UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
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Commission file number 0-14804
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General Electric Capital Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 06-1109503
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
260 Long Ridge Road,
Stamford, Connecticut 06927 (203) 357-4000
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(Address of principal (Zip Code) (Registrant's telephone
executive offices) number, including area code)
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SECURITIES REGISTERED PURSUANT
TO SECTION 12(b) OF THE ACT:
Title of each class Name of each
- ------------------------------ exchange on which registered
7 1/2% Guaranteed Subordinated ----------------------------
Notes Due August 21, 2035 New York Stock Exchange
SECURITIES REGISTERED PURSUANT
TO SECTION 12(g) OF THE ACT:
Title of each class
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Common Stock, par value $1,000 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
At March 7, 2002, 1,012 shares of voting common stock, which constitute all of
the outstanding common equity, with a par value of $1,000 were outstanding.
Aggregate market value of the outstanding common equity held by nonaffiliates of
the registrant at March 7, 2002. None.
DOCUMENTS INCORPORATED BY REFERENCE
The consolidated financial statements of General Electric Company, set forth in
the Annual Report on Form 10-K of General Electric Company for the year ended
December 31, 2001 are incorporated by reference into Part IV hereof.
Item 1. Business - Property and Casualty Reserves for Unpaid Claims and Claim
Expenses, set forth in the Annual Report on Form 10-K of GE Global Insurance
Holding Corporation for the year ended December 31, 2001 is incorporated by
reference into Part I hereof.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b)
OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE
FORMAT.
TABLE OF CONTENTS
Page
PART I
Item 1. Business .......................................................................................... 1
Item 2. Properties ........................................................................................ 12
Item 3. Legal Proceedings ................................................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders ............................................... 12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ......................... 13
Item 6. Selected Financial Data ........................................................................... 13
Item 7. Management's Discussion and Analysis of Results of Operations ..................................... 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........................................ 27
Item 8. Financial Statements and Supplementary Data ....................................................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............. 52
PART III
Item 10. Directors and Executive Officers of the Registrant ................................................ 53
Item 11. Executive Compensation ............................................................................ 53
Item 12. Security Ownership of Certain Beneficial Owners and Management .................................... 53
Item 13. Certain Relationships and Related Transactions .................................................... 53
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................................. 54
1
PART I
Item 1. Business.
GENERAL ELECTRIC CAPITAL SERVICES, INC.
General Electric Capital Services, Inc. (herein, together with its consolidated
affiliates, called "GE Capital Services", "the Corporation" or "GECS" unless the
context otherwise requires) was incorporated in 1984 in the State of Delaware.
Until February 1993, the name of the Corporation was General Electric Financial
Services, Inc. All outstanding common stock of GE Capital Services is owned
directly or indirectly by General Electric Company, a New York corporation ("GE
Company" or "GE"). The business of GE Capital Services consists of ownership of
two principal subsidiaries which, together with their affiliates, constitute GE
Company's principal financial services businesses. GE Capital Services is the
sole owner of the common stock of General Electric Capital Corporation ("GE
Capital" or "GECC") and GE Global Insurance Holding Corporation ("GE Global
Insurance Holdings").
GE Capital Services' principal executive offices are at 260 Long Ridge Road,
Stamford, Connecticut 06927 (Telephone number (203) 357-4000).
GENERAL ELECTRIC CAPITAL CORPORATION
GE Capital was incorporated in 1943 in the State of New York under the
provisions of the New York Banking Law relating to investment companies, as
successor to General Electric Contracts Corporation, which was formed in 1932.
The capital stock of GE Capital was contributed to GE Capital Services by GE
Company in June 1984. Until November 1987, the name of the corporation was
General Electric Credit Corporation. On July 2, 2001, GE Capital changed its
state of incorporation to Delaware. The business of GE Capital originally
related principally to financing the distribution and sale of consumer and other
products of GE Company. Currently, however, the types and brands of products
financed and the services offered are significantly more diversified. GE Company
manufactures few of the products financed by GE Capital.
GE Capital operates in five key operating segments that are described below.
These operations are subject to a variety of regulations in their respective
jurisdictions.
Services of GE Capital are offered primarily in the United States, Canada,
Europe and the Pacific Basin. GE Capital's principal executive offices are at
260 Long Ridge Road, Stamford, Connecticut 06927. At December 31, 2001, GE
Capital and affiliates employed approximately 88,000 persons.
GE GLOBAL INSURANCE HOLDING CORPORATION
GE Global Insurance Holdings, together with its affiliates, writes substantially
all lines of reinsurance and certain lines of property and casualty insurance.
GE Global Insurance Holdings has three principal subsidiaries: Employers
Reinsurance Corporation, GE Reinsurance Corporation and Medical Protective
Corporation. These affiliates, together with their direct and indirect
subsidiaries, reinsure property and casualty risks written by more than 1,000
insurers around the world. They also write certain specialty lines of insurance
on a direct basis, principally excess workers' compensation for self-insurers,
medical malpractice coverage for physicians and dentists, errors and omissions
coverage for insurance agents and brokers; excess indemnity for self-insurers of
medical benefits, and libel and allied torts. Other property and casualty
affiliates write excess and surplus lines insurance. The life reinsurance
affiliates are engaged in the reinsurance of life insurance products, including
term, whole and universal life, annuities, group long-term health products and
the provision of financial reinsurance to life insurers.
GE Global Insurance Holdings operates in three broad arenas: property and
casualty reinsurance, life reinsurance and primary commercial lines. GE Global
Insurance Holdings competes with more than 100 other property and casualty and
life reinsurance companies around the world, and with several hundred primary
commercial lines companies in the United States. GE Global Insurance Holdings is
the fourth largest reinsurer in the world, based on 2000 net written premiums.
It is a relatively small niche player in the broad primary commercial lines
arena. In one of its major primary areas - medical professional liability - GE
Global Insurance Holdings is the fourth largest writer in the United States
based on 2000 premiums.
2
Inherent in GE Global Insurance Holdings business is a range of insurance
underwriting risks, weather risk and financial risk associated with inflation,
economic growth or recession in specific areas. Important factors to continued
success include maintaining clear underwriting guidelines, balancing portfolios
geographically and demographically with a broad variety of exposures, and
maintaining a balanced global portfolio exposed to a variety of economic
conditions. In addition, the insurance/reinsurance industry can experience
cyclical turns in profitability associated with catastrophic events.
The global reinsurance industry is operating in an unprecedented environment in
the aftermath of the events of September 11. After years of the effect of excess
market capacity, the global market finds itself in a capacity crunch and with
many market participants declining to write coverage that includes terrorism.
The challenges associated with quantifying terrorism risk today are significant.
Primary insurers continue to consider alternatives to traditional risk transfer,
including 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.
Insurance and reinsurance operations are subject to regulation by various
insurance regulatory agencies.
GE Global Insurance Holdings and its affiliates conduct business throughout the
world using a network of local offices. The world headquarters of GE Global
Insurance Holdings are at 5200 Metcalf Avenue, Overland Park, Kansas 66201. At
December 31, 2001, GE Global Insurance Holdings and affiliates employed
approximately 3,400 persons.
OPERATING SEGMENTS
The Corporation provides a wide variety of financing, asset management, and
insurance products and services which are organized into the following operating
segments:
- - Consumer Services - private-label credit card loans, personal loans, time
sales and revolving credit and inventory financing for retail merchants,
auto leasing and inventory financing, mortgage servicing, retail businesses
and consumer savings and insurance services.
- - Equipment Management - leases, loans, sales and asset management services
for portfolios of commercial and transportation equipment, including
aircraft, trailers, auto fleets, modular space units, railroad rolling
stock, data processing equipment and marine shipping containers.
- - Mid-Market Financing - loans, financing and operating leases, and other
services for middle-market customers, including manufacturers, distributors
and end-users, for a variety of equipment that includes vehicles, corporate
aircraft, data processing equipment, medical and diagnostic equipment, and
equipment used in construction, manufacturing, office applications,
electronics and telecommunications activities.
- - Specialized Financing - loans and financing leases for major capital
assets, including industrial facilities and equipment, and energy-related
facilities; commercial and residential real estate loans and investments;
and loans to and investments in public and private entities in diverse
industries.
- - Specialty Insurance - U.S. and international multiple-line property and
casualty reinsurance; certain directly written specialty insurance and life
reinsurance; financial guaranty insurance, principally on municipal bonds
and asset-backed securities; and private mortgage insurance.
Refer to Item 7, "Management's Discussion and Analysis of Results of
Operations," in this Annual Report on Form 10-K for a discussion of the
Corporation's Portfolio Quality. Item 1. Business - Property and Casualty
Reserves for Unpaid Claims and Claim Expenses, which is set forth in the Annual
Report on Form 10-K of GE Global Insurance Holdings for the year ended December
31, 2001, is incorporated herein, by reference. A description of the
Corporation's principal businesses by operating segment follows.
3
CONSUMER SERVICES
GE Financial Assurance
GE Financial Assurance ("GEFA") provides consumers financial security solutions
by selling a wide variety of insurance, investment and retirement products,
payment protection insurance and income protection packages, primarily in North
America, Europe and Asia. These products help consumers invest, protect and
retire and are sold through a family of regulated insurance and annuity
affiliates. GEFA's principal product lines in North America and Asia are
annuities (deferred and immediate, fixed and variable), life insurance
(universal, term, ordinary and group), guaranteed investment contracts including
funding agreements, long-term care insurance, accident and health insurance,
personal lines of automobile insurance and consumer club memberships.
GEFA's principal product lines and services in Europe are payment protection
insurance (designed to protect customers' loan repayment obligations), personal
investment products, and travel and personal accident insurance, as well as
management of uninsured loss claims on behalf of victims of traffic accidents.
GEFA's product distribution in North America, Europe and Asia is accomplished
primarily through four channels: intermediaries (brokerage general agencies,
banks and securities brokerage firms), dedicated sales forces and financial
advisors, worksites, and direct and affinity based marketing (through the
Internet, telemarketing, and direct mail).
GEFA's principal operating affiliates include General Electric Capital Assurance
Company, First Colony Life Insurance Company, Federal Home Life Insurance
Company, GE Life and Annuity Assurance Company, GE Edison Life Insurance
Company, GE Insurance Holdings Limited and GE Life Group Limited.
GEFA recognizes that consolidation in the financial services industry will
create fewer but larger competitors. GEFA believes that the principal
competitive factors in the sale of insurance and investment products are product
features, commission structure, perceived stability of the insurer, claims
paying ability ratings, service, name recognition, price and cost efficiency.
GEFA's ability to compete is affected by its ability to provide competitive
products and quality service to the consumer, general agents, licensed insurance
agents and brokers; to maintain operating scale; and to continually reduce its
expenses through the elimination of duplicate functions and enhanced technology.
Many of GEFA's activities are regulated by a variety of insurance and
other regulators.
GEFA headquarters are in Richmond, Virginia.
Auto Financial Services
GE Capital Auto Financial Services ("AFS") provided financial services in North
America to automobile dealers, manufacturers, banks, financing companies and the
consumer customers of those entities, both through traditional channels and
through the Internet. In the United States, AFS was a leading independent
provider of leases for new and used motor vehicles and of non-prime financing
products. In addition, AFS offered inventory financing programs, off-lease
vehicle sales, productivity enhancing Internet solutions, and direct loans to
the industry.
On November 29, 2000, AFS announced its decision to discontinue originating new
lease, loan and commercial transactions effective December 1, 2000. Since that
date, AFS operations have consisted of servicing their existing portfolios and
re-marketing off-lease vehicles.
AFS headquarters are in Barrington, Illinois.
GE Card Services
GE Card Services ("CS") is a leading provider of sales financing services to
North American retailers in a broad range of consumer industries. Details of
financing plans differ, but include customized private-label credit card
programs with retailers and inventory financing programs with manufacturers,
distributors and retailers.
CS offers customized private-label credit card solutions designed to attract and
retain customers for retailers such as JC Penney, ExxonMobil, Wal-Mart, The Home
Depot, Sam's Club, Macy's and Lowe's. CS provides financing directly to
customers of retailers or purchases the retailers' customer receivables. Most of
the retailers sell a variety of products of various manufacturers on a time
sales basis. The terms for these financing plans differ according to the size of
contract and credit standing of the customer. Financing is provided to consumers
under contractual arrangements, both with and without recourse to retailers. CS'
wide range of financial services includes application processing, sales
authorization, statement billings, customer services and collection services. CS
provides inventory financing for retailers primarily in the appliance and
consumer electronics industries. CS maintains a security interest in the
inventory financed and retailers are obliged to maintain insurance coverage for
the merchandise financed.
4
Additionally, CS issues and services the GE Capital Corporate Card product,
providing payment and information systems which help medium and large-sized
companies reduce travel costs, and the GE Capital Purchasing Card product, which
helps customers streamline their purchasing and accounts payable processes.
CS competes in the unsecured consumer lending market, doing business principally
in the United States and Canada. CS' operations are subject to a variety of bank
and consumer protection regulations.
The unsecured consumer lending market's principal methods of competition are
price, servicing capability including Internet value added e-services and risk
management capability. The unsecured consumer lending market is subject to
various risks including declining retail sales, increases in personal bankruptcy
filings, increasing payment delinquencies and rising interest rates.
CS headquarters are in Stamford, Connecticut.
Global Consumer Finance
GE Capital Global Consumer Finance ("GCF") is a leading provider of credit and
insurance products and services to non-U.S. retailers and consumers. GCF
provides private-label credit cards and proprietary credit services to retailers
in Europe, Asia and, to a lesser extent, Central and South America, including
Tesco, The Home Depot, Metro and Wal-Mart, as well as offering a variety of
direct-to-consumer credit programs such as consumer loans, auto loans and
finance leases, mortgages, debt consolidation, bankcards and the distribution of
credit insurance.
GCF provides financing to consumers through operations in Argentina, Australia,
Austria, Brazil, the Caribbean, the Czech Republic, Denmark, France, Germany,
Hong Kong, Hungary, India, Indonesia, Italy, Japan, Korea, Mexico, New Zealand,
Norway, Poland, Portugal, Republic of Ireland, Slovakia, Spain, Sweden,
Switzerland, Taiwan, Thailand, and the United Kingdom.
In March, May and September 2001, GCF closed transactions increasing a former
minority interest in Budapest Bank in Hungary to a 99% majority holding.
Budapest Bank is a commercial and retail bank offering a variety of consumer and
small business financing products and new services such as electronic banking.
In June 2001, GCF acquired igroup Limited, a leading provider of mortgage and
debt consolidation products to the UK market, which is based in Watford,
England.
GCF's operations are subject to a variety of bank and consumer protection
regulations in their respective jurisdictions and a number of countries have
ceilings on rates chargeable to consumers in financial service transactions. The
consumer lending market is also subject to the risk of declining retail sales,
changes in interest and currency exchange rates, increases in personal
bankruptcy filings and payment delinquencies.
The businesses in which GCF engages are subject to competition from various
types of financial institutions including commercial banks, leasing companies,
consumer loan companies, independent finance companies, manufacturers' captive
finance companies, and insurance companies. Cross selling multiple products into
its customer base is a critical success factor for GCF.
GCF headquarters are in Stamford, Connecticut.
Mortgage Services
GE Capital Mortgage Services, Inc. ("Mortgage Services") engaged primarily in
the business of originating, purchasing, selling and servicing residential
mortgage loans collateralized by one-to-four-family homes located throughout the
United States. Mortgage Services obtained servicing through the origination and
purchase of mortgage loans and servicing rights, and primarily packaged the
loans it originated and purchased into mortgage-backed securities which it sold
to investors. Mortgage Services also originated and serviced home equity loans.
On September 29, 2000, Mortgage Services closed on a transaction with a major
mortgage company, which is owned by a major national bank holding company, to
subservice Mortgage Services' mortgage servicing portfolio and to acquire
Mortgage Services' servicing facility and mortgage origination business.
Mortgage Services retains its financial interest in the servicing portfolio and
the related assets, which are now being managed by GE Capital Mortgage Insurance
(see page 11) and the results of which are now included in the Specialty
Insurance segment. As a result of this transaction, Mortgage Services exited the
business of originating, purchasing and selling of residential mortgage loans.
5
EQUIPMENT MANAGEMENT
Aviation Services
GE Capital Aviation Services ("GECAS"), the world's foremost aircraft leasing
company, is a global commercial aviation financial services business that offers
a broad range of financial products to airlines, aircraft operators, owners,
lenders and investors. Financial solutions provided to customers include
operating leases, sale/leasebacks, aircraft purchasing and trading, financing
leases, engine/spare parts financing, pilot training, fleet planning and
financial advisory services.
GECAS owns approximately 1,000 aircraft and manages approximately 300 on behalf
of third parties. In addition, it has planes on order or on option from Boeing,
Airbus, Dornier, Embraer and Bombardier. GECAS has over 200 customers in over 60
countries.
GECAS operates in a highly competitive area serving a cyclical industry that
could further consolidate if airlines generally continue to weaken financially.
The impact of the events of September 11 has hastened and deepened a downturn in
the aviation industry served by GECAS. The business can also be affected by
regulatory changes that may impact aircraft values. Regulations under current
consideration, if enacted, that reduce permissible noise levels emitted from
commercial aircraft would have an effect on aircraft values.
GECAS headquarters are in Stamford, Connecticut, with regional offices in
Shannon, Republic of Ireland; New York, New York; Miami, Florida; Chicago,
Illinois; Vienna, Austria; Toulouse, France; Luxembourg; Beijing and Hong Kong,
China; Tokyo, Japan; and Singapore.
Fleet Services
GE Capital Fleet Services ("Fleet") is one of the leading corporate fleet
management companies with operations in North America, Europe, Australia, New
Zealand and Japan and has approximately 1.2 million cars and trucks under lease
and service management. Fleet offers finance and operating leases to several
thousand customers. The business via Web applications and other unique channels,
delivers productivity solutions that drive commercial vehicle cost savings to
company fleets of all sizes.
The primary product in North America is a terminal rental adjustment clause
lease through which the customer assumes the residual risk - that is, risk that
the book value will be greater than market value at lease termination. In
Europe, the primary product is a closed-end lease in which Fleet assumes
residual risk. In addition to the services directly associated with the lease,
Fleet offers value-added fleet management services designed to reduce customers'
total fleet management costs. These services include, among others, web-based
vehicle ordering and reporting, maintenance management programs, accident
services, national account purchasing programs, fuel programs, title and
licensing services and strategic cost analysis consulting. Fleet's customer base
is diversified with respect to industry and geography and includes many Fortune
500 companies.
Fleet competes both on a local and global basis with other leasing businesses of
various sizes as well as automobile manufacturers in some parts of the world.
The industry is dependent upon the attractiveness of leasing and fleet
management as a viable alternative for customers, along with the stability of
new and used car prices. Future success will depend upon the ability to maintain
a large and diverse customer portfolio, to estimate used car prices as well as
mitigate the impact of fluctuations in those prices, and to continue to
understand and deliver unique product and service offerings to the customers in
the most efficient and cost effective manner possible.
Fleet headquarters are in Eden Prairie, Minnesota.
Information Technology Solutions
GE Capital Information Technology Solutions ("IT Solutions") is a provider of a
broad array of information technology products and services, including full life
cycle services that provide customers with cost-effective control and management
of their information systems. Products offered include desktop personal
computers, client server systems, UNIX systems, local and wide area network
hardware, and software. Services offered include network design, network
support, asset management, help desk, disaster recovery, enterprise management
and financial services. IT Solutions serves commercial, educational and
governmental customers in 13 countries. During 2001, IT Solutions exited,
including through sales of portions of business units, its operations in France
and the United Kingdom.
6
The worldwide competition in information technology products and services is
intense. Competition is very active in all products and services and comes from
a number of principal manufacturers and other distributors and resellers of
information technology products. Markets for products and services are highly
price competitive. Additionally, many information technology product
manufacturers are bypassing traditional information technology resellers in
favor of direct manufacturer relationships with the ultimate end-users.
IT Solutions' North American headquarters are in Newport, Kentucky; its European
headquarters are in Munich, Germany.
Transport International Pool/Modular Space
In April, 1999, Transport International Pool and GE Capital Modular Space were
consolidated to generate cost savings and management synergies. This merger has
resulted in the elimination of duplicate support functions and the integration
of back offices.
Transport International Pool ("TIP") is one of the global leaders in renting,
leasing, selling and financing transportation equipment. With more than 40 years
of experience in the renting, leasing and selling of trailers, TIP's mission is
to provide customers with products and services that help them increase
productivity and lower operating costs. TIP's fleet of over 390,000 dry freight,
refrigerated and double vans, flatbeds, intermodal assets, and specialized
trailers is available for rent, lease or purchase at over 200 locations in the
United States, Europe, Canada, and Mexico. TIP's commercial vehicle fleet of
over 35,000 units is available for rent, lease, or purchase in the United
Kingdom. TIP also finances new and used trailers and buys trailer fleets. TIP's
customer base comprises trucking companies, railroads, shipping lines,
manufacturers and retailers.
TIP's competitive environment is made up of a few large national competitors and
many smaller, often changing regional players. TIP is a major participant in the
transportation renting, leasing, selling and financing market. The industry is
characterized by thin operating margins and continued consolidation of
companies, with their volume driven by the gross domestic product and their
costs affected by fuel prices and driver labor. The ability to remain
competitive will require the continued expansion of value-added services around
the core business of renting, leasing and financing transportation equipment.
GE Capital Modular Space ("Modular Space") provides commercial mobile and
modular structures for rental, lease and sale from over 100 facilities in the
United States, Europe, Canada and Mexico. The buildings are provided with
flexible customized financing, turnkey services and dedicated local sales staff.
The primary markets served include construction, education, healthcare,
financial, commercial, institutional and government. Modular Space products are
available as custom mobile and modular buildings, designed to customer
specifications, or are available through the Modular Space stock fleet of
approximately 120,000 mobile and modular units.
Competition consists primarily of national modular companies and regional/local
competitors who provide services in selected territories. Modular Space also
competes with construction companies on permanent structure opportunities.
Competitive factors for rental and lease customers include price, condition and
availability of local fleet. Factors for custom and fleet sales opportunities
include price, alternative solutions, and delivery.
TIP/Modular Space have offices in North America and Europe. The world
headquarters for TIP/Modular Space are in Devon, Pennsylvania. TIP/Modular Space
European headquarters and pooled accounting service center are in Amsterdam, The
Netherlands, and a commercial vehicle operation and administrative center is
located in Manchester, England.
GE SeaCo
GE SeaCo SRL ("GE SeaCo") is a joint venture between GE Capital and Sea
Containers Ltd., which operates the combined marine container fleets of Genstar
Container Corporation ("Genstar") and Sea Containers Ltd. GE SeaCo is one of the
world's largest lessors of marine shipping containers with a combined fleet of
over 900,000 twenty foot equivalent units of dry cargo, refrigerated and
specialized containers for global cargo transport. Lessees are primarily
shipping lines that lease on a long term or master lease basis.
The marine container leasing industry continues to be cyclical due to periods of
excess capacity and changes in trade volumes. Further risk is attributable to
the lessees, which are the major steamship lines and which exhibit cyclical
results and generally weak financial condition, exposing GE SeaCo to customer
credit risk. GE SeaCo is subject to asset value compression resulting from
declining new container prices and positioning risk attributed to the increased
use of one-way leases.
GE SeaCo headquarters are in Bridgetown, Barbados.
7
Penske Truck Leasing
GE Capital is a limited partner in Penske Truck Leasing Co. L.P. ("Penske"),
which is a leading provider of full-service truck leasing and commercial and
consumer truck rental in the United States and Canada. Penske operates through a
national network of full-service truck leasing and rental facilities. At
December 31, 2001, Penske had a fleet of about 145,000 tractors, trucks and
trailers in its leasing and rental fleets and provided contract maintenance
programs or other support services for about 50,000 additional vehicles.
Penske also provides dedicated logistics operations support which combines
company-employed drivers with its full-service lease vehicles to provide
dedicated contract carriage services. In addition, Penske offers supply chain
services such as distribution consulting, warehouse management and information
systems support.
In February 2001, Penske acquired Rollins Truck Leasing Corporation for
approximately $2 billion in cash and assumed debt. Rollins Truck Leasing
Corporation was one of the largest national full-service truck leasing and
rental companies, with locations in the United States and Canada.
Penske competes with several other companies conducting nationwide truck leasing
and rental operations, a large number of regional truck leasing companies, many
similar companies operating primarily on a local basis and both local and
nationwide common and contract carriers.
On a nationwide basis, Penske offers full-service truck leasing, commercial and
consumer rental and logistics services. In its leasing and support services,
Penske competes primarily on the basis of customer service. Geographic location,
price and equipment availability are also important competitive factors in this
business. In its consumer rental operations, Penske competes primarily on the
basis of equipment availability, price, geographic location and customer
service.
Penske headquarters are in Reading, Pennsylvania.
GE American Communications
GE American Communications ("Americom") engaged primarily as a satellite service
supplier to a diverse array of customers, including the broadcast and cable TV
industries, as well as broadcast radio. It also supplied integrated
communications services for government and commercial customers. Americom also
operated communications satellites and maintained a supporting network of earth
stations, central terminal offices, and telemetry, tracking and control
facilities.
On November 9, 2001, GECS exchanged the stock of Americom and other related
assets and liabilities for a combination of cash and stock in SES Global
("SES"), a leading satellite company. As a result of the transaction, GE Capital
now owns 30.7% of the combined operations of both Americom and SES. The
investment in the combined entity is now part of the Structured Finance Group.
Americom headquarters were in Princeton, New Jersey.
Rail Services
GE Capital Rail Services ("GERSCO") is one of the leading railcar leasing
companies in North America, with a fleet of 190,000 railcars in its total
portfolio. Serving Class 1 and short-line railroads and shippers throughout
North America, GERSCO offers one of the most diverse fleets in the industry and
a variety of lease options.
GERSCO also owns and operates a network of railcar repair and maintenance
facilities located throughout North America. The repair facilities offer a
variety of services, ranging from light maintenance to heavy repair of damaged
railcars. The company also provides railcar management, administration and other
services.
In addition, GERSCO is a pan-European provider of rail transport services,
offering a broad range of railcar equipment and rail-related services to
railroads, shippers and other transport providers.
Traditional competitors include railroads, stand-alone leasing companies and
other owners of railcar fleets, diversified financial institutions, and railcar
builders. Customers who lease railcars also have the choice of purchasing them,
either outright or through a financial sale. Certain segments of the North
American railcar leasing industry continue to be affected by an oversupply of
cars. Ongoing technology changes in car design and capacity are also impacting
car supply. In Europe, liberalization and privatization of national railroads
continue to significantly impact the rail industry. In addition, on both
continents, changes in supply and demand for commodities shipped by rail also
impact the demand for cars. In that regard, the trucking industries on both
continents continue to make inroads into traditional haulage by rail. The
8
interaction and timing of these forces across the portfolio of cars can impact
the profitability of GERSCO. The ability to remain competitive will require the
commitment to constant productivity gains and improvement in its breadth and
quality of service through the implementation of technology and process
improvements.
European sales offices are in England, France, Germany, Italy and Sweden. GERSCO
headquarters are in Chicago, Illinois.
MID-MARKET FINANCING
Commercial Equipment Financing
GE Capital Commercial Equipment Financing ("CEF") offers large and small
companies with a broad line of innovative financial solutions including leases
and loans to middle-market customers, including manufacturers, distributors,
dealers and end-users, as well as municipal financing and facilities financing,
in such areas as construction equipment, corporate aircraft, medical equipment,
trucks and trailers. It also furnishes customers with direct-source tax-exempt
finance programs, as well as lease and sale/leaseback offerings. Products are
either held for CEF's own account or brokered to third parties.
Generally, transactions range in size from $50 thousand to $50 million, with
financing terms from 36 to 180 months. CEF also maintains an asset management
operation that redeploys off-lease and repossessed equipment and other assets.
The global equipment financing industry continues to be highly fragmented and
intensely competitive. Competitors in the U.S. domestic and international
markets include independent financing companies, financing subsidiaries of
equipment manufacturers, and banks (national, regional, and local). Industry
participants compete not only on the basis of monthly payments, interest rates
and fees charged customers but also on deal structures and credit terms. The
profitability of CEF is affected not only by broad economic conditions that
impact customer credit quality and the availability and cost of capital, but
also by successful management of credit risk, operating risk and such market
risks as interest rate and currency exchange risk. Important factors to
continued success include maintaining strong risk management systems, diverse
portfolios, service and distribution channels, strong collateral and asset
management knowledge, deal structuring expertise and the reduction of costs
through enhanced use of technology.
During 2001, CEF purchased the stock of Franchise Finance Corporation of America
and certain assets and liabilities from Mellon Financial Corporation and SAFECO
Corporation. The purchase price for these acquisitions amounted to approximately
$4.4 billion.
CEF operates from offices throughout the Americas, Europe, Asia and Australia
and through joint ventures in Indonesia and China. CEF headquarters are in
Danbury, Connecticut.
Commercial Finance
GE Capital Commercial Finance ("CF") is a leading global provider of innovative
financing, primarily revolving and term debt and equity to finance acquisitions,
business expansion, bank refinancings, recapitalizations and other special
situations. Products also include asset securitization facilities, capital
expenditure lines and bankruptcy-related facilities, as well as factoring
services. Loan transactions range in size from under $10 million to over $200
million.
CF's clients are owners, managers and buyers of both public and private
companies, principally manufacturers, distributors, retailers and diversified
service providers, and CF has industry specialists in the retail, media and
communications, and high technology industries. Through its Merchant Banking
Group, CF provides senior debt, subordinated debt and bridge financing to buyout
and private equity firms, and co-invests in equity with buying groups or invests
directly on a select basis.
The corporate financing business is characterized by intense competition from a
variety of lenders and factoring services providers, including local, regional,
national and international banks and non-bank financing institutions.
Competition is based on interest rates, fees, credit terms, and transaction
structures. In addition to these factors, successful management of credit risks
within the existing customer loan portfolio also affects profitability.
Important factors to continued success include maintaining deal structuring
expertise, strong risk management systems, and collateral management knowledge.
CF headquarters are in Stamford, Connecticut. CF has lending operations in 25
cities, including international offices in Canada, Mexico, Thailand, Korea,
Australia, The Netherlands, and the United Kingdom, and also has significant
factoring operations in the U.S., France, the United Kingdom and Italy serving
U.S. and European companies.
Vendor Financial Services
GE Capital Vendor Financial Services ("VFS") provides financial solutions and
services to over 100 equipment manufacturers and more than 4,500
dealers/distributors in North America, Europe and Asia (including Japan),
9
enabling them to offer financing options to their customers. With nearly $20
billion in served assets, VFS helps its partners focus on their core businesses
and improve sales by providing flexible financial solutions and services.
Customers include major U.S. and non-U.S. manufacturers in a variety of
industries including information technology, office equipment, healthcare,
telecommunications, energy and industrial equipment. VFS establishes sales
financing in two ways - by forming captive partnerships with manufacturers that
do not have them, and by outsourcing captive partnerships from manufacturers
that do (captive partnerships provide sales financing solely for products of a
given manufacturer). VFS offers industry-specific knowledge, leading edge
technology, leasing and equipment expertise, and global capabilities. In
addition, VFS provides an expanding array of related financial services to
customers, including trade payables services.
In June 2001, VFS acquired the Manufacturer and Dealer Services business (MDS)
of Mellon Leasing for approximately $480 million. MDS provides financial
services for office equipment and industrial equipment manufacturers.
In September 2001, VFS signed a framework agreement with Xerox to form a Joint
Venture, Xerox Capital Services. Through this joint venture, VFS will become the
primary financing provider for Xerox customers across the United States.
An economic slowdown would impact the continued expansion of the equipment
financing industry, intensifying a competitive pricing environment, pressure
delinquencies and residual realizations, and pressure any recourse obligations
from vendor relationships. The ability to remain competitive will depend upon,
among other things, the ability to drive down costs through the significant
investment in productivity initiatives and the ability to continue to
effectively manage its spread of risk in industry sectors and equipment
categories in conjunction with vendor partners.
VFS has sales offices throughout the United States, Canada, Europe, Asia
(including Japan), and Australia. VFS headquarters are in Danbury, Connecticut.
GE European Equipment Finance
GE European Equipment Finance ("EEF") is one of Europe's leading diversified
equipment leasing businesses, offering financial solutions on a single-country
and pan-European basis. Customers include manufacturers, vendors and end-users
in industries such as office imaging, materials handling, corporate aircraft,
information technology, broadcasting, machine tools, telecommunications and
transportation. Products and services include loans, leases, master lease
coordination and other services, such as helping end-users increase purchasing
power through financing options and helping manufacturers and vendors to offer
leasing programs. For financial reporting purposes, EEF's operating results are
allocated to CEF and VFS.
EEF is subject to competition from various types of financial institutions,
including leasing companies, commercial and investment banks, and finance
companies associated with manufacturers. Consolidation in the financial services
industry will create fewer but larger competitors. EEF continues to be impacted
by pricing pressures, slow growth in some of its markets, and is directly
affected by the general economic conditions within country economies. Its
ability to effectively compete in a changing environment will be dependent upon,
among other things, its ability to increase productivity and offer innovative
financial products and services. Operations are subject to varying degrees of
regulation in several jurisdictions across the European continent.
EEF operates from offices in the United Kingdom, France, Germany, Switzerland,
Belgium, The Netherlands, Ireland, Italy, Spain, Norway, Denmark, Sweden and
Finland, as well as having transaction capabilities in countries such as
Portugal. EEF headquarters are in Hounslow, England.
Heller Financial
In October 2001, the Corporation acquired Heller Financial, Inc. ("Heller
Financial") for approximately $5.3 billion. At December 31, 2001, the
Corporation reported Heller Financial as a stand-alone entity within the
Mid-Market Financing segment due to the proximity of the acquisition to
year-end. During 2002, the Corporation will report Heller Financial's operations
with those of the Corporation's businesses with which they were combined,
primarily Commercial Finance, VFS and CEF. In addition, one of the strongest
Heller Financial / GE Capital synergies was achieved when their healthcare
businesses were combined to create a new business to meet the financial needs of
the dynamic healthcare industry, Healthcare Financial Services. Overall, Heller
Financial provides financing solutions to middle-market and small business
clients including collateralized cash flow and asset based lending, secured real
estate financing, debt and lease equipment financing and small businesses
financing.
Heller Financial originates transactions in the United States through its 62
domestic office locations and internationally through a network of wholly owned
subsidiaries and joint venture commercial finance companies in 22 countries
outside the United States. Heller Financial concentrates primarily on senior
10
secured lending, with approximately 90% of consolidated lending assets and
investments at December 31, 2001 being made on that basis. Heller Financial's
primary clients and customers are entities in the manufacturing and service
sectors having annual sales generally in the range of $5 million to $250 million
and in the real estate sector having property values generally in the range of
$1 million to $40 million.
Heller Financial's markets are highly fragmented and extremely competitive and
are characterized by competitive factors that vary by product and geographic
region. Heller Financial's competitors include commercial finance companies,
national and regional banks and thrift institutions, investment banks, leasing
companies, investment companies, and manufacturers and vendors. Heller Financial
competes primarily on the basis of pricing, terms, structure and service.
Heller Financial's operations are subject, in certain instances, to supervision
and regulation by state and federal governmental authorities. They may also be
subject to various laws and judicial and administrative decisions imposing
various requirements and restrictions, which, among other things, regulate
credit granting activities, establish maximum interest rates and finance
charges, restrict foreign ownership or investment, govern secured transactions
and set collection, foreclosure, repossession and claims handling procedures.
Heller Financial headquarters are in Chicago, Illinois.
SPECIALIZED FINANCING
Real Estate
GE Capital Real Estate ("Real Estate") provides funds for the acquisition,
refinancing and renovation of a wide range of apartment buildings, industrial
properties, multi-family housing, retail facilities and offices located
throughout the United States, Canada, Mexico, Europe and Asia. Real Estate also
provides asset management services to real estate investors and selected
services to real estate owners. Real Estate is one of the world's leading
providers of capital and services to the global commercial real estate market,
providing debt and equity for real estate operators, developers, REITs and
opportunity funds to allow them to meet their acquisition, refinancing and
renovation needs.
Lending is a major portion of Real Estate's business in the form of
intermediate-term senior or subordinated fixed and floating-rate loans secured
by existing income-producing commercial properties such as office buildings,
rental apartments, shopping centers, industrial buildings, mobile home parks,
hotels and warehouses. Loans range in amount from single-property mortgages
typically not less than $5 million to multi-property portfolios of several
hundred million dollars. Approximately 90% of all loans are senior mortgages.
Real Estate purchases and provides restructuring financing for portfolios of
real estate, mortgage loans, limited partnerships, and tax-exempt bonds. Real
Estate's business also includes the origination and securitization of low
leverage real estate loans, which are intended to be held less than one year
before outplacement. Additionally, Real Estate provides equity capital for real
estate partnerships through the holding of limited partnership interests and
receives preferred returns; typically such investments range from $2 million to
$10 million.
Real Estate also offers a variety of asset management services to outside
investors, institutions, corporations, investment banks, and others through its
real estate services subsidiaries. Asset management services include
acquisitions and dispositions, strategic asset management, asset restructuring,
and debt and equity management. In addition, Real Estate offers owners of
multi-family housing ways to reduce costs and enhance value in properties by
offering buying services (e.g., for appliances and roofing).
Competition is intense in each of Real Estate's areas and across all product
lines. Competitors include local, regional and, increasingly, multi-national
lenders and investors. Important competitive factors in Real Estate's lending
activities include financing rates, loan proceeds, loan structure and the
ability to complete transactions quickly. Where Real Estate provides equity
capital, principal competitive factors include the valuation of underlying
properties and investment structure as well as transaction cycle time.
Real Estate has offices throughout the United States, as well as in Canada,
Mexico, Australia, Japan, Sweden, France, Spain, Germany, Italy and the United
Kingdom. Real Estate headquarters are in Stamford, Connecticut.
Structured Finance Group
GE Capital Structured Finance Group ("SFG") provides innovative financial
solutions through equity, debt and structured investments to clients throughout
the world. SFG's clients are primarily in the energy, telecommunications,
industrial and transportation sectors and range from household names to early
stage businesses.
11
SFG combines industry and technical expertise to deliver a full range of
sophisticated financial services and products. Services include corporate
finance, acquisition finance and project finance (construction and term).
Products include a variety of debt and equity instruments, as well as structured
transactions, including leases and partnerships. SFG manages an investment
portfolio of approximately $17 billion.
SFG's competition is diverse and global, ranging from large financial
institutions to small niche capital providers. Additionally, two of SFG's client
industry segments, telecommunications and energy, are faced with extraordinary
challenges fostered by deregulation, globalization and technical innovation.
Both of these industries have been recently experiencing significant volatility
in demand for their products and services. The ability to remain competitive
will require innovative and unique ways of providing capital, based on industry
knowledge and competitive pricing, as well as the ability to properly assess
credit risks and effectively manage portfolios.
SFG headquarters are in Stamford, Connecticut, and it has offices in Chicago,
Illinois; Houston, Texas; New York, New York; and San Francisco, California.
Internationally, SFG is represented in London, United Kingdom; Frankfurt,
Germany; Milan, Italy; Tokyo, Japan; and Mexico City, Mexico.
GE Equity
GE Equity purchases equity investments in early-stage, early growth, pre-IPO
companies with a primary objective of long-term capital appreciation. GE
Equity's portfolio consists primarily of direct investments in convertible
preferred and common stocks in both public and private companies; GE Equity also
participates in certain investment limited partnerships. The portfolio includes
investments in the technology and communications, media and entertainment,
business services, financial services and healthcare sectors. The portfolio is
geographically diversified with investments located throughout the United
States, as well as in Latin America, Europe and Asia.
GE Equity operates in a highly competitive environment and competes with other
domestic and foreign institutions. Competitors include corporate investors,
private equity firms, investment banking companies, and a variety of other
financial services and advisory companies. GE Equity seeks to develop meaningful
business relationships with investees by offering GE's network of brands,
services and management expertise. GE Equity's competitive environment is
subject to the cyclical nature of the industries it invests in, as well as the
momentum in the stock market.
GE Equity headquarters are in Stamford, Connecticut.
SPECIALTY INSURANCE
In addition to GE Global Insurance Holdings (discussed above), GECS' principal
specialty insurance businesses are as follows.
Financial Guaranty Insurance Company
FGIC Holdings ("FGIC"), through its subsidiary, Financial Guaranty Insurance
Company ("Financial Guaranty"), is an insurer of municipal bonds, including new
issues, bonds traded in the secondary market and bonds held in unit investment
trusts and mutual funds. Financial Guaranty also guarantees certain taxable
structured debt. The in force guaranteed principal, after reinsurance, amounted
to approximately $174 billion at December 31, 2001. Approximately 84% of the
business written by Financial Guaranty is municipal bond insurance.
FGIC subsidiaries provide a variety of services to state and local governments
and agencies, liquidity facilities in variable-rate transactions, municipal
investment products and other services.
The municipal bond insurance business is fairly mature. This environment
requires FGIC to place increasing emphasis on strategies that differentiate its
offerings. Additionally, the stable nature of the industry continues to attract
interest from potential new competitors, such as multi-line insurance companies.
Important factors to continued success include maintaining strong
capitalization, superior customer service and competitive pricing.
FGIC headquarters are in New York, New York.
Mortgage Insurance
GE Capital Mortgage Insurance ("Mortgage Insurance") helps families become
homeowners by smoothing the way for customers to obtain low-down-payment
mortgages while protecting lenders and investors against the risks of default.
It enables more than a quarter million families per year to obtain
low-down-payment mortgages and now has a no-down-payment product as well.
Mortgage Insurance is engaged principally in providing residential mortgage
guaranty insurance in the United States, United Kingdom, Canada and Australia.
At December 31, 2001, Mortgage Insurance was the mortgage insurance carrier for
over 1.9 million residential homes, with total insurance in force aggregating
approximately $184 billion and total risk in force aggregating approximately $80
billion. When a valid claim is received, Mortgage Insurance either pays up to a
12
guaranteed percentage based on the specified coverage, or pays the mortgage and
delinquent interest, taking title to the property and arranging for its sale.
The mortgage insurance industry is sensitive to the interest rate environment
and housing market conditions. The mortgage insurance industry is intensely
competitive as excess market capacity seeks to underwrite business being
generated from a consolidating customer base. In addition, considerable
influence is exerted on the industry by two government-sponsored enterprises,
which buy the majority of the loans insured by mortgage insurers.
Mortgage Insurance headquarters are in Raleigh, North Carolina.
OTHER
Wards
All other consists primarily of Montgomery Ward, LLC ("Wards") from August 2,
1999, when GECS acquired control of the retailer upon its emergence from
bankruptcy reorganization, to December 28, 2000, when Wards again filed for
bankruptcy protection. The retailer is substantially liquidated.
REGULATIONS AND COMPETITION
The Corporation's activities are subject to a variety of federal and state
regulations including, at the federal level, the Consumer Credit Protection Act,
the Equal Credit Opportunity Act and certain regulations issued by the Federal
Trade Commission. A majority of states have ceilings on rates chargeable to
customers in retail time sales transactions, installment loans and revolving
credit financing. Insurance and reinsurance operations are subject to regulation
by various state insurance commissions or foreign regulatory authorities, as
applicable. The Corporation's international operations are subject to regulation
in their respective jurisdictions. To date, compliance with such regulations has
not had a material adverse effect on the Corporation's financial position or
results of operations.
The businesses in which the Corporation engages are highly competitive. The
Corporation is subject to competition from various types of financial
institutions, including banks, thrifts, investment banks, broker-dealers, credit
unions, leasing companies, consumer loan companies, independent finance
companies, finance companies associated with manufacturers and insurance and
reinsurance companies.
BUSINESS AND ECONOMIC CONDITIONS
The Corporation's businesses are generally affected by general business and
economic conditions in countries in which the Corporation conducts business.
When overall economic conditions deteriorate in those countries, there generally
are adverse effects on the Corporation's operations, although those effects are
dynamic and complex. For example, a downturn in employment or economic growth in
a particular national or regional economy will generally increase the pressure
on customers, which generally will result in deterioration of repayment patterns
and a reduction in the value of collateral. However, in such a downturn, demand
for loans and other products and services offered by the Corporation may
actually increase. Interest rates, another macro-economic factor, are important
to the Corporation's businesses. In the lending and leasing businesses, higher
real interest rates increase the Corporation's cost to borrow funds, but also
provide higher levels of return on new investments. For the Corporation's
operations that are less directly linked to interest rates, such as the
insurance operations, rate changes generally affect returns on investment
portfolios.
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 political, economic, business,
competitive, market and regulatory factors.
Item 2. Properties.
GE Capital Services and its subsidiaries conduct their businesses from various
facilities, most of which are leased. The locations of the Corporation's primary
facilities are described in Item 1. Business.
Item 3. Legal Proceedings.
The Corporation is not involved in any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted
13
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
See note 13 to the consolidated financial statements. The common stock of the
Corporation is owned entirely by GE Company and an affiliate and, therefore,
there is no trading market in such stock.
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the
financial statements of GE Capital Services and consolidated affiliates and the
related Notes to Consolidated Financial Statements.
Year ended December 31
----------------------------------------------------------------------
(In millions) 2001 2000 1999 1998 1997
----------------------------------------------------------------------
Revenues ..................................$ 58,353 $ 66,177 $ 55,749 $ 48,694 $ 39,931
Earnings before accounting changes......... 5,586 5,192 4,443 3,796 3,256
Cumulative effect of accounting changes.... (169) - - - -
Net earnings............................... 5,417 5,192 4,443 3,796 3,256
Return on common equity (a) ............... 21.84% 24.05% 23.74% 23.46% 22.59%
Ratio of earnings to fixed charges ........ 1.62 1.61 1.62 1.55 1.56
GECC ratio of earnings to fixed charges ... 1.72 1.52 1.60 1.50 1.48
GECC ratio of debt to equity .............. 7.31 7.53 8.44 7.86 7.45
Financing receivables - net ...............$ 174,032 $ 143,299 $ 134,215 $ 118,606 $ 101,133
Total assets............................... 425,484 370,636 345,018 303,297 255,408
Short-term borrowings ..................... 160,844 123,992 129,259 113,162 95,274
Long-term senior notes .................... 77,920 80,383 69,770 58,042 44,993
Long-term subordinated notes .............. 1,171 996 996 996 996
Minority interest ......................... 4,267 3,968 4,391 3,459 3,113
Share owners' equity ...................... 28,590 23,022 20,321 19,727 17,239
Insurance premiums written for the year ... 15,843 16,461 13,624 11,865 9,396
----------------------------------------------------------------------
(a) Common equity excludes unrealized gains and losses on investment securities
and derivatives qualifying as hedges, net of tax. Return on common equity
is calculated using earnings that are adjusted for preferred stock dividend
and common equity excludes preferred stock.
Item 7. Management's Discussion and Analysis of Results of Operations.
Overview
The Corporation's earnings before accounting changes were $5,586 million in
2001, up 8% from $5,192 million in 2000, with strong double-digit earnings
growth in three of the five operating segments. Net earnings in 2000 increased
17% from 1999. Earnings growth throughout the three-year period resulted from
origination volume and asset growth, productivity and acquisitions of businesses
and portfolios. Principal factors in the 2001 increase were strong productivity
($0.7 billion) and lower taxes ($0.5 billion) partially offset by GE Global
Insurance Holdings ($0.5 billion) and lower realized gains on financial
instruments. Excluding effects of Paine Webber Group, Inc. (PaineWebber) in 2000
and Americom in 2001, both of which are discussed below, such pre-tax gains were
lower in 2001 by $0.5 billion ($0.3 billion after tax). Pre-tax gains on sales
of investment securities declined in 2001 by $0.5 billion, of which $0.4 billion
related to GE Equity; other GE Equity gains were $0.8 billion lower; while gains
on securitizations were up $0.8 billion from 2000.
On November 9, 2001, GECS exchanged the stock of Americom and other related
assets and liabilities for a combination of cash and stock in SES Global, a
leading satellite company. The transaction resulted in a gain of $1,158 million
($642 million after tax).
On December 28, 2000, Montgomery Ward, LLC (Wards), formerly a GECS subsidiary,
filed for bankruptcy protection and began liquidation proceedings. Net earnings
for the year 2000 included operating losses from Wards amounting to $245 million
as well as a charge, primarily to other costs and expenses, for $815 million
($537 million after tax) to recognize additional associated losses.
14
Operating Results
Total Revenues decreased 12% to $58.4 billion in 2001, following a 19% increase
to $66.2 billion in 2000. The three principal reasons for the decrease in
revenues in 2001 compared with 2000 were: the deconsolidation of Wards and
resulting absence of sales in 2001 ($3.2 billion); the effects of
rationalization of operations and market conditions at IT Solutions ($2.9
billion); and reduced surrender fees compared with 2000 ($1.2 billion)
associated with the planned run-off of restructured insurance policies of Toho
Mutual Life Insurance Company (Toho) at GE Financial Assurance (GEFA). The
increase in 2000 reflected post-acquisition revenues from acquired businesses
($6.5 billion) as well as volume growth ($2.5 billion). Revenues in 2000 also
included the gain from sale of common stock of PaineWebber ($1.4 billion).
Additional information about other revenue items is provided in the analysis of
GECS operating segments beginning on page 15.
Interest expense on borrowings in 2001 was $10.6 billion, compared with $11.1
billion in 2000 and $9.4 billion in 1999. The change in both years reflected the
effects of both interest rates and the average level of borrowings used to
finance asset growth. The average composite effective interest rate was 5.11% in
2001, compared with 5.89% in 2000 and 5.14% in 1999. In 2001, average assets of
$386.6 billion were 7% higher than in 2000, which in turn were 13% higher than
in 1999. See page 20 for a discussion of interest rate risk management.
Operating and administrative expenses were $16.4 billion, $19.5 billion and
$16.3 billion in 2001, 2000 and 1999, respectively. Changes over the three-year
period were largely the result of acquisitions and unusual charges, which were
more than offset in 2001 by productivity at Consumer Services and Equipment
Management. Costs and expenses in 2001 included $0.4 billion of costs in
businesses that were acquired after January 1, 2001, as well as $0.3 billion of
costs discussed in the analysis of the All Other operating segment. Similarly,
2000 included $2.3 billion of costs in businesses that were acquired after
January 1, 2000; charges for costs associated with Wards amounting to $0.8
billion, as discussed previously; and $0.5 billion of costs to rationalize
certain operations discussed in the analysis of the All Other operating segment.
Insurance losses and policyholder and annuity benefits increased to $15.1
billion in 2001, compared with $14.4 billion in 2000 and $11.0 billion in 1999.
This increase reflected effects of growth in premium volume and business
acquisitions at GEFA throughout the period, and costs discussed in the analysis
of the Specialty Insurance and All Other operating segments, partially offset by
the planned run-off of restructured insurance policies at Toho.
Cost of goods sold declined to $3.3 billion in 2001, compared with $8.5 billion
in 2000 and $8.0 billion in 1999, reflecting volume declines at IT Solutions and
the deconsolidation of Wards on December 28, 2000, when Wards commenced
liquidation proceedings. The increase in 2000 primarily reflected the
consolidation of Wards from August 2, 1999, through December 28, 2000.
Provision for losses on financing receivables was $2.5 billion in 2001, compared
with $2.0 billion in 2000 and $1.7 billion in 1999. These provisions principally
related to private-label credit cards, bank credit cards, personal loans and
auto loans and leases as well as commercial, industrial, and equipment loans and
leases, all of which are discussed on page 18 under Portfolio Quality. The
provisions throughout the three-year period reflected higher average receivable
balances, changes in the mix of business, and the effects of delinquency rates -
higher during 2001 and lower during 2000 - consistent with industry experience.
Depreciation and amortization of buildings and equipment and equipment on
operating leases increased 4% to $3.5 billion in 2001, compared with $3.3
billion in 2000, a 4% increase over 1999. The increase in both years was
primarily the result of higher levels of short-lived equipment on operating
leases, primarily reflecting acquisitions of vehicles and aircraft.
Provision for income taxes was $1.4 billion in 2001 (an effective tax rate of
19.8%), compared with $1.9 billion in 2000 (an effective tax rate of 26.9%) and
$1.7 billion in 1999 (an effective tax rate of 27.1%). The 2001 effective tax
rate reflects the effects of continuing globalization, certain transactions (see
note 15), and the effect of a pre-tax charge related to the events of September
11. The pre-tax charge related to September 11 amounted to approximately $600
million, principally at Specialty Insurance, and reduced the Corporation's
effective tax rate by one percentage point. Management expects that trends in
the Corporation's businesses, particularly the continuing impact of
globalization, are likely to result in an effective tax rate for the Corporation
in 2002 that will be lower than the 2000 and 1999 rates, but higher than the
2001 rate.
Financing spreads - Over the last three years, market interest rates have been
more volatile than GECS average composite effective interest rates, principally
because of the mix of effectively fixed-rate borrowings in the GECS financing
structure. GECS portfolio of fixed and floating-rate financial products has
behaved similarly over that period. Consequently, financing spreads have
remained relatively flat over the three-year period.
15
Operating Segments
Revenues and earnings before accounting changes of the Corporation, by operating
segment, for the past three years are summarized and discussed as follows. For
additional information, see note 16 to the consolidated financial statements.
Consolidated
(In millions) 2001 2000 1999
------------------- ------------------- ------------------
Revenues
Consumer Services............................. $ 23,574 $ 23,893 $ 18,705
Equipment Management.......................... 12,542 14,747 15,383
Mid-Market Financing.......................... 8,659 7,026 5,929
Specialized Financing......................... 2,930 4,105 3,308
Specialty Insurance........................... 11,064 11,878 10,643
All other..................................... (416) 4,528 1,781
------------------- ------------------- ------------------
Total revenues.............................. $ 58,353 $ 66,177 $ 55,749
=================== =================== ==================
Net earnings
Consumer Services............................. $ 2,319 $ 1,671 $ 1,140
Equipment Management.......................... 1,607 833 683
Mid-Market Financing.......................... 1,280 1,010 822
Specialized Financing......................... 557 1,223 1,019
Specialty Insurance........................... 522 879 1,167
All other..................................... (699) (424) (388)
------------------- ------------------- ------------------
Total earnings before accounting changes...... 5,586 5,192 4,443
Cumulative effect of accounting changes....... (169) - -
------------------- ------------------- ------------------
Net earnings................................ $ 5,417 $ 5,192 $ 4,443
=================== =================== ==================
Following is a discussion of revenues and earnings before accounting changes
from operating segments. For purposes of this discussion, earnings before
accounting changes is referred to as net earnings.
Consumer Services
(In millions) 2001 2000 1999
------------------- ------------------- ------------------
Revenues
Global Consumer Finance...................... $ 5,282 $ 5,138 $ 4,839
GE Financial Assurance....................... 13,565 13,669 9,604
GE Card Services............................. 3,947 3,891 2,478
Other Consumer Services...................... 780 1,195 1,784
------------------- ------------------- ------------------
Total revenues............................. $ 23,574 $ 23,893 $ 18,705
=================== =================== ==================
Net earnings (a)
Global Consumer Finance...................... $ 903 $ 710 $ 580
GE Financial Assurance....................... 687 564 411
GE Card Services............................. 654 495 196
Other Consumer Services...................... 75 (98) (47)
------------------- ------------------- ------------------
Net earnings............................... $ 2,319 $ 1,671 $ 1,140
=================== =================== ==================
(a) Charges of $196 million and $107 million in 2001 and 2000,
respectively, were not allocated to this segment and are included in
the All Other operating segment.
Consumer Services revenues declined 1% in 2001, following a 28% increase in
2000. Overall, the revenue performance in both years reflected the
post-acquisition revenues from acquired businesses and volume growth at GEFA,
Global Consumer Finance and Card Services which were offset by decreases at Auto
Financial Services and Mortgage Services, which both stopped accepting new
business in 2000 (included in Other Consumer Services) and, in 2001, a decrease
in surrender fee income at GEFA associated with the planned run-off of
restructured insurance policies at Toho. Net earnings increased 39% in 2001 and
47% in 2000. The increase in 2001 reflected productivity benefits at Global
Consumer Finance and GEFA, volume growth at Card Services and reduced residual
losses at Auto Financial Services. The increase in net earnings in 2000 resulted
from acquisition and volume growth at Card Services, GEFA, and Global Consumer
Finance, partially offset by losses at Mortgage Services.
16
Equipment Management
(In millions) 2001 2000 1999
------------------- ------------------- ------------------
Revenues
Aviation Services (GECAS)..................... $ 2,173 $ 1,962 $ 1,551
Americom...................................... 1,698 594 463
IT Solutions.................................. 4,180 7,073 8,380
Other Equipment Management.................... 4,491 5,118 4,989
------------------- ------------------- ------------------
Total revenues........................... $ 12,542 $ 14,747 $ 15,383
=================== =================== ==================
Net earnings (a)
Aviation Services (GECAS)..................... $ 470 $ 474 $ 280
Americom...................................... 896 195 150
IT Solutions.................................. 11 (197) (66)
Other Equipment Management.................... 230 361 319
------------------- ------------------- ------------------
Net earnings............................. $ 1,607 $ 833 $ 683
=================== =================== ==================
(a) Charges of $135 million and $191 million in 2001 and 2000,
respectively, were not allocated to this segment and are included in
the All Other operating segment.
Equipment Management revenues decreased 15% in 2001 following a 4% decline in
2000. The decrease in both years was primarily attributable to effects of
rationalization of operations and market conditions on revenues at IT Solutions,
partially offset by the gain on the disposition of Americom in 2001, and volume
growth at GECAS in both years. Other Equipment Management revenues decreased in
2001, primarily as a result of lower volume across all of the remaining
businesses. Net earnings increased 93% in 2001 and 22% in 2000, reflecting the
Americom gain and productivity benefits at IT Solutions in 2001 and volume
growth at GECAS in 2000. The decrease in Other Equipment Management net earnings
in 2001 primarily reflected lower results at Transport International Pool and GE
Capital Modular Space.
Mid-Market Financing
(In millions) 2001 2000 1999
------------------- ------------------- ------------------
Revenues
Commercial Equipment Financing.............. $ 4,515 $ 3,610 $ 3,180
Commercial Finance.......................... 1,695 1,543 1,295
Vendor Financial Services................... 2,095 1,791 1,372
Other Mid-Market Financing.................. 354 82 82
------------------- ------------------- ------------------
Total revenues......................... $ 8,659 $ 7,026 $ 5,929
=================== =================== ==================
Net earnings (a)
Commercial Equipment Financing.............. $ 592 $ 496 $ 396
Commercial Finance.......................... 364 280 225
Vendor Financial Services................... 287 241 200
Other Mid-Market Financing.................. 37 (7) 1
------------------- ------------------- ------------------
Net earnings........................... $ 1,280 $ 1,010 $ 822
=================== =================== ==================
(a) Charges of $52 million in 2001 were not allocated to this segment and
are included in the All Other operating segment.
Mid-Market Financing revenues increased 23% in 2001, following a 19% increase in
2000, resulting from acquisition and volume growth at Commercial Equipment
Financing, Vendor Financial Services and Commercial Finance, including the
acquisition of Heller Financial on October 24, 2001, (included in Other
Mid-Market Financing), and increased gains on securitizations of financial
assets. The increase in revenues in 2000 primarily reflected asset growth from
originations across all major businesses. Net earnings increased 27% in 2001 and
23% in 2000. Growth in net earnings in 2001 reflected securitization gains and
asset growth from acquisitions across all major businesses. In 2000,
improvements in net earnings resulted from favorable tax effects and asset
growth from originations.
17
Specialized Financing
(In millions) 2001 2000 1999
------------------- ------------------- ------------------
Revenues
Real Estate................................... $ 1,919 $ 1,977 $ 1,582
Structured Finance Group...................... 1,093 999 812
GE Equity..................................... (126) 1,079 863
Other Specialized Financing................... 44 50 51
------------------- ------------------- ------------------
Total revenues........................... $ 2,930 $ 4,105 $ 3,308
=================== =================== ==================
Net earnings (a)
Real Estate................................... $ 486 $ 371 $ 300
Structured Finance Group...................... 385 344 270
GE Equity..................................... (270) 525 416
Other Specialized Financing................... (44) (17) 33
------------------- ------------------- ------------------
Net earnings............................. $ 557 $ 1,223 $ 1,019
=================== =================== ==================
(a) Charges of $103 million and $49 million in 2001 and 2000,
respectively, were not allocated to this segment and are included in
the All Other operating segment.
Specialized Financing revenues declined 29%, following a 24% increase in 2000,
and net earnings declined 54% in 2001 following a 20% increase in 2000. The
decrease in revenues and net earnings in 2001 were a result of reduced asset
gains at GE Equity, partially offset by profitable origination growth at
Structured Finance Group and higher asset gains and productivity benefits at
Real Estate. Revenues and net earnings growth in 2000 were principally the
result of origination growth across all businesses and a particularly high level
of gains on equity investment sales at GE Equity.
Specialty Insurance
2001 2000 1999
(In millions) ------------------- ------------------- ------------------
Revenues
Mortgage Insurance............................ $ 1,029 $ 973 $ 936
GE Global Insurance Holdings.................. 9,453 10,223 9,013
Other Specialty Insurance..................... 582 682 694
------------------- ------------------- ------------------
Total revenues........................... $ 11,064 $ 11,878 $ 10,643
=================== =================== ==================
Net earnings (a)
Mortgage Insurance............................ $ 395 $ 366 $ 340
GE Global Insurance Holdings.................. (47) 413 625
Other Specialty Insurance..................... 174 100 202
------------------- ------------------- ------------------
Net earnings............................. $ 522 $ 879 $ 1,167
=================== =================== ==================
(a) Charges of $170 million in 2001 were not allocated to this segment and
are included in the All Other operating segment.
Specialty Insurance revenues decreased 7% in 2001, following a 12% increase in
2000, as a result of reduced net premiums earned at GE Global Insurance Holdings
(the parent of Employers Reinsurance Corporation), reflecting the events of
September 11 as discussed below, and decreased investment income, partially
offset by increased premium income associated with origination volume. The
increase in 2000 resulted from premium growth and increased investment income,
as higher interest income more than offset a decrease in net realized investment
gains at GE Global Insurance Holdings. Net pre-tax realized investment gains in
the marketable equity and debt securities portfolios amounted to $572 million,
$639 million and $811 million in 2001, 2000 and 1999, respectively. Remaining
available gains in the portfolios at December 31, 2001, amounted to $509 million
before tax.
Net earnings decreased 41% and 25% in 2001 and 2000, respectively, reflecting GE
Global Insurance Holdings underwriting results. Net earnings in 2001 were
adversely affected by approximately $575 million ($386 million after tax)
related to the insurance losses arising from the events of September 11. This
amount, which primarily resulted from contingent premium payment provisions
contained in certain retrocession agreements, comprises $698 million recorded as
a reduction in net premiums earned, and $78 million reflecting policyholder
losses, partially offset by $201 million reflecting a reduction in insurance
acquisition costs. Historical experience related to large catastrophic events
has shown that a broad range of total insurance industry loss estimates often
exists following such an event and it is not unusual for there to be significant
subsequent revisions in such estimates. $575 million is management's best
estimate of its existing net liability based on the information currently
available, and is net of estimated recoveries under retrocession arrangements,
18
under which a portion of losses is routinely ceded to other reinsurance
entities. Substantially all of GECS retrocessionaires are large, highly rated
reinsurance entities. At this time, management does not anticipate that any
significant portion of its estimated recoveries will be uncollectible.
Net earnings in 2001 and 2000 were also adversely affected by the continued
deterioration of underwriting results, reflecting higher property and
casualty-related losses (principally as a result of adverse development relating
to prior-year loss events) and the continued effects of low premiums in the
property and casualty insurance/reinsurance industry. As GE Global Insurance
Holdings underwriting results in 2001 and 2000, typical of the global property
and casualty industry, were realized, management began underwriting initiatives
that increased premium prices for given levels of coverage. These initiatives
resulted in management reconsidering and clarifying the product lines, policies,
contracts and specific customers for which, given the risk, acceptable future
levels of profit seem achievable. For these businesses, GECS has sought to
retain or even expand its business. On the other hand, management has identified
particular property and casualty business channels from which returns do not
appear to justify the risks. For these channels, new business will be
significantly curtailed or exited.
The majority of the adverse development in 2001, and to a lesser extent in 2000,
related to higher projected ultimate losses for liability coverages, especially
in the hospital liability, nonstandard automobile (automobile insurance extended
to higher-risk drivers) and commercial and public entity general liability lines
of business. The increase in 2000 also reflected an increase in industry-wide
loss estimates related to certain large property loss events, with the largest
impact resulting from the European windstorms occurring in late 1999. The
adverse development of GE Global Insurance Holdings for both years was partially
mitigated by favorable experience in the Mortgage Insurance business, which
resulted from favorable economic conditions, improvement in certain real estate
markets and loss mitigation efforts.
All Other
(In millions) 2001 2000 1999
-------------------- ----------------- --------------------
Total revenues...................... $ (416) $ 4,528 $ 1,781
==================== ================= ====================
Total net earnings.................. $ (699) $ (424) $ (388)
==================== ================= ====================
All Other includes results of operations of businesses other than those in the
five operating segments as well as charges management has not allocated to those
segments. In 2001, $436 million of charges, principally for asset write-downs,
resulted in a negative total for this category. Revenues in 2000 included the
results of Wards through December 28, 2000; a pre-tax gain of $1,366 million
from sale of the Corporation's investment in common stock of PaineWebber; and
charges of $238 million, principally for asset write-downs. The net loss of $699
million for 2001 included after-tax costs of $656 million in certain
unprofitable insurance and financing product lines that are being exited; in
disposing of and providing for disposition of several nonstrategic investments
and other assets; and in restructuring various global operations. These costs
included asset write-downs totaling $285 million. The net loss of $424 million
for 2000 comprised the PaineWebber gain of $848 million; charges of $537 million
related to Wards; strategic rationalization costs of $347 million related to
other operating segments, primarily for asset write-downs, employee severance
and lease terminations; and operating losses from Wards of $245 million.
Portfolio Quality
Financing Receivables is the largest category of assets for GECS and represents
one of its primary sources of revenues. The portfolio of financing receivables,
before allowance for losses, increased to $178.8 billion at the end of 2001 from
$147.3 billion at the end of 2000, as discussed in the following paragraphs. The
related allowance for losses at the end of 2001 amounted to $4.8 billion ($4.0
billion at the end of 2000), representing management's best estimate of probable
losses inherent in the portfolio.
A discussion of the quality of certain elements of the financing receivables
portfolio follows. "Nonearning" receivables are those that are 90 days or more
delinquent (or for which collection has otherwise become doubtful) and
"reduced-earning" receivables are commercial receivables whose terms have been
restructured to a below-market yield.
Consumer financing receivables, primarily credit card and personal loans and
auto loans and leases, were $52.3 billion at year-end 2001, an increase of $3.5
billion from year-end 2000. Credit card and personal receivables increased $7.0
billion, primarily from increased origination and acquisition growth, partially
offset by sales and securitizations and the net effects of foreign currency
translation. Auto receivables decreased $3.5 billion, primarily as a result of
the run-off of the liquidating Auto Financial Services portfolio. Nonearning
consumer receivables at year-end 2001 were $1.5 billion, about 2.9% of
outstandings, compared with $1.1 billion, about 2.3% of outstandings at year-end
2000. Write-offs of consumer receivables increased to $1.7 billion from $1.3
billion for 2000, reflecting the maturing of private label credit card
19
portfolios and higher personal bankruptcies on credit card loan portfolios in
Japan. Consistent with industry trends, consumer delinquency rates increased
during 2001.
Other financing receivables, which totaled $126.5 billion at December 31, 2001,
consisted of a diverse commercial, industrial and equipment loan and lease
portfolio. This portfolio increased $28.0 billion during 2001, reflecting
increased acquisition and origination growth, partially offset by sales and
securitizations. Related nonearning and reduced-earning receivables were $1.7
billion, about 1.4% of outstandings at year-end 2001, compared with $0.9
billion, about 1.0% of outstandings at year-end 2000, reflecting several large
bankruptcies and the current economic environment. These receivables are backed
by assets and are covered by reserves for probable losses.
The Corporation's loans and leases to commercial airlines amounted to $21.5
billion at the end of 2001, up from $15.3 billion at the end of 2000. The
Corporation's commercial aircraft positions also included financial guarantees,
funding commitments, credit and liquidity support agreements and aircraft orders
as discussed in note 6.
International Operations
The Corporation's international operations include its operations located
outside the United States and certain of its operations that cannot be
meaningfully associated with specific geographic areas (for example, commercial
aircraft). The Corporation's international revenues were $23.1 billion in 2001,
a decrease of 12% from $26.3 billion in 2000.
Revenues in the Pacific Basin decreased 19% in 2001, as 2000 revenues included
surrender fee income at GEFA from the planned run-off of restructured insurance
policies of Toho. Revenues in Europe decreased 12% in 2001 as acquisition and
core growth at Global Consumer Finance were more than offset by reduced premiums
earned, associated with a combination of lower origination volume and increased
ceded premiums as a result of the events of September 11 at GE Global Insurance
Holdings, and reduced revenue associated with the rationalization of certain
operations at IT Solutions. International assets grew 16%, from $139 billion at
year-end 2000 to $162 billion at the end of 2001. The increase in 2001 primarily
reflected growth in GECS asset base. GECS assets increased 23% in Europe,
reflecting a mix of origination and acquisition growth. GECS also achieved
significant asset growth at GECAS.
The Corporation's activities span all global regions and primarily encompass
leasing of aircraft and providing certain financial services within these
regional economies. As such, when certain countries or regions such as the
Pacific Basin and Latin America experience currency and/or economic stress, the
Corporation may have increased exposure to certain risks but also may have new
profit opportunities. Potential increased risks include, among other things,
higher receivables delinquencies and bad debts, delays or cancellation of sales
and orders principally related to aircraft, higher local currency financing
costs and a slowdown in established financial services activities. New profit
opportunities include, among other things, more opportunities for lower cost
outsourcing, expansion of financial services activities through purchases of
companies or assets at reduced prices and lower U.S. debt financing costs.
Financial results reported in U.S. dollars are affected by currency exchange. A
number of techniques are used to manage the effects of currency exchange,
including selective borrowings in local currencies and selective hedging of
significant cross-currency transactions. Principal currencies are the euro, the
Japanese yen and the Canadian dollar. The Corporation's operations in Europe are
all euro-capable as of January 1, 2002.
Capital Resources and Liquidity
Statement of Financial Position
Investment securities for each of the past two years comprised mainly
investment-grade debt securities held by GE Financial Assurance and the
specialty insurance businesses of GECS in support of obligations to annuitants
and policyholders. Investment securities were $100.1 billion in 2001, compared
with $90.3 billion in 2000. The increase of $9.8 billion resulted from
investment of premiums received, reinvestment of investment income, and the
addition of securities from acquired companies, partially offset by sales and
maturities as well as decreases in the fair value of certain debt and equity
securities. A breakdown of the investment securities portfolio is provided in
note 2 to the consolidated financial statements.
Inventories were $270 million and $666 million at December 31, 2001 and 2000,
respectively. The decrease in 2001 primarily reflected the rationalization of
certain operations at IT Solutions, as well as improved inventory management.
Financing receivables were $174.0 billion at year-end 2001, net of allowance for
losses, up $30.7 billion over 2000. These receivables are discussed in the
Portfolio Quality section and in notes 3 and 4 to the consolidated financial
statements.
20
Insurance receivables were $27.3 billion at year-end 2001, an increase of $3.5
billion that was primarily attributable to increased recoveries under existing
retrocession agreements and core growth, partially offset by the planned run-off
of assets at Toho (see note 5).
Other receivables totaled $13.3 billion at both December 31, 2001 and 2000, and
consists primarily of nonfinancing customer receivables, accrued investment
income, amounts due from GE (generally related to certain trade payable
programs), amounts due under operating leases, receivables due on sales of
securities and various sundry items.
Equipment on operating leases was $27.3 billion at December 31, 2001, up $3.2
billion from 2000. Details by category of investment can be found in note 6 to
the consolidated financial statements. Additions to equipment on operating
leases were $12.6 billion during 2001 ($11.4 billion during 2000), primarily
reflecting acquisitions of transportation equipment.
Intangible assets were $18.7 billion at year-end 2001, up from $15.0 billion at
year-end 2000. The $3.7 billion increase in intangible assets related primarily
to goodwill and other intangibles associated with acquisitions, the largest of
which was the acquisition of Heller Financial, partially offset by amortization.
Other assets totaled $55.1 billion at year-end 2001, compared with $50.4 billion
at the end of 2000. The $4.7 billion increase was principally attributed to
additional investments in real estate and associated companies, the recognition
of all derivatives at fair value in accordance with SFAS 133, and increases in
deferred insurance acquisition costs, partially offset by decreases in "separate
accounts" (see note 9).
Borrowings were $239.9 billion at December 31, 2001, of which $160.8 billion is
due in 2002 and $79.1 billion is due in subsequent years. Comparable amounts at
the end of 2000 were $205.4 billion in total, $124.0 billion due within one year
and $81.4 billion due thereafter. The Corporation's composite interest rates are
discussed in the Interest Expense section of Operating Results. A large portion
of the Corporation's borrowings ($117.5 billion and $94.5 billion at the end of
2001 and 2000, respectively) was issued in active commercial paper markets that
management believes will continue to be a reliable source of short-term
financing. Most of this commercial paper was issued by GE Capital. The average
remaining terms and interest rates of GE Capital commercial paper were 46 days
and 2.37% at the end of 2001, compared with 45 days and 6.43% at the end of
2000. The GE Capital ratio of debt to equity was 7.31 to 1 at the end of 2001
and 7.53 to 1 at the end of 2000.
Insurance liabilities, reserves and annuity benefits were $114.2 billion, $8.1
billion higher than in 2000. The increase was primarily attributable to the
addition of reserves associated with the events of September 11, and growth in
deferred annuities and guaranteed investment contracts, partially offset by the
planned run-off of policyholder contracts at Toho and decreases in separate
accounts. For additional information on these liabilities, see note 11.
Interest Rate and Currency Risk Management.
Interest rate and currency risk management is important in the normal business
activities of the Corporation. Derivative financial instruments are used by the
Corporation to mitigate or eliminate certain financial and market risks,
including those related to changes in interest rates and currency exchange
rates. As a matter of policy, the Corporation does not engage in derivatives
trading, derivatives market-making, or other speculative activities. More
detailed information regarding these financial instruments, as well as the
strategies and policies for their use, is contained in notes 1, 10 and 20 to the
consolidated financial statements.
The Corporation manages its exposure to changes in interest rates, in part, by
funding its assets with an appropriate mix of fixed and variable rate debt and
its exposure to currency fluctuations principally by funding local currency
denominated assets with debt denominated in those same currencies. It uses
interest rate swaps, currency swaps (including non-U.S. currency and cross
currency interest rate swaps) and currency forwards to achieve lower borrowing
costs. Substantially all of these derivatives have been designated as modifying
interest rates and/or currencies associated with specific debt instruments.
One example of the risks to which the Corporation is exposed is prepayment risk
in certain of its business activities, such as in its mortgage servicing
activities. The Corporation uses interest rate swaps, purchased options and
futures as an economic hedge of the fair value of mortgage servicing rights.
These swaps, futures and option-based instruments are governed by the credit
risk policies described below and are transacted in either exchange-traded or
over-the-counter markets.
Established practices require that derivative financial instruments relate to
specific asset, liability or equity transactions or to currency exposures.
Substantially all treasury actions are centrally executed by the Corporation's
Treasury Department, which maintains controls on all exposures, adheres to
stringent counterparty credit standards and actively monitors marketplace
exposures.
21
Counterparty credit risk is managed on an individual counterparty basis, which
means that gains and losses are netted for each counterparty to determine the
amount at risk. When a counterparty exceeds credit exposure limits in terms of
amounts due to the Corporation, typically as a result of changes in market
conditions (see table below), no additional transactions are executed until the
exposure with that counterparty is reduced to an amount that is within the
established limit. All swaps are executed under master swap agreements
containing mutual credit downgrade provisions that provide the ability to
require assignment or termination in the event either party is downgraded below
A3 or A-.
As part of its ongoing activities, the Corporation enters into swaps that are
integrated into investments in or loans to particular customers. Such integrated
swaps not involving assumption of third-party credit risk are evaluated and
monitored like their associated investments or loans and are not therefore
subject to the same credit criteria that would apply to a stand-alone position.
Except for such positions, all other swaps, purchased options and forwards with
contractual maturities longer than one year are conducted within the credit
policy constraints provided in the table below. Foreign exchange forwards with
contractual maturities shorter than one year must be executed with
counterparties having an A-1+/ P-1 credit rating and the credit limit for these
transactions is $150 million.
Counterparty credit criteria Credit Rating
---------------------------------
Standard &
Moody's Poor's
---------------- --------------
Term of transaction
Between one and five years ........ Aa3 AA-
Greater than five years ........... Aaa AAA
Credit exposure limits
Up to $50 million ................. Aa3 AA-
Up to $75 million ................. Aaa AAA
The conversion of interest rate and currency risk into credit risk results in a
need to monitor counterparty credit risk actively. At December 31, 2001, the
notional amount of long-term derivatives for which the counterparty was rated
below Aa3/AA- was $1.5 billion. These amounts are primarily the result of (1)
counterparty downgrades, (2) transactions executed prior to the adoption of the
Corporation's current counterparty credit standards, and (3) transactions
relating to acquired assets or businesses.
Following is an analysis of credit risk exposures for the last three years.
Percentage of Notional Derivative Exposure by Counterparty Credit Rating
- -------------------------------------------------------------------------------
Moody's/Standard & Poor's 2001 2000 1999
- ----------------------------- --------------- -------------- --------------
Aaa/AAA .................... 70% 63% 59%
Aa/AA ...................... 29% 36% 38%
A/A and below .............. 1% 1% 3%
The interplay of the Corporation's credit risk policy with its funding
activities is seen in the following example, in which the Corporation is assumed
to have been offered three alternatives for funding five-year fixed rate U.S.
dollar assets with five-year fixed rate U.S. dollar debt.
Spread over U.S. Treasuries
in basis points Counterparty
------------------------------ -------------------------
(a) Fixed rate five-year medium-term note ................ +75 -
(b) U.S. dollar commercial paper swapped into five-year
U.S. dollar fixed rate funding ....................... +60 A
(c) Swiss franc fixed rate debt swapped into five-year
U.S. dollar fixed rate funding ....................... +73 B
Counterparty A is a major brokerage house with an Aaa/AAA rated swap subsidiary
and a current exposure in terms of amounts due to the Corporation of $39
million. Counterparty B is an Aa2/AA rated insurance company with a current
exposure of $50 million.
In this hypothetical case, the Corporation would have chosen alternative (a) or
alternative (b), depending on the ratio of commercial paper outstanding to total
debt outstanding. Alternative (c) would not have been chosen as the additional
credit risk of Counterparty B would have exceeded the Corporation's risk
management limits.
22
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
changes in interest rates and currency exchange rates 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 t