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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, 1997
-----------------------------------
Commission file number 1-8026
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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 |X| 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, 1997
Common Stock, $.50 par value 78,432,068 Shares
- --------------------------------------- --------------------------------
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GENERAL RE CORPORATION
10-Q INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Statements of Income
Three and nine months ended September 30, 1997 and 1996 3
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 4
Consolidated Statements of Common Stockholders' Equity
Nine months ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996 6
Notes to Consolidated Interim Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K (none) 19
Exhibit 11 - Statement Re: Computation of Per
Share Earnings 21
Exhibit 27 - Financial Data Schedule 22
2
GENERAL RE CORPORATION
Consolidated Statements of Income
(in millions, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Premiums and other revenues
Net premiums written
Property/casualty $1,294 $1,390 $4,107 $4,179
Life/health 327 275 910 785
------- ------- ------- ------
Total net premiums written $1,621 $1,665 $5,017 $4,964
====== ====== ====== ======
Net premiums earned
Property/casualty $1,338 $1,378 $4,097 $4,096
Life/health 327 276 892 775
------ ------ ------ ------
Total net premiums earned 1,665 1,654 4,989 4,871
Investment income 321 302 955 875
Other revenues 88 80 271 226
Net realized gains (losses)
on investments 2 (14) 7 66
------- ------ ------- ------
Total revenues 2,076 2,022 6,222 6,038
----- ----- ----- -----
Expenses
Claims and claim expenses 929 1,002 2,858 2,915
Life/health benefits 254 212 661 575
Acquisition costs 355 345 1,081 1,089
Other operating costs and expenses 200 181 609 501
Goodwill amortization 8 4 22 13
------- -------- ------- ------
Total expenses 1,746 1,744 5,231 5,093
----- ----- ----- -----
Income before income taxes and
minority interest 330 278 991 945
Income tax expense 75 75 230 236
-- -- --- ---
Income before minority interest 255 203 761 709
Minority interest 11 19 40 64
-- -- -- --
Net income $244 $184 $721 $645
==== ==== ==== ====
Share Data:
Net income per common share $3.06 $2.31 $8.97 $8.00
===== ===== ===== =====
Dividend per share to common
stockholders $.55 $.51 $1.65 $1.53
==== ==== ===== =====
Average common shares outstanding 79.0 78.4 79.5 79.7
==== ==== ==== ====
See notes to the consolidated interim financial
statements.
3
GENERAL RE CORPORATION
Consolidated Balance Sheets
(in millions, except share data)
(Unaudited)
September 30, December 31,
ASSETS 1997 1996
------------ -----------
Investments:
Fixed maturities:
Available-for-sale (cost: $16,273 in 1997;
$16,473 in 1996) $17,141 $17,168
Trading (cost: $1,912 in 1997; $2,994 in 1996) 1,977 2,967
Preferred equities, at fair value (cost: $1,007
in 1997; $771 in 1996) 1,063 789
Common equities, at fair value (cost: $2,087 in
1997; $1,941 in 1996) 4,631 3,675
Short-term investments, at amortized cost which
approximates fair value 1,330 1,267
Other invested assets 736 696
-------- --------
Total investments 26,878 26,562
Cash 358 365
Accrued investment income 383 405
Accounts receivable 2,894 2,832
Funds held by reinsured companies 480 474
Reinsurance recoverable 2,846 2,935
Deferred acquisition costs 479 457
Trading account assets 3,972 4,085
Securities purchased under agreement to resell 508 -
Goodwill 993 1,052
Other assets 1,149 994
-------- --------
Total assets $40,940 $40,161
======= =======
LIABILITIES
Claims and claim expenses $15,977 $15,977
Policy benefits for life/health contracts 918 751
Unearned premiums 1,997 1,957
Other reinsurance balances 3,147 3,388
Notes payable 384 290
Commercial paper 759 140
Income taxes 1,029 728
Securities sold under agreements to repurchase 1,159 1,985
Securities sold but not yet purchased 993 869
Trading account liabilities 3,673 3,907
Other liabilities 1,839 1,675
Minority interest 1,033 1,166
------- -------
Total liabilities 32,908 32,833
------ ------
Cumulative convertible preferred stock (shares
issued: 1,703,620 in 1997 and 1,711,907 in 1996;
no par value) 145 146
Loan to employee savings and stock ownership plan (144) (144)
---- ----
1 2
------ ------
COMMON STOCKHOLDERS' EQUITY
Common stock (102,827,344 shares issued in 1997
and 1996; par value $.50) 51 51
Paid-in capital 1,084 1,041
Unrealized appreciation of investments, net of
deferred income taxes 2,294 1,625
Currency translation adjustments, net of deferred
income taxes (22) (53)
Retained earnings 7,291 6,708
Less common stock in treasury, at cost (shares
held: 24,395,276 in 1997 and 21,262,113 in 1996) (2,667) (2,046)
------ ------
Total common stockholders' equity 8,031 7,326
------ ------
Total liabilities, cumulative convertible
preferred stock and common stockholders' equity $40,940 $40,161
======= =======
See notes to the consolidated interim financial statements.
4
GENERAL RE CORPORATION
Consolidated Statements of Common Stockholders' Equity
(in millions)
(Unaudited)
Nine months ended
September 30,
1997 1996
---- ----
Common stock:
Beginning of period $51 $51
Change for the period - -
--- ---
End of period 51 51
-- --
Paid-in capital:
Beginning of period 1,041 635
Stock issued under stock option and other
incentive arrangements 31 18
Other 12 4
------- -----
End of period 1,084 657
----- ---
Unrealized appreciation of investments,
net of deferred income taxes:
Beginning of period 1,625 1,468
Change for the period 1,057 (17)
Deferred income taxes (388) 13
------ -------
End of period 2,294 1,464
----- -----
Currency translation adjustments,
net of deferred income taxes:
Beginning of period (53) (11)
Change for the period 31 (52)
-- ---
End of period (22) (63)
--- ---
Retained earnings:
Beginning of period 6,708 5,986
Net income 721 645
Dividends on common stock (131) (121)
Dividends on preferred stock, net of
income taxes (8) (8)
Other 1 1
-------- --------
End of period 7,291 6,503
----- -----
Common stock in treasury:
Beginning of period (2,046) (1,542)
Cost of shares acquired during period (630) (590)
Stock issued under stock option and other
incentive arrangements 9 9
--------- --------
End of period (2,667) (2,123)
------ ------
Total common stockholders' equity $8,031 $6,489
====== ======
See notes to the consolidated interim financial
statements.
5
GENERAL RE CORPORATION
Consolidated Statements of Cash Flows
(in millions)
(Unaudited)
Nine months ended
September 30,
1997 1996
---- ----
Cash flows from operating activities:
Net income $721 $645
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in claim and claim expense liabilities - 516
Change in policy benefits for life/health
contracts 167 157
Change in reinsurance recoverable 89 (114)
Change in unearned premiums 40 89
Amortization of acquisition costs 1,081 1,089
Acquisition costs deferred (1,103) (1,094)
Trading account activities
Change in trading account securities 1,271 (1,796)
Securities purchased under agreements
to resell (508) 51
Securities sold under agreements to
repurchase (826) 1,811
Change in other trading balances (23) (8)
Other changes in assets and liabilities 59 68
Realized gains on investments (7) (66)
---- ------
Net cash from operating activities 961 1,348
--- -----
Cash flows from investing activities:
Fixed maturities: available-for-sale
Purchases (5,012) (6,948)
Calls and maturities 351 657
Sales 4,514 5,128
Preferred and common equities
Purchases (907) (842)
Sales 398 812
Net (purchases) sales of short-term investments (214) 112
Net purchases of other invested assets (27) 175
----- ----
Net cash used in investing
activities (897) (906)
---- ----
Cash flows from financing activities:
Commercial paper borrowing, net 619 150
Change in contract deposits 66 213
Cash dividends paid to common stockholders (131) (121)
Acquisition of treasury stock (633) (596)
Other 8 27
---- -----
Net cash used in financing activities (71) (327)
---- ----
Change in cash (7) 115
Cash, beginning of period 365 258
--- ---
Cash, end of period $358 $373
==== ====
See notes to the consolidated interim financial statements.
6
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. General - The interim financial statements of General Re Corporation
and its subsidiaries ("General Re") 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 and related notes should be read in conjunction with the
financial statements and related notes in General Re's 1996 Annual
Report filed on Form 10-K. Certain reclassifications have been made to
1996 balances to conform to the 1997 presentation. The operating
results of General Re's international reinsurance operations are
reported on a one quarter lag.
2. National Re - The comparable 1996 third quarter and year-to-date amounts do
not include the assets, liabilities, operating results and cash flows for
National Re Corporation, since it was acquired on October 3, 1996.
3. Income Taxes - General Re's effective income tax rate differs from current
statutory rates principally due to tax-exempt interest income and dividends
received deductions. General Re paid income taxes of $182 million and $174
million in the nine months ended September 30, 1997 and 1996, respectively.
4. Reinsurance Ceded - General Re 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, 1997 and 1996 were as
follows (in millions):
Property/Casualty Life/Health Claims and Life/Health
Written Earned Written Earned Claim Expenses Benefits
-------- ------- ------- ------ -------------- --------
1997
----
Direct $384 $385 - - $310 -
Assumed 4,376 4,356 $1,059 $1,022 2,929 $730
Ceded (653) (644) (149) (130) (381) (69)
------- ------- ---- ---- ------- -----
Net $4,107 $4,097 $910 $892 $2,858 $661
====== ====== ==== ==== ====== ====
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
====== ====== ==== ==== ====== ====
5. 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 common shares
outstanding were 78,959,758 and 79,467,367 for the three and nine months
ended September 30, 1997 and 78,423,243 and 79,706,910 for the same periods
in 1996.
7
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued)
6. New Accounting Standards - In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share. The statement establishes a new standard for computing and
presenting earnings per share data. The statement is effective for financial
statements issued for both interim and annual periods ending after December 15,
1997. This statement supersedes APB Opinion No. 15, Earnings Per Share, and
requires dual presentation of basic and diluted earnings per share on the face
of the income statement. Basic earnings per share exclude dilution and are
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share include the effect of all potentially dilutive securities.
All prior period earnings per share data presented must be restated.
General Re's primary earnings per share for the three and nine months ended
September 30, 1997 are the same as basic earnings per share calculated
under the new statement. Fully diluted earnings per share are not currently
presented because the dilution effects are not material. If General Re had
adopted the statement, diluted earnings per share would have been $2.98 and
$8.76 per share for the three and nine months ended September 30, 1997, and
$2.27 and $7.84 per share for the same periods in 1996.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income.
This statement establishes standards for the reporting and display of
comprehensive income and its components in the consolidated financial
statements. The purpose of reporting comprehensive income is to report the
change in equity of a business enterprise for the period from transactions
and other events and circumstances from nonowner sources. It includes all
changes in equity during a period except those resulting from investments
by owners and distributions to owners. These items include currency
translation adjustments and unrealized appreciation of investments, which
are currently reported as separate components of equity in the balance
sheet. The statement is effective in 1998 and will change the presentation
of information in the financial statements but will not have any effect on
General Re's financial position or results from operations.
Also in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, Disclosure about
Segments of an Enterprise and Related Information. This statement requires
that companies report certain information about their operating segments in
the interim and annual financial statements, including information about
the products and services from which revenues are derived, the geographic
areas of operation, and information about major customers. Operating
segments are determined by the way management decides how to allocate
resources and how it assesses performance. Descriptive information about
the method used to identify the reportable operating segments must also be
disclosed. The statement also requires a reconciliation of revenues, net
income, and assets and other amounts disclosed for the segments to the
corresponding amounts in the consolidated financial statements. The
statement is effective for year end 1998. The financial position and
operating results of General Re will not be affected by this statement.
8
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued)
In January 1997, the Securities and Exchange Commission ("SEC") issued Financial
Reporting Release ("FRR") No. 48, Disclosure of Accounting Policies For
Derivative Financial Instruments and Derivative Commodity Instruments and
Disclosure of Quantitative and Qualitative Information About Market Risk
Inherent In Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments. FRR No. 48 amends Regulation S-X and S-K by
expanding existing disclosures on accounting policies for derivative financial
instruments, and requires additional quantitative and qualitative information
about market risk inherent in derivative financial instruments and other
financial instruments. The SEC's new rule will supplement current fair value and
derivative disclosures and is effective in 1997. Since FRR No. 48 is a
disclosure requirement, it will not have any effect on General Re's financial
position or results from operations.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED
Income from operations, excluding after-tax realized gains and losses, was $3.03
per share in the third quarter of 1997, an increase of 11.0 percent from the
$2.73 per share earned in the comparable period in 1996. Net income for the
third quarter of 1997 was $3.06 per share, compared with $2.31 per share in
1996. Net income for the third quarter of 1997 included after-tax realized gains
of $.03 per share, compared with after-tax realized losses of $.42 per share in
the third quarter of 1996. The improved results in the third quarter of 1997
were primarily due to growth in North American property/casualty investment
income and an improved underwriting result in the international
property/casualty and global life/health operations.
For the first nine months of 1997, income from operations, excluding after-tax
realized gains and losses, was $8.95 per share compared with $7.96 per share in
1996, an increase of 12.4 percent. Net income for the first nine months of 1997
was $8.97 per share, compared with $8.00 per share for the same period in 1996.
Included in net income were after-tax realized gains of $.02 per share in the
first nine months of 1997, compared with realized gains of $.04 per share in the
same period of 1996. Growth in North American investment income, increased
profitability in the global life/health operations, and higher trading revenues
in the financial services operations were the primary contributors to the
increased earnings for the first nine months of 1997.
Consolidated net premiums written for the third quarter of 1997 were $1,621
million, a decrease of 2.6 percent from $1,665 million in 1996. Consolidated net
premiums written for the first nine months of 1997 increased 1.1 percent to
$5,017 million from $4,964 million in 1996. Excluding the effect of foreign
exchange, consolidated net premiums written increased 1.4 percent and 5.0
percent in the third quarter and first nine months of 1997, respectively.
Consolidated pretax investment income was $321 million in the third quarter of
1997, compared with $302 million in the same period of 1996. For the first nine
months, consolidated pretax investment income was $955 million and $875 million
in 1997 and 1996, respectively. The 9.2 percent increase in consolidated pretax
investment income in the first nine months of 1997 was due to higher invested
assets in existing operations and investment income from National Re, partially
offset by the effect of a decline in global interest rates and the strengthening
of the U.S. dollar, principally against the German mark.
The consolidated effective tax rate was 22.7 percent for the third quarter of
1997, compared with 26.9 percent in the third quarter of 1996. For the first
nine months the effective tax rate was 23.2 percent and 24.9 percent in 1997 and
1996, respectively. The decrease in the consolidated effective tax rate was
principally the result of a decrease in realized investment gains earned by
international subsidiaries in higher tax rate jurisdictions.
Excluding the financial services operations, consolidated net cash flow from
operations was $1,003 million in the first nine months of 1997, compared to
$1,245 million in the same period in 1996. The decline of $242 million in the
first nine months of 1997 was principally due to higher paid losses, loss
commutations in North American and international property/casualty operations,
and the effect of the strengthening U.S. dollar which lowered reported
international cash flow.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
At September 30, 1997 insurance invested assets were $23,991 million, an
increase of $823 million compared to $23,168 million at December 31, 1996. The
increase in insurance invested assets was primarily the result of operating cash
flow and unrealized appreciation in the equity and bond portfolios, partly
offset by common stock repurchases and dividend payments. The financial services
operations had $2,887 million of invested assets at September 30, 1997, a
decrease of $506 million compared to December 31, 1996. The decrease in
financial services invested assets in the first nine months of 1997 results from
changes in the hedging needs and activities of General Re Financial Products
Corporation ("GRFP"). At September 30, 1997 consolidated invested assets were
$26,878 million, a decrease of $316 million compared to $26,562 million at
December 31, 1996.
The consolidated gross liability for claims and claim expenses for the
property/casualty operations was $15,977 million at September 30, 1997,
substantially unchanged from the year-end 1996 liability. Excluding the effect
of foreign exchange, claim and claim expense liabilities would have increased
$430 million, or 2.7 percent. The asset for reinsurance recoverable on unpaid
claims was $2,489 million at September 30, 1997, compared to $2,572 million at
December 31, 1996. At September 30, 1997, the gross liability for claims and
claim expenses and the related asset for reinsurance recoverables included
$2,049 million and $630 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, 1997 was $8,031 million, an
increase of 9.6 percent from the $7,326 million at December 31, 1996. The
increase in common stockholders' equity during the first nine months of 1997 was
principally the result of net income of $721 million, an increase in after-tax
unrealized investment gains of $669 million, a decrease in unrealized foreign
currency translation losses of $31 million and the reissuance of common stock of
$40 million under employee compensation and benefit plans, partially offset by
common share repurchases of $630 million and common and preferred stock
dividends of $139 million. On a per share basis, common stockholders' equity was
$102.40 at September 30, 1997, an increase of 14.0 percent from $89.82 at
December 31, 1996.
On September 10, 1997 the Board of Directors declared a regular quarterly
dividend of $.55 per share on the common stock of General Re. During the first
nine months of 1997, General Re has paid cash dividends of $1.65 per share.
General Re repurchased 3,541,900 shares of common stock during the first nine
months of 1997 for aggregate consideration of $630 million. In addition to
specific repurchase programs, General Re has standing authority to repurchase
shares in anticipation of share issuances under various compensation plans.
Since the inception of the repurchase program in 1987, General Re has
repurchased 30,675,400 common shares for total consideration of $3.0 billion.
At September 30, 1997, General Re's notes payable included $150 million issued
by the holding company, General Re Corporation, which is rated AAA by Standard &
Poor's and Aa1 by Moody's, and $125 million issued by National Re Corporation,
which is rated AA by Standard and Poor's and Aa2 by Moody's. General Re
periodically issues commercial paper to provide additional financial flexibility
for its operations. Commercial
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
paper offered by General Re has been rated A1+ by Standard & Poor's and Prime
1 by Moody's. At September 30, 1997, General Re had $759 million of commercial
paper outstanding, which was used to support liquidity needs for GRFP. General
Re has $1.8 billion in available lines of credit which enhance General Re's
financial flexibility and support the commercial paper program. The credit lines
consist of a five-year credit facility of $1.0 billion and a 364-day facility
for the remaining $0.8 billion. The credit agreements with the banks require
General Re to maintain a minimum consolidated tangible net worth, as defined, of
$2.7 billion. All available lines of credit within these facilities were unused
at September 30, 1997.
Pretax income discussed in the segment sections that follow is before minority
interest deductions and goodwill amortization, both of which are deemed
corporate expenses that have not been allocated to the segments.
NORTH AMERICAN PROPERTY/CASUALTY
(in millions)
Third Quarter Year-to-date
------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
Income before income taxes and realized gains $206 $187 $622 $546
Net premiums written 798 824 2,320 2,203
Net underwriting income 5 6 16 20
Loss ratio 68.8% 71.8% 67.9% 69.7%
Expense ratio 30.6 27.4 31.4 29.4
---- ---- ---- ----
Combined ratio 99.4% 99.2% 99.3% 99.1%
Investment income $200 $183 $600 $523
Other income (loss) 1 (2) 6 3
Operating cash flow 361 314 614 664
For the third quarter of 1997, pretax income for the North American
property/casualty operations, excluding realized gains/losses, increased 9.8
percent over the comparable quarter of 1996, and increased 13.9 percent for the
first nine months of 1997. The 1997 results include the income from National Re.
The growth in pretax income was primarily due to increased investment income
resulting from a $1.1 billion increase in the fixed income portfolio,
principally due to inclusion of National Re's invested assets. The underwriting
results were substantially unchanged for the quarter and were not significantly
affected by catastrophes in either 1997 or 1996.
Net premiums written for the North American property/casualty operations of $798
million in the third quarter of 1997 and $2,320 million in the first nine months
of 1997 decreased 3.2 percent in the quarter and increased 5.3 percent over the
comparable 1996 nine month amounts. Excluding premiums from National Re, net
premiums written decreased by 10.5 percent for the quarter and 3.4 percent for
the first nine months of 1997. Portfolio
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
business includes reinsurance treaties and programs. Programs are similar to
treaties in that they reinsure a group of policies, but exhibit the higher risk
volatility characteristics more often associated with facultative reinsurance,
and accordingly are structured on a per policy rather than per occurrence basis.
The North American operations continues to experience favorable portfolio
premium growth from regional and specialty companies. For the first nine months
of 1997, portfolio business with regional and specialty companies increased
approximately 25.0 percent. The National Re acquisition was responsible for
approximately two thirds of the increase. This growth was offset by a continued
decline in portfolio business from large national companies. In 1995, business
with large national companies represented approximately 35 percent of General
Re's North American portfolio business. In the first nine months of 1997, this
business comprised approximately 23 percent of the portfolio business.
The wholesale nature of reinsurance transactions periodically results in
somewhat volatile premium trends between quarters and years. The addition or
loss of a large contract may significantly affect General Re's premium growth,
although large contracts generally have a smaller effect on earnings than on
premium trends.
General Re's treaty contracts usually include short-term cancellation
provisions. Its largest treaty has annualized premiums written of approximately
$250 million in 1996 and contributed approximately one half of one percent of
General Re's 1996 net income. This contract was terminated as of September 30,
1997.
For the General Star companies, which primarily write excess, surplus and
specialty insurance, net premiums written increased by 15.1 percent for the
quarter and 3.0 percent year-to-date. This increase was primarily due to higher
net premiums written in the general liability lines and growth in property lines
of business. General Star continues to experience increased competition from
standard companies for business that was previously written in the excess and
surplus lines market. For the Genesis operations, which provide direct excess
coverage to companies with self-insurance programs, net premiums written
decreased by 2.0 percent for the quarter, but increased 0.2 percent
year-to-date. Lower growth in Genesis premiums during 1997 is primarily due to
lower professional liability business, which had contributed to Genesis premium
growth during 1996.
Pretax investment income for the North American property/casualty operations
increased 9.5 percent compared to the third quarter of 1996 and 14.6 percent
year-to-date. On an after-tax basis, net investment income of $168 million for
the third quarter increased 8.2 percent from $155 million in the third quarter
of 1996. Investment income for the North American property/casualty operations
grew due to the inclusion of National Re's fixed income portfolio. Excluding the
effect of the National Re transaction, after-tax investment income increased 5.5
percent in the quarter.
The overall annualized pretax yield on the North American property/casualty
invested asset portfolio was 5.4 percent in the first nine months of 1997,
compared with 5.5 percent in the same period in 1996. The annualized pretax and
after-tax yield in the first nine months of 1997 on the segment's fixed maturity
portfolio was 6.6 percent and 5.6 percent, respectively, compared with 6.6
percent and 5.7 percent in the same period in 1996.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Operating cash flow for the North American property/casualty operations of $505
million in the first nine months of 1997 decreased $159 million from $664
million in the same period of 1996. This decrease is partially due to two
commutations in the first quarter which accounted for $51 million of the paid
losses in the period. In addition, the first quarter experienced an increased
number of large claim payments which were not concentrated in any particular
line of business or accident year. The commutation activity and increased loss
payments did not continue in the second or third quarter. Due to the nature of
General Re's reinsurance operations, paid claims may be volatile from quarter to
quarter.
North American property/casualty invested assets were $15,645 million at
September 30, 1997, an increase of 5.1 percent from December 31, 1996. The
increase in invested assets was primarily the result of positive operating cash
flow and unrealized appreciation in the equity and bond portfolios, partly
reduced by repurchases of General Re's common stock and common stock dividends.
During the first nine months of 1997, calls and maturities on grandfathered
tax-exempt bonds were approximately $52 million and preferred equity calls were
$150 million. The bonds had an average yield of approximately 7.8 percent and
the proceeds from the calls were reinvested at an average yield of approximately
5.5 percent. The preferred equities had an average yield of approximately 8.1
percent and the proceeds from the calls were reinvested at an average yield of
approximately 7.2 percent.
Based on its current investment portfolio and the current yield curve, General
Re presently anticipates additional calls and maturities through the end of 1997
of approximately $32 million of grandfathered tax-exempt bonds and $82 million
of preferred equities, with average yields of approximately 7.6 percent and 8.6
percent, respectively. Reinvestment of these funds may occur at lower yields.
The gross liability for claims and claim expenses for the North American
property/casualty operations was $10,876 million at September 30, 1997, an
increase of $109 million, or 1.0 percent compared to the year-end 1996
liability. The asset for reinsurance recoverable on unpaid claims was $1,963
million at September 30, 1997, compared to $2,025 million at December 31, 1996.
INTERNATIONAL PROPERTY/CASUALTY
(in millions)
Third Quarter Year-to-date
------------- ------------
1997 1996 1997 1996
---- ---- ---- ----
Income before income taxes and realized gains $86 $73 $235 $232
Net premiums written 496 566 1,787 1,976
Net underwriting income (loss) (9) (12) (40) (40)
Loss ratio 70.2% 73.7% 72.3% 72.8%
Expense ratio 31.3 28.2 30.0 29.2
---- ---- ---- ----
Combined ratio 101.5% 101.9% 102.3% 102.0%
Investment income $95 $96 $278 $291
Other income (loss) 0 (11) (3) (19)
Operating cash flow 61 185 389 581
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Income before income taxes and realized gains of the international
property/casualty operations of $86 million for the third quarter and $235
million for the first nine months increased 17.5 percent and 1.2 percent over
the respective periods of 1996. The comparisons for third quarter and
year-to-date 1997 were affected adversely by the strengthening of the U.S.
dollar (11.2 percent and 9.8 percent, respectively) relative to the German mark.
The underwriting combined ratio in the international property/casualty
operations of 101.5 percent in the third quarter compared favorably to the 101.9
percent for the third quarter of 1996 and 102.1 percent reported for the year
1996. For the first nine months of 1997 and 1996, the combined ratio was 102.3
percent and 102.0 percent, respectively. Catastrophe losses were not significant
during any of these periods.
International net premiums written were $496 million in the third quarter of
1997 and $1,787 million for the first nine months of 1997, compared with $566
million and $1,976 million respectively in 1996. Excluding the effect of foreign
exchange, international property/casualty premiums written decreased 4.4 and 2.4
percent in the third quarter and first nine months of 1997, respectively. The
decline in international property/casualty premiums was primarily due to higher
ceding company retention levels and General Re's cautious risk selection in
the face of increased competition in European insurance markets.
After-tax investment income for the international property/casualty operations
was $58 million for the third quarter of 1997 and 1996. Investment income was
unchanged in the quarter due to the decline in global interest rates over the
past two years and the effect of foreign exchange. Excluding the effect of
foreign exchange, after-tax investment income increased 5.0 and 1.0 percent
compared with the third quarter and first nine months of 1996. The overall
annualized pretax yield on the invested asset portfolio was 5.5 percent in the
first nine months of 1997 compared with 5.9 percent in the same period in 1996.
Operating cash flow of the international property/casualty and global
life/health operations of $389 million for the first nine months of 1997
decreased from $581 million in comparable period of 1996. The decline in
operating cash flow was principally due to the effect of foreign exchange,
payments made in connection with two commuted contracts and generally lower
underwriting cash flow.
International property/casualty and life/health invested assets were $8,346
million at September 30, 1997, compared with $8,290 million at December 31,
1996. The increase in invested assets was due to investment of operating cash
flows, partly offset by the stronger U.S. dollar, which appreciated 12.7 percent
against the German mark in the first nine months of 1997.
The gross liability for claims and claim expenses was $5,101 million at
September 30, 1997 compared with $5,210 million at December 31, 1996. The asset
for reinsurance recoverable on unpaid claims was $526 million at September 30,
1997 compared with $546 million at December 31, 1996. Excluding the effect of
foreign exchange, the gross liability for claims and claim expenses would have
increased by approximately $430 million to $5,531 million.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
GLOBAL LIFE/HEALTH
(in millions)
Third Quarter Year-to-date
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
Income before income taxes and realized gains $19 $12 $62 $40
Net premiums written
Life reinsurance 230 207 645 588
Health reinsurance 97 68 265 197
---- -- --- ----
Total life/health net premiums written 327 275 910 785
Net underwriting income (loss) 2 (1) 11 4
Investment income 18 17 54 44
Other income (loss) (1) (4) (3) (8)
This segment includes the global life/health operations of Cologne Re. Income
before income taxes and realized gains for the third quarter of $19 million
increased 53.7 percent from the $12 million in the comparable quarter of 1996.
Income before income taxes and realized gains for the first nine months of 1997
increased 55.2 percent compared with the first nine months of 1996. The
increases in third quarter and year-to-date results were due to increased
investment income derived from growth in the business and improved mortality
experience in the North American individual life operations.
Life reinsurance net premiums written of $230 million for the third quarter
increased 11.0% over the third quarter of 1996. For the first nine months, life
reinsurance premiums written of $645 million increased 9.5% over the comparable
period of 1996. Growth in life business was primarily attributable to expansion
in the United States, Australia and certain European countries. Excluding the
effect of changes in currency exchange rates, global life reinsurance premiums
increased approximately 20.0 percent in the third quarter and 18.0 percent in
the first nine months of 1997. Health reinsurance premiums written increased
43.7 percent and 34.8 percent in the third quarter and first nine months of
1997, respectively. This growth was primarily due to two new blocks of
individual health business written in the United States.
Investment income for the global life/health operations was $18 million and $54
million in the third quarter and first nine months of 1997, respectively,
compared to $17 million and $44 million in 1996. The increase in investment
income was due to the significant growth in premium volume.
The liability for policy benefits for life/health contracts was $918 million at
September 30, 1997, compared with $751 million at December 31, 1996. The asset
for reinsurance recoverable on unpaid losses was $272 million at September 30,
1997, compared to $228 million at December 31, 1996. 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 assets and total assets disclosures in the international
property/casualty segment includes the assets of the global life/health segment.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FINANCIAL SERVICES
(in millions)
Third Quarter Year-to-date
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
Income before income taxes and realized gains $25 $24 $87 $74
Total revenues (excluding realized gains) 73 60 237 185
Investment income 8 6 23 17
Other income 17 18 64 57
Financial services operations include General Re's derivative products,
investment management, insurance brokerage and management, reinsurance
brokerage, and real estate management operations. Income before income taxes and
realized gains grew 3.4% in the quarter and 17.9% year-to-date primarily due to
growth in GRFP's operations. In the third quarter and first nine months of 1997,
financial services revenues of $73 million and $237 million, respectively,
increased 20.7 percent and 27.8 percent from $60 million and $185 million in the
third quarter and first nine months of 1996. The growth in 1997 revenues was
principally attributable to growth in GRFP's European fixed income and foreign
exchange options business.
Invested assets held for trading purposes in the first nine months decreased
$506 million to $2,887 million at September 30, 1997. The decrease primarily
relates to the hedging activities of GRFP. At September 30, 1997, total assets
of the financial services operations were $8,067 million, compared with $8,038
million at December 31, 1996. 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 its market, currency, and
interest rate risks. 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 purchase of
government securities, usually financed through collateralized repurchase
agreements (securities sold under agreements to repurchase), and the sale of
government securities, whose proceeds are invested in reverse repurchase
agreements (securities purchased under agreements to resell), are used to offset
GRFP's market exposures. While the use of these instruments for risk management
activities may cause significant short-term fluctuations in GRFP's assets and
liabilities, they do not have a material effect on General Re's results from
operations or common stockholders' equity.
SAFE HARBOR DISCLOSURE
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "Act"), General Re sets forth below
cautionary statements identifying important factors that could cause its actual
results to differ materially from those which might be projected, forecasted, or
estimated in its forward-looking statements, as defined in the Act, made by or
on behalf of General Re in press releases, written statements or documents filed
with the Securities and Exchange Commission, or in its communications and
discussions with investors and analysts in the normal course of business through
meetings, phone calls and conference calls.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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
stockholders' equity (including book value per share), investments, financing
needs, capital plans, dividends, plans relating to products or services of
General Re, and estimates concerning the effects of litigation or other
disputes, as well as assumptions for any of the foregoing and are generally
expressed with words such as "believes," "estimates," "expects," "anticipates,"
"plans," "projects," "forecasts," "goals," "could have," "may have" and similar
expressions.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause General Re's results to differ materially from
such forward-looking statements and include, but are not limited to, the
following:
1) Changes in the level of competition in the North American and
international reinsurance or primary insurance markets that adversely
affect the volume or profitability of General Re'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 North America, and changes in the demand
for financial services operations' products, including derivatives
offered by GRFP;
3) The ability of General Re to execute its strategies in its property/
casualty, life/health and financial services operations;
4) Catastrophe losses in General Re's North American or international
property/casualty businesses;
5) 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;
6) Changes in inflation that affect the profitability of General Re'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;
7) Changes in General Re's property/casualty and life/health businesses'
retrocessional arrangements;
8) Lower than estimated retrocessional or reinsurance recoveries on unpaid
losses, including, but not limited to, losses due to a decline in the
creditworthiness of General Re's retrocessionaires or reinsurers;
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
9) Increases in interest rates, which cause a reduction in the market
value of General Re's fixed income investment portfolio, and its common
stockholders' equity;
10) 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;
11) Decline in the value of General Re's common equity investments;
12) Changes in the composition of General Re's investment portfolio;
13) Changes in mortality or morbidity levels that affect General Re's
life/health business;
14) Credit losses on General Re's investment portfolio; credit and market
losses on GRFP's portfolio of derivatives and other transactions;
15) Adverse results in litigation matters, including, but not limited to,
litigation related to environmental, asbestos and other potential mass
tort claims;
16) Gains or losses related to changes in foreign currency exchange rates; and
17) Changes in General Re's capital needs.
In addition to the factors outlined above that are directly related to General
Re's businesses, General Re 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Statement Re: Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
19
OTHER INFORMATION
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, 1997 JOSEPH P. BRANDON
Joseph P. Brandon
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: November 14, 1997 ELIZABETH A. MONRAD
Elizabeth A. Monrad
Vice President and Treasurer
(Principal Accounting Officer)
20
<PAGE>
Exhibit 11
Computation of Per Share Earnings
Three Months Ended Nine Months Ended
September 30, September 30,
Earnings Per Share of Common Stock
(in thousands, except share data) 1997 1996 1997 1996
- --------------------------------- ---- ---- ---- ----
Net income (applicable to common
stockholders) (1) $241,501 $181,469 $713,219 $637,328
Average number of common shares
outstanding 78,959,758 78,423,243 79,467,367 79,706,910
========== ========== ========== ==========
Net income per share (2) $3.06 $2.31 $8.97 $8.00
===== ===== ===== =====
(1) After deduction of preferred stock dividends of $3 million
and $8 million for the three and nine months ended
September 30, 1997 and 1996.
(2) Fully diluted earnings per share are not reported because
the effect of potentially dilutive securities is not material.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
The schedule contains summary financial information extracted from General Re's
consolidated balance sheets and consolidated statements of income included in
Item 1 of Part I of the September 30, 1997 Form 10-Q. Reference should also be
made to these financial statements and related notes.
</LEGEND>
<CIK>0000317745
<NAME>General Re Corporation
Exhibit 27
<MULTIPLIER> 1,000,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-1-1997
<PERIOD-END> Sep-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 19,118
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 5,694
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 26,878
<CASH> 358
<RECOVER-REINSURE> 85
<DEFERRED-ACQUISITION> 479
<TOTAL-ASSETS> 40,940
<POLICY-LOSSES> 13,488
<UNEARNED-PREMIUMS> 1,997
<POLICY-OTHER> 646
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,143
1
0
<COMMON> 51
<OTHER-SE> 7,980
<TOTAL-LIABILITY-AND-EQUITY> 40,940
4,989
<INVESTMENT-INCOME> 955
<INVESTMENT-GAINS> 7
<OTHER-INCOME> 271
<BENEFITS> 3,519
<UNDERWRITING-AMORTIZATION> 1,081
<UNDERWRITING-OTHER> 609
<INCOME-PRETAX> 991
<INCOME-TAX> 230
<INCOME-CONTINUING> 721
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 721
<EPS-PRIMARY> 8.97
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
