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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 March 31, 1998
-------------------------------
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 March 31, 1998
Common Stock, $.50 par value 76,510,211 Shares
- --------------------------------------- --------------------------------
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GENERAL RE CORPORATION
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Statements of Income
Three months ended March 31, 1998 and 1997 3
Consolidated Statements of Comprehensive Income
Three months ended March 31, 1998 and 1997 4
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 5
Consolidated Statements of Common Shareowners' Equity
Three months ended March 31, 1998 and 1997 6
Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997 7
Notes to Consolidated Interim Financial Statements 8
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 27 - Financial Data Schedules 21
<PAGE>
GENERAL RE CORPORATION
Consolidated Statements of Income
(in millions, except share data)
(Unaudited)
-----------
Three months ended
March 31,
---------
1998 1997
---- ----
Premiums and other revenues
Net premiums written
Property/casualty $1,087 $1,263
Life/health 324 298
------ -------
Total net premiums written $1,411 $1,561
====== ======
Net premiums earned
Property/casualty $1,167 $1,370
Life/health 307 286
------ -------
Total net premiums earned 1,474 1,656
Investment income 322 318
Other revenues 93 87
Net realized gains 37 11
------- -------
Total revenues 1,926 2,072
----- -----
Expenses
Claims and claim expenses 782 967
Life/health benefits 223 200
Acquisition costs 344 354
Other operating costs and expenses 185 206
Goodwill amortization 7 7
------- -------
Total expenses 1,541 1,734
----- -----
Income before income taxes and
minority interest 385 338
Income tax expense 96 81
------ ------
Income before minority interest 289 257
Minority interest 17 13
------ ------
Net income $272 $244
==== ====
Share data:
Net income per common share:
Basic $3.49 $2.97
===== =====
Diluted $3.40 $2.91
===== =====
Average common shares outstanding:
Basic 76,993,544 81,098,094
========== ==========
Diluted 79,689,665 83,463,222
========== ==========
Dividend per share to common shareowners $ .59 $ .55
===== =====
See notes to the consolidated interim financial statements.
3
<PAGE>
GENERAL RE CORPORATION
Consolidated Statements of Comprehensive Income
(in millions, except share data)
(Unaudited)
-----------
Three months ended
March 31,
---------
1998 1997
---- ----
Net income $272 $244
Unrealized appreciation (depreciation) of
investments, after tax:
Common equities 253 53
Preferred equities 4 1
Fixed maturities (7) (107)
Less: Reclassification for prior periods'
appreciation included in current
period's realized gains (33) -
Foreign currency translation gains (losses) (18) 38
----- -----
Comprehensive income $471 $229
==== ====
Share data:
Comprehensive income per diluted common share $5.90 $2.73
===== =====
See notes to the consolidated interim financial statements.
4
<PAGE>
GENERAL RE CORPORATION
Consolidated Balance Sheets
(in millions, except share data)
March 31, Dec. 31,
1998 1997
Assets
Insurance investments:
Fixed maturities, available-for-sale (cost:
$15,597 in 1998; $15,859 in 1997) $16,602 $16,847
Preferred equities, at fair value (cost:
$921 in 1998; $980 in 1997) 986 1,041
Common equities, at fair value (cost:
$2,155 in 1998; $2,098 in 1997) 5,201 4,748
Short-term investments, at amortized cost
which approximates fair value 1,178 1,172
Other invested assets 760 768
-------- --------
Total insurance investments 24,727 24,576
Cash 204 193
Accrued investment income 291 358
Accounts receivable 1,983 1,858
Funds held by reinsured companies 474 488
Reinsurance recoverable 2,575 2,706
Deferred acquisition costs 457 476
Goodwill 956 968
Other assets 735 962
Financial services assets:
Investment securities, at fair value (cost:
$1,103 in 1998; $790 in 1997) 1,107 792
Trading securities, at fair value (cost:
$2,146 in 1998; $1,908 in 1997) 2,110 1,859
Short-term investments, at fair value 268 129
Cash 88 159
Trading account assets 4,601 4,313
Securities purchased under agreements to resell 838 903
Other assets 791 719
-------- ---------
Total assets $42,205 $41,459
======= =======
Liabilities
Claims and claim expenses $15,719 $15,797
Policy benefits for life/health contracts 944 907
Unearned premiums 1,756 1,874
Other reinsurance balances 2,432 2,948
Commercial paper 150 -
Notes payable 285 285
Income taxes 1,308 1,104
Other liabilities 940 997
Minority interest 1,038 1,032
Financial services liabilities:
Securities sold under agreements to repurchase,
at contract value 1,047 1,030
Securities sold but not yet purchased, at
market value 1,020 1,190
Trading account liabilities 4,187 3,664
Commercial paper 640 689
Notes payable 1,176 746
Other liabilities 1,192 1,032
------- -------
Total liabilities 33,834 33,295
------ ------
Cumulative convertible preferred stock (shares
issued: 1,696,257 in 1998 and 1,700,231 in 1997;
no par value) 145 145
Loan to employee savings and stock ownership plan (142) (142)
------- -------
3 3
-------- ---------
Common shareowners' equity
Common stock (102,827,344 shares issued in 1998
and 1997; par value $.50) 51 51
Paid-in capital 1,128 1,109
Accumulated other comprehensive income, net of
deferred income taxes 2,617 2,418
Retained earnings 7,716 7,492
Less common stock in treasury, at cost (shares
held: 26,317,133 in 1998 and 25,393,840 in 1997) (3,144) (2,909)
-------- --------
Total common shareowners' equity 8,368 8,161
-------- -------
Total liabilities, cumulative convertible
preferred stock and common shareowners' equity $42,205 $41,459
======= =======
See notes to the consolidated interim financial statements.
5
<PAGE>
GENERAL RE CORPORATION
Consolidated Statements of Common Shareowners' Equity
(in millions)
(Unaudited)
-----------
Three months ended
March 31,
---------
1998 1997
---- ----
Common stock:
Beginning of period $51 $51
Change for the period - -
--- ---
End of period 51 51
-- --
Paid-in capital:
Beginning of period 1,109 1,041
Stock issued under stock option and other
incentive arrangements 14 13
Other 5 6
------ -----
End of period 1,128 1,060
----- -----
Accumulated other comprehensive income
net of deferred income taxes:
Unrealized appreciation of investments,
net of adjustment for appreciation
(depreciation) related to realized gains
included in net income
Beginning of period 2,460 1,625
Change for the period 337 (68)
Deferred income taxes (120) 15
------ -------
End of period 2,677 1,572
----- -----
Currency translation adjustments
Beginning of period (42) (53)
Change for the period (34) 36
Deferred income taxes 16 3
---- ----
End of period (60) (14)
--- ---
Accumulated other comprehensive income
Beginning of period 2,418 1,572
Change for the period 303 (32)
Deferred income taxes (104) 18
------ -------
End of period 2,617 1,558
----- -----
Retained earnings:
Beginning of period 7,492 6,708
Net income 272 244
Dividends on common stock (45) (44)
Dividends on preferred stock, net of
income taxes (3) (3)
------- -------
End of period 7,716 6,905
----- -----
Common stock in treasury:
Beginning of period (2,909) (2,046)
Cost of shares acquired during period (230) (167)
Stock issued under stock option and other
incentive arrangements (5) 4
------- ------
End of period (3,144) (2,209)
------ ------
Total common shareowners' equity $8,368 $7,365
====== ======
See notes to the consolidated interim financial statements.
6
<PAGE>
GENERAL RE CORPORATION
Consolidated Statements of Cash Flows
(in millions)
(Unaudited)
-----------
Three months ended
March 31,
---------
1998 1997
---- ----
Cash flows from operating activities:
Net income $272 $244
Adjustments to reconcile net income to net
cash provided by operating activities:
Change in claim and claim expense liabilities (78) 138
Increase in policy benefits for life/health
contracts 37 33
Change in reinsurance recoverable 131 (24)
Change in unearned premiums (118) (110)
Amortization of acquisition costs 344 354
Acquisition costs deferred (325) (343)
Trading account activities:
Change in trading account securities (587) (80)
Securities purchased under agreements
to resell 65 (476)
Securities sold under agreements to
repurchase 17 556
Change in other trading balances 366 (374)
Other changes in assets and liabilities 232 44
Net realized gains on investments (37) (11)
--- ----
Net cash from (used in)
operating activities 319 (49)
--- ----
Cash flows from investing activities:
Fixed maturities: available-for-sale
Purchases (1,251) (1,709)
Calls and maturities 144 116
Sales 986 2,007
Equity securities
Purchases (355) (418)
Sales 307 126
Net sales (purchases) of short-term investments 8 (203)
Net purchases of other invested assets (3) (16)
---- -------
Net cash used in investing
activities (164) (97)
---- -------
Cash flows from financing activities:
Issuance of structured notes 410 -
Commercial paper borrowing, net 101 310
Change in contract deposits (449) 1
Dividends paid to common shareowners (45) (44)
Acquisition of treasury stock (218) (172)
Other (14) 18
--- --
Net cash from (used in)financing activities (215) 113
---- ---
Change in cash (60) (33)
Cash, beginning of period 352 365
--- ---
Cash, end of period $292 $332
==== ====
See notes to the consolidated interim financial statements.
7
<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 1997 Annual Report
filed on Form 10-K. Certain reclassifications have been made to 1997 balances to
conform to the 1998 presentation. The operating results of General Re's
international reinsurance operations are reported on a one quarter lag.
2. 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 $23 million and $69
million in the first three months of 1998 and 1997, respectively.
3. 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 first three months of 1998 and 1997 were as follows (in
millions):
Property/Casualty Life/Health Claims and Life/Health
Written Earned Written Earned Claim Expenses Benefits
1998
Direct $ 127 $ 127 - - $ 69 -
Assumed 1,144 1,258 $359 $342 830 $245
Ceded (184) (218) (35) (35) (117) (22)
------ ------ ---- ---- ---- ----
Net $1,087 $1,167 $324 $307 $782 $223
====== ====== ==== ==== ==== ====
1997
Direct $ 123 $ 126 - - $104 -
Assumed 1,340 1,456 $352 $323 969 $221
Ceded (200) (212) (54) (37) (106) (21)
------ ------ ---- ---- ---- ----
Net $1,263 $1,370 $298 $286 $967 $200
====== ====== ==== ==== ==== ====
8
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued)
4. Per Common Share Data - Basic earnings per common share were based on
earnings less preferred dividends, divided by the weighted average common
shares outstanding during each period. Diluted earnings per share assume
the conversion of all outstanding convertible preferred stock and the
maximum dilutive effect of common stock equivalents. The following is a
reconciliation of the numerators and denominators used in the basic and
diluted earnings per share calculations for the first quarter of 1998 and
1997.
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
Income Shares Per share Income Shares Per share
(in millions, except
per share information)
Net income $ 272 $244
Less: preferred
dividends (3) (3)
---- ----
Basic earnings 269 77.0 $ 3.49 241 81.1 $ 2.97
====== ======
Effect of dilutive
securities
Stock options -- 1.0 -- 0.7
Conversion of
preferred stock 3 1.7 3 1.7
Conversion expense (1) -- (1) --
---- -- ---- --
Diluted earnings $ 271 79.7 $ 3.40 $ 243 83.5 $ 2.91
==== ==== ====== ==== ===== ======
5. New Accounting Standards - In June 1997, the Financial Accounting Standards
Board issued Statement No. 131, Disclosure about Segments of an Enterprise
and Related Information. This statement requires that companies report
certain information about their operating segments in their 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. The statement defines
operating segments based on internal management reporting and management's
method of allocating resources and assessing performance. The statement is
effective for year end 1998 and is not expected to change the four segments
now reported by General Re.
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 $3.12
per diluted share in the first quarter of 1998, an increase of 9.9 percent from
the $2.84 per diluted share earned in the comparable period in 1997. Net income
for the first quarter of 1998 was $3.40 per diluted share, compared with $2.91
per diluted share in 1997. Net income for the first quarter of 1998 included
after-tax realized gains of $0.28 per share, compared with $0.07 per share in
the first quarter of 1997. The improved results in the first quarter of 1998
were primarily due to improved international property/casualty underwriting
results and growth in North American property/casualty investment income.
As required by Financial Accounting Statement No. 130, Reporting Comprehensive
Income, General Re's financial statements for the first quarter of 1998 include
a statement of comprehensive income. Comprehensive income consists of net
income, unrealized changes in investment appreciation and foreign currency
translation gains or losses. Comprehensive income for the first quarter of 1998
was $471 million, or $5.90 per diluted share, compared with $229 million, or
$2.73 per diluted share for the same period in 1997. The difference between
comprehensive income and net income in the first quarter of 1998 was primarily
due to unrealized appreciation in the equity portfolio.
Consolidated net premiums written for the first quarter of 1998 were $1,411
million, a decrease of 9.6 percent from $1,561 million in 1997. The consolidated
underwriting combined ratio was 100.3 percent in the first quarter of 1998,
compared with 101.0 percent for the first quarter of 1997.
Consolidated pretax investment income was $322 million in the first quarter of
1998, compared with $318 million in the same period of 1997. The 1.4 percent
increase in consolidated pretax investment income in the first quarter of 1998
was due to higher invested assets 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 24.9 percent for the first quarter of
1998, compared with 24.1 percent in the first quarter of 1997 and 22.9% for the
full year 1997. The increase in the consolidated effective tax rate was
principally the result of an increase in earnings from the international
subsidiaries in higher tax rate jurisdictions.
Excluding the financial services operations, consolidated net cash flow from
operations was $462 million in the first quarter of 1998, compared to $345
million in the same period in 1997. The increase in the first quarter of 1998
was principally due to lower paid claims reduced by the effect of the
strengthening U.S. dollar which decreased reported international cash flow.
At March 31, 1998, insurance investments of $24,727 million increased $151
million from $24,576 million at December 31, 1997, primarily due to unrealized
appreciation in the equity portfolio, partly offset by common stock repurchases
and dividend payments. The financial service operations had $3,485 million of
invested assets at March 31, 1998, an increase of $705 million compared to
December 31, 1997. The increase in financial services invested assets results
from changes in the hedging needs and activities of General Re Financial
Products Corporation ("GRFP").
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The consolidated gross liability for claims and claim expenses for the
property/casualty operations was $15,719 million at March 31, 1998,
substantially unchanged from the year-end 1997 liability. Reinsurance
recoverable on unpaid claims was $2,236 million at March 31, 1998, compared to
$2,356 million at December 31, 1997. At March 31, 1998, the gross liability for
claims and claim expenses and the related asset for reinsurance recoverables
included $2,072 million and $613 million, respectively, for environmental and
latent injury claims. These amounts include provisions for both reported and
incurred but not reported claims.
Common shareowners' equity at March 31, 1998 was $8,368 million, an increase of
2.5 percent from the $8,161 million at December 31, 1997. The increase in common
shareowners' equity during the first quarter of 1998 was principally the result
of net income of $272 million, an increase in after-tax unrealized investment
gains of $217 million, partially offset by common share repurchases of $230
million and common and preferred stock dividends of $48 million. On a per share
basis, common shareowners' equity was $109.38 at March 31, 1998, an increase of
3.8 percent from $105.40 at December 31, 1997.
During the first quarter of 1998, General Re paid common dividends of $0.59 per
share.
General Re repurchased 1,073,600 shares of common stock during the first quarter
of 1998 for aggregate consideration of $230 million. In addition to specific
repurchase authorizations, 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 32,899,400 common shares for total consideration of $3.4 billion.
General Re periodically issues commercial paper to meet the short-term financing
needs of its various operations. Commercial paper offered by General Re has been
rated A1+ by Standard & Poor's and Prime 1 by Moody's. At March 31, 1998,
General Re had $790 million of commercial paper outstanding, $640 million of
which was used to support liquidity needs for GRFP and $150 million was used by
General Reinsurance Corporation for its liquidity needs. General Re has $1.8
billion in available lines of credit that provide General Re with additional
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. To date, General Re has not drawn against its corporate credit
facilities.
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.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NORTH AMERICAN PROPERTY/CASUALTY
(in millions)
First Quarter
-------------
1998 1997
---- ----
Income before income taxes and realized gains $220 $205
Net premiums written 672 795
Net underwriting income 5 6
Loss ratio 66.8% 67.9%
Expense ratio 32.5 31.3
---- ----
Underwriting combined ratio 99.3% 99.2%
Investment income $206 $199
Other income 10 -
Operating cash flow 295 117
For the first quarter of 1998, pretax income for the North American
property/casualty operations, excluding realized gains/losses, increased 7.3
percent over the comparable quarter of 1997. The growth in pretax income was
primarily due to increased investment income resulting from operating cash
flow during the prior year and lower operating expenses. The underwriting
results were substantially unchanged for the quarter.
Net premiums written for the North American property/casualty operations of $672
million in the first quarter of 1998, decreased 15.4 percent. The decline in
premium reflects the current competitive market and General Re's adherence to
underwriting discipline.
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 largest treaty, which had annualized premiums
written of approximately $250 million in 1997 and contributed approximately one
half of one percent of General Re's 1997 net income, was terminated as of
September 30, 1997 and thus impacts premium comparisons, since premiums from
this contract were included in the first quarter of 1997, but were not in the
first quarter of 1998. Excluding this contract, General Re's North American
premiums written declined 8.2 percent for the quarter. Based on current
estimates of premium inforce, General Re expects North American
property/casualty net premiums, excluding this contract, to decline in the
mid-single digets.
The General Star companies, which primarily write excess, surplus and specialty
insurance, increased net premiums written by 5.7 percent for the quarter. This
growth was primarily due to increased property business. General Star continues
to experience significant levels of 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 increased by 14.0 percent for the
quarter. Growth in Genesis premiums during 1998 was primarily due to increased
liability business.
Pretax investment income for the North American property/casualty operations
increased 3.3 percent compared to the first quarter of 1997. Growth in
investment income for the North American property/casualty operations
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
was due to operating cash flow over the last twelve months, partly offset by
common dividends and share repurchases. Net other income increased $10 million
in the first quarter of 1998 due to higher financial reinsurance fees and lower
corporate expenses.
The pretax total return on the North American property/casualty invested asset
portfolio was 3.75 percent in the first quarter of 1998. Segments within the
investment portfolio performed at or near their benchmarks.
Operating cash flow for the North American property/casualty operations of $295
million in the first quarter of 1998 increased $178 million from $117 million in
the same period of 1997. The increase was primarily due to lower net claim
payments during the period. Due to the nature of General Re's reinsurance
operations, paid claims may be volatile from quarter to quarter. In addition to
operating cash flow, the North American property/casualty operations had cash
outflows related to contract deposits that matured during the quarter of $298
million ("change in contract deposits" in the statement of cash flows). These
types of contracts generally have a provision that requires most of the
investment income earned on the funds held by General Re to be shared with the
ceding company. Thus, the impact of the return of these funds was immaterial to
investment income and earnings.
North American property/casualty invested assets were $16,315 million at March
31, 1998, an increase of 2.0 percent from December 31, 1997. The increase in
invested assets was primarily the result of unrealized appreciation in the
equity portfolios, partly reduced by common stock dividends and repurchases of
General Re's common stock.
The gross liability for claims and claim expenses for the North American
property/casualty operations was $10,641 million at March 31, 1998, a decrease
of $43 million, or 0.4 percent; compared to the year-end 1997 liability.
Reinsurance recoverable on unpaid claims was $1,681 million at March 31, 1998,
compared to $1,803 million at December 31, 1997.
INTERNATIONAL PROPERTY/CASUALTY
(in millions) First Quarter
- ------------- -------------
1998 1997
---- ----
Income before income taxes and realized gains $91 $71
Net premiums written 414 468
Net underwriting loss (8) (20)
Loss ratio 67.2% 74.3%
Expense ratio 34.3 29.2
---- ----
Underwriting combined ratio 101.5% 103.5%
Investment income $87 $93
Other income (loss) 11 (2)
Operating cash flow 1 167 228
1 Also includes operating cash flows from the global life/health operations.
13
<PAGE>
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 $91 million for the first quarter of 1998,
increased 27.1 percent over the 1997 period. The comparisons for the quarter
were affected adversely by the strengthening of the U.S. dollar relative to the
German mark (12.9 percent) and the Australian dollar (13.0 percent).
The international property/casualty operation's underwriting combined ratio of
101.5 percent in the first quarter compared favorably to the 103.5 percent for
the first quarter of 1997 and 102.4 percent reported for the full-year 1997.
Catastrophe losses were not significant during any of these periods. The
improved underwriting result was primarily due to lower property claims (1997's
first quarter included two large property losses) and favorable development on
previously reported case reserves.
International net premiums written were $414 million in the first quarter of
1998, a decline of 11.5%. Adjusted for the effects of foreign exchange,
international property/casualty premiums written were substantially unchanged
from the prior period.
After-tax investment income for the international property/casualty operations
was $54 million for the first quarter of 1998, compared with $57 million in
1997. Investment income was lower in the quarter due to the decline in global
interest rates over the past two years and the effects of foreign exchange.
Adjusted for the effects of foreign exchange, after-tax investment income
increased approximately 3.0 percent compared with the first quarter of 1997.
Operating cash flow of the international property/casualty and global
life/health operations of $167 million for the first quarter of 1998 decreased
from $228 million in comparable period of 1997. The decline in operating cash
flow was principally due to the effect of foreign exchange and lower
underwriting cash flow. In addition to operating cash flow, the international
property/casualty operations had cash outflows related to contract deposits that
matured during the first quarter of $151million ("change in contract deposits"
in the statement of cash flows). These types of contracts generally have a
provision that require most of the investment income earned on the funds held by
General Re to be shared with the ceding company. Thus, the impact of the return
of these funds is not material to investment income and earnings. General Re
anticipates that approximately an additional $100 million of deposit contracts
will mature during the remainder of 1998.
International property/casualty and life/health invested assets were $8,412
million at March 31, 1998, compared with $8,581 million at December 31, 1997.
The decrease in invested assets was due to the stronger U.S. dollar which
appreciated 2.1 percent against the German mark in the first quarter of 1998.
The gross liability for claims and claim expenses was $5,078 million at March
31, 1998, compared with $5,113 million at December 31, 1997. Reinsurance
recoverable on unpaid claims was $556 million at March 31, 1998 compared with
$553 million at December 31, 1997. Excluding the effect of foreign exchange, the
gross liability for claims and claim expenses would have increased by
approximately 1.0 percent.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
GLOBAL LIFE/HEALTH
First Quarter
-------------
(in millions) 1998 1997
---- ----
Income before income taxes and realized gains $20 $28
Net premiums written
Life reinsurance 216 207
Health reinsurance 108 91
----- ----
Total life/health net premiums written 324 298
Net underwriting income - 10
Investment income 21 18
Other income (loss) (1) 1
Income before income taxes and realized gains for the first quarter of $20
million decreased 27.7 percent from the $28 million in the comparable quarter of
1997. The decrease in first quarter was due to lower underwriting profits,
principally in the health reinsurance sector.
Life reinsurance net premiums written of $216 million for the first quarter
increased 4.7 percent over the first quarter of 1997. Adjusted for the effects
of foreign exchange, global life reinsurance premiums increased approximately
15.4 percent in the quarter. Health reinsurance premiums written increased 18.6
percent in the first quarter. This growth was primarily due to new group health
business written in London and new contracts written in the United States.
After-tax investment income for the global life/health operations was $12
million in the first quarter, an increase of 20.2 percent. The increase in
investment income was due to the significant growth in premium volume during the
last two years.
The liability for policy benefits for life/health contracts was $944 million at
March 31, 1998, compared with $907 million at December 31, 1997. Reinsurance
recoverable on unpaid losses was $287 million at March 31, 1998, compared to
$271 million at December 31, 1997.
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 include the assets of
the global life/health segment.
FINANCIAL SERVICES
(in millions)
First Quarter
1998 1997
---- ----
Income before income taxes and realized gains $25 $30
Total revenues (excluding realized gains) 84 82
Investment income 9 8
Other income 16 22
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Financial service 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 declined 16.1 percent in the quarter primarily due to increased
expenses from investments in new product initiatives. In the first quarter of
1998, financial services revenues of $84 million increased 2.6 percent. The
growth in 1998 revenues was principally attributable to growth in GRFP's equity
linked trades and fixed income transactions in North America.
Invested assets held for trading purposes in the first quarter increased $251
million to $2,110 million at March 31, 1998. The increase primarily relates to
the hedging activities of GRFP. At March 31, 1998, total assets of the financial
service operations were $9,700 million, compared with $8,793 million at December
31, 1997. The amount and nature of the financial service segment's assets and
liabilities are significantly affected by the risk management strategies
utilized by GRFP to reduce its market risks. GRFP's market exposures arising
from derivative products are managed through the purchase and sale of government
securities, futures and forward contracts, or by entering into 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 purposes 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 shareowners'
equity.
MARKET RISK
As a global reinsurance and financial services company, General Re is subject to
market risk arising from the potential change in the value of its various
financial instruments. These changes may be due to fluctuations in interest and
foreign exchange rates, credit spreads and equity prices. The level of market
risk is influenced by many factors, such as volatility, correlation and
liquidity. Potential gains or losses from changes in market rates can be
estimated through statistical models that project within a specified confidence
level the "value at risk" based on historical price and volatility movements.
General Re's 1997 Form 10-K provides a more detailed discussion of the market
risks affecting the reinsurance and financial service operations. Based on
General Re's estimates as of March 31, 1998, no material change has occurred in
its value at risk in the reinsurance operations, as compared to amounts
disclosed in its 1997 Form 10-K.
General Re's financial service operations are subject to market risk principally
through GRFP. GRFP monitors its market risk on a daily basis across all swap and
option products by calculating the effect on operating results of potential
changes in market variables over a one-week period, based on historical market
volatility, correlation data and informed judgment. This evaluation is performed
on an individual trading book basis, against limits set by individual book, to a
95% probability level. GRFP sets market risk limits for each type of risk, and
for an aggregate measure of risk, based on a 99% probability that movements in
market rates will not affect the results from operations in excess of the limit
over a one week period. Risk is measured primarily by Monte Carlo
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
simulations to obtain the required degree of confidence. The table below shows
the highest, lowest and average value at risk, as calculated using the above
methodology, by broad category of market risk to which GRFP is exposed. There
was no one-week period during either 1997 or the first quarter of 1998 in which
reported profit or loss exceeded the risk limit.
First Quarter 1998
------------------
Interest Foreign
(in millions) Rate Exchange Rate Equity All Risks
---- ------------- ------ ---------
Highest $9 $4 $4 $9
Lowest 7 3 3 6
Average 8 3 3 8
Full Year 1997
--------------
Interest Foreign
(in millions) Rate Exchange Rate Equity All Risks
---- ------------- ------ ---------
Highest $11 $6 $5 $13
Lowest 6 3 0 7
Average 9 4 2 10
For the first quarter of 1998, the largest weekly pretax gains and losses due to
market risk were $5 million and $1 million, respectively. The largest weekly
pretax gain due to market risk was $5 million and the largest weekly pretax loss
due to market risk was $3 million for the full year 1997. The average effect of
the change in market risk on income was a pretax gain of $1 million in the first
quarter of 1998 and was neutral for the full year 1997.
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 that 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. 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 shareowners' 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. General Re, as a
matter of policy, does not make any specific projections as to future earnings
nor does it endorse any projections regarding future performance that may be
made by others.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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 affect the
volume or profitability of General Re's property/casualty or life/health
businesses. These changes include, but are not limited to changes in the
intensity 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' risk retentions, and changes in the demand for excess and
surplus lines insurance coverages in North America, and changes in the
demand for financial service 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 service 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, such as possible
Year 2000 computer-related losses, 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;
9) Increases in interest rates, which cause a reduction in the market value
of General Re's fixed income investment portfolio, and its common
shareowners' 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;
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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) Reports on
Form 8-K - None
(b) Exhibit 27.1 - Financial Data Schedule for the Period Ended March 31, 1998
Exhibit 27.2 - Restated Financial Data Schedule for the Periods Ended
September 30, 1997, June 30, 1997, March 31, 1997 and
December 31, 1996
Exhibit 27.3 - Restated Financial Data Schedule for the Periods Ended
September 30, 1996, June 30, 1996 and March 31, 1996,
December 31, 1995 and December 31, 1994
19
<PAGE>
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: May 14, 1998 JOSEPH P. BRANDON
Joseph P. Brandon
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: May 14, 1998 ELIZABETH A. MONRAD
Elizabeth A. Monrad
Vice President and Treasurer
(Principal Accounting Officer)
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Financial Data Schedule for the Period Ended March 31, 1998
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 March 31, 1998 Form 10-Q. Reference should also be made
to these financial statements and related notes.
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Restated Financial Data Schedule for the Periods Ended March 31, 1997, June 30,
1997, September 30, 1997 and December 31, 1996.
The schedule contains summary financial information extracted from General Re's
consolidated balance sheets and consolidated statements of income. Reference
should also be made to these financial statements and related notes.
</LEGEND>
<CIK>0000317745
<NAME>General Re Corporation
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Restated Financial Data Schedule for the Periods Ended March 31, 1996, June 30,
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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 March 31, 1998 Form 10-Q. Reference should also be made
to these financial statements and related notes.
</LEGEND>
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<NAME>General Re Corporation
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