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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
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Commission file number 0-27394
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GE Global Insurance Holding Corporation
(Exact name of registrant as specified in its charter)
Delaware 95-3435367
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5200 Metcalf, Overland Park, Kansas 66201 (913) 676-5200
(Address of principal executive offices) (Zip Code) (Registrant's telephone
number, including area code)
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SECURITIES REGISTERED PURSUANT
TO SECTION 12(b) OF THE ACT:
Name of each
Title of each class exchange on which registered
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7% Notes Due February 15, 2026 New York Stock Exchange
SECURITIES REGISTERED PURSUANT
TO SECTION 12(g) OF THE ACT:
Title of each class
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Common Stock, par value $5,000 per share
Indicate by check mark whether the registrant(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant at March 24, 1999. None.
At March 24, 1999, 1,000 shares of common stock with a par value of $5,000 were
outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b)
OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE
FORMAT.
TABLE OF CONTENTS
Page
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PART I
Item 1. Business........................................................................1
Item 2. Properties.....................................................................12
Item 3. Legal Proceedings..............................................................12
Item 4. Submission of Matters to a Vote of Security Holders............................12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......12
Item 6. Selected Financial Data........................................................12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................22
Item 8. Financial Statements and Supplementary Data....................................22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................22
PART III
Item 10. Directors and Executive Officers of the Registrant.............................22
Item 11. Executive Compensation.........................................................22
Item 12. Security Ownership of Certain Beneficial Owners and Management.................23
Item 13. Certain Relationships and Related Transactions.................................23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................23
PART I
Item 1. Business.
GE Global Insurance Holding Corporation ("GE Global Insurance" and, together
with its subsidiaries, ("the Company"), through its direct and indirect
subsidiaries, is principally engaged in the reinsurance business in the United
States and throughout the world. All outstanding common stock of GE Global
Insurance is owned by General Electric Capital Services, Inc. ("GE Capital
Services"), which in turn is wholly-owned by General Electric Company ("GE
Company").
The principal executive offices of GE Global Insurance are located at 5200
Metcalf, Overland Park, Kansas 66201 (Telephone number (913) 676-5200).
Overview of the Reinsurance Industry
Reinsurance is a form of insurance in which a reinsurer indemnifies a primary
insurer against part or all of the liability assumed by the primary insurer
under one or more insurance policies. Reinsurance may provide a primary insurer
with several major benefits: a reduction in net liability of individual risks,
protection against catastrophic losses, reduction of financial leverage and
stabilization of operating results. Reinsurance may also provide a primary
insurer the ability to increase its underwriting capacity by allowing the
primary insurer to accept larger risks and to more rapidly expand its book of
business.
The global reinsurance industry continues to be impacted by industry
consolidation, excess market capacity and primary insurers seeking alternative
forms of risk transfer such as insurance captives, structured securities and
derivative products. Global reinsurers are offering ways to meet the demands of
this changing global market by expanding their markets, entering into new
reinsurance niches, offering new reinsurance products and spreading their risks
geographically. This changing reinsurance environment may affect the industry's
profitability which has historically been influenced by the insurance industry's
underwriting cycle, changes in interest rates and catastrophic events.
General
GE Global Insurance is one of the largest reinsurance groups in the world, with
subsidiaries providing risk management solutions for well over a century. The
Company writes substantially all types of property and casualty, healthcare and
life reinsurance and some lines of primary health, property and casualty and
excess workers' compensation insurance.
The Company conducts business and services its accounts through a network of
local offices located in cities throughout the world. As of December 31, 1998,
the Company had 19 offices in the North American region, 10 offices in the
European region, 10 offices in the Asia/Pacific region and 3 offices in the
Latin American region.
As one of the largest direct writers of reinsurance in the world, the Company
works directly with its clients which enhances the Company's ability to evaluate
its clients and their respective risks and allows the Company to be more
responsive to the individual needs of its customers. The Company utilizes its
network of local offices throughout the world to service the particular needs of
its reinsurance clients. This system enables the Company to provide a wider
range of services targeted at the needs of a particular market. To enhance its
responsiveness to customer needs in the property and casualty segment, the
Company operates in a decentralized environment with respect to underwriting
decisions and customer service.
The Company also competes in the reinsurance broker market throughout the world.
During 1998 and in early 1999, the Company has significantly expanded its
presence in the reinsurance broker market by acquiring Kemper Reinsurance
Company ("Kemper Re") and Eagle Star Reinsurance Company Limited ("Eagle Star
Re") (See Notes 3 and 17 to the consolidated financial statements). The
acquisitions of Kemper Re and Eagle Star Re significantly enhance the Company's
distribution channel in the worldwide reinsurance broker market and further
enables the Company to respond to the growing risk management needs of a wider
and more diverse group of customers. The acquisitions of Kemper Re and Eagle
Star Re position the Company as one of the largest reinsurance broker writers in
the world.
1
The Company manages and diversifies its risk through the careful underwriting of
risks, active claims management and the purchase of retrocessional coverage.
Retrocessional coverage represents a form of secondary reinsurance where a
reinsurer seeks reinsurance coverage on a specified reinsurance agreement. The
Company monitors adherence to underwriting guidelines through the use of
computer systems and internal audits.
The Company's business strategy is to continue to increase revenues by
concentrating on select profitable customer segments and delivering
comprehensive risk transfer and risk management solutions. The Company does not
intend, however, to increase premium income at the expense of its underwriting
results.
The Company, as a result of General Electric Capital Corporation's ("GE Capital
Corporation" - a wholly-owned subsidiary of GE Capital Services) acquisition of
Coregis Insurance Company ("Coregis"), acquired the renewal rights of certain
domestic property and casualty business to continue expansion of its specialty
insurance product line in 1997. During 1998, the Company, either directly or
through its affiliates, acquired three major property and casualty
insurance/reinsurance businesses which strengthens its global presence in the
Fortune 1000 commercial property markets, the broker-serviced markets and the
healthcare product lines.
The Company has established a Financial Market Products ("FMP") unit which will
address the needs of customers seeking innovative risk transfer solutions,
globally. FMP will partner with an affiliate, GECC Capital Markets Group, Inc.,
to deliver the full range of services desired by this growing customer segment.
Other than start-up administrative expenses, the Company's 1998 results do not
reflect any significant revenues or operating results from products and services
being contemplated by the FMP unit.
On January 6, 1998, the Company purchased the assets and assumed the renewal
rights of Industrial Risk Insurers ("IRI"), a leader in providing highly
protected risk property insurance, for a cash consideration of approximately
$235 million. The business underwritten through IRI is managed by a joint
venture formed between the Company and The Hartford Steam Boiler Inspection and
Insurance Company ("HSB") as stipulated by a management agreement. IRI writes
business utilizing the licensing authority of HSB and the business underwritten
is subsequently allocated to HSB and the Company in accordance with certain
reinsurance agreements between HSB and the Company. The expansion into these two
niche markets positions the Company to continue to meet the demands of the
changing domestic market and provide services to a new base of customers.
In the fourth quarter of 1998, the Company completed the acquisitions of Medical
Protective Corporation ("Medical Protective") and Kemper Re. Medical Protective
is the oldest medical professional liability insurer of physicians and dentists
in the United States. The cash consideration of approximately $628 million was
financed be GE Capital Corporation via an interim loan agreement. Kemper Re is a
property and casualty reinsurance company principally doing business through
intermediaries. The cash consideration of approximately $468 million was
financed by utilizing existing unused credit facilities.
Also in recent years, the Company has expanded its global business through the
extension of its local office network. The Company opened offices in Kuala
Lumpar and Shanghai in 1998, Buenos Aires and Montreal in 1997 and Sydney,
Melbourne, Brisbane and Auckland in 1996. Consistent with its global expansion
strategy, the Company anticipates further expanding its presence in the
Asia/Pacific and Latin American regions.
Unless otherwise indicated, all financial data has been prepared in accordance
with United States generally accepted accounting principles ("GAAP").
2
Lines of Business
The Company's two business segments are (1) property and casualty
insurance/reinsurance ("P&C") and (2) life reinsurance. The Company's principal
product lines under the property and casualty segment are traditional property
and casualty reinsurance, healthcare reinsurance and specialty insurance
(generally primary property and casualty insurance) and its principal product
lines under the life reinsurance segment are traditional life reinsurance and
financial reinsurance. The Company also provides primary insurance products to
hospitals, health maintenance organizations and medical professionals as part of
its healthcare product line and to niche customers as part of its specialty
insurance product line.
Unless otherwise indicated, the Company's domestic results include business
written in the United States (including business written in the United States
where the reinsured is outside the United States) and Canada, and the
international results include all other business written by the Company. The
geographic breakdown, based on net premiums written, of the Company's principal
product lines is summarized as follows:
Year ended December 31,
-------------------------------------------------------------------------
(In millions) 1998 1997 1996
--------------------- --------------------- ---------------------
Inter- Inter- Inter-
Domestic national Domestic national Domestic national
--------------------- --------------------- ---------------------
Property and Casualty Segment
Property and Casualty......... $1,487 $2,306 $1,038 $1,592 $1,167 $2,196
Healthcare.................... 514 83 432 92 405 -
Specialty..................... 498 - 339 - 169 -
Life Segment..................... 422 674 512 540 189 447
------ ------ ------ ------ ------ ------
Total......................... $2,921 $3,063 $2,321 $2,224 $1,930 $2,643
====== ====== ====== ====== ====== ======
The following is a summary description of the Company's domestic and
international business based on principal product lines:
Property and Casualty Insurance/Reinsurance Segment
Property and Casualty Reinsurance. The Company's largest product line,
traditional property and casualty reinsurance, accounted for approximately 63%
of the Company's worldwide net premiums written in 1998. The Company's premium
volume in the property and casualty segment is derived principally from treaty
agreements, which enable the Company to maintain lower operating costs because
fewer personnel are required to administer treaty business than facultative
business. Most of the Company's casualty business is written on an excess of
loss basis because it better enables the Company to control its exposure on
business that has a relatively longer "tail".
The Company's property business is written on both an excess of loss and a
proportional basis. Generally, the Company is the lead reinsurer for any
domestic program in which it participates, enabling it to negotiate the terms of
the reinsurance. The Company also acts as the lead reinsurer on a portion of its
international business.
The Company's domestic property and casualty business is conducted primarily
throughout the United States and Canada. For the year ended December 31, 1998,
approximately 48% of the Company's domestic net premiums written from the
property and casualty segment were derived from property reinsurance,
approximately 45% from casualty reinsurance and approximately 7% from other
lines of reinsurance. Based on 1998 net premiums written, approximately 63% of
the Company's domestic property and casualty reinsurance was written on a direct
basis, with the remainder written through brokers.
3
The Company's international property and casualty business services worldwide
markets, including most European countries and countries in the Middle East, Far
East and Latin America. For the year ended December 31, 1998, approximately 46%
of the Company's international net premiums written from property and casualty
reinsurance was derived from property reinsurance, approximately 25% from
casualty reinsurance, approximately 24% from aviation and marine reinsurance and
approximately 5% from other lines of reinsurance. Based on 1998 net premiums
written, approximately 59% of the Company's international property and casualty
business was written on a direct basis, with the remainder written through
brokers.
In recent years, insurance companies have directed more business to the
better-capitalized, more highly-rated reinsurers, which has led to a
consolidation in the reinsurance industry. In competing with a smaller number of
global reinsurers, the Company has found that a number of its global customers
are increasingly demanding that reinsurers provide a broader range of coverages.
In response to this trend, the Company has expanded the property and casualty
risks it reinsures beyond its more traditional property and casualty reinsurance
business to include risks such as errors and omissions, directors and officers
and non-standard auto liability. In addition to the expansion of lines of
business, property and casualty reinsurance has aligned its marketing efforts
with its core expertise in areas such as aviation, national accounts and global
accounts. Management believes that the Company is well positioned to compete on
a global basis in these markets.
The property and casualty reinsurance industry has experienced a significant
increase in catastrophic exposure and loss during the last decade. Increased
population density, particularly in regions susceptible to tropical storms or
earthquakes, and the higher incidence and greater severity of catastrophes, has
increased the losses incurred in many recent catastrophes. As a result of these
developments, the Company has taken steps to limit its exposure by carefully
monitoring and allocating its property and casualty exposure to specific
geographic zones, both domestically and internationally.
Healthcare. As part of the Company's property and casualty business segment, the
Company provides insurance and reinsurance for the healthcare industry, also
targeting employers, public entities, manufacturers and others for certain
product lines. Coverages include primary insurance and reinsurance for medical
professional liability and reinsurance protecting primary insurers (including
self-insurers) in the healthcare market (i.e., reinsurance of long-term care,
excess workers' compensation, stop loss insurance and provider excess
coverages).
The healthcare industry continues to change and evolve due to voluntary
healthcare reform, expansion of managed healthcare initiatives, increased
competition and the uncertainty related to the extent of government regulation.
In addition, companies that historically specialized in one line of business
have expanded their lines of business and are now writing multiple lines of
business. The Company, to serve the growing needs of their clients, has
developed new and innovative healthcare products and has expanded coverages to
include various other lines of business. Additionally, the Company's
international operations have begun to write accident and health reinsurance
from the property and casualty insurance/reinsurance segment.
The Company believes that it is well positioned to compete in the healthcare
market because of its wide range of experience in providing healthcare liability
coverage and accident and health coverage, leveraging it acquisition of Medical
Protective and utilizing multiple products and disciplines to provide healthcare
solutions.
Specialty Insurance. An additional component of the Company's domestic property
and casualty business is its specialty insurance product line, which generally
consists of commercial property and casualty policies written on a primary basis
in niche markets. The Company's specialty business concentrates on providing
commercial insurance products for target markets, usually professional
associations and homogeneous groups. The acquisition of the renewal rights
associated with Coregis has significantly increased the specialty business'
premium volume and has provided access to several new customer groups. Specialty
products include professional liability programs, communications/media liability
coverages and some niche programs in the general property/casualty area. This
coverage provides insurance for errors and omissions (E&O) arising out of the
professional activities of the insureds and commercial property and casualty
coverages for niche programs.
4
Professional classes underwritten include lawyers, property and casualty
insurance agents and brokers, life and health insurance agents and brokers,
directors and officers (not-for-profit) and a few miscellaneous classes such as
travel agents, computer consultants and marketing consultants. The majority of
this business provides coverage to lawyers and property and casualty and life
insurance agents and brokers.
Competition for the classes of business underwritten within the Company's
specialty insurance product line has recently increased as more companies have
redirected their resources to the specialty niche business. In order to compete
for this business, the Company has provided value-added services, including
enhanced underwriting and automated processing services, to its specialty line
customers.
Life Reinsurance Segment
Life Reinsurance. The Company is engaged in the reinsurance of various life
insurance products, including term, whole and universal life, annuities, group
long-term health and health products and provides financial reinsurance to life
insurers. Based on net premiums written, life reinsurance accounted for
approximately 19% of the Company's worldwide business in 1998.
With respect to life reinsurance, the Company writes mostly on a direct basis
with primary insurers. The Company's life reinsurance business consists
principally of treaty business and is written generally on a pro-rata basis. The
Company's domestic life reinsurance business is written in every state in the
United States. The Company's international life reinsurance business services
worldwide markets, including France, Germany, Greece, Israel, Italy, Mexico,
Scandinavia, Singapore, Spain and the United Kingdom. For the year ended
December 31, 1998, approximately 65% of the Company's international life
reinsurance net premiums written were for traditional life reinsurance, with the
balance for healthcare reinsurance.
The Company believes that increases in life expectancy, decreases in public
funding for social programs in Europe and deregulation of the life reinsurance
markets in Europe and Japan present increased opportunities for the Company's
life reinsurance business line. In response to these trends, the Company has
expanded its international life reinsurance market by increasing its presence in
the market for reinsurance of annuity providers.
Financial Reinsurance. Financial reinsurance is primarily designed to enhance
the current statutory surplus of the ceding company while reducing future
statutory earnings as amounts are repaid to the reinsurer. This financial
transaction is effectively collateralized by anticipated future income streams
from selected insurance policies. The Company writes financial reinsurance on a
direct basis and through brokers and generally only for companies with credit
ratings of not less than "A" at the inception of the policy and that have a
minimum capital and surplus of $15 million. The two principal categories of
transactions are financial reinsurance and financial risk reinsurance. Financial
reinsurance typically has a duration of three to five years. Financial risk
reinsurance represents a longer term traditional risk sharing arrangement where
reinsurance is provided on existing portfolios of in force business. The
Company's focus in the past year has been on expanding the financial risk
reinsurance line.
Property and Casualty Reserves for Unpaid Claims and Claim Expenses
Domestic. The Company's domestic subsidiaries maintain reserves to cover their
estimated ultimate liability for unpaid claims and claim expenses with respect
to reported and unreported claims incurred as of the end of each accounting
period (net of estimated related salvage and subrogation claims). These reserves
are estimates that involve actuarial and statistical projections of the expected
cost of the ultimate settlement and administration of unpaid claims based on
facts and circumstances then known, estimates of future trends in claims
severity and other variable factors such as inflation and new concepts of
liability. The inherent uncertainties of estimating claim reserves are
exacerbated for reinsurers by the significant periods of time that often elapse
between the occurrence of an insured claim, the reporting of the claim to the
primary insurer and, ultimately, to the reinsurer, and the primary insurer's
payment of that claim and subsequent indemnification by the reinsurer (the
"tail"). As a consequence, actual claims and claim expenses paid may deviate,
perhaps substantially, from estimates reflected in the insurance companies'
reserves in their financial statements. Adjustments to previously reported
reserves for net claims and claim expenses are reflected in the financial
statements in the period in which the adjustment occurs.
5
When a claim is reported to a ceding company, the ceding company's claims
personnel establish a "case reserve" for the estimated amount of the ultimate
payment. The estimate reflects the informed judgment of such personnel based on
general insurance reserving practices and on the experience and knowledge of
such personnel regarding the nature and value of the specific type of claim. The
Company, in turn, typically establishes a case reserve when it receives notice
of a claim from the ceding company. Such reserves are based on an independent
evaluation by the Company's claims departments, taking into consideration
coverage, liability, severity of injury or damage, jurisdiction, an assessment
of the ceding company's ability to evaluate and handle the claim and the amount
of reserves recommended by the ceding company. Case reserves are adjusted
periodically by the claims departments based on subsequent developments and
audits of ceding companies.
In accordance with industry practice, the Company maintains reserves for claims
incurred but not reported ("IBNR"). Such reserves are established to provide for
future case reserves and loss payments on incurred claims that have not yet been
reported to an insurer or reinsurer. In calculating IBNR reserves, the Company
uses generally accepted actuarial reserving techniques that take into account
quantitative loss experience data, together with, where appropriate, qualitative
factors. IBNR reserves are based on claim experience and are grouped both by
class of business and by accident year. IBNR reserves are also adjusted to take
into account certain additional factors, such as changes in the volume of
business written, reinsurance contract terms and conditions, the mix of
business, claims processing and inflation, that can be expected to affect the
Company's liability for claims over time.
International. The Company's international property and casualty reinsurance
operations establish their reserves using analytical techniques similar to those
utilized by GE Global Insurance's domestic subsidiaries. They also maintain IBNR
reserves using actuarial and statistical projections. The potential for adverse
development of the Company's reserves for its international business, as
compared to that of its domestic business, is reduced because the international
operations have a relatively low proportion of longer tail exposures. As of
December 31, 1998, approximately 2% of the Company's net international reserves
($69 million) related to business acquired by the Company from Assurance
Compagniet Baltica Aktiesellskab ("Baltica") in 1988. At the time of the
acquisition, the Company obtained from Baltica a 90% loss development guarantee,
pursuant to which Baltica is obligated to pay the Company 90% of the amount of
claim reserve development (adjusted for certain income and expenses) from 1988
through December 31, 1997. The Company is currently negotiating the settlement
of this loss development guarantee with Baltica.
Reserve Development. The development of the Company's net balance sheet property
and casualty liabilities for unpaid claims and claim expenses for accident years
1988 through 1998 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 1988 to 1998.
The liability includes both case and IBNR reserves as of each year-end date, net
of anticipated recoveries from other reinsurers. The rows immediately following
the first row of data show cumulative paid data at December 31, as of one year,
two years, ..., 10 years of subsequent payments.
Net Liability Re-estimated. The middle rows of data show the re-estimated amount
for previously reported net liability based on experience as of the end of each
subsequent calendar year's results. This estimate is changed as more information
becomes known about the underlying claims for individual years. The cumulative
redundancy (deficiency) shown in the table is the aggregate net change in
estimates over the period of years subsequent to the calendar year reflected at
the top of the respective columns. The amount in the line titled "Redundancy
(Deficiency) at December 31, 1998", represents for each calendar year (the "Base
Year") the aggregate change in (i) the Company's original estimate of net
liability for unpaid claims and claim expenses for all years prior to and
including the Base Year compared to (ii) the Company's re-estimate as of
December 31, 1998, of net liability for unpaid claims and claim expenses for all
years prior to and including the Base Year. A redundancy means that the original
estimate was greater than the re-estimate and a deficiency means that the
original estimate was less than the re-estimate. By way of example, the
deficiency for the year 1994, calculated as of December 31, 1998, represents a
deficiency in the Company's original estimate of unpaid claims and claim
expenses for 1994 and prior years.
The last seven lines of data present the development of reserves on a "gross of
reinsurance" basis, reconciled to the "net of reinsurance" basis shown in the
immediately preceding table.
6
Changes in Historical Reserves for Unpaid Claims and Claim Expenses
For the Last Ten Years - GAAP Basis as of December 31, 1998
Year ended December 31,
--------------------------------------------------------------------------------------------------------
(In millions) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
--------------------------------------------------------------------------------------------------------
Net liability for unpaid
claims and claim
expenses $3,087 $3,338 $3,579 $3,596 $ 3,991 $ 4,525 $ 5,071 $ 9,351 $ 9,458 $ 9,114 $12,495
Paid (cumulative) as of:
One year later......... 681 706 747 665 802 949 1,115 1,964 1,949 2,176 ---
Two years later........ 1,064 1,125 1,119 1,103 1,274 1,602 1,804 3,130 3,189 --- ---
Three years later...... 1,432 1,469 1,524 1,499 1,739 2,054 2,341 3,933 --- --- ---
Four years later....... 1,687 1,746 1,772 1,784 2,036 2,424 2,708 --- --- --- ---
Five years later....... 1,919 1,929 1,989 2,008 2,293 2,690 --- --- --- --- ---
Six years later........ 2,065 2,072 2,173 2,208 2,485 --- --- --- --- --- ---
Seven years later...... 2,221 2,229 2,348 2,362 --- --- --- --- --- --- ---
Eight years later...... 2,347 2,380 2,482 --- --- --- --- --- --- --- ---
Nine years later....... 2,478 2,495 --- --- --- --- --- --- --- --- ---
Ten years later........ 2,581 --- --- --- --- --- --- --- --- --- ---
Net liability
re-estimated as of:
One year later......... $3,134 $3,390 $3,616 $3,625 $ 3,919 $ 4,612 $ 5,173 $ 9,192 $ 9,229 $ 9,179 ---
Two years later........ 3,220 3,482 3,583 3,587 4,066 4,656 5,313 8,959 9,127 --- ---
Three years later...... 3,346 3,462 3,564 3,701 4,095 4,793 5,256 8,907 --- --- ---
Four years later....... 3,360 3,472 3,654 3,687 4,238 4,747 5,155 --- --- --- ---
Five years later....... 3,406 3,537 3,635 3,818 4,154 4,668 --- --- --- --- ---
Six years later........ 3,470 3,521 3,758 3,771 4,075 --- --- --- --- --- ---
Seven years later...... 3,494 3,626 3,734 3,711 --- --- --- --- --- --- ---
Eight years later...... 3,582 3,608 3,674 --- --- --- --- --- --- --- ---
Nine years later....... 3,575 3,567 --- --- --- --- --- --- --- --- ---
Ten years later........ 3,549 --- --- --- --- --- --- --- --- --- ---
Redundancy (Deficiency)
at December 31, 1998 (462) (229) (95) (115) (84) (143) (84) 444 331 (65) ---
Effect of foreign
exchange (1) 7 16 (16) (20) 4 26 11 (309) (228) 81 ---
------ ------ ------ ------ ------- ------- ------- ------- ------- ------- -------
Redundancy (Deficiency)
at December 31, 1998,
excluding foreign
exchange $ (455) $ (213) $ (111) $ (135) $ (80) $ (117) $ (73) $ 135 $ 103 $ 16 $ ---
====== ====== ====== ====== ======= ======= ======= ======= ======= ======= =======
(In millions) 1992 1993 1994 1995 1996 1997 1998
--------------------------------------------------------------------
Balance at December 31 - gross............................... $ 4,815 $ 5,312 $ 6,020 $11,145 $10,869 $10,936 $15,342
Less reinsurance recoverables................................ (824) (787) (949) (1,794) (1,411) (1,822) (2,847)
------- ------- ------- ------- ------- ------- -------
Balance at December 31 - net................................. 3,991 4,525 5,071 9,351 9,458 9,114 12,495
------- ------- ------- ------- ------- ------- -------
Latest re-estimated liability - gross........................ 5,179 5,726 6,298 10,630 10,797 11,065 ---
Latest re-estimated reinsurance recoverables................. (1,104) (1,058) (1,143) (1,723) (1,670) (1,886) ---
------- ------- ------- ------- ------- ------- -------
Latest re-estimated liability - net.......................... 4,075 4,668 5,155 8,907 9,127 9,179 ---
------- ------- ------- ------- ------- ------- -------
Gross redundancy (deficiency)................................ (364) (414) (278) 515 72 (129) ---
Effect of foreign exchange (1)............................... 4 27 11 (377) (271) 101 ---
------- ------- ------- ------- ------- ------- -------
Gross redundancy (deficiency), excluding foreign exchange.... $ (360) $ (387) $ (267) $ 138 $ (199) $ (28) $ ---
======= ======= ======= ======= ======= ======= =======
(1) The results of the Company's international operations translated from
functional currencies into U.S. dollars are included with the Company's
U.S. underwriting operations in this table. The foreign currency
translation impact on the cumulative redundancy (deficiency) arises from
the difference between reserve developments translated at the exchange
rates at the end of the year in which the liabilities were originally
estimated and the exchange rates at the end of the year in which the
liabilities were re-estimated.
Note: For a description of the purpose of the above table and the various table
sections, please refer to the immediately preceding section entitled "Reserve
Development."
7
A number of major trends that occurred within the insurance industry, the
economy in general and several Company-specific factors have had a significant
effect on the Company's liabilities for unpaid claims and claim expenses during
the period covered by the preceding table. The claims and claim expense reserve
deficiencies developed to December 31, 1998, as reflected in the preceding
table, included reserve deficiencies of approximately $130 million in 1988, $79
million in 1989, $48 million in 1990 and $23 million in 1991 related to the
general liability business on the books of Puritan Excess and Surplus Lines
Insurance Company ("PESLIC") before the Company's acquisition of PESLIC in 1994.
Prior to 1994, PESLIC was owned by GE Capital Corporation. Additionally,
beginning in 1985, the Company strengthened the reserves for its excess
liability and workers' compensation business for qualified self-insured
employers. Claims and claim expense reserve development in the mid 1980's in
these businesses reflected the inadequate premium rates which resulted from
intense competition in the market during that period.
In the late 1980's, the reinsurance market generally reacted to the rate
deficiencies and the resulting claims and claim expense reserve development by
increasing rates and strengthening claims and claim expense reserves. This is
reflected, with respect to the Company, in the significant reductions in the
reserve deficiencies in recent years.
To a lesser degree, development of asbestos and environmental claims has
affected the Company's results. Higher than anticipated levels of inflation in
certain lines of reinsurance businesses has also had an adverse effect on
liabilities for claims and claim expenses, particularly in excess of loss
reinsurance. Partially offsetting the above factors is favorable development in
recent years in medical professional liability and facultative casualty
businesses, as well as an increase in net retentions by ceding companies.
The Company's reconciliation of its beginning and ending property and casualty
reserves for unpaid claims and claim expenses on a GAAP basis is summarized as
follows:
Year ended December 31,
----------------------------------
(In millions) 1998 1997 1996
----------------------------------
Balance at January 1 - gross.................... $10,936 $10,869 $11,145
Less reinsurance recoverables................... (1,822) (1,411) (1,794)
------- ------- -------
Balance at January 1 - net...................... 9,114 9,458 9,351
------- ------- -------
Claims and expenses incurred:
Current year................................. 3,286 2,438 2,763
Prior years.................................. (126) 71 106
------- ------- -------
3,160 2,509 2,869
------- ------- -------
Claims and expenses paid:
Current year................................. (1,074) (612) (485)
Prior years.................................. (2,176) (1,949) (1,990)
------- ------- -------
(3,250) (2,561) (2,475)
------- ------- -------
Claim reserves related to acquired companies.... 3,470 - -
Foreign exchange and other...................... 1 (292) (287)
------- ------- -------
Balance at December 31 - net.................... 12,495 9,114 9,458
Add reinsurance recoverables.................... 2,847 1,822 1,411
------- ------- -------
Balance at December 31 - gross.................. $15,342 $10,936 $10,869
======= ======= =======
The liabilities for claims and claim expenses in the preceding table include
long-term disability claims that are discounted at a 6% rate. As a result of
discounting the Company's long-term disability claims, total liabilities for
claims and claim expenses have been reduced by an estimated 2% and 3% at
December 31, 1998 and 1997, respectively. The amortization of discount is
included in current operating results as part of the development of prior year
liabilities.
8
Long-term disability discounts accrued as a percentage of claims, claim expenses
and policy benefits were less than 1%, approximately 1% and 5% for the years
ended December 31, 1998, 1997 and 1996, respectively. Discounts amortized as a
percentage of claims, claim expenses and policy benefits were less than 1%,
approximately 1% and 2% for the years ended December 31, 1998, 1997 and 1996,
respectively.
The Company's reconciliation of its property and casualty reserves for unpaid
claims and claim expenses between statutory basis and GAAP basis is summarized
as follows:
December 31,
---------------------------------
(In millions) 1998 1997 1996
---------------------------------
Statutory basis reserves for U.S. companies - net.... $ 7,679 $ 5,527 $ 5,875
Adjustments to GAAP basis (1)........................ 667 (118) (435)
------- ------- -------
GAAP basis reserves for U.S. companies - net......... 8,346 5,409 5,440
GAAP basis reserves for non-U.S. companies - net..... 4,149 3,705 4,018
------- ------- -------
Total GAAP basis reserves - net...................... 12,495 9,114 9,458
Add reinsurance recoverables......................... 2,847 1,822 1,411
------- ------- -------
GAAP basis reserves - gross.......................... $15,342 $10,936 $10,869
======= ======= =======
(1) Statutory basis reserve offsets and reserves reclassified to contract
deposit assets or liabilities based on risk transfer provisions of FAS No.
113.
Environmental and Asbestos Exposure. Included in the Company's liability for
claims and claim expenses are liabilities for environmental and asbestos
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 environmental and asbestos risks from coverage and most of
the environmental and asbestos exposures arise from risks located in the United
States. During 1997, the Company's international operations completed the
initial process of identifying environmental and asbestos claims that had been
reserved in prior periods but were initially aggregated and coded under other
general lines of business rather than being specifically identified as
environmental or asbestos claims.
The three-year development of claims and claim expense reserves associated with
the Company's asbestos and environmental claims, including case and IBNR
reserves, is summarized as follows:
Year ended December 31,
-------------------------------
(In millions) 1998 1997 1996
-------------------------------
Balance at January 1 - gross.................... $ 462 $ 368 $ 436
Less reinsurance recoverables................... (193) (174) (240)
----- ----- -----
Balance at January 1 - net...................... 269 194 196
Claims and expenses incurred.................... 35 54 19
Claim identification and IBNR allocation........ - 43 (1) -
Claims and expenses paid........................ (39) (22) (21)
Claim reserves related to acquired companies.... 524 - -
----- ----- -----
Balance at December 31 - net.................... 789 269 194
Add reinsurance recoverables.................... 206 193 174
----- ----- -----
Balance at December 31 - gross.................. $ 995 $ 462 $ 368
===== ===== =====
(1) Prior to 1997, the Company's international operations were unable to
identify and segregate recorded claim reserves that related to asbestos and
environmental exposures as they were grouped with claim reserves in various
lines of business such as general liability. Beginning in 1997, the Company
began identifying and segregating the asbestos and environmental claims
related to its international operations.
These amounts are management's best estimate, based on currently available
information, of claims and claim expense payments and recoveries that are
expected to develop in future years.
9
The Company monitors evolving case law and its effect on asbestos-related
illness and toxic waste cleanup claims. Changing domestic and foreign government
regulations and legislation, including continuing congressional consideration of
federal Superfund law, newly reported claims, new contract interpretations and
other factors could significantly affect future claim development. While the
Company has recorded its best estimate of its liabilities for asbestos-related
illness and toxic waste cleanup claims based on currently available information,
it is possible that additional liabilities may arise in the future. It is not
possible to estimate with any certainty the amount of additional net claims and
claim expenses, or the range of net claims and claim expenses, if any, that is
reasonably possible; therefore, there can be no assurance that future
liabilities will not materially affect the Company's results of operations,
financial position or cash flows.
Breast Implant Exposure. The Company has minimal exposure to products liability
claims involving silicone breast implants. The Company has, in the past,
generally avoided the products liability reinsurance business, specifically
pharmaceutical and chemical exposures.
Year 2000 Exposure. The Company has evaluated the possibility of experiencing an
increase in property and casualty insurance and reinsurance claims and claim
expenses arising as a result of Year 2000-related exposures. Management is
unable to reasonably estimate the amount or range of loss that may occur due to
the uncertainty surrounding the likelihood of computer system failures and what
portion, if any, will be deemed to be insured losses. Accordingly, the Company
is unable to determine whether such losses may have an adverse effect on its
results of operations, financial position or cash flows. The Company's loss
mitigation strategy includes adding Year 2000 considerations to its underwriting
guidelines, as well as its decisions to purchase retrocessional coverage. In
addition, the Company employs an active claims management strategy which will
include the coordinated handling of any Year 2000-related claims.
Life and Health Reserves for Future Policy Benefits and Accumulated Contract
Values
Future policy benefits for traditional life and health reinsurance contracts
represent the present value of such benefits based on mortality and other
assumptions which were appropriate at the time the policies were issued or, in
the event the policies were acquired by the Company from another insurer, at the
date of acquisition. Interest rate assumptions used in calculating the present
value range from 3.00% to 8.50% per annum at December 31, 1998. Payments
received from sales of universal life and investment contracts are recognized by
providing liabilities equal to the accumulated contract values of the
policyholders' contracts. Interest rates credited to such universal life and
investment contracts are guaranteed for the policy terms with renewal rates
determined by the Company. Such crediting interest rates ranged from 3.00% to
9.00% per annum in 1998.
Regulatory Matters
GE Global Insurance and its domestic subsidiaries are subject to regulation
under the insurance statutes, including insurance holding company statutes, of
various states, including Missouri, Kansas, Indiana and Illinois, the
domiciliary states of GE Global Insurance's principal domestic insurance company
subsidiaries. The international subsidiaries of ERC (the "ERC Frankona Group")
are subject to regulation under insurance statutes of various foreign countries.
General. The regulation and supervision to which GE Global Insurance's
subsidiaries are subject relate primarily to licensing requirements of
reinsurers, the standards of solvency that must be met and maintained, the
amount of dividends that may be paid by such subsidiaries, the nature of and
limitations on investments, restrictions on the size of risks that may be
insured or reinsured, deposits of securities for the benefit of ceding
companies, periodic examinations of the financial condition and affairs of
reinsurers, the form and content of financial statements required to be filed
with regulatory authorities and reserves for unearned premiums, losses and other
purposes. In general, such regulation is for the protection of the ceding
companies and, ultimately, their policyholders, rather than securityholders of
the regulated reinsurer. GE Global Insurance believes it is, and that its
subsidiaries are, in material compliance with all applicable laws and
regulations pertaining to their business and operations.
10
U.S. Insurance Regulation. U.S. domestic property and casualty and life
insurers, including reinsurers, are subject to regulation by their states of
domicile and by those states in which they are licensed. The rates and policy
terms of primary insurance policies generally are closely regulated by state
insurance departments. While reinsurance is not regulated as closely as primary
insurance, some states do impose control over certain terms and conditions of
reinsurance agreements by virtue of their authority to grant or deny credit for
ceded reinsurance by its domiciled primary insurers. In addition, as a practical
matter, the rates permitted to be charged by primary insurers can have an effect
on the rates that are charged by reinsurers.
Risk-Based Capital. The National Association of Insurance Commissioners ("NAIC")
has adopted minimum risk-based capital requirements to evaluate the adequacy of
statutory capital and surplus in relation to an insurance company's risks.
Regulatory compliance with risk-based capital requirements is defined by a ratio
of a company's regulatory total adjusted capital to its authorized control level
risk-based capital, as defined by the NAIC. At December 31, 1998, each of GE
Global Insurance's domestic insurance company subsidiaries exceeded the minimum
risk-based capital requirements.
Insurance Holding Company Regulations. The insurance holding company laws and
regulations vary from state to state, but generally require an insurance holding
company to register with its domiciliary state insurance regulatory agency and
file certain reports that include current information concerning the capital
structure, ownership, management, financial condition and general business
operations of the insurance holding company and its subsidiary insurers that are
licensed in the state. State insurance holding company laws and regulations,
with respect to domestic insurers, also require prior notice or regulatory
approval of changes in control of an insurer or its holding company and of
material inter-affiliate transactions within the holding company structure.
Dividends by Subsidiaries. Because the operations of GE Global Insurance are
conducted primarily through Employers Reinsurance Corporation ("ERC") and Kemper
Re, GE Global Insurance is dependent upon dividends and tax allocation and other
payments primarily from ERC and Kemper Re to service its debt and meet its other
obligations. The payment of dividends and other payments to GE Global Insurance
by ERC and Kemper Re are subject to limitations imposed by the Missouri and
Illinois Insurance Codes, respectively. The payment of dividends to ERC by its
principal life reinsurance subsidiaries, Employers Reassurance Corporation and
ERC Life Reinsurance Corporation, are subject to limitations imposed by the
Kansas and Missouri Insurance Codes, respectively. No prediction can be made as
to whether any legislative proposals relating to dividend rules in Kansas,
Missouri or Illinois will be made, whether any such legislative proposal will be
adopted in the future, or the effect, if any, any such proposal would have on
the Company.
The maximum amount available for the payment of dividends during 1999 by ERC
without prior regulatory approval is $410 million after December 30, 1999. Of
this amount, $96 million is committed to pay dividends on the preferred stock
issued by ERC to GE Capital Corporation. Kemper Re will not be able to make any
dividend payments during 1999 without the prior approval of the Director of
Insurance for the State of Illinois.
International Regulations. Based on 1998 net premiums written, approximately 51%
of the Company's business is carried on outside of the United States. The degree
of regulation and supervision in foreign jurisdictions varies from minimal in
some to stringent in others. Licenses issued by foreign authorities to the ERC
Frankona Group are subject to modification or revocation by such authorities,
and such subsidiaries could be prevented from conducting business in certain of
the jurisdictions where they currently operate. In the past, the ERC Frankona
Group has been allowed to modify their operations to conform with new licensing
requirements in all jurisdictions that are material to the Company's
international operations.
In addition to licensing requirements, the ERC Frankona Group is regulated in
various jurisdictions with respect to, among other things, currency, policy
language and terms, methods of accounting and auditing, amount and type of
security deposits, amount and type of reserves, amount and type of local
investment and the share of profits to be returned to policyholders on
participating policies. Regulations governing constitution of technical reserves
(including equalization reserves) in some countries could hinder the remittance
of profits and repatriation of assets and the payment of dividends; however, the
Company does not believe that these regulations will have a material impact on
the ERC Frankona Group's operations.
11
Item 2. Properties.
The Company conducts business from various facilities, most of which are leased.
In addition, the Company owns its administrative offices in Overland Park,
Kansas, Copenhagen, Denmark and Munich, Germany.
Item 3. Legal Proceedings.
There are no pending legal proceedings beyond the ordinary course of business
that could have a material financial effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted
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 the Company's common equity. GE Global Insurance paid
dividends on its common stock on December 30, 1998 of $270 million.
Item 6. Selected Financial Data.
Consolidated Financial Data
Year ended December 31,
------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994
------------------------------------------------------------
Total revenues................................ $ 7,203 $ 5,784 $ 5,751 $ 4,798 $ 3,148
Net premiums written.......................... 5,984 4,545 4,573 3,561 2,573
Net investment income......................... 985 910 837 676 528
Net realized gains on investments............. 432 303 223 191 103
Earnings before income taxes.................. 1,070 882 780 561 409
Net earnings.................................. 779 648 567 437 358
Total investments............................. 21,987 18,343 16,479 15,394 9,850
Total assets.................................. 35,047 27,532 25,388 25,613 14,496
Stockholder's equity.......................... $ 6,020 $ 5,374 $ 4,760 $ 4,191 $ 2,722
Return on equity (average).................... 13.7% 12.8% 12.7% 12.6% 12.7%
Stockholder's equity, excluding unrealized
gains (losses) on investment securities.... $ 5,088 $ 4,628 $ 4,260 $ 3,755 $ 2,888
Return on equity (average), excluding
unrealized gains (losses) on investment
securities................................. 16.0% 14.6% 14.1% 13.2% 13.0%
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net premiums written increased $1,439 million or 32% in 1998, primarily
attributable to growth in various product lines, including new P&C business
associated with the acquisition of the renewal rights of business from IRI and
Coregis and the acquisitions of Medical Protective and Kemper Re. This increase
was partially offset by three significant quota share life reinsurance contracts
obtained in 1997 that did not recur in 1998, the impact of foreign currency
translation in association with the strengthening of the U.S. dollar and
continued competitive market conditions.
Net earnings increased $131 million or 20% in 1998, including an increase in
after-tax net realized gains on investments of $75 million. Excluding after-tax
net realized gains on investments, net earnings increased $56 million or 12% in
1998. This increase was primarily attributable to a $75 million increase in net
investment income, primarily due to the acquisitions of Medical Protective and
Kemper Re and continued growth in the investment portfolios, and a $47 million
increase in other revenues, primarily due to an increase in revenues generated
from investment-related life reinsurance products and financial reinsurance
transactions. These increases were partially offset by a decrease in
underwriting results reflecting increased underwriting and operating expenses
associated with the acquisitions and continued competitive market conditions.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net premiums written in 1997 were $4,545 million compared to $4,573 million in
1996. The slight decrease was primarily attributable to a decrease in
international P&C net premiums written reflecting competitive market conditions,
the repositioning of certain portfolios to minimize loss accumulations and the
impact of foreign currency translation in association with the strengthening of
the U.S. dollar. This decrease in international P&C net premiums written was
substantially offset by an increase in domestic business reflecting strong
growth in life reinsurance business and the assumption of the renewal rights of
a portfolio of specialty P&C business obtained as a result of GE Capital
Corporation's acquisition of the renewal rights of business from Coregis.
Net earnings increased $81 million or 14% in 1997, including an increase in
after-tax net realized gains on investments of $49 million. Excluding after-tax
net realized gains on investments, net earnings increased $32 million or 7% in
1997. This increase was primarily attributable to a $73 million increase in net
investment income, primarily due to continued growth in the investment
portfolios, and a $61 million increase in other revenues, primarily due to an
increase in revenues generated from investment-related life reinsurance products
and financial reinsurance transactions. These increases were partially offset by
a decrease in P&C underwriting results reflecting increased underwriting and
operating expenses and competitive market conditions.
13
Domestic Property and Casualty Business
Year ended December 31,
-------------------------------
(In millions) 1998 1997 1996
-------------------------------
Net premiums written............................ $2,499 $1,809 $1,741
Net underwriting loss........................... (58) (64) (98)
Net investment income........................... 419 389 390
Earnings before income taxes.................... 601 489 415
Net realized gains on investments............... 311 212 169
Earnings before income taxes, excluding
net realized gains on investments............ 290 277 246
GAAP ratios (1):
GAAP claims and claim expense ratio.......... 68.9% 70.8% 75.7%
GAAP underwriting expense ratio.............. 33.6% 33.0% 29.7%
----- ----- -----
GAAP combined ratio.......................... 102.5% 103.8% 105.4%
===== ===== =====
(1) Represents data for the applicable periods calculated in accordance with
GAAP. Claims and claim expense ratio represents incurred claims and claim
expenses as a percentage of net premiums earned. Underwriting expense ratio
represents acquisition costs and other underwriting expenses (excluding
amortization of intangibles, interest expense and minority interest in net
earnings of consolidated subsidiaries) as a percentage of net premiums
earned. The combined ratio represents the sum of the claims and claim
expense ratio and the underwriting expense ratio.
Net premiums written increased $690 million or 38% in 1998, primarily
attributable to growth in various product lines, including new P&C business
associated with the acquisition of the renewal rights of business from IRI and
Coregis and the acquisitions of Medical Protective and Kemper Re, partially
offset by continued competitive market conditions. Net premiums written
increased $68 million or 4% in 1997, primarily attributable to new business
associated with GE Capital Corporation's acquisition of the renewal rights of
business from Coregis and growth in the national accounts business, partially
offset by the termination of certain long-term disability business and continued
competitive market conditions.
Typically, the underwriting performance of P&C business is measured in terms of
a combined ratio. The combined ratio is the sum of the loss ratio and the
underwriting expense ratio, with a ratio lower than 100% indicating an
underwriting profit and a ratio greater than 100% indicating an underwriting
loss. Although the combined ratio has been greater than 100% for the three years
presented above, the operating results of insurance/reinsurance companies
include net investment income which generally yields an overall operating profit
as reflected above in the caption "Earnings before income taxes, excluding net
realized gains on investments."
The lower combined ratio in 1998 primarily reflects a general reduction in
incurred losses caused by a decline in both the frequency and overall severity
of claims, partially offset by an increase in hurricane and other
weather-related catastrophe losses. The lower combined ratio in 1997 primarily
reflects a reduction in catastrophe costs due to a decline in both the frequency
and severity of catastrophe losses, although it was moderately impacted by an
increase in underwriting and operating costs associated with the implementation
of new strategic business initiatives.
Net investment income increased $30 million or 8% in 1998, primarily
attributable to the acquisitions of Medical Protective and Kemper Re and
continued growth in the investment portfolios. Net investment income of $389
million in 1997 was comparable to the $390 million in 1996.
Earnings before income taxes, excluding net realized gains on investments,
increased $13 million or 5% in 1998, primarily attributable to the decrease in
the combined ratio and the increase in net investment income discussed above.
Earnings before income taxes, excluding net realized gains on investments,
increased $31 million or 13% in 1997, primarily attributable to the decrease in
the combined ratio discussed above.
14
International Property and Casualty Business
Year ended December 31,
-------------------------------
(In millions) 1998 1997 1996
-------------------------------
Net premiums written............................ $2,389 $1,684 $2,196
Net underwriting gain (loss).................... (31) (64) 18
Net investment income........................... 286 292 266
Earnings before income taxes.................... 312 241 247
Net realized gains on investments............... 87 48 31
Earnings before income taxes, excluding
net realized gains on investments............ 225 193 216
GAAP ratios (1):
GAAP claims and claim expense ratio.......... 70.5% 70.1% 68.0%
GAAP underwriting expense ratio.............. 30.9% 33.4% 31.2%
----- ----- ----
GAAP combined ratio.......................... 101.4% 103.5% 99.2%
===== ===== ====
(1) Represents data for the applicable periods calculated in accordance with
GAAP. Claims and claim expense ratio represents incurred claims and claim
expenses as a percentage of net premiums earned. Underwriting expense ratio
represents acquisition costs and other underwriting expenses (excluding
amortization of intangibles, interest expense and minority interest in net
earnings of consolidated subsidiaries) as a percentage of net premiums
earned. The combined ratio represents the sum of the claims and claim
expense ratio and the underwriting expense ratio.
Net premiums written increased $705 million or 42% in 1998, primarily
attributable to growth in various product lines, including new P&C business
associated with the acquisition of Kemper Re, partially offset by the impact of
foreign currency translation in association with the strengthening of the U.S.
dollar and continued competitive market conditions. Net premiums written
decreased $512 million or 23% in 1997, including an approximate $235 million
decrease resulting from foreign currency translation in association with the
strengthening of the U.S. dollar. Excluding the impact of foreign currency
translation, net premiums written decreased approximately $277 million in 1997
reflecting a $58 million increase in ceded premium resulting from an expanded
retrocession program, the repositioning of certain portfolios to minimize loss
accumulations and a general decrease in premium rates associated with
competitive market conditions.
The lower combined ratio in 1998 primarily reflects a general reduction in
incurred losses caused by a decline in both the frequency and overall severity
of claims, partially offset by the an increase in aviation, hurricane and other
weather-related catastrophe losses. The higher combined ratio in 1997 primarily
reflects less favorable loss experience, a general decline in international
premium rates and market conditions, increased underwriting and operating costs
associated with the implementation of new strategic business initiatives and
certain large catastrophe losses such as the Eastern Europe floods and aviation
losses.
Net investment income decreased $6 million or 2% in 1998, primarily attributable
to market conditions, partially offset by the acquisition of Kemper Re. Net
investment income increased $26 million or 10% in 1997, primarily attributable
to continued growth in the investment portfolios, partially offset by the impact
of foreign currency translation in association with the strengthening of the
U.S. dollar.
Earnings before income taxes, excluding net realized gains on investments,
increased $32 million or 17% in 1998, primarily attributable to the decrease in
the combined ratio discussed above. Earnings before income taxes, excluding net
realized gains on investments, decreased $23 million or 11% in 1997, primarily
attributable to the increase in the combined ratio discussed above, partially
offset by the increase in net investment income discussed above and a $27
million increase in other revenues, primarily due to fees generated from
financial reinsurance transactions.
15
Life Reinsurance Business
Year ended December 31,
--------------------------
(In millions) 1998 1997 1996
--------------------------
Revenues............................................. $1,525 $1,283 $881
Earnings before income taxes......................... 157 152 118
Revenues, which consist of net premiums earned, net investment income, net
realized gains on investments and other revenues, including fees generated from
investment-related life reinsurance products and financial reinsurance
transactions, increased $242 million or 19% in 1998. This increase was primarily
attributable to growth in the traditional life and credit life business and fees
generated from investment-related life reinsurance products and financial
reinsurance transactions. Revenues increased $402 million or 46% in 1997,
primarily attributable to growth in the domestic traditional life and credit
life business, principally related to four significant quota share reinsurance
contracts, and fees generated from investment-related life reinsurance products
and financial reinsurance transactions.
Earnings before income taxes increased $5 million or 3% in 1998, including a $9
million decrease in net realized gains on investments. Excluding net realized
gains on investments, earnings before income taxes increased $14 million or 13%
in 1998, primarily attributable to an increase in net investment income,
primarily due to continued growth in the investment portfolios, and fees
generated from investment-related life reinsurance products and financial
reinsurance tranactions. Earnings before income taxes increased $34 million in
1997, including a $20 million increase in net realized gains on investments.
Excluding net realized gains on investments, earnings before income taxes
increased $14 million in 1997, primarily attributable to an increase in net
investment income, primarily due to continued growth in the investment
portfolios, and fees generated from investment-related life reinsurance products
and financial reinsurance transactions.
Liquidity and Capital Resources
GE Global Insurance's ability to meet its obligations, including debt service
and operating expenses, and pay dividends to its shareholder depends primarily
upon its receipt of sufficient funds from its insurance subsidiaries. The
payment of dividends by ERC and Kemper Re are subject to restrictions set forth
in the insurance laws of Missouri and Illinois, respectively, as well as other
restrictions. Historically, the Company's liquidity requirements have been met
by funds provided from operations and from the maturity and sales of
investments.
Cash flows from operating activities, which primarily consists of premiums
collected during the period in excess of payments made for claims and claim
expenses, decreased $586 million in 1998. This decrease was primarily
attributable to an increase in claim settlements relative to the collection of
premiums, the timing of reinsurance settlements in association with catastrophe
loss recoverables and an increase in underwriting and operating cash outlays
associated with the acquisition of the renewal rights of business from IRI and
Coregis and the acquisitions of Medical Protective and Kemper Re. Cash flows
from operating activities increased $31 million in 1997, primarily attributable
to a decrease in claim settlements relative to the collection of premiums,
partially offset by an increase in underwriting and operating cash outlays
associated with the implementaion of new strategic business initiatives.
Cash flows used for investing activities decreased $423 million in 1998,
primarily attributable to an increase in the maturity and sales of investments,
partially offset by the acquisitions of Medical Protective and Kemper Re. Cash
flows used for investing activities increased $290 million in 1997, primarily
attributable to the purchase of other invested assets and the acquisition of
minority shares associated with the Company's 1995 acquisition of Frankona
Ruckversicherungs-Aktiengesellschaft ("Frankona Re").
Cash flows from financing activities increased $182 million in 1998, primarily
attributable to an increase in the proceeds from short-term borrowings
associated with the acquisitions of Medical Protective and Kemper Re, partially
offset by the change in contract deposits associated with the commutation of a
financial reinsurance treaty and an increase in dividends paid to affiliates.
Cash flows from financing activities decreased $47 million in 1997, primarily
attributable to an increase in dividends paid to affiliates, partially offset by
the change in contract deposits and an increase in the proceeds from short-term
borrowings.
16
In 1996, GE Global Insurance executed a $1 billion shelf registration statement
of senior unsecured debt securities rated AA by Standard & Poor's, of which $600
million was outstanding as of December 31, 1998. On March 1, 1999, the Company
issued the remaining $400 million of redeemable senior unsecured debt securities
at 6.45% per annum that are scheduled to mature on March 1, 2019. The Company
received $395 million in net proceeds from the issuance of these notes (after
deduction of underwriting discounts and commissions) which was used to repay a
significant portion of the outstanding short-term borrowings under the
intercompany credit agreement with GE Capital Services in association with the
funding of the Kemper Re acquisition.
In addition, the Company has a one-year $600 million revolving credit agreement
with GE Capital Services which enables the Company to borrow from GE Capital
Services at an interest rate per annum equal to GE Capital Services' cost of
funds for a one year period. The agreement shall be automatically extended for
successive terms of one year each unless terminated in accordance with terms of
the agreement.
Investments
General. The Company follows a conservative investment strategy that emphasizes
maintaining a high quality investment portfolio. The primary goals include a
growing stream of investment income and improving total investment returns. All
investments are administered under guidelines established and approved by the
Company's Board of Directors. The Company's guidelines specify credit quality
and concentration limits with respect to both fixed income and equity
securities.
In structuring its fixed maturity portfolios, the Company considers the duration
of its assets and claims and claim expense reserves. Most fixed maturity
portfolios have total return benchmarks against which relative performance is
measured. The total return benchmarks include investment income and realized and
unrealized gains and losses on investments. Equity funds are managed for total
return, and performance is measured against equity benchmarks.
On a worldwide basis, the Company manages 64% of its investments internally.
General Electric Investment Corporation manages an additional 15% of the
Company's investments, and the balance is managed by unaffiliated outside
managers.
The Company's investment results are summarized as follows:
Year ended December 31,
---------------------------------------------------
(In millions) 1998 1997 1996 1995 1994
---------------------------------------------------
Average invested assets (at cost)............. $18,794 $16,417 $15,195 $12,153 $9,020
Net investment income......................... 985 910 837 676 528
Net effective yield........................... 5.2% 5.5% 5.5% 5.6% 5.9%
Net realized gains on investments............. $ 432 $ 303 $ 223 $ 191 $ 103
Unrealized gains (losses) on investment
securities before deferred income taxes.... 1,554 1,189 799 684 (251)
The Company continues to seek opportunities to enhance investment yield through
a conservative, primarily fixed maturity investment strategy. Its current
investment strategy does not contemplate material additional investments in
non-investment grade debt securities, commercial real estate, commercial
mortgages, equity securities or derivatives.
17
Domestic Investment Operations. The Company's domestic property and casualty
investment portfolios are principally invested in tax-exempt state and municipal
bonds, which the Company believes provide the most attractive after-tax yield.
Some additional commitment was made to equity securities, primarily through
limited partnership arrangements, in 1996 to enhance total investment returns in
the longer term. The Company's domestic life investment portfolios are largely
invested in taxable debt securities.
The Company's domestic fixed maturity portfolios categorized by rating based on
market values are summarized as follows:
Domestic Property
and Casualty Domestic Life
---------------------------------------
December 31,
---------------------------------------
1998 1997 1998 1997
---------------------------------------
U.S. government and government agency securities..... 9.0% 1.4% 6.6% 8.3%
Aaa.................................................. 39.0 48.9 4.5 1.8
Aa................................................... 26.9 27.1 6.7 2.8
A.................................................... 12.2 11.4 20.9 16.9
Baa.................................................. 1.2 0.5 13.5 9.4
Ba................................................... 0.2 0.1 2.1 1.5
Canadian securities.................................. 2.5 3.9 0.0 0.0
Mortgage-backed and other asset-backed securities.... 3.9 0.3 37.6 45.8
Other................................................ 5.1 6.4 8.1 13.5
----- ----- ----- -----
Total............................................. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Ratings are as assigned by Moody's when available, or by S&P and converted to
the generally comparable Moody's rating.
The Company's emphasis on investment quality is evidenced by the preceding
table, which indicates that the bonds in the Company's investment portfolios are
principally invested in either U.S. government and government agency securities
or issues rated "A" or above. The Canadian securities held by the Company are
similar in quality to the other securities held in its domestic property and
casualty portfolio. Bonds held by the Company in its domestic life portfolios
include mortgage-backed and other asset-backed securities that are matched to
the liability profile of specific life reinsurance contracts. Investments in
mortgage-backed and other asset-backed securities are limited to lower risk
tranches and do not include any interest only or principal only elements.
Mortgage-backed and other asset-backed securities in the Company's investment
portfolio were principally issued by Federal agencies. The balance of the other
securities held in the domestic life portfolios are principally U.S. government
and government agency securities and other bonds with an investment grade
rating. The Company does not contemplate significant additional investment in
non-investment grade securities in either the property and casualty or life
portfolios.
International Investment Operations. The investment portfolios of the Company's
international operations (other than certain equity portfolios, which are
managed by outside managers) are managed by the ERC Frankona Group's investment
personnel based in Munich, within guidelines established by the management of
the ERC Frankona Group and under the overall supervision and review of ERC's
investment department.
The principal objective of the ERC Frankona Group's investment policy is to
manage the investment portfolios on a total return basis taking into
consideration the duration and currency structure of the ERC Frankona Group's
reinsurance liabilities. The ERC Frankona Group's investment portfolios are
geographically diversified with investments principally from the major European
markets and the United States.
18
As of December 31, 1998, the fair value of the ERC Frankona Group's investments
totaled $7,256 million, an increase of $891 million from December 31, 1997. The
composition of ERC Frankona Group's investments is summarized as follows:
December 31,
-----------------
1998 1997
-----------------
Fixed maturity securities......................... 81.3% 81.4%
Equity securities................................. 12.6% 13.2%
Other invested assets............................. 6.1% 5.4%
----- -----
Total............................................. 100.0% 100.0%
===== =====
The ERC Frankona Group's investment portfolios are globally diversified, with
most fixed maturities having a term less than ten years. The fixed maturity
securities consist of high credit quality securities, and almost all bonds are
investment grade securities with a comparable average rating equal to or above a
Moody's or S&P "AA" rating. Fixed maturity securities include German and Danish
mortgage-backed securities, although these mortgage-backed securities have
significantly less principal and interest prepayment risk than typical U.S.
mortgage-backed securities, as the German and Danish tax and social environments
are not conducive to risks of prepayment of interest and principal. Equity
securities and other invested assets were internationally diversified with
principal holdings in Germany, the United Kingdom and the United States.
Interest Rate and Currency Risk Management
In normal operations, the Company must deal with effects of changes in interest
rates and currency exchange rates. The following discussion presents an overview
of how such changes are managed, a view of their potential effects, and,
finally, what considerations arise from recent developments in Asia.
The Company utilizes various financial instruments, such as currency and
interest rate swaps, options and currency forwards to manage risks. The Company
is exclusively an end user of these financial instruments, which are commonly
referred to as derivatives. The Company does not engage in any derivatives
trading, market-making or other speculative activities in the derivative
markets.
The Company manages its exposure to currency principally by matching the
underlying reinsurance liabilities with the corresponding assets. Any remaining
significant net asset/liability positions in a given currency are hedged with
forward currency purchase or sale contracts to further mitigate currency
exposures. The Company also hedges its currency risk on a portion of its foreign
subsidiary investments by utilizing currency swaps that have been designated to
modify currency exposure associated with specific debt instruments.
On a limited basis, and as part of ongoing customer activities, the Company
utilizes interest rate swaps and options to minimize its exposure to movements
in interest rates and financial markets that have a direct correlation with
certain of its reinsurance products.
Substantially all derivative transactions are executed by the Company's Treasury
Department which works closely with GE Capital Treasury personnel to maintain
controls on all exposures, adhere to stringent counterparty credit standards and
actively monitor marketplace exposures. Although the Company is exposed to
credit risk that the counterparty may not be able to comply with the terms and
conditions of the contracts, the Company utilizes only highly rated institutions
as counterparties to the derivative transactions.
19
The Securities and Exchange Commission requires that registrants include
information about potential effects of changes in interest rates and currency
exchange in their financial statements. Although the rules offer alternatives
for presenting this information, none of the alternatives is without
limitations. The following discussion is based on so-called "shock-tests," which
model effects of interest rate and currency shifts on the reporting company.
Shock tests, while probably the most meaningful analysis permitted, are
constrained by several factors, including the necessity to conduct the analysis
based on a single point in time and by their inability to include the
extraordinarily complex market reactions that normally would arise from the
market shifts modeled. While the following results of shock tests for interest
rates and currencies may have some limited use as benchmarks, they should not be
viewed as forecasts:
One means of assessing exposure to interest rate changes is a
duration-based analysis that measures the potential loss in net earnings
resulting from a hypothetical decrease in interest rates of 100 basis
points across all maturities (sometimes referred to as a "parallel shift in
the yield curve"). Under this model, it is estimated that, all else
constant, such a decrease, including repricing effects in the securities
portfolio, would reduce the 1999 net earnings of the Company based on
December 31, 1998 positions by an insignificant amount.
One means of assessing exposure to changes in currency exchange rates is
to model effects on reported earnings using a sensitivity analysis.
Year-end 1998 consolidated currency exposures, including financial
instruments designated and effective as hedges, were analyzed to identify
Company assets and liabilities denominated in other than their relevant
functional currency. Net unhedged exposures in each currency were then
remeasured assuming a 10 percent decrease (20 percent for hyperinflationary
economies) in currency exchange rates compared with the U.S. dollar. Under
this model, it is estimated that, all else constant, such a decrease would
reduce the 1999 net earnings of the Company based on December 31, 1998
positions by an insignificant amount.
Recent economic developments in parts of Asia have altered somewhat the risks
and opportunities of Company activities in affected economies. These activities
encompass providing certain reinsurance products and investing in marketable
securities within those Asian economies. As such, exposure exists to, among
other things, increased receivable delinquencies and potential bad debts,
impairment of marketable securities and increased reinsurance claims activity.
Conversely, new reinsurance opportunities may arise and the liberalization of
financial and reinsurance regulation may open new opportunities to penetrate
Asian markets. Taken as a whole, while this situation bears close monitoring and
increased management attention, the current situation is expected to have an
immaterial impact on the Company's results of operations, financial position and
cash flows in 1999.
Cyclicality
The property and casualty reinsurance industry has been highly cyclical. Demand
for reinsurance is significantly influenced by underwriting results of primary
property and casualty insurance companies and prevailing general economic and
reinsurance premium rates. The cyclical trends in the industry and the
industry's profitability can also be affected significantly by volatile and
unpredictable developments, including changes in what the Company believes to be
the propensity of courts to grant large awards, natural disasters and other
catastrophic events (such as hurricanes, windstorms, earthquakes, floods and
fires), fluctuations in interest rates and other changes in the investment
environment which affect inflationary pressures that may tend to affect the size
of losses experienced by ceding primary insurance companies.
20
Year 2000
Year 2000 will test the capability of business processes to function correctly.
The Company, in conjunction with GE Company and GE Capital Services, has
undertaken a global effort to identify and mitigate Year 2000 issues in their
information systems, products and services, facilities and suppliers, as well as
to assess the extent to which Year 2000 issues will affect its customers. Each
business within the GE Company structure has a Year 2000 leader who oversees a
multi-functional remediation project team responsible for applying a Six Sigma
quality approach in four phases: (1) define/measure - identify and inventory
possible sources of Year 2000 issues; (2) analyze - determine the nature and
extent of Year 2000 issues and develop project plans to address those issues;
(3) improve - execute project plans and perform a majority of the testing; and
(4) control - complete testing, continue monitoring readiness and complete
necessary contingecy plans. The progress of this program is monitored at each
business and Company-wide reviews with senior management are conducted monthly.
The first three phases of the program have been completed for a substantial
majority of mission-critical activities. Management plans to have nearly all
significant information systems, product and services and facilities through the
control phase of the program by mid-1999.
The scope of the global Year 2000 effort encompasses many thousands of
applications and computer programs; products and services; facilities and
facilities-related equipment; suppliers and customers. Business operations are
also affected by the Year 2000 readiness of customers and infrastructure
suppliers in areas such as utilities, communications, transportation and other
services. In this environment, there will likely be instances of failure that
could cause disruptions in business processes for the Company's businesses,
affect their customers' ability to repay amounts owed or result in an increased
level of insurance claims activity. The likelihood and effects of failures in
the customer base, infrastructure systems and in the supply chain cannot be
estimated. However, with respect to operations under its direct control,
management does not expect, in view of its Year 2000 program efforts and the
diversity of its businesses, suppliers and customers, that occurrences of Year
2000 failures will have a material adverse effect on the results of operations,
financial position or liquidity of the Company.
Including amounts attributable to recent acquisitions, total Year 2000
remediation expenditures are expected to be approximately $4 million, of which
approximately 90% was spent by the end of 1998. Substantially all of the
remainder is expected to be spent in 1999. Most of these costs are not likely to
be incremental costs, but rather will represent the redeployment of existing
resources. The activities involved in the Year 2000 effort necessarily involve
estimates and projections of activities and resources that will be required in
the future. These estimates and projections could change as work progresses.
In addition, the Company has evaluated the possibility of experiencing an
increase in property and casualty insurance and reinsurance claims and claim
expenses arising as a result of Year 2000-related exposures. Management is
unable to reasonably estimate the amount or range of loss that may occur due to
the uncertainty surrounding the likelihood of computer system failures and what
portion, if any, will be deemed to be insured losses. Accordingly, the Company
is unable to determine whether such losses may have an adverse effect on its
results of operations, financial position or cash flows. The Company's loss
mitigation strategy includes adding Year 2000 considerations to its underwriting
guidelines, as well as its decisions to purchase retrocessional coverage. In
addition, the Company employs an active claims management strategy which will
include the coordinated handling of any Year 2000-related claims.
21
New Accounting Standards
New accounting standards issued in 1998 are described below:
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, requires that, upon adoption, all
derivative instruments (including certain derivative instruments embedded in
other contracts) be recognized in the balance sheet at fair value, and that
changes in such fair values be recognized in earnings unless specific hedging
criteria are met. Changes in the values of derivatives that meet these hedging
criteria will ultimately offset related earnings effects of the hedged items;
effects of certain changes in fair value are recorded in equity pending
recognition in earnings. The Company will adopt the Statement on January 1,
2000. The impact of adoption will be determined by several factors, including
the specific hedging instruments in place and their relationships to hedged
items, as well as market conditions. Management has not estimated the effects of
adoption as it believes that such determination will not be meaningful until
closer to the adoption date.
Effects of Inflation
The Company's ultimate claims and claim expense costs on claims not yet settled
is increased by the effects of inflation, and changes in the inflation rate
therefore could become a significant factor in determining appropriate claims
and claim expense reserves, as well as reinsurance premium rates. Generally, the
Company's methods used to estimate claims and claim expense reserves and to
calculate reinsurance premium rates take into account the anticipated effects of
inflation in estimating the ultimate claims and claim expense costs. The Company
uses both insurance industry data and government economic indices in estimating
the effects of inflation on reinsurance premium rates and claims and claim
expense reserves. However, until claims are ultimately settled, the full effect
of inflation on the Company's results cannot be known.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information about potential effects of changes in interest rates and currency
exchange on the Company is discussed on pages 19-20.
Item 8. Financial Statements and Supplementary Data.
The Company's Consolidated Financial Statements and the Independent Auditors'
Report thereon and the Supplementary Financial Statement Schedules listed on the
accompanying Index to Financial Statements and Financial Statement Schedules are
filed as part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable
PART III
Item 10. Directors and Executive Officers of the Registrant.
Omitted
Item 11. Executive Compensation.
Omitted
22
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted
Item 13. Certain Relationships and Related Transactions.
Omitted
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements and Schedules.
The consolidated financial statements of the Company filed as part of
this report are listed in the Index to Consolidated Financial
Statements and Financial Statement Schedules (page 24).
(a) 2. Financial Statement Schedules.
The consolidated financial statement schedules of the Company filed
as part of this report are listed in the Index to Consolidated
Financial Statements and Financial Statement Schedules (page 24).
(a) 3. Listing of Exhibits.
3.1 A complete copy of the Articles of Incorporation of the
Company, as last amended on August 30, 1995, and currently in
effect. (Incorporated by reference to Exhibit 3.1 of the
Company's Form 10-K for the year ended December 31, 1995.)
3.2 A complete copy of the By-laws of the Company, as last amended
on February 26, 1995, and currently in effect. (Incorporated
by reference to Exhibit 3.2 of the Company's Registration
Statement on Form 10, File No. 0-27394.)
10.1 First Whole Account Aggregate Excess of Loss Retrocession
Agreement (E1), between Employers Reinsurance Corporation and
National Indemnity Company, dated January 1, 1998 (portions
redacted in accordance with application for confidentiality
previously filed).
10.2 Second Whole Account Aggregate Excess of Loss Retrocession
Agreement (E2), between Employers Reinsurance Corporation and
Zurich Reinsurance (North America), Inc. of New York, dated
January 1, 1998 (portions redacted in accordance with
application for confidentiality previously filed).
10.3 Second Whole Account Aggregate Excess of Loss Retrocession
Agreement (E2), between Employers Reinsurance Corporation and
National Union Fire Insurance Company of Pittsburgh, PA, dated
January 1, 1998 (portions redacted in accordance with
application for confidentiality previously filed).
12 Computation of ratio of earnings to fixed charges.
23 Consent of KPMG LLP.
(b) Reports on Form 8-K.
None.
23
ITEM 14(a)
GE Global Insurance Holding Corporation
and Subsidiaries
Index to
Consolidated Financial Statements
and
Financial Statement Schedules
Page
----
Consolidated Financial Statements
Independent Auditors' Report..............................................25
Consolidated Statement of Earnings........................................26
Consolidated Statement of Financial Position..............................27
Consolidated Statement of Stockholder's Equity............................29
Consolidated Statement of Cash Flows......................................30
Notes to Consolidated Financial Statements................................31
Financial Statement Schedules
Schedule II - Condensed Financial Information of Registrant...............57
Schedule III - Supplementary Insurance Information........................61
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
GE Global Insurance Holding Corporation:
We have audited the accompanying consolidated statements of financial position
of GE Global Insurance Holding Corporation and subsidiaries as of December 31,
1998 and 1997, 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, 1998. Our audits also included the financial statement
schedules listed in the Index at Item 14(a) as of December 31, 1998 and 1997 and
for each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GE Global Insurance
Holding Corporation and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
KPMG LLP
Kansas City, Missouri
January 22, 1999
25
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Earnings
Year ended December 31,
------------------------------
(In millions) 1998 1997 1996
------------------------------
Revenues
Net premiums written (Note 10) $5,984 $4,545 $4,573
====== ====== ======
Net premiums earned (Note 10) $5,635 $4,467 $4,648
Net investment income (Note 4) 985 910 837
Net realized gains on investments (Note 4) 432 303 223
Other revenues 151 104 43
------ ------ ------
Total revenues 7,203 5,784 5,751
------ ------ ------
Costs and Expenses
Claims, claim expenses and policy benefits 4,103 3,260 3,373
Insurance acquisition costs 1,357 1,073 1,106
Amortization of intangibles 89 78 82
Interest expense 55 42 42
Other operating costs and expenses 444 366 284
Minority interest in net earnings of consolidated
subsidiaries (Notes 3 and 11) 85 83 84
------ ------ ------
Total costs and expenses 6,133 4,902 4,971
------ ------ ------
Earnings before income taxes 1,070 882 780
------ ------ ------
Provision for income taxes (Note 7):
Current 324 (37) 207
Deferred (33) 271 6
------ ------ ------
291 234 213
------ ------ ------
Net earnings $ 779 $ 648 $ 567
====== ====== ======
See Notes to Consolidated Financial Statements.
26
GE GLOBAL INSURANCE HOLDING CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Financial Position
December 31,
---------------------
(In millions) 1998 1997
---------------------
Assets
Investments (Note 4):
Fixed maturity securities available-for-sale, at fair value $18,161 $14,816
Equity securities, at fair value 2,722 2,513
Short-term investments, at amortized cost 596 661
Other invested assets 508 353
------- -------
Total investments 21,987 18,343
Cash 258 269
Securities and indebtedness of related parties 564 318
Accrued investment income