GENERAL RE CORPORATION
Financial Centre
P.O. Box 10350
Stamford, CT 06904-2350
November 14, 1996
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Gentlemen/Ladies:
Pursuant to the requirements of the Securities Exchange
Act of 1934, we are transmitting herewith the attached
Form 10-Q.
Very truly yours,
Elizabeth A. Monrad
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission file number 1-8026
GENERAL RE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1026471
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Financial Centre, P.O. Box 10350
Stamford, Connecticut 06904-2350
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, with area code (203) 328-5000
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes * No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable
date.
Class Outstanding at September 30, 1996
Common Stock, $.50 par value 78,323,425 Shares
GENERAL RE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
Item 1. Financial Statements
Consolidated Statements of Income
Three and nine months ended September 30, 1996 and 1995 3
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 4
Consolidated Statements of Common Stockholders' Equity
Nine months ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1996 and 1995 6
Notes to Consolidated Interim Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Statement Re: Computation of Per Share
Earnings 18
(b) Reports on Form 8-K 19
2
<TABLE>
GENERAL RE CORPORATION
Consolidated Statements of Income
(in millions, except per share data)
<CAPTION>
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
1996 1995 1996 1995
Premiums and other revenues
Net premiums written
Property/casualty $1,390 $1,460 $4,179 $4,055
Life/health 275 235 785 456
Total net premiums written $1,665 $1,695 $4,964 $4,511
Net premiums earned
Property/casualty $1,378 $1,427 $4,096 $3,727
Life/health 276 233 775 448
Total net premiums earned 1,654 1,660 4,871 4,175
Net investment income 302 269 875 717
Other revenues 80 83 226 224
Net realized gains (losses)
on investments (14) (8) 66 24
Total revenues 2,022 2,004 6,038 5,140
Expenses
Claims and claim expenses 1,002 1,035 2,915 2,696
Life/health benefits 212 169 575 317
Acquisition costs 345 376 1,089 946
Other operating costs and expenses 185 148 514 402
Total expenses 1,744 1,728 5,093 4,361
Income before income taxes and
minority interest 278 276 945 779
Income tax expense 75 67 236 161
Income before minority interest 203 209 709 618
Minority interest 19 10 64 22
NET INCOME $184 $199 $645 $596
Share Data
Net income per common share $2.31 $2.39 $8.00 $7.17
Dividends per common share $0.51 $0.49 $1.53 $1.47
Average shares outstanding 78.4 82.2 79.7 82.0
</TABLE>
See notes to the consolidated interim financial statements.
3
<TABLE>
GENERAL RE CORPORATION
Consolidated Balance Sheets
(in millions, except share data)
<CAPTION>
(Unaudited)
<S> <C> <C>
Assets Sept. 30, 1996 Dec. 31, 1995
Investments:
Fixed maturities:
Available-for-sale (cost: $15,175
in 1996; $14,342 in 1995) $15,690 $15,225
Trading (cost: $3,577 in 1996;
$2,316 in 1995) 3,582 2,317
Preferred stocks, at fair value
(cost: $424 in 1996; $453 in 1995) 429 472
Common stocks, at fair value (cost: $2,061
in 1996; $1,910 in 1995) 3,721 3,234
Short-term investments, at amortized cost
which approximates fair value 1,632 1,449
Other invested assets 721 797
Total investments 25,775 23,494
Cash 373 258
Accrued investment income 391 390
Accounts receivable 2,562 2,368
Funds held by reinsured companies 447 497
Reinsurance recoverable 2,908 2,794
Deferred acquisition costs 439 434
Securities purchased under agreements to resell 15 66
Trading account assets 2,954 2,434
Other assets 1,479 1,528
Total assets $37,343 $34,263
Liabilities
Claims and claim expenses $14,768 $14,252
Policy benefits for life/health contracts 737 580
Unearned premiums 2,002 1,913
Other reinsurance balances 3,040 3,056
Notes payable and commercial paper 304 155
Income taxes 683 634
Securities sold under agreements to repurchase 3,074 1,263
Securities sold but not yet purchased 258 614
Trading account liabilities 3,272 2,627
Other liabilities 1,560 1,357
Minority interest 1,155 1,224
Total liabilities 30,853 27,675
Cumulative convertible preferred stock
(shares issued: 1,713,890 in 1996 and
1,724,037 in 1995; no par value) 147 147
Loan to employee savings and stock ownership plan (146) (146)
1 1
Common stockholders' equity
Common stock (102,827,344 shares issued
in 1996 and 1995; par value $.50) 51 51
Paid-in capital 657 635
Unrealized appreciation of investments,
net of deferred income taxes 1,464 1,468
Currency translation adjustments, net of
deferred income taxes (63) (11)
Retained earnings 6,503 5,986
Less common stock in treasury, at cost
(shares held: 24,503,919 in 1996
and 20,714,069 in 1995) (2,123) (1,542)
Total common stockholders' equity 6,489 6,587
Total liabilities, cumulative convertible
preferred stock and common stockholders'
equity $37,343 $34,263
</TABLE>
See notes to the consolidated interim financial statements.
4
<TABLE>
GENERAL RE CORPORATION
Consolidated Statements of Common Stockholders' Equity
(in millions)
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
<S><C><C>
1996 1995
Common stock:
Beginning of period $51 $51
Change for the period - -
End of period 51 51
Paid-in capital:
Beginning of period 635 604
Stock issued under stock option
and other incentive arrangements 18 21
Other 4 5
End of period 657 630
Unrealized appreciation of investments,
net of deferred income taxes:
Beginning of period 1,468 421
Change for the period (17) 1,180
Applicable income taxes 13 (438)
End of period 1,464 1,163
Currency translation adjustments,
net of deferred income taxes:
Beginning of period (11) (20)
Change for the period (52) 12
End of period (63) (8)
Retained earnings:
Beginning of period 5,986 5,330
Net income 645 596
Dividends paid on common stock (121) (121)
Dividends paid on preferred stock,
net of income taxes (8) (8)
Other 1 2
End of period 6,503 5,799
Common stock in treasury:
Beginning of period (1,542) (1,527)
Cost of shares acquired during period (590) -
Issued under stock option and other
incentive arrangements 9 20
End of period (2,123) (1,507)
Total common stockholders' equity $6,489 $6,128
</TABLE>
See notes to the consolidated interim financial statements.
<TABLE>
GENERAL RE CORPORATION
Consolidated Statements of Cash Flows
(in millions)
<CAPTION>
(Unaudited)
Nine months ended
September 30,
<S><C><C>
1996 1995
Cash flows from operating activities
Net income $645 $596
Adjustments to reconcile net income to
net cash provided by operating activities:
Change in claim and claim expense liabilities 516 1,446
Change in policy benefits for life/health
contracts 157 107
Change in reinsurance recoverable (114) (230)
Change in unearned premiums 144 378
Amortization of acquisition costs 1,089 946
Acquisition costs deferred (1,066) (1,060)
Trading account activities
Change in trading account securities (1,796) (1,608)
Securities purchased under agreements to resell 51 622
Securities sold under agreements to repurchase 1,811 415
Change in other trading balances 58 597
Other changes in assets and liabilities (81) (1,036)
Net realized gains on investments (66) (24)
Net cash from operating activities 1,348 1,149
Cash flows from investing activities
Fixed maturities: available-for-sale
Purchases (6,948) (4,644)
Calls and maturities 657 473
Sales 5,128 3,377
Equity securities:
Purchases (842) (626)
Sales 812 559
Net purchases of short-term investments 112 (263)
Net sales (purchases) of other invested assets 175 (120)
Net cash used in investing activities (906) (1,244)
Cash flows from financing activities
Commercial paper (repayment) borrowing, net 150 (31)
Change in contract deposits 213 105
Cash dividends paid to common stockholders (121) (121)
Acquisition of treasury stock (596) -
Other 27 140
Net cash used in financing activities (327) 93
Change in cash 115 (2)
Cash, beginning of period 258 242
Cash, end of period $373 $240
</TABLE>
See notes to the consolidated interim financial statements.
6
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. General - The interim financial statements have
been prepared on the basis of generally accepted
accounting principles and, in the opinion of management,
reflect all adjustments (consisting of normal, recurring
accruals) necessary for a fair presentation of results for
such periods. The results of operations for any interim
period are not necessarily indicative of results for the full
year. These financial statements should be read in
conjunction with the financial statements and related
notes in the Corporation's 1995 Annual Report filed on
Form 10-K. Certain reclassifications have been made to
1995 balances to conform to the 1996 presentation. The
operating results of the Corporation's international
reinsurance operations are reported on a quarter lag.
2. Cologne Re - The comparable 1995 year-to-date
amounts include only two quarters of income and cash
flows for Cologne Re and GR-CK, since the formation
of GR-CK did not occur until December 28, 1994 and the
Corporation reports the results of its international
operations on a one quarter lag. The minority interest
included in the Corporation's statement of income and
balance sheet relates to the economic interest of Cologne
Re not owned by GR-CK and the Class A shares of
GR-CK, which are not owned by the Corporation.
3. Income Taxes - The Corporation's effective
income tax rate differs from current statutory rates
principally due to tax-exempt interest income and
dividends received deductions. The Corporation paid
income taxes of $174 million and $160 million in the
nine months ended September 30, 1996 and 1995,
respectively.
4. Reinsurance Ceded - The Corporation utilizes
reinsurance to reduce its exposure to large losses. The
income statement amounts for premiums written, premiums
earned, claims and claim expenses incurred and life/health
benefits are reported net of reinsurance. Direct, assumed,
ceded and net amounts for the nine months ended
September 30, 1996 and 1995 were as follows
(in millions):
<TABLE>
<CAPTION>
Property/Casualty Life/Health Claims and Life/Health
Written Earned Written Earned Claim Expenses Benefits
<S><C><C><C><C><C><C>
1996
Direct $365 $325 - - $230 -
Assumed 4,471 4,409 $873 $863 3,215 $651
Ceded (657) (638) (88) (88) (530) (76)
Net $4,179 $4,096 $785 $775 $2,915 $575
1995
Direct $298 $263 - - $145 -
Assumed 4,569 4,266 $508 $500 3,167 $370
Ceded (812) (802) (52) (52) (616) (53)
Net $4,055 $3,727 $456 $448 $2,696 $317
</TABLE>
5. Allowance for Doubtful Accounts - The
Corporation establishes an allowance for uncollectible
reinsurance recoverables and other doubtful receivables.
The allowance was approximately $124 million and $135
million at September 30, 1996 and December 31, 1995,
respectively.
7
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (continued)
6. Per Common Share Data - Income per common
share is based on net income less preferred dividends
divided by the weighted average common shares
outstanding during the period. The weighted average
number of common shares outstanding was 78,423,243
and 79,706,910 for the three and nine months ended
September 30, 1996, and 82,180,498 and
82,032,784 for the three and nine months ended
September 30, 1995, respectively.
7. New Accounting Standards - In October 1995, the
Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation. The
Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans
and is effective in 1996. The Statement defines a
fair-value based method of accounting for stock option
plans whereby compensation cost is measured at the grant
date based on the value of the award and is recognized
over the service period. Under the new Statement,
companies may continue to measure compensation cost
of stock-based plans using the current accounting
prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees.
Companies electing to remain with the accounting in
Opinion No. 25 must make pro forma disclosures of net
income and earnings per share as if the fair-value based
method of accounting defined in the Statement were
applied.
The Corporation has elected to continue its current
method of accounting for stock-based compensation plans.
The fair-value based disclosures, which are only required in
full-year financial statements, will be included in the
Corporation's 1996 Annual Report on Form 10-K.
In March 1995, the FASB issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of. The
Statement established accounting standards for impairment
of long-lived assets, certain identifiable intangibles and
goodwill. The Statement requires that long-lived assets
and intangibles be reviewed for impairment using an
estimate of future undiscounted cash flows compared to
the carrying amount of the assets. The Statement was
effective January 1, 1996 and had no effect on the results
from operations, financial position or cash flows of the
Corporation in the first nine months of 1996.
8. Acquisitions and Dispositions - On July 1, 1996
the Corporation reached a definitive agreement to acquire
all of the outstanding shares of National Re Corporation
("National Re"). At the closing on October 3, 1996,
pursuant to the merger agreement, each shareholder of
National Re common stock received, depending upon the
shareholder's election, either $53 in cash or .37262 shares
of the Corporation's common stock for each National Re
share. Approximately 35 percent of National Re
shareholders elected to receive cash, and the remaining
65 percent received shares of the Corporation's common
stock. Upon closing of the transaction, the Corporation
issued approximately 4,024,000 shares of common stock
as a result of these elections and paid cash consideration
of approximately $308 million.
On July 1, 1996, ACE Limited finalized the
acquisition of Tempest Reinsurance Company Limited
("Tempest"). The Corporation received $216 million in
cash in exchange for its 20.7 percent interest in Tempest,
its sponsor stock options, and early termination of its
underwriting services agreement with Tempest.
8
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated
Income from operations, excluding after-tax realized
gains and losses, was $2.73 per share in the third quarter
of 1996, an increase of 12.3 percent from the $2.43 per
share earned in the comparable period in 1995. Net
income for the third quarter of 1996 included after-tax
realized losses of $.42 per share, compared with a loss of
$.04 per share in the third quarter of 1995. In the third
quarter of 1996, the improved results, excluding after-tax
realized gains and losses, were primarily due to an increase
in United States property/casualty underwriting profits
and growth in investment income in both the United States
and international operations.
For the first nine months of 1996, net income was $8.00
per share, compared with $7.17 per share for the same
period in 1995. Included in net income were after-tax
realized gains of $.04 per share in the first nine months of
1996, compared to $.22 per share in 1995. Due to the
reporting of international operations on a quarter lag, the
results for the first nine months of 1996 include nine
months of income for Cologne Re and the related joint-
venture company GR-CK, compared to only six months
of income for the same period in 1995.
Consolidated net premiums written for the third quarter
of 1996 were $1,665 million, a decrease of 1.8 percent
from $1,695 million in 1995. Consolidated net premiums
written for the first nine months of 1996 were $4,964
million, compared with $4,511 million in 1995. United
States property/casualty premiums written in the third
quarter of both 1996 and 1995 was $824 million.
Premium volume was adversely affected by the non-
renewal of a large quota share treaty contract in 1996
and a competitive pricing environment. These effects
were partially offset by a new quota share contract
written during the quarter which represented
approximately 6.0 percent of the United States net
premiums written in the third quarter of 1996. Excluding
the impact of the non-renewed contract, total United
States property/casualty premiums grew 12.7 percent.
The international property/casualty subsidiaries' net
premiums written were $566 million in the third quarter
of 1996, compared to $636 million for the same period in
1995. Net premiums written for the life/health segment,
which consists of Cologne Re's United States and
international life/health operations, were $275 million in
the third quarter of 1996, an increase of $40 million from
the comparable amount in 1995. This increase was
primarily due to growth in the United States' individual
life and group health portfolios and growth in France,
Spain and Australia.
Consolidated pretax net investment income was $302
million in the third quarter of 1996, compared with $269
million in 1995. Net investment income for the United
States property/casualty operations of $183 million in the
third quarter of 1996 increased by $4 million as compared
to $179 million in the third quarter of 1995. Net investment income
for the international property/casualty operations was $96
million in the third quarter of 1996, compared with $72
million in the third quarter of 1995. Net investment
income for the life/health operations was $17 million in
third quarter of 1996 as compared to $13 million in the
third quarter of 1995. The financial services segment's
net investment income was $6 million and $5 million in
the third quarter of 1996 and 1995, respectively.
For the nine months ended September 30, after-tax
investment gains of $3 million and $18 million were
realized in 1996 and 1995, respectively. For the third
quarter of 1996, realized losses after-tax and minority
interest on investments were $33 million, compared to
a loss of $4 million in the third quarter of 1995. After-tax realized
losses for the third quarter of 1996 included $12 million from
S&P futures contracts that were used to hedge a portion of the common
equity portfolio.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The consolidated effective tax rate was 26.9 percent for
the third quarter of 1996, compared with 24.2 percent in
the third quarter of 1995. The consolidated effective tax
rate for the first nine months of 1996 was 24.9 percent,
compared to 20.6 percent in 1995. The increase in the
consolidated effective tax rate was the result of an increase
in the proportion of the Corporation's income earned by
its international subsidiaries in higher tax rate jurisdictions.
The Corporation's net cash flow from consolidated
operations was $1,348 million in the first nine months of
1996, compared to $1,149 million in the same period in
1995. Cash flows from operations for the United States
property/casualty operations were $664 million and $850
million in the first nine months of 1996 and 1995,
respectively. The financial services operations had
net cash flows from operations of $103 million in the
first nine months of 1996, compared to $10 million in
the first nine months of 1995. The international
property/casualty and life/health operations had cash
flow from operating activities of $581 million for the first
nine months of 1996, compared with $289 million in 1995.
At September 30, 1996, total consolidated assets were
$37,343 million, compared with $34,263 million at
December 31, 1995. The growth in total assets was
due to increases of $265 million in the United States
property/casualty operations, $660 million in the
international property/casualty and life/health operations
and $2,155 million in the financial services segment. The
increase in the United States property/casualty assets was
primarily the result of operating cash flow, partially offset
by the repurchases of the Corporation's common
stock. The growth in the assets of the international
property/casualty and life/health operations was also due
to operating cash flow. The increase in the financial
services assets primarily relates to the purchase of
investment securities to hedge open swap positions.
During the first nine months of 1996, total invested
assets increased by $2,281 million to $25,775 million.
The growth in invested assets was due to increases of
$276 million in the United States property/casualty
operations, $473 million in the international
property/casualty and life/health operations and
$1,532 million in the financial services segment.
The consolidated gross liability for claims and claim
expenses for property/casualty operations was $14,768
million at September 30, 1996, an increase of $516
million over the year-end 1995 liability. The asset for
reinsurance recoverable on unpaid claims was $2,567
million at September 30, 1996, compared to $2,514
million at December 31, 1995. At September 30, 1996,
the gross liability for claims and claim expenses and the
related asset for reinsurance recoverables include $1,881
million and $601 million, respectively, for environmental
and latent injury claims. These amounts include provisions
for both reported and incurred but not reported claims.
Common stockholders' equity at September 30, 1996 was
$6,489 million, a decrease of 1.5 percent from the $6,587
million at December 31, 1995. The change in common
stockholders' equity during the first nine months of 1996
was principally the result of net income of $645 million
offset by common share repurchases of $590
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
million, an increase in unrealized foreign currency
translation losses of $52 million and common and
preferred stock dividends of $129 million. On a per
share basis, common stockholders' equity increased
from $80.22 at December 31, 1995 to $82.85 at
September 30, 1996.
Dividends paid to common stockholders were $121 million
for the first nine months of 1996 and 1995. The
Corporation repurchased 290,100 and 4,045,400 shares
of common stock during the third quarter and first nine
months of 1996 for aggregate consideration of $43 million
and $590 million, respectively. On June 12, 1996, the
Corporation's Board of Directors approved a new
repurchase program for $500 million. In addition to
specific repurchase programs, the Corporation has
standing authority to repurchase shares in anticipation
of share issuances under various compensation plans.
Since the inception of the repurchase program in 1987,
the Corporation has repurchased 26,189,900 common
shares for total consideration of $2,189 million.
During the second quarter of 1995, Cologne Re completed
a rights offering that raised DM 437 million ($317 million
at the June 30, 1995 exchange rate), which increased its
capital under United States generally accepted accounting
principles by 62.9 percent over the amount reported at
December 31, 1994. In connection with Cologne Re's
rights offering, GR-CK subscribed for its pro rata share,
approximately DM 297 million ($215 million at the June
30, 1995 exchange rate), of the offering. In addition, the
Corporation has purchased through September 30, 1996
an additional 80,523 ordinary and 73,796 preference
shares of Cologne Re for aggregate consideration of
$84 million. These purchases maintained GR-CK's 66.3
percent ownership interest of Cologne Re and, in addition,
gave the Corporation a direct interest of 8.3 percent in
Cologne Re, bringing the Corporation's total consolidated
interest to 74.6 percent at September 30, 1996. The
Corporation's financial statements include the additional
percentage ownership in Cologne Re.
At September 30, 1996, the Corporation had $150 million
of senior debt outstanding which matures in September
2009. This debt is rated AAA by Standard and Poor's
Corporation and Aa1 by Moody's Investors Services.
At September 30, 1996, $150 million of short-term
commercial paper was outstanding. Commercial paper
offered by the Corporation is rated A1+ by Standard &
Poor's Corporation and Prime 1 by Moody's Investors
Service.
On July 31, 1996, the Corporation increased its credit
facility to $1.2 billion, of which $800 million is committed
for five years and $400 million for 364 days. The lines of
credit are extended by a group of 24 banks and provide the
Corporation with support for its commercial paper
program and enhance the Corporation's financial flexibility.
The Corporation has not borrowed against its credit
facilities to date.
United States Property/Casualty
(in millions) Third Quarter Year-to-date
1996 1995 1996 1995
Income before income taxes and
realized gains $188 $176 $546 $530
Net premiums written 824 824 2,203 2,213
Net underwriting gain (loss) 6 (4) 20 (3)
Net investment income 183 179 523 534
Combined underwriting ratio 99.2% 99.1% 99.1% 99.1%
Operating cash flow $314 $390 $664 $850
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Pretax income for the United States property/casualty
operations, excluding realized gains/losses, increased 6.9
percent in the third quarter of 1996, as compared to the
same quarter of 1995, and increased 3.0 percent for the
first nine months of 1996. The $16 million increase in
pretax income excluding realized gains/losses for the first
nine months was due to the improved underwriting results
on traditional treaty business. In the third quarter of
1996, the GAAP combined underwriting ratio for the
United States property/casualty operations was 99.2
percent, compared with 100.5 percent for the third
quarter of 1995. The GAAP combined ratio for the first
nine months of 1996 was 99.1 percent, compared with
100.1 percent for the first nine months of 1995 and 99.6
percent for the full-year 1995.
Net premiums written for the United States
property/casualty operations were $824 million in the
third quarter of 1996 and $2,203 million in the first
nine months of 1996, representing a decline of 0.5
percent for the first nine months from the comparable
1995 amounts. Net premiums written were adversely
affected by a large quota share treaty contract that was
not renewed in 1996, partially offset by a new quota
share contract written during the third quarter of 1996.
Adjusting for the non-renewal of the treaty contract,
United States property/casualty net premiums grew by
12.7 percent in the quarter and 7.7 percent for the first
nine months of 1996. Net premiums written by General
Reinsurance Corporation, excluding the non-renewal of
the quota share contract and the new quota share contract,
increased by 6.1 percent year-to-date. This increases
reflects a lower rate of growth in the United States
property/casualty operations than experienced in the
prior three years. The reduced growth rate results from
an increasingly competitive environment in both
the primary insurance and reinsurance markets, where
there are fewer attractive, new business opportunities
that would meet the Corporation's underwriting standards.
For the General Star companies, which write primary and
excess specialty insurance, net premiums written increased
by 37.6 percent and 23.4 percent for the quarter and year-
to-date. For the Genesis operations, which provide direct
excess insurance, net premiums written increased by 10.4
percent and 11.7 percent for the third quarter and first
nine months of 1996, respectively, compared to the same
period in 1995.
Pretax investment income for the United States
property/casualty operations increased 2.2 percent
compared to the third quarter of 1995 but declined
1.9 percent year-to-date. On an after-tax basis, net
investment income increased 4.7 percent from $148 million
to $155 million during the quarter. The overall annualized
pretax yield on the United States property/casualty invested
asset portfolio was 5.5 percent in the first nine months of 1996,
compared with 5.9 percent in the same period in 1995. The
annualized pretax and after-tax yield in the first nine months
of 1996 on the segment's fixed maturity portfolio was 6.6 percent and
5.7 percent, respectively, compared with 7.6 percent and
6.3 percent, in the same period in 1995.
During the first nine months of 1996, the Corporation
had approximately $368 million of calls and maturities
on grandfathered tax-exempt bonds. These bonds had
an average yield of approximately 8.0 percent and the
proceeds from the calls were reinvested at an average
yield of approximately 5.2 percent. In addition, based
on the Corporation's current investment portfolio and
the current yield curve, the Corporation presently
anticipates
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
additional calls and maturities during 1996 of
approximately $136 million of grandfathered tax-exempt
bonds with an average yield of approximately 7.9 percent,
which will adversely affect average portfolio yields and
investment income.
The gross liability for claims and claim expenses for the
United States property/casualty operations was $9,695
million at September 30, 1996, an increase of $339 million,
or 3.6 percent, over the year-end 1995 liability. The
asset for reinsurance recoverable on unpaid claims was
$2,027 million at September 30, 1996, compared to
$1,971 million at December 31, 1995. At September
30, 1996, total assets of the United States property/casualty
operations were $17,685 million, compared with $17,420
million at December 31, 1995.
International Property/Casualty
(in millions) Third Quarter Year-to-date
1996 1995 1996 1995
Income before income taxes,
minority interest and
realized gains $73 $59 $232 $121
Net premiums written 566 636 1,976 1,842
Net underwriting loss (12) (10) (41) (34)
Net investment income 96 72 291 144
Combined underwriting ratio 101.9% 101.8% 102.0% 101.7%
Operating cash flow $185 $97 $581 $289
The international property/casualty operations' income
before income taxes, minority interest and realized gains
increased 24.1 percent for the third quarter of 1996,
compared with the third quarter of 1995 and 91.7 percent
for the first nine months of 1996 compared with the first
nine months of 1995. For the third quarter of 1996,
income for the international property/casualty operations
increased as compared to 1995's third quarter due to
increased investment income related to the growth in the
segment's investment portfolio. This segment's year-
to-date figures are not comparable to 1995, since 1995
amounts include only two quarters of Cologne Re's
results due to the quarter reporting lag.
International net premiums written were $566 million in
the third quarter of 1996, compared with $636 million
in the third quarter of 1995, a decline of 11.0 percent.
A significant portion of this decrease, approximately 7
percent, can be attributed to foreign exchange effects.
In addition, treaty volume in the international
property/casualty segment, which is written mostly on a
proportional basis, declined in the third quarter of 1996
as compared to 1995, reflecting an increasingly competitive
environment in Europe.
Pretax investment income for the international
property/casualty operations was $96 million for the third
quarter of 1996, compared with $72 million in the same
period of 1995. The increase in investment income is due
to greater investment income from Cologne Re and GR-CK,
as well as growth in the wholly owned subsidiaries'
investment portfolio. The international property/casualty
segment's net investment income for the first nine
1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
months of 1996 increased by $147 million. This growth is
primarily due to the inclusion of nine months of investment
income for Cologne Re and GR-CK in 1996 compared to
only six months in 1995. The overall annualized pretax
yield on the invested asset portfolio was 5.9 percent in the
first nine months of 1996.
At September 30, 1996, total assets of the international
property/casualty and life/health operations were $12,092
million, compared with $11,432 million at December 31,
1995. The gross liability for claims and
claim expenses was $5,072 million at September 30, 1996
compared with $4,896 million at December 31, 1995.
The asset for reinsurance recoverable on unpaid claims
was $540 million at September 30, 1996, compared to
$544 million at December 31, 1995.
Life/Health
(in millions) Third Quarter Year-to-date
1996 1995 1996 1995
Income before income taxes,
minority interest and
realized gains $12 $16 $40 $31
Net premiums written 275 235 785 456
Net underwriting income (1) 5 5 6
Net investment income 17 13 44 26
This segment includes the United States and international
life/health operations of Cologne Re. Similar to Cologne
Re's property/casualty business, this segment's year-to-
date figures for 1995 include only two quarters of results
due to the quarter reporting lag. Pretax income for the
third quarter of $12 million, decreased 21.2 percent from
the $16 million in the comparable quarter of 1995,
principally due to a decline in underwriting results from a
few large mortality losses, partially offset by an increase in
investment income. Life/health premiums written were
$275 million for the third quarter of 1996, compared with
$235 million in the third quarter of 1995. The increase was
due to growth in the United States' individual life and
group health portfolios and growth in business written in
France, Spain and Australia.
The liability for policy benefits for life/health contracts was
$737 million at September 30, 1996, compared with $580
million at December 31, 1995. The asset for reinsurance
recoverable on unpaid losses was $231 million at
September 30, 1996, compared to $201 million at
December 31, 1995. Cologne Re manages its invested
assets and total assets on an aggregate basis for the
life/health and property/casualty business and does not
presently disaggregate these accounts by segment. The
invested asset and total asset disclosures in the international
property/casualty segment include all of Cologne Re's
invested assets.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Financial Services
(in millions) Third Quarter Year-to-date
1996 1995 1996 1995
Income before income taxes,
minority interest and
realized gains $24 $38 $74 $81
Total revenues (excluding
realized gains) 60 74 185 188
Net investment income 6 5 17 14
Financial services operations include the Corporation's
derivative products, investment management, insurance
brokerage and management, reinsurance brokerage,
underwriting services and real estate management
subsidiaries. In August 1995, the Corporation acquired
all of the outstanding stock of New England Asset
Management, which provides investment management
services primarily for insurance companies.
In the third quarter of 1996, the financial services segment
had total revenues of $60 million, down 18.1 percent
from $74 million in the third quarter of 1995. For the first
nine months, total revenues declined from $188 million in
1995 to $185 million in 1996, an decrease of 1.4 percent.
The decline in revenue in the third quarter and first nine
months was principally attributable to GRFP, which had
lower trading revenues during the period.
At September 30, 1996, total assets of the financial
services operations were $7,566 million, compared with
$5,411 million at December 31, 1995. GRFP's market
exposures arising from derivative products are managed
through the purchase and sale of government securities,
futures and forward contracts or offsetting derivatives
transactions. The amount and nature of the financial
services segment's assets and liabilities are significantly
affected by the risk management strategies utilized by
GRFP to reduce market, currency rate, and interest rate
risk. The purchase of government securities financed
through collateralized repurchase agreements and the sale
of government securities, whose proceeds are invested in
reverse repurchase agreements, may cause short-term
fluctuations in GRFP's assets and liabilities. The use of
these transactions to offset GRFP's market exposures
will increase or decrease the amount of GRFP's trading
account assets or liabilities. While these risk management
strategies may have a significant impact on the amount of
assets and liabilities, they generally do not have a material
effect on the Corporation's results from operations or
common stockholders' equity.
During the first nine months of 1996, total invested assets
of the financial services operations increased $1,532
million to $4,010 million. Securities purchased under
agreements to resell, which represent short-term liquid
investment of excess funds, decreased $51 million in the
first nine months of 1996 to $15 million. Securities
sold under agreements to repurchase, which are short-term
borrowings of funds, increased $1,811 million in the
first nine months of 1996 to $3,074 million. Securities
sold, but not yet purchased, which decreased by $356
million during 1996, represent obligations of the
Corporation to deliver the specified security at the
contracted price, thereby creating a liability to purchase
the security in the market at prevailing prices. Accordingly,
the Corporation's ultimate obligation to satisfy the sale
of securities sold, but not yet purchased may exceed the
amount recognized in the balance sheet. The Corporation
controls this risk and other market risks associated
with its derivative products operations through, among
other techniques, strict market position limits, marking
the trading portfolio to market on a daily basis, ongoing
monitoring and analysis of its market exposures, and
periodically stress testing the portfolio.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Safe Harbor Disclosure
In connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 (the
"Act"), the Corporation sets forth below cautionary statements
identifying important factors that could cause the Corporation's
actual results to differ materially from those which might be projected,
forecast, or estimated in the Corporation's forward-looking
statements, as defined in the Act, made by or on behalf of the
Corporation in press releases, written statements or documents filed
with the Securities and Exchange Commission, or in its communications and
discussions with shareholders and analysts in the normal course of business
via meetings, phone calls and conference calls. Such statements may
Include, but are not limited to, projections of premium
revenue, investment income, other revenue, losses,
expenses, earnings (including earnings per share), cash
flows, plans for future operations, common shareholders'
equity, financing needs, capital plans, dividends, plans
relating to products or services of the Corporation, and
estimates concerning the effects of litigation or other
disputes, as well as assumptions for any of the foregoing.
Forward-looking statements are inherently subject to risks
and uncertainties. The Corporation cautions that
factors which may cause the Corporation's results to
differ materially from such forward-looking statements
include, but are not limited to, the following:
1) Changes in the level of competition in the United
States and international reinsurance or primary insurance
markets that adversely impact the volume or profitability
of the Corporation's property/casualty or life/health
businesses. These changes include, but are not limited to,
the intensification of price competition, the entry of new
competitors, existing competitors exiting the market, and
the development of new products by new and existing
competitors;
2) Changes in the demand for reinsurance, including
changes in ceding companies' retentions, and changes
in the demand for excess and surplus lines insurance
coverages in the United States;
3) The ability of the Corporation to execute its
growth strategies in its property/casualty, life/health and
financial services operations;
4) The ability of the Corporation to both retain a significant portion of
National Reinsurance Corporation's book of business and realize certain
synergies in connection with its acquisition of National Re Corporation;
5) Catastrophe losses in the Corporation's United
States or International property/casualty businesses;
6) Adverse development on property/casualty claim
and claim expense liabilities related to business written
in prior years, including, but not limited to, evolving case
law and its effect on environmental and other latent injury
claims, changing government regulations, newly identified
toxins, newly reported claims, new theories of liability, or
new insurance and reinsurance contract interpretations;
7) Changes in inflation that affect the profitability of
the Corporation's current property/casualty and life/health
businesses or the adequacy of its property/casualty claim
and claim expense liabilities and life/health policy benefit
liabilities related to prior years' business;
8) Changes in the Corporation's property/casualty and life/health businesses'
retrocessional arrangements;
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
9) Lower than estimated retrocessional or reinsurance
recoveries on unpaid losses, including, but not limited to,
losses due to a decline in the creditworthiness of the
Corporation's retrocessionaires or reinsurers;
10) Increases in interest rates, which cause a reduction
in the market value of the Corporation's interest rate
sensitive investments, including, but not limited to, its
fixed income investment portfolio, and its common
shareholders' equity;
11) Decreases in interest rates causing a reduction of
income earned on new cash flow from operations and
the reinvestment of the proceeds from sales, calls or
maturities of existing investments;
12) Declines in the value of the Corporation's common
equity investments;
13) Changes in mortality or morbidity levels that
affect the Corporation's life/health business;
14) Changes in the demand for the Corporation's
financial services operations' products, including
derivatives offered by General Re Financial Products
("GRFP");
15) Credit losses on the Corporation's investment
portfolio. Credit and market losses on GRFP's portfolio
of derivatives and other transactions;
16) Adverse results in litigation matters, including,
but not limited to, litigation related to environmental,
asbestos and other potential mass tort claims; and
17) Gains or losses related to foreign currency
exchange rate fluctuations.
In addition to the factors outlined above that are directly
related to the Corporation's businesses, the Corporation
is also subject to general business risks, including, but not
limited to, adverse state, federal or foreign legislation
and regulation, adverse publicity or news coverage,
changes in general economic factors, and the loss of key
employees.
17
OTHER INFORMATION
Item 1. Legal Proceedings
In May 1996, a criminal trial commenced against United
States Aviation Underwriters, Inc. ("USAU"), a subsidiary
of the Corporation, and John V. Brennan, former Chairman
and Chief Executive Officer of USAU, in the United
States District Court for the Eastern District of New
York. The criminal indictment alleged mail fraud in
connection with the allocation of insurance claims
between two companies, arising out of the 1987 crash
of a domestic flight. On July 1, 1996, Mr.
Brennan and USAU were found guilty. The Corporation
plans to file motions seeking to overturn the verdict and
also plans to file an appeal of the convictions with the
United States Circuit Court of Appeals. It is not possible
to estimate the liability to the Corporation if the verdict
is not overturned on appeal, but the effect of
such an event is not expected to be material to the financial
position, results of operations or cash flows of the
Corporation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Statement Re: Computation of Per
Share Earnings
Three Months Ended Nine Months Ended
September 30, September 30,
Earnings Per Share of Common Stock
(in millions, except share data) 1996 1995 1996 1995
Net income (applicable to
common stock) (1) $181 $196 $637 $588
Average number of common shares
outstanding 78,423,243 82,180,498 79,706,910 82,032,784
Net income per share (2) $2.31 $2.39 $8.00 $7.17
(1) After deduction of preferred stock dividends of
$3 million and $8 million for the three and nine months
ended September 30, 1996 and 1995.
(2) Fully diluted earnings per share are not reported
because the effect of potentially dilutive securities was not
significant.
18
OTHER INFORMATION (continued)
(b) Reports on Form 8-K
A report on Form 8-K dated July 1, 1996 was
filed regarding the Corporation's agreement to purchase
all of the outstanding shares of National Re Corporation.
The report contains unaudited pro forma consolidated
statements of income for the year ended December 31,
1995 and quarter ended March 31, 1996 and an unaudited
pro forma consolidated balance sheet at March 31, 1996.
A report on Form 8-K dated October 3, 1996 was
also filed. The report filed by the Corporation announced
the completion of the merger with National Re.
A report on Form 8-K dated November 6, 1996
was filed in connection with the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995.
The report contains risk factors which may cause the
Corporation's results to differ materially from the forward-
looking statements made by the Corporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
GENERAL RE CORPORATION
(Registrant)
Date: November 14, 1996 JOSEPH P. BRANDON
Joseph P. Brandon
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: November 14, 1996 ELIZABETH A. MONRAD
Elizabeth A. Monrad
Vice President and Treasurer
(Principal Accounting Officer)
19
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