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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
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Commission file number 0-27394
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GE Global Insurance Holding Corporation
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(Exact name of registrant as specified in its charter)
Delaware 95-3435367
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5200 Metcalf, Overland Park, Kansas 66202
(Address of principal executive offices) (Zip Code)
(913) 676-5200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
At July 31, 2002, 1,000 shares of common stock with a par value of $5,000 per
share were outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE
FORMAT.
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION.
Item 1. Financial Statements.......................................................................... 1
Item 2. Management's Discussion and Analysis of Results of Operations................................. 8
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges............................................. 13
Exhibit 99.1. Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002 ................................................................... 14
Exhibit 99.2. Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002 ................................................................... 15
PART II - OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K.............................................................. 16
Signatures. .............................................................................................. 17
Index to Exhibits. .............................................................................................. 18
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Condensed, Consolidated Statement of Current and Retained Earnings
(Unaudited)
Three months ended Six months ended
------------------------------ ------------------------------
(In millions) June 29, 2002 June 30, 2001 June 29, 2002 June, 30 2001
------------- ------------- ------------- -------------
Revenues
Net premiums written $1,620 $1,945 $3,739 $4,047
====== ====== ====== ======
Net premiums earned $1,719 $2,000 $3,710 $4,011
Net investment income 272 290 543 606
Net realized gains on investments 18 77 58 141
Other revenues 21 154 76 200
------ ------ ------ ------
Total revenues 2,030 2,521 4,387 4,958
------ ------ ------ ------
Costs and Expenses
Claims, claim expenses and policy benefits 1,693 1,649 3,307 3,267
Insurance acquisition costs 469 480 899 968
Other operating costs and expenses 183 187 363 391
Minority interest in net earnings of
consolidated subsidiaries 22 23 44 45
------ ------ ------ ------
Total costs and expenses 2,367 2,339 4,613 4,671
------ ------ ------ ------
Earnings (loss)
Earnings (loss) before income taxes and cumulative effect
of change in accounting principle (337) 182 (226) 287
Income tax expense (benefit) (120) 56 (94) 79
------ ------ ------ ------
Earnings (loss) before cumulative effect of change
in accounting principle (217) 126 (132) 208
Cumulative effect of change in accounting principle - - - (11)
------ ------ ------ ------
Net earnings (loss) (217) 126 (132) 197
Dividends on preferred stock (2) (2) (4) (4)
Retained earnings at beginning of period 5,085 5,273 5,002 5,204
------ ------ ------ ------
Retained earnings at end of period $4,866 $5,397 $4,866 $5,397
====== ====== ====== ======
See Notes to Condensed, Consolidated Financial Statements.
1
Item 1. Financial Statements (Continued).
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Condensed, Consolidated Statement of Financial Position
(In millions) June 29, 2002 December 31, 2001
------------- -----------------
(Unaudited)
Assets
Investments:
Fixed maturity securities, at fair value $20,311 $19,769
Equity securities, at fair value 655 641
Other invested assets 2,244 2,085
------- -------
Total investments 23,210 22,495
Cash 455 470
Premiums receivable 4,380 4,376
Other receivables 1,379 1,402
Reinsurance recoverables 10,443 10,367
Deferred insurance acquisition costs 1,636 1,615
Other assets 4,308 4,393
------- -------
Total assets $45,811 $45,118
======= =======
Liabilities and equity
Claims and claim expenses $22,096 $22,033
Accumulated contract values 2,829 2,909
Future policy benefits for life and health contracts 3,156 2,965
Unearned premiums 2,921 2,763
Other reinsurance balances 3,287 2,935
Other liabilities 2,242 2,313
Long-term borrowings 1,655 1,655
------- -------
Total liabilities 38,186 37,573
------- -------
Minority interest in equity of consolidated subsidiaries 1,184 1,183
------- -------
Accumulated non-owner changes in equity:
Accumulated unrealized gains on investment
securities - net 100 23
Accumulated foreign currency translation adjustments (116) (241)
Derivatives qualifying as hedges 11 (2)
------- -------
Total accumulated non-owner changes in equity (5) (220)
Preferred stock 150 150
Common stock 5 5
Paid-in capital 1,425 1,425
Retained earnings 4,866 5,002
------- -------
Total stockholder's equity 6,441 6,362
------- -------
Total liabilities and equity $45,811 $45,118
======= =======
See Notes to Condensed, Consolidated Financial Statements.
2
Item 1. Financial Statements (Continued).
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Condensed, Consolidated Statement of Cash Flows
(Unaudited)
Six months ended
-------------------------------------
(In millions) June 29, 2002 June 30, 2001
------------- -------------
Cash from operating activities $ 328 $ 213
------- -------
Cash Flows From Investing Activities
Fixed maturity securities:
Purchases (6,065) (7,476)
Sales 4,994 6,703
Maturities 881 502
Equity securities:
Purchases (315) (196)
Sales 331 84
Net (purchases) sales of short-term investments (106) 120
Other investing activities (75) 16
------- -------
Cash used for investing activities (355) (247)
------- -------
Cash Flows From Financing Activities
Change in contract deposits 13 2
Net contract accumulation payments (81) (10)
Proceeds from short-term borrowings 70 64
Principal payments on short-term borrowings (21) (9)
Dividends paid (4) (4)
------- -------
Cash from (used for) financing activities (23) 43
------- -------
Effect of exchange rate changes on cash 35 110
------- -------
Increase (decrease) in cash (15) 119
Cash at beginning of period 470 196
------- -------
Cash at end of period $ 455 $ 315
======= =======
See Notes to Condensed, Consolidated Financial Statements.
3
Item 1. Financial Statements (Continued).
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
(Unaudited)
1. The accompanying condensed, consolidated quarterly financial statements of
GE Global Insurance Holding Corporation ("GE Global Insurance") include
the accounts and operations, after intercompany eliminations, of GE Global
Insurance and its wholly-owned subsidiaries, Employers Reinsurance
Corporation, GE Reinsurance Corporation and Medical Protective Corporation.
GE Global Insurance and its consolidated subsidiaries are collectively
referred to as "the Company."
2. The condensed, consolidated quarterly financial statements are
unaudited. These statements include all adjustments (consisting of normal
recurring accruals) considered necessary by management to present a fair
statement of the results of operations, financial position and cash flows.
The results reported in these condensed, consolidated quarterly financial
statements should not be regarded as necessarily indicative of results that
may be expected for the entire year.
3. The Financial Accounting Standards Board's ("FASB") Statement of
Financial Accounting Standards ("SFAS") 142, Goodwill and Other Intangible
Assets, generally became effective on January 1, 2002. Under SFAS 142,
goodwill is no longer amortized but is tested for impairment using a fair
value methodology.
The Company ceased amortizing goodwill effective January 1, 2002.
Simultaneously, to maintain a consistent basis for its measurement of
performance, management revised previously-reported segment information to
correspond to the earnings measurements by which businesses were to be
evaluated. In accordance with the requirements of SFAS 131, Reporting
Segments of a Business Enterprise, previously reported segment results
(presented in footnote 6), have been restated to be consistent with 2002
reporting. Goodwill amortization expense for the quarter and first six
months ended June 30, 2001, was $20 million ($16 million after-tax) and $42
million ($34 million after-tax), respectively. The effect on earnings of
excluding such goodwill amortization from the second quarter and first six
months of 2001 follows:
Three months ended Six months ended
------------------------------- -------------------------------
(In millions) June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001
------------- ------------- ------------- -------------
Earnings (loss) before cumulative effect of
change in accounting principle $(217) $126 $(132) $208
----- ---- ----- ----
Earnings (loss) before cumulative effect of
change in accounting principle,
excluding goodwill amortization $(217) $142 $(132) $242
----- ---- ----- ----
Net earnings (loss) $(217) $126 $(132) $197
----- ---- ----- ----
Net earnings (loss), excluding 2001
goodwill amortization $(217) $142 $(132) $231
----- ---- ----- ----
4
Item 1. Financial Statements (Continued).
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements (Continued)
3. (continued)
Under SFAS 142, the Company was required to test all existing goodwill for
impairment as of January 1, 2002, on a "reporting unit" basis. A reporting
unit is the operating segment unless, at businesses one level below that
operating segment (the "component" level), discrete financial information
is prepared and regularly reviewed by management, in which case such
component is the reporting unit.
A fair value approach is used to test goodwill for impairment. An
impairment charge is recognized for the amount, if any, by which the
carrying amount of goodwill exceeds its fair value. Fair values were
established using discounted cash flows. When available and as appropriate,
comparative market multiples were used to corroborate discounted cash flow
results.
The result of testing goodwill of the Company for impairment in accordance
with SFAS 142, as of January 1, 2002, resulted in no impairment charge.
At June 29, 2002 At December 31, 2001
-------------------------- ------------------------------
(In millions) Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
Intangibles Subject to Amortization
Present value of future profits ("PVFP") $271 $(114) $267 $(102)
Capitalized software 184 (52) 185 (43)
All other 5 (3) 136 (29)
---- ----- ---- -----
Total $460 $(169) $588 $(174)
==== ===== ==== =====
Amortization expense related to intangible assets, excluding goodwill for
both the second quarter of 2002 and 2001, was $14 million and for the first
six months of 2002 and 2001 was $26 million and $27 million, respectively.
The estimated percentage of the December 31, 2001 net PVFP balance to be
amortized over each of the next five years follows:
2002 . . . . . . . . . . . . . . . . . 10.1%
2003 . . . . . . . . . . . . . . . . . 10.1%
2004 . . . . . . . . . . . . . . . . . 9.7%
2005 . . . . . . . . . . . . . . . . . 9.2%
2006 . . . . . . . . . . . . . . . . . 7.6%
Amortization expense for PVFP in future periods will be affected by
acquisitions, realized capital gains/losses or other factors affecting the
ultimate amount of gross profits realized from certain lines of business.
Similarly, future amortization expense for other intangibles will depend on
acquisition activity and other business transactions.
The only change to recorded goodwill during the period ended June 29, 2002
was an addition of $104 million, representing amounts reclassified from
other intangible assets as of the January 1, 2002 adoption date of SFAS
142.
5
Item 1. Financial Statements (Continued).
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements (Continued)
4. At January 1, 2001, the Company adopted SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. Under SFAS 133,
all derivative instruments are recognized in the statement of financial
position at their fair values. The cumulative effect of adopting this
standard was a one-time reduction of net earnings in the first quarter of
2001 of $11 million and comprised a portion of the effect of marking to
market options and currency contracts used for hedging.
5. Changes in stockholder's equity that did not result directly from
transactions with the share owner were as follows:
Three months ended
-------------------------------------
(In millions) June 29, 2002 June 30, 2001
------------- -------------
Net earnings (loss) $(217) $126
Net unrealized gains (losses) on investment securities 186 (173)
Foreign currency translation adjustments 130 (33)
Derivatives qualifying as hedges-net changes in value 8 (8)
----- ----
Total $ 107 $(88)
===== ====
Six months ended
-------------------------------------
(In millions) June 29, 2002 June 30, 2001
------------- -------------
Net earnings (loss) $(132) $197
Net unrealized gains (losses) on investment securities 77 (1)
Foreign currency translation adjustments 125 40
Derivatives qualifying as hedges-net changes in value 13 (8)
----- ----
Total $ 83 $228
===== ====
6. The Company's operating segment activity is summarized as follows:
Three months ended
-------------------------------------
(In millions) June 29, 2002 June 30, 2001
------------- -------------
Revenues
Property/Casualty $1,433 $2,037
Life 597 484
------ ------
Total revenues $2,030 $2,521
====== ======
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle (1)
Property/Casualty $ (349) $ 147
Life 12 55
------ ------
Total earnings (loss) before income taxes and cumulative
effect of change in accounting principle $ (337) $ 202
====== ======
(1) Amounts for 2001 have been adjusted to exclude goodwill amortization
expense for consistent comparative purposes.
6
Item 1. Financial Statements (Continued).
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements (Continued)
6. (continued)
Six months ended
-------------------------------------
(In millions) June 29, 2002 June 30, 2001
------------- -------------
Revenues
Property/Casualty $3,143 $3,828
Life 1,244 1,130
------ ------
Total revenues $4,387 $4,958
====== ======
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle (1)
Property/Casualty $ (283) $ 177
Life 57 152
------ ------
Total earnings (loss) before income taxes and cumulative
effect of change in accounting principle $ (226) $ 329
====== ======
(1) Amounts for 2001 have been adjusted to exclude goodwill amortization
expense for consistent comparative purposes.
7
Item 2. Management's Discussion and Analysis of Results of Operations.
SECOND QUARTER OF 2002 COMPARED WITH SECOND QUARTER OF 2001
Overview
GE Global Insurance incurred a loss before cumulative effect of change in
accounting principle (discussed in note 4 of this 10Q report) of $217 million
for the second quarter of 2002, as compared to earnings of $126 million for the
comparable period in 2001. The significant decrease in reported profitability is
primarily attributable to an approximately $550 million pre-tax charge made
during the period to reflect identified adverse development related to prior
year loss events. Due to the impacts of existing retrocession coverages
purchased by the Company, the recording of this adverse development both
decreased premium revenues (principally due to higher levels of required ceded
premiums) and increased incurred claims and claim expenses. Decreases in net
investment income (including net realized gains on investments) and other
revenues were largely offset by (1) improved current quarter underwriting
results within the property and casualty insurance/reinsurance segment due to
the recent hardening price environment and the absence of any significant
catastrophic events occurring during the period and (2) the impact of SFAS 142,
which resulted in the amortization of goodwill ceasing effective January 1,
2002.
The Company's two business segments are (1) property and casualty
insurance/reinsurance and (2) life reinsurance. Business is conducted throughout
the world utilizing the Company's network of local offices. Although the
movement in certain foreign currency exchange rates during 2002 and 2001 had a
slight impact on the individual revenue and expense categories, the overall
impact on net earnings was not significant. The Company's operating segment
activity is summarized as follows:
Second quarter ended
-----------------------------------
(In millions) June 29, 2002 June 30, 2001
------------- -------------
Revenues
Property/Casualty $1,433 $2,037
Life 597 484
------ ------
Total revenues $2,030 $2,521
====== ======
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle (1)
Property/Casualty $ (349) $ 147
Life 12 55
------ ------
Total earnings (loss) before income taxes and cumulative
effect of change in accounting principle $ (337) $ 202
====== ======
(1) Amounts for 2001 have been adjusted to exclude goodwill amortization expense
for consistent comparative purposes.
Typically, the underwriting performance of property and casualty
insurance/reinsurance business is measured in terms of a combined ratio and
earnings before income taxes. The combined ratio is the sum of the loss ratio
and the underwriting expense ratio. For the second quarter of 2002, the property
and casualty combined ratio was 142.1%, compared to 112.3% for the same period
in 2001. The higher combined ratio in the second quarter of 2002 is primarily
attributable to the significant charge taken during the period for identified
adverse development related to prior year loss events, somewhat offset by
improved current year underwriting results due to the recent hardening price
environment and the absence of any significant catastrophic events occurring
during the period. Earnings before income taxes and cumulative effect of change
in accounting principle from property and casualty operations decreased $496
million for the second quarter 2002, primarily attributable to the higher
combined ratio in the second quarter of 2002 as compared with the same period in
2001.
8
Item 2. Management's Discussion and Analysis of Results of Operations (Cont'd).
The life reinsurance segment typically measures performance based on revenues
and earnings before income taxes. Revenues consist of net premiums earned, net
investment income, net realized gains on investments and other revenues,
including fees generated from investment-related life reinsurance products and
financial reinsurance transactions. For the quarter ended June 29, 2002, the
life operations generated revenues and earnings before income taxes and
cumulative effect of change in accounting principle of $597 million and $12
million, respectively, compared to $484 million and $55 million, respectively,
for the same period in 2001. While the second quarter 2002 revenues increased
$113 million or 23% as compared to the same period in 2001, reported earnings
before income taxes and cumulative effect of change in accounting principle of
the life segment decreased $43 million or 78% as compared to the same period in
2001. This decreased profitability is primarily attributable to (1) a decrease
in net realized gains on investments, (2) an increase in net borrowing costs
resulting from currency and interest rate changes and (3) a decrease in other
revenues principally due to non-recurring income generated in 2001 related to
the commutation of certain single-premium bond business.
Operating Results
Net premiums written and net premiums earned decreased $325 million (or 17%) and
$281 million (or 14%), respectively for the second quarter of 2002 as compared
to the second quarter of 2001. This decrease is primarily attributed to
increased levels of ceded premiums associated with adverse development related
to prior year loss events identified in the period. In general, second quarter
2002 premiums increased, reflecting the combination of recent hardening pricing
within the overall property and casualty insurance/reinsurance industry and a
focus on growth within certain niche markets. However, this increase in new and
renewal premiums was largely offset by the impact of the decision to exit
certain lines of business and customer relationships as part of a reunderwriting
initiative undertaken during 2001 and 2000.
Net investment income decreased $18 million or 6% for the second quarter of 2002
as compared to the second quarter of 2001, primarily attributable to the lower
interest rate environment in the U.S.
Net realized gains on investments decreased $59 million or 77% for the second
quarter of 2002 as compared to the second quarter of 2001, primarily
attributable to fewer sales of investments reflecting gains in the second
quarter of 2002 as compared to the same period in 2001 coupled with the impact
of a lower interest rate environment.
Other revenues decreased $133 million or 86% for the second quarter of 2002 as
compared to the second quarter of 2001, primarily attributable to certain
non-recurring revenues in 2001 related to the favorable resolution of issues
involving a recent acquisition.
Claims, claim expenses and policy benefits increased $44 million or 3% for the
second quarter of 2002 as compared to the second quarter of 2001. This increase
is primarily attributable to the adverse development related to prior year loss
events identified in the second quarter of 2002, somewhat offset by a lower loss
ratio applicable to the current underwriting year as a result of the recent
hardening pricing within the overall property and casualty insurance/reinsurance
industry. The Company has reached its purchased limit of coverage on the 1999
aggregate retrocession program and is approaching its purchased limit of
coverage for the 2000 program.
Insurance acquisition costs decreased $11 million or 2% for the second quarter
of 2002 as compared to the second quarter of 2001, primarily attributable to the
reduction in net premiums earned discussed above.
Other operating costs and expenses (including amortization of goodwill) for the
second quarter of 2002 remained relatively in line with the comparable period in
2001. Absent the goodwill amortization expense in the second quarter of 2001,
other operating costs and expenses would have increased $16 million or 10% for
the second quarter of 2002, primarily attributable to higher general operating
and administrative expense levels.
9
Item 2. Management's Discussion and Analysis of Results of Operations (Cont'd).
Provision for income taxes was a benefit of $120 million for the second quarter
of 2002 (an effective tax benefit rate of 35.6%), compared to an expense of $56
million for the second quarter of 2001 (an effective tax rate of 30.8%). The
higher effective tax rate in the second quarter of 2002 results principally from
the impact of tax-exempt investment income. In a pre-tax loss quarter such as
2002, the existence of tax-exempt investment income serves to increase the
otherwise taxable loss (resulting in a higher effective tax rate), while in a
pre-tax income quarter such as 2001, tax-exempt income reduces otherwise taxable
income (resulting in a lower effective tax rate).
FIRST HALF OF 2002 COMPARED WITH FIRST HALF OF 2001
Overview
GE Global Insurance incurred a loss before cumulative effect of change in
accounting principle (discussed in note 4 of this 10Q report) of $132 million
for the first six months of 2002, as compared to earnings of $208 million for
the comparable period in 2001. The significant decrease in reported
profitability is primarily attributable to an approximately $600 million pre-tax
charge made during the period to reflect identified adverse development related
to prior year loss events. Due to the impacts of existing retrocession coverages
purchased by the Company, the recording of this adverse development both
decreased premium revenues (principally due to higher levels of required ceded
premiums) and increased incurred claims and claim expenses. Decreases in net
investment income (including net realized gains on investments) and other
revenues were largely offset by (1) improved current year underwriting results
within the property and casualty insurance/reinsurance segment due to the recent
hardening price environment and the absence of any significant catastrophic
events occurring during the period and (2) the impact of SFAS 142, which
resulted in the amortization of goodwill ceasing effective January 1, 2002.
The Company's two business segments are (1) property and casualty
insurance/reinsurance and (2) life reinsurance. Business is conducted throughout
the world utilizing the Company's network of local offices. Although the
movement in certain foreign currency exchange rates during 2002 and 2001 had a
slight impact on the individual revenue and expense categories, the overall
impact on net earnings was not significant. The Company's operating segment
activity is summarized as follows:
Six months ended
-----------------------------------
(In millions) June 29, 2002 June 30, 2001
------------- -------------
Revenues
Property/Casualty $3,143 $3,828
Life 1,244 1,130
------ ------
Total revenues $4,387 $4,958
====== ======
Earnings (loss) before income taxes and cumulative effect
of change in accounting principles (1)
Property/Casualty $ (283) $ 177
Life 57 152
------ ------
Total earnings (loss) before income taxes and cumulative
effect of change in accounting principles $ (226) $ 329
====== ======
(1) Amounts for 2001 have been adjusted to exclude goodwill amortization expense
for consistent comparative purposes.
Typically, the underwriting performance of property and casualty
insurance/reinsurance business is measured in terms of a combined ratio and
earnings before income taxes. The combined ratio is the sum of the loss ratio
and the underwriting expense ratio. For the first six months of 2002, the
property and casualty combined ratio was 123.6%, compared to 112.9% for the same
period in 2001.
10
Item 2. Management's Discussion and Analysis of Results of Operations (Cont'd).
The higher combined ratio in 2002 is primarily attributable to the significant
charge taken during the period for identified adverse development related to
prior year loss events, somewhat offset by improved current year underwriting
results due to the recent hardening price environment and the absence of any
significant catastrophic events occurring during the period. Earnings before
income taxes and cumulative effect of change in accounting principle from
property and casualty operations decreased $460 million in the first six months
of 2002, primarily attributable to the higher combined ratio in 2002 as compared
with 2001.
The life reinsurance segment typically measures performance based on revenues
and earnings before income taxes. Revenues consist of net premiums earned, net
investment income, net realized gains on investments and other revenues,
including fees generated from investment-related life reinsurance products and
financial reinsurance transactions. For the first six months of 2002, the life
operations generated revenues and earnings before income taxes and cumulative
effect of change in accounting principle of $1,244 million and $57 million,
respectively, compared to $1,130 million and $152 million, respectively, for the
same period in 2001. While 2002 revenues increased $114 million or 10% as
compared to 2001, reported earnings before income taxes and cumulative effect of
change in accounting principle of the life segment decreased $95 million or 63%
as compared to 2001. This decreased profitability is primarily attributable to
(1) a decrease in net realized gains on investments, (2) an increase in net
borrowing costs resulting from currency and interest rate changes and (3) a
decrease in other revenues principally due to non-recurring income generated in
2001 related to the commutation of certain single-premium bond business.
Operating Results
Net premiums written and net premiums earned decreased $308 million (or 8%) and
$301 million (also 8%), respectively in 2002. This decrease is primarily
attributed to increased levels of ceded premiums associated with adverse
development related to prior year loss events identified in 2002. In general,
2002 premiums increased, reflecting the combination of recent hardening pricing
within the overall property and casualty insurance/reinsurance industry and a
focus on growth within certain niche markets. However, this increase in new and
renewal premiums was largely offset by the impact of the decision to exit
certain lines of business and customer relationships as part of a reunderwriting
initiative undertaken during 2001 and 2000.
Net investment income decreased $63 million or 10% in 2002, primarily
attributable to the lower interest rate environment in the U.S. in the current
year as compared with 2001.
Net realized gains on investments decreased $83 million or 59% in 2002,
primarily attributable to fewer sales of investments reflecting gains in 2002 as
compared to 2001 coupled with the impact of a lower interest rate environment.
Other revenues decreased $124 million or 62% in 2002, primarily attributable to
certain non-recurring revenues in 2001 related to the favorable resolution of
issues involving a recent acquisition.
Claims, claim expenses and policy benefits increased $40 million or 1% in 2002.
This increase is primarily attributable to the adverse development related to
prior year loss events identified in 2002, somewhat offset by a lower loss ratio
applicable to the current underwriting year as a result of the recent hardening
pricing within the overall property and casualty insurance/reinsurance industry.
The Company has reached its purchased limit of coverage on the 1999 aggregate
retrocession program and is approaching its purchased limit of coverage for the
2000 program.
Insurance acquisition costs decreased $69 million or 7% in 2002, which is
generally in line with the decrease in net premiums earned discussed above.
11
Item 2. Management's Discussion and Analysis of Results of Operations (Cont'd).
Other operating costs and expenses (including amortization of goodwill)
decreased $28 million or 7% in 2002, primarily attributable to the termination
of goodwill amortization in 2002 associated with the implementation of SFAS 142.
Absent the goodwill amortization expense in 2001, other operating costs and
expenses would have increased $14 million or 4% in 2002, primarily attributable
to higher interest expense.
Provision for income taxes was a benefit of $94 million for the first six months
of 2002 (an effective tax benefit rate of 41.6%), compared to an expense of $79
million for the first six months of 2001 (an effective tax rate of 27.5%). The
higher effective tax rate in 2002 results principally from the impact of
tax-exempt investment income. In a pre-tax loss year such as 2002, the existence
of tax-exempt investment income serves to increase the otherwise taxable loss
(resulting in a higher effective tax rate), while in a pre-tax income year such
as 2001, tax-exempt income reduces otherwise taxable income (resulting in a
lower effective tax rate).
Forward Looking Statements
This document includes certain "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements are
based on management's current expectations and are subject to uncertainty and
changes in circumstances. Actual results may differ materially from these
expectations due to changes in global economic, business, competitive market and
regulatory factors.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
Exhibit 12. Computation of ratio of earnings to fixed charges.
Exhibit 99.1. Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.
Exhibit 99.2. Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.
b. Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GE GLOBAL INSURANCE HOLDING CORPORATION
---------------------------------------
(Registrant)
Date: July 31, 2002 By: /s/ MARC A. MEICHES
------------------------------------------------
Marc A. Meiches
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: July 31, 2002 By: /s/ WILLIAM J. STEILEN
------------------------------------------------
William J. Steilen
Vice President and Controller
(Principal Accounting Officer)
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GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Index to Exhibits
Exhibit No. Page
- ----------- ----
12 Computation of ratio of earnings to fixed charges.......... 13
99.1 Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The Sarbanes-Oxley
Act Of 2002................................................ 14
99.2 Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The Sarbanes-Oxley
Act Of 2002................................................ 15
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