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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 30, 2003
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
(Address of principal executive offices) (Zip Code)
(913) 676-5200
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
At August 1, 2003, 1,600 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.
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7/23/03 DRAFT
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements..............................................1
Item 2. Management's Discussion and Analysis of Results of Operations.....7
Item 4. Controls and Procedures..........................................12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................13
Signatures. .................................................14
INDEX TO EXHIBITS
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges............15
Exhibit 31. Certifications Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002..................................................16
Exhibit 32. Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002....18
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
GE GLOBAL INSURANCE HOLDING CORPORATION
AND CONSOLIDATED SUBSIDIARIES
Condensed, Consolidated Statement of Current and Retained Earnings
Unaudited
Second Quarter Ended Six Months Ended
(Dollars in millions) June 30 June 30
----------------------------------------------------------------------
2003 2002 2003 2002
----------------- ---------------------------------- -----------------
Revenues
Net premiums written $ 2,510 $ 1,620 $ 4,842 $ 3,739
================= ================================== =================
Net premiums earned $ 2,646 $ 1,719 $ 5,010 $ 3,710
Net investment income 287 272 583 543
Net realized gains on investments 86 18 83 58
Other revenues 42 21 86 76
----------------- ---------------------------------- -----------------
Total revenues 3,061 2,030 5,762 4,387
----------------- ---------------------------------- -----------------
Cost and Expenses
Claims, claim expenses and policy benefits 2,109 1,693 3,930 3,307
Insurance acquisition costs 562 469 1,002 899
Other operating costs and expenses 197 183 424 363
Minority interest in net earnings of consolidated
subsidiaries 22 22 44 44
----------------- ---------------------------------- -----------------
Total costs and expenses 2,890 2,367 5,400 4,613
----------------- ---------------------------------- -----------------
Earnings (loss)
Earnings (loss) before income taxes 171 (337) 362 (226)
Income tax (expense) benefit (48) 120 (105) 94
----------------- ---------------------------------- -----------------
Net earnings (loss) 123 (217) 257 (132)
Dividends on preferred stock (2) (2) (4) (4)
Retained earnings at beginning of period 3,394 5,085 3,262 5,002
----------------- ---------------------------------- -----------------
Retained earnings at end of period $ 3,515 $ 4,866 $ 3,515 $ 4,866
================= ================================== =================
See Notes to Condensed, Consolidated Financial Statements.
Item 1. Financial Statements (Continued).
GE GLOBAL INSURANCE HOLDING CORPORATION
AND CONSOLIDATED SUBSIDIARIES
Condensed, Consolidated Statement of Financial Position
(Dollars in millions) June 30, December 31,
2003 2002
----------------------------------
(Unaudited)
Assets
Investments:
Fixed maturity securities, at fair value $ 25,943 $ 22,200
Equity securities, at fair value 604 627
Other invested assets 1,191 3,995
----------------------------------
Total investments 27,738 26,822
Cash 803 911
Premiums receivable 4,357 4,447
Other receivables 1,670 1,984
Reinsurance recoverables 10,249 10,901
Deferred insurance acquisition costs 1,926 1,882
Other assets 5,677 4,839
----------------------------------
Total assets $ 52,420 $ 51,786
==================================
Liabilities and equity
Claims and claim expenses $ 25,072 $ 25,157
Accumulated contract values 2,725 2,826
Future policy benefits for life and health contracts 4,126 3,852
Unearned premiums 3,244 3,231
Other reinsurance balances 4,283 4,325
Other liabilities 2,585 2,839
Long-term borrowings 1,656 1,656
----------------------------------
Total liabilities 43,691 43,886
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Minority interest in equity of consolidated subsidiaries 1,230 1,236
----------------------------------
Accumulated non-owner changes in equity:
Accumulated unrealized gains on investments securities - net 641 149
Accumulated foreign currency translation adjustments 17 (138)
Derivatives qualifying as hedges (54) 11
----------------------------------
Total accumulated non-owner changes in equity 604 22
Preferred stock 150 150
Common stock 8 8
Paid-in capital 3,222 3,222
Retained earnings 3,515 3,262
----------------------------------
Total stockholder's equity 7,499 6,664
----------------------------------
Total liabilities and equity $ 52,420 $ 51,786
==================================
See Notes to Condensed, Consolidated Financial Statements.
Item 1. Financial Statements (Continued).
GE GLOBAL INSURANCE HOLDING CORPORATION
AND CONSOLIDATED SUBSIDIARIES
Condensed, Consolidated Statement of Cash Flows
Unaudited
(Dollars in millions) Six Months Ended
June 30
----------------------------------
2003 2002
----------------------------------
Cash flows from operating activities
Net earnings (loss) $ 257 $ (132)
Adjustments to reconcile net earnings (loss) to cash
from operating activities:
Claims and claim expenses (85) 63
Reinsurance recoverables 652 (76)
Other operating activities (495) 473
----------------------------------
Cash from operating activities 329 328
----------------------------------
Cash flows from investing activities Fixed maturity securities
available-for-sale:
Purchases (11,380) (6,065)
Sales 7,370 4,994
Maturities 1,884 881
Equity securities:
Purchases (341) (315)
Sales 347 331
Net sales (purchases) of short-term investments 2,718 (106)
Other investing activities (1,210) (75)
----------------- ----------------
Cash used for investing activities (612) (355)
----------------------------------
Cash flows from financing activities
Change in contract deposits (29) 13
Net contract accumulation payments (101) (81)
Proceeds from short-term borrowings 459 70
Principal payments on short-term borrowings (80) (21)
Dividends paid (4) (4)
----------------- ----------------
Cash from (used for) financing activities 245 (23)
----------------------------------
Effect of exchange rate changes on cash (70) 35
----------------------------------
Decrease in cash (108) (15)
Cash at beginning of period 911 470
----------------------------------
Cash at end of period $ 803 $ 455
==================================
See Notes to Condensed, Consolidated Financial Statements.
Item 1. Financial Statements (Continued).
GE GLOBAL INSURANCE HOLDING CORPORATION
AND CONSOLIDATED 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, Employers Reinsurance Corporation, GE Reinsurance Corporation,
Medical Protective Corporation and CORE Insurance Holdings. These statements
have been prepared on the basis of accounting principles generally accepted in
the United States of America ("GAAP"). GE Global Insurance is collectively
referred to as "we", "us" or "our" in this document unless the context otherwise
requires.
2. The condensed, consolidated quarterly financial statements are unaudited.
These statements include all adjustments (consisting of normal recurring
accruals) that we considered necessary to present a fair statement of the
results of operations, financial position and cash flows. We label our quarterly
information using a calendar convention, that is, first quarter is consistently
labeled as ending on March 31, second quarter as ending on June 30, and third
quarter as ending on September 30. It is our longstanding practice to establish
actual interim closing dates using a "fiscal" calendar, which requires our
businesses to close their books on a Saturday in order to normalize the
potentially disruptive effects of quarterly closings on business processes. The
effects of this practice are modest and only exist within a reporting year. 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. Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities" is effective for us on July 1,
2003. While FIN 46 represents a significant change in accounting principles
governing consolidation, it does not change the economic or legal
characteristics of asset sales. The adoption of FIN 46 did not have a material
effect on our financial position, operating results or cash flows.
In April 2003, the FASB finalized SFAS 133 Implementation Issue No. B36,
Modified Coinsurance Arrangements and Debt Instruments that Incorporate Credit
Risk Exposures that are Unrelated or Only Partially Related to the
Creditworthiness of the Obligor under those Instruments. In summary, the FASB
determined that modified coinsurance arrangements where the ceding insurer
withholds funds may include an embedded derivative that must be bifurcated from
the host instrument if it is not clearly and closely related to such host
instrument. This situation often arises when the interest rate on the funds held
balance is linked to the actual performance of a specified pool of assets. This
guidance is effective on the first day of the first fiscal quarter beginning
after September 15, 2003. We are currently evaluating the effect that this
guidance may have on our financial statements; however, based on preliminary
analysis performed, we do not believe it will materially impact our financial
position or future operating results.
4. Changes in stockholder's equity that did not result directly from
transactions with the share owner were as follows:
Second Quarter Ended
(Dollars in millions) June 30
-----------------------------------
2003 2002
----------------- -----------------
Net earnings (loss) $ 123 $ (217)
Net unrealized gains on investment securities 386 186
Foreign currency translation adjustments 135 130
Derivatives qualifying as hedges (63) 8
----------------- -----------------
Total $ 581 $ 107
================= =================
Six Months Ended
(Dollars in millions) June 30
-----------------------------------
2003 2002
----------------- -----------------
Net earnings (loss) $ 257 $ (132)
Net unrealized gains on investment securities 492 77
Foreign currency translation adjustments 155 125
Derivatives qualifying as hedges (65) 13
----------------- -----------------
Total $ 839 $ 83
================= =================
5. Our operating segment activity is summarized as follows:
Second Quarter Ended
(Dollars in millions) June 30
-----------------------------------
2003 2002
----------------- -----------------
Revenues
Property and Casualty $ 2,173 $ 1,433
Life 888 597
----------------- -----------------
Total revenues $ 3,061 $ 2,030
================= =================
Earnings (loss) before income taxes
Property and Casualty $ 137 $ (349)
Life 34 12
----------------- -----------------
Total earnings (loss) before income taxes $ 171 $ (337)
================= =================
Six Months Ended
(Dollars in millions) June 30
-----------------------------------
2003 2002
----------------- -----------------
Revenues
Property and Casualty $ 4,051 $ 3,143
Life 1,711 1,244
----------------- -----------------
Total revenues $ 5,762 $ 4,387
================= =================
Earnings (loss) before income taxes
Property and Casualty $ 293 $ (283)
Life 69 57
----------------- -----------------
Total earnings (loss) before income taxes $ 362 $ (226)
================= =================
6. There is a high degree of uncertainty inherent in the estimates of ultimate
losses underlying the liability for unpaid claims and claim expenses. This
inherent uncertainty is particularly significant for liability-related
exposures, including latent claim issues (such as asbestos and environmental
related coverage disputes) because of 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. This
situation is then further exacerbated for reinsurance entities (as opposed to
primary insurers) because of lags in receiving current claims data. Because
reinsurance protection is often provided on an "excess-of-loss" basis whereby
the reinsurer is only obligated to pay losses in excess of pre-established
limits, notification is required to be provided to the reinsurer only when the
claim is assessed as having a reasonable possibility of exceeding the primary
insurer's retention thresholds. This notification can often be years after the
loss event was initially reported to the primary insurer.
We continually update loss estimates using both quantitative information from
our reserving actuaries and qualitative information from other sources. While
detailed analysis is performed on a quarterly basis to assess the overall
adequacy of recorded claim reserves, a more comprehensive evaluation is
undertaken on an annual basis. Historically, this more comprehensive review has
been completed during the fourth quarter of each year using both reported and
paid claims activity as of September 30. Adjustments to recorded reserves
resulting from these reviews are accounted for as changes in estimates and
included in current operations.
7. During the second quarter of 2003, one of our reinsurance company
subsidiaries received significant additional reported claims related to product
liability coverage provided to a pharmaceutical-related entity. While this
matter is in the very early stages, we believe there is evidence indicating that
our ultimate liability, if any, will be considerably less than reported claims
and have established reserves consistent with this belief. As of June 30, 2003,
recorded reserves were approximately $75 million less than reported claim
amounts.
Item 2. Management's Discussion and Analysis of Results of Operations.
The following discussion and analysis of our results of operations should be
read in conjunction with our condensed, consolidated financial statements and
related notes included elsewhere in this Form 10-Q and with Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended December 31, 2002 included in our Form 10-K.
SECOND QUARTER OF 2003 COMPARED WITH SECOND QUARTER OF 2002
Overview
Net earnings for the second quarter of 2003 were $123 million, which compares to
a net loss of $217 million for the second quarter of 2002. The increase in net
earnings principally resulted from (1) significant improvement in current year
underwriting results driven largely by the continued favorable pricing
environment within the overall property and casualty industry and, to a lesser
extent, lower levels of adverse development related to prior year loss events
and (2) increased net realized investment gains. We also reported a modest
increase in net investment income because of a higher level of invested assets.
Although the movement in certain foreign currency exchange rates during 2003 and
2002 had an impact on the individual revenue and expense categories, the overall
impact on net earnings was not significant. Specifically, most of the major
European currencies strengthened relative to the U.S. dollar during the second
quarter of 2003 as compared with the second quarter of 2002 and, accordingly,
this has contributed to an increase in most of the individual revenue and
expense line items in the accompanying earnings statement.
Our two business segments are (1) property and casualty insurance/reinsurance
and (2) life reinsurance. Business is conducted throughout the world utilizing
our network of local offices. Our operating segment activity is summarized as
follows:
Second Quarter Ended
(Dollars in millions) June 30
----------------------------------
2003 2002
----------------------------------
Revenues
Property and Casualty $ 2,173 $ 1,433
Life 888 597
----------------------------------
Total revenues $ 3,061 $ 2,030
==================================
Earnings (loss) before income taxes
Property and Casualty $ 137 $ (349)
Life 34 12
----------------------------------
Total earnings (loss) before income taxes $ 171 $ (337)
==================================
Typically, the underwriting performance of property and casualty 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 2003, the property and casualty combined ratio was
105.1%, compared with 142.1% for the same period in 2002. The significant
improvement in the 2003 second quarter combined ratio is primarily attributable
to a decrease in the loss ratio, which reflects both the continued hardening of
pricing within the overall property and casualty insurance industry and lower
levels of prior-year adverse reserve development in 2003 compared with 2002. To
a much lesser extent, the improvement in the combined ratio is also attributable
to a decrease in the underwriting expense ratio. Earnings before income taxes
from property and casualty operations increased $486 million to $137 million in
the second quarter of 2003, principally as a result of the lower combined ratio
discussed above and, to a lesser extent, an increase in net realized investment
gains.
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 30, 2003, the
life operations generated revenues and earnings before income taxes of $888
million and $34 million, respectively, compared with $597 million and $12
million, respectively, for the same period in 2002. The increase in revenues is
principally related to the acquisition of a block of life reinsurance business
in the third quarter of 2002 (the "AUL acquisition") and the impact of changes
in foreign exchange rates applicable to the second quarter of 2003 versus the
second quarter of 2002. The increase in earnings is also primarily attributable
to the AUL acquisition, coupled with a decrease in claim activity in the current
quarter as compared with the same period in 2002 in mortality and certain
health-related products as well as higher levels of investment-related income.
Operating Results
Net premiums written and net premiums earned increased $890 million or 55% and
$927 million or 54%, respectively. This significant increase in premiums can be
primarily attributed to the combination of: (1) Current Year Factors--including
the continued favorable pricing environment within the overall property and
casualty industry, additional premiums resulting from the AUL acquisition
completed in the third quarter of 2002, the impact of changes in foreign
exchange rates and volume growth in certain business sectors, partially offset
by decreases in other business sectors resulting from the adherence to stricter
underwriting discipline and planned actions taken to exit certain product lines,
policies, contracts and specific customers for which, given the risk, acceptable
future levels of profit did not seem achievable; and (2) Prior Year
Factors--increased levels of ceded premiums associated with adverse development
related to prior year loss events.
Net investment income increased $15 million or 6% in 2003, principally as a
result of higher levels of invested assets. The increase in invested assets
includes the impact of a $1.8 billion capital contribution received in the
fourth quarter of 2002 and the AUL acquisition that occurred in the third
quarter of 2002.
Net realized gains on investments increased $68 million in 2003, primarily
attributable to increased opportunities for gains within the overall investment
portfolio driven by the decreasing interest rate environment, somewhat offset by
a higher level of other-than-temporary impairment charges recognized in 2003 as
compared to 2002.
Other revenues increased $21 million or 100% in 2003, primarily attributable to
certain non-recurring revenues generated in 2003.
Claims, claim expenses and policy benefits increased $416 million or 25% in
2003, principally resulting from the AUL acquisition discussed above, the impact
of changes in foreign exchange rates, and volume growth in certain business
sectors partially offset by lesser levels of adverse reserve development related
to prior year loss events.
As we reported previously, during the fourth quarter of 2002, we reevaluated the
recorded reserves for certain liability-related exposures in response to
continued escalated levels of reported claims activity. Following this
evaluation, we concluded that the accumulated data supported an increased
estimate of the ultimate losses in several lines of business underwritten in
1997 through 2001. Following these adjustments, we continued to monitor reported
claims activity for these lines of business. For certain lines of business, the
2003 to-date reported claims activity for prior accident years has continued to
develop at a level exceeding even our revised expectations. In addition, we
incorporated a more pessimistic view of the potential for individually
significant losses on certain Product Liability and Directors & Officers
exposures. As a result, we made adjustments of approximately $250 million to
reflect increased estimates of ultimate losses in the second quarter of 2003. We
will continue to monitor reported claims activity for all lines of business in
the future and take necessary reserve actions--either to increase or decrease
reserves--as our estimates mature.
Insurance acquisition costs increased $93 million or 20% in 2003, primarily
attributable to the increase in net earned premiums discussed above, somewhat
offset by a decrease in contingent commissions as compared with 2002.
Other operating costs and expenses increased $14 million or 8% in 2003,
primarily resulting from: (1) an increase in average employee salaries and
related benefits costs; (2) the AUL acquisition; and (3) the impact of changes
in foreign exchange rates.
Provision for income taxes was $48 million for the second quarter of 2003 (an
effective tax rate of 28.1%), compared with a benefit of $120 million for the
second quarter of 2002 (an effective tax rate of 35.6%). In a pre-tax income
quarter such as 2003, tax-exempt income reduces otherwise taxable income
(resulting in a lower effective tax rate), while 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).
FIRST HALF OF 2003 COMPARED WITH FIRST HALF OF 2002
Overview
Net earnings for the first six months of 2003 were $257 million, which compares
to a net loss of $132 million for the first six months of 2002. The increase in
net earnings principally resulted from (1) significant improvement in current
year underwriting results driven largely by the continued favorable pricing
environment within the overall property and casualty industry and, to a lesser
extent, lower levels of adverse development related to prior year loss events
and (2) increased investment related income (including both net investment
income and net realized investment gains).
Although the movement in certain foreign currency exchange rates during 2003 and
2002 had an impact on the individual revenue and expense categories, the overall
impact on net earnings was not significant. Specifically, most of the major
European currencies strengthened relative to the U.S. dollar during the first
six months of 2003 as compared with the first six months of 2002 and,
accordingly, this has contributed to an increase in most of the individual
revenue and expense line items in the accompanying earnings statement.
Our two business segments are (1) property and casualty insurance/reinsurance
and (2) life reinsurance. Business is conducted throughout the world utilizing
our network of local offices. Our operating segment activity is summarized as
follows:
(Dollars in millions) Six Months Ended
June 30
----------------------------------
2003 2002
----------------------------------
Revenues
Property and Casualty $ 4,051 $ 3,143
Life 1,711 1,244
----------------------------------
Total revenues $ 5,762 $ 4,387
==================================
Earnings (loss) before income taxes
Property and Casualty $ 293 $ (283)
Life 69 57
----------------------------------
Total earnings (loss) before income taxes $ 362 $ (226)
==================================
Typically, the underwriting performance of property and casualty 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 2003, the property and casualty combined ratio was
103.0%, compared with 123.6% for the same period in 2002. The significant
improvement in the 2003 combined ratio is primarily attributable to a decrease
in the loss ratio, which reflects both the continued hardening of pricing within
the overall property and casualty insurance industry and lower levels of
prior-year adverse reserve development in 2003 compared with 2002. To a much
lesser extent, the improvement in the combined ratio is also attributable to a
decrease in the underwriting expense ratio. Earnings before income taxes from
property and casualty operations increased $576 million to $293 million for the
first six months of 2003, principally as a result of the lower combined ratio
discussed above and, to a lesser extent, an increase in investment-related
income.
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 2003, the life
operations generated revenues and earnings before income taxes of $1,711 million
and $69 million, respectively, compared with $1,244 million and $57 million,
respectively, for the same period in 2002. The increase in revenues is
principally related to the AUL acquisition and the impact of changes in foreign
exchange rates applicable to the first six months of 2003 versus the first six
months of 2002. The increase in earnings is also primarily attributable to the
AUL acquisition.
Operating Results
Net premiums written and net premiums earned increased $1,103 million or 29% and
$1,300 million or 35%, respectively. This significant increase in premiums can
be primarily attributed to the combination of: (1) Current Year
Factors--including the continued favorable pricing environment within the
overall property and casualty industry, additional premiums resulting from the
AUL acquisition completed in the third quarter of 2002, the impact of changes in
foreign exchange rates and volume growth in certain business sectors, partially
offset by decreases in other business sectors resulting from the adherence to
stricter underwriting discipline and intentional actions taken to exit certain
product lines, policies, contracts and specific customers for which, given the
risk, acceptable future levels of profit did not seem achievable; and (2) Prior
Year Factors--increased levels of ceded premiums associated with adverse
development related to prior year loss events.
Net investment income increased $40 million or 7% in 2003, principally as a
result of higher levels of invested assets. The increase in invested assets
includes the impact of a $1.8 billion capital contribution received in the
fourth quarter of 2002 and the AUL acquisition that occurred in the third
quarter of 2002.
Net realized gains on investments increased $25 million or 43% in 2003,
primarily attributable to increased opportunities for gains within the overall
investment portfolio driven by the decreasing interest rate environment,
somewhat offset by a higher level of other-than-temporary impairment charges
recognized in 2003 as compared to 2002.
Other revenues increased $10 million or 13% in 2003, primarily attributable to
certain non-recurring revenues generated in 2003.
Claims, claim expenses and policy benefits increased $623 million or 19% in
2003, principally resulting from the AUL acquisition discussed above, the impact
of changes in foreign exchange rates, and volume growth in certain business
sectors partially offset by lesser levels of adverse reserve development related
to prior year loss events.
As we reported previously, during the fourth quarter of 2002, we reevaluated the
recorded reserves for certain liability-related exposures in response to
continued escalated levels of reported claims activity. Following this
evaluation, we concluded that the accumulated data supported an increased
estimate of the ultimate losses in several lines of business underwritten in
1997 through 2001. Following these adjustments, we continued to monitor reported
claims activity for these lines of business. For certain lines of business, the
to-date reported claims activity for prior accident years has continued to
develop at a level exceeding even our revised expectations. In addition, we
incorporated a more pessimistic view of the potential for individually
significant losses on certain Product Liability and Directors & Officers
exposures. As a result, we made further upward adjustments of approximately $350
million to reflect increased estimates of ultimate losses in 2003. We will
continue to monitor reported claims activity for all lines of business in the
future and take necessary reserve actions--either to increase or decrease
reserves--as our estimates mature.
Insurance acquisition costs increased $103 million or 11% in 2003, primarily
attributable to the increase in net earned premiums discussed above.
Other operating costs and expenses increased $61 million or 17% in 2003,
primarily resulting from: (1) an increase in average employee salaries and
related benefits costs; (2) the AUL acquisition discussed above; and (3) the
impact of changes in foreign exchange rates.
Provision for income taxes was $105 million for the first six months of 2003 (an
effective tax rate of 29.0%), compared with a benefit of $94 million for the
first six months of 2002 (an effective tax rate of 41.6%). In a pre-tax income
year such as 2003, tax-exempt income reduces otherwise taxable income (resulting
in a lower effective tax rate), while 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).
Other Considerations
Investment portfolio
Our investment portfolio consists primarily of investment grade debt securities
and was $27.7 billion, including gross unrealized gains and losses of $1.3
billion and $146 million, respectively, at June 30, 2003, compared with $26.8
billion, including gross unrealized gains and losses of $558 million and $263
million, respectively, as of December 31, 2002. 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 June 30, 2003, approximately $65.0
million is at risk of being charged to earnings in the next 12 months.
Ratings action
During the quarter ended June 30, 2003, A.M. Best Company (A.M. Best) revised
its financial strength rating on Employers Reinsurance Corporation and its
affiliated domestic and international non-life and life reinsurance companies to
A (Excellent) from A+ (Superior). Concurrently, the ratings on our senior debt
securities were revised to "a-" from "a". We do not believe these actions will
materially affect our 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 because of changes in global economic, business, competitive market
and regulatory factors.
Item 4. Controls and Procedures
As required by Rule 13a-15(b), we, including the Chief Executive Officer and
Chief Financial Officer, conducted an evaluation as of the end of the period
covered by this report, of the effectiveness of the company's disclosure
controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the company's disclosure controls and procedures were effective as of the
end of the period covered by this report. As required by Rule 13a-15(d), we,
including the Chief Executive Officer and Chief Financial Officer, also
conducted an evaluation of the company's internal control over financial
reporting to determine whether any changes occurred during the quarter covered
by this report that have materially affected, or are reasonably likely to
materially affect, the company's internal control over financial reporting.
Based on that evaluation, there has been no such change during the quarter
covered by this report.
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 31. Certifications Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit 32. Certifications 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.
A current report on Form 8-K was filed on July 10, 2003, under Item 5, reporting
that A.M. Best revised its financial strength ratings for certain of the
Company's insurance subsidiaries.
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: August 1, 2003 By:
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William J. Steilen
Vice President and Controller
(Principal Accounting Officer)