Item 1. Business.
GE Global Insurance Holding Corporation ("GE Global Insurance" and, together with its subsidiaries, "the Company"), through its direct and indirect subsidiaries, is principally engaged in the reinsurance business in the United States and throughout the world. All outstanding common stock of GE Global Insurance is owned by General Electric Capital Services, Inc. ("GE Capital Services"), which in turn is wholly-owned by General Electric Company ("GE Company").
The principal executive offices of GE Global Insurance are located at 5200 Metcalf, Overland Park, Kansas 66201 (Telephone number (913) 676-5200).
Overview of the Reinsurance Industry
Reinsurance is a form of insurance in which a reinsurer indemnifies a primary insurer against part or all of the liability assumed by the primary insurer under one or more insurance policies. Reinsurance may provide a primary insurer with several major benefits: a reduction in net liability of individual risks, protection against catastrophic losses, reduction of financial leverage and stabilization of operating results. Reinsurance may also provide a primary insurer the ability to increase its underwriting capacity by allowing the primary insurer to accept larger risks and to more rapidly expand its book of business.
The global reinsurance industry continues to be impacted by industry consolidation, excess market capacity and primary insurers seeking alternative forms of risk transfer such as insurance captives, structured securities and derivative products. Global reinsurers are offering ways to meet the demands of this changing global market by expanding their markets, entering into new reinsurance niches, offering new reinsurance products and spreading their risks geographically. This changing reinsurance environment may affect the industry's profitability which has historically been influenced by the insurance industry's underwriting cycle, changes in interest rates and catastrophic events.
General
GE Global Insurance is one of the largest reinsurance groups in the world, with subsidiaries providing risk management solutions for well over a century. The Company writes substantially all types of property and casualty, healthcare and life reinsurance and some lines of primary health, property and casualty and excess workers' compensation insurance.
The Company conducts business and services its accounts through a network of local offices located in cities throughout the world. As of December 31, 1999, the Company had 19 offices in the North American region, 12 offices in the European region, 10 offices in the Asia/Pacific region and 4 offices in the Latin American region.
As one of the largest direct writers of reinsurance in the world, the Company works directly with its clients which enhances the Company's ability to evaluate its clients and their respective risks and allows the Company to be more responsive to the individual needs of its customers. The Company utilizes its network of local offices throughout the world to service the particular needs of its reinsurance clients. This system enables the Company to provide a wider range of services targeted at the needs of a particular market. To enhance its responsiveness to customer needs in the property and casualty segment, the Company operates in a decentralized environment with respect to underwriting decisions and customer service.
The Company also competes in the reinsurance broker market throughout the world. During 1998 and in early 1999, the Company significantly expanded its presence in the reinsurance broker market by acquiring Kemper Reinsurance Company (subsequently renamed GE Reinsurance Corporation - "GE Re") and Eagle Star Reinsurance Company Limited ("Eagle Star Re") (See Note 3 to the consolidated financial statements). The acquisitions of GE Re and Eagle Star Re significantly enhance the Company's distribution channel in the worldwide reinsurance broker market and further enables the Company to respond to the growing risk management needs of a wider and more diverse group of customers. The acquisitions of GE Re and Eagle Star Re position the Company as one of the largest reinsurance broker writers in the world.
The Company manages and diversifies its risk through the careful underwriting of risks, active claims management and the purchase of retrocessional coverage. Retrocessional coverage represents a form of secondary reinsurance where a reinsurer seeks reinsurance coverage on a specified portion of assumed risks. The Company maintains strict underwriting controls whereby individual underwriters are assigned maximum levels of underwriting authority based on specified lines of business. The assumption of risks greater than the specified maximum amount requires approvals of designated individuals. Adherence to these underwriting guidelines is monitored though pre-renewal account reviews, periodic underwriting audits and computer edit controls. In addition to transactional controls, the Company employs portfolio monitoring of key risks for all products and controls new product introductions through the use of required management reviews ("tollgates") to approve such new products and related underwriting guidelines.
The Company's business strategy is to continue to increase revenues by concentrating on select profitable customer segments and delivering comprehensive risk transfer and risk management solutions. The Company does not intend, however, to increase premium income at the expense of its underwriting results.
On March 4, 1999, the Company completed the acquisition of Eagle Star Re, a leading London Market non-life reinsurance company principally doing business through intermediaries. This acquisition significantly enhanced the Company's worldwide reinsurance broker distribution channel. The cash consideration of approximately $346 million was provided through existing funds.
During 1998, the Company, either directly or through its affiliates, acquired three major property and casualty insurance/reinsurance businesses which strengthened its global presence in the healthcare product lines, the broker-serviced markets and the Fortune 1000 commercial property markets.
In the fourth quarter of 1998, the Company completed the acquisitions of Medical Protective Corporation ("Medical Protective") and GE Re. Medical Protective is the oldest medical professional liability insurer of physicians and dentists in the United States. The cash consideration of approximately $628 million was financed by GE Capital Corporation via an interim loan agreement. GE Re is a property and casualty reinsurance company principally doing business through intermediaries. The cash consideration of approximately $468 million was financed initially in 1998 by utilizing existing credit facilities and subsequently refinanced in 1999 through additional long-term borrowings.
On January 6, 1998, the Company purchased the assets and assumed the renewal rights of Industrial Risk Insurers ("IRI"), a leader in providing highly protected risk property insurance, for a cash consideration of approximately $235 million. The business underwritten through IRI is managed by a joint venture formed between the Company and The Hartford Steam Boiler Inspection and Insurance Company ("HSB") as stipulated by a management agreement. IRI writes business utilizing the licensing authority of its members and the business underwritten is subsequently allocated to members in proportion to membership participation and further allocated in accordance with certain reinsurance agreements between HSB and the Company.
The Company, as a result of General Electric Capital Corporation's ("GE Capital Corporation" - a wholly-owned subsidiary of GE Capital Services) acquisition of Coregis Insurance Company ("Coregis"), acquired the renewal rights of certain domestic property and casualty business to continue expansion of its specialty insurance product line in 1997.
The Company has also established a Financial Market Products ("FMP") unit which will address the needs of customers seeking innovative risk transfer solutions, globally. FMP will partner with an affiliate, GECC Capital Markets Group, Inc., to deliver the full range of services desired by this growing customer segment. To date, other than start-up administrative expenses, the Company's results do not reflect any significant revenues or operating results from products and services provided by this FMP unit.
Also in recent years, the Company has expanded its global business through the extension of its local office network. The Company opened offices in Rio de Janeiro and Warsaw in 1999, Kuala Lumpar and Shanghai in 1998 and Buenos Aires and Montreal in 1997. Consistent with its global expansion strategy, the Company anticipates further expanding its presence in the Asia/Pacific and Latin American regions.
Unless otherwise indicated, all financial data has been prepared in accordance with U.S. generally accepted accounting principles ("GAAP").
Lines of Business
The Company's two business segments are (1) property and casualty insurance/reinsurance and (2) life reinsurance. The Company's principal product lines under the property and casualty segment are traditional property and casualty reinsurance, healthcare reinsurance and specialty insurance (generally primary property and casualty insurance) and its principal product lines under the life reinsurance segment are traditional life reinsurance and financial reinsurance. The Company also provides primary insurance products to hospitals, health maintenance organizations and medical professionals as part of its healthcare product line and to niche customers as part of its specialty insurance product line.
Unless otherwise indicated, the Company's domestic results include business written in the United States (including business written in the United States where the reinsured is outside the United States) and Canada, and the international results include all other business written by the Company. The geographic breakdown, based on net premiums written, of the Company's principal product lines is summarized as follows:
The following is a summary description of the Company's domestic and international business based on principal product lines:
Property and Casualty Insurance/Reinsurance Segment
Property and Casualty Reinsurance. The Company's largest product line, traditional property and casualty reinsurance, accounted for approximately 64% of the Company's worldwide net premiums written in 1999. The Company's premium volume in the property and casualty segment is derived principally from treaty agreements, which enable the Company to maintain lower operating costs because fewer personnel are required to administer treaty business than facultative business. Most of the Company's casualty business is written on an excess of loss basis because it better enables the Company to control its exposure on business that has a relatively longer claim settlement pattern (i.e., the "tail").
The Company's property business is written on both an excess of loss and a proportional basis. Generally, the Company is the lead reinsurer for any domestic program in which it participates, enabling it to negotiate the terms of the reinsurance. The Company also acts as the lead reinsurer on a portion of its international business.
The Company's international property and casualty business services worldwide markets, including most European countries and countries in the Middle East, Far East and Latin America. For the year ended December 31, 1999, approximately 50% of the Company's international net premiums written from property and casualty reinsurance was derived from property reinsurance, approximately 24% from casualty reinsurance, approximately 25% from aviation and marine reinsurance and approximately 1% from other lines of reinsurance. Based on 1999 net premiums written, approximately 51% of the Company's international property and casualty business was written on a direct basis, with the remainder written through brokers.
In recent years, insurance companies have directed more business to the better-capitalized, more highly-rated reinsurers, which has led to a consolidation in the reinsurance industry. In competing with a smaller number of global reinsurers, the Company has found that a number of its global customers are increasingly demanding that reinsurers provide a broader range of coverages. In response to this trend, the Company has expanded the property and casualty risks it reinsures beyond its more traditional property and casualty reinsurance business to include risks such as errors and omissions, directors and officers and non-standard auto liability. In addition to the expansion of lines of business, property and casualty reinsurance has aligned its marketing efforts with its core expertise in areas such as aviation, national accounts and global accounts. Management believes that the Company is well positioned to compete on a global basis in these markets.
The property and casualty reinsurance industry has experienced a significant increase in catastrophic exposure and loss during the last decade. Increased population density, particularly in regions susceptible to tropical storms or earthquakes, and the higher incidence and greater severity of catastrophes, has increased the losses incurred in many recent catastrophes. As a result of these developments, the Company has taken steps to limit its exposure by carefully monitoring and allocating its property and casualty exposure to specific geographic zones, both domestically and internationally.
Healthcare. As part of the Company's property and casualty business segment, the Company provides insurance and reinsurance for the healthcare industry, also targeting employers, public entities, manufacturers and others for certain product lines. Coverages include primary insurance and reinsurance for medical professional liability and insurance protecting primary insurers (including self-insurers) in the healthcare market (i.e., excess workers' compensation, stop loss insurance, directors and officers liability for non-profit firms and provider excess coverages).
The healthcare industry continues to change and evolve due to voluntary healthcare reform, expansion of managed healthcare initiatives, increased competition and the uncertainty related to the extent of government regulation. In addition, companies that historically specialized in one line of business have expanded their lines of business and are now writing multiple lines of business. The Company, to serve the growing needs of their clients, has developed new and innovative healthcare products and has expanded coverages to include various other lines of business.
The Company believes that it is well positioned to compete in the healthcare market because of its wide range of experience in providing healthcare liability coverage and excess protection for self-insured employers, leveraging its acquisition of Medical Protective and utilizing multiple products and disciplines to provide healthcare solutions.
Specialty Insurance. An additional component of the Company's domestic property and casualty business is its specialty insurance product line, which generally consists of commercial property and casualty policies written on a primary basis in niche markets. The Company's specialty business concentrates on providing commercial insurance products for target markets, usually professional associations and homogeneous groups. Specialty products include professional liability programs and niche programs in the general property and casualty area. This coverage provides insurance for errors and omissions (E&O) arising out of the professional activities of the insureds and commercial property and casualty coverages for niche programs.
Professional classes underwritten include lawyers, property and casualty insurance agents and brokers, life and health insurance agents and brokers, accountants and a few miscellaneous classes. The majority of this business provides coverage to lawyers and property and casualty and life insurance agents and brokers.
Competition for the classes of business underwritten within the Company's specialty insurance product line has recently increased as more companies have redirected their resources to the specialty niche business. In order to compete for this business, the Company has provided value-added services, including enhanced underwriting and automated processing services, to its wholesalers and managing general agents producing such business.
Life Reinsurance Segment
Life Reinsurance. The Company is engaged in the reinsurance of various life insurance products, including term, whole and universal life, annuities, group long-term health and health products and provides financial reinsurance to life insurers. Based on net premiums written, life reinsurance accounted for approximately 18% of the Company's worldwide business in 1999.
With respect to life reinsurance, the Company writes mostly on a direct basis with primary insurers. The Company's life reinsurance business consists principally of treaty business and is written generally on a pro-rata basis. The Company's domestic life reinsurance business is written in every state in the United States. The Company's international life reinsurance business services worldwide markets, including France, Germany, Greece, Israel, Italy, Mexico, Scandinavia, Singapore, Spain and the United Kingdom. For the year ended December 31, 1999, approximately 66% of the Company's international life reinsurance net premiums written were for traditional life reinsurance, with the balance for healthcare reinsurance.
The Company believes that increases in life expectancy, decreases in public funding for social programs in Europe and deregulation of the life reinsurance markets in Europe and Japan present increased opportunities for the Company's life reinsurance business line.
Financial Reinsurance. Financial reinsurance does not transfer significant underwriting risk to the reinsurer and is designed primarily to enhance the current statutory surplus of the ceding company while reducing future statutory earnings as amounts are repaid to the reinsurer. This financial transaction is effectively collateralized by anticipated future income streams from selected insurance policies. The Company writes financial reinsurance on a direct basis and through brokers and generally only for companies with credit ratings of not less than "A" at the inception of the reinsurance contract and that have a minimum capital and surplus of $15 million. The two principal categories of transactions are financial reinsurance and financial risk reinsurance. Financial reinsurance typically has a duration of three to five years. Financial risk reinsurance represents a longer term traditional risk sharing arrangement where reinsurance is provided on existing portfolios of in-force business. The Company's focus in the past year has been on expanding the financial risk reinsurance line.
Property and Casualty Reserves for Unpaid Claims and Claim Expenses
The Company's insurance/reinsurance subsidiaries maintain reserves to cover their estimated ultimate liability for unpaid claims and claim expenses with respect to reported and unreported claims incurred as of the end of each accounting period (net of estimated related salvage and subrogation claims). These reserves are estimates that involve actuarial and statistical projections of the expected cost of the ultimate settlement and administration of unpaid claims based on facts and circumstances then known, estimates of future trends in claims severity and other variable factors such as inflation and new concepts of liability. The inherent uncertainties of estimating claim reserves are exacerbated for reinsurers by the significant periods of time that often elapse between the occurrence of an insured claim, the reporting of the claim to the primary insurer and, ultimately, to the reinsurer, and the primary insurer's payment of that claim and subsequent indemnification by the reinsurer (i.e., the "tail"). As a consequence, actual claims and claim expenses paid may deviate, perhaps substantially, from estimates reflected in the insurance companies' reserves in their financial statements. Adjustments to previously reported reserves for net claims and claim expenses are considered changes in estimates for accounting purposes and are reflected in the financial statements in the period in which the adjustment occurs.
When a claim is reported to a ceding company, the ceding company's claims personnel establish a "case reserve" for the estimated amount of the ultimate payment. The estimate reflects the informed judgment of such personnel based on general insurance reserving practices and on the experience and knowledge of such personnel regarding the nature and value of the specific type of claim. The Company, in turn, typically establishes a case reserve when it receives notice of a claim from the ceding company. Such reserves are based on an independent evaluation by the Company's claims departments, taking into consideration coverage, liability, severity of injury or damage, jurisdiction, an assessment of the ceding company's ability to evaluate and handle the claim and the amount of reserves recommended by the ceding company. Case reserves are adjusted periodically by the claims departments based on subsequent developments and audits of ceding companies.
In accordance with GAAP, the Company also maintains reserves for claims incurred but not reported ("IBNR"). Such reserves are established to provide for future case reserves and loss payments on incurred claims that have not yet been reported to an insurer or reinsurer. In calculating IBNR reserves, the Company uses generally accepted actuarial reserving techniques that take into account quantitative loss experience data, together with, where appropriate, qualitative factors. IBNR reserves are based on claim experience and are grouped both by class of business and by accident year. IBNR reserves are also adjusted to take into account certain additional factors, such as changes in the volume of business written, reinsurance contract terms and conditions, the mix of business, claims processing and inflation, that can be expected to affect the Company's liability for claims over time.
The potential for adverse development of the Company's reserves for its international business, as compared to that of its domestic business, is reduced because the international operations have a relatively low proportion of longer tail exposures.
Reserve Development. The development of the Company's net balance sheet property and casualty liabilities for unpaid claims and claim expenses for accident years 1989 through 1999 is summarized in the following table.
Net Liability. The first row of data shows the estimated net liability for unpaid claims and claim expenses at December 31 for each year from 1989 to 1999. The liability includes both case and IBNR reserves as of each year-end date, net of anticipated recoveries from other reinsurers. The rows immediately following the first row of data show cumulative paid data at December 31, as of one year, two years, ..., 10 years of subsequent payments.
Net Liability Re-estimated. The middle rows of data show the re-estimated amount for previously reported net liability based on experience as of the end of each subsequent calendar year's results. This estimate is changed as more information becomes known about the underlying claims for individual years. The cumulative redundancy (deficiency) shown in the table is the aggregate net change in estimates over the period of years subsequent to the calendar year reflected at the top of the respective columns. The amount in the line titled "Redundancy (Deficiency) at December 31, 1999," represents for each calendar year (the "Base Year") the aggregate change in (i) the Company's original estimate of net liability for unpaid claims and claim expenses for all years prior to and including the Base Year compared to (ii) the Company's re-estimate as of December 31, 1999, of net liability for unpaid claims and claim expenses for all years prior to and including the Base Year. A redundancy means that the original estimate was greater than the re-estimate and a deficiency means that the original estimate was less than the re-estimate.
(1) The results of the Company's international operations translated from functional currencies into U.S. dollars are included with the Company's U.S. underwriting operations in this table. The foreign currency translation impact on the cumulative redundancy (deficiency) arises from the difference between reserve developments translated at the exchange rates at the end of the year in which the liabilities were originally estimated and the exchange rates at the end of the year in which the liabilities were re-estimated.
Note: For a description of the purpose of the above table and the various table sections, please refer to the immediately preceding section entitled "Reserve Development."
A number of major trends that occurred within the insurance industry, the economy in general and several Company-specific factors have had a significant effect on the Company's liabilities for unpaid claims and claim expenses during the period covered by the preceding table. The claims and claim expense reserve deficiencies developed to December 31, 1999, as reflected in the preceding table, included reserve deficiencies of approximately $52 million in 1989 and $21 million in 1990 related to the general liability business on the books of Puritan Excess and Surplus Lines Insurance Company ("PESLIC") before the Company's acquisition of PESLIC in 1994. Prior to 1994, PESLIC was owned by GE Capital Corporation. Additionally, beginning in 1985, the Company strengthened the reserves for its excess liability and workers' compensation business for qualified self-insured employers. Claims and claim expense reserve development in the mid 1980's in these businesses reflected the inadequate premium rates which resulted from intense competition in the market during that period.
In the late 1980's, the reinsurance market generally reacted to the rate deficiencies and the resulting claims and claim expense reserve development by increasing rates and strengthening claims and claim expense reserves. This is reflected, with respect to the Company, in the significant improvements in the overall reserve adequacy in most of the recent years. The increase in reserve redundancies indicated for 1995 through 1997 is attributable to the favorable claim environment that existed during that period.
The indicated deficiency in the 1998 reserve position is attributable to higher than normal claim and claim expense development across a number of lines of business, including property coverages (which was most highly impacted by much higher than expected industry-wide losses with respect to Hurricane Georges), long-term disability and communications/media liability.
To a lesser degree, development of asbestos and environmental claims has affected the Company's results. Higher than anticipated levels of inflation in certain lines of reinsurance businesses has also had an adverse effect on liabilities for claims and claim expenses, particularly in excess of loss reinsurance. Partially offsetting the above factors is favorable development in recent years in medical professional liability and facultative casualty businesses, as well as an increase in net retentions by ceding companies.
The Company's reconciliation of its beginning and ending property and casualty reserves for unpaid claims and claim expenses on a GAAP basis is summarized as follows:
The liabilities for claims and claim expenses in the preceding table include long-term disability claims that are discounted at a 6% rate for all years presented. As a result of discounting the Company's long-term disability claims, total liabilities for claims and claim expenses have been reduced by an estimated 2% at December 31, 1999 and 1998. The amortization of discount is included in current operating results as part of the development of prior year liabilities.
Long-term disability discounts accrued as a percentage of claims, claim expenses and policy benefits were less than 1% for the years ended December 31, 1999 and 1998 and approximately 1% for the year ended December 31, 1997. Discounts amoritized as a percentage of claims, claim expenses and policy benefits were less than 1% for the years ended December 31, 1999 and 1998 and approximately 1% for the year ended December 31, 1997.
The Company's reconciliation of its property and casualty reserves for unpaid claims and claim expenses between statutory basis and GAAP basis is summarized as follows:
(1) Statutory basis reserve offsets and reserves reclassified to contract deposit assets or liabilities based on risk transfer provisions of SFAS No. 113.
Asbestos and Environmental Exposure. Included in the Company's liability for claims and claim expenses are liabilities for asbestos and environmental exposures. These claims and claim expenses are primarily related to policies written prior to 1986 as the policies written since 1986 have tended to explicitly exclude asbestos and environmental risks from coverage and most of the asbestos and environmental exposures arise from risks located in the United States. During 1997, the Company's international operations completed the initial process of identifying asbestos and environmental claims that had been reserved in prior periods but were initially aggregated and coded under other general lines of business rather than being specifically identified as asbestos and environmental claims.
The three-year development of claims and claim expense reserves associated with the Company's asbestos and environmental claims, including case and IBNR reserves, is summarized as follows:
(1) Prior to 1997, the Company's international operations were unable to identify and segregate recorded claim reserves that related to asbestos and environmental exposures as they were grouped with claim reserves in various lines of business such as general liability. Beginning in 1997, the Company began identifying and segregating the asbestos and environmental claims related to its international operations.
The amounts on the preceding page are management's best estimate, based on currently available information, of claims and claim expense payments and recoveries that are expected to develop in future years.
The Company monitors evolving case law and its effect on asbestos-related illness and toxic waste cleanup claims. Changing domestic and foreign government regulations and legislation, including continuing congressional consideration of federal Superfund law, newly reported claims, new contract interpretations and other factors could significantly affect future claim development. While the Company has recorded its best estimate of its liabilities for asbestos-related illness and toxic waste cleanup claims based on currently available information, it is possible that additional liabilities may arise in the future. It is not possible to estimate with any certainty the amount of additional net claims and claim expenses, or the range of net claims and claim expenses, if any, that is reasonably possible; therefore, there can be no assurance that future liabilities will not materially affect the Company's results of operations, financial position or cash flows.
Other Mass Tort Exposures. In addition to asbestos and environmental exposures, the Company also may have exposures to other mass torts involving primarily product liability issues such as tobacco products, gun manufacturers and silicone breast implants. The Company has, in the past, generally avoided the products liability reinsurance business, and, based on currently available information, future liabilities resulting from these matters are not expected to be material to the Company's results of operations, financial position or cash flows.
Life and Health Reserves for Future Policy Benefits and Accumulated Contract Values
Future policy benefits for traditional life and health reinsurance contracts represent the present value of such benefits based on mortality and other assumptions which were appropriate at the time the policies were issued or, in the event the policies were acquired by the Company from another insurer, at the date of acquisition. Interest rate assumptions used in calculating the present value generally ranged from 3.00% to 8.50% per annum at December 31, 1999. Payments received from sales of universal life and investment contracts are recognized by providing liabilities equal to the accumulated contract values of the policyholders' contracts. Interest rates credited to such universal life and investment contracts are generally guaranteed for a specified time period with renewal rates determined by the Company. Such crediting interest rates ranged from 3.00% to 9.00% per annum in 1999.
Regulatory Matters
GE Global Insurance and its domestic subsidiaries are subject to regulation under the insurance statutes, including insurance holding company statutes, of various states, including Missouri, Kansas, Illinois and Indiana, the domiciliary states of GE Global Insurance's principal domestic insurance company subsidiaries. The international subsidiaries of Employers Reinsurance Corporation (the "ERC Frankona Group") are subject to regulation under insurance statutes of various foreign countries.
General. The regulation and supervision to which GE Global Insurance's subsidiaries are subject relate primarily to licensing requirements of reinsurers, the standards of solvency that must be met and maintained, the amount of dividends that may be paid by such subsidiaries, the nature of and limitations on investments, restrictions on the size of risks that may be insured or reinsured, deposits of securities for the benefit of ceding companies, periodic examinations of the financial condition and affairs of reinsurers, the form and content of financial statements required to be filed with regulatory authorities and reserves for unearned premiums, losses and other purposes. In general, such regulation is for the protection of the ceding companies and, ultimately, their policyholders, rather than security holders of the regulated reinsurer. GE Global Insurance believes it is, and that its subsidiaries are, in material compliance with all applicable laws and regulations pertaining to their business and operations.
U.S. Insurance Regulation. U.S. domestic property and casualty and life insurers, including reinsurers, are subject to regulation by their states of domicile and by those states in which they are licensed. The rates and policy terms of primary insurance policies generally are closely regulated by state insurance departments. While reinsurance is not regulated as closely as primary insurance, some states do impose control over certain terms and conditions of reinsurance agreements by virtue of their authority to grant or deny credit for ceded reinsurance by its domiciled primary insurers. In addition, as a practical matter, the rates permitted to be charged by primary insurers can have an effect on the rates that are charged by reinsurers.
Risk-Based Capital. The National Association of Insurance Commissioners ("NAIC") has adopted minimum risk-based capital requirements to evaluate the adequacy of statutory capital and surplus in relation to an insurance company's risks. Regulatory compliance with risk-based capital requirements is defined by a ratio of a company's regulatory total adjusted capital to its authorized control level risk-based capital, as defined by the NAIC. At December 31, 1999, each of GE Global Insurance's domestic insurance company subsidiaries exceeded the minimum risk-based capital requirements.
Insurance Holding Company Regulations. The insurance holding company laws and regulations vary from state to state, but generally require an insurance holding company to register with its domiciliary state insurance regulatory agency and file certain reports that include current information concerning the capital structure, ownership, management, financial condition and general business operations of the insurance holding company and its subsidiary insurers that are licensed in the state. State insurance holding company laws and regulations, with respect to domestic insurers, also require prior notice or regulatory approval of changes in control of an insurer or its holding company and of material inter-affiliate transactions within the holding company structure.
Dividends by Subsidiaries. Because the operations of GE Global Insurance are conducted primarily through Employers Reinsurance Corporation ("ERC"), GE Re and Medical Protective, GE Global Insurance is dependent upon dividends, tax allocation and other payments primarily from ERC, GE Re and Medical Protective to service its debt and meet its other obligations. The payment of dividends and other payments to GE Global Insurance by ERC, GE Re and Medical Protective are subject to limitations imposed by the Missouri, Illinois and Indiana Insurance Codes, respectively. The payment of dividends to ERC by its principal life reinsurance subsidiaries, Employers Reassurance Corporation and ERC Life Reinsurance Corporation, are subject to limitations imposed by the Kansas and Missouri Insurance Codes, respectively. No prediction can be made as to whether any legislative proposals relating to dividend rules in Kansas, Missouri, Illinois or Indiana will be made, whether any such legislative proposal will be adopted in the future, or the effect, if any, any such proposal would have on the Company.
The maximum amount available for the payment of dividends during 2000 by ERC without prior regulatory approval is $294 million after December 29, 2000. Of this amount, $88 million is committed to pay dividends on the preferred stock issued by ERC to GE Capital Corporation. GE Re will not be able to make any dividend payments during 2000 without the prior approval of the Director of Insurance for the State of Illinois. The maximum amount available for the payment of dividends during 2000 by Medical Protective without prior regulatory approval is $66 million after December 17, 2000.
International Regulations. Based on 1999 net premiums written, approximately 44% of the Company's business is carried on outside of the United States. The degree of regulation and supervision in foreign jurisdictions varies from minimal in some to stringent in others. Licenses issued by foreign authorities to the ERC Frankona Group are subject to modification or revocation by such authorities, and such subsidiaries could be prevented from conducting business in certain of the jurisdictions where they currently operate. In the past, the ERC Frankona Group has been allowed to modify their operations to conform with new licensing requirements in all jurisdictions that are material to the Company's international operations.
In addition to licensing requirements, the ERC Frankona Group is regulated in various jurisdictions with respect to, among other things, currency, policy language and terms, methods of accounting and auditing, amount and type of security deposits, amount and type of reserves, amount and type of local investment and the share of profits to be returned to policyholders on participating policies. Regulations governing constitution of technical reserves (including equalization reserves) in some countries could hinder the remittance of profits and repatriation of assets and the payment of dividends; however, the Company does not believe that these regulations will have a material impact on the ERC Frankona Group's operations.
Item 2.
Item 2. Properties.
The Company conducts business from various facilities, most of which are leased. In addition, the Company owns its administrative offices in Overland Park, Kansas, Fort Wayne, Indiana, Copenhagen, Denmark and Munich, Germany.
Item 3.
Item 3. Legal Proceedings.
There are no pending legal proceedings beyond the ordinary course of business that in the opinion of the Company's management, based on information available at the date of this report, would have a material adverse effect on the Company's consolidated results of operation or financial condition.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
All of the common stock of GE Global Insurance, its sole class of common equity on the date hereof, is owned by GE Capital Services. Accordingly, there is no public trading market for the Company's common equity. GE Global Insurance paid dividends on its common stock on December 28, 1999 of $243 million.
Item 6.
Item 6. Selected Financial Data.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net premiums written increased $1,163 million or 19% in 1999, primarily attributable to inclusion of a full year of operating activity for the October 1998 acquisitions of GE Re and Medical Protective, the March 1999 acquisition of Eagle Star Re and core growth in various product lines. This increase was partially offset by continued competitive market conditions, an increase in contingently payable ceded premiums relating to recorded recoveries under aggregate excess retrocession programs and the impact of foreign currency translation in connection with the strengthening of the U.S. dollar compared to most major European currencies.
Net earnings decreased $59 million or 8% in 1999, including an increase in after-tax net realized gains on investments of $176 million. Excluding after-tax net realized gains on investments, net earnings decreased $235 million or 46% in 1999. This decrease was primarily attributable to increased property and casualty-related losses related to the frequency and severity of large loss events occurring in 1999 as compared to 1998 and, to a lesser extent, adverse development on prior year recorded losses. Large loss events are individual events that, after specific reinsurance recoveries and related premium adjustments, affect operations by $2 million or more, and include losses from earthquakes, aviation or railroad accidents, fire damage, and weather-related damage from hurricanes, tornadoes, wind and ice. Large loss events amounted to approximately $720 million in 1999, as compared to $230 million in 1998. A portion of the 1999 losses was recovered under aggregate excess retrocession coverages obtained in the ordinary course of business. This increase in property and casualty-related losses was partially offset by a $166 million increase in net investment income, primarily due to growth in the investment portfolio as a result of acquisitions, and a $134 million increase in other revenues, primarily due to acquisitions, equity-method investments and a gain on disposition of the Company's reinsurance brokerage subsidiary. An increase in underwriting and operating expenses associated with acquisitions and continued competitive market conditions also contributed to the deterioration in underwriting results. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net premiums written increased $1,439 million or 32% in 1998, primarily attributable to growth in various product lines, including new property and casualty business associated with the acquisition of the renewal rights of business from IRI and Coregis and the acquisitions of Medical Protective and GE Re. This increase was partially offset by three significant quota share life reinsurance contracts obtained in 1997 that did not recur in 1998, the impact of foreign currency translation in association with the strengthening of the U.S. dollar and continued competitive market conditions.
Net earnings increased $131 million or 20% in 1998, including an increase in after-tax net realized gains on investments of $75 million. Excluding after-tax net realized gains on investments, net earnings increased $56 million or 12% in 1998. This increase was primarily attributable to a $75 million increase in net investment income, primarily due to the acquisitions of Medical Protective and GE Re and continued growth in the investment portfolios, and a $47 million increase in other revenues, primarily due to an increase in revenues generated from investment-related life reinsurance products and financial reinsurance transactions. These increases were partially offset by a decrease in underwriting results reflecting increased underwriting and operating expenses associated with the acquisitions and continued competitive market conditions.
Domestic Property and Casualty Business
(1) Represents data for the applicable periods calculated in accordance with GAAP. Claims and claim expense ratio represents incurred claims and claim expenses as a percentage of net premiums earned. Underwriting expense ratio represents acquisition costs and other underwriting expenses (excluding amortization of intangibles, interest expense and minority interest in net earnings of consolidated subsidiaries) as a percentage of net premiums earned. The combined ratio represents the sum of the claims and claim expense ratio and the underwriting expense ratio.
Net premiums written increased $871 million or 35% in 1999, primarily attributable to the acquisitions of GE Re and Medical Protective and core growth in various product lines, partially offset by continued competitive market conditions and an increase in contingently payable ceded premiums relating to recorded recoveries under aggregate excess retrocession programs. Net premiums written increased $690 million or 38% in 1998, primarily attributable to growth in various product lines, including new property and casualty business associated with the acquisition of the renewal rights of business from IRI and Coregis and the acquisitions of GE Re and Medical Protective, partially offset by continued competitive market conditions.
Typically, the underwriting performance of property and casualty business is measured in terms of a combined ratio. The combined ratio is the sum of the loss ratio and the underwriting expense ratio, with a ratio lower than 100% indicating an underwriting profit and a ratio greater than 100% indicating an underwriting loss. Although the combined ratio has been greater than 100% for the three years presented above, the operating results of insurance/reinsurance companies include net investment income which generally yields an overall operating profit as reflected above in the caption "Earnings before income taxes, excluding net realized gains on investments."
The significant increase in the combined ratio in 1999 reflects an increase in the frequency and severity of large loss events occurring in 1999 and, to a lesser extent, adverse development on prior year recorded losses. The lower combined ratio in 1998 primarily reflects a general reduction in incurred losses caused by a decline in both the frequency and overall severity of claims, partially offset by an increase in hurricane and other weather-related catastrophe losses.
Net investment income increased $94 million or 22% in 1999, primarily attributable to inclusion of a full year of investment activity in 1999 for the 1998 GE Re and Medical Protective acquisitions. Net investment income increased $30 million or 8% in 1998, primarily attributable to the acquisitions of GE Re and Medical Protective and continued growth in the investment portfolios.
Earnings before income taxes, excluding net realized gains on investments, decreased $273 million in 1999, primarily attributable to the significant increase in the combined ratio, partially offset by the increase in net investment income discussed above. Earnings before income taxes, excluding net realized gains on investments, increased $13 million or 5% in 1998, primarily attributable to the decrease in the combined ratio and the increase in net investment income discussed above.
International Property and Casualty Business
(1) Represents data for the applicable periods calculated in accordance with GAAP. Claims and claim expense ratio represents incurred claims and claim expenses as a percentage of net premiums earned. Underwriting expense ratio represents acquisition costs and other underwriting expenses (excluding amortization of intangibles, interest expense and minority interest in net earnings of consolidated subsidiaries) as a percentage of net premiums earned. The combined ratio represents the sum of the claims and claim expense ratio and the underwriting expense ratio.
Net premiums written increased $124 million or 5% in 1999, primarily attributable to the acquisitions of Eagle Star Re and GE Re and core growth in various product lines, partially offset by continued competitive market conditions, an increase in contingently payable ceded premiums relating to recorded recoveries under aggregate excess retrocession programs and the impact of foreign currency translation in connection with the strengthening of the U.S. dollar compared to most major European currencies. Net premiums written increased $705 million or 42% in 1998, primarily attributable to growth in various product lines, including new property and casualty business associated with the acquisition of GE Re, partially offset by the impact of foreign currency translation in association with the strengthening of the U.S. dollar and continued competitive market conditions.
Consistent with experience in the domestic property and casualty business, the significant increase in the combined ratio in 1999 reflects an increase in the frequency and severity of large loss events occurring in 1999 and, to a lesser extent, adverse development on prior year recorded losses. The lower combined ratio in 1998 primarily reflects a general reduction in incurred losses caused by a decline in both the frequency and overall severity of claims, partially offset by an increase in aviation, hurricane and other weather-related catastrophe losses.
Net investment income increased $54 million or 19% in 1999, primarily attributable to the acquisitions of GE Re and Eagle Star Re. Net investment income decreased $6 million or 2% in 1998, primarily attributable to market conditions partially offset by the acquisition of GE Re.
Earnings before income taxes, excluding net realized gains on investments, decreased $115 million or 51% in 1999, primarily attributable to the significant increase in the combined ratio, partially offset by the increase in net investment income discussed above. Earnings before income taxes, excluding net realized gains on investments, increased $32 million or 17% in 1998, primarily attributable to the decrease in the combined ratio discussed above.
Life Reinsurance Business
Revenues, which consist of net premiums earned, net investment income, net realized gains on investments and other revenues, including fees generated from investment-related life reinsurance products and financial reinsurance transactions, increased $264 million or 17% in 1999. This increase was primarily attributable to growth in the domestic traditional life and credit life business, an increase in net realized gains on investments and fees generated from investment-related life reinsurance products and financial reinsurance transactions. Revenues increased $242 million or 19% in 1998, primarily attributable to growth in the traditional life and credit life business and fees generated from investment-related life reinsurance products and financial reinsurance transactions.
Earnings before income taxes increased $87 million or 55% in 1999, including a $48 million increase in net realized gains on investments. Excluding net realized gains on investments, earnings before income taxes increased $39 million or 32% in 1999, primarily attributable to an increase in net investment income, primarily due to continued growth in the investment portfolios, and fees generated from investment-related life reinsurance products and financial reinsurance transactions. Earnings before income taxes increased $5 million or 3% in 1998, including a $9 million decrease in net realized gains on investments. Excluding net realized gains on investments, earnings before income taxes increased $14 million or 13% in 1998, primarily attributable to an increase in net investment income, primarily due to continued growth in the investment portfolios, and fees generated from investment-related life reinsurance products and financial reinsurance transactions.
Liquidity and Capital Resources
GE Global Insurance's ability to meet its obligations, including debt service and operating expenses, and pay dividends to its shareholder depends primarily upon its receipt of sufficient funds from its insurance subsidiaries. The payment of dividends by ERC, GE Re and Medical Protective are subject to restrictions set forth in the insurance laws of Missouri, Illinois and Indiana, respectively, as well as other restrictions. Historically, the Company's liquidity requirements have been met by funds provided from operations and from the maturity and sales of investments.
Cash flows from operating activities, which primarily consists of premiums collected during the period in excess of payments made for claims and claim expenses, increased $578 million in 1999. This increase was primarily attributable to a decrease in claim settlements relative to the collection of premiums, somewhat offset by an increase in reinsurance recoverables under the Company's aggregate excess retrocession programs. Cash flows from operating activities decreased $586 million in 1998, primarily attributable to an increase in claim settlements relative to the collection of premiums, the timing of reinsurance settlements in association with catastrophe loss recoverables and an increase in underwriting and operating cash outlays associated with the acquisition of the renewal rights of business from IRI and Coregis and the acquisitions of Medical Protective and GE Re.
Cash flows used for investing activities activities decreased $374 million in 1999, primarily attributable to a reduction in cash used to fund acquisitions in 1999 due to the 1998 acquisitions of Medical Protective and GE Re, somewhat offset by a net increase in the purchases of investment securities. Cash flows used for investing activities decreased $423 million in 1998, primarily attributable to an increase in the maturity and sales of investments, partially offset by the acquisitions of Medical Protective and GE Re.
Cash flows from financing activities decreased $733 million in 1999, primarily attributable to the large amount of 1998 proceeds from short-term borrowings associated with the acquisitions of Medical Protective and GE Re and the change in contract deposit liabilities resulting from the 1998 commutation of a significant financial reinsurance treaty. The $395 million of proceeds from long-term borrowings in 1999 were used largely to repay short-term borrowings made in 1998 under the Company's revolving credit agreement with GE Capital Services. Cash flows from financing activities increased $182 million in 1998, primarily attributable to an increase in the proceeds from short-term borrowings associated with the acquisitions of Medical Protective and GE Re, partially
offset by the change in contract deposits associated with the commutation of a financial reinsurance treaty and an increase in dividends paid to affiliates.
As of December 31, 1999, the Company had a $625 million note payable to GE Capital Corporation (which carries an annual interest rate equal to GE Capital Corporation's cost of funds) under an interim loan agreement that was used to fund its acquisition of Medical Protective.
In addition, the Company has a one-year $600 million revolving credit agreement with GE Capital Services which enables the Company to borrow from GE Capital Services at an interest rate per annum equal to GE Capital Services' cost of funds for a one year period. The agreement is automatically extended for successive terms of one year each unless terminated in accordance with terms of the agreement.
Investments
General. The Company follows a conservative investment strategy that emphasizes maintaining a high quality investment portfolio. The primary goals include a growing stream of investment income and improving total investment returns. All investments are administered under guidelines established and approved by the Company's Board of Directors. The Company's guidelines specify credit quality and concentration limits with respect to both fixed maturity and equity securities.
In structuring its fixed maturity portfolios, the Company considers the duration of its assets and claims and claim expense reserves. Most fixed maturity portfolios have total return benchmarks against which relative performance is measured. The total return benchmarks include investment income and realized and unrealized gains and losses on investments. Equity funds are managed for total return and performance is measured against equity benchmarks.
On a worldwide basis, based on data as of December 31, 1999, the Company manages 68% of its investments internally. General Electric Investment Corporation manages an additional 16% of the Company's investments, and the balance is managed by unaffiliated outside managers.
The Company's investment results are summarized as follows:
The significant decrease in unrealized gains on investment securities before deferred income taxes in 1999 is primarily due to the concentration of fixed maturity debt securities held in the investment portfolio and the effects of a general rise in interest rates which occurred during 1999.
The Company continues to seek opportunities to enhance investment yield through a conservative, primarily fixed maturity investment strategy. Its current investment strategy does not contemplate material additional investments in non-investment grade debt securities, commercial real estate, commercial mortgages, equity securities or derivatives.
Domestic Investment Operations. The Company's domestic property and casualty investment portfolios are principally invested in tax-exempt state and municipal bonds, which the Company believes provide the most attractive after-tax yield. Some additional commitment was made to equity securities in recent years to enhance total investment returns in the longer term. The Company's domestic life investment portfolios are largely invested in taxable debt securities.
The Company's domestic fixed maturity portfolios categorized by rating based on market values are summarized as follows:
Ratings are as assigned by Moody's when available, or by S&P and converted to the generally comparable Moody's rating.
The Company's emphasis on investment quality is evidenced by the preceding table, which indicates that the bonds in the Company's investment portfolios are principally invested in either U.S. government and government agency securities or issues rated "A" or above. The Canadian securities held by the Company are similar in quality to the other securities held in its domestic property and casualty portfolio. Fixed maturity securities held by the Company in its domestic life portfolios include mortgage-backed and other asset-backed securities that are matched to the liability profile of specific life reinsurance contracts. Investments in mortgage-backed and other asset-backed securities are limited to lower risk tranches and do not include any interest only or principal only elements. Mortgage-backed and other asset-backed securities in the Company's investment portfolio were principally issued by Federal agencies. The majority of the balance of other securities held in both the domestic property and casualty and domestic life portfolios represent investments in non-rated debt securities. The Company does not contemplate significant additional investment in non-investment grade securities in either the property and casualty or life portfolios.
International Investment Operations. The investment portfolios of the Company's international operations (other than certain equity portfolios, which are managed by outside managers) are managed by the ERC Frankona Group's investment personnel based in Munich, within guidelines established by the management of the ERC Frankona Group and under the overall supervision and review of ERC's investment department.
The principal objective of the ERC Frankona Group's investment policy is to manage the investment portfolios on a total return basis taking into consideration the duration and currency structure of the ERC Frankona Group's reinsurance liabilities. The ERC Frankona Group's investment portfolios are geographically diversified with investments principally from the major European markets and the United States.
As of December 31, 1999, the fair value of the ERC Frankona Group's investments totaled $7,490 million, an increase of $234 million from December 31, 1998. The composition of ERC Frankona Group's investments is summarized as follows:
Most fixed maturity securities within the ERC Frankona Group's investment portfolios have a term of less than ten years. The fixed maturity securities consist of high credit quality securities, and almost all bonds are investment grade securities with a comparable average rating equal to or above a Moody's or S&P "AA" rating. Fixed maturity securities include German and Danish mortgage-backed securities, although these mortgage-backed securities have significantly less prepayment risk than typical U.S. mortgage-backed securities, as the German and Danish tax and social environments are not conducive to risks of prepayment of interest and principal. Equity securities and other invested assets were internationally diversified with principal holdings in Germany, the United Kingdom and the United States.
Interest Rate and Currency Risk Management
Interest rate and currency risk management is important in the normal operations of the Company. The following discussion presents an overview of such management.
The Company uses various financial instruments, such as currency and interest rate swaps, options and currency forwards, principally to manage interest rate and currency risks. The Company is exclusively an end-user of these instruments, which are commonly referred to as derivatives. The Company does not engage in trading, market-making or other speculative activities in the derivatives markets. Management requires that derivative financial instruments relate to specific asset, liability or equity transactions or to currency exposures. More detailed information about these financial instruments, as well as the strategies and policies for their use, is provided in Notes 2 and 14 to the consolidated financial statements.
The Company manages its exposure to currency principally by matching the underlying reinsurance liabilities with the corresponding assets. Any remaining significant net asset/liability positions in a given currency are hedged with forward currency purchase or sale contracts to further mitigate currency exposures. The Company also hedges its currency risk on a portion of its foreign subsidiary investments by utilizing currency swaps that have been designated to modify currency exposure associated with specific debt instruments.
On a limited basis, and as part of ongoing customer activities, the Company uses interest rate swaps and options to minimize its exposure to movements in interest rates and financial markets that have a direct correlation with certain of its reinsurance products.
Substantially all derivative transactions are executed by the Company's Treasury Department, which works closely with GE Capital Treasury personnel to maintain controls on all exposures, adhere to stringent counterparty credit standards and actively monitor marketplace exposures. Although the Company is exposed to credit risk that the counterparty may not be able to comply with the terms and conditions of the contracts, the Company uses only highly rated institutions as counterparties to the derivative transactions.
The U.S. Securities and Exchange Commission requires that registrants provide information about potential effects of changes in interest rates and currency exchange. Although the rules offer alternatives for presenting this information, none of the alternatives is without limitations. The following discussion is based on so-called "shock-tests," which model effects of interest rate and currency shifts on the reporting company. Shock tests, while probably the most meaningful analysis permitted, are constrained by several factors, including the necessity to conduct the analysis based on a single point in time and by their inability to include the complex market reactions that normally would arise from the market shifts modeled. While the following results of shock tests for interest rates and currencies may have some limited use as benchmarks, they should not be viewed as forecasts.
One means of assessing exposure to interest rate changes is a duration-based analysis that measures the potential loss in net earnings resulting from a hypothetical decrease in interest rates of 100 basis points across all maturities (sometimes referred to as a "parallel shift in the yield curve"). Under this model, it is estimated that, all else constant, such a decrease, including repricing effects in the securities portfolio, would reduce the 2000 net earnings of the Company based on year-end 1999 positions by an insignificant amount. Based on positions at year-end 1998, the pro forma effect on 1999 net earnings of such a decrease in interest rates was also estimated to be an insignificant amount.
One means of assessing exposure to changes in currency exchange rates is to model effects on reported earnings using a sensitivity analysis. Year-end 1999 consolidated currency exposures, including financial instruments designated and effective as hedges, were analyzed to identify Company assets and liabilities denominated in other than their relevant functional currency. Net unhedged exposures in each currency were then remeasured assuming a 10 percent decrease (20 percent for hyperinflationary economies) in currency exchange rates compared with the U.S. dollar. Under this model, it is estimated that, all else constant, such a decrease would have had an insignificant effect on the 2000 net earnings of the Company based on year-end 1999 positions. Based on conditions at year-end 1998, the effect on 1999 net earnings of such a decrease in exchange rates was also estimated to be an insignificant amount.
Cyclicality
The property and casualty reinsurance industry has been highly cyclical. Underwriting results of primary property and casualty insurance companies and prevailing general economic and reinsurance premium rates significantly influences demand for reinsurance. The cyclical trends in the industry and the industry's profitability can also be affected significantly by volatile and unpredictable developments, including changes in what the Company believes to be the propensity of courts to grant large awards, natural disasters and other catastrophic events (such as hurricanes, windstorms, earthquakes, floods and fires), fluctuations in interest rates and other changes in the investment environment which affect inflationary pressures that may tend to affect the size of losses experienced by ceding primary insurance companies.
New Accounting Standards
Two changes in accounting standards may affect future financial statements. The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133), effective for the Company on January 1, 2001. Upon adoption, all derivative instruments (including certain derivative instruments embedded in other contracts) will be recognized in balance sheets at fair value, and changes in such fair values must be recognized immediately in earnings unless specific hedging criteria are met. Changes in the values of derivatives meeting these hedging criteria will ultimately offset related earnings effects of the hedged items; effects of qualifying changes in fair value are to be recorded in equity pending recognition in earnings. Certain significant refinements and interpretations of Statement 133 are being deliberated by the FASB, and the effects on accounting for the Company's financial instruments will depend to some degree on the results of such deliberations. Management has not determined the total probable effects on its financial statements of adopting Statement 133, and does not believe that an estimate of such effects would be meaningful at this time.
The FASB has also proposed new accounting for business combinations that, among other things, would change the accounting for and display of goodwill and other intangibles recorded in business acquisitions for transactions after January 1, 2001. An important aspect of the proposal is that goodwill amortization would be displayed as a separate element in the Statement of Earnings. Management believes that this proposal represents a useful approach to understanding financial performance, but believes that the utility of this information would be materially enhanced if the proposed approach for goodwill were applied to all intangible assets acquired with a business.
Effects of Inflation
The Company's ultimate claims and claim expense costs on claims not yet settled is increased by the effects of inflation, and changes in the inflation rate therefore could become a significant factor in determining appropriate claims and claim expense reserves, as well as reinsurance premium rates. Generally, the Company's methods used to estimate claims and claim expense reserves and to calculate reinsurance premium rates take into account the anticipated effects of inflation in estimating the ultimate claims and claim expense costs. The Company uses both insurance industry data and government economic indices in estimating the effects of inflation on reinsurance premium rates and claims and claim expense reserves. However, until claims are ultimately settled, the full effect of inflation on the Company's results cannot be known.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information about potential effects of changes in interest rates and currency exchange on the Company is discussed on pages 19-20.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The Company's Consolidated Financial Statements and the Independent Auditors' Report thereon and the Supplementary Financial Statement Schedules listed on the accompanying Index to Financial Statements and Financial Statement Schedules are filed as part of this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Omitted
Item 11.
Item 11. Executive Compensation.
Omitted
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted
Item 13.
Item 13. Certain Relationships and Related Transactions.
Omitted
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements and Schedules.
The consolidated financial statements of the Company filed as part of this report are listed in the Index to Consolidated Financial Statements and Financial Statement Schedules (page 24).
(a) 2. Financial Statement Schedules.
The consolidated financial statement schedules of the Company filed as part of this report are listed in the Index to Consolidated Financial Statements and Financial Statement Schedules (page 24).
(a) 3. Listing of Exhibits.
3.1 A complete copy of the Articles of Incorporation of the Company, as last amended on August 30, 1995, and currently in effect. (Incorporated by reference to Exhibit 3.1 of the Company's Form 10-K for the year ended December 31, 1995.)
3.2 A complete copy of the By-laws of the Company, as last amended on February 26, 1995, and currently in effect. (Incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form 10, File No. 0-27394.)
10.1 First Whole Account Aggregate Excess of Loss Retrocession Agreement (E1), between Employers Reinsurance Corporation and National Indemnity Company, dated January 1, 1999 (portions redacted in accordance with application for confidentiality previously filed).
10.2 Second Whole Account Aggregate Excess of Loss Retrocession Agreement (E2), between Employers Reinsurance Corporation and Centre Insurance Company, dated January 1, 1999 (portions redacted in accordance with application for confidentiality previously filed).
10.3 Second Whole Account Aggregate Excess of Loss Retrocession Agreement (E2), between Employers Reinsurance Corporation and National Union Fire Insurance Company of Pittsburgh, PA, dated January 1, 1999 (portions redacted in accordance with application for confidentiality previously filed).
10.4 Second Whole Account Aggregate Excess of Loss Retrocession Agreement (E2), between Employers Reinsurance Corporation and Federal Insurance Company, dated January 1, 1999 (portions redacted in accordance with application for confidentiality previously filed).
12 Computation of ratio of earnings to fixed charges.
(b) Reports on Form 8-K.
None.
ITEM 14(a)
GE Global Insurance Holding Corporation and Subsidiaries
Index to Consolidated Financial Statements and Financial Statement Schedules
Page ----
Consolidated Financial Statements Independent Auditors' Report..............................................25 Consolidated Statement of Earnings........................................26 Consolidated Statement of Financial Position..............................27 Consolidated Statement of Stockholder's Equity............................29 Consolidated Statement of Cash Flows......................................30 Notes to Consolidated Financial Statements................................31
Financial Statement Schedules Schedule II - Condensed Financial Information of Registrant...............56 Schedule III - Supplementary Insurance Information........................60
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder GE Global Insurance Holding Corporation:
We have audited the accompanying consolidated statements of financial position of GE Global Insurance Holding Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of earnings, stockholder's equity and cash flows for each of the years in the three-year period ended December 31, 1999. Our audits also included the financial statement schedules listed in the Index at Item 14(a) as of December 31, 1999 and 1998 and for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GE Global Insurance Holding Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG LLP
Kansas City, Missouri January 21, 2000
See Notes to Consolidated Financial Statements.
(a) The sum of accumulated unrealized gains on investment securities and accumulated foreign currency translation adjustments constitutes "Accumulated nonowner changes other than earnings," as shown in the Consolidated Statement of Stockholder's Equity, and was $(55) million and $859 million at year-end 1999 and 1998, respectively.
See Notes to Consolidated Financial Statements.
(a) Presented net of taxes of $233 million, $(305) million and $(146) million in 1999, 1998 and 1997, respectively.
(b) Presented net of taxes of $17 million, $20 million and $17 million in 1999, 1998 and 1997, respectively.
(c) Presented net of taxes of $274 million and $164 million in 1999 and 1998, respectively. (Note: In addition to net realized gains on investment securities, the 1999 reclassification adjustment includes $48 million in pre-tax gains related to available-for-sale investment securities held by an investee accounted for under the equity method; these gains were included in other revenues in the accompanying consolidated statement of earnings.)
See Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
Principles of Consolidation
GE Global Insurance Holding Corporation ("GE Global Insurance") is a wholly-owned subsidiary of General Electric Capital Services, Inc. ("GE Capital Services"), which is a wholly-owned subsidiary of General Electric Company ("GE Company"). The accompanying consolidated financial statements of GE Global Insurance include the accounts and operations, after intercompany eliminations, of GE Global Insurance, Employers Reinsurance Corporation ("ERC"), GE Reinsurance Corporation ("GE Re" - formerly Kemper Reinsurance Company) and Medical Protective Corporation ("Medical Protective"). ERC and GE Re are reinsurance companies and Medical Protective is an insurance company, with each having various property and casualty insurance/reinsurance and life reinsurance subsidiaries. GE Global Insurance owns 100% of the common stock of ERC, GE Re and Medical Protective, representing 89.5%, 100% and 100% of ERC's, GE Re's and Medical Protective's voting rights, respectively. General Electric Capital Corporation ("GE Capital Corporation" - a wholly-owned subsidiary of GE Capital Services) owns 100% of ERC's preferred stock, representing 10.5% of ERC's voting rights. GE Global Insurance and its consolidated subsidiaries are collectively referred to as "the Company."
Other affiliates, generally companies in which the Company owns 20 to 50 percent of the voting rights or otherwise has significant influence, are included in other invested assets and valued at the appropriate share of equity plus loans and advances.
Basis of Accounting
The accompanying consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles ("GAAP"), which, as to the insurance company subsidiaries, vary from statutory accounting practices prescribed or permitted by insurance regulatory authorities. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates.
2. Summary of Significant Accounting Policies
Investments
The Company's fixed maturity and marketable equity securities have been designated as available-for-sale, and are reported at fair value with net unrealized gains or (losses) included in stockholder's equity, net of applicable taxes and certain other adjustments. Such reported fair values are based primarily on quoted market prices, or if quoted prices are not available, are valued by third party pricing vendors. Realized gains or (losses) on sales of investments are determined on the specific-identification method and include adjustments to the net realizable value of investments for declines in value that are considered to be other than temporary. Investment income is recognized as earned and includes the accretion of discounts and amortization of premiums related to fixed maturity securities.
Property and Casualty Insurance/Reinsurance Segment
Premiums are reported as earned over the terms of the related insurance/reinsurance treaties or policies. In general, earned premiums are calculated on a pro rata basis, are determined based on reports received from reinsureds or are estimated if reports are not received timely from reinsureds. Premium adjustments under retrospectively rated reinsurance contracts are recorded based on estimated claims and claim expenses, including both case and incurred but not yet reported liabilities. Assumed foreign reinsurance is accounted for using the periodic method.
Certain insurance acquisition costs, principally commissions and brokerage expenses, are deferred and amortized over the contract period in which the related premiums are earned. Future investment income is considered in determining the recoverability of deferred insurance acquisition costs.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
The liabilities for claims and claim expenses represent the estimated liabilities for reported claims plus those incurred but not yet reported and the related estimated claim expenses. The liabilities for claims and claim expenses are determined using case-basis evaluations and statistical analyses and represent estimates of the ultimate cost of all claims incurred through December 31 of each year. Although considerable variability is inherent in such estimates, management believes that the liabilities for claims and claim expenses are adequate. The estimates are continually reviewed and adjusted as necessary; such adjustments are included in current operations and are accounted for as changes in estimates. Included in the liabilities for claims and claim expenses are $887 million and $940 million at December 31, 1999 and 1998, respectively, of long-term disability claims that are discounted at a 6% rate (See Note 12).
Amounts recoverable from reinsurers related to the liabilities for claims and claim expenses are estimated in a manner consistent with the related liabilities associated with the reinsured policies.
Life Reinsurance Segment
The Company provides reinsurance for life and health insurance and annuities. These products can be classified into three groups: traditional insurance contracts, universal life insurance contracts and investment contracts. Insurance contracts are broadly defined to include contracts with significant mortality and/or morbidity risk, while investment contracts are broadly defined to include contracts without significant mortality or morbidity risk. Universal life insurance contracts are insurance contracts with terms that are not fixed and guaranteed.
Revenues from traditional insurance contracts are recognized as revenues when due or over the terms of the policies. For universal life contracts and investment contracts, premiums received are reported as liabilities ("accumulated contract values"), not as revenues. Revenues from universal life contracts and investment contracts are recognized for assessments made against the policyholder's accumulated contract values for insurance, policy administration, surrenders and other authorized charges.
Future policy benefits for traditional life and health contracts represent the present value of such benefits based on mortality and other assumptions which were appropriate at the time the policies were issued or at the date of purchase. Interest rate assumptions used in calculating the present value generally ranged from 3.00% to 8.50% at December 31, 1999 and 1998. Interest rates credited to universal life contracts and investment contracts are generally guaranteed for a specified time period with renewal rates determined by management. Such crediting interest rates ranged from 3.00% to 9.00% in 1999 and 1998 and 3.75% to 9.00% in 1997.
Acquisition costs include costs and expenses that vary with, and are primarily related to, the acquisition of insurance and investment contracts, such as commissions and certain support costs, such as underwriting and policy issuance expenses. For universal life contracts and investment contracts, the amortization is based on the anticipated gross profits from investments, surrender and other charges net of interest credited, mortality and maintenance expenses. As actual gross profits vary from projected gross profits, the impact on amortization is included in net income. For traditional insurance contracts, the acquisition costs are amortized over the premium paying periods or, in the case of limited payment contracts, over the estimated benefit payment periods using assumptions consistent with those used in computing future policy benefit reserves.
The actuarially determined present value of anticipated net cash flows to be realized from insurance, annuity and investment contracts in force at the date of acquisition of life insurance enterprises is recorded as the present value of future profits and is amortized over the respective policy terms in a manner similar to deferred insurance acquisition costs. Unamortized balances are adjusted to reflect experience and impairment, if any.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Funds Held by Reinsured Companies
Funds held by reinsured companies represent ceded premiums retained by the ceding companies according to contractual terms. The Company generally earns investment income on these balances during the periods that the funds are held.
Allowance for Doubtful Accounts
The Company establishes an allowance for uncollectible premiums receivable, reinsurance recoverables and other doubtful receivables. The allowance is recorded as a valuation account that reduces the corresponding asset. The allowance totaled $79 million and $80 million at December 31, 1999 and 1998, respectively.
Goodwill
The Company amortizes goodwill recorded in connection with its business combinations over periods ranging from 15 to 30 years using the straight-line method. If goodwill is identified with long-lived assets that are subject to an impairment loss, and an adjustment is to be made to reflect fair value, the goodwill shall be reduced or eliminated before the carrying value of such long-lived assets is written down to fair value. Goodwill in excess of associated expected operating cash flows is considered to be impaired and is written down to fair value.
Statement of Cash Flows
Cash includes cash on hand, demand deposits and certificates of deposit. All highly liquid investments with an original maturity of three months or less are classified as short-term investments in the consolidated statement of financial position, and transactions as such are considered investing activities in the consolidated statement of cash flows.
Reinsurance
Reinsurance contracts that do not both transfer significant insurance risk and result in the reasonable possibility that the reinsurer (or retrocessionaire) may realize a significant loss from the transaction are required to be accounted for as deposits. These contract deposits are classified as contract deposit assets (included in "other assets") or "contract deposit liabilities" and are accounted for as financing transactions with interest income or expense credited or charged to the contract deposits.
Income Taxes
GE Global Insurance, together with its domestic property and casualty insurance/reinsurance company subsidiaries, one domestic life insurance company subsidiary and its parent, GE Capital Services, are included in the consolidated federal income tax return of GE Company. GE Global Insurance's other domestic life insurance company subsidiary is taxed as a life insurance company, and that subsidiary files a separate federal income tax return.
The international insurance company subsidiaries of GE Global Insurance file separate income tax returns in the countries where the subsidiaries are domiciled or operate.
The Company utilizes the liability method, whereby deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws. The Company is required to establish a "valuation allowance" for any portion of the deferred tax asset that management believes will not be realized.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Interest Rate and Currency Risk Management
As a matter of policy, the Company does not engage in any trading, market-making or other speculative activities in the derivative markets. The Company uses various financial instruments, such as currency and interest rate swaps, options and currency forwards principally to lessen its exposure to movements in interest rates and foreign currency exchange rates.
Designated interest rate and currency swaps that modify borrowings or certain assets are accounted for on an accrual basis. The Company requires all other derivative instruments, such as options and forwards, to be designated and accounted for as hedges of specific assets, liabilities or committed transactions; resulting payments and receipts are recognized contemporaneously with effects of hedged transactions. A payment or receipt arising from early termination of an effective hedge is accounted for as an adjustment to the basis of the hedged transaction.
Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract. Accordingly, changes in market values of hedged instruments must be highly correlated with changes in market values of underlying hedged items, both at inception of the hedge and over the life of the hedge contract. Any derivative that is either not designated as a hedge, or is so designated but is ineffective, is marked to market and recognized in operations immediately.
Foreign Currency Translation
The Company operates in a multiple functional currency environment whereby revenues and expenses in functional currencies are translated using periodic weighted average exchange rates during the year and functional currency assets and liabilities are translated at the rates of exchange in effect at the close of the year. Gains or losses resulting from translating the functional currencies into U.S. dollars are accumulated in a separate component of stockholder's equity, entitled "accumulated foreign currency translation adjustments." The Company partially hedges its foreign currency risk on its foreign subsidiary investments by utilizing a cross currency swap (See Note 14). The gain on the cross currency swap, which is included in "accumulated foreign currency translation adjustments," was $237 million and $124 million at December 31, 1999 and 1998, respectively. The net effect of foreign currency transactions on operating results during 1999, 1998 and 1997 was immaterial.
Benefit Plans
Prior to September 30, 1999, employees of the Company and its domestic subsidiaries were covered by trusteed, noncontributory defined benefit pension plans and unfunded postretirement plans that provided medical benefits and life insurance benefits to substantially all employees and their dependents. Effective October 1, 1999, the majority of the Company's domestic employees began participating in a trusteed, contributory defined benefit pension plan sponsored by the Company's ultimate parent, GE Company. Additionally, effective September 30, 1999, the Company terminated substantially all of its domestic postretirement plans, with covered employees becoming participants in similar plans sponsored by GE Company. The existing accumulated postretirement benefit obligations under the terminated plans were also transferred to GE Company, with no gain or loss resulting from this transaction. GE Company charges the Company, in turn, for its relative share of the costs associated with the overall GE Company Group Pension and Postretirement Plans. Certain of the Company's international subsidiaries also sponsor noncontributory defined benefit pension plans for their employees. The net effect of all benefit plans on the consolidated statement of financial position and statement of earnings for 1999, 1998 and 1997 was immaterial.
Reclassifications
Certain reclassifications of prior year balances have been made to conform to the current year presentation.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
3. Acquisitions and Dispositions
On March 4, 1999, the Company completed the acquisition of Eagle Star Reinsurance Company Limited ("Eagle Star Re") from Zurich Financial Services for a cash consideration of approximately $346 million. The cash consideration was provided through existing funds. Eagle Star Re is a leading London Market non-life reinsurance company principally doing business through intermediaries. The transaction excludes substantially all business written by Eagle Star Re before 1993. The acquisition has been accounted for as a purchase; accordingly, the operating results of Eagle Star Re have been included in the Company's consolidated financial statements since the date of acquisition.
On October 27, 1998, the Company completed the acquisition of Kemper Reinsurance Company (subsequently renamed GE Reinsurance Corporation - "GE Re") for a cash consideration of approximately $468 million. The cash consideration was initially financed by utilizing existing unused credit facilities and subsequently refinanced in 1999 through additional long-term borrowings (See Note 9). GE Re is a property and casualty reinsurance company principally doing business through intermediaries. The acquisition has been accounted for as a purchase; accordingly, the operating results of GE Re have been included in the Company's consolidated financial statements since the date of acquisition.
On October 15, 1998, the Company completed the acquisition of Medical Protective Corporation ("Medical Protective") for a cash consideration of approximately $628 million. The cash consideration was financed by GE Capital Corporation via an interim loan agreement. Medical Protective is the oldest medical professional liability insurer of physicians and dentists in the United States. The acquisition has been accounted for as a purchase; accordingly, the operating results of Medical Protective have been included in the Company's consolidated financial statements since the date of acquisition.
On January 6, 1998, the Company purchased the assets and assumed the renewal rights of Industrial Risk Insurers ("IRI"), a leader in providing highly protected risk property insurance, for a cash consideration of approximately $235 million. The business underwritten through IRI is managed by a joint venture formed between the Company and the Hartford Steam Boiler Inspection and Insurance Company ("HSB") as stipulated by a management agreement. IRI writes business utilizing the licensing authority of its members and the business underwritten is subsequently allocated to members in proportion to membership participation and further allocated in accordance with certain reinsurance agreements between HSB and the Company. In conjunction with this acquisition, the Company purchased $300 million of 7% convertible capital securities from a Delaware business trust formed by HSB's parent, HSB Group, Inc., to provide capital for HSB to support the anticipated increase in gross premiums written associated with the IRI business. The acquisition has been accounted for as a purchase; accordingly, the operating results of IRI have been included in the Company's consolidated financial statements since the date of acquisition.
Subsequent to the Company's acquisition of over 93% of the outstanding shares of Frankona Ruckversicherungs-Aktiengesellschaft ("Frankona Re") in July, 1995, the Company continued to purchase the remaining outstanding shares held by minority shareholders. The majority of this activity occurred during 1997 as a result of entering into an agreement with the remaining minority shareholders on December 7, 1996, whereby the Company offered to purchase the remaining outstanding shares at a stipulated price and guaranteed a specific compensation payment. Specifically, the Company paid cash of approximately $69 million in 1997 for shares acquired from the minority shareholders, and the purchase of these shares was accounted for using the purchase method of accounting. The excess of the purchase price over the fair market value of the net assets acquired of approximately $40 million was recognized as goodwill and is being amortized over the remaining initial goodwill amortization period. Minority shareholders who elected not to redeem their outstanding shares under this agreement will receive a stated future annual dividend and forfeited their right to participate in the future net earnings of Frankona Re. As of December 31, 1999, the Company owns approximately 99% of the outstanding shares of Frankona Re.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
3. Acquisitions and Dispositions (continued)
The allocations of the purchase price for Medical Protective and GE Re are summarized as follows:
The following unaudited pro forma information has been prepared as if the acquisitions of Medical Protective and GE Re had occurred on January 1, 1997. The pro forma information includes all significant adjustments to the historical results that were directly attributable to the transactions and were expected to have a continuing effect on the Company.
In late 1999, the Company sold its reinsurance brokerage subsidiary. The resulting gain from this transaction was not material to the 1999 consolidated statement of earnings.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
4. Investments
The amortized cost, estimated fair value and gross unrealized gains and losses of fixed maturity securities, equity securities, short-term investments and other invested assets are summarized as follows:
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
4. Investments (continued)
The amortized cost and estimated fair value of fixed maturity securities at December 31, 1999 are summarized, by stated maturity, as follows:
The foregoing data is based on the stated maturities of the securities. Actual maturities will differ for some securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Major categories of investment income are summarized as follows:
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
4. Investments (continued)
The Company's sales proceeds and realized gains and losses on investment securities are summarized as follows:
The change in net unrealized gains (losses), before income taxes, on fixed maturity securities was $(1,179) million, $225 million and $174 million in 1999, 1998 and 1997, respectively; the corresponding amounts for equity securities were $(209) million, $37 million and $216 million in 1999, 1998 and 1997, respectively; and the corresponding amounts for other invested assets were $(74) million and $103 million in 1999 and 1998, respectively.
The Company had investments in fixed maturity securities with a carrying amount of $768 million and $475 million at December 31, 1999 and 1998, respectively, on deposit with state insurance departments to satisfy regulatory requirements.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
5. Intangible Assets
The Company's intangible assets are summarized as follows:
The Company's intangible assets are shown net of accumulated amortization of $721 million and $628 million at December 31, 1999 and 1998, respectively.
The PVFP was determined using risk adjusted discount rates from 8% to 15% and the interest rates selected for the valuation were determined based on the applicable interest rates in the country of risk inherent in the realization of the estimated future profits. PVFP is being amortized using the interest method over the duration of the related life business, approximately 20 years, as the premiums on the books of business are recognized.
The Company's intangible assets other than goodwill and PVPF include the value of property and casualty business recorded in connection with GE Capital Services' acquisition of ERC in 1984 and the value of a customer list recorded in connection with the acquisition of the IRI business in 1998 (See Note 3). These items are being amortized using the straight-line method over a 16 year period and a 20 year period, respectively.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
6. Claims and Claim Expenses
The Company's reconciliation of its beginning and ending claims and claim expense liabilities, net of reinsurance, is summarized as follows:
Prior-year claims and expenses incurred in the preceding table resulted principally from settling claims established in earlier accident years for amounts that differed from expectations and due to changes in estimates associated with a lag in receiving underwriting reports from ceding companies that causes development of both premiums and claims, especially as it relates to the international operations.
The increase in 1999 claims and expenses incurred related to prior years is attributable to higher than normal claim and expense development across a number of lines of business, including property coverages (which was most highly impacted by much higher than expected industry-wide losses with respect to Hurricane Georges), long-term disability and communications/media liability.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
6. Claims and Claim Expenses (continued)
In establishing the liabilities for claims and claim expenses related to asbestos-related illnesses and toxic waste cleanup, management considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of specific insurance or reinsurance contracts and management can reasonably estimate its liability. In addition, amounts have been established to cover additional exposures on both known and unasserted claims, and estimates of the liabilities are reviewed and updated continually.
The gross liabilities for asbestos-related illness and toxic waste cleanup claims and claim expenses and the related reinsurance recoverables were $800 million and $195 million, respectively, at December 31, 1999. These amounts are management's best estimate, based on currently available information, of future claim and claim expense payments and recoveries that are expected to develop in future years. The Company monitors evolving case law and its effect on asbestos-related illness and toxic waste cleanup claims. Changing U.S. government regulations and legislation, including continuing Congressional consideration of a Federal Superfund law, newly reported claims, new contract interpretations and other factors could significantly affect future claim development. While the Company has recorded its best estimate of its liabilities for asbestos-related illness and toxic waste cleanup claims based on currently available information, it is possible that additional liabilities may arise in the future. It is not possible to estimate with any certainty the amount of additional net loss, or the range of net loss, that is reasonably possible; therefore, there can be no assurance that future liabilities will not materially affect the Company's results of operations, financial position or cash flows.
7. Income Taxes
The Company's provision for income taxes is summarized as follows:
Income taxes paid (recovered) by the Company totaled $244 million, $390 million and $(53) million in 1999, 1998 and 1997, respectively.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
The Company's effective income tax rate on pre-tax income is lower than the prevailing U.S. corporate federal income tax rate and is summarized as follows:
The significant components of the Company's net deferred tax assets and liabilities are summarized as follows:
A valuation allowance is provided when it is more likely than not that certain deferred tax assets will not be realized. The Company has established a valuation allowance for deferred tax assets associated with foreign tax credit carryforwards that exceed the projected future benefit of such foreign tax credits.
The Company did not have a payable to (recoverable from) GE Capital Services for income taxes due at December 31, 1999 or 1998.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
8. Indebtedness to/from Related Parties
The Company and GE Capital Corporation are participants in a revolving credit agreement that involves an international cash pooling arrangement on behalf of certain European affiliates of the Company. In such roles, either participant may make short-term loans to the other as part of the cash pooling arrangement. Each such borrowing shall be repayable upon demand, but not to exceed 364 days. This unsecured line of credit has an interest rate per annum equal to GE Capital Services' cost of funds for the currency in which such borrowing is denominated and is available for an initial term of five years expiring October 21, 2002, and shall be automatically extended for successive terms of one year each, unless terminated in accordance with the terms of the agreement. The total amount drawn (loaned) on this credit facility by the Company was $53 million and $(265) million as of December 31, 1999 and 1998, respectively.
The Company has in place a revolving credit agreement with GE Capital Services for an amount up to $600 million that expires January 1, 2001, with an interest rate per annum equal to GE Capital Services' cost of funds. This agreement is automatically extended for successive terms of one year each, unless terminated in accordance with the terms of the agreement. The total amount drawn on this credit facility, including accrued interest payable, was $42 million and $426 million as of December 31, 1999 and 1998, respectively. During 1998, the Company utilized this credit facility primarily to fund its acquisition of GE Re (See Note 3), with such amounts being repaid in 1999 using proceeds from long-term borrowings (See Note 9). Interest accrued on such borrowings at an annual weighted-average interest rate of 5.18% and 5.41% for the years ended December 31, 1999 and 1998, respectively. Total interest paid in 1999 was $9 million, with no interest paid in 1998 or 1997.
In October 1998, the Company entered into an interim loan agreement with GE Capital Corporation for $625 million to fund its acquisition of Medical Protective (See Note 3). This interim loan agreement has an interest rate per annum equal to GE Capital Corporation's cost of funds. The total balance outstanding under this interim loan agreement, including accrued interest payable, was $666 million and $632 million as of December 31, 1999 and 1998, respectively. Interest accrued on such borrowings at an annual weighted-average interest rate of 5.26% and 5.34% for the years ended December 31, 1999 and 1998, respectively, with no interest paid in either year.
9. Borrowings
In February 1996, the Company issued $600 million of senior unsecured debt securities at 7% per annum, which are not redeemable prior to maturity on February 15, 2026. The Company received $556 million in net proceeds from these notes (after deduction of underwriting discounts and commissions and the original issue discount and cost of an interest rate "lock" contract) which was used to repay short-term borrowings.
In March 1999, the Company issued $400 million of redeemable senior unsecured debt securities at 6.45% per annum, that are scheduled to mature on March 1, 2019. The Company received $395 million in net proceeds from the issuance of these notes (after deduction of underwriting discounts and commissions) which was used to repay outstanding short-term borrowings under the intercompany revolving credit agreement with GE Capital Services (See Note 8).
Total interest paid on borrowings was $55 million, $42 million and $42 million in 1999, 1998 and 1997, respectively.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
10. Supplemental Financial Statement and Reinsurance Data
Insurance premiums written and earned in 1999, 1998 and 1997 and life insurance in force as of December 31, 1999, 1998 and 1997 are summarized as follows:
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
10. Supplemental Financial Statement and Reinsurance Data (continued)
Claims, claim expenses and policy benefits incurred in 1999, 1998 and 1997 are summarized as follows:
The Company's insurance company subsidiaries both assume reinsurance from and cede reinsurance to other insurance companies. That portion of the risks exceeding each subsidiary's retention limit is reinsured with other insurers. The Company also acquires other reinsurance coverages with retentions and limits that management believes are appropriate for the circumstances. In the accompanying consolidated financial statements, premiums, claims, claim expenses and policy benefits and deferred insurance acquisition costs are reported net of reinsurance ceded; reinsurance liabilities, unearned premiums and accruals are reported gross of reinsurance ceded.
The Company's retrocession program includes aggregate excess of loss coverages in which accident year losses exceeding a specified loss ratio are ceded to retrocessionaires. These contracts also contain contingent premium provisions whereby the Company is required to cede additional premiums equal to a specified portion of the covered losses. In 1999, the accident year losses incurred exceeded the specified loss ratio and, accordingly, accruals for reinsurance recoverables and ceded premium payables were reflected in the accompanying consolidated financial statements in accordance with the terms of the underlying retrocession contracts.
The Company's insurance company subsidiaries remain liable to their policyholders if the reinsurers they cede to are unable to meet their contractual obligations under the applicable reinsurance agreements. To minimize its exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers. There was no significant concentration of reinsurance recoverables and prepaid reinsurance premiums due from any one reinsurer at December 31, 1999, with the exception of approximately $500 million of accrued reinsurance recoverables from National Indemnity Company (currently rated A++ (Superior) by A.M. Best Company) in connection with the Company's aggregate excess retrocession program.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
10. Supplemental Financial Statement and Reinsurance Data (continued)
For financial reinsurance assumed, premiums received are reported as contract deposit liabilities, not as revenues-the Company reports revenue for the risk fees charged for those services. Statutory policyholder's surplus of the life insurance company subsidiaries has been reduced approximately $288 million at December 31, 1999 in connection with financial reinsurance assumed. Such amounts are secured by future profits on the reinsured business. The Company's life insurance subsidiaries are also subject to the risk that the ceding companies may become insolvent and the right of offset would not be permitted; however, management does not believe such risk is significant.
11. Stockholder's Equity
ERC has issued 11,673 shares of $100,000 par value, nonredeemable, voting preferred stock to GE Capital Corporation. This preferred stock accrues preferential and cumulative dividends at an annual rate of 7.5% (prior to 1999, the dividend rate was a variable rate). ERC may, upon approval by its Board of Directors, redeem the preferred stock, in whole or in part, at 100% of the par value of the preferred stock plus all dividends accrued thereon to the date of redemption. Preferred stock dividends paid by ERC totaled $88 million, $85 million and $82 million in 1999, 1998 and 1997, respectively.
GE Global Insurance has issued 1,500 shares of $100,000 par value, nonvoting, cumulative preferred stock to GE Capital Corporation. Dividends on the preferred stock are paid at a rate of 5% per annum if, as and when declared by the Board of Directors of the Company, and totaled $8 million in 1999, 1998 and 1997.
12. Statutory Accounting Practices
ERC and its domestic insurance company subsidiaries are domiciled in Missouri and Kansas, GE Re is domiciled in Illinois and Medical Protective is domiciled in Indiana. Statutory-basis financial statements are prepared in accordance with accounting practices prescribed or permitted by the respective state insurance departments. "Prescribed" statutory accounting practices include state laws, regulations and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners ("NAIC"). "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state and may change in the future. There are no significant permitted accounting practices that vary from prescribed accounting practices being utilized by the Company's domestic insurance company subsidiaries, except as noted on the following page.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
12. Statutory Accounting Practices (continued)
Stockholder's equity and net income, as reported to the domiciliary state insurance departments in accordance with its prescribed or permitted statutory accounting practices, for the Company's domestic insurance company subsidiaries are summarized as follows:
The comparability of the 1999 and 1998 amounts in the above tables is impacted by the following two 1999 transactions: (1) the merger of GE Re and its property and casualty subsidiary and (2) the assignment by ERC of its investment in Medical Protective to GE Global Insurance. The comparability of the 1998 and 1997 amounts in the above table is impacted by the 1998 dividend by ERC of a property and casualty subsidiary to GE Global Insurance, who in turn contributed such subsidiary to GE Re.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
12. Statutory Accounting Practices (continued)
The payment of stockholder dividends by domestic insurance companies without the prior approval of regulators is limited to formula amounts based on net investment income and/or net income, capital and surplus determined in accordance with statutory accounting practices, as well as the timing and amount of dividends paid in the preceding 12 months. The maximum amount available for the payment of dividends during 2000 by ERC without prior regulatory approval is $294 million after December 29, 2000. Of this amount, $88 million is committed to pay dividends on the preferred stock issued by ERC to GE Capital Corporation. GE Re will not be able to make any dividend payments during 2000 without the prior approval of the Director of Insurance for the State of Illinois. The maximum amount available for the payment of dividends during 2000 by Medical Protective without prior regulatory approval is $66 million after December 17, 2000.
ERC has received written approval from the Missouri Department of Insurance to discount its claims and claim expense liabilities related to long-term disability business. Prescribed statutory accounting practice does permit claims and claim expense liabilities associated with long-term disability to be accounted for on a discounted basis although the Missouri Department of Insurance requires that insurance companies obtain written permission to discount certain claims and claim expense liabilities. The total discount recognized for statutory purposes was $302 million and $327 million at December 31, 1999 and 1998, respectively.
ERC has also received written approval from the Missouri Department of Insurance to take credit for certain unauthorized reinsurance by obtaining a parental guarantee from GE Global Insurance.
The NAIC has adopted minimum risk-based capital requirements to evaluate the adequacy of statutory capital and surplus in relation to an insurance company's risks. Regulatory compliance with risk-based capital requirements is defined by a ratio of a company's regulatory total adjusted capital to its authorized control level risk-based capital, as defined by the NAIC. Each of GE Global Insurance's domestic insurance company subsidiaries exceeded the minimum risk-based capital requirements at December 31, 1999.
The Company's international insurance company subsidiaries prepare statutory financial statements based on local laws and regulations. Some jurisdictions, such as the United Kingdom, impose complex regulatory requirements on reinsurance companies, while other jurisdictions, such as Germany, impose fewer requirements. Local reinsurance business conducted by the Company's insurance company subsidiaries in some countries require licenses issued by governmental authorities. These licenses may be subject to modification or revocation dependent on such factors as amount and types of reserves and minimum capital and solvency tests. Jurisdictions may also impose fines, censure and/or criminal sanctions for violation of regulatory requirements.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
13. Contingencies
There are no pending legal proceedings beyond the ordinary course of business that in the opinion of the Company's management, based on information available at the date of this report, would have a material adverse effect on the Company's consolidated results of operation or financial condition.
14. Fair Value of Financial Instruments
This note discloses fair value information about certain of the Company's financial instruments, whether or not recognized in the balance sheet. No attempt has been made to estimate the value of anticipated future business or the value of assets or liabilities that are not considered financial instruments. Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. In cases where quoted market prices are not available, fair values are estimated using discounted cash flow or other valuation techniques. These estimates may be subjective in nature and involve uncertainties and, therefore, cannot be determined with precision. Changes in the assumptions could significantly affect the estimates. As such, the derived fair value estimates cannot necessarily be substantiated by comparison to independent markets and may differ from the amounts that might be involved in an immediate settlement of the instrument. Fair value disclosures are not required for certain financial instruments, the most significant of these for the Company are the insurance liabilities and related assets, other than financial guarantees and investment contracts.
Financial instruments that are reflected in the accompanying financial statement at fair value or for which fair values are disclosed elsewhere in the notes to the financial statements are not included in the following disclosure. The most significant of which are investments, cash, amounts due from related parties, accrued investment income, separate accounts and other receivables and payables. Fair values of other financial instruments have been determined as follows:
Accumulated contract values - Based on expected future cash flows, discounted at currently offered interest rates for similar contracts with maturities consistent with those remaining for the contracts being valued.
Financial guaranty reinsurance - Based on estimated premium rates that would be charged and commissions that would be allowed at the financial statement date.
Borrowings - Based on quoted market prices or market comparables and includes the effects of counterparty creditworthiness.
All other instruments - Based on comparable transactions, market comparables, discounted future cash flows, quoted market prices and/or estimates of the cost to terminate or otherwise settle obligations to counterparties.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
14. Fair Value of Financial Instruments (continued)
Information about certain financial instruments that were not carried at fair value at December 31, 1999 and 1998, is summarized as follows:
(a) Not applicable. (b) See Note 9.
The Company uses S&P 500 indexed call options to hedge the equity index component of several single-premium equity-indexed annuities reinsured. The Company, having paid a premium for these options, has the right to purchase a notional investment in the S&P 500 index at a fixed price on a specific date.
Foreign currency forward purchase contracts are employed to manage exposures to changes in currency exchange rates. These financial instruments generally are used as hedges of identified assets, liabilities or net functional currency positions.
Cross currency swaps are used by the Company to hedge foreign currency risk on net investment exposure resulting from exchange rate fluctuations in foreign currency denominated assets and liabilities. On a limited basis, and as part of ongoing customer activities, the Company utilizes interest rate swaps and options to minimize its exposure to movements in interest rates and financial markets that have a direct correlation with certain of its reinsurance products.
The Company is exposed to credit-related losses in the event of non-performance by the counterparties to various contracts, but it does not expect the counterparties to fail to meet their obligations due to rigid counterparty credit exposure policies employed.
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
15. Segment Information
The Company conducts its operations principally through the following two business segments:
Property and Casualty Insurance/Reinsurance Segment (Property/Casualty)
The domestic property/casualty operations of the Company include reinsurance of most property/casualty lines of business, including general liability, property, excess workers' compensation and auto liability in the United States, Canada and business written in the United States where the reinsured is outside the United States. In addition, the Company provides insurance and reinsurance for the healthcare industry, conducts excess and surplus lines and direct specialty insurance business and participates in financially oriented reinsurance treaties.
International property/casualty operations are conducted through subsidiaries and branch offices located in Australia, Brazil, Denmark, England, France, Germany, Hong Kong, Ireland, Italy, Japan, Lebanon, Luxembourg, Malaysia, Mexico, New Zealand, Poland, Singapore and Spain, and include reinsurance of property/casualty business in those countries and elsewhere outside the United States and Canada.
Life Reinsurance Segment (Life)
The domestic and international life operations of the Company include reinsurance of life and health insurance and annuity products and participation in financially oriented reinsurance treaties. The international life operations are conducted through subsidiaries and branch offices as detailed above and include reinsurance of life business in those countries and elsewhere outside the United States and Canada.
The Company's industry segment activity is summarized as follows:
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
15. Segment Information (continued)
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
15. Segment Information (continued)
The Company's business by geographic area is summarized in the following table. Allocations to the domestic geographic area include business related to the United States and Canada, as well as business written in the United States where the reinsured is outside the United States. International business includes business written by subsidiaries located outside the United States, predominantly in Europe.
16. Unaudited Quarterly Financial Data
The Company's quarterly financial results and other data in 1999 and 1998 are summarized as follows:
Financial Statement Schedules
See Notes to Condensed Financial Information of Registrant.
(a) The sum of accumulated unrealized gains on investment securities and accumulated foreign currency translation adjustments constitutes "Accumulated nonowner changes other than earnings," as shown in the Consolidated Statement of Stockholder's Equity, and was $(55) million and $859 million at year-end 1999 and 1998, respectively.
See Notes to Condensed Financial Information of Registrant.
See Notes to Condensed Financial Information of Registrant.
Schedule II
GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES
Notes to Condensed Financial Information of Registrant (Parent Company)
1. Basis of Presentation
GE Global Insurance Holding Corporation ("GE Global Insurance") is a wholly-owned subsidiary of General Electric Capital Services, Inc. ("GE Capital Services"), which is a wholly-owned subsidiary of General Electric Company.
GE Global Insurance's primary assets are its 100% investment in the common stock of ERC, a Missouri-domiciled property and casualty reinsurance company, GE Re, an Illinois-domiciled property and casualty reinsurance company principally doing business through intermediaries and Medical Protective, an Indiana-domiciled property and casualty insurance company. The common stock of Medical Protective was assigned by ERC to GE Global Insurance effective December 31, 1999. ERC, GE Re and Medical Protective own 100% of the common stock of various other property and casualty insurance/reinsurance and life reinsurance companies.
In accordance with the requirements of Regulation S-X of the Securities and Exchange Commission, the financial statements of the registrant are condensed and omit many disclosures presented in the consolidated financial statements and the notes thereto.
2. Dividends from Subsidiaries
Cash dividends paid to GE Global Insurance by its consolidated subsidiaries were $323 million, $390 million and $298 million in 1999, 1998 and 1997, respectively. Dividends declared but not yet paid to GE Global Insurance by its consolidated subsidiaries were $64 million at December 31, 1999.
On December 31, 1998, ERC transferred to GE Global Insurance, as a non-cash dividend, 100% of its $264 million investment in the common stock of First Excess Reinsurance Corporation ("First Excess"). GE Global Insurance then contributed the common stock of First Excess to GE Re on that same date.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.