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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 30, 2003
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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
(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 October 31, 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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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. Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002............................ 18
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
Third Quarter Ended Nine Months Ended
(Dollars in millions) September 30 September 30
---------------------------------- --------------------------------
2003 2002 2003 2002
---------------- --------------- --------------- ---------------
Revenues
Net premiums written $ 2,507 $ 2,273 $ 7,349 $ 6,012
================ ================ ============== ===============
Net premiums earned $ 2,477 $ 2,116 $ 7,487 $ 5,826
Net investment income 311 272 894 815
Net realized gains on investments 60 150 143 208
Other revenues 50 30 136 106
---------------- ----------------- ------------- ---------------
Total revenues 2,898 2,568 8,660 6,955
---------------- ----------------- ------------- ---------------
Costs and Expenses
Claims, claim expenses and policy benefits 1,922 2,125 5,851 5,432
Insurance acquisition costs 534 453 1,536 1,352
Other operating costs and expenses 216 181 640 544
Minority interest in net earnings of consolidated
subsidiaries 22 22 67 66
---------------- ----------------- ------------ ---------------
Total costs and expenses 2,694 2,781 8,094 7,394
---------------- ----------------- ------------ ---------------
Earnings (loss)
Earnings (loss) before income taxes 204 (213) 566 (439)
Income tax (expense) benefit (54) 90 (159) 184
---------------- ---------------- ------------ ---------------
Net earnings (loss) 150 (123) 407 (255)
Dividends on preferred stock (2) (2) (6) (6)
Retained earnings at beginning of period 3,515 4,866 3,262 5,002
---------------- ---------------- ------------ ---------------
Retained earnings at end of period $ 3,663 $ 4,741 $ 3,663 $ 4,741
================ ================ ============ ===============
See Notes to Condensed, Consolidated Financial Statements.
1
Item 1. Financial Statements (Continued).
GE GLOBAL INSURANCE HOLDING CORPORATION
AND CONSOLIDATED SUBSIDIARIES
Condensed, Consolidated Statement of Financial Position
September 30, December 31,
(Dollars in millions) 2003 2002
---------------- ---------------
(Unaudited)
Assets
Investments:
Fixed maturity securities, at fair value $ 26,245 $ 22,200
Equity securities, at fair value 509 627
Other invested assets 409 3,995
---------------- ---------------
Total investments 27,163 26,822
Cash 2,073 911
Premiums receivable 4,428 4,447
Other receivables 1,594 1,984
Reinsurance recoverables 10,184 10,901
Deferred insurance acquisition costs 1,865 1,882
Other assets 4,662 4,839
---------------- ---------------
Total assets $ 51,969 $ 51,786
================ ===============
Liabilities and equity
Claims and claim expenses $ 24,778 $ 25,157
Accumulated contract values 2,682 2,826
Future policy benefits for life and health contracts 4,204 3,852
Unearned premiums 3,230 3,231
Other reinsurance balances 4,356 4,325
Other liabilities 2,594 2,839
Long-term borrowings 1,656 1,656
--------------- ---------------
Total liabilities 43,500 43,886
--------------- ---------------
Minority interest in equity of consolidated subsidiaries 1,226 1,236
--------------- ---------------
Accumulated non-owner changes in equity:
Accumulated unrealized gains on investments securities-net 288 149
Accumulated foreign currency translation adjustments (89) (138)
Derivatives qualifying as hedges 1 11
--------------- ---------------
Total accumulated non-owner changes in equity 200 22
Preferred stock 150 150
Common stock 8 8
Paid-in capital 3,222 3,222
Retained earnings 3,663 3,262
---------------- ---------------
Total stockholder's equity 7,243 6,664
---------------- ---------------
Total liabilities and equity $ 51,969 $ 51,786
================ ===============
See Notes to Condensed, Consolidated Financial Statements.
2
Item 1. Financial Statements (Continued).
GE GLOBAL INSURANCE HOLDING CORPORATION
AND CONSOLIDATED SUBSIDIARIES
Condensed, Consolidated Statement of Cash Flows
Unaudited
(Dollars in millions) Nine Months Ended
September 30
----------------------------------
2003 2002
----------------- ---------------
Cash flows from operating activities
Net earnings (loss) $ 407 $ (255)
Adjustments to reconcile net earnings (loss) to cash
from operating activities:
Claims and claim expenses (379) 780
Reinsurance recoverables 717 597
Other operating activities 194 (313)
---------------- ----------------
Cash from operating activities 939 809
---------------- ----------------
Cash flows from investing activities
Fixed maturity securities available-for-sale:
Purchases (16,207) (10,408)
Sales 10,092 10,256
Maturities 2,760 1,943
Equity securities:
Purchases (405) (459)
Sales 538 442
Net sales (purchases) of short-term investments 3,539 (2,056)
Net cash paid for acquisitions and in-force reinsurance
transactions - (25)
Other investing activities (415) 402
---------------- ---------------
Cash from (used for) investing activities (98) 95
---------------- ---------------
Cash flows from financing activities
Change in contract deposits (51) (20)
Net contract accumulation payments (144) (135)
Net procedes under related party credit facility 642 259
Principal payments on short-term borrowings (80) (156)
Proceeds from issuance of subsidiary preferred stock - 70
Dividends paid (6) (6)
---------------- ---------------
Cash from financing activities 361 12
---------------- ---------------
Effect of currency exchange rate changes on cash (40) (160)
---------------- ---------------
Increase in cash 1,162 756
Cash at beginning of period 911 470
---------------- ---------------
Cash at end of period $ 2,073 $ 1,226
================ ===============
See Notes to Condensed, Consolidated Financial Statements.
3
Item 1. Financial Statements (Continued).
GE GLOBAL INSURANCE HOLDING CORPORATION
AND CONSOLIDATED SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
(Unaudited)
1. Principles of Consolidation - 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. Interim Reporting Considerations - 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. Accounting Changes - We adopted Financial Accounting Standards Board (FASB)
Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities"
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 continue
to evaluate 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
4. Comprehensive Income - Changes in stockholder's equity that did not result
directly from transactions with the share owner were as follows:
Third Quarter Ended
(Dollars in millions) September 30
-----------------------------------
2003 2002
----------------- -----------------
Net earnings (loss) $ 150 $ (123)
Net unrealized gains (losses) on investment securities (353) 225
Foreign currency translation adjustments (106) (59)
Derivatives qualifying as hedges 55 7
----------------- -----------------
Total $ (254) $ 50
================= =================
Nine Months Ended
(Dollars in millions) September 30
-----------------------------------
2003 2002
----------------- -----------------
Net earnings (loss) $ 407 $ (255)
Net unrealized gains on investment securities 139 302
Foreign currency translation adjustments 49 66
Derivatives qualifying as hedges (10) 20
----------------- -----------------
Total $ 585 $ 133
================= =================
5. Operating Segments - Our operating segment activity is summarized as
follows:
Third Quarter Ended
(Dollars in millions) September 30
-----------------------------------
2003 2002
----------------- -----------------
Revenues
Property and Casualty $ 2,010 $ 1,774
Life 888 794
----------------- -----------------
Total revenues $ 2,898 $ 2,568
================= =================
Earnings (loss) before income taxes
Property and Casualty $ 183 $ (237)
Life 21 24
----------------- -----------------
Total earnings (loss) before income taxes $ 204 $ (213)
================= =================
Nine Months Ended
(Dollars in millions) September 30
-----------------------------------
2003 2002
----------------- -----------------
Revenues
Property and Casualty $ 6,061 $ 4,917
Life 2,599 2,038
----------------- -----------------
Total revenues $ 8,660 $ 6,955
================= =================
Earnings (loss) before income taxes
Property and Casualty $ 476 $ (520)
Life 90 81
----------------- -----------------
Total earnings (loss) before income taxes $ 566 $ (439)
================= =================
5
6. Liability for Unpaid Claims and Claim Expenses - 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. Contingencies - 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 September 30, 2003, recorded reserves
were approximately $75 million less than reported claim amounts.
In connection with the events of September 11, 2001, we accrued a
reinsurance recoverable of approximately $70 million under an arrangement
with two retrocessionaires. During the third quarter of 2003, the
retrocessionaires denied coverage on the grounds that they interpreted the
underlying contracts to only provide coverage for natural events. We
believe that there is compelling evidence supporting our position that such
contracts also extended to certain unnatural events and have not adjusted
the recorded reinsurance recoverable. We are currently considering whether
to pursue binding arbitration or litigation to resolve this matter.
8. Subsequent Events - On October 24, 2003, we reached agreement to sell 95%
of the common stock of ERC Life Reinsurance Corporation (ERC Life), one of
our Life segment legal entities. Although the transaction is subject to
regulatory approval, we expect to finalize the disposition prior to
year-end. As of the anticipated closing date, total assets of ERC Life are
expected to be approximately $1.4 billion.
In order to facilitate the disposition of ERC Life, on October 23, 2003, we
distributed 100% of the common stock of ERC Life's wholly-owned subsidiary,
Employers Re Corporation (UK) Limited to Employers Reinsurance Corporation.
We do not believe these transactions, as a whole, will have a material
impact on 2003 net income.
6
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.
THIRD QUARTER OF 2003 COMPARED WITH THIRD QUARTER OF 2002
Overview
Net earnings for the third quarter of 2003 were $150 million, which compares to
a net loss of $123 million for the third quarter of 2002. The increase in net
earnings principally resulted from significant improvement in current year
underwriting results driven largely by the continued favorable pricing
environment within the overall property and casualty industry and lower levels
of adverse development related to prior year loss events. To a lesser extent,
the improvement in profitability was also attributable to an increase in net
investment income due principally to higher levels of invested assests.
Partially offsetting these positive factors was a decrease in net realized gains
on investments and on an increase in general operating costs and expenses.
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 third
quarter of 2003 as compared with the third 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:
Third Quarter Ended
(Dollars in millions) September 30
----------------------------------
2003 2002
--------------- -----------------
Revenues
Property and Casualty $ 2,010 $1,774
Life 888 794
--------------- -----------------
Total revenues $ 2,898 $2,568
=============== =================
Earnings (loss) before income taxes
Property and Casualty $ 183 $ (237)
Life 21 24
--------------- -----------------
Total earnings (loss) before income taxes $ 204 $ (213)
=============== =================
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 third quarter of 2003, the property and casualty combined ratio was
103.4%, compared with 138.5% for the same period in 2002. The significant
improvement in the 2003 third 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.
Earnings before income taxes from property and casualty operations increased
$420 million to $183 million in the third quarter of 2003, principally as a
result of the lower combined ratio discussed above and an increase in net
investment income, partially offset by a decrease in net realized investment
gains.
7
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 30, 2003,
the life operations generated revenues and earnings before income taxes of $888
million and $21 million, respectively, compared with $794 million and $24
million, respectively, for the same period in 2002. The increase in revenues is
principally related to volume growth in certain accident and health premiums and
the impact of changes in foreign exchange rates applicable to the third quarter
of 2003 versus the third quarter of 2002. Earnings decreased marginally due to a
decrease in net realized gains on investments and a slight increase in general
operating costs.
Operating Results
Net premiums written and net premiums earned increased $234 million or 10% and
$361 million or 17%, respectively. This 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, 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 $39 million or 14% in 2003, principally as a
result of higher levels of invested assets, somewhat offset by a slight decrease
in overall yield. The increase in invested assets includes the impact of a $1.8
billion capital contribution received in the fourth quarter of 2002.
Net realized gains on investments decreased $90 million in 2003, primarily
attributable to decreased opportunities for gains within the overall investment
portfolio.
Other revenues increased $20 million in 2003, primarily attributable to improved
operating results related to certain equity-method investments and higher levels
of fee income.
Claims, claim expenses and policy benefits decreased $203 million or 10% in
2003, principally related to a lower overall loss to premium ratio resulting
from the continued favorable pricing environment and lower levels of adverse
reserve development related to prior year loss events, partially offset by the
impact of changes in foreign exchange rates.
As we reported previously, during the fourth quarter of 2002, we reevaluated the
recorded claim 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 our revised expectations. As a result, we made
further upward adjustments of approximately $190 million to reflect increased
estimates of ultimate losses in the third 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 $81 million or 18% in 2003, primarily
attributable to the increase in net premiums earned discussed above.
8
Other operating costs and expenses increased $35 million or 19% in 2003,
primarily resulting from an increase in both the number of employees and average
salaries and related benefits costs coupled with the impact of changes in
foreign currency exchange rates.
Provision for income taxes was $54 million for the third quarter of 2003 (an
effective tax rate of 26.5%), compared with a benefit of $90 million for the
third quarter of 2002 (an effective tax rate of 42.3%). 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 NINE MONTHS OF 2003 COMPARED WITH FIRST NINE MONTHS OF 2002
Overview
Net earnings for the first nine months of 2003 were $407 million, which compares
to a net loss of $255 million for the first nine months of 2002. The increase in
net earnings principally resulted from significant improvement in current year
underwriting results driven largely by the continued favorable pricing
environment within the overall property and casualty industry and lower levels
of adverse development related to loss events. To a lesser extent, the
improvement in profitability was also attibutable to an increase in net
investment income, due principally to higher levels of invested assets.
Partially offestting these positive factors was a decrease in net realized gains
on investments and an increase in general operating costs and expenses.
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
nine months of 2003 as compared with the first nine 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) Nine Months Ended
September 30
----------------------------------
2003 2002
---------------- ----------------
Revenues
Property and Casualty $ 6,061 $ 4,917
Life 2,599 2,038
---------------- ----------------
Total revenues $ 8,660 $ 6,955
================ ================
Earnings (loss) before income taxes
Property and Casualty $ 476 $ (520)
Life 90 81
---------------- ----------------
Total earnings (loss) before income taxes $ 566 $ (439)
================ ================
9
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 nine months of 2003, the property and casualty combined ratio was
103.1%, compared with 128.0% 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. Earnings
before income taxes from property and casualty operations increased $996 million
to $476 million for the first nine months of 2003, principally as a result of
the lower combined ratio discussed above and an increase in net investment
income, partially offset by a decrease 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 first nine months of 2003, the life
reinsurance operations generated revenues and earnings before income taxes of
$2,599 million and $90 million, respectively, compared with $2,038 million and
$81 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"), core volume
growth in certain accident and health premiums and the impact of changes in
foreign currency exchange rates applicable to the first nine months of 2003
versus the first nine months of 2002. The increase in earnings is also primarily
attributable to these factors, except that the revenue growth resulting from
changes in foreign currency exchange rates was largely negated by a
corresponding increase in associated costs and expenses.
Operating Results
Net premiums written and net premiums earned increased $1,337 million or 22% and
$1,661 million or 29%, respectively. This 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 currency 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 $79 million or 10% in 2003, principally as a
result of higher levels of invested assets, somewhat offset by a slight decrease
in overall yield. 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 decreased $65 million or 31% in 2003,
primarily attributable to decreased opportunities for gains within the overall
investment portfolio and a higher level of other-than-temporary impairment
charges recognized in 2003 as compared to 2002.
Other revenues increased $30 million or 28% in 2003, primarily attributable to
improved operating results related to certain equity-method investments and
higher levels of fee income.
Claims, claim expenses and policy benefits increased $419 million or 8% in 2003,
principally resulting from the AUL acquisition discussed above, the impact of
changes in foreign currency exchange rates, and volume growth in certain
business sectors, partially offset by lower levels of adverse reserve
development related to prior year loss events.
10
As we reported previously, during the fourth quarter of 2002, we reevaluated the
recorded claim 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 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 in the second quarter of this year. As a result, we made further
upward adjustments of approximately $540 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 $184 million or 14% in 2003, primarily
attributable to the increase in net premiums earned discussed above.
Other operating costs and expenses increased $96 million or 18% in 2003,
primarily resulting from: (1) an increase in both the number of employees and
average salaries and related benefits costs; (2) the AUL acquisition discussed
above; and (3) the impact of changes in foreign currency exchange rates.
Provision for income taxes was $159 million for the first nine months of 2003
(an effective tax rate of 28.1%), compared with a benefit of $184 million for
the first nine months of 2002 (an effective tax rate of 41.9%). 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 $27.2 billion, including gross unrealized gains and losses of $797
million and $257 million, respectively, at September 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 September 30, 2003, approximately
$55.0 million is at risk of being charged to earnings in the next 12 months.
Ratings action
During the quarter ended September 30, 2003, Standard & Poor's Ratings Services
revised its rating on our senior debt securities to "A-" from "A". Concurrently,
the financial strength rating and counterparty credit ratings on Employers
Reinsurance Corp. (and affiliated non-life insurance/reinsurance entities),
Employers Reassurance Corp. and ERC Life Reinsurance Corp. were revised to "A+"
from "AA-". We do not believe these actions will materially affect our liquidity
or capital resources or the ability to write future business.
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Forward Looking Statements
This document includes certain "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, but are not limited to our plans, objectives, expectations
and intentions and other statements contained in this report that are not
historical facts as well as statements identified by words such as "expects",
"anticipates", "intends", "plans", "believes", "seeks", "estimates" or words of
similar meaning. These statements are based on our current beliefs or
expectations and are inherently subject to significant uncertainties and changes
in circumstances, many of which are beyond our control. Actual results may
differ materially from these expectations due to changes in global political,
economic, business, competitive, market and regulatory factors.
Item 4. Controls and Procedures
As of September 30, 2003, under direction of our Chief Executive Officer and
Chief Financial Officer, we evaluated the effectiveness of our disclosure
controls and procedures and internal controls over financial reporting and
concluded that (i) our disclosure controls and procedures were effective as of
September 30, 2003, and (ii) no changes occurred during the quarter ended
September 30, 2003, that have materially affected, or are reasonably likely to
materially affect, such internal controls.
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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 31. Certifications Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit 32. 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.
A current report on Form 8-K was filed on September 3, 2003, under Item 5,
reporting that Standard & Poor's Ratings Services revised its ratings for the
Company and certain of its insurance subsidiaries.
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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
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(Registrant)
Date: October 31, 2003 By: /s/ William J. Steilen
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William J. Steilen
Vice President and Controller
(Principal Accounting Officer)
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