10-Q 1 form10q-q201body.txt FORM 10Q-Q201 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________to________ Commission file number 0-27394 GE Global Insurance Holding Corporation --------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-3435367 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5200 Metcalf, Overland Park, Kansas 66201 (Address of principal executive offices) (Zip Code) (913) 676-5200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [] No[ ] At July 23, 2001, 1,000 shares of common stock with a par value of $5,000 per share were outstanding. REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.

TABLE OF CONTENTS Page ---- PART I - FINANCIAL INFORMATION. Item 1. Financial Statements.......................................................................... 1 Item 2. Management's Discussion and Analysis of Results of Operations................................. 76 Exhibit 12. Computation of Ratio of Earnings to Fixed Charges............................................. 108 PART II - OTHER INFORMATION. Item 6. Exhibits and Reports on Form 8-K.............................................................. 119 Signatures. .............................................................................................. 1210 Index to Exhibits. .............................................................................................. 1311

PART I - FINANCIAL INFORMATION Item 1. Financial Statements.

GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES Condensed, Consolidated Statement of Current and Retained Earnings (Unaudited) Three months ended Six months ended ------------------------------ ------------------------------ (In millions) ~~March~~June 3130, 2001 ~~April~~July 1, 2000 June 30, 2001 July 1, 2000 ------------- ------------ ------------- ------------ Revenues Net premiums written $21,~~102~~945 $1,~~855~~934 $4,047 $3,789 ====== ====== ====== ====== Net premiums earned $2,~~011~~000 $1,~~738~~925 $4,011 $3,663 Net investment income ~~316~~ 290 326 606 616 Net realized gains on investments 6477 35311 141 346 Other revenues 46154 ~~107~~75 200 182 ------ ------ ------ ------ Total revenues 2,~~437~~521 2,~~170~~637 4,958 4,807 ------ ------ ------ ------ Costs and Expenses Claims, claim expenses and policy benefits 1,~~618~~649 1,~~361~~700 3,267 3,061 Insurance acquisition costs ~~488~~480 ~~471~~469 968 940 Other operating costs and expenses ~~204~~187 ~~196~~189 391 385 Minority interest in net earnings of consolidated subsidiaries 2223 22 45 44 ------ ------ ------ ------ Total costs and expenses 2,~~332~~339 2,~~050~~380 4,671 4,430 ------ ------ ------ ------ Earnings Earnings before income taxes and cumulative effect of change in accounting principle ~~105~~182 ~~120~~257 287 377 Provision for income taxes 2356 1662 79 78 ------ ------ ------ ------ Earnings before cumulative effect of change in accounting principle 82126 ~~104~~195 208 299 Cumulative effect of change in accounting principle - - (11) - ------ ------ ------ ------ Net earnings 71126 ~~104~~195 197 299 Dividends on preferred stock (2) (2) (4) (4) Retained earnings at beginning of period 5,273 4,732 5,204 4,630 ------ ------ ------ ------ Retained earnings at end of period $5,~~273~~397 $4,~~732~~925 $5,397 $4,925 ====== ====== ====== ======

See Notes to Condensed, Consolidated Financial Statements. 1 Item 1. Financial Statements (Continued).

GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES Condensed, Consolidated Statement of Financial Position (In millions) ~~March~~June 3130, 2001 December 31, 2000 -------------- ----------------- (Unaudited) Assets Investments: Fixed maturity securities, at fair value $19,~~146~~211 $18,761 Equity securities, at fair value ~~425~~531 718 Other invested assets 1,~~518~~588 1,712 ------- ------- Total investments 21,~~089~~330 21,191 Cash ~~342~~315 196 Premiums receivable 43,~~118~~718 3,844 Other receivables 1,~~900~~519 1,823 Reinsurance recoverables 6,~~754~~572 6,436 Deferred insurance acquisition costs 1,~~592~~573 1,494 Other assets 3,~~775~~788 3,580 ------- ------- Total assets $3938,~~570~~815 $38,564 ======= ======= Liabilities and equity Claims and claim expenses $1817,~~057~~746 $17,678 Accumulated contract values 2,~~175~~151 2,161 Future policy benefits for life and health contracts 2,~~753~~804 2,636 Unearned premiums 2,~~715~~679 2,584 Other reinsurance balances 21,~~197~~807 2,062 Other liabilities 2,~~502~~542 2,587 Long-term borrowings 1,654 1,654 ------- ------- Total liabilities 3231,~~053~~383 31,362 ------- ------- Minority interest in equity of consolidated subsidiaries 1,~~178~~183 1,177 ------- ------- Accumulated non-owner changes in equity: ~~Accumulated~~Unrealized ~~unrealized~~ gains on investment securities - net ~~315~~142 143 ~~Accumulated~~Foreign ~~foreign~~ currency translation adjustments (~~249~~282) (322) Derivatives qualifying as hedges (8) - ------- ------- Total accumulated non-owner changes in equity 66(148) (179) Preferred stock 150 150 Common stock 5 5 Paid-in capital 845 845 Retained earnings 5,~~273~~397 5,204 ------- ------- Total stockholder's equity 6,~~339~~249 6,025 ------- ------- Total liabilities and equity $3938,~~570~~815 $38,564 ======= =======

See Notes to Condensed, Consolidated Financial Statements. 2 Item 1. Financial Statements (Continued). GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES Condensed, Consolidated Statement of Cash Flows (Unaudited)

GESix ~~GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES Condensed, Consolidated Statement of Cash Flows (Unaudited) Three~~ months ended ------------------------------------- (In millions) ~~March~~June 3130, 2001 ~~April~~July 1, 2000 -------------- ------------- Cash from (used for) operating activities $ ~~(431)~~213 $ (~~233~~568) ------- ------- Cash ~~Flows~~flows ~~From~~from ~~Investing~~investing ~~Activities~~activities Fixed maturity securities: Purchases (37,~~372~~476) (24,~~197~~179) Sales 36,~~301~~703 12,~~124~~340 Maturities ~~244~~502 ~~271~~383 Equity securities: Purchases (57196) (~~683~~854) Sales 3184 23,~~003~~150 Net ~~(purchases)~~ sales of short-term investments ~~197~~120 ~~(189)~~19 Other investing activities 816 ~~(28)~~3 ------- ------- Cash from (used for) investing activities ~~352~~(247) ~~301~~862 ------- ------- Cash ~~Flows~~flows ~~From~~from ~~Financing~~financing ~~Activities~~activities Change in contract deposits ~~(13)~~2 (133) Net contract accumulation receipts (payments) 13 (3710) 60 Proceeds from short-term borrowings 4264 ~~159~~82 Principal payments on short-term borrowings (49) (48695) Proceeds from long-term borrowings - 691 Dividends paid (24) (24) ------- ------- Cash from financing activities 3643 71101 ------- ------- Effect of exchange rate changes on cash ~~189~~110 (53100) ------- ------- Increase in cash ~~146~~119 86295 Cash at beginning of period 196 359 ------- ------- Cash at end of period $ ~~342~~315 $ ~~445~~654 ======= =======

See Notes to Condensed, Consolidated Financial Statements. 3 Item 1. Financial Statements (Continued). GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES Notes to Condensed, Consolidated Financial Statements (Unaudited) 1. The accompanying condensed, consolidated quarterly financial statements of GE Global Insurance Holding Corporation ("GE Global Insurance") include the accounts and operations, after intercompany eliminations, of GE Global Insurance and its wholly-owned subsidiaries, Employers Reinsurance Corporation, GE Reinsurance Corporation and Medical Protective Corporation. GE Global Insurance and its consolidated subsidiaries are collectively referred to as "the Company." 2. The condensed, consolidated quarterly financial statements are unaudited. These statements include all adjustments (consisting of normal recurring accruals) considered necessary by management to present a fair statement of the results of operations, financial position and cash flows. The results reported in these condensed, consolidated quarterly financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. 3. The Financial Accounting Standards Board ("FASB") issued, then subsequently amended, Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, which became effective for the Company on January 1, 2001. Under SFAS No. 133, as amended, all derivative instruments (including certain derivative instruments embedded in other contracts) are recognized in the balance sheet at their fair values and changes in fair value are recognized immediately in operations, unless the derivatives qualify as hedges of future cash flows. For derivatives qualifying as hedges of future cash flows, the effective portion of changes in fair value is recorded temporarily in equity, then recognized in earnings along with the related effects of the hedged items. Any ineffective portion of a hedge is reported in earnings as it occurs. The nature of the Company's business activities necessarily involves the management of various financial and market risks, including those related to changes in interest rates, equity prices and currency exchange rates. As discussed more fully in the notes of the 2000 Annual Report on Form 10-K, the Company uses derivative financial instruments to mitigate or eliminate certain of those risks. The January 1, 2001 accounting change described above affected only the pattern and timing of non-cash accounting recognition. At January 1, 2001, the Company's financial statements were adjusted to record a cumulative effect of the transition to SFAS No. 133, as follows: (In millions) Earnings -------- Adjustment to fair value of derivatives $17 Income tax effect (6) --- Total $11 === 4 Item 1. Financial Statements (Continued). GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES Notes to Condensed, Consolidated Financial Statements (Continued) 3. (continued) A reconciliation of current period changes, net of applicable income taxes, in the separate component of stockholder's equity labeled "derivatives qualifying as hedges" follows: (In millions) Transition adjustment as of January 1, 2001 $ - Current period declines in fair value - net (9) Reclassifications to earnings - net 1 --- Balance at June 30, 2001 $(8) === 4. Changes in stockholder's equity that did not result directly from transactions with the share owner were as follows:

~~Three~~Six months ended ---------------------------------~~----~~ (In millions) ~~March~~June 3130, 2001 ~~April~~July 1, 2000 -------------- ------------- Net earnings $197 71 $~~104~~299 Net unrealized ~~gains~~losses on investment securities ~~172~~(1) 76(213) Foreign currency translation adjustments 7340 (1196) Derivatives qualifying as hedges (8) - ---- ---- Total $~~316~~228 $~~169~~(10) ==== ====

5. The Company's operating segment activity is summarized as follows:

~~Three~~Six months ended ---------------------------------~~----~~ (In millions) ~~March~~June 3130, 2001 ~~April~~July 1, 2000 -------------- ------------- Revenues Property/Casualty $13,~~791~~828 $13,~~666~~778 Life ~~646~~1,130 ~~504~~1,029 ------ ------ Total revenues $24,~~437~~958 $24,~~170~~807 ====== ====== Earnings before income taxes and cumulative effect of change in accounting principle Property/Casualty $ 9136 $ 69269 Life 96151 51108 ------ ------ Total earnings before income taxes and cumulative effect of change in accounting principle $ ~~105~~287 $ ~~120~~377 ====== ======

5 Item 2. Management's Discussion and Analysis of Results of Operations. Overview Net earnings before cumulative effect of change in accounting principle (discussed in note 3 of this 10Q report) for the first six months of 2001 was $287 million, a $90 million decrease from the first six months of 2000. This decrease is primarily attributable to the $205 million reduction in net realized gains on investments, somewhat offset by an improvement in underwriting results due to a slight reduction in the combined ratio within the property and casualty business segment. Other revenues remained relatively in line with 2000 levels (increase of $18 million) as a result of a 2001 gain recognized in connection with the favorable resolution of issues with a recent acquisition being largely offset by lower levels of income associated with equity-method investments. The Company's two business segments are (1) property and casualty insurance/reinsurance and (2) life reinsurance. Business is conducted throughout the world utilizing the Company's network of local offices. Although the movement in certain foreign currency exchange rates during 2001 and 2000 had a slight impact on the individual revenue and expense categories, the overall impact on net earnings was not significant. The Company's operating segment activity is summarized as follows:

~~Three~~Six months ended --------------------------------- (In millions) ~~March~~June 3130, 2001 ~~April~~July 1, 2000 -------------- ------------- Revenues Property/Casualty $13,~~791~~828 $13,~~666~~778 Life ~~646~~1,130 ~~504~~1,029 ------ ------ Total revenues $24,~~437~~958 $24,~~170~~807 ====== ====== Earnings before income taxes and cumulative effect of change in accounting principle Property/Casualty $ 9136 $ 69269 Life 96151 51108 ------ ------ Total earnings before income taxes and cumulative effect of change in accounting principle $ ~~105~~287 $ ~~120~~377 ====== ======

Typically, the underwriting performance of property and casualty business is measured in terms of a combined ratio and earnings before income taxes. The combined ratio is the sum of the loss ratio and the underwriting expense ratio. For the first six months of 2001, the property and casualty combined ratio was 112.9%, compared to 115.8% for the same period in 2000. The higher than desired combined ratios in both 2001 and 2000 primarily reflect the effects of insufficient pricing within the overall property and casualty insurance/reinsurance industry in recent years and, to a lesser extent, adverse development on prior year recorded losses. Earnings before income taxes from property and casualty operations decreased $133 million or 49% in the first six months of 2001, primarily attributable to the decrease in net realized gains on investments discussed above. The life reinsurance segment typically measures performance based on revenues and earnings before income taxes. Revenues consist of net premiums earned, net investment income, net realized gains on investments and other revenues, including fees generated from investment-related life reinsurance products and financial reinsurance transactions. For the first six months of 2001, the life operations generated revenues and earnings before income taxes of $1,130 million and $151 million, respectively, compared to $1,029 million and $108 million, respectively, for the same period in 2000. The increase in revenues and earnings before income taxes and cumulative effect of change in accounting principle primarily reflects growth in underwriting origination volume and an increase in fee income included in other revenues. 6 Item 2. Management's Discussion and Analysis of Results of Operations (Cont'd). Operating Results Net premiums written and net premiums earned increased $258 million (or 7%) and $348 million (or 10%), respectively, in 2001. This growth is primarily attributable to the combination of hardening pricing within the overall property and casualty insurance/reinsurance industry, a focus on growth within certain niche markets and lower levels of ceded premiums under aggregate excess retrocession programs. This increase was partially offset by the decision to exit certain lines of business and customer relationships as part of a reunderwriting initiative undertaken during 2000. Net investment income decreased $10 million or 2% in 2001, primarily attributable to the lower interest rate environment in both the U.S. and Europe in the current year as compared to 2000. Net realized gains on investments decreased $205 million or 59% in 2001, primarily attributable to the significant level of gains recognized during 2000 in connection with the Company's decision to reposition the investment portfolio to lessen its exposure to equity securities and include a higher proportion of fixed maturity securities. Other revenues increased $18 million or 10% in 2001, primarily attributable to the favorable resolution of issues involving a recent acquisition somewhat offset by lower levels of income associated with equity-method investments. Claims, claim expenses and policy benefits increased $206 million or 7% in 2001, primarily attributable to the growth in premiums discussed above coupled with the slightly lower combined ratio for the property and casualty operations. Insurance acquisition costs increased $28 million or 3% in 2001, primarily attributable to the growth in premiums discussed above. Other operating costs and expenses increased $6 million or 2% in 2001, primarily attributable to a charge recorded during the first quarter related to planned employee terminations. Provision for income taxes was $79 million for the first six months of 2001 (an effective tax rate of 27.5%), compared to $78 million for the first six months of 2000 (an effective tax rate of 20.7%). The higher effective tax rate in 2001 primarily reflects a lower proportion of tax-exempt investment income. Forward Looking Statements This document includes certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in global economic, business, competitive market and regulatory factors. 7 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. a. Exhibits. Exhibit 12. Computation of ratio of earnings to fixed charges. b. Reports on Form 8-K. None. 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GE GLOBAL INSURANCE HOLDING CORPORATION --------------------------------------- (Registrant) Date: July 23, 2001 By: /s/ MARC A. MEICHES ------------------------------------------------- Marc A. Meiches Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date: July 23, 2001 By: /s/ WILLIAM J. STEILEN ------------------------------------------------- William J. Steilen Vice President and Controller (Principal Accounting Officer) 10 GE GLOBAL INSURANCE HOLDING CORPORATION AND SUBSIDIARIES Index to Exhibits Exhibit No. Page ---- 12 Computation of ratio of earnings to fixed charges........... 8 11

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