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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 September 28, 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 October 29, 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
Item 4. Controls and Procedures...................................................................... 14
PART II - OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K............................................................. 15
Signatures. ............................................................................................. 16
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002............................................. 17
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges............................................ 19
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................................................................... 20
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................................................................... 21
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 Nine months ended
-------------------------------- --------------------------------
(In millions) Sept. 28, 2002 Sept. 29, 2001 Sept. 28, 2002 Sept. 29, 2001
-------------- -------------- -------------- --------------
Revenues
Net premiums written $2,273 $1,110 $6,012 $5,157
====== ====== ====== ======
Net premiums earned $2,116 $1,066 $5,826 $5,077
Net investment income 272 303 815 909
Net realized gains on investments 150 192 208 333
Other revenues 30 69 106 269
------ ------ ------ ------
Total revenues 2,568 1,630 6,955 6,588
------ ------ ------ ------
Costs and Expenses
Claims, claim expenses and policy benefits 2,125 1,662 5,432 4,929
Insurance acquisition costs 453 258 1,352 1,226
Other operating costs and expenses 181 158 544 549
Minority interest in net earnings of
consolidated subsidiaries 22 22 66 67
------ ------ ------ ------
Total costs and expenses 2,781 2,100 7,394 6,771
------ ------ ------ ------
Earnings (loss)
Loss before income taxes and cumulative effect of
change in accounting principle (213) (470) (439) (183)
Income tax benefit (90) (232) (184) (153)
------ ------ ------ ------
Loss before cumulative effect of change in
accounting principle (123) (238) (255) (30)
Cumulative effect of change in accounting principle - - - (11)
------ ------ ------ ------
Net loss (123) (238) (255) (41)
Dividends on preferred stock (2) (2) (6) (6)
Retained earnings at beginning of period 4,866 5,397 5,002 5,204
------ ------ ------ ------
Retained earnings at end of period $4,741 $5,157 $4,741 $5,157
====== ====== ====== ======
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) September 28, 2002 December 31, 2001
------------------ -----------------
(Unaudited)
Assets
Investments:
Fixed maturity securities, at fair value $19,090 $19,769
Equity securities, at fair value 620 641
Other invested assets 4,579 2,085
------- -------
Total investments 24,289 22,495
Cash 1,226 470
Premiums receivable 4,637 4,376
Other receivables 1,788 1,402
Reinsurance recoverables 10,964 10,367
Deferred insurance acquisition costs 1,755 1,615
Other assets 5,141 4,393
------- -------
Total assets $49,800 $45,118
======= =======
Liabilities and equity
Claims and claim expenses $22,813 $22,033
Accumulated contract values 2,774 2,909
Future policy benefits for life and health contracts 3,723 2,965
Unearned premiums 3,323 2,763
Other reinsurance balances 3,856 2,935
Other liabilities 3,912 2,313
Long-term borrowings 1,655 1,655
------- -------
Total liabilities 42,056 37,573
------- -------
Minority interest in equity of consolidated subsidiaries 1,255 1,183
------- -------
Accumulated non-owner changes in equity:
Unrealized gains on investment securities - net 325 23
Foreign currency translation adjustments (175) (241)
Derivatives qualifying as hedges 18 (2)
------- -------
Total accumulated non-owner changes in equity 168 (220)
Preferred stock 150 150
Common stock 5 5
Paid-in capital 1,425 1,425
Retained earnings 4,741 5,002
------- -------
Total stockholder's equity 6,489 6,362
------- -------
Total liabilities and equity $49,800 $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)
Nine months ended
---------------------------------------
(In millions) Sept. 28, 2002 Sept. 29, 2001
-------------- --------------
Cash from operating activities $ 809 $ 244
------- -------
Cash flows from investing activities
Fixed maturity securities:
Purchases (10,408) (11,408)
Sales 10,256 11,618
Maturities 1,943 712
Equity securities:
Purchases (459) (310)
Sales 442 177
Net purchases of short-term investments (2,056) (906)
Net cash paid for acquisitions and in-force reinsurance
transactions (25) -
Other investing activities 402 43
------- -------
Cash from (used for) investing activities 95 (74)
------- -------
Cash flows from financing activities
Change in contract deposits (20) (13)
Net contract accumulation payments (135) (61)
Proceeds from short-term borrowings 259 87
Principal payments on short-term borrowings (156) (187)
Capital contribution received - 400
Proceeds from issuance of subsidiary preferred stock 70 -
Dividends paid (6) (6)
------- -------
Cash from financing activities 12 220
------- -------
Effect of exchange rate changes on cash (160) 4
------- -------
Increase in cash 756 394
Cash at beginning of period 470 196
------- -------
Cash at end of period $ 1,226 $ 590
======= =======
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 nine months
ended September 29, 2001, was $22 million ($18 million after-tax) and $64
million ($52 million after-tax), respectively. The effect on earnings of
excluding such goodwill amortization from the third quarter and first nine
months of 2001 follows:
Three months ended Nine months ended
-------------------------------- --------------------------------
(In millions) Sept. 28, 2002 Sept. 29, 2001 Sept. 28, 2002 Sept. 29, 2001
-------------- -------------- -------------- --------------
Loss before cumulative effect of change in
accounting principle $(123) $(238) $(255) $(30)
===== ===== ===== ====
Earnings (loss) before cumulative effect of
change in accounting principle,
excluding 2001 goodwill amortization $(123) $(220) $(255) $ 22
===== ===== ===== ====
Net loss $(123) $(238) $(255) $(41)
===== ===== ===== ====
Net earnings (loss), excluding 2001
goodwill amortization $(123) $(220) $(255) $ 11
===== ===== ===== ====
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 September 28, 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") $505 $(122) $267 $(102)
Capitalized software 188 (61) 185 (43)
All other 11 (4) 136 (29)
---- ----- ---- -----
Total $704 $(187) $588 $(174)
==== ===== ==== =====
The only changes to recorded goodwill during the nine-month period ended
September 28, 2002 were an addition of $104 million, representing amounts
reclassified from other intangible assets as of the January 1, 2002
adoption date of SFAS 142, and $26 million relating to the acquisition of
an existing block of life and health business completed during the third
quarter of 2002. The increase in the gross carrying amount of PVFP is
primarily attributable to the acquisition of an existing block of life and
health business completed during the third quarter of 2002.
Amortization expense related to intangible assets, excluding goodwill for
the third quarter of 2002 and 2001, was $14 million and $15 million,
respectively, and for the first nine months of 2002 and 2001 was each $41
million. 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.
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) Sept. 28, 2002 Sept. 29, 2001
-------------- --------------
Net loss $(123) $(238)
Net unrealized gains on investment securities 225 25
Foreign currency translation adjustments (59) 42
Derivatives qualifying as hedges-net changes in value 7 9
----- -----
Total $ 50 $(162)
===== =====
Nine months ended
---------------------------------------
(In millions) Sept. 28, 2002 Sept. 29, 2001
-------------- --------------
Net loss $(255) $(41)
Net unrealized gains on investment securities 302 24
Foreign currency translation adjustments 66 82
Derivatives qualifying as hedges-net changes in value 20 1
----- ----
Total $ 133 $ 66
===== ====
6. The Company's operating segment activity is summarized as follows:
Three months ended
---------------------------------------
(In millions) Sept. 28, 2002 Sept. 29, 2001
-------------- --------------
Revenues
Property/Casualty $1,774 $1,007
Life 794 623
------ ------
Total revenues $2,568 $1,630
====== ======
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle (1)
Property/Casualty $ (237) $ (518)
Life 24 70
------ ------
Total loss before income taxes and cumulative
effect of change in accounting principle $ (213) $ (448)
====== ======
(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)
Nine months ended
---------------------------------------
(In millions) Sept. 28, 2002 Sept. 29, 2001
-------------- --------------
Revenues
Property/Casualty $4,917 $4,835
Life 2,038 1,753
------ ------
Total revenues $6,955 $6,588
====== ======
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle (1)
Property/Casualty $ (520) $ (341)
Life 81 222
------ ------
Total loss before income taxes and cumulative effect of
change in accounting principle $ (439) $ (119)
====== ======
(1) Amounts for 2001 have been adjusted to exclude goodwill
amortization expense for consistent comparative purposes.
7. During the quarter ended September 28, 2002, Employers Reinsurance
Corporation (a subsidiary of the Company) issued 700 shares of non-voting,
cumulative preferred stock with a par value of $100,000 per share to an
affiliated entity. This transaction was reflected as an addition to
minority interest in equity of consolidated subsidiaries in the
accompanying condensed, consolidated statement of financial position.
During the quarter ended September 29, 2001, GE Global Insurance received
capital contributions from its parent, GE Capital Services, Inc., 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.
7
Item 2. Management's Discussion and Analysis of Results of Operations.
A. Results of Operations - Third quarter of 2002 compared with third quarter of
2001
Overview
GE Global Insurance incurred a loss before cumulative effect of change in
accounting principle of $123 million for the third quarter of 2002, as compared
to a loss of $238 million for the comparable period in 2001. The loss for the
third quarter of 2002 is primarily attributable to the recognition of
approximately $500 million of additional 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
increased incurred claims and claim expenses and decreased premium revenues
(principally due to higher levels of required ceded premiums).
There is a high degree of uncertainty inherent in the estimates of ultimate
losses underlying the liability for claims and claim expenses. One reason that
leads to this uncertainty is the extended period, often many years, that
transpires between a loss event, receipt of related claims data from
policyholders and/or primary insurers and ultimate settlement of the claim.
Management continually updates loss estimates using both quantitative
information from reserving actuaries and qualitative information from other
sources. Based on information available at the time, management makes its best
estimates of loss reserves and related incurred losses. The level of reported
claims activity related to prior year loss events, particularly for the 1997
through 2000 underwriting years, has continued to accelerate at a rate higher
than anticipated, and has caused management to increase its estimate of ultimate
losses, a change that has been reflected in the accompanying financial
information. The potential for further adverse loss developments in these areas
is highly uncertain.
The significant negative impact on the reported third quarter of 2002
underwriting results from adverse development on prior year loss events was
partially offset by improved current quarter underwriting results within the
property and casualty insurance/reinsurance segment. The improvement in current
underwriting results is principally due to the recent hardening price
environment within the overall property and casualty insurance/reinsurance
industry coupled with management actions initiated in 2001 to exit certain
product lines, policies, contracts and specific customers for which, given the
risk, acceptable future levels of profit did not seem achievable. Also adversely
impacting the third quarter of 2002 operating results as compared to the same
period of 2001 were a reduction of $73 million of investment-related income
(including both net investment income and net realized gains on investments), a
reduction in other revenues and an increase in other operating costs and
expenses, somewhat offset by the impact of SFAS 142, which resulted in the
amortization of goodwill ceasing effective January 1, 2002.
The loss recorded in the third quarter of 2001 was primarily attributable to the
approximately $575 million of underwriting losses resulting from the events of
September 11, 2001. Substantially all of the gross losses resulting from this
event (estimated to be approximately $3.3 billion) are expected to be covered
under specific and/or aggregate reinsurance programs in place and, accordingly,
the level of retained losses is not expected to be significant. Certain of the
referenced retrocession agreements contain premium adjustment provisions in
which the Company is required to pay additional premiums. These additional
premiums are reflected as ceded premiums--i.e., a reduction in premium
revenues--and totaled $821 million. In connection with the ceding of these
additional premiums, the Company is entitled to receive a ceding commission of
$246 million (representing 30% of the related ceded premiums), which is
reflected as a reduction in insurance acquisition costs in the accompanying
condensed, consolidated statement of current and retained earnings. The
estimated gross losses arising from the events of September 11, 2001 relate to
underlying insurance policies and reinsurance contracts providing general
property, general liability, aviation, business interruption, workers
compensation and life and health-related coverages. The $575 million represented
management's best estimate of its existing net liability based on information
available at that time and such estimate has not changed significantly through
the current date.
8
Item 2. Management's Discussion and Analysis of Results of Operations (Cont'd).
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:
Third quarter ended
----------------------------------------
(In millions) Sept. 28, 2002 Sept. 29, 2001
--------------- --------------
Revenues
Property/Casualty $1,774 $1,007
Life 794 623
------ ------
Total revenues $2,568 $1,630
====== ======
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle (1)
Property/Casualty $ (237) $ (518)
Life 24 70
------ ------
Total loss before income taxes and cumulative
effect of change in accounting principle $ (213) $ (448)
====== ======
(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 third quarter of 2002, the property
and casualty combined ratio was 138.5%, compared to 261.1% for the same period
in 2001. The high combined ratio in the third 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. The significantly elevated combined
ratio in the third quarter of 2001 is primarily attributable to the insurance
losses arising from the events of September 11, 2001. These same factors
contributing to the respective combined ratios in 2002 and 2001 were also the
principle reasons driving the recorded loss before income taxes and cumulative
effect of change in accounting principle for such periods.
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 September 28, 2002,
the life operations generated revenues and earnings before income taxes and
cumulative effect of change in accounting principle of $794 million and $24
million, respectively, compared to $623 million and $70 million, respectively,
for the same period in 2001. While the third quarter 2002 revenues increased
$171 million or 27% 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 $46 million as compared to the same period in 2001.
This decreased profitability is primarily attributable to increased claim
activity in the current quarter as compared to the same period in 2001 with
respect to mortality and certain health-related products and, to a lessor
extent, a decrease in the level of net realized gains on investments.
9
Item 2. Management's Discussion and Analysis of Results of Operations (Cont'd).
Operating Results
Net premiums written and net premiums earned increased $1,163 million (or 105%)
and $1,050 million (or 98%), respectively for the third quarter of 2002 as
compared to the third quarter of 2001. This significant increase in premiums is
primarily attributable to the $821 million of additional ceded premiums in 2001
in connection with accrued reinsurance recoveries related to the events of
September 11, 2001. Excluding this amount, net premiums written and net premiums
earned increased $342 million (or 18%) and $229 million (or 12%), respectively,
primarily attributed to the recent hardening price environment within the
overall property and casualty insurance/reinsurance industry and a focus on
growth within certain niche markets. This increase in new and renewal premiums
was partially offset by the impact of selective exits from certain lines of
business and customer relationships as part of a portfolio review undertaken
during 2001.
Net investment income decreased $31 million or 10% for the third quarter of 2002
as compared to the third quarter of 2001, primarily attributable to the lower
U.S. interest rate environment in the current year as compared to 2001.
Net realized gains on investments decreased $42 million or 22% for the third
quarter of 2002 as compared to the third quarter of 2001, primarily attributable
to: (1) fewer sales of investments reflecting gains in the third quarter of 2002
as compared to the same period in 2001 and (2) a higher level of
other-than-temporary impairment charges recognized during the current year.
Other revenues decreased $39 million or 57% for the third quarter of 2002 as
compared to the third quarter of 2001, primarily attributable to non-recurring
revenues generated in 2001 related to certain non-trade receivables.
Claims, claim expenses and policy benefits increased $463 million or 28% for the
third quarter of 2002 as compared to the third quarter of 2001. This increase is
primarily attributable to the adverse development related to prior year loss
events identified in the third quarter of 2002, somewhat offset by a lower loss
ratio applicable to the current underwriting year. The lower loss ratio in 2002
is principally due to the recent hardening price environment within the overall
property and casualty insurance/reinsurance industry coupled with management
actions initiated in 2001 to exit certain product lines, policies, contracts and
specific customers for which, given the risk, acceptable future levels of profit
did not seem achievable. The Company has no aggregate retrocession coverage
available for years prior to 1999, has reached its purchased limit of coverage
on the 1999 and 2000 aggregate retrocession programs and is approaching its
purchased limit of coverage for the 2001 program.
Insurance acquisition costs increased $195 million or 76% for the third quarter
of 2002 as compared to the third quarter of 2001, primarily attributable to the
same factors impacting net premiums earned discussed above, including the impact
of the $246 million ceding commission received in 2001 relating to the
additional ceded premiums resulting from the events of September 11, 2001.
Other operating costs and expenses (including amortization of goodwill)
increased $23 million or 15% for the third quarter of 2002 as compared to the
third quarter of 2001. Absent the goodwill amortization expense in the third
quarter of 2001, other operating costs and expenses would have increased $45
million or 33% for the third quarter of 2002, primarily attributable to the
reclassification in the current year of certain costs previously reflected as
insurance acquisition costs and higher general expenses resulting from the
recent acquisition of a relatively large block of life and health business.
Provision for income taxes was a benefit of $90 million for the third quarter of
2002 (an effective tax benefit rate of 42%), compared to a benefit of $232
million for the third quarter of 2001 (an effective tax benefit rate of 49%).
The high effective tax rate in the third quarter of 2002 and 2001 results
principally from the impacts of tax-exempt investment income.
10
Item 2. Management's Discussion and Analysis of Results of Operations (Cont'd).
B. Results of Operations - First nine months of 2002 compared with first nine
months of 2001
Overview
GE Global Insurance incurred a loss before cumulative effect of change in
accounting principle of $255 million for the first nine months of 2002, as
compared to a loss of $30 million for the comparable period in 2001. The 2002
loss is primarily attributable to the recognition of approximately $1 billion of
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.
There is a high degree of uncertainty inherent in the estimates of ultimate
losses underlying the liability for claims and claim expenses. One reason that
leads to this uncertainty is the extended period, often many years, that
transpires between a loss event, receipt of related claims data from
policyholders and/or primary insurers and ultimate settlement of the claim.
Management continually updates loss estimates using both quantitative
information from reserving actuaries and qualitative information from other
sources. Based on information available at the time, management makes its best
estimates of loss reserves and related incurred losses. The level of reported
claims activity related to prior year loss events, particularly for the 1997
through 2000 underwriting years, has continued to accelerate at a rate higher
than anticipated, and has caused management to increase its estimate of ultimate
losses, a change that has been reflected in the accompanying financial
information. The potential for further adverse loss developments in these areas
is highly uncertain.
The significant negative impact on reported 2002 underwriting results resulting
from adverse development on prior year loss events was partially offset by
improved current year underwriting results within the property and casualty
insurance/reinsurance segment. The improvement in current underwriting results
is principally due to the recent hardening price environment within the overall
property and casualty insurance/reinsurance industry coupled with management
actions initiated in 2001 to exit certain product lines, policies, contracts and
specific customers for which, given the risk, acceptable future levels of profit
did not seem achievable. Also adversely impacting the first nine months of 2002
operating results as compared to the same period of 2001 were a reduction of
$219 million of investment-related income (including both net investment income
and net realized gains on investments) and a reduction in other revenues,
somewhat offset by 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 on the following page:
11
Item 2. Management's Discussion and Analysis of Results of Operations (Cont'd).
Nine months ended
---------------------------------------
(In millions) Sept. 28, 2002 Sept. 29, 2001
-------------- --------------
Revenues
Property/Casualty $4,917 $4,835
Life 2,038 1,753
------ ------
Total revenues $6,955 $6,588
====== ======
Earnings (loss) before income taxes and cumulative effect
of change in accounting principles (1)
Property/Casualty $ (520) $ (341)
Life 81 222
------ -----
Total loss before income taxes and cumulative effect
of change in accounting principles $ (439) $ (119)
====== ======
(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 nine months of 2002, the
property and casualty combined ratio was 128.0% compared to 135.5% for the same
period in 2001. The high 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. The elevated combined ratio in 2001 is primarily
attributable to the insurance losses arising from the events of September 11,
2001. These same factors contributing to the respective combined ratios in 2002
and 2001 were also the principle reasons driving the recorded loss before income
taxes and cumulative effect of change in accounting principle for such periods.
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 nine months of 2002, the life
operations generated revenues and earnings before income taxes and cumulative
effect of change in accounting principle of $2,038 million and $81 million,
respectively, compared to $1,753 million and $222 million, respectively, for the
same period in 2001. While 2002 revenues increased $285 million or 16% as
compared to 2001, reported earnings before income taxes and cumulative effect of
change in accounting principle of the life segment decreased $141 million 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, (3) increased
claim activity in the current year as compared to the same period in 2001 with
respect to mortality and certain health-related products and (4) a decrease in
other revenues principally due to non-recurring income generated in 2001 related
to the commutation of certain single-premium bond business.
12
Item 2. Management's Discussion and Analysis of Results of Operations (Cont'd).
Operating Results
Net premiums written and net premiums earned increased $855 million (or 17%) and
$749 million (or 15%), respectively in 2002. This significant increase in
premiums is primarily attributable to the $821 million of additional ceded
premiums in 2001 in connection with accrued reinsurance recoveries related to
the events of September 11, 2001. Excluding this amount, net premiums written
increased only $34 million, with net premiums earned decreasing $72 million (or
1%), primarily attributed to the recent hardening price environment within the
overall property and casualty insurance/reinsurance industry and a focus on
growth within certain niche markets, substantially offset by the impact of
selective exits from certain lines of business and customer relationships as
part of a portfolio review undertaken during 2001.
Net investment income decreased $94 million or 10% in 2002, primarily
attributable to the lower U.S. interest rate environment in the current year as
compared with 2001.
Net realized gains on investments decreased $125 million or 38% in 2002,
primarily attributable to: (1) fewer sales of investments reflecting gains in
2002 as compared to 2001 and (2) a higher level of other-than-temporary
impairment charges recognized during the current year.
Other revenues decreased $163 million or 61% in 2002, primarily attributable to
non-recurring revenues generated in 2001 related to: (1) the favorable
resolution of issues involving an acquisition and (2) certain non-trade
receivables.
Claims, claim expenses and policy benefits increased $503 million or 10% 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. The lower loss ratio in 2002
is principally due to the recent hardening price environment within the overall
property and casualty insurance/reinsurance industry coupled with management
actions initiated in 2001 to exit certain product lines, policies, contracts and
specific customers for which, given the risk, acceptable future levels of profit
did not seem achievable. The Company has no aggregate retrocession coverage
available for years prior to 1999, has reached its purchased limit of coverage
on the 1999 and 2000 aggregate retrocession programs and is approaching its
purchased limit of coverage for the 2001 program.
Insurance acquisition costs increased $126 million or 10% in 2002, primarily
attributable to the same factors impacting net premiums earned discussed above,
including the impact of the $246 million ceding commission received in 2001
relating to the additional ceded premiums resulting from the events of September
11, 2001.
Other operating costs and expenses (including amortization of goodwill) remained
relatively stable as compared to the same period in 2001. Absent the goodwill
amortization expense in 2001, other operating costs and expenses would have
increased $59 million or 12% in 2002, primarily attributable to the combination
of higher net borrowing costs, the reclassification in the current year of
certain costs previously reflected as insurance acquisition costs and higher
general expenses resulting from the recent acquisition of a relatively large
block of life and health business.
Provision for income taxes was a benefit of $184 million for the first nine
months of 2002 (an effective tax benefit rate of 42%), compared to a benefit of
$153 million for the first nine months of 2001 (an effective tax benefit rate of
84%). The high effective tax rate in 2002 results principally from the impact of
tax-exempt investment income. The unusually high effective tax rate for 2001
principally reflects the impact of tax-exempt investment income and treatment of
proceeds received in connection with the resolution of issues involving an
acquisition as a purchase price adjustment for tax purposes.
13
Item 2. Management's Discussion and Analysis of Results of Operations (Cont'd).
Additional Considerations
Investments comprise principally investment grade debt securities and were $24.3
billion, including gross unrealized gains and losses of $803 million and $227
million, respectively, at September 28, 2002, compared with $22.5 billion,
including gross unrealized gains and losses of $336 million and $287 million,
respectively, as of December 31, 2001. Investment securities are regularly
reviewed for impairment based on criteria that include the extent to which cost
exceeds market value, the duration of that market decline and the financial
health and specific prospects for the issuer. Of those securities whose carrying
amount exceeded fair value at September 28, 2002, approximately $90 million is
at risk of being charged to earnings in the next 12 months. Impairment losses
recognized for the first nine months of 2002 were $34 million, including $13
million from the telecommunications and cable industries.
Investments in entities in the telecommunication and cable industries
approximated $400 million as of September 28, 2002. These investments have been
entered into subject to strict risk criteria and are diversified. Recently,
during declines in the values of these investments, the positions have been
routinely reviewed for impairment losses, and actions have been taken to
mitigate exposures. The Company has made provision for probable losses. Future
losses will depend upon business and economic developments as well as the
success of risk mitigation actions.
During the quarter ended September 28, 2002, certain external credit rating
agencies announced negative actions with respect to GE Global Insurance and
subsidiaries. Those rating agencies made similar announcements with regard to
other property and casualty insurance and reinsurance entities at about the same
time. A.M. Best lowered its financial strength group rating for GE Global
Insurance from A++ (superior) to A+ (superior) and also lowered its rating on GE
Global Insurance senior unsecured debt from aa- (very strong) to a (strong).
Standard & Poor's Rating Services placed GE Global Insurance's debt on "credit
watch negative." Moody's Investors Service announced that its ratings of GE
Global Insurance and its outstanding debt are under review for possible
downgrade. Management does not believe these actions will materially affect GE
Global Insurance's liquidity or capital resources or the ability to write future
business.
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.
Item 4. Controls and Procedures.
GE Global Insurance management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
14
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.
15
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: October 29, 2002 By: /s/ MARC A. MEICHES
------------------------------------------------
Marc A. Meiches
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: October 29, 2002 By: /s/ WILLIAM J. STEILEN
------------------------------------------------
William J. Steilen
Vice President and Controller
(Principal Accounting Officer)
16
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
-------------
I, Ronald R. Pressman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GE Global Insurance
Holding Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 29, 2002
/s/ Ronald R. Pressman
- --------------------------
Ronald R. Pressman
Chief Executive Officer
17
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
-------------
I, Marc A. Meiches, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GE Global Insurance
Holding Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 29, 2002
/s/ Marc A. Meiches
- ----------------------
Marc A. Meiches
Chief Financial Officer
18
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Index to Exhibits
Exhibit No. Page
- ----------- ----
12 Computation of Ratio of Earnings to Fixed Charges.......... 19
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002................................................ 20
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002................................................ 21
22