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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
Commission file number 0-27394
GE Global Insurance Holding Corporation
(Exact name of registrant as specified in its charter)
Delaware 95-3435367
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5200 Metcalf, Overland Park, Kansas 66202 (913) 676-5200
(Address of principal executive offices (Zip Code(Registrant's telephone number,
including area code)
SECURITIES REGISTERED PURSUANT
TO SECTION 12(b) OF THE ACT:
Name of eac
Title of each class exchange on which registered
7% Notes Due February 15, 2026 New York Stock Exchange
SECURITIES REGISTERED PURSUANT
TO SECTION 12(g) OF THE ACT:
Title of each class
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]
Indicate by check mark whether the registerant is an accelerated filer as
defined in Exchange Act Rule 12b-2. Yes [x] No []
Aggregate market value of the voting stock held by non-affiliates of the
registrant at last business day of the registerant is most recently completed
second fiscal quarter. None.
At February 27, 2004, 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
PART I
Item 1. Business...........................................................................................2
Item 2. Properties........................................................................................11
Item 3. Legal Proceedings.................................................................................11
Item 4. Submission of Matters to a Vote of Security Holders...............................................12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.........................13
Item 6. Selected Financial Data...........................................................................13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................................14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................20
Item 8. Financial Statements and Supplementary Data.......................................................20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................................................20
Item 9A. Controls and Procedures ..........................................................................20
PART III
Item 10. Directors and Executive Officers of the Registrant................................................21
Item 11. Executive Compensation............................................................................21
Item 12. Security Ownership of Certain Beneficial Owners and Management....................................21
Item 13. Certain Relationships and Related Transactions....................................................21
Item 14. Principal Accountant Fees and Services............................................................21
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................22
Signatures...................................................................................................60
Certifications Pursuant to Exchange Act Rule 13(a)-14(a)/15(d)-14(a).........................................62
Certification Pursuant to 18 U.S.C. Section 1350.............................................................64
1
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 overall insurance/reinsurance industry has been impacted by a number of
significant developments in recent years. These developments have included the
impact of the September 11, 2001 terrorist attack in the United States and the
resulting awakening as to the level of risks presented to the
insurance/reinsurance industry by future terrorism-related activity. The gradual
realization as to the level of price erosion on liability-related exposures
underwritten in the 1997-2001 period and the decreasing interest rate
environment have provided further industry challenges in recent years. After
several years of deteriorating underwriting results and depleting surplus
levels, the global insurance/reinsurance sector showed signs of recovery in
2003. Continuing legislative proposals as to asbestos and environmental related
exposures (as well as broader measures dealing with general tort reform in the
U.S.) and the impacts of the recently enacted U.S. Terrorism Risk Insurance Act
("TRIA") are matters that warrant close monitoring in the years to come.
General
Through our principal insurance and reinsurance company affiliates -- Employers
Reinsurance Corporation, GE Reinsurance Corporation, the GE Frankona Group and
the Medical Protective Corporation -- we write substantially all lines of
reinsurance (where the insured party is another insurance company) and select
lines of direct property and casualty insurance (where the insured party is a
non-insurance company or an individual).
The reinsurance operations include the reinsurance of property and casualty
risks written by more than 1,000 insurers around the world. Direct insurance
operations are focused on niche lines of business, principally medical
malpractice coverage for physicians and dentists, medical professional liability
for hospitals, errors and omissions coverage for insurance agents and brokers,
professional liability insurance for attorneys, excess indemnity for
self-insurers of medical benefits and excess workers' compensation for
self-insurers. The life reinsurance affiliates are engaged in the reinsurance of
life insurance products, including term, whole and universal life, annuities,
certain health-related coverages and the provision of financial reinsurance to
life insurers.
In our opinion, we compete in the reinsurance marketplace principally on the
basis of our expertise, relationships, financial strength, price and creativity
in developing customized solutions to customer needs. Within the direct
insurance marketplace, we believe we compete principally on the basis of our
product offerings, established relationships with customers and key distribution
partners, price and ease of doing business.
Employers Reinsurance Corporation is one of the largest competitors in its
marketplace. Our property and casualty reinsurance operations are ranked fifth
in the world in terms of net premiums written and we compete with the
2
world's largest reinsurers as well as dozens of smaller niche competitors. Our
life reinsurance operations are ranked in the top four life reinsurers in the
world and our direct insurance operations are ranked in the top fifteen in the
United States.
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.
Property and Casualty Insurance/Reinsurance Segment
Property and Casualty Reinsurance. Our largest product line, traditional
property and casualty reinsurance, accounted for approximately 44% of our
worldwide net premiums written in 2003. 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 domestic programs 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, 2003, approximately 34% of our
international net premiums written from property and casualty reinsurance were
derived from property reinsurance, approximately 32% from casualty reinsurance
and approximately 34% from aviation and marine reinsurance. Based on 2003 net
premiums written, approximately 36% of the international property and casualty
business was written on a direct basis, with the remainder written through
brokers.
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 26% of our
worldwide net premiums written in 2003. 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).
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 30% of our worldwide business in 2003.
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, 2003, approximately 71% of our
international life reinsurance net premiums written were for traditional life
reinsurance, with the balance for health and disability reinsurance.
3
In the fourth quarter of 2003, we made some critical decisions to attempt to
focus our life reinsurance business in those areas that we believe offer the
greatest near-term return on equity prospects. Starting in 2004, we will not
write new U.S. mortality business, and we will cease originating life & health
business in Canada, Latin America and the Asia Pacific region. Also in the
fourth quarter, we sold 95% of the stock in ERC Life, one of our U.S. domiciled
life reinsurance entities. In 2003, ERC Life represented 7% of the net premiums
written from our life reinsurance segment.
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, environmental and
other mass tort 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 derived from other sources.
While detailed analysis is performed quarterly to assess the overall adequacy of
recorded claim reserves, more comprehensive evaluations are undertaken annually
for the over 300 different reserve segments. These more comprehensive reviews
were completed during the third and fourth quarters of 2003 using both reported
and paid claims data from 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.
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. In accordance with common insurance industry
practice, the IBNR reserves include provision for development on known claims in
addition to true late reported losses.
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
4
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 methadologies 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 combined with external data where appropriate. 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 reserve
segments, each possessing unique actuarial development patterns. However, these
300 reserve 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
5
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.
Reserve Development. The development of our net balance sheet property and
casualty liabilities for unpaid claims and claim expenses for accident years
1993 through 2003 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 1993 to 2003.
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," 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,
2003, 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.
6
Changes in Historical Reserves for Unpaid Claims and Claim Expenses
For the Last Ten Years - GAAP Basis as of December 31, 2003 (Property & Casualty Operations)
Year ended December 31,
--------- ---------- --------- --------- ---------- --------- --------- ---------- --------- ---------
(In millions) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
----------------------------------------------------------------------------------------------------
Net liability for unpaid
claims and claim expenses $ 4,525 $ 5,071 $ 9,351 $ 9,458 $ 9,114 $12,495 $13,210 $12,202 $12,303 $15,140 $16,324
Cumulative paid as of:
One year later....... 949 1,115 1,964 1,949 2,176 2,867 4,811 4,758 4,798 4,947 ---
Two years later...... 1,602 1,804 3,130 3,189 3,241 5,803 7,782 8,035 8,350 --- ---
Three years later.... 2,054 2,341 3,933 3,881 4,863 7,263 9,962 10,577 --- --- ---
Four years later..... 2,424 2,708 4,464 5,294 5,648 8,648 11,701 --- --- --- ---
Five years later..... 2,690 2,988 5,686 5,919 6,245 9,537 --- --- --- --- ---
Six years later...... 2,952 3,318 6,151 6,350 6,696 --- --- --- --- --- ---
Seven years later.... 3,181 3,540 6,488 6,642 --- --- --- --- --- --- ---
Eight years later.... 3,353 3,771 6,741 --- --- --- --- --- --- --- ---
Nine years later..... 3,534 3,948 --- --- --- --- --- --- --- --- ---
Ten years later...... 3,641 --- --- --- --- --- --- --- --- --- ---
Net liability re-estimated
as of:
One year later....... $ 4,612 $ 5,173 $ 9,192 $ 9,229 $ 9,179 $12,410 $13,749 $13,314 $16,341 $16,543 ---
Two years later...... 4,656 5,313 8,959 9,127 8,655 12,115 14,504 16,798 17,438 --- ---
Three years later.... 4,793 5,256 8,907 8,549 8,453 11,987 17,001 17,710 --- --- ---
Four years later..... 4,747 5,155 8,392 8,252 8,601 13,708 17,471 --- --- --- ---
Five years later..... 4,668 4,902 8,029 8,389 9,231 14,122 --- --- --- --- ---
Six years later...... 4,487 4,804 8,180 8,707 9,474 --- --- --- --- --- ---
Seven years later.... 4,402 4,854 8,454 8,873 --- --- --- --- --- --- ---
Eight years later.... 4,461 5,159 8,620 --- --- --- --- --- --- --- ---
Nine years later..... 4,704 5,260 --- --- --- --- --- --- --- --- ---
Ten years later...... 4,788 --- --- --- --- --- --- --- --- --- ---
Cumulative favorable
(adverse) development (263) (189) 731 585 (360) (1,627) (4,261) (5,508) (5,135) (1,403) ---
Effect of foreign exchange
(1) 29 11 (444) (392) (118) (281) (11) 959 882 548 ---
--------- ---------- --------- --------- ---------- --------- --------- ---------- --------- ---------
Cumulative favorable $ (234) $ (178) $ 287 $ 193 $ (478) $(1,908) $(4,307) $(4,557) $(4,264) $ (863) $ ---
(adverse) development, excluding foreign exchange
========= ========== ========= ========= ========== ========= ========= ========== ========= =========
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
----------------------------------------------------------------------------------------------------
Balance at December 31 - gross $ 6,020 $ 11,145 $10,869 $10,936 $15,342 $17,435 $16,932 $20,882 $23,839 $24,226
Less reinsurance recoverables (949) (1,794) (1,411) (1,822) (2,847) (4,225) (4,730) (8,579) (8,699) (7,902)
----------------------------------------------------------------------------------------------------
Balance at December 31, - net 5,071 9,351 9,458 9,114 12,495 13,210 12,202 12,303 15,140 16,324
----------------------------------------------------------------------------------------------------
Latest re-estimated liability - 6,536 10,409 10,588 11,661 18,117 23,833 24,560 28,553 25,575 ---
gross
Less re-estimated reinsurance
recoverables (1,276) (1,789) (1,715) (2,187) (3,995) (6,362) (6,850) (11,115) (9,032) ---
----------------------------------------------------------------------------------------------------
Latest re-estimated liability- 5,260 8,620 8,873 9,474 14,122 17,471 17,710 17,438 16,543 ---
net ----------------------------------------------------------------------------------------------------
Gross cumulative development (516) 736 281 (725) (2,775) (6,398) (7,628) (7,671) (1,736) ---
Effect of foreign exchange (1) 6 (540) (466) (130) (389) 20 1,477 1,746 762 ---
----------------------------------------------------------------------------------------------------
Gross cumulative development, $ (510) $ 196 $ (185) $ (855) $ (3,164) $(6,378) $(6,151) $(5,925) $ (974) ---
excluding foreign exchange ====================================================================================================
(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."
7
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 a result, 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, 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 $3.7
billion.
In 2003, we observed our reported claims activity compared with our revised
expected loss levels. In a majority of our lines of business, reported claims
activity in 2003 was reasonably close to expected amounts. In a few
lines--principally medical malpractice, product liability and certain director
and officer related coverages--reported claim volumes exceeded our revised loss
expectations. Accordingly, we increased our loss reserves to the newly-indicated
ultimate levels in 2003, recording adverse development as shown in the preceding
chart of $0.9 billion.
The significant indicated deficiencies reflected in the preceding table for the
more recent accident years is primarily attributable to recognition during
2000-2003 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.
8
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:
(In millions) Year ended December 31,
-------------------------------------------------
2003 2002 2001
---------------- --------------- ----------------
Balance at January 1 - gross $ 23,839 $ 20,882 $ 16,932
Less reinsurance recoverables (8,699) (8,579) (4,730)
---------------- --------------- ----------------
Balance at January 1 - net 15,140 12,303 12,202
---------------- --------------- ----------------
Claims and expenses incurred:
Current year 4,563 3,865 4,579
Prior years 897 3,568 811
---------------- --------------- ----------------
5,460 7,433 5,390
---------------- --------------- ----------------
Claims and expenses paid:
Current year (471) (472) (761)
Prior years (4,946) (4,797) (4,758)
---------------- --------------- ----------------
(5,417) (5,269) (5,519)
---------------- --------------- ----------------
Claim reserves related to acquired/contributed companies 378 285 -
Foreign exchange and other 763 388 230
---------------- --------------- ----------------
Balance at December 31 - net 16,324 15,140 12,303
Add reinsurance recoverables 7,902 8,699 8,579
---------------- --------------- ----------------
Balance at December 31 - gross $ 24,226 $ 23,839 $ 20,882
================ =============== ================
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 5%
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, 2003 and 2002. 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, 2003,
2002 and 2001.
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.
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) 2003 2002 2001
-------------- -------------- --------------
Balance at January 1 - gross $ 943 $ 786 $ 829
Less reinsurance recoverables (287) (165) (183)
-------------- -------------- --------------
Balance at January 1 - net 656 621 646
Claims and expenses incurred 43 121 23
Claims and expenses paid (107) (86) (48)
-------------- -------------- --------------
Balance at December 31 - net 592 656 621
Add reinsurance recoverables 345 287 165
-------------- -------------- --------------
Balance at December 31 - gross $ 937 $ 943 $ 786
============== ============== ==============
9
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 comprehensive reserve reviews completed in
the third and fourth quarter of 2003, we again 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 to five years (generally excluding large one-time settlements such as
those involving a commutation of a block of business). In 2002, the decision to
adjust reserves to reflect a 12-year survival ratio 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 of that year.
We actively monitor evolving case law and its effect on asbestos and
environmental related illness claims and have implemented an active commutation
program to lessen these exposures. While we have recorded our best estimate of
liabilities for asbestos and environmental related illness 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 and environmental 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 Fair Act and 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 risks, we
also have exposures to other mass torts involving primarily liability issues
such as tobacco products, gun manufacturers, silicone breast implants and the
impacts of household mold. Of recent concern is the increase in class-action
litigation surrounding pharmaceutical-related products. We attempt to closely
monitor legal developments pertaining to such issues and establish specific
reserves (including the cost of related litigation) for individual actions when
such legal proceedings have progressed to the point indicating that some level
of liability is likely and we can reasonably estimate such liability.
Additionally, we have established amounts to cover additional exposures on both
known and unasserted claims. We believe the recorded reserves represent our best
estimate of ultimate liability based on information known to date; however,
there remains the risk that such exposures could develop unfavorably in future
years.
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. Our international businesses (principally the "GE Frankona Re
Group") are subject to regulation under insurance statutes of various foreign
countries in which they are domiciled or write business.
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, 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 that our businesses
are in material compliance with all applicable laws and regulations pertaining
to our business and operations as of December 31, 2003.
U.S. Insurance Regulation. U.S. property & casualty and life & health 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
10
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.
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, 2003.
International Regulations. 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) were 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, 2003, our
international insurance company businesses that are subject to the EU Directives
are in compliance with such, on both an individual and group basis.
Dividends by Subsidiaries. Because the operations of GE Global Insurance are
conducted primarily through regulated insurance companies, it is dependent upon
dividends, tax allocation and other payments from these regulated subsidiaries
in order to service its debt and meet its other obligations. The payment of
dividends and other payments to us by our U.S. domiciled insurance/reinsurance
subsidiaries are subject to limitations imposed by the applicable state
Insurance Codes. The maximum amount available for the payment of dividends
during 2004 by our U.S. domiciled regulated insurance companies without prior
regulatory approval is $576 million. Certain restrictions also exist with
respect to the payment of dividends by our foreign domiciled subsidiaries. No
prediction can be made as to whether any legislative proposals relating to
dividend rules 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.
Item 2. Properties.
We conduct business from various facilities, most of which are leased. In
addition, we own our administrative offices in Fort Wayne, Indiana and Munich,
Germany.
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 operations
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. Both IRI and ERC have retrocessional coverage on their exposure to
WTC losses covering a portion of losses incurred. We believe there is
11
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 coverage. We believe that our maximum exposure resulting
from an unfavorable outcome to this matter is approximately $300 million.
In February 2004, the first phase of a three-part trial to determine the amount
of property insurance coverage available as a result of the September 11, 2001
terrorist attack on the World Trade Center complex began in New York City. Phase
I of the trial is limited to the issue of whether the parties agreed to bind
coverage under the policy form originally provided by the insured's broker. IRI
is clearly bound under its own policy language, and therefore IRI is not an
active participant in Phase I. IRI will be actively involved in Phase II (number
of occurrences) and Phase III (damages). Resolution of all three phases of the
trial is expected in 2004.
ERC is in dispute with an insured involving approximately (pound)100 million of
coverage. To date, ERC has made payments totaling approximately (pound)25
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
is engaged in arbitration to settle the dispute. We are in the process of
discovery with proceedings expected to begin in the third quarter of 2004. 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 $150 million. The case is in discovery and trial is
expected in late 2004. We intend to pursue this matter vigorously.
In connection with the September 11, 2001 terrorist attack, we accrued a
reinsurance recoverable of approximately $70 million under an arrangement with
two retrocessionaires. During 2003, the retrocessionaires denied coverage on the
grounds that they interpreted the underlying contracts to only provide coverage
for natural events. We believe that there is compelling evidence supporting our
position that such contracts also extended to certain other than natural events
and have not adjusted the recorded reinsurance recoverable. We intend to pursue
either binding arbitration or litigation to resolve this matter.
Item 4. Submission of Matters to a Vote of Security Holders.
Not required by this form.
12
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.
Not required by this form.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Our net premiums written and net premiums earned increased $1,837 million (23%)
and $2,214 million (28%), respectively, in 2003. Direct and assumed premiums
earned grew $802 million principally as a result of the continued favorable
pricing environment within the overall property and casualty
insurance/reinsurance industry and, to a lesser degree, core volume growth in
certain European health insurance products. Also contributing to the growth in
premiums was the impact of foreign currency exchange rates as a result of the
significant weakening of the U.S. dollar against most European currencies in
2003. Somewhat offsetting the growth from these factors was the loss of certain
business as a result of our continued application of discipline in underwriting
activities by rejecting risks that either fail to meet our established standards
of price or terms and conditions, or that involve risks for which sufficient
historical data do not exist to permit us to make a satisfactory evaluation. 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 channels (both property/casualty and accident/health) when expected
returns do not appear to justify the risks. Incorporated into these evaluations
are realistic expectations of investment returns in the current low interest
rate environment and the resulting understanding that greater levels of
underwriting profits will be required in order to meet desired levels of
profitability in the foreseeable future. As a recent example, in the fourth
quarter of 2003, we announced our intent to cease underwriting U.S. mortality
business and all life and health business in Canada, Latin America and the Asia
Pacific region in order to focus on lines of business that we believe offer the
potential for higher investment returns. Also contributing to the increase in
net premiums earned was a decline in ceded reinsurance premiums of $1,412
million, primarily due to a decrease in contingently payable premiums resulting
from lower levels of adverse development on prior year loss events in 2003 as
compared to 2002.
In 2003, our total revenues increased $2,345 (25%), primarily due to the
increase in net premiums earned discussed above. Also contributing to the
revenue growth was a $131 million (12%) increase in net investment income, which
resulted principally from an increase in average invested assets. The slight
decrease in net realized gains on investments ($17 million or 7%) was fully
offset by a $17 million increase in other revenues.
During 2003, we generated $656 million of net earnings, which compares to a net
loss of $1,733 million in 2002. The principal factors contributing to this
dramatic increase in profitability include: (1) a significant improvement in
underwriting results driven by the combination of the current favorable industry
pricing environment, continued commitment to established underwriting
discipline, lower levels of adverse development related to prior year loss
events and the lower than average occurrence of catastrophic-type loss events in
2003; (2) an after-tax gain of $153 million on the sale of ERC Life; and (3) the
$131 million increase in net investment income discussed above. Partially
offsetting these factors was a modest increase ($35 million or 6%) in other
operating costs and expenses. While the sale of ERC Life generated a $116
million pre-tax loss, this loss was more than offset by associated tax benefits
resulting from ERC Life's tax basis being substantially in excess of its book
basis.
The significant 2002 net loss was largely attributable to the fourth quarter
2002 decision to strengthen reserves by $2.5 billion ($1.6 billion after-tax)
across a large portion of our liability-related exposures underwritten in 1997
through 2001. With the amounts recognized in the first three quarters of 2002,
the total pre-tax charge for adverse development amounted to $3.7 billion ($2.4
billion after tax). In 2003, we continued to monitor our reported claims
activity compared with our revised expected loss levels. In a majority of lines
of business, reported claims activity in 2003 was reasonably close to expected
amounts. In a few lines--principally medical malpractice, product liability and
certain director and officer related coverages--reported claims volumes exceeded
our revised loss expectations. Accordingly, we increased our loss reserves to
the newly-indicated ultimate levels in 2003, recording adverse development of
$0.9 billion.
See the section titled "Property and Casualty Reserves for Unpaid Claims and
Claim Expenses" on pages 4-6 and Note 6 to our consolidated financial statements
for a more detailed discussion of the general approach we follow in establishing
and adjusting claim-related reserves.
Insurance loss provisions are based on the best available estimates at a given
time. As described on pages 18-19 under the caption "Insurance Liabilities and
Reserves," these estimates will be adjusted in the future as required.
14
Retrocession Activities
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, 2003, 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. Although we do not intend to renew this coverage in 2004,
the total financing charges related to our 2001 and prior aggregate
excess-of-loss contracts are estimated to be approximately $125 million in 2004.
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 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 had been
substantially exhausted. No claim is currently anticipated with respect to the
2002 and 2003 aggregate contracts as the accident year losses and loss expenses
recognized to date are less than the attachment points specified in those
contracts. The additional 2003 ceded losses reflected in the chart below
resulted from updating certain estimates related to the 1999 and 2000 aggregate
contracts. The impact of these aggregate contracts on our reported operating
results for 2003, 2002 and 2001 was as follows:
(In millions) Year Ended December 31,
-----------------------------------------
2003 2002 2001
------------- ------------- -------------
Ceded written and earned premiums, net of ceding $ (9) $ (364) $ (723)
commission
Additional ceded premiums representing finance
charges on deferred premium payments (130) (143) (115)
Ceded incurred losses and loss adjustment expenses 72 336 1,490
------------- ------------- -------------
Net pre-tax benefit (cost) $ (67) $ (171) $ 652
============= ============= =============
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 $9.6 billion of consolidated reinsurance recoverables at
December 31, 2003, approximately 36% 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.
Exchange Rate and Interest Rate Risks
Exchange rate and interest rate risks are managed with a variety of
straightforward techniques, including match funding and selective use of
derivatives. We use derivatives to mitigate or eliminate certain financial and
market risks because we conduct business in diverse markets around the world. We
apply strict policies to manage each of these risks, including prohibitions on
derivatives trading, derivatives market-making or other speculative activities.
15
Following is an analysis of the potential effects of changes in currency
exchange and interest rates using so-called "shock" tests that model effects of
shifts in rates. These are not forecasts.
o If, on January 1, 2004, interest rates had increased 100 basis points
across the yield curve (a "parallel shift" in the yield curve) and that
increase remained in place for 2004, we estimate, based on our year-end
2003 portfolio and holding everything else constant, that the effect on our
2004 net earnings would be insignificant.
o If, on January 1, 2004, currency exchange rates were to decline by 10%
against the U.S. dollar and that decline remained in place for 2004, we
estimate, based on our year-end 2003 portfolio and holding everything else
constant, that the effect on our 2004 net earnings would be insignificant.
Cash Requirements
Achieving optimal returns on cash often involves making long-term commitments.
U.S. Securities and Exchange Commission (SEC) regulations require that we
present our contractual obligations, and we have done so in the table that
follows. However, our future cash flow prospects cannot reasonably be assessed
based on such obligations--the most significant factor affecting our future cash
flows is our ability to earn and collect cash from customers. Future cash
outflows, whether they are contractual obligations or not, will vary based on
our future needs. While some such outflows are completely fixed (for example,
commitments to repay principal and interest on fixed-rate borrowings), most
depend on future events (for example, payout pattern on reserves which have been
incurred but not reported). Further, normal operations involve significant
expenditures that are not based on "commitments," for example, expenditures for
income taxes or for payroll. As defined by reporting regulations, our
contractual obligations as of December 31, 2003, follow:
(In millions) Total 2004 2005-2006 2007-2008 2009
Thereafter
------------- ------------- ------------- ------------- -------------
Borrowings (Note 9) $ 3,951 $ 121 $ 242 $ 242 $ 3,346
Operating lease obligations (Note 14) 200 33 57 38 72
Purchase obligations (a) 9 9 - - -
Insurance liabilities (Note 6) (b) 6,032 615 961 718 3,738
Other liabilities (c) 1,731 604 334 334 459
(a) Includes capital expenditures, ordinary course of business purchase
orders and other commitments.
(b) Includes guaranteed investment contracts, structured settlements and
single premium immediate annuities based on scheduled payouts, as well
as those contracts with readily determinable cash flows such as
workers' compensation tabular indemnity and long-term disability
claims.
(c) Due to the indeterminate nature of their cash outflows, certain
categories of other noncurrent liabilities are not presented in the
above table. These include deferred taxes, fair values of financial
instruments and other sundry items. Refer to notes 7 and 15 for
further information on these items.
Other matters that provide additional context for considering our liquidity
position are discussed below.
Off-Balance Sheet Arrangements
We have not utilized forms of off-balance sheet arrangements, such as asset
securitizations, involving special purpose entities to facilitate improved share
owner returns and securities transactions, transfer selected credit risk, or
engage in speculative activities and have not provided financial support to
special purpose entities under any liquidity or credit support agreements.
Liquidity and Capital Resources
GE Global Insurance's ability to meet future obligations, including debt service
and operating expenses, and to pay dividends to its shareholder, depends
primarily upon the receipt of sufficient funds from its insurance businesses.
The payment of dividends by our U.S. domiciled subsidiaries is subject to
restrictions set forth in the insurance laws of their respective states of
domicile as well as other restrictions. The payment of dividends by our foreign
domiciled insurance companies is dependent on the laws and regulations of the
countries in which they are located and operate. 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
from our ultimate parent--GE Company--have been a liquidity source. However,
there are no contractual capital
16
support agreements in place and, accordingly, there can be no assurances as to
the level of any future capital contributions.
Cash flows from operating activities, which consist primarily of premiums
collected during the period (net of related acquisition costs) and payments made
for claims and claim expenses, decreased $915 million in 2003, principally as a
result of an increase in claim payments in 2003 attributable to both significant
payments made in connection with the events of September 11, 2001 and a general
increase in reported claims activity experienced in recent periods. Cash flows
used in investing activities decreased $2.4 billion in 2003, primarily due to
lower levels of operating and financing cash flows available for investment,
offset slightly by the cash proceeds from the sale of ERC Life. Cash flows from
financing activities decreased $1.3 billion in 2003, primarily attributable to
the lack of a current year counterpart to the $1.8 billion capital contribution
received in 2002, partially offset by cash receipts from a related party credit
facility. The $1.8 billion capital contribution received in 2002 was made to
replenish capital sufficient to cover the after-tax impact of the $2.5 billion
charge taken in the fourth quarter to strengthen prior year claim reserves.
In connection with the 2002 $1.8 billion capital contribution and other
transactions, we transferred our international property and casualty businesses
from ERC Life to GE Investments, Inc. ("GEII"), and following those
transactions, we own all the outstanding shares of Class C common stock of GEII.
The Class C stock is intended to reflect the value and the financial performance
of the transferred businesses. Because GE Company has delegated control of the
transferred businesses to us, we continue to consolidate the financial results
of those businesses with our results. Our Class C shares represent less than 20%
of the outstanding common stock of GEII. The following table provides summary
balance sheet information of the transferred businesses as of December 31, 2003
and 2002:
(In millions)
2003 2002
-------------- ---------------
Assets
Total investments $ 8,898 $ 5,535
Reinsurance recoverables 4,396 5,723
Premiums receivable 2,483 2,360
Other assets 4,000 3,150
-------------- ---------------
$ 19,777 $ 16,768
============== ===============
Liabilities and Equity
Claims and claim expenses $ 10,002 $ 10,901
Other liabilities 5,669 3,428
Equity 4,106 2,439
-------------- ---------------
$ 19,777 $ 16,768
============== ===============
We have a one-year $600 million revolving credit agreement in place with GE
Capital Services which enables us to borrow from GE Capital Services at an
interest rate per annum equal to GE Capital Services' cost of funds for a one
year period. The agreement is automatically extended for successive terms of one
year each unless terminated in accordance with terms of the agreement. The total
amount outstanding on this credit facility, including accrued interest payable,
was $111 million and $190 million as of December 31, 2003 and 2002,
respectively.
We, along with GE Capital Corporation, are participants in a revolving credit
agreement that involves an international cash pooling arrangement on behalf of
certain of our European affiliates. In such roles, either participant may make
short-term loans to the other as part of the cash pooling arrangement. Each such
borrowing shall be repayable upon demand, but not to exceed 364 days. This
unsecured line of credit has an interest rate per annum equal to GE Capital
Services' cost of funds for the currency in which such borrowing is denominated.
This credit facility has a current expiration date of August 26, 2004, but is
automatically extended for successive terms of one year each, unless terminated
in accordance with the terms of the agreement. We had a net payable of $103
million under this credit facility at December 31, 2003 and a net receivable of
$459 million at December 31, 2002.
We entered into a one year $250 million letter of credit facility on December
30, 2003 with a syndicate of banks lead by Sun Trust Bank as the issuing bank.
The facility is fully allocated to provide collateral with respect to amounts
due from foreign reinsurers to prevent a reduction in statutory capital in
certain of our domestic insurance subsidiaries.
17
During 2003, certain external credit rating agencies announced actions with
respect to GE Global Insurance and its businesses. Standard's & Poor's Rating
Services revised its rating on our senior debt securities from "A" to "A-".
Concurrently, the financial strength rating and counterparty credit ratings on
Employers Reinsurance Corporation (and affiliated non-life insurance/reinsurance
entities) and Employers Reassurance Corporation were revised from "AA" to "A+".
Additionally, AM Best Company revised the financial strength ratings of
Employers Reassurance Corporation from "A+" to "A". These actions are consistent
with actions and announcements throughout the insurance/reinsurance industry. We
do not believe these actions will materially affect our liquidity or capital
resources or the ability to write future business.
Cyclicality
The property and casualty reinsurance industry historically has been highly
cyclical. Underwriting results of primary property and casualty insurance
companies and prevailing general economic and reinsurance premium rates
significantly influences demand for reinsurance. The cyclical trends in the
industry and the industry's profitability can also be affected significantly by
volatile and unpredictable developments, including changes in what we believe to
be the propensity of courts to grant large awards, natural disasters and other
catastrophic events (such as hurricanes, windstorms, earthquakes, floods, fires
and, as experienced in 2001, intentional events such as terrorist acts),
fluctuations in interest rates and other changes in the investment environment
which affect inflationary pressures that may tend to affect the size of losses
experienced by ceding primary insurance companies.
Effects of Inflation
Our ultimate claims and claim expense costs on claims not yet settled is
increased by the effects of inflation, and changes in the inflation rate
therefore could become a significant factor in determining appropriate claims
and claim expense reserves, as well as reinsurance premium rates. Generally, our
methods used to estimate claims and claim expense reserves and to calculate
reinsurance premium rates take into account the anticipated effects of inflation
in estimating the ultimate claims and claim expense costs. We use both insurance
industry data and government economic indices in estimating the effects of
inflation on claims and claim expense reserves and reinsurance premium rates.
However, until claims are ultimately settled, the full effect of inflation on
our results cannot be known.
Critical Accounting Estimates
Accounting estimates and assumptions discussed in this section are those that we
consider to be the most critical to an understanding of our financial statements
because they inherently involve significant judgments and uncertainties. For all
of these estimates, we caution that future events rarely develop exactly as
forecast, and the best estimates routinely require adjustment.
Insurance liabilities and reserves differ for short and long-duration insurance
contracts. Short-duration contracts such as property and casualty policies are
accounted for based on actuarial estimates of losses inherent in that period's
claims, including losses for which claims have not yet been reported.
Short-duration contract loss estimates rely on actuarial observations of
ultimate loss experience for similar historical events. Measurement of
long-duration insurance liabilities (such as term and whole life insurance
policies) also is based on approved actuarial methodologies that include
assumptions about mortality morbidity, lapse rates and future yield on related
investments. Historical insurance industry experience indicates that a greater
degree of inherent variability exists in assessing the ultimate amount of losses
under short-duration property and casualty contracts than exists for
long-duration mortality exposures. This inherent variability is particularly
significant for liability-related exposures, including latent claims issues
(such as asbestos and environmental related coverage disputes), because of the
extended period of time--often many years--that transpires between when a given
claim event occurs and the ultimate full settlement of such claim. This
situation is then further exacerbated for reinsurance entities (as opposed to
primary insurers) due to coverage often being provided on an "excess-of-loss"
basis and the resulting lags in receiving current claims data. Benefit-related
insurance liabilities totaled $31.6 billion at year-end 2003. Of that total,
approximately $25.3 billion ($16.5 billion net of reinsurance recoverables)
related to unpaid claims and claims adjustment expenses under short-duration
insurance contracts.
We continually evaluate the potential for changes in loss estimates with the
support of qualified reserving actuaries and use the results of these
evaluations both to adjust recorded reserves and to proactively modify
underwriting criteria and product offerings. For actuarial analysis purposes,
reported and paid claims activity is segregated into several hundred reserving
segments, each having differing historical settlement trends. A variety of
actuarial methodologies are then applied to the underlying data for each of
these reserving segments in arriving at an
18
estimated range of "reasonably possible" loss scenarios. Factors such as line of
business, length of historical settlement pattern, recent changes in
underwriting standards and unusual trends in reported claims activity will
generally affect which actuarial methodologies are given more weight for
purposes of determining the "best estimate" of ultimate losses in a particular
reserving segment. As discussed in the insurance section on pages 8-10 and in
Note 6 to our consolidated financial statements, reported claims activity
related to prior year loss events, particularly for liability-related exposures
underwritten in 1997 through 2001, has performed much worse than we
anticipated. This trend was considered in the actuarial reserve study completed
in the fourth quarter of 2002, resulting in a significant increase in recorded
reserves. Following these actions, we have continued to monitor reported claims
volumes relative to our revised expected loss levels. While for the majority of
our lines of business, reported claims activity in 2003 was reasonably close to
expected amounts, for certain lines of business, the reported claims volumes
exceeded our revised loss expectations. In response to this new data, we further
increased our loss reserves in 2003. Actuarial reserve studies and recorded
reserves continue to be updated accordingly.
Impairment of investment securities results in a charge to operations when a
market decline below cost is considered other than temporary. We regularly
review investment securities for impairment based on criteria that include the
extent to which the investment's carrying value exceeds its related market
value, the duration of the market decline, our ability to hold to recovery and
the financial strength and specific prospects of the issuer of the security. Our
investment securities amounted to $29.0 billion at year-end 2003. Gross
unrealized gains and losses included in that carrying amount related to debt
securities were $704 million and $177 million, respectively. Gross unrealized
gains and losses on equity securities were $31 million and $40 million,
respectively. Of securities with unrealized losses at year-end 2003, and based
on application of our accounting policy for impairment, approximately $40
million of portfolio value is at risk of being charged to earnings in 2004. We
actively perform comprehensive market research and analysis and monitor market
conditions to identify potential impairments. Further information is provided in
Notes 2 and 4 to our consolidated financial statements.
Losses on uncollectible premium receivables and reinsurance recoverables are
recognized when they are incurred. The nature of our operations is such that we
generally expect to receive amounts due and our historical charge-off ratio is
relatively low. As a result, our general reserving approach is to only establish
reserves for specifically identified disputes or collection issues. In
establishing required allowances, we give consideration to relevant observable
data as to the nature of the dispute, the overall financial health of the
customer, collateral value (such as letters of credit and funds held balances)
and legal right-of-offset of related claim liabilities. Exposure to losses on
uncollectible premium receivables and reinsurance recoverables at year-end 2003
was approximately $13.6 billion, against which an allowance for losses of $124
million was provided. Further information is provided in Notes 2, 6 and 10 to
our consolidated financial statements. While losses depend to a large degree on
future economic conditions (including the impact of future claims experience),
we do not anticipate significant receivable write-offs in 2004.
Projections of future cash flows are required in order to both perform
impairment testing for some asset categories and to properly account for certain
reinsurance arrangements. The more significant asset categories requiring
routine impairment testing using a cash flow based methodology include deferred
insurance acquisition costs, present value of future profits and goodwill. At
year-end 2003, these asset categories totaled $3.8 billion. While any required
future impairment actions will depend to a large degree on future economic
conditions (including the impact of future claims experience and, to a lesser
extent, investment yields), we do not anticipate significant impairment charges
in 2004. The reinsurance-specific requirements necessitating projections of
future cash flows include "risk transfer" testing for both assumed and ceded
business at contract inception and, for certain ceded contracts containing
retrocessionaire limits expressed in terms of an "economic loss," throughout the
life of the underlying contract. At year-end 2003, approximately $1.3 billion of
reinsurance recoverables related to contracts containing economic loss limits.
As part of our continuing updates of recorded liabilities for claims and claim
expenses, we also periodically reassess the expected payout patterns and
resulting cash flow projections and make indicated adjustments to recorded
reinsurance recoverables. We do not anticipate significant adjustments in 2004.
Other loss contingencies are recorded as liabilities when it is probable that a
liability has been incurred and the amount of the loss is reasonably estimable.
Disclosure is required when there is a reasonable possibility that the ultimate
loss will exceed the recorded provision. Contingent liabilities are often
resolved over long time periods. Estimating probable losses requires analysis of
multiple forecasts that often depend on judgments about potential actions by
third parties such as regulators.
19
Certain significant accounting policies do not involve the same level of
measurement uncertainties as those discussed above, but are nevertheless
important to an understanding of our financial statements. Policies related to
revenue recognition, financial instruments and business combinations require
difficult judgments on complex matters that are often subject to multiple
sources of authoritative guidance. Certain of these matters are among topics
currently under reexamination by accounting standard setters and regulators;
based on their tentative conclusions, significant changes to GAAP, and therefore
to certain of our accounting policies, are possible in the future. Also see Note
2 to our consolidated financial statements, Summary of Significant Accounting
Policies, which discusses accounting policies that we have selected from
acceptable alternatives.
New Accounting Standards--Currently Effective
In April 2003, the Financial Accounting Standards Board (FASB) finalized
Statement of Financial Accounting Standards ("SFAS") 133 Implementation Issue
No. B36, Modified Coinsurance Arrangements and Debt Instruments that Incorporate
Credit Risk Exposures that Are Unrelated or Only Partially Related to the
Creditworthiness of the Obligor Under Those Instruments ("B36"). In summary, the
FASB determined that modified coinsurance arrangements, where the ceding insurer
withholds funds, might include an embedded derivative that must be bifurcated
from the host instrument if it is not clearly and closely related to such host
instrument. This situation often arises when the interest rate on the funds held
balance is linked to the actual performance of a specified pool of assets. This
guidance was effective on the first day of the first fiscal quarter beginning
after September 15, 2003. The adoption of B36 did not materially impact our
financial position or current operating results.
SFAS 142, Goodwill and Other Intangible Assets, generally became effective for
us on January 1, 2002. Under SFAS 142, goodwill is no longer amortized but is
tested for impairment using a fair value methodology. We stopped amortizing
goodwill effective January 1, 2002. The result of our applying the new rules as
of January 1, 2002, resulted in no impairment charge.
The cumulative effect of the accounting change in 2001 related to the adoption,
as of January 1, 2001, of SFAS 133, Accounting for Derivative Instruments and
Hedging Activities, as amended. We recognized a one-time, non-cash charge of $11
million to earnings related to such adoption.
Other New Accounting Standards
In December 2003, the FASB modified FIN 46, Consolidation of Variable Interest
Entities (with FIN 46R), amending FIN 46 and deferring its application in
certain cases. Our adoption of FIN 46 on July 1, 2003, was unchanged by FIN 46R.
Because we have not traditionally engaged in the types of securitization
vehicles within the scope of FIN 46, no cumulative or future effect on our
earnings or equity resulted from either the adoption of FIN 46 or the changes
outlined in FIN 46R.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information about potential effects of changes in interest rates and currency
exchange on us is discussed on pages 15-16.
Item 8. Financial Statements and Supplementary Data.
Our Consolidated Financial Statements and the Independent Auditors' Report
thereon and the Supplementary Financial Statement Schedules listed on the
accompanying Index to Financial Statements and Financial Statement Schedules are
filed as part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures
Under the direction of our Chief Executive Officer and Chief Financial Officer,
we evaluated our disclosure controls and procedures and internal control over
financial reporting and concluded that (i) our disclosure controls and
procedures were effective as of December 31, 2003 and (ii) no change in internal
control over financial reporting occurred during the quarter ended December 31,
2003 that has materially affected, or is reasonably likely to materially affect,
such internal control over financial reporting.
20
PART III
Item 10. Directors and Executive Officers of the Registrant.
Not required by this form.
Item 11. Executive Compensation.
Not required by this form.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Not required by this form.
Item 13. Certain Relationships and Related Transactions.
Not required by this form.
Item 14. Principal Accountant Fees and Services.
The aggregate fees billed for professional services by KPMG in 2003 and 2002
were:
(In millions)
2003 2002
------------- -------------
Type of fees:
Audit fees $ 5.5 $ 4.6
Audit-related fees -- 0.3
Tax fees 0.1 0.3
All other fees -- 0.7
------------- -------------
Total $ 5.6 $ 5.9
============= =============
In the above table, in accordance with the SEC's definitions and rules, "audit
fees" are fees we paid KPMG for professional services for the audit of our
consolidated financial statements included in Form 10-K and review of financial
statements included in Form 10-Qs, and for services that are normally provided
by the accountant in connection with statutory and regulatory filings or
engagements; "audit-related fees" are fees for assurance and related services
that are reasonably related to the performance of the audit or the review of our
financial statements; "tax fees" are fees for tax compliance, tax advice and tax
planning; and "all other fees" are fees for any services not included in the
first three categories.
21
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1.Financial Statements and Schedules.
The consolidated financial statements filed as part of this report are
listed in the Index to Consolidated Financial Statements and Financial
Statement Schedules (page 23).
(a) 2.Financial Statement Schedules.
The consolidated financial statement schedules filed as part of this
report are listed in the Index to Consolidated Financial Statements
and Financial Statement Schedules (page 23).
(a) 3.Listing of Exhibits.
3.1 A complete copy of our Articles of Incorporation, as last amended
on August 30, 1995, and currently in effect. (Incorporated by
reference to Exhibit 3.1 of our Form 10-K for the year ended
December 31, 1995.)
3.2 A complete copy of our By-laws, as last amended on February 26,
1995, and currently in effect. (Incorporated by reference to
Exhibit 3.2 of our Registration Statement on Form 10, File No.
0-27394.)
10.1 Whole Account Aggregate Excess of Loss Retrocession Reinsurance
Agreement, between Employers Reinsurance Corporation, GE
Reinsurance Corporation, GE Frankona
Ruckversicherungs-Aktiengesellschaft, GE Frankona Reinsurance
Ltd., GE Specialty Insurance (U.K.) Ltd. and XL Re Ltd., dated
January 1, 2003 (material omitted and separately filed with the
Securities and Exchange Commission pursuant to a request for
confidential treatment).
10.2 Whole Account Aggregate Excess of Loss Retrocession Reinsurance
Agreement, between Employers Reinsurance Corporation, GE
Reinsurance Corporation, GE Frankona
Ruckversicherungs-Aktiengesellschaft, GE Frankona Reinsurance
Ltd., GE Specialty Insurance (U.K.) Ltd. and Tokio Millennium Re
Ltd., dated January 1, 2003 (material omitted and separately
filed with the Securities and Exchange Commission pursuant to a
request for confidential treatment).
10.3 Whole Account Aggregate Excess of Loss Retrocession Reinsurance
Agreement, between Employers Reinsurance Corporation, GE
Reinsurance Corporation, GE Frankona
Ruckversicherungs-Aktiengesellschaft, GE Frankona Reinsurance
Ltd., GE Specialty Insurance (U.K.) Ltd. and Inter-Ocean
Reinsurance (Ireland) Limited., dated January 1, 2003 (material
omitted and separately filed with the Securities and Exchange
Commission pursuant to a request for confidential treatment).
12 Computation of Ratio of Earnings to Fixed Charges.
31(a)Certification Pursuant to Exchange Act Rule 13(a)-14(a)/15(d)-
14(a).
31(b)Certification Pursuant to Exchange Act Rule 13(a)-14(a)/15(d)-
14(a).
32 Certification Pursuant To 18 U.S.C. Section 1350.
(b) 1.Reports on Form 8-K.
A current report on Form 8-K was filed on June 26, 2003, under Item 5.
setting forth revised A.M Best ratings of GE Global Insurance and
certain of its insurance subsidiaries.
A current report on Form 8-K was filed on September 3, 2003, under
Item 5. setting forth revised Standard & Poor's ratings of GE Global
Insurance and certain of its insurance subsidiaries.
22
GE GLOBAL INSURANCE HOLDING CORPORATION
AND CONSOLIDATED SUBSIDIARIES
ITEM 15(a)
Index to
Consolidated Financial Statements and
Financial Statement Schedules
Page
Consolidated Financial Statements
Independent Auditors' Report ...................................................................... 24
Consolidated Statement of Earnings .................................................................25
Consolidated Statement of Financial Position .......................................................26
Consolidated Statement of Stockholder's Equity .....................................................27
Consolidated Statement of Cash Flows ...............................................................28
Notes to Consolidated Financial Statements ....................................................... 29
Financial Statement Schedules
Schedule II - Condensed Financial Information of Registrant ........................................55
Schedule III - Supplementary Insurance Information .................................................59
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
GE Global Insurance Holding Corporation:
We have audited the accompanying consolidated statement of financial position of
GE Global Insurance Holding Corporation and subsidiaries as of December 31, 2003
and 2002, and the related consolidated statements of earnings, stockholder's
equity and cash flows for each of the years in the three-year period ended
December 31, 2003. In connection with our audits of the consolidated financial
statements, we also audited the financial statement schedules listed in the
Index at Item 15(a) as of December 31, 2003 and 2002, and for each of the years
in the three-year period ended December 31, 2003. These consolidated financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GE Global Insurance
Holding Corporation and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
As discussed in note 2 to the consolidated financial statements, the Company in
2002 changed its method of accounting for goodwill and other intangible assets
and in 2001 changed its method of accounting for derivative instruments and
hedging activities.
KPMG LLP
Kansas City, Missouri
February 6, 2004
24
GE GLOBAL INSURANCE HOLDING CORPORATION
AND CONSOLIDATED SUBSIDIARIES
Consolidated Statement of Earnings
(In millions) Year ended December 31,
-----------------------------------------
2003 2002 2001
Revenues
Net premiums written $ 9,729 $ 7,892 $ 7,392
============= ============= =============
Net premiums earned $ 10,001 $ 7,787 $ 7,185
Net investment income 1,203 1,072 1,202
Net realized gains on investments 224 241 436
Other revenues 193 176 368
------------- ------------- -------------
Total revenues 11,621 9,276 9,191
------------- ------------- -------------
Costs and Expenses
Claims, claim expenses and policy benefits 7,912 9,282 6,975
Insurance acquisition costs 2,103 1,867 1,830
Amortization of intangibles 71 57 123
Interest expense 127 124 102
Loss on disposition of subsidiary 116 - -
Other operating costs and expenses 647 612 538
Minority interest in net earnings of consolidated
subsidiaries 90 89 89
------------- ------------- -------------
Total costs and expenses 11,066 12,031 9,657
------------- ------------- -------------
Earnings (loss) before income taxes and cumulative effect of
change in accounting principle 555 (2,755) (466)
------------- ------------- -------------
Income tax benefit (expense):
Current 379 851 297
Deferred (278) 171 (15)
------------- ------------- -------------
101 1,022 282
------------- ------------- -------------
Earnings (loss) before cumulative effect of change in accounting
principle 656 (1,733) (184)
------------- ------------- -------------
Cumulative effect of change in accounting principle - - (11)
------------- ------------- -------------
Net earnings (loss) $ 656 $ (1,733) $ (195)
============= ============= =============
See Notes to Consolidated Financial Statements.
25
GE GLOBAL INSURANCE HOLDING CORPORATION
AND CONSOLIDATED SUBSIDIARIES
Consolidated Statement of Financial Position
(In millions) December 31,
---------------------------
2003 2002
------------- -------------
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value $ 28,302 $ 22,200
Equity securities, at fair value 535 627
Short-term investment securities, at amortized cost 138 3,620
Other invested assets 259 375
Total investments 29,234 26,822
Cash 1,521 911
Securities and indebtedness of related parties 276 786
Accrued investment income 504 383
Premiums receivable 3,955 4,447
Funds held by reinsured companies 619 815
Reinsurance recoverables 9,610 10,901
Deferred insurance acquisition costs 1,914 1,882
Intangible assets 2,051 2,001
Other assets 2,858 2,838
------------- -------------
Total assets $ 52,542 $ 51,786
============= =============
Liabilities and equity
Claims and claim expenses $ 25,324 $ 25,157
Accumulated contract values 2,460 2,826
Future policy benefits for life and health contracts 3,800 3,852
Unearned premiums 3,238 3,231
Other reinsurance balances 4,462 4,325
Contract deposit liabilities 836 887
O