GENERAL RE CORPORATION
Financial Centre
P.O. Box 10350
Stamford, CT 06904-2350
August 13, 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
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 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:
Class Outstanding at June 30, 1996
Common Stock, $.50 par value 78,567,804 Shares
GENERAL RE CORPORATION
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Consolidated Statements of Income
Three and six months ended June 30, 1996 and 1995 3
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 4
Consolidated Statements of Common Stockholders' Equity
Six months ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows
Six months ended June 30, 1996 and 1995 6
Notes to Consolidated Interim Financial Statements 7 - 9
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10 - 17
PART II. OTHER INFORMATION 18 - 19
2
<TABLE>
GENERAL RE CORPORATION
Consolidated Statements of Income
(in millions, except per share data)
<CAPTION>
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
<S> <C> <C> <C> <C>
1996 1995 1996 1995
Premiums and other revenues
Net premiums written
Property/casualty $1,579 $1,589 $2,789 $2,595
Life/health 259 220 510 220
Total net premiums written $1,838 $1,809 $3,299 $2,815
Net premiums earned
Property/casualty $1,424 $1,345 $2,718 $2,300
Life/health 254 215 499 215
Total net premiums earned 1,678 1,560 3,217 2,515
Net investment income 288 255 573 449
Other revenues 78 91 146 142
Net realized gains on investments 30 24 80 31
Total revenues 2,074 1,930 4,016 3,137
Expenses
Claims and claim expenses 1,004 998 1,912 1,661
Life/health benefits 184 148 364 148
Acquisition costs 389 342 744 570
Other operating costs and expenses 177 157 329 255
Total expenses 1,754 1,645 3,349 2,634
Income before income taxes and
minority interest 320 285 667 503
Income tax expense 74 59 161 94
Income before minority interest 246 226 506 409
Minority interest 22 12 45 12
NET INCOME $224 $214 $461 $397
Share Data
Net income per common share $2.80 $2.58 $5.67 $4.78
Dividend per common share $0.51 $.49 $1.02 $ .98
Average shares outstanding 79.3 82.0 80.4 82.0
See notes to the consolidated interim financial statements.
</TABLE>
3
<TABLE>
GENERAL RE CORPORATION
Consolidated Balance Sheets
(in millions, except share data)
<CAPTION>
(Unaudited)
<S> <C> <C>
Assets June 30, 1996 Dec. 31, 1995
Investments:
Fixed maturities:
Available-for-sale (cost:
$14,887 in 1996; $14,342 in 1995) $15,370 $15,225
Trading (cost: $3,004 in 1996;
$2,316 in 1995) 2,965 2,317
Preferred stocks, at fair value (cost:
$368 in 1996; $453 in 1995) 374 472
Common stocks, at fair value (cost: $2,102
in 1996; $1,910 in 1995) 3,661 3,234
Short-term investments, at amortized cost
which approximates fair value 1,523 1,449
Other invested assets 853 797
Total investments 24,746 23,494
Cash 407 258
Accrued investment income 386 390
Accounts receivable 2,793 2,368
Funds held by reinsured companies 2,141 2,180
Reinsurance recoverable 2,867 2,794
Deferred acquisition costs 439 434
Securities purchased under agreements to resell 157 66
Trading account assets 2,350 2,434
Other assets 1,527 1,528
Total assets $37,813 $35,946
Liabilities
Claims and claim expenses $14,701 $14,252
Policy benefits for life/health contracts 2,378 2,263
Unearned premiums 1,993 1,913
Other reinsurance balances 3,041 3,056
Notes payable and commercial paper 379 155
Income taxes 593 634
Securities sold under agreements to repurchase 2,607 1,263
Securities sold but not yet purchased 568 614
Trading account liabilities 2,664 2,627
Other liabilities 1,407 1,357
Minority interest 1,184 1,224
Total liabilities 31,515 29,358
Cumulative convertible preferred stock (shares
issued: 1,719,371 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 654 635
Unrealized appreciation of investments, net of
deferred income taxes 1,358 1,468
Currency translation adjustments, net of deferred
income taxes (45) (11)
Retained earnings 6,361 5,986
Less common stock in treasury, at cost (shares
held: 24,259,540 in 1996 and 20,714,069
in 1995) (2,082) (1,542)
Total common stockholders' equity 6,297 6,587
Total liabilities, cumulative convertible
preferred stock and common stockholders'
equity $37,813 $35,946
See notes to the consolidated interim financial statements.
</TABLE>
4
GENERAL RE CORPORATION
Consolidated Statements of Common Stockholders' Equity
(in millions)
(Unaudited)
Six Months Ended
June 30,
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 16 5
Other 3 3
End of period 654 612
Unrealized appreciation of investments,
net of deferred income taxes:
Beginning of period 1,468 421
Change for the period (171) 731
Applicable income taxes 61 (251)
End of period 1,358 901
Currency translation adjustments,
net of deferred income taxes:
Beginning of period (11) (20)
Change for the period (34) 42
End of period (45) 22
Retained earnings:
Beginning of period 5,986 5,330
Net income 461 397
Dividends paid on common stock (81) (80)
Dividends paid on preferred stock, net of
income taxes (5) (5)
Other - 1
End of period 6,361 5,643
Common stock in treasury:
Beginning of period (1,542) (1,527)
Cost of shares acquired during period (547) -
Issued under stock option and other incentive
arrangements 7 6
End of period (2,082) (1,521)
Total common stockholders' equity $6,297 $5,708
See notes to the consolidated interim financial statements.
GENERAL RE CORPORATION
Consolidated Statements of Cash Flows
(in millions)
(Unaudited)
Six months ended
June 30,
1996 1995
Cash flows from operating activities
Net income $461 $397
Adjustments to reconcile net income to net
cash provided by operating activities:
Change in claim and claim expense liabilities 449 1,259
Change in policy benefits for life/health contracts 115 190
Change in reinsurance recoverable (73) (272)
Change in unearned premiums 149 360
Amortization of acquisition costs 744 570
Acquisition costs deferred (749) (738)
Trading account activities
Change in trading account securities (1,154) (2,582)
Securities purchased under agreements to resell (91) 612
Securities sold under agreements to repurchase 1,344 1,046
Change in other trading balances 13 950
Other changes in assets and liabilities (273) (1,106)
Net realized gains on investments (80) (31)
Net cash from operating activities 855 655
Cash flows from investing activities
Fixed maturities: held-to-maturity
Purchases - (24)
Calls and maturities - 178
Sales - -
Fixed maturities: available-for-sale
Purchases (4,066) (2,869)
Calls and maturities 461 156
Sales 3,043 2,348
Equity securities:
Purchases (584) (438)
Sales 378 419
Net purchases of short-term investments 328 (305)
Net purchases of other invested assets (14) (81)
Net cash used in investing activities (454) (616)
Cash flows from financing activities
Commercial paper borrowing, net 225 (31)
Change in contract deposits 130 (11)
Cash dividends paid to common stockholders (81) (80)
Acquisition of treasury stock (548) -
Other 22 10
Net cash used in financing activities (252) (112)
Change in cash 149 (73)
Cash, beginning of period 258 242
Cash, end of period $407 $169
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 one quarter 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 $136 million and $86
million in the six months ended June 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 six months ended June 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 $225 $211 - - $152 -
Assumed 3,006 2,949 $573 $562 2,153 $448
Ceded (442) (442) (63) (63) (393) (84)
Net $2,789 $2,718 $510 $499 $1,912 $364
1995
Direct $236 $216 - - $155 -
Assumed 2,852 2,576 $244 $239 1,961 $173
Ceded (493) (492) (24) (24) (455) (25)
Net $2,595 $2,300 $220 $215 $1,661 $148
</TABLE>
7
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (continued)
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 June 30,
1996 and December 31, 1995, respectively.
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 79,254,137 and 80,355,796 for the three
and six months ended June 30, 1996, and 81,996,173 and
81,957,703 for the three and six months ended June 30, 1995.
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 six
months of 1996.
8. Subsequent Events - On July 1, 1996 the Corporation
reached a definitive agreement to acquire all of the outstanding
shares of National Re Corporation ("National Re"). Under
terms of the merger agreement, National Re shareholders will
have the right to receive, at the election of the holder, either:
(i) a fraction of a share of the Corporation's common stock
determined by dividing $53 by the average closing price of the
Corporation's common stock for the ten consecutive trading
days immediately preceding the closing date of the merger,
but not more than .39259 shares or less than .32121 shares, or
(ii) $53 in cash. The transaction provides for a minimum stock
component of 50%. There is no minimum cash component.
8
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (continued)
For shareholders electing stock, the transaction is
expected to be tax free. The total consideration for the
acquisition is expected to be approximately $940 million.
The Corporation plans to finance the cash component of the
transaction from internal sources. The transaction, which is
subject to, among other things, regulatory approvals and the
approval of National Re shareholders, is expected to be
completed in the fourth quarter.
On July 1, 1996, ACE Limited finalized the acquisition
of Tempest Reinsurance Company Limited ("Tempest"). In
exchange for its 20.7 percent interest in Tempest, its sponsor
stock options, and early termination of its underwriting services
agreement with Tempest, the Corporation received $216 million
in cash. The effect of this transaction will be included in the
Corporation's third-quarter financial statements.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated
Income from operations, excluding after-tax realized gains and
losses, was $2.65 per share in the second quarter of 1996, an
increase of 11.8 percent from the $2.37 per share earned in the
comparable period in 1995. Net income for the second quarter
of 1996 included after-tax realized gains of $.15 per share,
compared with a gain of $.21 per share in the second quarter
of 1995. The improved results in the second quarter of 1996
were primarily due to an increase in underwriting profits and
growth in investment income in the international
operations.
For the first six months of 1996, net income was $5.67 per
share, compared with $4.78 per share for the same period in
1995. Included in net income were after-tax realized gains
of $.44 per share in the first six months of 1996, compared
with $.26 per share in 1995. Due to the reporting of
international operations on a quarter lag, the results for the
first six months of 1996 include six months of income from
operations for Cologne Re and the related joint-venture
company GR-CK, compared to only three months of income
for the same period in 1995.
Consolidated net premiums written for the second quarter of
1996 were $1,838 million, an increase of 1.6 percent from
$1,809 million in 1995. Consolidated net premiums written
for the first six months of 1996 were $3,299 million,
compared with $2,815 million in 1995. United States
property/casualty premiums written were $690 million in
the second quarter of 1996, compared with $704 million in
1995, a decrease of 2.0 percent. A large quota share treaty
contract that was not renewed in 1996 resulted in a decrease
of approximately $35 million of net premiums written in the
second quarter as compared with 1995. Excluding the impact
of this contract, total United States property/casualty
premiums grew 3.1 percent. The international property/casualty
subsidiaries' net premiums written were $889 million in the
second quarter of 1996, compared to $885 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 $259 million in the
second quarter of 1996, an increase of $39 million from the
comparable amount in 1995. This increase was primarily
due to growth in the United States' individual life and group
medical portfolios and growth in France, Spain and Australia.
Consolidated pretax net investment income was $288 million
in the second quarter of 1996, compared with $255 million in
1995. Net investment income for the United States
property/casualty operations of $172 million in the second
quarter of 1996, declined compared with $176 million in the
second quarter of 1995 due principally to the effect of tax-
exempt bond calls, the reallocation of investments from
taxable to tax-exempt bonds, and the repurchase of common
shares. Net investment income for the international
property/casualty operations was $97 million in the second
quarter of 1996, compared with $61 million in the second
quarter of 1995. Net investment income for the life/health
operations was $13 million in the second quarter of 1996
and 1995.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The consolidated effective tax rate was 23.1 percent for the
second quarter of 1996, compared with 20.8 percent in the
second quarter of 1995. The consolidated effective tax rate
for the first six months of 1996 was 24.1 percent, compared
to 18.7 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 $855 million in the first six months of 1996, compared to
$655 million in the same period in 1995. Cash flows from
operations for the United States property/casualty operations
were $350 million and $460 million in the first six months of
1996 and 1995, respectively. The financial services operations
had net cash flows from operations of $109 million in the first
six months of 1996, compared to $3 million in the first six
months of 1995. The international property/casualty and
life/health operations had cash flow from operating activities
of $396 million for the first six months of 1996, compared
with $192 million in 1995.
At June 30, 1996, total consolidated assets were $37,813
million, compared with $35,946 million at December 31, 1995.
The growth in total assets was due to increases of $1,385
million in the financial services segment, $675 million in the
international property/casualty and life/health operations and
a reduction of $193 million in the United States property/casualty
operations. The increase in the financial services assets
primarily relates to the purchase of investment securities
to hedge open swap positions. The growth in the assets of
the international property/casualty and life/health operations
was due to operating cash flow and investment appreciation.
The decrease in the United States property/casualty assets was
primarily the result of a decline in the unrealized appreciation
of the bond portfolio and repurchases of the Corporation's
common stock, partially offset by an increase in the unrealized
appreciation of the equity portfolio.
During the first six months of 1996, total invested assets
increased by $1,252 million to $24,746 million. The growth in
invested assets was due to increases of $1,026 million in the
financial services segment, $304 million in the international
property/casualty and life/health operations and a decrease of
$78 million in the United States property/casualty operations.
The consolidated gross liability for claims and claim expenses
for property/casualty operations was $14,701 million at June
30, 1996, an increase of $449 million over the year-end 1995
liability. The asset for reinsurance recoverable on unpaid
claims was $2,584 million at June 30, 1996, compared to
$2,514 million at December 31, 1995. At June 30, 1996, the
gross liability for claims and claim expenses and the related
asset for reinsurance recoverables include $1,925 million and
$634 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 June 30, 1996 was $6,297
million, a decrease of 4.4 percent from the $6,587 million at
December 31, 1995. The decrease in common stockholders'
equity during the first six months of 1996 was principally the
result of net income of $461 million offset by common share
repurchases of $547 million, a decrease in after-tax unrealized
investment gains of $110 million, unrealized foreign currency
translation losses of $34 million and common and preferred
stock dividends of $86 million. On a per share basis, common
stockholders' equity decreased slightly from $80.22 at
December 31, 1995 to $80.15 at June 30, 1996.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Dividends paid to common stockholders were $81 million and
$80 million in the first six months of 1996 and 1995,
respectively. The Corporation repurchased 3,755,300 shares
of common stock during the first six months of 1996 for
aggregate consideration of $547 million, which equates to an
average cost of $145.71 per share. 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 25,899,800
common shares for total consideration of $2,145 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 June 30, 1996 an additional 80,523 ordinary and
64,440 preference shares of Cologne Re for aggregate
consideration of $77 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 7.8 percent in Cologne Re, bringing the Corporation's
total consolidated interest to 74.1 percent at June 30, 1996.
The Corporation's financial statements include the additional
percentage ownership in Cologne Re.
At June 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. Subsequent to the Corporation's
announcement to acquire National Re, these senior-debt ratings
were placed on credit watch. At June 30, 1996, $225 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
by a group of 24 banks for five years and $400 million for
364 days. The lines of credit 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
Second Quarter Year-to-date
(in millions) 1996 1995 1996 1995
Income before income taxes $175 $204 $365 $392
Pretax realized gains (3) 26 7 38
Income before income taxes
and realized gains $178 $178 $358 $354
Net premiums written $690 $704 $1,378 $1,389
Net underwriting gain 6 9 14 1
Net investment income 172 176 340 355
Combined underwriting ratio 99.2% 99.0% 99.1% 99.3%
Operating cash flow $75 $149 $350 $460
12
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, was substantially
unchanged in the second quarter of 1996, as compared to the
second quarter of 1995, but increased 1.1 percent for the first
six months of 1996. The $4 million increase in pretax income
excluding realized gains for the first six months was primarily
due to improvement of $13 million in the underwriting result,
which was partly offset by a decline in investment income and
other revenues. In the second quarter of 1996, the GAAP
combined underwriting ratio for the United States
property/casualty operations was 99.2 percent, compared
with 98.8 percent for the second quarter of 1995. The GAAP
combined ratio for the first six months of 1996 was 99.1
percent, compared with 100.0 percent for the first six months
of 1995 and 99.6 percent for the full-year 1995.
Net premiums written for the United States property/casualty
operations were $690 million in the second quarter of 1996
and $1,378 million in the first six months of 1996, representing
a decline of 2.0 percent and 0.8 percent from the comparable
1995 amounts. Net premiums written in 1996 were adversely
impacted in the second quarter by the nonrenewal of a large
quota share treaty which resulted in a decrease in net premiums
written of approximately $35 million in the second quarter of
1996 and $75 million for the first six months of 1996.
Adjusting for the nonrenewal of this treaty, United States
property/casualty net premiums grew by 3.1 percent in the
quarter and 4.9 percent for the first six months of 1996. Net
premiums written by General Reinsurance Corporation,
excluding the nonrenewal of the quota share contract, increased
by 1.3 percent during the quarter and 3.6 percent year-to-date.
These increases reflect 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 pricing 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
16.9 percent and 15.9 percent for the quarter and year-to-date.
For the Genesis operations, which provide direct excess
insurance, net premiums written increased by 12.6 percent
for the first six months of 1996 compared to the same period
in 1995.
Pretax investment income for the United States
property/casualty operations decreased 2.3 percent compared
to the second quarter of 1995 and 4.2 percent year-to-date.
On an after-tax basis, net investment income declined slightly
from $153 million to $147 million during the quarter. Average
yields for the United States fixed income portfolio as of June
30, 1996 declined in various sectors as compared to June 30,
1995; tax-exempt securities' average yield declined 58 basis
points, short-term funds declined 43 basis points and common
equities fell 61 basis points. The overall annualized pretax
yield on the United States invested asset portfolio was 5.4
percent in the first six months of 1996, compared with 5.9
percent in the same period in 1995. The pretax and after-tax
yield in the first six months of 1996 on the segment's fixed
maturity portfolio was 6.6 percent and 5.6 percent, respectively,
compared with 7.1 percent and 5.9 percent, respectively, in the
same period in 1995.
During the first six months of 1996, the Corporation had
approximately $286 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 5.6 percent. In addition, based on the
Corporation's current investment portfolio and the current
yield curve, the Corporation presently anticipates
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
additional calls during 1996 of approximately $240 million of
grandfathered tax-exempt bonds with an average yield of
approximately 7.8 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 $9,612 million at June
30, 1996, an increase of $256 million, or 2.7 percent, over the
year-end 1995 liability. The asset for reinsurance recoverable
on unpaid claims was $2,053 million at June 30, 1996,
compared to $1,971 million at December 31, 1995. At June
30, 1996, total assets of the United States property/casualty
operations were $17,227 million, compared with $17,420
million at December 31, 1995.
International Property/Casualty
Second Quarter Year-to-date
(in millions) 1996 1995 1996 1995
Income before income taxes
and minority interest $105 $30 $220 $50
Pretax realized gains (losses) 33 (4) 69 (9)
Income before income taxes,
minority interest and
realized gains $72 $34 $151 $59
Net premiums written $889 $885 $1,411 $1,206
Net underwriting loss (18) (38) (29) (23)
Net investment income 97 61 196 72
Combined underwriting ratio 102.6% 104.5% 102.2% 101.6%
Operating cash flow $181 $220 $396 $192
The international property/casualty operations' income before
income taxes, minority interest and realized gains increased
111.8 percent for the second quarter of 1996, compared with
the second quarter of 1995 and 155.9 percent for the first six
months of 1996 compared with the first six months of 1995.
For the second quarter of 1996, income for the international
property/casualty operations increased as compared to 1995's
second quarter due to improved underwriting results and
increased investment income due to the growth in the
segment's investment portfolio. This segment's year-to-date
figures for 1995 include only one quarter of Cologne Re's
results due to the quarter reporting lag.
International net premiums written were $889 million in the
second quarter of 1996, compared with $885 million in the
second quarter of 1995. Within the international
property/casualty segment, treaty volume, which is written
mostly on a proportional basis, was essentially level with last
year, reflecting an increasingly competitive environment in
Europe, including Germany. Excess-of-loss property and
casualty individual risk facultative business has experienced
higher growth rates than proportional business in 1996.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Pretax investment income for the international property/casualty
operations was $97 million for the second quarter of 1996,
compared with $61 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 six months of 1996 increased by $124
million. This is primarily due to the inclusion of six months of
investment income for Cologne Re and GR-CK in 1996
compared to only three months in 1995. The overall annualized
pretax yield on the invested asset portfolio was 6.0 percent in
the first six months of 1996, compared with 5.4 percent in the
same period in 1995.
At June 30, 1996, total assets of the international
property/casualty operations were $13,790 million,
compared with $13,115 million at December 31, 1995.
The increase in total assets in 1996 was due to the continued
growth of the international operations' underwriting portfolios
and unrealized appreciation of the investment portfolios. The
gross liability for claims and claim expenses was $5,089 million
at June 30, 1996 compared with $4,896 million at December
31, 1995. The asset for reinsurance recoverable on unpaid
claims was $531 million at June 30, 1996, compared to
$544 million at December 31, 1995.
Financial Services
Second Quarter Year-to-date
(in millions) 1996 1995 1996 1995
Income before income taxes and
minority interest $24 $36 $52 $46
Pretax realized gains - 2 2 3
Income before income taxes,
minority interest and
realized gains $24 $34 $50 $43
Total revenues $62 $79 $127 $117
Net investment income 6 5 10 9
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. Through the combination of this and existing
investment management operations, the Corporation has 51
insurance company clients and approximately $10 billion of
client assets under management.
In the second quarter of 1996, the financial services segment
had total revenues of $62 million, down 21.5 percent from
$79 million in the second quarter of 1995. For the first
six months, total revenues increased from $117 million in 1995
to $127 million in 1996, an increase of 8.5 percent. The decline
in revenue in the second quarter was principally attributable to
GRFP, which had a difficult comparison with 1995's excellent
second quarter. Pretax income of both GRFP and the other
operations in the financial services segment also grew during
the six month period.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
At June 30, 1996, total assets of the financial services
operations were $6,797 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 six months of 1996, total invested assets of the
financial services operations increased $1,026 million to $3,504
million. Securities purchased under agreements to resell, which
represent short-term liquid investment of excess funds,
increased $91 million in the first six months of 1996 to
$157 million. Securities sold under agreements to repurchase,
which are short-term borrowings of funds, increased $1,344
million in the first six months of 1996 to $2,607 million.
Securities sold, but not yet purchased, which decreased by
$46 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.
Life/Health
Second Quarter Year-to-date
(in millions) 1996 1995 1996 1995
Income before income taxes and
minority interest $16 $15 $30 $15
Pretax realized gains - - 2 -
Income before income taxes,
minority interest and
realized gains $16 $15 $28 $15
Net premiums written $259 $220 $510 $220
Net underwriting income 4 1 6 1
Net investment income 13 13 27 13
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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 one quarter of results due to the quarter
reporting lag. Pretax income for the second quarter of $16
million increased modestly from the $15 million in the
comparable quarter of 1995, principally due to improved
underwriting results and flat investment income. Life/health
premiums written were $259 million for the second quarter of
1996, compared with $220 million in the second quarter of
1995. The increase was due to growth in the United
States' individual life and group medical portfolios and
growth in business written in France, Spain and Australia.
The liability for policy benefits for life/health contracts was
$2,378 million at June 30, 1996, compared with $2,263 million
at December 31, 1995. The asset for reinsurance recoverable
on unpaid losses was $228 million at June 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.
1
PART II. 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 USAir and
Ogden-Allied Corporation, arising out of the 1987 crash
of a domestic USAir 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 with the United States Circuit
Court of Appeals. It is not possible to estimate the liability
to the Corporation if the verdict of guilty is not overturned
on appeal, but the effect of such an event, net of existing
provisions, 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) Exhibits
Exhibit #11 - Statement re: computation of earnings
per share
(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.
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: August 13, 1996 JOSEPH P. BRANDON
Joseph P. Brandon
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 1996 ELIZABETH A. MONRAD
Elizabeth A. Monrad
Vice President and Treasurer
(Principal Accounting Officer)
18
GENERAL RE CORPORATION
COMPUTATION of EARNINGS PER SHARE
(in millions, except share data)
Three Months Ended Six Months Ended
June 30, June 30,
Earnings Per Share of Common Stock 1996 1995 1996 1995
Net income (applicable to
common stock) (a) $222 $212 $456 $392
Average number of common shares
outstanding 79,254,137 81,996,173 80,355,796 81,957,703
Net income per share $2.80 $2.58 $5.67 $4.78
(a) After deduction of preferred stock dividends of $3
million and $5 million for the three and six months ended June
30, 1996 and 1995.
(b) Fully diluted earnings per share are not reported
because the effect of potentially dilutive securities was not
significant.
19
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