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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
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Commission file number 0-27394
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GE Global Insurance Holding Corporation
(Exact name of registrant as specified in its charter)
Delaware 95-3435367
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5200 Metcalf, Overland Park, Kansas 66202 (913) 676-5200
(Address of principal executive offices) (Zip Code) (Registrant's telephone
number, including area code)
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SECURITIES REGISTERED PURSUANT
TO SECTION 12(b) OF THE ACT:
Name of each
Title of each class exchange on which registered
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7% Notes Due February 15, 2026 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 $5,000 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 the 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]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant at March 7, 2003. None.
At March 7, 2003, 1,600 shares of common stock with a par value of $5,000 per
share were outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION 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
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PART I
Item 1. Business...........................................................................................3
Item 2. Properties........................................................................................15
Item 3. Legal Proceedings.................................................................................15
Item 4. Submission of Matters to a Vote of Security Holders...............................................16
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.........................17
Item 6. Selected Financial Data...........................................................................17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................32
Item 8. Financial Statements and Supplementary Data.......................................................32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................................................32
PART III
Item 10. Directors and Executive Officers of the Registrant................................................32
Item 11. Executive Compensation............................................................................32
Item 12. Security Ownership of Certain Beneficial Owners and Management....................................32
Item 13. Certain Relationships and Related Transactions....................................................32
Item 14. Controls and Procedures...........................................................................32
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................33
Signatures...................................................................................................72
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.....................................74
PART I
Item 1. Business.
GE Global Insurance Holding Corporation ("GE Global Insurance" herein, together
with its consolidated businesses, called "we", "us" or "our" unless the context
otherwise requires), through its direct and indirect businesses, is principally
engaged in the reinsurance and commercial insurance business in the United
States and throughout the world. All of our outstanding common stock is owned by
General Electric Capital Services, Inc. ("GE Capital Services"), which in turn
is wholly-owned by General Electric Company ("GE Company").
Our principal executive offices are located at 5200 Metcalf, Overland Park,
Kansas 66202 (Telephone number (913) 676-5200).
Our financial information, including the information contained in this report
filed on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K;
and any amendments to the above mentioned reports, may be viewed on the Internet
at www.ercgroup.com/global/company/company_financial_strength.shtml. In
addition, you may also access this information at
www.ge.com/en/company/investor/secfilings.htm. Copies are also available,
without charge, from ERC Public Relations and Communications, P.O. Box 2991,
Overland Park, Kansas, 66201. Alternatively, reports filed with the SEC may be
viewed or obtained at the SEC Public Reference Room in Washington, D.C., or at
the SEC's Internet site at www.sec.gov.
Overview of the Reinsurance Industry
Reinsurance is a form of insurance in which a reinsurer indemnifies a primary
insurer against part or all of the liability assumed by the primary insurer
under one or more insurance policies. Reinsurance may provide a primary insurer
with several major benefits: a reduction in net liability of individual risks,
protection against catastrophic losses, reduction of financial leverage and
stabilization of operating results. Reinsurance may also provide a primary
insurer the ability to increase its underwriting capacity by allowing the
primary insurer to accept larger risks and to more rapidly expand its book of
business.
The global reinsurance industry is operating in an unprecedented environment in
the aftermath of the events of September 11, 2001. 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.
General
We are one of the largest reinsurance groups in the world, with businesses
providing risk management solutions for well over a century. We write
substantially all types of property and casualty, healthcare and life
reinsurance and some lines of primary health, property and casualty and excess
workers' compensation insurance.
We conduct business and service our accounts through a network of local offices
located in cities throughout the world.
As one of the largest direct writers of reinsurance in the world, we work
directly with our clients, enhancing our ability to evaluate our clients and
their respective risks which allows us to be more responsive to the individual
needs of our customers. We utilize our network of local offices throughout the
world to service the particular needs of our reinsurance clients. This system
enables us to provide a wider range of services targeted at the needs of a
particular market.
We are also one of the largest broker market writers in the world. In the U.S.,
the majority of our broker market business is written by GE Reinsurance
Corporation ("GE Re"). Our international businesses in the United Kingdom and
Germany write the majority of our London market and other foreign-based broker
market business. We view the broker market as another distribution channel that
enables us to respond to the growing risk management needs of a wider and more
diverse group of customers.
3
We manage and diversify our risk through the careful underwriting of risks,
active claims management and the purchase of retrocessional coverage, including
aggregate covers, on portions of risk. Retrocessional coverage represents a form
of secondary reinsurance where a reinsurer seeks reinsurance coverage on a
specified portion of assumed risks. We maintain strict underwriting controls
whereby individual underwriters are assigned maximum levels of underwriting
authority based on specified lines of business. The assumption of risks greater
than the specified maximum amount requires approvals of designated individuals.
Adherence to these underwriting guidelines is monitored through pre-renewal
account reviews, periodic underwriting audits and online underwriting controls.
In addition to transactional controls, we employ portfolio monitoring of key
risks for all products and control new product introductions through the use of
required management reviews ("tollgates") to approve such new products and
related underwriting guidelines.
Our business strategy is to continue to increase revenues by concentrating on
select profitable customer segments and delivering comprehensive risk transfer
and risk management solutions. We do not intend, however, to increase premium
income at the expense of our underwriting results. In response to deteriorating
underwriting results in recent years, we have continued our rigorous commitment
to improved underwriting initiatives aimed at ensuring consistent and diligent
underwriting standards are applied to all risks. Throughout 2002, we have been
disciplined in rejecting risks that either fail to meet the established
standards of price or terms and conditions, or involve areas for which
sufficient historical data does not exist to evaluate the risk adequately. For
risks that pass our criteria, we have sought to retain or even judiciously
expand our business. On the other hand, we have curtailed or exited business in
particular property and casualty channels when expected returns do not appear to
justify the risks. Incorporated into these evaluations are realistic
expectations of investment returns based on the current investment environment
(which are lower than those achieved in recent years) and the understanding that
greater levels of underwriting profits will be required in order to meet desired
levels of profitability in the forseeable future.
Unless otherwise indicated, all financial data has been prepared in accordance
with accounting principles generally accepted in the United States of America
("GAAP").
4
Lines of Business
Our two business segments are (1) property and casualty insurance/reinsurance
and (2) life reinsurance. The principal product lines under the property and
casualty segment are traditional property and casualty reinsurance, healthcare
reinsurance and commercial insurance (generally primary property and casualty
insurance) and our principal product lines under the life reinsurance segment
are traditional life reinsurance and financial reinsurance. We provide primary
insurance products to hospitals, health maintenance organizations and medical
professionals as part of our healthcare product line and to niche customers as
part of our commercial insurance product line.
Unless otherwise indicated, our domestic results include business written in the
United States (including business written in the United States where the
reinsured is outside the United States) and Canada, and the international
results include all other business written. The geographic breakdown, based on
net premiums written, of our principal product lines is summarized as follows:
Year ended December 31,
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(In millions) 2002 2001 2000
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Inter- Inter- Inter-
Domestic national Domestic national Domestic national
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Property and Casualty Segment
Property and Casualty............. $1,586 $1,831 $1,955 $1,797 $2,103 $2,677
Healthcare........................ 1,595 49 1,383 67 1,294 76
Commercial........................ 710 - 349 - 404 -
Life Segment......................... 1,069 1,052 790 1,051 832 805
------ ------ ------ ------ ------ ------
Total............................. $4,960 $2,932 $4,477 $2,915 $4,633 $3,558
====== ====== ====== ====== ====== ======
The following is a summary description of our domestic and international
business based on principal product lines:
Property and Casualty Insurance/Reinsurance Segment
Property and Casualty Reinsurance. Our largest product line, traditional
property and casualty reinsurance, accounted for approximately 43% of our
worldwide net premiums written in 2002. The premium volume in the property and
casualty segment is derived principally from treaty agreements, which enables us
to maintain lower operating costs because fewer personnel are required to
administer treaty business than facultative business. Most of our casualty
business is written on an excess-of-loss basis because it better enables us to
control our exposure and impact pricing on business that has a relatively longer
claim settlement pattern.
The property business is written on both an excess of loss and a proportional
basis. Generally, we are the lead reinsurer for any domestic program in which we
participate, enabling us to negotiate the terms of the reinsurance. We also act
as the lead reinsurer on a portion of our international business.
The international property and casualty business services worldwide markets,
including most European countries and countries in the Middle East, Far East and
Latin America. For the year ended December 31, 2002, approximately 47% of our
international net premiums written from property and casualty reinsurance was
derived from property reinsurance, approximately 36% from casualty reinsurance
and approximately 17% from aviation and marine reinsurance. Based on 2002 net
premiums written, approximately 47% of the international property and casualty
business was written on a direct basis, with the remainder written through
brokers.
In recent years, insurance companies have directed more business to the
better-capitalized, more highly-rated reinsurers, which has led to a
consolidation in the reinsurance industry. In competing with a smaller number of
global reinsurers, we have found that a number of our global customers seek a
broad range of coverages. While we offer a wide range of products, we have
re-examined, re-underwritten, reduced or exited lines of business, contracts and
customers that we do not believe provide sufficient long-term returns. In our
property and casualty business, we have aligned expert underwriting teams to
evaluate programs and risks in property, aviation, marine and casualty, so that
we offer our clients consistent underwriting and world-class expertise. We
believe that we are well positioned to compete on a global basis in these
markets.
5
The property and casualty reinsurance industry has experienced a significant
increase in catastrophic exposure and loss during the last decade. Increased
population density, particularly in regions susceptible to tropical storms or
earthquakes, and the higher incidence and greater severity of catastrophes, has
increased the losses incurred in many recent catastrophes. As a result of these
developments, we have taken steps to limit our exposure by carefully monitoring
and allocating our property and casualty exposure to specific geographic zones,
especially within the U.S., Europe, Japan and the Carribean.
The September 11, 2001 attack on America has also had a dramatic affect on the
insurance and reinsurance industry. The industry is playing a key role in the
recovery and rebuilding effort. It is estimated that insurers and reinsurers
will pay claims of more than $35 billion during the next several years. We
initially estimated that our net pre-tax losses would be $575 million from that
attack, and this estimate has not changed significantly to date. We have paid or
anticipate that we will pay claims for coverage on the World Trade Center
complex and surrounding buildings, our portion of aviation coverage for the four
aircraft involved, life reinsurance claims and business interruption claims. The
attack has led to significant changes in underwriting guidelines and, outside of
the U.S., we no longer provide terrorism coverage in many treaties and policies.
Healthcare and Commercial Insurance. A large and growing component of our
overall property and casualty business is our Healthcare and Commercial product
lines ("Commercial Insurance"), accounting for approximately 30% of our
worldwide net premiums written in 2002. Commercial Insurance provides an array
of direct property and casualty products for a diversified group of clients. The
main markets for Commercial Insurance are hospitals (medical malpractice),
dentists and doctors (medical malpractice), Fortune 3000 companies (property
related), attorneys and insurance agents (general liability - E&O coverage),
small business workers' compensation and other niche commercial markets
(property, auto, general liability).
The healthcare industry represents the largest target market for Commercial
Insurance. We provide medical malpractice insurance for individual physicians,
dentists, physician partnerships, corporations and large group practices on an
occurrence and claims-made basis through our subsidiary--The Medical Protective
Company ("Medical Protective"), a subsidiary of Medical Protective
Corporation--the oldest professional liability carrier in the United States.
Commercial Insurance also provides insurance and reinsurance for the healthcare
industry, employers, manufacturers and others for certain product lines.
Coverages include primary insurance and reinsurance for medical professional
liability and insurance protecting primary insurers (including self-insurers) in
the healthcare market (e.g., employer stop loss insurance, HMO reinsurance and
provider excess coverages).
Another significant market of the Commercial Insurance operation is the Program
Managers business, an industry leader in providing property and casualty
insurance to specific niche customers. In addition to the above mentioned
markets, Commercial Insurance targets profitable niches where our vast industry
expertise can be leveraged. We believe that we are well positioned to compete in
all markets in which we currently do business because of our extensive range of
experience in analyzing, underwriting and managing commercial risks.
Life Reinsurance Segment
Life Reinsurance. We are engaged in the reinsurance of various life insurance
products, including term, whole and universal life, annuities, group life, group
and individual long-term health and disability products and provide financial
reinsurance to life insurers. Based on net premiums written, life reinsurance
accounted for approximately 27% of our worldwide business in 2002.
With respect to life reinsurance, we write mostly on a direct basis with primary
insurers. The life reinsurance business consists principally of treaty business
and is written generally on a pro-rata basis. The domestic life reinsurance
business is written in every state in the United States. The international life
reinsurance business services worldwide markets with an emphasis in Western
Europe. For the year ended December 31, 2002, approximately 64% of our
international life reinsurance net premiums written were for traditional life
reinsurance, with the balance for health and disability reinsurance.
We believe that continued increases in life expectancy, consumer trends to shift
to more investment types of life insurance products, decreases in public funding
for social programs in Europe and deregulation of the life reinsurance markets
in Europe and Japan present increased opportunities for our life reinsurance
business line.
6
Financial Reinsurance. Within the Life Reinsurance segment, we also write a
substantial amount of financial reinsurance business. Financial reinsurance does
not transfer significant underwriting risk to the reinsurer and is designed
primarily to enhance the current statutory surplus of the ceding company while
reducing future statutory earnings as amounts are repaid to the reinsurer. These
financial transactions are effectively collateralized by anticipated future
income streams from selected insurance policies. Financial reinsurance typically
has a duration of three to five years. These types of arrangements often do
contain significant credit risk; we manage this risk by only entering into
transactions of this nature with highly-rated companies and then actively
monitoring the financial status of such entities.
Property and Casualty Reserves for Unpaid Claims and Claim Expenses
Our insurance/reinsurance businesses maintain reserves to cover their estimated
ultimate liability for unpaid claims and claim expenses with respect to reported
and unreported claims incurred as of the end of each accounting period (net of
estimated related salvage and subrogation recoveries). These reserves are
estimates that involve actuarial and statistical projections of the expected
cost of the ultimate settlement and administration of unpaid claims based on
facts and circumstances then known, estimates of future trends in claims
severity and other variable factors such as inflation, new concepts of liability
and change in claim settlement procedures. Insurance reserves, by their very
nature, do not represent an exact calculation of liability and, while we have
established reserves equal to the current best estimate of ultimate losses,
there remains a high likelihood that further changes in such loss
estimates--either upward or downward--will occur in the future. Adjustments to
previously reported reserves for net claims and claim expenses are considered
changes in estimates for accounting purposes and are reflected in the financial
statements in the period in which the adjustment occurs.
There is a high degree of uncertainty inherent in the estimates of ultimate
losses underlying the liability for unpaid claims and claim expenses. This
inherent uncertainty is particularly significant for liability-related
exposures, including latent claim issues (such as asbestos and environmental
related coverage disputes) due to the extended period, often many years, that
transpires between a loss event, receipt of related claims data from
policyholders and/or primary insurers and ultimate settlement of the claim. This
situation is then further exacerbated for reinsurance entities (as opposed to
primary insurers) due to lags in receiving current claims data. Because
reinsurance protection is often provided on an "excess-of-loss" basis whereby
the reinsurer is only obligated to pay losses in excess of pre-established
limits, notification is only required to be provided to the reinsurer when the
claim is assessed as having a reasonable possibility of exceeding the primary
insurer's retention thresholds. This notification can often be years after the
loss event was initially reported to the primary insurer.
We continually update loss estimates using both quantitative information from
our reserving actuaries and qualitative information from other sources. While
detailed analysis is performed on a quarterly basis to assess the overall
adequacy of recorded claim reserves, a more comprehensive evaluation is
undertaken on an annual basis. This more comprehensive review is generally
undertaken and completed during the fourth quarter of each year using both
reported and paid claims activity as of September 30. This more comprehensive
review encompasses all major reserve segments, with specific additional emphasis
focused on those lines of business in which recent reported claims activity
differs significantly from anticipated levels.
The liability for claims and claim expenses includes two components: case
reserves for reported claims and IBNR reserves (incurred but not reported) for
unreported claims that are estimated to have occurred prior to the end of the
respective accounting period. Case reserves are established by experienced
professionals from our claims teams based on case-specific facts and
circumstances and are updated continually as further information becomes
available. Determining required IBNR reserves is a more complex and often more
subjective process involving qualified actuaries familiar with the underlying
exposures in the portfolio.
With respect to our primary insurance activities, our claims personnel establish
a "case reserve" for the estimated amount of the ultimate payment when the claim
is reported. The estimate reflects the informed judgment of the claims staff
based on general insurance reserving practices and on the experience and
knowledge regarding the nature and value of the specific type of claim. With
respect to our reinsurance activities (as opposed to primary insurance
activities), we typically establish a case reserve when we receive notice of a
claim from the ceding company. Such reinsurance-related reserves are based on an
independent evaluation by our claims departments, taking into consideration
coverage, liability, severity of injury or damage, jurisdiction, an assessment
of the ceding company's ability to evaluate and handle the claim and the amount
of reserves recommended by the ceding company. For both primary and reinsurance
business, recorded case reserves are adjusted periodically by our claims
7
departments based on subsequent developments and audits of documentation
supporting the underlying claims. We have reorganized our claim teams in recent
years into integrated groups aligned with our business structure. In the course
of this reorganization, the team recognized that best practices existed in many
of the original claims teams. In order to leverage these best practices across
the new claims organization, the Global Claims Team launched the Claims Six
Sigma initiative. Claims Six Sigma has focused on establishing common processes
in areas such as claims adjudication, subrogation, auditing, alternative dispute
resolution and use of structured settlements.
In accordance with GAAP, we also maintain reserves for claims incurred but not
reported ("IBNR"). Such reserves are established to provide for future case
reserves and loss payments on incurred claims that have not yet been reported to
an insurer or reinsurer. In calculating IBNR reserves, we use generally accepted
actuarial reserving techniques that take into account quantitative loss
experience data, together with, where appropriate, qualitative factors. IBNR
reserves are based on claim experience and are grouped both by class of business
and by accident year or underwriting year. IBNR reserves are also adjusted to
take into account certain additional factors--such as changes in the volume of
business written, reinsurance contract terms and conditions, the mix of
business, claims processing and inflation--that can be expected to affect our
liability for claims over time.
The methodology we employ in establishing IBNR reserves for a given reserving
segment consists of a combination of the use of expected loss ratios ("ELRs")
and loss development factor based methodologies ("LDFs"). The ELRs, when
multiplied by earned premiums, generate an expected ultimate loss for a
portfolio of business. For the most recent underwriting year, ELRs initially are
established jointly by the reserving and underwriting teams. The underwriting
teams are comprised of professional underwriters and pricing actuaries. The ELRs
reflect recent years' underwriting results, adjusted for known changes in
pricing, loss trends, contract terms and conditions and other factors that will
likely influence actual underwriting results achieved (using both quantitative
and subjective analysis). As new information becomes available regarding loss
trends, pricing levels, and other factors that influence underwriting results,
ELRs for prior periods are reviewed jointly by underwriting, pricing actuaries,
reserving actuaries, and selected business leaders, and revised where
appropriate.
The reserving actuaries select loss development factors based on prior year
claim experience. The selected loss development factors are used to extrapolate
future loss development in order to generate ultimate loss estimates driven by
actual loss experience. While the LDF methods are statistically based, they also
incorporate subjective interpretations of the underlying claim trends.
The LDF-based approach is generally viewed as preferable once an acceptable base
of observable loss activity is available. Accordingly, for more recent/immature
experience periods, the ELR-based approach is generally more heavily relied upon
due to the lack of historical loss data on which to perform the LDF loss
projections. As the experience period matures (i.e., more data becomes available
over time), the weights given to the ELRs are generally shifted to the LDF-based
loss projections.
We apply the ELR and LDF reserving approaches to over 300 individual reserving
segments, each possessing unique actuarial development trends. However, these
300 reserving segments can generally be broadly assigned to property-related
exposures or liability-related exposures. For property-related exposures, the
insured "loss event" is normally readily apparent (e.g., losses due to fires,
windstorms or vehicle accidents) and the related claims are generally received
within a relatively short period following such event. Property claims involve
relatively infrequent disputes as to coverage or determination of damages but,
in such an event, the disputes are normally fully settled within a few years
following the underlying event. As a result, the migration within our reserving
process from reliance on ELRs to the more claims driven LDF approach happens
quite quickly. Compared to property-related exposures, liability-related
exposures are often significantly more complicated and routinely involve
situations in which claims are identified and submitted many years after the
occurrence of the insured "loss event" giving rise to such claims. As would be
expected, these types of claims also involve a higher incidence of dispute as to
coverage, interpretation of contract wording and fair compensation for damages.
Consequently, it generally takes a number of years before a sufficient base of
reported claims experience develops in order to support reliable LDF loss
projections. Accordingly, we rely on ELRs within the reserving process much
longer for liability-related exposures than for property-related exposures.
8
Reserve Development. The development of our net balance sheet property and
casualty liabilities for unpaid claims and claim expenses for accident years
1992 through 2002 is summarized in the following table.
Net Liability. The first row of data shows the estimated net liability for
unpaid claims and claim expenses at December 31 for each year from 1992 to 2002.
The liability includes both case and IBNR reserves as of each year-end date, net
of anticipated recoveries from other reinsurers. The rows immediately following
the first row of data show cumulative paid data at December 31, as of one year,
two years, . . ., 10 years of subsequent payments.
Net Liability Re-estimated. The middle rows of data show the re-estimated amount
for previously reported net liability based on experience as of the end of each
subsequent calendar year's results. This estimate is changed as more information
becomes known about the underlying claims for individual years. The cumulative
favorable (adverse) development shown in the table is the aggregate net change
in estimates over the period of years subsequent to the calendar year reflected
at the top of the respective columns. The amount in the line titled "Cumulative
favorable (adverse) development, excluding foreign exchange" represents for each
calendar year (the "Base Year") the aggregate change in (i) our original
estimate of net liability for unpaid claims and claim expenses for all years
prior to and including the Base Year compared to (ii) our re-estimate as of
December 31, 2002, of net liability for unpaid claims and claim expenses for all
years prior to and including the Base Year. Favorable development means that the
original estimate was greater than the re-estimate and adverse development means
that the original estimate was less than the re-estimate.
9
Changes in Historical Reserves for Unpaid Claims and Claim Expenses
For the Last Ten Years - GAAP Basis as of December 31, 2002 (Property & Casualty Operations)
Year ended December 31,
-------------------------------------------------------------------------------------------------------
(In millions) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
-------------------------------------------------------------------------------------------------------
Net liability for unpaid
claims and claim
expenses $3,991 $4,525 $5,071 $9,351 $9,458 $9,114 $12,495 $13,210 $12,202 $12,303 $15,140
Cumulative paid as of:
One year later....... 802 949 1,115 1,964 1,949 2,176 2,867 4,811 4,758 4,798 ---
Two years later...... 1,274 1,602 1,804 3,130 3,189 3,241 5,803 7,782 8,035 --- ---
Three years later.... 1,739 2,054 2,341 3,933 3,881 4,863 7,263 9,962 --- --- ---
Four years later..... 2,036 2,424 2,708 4,464 5,294 5,648 8,648 --- --- --- ---
Five years later..... 2,293 2,690 2,988 5,686 5,919 6,245 --- --- --- --- ---
Six years later...... 2,485 2,952 3,318 6,151 6,350 --- --- --- --- --- ---
Seven years later.... 2,688 3,181 3,540 6,488 --- --- --- --- --- --- ---
Eight years later.... 2,841 3,353 3,771 --- --- --- --- --- --- --- ---
Nine years later..... 2,985 3,534 --- --- --- --- --- --- --- --- ---
Ten years later...... 3,122 --- --- --- --- --- --- --- --- --- ---
Net liability re-estimated
as of:
One year later....... $3,919 $4,612 $5,173 $9,192 $9,229 $9,179 $12,410 $13,749 $13,314 $16,341 ---
Two years later...... 4,066 4,656 5,313 8,959 9,127 8,655 12,115 14,504 16,798 --- ---
Three years later.... 4,095 4,793 5,256 8,907 8,549 8,453 11,987 17,001 --- --- ---
Four years later..... 4,238 4,747 5,155 8,392 8,252 8,601 13,708 --- --- --- ---
Five years later..... 4,154 4,668 4,902 8,029 8,389 9,231 --- --- --- --- ---
Six years later...... 4,075 4,487 4,804 8,180 8,707 --- --- --- --- --- ---
Seven years later.... 3,942 4,402 4,854 8,454 --- --- --- --- --- --- ---
Eight years later.... 3,906 4,461 5,159 --- --- --- --- --- --- --- ---
Nine years later..... 3,946 4,704 --- --- --- --- --- --- --- --- ---
Ten years later...... 4,125 --- --- --- --- --- --- --- --- --- ---
Cumulative favorable
(adverse) development (134) (179) (88) 897 751 (117) (1,213) (3,791) (4,596) (4,038) ---
Effect of foreign
exchange (1) (12) 16 (9) (620) (608) (289) (587) (400) 598 381 ---
----- ----- ----- ----- ----- ----- ------ ------ ------ ------ ------
Cumulative favorable
(adverse) development,
excluding foreign $(146) $(163) $ (97) $277 $ 143 $(406) $(1,800) $(4,191) $(3,998) $(3,657) $ ---
exchange ===== ===== ===== ==== ====== ===== ======= ======= ======= ======= ======
(In millions) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
----------------------------------------------------------------------------------------------
Balance at December 31-gross $5,312 $6,020 $11,145 $10,869 $10,936 $15,342 $17,435 $16,932 $20,882 $23,839
Less reinsurance recoverables (787) (949) (1,794) (1,411) (1,822) (2,847) (4,225) (4,730) (8,579) (8,699)
------ ------ ------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31-net 4,525 5,071 9,351 9,458 9,114 12,495 13,210 12,202 12,303 15,140
------ ------ ------- ------- ------- ------- ------- ------- ------- -------
Latest re-estimated liability-
gross 5,881 6,408 10,085 10,394 11,431 17,372 22,311 22,796 26,829 ---
Less re-estimated reinsurance
recoverables (1,177) (1,249) (1,631) (1,687) (2,200) (3,664) (5,310) (5,998) (10,488) ---
------ ------ ------- ------- ------- ------- ------- ------- ------- -------
Latest re-estimated liability-net 4,704 5,159 8,454 8,707 9,231 13,708 17,001 16,798 16,341 ---
------ ------ ------- ------- ------- ------- ------- ------- ------- -------
Gross cumulative development (569) (388) 1,060 475 (495) (2,030) (4,876) (5,864) (5,947) ---
Effect of foreign exchange (1) 17 2 (717) (674) (285) (706) (444) 1,035 838 ---
------ ------ ------- ------- ------- ------- ------- ------- ------- -------
Gross cumulative development,
excluding foreign exchange $ (552) $ (386) $ 343 $ (199) $ (780) $(2,736) $(5,320) $(4,829) $(5,109) $ ---
====== ====== ======= ======= ======= ======= ======= ======= ======= =======
(1) The results of our international operations translated from functional
currencies into U.S. dollars are included with our underwriting operations
in this table. The foreign currency translation impact on the cumulative
redundancy (deficiency) arises from the difference between reserve
developments translated at the exchange rates at the end of the year in
which the liabilities were originally estimated and the exchange rates at
the end of the year in which the liabilities were re-estimated.
Note: For a description of the purpose of the above table and the various table
sections, please refer to the immediately preceding section entitled "Reserve
Development."
10
A number of trends that occurred within the insurance industry, the economy in
general and several factors specific to us have had a significant impact on our
recorded liabilities for unpaid claims and claim expenses during the periods
covered by the preceding table.
In the early to mid 1990's, generally adequate pricing existed within the
overall property and casualty insurance/reinsurance industry. This is reflected
in the preceding table, with respect to us, by the relatively modest subsequent
year reserve development applicable to these years. Starting in the later
1990's, there was significant downward pressure on premium pricing within the
industry as a number of major industry players were attempting to increase
market share. Based on an observable acceleration in reported claim activity
relative to associated premiums, beginning in 2000, it started becoming apparent
that the level of price erosion that occurred in the primary property and
casualty insurance industry in recent years was significantly greater than had
been previously contemplated.
The negative impacts of this price erosion on property-related exposures
manifested itself within a few years due to the relatively short historical
settlement period (i.e., the time between when an insured property loss occurs
and the time it is fully settled) applicable to these types of coverages.
Liability-related exposures, on the other hand, are often significantly more
complicated and routinely involve situations in which claims are identified and
submitted many years after the occurrence of the insured "loss event" giving
rise to such claims. As would be expected, these types of claims also involve a
higher incidence of dispute as to coverage, interpretation of contract wording
and fair compensation for damages. Consequently, there is a much longer period,
often many years, that transpires between a loss event, receipt of related
claims data from policyholders and/or primary insurers and ultimate settlement
of the claim. This situation is then further exacerbated for reinsurance
entities (as opposed to primary insurers) due to lags in receiving current
claims data. Because reinsurance protection is often provided on an
"excess-of-loss" basis whereby the reinsurer is only obligated to pay losses in
excess of pre-established limits, notification is only required to be provided
to the reinsurer when the claim is assessed as having a reasonable possibility
of exceeding the primary insurer's retention thresholds. This notification can
often be years after the loss event was initially reported to the primary
insurer. As a result of the above, it took a number of years before we were able
to obtain a clearer picture of the actual level of pricing insufficiency that
existed for liability-related exposures from 1997 through 2001 underwriting
years and reflect such realities in our recorded claim reserves.
During the fourth quarter of 2002, we completed our annual comprehensive review
of recorded claim reserves. As part of this review, in response to continued
escalation in reported claim activity and the resulting realization that the
level of price erosion related to liability-related exposures underwritten in
1997 through 2001 were significantly greater than had been previously
contemplated, we concluded that our best estimate of ultimate losses was higher
in the range of reasonably possible loss scenarios than previously estimated.
Accordingly, we recognized a fourth quarter pre-tax charge of approximately $2.5
billion to increase recorded reserves to reflect the revised indications of
remaining liability. The significant components of this adverse development
included hospital medical malpractice ($300 million), product liability ($300
million), professional liability ($250 million), umbrella liability ($200
million), workers compensation ($200 million), individual liability ($150
million) and asbestos-related exposures ($150 million). With amounts recognized
in previous quarters of 2002, the overall 2002 pre-tax charge for adverse
development related to our property and casualty operations amounted to
approximately $3.6 billion.
The significant indicated deficiencies reflected in the preceding table for the
more recent accident years is primarily attributable to recognition during 2000,
2001 and 2002 of adverse development with respect to liability-related exposures
underwritten during the 1997 through 2001 time frame. Also contributing to the
indicated deficiencies were higher than expected industry-wide property loss
projections related to the 1998 Hurricane Georges and certain European
windstorms occurring in December 1999.
11
The reconciliation of our beginning and ending property and casualty reserves
for unpaid claims and claim expenses on a GAAP basis is summarized as follows:
Year ended December 31,
-------------------------------------
(In millions) 2002 2001 2000
-------------------------------------
Balance at January 1 - gross............................. $20,882 $16,932 $17,435
Less reinsurance recoverables............................ (8,579) (4,730) (4,225)
------- ------- -------
Balance at January 1 - net............................... 12,303 12,202 13,210
------- ------- -------
Claims and expenses incurred:
Current year.......................................... 3,865 4,579 4,401
Prior years........................................... 3,568 811 934
------- ------- -------
7,433 5,390 5,335
------- ------- -------
Claims and expenses paid:
Current year.......................................... (472) (761) (1,290)
Prior years........................................... (4,797) (4,758) (4,811)
------- ------- -------
(5,269) (5,519) (6,101)
-------- ------- -------
Claim reserves related to acquired companies............. 285 - 279
Foreign exchange and other............................... 388 230 (521)
------- ------- -------
Balance at December 31 - net............................. 15,140 12,303 12,202
Add reinsurance recoverables............................. 8,699 8,579 4,730
------- ------- -------
Balance at December 31 - gross........................... $23,839 $20,882 $16,932
======= ======= =======
The liabilities for claims and claim expenses in the preceding table include
long-term disability claims and certain workers' compensation claims (limited to
run-off business in a Bermuda-domiciled subsidiary) that are discounted at a 6%
and 3% rate, respectively, for all years presented. As a result of this
discount, total liabilities for claims and claim expenses have been reduced by
an estimated 1% at December 31, 2002 and 2001. The accretion of discount is
included in current operating results as part of the development of prior year
liabilities. Discounts amortized as a percentage of claims, claim expenses and
policy benefits were less than 1% for each of the years ended December 31, 2002,
2001 and 2000.
The reconciliation of property and casualty reserves for unpaid claims and claim
expenses between statutory basis and GAAP basis is summarized as follows:
December 31,
------------------------------------------------
(In millions) 2002 2001 2000
---------------- --------------- ---------------
Statutory basis reserves for U.S. companies - net......... $ 9,728 $ 5,786 $ 6,213
Adjustments to arrive at GAAP basis (1)................... 490 664 500
------- ------- -------
GAAP basis reserves for U.S. companies - net.............. 10,218 6,450 6,713
GAAP basis reserves for non-U.S. companies - net.......... 4,922 5,853 5,489
------- ------- -------
Total GAAP basis reserves - net........................... 15,140 12,303 12,202
Add reinsurance recoverables.............................. 8,699 8,579 4,730
------- ------- -------
GAAP basis reserves - gross............................... $23,839 $20,882 $16,932
======= ======= =======
(1) Statutory basis reserve offsets and reserves reclassified to contract
deposit assets or liabilities based on risk transfer provisions of SFAS No.
113.
Asbestos and Environmental Exposure. Included in our liability for claims and
claim expenses are liabilities for asbestos and environmental exposures. These
claims and claim expenses are primarily related to policies written prior to
1986 as the policies written since 1986 have tended to explicitly exclude
asbestos and environmental risks from coverage and most of the asbestos and
environmental exposures arise from risks located in the United States.
12
The three-year development of claims and claim expense reserves associated with
our asbestos and environmental claims, including case and IBNR reserves, is
summarized as follows:
Year ended December 31,
--------------------------------------------
(In millions) 2002 2001 2000
-------------- -------------- --------------
Balance at January 1 - gross.............................. $786 $829 $800
Less reinsurance recoverables............................. (165) (183) (195)
---- ---- ----
Balance at January 1 - net................................ 621 646 605
Claims and expenses incurred.............................. 121 23 99
Claims and expenses paid.................................. (86) (48) (58)
---- ---- ----
Balance at December 31 - net.............................. 656 621 646
Add reinsurance recoverables.............................. 287 165 183
---- ---- ----
Balance at December 31 - gross............................ $943 $786 $829
==== ==== ====
The amounts in the preceding table represent our best estimate, based on
currently available information, of claims and claim expense payments and
recoveries for asbestos and environmental exposures that are expected to develop
in future years. In connection with a comprehensive reserve review completed in
the fourth quarter of 2002, we benchmarked our recorded asbestos-related
reserves against certain of our industry competitors having similar exposures.
The most common benchmarking approach involves the comparison of what are
referred to as "survival ratios." A survival ratio is a measure of the number of
years it would take to exhaust recorded asbestos reserves based on recent
payment activity. This ratio is derived by taking the current ending reserves
and dividing it by the average annual payments for the most recent three years
(generally excluding large one-time settlements such as those involving a
commutation of a block of business). Based on our industry benchmarking
analysis, we made the decision to increase specific asbestos-related reserves to
reflect a 12-year survival ratio. This resulted in an approximately $150 million
pre-tax charge, which was a component of the overall $2.5 billion charge taken
for adverse development in the fourth quarter.
While our portfolio does not have asbestos and toxic waste cleanup exposures
commensurate with many of our insurance and reinsurance competitors, we actively
monitor evolving case law and its effect on asbestos-related illness and toxic
waste cleanup claims. Additionally, we have implemented an active commutation
program to lessen these exposures. While we have recorded our best estimate of
liabilities for asbestos-related illness and toxic waste cleanup claims based on
currently available information, it is possible that additional liabilities may
arise in the future. There are many factors that may significantly affect our
asbestos-related claim development and the resulting liability for those claims.
Among these factors are changing domestic and foreign government regulations and
legislation (including continuing congressional consideration of federal
Superfund legislation), newly reported claims, and new contract interpretations.
It is not possible to estimate with any certainty the amount of additional net
claims and claim expenses, or the range of net claims and claim expenses, if
any, that is reasonably possible; therefore, there can be no assurance that
future liabilities will not materially affect our results of operations,
financial position or cash flows.
Other Mass Tort Exposures. In addition to asbestos and environmental exposures,
we also may have exposures to other mass torts involving primarily product
liability issues such as tobacco products, gun manufacturers and silicone breast
implants. We have, in the past, generally limited our exposure to the products
liability reinsurance business, and, based on currently available information,
future liabilities resulting from these matters are not expected to be material
to our results of operations, financial position or cash flows.
Life and Health Reserves for Future Policy Benefits and Accumulated Contract
Values
Future policy benefits for traditional life and health reinsurance contracts
represent the present value of such benefits based on mortality and other
assumptions which were appropriate at the time the policies were issued or, in
the event that we acquired the policies from another insurer, at the date of
acquisition. Interest rate assumptions used in calculating the present value
generally ranged from 5-9% per annum at December 31, 2002. Payments received
from sales of universal life and investment contracts are recognized by
providing liabilities equal to the accumulated contract values of the
policyholders' contracts. Interest rates credited to such universal life and
investment contracts are generally guaranteed for a specified time period with
renewal rates determined by the issuing insurance company. Such crediting
interest rates ranged from 3-8% per annum in 2002.
13
Regulatory Matters
GE Global Insurance and its U.S. domiciled insurance subsidiaries are subject to
regulation under the insurance statutes, including insurance holding company
statutes, of various states, including Missouri, Kansas, Illinois, Indiana and
Vermont, the domiciliary states of our principal domestic insurance company
subsidiaries. The international businesses of Employers Reinsurance Corporation
(the "GE Frankona Re Group") are subject to regulation under insurance statutes
of various foreign countries.
General. The regulation and supervision to which our businesses are subject
relate primarily to licensing requirements of insurers/reinsurers, the standards
of solvency that must be met and maintained, the amount of dividends that may be
paid by such businesses, the nature of and limitations on investments,
restrictions on the size of risks that may be insured or reinsured, deposits of
securities for the benefit of ceding companies, periodic examinations of the
financial condition and affairs of reinsurers, the form and content of financial
statements required to be filed with regulatory authorities and reserves for
unearned premiums, losses and other purposes. In general, such regulation is for
the protection of the ceding companies and, ultimately, their policyholders,
rather than security holders of the regulated reinsurer. We believe it is, and
that our businesses are, in material compliance with all applicable laws and
regulations pertaining to our business and operations.
U.S. Insurance Regulation. U.S. property and casualty and life insurers,
including reinsurers, are subject to regulation by their states of domicile and
by those states in which they are licensed. The rates and policy terms of
primary insurance policies generally are closely regulated by state insurance
departments. While reinsurance is not regulated as closely as primary insurance,
some states do impose control over certain terms and conditions of reinsurance
agreements by virtue of their authority to grant or deny credit for ceded
reinsurance by its domiciled primary insurers. In addition, as a practical
matter, the rates permitted to be charged by primary insurers can have an effect
on the rates that are charged by reinsurers.
Effective January 1, 2001, each of our U.S. domiciliary state regulators adopted
provisions which required that insurance companies prepare their statutory basis
financial statements in accordance with the revised NAIC Accounting Practices
and Procedures Manual. This manual was intended to establish a comprehensive
basis of statutory accounting principles which is recognized and adhered to if
not in conflict with domestic statutes and/or regulations, or when such statutes
or regulations are silent. As a result of adopting these revised statutory
accounting principles, aggregate cumulative adjustments totaling $234 million
were recorded by Employers Reinsurance Corporation ("ERC"), GE Reinsurance
Corporation ("GE Re") and The Medical Protective Company ("Medical Protective")
as an increase to unassigned funds (surplus) at January 1, 2001, primarily
related to the establishment of net deferred tax assets.
Risk-Based Capital. Each of the U.S. domiciliary state regulators have adopted
the NAIC minimum risk-based capital requirements which are used by regulators to
evaluate the adequacy of statutory capital and surplus in relation to an
insurance company's risks. Regulatory compliance with risk-based capital
requirements is defined by a ratio of a company's regulatory total adjusted
capital to its authorized control level risk-based capital, as defined by the
NAIC. Each of our U.S. insurance company subsidiaries exceeded the minimum
risk-based capital requirements at December 31, 2002.
Insurance Holding Company Regulations. The insurance holding company laws and
regulations vary from state to state, but generally require an insurance holding
company to register with its domiciliary state insurance regulatory agency and
file certain reports that include current information concerning the capital
structure, ownership, management, financial condition and general business
operations of the insurance holding company and its subsidiary insurers that are
licensed in the state. State insurance holding company laws and regulations,
with respect to domestic insurers, also require prior notice or regulatory
approval of changes in control of an insurer or its holding company and of
material inter-affiliate transactions within the holding company structure.
Dividends by Subsidiaries. Because the operations of GE Global Insurance are
conducted primarily through ERC, GE Re, Medical Protective Corporation and CORE
Insurance Holdings ("CORE", a reinsurance holding company whose underlying
reinsurance operations are in run-off), it is dependent upon dividends, tax
allocation and other payments primarily from ERC, GE Re, Medical Protective and
CORE Insurance Company ("CORE Insurance," the U.S. insurance company subsidiary
of CORE) to service its debt and meet its other obligations. The payment of
dividends and other payments to us by ERC, GE Re, Medical Protective and CORE
Insurance are subject to limitations imposed by the Missouri, Illinois, Indiana
and Vermont Insurance Codes, respectively. The payment of dividends to ERC by
14
its principal life reinsurance subsidiaries, Employers Reassurance Corporation
and ERC Life Reinsurance Corporation ("ERC Life"), are subject to limitations
imposed by the Kansas and Missouri Insurance Codes, respectively. No prediction
can be made as to whether any legislative proposals relating to dividend rules
in Kansas, Missouri, Illinois, Indiana or Vermont will be made, whether any such
legislative proposal will be adopted in the future, or the effect, if any, any
such proposal would have on us.
The maximum amount available for the payment of dividends during 2003 by ERC
without prior regulatory approval is $488 million. Of this amount, $88 million
is committed to pay dividends on the preferred stock issued by ERC to GE Capital
Corporation. The maximum amount available for the payment of dividends during
2003 by Medical Protective without prior regulatory approval is $74 million. GE
Re and CORE Insurance will not be able to make any dividend payments during 2003
without the prior approval of their respective state regulators.
International Regulations. Based on 2002 net premiums written, approximately 37%
of our business is carried on outside of the United States. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Licenses issued by foreign authorities to the GE
Frankona Re Group are subject to modification or revocation by such authorities,
and such businesses could be prevented from conducting business in certain of
the jurisdictions where they currently operate. In the past, the GE Frankona Re
Group has been allowed to modify their operations to conform with new licensing
requirements in all jurisdictions that are material to our international
operations.
In addition to licensing requirements, the GE Frankona Re Group is regulated in
various jurisdictions with respect to, among other things, currency, policy
language and terms, methods of accounting and auditing, amount and type of
security deposits, amount and type of reserves, amount and type of local
investment and the share of profits to be returned to policyholders on
participating policies. Regulations governing constitution of technical reserves
(including equalization reserves) in some countries could hinder the remittance
of profits and repatriation of assets and the payment of dividends; however, we
do not believe that these regulations will have a material impact on the GE
Frankona Re Group's future operations.
Effective January 1, 2001, certain of our international businesses (licensed in
the European Union ("EU") member states) are required to comply with the EU
Directive on Supplementary Supervision of Insurance Undertakings in an Insurance
Group. This directive is designed to address solvency issues for groups of
insurance companies and supplements the solvency tests historically performed on
individual insurance companies. The primary objective of this directive is to
assess the overall capital available to the group, rather than on an individual
company basis, and identify potential risks. At December 31, 2002, the
international insurance company businesses that are subject to the EU Directives
are in compliance with such, on both an individual and group basis.
Item 2. Properties.
We conduct business from various facilities, most of which are leased. In
addition, we own our administrative offices in Overland Park, Kansas and Fort
Wayne, Indiana.
Item 3. Legal Proceedings.
There are no pending legal proceedings beyond the ordinary course of business
that in our opinion, based on information available at the date of this report,
would have a material adverse effect on our consolidated results of operation or
financial condition, except as noted in the following paragraphs.
As a result of the September 11, 2001 terrorist attack, the World Trade Center
complex in New York City ("WTC") was destroyed. Industrial Risk Insurers
("IRI"), an affiliate of ERC, was one of the primary insurers of the WTC with a
policy limit of $237 million. The principal lessee of the WTC is alleging that
the damage to (i.e., the loss of) each of the "twin towers" was a separate
occurrence, requiring payment of up to two times the policy limits. It is the
contention of all insurers of the WTC that the policies were written in such a
way that the loss constituted one occurrence. Suit has been filed by the insured
in the United States District Court in New York seeking a declaratory judgment
on this question. IRI is a party to this suit, as are several of ERC's
reinsureds. Discovery in the suit is continuing, and trial is expected in late
2003 or 2004. Both IRI and ERC have retrocessional coverage on their exposure to
WTC losses covering a portion of losses incurred. We believe there is compelling
support for the contention that the loss constituted a single occurrence, and we
are prepared to defend this position vigorously. We have established claim
reserves on this basis. In addition, we have provided reinsurance coverage to
various other primary insurers of the WTC and, if it is ultimately determined
that the loss of each of the WTC towers constitutes a separate insured event, we
may incur some level of additional claims as a result of this reinsurance
15
coverage. We believe that our maximum exposure resulting from an unfavorable
outcome to this matter is approximately $300 million.
ERC is in dispute with a reinsured involving approximately $150 million of
coverage. The reinsured has filed claims for $100 million and the full limit of
$150 million is expected to be requested by the end of 2003. To date, ERC has
made payments totaling approximately $40 million under a reservation of rights
but has refused to pay anything further. ERC is contesting liability based on
the manner in which claims are computed and may seek rescission of the agreement
if the matter proceeds to arbitration. ERC has not posted additional reserves to
cover amounts not paid to date.
ERC filed suit against a cedant seeking damages and rescission of a reinsurance
contract covering non-standard auto insurance assumed by ERC. ERC asserts
several legal theories to support its claims, including misrepresentation and
negligence. The cedant filed a counterclaim asserting breach of contract, and
asserted that ERC's actions have, among other things, impacted its financial
status. The cedant alleges the total amount due under the reinsurance contract
could reach approximately $80 million. The case is in discovery and trial is
unlikely until late 2003 or 2004. We believe there is compelling evidence
supporting our damages claim as well as our position that this reinsurance
contract should be rescinded. We intend to pursue this matter vigorously.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted
16
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
All of the common stock of GE Global Insurance, its sole class of common equity
on the date hereof, is owned by GE Capital Services. Accordingly, there is no
public trading market for GE Global Insurance's common equity.
Item 6. Selected Financial Data.
Consolidated Financial Data
Year ended December 31,
----------------------------------------------------------------
(In millions) 2002 2001 2000 1999 1998
----------------------------------------------------------------
Total revenues............................. $ 9,276 $ 9,191 $10,131 $ 9,031 $ 7,203
Net premiums written....................... 7,892 7,392 8,191 7,147 5,984
Net investment income...................... 1,072 1,202 1,315 1,151 985
Net realized gains on investments.......... 241 436 522 699 432
Earnings (loss) before income taxes and
cumulative effect of change in
accounting principle ................... (2,755) (466) 605 988 1,070
Net earnings (loss)........................ (1,733) (195) 581 720 779
Total investments.......................... 26,822 22,495 21,191 21,539 21,987
Total assets............................... 51,786 45,118 38,564 37,561 35,047
Stockholder's equity....................... $ 6,664 $ 6,362 $ 6,025 $ 5,575 $ 6,020
Return on equity (average)................. (26.6%) (3.1%) 10.0% 12.4% 13.7%
Stockholder's equity, excluding unrealized
gains (losses) on investment securities. $ 6,515 $ 6,339 $ 5,882 $ 5,524 $ 5,088
Return on equity (average), excluding
unrealized gains (losses) on investment
securities.............................. (27.0%) (3.2%) 10.2% 13.6% 16.0%
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net premiums written and net premiums earned increased $500 million (7%) and
$602 million (8%), respectively, in 2002. Substantially all of the growth in
premiums earned is attributable to price increases achieved in direct property
and casualty insurance. Assumed reinsurance premiums earned grew only slightly
($81 million or 1%) during 2002 as the positive impacts of higher premium
pricing stemming from the recent hardening price environment within the overall
property and casualty insurance/reinsurance industry were largely negated by our
actions initiated in 2001 and 2002 to exit certain reinsurance product lines,
policies, contracts and specific customers for which, given the risk, acceptable
future levels of profit did not seem achievable. Ceded reinsurance premiums
earned also grew only slightly ($40 million or 1%) during 2002 due to the
unusually high level of 2001 ceded premium activity driven by the events of
September 11, 2001 being offset by similarly elevated 2002 ceded premium levels.
The high 2002 ceded premiums resulted from the combination of increasing
contingent premium cost estimates (including reinstatement premiums) related to
prior year loss events and higher general retrocession costs.
Total revenues increased only $85 million (1%) in 2002. The modest increase in
2002 revenues was principally driven by the growth in net premiums earned
discussed above being largely offset by a decrease in investment-related and
other revenue components. Net investment income decreased $130 million (11%) in
2002 principally due to the lower interest rate environment that existed in 2002
as compared to 2001. Net realized gains on investments decreased $195 million
(45%) in 2002 due to reduced opportunity for gains within the overall investment
portfolio combined with higher levels of other-than-temporary impairment charges
recognized. The decrease in total investment-related revenues is consistent with
experience of the insurance industry as a whole. The $192 million (52%) decrease
in other revenues in 2002 is primarily attributable to the lack of comparable
non-recurring revenues generated in 2001 related to the favorable resolution of
issues involving an acquisition and certain non-trade receivables.
We incurred a loss before cumulative effect of change in accounting principle
(see further discussion of this accounting change in note 2 to the accompanying
consolidated financial statements) of $1.7 billion in 2002, compared to a loss
of $184 million in 2001. The significant 2002 net loss is primarily attributable
to the recognition of approximately $3.7 billion ($2.4 billion after-tax) of
adverse development related to prior year loss events, including a $2.5 billion
($1.6 billion after-tax) charge recognized during the fourth quarter. Due to the
impacts of existing retrocession coverages previously purchased, the recording
of this adverse development both increased incurred claims and claim expenses
and, to a lesser extent, decreased premium revenues (principally because of
higher levels of contingent ceded premiums following these reserve adjustments).
There is a high degree of uncertainty inherent in the estimates of ultimate
losses underlying the liability for unpaid claims and claim expenses. This
inherent uncertainty is particularly significant for liability-related
exposures, including latent claim issues (such as asbestos and environmental
related coverage disputes) due to the extended period, often many years, that
transpires between a loss event, receipt of related claims data from
policyholders and/or primary insurers and ultimate settlement of the claim. This
situation is then further exacerbated for reinsurance entities (as opposed to
primary insurers) due to lags in receiving current claims data. Because
reinsurance protection is often provided on an "excess-of-loss" basis whereby
the reinsurer is only obligated to pay losses in excess of pre-established
limits, notification is only required to be provided to the reinsurer when the
claim is assessed as having a reasonable possibility of exceeding the primary
insurer's retention thresholds. This notification can often be years after the
loss event was initially reported to the primary insurer.
We continually update loss estimates using both quantitative information from
our reserving actuaries and qualitative information from other sources. While
detailed analysis is performed on a quarterly basis to assess the overall
adequacy of recorded claim reserves, a more comprehensive evaluation is
undertaken on an annual basis. Consistent with historical practices, this more
comprehensive review was completed during the fourth quarter of 2002 using both
reported and paid claims activity as of September 30. This more comprehensive
review was performed on all major reserve segments, with specific additional
emphasis focused on those lines of business in which recent reported claims
activity differed significantly from anticipated levels.
18
The liability for claims and claim expenses includes two components: case
reserves for reported claims and IBNR reserves (incurred but not reported) for
unreported claims that are estimated to have occurred prior to the end of the
respective accounting period. Case reserves are established by experienced
professionals from our claims teams based on case-specific facts and
circumstances and are updated continually as further information becomes
available. Determining required IBNR reserves is a more complex and often more
subjective process involving qualified actuaries familiar with the underlying
exposures in the portfolio.
The methodology we employ in establishing IBNR reserves for a given reserving
segment consists of a combination of the use of expected loss ratios ("ELRs")
and loss development factor based methodologies ("LDFs"). The ELRs, when
multiplied by earned premiums, generate an expected ultimate loss for a
portfolio of business. For the most recent underwriting year, ELRs initially are
established jointly by the reserving and underwriting teams. The underwriting
teams are comprised of professional underwriters and pricing actuaries. The ELRs
reflect recent years' underwriting results, adjusted for known changes in
pricing, loss trends, contract terms and conditions and other factors that will
likely influence actual underwriting results achieved (using both quantitative
and subjective analysis). As new information becomes available regarding loss
trends, pricing levels, and other factors that influence underwriting results,
ELRs for prior periods are reviewed jointly by underwriting, pricing actuaries,
reserving actuaries, and selected business leaders, and revised where
appropriate.
The reserving actuaries select loss development factors based on prior year
claim experience. The selected loss development factors are used to extrapolate
future loss development in order to generate ultimate loss estimates driven by
actual loss experience. While the LDF methods are statistically based, they also
incorporate subjective interpretations of the underlying claim trends.
The LDF-based approach is generally viewed as preferable once an acceptable base
of observable loss activity is available. Accordingly, for more recent/immature
experience periods, the ELR-based approach is generally more heavily relied upon
due to the lack of historical loss data on which to perform the LDF loss
projections. As the experience period matures (i.e., more data becomes available
over time), the weights given to the ELRs are generally shifted to the LDF-based
loss projections.
We apply the ELR and LDF reserving approaches to over 300 individual reserving
segments, each possessing unique actuarial development trends. However, these
300 reserving segments can generally be broadly assigned to property-related
exposures or liability-related exposures. For property-related exposures, the
insured "loss event" is normally readily apparent (e.g., losses due to fires,
windstorms or vehicle accidents) and the related claims are generally received
within a relatively short period following such event. Property claims involve
relatively infrequent disputes as to coverage or determination of damages but,
in such an event, the disputes are normally fully settled within a few years
following the underlying event. As a result, the migration within our reserving
process from reliance on ELRs to the more claims driven LDF approach happens
quite quickly. Compared to property-related exposures, liability-related
exposures are often significantly more complicated and routinely involve
situations in which claims are identified and submitted many years after the
occurrence of the insured "loss event" giving rise to such claims. As would be
expected, these types of claims also involve a higher incidence of dispute as to
coverage, interpretation of contract wording and fair compensation for damages.
Consequently, it generally takes a number of years before a sufficient base of
reported claims experience develops in order to support reliable LDF loss
projections. Accordingly, we rely on ELRs within the reserving process much
longer for liability-related exposures than for property-related exposures.
The above-described reserving approach provides a preliminary view as to the
range of indicated changes in estimates of ultimate losses and the resulting
impact on recorded claim-related reserves. Considerable effort is then expended
by management (including business general management and constituents from our
underwriting, pricing actuaries, reserving actuaries, claims and finance teams)
to fully understand the preliminary view, including changes in underlying
methodologies and assumptions. This includes assessing the relative weight given
to emerging claim trends resulting from recent business process changes in such
areas as underwriting standards, pricing, terms and conditions and claims
handling. Based on this analysis, we select a "best estimate" of remaining
liability--within the range of reasonably possible loss scenarios--to record in
the financial statements. In making this determination, we consider both (1) a
balance sheet perspective--i.e., that the recorded reserves represent a
reasonable estimate of the remaining liability for events occurring through the
balance sheet date and (2) an income statement perspective--i.e., that the
reported operating results reasonably reflect information obtained during the
current reporting period.
19
Higher than anticipated levels of reported claims activity, particularly for
liability-related exposures underwritten in 1997 through 2001, combined with
updated pricing and underwriting metrics, caused us to both (1) accelerate the
migration from an ELR to an LDF based reserving approach for certain
liability-related reserving segments and (2) update ELRs assigned to the more
recent accident/underwriting years in response to the reported claims activity.
As a result of these changes, we concluded that our best estimate of ultimate
losses was higher in the range of reasonably possible loss scenarios than
previously estimated. Accordingly, we recognized a fourth quarter pre-tax charge
of approximately $2.5 billion to increase recorded reserves to reflect the
revised indications of remaining liability. The significant components of this
adverse development included hospital medical malpractice ($300 million),
product liability ($300 million), professional liability ($250 million),
umbrella liability ($200 million), workers compensation ($200 million),
individual liability ($150 million) and asbestos-related exposures ($150
million). With amounts recognized in previous quarters of 2002, our overall 2002
pre-tax charge for adverse development amounted to approximately $3.7 billion.
Insurance loss provisions are based on the best available estimates at a given
time. As described on page 29 under the caption "Insurance Liabilities and
Reserves," these estimates will be adjusted in the future as required.
We have continued our rigorous commitment to improved underwriting initiatives
aimed at ensuring consistent and diligent underwriting standards are applied to
all risks. Throughout 2002, we have been disciplined in rejecting risks that
either fail to meet the established standards of price or terms and conditions,
or involve areas for which sufficient historical data does not exist to evaluate
the risk adequately. For risks that pass our criteria, we have sought to retain
or even judiciously expand our business. On the other hand, we have curtailed or
exited business in particular property and casualty channels when expected
returns do not appear to justify the risks. Incorporated into these evaluations
are realistic expectations of investment returns based on the current investment
environment (which are lower than those achieved in recent years) and the
understanding that greater levels of underwriting profits will be required in
order to meet desired levels of profitability in the foreseeable future.
In addition to the underwriting results discussed above, 2002 reported operating
results as compared to 2001 were also impacted by (1) the January 1, 2002
implementation of SFAS 142, Goodwill and Other Intangible Assets, which resulted
in goodwill no longer being amortized (2001 amortization totaled $86 million,
$70 million after-tax) and (2) a general increase in other operating costs and
expenses. In addition, income tax benefits partially offset the significant
pre-tax operating loss generated in 2002. Such recorded tax benefits include the
impact of us holding a significant portion of our overall investment portfolio
in securities that are substantially exempt from U.S taxation.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net premiums written and net premiums earned decreased $799 million (or 10%) and
$816 million (also 10%), respectively, in 2001. The majority of this decrease is
attributable to the $698 million of premiums ceded in connection with the events
of September 11, 2001 as discussed below. The remaining decrease in premiums is
attributable to (1) the decision to exit certain lines of business and customer
relationships as part of a reunderwriting initiative undertaken in 2001 and (2)
additional ceded premiums resulting from claims made on prior year retrocession
coverages in place as a result of the adverse development on prior year losses
recognized in 2001, somewhat offset by general growth in premiums due to the
combination of recent hardening of pricing within the overall property and
casualty insurance/reinsurance industry and a focus on growth within certain
niche markets.
Excluding the decrease in net premiums earned, the remaining revenue categories
decreased $124 million, principally as a result of lower levels of investment
income resulting from the general decline in interest rates in 2001 and a
reduction in net realized gains on investments, somewhat offset by an increase
in other revenues.
We incurred a loss before cumulative effect of change in accounting principle
(see further discussion of this accounting change in note 2 to the accompanying
consolidated financial statements) of $184 million in 2001, as compared to
earnings of $581 million in 2000. Operating results for 2001 as compared to 2000
were adversely impacted by approximately $575 million related to the insurance
losses arising from the events of September 11, 2001. This amount, which
primarily resulted from contingent premium payments contained in certain
retrocession agreements, comprises $698 million recorded as a reduction in net
premiums earned, and $78 million reflecting additional claims, claim expenses
and policy benefits, partially offset by $201 million reflecting a reduction in
insurance acquisition costs. The gross losses arising from the events of
September 11, 2001 (estimated to be $3.3 billion) relate to underlying insurance
policies and reinsurance contracts providing general property, general
liability, aviation, business interruption, workers compensation and life and
health-related coverages. 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. Our best estimate of
20
existing net liability, net of estimated recoveries under retrocession
arrangements, has not changed significantly from our initial estimate. Further
information regarding potential litigation associated with the events of
September 11, 2001 is discussed in note 13 to the consolidated financial
statements.
Our retrocession program includes aggregate excess of loss coverages in which
accident year losses exceeding a specified loss ratio are ceded to
retrocessionaires. These contracts also contain contingent premium provisions
whereby we are required to cede additional premiums equal to a specified portion
of the covered losses. As described in more detail in the section that follows
titled "Aggregate Excess-of-Loss Program," the accident year losses incurred in
2001, primarily as a result of the insurance losses arising from the events of
September 11, 2001, exceeded the specified loss ratio and, accordingly, accruals
for reinsurance recoverables and ceded premium payables were reflected in the
accompanying consolidated financial statements in accordance with the terms of
the underlying retrocession contracts. The associated reinsurance recoverables
will be collected when the underlying paid losses exceed the specified loss
ratios. Substantially all of our retrocessionaires are large, highly rated
reinsurance entities or members of similarly rated reinsurance groups. At this
time, we do not anticipate that any significant portion of estimated recoveries
will be uncollectible.
Operating results in 2001 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 in recent years. As our
underwriting results in 2001, typical of the global property and casualty
industry, were realized, we began underwriting initiatives that increased
premium prices for given levels of coverage. These initiatives resulted in us
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, we have sought to retain or even expand such
business. On the other hand, we have 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 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 general liability lines of business.
Income tax benefits partially offset the significant pre-tax operating loss
generated in 2001. Such recorded tax benefits include the impact of our holding
a significant portion of the overall investment portfolio in securities that are
substantially exempt from U.S. taxation and the treatment as a purchase price
adjustment for tax of certain amounts received from the seller as resolution of
issues in a previous acquisition.
Aggregate Excess-of-Loss Program
The ceding of a portion of the risks underwritten by our insurance and
reinsurance businesses to other insurers and reinsurers--commonly referred to as
retrocession--is an integral part of our overall risk management program. Our
coordinated retrocession program ranges from the ceding of individual risks that
we are not prepared to accept in part or whole; to portfolio arrangements
designed to address concentrations of specified risks above our agreed-upon
retention thresholds; to aggregate excess-of-loss treaties principally designed
to reduce company-wide volatility associated with large unanticipated insurance
events.
During each of the years in the three-year period ended December 31, 2002, we
entered into aggregate excess-of-loss reinsurance treaties providing coverage
when company-wide accident year loss ratios exceed the attachment point
specified in the respective contracts. In general, the terms of these aggregate
treaties require the payment of an initial premium to our reinsurers upon
inception of the contract. On these contracts, we also pay additional contingent
premiums when we incur losses that are subject to recovery under the treaty.
Alternatively, certain contracts allow for the required additional contingent
premiums to be paid to our reinsurers (plus financing charges) when we settle
the related losses and loss expenses (often many years after the incurred date).
Other than the referenced contingent premiums paid or accrued at the time a
claim for recovery is recognized (plus financing costs, if applicable), we are
not obligated to pay any additional future premiums under the terms of these
aggregate treaties. The total financing charges related to our aggregate
excess-of-loss program for 2003 are estimated to be approximately $120 million.
21
During 1999 through 2001, accident year loss ratios exceeded the attachment
point specified in our aggregate excess-of-loss reinsurance contracts and,
accordingly, we have accrued for the expected recovery on an undiscounted basis
(consistent with our establishment of the related undiscounted reserves--a GAAP
requirement). Additionally, during each of the years 2002, 2001 and 2000, the
recognition of adverse development related to prior year loss events resulted in
additional recoveries being accrued under the aggregate contracts. As of
December 31, 2002, the coverage under the 1999, 2000 and 2001 aggregate
contracts has been substantially exhausted. No claim is currently anticipated
with respect to the 2002 aggregate contract as the accident year losses and loss
expenses recognized to date are less than the attachment point specified in the
2002 contracts. The impact of these aggregate contracts on our reported
operating results for 2002, 2001 and 2000 was as follows:
Year ended December 31,
-----------------------------------------
(In millions) 2002 2001 2000
----------- ------------ ------------
Ceded written and earned premiums, net of ceding commission $(364) $ (723) $ (671)
Additional ceded premiums representing finance charges on
deferred premium payments (143) (115) -
Ceded incurred losses and loss adjustment expenses 336 1,490 1,084
----------- ------------ ------------
Net pre-tax (cost) benefit $(171) $ 652 $ 413
=========== ============ ============
Our insurance company businesses remain liable to their policyholders if the
reinsurers they cede to are unable to meet their contractual obligations under
the applicable reinsurance agreements. To minimize our exposure to significant
losses from reinsurance insolvencies, we routinely evaluate the financial
condition of our reinsurers and monitor concentrations of credit risk arising
from similar geographic regions, activities or economic characteristics of the
reinsurers. Of the $10.9 billion of consolidated reinsurance recoverables at
December 31, 2002, approximately 33% is due from 4 specific retrocessionaires,
primarily in connection with our aggregate excess-of- loss retrocession program.
All of these retrocessionaires are large, highly rated reinsurance entities or
members of similarly rated reinsurance groups. At this time, we do not
anticipate that any significant portion of recorded reinsurance recoverables
will be uncollectible.
Domestic Property and Casualty Business
Year ended December 31,
-----------------------------------------------------
(In millions) 2002 2001 2000
-----------------------------------------------------
Net premiums written...................................... $3,891 $3,687 $3,801
Net underwriting loss..................................... (2,665) (1,305) (419)
Net investment income..................................... 458 530 606
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle............. (2,036) (586) 250
Net realized gains on investments......................... 219 268 128
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle, excluding
net realized gains on investments..................... (2,255) (854) 122
GAAP ratios (1):
GAAP claims and claim expense ratio.................... 136.4% 102.2% 77.4%
GAAP underwriting expense ratio........................ 33.8% 33.1% 34.4%
----- ----- -----
GAAP combined ratio.................................... 170.2% 135.3% 111.8%
===== ===== =====
(1) Represents data for the applicable periods calculated in accordance
with GAAP. Claims and claim expense ratio represents incurred claims and
claim expenses as a percentage of net premiums earned. Underwriting expense
ratio represents acquisition costs and other underwriting expenses
(excluding amortization of intangibles, interest expense and minority
interest in net earnings of consolidated businesses) as a percentage of net
premiums earned. The combined ratio represents the sum of the claims and
claim expense ratio and the underwriting expense ratio.
Net premiums written increased $204 million or 6% in 2002, primarily
attributable to the positive impacts of higher premium pricing stemming from the
recent hardening price environment within the overall property and casualty
insurance/reinsurance industry. This growth was partially negated by actions
initiated in 2001 and 2002 to exit certain product lines, policies, contracts
and specific customers for which, given the risk, acceptable future levels of
profit did not seem achievable. Ceded reinsurance premiums written decreased
22
only modestly ($129 million or 10%) during 2002 due to the unusually high level
of 2001 ceded premium activity driven by the events of September 11, 2001 being
largely offset by similarly escalated 2002 ceded premium levels. The high 2002
ceded premiums written resulted from the combination of increasing contingent
premium cost estimates (including reinstatement premiums) related to prior loss
events and higher general retrocession costs. Net premiums written decreased
$114 million or 3% in 2001, primarily attributable to (1) higher levels of ceded
losses under aggregate excess-of-loss retrocession programs (both current year
principally as a result of the events of September 11, 2001 and prior years due
to continued adverse claim development) and (2) the decision to exit certain
lines of business and customer relationships as part of a reunderwriting
initiative undertaken in 2001, somewhat offset by general growth in premiums due
to the combination of recent hardening of pricing within the overall property
and casualty insurance/reinsurance industry and a focus on growth within certain
niche markets.
Typically, the underwriting performance of property and casualty business is
measured in terms of a combined ratio. The combined ratio is the sum of the loss
ratio and the underwriting expense ratio, with a combined ratio lower than 100%
indicating an underwriting profit and a combined ratio greater than 100%
indicating an underwriting loss. Although the combined ratio has been greater
than 100% for the three years presented above, the operating results of
insurance/reinsurance companies include net investment income, which has a
positive impact on overall operating profitability.
The significant increase in the combined ratio in 2002 is primarily attributable
to the recognition of adverse development related to prior year loss events,
including a significant charge recognized during the fourth quarter. Due to the
impacts of existing retrocession coverages previously purchased, the recording
of this adverse development both increased incurred claims and claim expenses
and, to a lesser extent, decreased premium revenues (principally because of
higher levels of contingent ceded premiums following these reserve adjustments).
The escalated combined ratio for 2001 is partially attributable to higher levels
of ceded premiums and incurred losses resulting from the events of September 11,
2001. Excluding this impact, the 2001 combined ratio would have been 126.6%. The
relatively high combined ratios in 2001 (excluding the impact of the events of
September 11, 2001) and, to a lesser extent, in 2000 primarily reflect the
effects of continued insufficient pricing within the overall property and
casualty insurance/reinsurance industry in recent years and adverse development
on prior year recorded losses. The majority of the adverse development in 2001
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 general liability lines of business.
The reduction in net investment income of $72 million (14%) in 2002 and $76
million (13%) in 2001 is primarily due to the declining interest rate
environment experienced in both 2002 and 2001. The decrease in net realized
gains on investments in 2002 is attributable to reduced opportunity for gains
within the overall investment portfolio combined with higher levels of
other-than-temporary impairment charges recognized. The decrease in total
investment-related revenues is consistent with experience of the insurance
industry as a whole.
Earnings (loss) before income taxes and cumulative effect of change in
accounting principle, excluding net realized gains on investments, decreased
$1.4 billion in 2002, primarily attributable to the factors driving the
significant increase in the combined ratio discussed above and, to a lesser
extent, a decrease in investment-related income. Earnings (loss) before income
taxes and cumulative effect of change in accounting principle, excluding net
realized gains on investments, decreased $976 million in 2001, primarily
attributable to the increase in the combined ratio (including the significant
impact of the events of September 11, 2001) and the decrease in net investment
income.
23
International Property and Casualty Business
Year ended December 31,
---------------------------------------------------
(In millions) 2002 2001 2000
----------------- --------------- -----------------
Net premiums written...................................... $1,880 $1,864 $2,754
Net underwriting loss..................................... (1,014) (618) (509)
Net investment income..................................... 222 303 347
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle............. (818) (140) 117
Net realized gains on investments......................... 15 112 297
Loss before income taxes and cumulative effect of
change in accounting principle, excluding net
realized gains on investments......................... (833) (252) (180)
GAAP ratios (1):
GAAP claims and claim expense ratio.................... 120.4% 100.5% 91.6%
GAAP underwriting expense ratio........................ 33.8% 38.1% 26.4%
----- ----- -----
GAAP combined ratio.................................... 154.2% 138.6% 118.0%
===== ===== =====
(1) Represents data for the applicable periods calculated in accordance
with GAAP. Claims and claim expense ratio represents incurred claims and
claim expenses as a percentage of net premiums earned. Underwriting expense
ratio represents acquisition costs and other underwriting expenses
(excluding amortization of intangibles, interest expense and minority
interest in net earnings of consolidated businesses) as a percentage of net
premiums earned. The combined ratio represents the sum of the claims and
claim expense ratio and the underwriting expense ratio.
Net premiums written increased only $16 million or 1% in 2002. This modest
increase was primarily attributable to the positive impacts of higher premium
pricing stemming from the recent hardening price environment within the overall
property and casualty insurance/reinsurance industry being largely negated by
actions initiated in 2001 and 2002 to exit certain product lines, policies,
contracts and specific customers for which, given the risk, acceptable future
levels of profit did not seem achievable. Ceded reinsurance premiums written
grew somewhat during 2002 ($406 million or 36%) due to the unusually high 2001
ceded premium activity driven by the events of September 11, 2001 being more
than matched by elevated 2002 ceded premium levels. The high 2002 ceded premiums
written resulted from the combination of increasing contingent premium cost
estimates (including reinstatement premiums) related to prior loss events and
higher general retrocession costs. Net premiums written decreased $890 million
or 32% in 2001, primarily attributable to (1) higher levels of ceded losses
under the aggregate excess-of-loss retrocession program principally as a result
of the events of September 11, 2001 and (2) the decision to exit certain lines
of business and customer relationships as part of a reunderwriting initiative
undertaken in 2001, somewhat offset by general growth in premiums due to the
recent hardening of pricing within the overall property and casualty
insurance/reinsurance industry.
Consistent with experience in the domestic property and casualty business, the
significant increase in the combined ratio in 2002 is primarily attributable to
the recognition of adverse development related to prior year loss events,
including a significant charge recognized during the fourth quarter. Due to the
impacts of existing retrocession coverages previously purchased, the recording
of this adverse development both increased incurred claims and claim expenses
and, to a lesser extent, decreased premium revenues (principally because of
higher levels of contingent ceded premiums following these reserve adjustments).
The elevated combined ratio for 2001 is partially attributable to higher levels
of ceded premiums and incurred losses resulting from the events of September 11,
2001. Excluding this impact, the 2001 combined ratio would have been 114.8%. The
relatively high combined ratios in 2001 (excluding the impact of the events of
September 11, 2001) and, to a lesser extent in 2000, primarily reflect the
effects of continued insufficient pricing within the overall property and
casualty insurance/reinsurance industry in recent years and adverse development
on prior year recorded losses. The increase in the combined ratio in 2000 also
includes the impact of significant adverse development relating to certain
European windstorms occurring late in 1999.
24
Life Reinsurance Business
Year ended December 31,
--------------------------------------
(In millions) 2002 2001 2000
--------------------------------------
Revenues.................................................. $2,642 $2,466 $2,207
Earnings before income taxes and cumulative
effect of change in accounting principle............. 98 260 238
Revenues, which consist of net premiums earned, net investment income, net
realized gains on investments and other revenues--including fees generated from
investment-related life reinsurance products and financial reinsurance
transactions--increased $176 million or 7% in 2002 and $259 million or 12% in
2001. The revenue growth in 2002 was primarily related to the acquisition during
the year of a relatively substantial block of traditional life business in the
U.S., somewhat offset by a decrease in net realized gains on investments. The
increase in revenues in 2001 was primarily attributable to growth in the
international traditional life and health business (principally in Europe and
Latin America), somewhat offset by a decrease in net realized gains on
investments.
Earnings before income taxes and cumulative effect of change in accounting
principle decreased $162 million or 62% in 2002, including a $49 million
decrease in net realized gains on investments. Excluding net realized gains on
investments, earnings before income taxes and cumulative effect of change in
accounting principle decreased $113 million or 55% in 2002, primarily
attributable to increased claim activity in 2002 as compared to 2001with respect
to mortality and certain health-related products. Earnings before income taxes
and cumulative effect of change in accounting principle increased $22 million or
9% in 2001, including a $41 million decrease in net realized gains on
investments. Excluding net realized gains on investments, earnings before income
taxes and cumulative effect of change in accounting principle increased $63
million or 45% in 2001, primarily attributable to the increase in revenues
discussed above and more favorable claim experience as compared to 2000
(particularly in the international individual disability line of business).
Liquidity and Capital Resources
GE Global Insurance's ability to meet its obligations, including debt service
and operating expenses, and pay dividends to its shareholder depends primarily
upon the receipt of sufficient funds from its insurance businesses. The payment
of dividends by ERC, GE Re, Medical Protective and CORE Insurance are subject to
restrictions set forth in the insurance laws of Missouri, Illinois, Indiana and
Vermont, respectively, as well as other restrictions. Historically, our
liquidity requirements have been met by funds provided from operations and from
the maturity and sales of investments. In the recent past (such as in 2002 in
response to the significant fourth quarter charge taken for adverse development
and in 2001 in response to the events of September 11), capital contributions