 4,668 4,902 8,029 8,389 --- --- --- --- ---
Six years later...... 3,771 4,075 4,487 4,804 8,180 --- --- --- --- --- ---
Seven years later.... 3,711 3,942 4,402 4,854 --- --- --- --- --- --- ---
Eight years later.... 3,592 3,906 4,461 --- --- --- --- --- --- --- ---
Nine years later..... 3,591 3,946 --- --- --- --- --- --- --- --- ---
Ten years later...... 3,643 --- --- --- --- --- --- --- --- --- ---
Redundancy (Deficiency)
at December 31, 2001 (47) 45 64 217 1,171 1,069 513 508 (1,294) (1,112) ---
Effect of foreign
exchange (1) (41) (21) 2 (25) (708) (672) (344) (729) (589) 216 ---
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Redundancy (Deficiency)
at December 31, 2001,
excluding foreign
exchange $ (88) $ 24 $ 66 $ 192 $ 463 $ 397 $ 169 $ (221) $(1,883) $ (896) $ ---
====== ====== ====== ====== ====== ====== ====== ====== ======= ====== ======
(In millions) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
----------------------------------------------------------------------------------------------
Balance at December 31 - gross..... $4,815 $5,312 $6,020 $11,145 $10,869 $10,936 $15,342 $17,435 $16,932 $20,882
Less reinsurance recoverables...... (824) (787) (949) (1,794) (1,411) (1,822) (2,847) (4,225) (4,730) (8,579)
------ ------ ------ ------- ------- ------- ------- ------- ------- -------
Balance at December 31 - net....... 3,991 4,525 5,071 9,351 9,458 9,114 12,495 13,210 12,202 12,303
------ ------ ------ ------- ------- ------- ------- ------- ------- -------
Latest re-estimated liability -
gross........................... 5,079 5,546 5,958 9,724 9,888 10,336 15,520 20,340 19,364 ---
Less re-estimated reinsurance
recoverables.................... (1,133) (1,085) (1,104) (1,544) (1,499) (1,735) (3,533) (5,836) (6,050) ---
------ ------ ------ ------- ------- ------- ------- ------- ------- -------
Latest re-estimated liability -
net............................ 3,946 4,461 4,854 8,180 8,389 8,601 11,987 14,504 13,314 ---
------ ------ ------ ------ ------ ------ ------- ------- ------- -------
Gross redundancy (deficiency)...... (264) (234) 62 1,421 981 600 (178) (2,905) (2,432) ---
Effect of foreign exchange (1)..... (30) (3) (35) (859) (816) (402) (1,091) (934) 382 ---
------- ------ ------ ------ ------- ------- ------- ------- ------- ------
Gross redundancy (deficiency),
excluding foreign exchange...... $ (294) $ (237) $ 27 $ 562 $ 165 $ 198 $(1,269) $(3,839) $(2,050) $ ---
====== ====== ====== ====== ======= ======= ======= ======= ======= =======
(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.
Claims and claim expense reserve development in the mid 1980's 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 the early 1990's. 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.
The significant indicated deficiency that has developed with respect to the 1999
recorded reserves is primarily attributable to the combination of the effects of
continued insufficient pricing within the overall property and casualty
insurance/reinsurance industry and the insurance industry's undervaluing the
initial loss estimates for certain European windstorms occurring late in
December 1999. Based on the continued escalation in reported losses relative to
associated premiums, it became more apparent during 2000 that the level of
general price erosion that occurred in the primary property and casualty
insurance industry in recent years was significantly greater than had been
previously contemplated. In response to this new information, it became
necessary for the Company to increase claim reserves to reflect the higher
ultimate loss projections resulting from this increasing trend of claim
development on these more recent underwriting years.
Unfortunately, the escalation in reported losses relative to associated premiums
that emerged in 2000 continued in 2001, and at a pace greater than had been
anticipated in the actuarial reserve studies completed in late 2000. As a
result, in 2001, it again became necessary for the Company to increase claim
reserves to reflect the higher ultimate loss projections for prior year loss
events. The majority of the adverse development in 2001, and to a lesser extent
in 2000, related to higher projected losses on liability coverages, especially
in the hospital liability, nonstandard automobile (automobile insurance extended
to higher-risk drivers) and commercial general liability lines of business. The
total adverse development on prior year loss events recognized in 2001
aggregated approximately $800 million.
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.
8
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) 2001 2000 1999
-----------------------------------
Balance at January 1 - gross............................. $16,932 $17,435 $15,342
Less reinsurance recoverables............................ (4,730) (4,225) (2,847)
------- ------- -------
Balance at January 1 - net............................... 12,202 13,210 12,495
------- ------- -------
Claims and expenses incurred:
Current year.......................................... 4,579 4,401 4,162
Prior years........................................... 811 934 233
------- ------- -------
5,390 5,335 4,395
------- ------- -------
Claims and expenses paid:
Current year.......................................... (761) (1,290) (1,228)
Prior years........................................... (4,758) (4,811) (2,867)
------- ------- -------
(5,519) (6,101) (4,095)
------- ------- -------
Claim reserves related to acquired companies............. - 279 793
Claim reserves related to disposed companies............. - - (202)
Foreign exchange and other............................... 230 (521) (176)
------- ------- -------
Balance at December 31 - net............................. 12,303 12,202 13,210
Add reinsurance recoverables............................. 8,579 4,730 4,225
------- ------- -------
Balance at December 31 - gross........................... $20,882 $16,932 $17,435
======= ======= =======
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 1% at December 31, 2001 and 2000. The accretion of discount is
included in current operating results as part of the development of prior year
liabilities. Discounts amortized as a percentage of claims, claim expenses and
policy benefits were less than 1% for each of the years ended December 31, 2001,
2000 and 1999.
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) 2001 2000 1999
---------------- --------------- ---------------
Statutory basis reserves for U.S. companies - net......... $ 5,786 $ 6,213 $ 7,204
Adjustments to arrive at GAAP basis (1)................... 664 500 636
------- ------- -------
GAAP basis reserves for U.S. companies - net.............. 6,450 6,713 7,840
GAAP basis reserves for non-U.S. companies - net.......... 5,853 5,489 5,370
------- ------- -------
Total GAAP basis reserves - net........................... 12,303 12,202 13,210
Add reinsurance recoverables.............................. 8,579 4,730 4,225
------- ------- -------
GAAP basis reserves - gross............................... $20,882 $16,932 $17,435
======= ======= =======
(1) Statutory basis reserve offsets and reserves reclassified to contract
deposit assets or liabilities based on risk transfer provisions of SFAS No.
113.
9
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.
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) 2001 2000 1999
-------------- -------------- --------------
Balance at January 1 - gross.............................. $829 $800 $995
Less reinsurance recoverables............................. (183) (195) (206)
---- ---- ----
Balance at January 1 - net................................ 646 605 789
Claims and expenses incurred.............................. 23 99 (7)
Claims and expenses paid.................................. (48) (58) (210)
Claim reserves related to acquired companies.............. - - 33
---- ---- ----
Balance at December 31 - net.............................. 621 646 605
Add reinsurance recoverables.............................. 165 183 195
---- ---- ----
Balance at December 31 - gross............................ $786 $829 $800
==== ==== ====
The amounts in the preceding table are management's best estimate, based on
currently available information, of claims and claim expense payments and
recoveries for asbestos and environmental exposures 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 legislation, 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 3-9% per annum at December 31, 2001. 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 issuing insurance company. Such crediting
interest rates ranged from 3-9% per annum in 2001.
10
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 "GE Frankona Re 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.
Effective January 1, 2001, the National Association of Insurance Commissioners
("NAIC") required that insurance companies prepare their statutory basis
financial statements in accordance with the NAIC Accounting Practices and
Procedures Manual subject to any deviations prescribed or permitted by the
domiciliary state insurance departments. Statutory accounting practices
determine, among other things, the statutory surplus of an insurance company
and, therefore, the amount of funds that can be paid as dividends. For statutory
reporting purposes, accounting changes adopted to conform to these accounting
practices are reported as changes in accounting principles, with the cumulative
effect reported as an adjustment to 2001 unassigned funds (surplus). The
cumulative effect is the difference between the amount of capital and surplus at
the beginning of the year and the amount of capital and surplus that would have
been reported at that date if the new accounting principles had been applied
retroactively for all periods. As a result of adoption of the model statutory
accounting practices, aggregate cumulative adjustments totaling $234 million
were recorded by Employers Reinsurance Corporation ("ERC"), GE Reinsurance
Corporation ("GE Re") and Medical Protective as an increase to unassigned funds
(surplus) at January 1, 2001, primarily related to the recording of deferred tax
assets.
Risk-Based Capital. 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. At December 31, 2001, 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.
11
Dividends by Subsidiaries. Because the operations of GE Global Insurance are
conducted primarily through 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 by ERC without prior
regulatory approval is $273 million at December 31, 2001. Such amount will
increase to $341 million by December 31, 2002. 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 2002
without the prior approval of the Director of Insurance for the State of
Illinois. The maximum amount available for the payment of dividends during 2002
by Medical Protective without prior regulatory approval is $74 million after
December 27, 2002.
International Regulations. Based on 2001 net premiums written, approximately 39%
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 GE
Frankona Re 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 GE Frankona Re
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 GE Frankona Re 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 GE Frankona Re Group's operations.
Effective January 1, 2001, certain of the Company's international operations
(licensed in the European Union ("EU") member states) are required to comply
with the EU Directive on Supplementary Supervision of Insurance Undertakings in
an Insurance Group. This directive is designed to address solvency issues for
groups of insurance companies and supplements the solvency tests historically
performed on individual insurance companies. The main goal of this directive is
to assess the overall capital available to the group, rather than on an
individual company basis, and identify potential risks. The Company is currently
in the process of performing such required solvency tests in anticipation of the
first filing in 2002.
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 and Munich, Germany.
12
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, except as
noted in the following paragraph.
As a result of the September 11, 2001 terrorist attacks, both towers of the
World Trade Center in New York City ("WTC") were completely destroyed.
Industrial Risk Insurers ("IRI"), an affiliate of ERC, was one of the primary
insurers of the WTC with an occurrence policy limit of $237 million. In
addition, ERC reinsured part of the various other primary insurers of the WTC,
limits of which are also written on a per occurrence basis. The principal lessee
of the WTC is alleging that the damage to (i.e., the loss of) each tower was a
separate occurrence. It is the contention of all insurers of the WTC that the
policies were written in such a way that the loss of both towers in this
instance constituted one occurrence. Suit has been filed in the United States
District Court in New York seeking a declaratory judgment on this question. IRI
is a party to this suit, as are several of ERC's reinsureds. Discovery in the
suit(s) is underway. Both IRI and ERC have retrocessional coverage on their
exposure to WTC losses covering a portion of losses incurred. Management
believes that there is compelling evidence supporting their contention that the
loss of both towers constituted a single occurrence of loss and is prepared to
defend this position vigorously (including litigation if required) and,
accordingly, has established claim reserves on this basis.
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.
Item 6. Selected Financial Data.
Consolidated Financial Data
Year ended December 31,
-----------------------------------------------------------------
(In millions) 2001 2000 1999 1998 1997
-----------------------------------------------------------------
Total revenues............................... $9,191 $10,131 $ 9,031 $ 7,203 $ 5,784
Net Premiums Written......................... 7,392 8,191 7,147 5,984 4,545
Net investment income........................ 1,202 1,315 1,151 985 910
Net realized gains on investments............ 436 522 699 432 303
Earnings (loss) before income taxes and
cumulative effect of change in
accounting principle ..................... (466) 605 988 1,070 882
Net earnings (loss).......................... (195) 581 720 779 648
Total investments............................ 22,495 21,191 21,539 21,987 18,343
Total assets................................. 45,118 38,564 37,561 35,047 27,532
Stockholder's equity......................... $ 6,362 $ 6,025 $ 5,575 $ 6,020 $ 5,374
Return on equity (average)................... (3.1%) 10.0% 12.4% 13.7% 12.8%
Stockholder's equity, excluding unrealized
gains (losses) on investment securities... $ 6,339 $ 5,882 $ 5,524 $ 5,088 $ 4,628
Return on equity (average), excluding
unrealized gains (losses) on investment
securities................................ (3.2%) 10.2% 13.6% 16.0% 14.6%
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net premiums written and net premiums earned decreased $798 million (or 10%) and
$816 million (also 10%), respectively, in 2001. The majority of this decrease is
attributable to the $698 million of premiums ceded in connection with the events
of September 11 as discussed below. The remaining decrease in premiums is
attributable to (1) the decision to exit certain lines of business and customer
relationships as part of a reunderwriting initiative undertaken in 2000/2001 and
(2) additional ceded premiums resulting from claims made on prior year
retrocession coverages in place as a result of the adverse development on prior
year losses recognized in 2001, somewhat offset by general growth in premiums
due to the combination of recent hardening of pricing within the overall
property and casualty insurance/reinsurance industry and a focus on growth
within certain niche markets.
Excluding the decrease in net premiums earned, the remaining revenue categories
decreased $124 million, principally as a result of lower levels of investment
income resulting from the general decline in interest rates in 2001 and a
reduction in net realized gains on investments, somewhat offset by an increase
in other revenues.
GE Global Insurance incurred a loss before cumulative effect of change in
accounting principle (see further discussion of this accounting change in note 2
to the accompanying consolidated financial statements) of $184 million in 2001,
as compared to earnings of $581 million in 2000. Operating results for 2001 as
compared to 2000 were adversely impacted by approximately $575 million related
to the insurance losses arising from the events of September 11. This amount,
which primarily resulted from contingent premium payments contained in certain
retrocession agreements, comprises $698 million recorded as a reduction in net
premiums earned, and $78 million reflecting additional claims, claim expenses
and policy benefits, partially offset by $201 million reflecting a reduction in
insurance acquisition costs. The gross losses arising from the events of
September 11 (estimated to be $3.3 billion) relate to underlying insurance
policies and reinsurance contracts providing general property, general
liability, aviation, business interruption, workers compensation and life and
health-related coverages. Historical experience related to large catastrophic
events has shown that a broad range of total insurance industry loss estimates
often exists following such an event and it is not unusual for there to be
significant subsequent revisions in such estimates. $575 million is management's
best estimate of its existing net liability based on the information currently
available, and is net of estimated recoveries under retrocession arrangements,
under which a portion of losses is routinely ceded to other reinsurance
entities. Further information regarding potential litigation associated with the
events of September 11 is discussed in note 13 to the consolidated financial
statements.
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. As described in the preceding paragraph, the
accident year losses incurred in 2001, primarily as a result of the insurance
losses arising from the events of September 11, 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
associated accrued reinsurance recoverables will be collected when the
underlying paid losses exceed the specified loss ratios.
Substantially all of the Company's retrocessionaires are large, highly rated
reinsurance entities. At this time, management does not anticipate that any
significant portion of its estimated recoveries will be uncollectible.
Operating results in 2001 were also adversely affected by the continued
deterioration of underwriting results, reflecting higher property and
casualty-related losses (principally as a result of adverse development relating
to prior-year loss events) and the continued effects of low premiums in the
property and casualty insurance/reinsurance industry in recent years. As the
Company's underwriting results in 2001, typical of the global property and
casualty industry, were realized, management began underwriting initiatives that
increased premium prices for given levels of coverage. These initiatives
resulted in management reconsidering and clarifying the product lines, policies,
contracts and specific customers for which, given the risk, acceptable future
levels of profit seem achievable. For these businesses, the Company has sought
to retain or even expand its business. On the other hand, management has
identified particular property and casualty business channels from which returns
do not appear to justify the risks. For these channels, new business will be
significantly curtailed or exited.
14
The majority of the adverse development in 2001 related to higher projected
ultimate losses for liability coverages, especially in the hospital liability,
nonstandard automobile (automobile insurance extended to higher-risk drivers)
and commercial general liability lines of business.
Income tax benefits partially offset the significant pre-tax operating loss
generated in 2001. Such recorded tax benefits include the impact of the Company
holding a significant portion of its overall investment portfolio in securities
that are substantially exempt from U.S. taxation and the treatment of certain
proceeds received in connection with the resolution of issues involving a
previous acquisition as a purchase price adjustment for tax purposes.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net premiums written increased $1,044 million or 15% in 2000, primarily
attributable to the combination of hardening pricing within the overall property
and casualty insurance/reinsurance industry, a focus on growth within the niche
direct commercial market and the impact of a full year of operating activity for
the March 1999 acquisition of Eagle Star Re. This growth was somewhat offset by
the 2000 decisions to exit certain lines of business and customer relationships
as part of a reunderwriting initiative undertaken during the year, an increase
in contingently payable ceded premiums related to recorded recoveries under
aggregate excess retrocession programs and the impact of foreign currency
translation in connection with the continued strengthening of the U.S. dollar
compared to most major European currencies.
Net earnings decreased $139 million or 19% in 2000, including a decrease in
after-tax net realized gains on investments of $100 million. Excluding after-tax
net realized gains on investments, net earnings decreased $39 million or 14% in
2000. This decrease reflects deterioration of underwriting results, including
adverse development on prior year recorded losses. The significant level of
adverse development on prior year recorded losses is primarily attributable to
the combination of the effects of continued insufficient pricing within the
overall property and casualty insurance/reinsurance industry and the insurance
industry's undervaluing the initial loss estimates for certain European
windstorms occurring late in December 1999. Based on the continued escalation in
reported losses relative to associated premiums, it became more apparent during
2000 that the level of general price erosion that occurred in the primary
property and casualty insurance industry in recent years was significantly
greater than had been previously contemplated. In response to this new
information, it became necessary for the Company to increase claim reserves to
reflect the higher ultimate loss projections resulting from this increasing
trend of claim development on these more recent underwriting years.
Partially offsetting these reductions in net earnings were: (1) an increase in
net investment income due to the combination of higher average investment yields
(as a result of the increasing U.S. interest rate environment throughout most of
2000) and repositioning of the investment portfolio to include a higher
proportion of fixed maturity securities and (2) tax benefits attributable to a
step-up in the tax basis of certain assets following the conversion of a
corporate subsidiary to a partnership for German tax purposes.
15
Domestic Property and Casualty Business
Year ended December 31,
-------------------------------
(In millions) 2001 2000 1999
-------------------------------
Net premiums written........................... $3,687 $3,801 $3,370
Net underwriting loss.......................... (1,305) (419) (423)
Net investment income.......................... 530 606 513
Earnings (loss) before income taxes and
cumulative effect of change in accounting
principle.................................. (586) 250 533
Net realized gains on investments.............. 268 128 516
Earnings (loss) before income taxes and
cumulative effect of change in accounting
principle, excluding net realized gains
on investments............................. (854) 122 17
GAAP ratios (1):
GAAP claims and claim expense ratio......... 102.2% 77.4% 79.5%
GAAP underwriting expense ratio............. 33.1% 34.4% 33.6%
----- ----- -----
GAAP combined ratio......................... 135.3% 111.8% 113.1%
===== ===== =====
(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 decreased $114 million or 3% in 2001, primarily
attributable to (1) higher levels of ceded losses under aggregate excess
retrocession programs (both current year principally as a result of the events
of September 11 and prior years due to continued adverse claim development) and
(2) the decision to exit certain lines of business and customer relationships as
part of a reunderwriting initiative undertaken in 2000/2001, somewhat offset by
general growth in premiums due to the combination of recent hardening of pricing
within the overall property and casualty insurance/reinsurance industry and a
focus on growth within certain niche markets. Net premiums written increased
$431 million or 13% in 2000, primarily attributable to the combination of
hardening pricing within the overall property and casualty insurance/reinsurance
industry and a focus on growth within the niche direct commercial market. This
increase was partially offset by the 2000 decision to exit certain lines of
business and customer relationships as part of a reunderwriting initiative
undertaken during the year and higher levels of ceded premiums under aggregate
excess retrocession programs.
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.
The significant increase in the 2001 combined ratio is partially attributable to
higher levels of ceded premiums and incurred losses resulting from the events of
September 11. Excluding this impact, the 2001 combined ratio would have been
126.6%. The relatively high combined ratios in 2001 (excluding the impact of the
events of September 11), 2000 and 1999 primarily reflect the effects of
continued insufficient pricing within the overall property and casualty
insurance/reinsurance industry in recent years and adverse development on prior
year recorded losses. The majority of the adverse development in 2001 related to
higher projected ultimate losses for liability coverages, especially in the
hospital liability, nonstandard automobile (automobile insurance extended to
higher-risk drivers) and commercial general liability lines of business.
Net investment income decreased $76 million or 13% in 2001, primarily
attributable to the general decline in interest rates during 2001. Net
investment income increased $93 million or 18% in 2000, primarily attributable
to the combination of higher average investment yields (as a result of the
increasing U.S. interest rate environment throughout most of 2000) and
repositioning of the investment portfolio to include a higher proportion of
fixed maturity securities.
16
Earnings (loss) before income taxes and cumulative effect of change in
accounting principle, excluding net realized gains on investments, decreased
$976 million in 2001, primarily attributable to the increase in the combined
ratio (including the significant impact of the events of September 11) and the
decrease in net investment income discussed above. Earnings before income taxes
and cumulative effect of change in accounting principle, excluding net realized
gains on investments, increased $105 million in 2000, primarily attributable to
the decrease in the combined ratio and the increase in net investment income
discussed above.
International Property and Casualty Business
Year ended December 31,
------------------------------
(In millions) 2001 2000 1999
------------------------------
Net premiums written............................ $1,864 $2,754 $2,513
Net underwriting loss........................... (618) (509) (238)
Net investment income........................... 303 347 340
Earnings (loss) before income taxes
and cumulative effect of change in
accounting principle....................... (140) 117 211
Net realized gains on investments............... 112 297 101
Earnings (loss) before income taxes and
cumulative effect of change in accounting
principle, excluding net realized gains
on investments............................... (252) (180) 110
GAAP ratios (1):
GAAP claims and claim expense ratio.......... 100.5% 91.6% 76.3%
GAAP underwriting expense ratio.............. 38.1% 26.4% 33.6%
----- ----- -----
GAAP combined ratio............................ 138.6% 118.0% 109.9%
===== ===== =====
(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 decreased $890 million or 32% in 2001, primarily
attributable to (1) higher levels of ceded losses under the aggregate excess
retrocession program principally as a result of the events of September 11 and
(2) the decision to exit certain lines of business and customer relationships as
part of a reunderwriting initiative undertaken in 2000/2001, somewhat offset by
general growth in premiums due to the combination of recent hardening of pricing
within the overall property and casualty insurance/reinsurance industry. Net
premiums written increased $241 million or 10% in 2000, primarily attributable
to the combination of hardening pricing within the overall property and casualty
insurance/reinsurance industry and the impact of a full year of operating
activity for the March 1999 acquisition of Eagle Star Re. This increase was
somewhat offset by the 2000 decision to exit certain lines of business and
customer relationships as part of a reunderwriting initiative undertaken during
the year.
Consistent with experience in the domestic property and casualty business, the
significant increase in the 2001 combined ratio is primarily attributable to
higher levels of ceded premiums and incurred losses resulting from the events of
September 11. Excluding this impact, the 2001 combined ratio would have been
114.8%. The relatively high combined ratios in 2001 (excluding the impact of the
events of September 11), 2000 and 1999 primarily reflect the effects of
continued insufficient pricing within the overall property and casualty
insurance/reinsurance industry in recent years and adverse development on prior
year recorded losses. The increase in the combined ratio in 2000 includes the
impact of significant adverse development relating to certain European
windstorms occurring late in 1999.
Net investment income decreased $44 million or 13% in 2001, primarily
attributable to the general decline in interest rates during 2001. Net
investment income increased $7 million or 2% in 2000, primarily attributable to
the repositioning of the investment portfolio to include a higher proportion of
fixed maturity securities.
17
Earnings (loss) before income taxes and cumulative effect of change in
accounting principle, excluding net realized gains on investments, decreased $72
million in 2001, primarily attributable to the increase in the combined ratio
(including the significant impact of the events of September 11) and the
decrease in net investment income discussed above. Earnings before income taxes
and cumulative effect of change in accounting principle, excluding net realized
gains on investments, decreased $290 million in 2000, primarily attributable to
the significant increase in the combined ratio discussed above.
Life Reinsurance Business
Year ended December 31,
-------------------------
(In millions) 2001 2000 1999
-------------------------
Revenues....................................... $2,466 $2,207 $1,789
Earnings before income taxes and cumulative
effect of change in accounting
accounting principle ....................... 260 238 244
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 $259 million or 12% in 2001. This increase was primarily
attributable to growth in the international traditional life and health business
(principally in Europe and Latin America), somewhat offset by a decrease in net
realized gains on investments. Revenues increased $418 million or 23% in 2000.
This increase was primarily attributable to growth in the domestic traditional
life and credit life business and an increase in net realized gains on
investments.
Earnings before income taxes and cumulative effect of change in accounting
principle increased $22 million or 9% in 2001, including a $41 million decrease
in net realized gains on investments. Excluding net realized gains on
investments, earnings before income taxes and cumulative effect of change in
accounting principle increased $63 million or 45% in 2001, primarily
attributable to the increase in revenues discussed above and more favorable
claim experience as compared to 2000 (particularly in the international
individual disability line of business). Earnings before income taxes and
cumulative effect of change in accounting principle decreased $6 million or 2%
in 2000, including a $15 million increase in net realized gains on investments.
Excluding net realized gains on investments, earnings before income taxes and
cumulative effect of change in accounting principle decreased $21 million or 13%
in 2000, primarily attributable to an increase in claims experience.
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 the 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 and payments made for claims and claim expenses,
increased $74 million in 2001, 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 $1,030
million in 2000, primarily as a result of an escalation in claim-related
payments attributable to higher levels of incurred claims and claim expenses in
recent years.
Cash flows from investing activities decreased $1,307 million in 2001, primarily
attributable to a net increase in the purchase of investment securities as a
result of the cash inflows from higher volumes of contract deposits within the
life reinsurance operations and the capital contributions discussed below under
cash flows from financing activities. Cash flows from investing activities
increased $447 million in 2000, primarily attributable to a net decrease in the
purchases of investment securities as a result of the decrease in operating cash
flows discussed above.
18
Cash flows from financing activities increased $944 million in 2001, primarily
attributable to an increase in contract deposit liabilities resulting from
growth within the life reinsurance business segment and capital contributions
received to replenish capital sufficient to cover losses associated with the
events of September 11, somewhat offset by a decrease in short-term borrowings.
Cash flows from financing activities increased $520 million in 2000, primarily
attributable to the following factors: (1) an increase in short-term borrowings,
(2) a reduction in dividends paid on common stock and (3) an increase in
contract deposit liabilities resulting from growth in financial reinsurance
business volumes. The $691 million of proceeds from long-term borrowings in 2000
were substantially all used to repay outstanding borrowings under an interim
loan agreement with GE Capital Corporation used to fund the Company's 1998
acquisition of Medical Protective.
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. The total
amount outstanding on this credit facility, including accrued interest payable,
was $108 million and $129 million as of December 31, 2001 and 2000,
respectively.
Off-Balance Sheet Arrangements
The Company has not utilized forms of off-balance sheet arrangements, such as
asset securitizations, involving special purpose entities to facilitate improved
share owner returns and securities transactions, transfer selected credit risk,
or engage in speculative activities and has not provided financial support to
special purpose entities under any liquidity or credit support agreements.
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 portfolios are managed for
total return and performance is measured against equity benchmarks.
On a worldwide basis, based on data as of December 31, 2001, the Company manages
73% of its investments internally. GE Asset Management Incorporated, an
affiliate of the Company, manages an additional 8% 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) 2001 2000 1999 1998 1997
-----------------------------------------------------------
Average invested assets (at cost)............. $21,697 $21,197 $20,940 $18,794 $16,417
Net investment income....................... 1,202 1,315 1,151 985 910
Net effective yield......................... 5.5% 6.2% 5.5% 5.2% 5.5%
Net realized gains on investments........... $ 436 $ 522 $ 699 $ 432 $ 303
Net unrealized gains on investment securities,
before deferred income taxes............. 49 244 92 1,554 1,189
The decrease in unrealized gains on investment securities before deferred income
taxes in 2001 is primarily due to the impact of realized gains recognized,
somewhat offset by the concentration of fixed maturity debt securities held in
the investment portfolio and the effects of a general decrease in interest rates
which occurred in 2001.
19
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 or derivatives.
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.
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,
-----------------------------------------------
2001 2000 2001 2000
-----------------------------------------------
U.S. government and government agency securities..... 1.0% 0.5% 2.0% 2.6%
Aaa.................................................. 40.5 45.2 2.1 1.7
Aa................................................... 26.0 29.4 9.1 9.0
A.................................................... 12.0 10.8 29.3 27.9
Baa.................................................. 2.0 1.5 13.1 13.1
Ba................................................... 0.5 0.5 1.1 0.8
Canadian securities.................................. 4.1 3.6 10.1 7.2
Mortgage-backed and other asset-backed securities.... 11.1 6.7 32.0 36.0
Other................................................ 2.8 1.8 1.2 1.7
----- ----- ----- -----
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 "Baa" or above. The Canadian securities held by the Company are
similar in quality to the other securities held in its domestic 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 securities.
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 GE Frankona Re Group's
investment personnel based in Munich, within guidelines established by the
management of the GE Frankona Re Group and under the overall supervision and
review of ERC's investment department.
The principal objective of the GE Frankona Re 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 GE Frankona Re Group's
reinsurance liabilities. The GE Frankona Re Group's investment portfolios are
geographically diversified with investments principally from the major European
markets and the United States.
20
As of December 31, 2001, the fair value of the GE Frankona Re Group's
investments totaled $6,597 million, a decrease of $143 million from December 31,
2000. The composition of GE Frankona Re Group's investments is summarized as
follows:
December 31,
----------------
2001 2000
----------------
Fixed maturity securities............................ 89.1% 89.5%
Equity securities.................................... 8.1 7.5
Other invested assets................................ 2.8 3.0
----- -----
Total................................................ 100.0% 100.0%
===== =====
Most fixed maturity securities within the GE Frankona Re 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 business
activities of GE Global Insurance. The Company uses derivative financial
instruments to mitigate or eliminate certain financial and market risks,
including those related to changes in interest rates and currency exchange
rates. As a matter of policy, the Company does not engage in derivatives
trading, derivatives market-making or other speculative activities. More
detailed information regarding these financial instruments, as well as
strategies and policies for their use, is contained in notes 2 and 14 to the
consolidated financial statements.
The Company manages its exposure to currency principally by matching investment
assets with the underlying reinsurance liabilities. 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 by utilizing cross currency swaps and
currency forwards. The Company manages its exposure to interest rates
principally by matching floating rate liabilities with corresponding floating
rate assets and by matching fixed rate liabilities with corresponding fixed rate
assets. Certain of the products reinsured within the life segment include fixed
rate interest rate features that are matched with fixed rate investments of a
similar duration.
On a limited basis, and as part of ongoing customer activities, the Company uses
equity options to minimize its exposure to movements in equity markets that have
a direct correlation with certain of its reinsurance products. Additionally, the
Company has entered into a limited number of credit default swaps to lessen its
exposure on certain financial guarantee reinsurance business.
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.
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.
21
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 with all else constant, it is estimated
that such a decrease, including repricing in the securities portfolio,
would reduce the 2002 net earnings of the Company based on year-end 2001
positions by an insignificant amount. Based on positions at year-end 2000,
the pro forma effect on 2001 net earnings of such a decrease in interest
rates was also estimated to be an insignificant amount.
The geographic distribution of the Company's operations is diverse. One
means of assessing exposure to changes in currency exchange rates is to
model effects on reported earnings using a sensitivity analysis. Year-end
2001 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
currencies. Net unhedged exposures in each currency were then remeasured
assuming a 10 percent decrease (substantially greater decreases for
hyperinflationary currencies) in currency exchange rates compared with the
U.S. dollar. Under this model, management estimated at year-end 2001 that
such a decrease would have an insignificant effect on 2002 earnings of the
Company.
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, fires
and, as experienced in 2001, intentional events such as terrorist acts),
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.
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.
Critical Accounting Policies
High quality financial statements require rigorous application of high quality
accounting policies. The policies discussed below are considered by management
critical to an understanding of the Company's financial statements because their
application places the most significant demands on management's judgment, with
reporting results relying on estimation about the effect of matters that are
inherently uncertain. Specific risks for these critical accounting policies are
described in the following paragraphs. For all of these policies, management
cautions that future events rarely develop exactly as forecast, and the best
estimates routinely require adjustment.
Insurance related liabilities and reserves differ for short and long duration
insurance contracts. Short-duration contracts such as property and casualty
policies are accounted for based on actuarial estimates of the amount of loss
inherent in that period's claims, including losses for which claims have not yet
been reported. Short-duration contract loss estimates rely on actuarial
observations of ultimate loss experience for similar historical events.
Measurement of long-duration insurance liabilities (such as term and whole life
insurance policies) also is based on approved actuarial techniques, but
necessarily includes assumptions about mortality, lapse rates and future yield
on related investments. The Company's insurance related liabilities and reserves
totaled $31 billion at year-end 2001. Of that total, approximately $20 billion
related to unpaid claims and claims adjustment expenses for short-duration
insurance coverage. As discussed on page 14, there has been a recent shift in
the source of adverse loss development away from property to liability coverage.
Management continually evaluates the potential for changes in loss estimates,
both positive and negative, and uses the results of these evaluations both to
adjust recorded provisions and to adjust underwriting criteria and product
offerings. The potential for further adverse loss
22
development in these areas is highly uncertain. Further information about
insurance liabilities is provided in note 6 to the consolidated financial
statements.
Impairment of investment securities results in a charge to operations when a
market decline below cost is other than temporary. Management regularly reviews
each investment security for impairment based on criteria that include the
extent to which cost exceeds market value, the duration of that market decline
and the financial health of and specific prospects for the issuer. The Company's
investment securities amounted to approximately $22 billion at year-end 2001.
Gross unrealized gains and losses included in that carrying amount related to
debt securities were $317 million and $249 million, respectively. Gross
unrealized gains and losses of equity securities were $19 million and $38
million, respectively. Of thoses securities whose carrying amount exceeds fair
value at year-end 2001, and based on application of the Company's accounting
policy for impairment, approximately $30 million of portfolio value is at risk
of being charged to earnings in 2002. The Company actively performs
comprehensive market research, monitors market conditions and segments its
investments by credit risk in order to minimize impairment risks. Further
information is provided in notes 2 and 4 to the consolidated financial
statements and pages 19-21, which discusses the investment securities portfolio.
Provision for uncollectible premium receivables and reinsurance recoverables are
recognized when they are incurred. Measurement of such losses requires
consideration of historical loss experience, including the need to adjust for
current conditions, and judgments about the probable effects of relevant
observable data, including present economic conditions such as delinquency
rates, financial health of specific customers, collateral value (such as letters
of credit and funds held balances) and legal right-of-offset of related claim
liabilities. The Company's exposure to uncollectible premium receivables and
reinsurance recoverables was approximately $15 billion at year-end 2001, against
which an allowance for losses of approximately $159 million was provided. While
collection prospects depend to a large degree on future economic conditions
(including the impact of future claims experience), management does not forecast
significant receivable write-offs in 2002. Further information is provided in
notes 2 and 6 to the consolidated financial statements.
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. Policies related to revenue
recognition, financial instruments and consolidation policy require difficult
judgments on complex matters that are often subject to multiple sources of
authoritative guidance. Certain of these matters are among topics currently
under reexamination by accounting standards setters and regulators. Although no
specific conclusions reached by these standard setters appear likely to cause a
material change in the Corporation's accounting policies, outcomes cannot be
predicted with confidence. Also see note 2, Summary of Significant Accounting
Policies, which discusses accounting policies that must be selected by
management when there are acceptable alternatives.
New Accounting Standards
Major provisions of new accounting standards that may be significant to the
Company's financial statements in the future are described in the following
paragraphs.
Statement of Financial Accounting Standards ("SFAS") 141, Business Combinations,
and SFAS 142, Goodwill and Other Intangible Assets, modify the accounting for
business combinations, goodwill and identifiable intangible assets. As of
January 1, 2002, all goodwill and indefinite-lived intangible assets must be
tested for impairment and a transition adjustment will be recognized. Management
believes no goodwill impairment will be recognized under these new standards.
Amortization of goodwill will cease as of January 1, 2002, and, thereafter, all
goodwill and any indefinite-lived intangible assets must be tested at least
annually for impairment. The effect of the non-amortization provisions on 2002
operations will be affected by 2002 acquisitions and cannot be forecast, but if
these rules had applied to goodwill in 2001, management believes that full year
2001 net earnings would have increased by approximately $81 million.
SFAS 143, Accounting for Asset Retirement Obligations, requires recognition of
the fair value of obligations associated with the retirement of long-lived
assets when there is a legal obligation to incur such costs. This amount is
accounted for like an additional element of the corresponding asset's cost, and
is depreciated over that asset's useful life. SFAS 143 will be effective for the
Company on January 1, 2003. Management has not yet determined the effects of
adopting this standard on the Company's financial position and results of
operations.
23
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 21-22.
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.
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
24
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 27).
(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 27).
(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 Whole Account Aggregate Excess of Loss Retrocession
Reinsurance Agreement, between Employers Reinsurance
Corporation and National Indemnity Company, dated January 1,
2001 (material omitted and separately filed with the
Securities and Exchange Commission pursuant to a request for
confidential treatment).
10.2 Whole Account Aggregate Excess of Loss Retrocession
Reinsurance Agreement, between Employers Reinsurance
Corporation and Scandinavian Reinsurance Company Ltd., dated
January 1, 2001 (material omitted and separately filed with
the Securities and Exchange Commission pursuant to a request
for confidential treatment).
10.3 Whole Account Aggregate Excess of Loss Retrocession
Reinsurance Agreement, between Employers Reinsurance
Corporation and National Union Fire Insurance Company of
Pittsburgh, PA, dated January 1, 2001 (material omitted and
separately filed with the Securities and Exchange Commission
pursuant to a request for confidential treatment).
10.4 Whole Account Aggregate Excess of Loss Retrocession
Reinsurance Agreement, between Employers Reinsurance
Corporation and Underwriters Reinsurance Company (Barbados)
Inc., dated January 1, 2001 (material omitted and separately
filed with the Securities and Exchange Commission pursuant
to a request for confidential treatment).
12 Computation of ratio of earnings to fixed charges.
(b) Reports on Form 8-K.
None.
25
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..............................................27
Consolidated Statement of Earnings........................................28
Consolidated Statement of Financial Position..............................29
Consolidated Statement of Stockholder's Equity............................31
Consolidated Statement of Cash Flows......................................32
Notes to Consolidated Financial Statements................................33
Financial Statement Schedules
Schedule II - Condensed Financial Information of Registrant...............58
Schedule III - Supplementary Insurance Information........................62
26
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,
2001 and 2000, 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, 2001. In connection with our audits of the
consolidated financial statements, we also audited the financial statement
schedules listed in the Index at Item 14(a) as of December 31, 2001 and 2000 and
for each of the years in the three-year period ended December 31, 2001. These
consolidated financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. 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.
As discussed in note 2 to the consolidated financial statements, the Company in
2001 changed its method of accounting for derivative instruments and hedging
activities.
KPMG LLP
Kansas City, Missouri
January 24, 2002
27
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Earnings
Year ended December 31,
-------------------------------
(In millions) 2001 2000 1999
-------------------------------
Revenues
Net premiums written $7,392 $ 8,191 $7,147
====== ====== ======
Net premiums earned $7,185 $ 8,001 $6,896
Net investment income 1,202 1,315 1,151
Net realized gains on istments 436 522 699
Other revenues 368 293 285
------ ------- ------
Total revenues 9,191 10,131 9,031
------ ------- ------
Costs and Expenses
Claims, claim expenses and policy benefits 6,975 6,727 5,385
Insurance acquisition costs 1,830 1,913 1,839
Amortization of intangibles 92 143 111
Interest expense 102 126 102
Other operating costs and expenses 569 529 518
Minority interest in net earnings of consolidated
subsidiaries 89 88 88
------ ------- ------
Total costs and expenses 9,657 9,526 8,043
------ ------- ------
Earnings (loss) before income taxes and cumulative effect of
change in accounting principle (466) 605 988
------ ------- ------
Provision for income taxes:
Current (297) (109) 216
Deferred 15 133 52
------ ------- ------
(282) 24 268
------ ------- ------
Earnings (loss) before cumulative effect of change in
accounting principle (184) 581 720
------ ------- ------
Cumulative effect of change in accounting principle (11) - -
------ ------- ------
Net earnings (loss) $ (195) $ 581 $ 720
====== ======= ======
See Notes to Consolidated Financial Statements.
28
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Financial Position
December 31,
-------------------------
(In millions) 2001 2000
-------------------------
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value $19,769 $18,761
Equity securities, at fair value 641 718
Short-term investments, at amortized cost 1,748 1,348
Other invested assets 337 364
------- -------
Total investments 22,495 21,191
Cash 470 196
Securities and indebtedness of related parties 296 676
Accrued investment income 386 407
Premiums receivable 4,376 3,844
Funds held by reinsured companies 720 740
Reinsurance recoverables 10,367 6,436
Deferred insurance acquisition costs 1,615 1,494
Intangible assets 1,585 1,640
Other assets 2,808 1,940
------- -------
Total assets $45,118 $38,564
======= =======
29
December 31,
--------------------------
(In millions) 2001 2000
--------------------------
Liabilities and equity
Claims and claim expenses $22,033 $17,678
Accumulated contract values 2,909 2,161
Future policy benefits for life and health contracts 2,965 2,636
Unearned premiums 2,763 2,584
Other reinsurance balances 2,935 2,062
Contract deposit liabilities 915 1,169
Other liabilities 1,181 840
Long-term borrowings 1,655 1,654
Indebtedness to related parties 217 578
------- -------
Total liabilities 37,573 31,362
------- -------
Minority interest in equity of consolidated
subsidiaries 1,183 1,177
------- -------
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 1,425 845
Retained earnings 5,002 5,204
Accumulated unrealized gains on investment securities - net (a) 23 143
Accumulated foreign currency translation adjustments (a) (241) (322)
Derivatives qualifying as hedges (a) (2) -
------- -------
Total stockholder's equity 6,362 6,025
------- -------
Total liabilities and equity $45,118 $38,564
======= =======
(a) The sum of accumulated unrealized gains on investment securities,
accumulated foreign currency translation adjustments and derivatives
qualifying as hedges constitutes "Accumulated nonowner changes other
than earnings," as shown in the Consolidated Statement of Stockholder's
Equity, and was $(220) million and $(179) million at year-end 2001 and
2000, respectively.
See Notes to Consolidated Financial Statements.
30
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, 1999 $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
------
Changes other than transactions with share owner:
Net earnings - - - 581 - 581
Net unrealized gains on investment securities (a) - - - - 452 452
Foreign currency translation adjustments (b) - - - - (216) (216)
Reclassification adjustments (c) - - - - (360) (360)
------
Total changes other than transactions with share owner 457
------
Dividends paid on preferred stock - - - (7) - (7)
---- -- ----- ------ ----- ------
Balances, December 31, 2000 150 5 845 5,204 (179) 6,025
------
Changes other than transactions with share owner:
Capital contribution received - - 580 - - 580
Net loss - - - (195) - (195)
Net unrealized gains on investment securities (a) - - - - 162 162
Foreign currency translation adjustments (b) - - - - 81 81
Derivatives qualifying as hedges (d) - - - - (2) (2)
Reclassification adjustments (c) - - - - (282) (282)
------
Total changes other than transactions with share owner 344
------
Dividends paid on preferred stock - - - (7) - (7)
---- -- ------ ------ ----- ------
Balances, December 31, 2001 $150 $5 $1,425 $5,002 $(220) $6,362
==== == ====== ====== ===== ======
(a) Presented net of taxes of $(78) million, $(195) million and $233 million in
2001, 2000 and 1999, respectively.
(b) Presented net of taxes of $(62) million, $113 million and $17 million in
2001, 2000 and 1999, respectively.
(c) Presented net of taxes of $154 million, $189 million and $274 million in
2001, 2000 and 1999, respectively. (Note: In addition to net realized
gains on investment securities, the 2000 and 1999 reclassification
adjustments include $27 million and $48 million, respectively, 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.)
(d) Presented net of taxes of $1 million in 2001.
See Notes to Consolidated Financial Statements.
Page 31
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Year ended December 31,
-------------------------------
(In millions) 2001 2000 1999
-------------------------------
Cash Flows From Operating Activities
Net earnings (loss) $ (195) $ 581 $ 720
Adjustments to reconcile net earnings (loss) to cash
from (used for) operating activities:
Claims and claim expenses 3,863 1,084 1,574
Future policy benefits for life and health contracts 271 589 182
Unearned premiums 129 207 400
Funds held by reinsured companies 47 (103) 5
Reinsurance recoverables (3,697) (1,579) (1,409)
Deferred income taxes 15 133 52
Income taxes payable (receivable) (133) (120) 10
Amortization of insurance acquisition costs 1,830 1,913 1,839
Insurance acquisition costs deferred (1,916) (2,200) (1,915)
Net realized gains on investments (436) (522) (699)
Other, net 155 (124) 130
------- ------- -------
Cash from (used for) operating activities (67) (141) 889
------- ------- -------
Cash Flows From Investing Activities
Fixed maturity securities available-for-sale:
Purchases (17,706) (9,823) (7,995)
Sales 14,797 7,235 6,399
Maturities 2,337 940 1,566
Equity securities:
Purchases (459) (1,175) (2,812)
Sales 191 3,522 2,812
Net purchases of short-term investments (400) (560) (216)
Net cash paid for acquisitions and in-force reinsurance
transactions - - (258)
Net cash received from dispositions - - 88
Other investing activities 100 28 136
------- ------- -------
Cash from (used for) investing activities (1,140) 167 (280)
------- ------- -------
Cash Flows From Financing Activities
Change in contract deposits (33) 38 (171)
Net contract accumulation payments 746 6 (87)
Proceeds from short-term borrowings 289 105 132
Principal payments on short-term borrowings (339) (721) (426)
Proceeds from long-term borrowings - 691 395
Capital contribution received 400 - -
Dividends paid (7) (7) (251)
------- ------- -------
Cash from (used for) financing activities 1,056 112 (408)
------- ------- -------
Effect of exchange rate changes on cash 425 (301) (100)
------- ------- -------
Increase (decrease) in cash 274 (163) 101
Cash at beginning of year 196 359 258
------- ------ -------
Cash at end of year $ 470 $ 196 $ 359
======= ====== =======
See Notes to Consolidated Financial Statements.
32
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 accounting principles generally accepted in the United States of
America ("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.
Certain reclassifications of prior year balances have been made to conform to
the current year presentation.
2. Summary of Significant Accounting Policies
Investments
Substantially all of the Company's fixed maturity securities 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. Investment securities
are regularly reviewed for impairment based on criteria that include the extent
to which cost exceeds market value, the duration of the market decline and the
financial health of and specific prospects for the issuer. 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.
33
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
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.
Certain insurance acquisition costs, principally commissions, brokerage expenses
and premium taxes, 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.
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 settlement 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 $820 million and $823 million at December 31, 2001 and 2000,
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 3-9% at December 31, 2001 and 2000. Interest rates
credited to universal life contracts and investment contracts are generally
guaranteed for a specified time period with renewal rates determined by the
issuing insurance company. Such crediting interest rates generally ranged from
3-9% in 2001, 2000 and 1999.
34
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
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 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. 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.
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.
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 accounts at the time such losses are
estimated to have been incurred. Measurement of such losses requires
consideration of historical loss experience, including the need to adjust for
current conditions, and judgments about the probable effects of relevant
observable data, including present economic conditions such as delinquency
rates, financial health of specific customers, collateral value (such as letters
of credit and funds held balances) and legal right-of-offset of related claim
liabilities. The allowance is recorded as a valuation account that reduces the
corresponding asset. The allowance totaled $159 million and $74 million at
December 31, 2001 and 2000, 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 is 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.
35
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
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
generally accounted for similar to 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 subsidiaries, various non-insurance subsidiaries and its
parent, GE Capital Services, are included in the consolidated federal income tax
return of GE Company. GE Global Insurance's two domestic life insurance
subsidiaries are taxed as life insurance companies, and those subsidiaries each
file separate federal income tax returns.
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 in accounting for income taxes,
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 establishes a
"valuation allowance" for any portion of the deferred tax asset that management
believes will not be realized.
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." It is the Company's general policy to offset currency risk related
to insurance claims and claim expenses by maintaining investment securities
matched to the major currencies represented in its recorded net claim-related
liabilities. This approach to reducing currency risk is sometimes supplemented
by the use of foreign currency forward purchase or sale contracts. In addition,
the Company partially hedges the foreign currency risk on its foreign subsidiary
investments and certain foreign currency denominated intercompany loans by
utilizing cross currency swaps and foreign currency forward purchase or sale
contracts (See Note 14). As a result, while foreign currency may have
significantly impacted individual asset, liability, revenue and expense
categories, the net effect of foreign currency transactions on operating results
during 2001, 2000 and 1999 was not material.
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
36
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
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 or participate in GE Company sponsored contributory
defined benefit plans. The net effect of all benefit plans on the consolidated
statement of financial position and statement of earnings for 2001, 2000 and
1999 was not material.
Accounting Changes
At January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. Under SFAS 133, all derivative instruments (including
certain derivative instruments embedded in other contracts) are recognized in
the balance sheet at their fair values and changes in fair value are recognized
immediately in earnings, unless the derivatives qualify as hedges of net foreign
investments or future cash flows. For derivatives qualifying as hedges of net
foreign investments, the effective portion of changes in fair value is recorded
in a separate component of stockholder's equity entitled "accumulated foreign
currency translation adjustments." For derivatives qualifying as hedges of
future cash flows, the effective portion of changes in fair value is recorded
temporarily in equity, then recognized in earnings along with the related
effects of the hedged items. Any ineffective portion of hedges is reported in
earnings as it occurs. Further information about derivatives and hedging is
provided in note 14.
The cumulative effect of adopting this accounting change at January 1, 2001, was
as follows:
(In millions) Earnings (a)
-----------
Adjustment to fair value of derivatives $(17)
Income tax effect 6
Total ----
$(11)
====
(a) For earnings effect, amount shown is net of adjustment to hedged items.
The cumulative effect on earnings was due to the effect of marking to market
options and currency contracts used for hedging. Decreases in the fair values of
these instruments were attributable to movements in embedded interest rates
since inception of the hedging arrangements.
This accounting change did not involve cash, and management expects that it will
have no more than a modest effect on future results.
3. Acquisitions and Dispositions
On March 4, 1999, the Company completed the acquisition of Eagle Star
Reinsurance Company Limited ("Eagle Star Re", subsequently merged with GE
Frankona Reinsurance Limited, an affiliate) 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.
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.
37
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, 2001
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
------------------------------------------------
Fixed maturity securities:
U.S. government $ 237 $ 4 $ (1) $ 240
International government 3,565 65 (26) 3,604
Tax-exempt 6,068 73 (76) 6,065
Corporate 6,341 114 (130) 6,325
U.S. mortgage-backed and other asset-backed 2,551 49 (13) 2,587
International mortgage-backed and other asset-backed 939 12 (3) 948
------- ---- ---- -------
Total fixed maturity securities 19,701 317 (249) 19,769
Equity securities 660 19 (38) 641
Short-term investments 1,748 - - 1,748
Other invested assets 337 - - 337
------- ---- ----- -------
Total investments $22,446 $336 $(287) $22,495
======= ==== ===== =======
December 31, 2000
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
-------------------------------------------------
Fixed maturity securities:
U.S. government $ 474 $ 5 $ (4) $ 475
International government 2,183 44 (28) 2,199
Tax-exempt 6,756 254 (13) 6,997
Corporate 6,462 91 (160) 6,393
U.S. mortgage-backed and other asset-backed 1,899 34 (11) 1,922
International mortgage-backed and other asset-backed 772 10 (7) 775
------- ---- ----- ------
Total fixed maturity securities 18,546 438 (223) 18,761
Equity securities 689 68 (39) 718
Short-term investments 1,348 - - 1,348
Other invested assets 364 - - 364
------- ---- ----- -------
Total investments $20,947 $506 $(262) $21,191
======= ==== ===== =======
38
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, 2001 are summarized, by stated maturity, as follows:
Estimated
Amortized Fair
(In millions) Cost Value
----------------------
Maturity:
Due in 2002 $ 792 $ 799
Due in 2003-2006 3,476 3,519
Due in 2007-2011 5,826 5,807
Due after 2011 6,117 6,109
------- -------
16,211 16,234
Mortgage-backed and other asset-backed securities 3,490 3,535
------- -------
Total fixed maturity securities $19,701 $19,769
======= =======
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) 2001 2000 1999
----------------------------
Gross investment income:
Fixed maturity securities $1,049 $1,081 $ 997
Equity securities 14 82 58
Short-term investments 73 66 45
Securities and indebtedness of related parties 23 22 21
Other 64 79 47
------ ------ -------
1,223 1,330 1,168
Investment expenses (21) (15) (17)
------ ------ ------
Net investment income $1,202 $1,315 $1,151
====== ====== ======
39
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) 2001 2000 1999
-----------------------------
Sales proceeds from investment securities $14,988 $10,757 $9,211
======= ======= ======
Net realized gains on investments before income taxes:
Fixed maturity securities:
Gross realized gains $517 $194 $119
Gross realized losses (81) (87) (87)
Equity securities:
Gross realized gains 43 696 734
Gross realized losses (43) (281) (67)
---- ---- ----
Total net realized gains before income taxes 436 522 699
Provision for income taxes (154) (178) (255)
---- ---- ----
Net realized gains on investments, after income taxes $282 $344 $444
==== ==== ====
The change in net unrealized gains (losses), before income taxes, on fixed
maturity securities was $(147) million, $511 million and $(1,179) million in
2001, 2000 and 1999, respectively; the corresponding amounts for equity
securities were $(48) million, $(330) million and $(209) million in 2001, 2000
and 1999, respectively; and the corresponding amounts for other invested assets
were $(29) million and $(74) million in 2000 and 1999, respectively.
The Company had investments in fixed maturity securities with a carrying amount
of $1,090 million and $857 million at December 31, 2001 and 2000, respectively,
on deposit with state and provincial insurance departments to satisfy regulatory
requirements.
5. Intangible Assets
The Company's intangible assets are summarized as follows:
December 31,
--------------------------
(In millions) 2001 2000
--------------------------
Goodwill $1,313 $1,327
Present value of future profits (" PVFP") 165 200
Other 107 113
------ ------
$1,585 $1,640
====== ======
The Company's intangible assets are shown net of accumulated amortization of
$668 million and $568 million at December 31, 2001 and 2000, 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 and the 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 or gross profits on the books of business are recognized.
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) 2001 2000 1999
---------------------------------
Balance at January 1 - gross $17,678 $18,134 $15,852
Less reinsurance recoverables (4,924) (4,314) (2,936)
------ ------- -------
Balance at January 1 - net 12,754 13,820 12,916
------- ------- -------
Claims and expenses incurred:
Current year 6,164 5,525 4,789
Prior years 811 934 340
------- ------- -------
6,975 6,459 5,129
------- ------- -------
Claims and expenses paid:
Current year (1,076) (1,650) (1,672)
Prior years (5,596) (5,290) (2,997)
------- ------- -------
(6,672) (6,940) (4,669)
------- ------- -------
Claim reserves related to acquired companies (See Note 3) - 279 793
Claim reserves related to disposed companies - - (202)
Foreign exchange and other 15 (864) (147)
------- ------- -------
Balance at December 31 - net 13,072 12,754 13,820
Add reinsurance recoverables 8,961 4,924 4,314
------- ------- -------
Balance at December 31 - gross $22,033 $17,678 $18,134
======= ======= =======
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.
Unfortunately, the escalation in reported losses relative to associated premiums
that emerged in 2000 as discussed below continued in 2001, and at a pace greater
than had been anticipated in the actuarial reserve studies completed in late
2000. As a result, in 2001, it again became necessary for the Company to
increase claim reserves to reflect the higher ultimate loss projections for
prior year loss events. The majority of the adverse development in 2001, and to
a lesser extent in 2000, related to higher projected losses on liability
coverages, especially in the hospital liability, nonstandard automobile
(automobile insurance extended to higher-risk drivers) and commercial general
liability lines of business.
41
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
6. Claims and Claim Expenses (continued)
The high level of claims and expenses incurred related to prior years reflected
in the above table for 2000 is primarily attributable to the combination of the
effects of continued insufficient pricing within the overall property and
casualty insurance/reinsurance industry and the insurance industry's
undervaluing the initial loss estimates for certain European windstorms
occurring late in December 1999. Based on the continued escalation in reported
losses relative to associated premiums, it became more apparent during 2000 that
the level of general price erosion that occurred in the primary property and
casualty insurance industry in recent years was significantly greater than had
been previously contemplated. In response to this new information, it became
necessary for the Company to increase claim reserves to reflect the higher
ultimate loss projections resulting from this increasing trend of claim
development on these more recent underwriting years.
The 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.
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 $786
million and $165 million, respectively, at December 31, 2001. 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.
Operating results for 2001 as compared to 2000 were adversely impacted by
approximately $575 million ($386 million after tax) related to the insurance
losses arising from the events of September 11. This amount, which primarily
resulted from contingent premium payments contained in certain retrocession
agreements, comprises $698 million recorded as a reduction in net premiums
earned, and $78 million reflecting additional claims, claim expenses and policy
benefits, partially offset by $201 million reflecting a reduction in insurance
acquisition costs. The gross losses arising from the events of September 11
(estimated to be $3.3 billion) relate to underlying insurance policies and
reinsurance contracts providing general property, general liability, aviation,
business interruption, workers compensation and life and health-related
coverages. Historical experience related to large catastrophic events has shown
that a broad range of total insurance industry loss estimates often exists
following such an event and it is not unusual for there to be significant
subsequent revisions in such estimates. $575 million is management's best
estimate of its existing net liability based on the information currently
available, and is net of estimated recoveries under retrocession arrangements,
under which a portion of losses is routinely ceded to other reinsurance
entities. Further information regarding potential litigation associated with the
events of September 11 is discussed in note 13.
42
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
6. Claims and Claim Expenses (continued)
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. Of the $10.4 billion of consolidated
reinsurance recoverables at December 31, 2001, approximately 33% is due from 4
specific retrocessionaires, primarily in connection with the Company's aggregate
excess of loss retrocession program. All of these retrocessionaires are large,
highly rated reinsurance entities. At this time, management does not anticipate
that any significant portion of its recorded reinsurance recoverables will be
uncollectible.
7. Income Taxes
The Company's provision for income taxes is summarized as follows:
Year ended December 31,
----------------------------------------------------------------------------------------
2001 2000 1999
-------------------------- ------------------------- -------------------------
United Inter- United Inter- United Inter-
(In millions) States national Total States National Total States national Total
-------------------------- ------------------------- -------------------------
Current $(206) $(91) $(297) $(73) $ (36) $(109) $138 $ 78 $216
Deferred (49) 64 15 202 (69) 133 27 25 52
----- ---- ----- ---- ----- ----- ---- ---- ----
Total $(255) $(27) $(282) $129 $(105) $ 24 $165 $103 $268
===== ==== ===== ==== ===== ===== ==== ==== ====
Income taxes paid (received) by the Company totaled $(177) million, $22 million
and $244 million in 2001, 2000 and 1999, respectively.
The Company's effective income tax rate on pre-tax income differs from the
prevailing U.S. corporate federal income tax rate and is summarized as follows:
Year ended December 31,
---------------------------
2001 2000 1999
---------------------------
Corporate federal income tax rate (35)% 35% 35%
Tax-exempt investment income (22) (20) (12)
Purchase price adjustment related to recent acquisition (7) (1) -
German restructuring resulting in step-up of tax basis - (12) -
Election to permanently defer certain foreign earnings (4) (1) -
Increase in foreign tax credit capacity - (4) -
Intercompany dividend payment 5 4 3
Other items, net 2 3 1
--- -- --
Effective tax rate (61)% 4% 27%
=== == ==
The Company holds a significant portion of its overall investment portfolio in
securities that are substantially exempt from U.S. taxation (principally state
and municipal bonds). This is the most significant factor for all years
presented in reconciling the prevailing 35% U.S. corporate federal income tax
rate to the Company's lower effective tax rate. Additional significant factors
contributing to the lower effective tax rate include (1) 2001 - treatment of
certain proceeds received in connection with the resolution of issues involving
a recent acquisition as a purchase price adjustment for tax purposes and (2)
2000 - tax benefits attributable to a step-up in the tax basis of certain assets
following the conversion of a corporate subsidiary to a partnership for German
tax purposes.
43
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
The significant components of the Company's net deferred tax assets and
liabilities are summarized as follows:
December 31,
--------------------
(In millions) 2001 2000
--------------------
Deferred tax assets:
Claims and claim expenses $ 362 $206
Unearned premiums 119 169
Foreign tax credit carryforwards 37 20
Foreign currency translation 361 320
Contract deposit assets 103 113
Other 126 135
------ ----
Total deferred tax assets 1,108 963
------ ----
Deferred tax liabilities:
Deferred insurance acquisition costs 510 527
Net unrealized gains on investment securities 106 79
Software 42 45
Contract deposit liabilities 154 41
Cross currency swaps 113 121
Other 170 181
------ ----
Total deferred tax liabilities 1,095 994
------ ----
Net deferred tax asset (liability) $ 13 $(31)
====== ====
Income taxes payable (receivable) totaled $(122) million and $11 million at
December 31, 2001 and 2000, respectively.
44
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 outstanding on this credit facility was $110 million and $32 million as
of December 31, 2001 and 2000, 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, 2003, 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 outstanding on
this credit facility, including accrued interest payable, was $108 million and
$129 million as of December 31, 2001 and 2000, respectively. Interest accrued on
such borrowings at an annual weighted-average interest rate of 4.07% and 6.70%
for the years ended December 31, 2001 and 2000, respectively. No interest was
paid in 2001 or 2000.
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 Corporation. This interim loan agreement had 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 as of December 31, 1999, which was repaid in 2000
using proceeds from long-term borrowings (See Note 9). Interest accrued on such
borrowings at an annual weighted-average interest rate of 6.16% for the year
ended December 31, 2000. Total interest paid in 2000 was $62 million.
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).
In June 2000, the Company issued $350 million of redeemable senior unsecured
debt securities at 7.5% per annum, that are scheduled to mature on June 15, 2010
and $350 million of redeemable senior unsecured debt securities at 7.75% per
annum, that are scheduled to mature on June 15, 2030. The Company received $691
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 an interim loan agreement with GE Capital
Corporation (See Note 8).
Total interest paid on borrowings was $121 million, $93 million and $55 million
in 2001, 2000 and 1999, respectively.
45
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 2001, 2000 and 1999 and life insurance
in-force as of December 31, 2001, 2000 and 1999 are summarized as follows:
Insurance Premiums Written
---------------------------------
Property/
(In millions) Casualty Life Total
---------------------------------
2001:
Direct $1,857 $ 9 $1,866
Assumed 6,092 2,408 8,500
Ceded (2,398) (576) (2,974)
------ ------ ------
Net $5,551 $1,841 $7,392
====== ====== ======
2000:
Direct $1,455 $ 6 $1,461
Assumed 6,644 2,044 8,688
Ceded (1,545) (413) (1,958)
------ ------ ------
Net $6,554 $1,637 $8,191
====== ====== ======
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
====== ====== ======
Insurance Premiums Earned
----------------------------------
Life
Propterty/ Insurance
(In millions) Casualty Life Total In-Force
-------------------------------------------------
2001:
Direct $1,812 $ 10 $1,822 $ -
Assumed 5,916 2,448 8,364 624,668
Ceded (2,426) (575) (3,001) (176,593)
------ ------ ------ --------
Net $5,302 $1,883 $7,185 $448,075
====== ====== ====== ========
2000:
Direct $1,228 $ 6 $1,234 $ 3,284
Assumed 6,753 2,025 8,778 583,279
Ceded (1,604) (407) (2,011) (174,206)
------ ------ ------ --------
Net $6,377 $1,624 $8,001 $412,357
====== ====== ====== ========
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
====== ====== ====== ========
46
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 2001, 2000 and 1999 are
summarized as follows:
Property/
(In millions) Casualty Life Total
-----------------------------------
2001
Direct $2,689 $ - $2,689
Assumed 7,588 2,073 9,661
Ceded (4,888) (487) (5,375)
------ ------ ------
Net $5,389 $1,586 $6,975
====== ====== ======
2000:
Direct $ 682 $ - $ 682
Assumed 7,113 1,754 8,867
Ceded (2,460) (362) (2,822)
------ ------ ------
Net $5,335 $1,392 $6,727
====== ====== ======
1999:
Direct $ 279 $ - $ 279
Assumed 6,075 1,289 7,364
Ceded (1,960) (298) (2,258)
------ ------ ------
Net $4,394 $ 991 $5,385
====== ====== ======
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; claim 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 2001, 2000 and 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 associated accrued reinsurance
recoverables will be collected when the underlying paid losses exceed the
specified loss ratios.
47
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 $154 million at
December 31, 2001 in connection with financial reinsurance assumed, principally
due to ceding commissions paid in connection with such transactions being
expensed as incurred for statutory reporting purposes. 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%. 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 in 2001, 2000 and 1999. These dividends are classified as "Minority
interest in net earnings of consolidated subsidiaries" in the Consolidated
Statement of Earnings.
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 $7.5 million in 2001, 2000 and 1999.
During 2001, the Company received capital contributions from its parent, GE
Capital Services, totaling $580 million-$400 million in the form of cash and
$180 million in the form of other assets. The $400 million capital contribution
was made to replenish capital sufficient to cover estimated losses associated
with the events of September 11, 2001.
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 page 50.
Effective January 1, 2001, the NAIC required that insurance companies prepare
their statutory basis financial statements in accordance with the NAIC
Accounting Practices and Procedures Manual subject to any deviations prescribed
or permitted by the domiciliary state insurance departments. Statutory
accounting practices determine, among other things, the statutory surplus of an
insurance company and, therefore, the amount of funds that can be paid as
dividends. For statutory reporting purposes, accounting changes adopted to
conform to these accounting practices are reported as changes in accounting
principles, with the cumulative effect reported as an adjustment to 2001
unassigned funds (surplus). The cumulative effect is the difference between the
amount of capital and surplus at the beginning of the year and the amount of
capital and surplus that would have been reported at that date if the new
accounting principles had been applied retroactively for all periods. As a
result of adoption of the model statutory accounting practices, aggregate
cumulative adjustments of $234 million were recorded by ERC, GE Re and Medical
Protective as an increase to unassigned funds (surplus) at January 1, 2001,
primarily related to the recording of deferred tax assets.
48
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
12. Statutory Accounting Practices (continued)
Stockholder's equity and net income (loss), 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) 2001 2000
--------------------
Stockholder's equity:
ERC $4,858 $4,050
Property and casualty subsidiaries of ERC 263 225
Life and annuity subsidiaries of ERC 2,568 2,517
GE Re 735 775
Medical Protective 408 373
Year ended December 31,
--------------------------
(In millions) 2001 2000 1999
--------------------------
Net income (loss):
ERC ($40) $263 $349
Property and casualty subsidiaries of ERC 40 9 22
Life and annuity subsidiaries of ERC 270 665 (9)
GE Re (71) 80 40
Medical Protective 74 81 66
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 by ERC without prior regulatory approval is $273
million at December 31, 2001. Such amount will increase to $341 million by
December 31, 2002. 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 2002 without the prior approval of the
Director of Insurance for the State of Illinois. The maximum amount available
for the payment of dividends during 2002 by Medical Protective without prior
regulatory approval is $74 million after December 27, 2002.
Prescribed statutory accounting practice permits 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. 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. The total discount recognized for
statutory purposes was $235 million and $244 million at December 31, 2001 and
2000, respectively.
ERC has also received written approval from the Missouri Department of Insurance
to take credit for certain otherwise unauthorized reinsurance by obtaining a
parental guarantee from GE Global Insurance (See Note 14).
49
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
12. Statutory Accounting Practices (continued)
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, 2001.
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.
Effective January 1, 2001, certain of the Company's international operations
(licensed in the European Union ("EU") member states) are required to comply
with the EU Directive on Supplementary Supervision of Insurance Undertakings in
an Insurance Group. This directive is designed to address solvency issues for
groups of insurance companies and supplements the solvency tests historically
performed on individual insurance companies. The main goal of this directive is
to assess the overall capital available to the group, rather than on an
individual company basis, and identify potential risks. The Company is currently
in the process of performing such required solvency tests in anticipation of the
first filing in 2002.
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 operations or financial condition, except as
noted in the following paragraph.
As a result of the September 11, 2001 terrorist attacks, both towers of the
World Trade Center in New York City ("WTC") were completely destroyed.
Industrial Risk Insurers ("IRI"), an affiliate of ERC, was one of the primary
insurers of the WTC with an occurrence policy limit of $237 million. In
addition, ERC reinsured part of the various other primary insurers of the WTC,
limits of which are also written on a per occurrence basis. The principal lessee
of the WTC is alleging that the damage to (i.e., the loss of) each tower was a
separate occurrence. It is the contention of all insurers of the WTC that the
policies were written in such a way that the loss of both towers in this
instance constituted one occurrence. Suit has been filed in the United States
District Court in New York seeking a declaratory judgment on this question. IRI
is a party to this suit, as are several of ERC's reinsureds. Discovery in the
suit(s) is underway. Both IRI and ERC have retrocessional coverage on their
exposure to WTC losses covering a portion of losses incurred. Management
believes that there is compelling evidence supporting their contention that the
loss of both towers constituted a single occurrence of loss and is prepared to
defend this position vigorously (including litigation if required) and,
accordingly, has established claim reserves on this basis.
50
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
14. Fair Value of Financial Instruments
Assets and liabilities that are reflected in the accompanying financial
statements at fair value are not included in the following disclosures; such
items include cash and equivalents, investment securities, amounts due from or
to related parties, accrued investment income, separate accounts, other
receivables and payables and, beginning in 2001, derivative financial
instruments. Other assets and liabilities - those not carried at fair value -
are discussed in the following pages. Apart from certain marketable securities,
few of the instruments discussed below are actively traded and their fair values
must often be determined using models. Although management has made every effort
to develop the fairest representation of fair value for this section, if would
be unusual if the estimates could actually have been realized at December 31,
2001 or 2000.
A description of how fair values are estimated 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.
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.
Information about certain assets and liabilities that were not carried at fair
value at December 31, 2001 and 2000, is summarized as follows:
December 31, 2001 December 31, 2000
------------------------------------------ --------------------------------------------
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:
Other cash financial instruments (a) 45 46 46 (a) 93 95 95
Liabilities:
Borrowings (b) (a) (1,655) (1,795) (1,795) (a) (1,654) (1,711) (1,711)
Accumulated contract values (a) (1,846) (1,851) (1,851) (a) (1,060) (1,039) (1,039)
Financial guaranty reinsurance 1,930 (9) (10) (13) 3,877 (19) (21) (28)
Performance guarantees,
principally letters of credit 687 - - - 644 - - -
(a) These financial instruments do not have notional amounts.
(b) See Note 9.
One of the Company's subsidiaries is the beneficiary of a $180 million letter of
credit issued by an outside bank to secure the collectibility of certain accrued
reinsurance-related receivables. This letter of credit was excluded from the
above table as the arrangement includes a full guarantee by the Company in the
event the letter of credit is drawn.
51
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
14. Fair Value of Financial Instruments (continued)
Derivatives and Hedging
The Company's global business activities routinely deal with fluctuations in
interest rates, in currency exchange rates and other asset prices. The Company
applies strict policies to managing each of these risks, including prohibitions
on derivatives trading, derivatives market-making or other speculative
activities. These policies require the use of derivative instruments in concert
with other techniques to reduce or eliminate these risks.
On January 1, 2001, the Company adopted SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, as discussed in note 2. The paragraphs that
follow provide additional information about derivatives and hedging
relationships in accordance with the requirements of SFAS 133.
Cash Flow Hedges
Under SFAS 133, cash flow hedges are hedges that use simple derivatives to
offset the variability of expected future cash flows. Variability can arise from
changes in interest rates or currency exchange rates. For example, certain loans
used to finance the Company's foreign operations are denominated in functional
currencies which are not reporting currency. To eliminate the currency exposure,
the Company will contractually commit to pay a fixed rate of interest in the
functional currency to a counterparty who will pay the Company a fixed rate of
interest in the reporting currency (a "currency swap"). These currency swaps are
then designated as a cash flow hedge of the associated foreign currency fixed
rate loan. If, as would be expected, the derivative is perfectly effective in
offsetting variability due to changes in currency exchange rates on the loans,
changes in its fair value are recorded in a separate component in equity and
released to earnings contemporaneously with the earnings effects of the hedged
item. Further information about hedge effectiveness is provided below.
During 2001, an amount of $1.0 million was transferred to earnings along with
the earnings effects of the related forecasted transaction for no net impact on
earnings. At December 31, 2001, amounts related to derivatives qualifying as
cash flow hedges amounted to a reduction of equity of $2.0 million, of which
$1.5 million was expected to be transferred to earnings in 2002. In 2001, there
were no forecasted transactions that failed to occur. At December 31, 2001, the
term of the derivative instrument hedging a forecasted transaction, except that
related to variability due to changes in foreign currency exchange rates on an
existing financial instrument, was zero.
Net Investment Hedges
The net investment hedge designation under SFAS 133 refers to the use of
derivative contracts or cash instruments to hedge the foreign currency exposure
of a net investment in a foreign operation. At the Company, currency exposures
that result from net investments in affiliates are managed principally by
funding assets denominated in local currency with debt denominated in that same
currency. In certain circumstances, such exposures are managed using currency
forwards and, until the first quarter of 2001, cross currency swaps.
Derivatives Not Designated as Hedges
SFAS 133 specifies criteria that must be met in order to apply any of the two
classes of hedge accounting. For example, hedge accounting is not permitted for
hedged items that are marked to market through earnings. The Company uses
derivatives to hedge exposures when it makes economic sense to do so, including
circumstances in which the hedging relationship does not qualify for hedge
accounting as described in the following paragraph. Under SFAS 133, derivatives
that do not qualify for hedge accounting are marked to market through earnings.
The Company uses option contracts, including caps, floors and collars, as an
economic hedge of changes in equity prices on certain types of assets and
liabilities. For example, the Company uses equity options to hedge the risk of
changes in equity prices embedded in insurance liabilities associated with
annuity contracts.
52
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
14. Fair Value of Financial Instruments (continued)
Fair Value of Derivatives
At December 31, 2001, the fair value of derivatives in a gain position and
recorded in "other assets" is $394 million and the fair value of derivatives in
a loss position and recorded in "other liabilities" is $64 million.
The following table provides fair value information about derivative instruments
for the year 2000. Following adoption of SFAS 133 on January 1, 2001, all
derivative instruments are reported at fair value in the financial statements
and similar disclosures for December 31, 2001, are not relevant.
December 31, 2000
-----------------------------------------
Assets(liabilities)
-------------------------------
Notional Carrying
(In millions) Amount Amount Estimated Fair Value
-------- -------- ---------------------
Assets:
Options, including "floors" $209 $ 6 $ 12
Liabilities:
Currency forwards 591 2 2
Other firm commitments:
Cross currency swaps 647 292 275
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.
53
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 a network of
subsidiaries and branch offices located throughout the world and include
reinsurance of property/casualty business in those countries and elsewhere.
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.
The Company's industry segment activity is summarized as follows:
2001 - Industry Segments
---------------------------------
Property/
(In millions) Casualty Life Consolidated
---------------------------------
Net premiums written $ 5,551 $ 1,841 $ 7,392
======== ======= ========
Net premiums earned $ 5,302 $ 1,883 $ 7,185
Net investment income 833 369 1,202
Net realized gains on investments 380 56 436
Other revenues 210 158 368
------- ------ -------
Total revenues 6,725 2,466 9,191
------- ------ -------
Claims, claim expenses and policy benefits 5,389 1,586 6,975
Insurance acquisition costs 1,397 433 1,830
Other operating costs and expenses 665 187 852
------- ------ -------
Total costs and expenses 7,451 2,206 9,657
------- ------ -------
Earnings (loss) before income taxes and
cumulative effect of change in
accounting principle $ (726) $ 260 $ (466)
======= ======= =======
Total assets at December 31 $33,611 $11,507 $45,118
======= ======= =======
54
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
15. Segment Information (continued)
2000 - Industry Segments
---------------------------------
Property/
(In millions) Casualty Life Consolidated
---------------------------------
Net premiums written $ 6,554 $ 1,637 $ 8,191
======== ======= ========
Net premiums earned $ 6,377 $ 1,624 $ 8,001
Net investment income 953 362 1,315
Net realized gains on investments 425 97 522
Other revenues 169 124 293
------- ------ -------
Total revenues 7,924 2,207 10,131
------- ------ -------
Claims, claim expenses and policy benefits 5,335 1,392 6,727
Insurance acquisition costs 1,553 360 1,913
Other operating costs and expenses 669 217 886
------- ------ -------
Total costs and expenses 7,557 1,969 9,526
------- ------ -------
Earnings before income taxes $ 367 $ 238 $ 605
======= ====== =======
Total assets at December 31 $28,200 $10,364 $38,564
======= ======= =======
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
======= ====== =======
55
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
--------------------------------------------
2001:
Revenues $ 5,829 $ 3,362 $ 9,191
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle (468) 2 (466)
Identifiable assets at December 31 27,489 17,629 45,118
2000:
Revenues $ 5,617 $ 4,514 $ 10,131
Earnings before income taxes 357 248 605
Identifiable assets at December 31 23,285 15,279 38,564
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
16. Unaudited Quarterly Financial Data
The Company's quarterly financial results and other data in 2001 and 2000 are
summarized as follows:
Year ended December 31, 2001
---------------------------------------------
First Second Third Fourth
(In millions) Quarter Quarter Quarter Quarter
---------------------------------------------
Net premiums earned $2,011 $2,000 $1,066 $2,108
Net investment income 316 290 303 293
Total costs and expenses 2,332 2,339 2,100 2,886
Net earnings (loss) 71 126 (238) (154)
Year ended December 31, 2000
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------------------------------------
Net premiums earned $1,738 $1,925 $1,908 $2,430
Net investment income 290 326 348 351
Total costs and expenses 2,050 2,380 2,354 2,742
Net earnings 104 195 134 148
56
Financial Statement Schedules
57
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) 2001 2000 1999
----------------------------
Revenues
Net investment income $ 12 $ 11 $ 1
Equity in undistributed earnings (losses) (239) 582 393
Dividends from subsidiaries 136 88 387
Other income 21 7 -
----- ----- ----
Total revenues (70) 688 781
----- ----- ----
Costs and Expenses
Interest expense 127 121 68
Other operating costs and expenses 52 34 26
----- ---- ---
Total costs and expenses 179 155 94
----- ---- ---
Earnings before income taxes (249) 533 687
Income tax benefit 54 48 33
----- ---- ----
Net earnings (loss) $(195) $581 $720
===== ==== ====
See Notes to Condensed Financial Information of Registrant.
58
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) 2001 2000
---------------------
Assets
Cash $ 24 $ 1
Investment in subsidiaries 7,944 7,577
Fixed maturity securities available for sale, at fair value 5 -
Short-term investments, at amortized cost 12 89
Indebtedness of related parties 198 144
Other assets 25 22
------ ------
Total assets $8,208 $7,833
====== ======
Liabilities and equity
Other liabilities $ 81 $ 25
Long-term borrowings 1,655 1,654
Indebtedness to related parties 110 129
------ ------
Total liabilities 1,846 1,808
------ ------
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 1,425 845
Retained earnings 5,002 5,204
Accumulated unrealized gains on investment securities - net (a) 23 143
Accumulated foreign currency translation adjustments - (a) (241) (322)
Derivatives qualifying as hedges - (a) (2) -
------ ------
Total stockholder's equity 6,362 6,025
------ ------
Total liabilities and equity $8,208 $7,833
====== ======
(a) The sum of accumulated unrealized gains on investment securities,
accumulated foreign currency translation adjustments and derivatives
qualifying as hedges constitutes "Accumulated nonowner changes other than
earnings," as shown in the Consolidated Statement of Stockholder's Equity,
and was $(220) million and $(179) million at year-end 2001 and 2000,
respectively.
See Notes to Condensed Financial Information of Registrant.
59
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) 2001 2000 1999
---------------------------
Cash Flows From Operating Activities
Net earnings (loss) $(195) $581 $720
Adjustments to reconcile net earnings (loss) to cash
from operating activities:
Equity in undistributed earnings 239 (625) (393)
Other, net (12) 54 (7)
----- ---- ----
Cash from operating activities 32 10 320
----- ---- ----
Cash Flows From Investing Activities
Fixed maturity securities available-for-sale:
Purchases (46) - -
Sales 33 - -
Net (purchases) sales of short-term investments 77 (7) (34)
Investment in subsidiaries (440) (108) (694)
----- ----- -----
Cash used for investing activities (376) (115) (728)
----- ----- -----
Cash Flows From Financing Activities
Proceeds from short-term borrowings - 126 694
Payments on short-term borrowings (26) (708) (426)
Proceeds from long-term borrowings - 691 395
Capital contribution received 400 - -
Dividends paid (7) (7) (251)
----- ---- -----
Cash from financing activities 367 102 412
----- ---- -----
Increase (decrease) in cash 23 (3) 4
Cash at beginning of year 1 4 -
----- ---- ----
Cash at end of year $ 24 $ 1 $ 4
===== ==== ====
See Notes to Condensed Financial Information of Registrant.
60
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., which is a
wholly-owned subsidiary of General Electric Company ("GE 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.
GE Global Insurance is included in the consolidated federal income tax return of
GE Company. The provision for estimated taxes payable includes the effect of GE
Global Insurance on the consolidated return.
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
$136 million, $109 million and $323 million in 2001, 2000 and 1999,
respectively.
61
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 Accumulated Net
Acquisition Future Policy Unearned Contract Premiums
(In millions) Costs Benefit Reserves Premiums Values Earned
------------------------------------------------------------------------------------
December 31, 2001:
Property/Casualty $ 504 $20,882 $2,598 $ - $5,302
Life 1,111 4,116 165 2,909 1,883
------ ------- ------ ------ ------
Total $1,615 $24,998 $2,763 $2,909 $7,185
====== ======= ====== ====== ======
December 31, 2000:
Property/Casualty $ 547 $16,932 $2,368 $ - $6,377
Life 947 3,382 216 2,161 1,624
----- ------- ------ ------ ------
Total $1,494 $20,314 $2,584 $2,161 $8,001
====== ======= ====== ====== ======
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
====== ======= ====== ====== ======
Column G Column H Column I Column J Column K
----------------------------------------------------------------------------------
Amortization Other
Claims, Claim of Deferred Operating
Net Expenses and Insurance Costs Net
Investment Policy Benefits Acquisition and Premiums
Income Incurred Costs Expenses Written
----------------------------------------------------------------------------------
December 31, 2001:
Property/Casualty $ 833 $5,389 $1,397 $ 665 $5,551
Life 369 1,586 433 187
------ ------ ------ -----
Total $1,202 $6,975 $1,830 $ 852
====== ====== ====== =====
December 31, 2000:
Property/Casualty $ 953 $5,335 $1,553 $ 669 $6,554
Life 362 1,392 360 217
------ ------ ------ -----
Total $1,315 $6,727 $1,913 $ 886
====== ====== ====== =====
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
====== ====== ====== =====
62
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 8, 2002 By: /s/ Marc A. Meiches
-------------------------------------------------
Marc A. Meiches
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/ RONALD R. PRESSMAN President, Chief Executive Officer and Director March 8, 2002
- ----------------------------------------
Ronald R. Pressman (Principal Executive Officer)
/s/ MARC A. MEICHES Senior Vice President, Chief Financial Officer and Director March 8, 2002
- ----------------------------------------
Marc A. Meiches (Principal Financial Officer)
/s/ DENNIS D. DAMMERMAN Chairman March 8, 2002
- ----------------------------------------
Dennis D. Dammerman
/s/ JAMES A. PARKE Director March 8, 2002
- ----------------------------------------
James A. Parke
/s/ NICHOLAS J. SPAETH Senior Vice President and General Counsel March 8, 2002
- ----------------------------------------
Nicholas J. Spaeth
/s/ WILLIAM J. STEILEN Vice President and Controller March 8, 2002
- ----------------------------------------
William J. Steilen (Principal Accounting Officer)
63