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, 1998
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Commission file number 1-8026
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[OBJECT OMITTED]
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, 1998
Common Stock, $.50 par value 75,690,007 Shares
- - --------------------------------------- -----------------------------------
[OBJECT OMITTED]
GENERAL RE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Statements of Income
Three and nine months ended September 30, 1998 and 1997 3
Consolidated Statements of Comprehensive Income
Nine months ended September 30, 1998 and 1997 4
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 5
Consolidated Statements of Common Shareowners' Equity
Nine months ended September 30, 1998 and 1997 6
Consolidated Statements of Cash Flows
Nine months ended September 30, 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 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters To a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K (none)
Exhibit 27 - Financial Data Schedule 26
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,
------------- ---------------
1998 1997 1998 1997
---- ---- ---- ----
Premiums and other revenues
Net premiums written
Property/casualty $1,113 $1,294 $3,599 $4,107
Life/health 306 327 925 910
------- ------- ------- -------
Total net premiums written $1,419 $1,621 $4,524 $5,017
====== ====== ====== ======
Net premiums earned
Property/casualty $1,169 $1,338 $3,521 $4,097
Life/health 321 327 915 892
------- ------ ------ ------
Total net premiums earned 1,490 1,665 4,436 4,989
Investment income 331 321 976 955
Other revenues 97 88 301 271
Net realized gains 258 2 292 7
------ ------- ----- -------
Total revenues 2,176 2,076 6,005 6,222
----- ----- ----- -----
Expenses
Claims and claim expenses 832 929 2,408 2,858
Life/health benefits 246 254 675 661
Acquisition costs 336 355 1,019 1,081
Other operating costs and expenses 187 200 586 609
Goodwill amortization 7 8 21 22
------- -------- ------ -------
Total expenses 1,608 1,746 4,709 5,231
----- ----- ----- -----
Income before income taxes and
minority interest 568 330 1,296 991
Income tax expense 161 75 331 230
---- ---- ---- ---
Income before minority interest 407 255 965 761
Minority interest 15 11 47 40
----- ----- ----- -----
Net income $392 $244 $918 $721
==== ==== ==== ====
Share Data:
Net income per common share:
Basic $5.14 $3.06 $11.94 $8.97
===== ===== ====== =====
Diluted $4.98 $2.98 $11.59 $8.76
===== ===== ====== =====
Average common shares outstanding:
Basic 75,668,886 78,959,758 76,223,730 79,467,367
========== ========== ========== ==========
Diluted 78,437,507 81,638,130 78,926,553 81,902,853
========== ========== ========== ==========
Dividend per share to common
shareowners $ .59 $ .55 $1.77 $1.65
===== ===== ===== =====
See notes to the consolidated interim financial statements.
3
<PAGE>
GENERAL RE CORPORATION
Consolidated Statements of Comprehensive Income
(in millions, except share data)
(Unaudited)
-----------------
Nine months ended
September 30,
-------------
1998 1997
---- ----
Net income $918 $721
Unrealized appreciation (depreciation) of
investments, after tax:
Common equities 43 512
Preferred equities 1 25
Fixed maturities 101 133
Less: Reclassification for prior periods'
appreciation included in current
period's realized gains (144) -
Foreign currency translation gains (losses) (72) 30
----- -----
Comprehensive income $847 $1,421
==== ======
Share data:
Comprehensive income per diluted common share $10.70 $17.31
====== ======
See notes to the consolidated interim financial statements.
4
GENERAL RE CORPORATION
Consolidated Balance Sheets
(in millions, except share data)
(Unaudited)
Assets September 30, 1998 Dec. 31, 1997
------------------ -------------
Insurance investments:
Fixed maturities, available-for-sale (cost:
$16,180 in 1998; $15,859 in 1997) $17,314 $16,847
Preferred equities, at fair value (cost:
$845 in 1998; $980 in 1997) 898 1,041
Common equities, at fair value (cost:
$2,086 in 1998; $2,098 in 1997) 4,710 4,748
Short-term investments, at amortized cost
which approximates fair value 918 1,172
Other invested assets 866 768
------- -------
Total insurance investments 24,706 24,576
Cash 296 193
Accrued investment income 317 358
Accounts receivable 2,100 1,858
Funds held by reinsured companies 459 488
Reinsurance recoverable 2,449 2,706
Deferred acquisition costs 499 476
Goodwill 948 968
Other assets 840 962
Financial services assets:
Investment securities, at fair value (cost:
$1,421 in 1998; $790 in 1997) 1,426 792
Trading securities, at fair value (cost:
$2,433 in 1998; $1,908 in 1997) 2,484 1,859
Short-term investments, at fair value 482 129
Cash 147 159
Trading account assets 6,886 4,313
Securities purchased under agreements to resell 863 903
Other assets 1,102 719
------- -------
Total assets $46,004 $41,459
======= =======
Liabilities
Claims and claim expenses $15,669 $15,797
Policy benefits for life/health contracts 962 907
Unearned premiums 1,947 1,874
Other reinsurance balances 2,577 2,948
Commercial paper 10 -
Notes payable 284 285
Income taxes 1,306 1,104
Other liabilities 934 997
Minority interest 1,063 1,032
Financial services liabilities:
Securities sold under agreements to repurchase,
at contract value 1,569 1,030
Securities sold but not yet purchased,
at market value 1,195 1,190
Trading account liabilities 5,965 3,664
Commercial paper 805 689
Notes payable 1,455 746
Other liabilities 1,811 1,032
------ ------
Total liabilities 37,552 33,295
------ ------
Cumulative convertible preferred stock (shares
issued: 1,688,321 in 1998 and 1,700,231 in 1997;
no par value) 144 145
Loan to employee savings and stock ownership plan (142) (142)
------- -------
2 3
------- -------
Common Shareowners' Equity
Common stock (102,827,344 shares issued in 1998
and 1997; par value $.50) 51 51
Paid-in capital 1,153 1,109
Accumulated other comprehensive income, net of
deferred income taxes 2,347 2,418
Retained earnings 8,267 7,492
Less common stock in treasury, at cost (shares
held: 27,137,337 in 1998 and 25,393,840 in 1997) (3,368) (2,909)
------- -------
Total common shareowners' equity 8,450 8,161
------- -------
Total liabilities, cumulative convertible
preferred stock and common shareowners' equity $46,004 $41,459
======= =======
See notes to the consolidated interim financial statements.
5
<PAGE>
GENERAL RE CORPORATION
Consolidated Statements of Common Shareowners' Equity
(in millions)
(Unaudited)
Nine months ended
September 30,
----------------------
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 29 31
Other 15 12
---- ------
End of period 1,153 1,084
----- -----
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 62 1,057
Deferred income taxes (61) (388)
----- -----
End of period 2,461 2,294
----- -----
Currency translation adjustments
Beginning of period (42) (53)
Change for the period (79) (44)
Deferred income taxes 7 75
---- ----
End of period (114) (22)
---- ----
Accumulated other comprehensive income
Beginning of period 2,418 1,572
Change for the period (17) 1,013
Deferred income taxes (54) (313)
----- -----
End of period 2,347 2,272
----- -----
Retained earnings:
Beginning of period 7,492 6,708
Net income 918 721
Dividends on common stock (135) (131)
Dividends on preferred stock, net of
income taxes (8) (7)
----- -----
End of period 8,267 7,291
----- -----
Common stock in treasury:
Beginning of period (2,909) (2,046)
Cost of shares acquired during period (454) (630)
Stock issued under stock option and other
incentive arrangements (5) 9
------ ------
End of period (3,368) (2,667)
------ ------
Total common shareowners' equity $8,450 $8,031
====== ======
See notes to the consolidated interim financial statements.
6
GENERAL RE CORPORATION
Consolidated Statements of Cash Flows
(in millions)
(Unaudited)
-----------
Nine months ended
September 30,
------------
1998 1997
---- ----
Cash flows from operating activities:
Net income $918 $721
Adjustments to reconcile net income to net
cash provided by operating activities:
Change in claim and claim expense liabilities (128 -
Increase in policy benefits for life/health
contracts 55 167
Change in reinsurance recoverable 257 89
Increase in unearned premiums 73 40
Amortization of acquisition costs 1,018 1,081
Acquisition costs deferred (1,041 (1,103)
Trading account activities
Change in trading account securities (1,090 1,271
Securities purchased under agreements
to resell 40 (508)
Securities sold under agreements to
repurchase 539 (826)
Change in other trading balances 267 (23)
Other changes in assets and liabilities 251 59
Net realized gains on investments (292 (7)
---- ----
Net cash from operating activities 867 961
---- ----
Cash flows from investing activities:
Fixed maturities: available-for-sale
Purchases (5,444 (5,012)
Calls and maturities 499 351
Sales 4,015 4,514
Equity securities
Purchases (738 (907)
Sales 1,038 398
Net sales (purchases) of short-term investments 226 (214)
Net purchases of other invested assets (81 (27)
---- ----
Net cash (used in) from investing activities (485 (897)
---- ----
Cash flows from financing activities:
Issuance of structured notes 679 -
Commercial paper borrowing, net 126 619
Change in contract deposits (471 66
Cash dividends paid to common shareowners (135 (131)
Acquisition of treasury stock (463 (633)
Other (27 8
---- ----
Net cash used in financing activities (291 (71)
---- ----
Change in cash 91 (7)
Cash, beginning of period 352 365
--- ---
Cash, end of period $443 $358
==== ====
See notes to the consolidated interim financial statements.
7
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 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 $158 million and $182
million in the first nine 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 nine 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 $ 398 $ 394 - - $ 329 -
Assumed 3,797 3,716 $1,043 $1,033 2,397 $766
Ceded (596) (589) (118) (118) (318) (91)
------ ------ ------- ------ ------ -----
Net $3,599 $3,521 $ 925 $ 915 $2,408 $675
====== ====== ======= ====== ====== ====
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
====== ====== ==== ==== ====== ====
8
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 three months and nine
months ended September 30, 1998 and 1997 (in millions, except per share
information) .
Income Shares Per share Income Shares Per share
------ ------ --------- ------ ------ -------
Three months ended: September 30, 1998 September 30, 1997
------------------ ------------------
Net income $392 $244
Less: preferred
dividends (3) (2)
---- ----
Basic earnings 389 75.7 $5.14 242 79.0 $3.06
===== =====
Effect of dilutive
securities
Stock options - 1.0 - 1.0
Conversion of
preferred stock 3 1.7 2 1.7
Conversion expense (1) (1)
----- ---- ----
Diluted earnings $391 78.4 $4.98 $243 81.7 $2.98
==== ==== ===== ==== ==== =====
Nine months ended: September 30, 1998 September 30, 1997
------------------ ------------------
Net income $918 $721
Less: preferred
dividends (8) (8)
---- ----
Basic earnings 910 76.2 $11.94 713 79.5 $8.97
====== =====
Effect of dilutive
securities
Stock options - 1.0 - 0.7
Conversion of
preferred stock 8 1.7 8 1.7
Conversion expense (3) (3)
---- ---- ----
Diluted earnings $915 78.9 $11.59 $718 81.9 $8.76
==== ==== ====== ==== ==== =====
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
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued)
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts. It requires that all derivatives be recognized as either assets
or liabilities in the balance sheet and measure those instruments at fair
value. If certain conditions are satisfied, the derivative may be
designated as a hedge of an exposure to changes in the value of an asset or
liability, variable cash flows for forecasted transactions, or the foreign
currency exposure of the net investment in a foreign operation. For
derivatives designated as hedging instruments, net income will be affected
by the extent to which the derivative is not effective as a hedge of the
underlying instrument. For derivatives designated as a hedge of the net
investment in a foreign operation, the gain or loss on the derivative would
be included in other comprehensive income. For derivatives not designated
as hedges, the gain or loss would be recognized in income in the period of
change.
The statement is effective for all fiscal quarters beginning after June 15,
1999. General Re is currently assessing the effect of adopting this
statement on its financial position and operating results. It is not
expected, however, that the adoption of this statement will have a material
effect on General Re's financial position or results from operations.
6. Berkshire Hathaway Merger - On June 19, 1998, General Re and Berkshire
Hathaway Inc. ("Berkshire") announced that they had entered into an
Agreement and Plan of Mergers. Under the terms of the agreement, General Re
shareholders will receive at their election either 0.0035 shares of
Berkshire Class A common stock or 0.105 shares of Berkshire Class B common
stock for each share of General Re common stock they own at the time the
transaction is consummated. In September 1998, shareowners of both
Berkshire and General Re approved the merger. In addition, the companies
have received all of the necessary regulatory approvals.
Berkshire and General Re expect the merger to close in the fourth
quarter, pending certain tax rulings requested from the Internal Revenue
Service. The agreement provides that if Berkshire and General Re are unable
to receive certain tax rulings from the Internal Revenue Service prior to
February 19, 1999, Berkshire may elect to have an alternative form of
transaction, under which General Re shareholders will receive the same
aggregate value in consideration as stated above, although 3 percent of the
consideration would be received in cash rather than stock. The total
consideration for the transaction, based upon the closing price of
Berkshire Class A common stock on October 30, 1998, is approximately $17.5
billion.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MERGER
On June 19, 1998, General Re and Berkshire Hathaway Inc. ("Berkshire") announced
that they had reached a definitive agreement to merge. See Note 6 to the
consolidated interim financial statements for more information on the
transaction.
CONSOLIDATED
Net income for the third quarter of 1998 was $4.98 per diluted share, compared
with $2.98 per diluted share in 1997. Net income for the third quarter of 1998
included after-tax realized gains of $2.06 per diluted share, compared with
after-tax realized gains of $.03 per diluted share in the third quarter of 1997.
Income from operations, excluding after-tax realized gains and losses, was $2.92
per diluted share in the third quarter of 1998, compared with $2.95 per diluted
share earned in the comparable period in 1997. The decline in operating results
for the third quarter of 1998 was primarily due to Hurricane Georges losses in
the North American property/casualty operations and certain merger-related
expenses.
Net income for the first nine months of 1998 was $11.59 per diluted share,
compared with $8.76 per diluted share for the same period in 1997. Included in
net income were after-tax realized gains of $2.34 per diluted share in the first
nine months of 1998, compared with after-tax realized gains of $.02 per diluted
share in the same period of 1997. Income from operations, excluding after-tax
realized gains and losses, was $9.25 per diluted share compared with $8.74 per
diluted share in 1997, an increase of 5.8 percent. Improved international
property/casualty underwriting results and growth in trading revenues in the
financial service operations were the primary contributors to the increased
earnings for the first nine months of 1998.
As required by the Financial Accounting Standard Board's Statement No. 130,
Reporting Comprehensive Income, General Re's financial statements for 1998
include a statement of comprehensive income. Comprehensive income consists of
net income, changes in unrealized investment appreciation and foreign currency
translation gains or losses. Comprehensive income for the first nine months of
1998 was $847 million, or $10.70 per diluted share, compared with $1,421
million, or $17.31 per diluted share for the same period in 1997. The decline in
comprehensive income for the first nine months of 1998 is primarily due to less
favorable equity markets, which resulted in lower appreciation on investments in
1998, as compared to the same period in 1997.
Consolidated net premiums written for the third quarter of 1998 were $1,419
million, a decrease of 12.5 percent from $1,621 million in 1997. Consolidated
net premiums written for the first nine months of 1998 decreased 9.8 percent
from $5,017 million in 1997 to $4,524 million in 1998. Adjusted for the effects
of foreign exchange, consolidated traditional net premiums written decreased 5.4
percent and were unchanged in the third quarter and first nine months of 1998,
respectively.
General Re's consolidated underwriting combined ratio was 103.5 percent in the
third quarter of 1998, compared with 100.3 percent in the third quarter of 1997.
The increase in the combined ratio was due to the effects of catastrophe losses,
principally Hurricane Georges, during the third quarter of 1998. For the first
nine months of 1998 and 1997, the consolidated underwriting combined ratio was
101.3 percent and 100.6 percent, respectively.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Consolidated pretax investment income was $331 million in the third quarter of
1998, an increase of 3.1 percent from $321 million in the same period of 1997.
For the first nine months of 1998 and 1997, respectively, consolidated pretax
investment income was $976 million and $955 million. The 2.2 percent increase in
consolidated pretax investment income in the first nine months of 1998 was due
to the investment of operating cash flow over the last year, partially offset by
the effects of common stock repurchases during the second half of 1997 and the
first half of 1998, dividend payments and the strengthening of the U.S. dollar,
principally against the German mark.
The consolidated effective tax rate was 28.4 percent for the third quarter of
1998, compared with 22.7 percent in the third quarter of 1997. For the first
nine months, the effective tax rate was 25.5 percent and 23.2 percent in 1998
and 1997, respectively. The increase in the effective tax rates for the periods
was primarily due to the increase in realized investment gains which are taxed
in the United States at the statutory 35 percent tax rate.
Excluding the financial service operations, consolidated net cash flow from
operations was $1,054 million in the first nine months of 1998, compared to
$1,003 million in the same period in 1997. The increase of $51 million in the
first nine months of 1998 was due to lower net paid claims, partially offset by
the effect of the strengthening U.S. dollar which decreased reported
international cash flow.
At September 30, 1998, insurance invested assets of $24,706 million increased
$130 million from $24,576 million at December 31, 1997. The growth was primarily
the result of invested cash flow, partially offset by common stock repurchases
and dividend payments. The financial service operations had $4,392 million of
invested assets at September 30, 1998, an increase of $1,612 million compared to
December 31, 1997. The increase in financial services invested assets in the
first nine months of 1998 results from changes in the hedging activities of
General Re Financial Products Corporation ("GRFP") and growth in its
match-funded business.
The consolidated gross liability for claims and claim expenses for the
property/casualty operations was $15,669 million at September 30, 1998, a
decrease of $128 million from the year-end 1997 liability. Adjusted for the
effects of foreign exchange, the gross liability would have decreased $25
million, or 0.2 percent. The asset for reinsurance recoverable on unpaid claims
was $2,095 million at September 30, 1998, compared to $2,356 million at December
31, 1997. At September 30, 1998, the gross liability for claims and claim
expenses and the related asset for reinsurance recoverables include $2,041
million and $638 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 September 30, 1998 of $8,450 million increased
$289 million, or 3.5 percent, from the $8,161 million at December 31, 1997. The
increase was principally the result of net income of $918 million and the
reissuance of common stock of $38 million under employee compensation and
benefit plans, partially offset by common share repurchases of $454 million,
common and preferred stock dividends of $143 million and foreign currency
translation losses of $72 million. On a per share basis, common shareowners'
equity was $111.64 at September 30, 1998, an increase of 5.9 percent from
$105.40 at December 31, 1997.
General Re repurchased 2,076,600 shares of common stock from January 1, 1998
through June 18, 1998 for aggregate consideration of $454 million. No shares
have been repurchased since the announcement of General Re's merger with
Berkshire. Since the inception of the repurchase program in 1987, General Re has
repurchased 33,902,400 common shares for total consideration of $3.7 billion.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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 September 30, 1998,
General Re had $815 million of commercial paper outstanding, $805 million of
which was used to support GRFP's liquidity needs and $10 million was used by
General Re Corporation for its liquidity needs. At September 30, 1998, General
Re had $2.7 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 $1.7 billion. The credit agreements with the
participating 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 each of 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
---------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
Income before income taxes
and realized gains $189 $206 $618 $622
Net premiums written 710 798 1,994 2,320
Net underwriting income (28) 5 (19) 16
Loss ratio 71.6% 68.8% 67.9% 67.9%
Expense ratio 32.5 30.6 33.1 31.4
---- ---- ---- ----
Underwriting combined ratio 104.1% 99.4% 101.0% 99.3%
Investment income $203 $200 $612 $600
Other income 13 1 24 6
Operating cash flow 302 361 729 614
Pretax income for the North American property/casualty operations, excluding
realized gains/losses, decreased 8.3 percent in the third quarter and 0.7
percent for the first nine months of 1998, as compared to the respective periods
of 1997. Operating income in this segment was reduced by the effect on
investment income of approximately $1.1 billion of cash flows used to repurchase
common stock and pay dividends during the past twelve months. The underwriting
loss in the third quarter was due to losses from Hurricane Georges.
Net premiums written for the North American property/casualty operations were
$710 million in the third quarter of 1998 and $1,994 million in the first nine
months of 1998, representing a decrease of 11.0 percent and 14.1 percent from
the comparable 1997 amounts. The decline in premiums reflects the current
competitive market and General Re's adherence to underwriting discipline.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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 affected premium comparisons. Premiums from this
contract were included in the first nine months of 1997, but were not in the
first nine months of 1998. Excluding this contract, General Re's North American
premiums written declined 3.4 percent for the quarter and 6.5 percent
year-to-date. 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 digits for the full-year 1998.
Net premiums written for the General Star companies, which primarily write
excess, surplus and specialty insurance, decreased 14.7 percent in the quarter
and 1.3 percent in the first nine months of 1998. The decline in premiums
written was due to lower commercial general liability and long-haul trucking
business. General Star's markets are experiencing increased competition from
insurers predominantly writing standard coverages in the excess and surplus
lines market. For the Genesis operations, which provide direct excess coverage
to companies with qualified self-insurance programs, net premiums written
decreased by 21.7 percent for the quarter and increased 2.2 percent for the
first nine months of 1998.
Pretax investment income for the North American property/casualty operations
increased 1.4 percent compared to the third quarter of 1997 and 2.1 percent
year-to-date. Investment income for the North American property/casualty
operations grew modestly during the periods due to positive operating cash flow
in the prior twelve months, partially offset by the effects of share repurchases
and common dividends. The overall pretax total return on the North American
property/casualty investment portfolio was 5.0 percent in the first nine months
of 1998, compared with 9.9 percent in the same period in 1997. The decline in
total return was primarily due to less favorable results in the common equity
portfolio, which had a total return of 1.9 percent for the first nine months of
1998, compared with 28.5 percent for the same period of 1997.
Operating cash flow for the North American property/casualty operations of $729
million in the first nine months of 1998 increased 18.7 percent from $614
million in the same period of 1997, primarily due to lower paid losses. 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 $298 million of cash outflows related to
contract deposits that matured during the first nine months of 1998 (included in
"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 effect of the return of these funds was not material to investment
income and earnings.
North American property/casualty invested assets were $16,052 million at
September 30, 1998, an increase of 0.4 percent from December 31, 1997. The
modest growth in invested assets was primarily the result of positive operating
cash flow, partially offset by the effect of share repurchases and common stock
dividends, which are funded primarily by this segment. The North American
property/casualty operations realized $253 million of investment gains during
the third quarter, of which $141 million was from sales of equity securities and
$59 million of net gains on S&P 500 put options.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The gross liability for claims and claim expenses for the North American
property/casualty operations was $10,547 million at September 30, 1998, a
decrease of $137 million, or 1.3 percent, compared to the year-end 1997
liability.
INTERNATIONAL PROPERTY / CASUALTY
(in millions) Third Quarter Year-to-date
--------------- ---------------
1998 1997 1998 1997
---- ---- ---- ----
Income before income taxes and
realized gains $88 $86 $261 $235
Net premiums written 403 496 1,605 1,787
Net underwriting (loss) (11) (9) (29) (40)
Loss ratio 70.4% 70.2% 69.0% 72.3%
Expense ratio 31.7 31.3 32.8 30.0
----- ----- ----- -----
Underwriting combined ratio 102.1% 101.5% 101.8% 102.3%
Investment income $93 $95 $270 $278
Other income (loss) 5 - 19 (3)
Operating cash flow 37 61 325 389
Results of the international reinsurance operations are reported on a quarter
lag.
Income before income taxes and realized gains of the international
property/casualty operations increased 2.0 percent for the third quarter of
1998, compared with the third quarter of 1997 and increased 11.0 percent
compared with the first nine months of 1997. For the first nine months of 1998,
income for the international property/casualty operations increased due to
improved underwriting results and higher other income. The comparisons for the
third quarter and year-to-date 1998 were adversely affected by the strengthening
of the U.S. dollar (4.3 percent and 9.0 percent, respectively) relative to the
German mark.
The underwriting combined ratio in the international property/casualty
operations was 102.1 percent in the third quarter, compared to 101.5 percent for
the third quarter of 1997 and 102.4 percent reported for the full year 1997. For
the first nine months of 1998 and 1997, the combined ratio was 101.8 percent and
102.3 percent, respectively. The third quarter underwriting results were
adversely affected by a few large property losses.
International net premiums written were $403 million in the third quarter of
1998 and $1,605 million for the first nine months of 1998, compared with $496
million and $1,787 million, respectively, in 1997. Adjusted for the effects of
foreign exchange, international property/casualty premiums written decreased
14.7 percent and 2.7 percent in the third quarter and first nine months of 1998,
respectively. The decline in premium growth for the quarter was due in part to
increased retentions by cedants and the continuing effects from competitive rate
conditions in most insurance and reinsurance markets globally.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Pretax investment income for the international property/casualty operations was
$93 million for the third quarter of 1998, compared with $95 million in the same
period of 1997. The decline in investment income was due to a decline in global
interest rates and the effect of foreign exchange. Adjusted for the effects of
foreign exchange, pretax investment income increased 2.1 percent and 4.0 percent
for the third quarter and year-to-date. The international property/casualty and
global life/health operations had cash flow from operating activities of $325
million for the first nine months of 1998, compared with $389 million in 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 net cash outflows related to
contract deposits during the period of $173 million. Similar to North American
deposit transactions, 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 effect of the return of these funds
is not material to investment income and earnings.
International property/casualty and life/health invested assets were $8,653
million at September 30, 1998, compared with $8,581 million at December 31,
1997. The increase in invested assets was due to investment of operating cash
flows. The gross liability for claims and claim expenses was $5,122 million at
September 30, 1998, compared with $5,113 million at December 31, 1997.
GLOBAL LIFE / HEALTH
(in millions)
Third Quarter Year-to-date
------------- ------------
1998 1997 1998 1997
Income before income taxes and
realized gains $18 $19 $55 $62
Net premiums written
Life reinsurance 200 230 608 645
Health reinsurance 106 97 317 265
--- ---- --- ---
Total life/health net premiums written 306 327 925 910
Net underwriting income (loss) 1 2 (2) 11
Investment income 20 18 61 54
Other income (loss) (3) (1) (4) (3)
Income before income taxes and realized gains for the global life/health
operations decreased 6.3 percent for the third quarter of 1998 and declined 12.5
percent for the first nine months of 1998. The decline in operating income for
the nine months was due to lower underwriting results, principally in the group
health reinsurance sector.
Life reinsurance premiums written were $199 million for the third quarter of
1998, compared with $230 million in the third quarter of 1997. For the first
nine months, life reinsurance premiums written were $608 million and $645
million in 1998 and 1997, respectively. Adjusted for the effects of foreign
exchange, global life reinsurance premiums decreased approximately 10.4 percent
in the quarter and increased 1.0 percent year-to-date. Premium trends in the
life reinsurance business were adversely affect by product mix changes in Europe
and the loss of one contract with approximately $28 million of annual premium
due to merger and acquisition activity.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Investment income for the global life/health operations was $20 million and $61
million in the third quarter and first nine months of 1998, respectively,
compared to $18 million and $54 million in 1997. The increase in investment
income was due to invested cash flow from higher premium volume over the prior
twelve months.
The liability for policy benefits for life/health contracts was $962 million at
September 30, 1998, compared with $907 million at December 31, 1997. The asset
for reinsurance recoverable on unpaid losses was $299 million at September 30,
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 disaggregate its investments by segment.
FINANCIAL SERVICES
(in millions)
Third Quarter Year-to-date
------------- ------------
1998 1997 1998 1997
---- ---- ---- ----
Income before income taxes and realized gains $24 $25 $93 $87
Total revenues(excluding realized gains) 78 73 267 237
Investment income 15 8 33 23
Other income 9 17 60 64
Financial services operations include General Re's derivative
products, investment management, insurance brokerage and management, reinsurance
brokerage, and real estate management operations. In the third quarter and first
nine months of 1998, financial services revenues of $78 million and $267
million, respectively, increased 7.4 percent and 12.7 percent from the $73
million and $237 million in the third quarter and first nine months of 1997,
respectively. The growth in 1998 revenues was principally attributable to growth
in GRFP's global equity business and fixed income business in North America
during the first two quarters of 1998 which slowed during the third quarter due
to the turbulence in international financial markets.
Invested assets held for trading purposes in the first nine months of 1998
increased $625 million to $2,484 million at September 30, 1998. The increase
primarily relates to the hedging activities of GRFP and growth in GRFP's
match-funded business. At September 30, 1998, total assets of the financial
service operations were $13,269 million, compared with $8,874 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.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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 September 30, 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 percent probability level. GRFP sets market risk limits for each type of
risk, and for an aggregate measure of risk, based on a 99 percent 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 simulations to obtain the required degree of confidence. In addition to
daily and weekly assessments of value at risk, GRFP performs stress tests to
estimate its exposure to extreme movements in various market risk factors.
The table below shows the highest, lowest and average value-at-risk amounts for
each type of market risk to which GRFP is exposed. Since 1992, when GRFP
initiated these calculations, there has been no one-week period for which GRFP
experienced a gain or loss that exceeded its estimated market risk exposure.
Value at Risk
-------------
First Nine Months of 1998
-------------------------
Interest Foreign
(in millions) Rate Exchange Rate Equity All Risks
---- ------------- ------ ---------
Highest $9 $4 $8 $13
Lowest 5 2 2 6
Average 7 3 5 9
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
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
For the first nine months of 1998, the largest weekly pretax gain and loss due
to market risk was $5 million and $6 million, respectively. In 1997, the
largest weekly pretax gain and loss 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 neutral in
the first nine months of 1998 and for the full year 1997.
CREDIT RISK
Credit risk arises from the possible inability of counterparties to meet the
terms of their contracts. GRFP evaluates and records a fair value adjustment
against trading revenue to recognize counterparty credit exposure and future
costs associated with administering each contract. The expected credit exposure
for each trade is initially established on the trade date and is determined
through the use of a proprietary credit exposure model that is based on
historical default probabilities, market volatilities and, if applicable, the
legal right of setoff. These exposures are continuously monitored, and the fair
value adjustment is adjusted to reflect the changes in the credit quality of the
counterparty, changes in interest and currency rates or changes in other factors
affecting credit exposures. GRFP has not experienced any write-offs on such
contracts. In the event counterparties are unable to fulfill their contractual
obligations, future losses due to defaults may exceed amounts currently
recognized in the balance sheet.
YEAR 2000
General Re began to address its Year 2000 remediation needs formally as part of
its annual technology planning process beginning in 1994. A project team was
established that year, and a comprehensive Year 2000 plan was completed in
September 1996. This plan required a complete assessment of the internal
mainframe, server and personal computer hardware and software applications which
may be affected by the Year 2000. In addition, inventories were produced of
internally developed systems and programs, telecommunications equipment, and
licensed software products used by General Re. Where business needs justified
the effort, some information systems needed to be replaced with entirely new
applications. Other systems and programs are being repaired, as necessary, to
achieve Year 2000 compliance.
As of September 30, 1998, coding for those systems under repair was
approximately 95 percent complete, and testing was approximately 90 percent
complete. The inventory and assessment phases of the project had been previously
completed. As of September 30, 1998, none of the General Re's other significant
information technology projects had been delayed due to Year 2000 initiatives.
In addition to internally developed applications, the Year 2000 project has
several other elements. A portion of the software used by General Re is licensed
from outside vendors. For example, vendor software is found in certain of
General Re's mainframe operating systems and desktop tools and packages. The
project team has been working with software vendors to ensure that their
programs will continue to operate, and this effort is scheduled to be completed
by the end of 1998. Additionally, the inventory of computer workstations,
servers and other computing equipment is being reviewed, and hardware is being
replaced or repaired, as appropriate.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
As part of the Year 2000 project, vendors and service providers of equipment
with embedded technology (e.g. elevators, security systems, etc.) are being
contacted to obtain the necessary compliance certifications. A similar effort is
underway for financial service providers and vendors supporting General Re's
employee benefits plans. Where necessary, facilities-related equipment and
control systems are being upgraded to achieve compliance, and these activities
are also targeted for completion by the end of 1998.
General Re's Year 2000 project is proceeding on schedule, and it is anticipated
that all Year 2000 repair or replacement work will be completed by the end of
1998; however, General Re's financial results or financial position could be
adversely affected if Year 2000 issues are not resolved by General Re or its
significant clients, vendors or business partners before the Year 2000. Possible
adverse consequences include but are not limited to: (1) the inability to obtain
services used in General Re's operations; (2) the inability to transact business
with key clients or customers; (3) the inability to execute transactions through
the financial markets; (4) the decline in economic value within General Re's
investment portfolio, and (5) the occurrence of Year 2000 related losses under
property and casualty insurance and reinsurance contracts. On a worst case
basis, if General Re, one or more of its significant business partners, or key
governmental bodies are unable to implement timely and effective solutions to
the Year 2000 issues, General Re could suffer material adverse effects. The
financial impact of such effects cannot currently be estimated.
Contingency Plan
General Re's overall Year 2000 project plan was developed with the intention of
minimizing the need for contingency activity. Despite the best planning and
execution efforts, however, General Re is preparing for the possibility that
some issues with the Year 2000 may not be uncovered. Accordingly, General Re has
developed several levels of contingency planning.
The target completion date of December 31, 1998 provides a contingency year.
With repaired systems in production, and infrastructure and process changes
tested and implemented, General Re expects to uncover any remaining system or
process issues during 1999. The year also affords the opportunity for additional
testing of systems, as appropriate. Should some portions of the project take
longer than planned, the contingency year also provides a period of time to
address those issues.
As a further step, contingency planning for General Re's dependencies on
external service providers and suppliers has just begun and is scheduled to be
completed in 1999. Finally, plans call for the deployment of Year 2000 support
teams before, during and after January 1, 2000, to respond to unexpected issues
that may arise.
Costs
The total cost associated with required modifications to become Year 2000
compliant is approximately $20 million. The total amount expended on the Project
through the end of 1997 was approximately $7 million. The cost to complete the
Year 2000 Project is estimated to be approximately $13 million. Funds for the
project are included in existing operating budgets. The costs of implementing
any business replacement systems are not included in these estimates.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Insurance/Reinsurance Risk
In addition to its own computer systems and third party relationships, General
Re may also have exposure in its property/casualty operations to claims asserted
under certain reinsurance contracts and insurance policies for damages caused by
companies' failure to address Year 2000 computer problems. General Re has made
significant investments in understanding and evaluating the potential insurance
exposures arising from Year 2000 problems. A quantification of the insurance
industry's or General Re's potential exposure to Year 2000 losses is not yet
possible, as policy wordings vary and legal interpretations of possible coverage
for losses is likely to differ from jurisdiction to jurisdiction.
THE EURO
On January 1, 1999, eleven of the fifteen member countries of the European Union
are scheduled to establish a fixed conversion ratio between their local
currencies and a newly formed currency, the "Euro". The Euro will begin trading
on foreign currency exchanges and may be used for business transactions from
that point forward. During this interim phase, either the Euro or local currency
may be used as legal tender for noncash transactions. Beginning in January 2002,
coins and paper currency denominated in Euros will be issued and local
currencies of the eleven countries will be withdrawn from circulation. General
Re is modifying its computer systems to accommodate transactions denominated in
the Euro. Most of General Re's existing systems that will be affected by the
introduction of the Euro already handle multiple currencies. Based on current
assessments, General Re believes the Euro conversion will not have a material
impact on its consolidated financial position or results from operations.
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 risks and uncertainties 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.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Forward-looking statements involve known and unknown risks and uncertainties,
which may cause General Re's results to differ materially from such
forward-looking statements. These risks and uncertainties 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.
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 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;
22
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;
17) The potential interruption in, or a failure of, certain normal business
activities or operations due to Year 2000
related computer problems, and
18) 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.
23
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of the Stockholders of General Re was held on September 18,
1998. During the meeting, the stockholders approved the Agreement and Plan of
Mergers between General Re and Berkshire Hathaway Inc. and the transactions
contemplated therein.
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 September 30, 1998
24
<PAGE>
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 16, 1998 JOSEPH P. BRANDON
Joseph P. Brandon
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: November 16, 1998 ELIZABETH A. MONRAD
Elizabeth A. Monrad
Vice President and Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
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<LEGEND>
Financial Data Schedule for the Period Ended September 30, 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 September 30, 1998 Form 10-Q. Reference should also be
made to these financial statements and related notes.
</LEGEND>
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