<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 1-
8026
LOGO
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.)
695 EAST MAIN STREET
STAMFORD, CONNECTICUT 06904-2351
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 328-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -----------------------
<S> <C>
Common Stock, $.50 par
value New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value on March 1, 1998 of the voting stock held by
nonaffiliates of the registrant was $16,303.8 million.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT MARCH 1, 1998
----- ----------------------------
<C> <S>
Common Stock, $.50 par value 76,854,453
</TABLE>
Certain information required by Items 10, 11 and 12 of Form 10-K is
incorporated by reference into Part III hereof from the registrant's proxy
statement which will be filed with the Securities and Exchange Commission
within 120 days of the close of the registrant's fiscal year ended December
31, 1997.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GENERAL RE CORPORATION
TABLE OF CONTENTS
PART I.
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ITEM 1. Business............................................................................... 2
ITEM 2. Properties............................................................................. 6
ITEM 3. Legal Proceedings...................................................................... 6
ITEM 4. Submission of Matters to a Vote of Security Holders.................................... 7
PART II.
ITEM 5. Market for General Re Corporation's Common Equity and Related Stockholder Matters...... 7
ITEM 6. Selected Financial Data: Eleven-Year Summary........................................... 8
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 11
ITEM 8. Financial Statements and Supplementary Data............................................ 28
ITEM 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure.... 66
PART III.
ITEM 10. Directors and Executive Officers of General Re Corporation............................. 66
ITEM 11. Executive Compensation................................................................. 68
ITEM 12. Security Ownership of Certain Beneficial Owners and Management......................... 68
ITEM 13. Certain Relationships and Related Transactions......................................... 68
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 69
</TABLE>
1
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
General Re Corporation was established in 1980 to serve as the holding company
of General Reinsurance Corporation ("GRC," incorporated in 1921) and its
affiliates. General Re Corporation and subsidiaries ("General Re") have global
reinsurance and financial service operations in 61 cities in 31 countries on 6
continents and provide reinsurance coverage in over 150 countries. General Re
operates four principal businesses: North American property/casualty
reinsurance, international property/casualty reinsurance, global life/health
reinsurance and financial services. General Re's principal reinsurance
operations are based in North America and Germany, with other major operations
in Asia, Australia, Europe and South America. General Re's principal financial
service operations are located in the United States, the United Kingdom,
Japan, Hong Kong and Canada. GRC is the largest North American professional
property/casualty reinsurer, and General Re is among the three largest
reinsurers in the world based on net premiums written and capital. General Re
employed 3,869 associates at December 31, 1997, of which 2,482 were employed
in North America and 1,387 in operations outside of North America.
FINANCIAL HIGHLIGHTS
The following table provides financial highlights of General Re and its
business segments:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1997 1996 1995
------- ------- -------
(IN MILLIONS, EXCEPT
SHARE DATA)
<S> <C> <C> <C>
Total revenues
North American property/casualty..................... $ 3,967 $ 3,887 $ 3,641
International property/casualty...................... 2,706 3,004 2,573
Life/health.......................................... 1,277 1,134 742
Financial services................................... 301 271 254
------- ------- -------
Total............................................... $ 8,251 $ 8,296 $ 7,210
======= ======= =======
Earnings per common share, excluding realized
gains/losses--basic.................................. $ 12.00 $ 10.79 $ 9.47
Earnings per common share, excluding realized
gains/losses--diluted................................ 11.72 10.57 9.30
Net income per common share--basic.................... 12.04 11.00 9.92
Net income per common share--diluted.................. 11.76 10.78 9.74
Operating cash flow................................... 1,468 1,678 1,774
Invested assets--insurance operations................. 24,576 23,168 21,016
Common shareowners' equity............................ 8,161 7,326 6,587
</TABLE>
An eleven-year summary of additional significant financial information is
presented on pages 8-10. Pretax earnings discussed in each of the segment
sections in Item 1 exclude realized gains/losses and are before minority
interest deductions and goodwill amortization.
REINSURANCE OPERATIONS
Reinsurance is the business in which a reinsurer agrees to indemnify a
"primary" or "ceding" insurer against all or part of the risks assumed by the
primary insurer under a policy or policies it has issued. Among its benefits,
reinsurance offers primary insurers the opportunity to increase underwriting
capacity, write larger individual risks, reduce financial leverage, stabilize
operating results, enter new markets with shared underwriting risk, protect
against catastrophic losses and obtain consultative underwriting and risk
management services.
2
<PAGE>
Treaty reinsurance refers to automatic reinsurance coverage for all or a
portion of a specified class of risks ceded by the primary insurer, while
facultative reinsurance involves underwriting of individual risks. Pro rata,
or proportional reinsurance, describes all forms of reinsurance in which the
reinsurer shares in a proportional part of the original premiums and losses of
the business ceded by the primary company. Excess, or nonproportional
reinsurance, refers to reinsurance which indemnifies the primary company for
that portion of the loss that exceeds an agreed-upon amount or "retention."
The reinsurance industry's overall profitability has historically been subject
to cyclicality, principally due to the insurance industry's underwriting
cycle, overall economic conditions, investment returns, industry capital
levels and insured catastrophic events. The reinsurance industry, both
domestically and globally, has recently experienced consolidation, as
reinsurers seek to expand their markets, obtain critical mass in certain
markets and further diversify their risks. In addition, there has been a shift
in recent years in primary insurers' reinsurance purchases toward better
capitalized and more creditworthy reinsurers. During 1997, the
property/casualty pricing environment in both the primary insurance and
reinsurance markets continued to experience significant competitive pressures.
There are virtually no barriers to entry to the reinsurance industry and
competitors may be domestic or foreign, licensed or unlicensed. The number of
General Re's competitors within the reinsurance industry is not known. Within
the United States, the Reinsurance Association of America has identified
approximately 73 property/casualty reinsurers writing predominantly
unaffiliated business whose surplus exceeds $50 million or whose assumed
reinsurance premiums are greater than $10 million. Reinsurers compete on the
basis of reliability, financial strength and stability, ratings, underwriting
consistency, service, business ethics, price, performance, capacity, terms and
conditions.
NORTH AMERICAN PROPERTY/CASUALTY REINSURANCE
General Re's North American property/casualty operations produced 48 percent
of consolidated revenues in 1997 and 63 percent of pretax earnings. The
principal business of these operations is treaty and facultative reinsurance
underwritten on a direct basis throughout the United States and Canada.
General Re writes predominately excess reinsurance. Casualty reinsurance
represented approximately 57 percent of General Re's North American
property/casualty net premiums written in 1997 and property reinsurance
business represented approximately 30 percent. General Re also writes
specialty, excess and surplus lines insurance through the General Star
companies and provides direct excess insurance to companies with self-insured
programs through the Genesis companies. These lines together represented
approximately 13 percent of the North American property/casualty net premiums
written in 1997.
On October 3, 1996, General Re Corporation acquired all of the outstanding
shares of National Re Corporation and subsidiaries ("National Re"), a North
American property/casualty reinsurance group. National Re, through its wholly
owned subsidiary, National Reinsurance Corporation ("NRC"), provides property
and casualty reinsurance to insurers written on a direct basis. See Item 7,
Management's Discussion and Analysis, and Note 3 to the consolidated financial
statements, "Acquisitions and Reinsurance Ventures," for additional discussion
of this transaction.
U.S. property/casualty insurers and reinsurers are subject to regulation by
their states of domicile and by those states in which they are licensed.
General Re's principal U.S. subsidiary, GRC, is domiciled in Delaware and
licensed in the District of Columbia and in all states but Hawaii, where it is
an accredited reinsurer. General Re's two specialty, excess and surplus lines
insurers, the General Star companies, are domiciled in Connecticut and Ohio.
The Genesis companies, which are General Re's excess insurance writers for
self-insured programs, are domiciled in Connecticut and North Dakota. General
Re also writes excess insurance for self insurers through GRC. NRC is
domiciled in the state of Delaware and licensed in all 50 states, the District
of Columbia, Puerto Rico, Canada, and the United Kingdom. Fairfield Insurance
Company, a subsidiary of NRC, is engaged in property and casualty insurance
services, is domiciled in Connecticut, and is licensed in 42 states and the
District of Columbia.
3
<PAGE>
In addition to solvency regulation, licensed primary insurers are typically
subject to regulatory approval of insurance policy forms and the rates charged
to policyholders; similar approvals are not typically required for either
reinsurance contracts or the rates agreed to between ceding insurers and their
reinsurers. The insurance regulators of every state participate in the
National Association of Insurance Commissioners ("NAIC"). The NAIC adopts
forms, instructions and accounting procedures for use by U.S. insurers,
including reinsurers, in preparing and filing annual statutory financial
statements. These forms, instructions and procedures are collectively known as
statutory accounting practices ("SAP"). Every state requires use of the NAIC
annual statement form, although some states require or permit variations from
the NAIC form and SAP. The NAIC is currently in the process of codifying SAP
to bring greater uniformity to U.S. statutory insurance accounting practices
throughout the United States. While codification is not expected to have a
material effect on General Re's business, it may reduce GRC's regulatory
capital, also known as statutory surplus.
In addition to its activities relating to the annual statement and SAP, the
NAIC develops model laws and regulations for use by its members. In 1989, the
NAIC adopted its Financial Regulation Standards to guide state legislatures
and state regulators in the development of effective insurer solvency
regulation. These standards are viewed by the NAIC as minimum requirements for
effective state regulatory oversight.
The NAIC has adopted a formal accreditation program to encourage states to
comply with its Financial Regulation Standards. Accredited states may refuse
to accept financial examination reports of insurers issued by nonaccredited
states; other sanctions may also be imposed by accredited states, including a
refusal to license insurers domiciled in nonaccredited states. As of December
1997, 49 state insurance departments, including Delaware, and the District of
Columbia are accredited.
The NAIC has risk-based capital reporting requirements which apply to
statutory annual statements of life insurers and property/casualty insurers.
The NAIC also adopted a risk-based capital model law which supplanted the
diverse minimum capital and surplus requirements with the risk-based capital
requirement for those states adopting the model law. The formula and the model
law have been made a part of the Financial Regulation Standards. The model law
subjects an insurer failing its risk-based capital requirement to various
levels of regulatory action. The model law has been adopted in many states
including Delaware, Connecticut and North Dakota, domiciles for various
General Re companies. General Re's U.S. insurance subsidiaries have filed 1997
statutory annual statements which report risk-based capital well above the
threshold for regulatory action.
In 1995, the NAIC adopted a "defined limits" model law related to investments
which has not yet been made a part of the Financial Regulation Standards. If
ultimately enacted, the "defined limits" model law would change the amount and
kind of permitted investments by insurers. The NAIC has also considered a
different model investment law which would be based on a "prudent person"
standard. While it is uncertain whether either, or both, of these model laws
will eventually be made a part of the Financial Regulation Standards or
adopted by each state. General Re does not currently anticipate that adoption
of either of the model laws would have a significant effect on the investment
management practices of its U.S. insurance subsidiaries.
General Re Corporation uses dividends, primarily from GRC, to satisfy its
liquidity needs. Ordinary dividends by GRC to General Re Corporation are not
subject to any restriction, other than ten days' advance notice. Extraordinary
dividends and other extraordinary distributions by GRC to General Re
Corporation are subject to prior regulatory approval under the Delaware
Insurance Holding Company System Registration Act. Under this Act, dividends
or other distributions which, together with others during the preceding
rolling twelve-month period, exceed the greater of the insurer's net income,
excluding realized capital gains, for the prior calendar year or 10 percent of
its statutory surplus are generally considered extraordinary and require such
approval.
For additional discussion of regulatory matters, see the section on
Consolidated Liabilities in Management's Discussion and Analysis (page 21).
4
<PAGE>
INTERNATIONAL PROPERTY/CASUALTY REINSURANCE
On December 28, 1994, General Re acquired a controlling interest in Kolnische
Ruckversicherungs-Gesellschaft AG ("Cologne Re"). See Note 3 to the
Consolidated Financial Statements (page 42) for more information on the
transaction. General Re has consolidated Cologne Re in its financial
statements and reflected the ownership of other shareowners as minority
interests.
In 1997, General Re's international property/casualty operations produced 33
percent of consolidated revenues and 23 percent of consolidated pretax
earnings. In total, General Re operates its international reinsurance business
in 29 countries and provides reinsurance coverage in over 150 countries
throughout the world. In 1997, the international property/casualty operations
principally wrote business in the form of reinsurance treaties with smaller
amounts written on a facultative basis. Approximately 79 percent of
international premiums in 1997 were written on a proportional basis and 21
percent were nonproportional or excess. Property premiums written in 1997 were
approximately 61 percent of total international property/casualty premiums and
casualty premiums were approximately 39 percent.
In general, regulation of the property/casualty reinsurance industry outside
of the United States is subject to the differing laws and regulations of each
country in which General Re has operations or writes premiums. Some
jurisdictions, such as the United Kingdom, impose complex regulatory
requirements on reinsurance companies, while other jurisdictions, such as
Germany, impose fewer requirements. Local reinsurance business conducted by
General Re's subsidiaries in some countries require licenses issued by
governmental authorities. These licenses may be subject to modification,
suspension or revocation dependent on such factors as amount and types of
reserves and minimum capital and solvency tests. Jurisdictions may impose
fines, censure and/or criminal sanctions for violation of regulatory
requirements.
GLOBAL LIFE/HEALTH REINSURANCE
In 1997, General Re's global life/health reinsurance operations produced 15
percent of consolidated revenues and 6 percent of consolidated pretax
earnings. These operations include the North American and international
life/health reinsurance operations of Cologne Re. Life/health net premiums
written in 1997 were $1,219 million. Approximately 38 percent of General Re's
life/health net premiums were written in Europe, another 47 percent were
written in North America and the remaining 15 percent were written throughout
the rest of the world. The life/health operations provide individual life,
group life, group health, long-term care, individual health and finite risk
reinsurance. Most of the life reinsurance business is written on a
proportional treaty basis, with smaller amounts written on a facultative
basis, while health business is predominantly written on an excess treaty
basis. General Re's life/health business is marketed primarily on a direct
basis with the exception of group health, which is marketed primarily through
brokers.
U.S. life insurers and reinsurers are subject to substantially similar
regulatory requirements as those discussed in the North American
property/casualty section above. Regulation of the life/health reinsurance
industry outside of the United States is subject to the differing laws and
regulations of each country in which General Re has operations or writes
premiums.
FINANCIAL SERVICES
In 1997, General Re's financial service operations produced 4 percent of
consolidated revenues and 8 percent of consolidated pretax earnings. General
Re's financial service operations include derivative products, insurance
brokerage and management, investment management, reinsurance brokerage and
real estate management operations.
General Re Financial Products Corporation ("GRFP"), a dealer in derivative
products, offers a full line of interest rate, currency and equity swaps and
options, as well as structured finance products through its offices or
affiliates in London, New York, Tokyo, Hong Kong and Toronto. GRFP's client
base consists principally of
5
<PAGE>
major corporations, insurance companies, financial institutions and sovereigns
that use derivative products as part of their asset and liability risk
management strategies.
In August 1995, General Re acquired all of the outstanding stock of New
England Asset Management, Inc. in exchange for stock of General Re. The
resulting company, General Re-New England Asset Management, Inc. ("GR-NEAM"),
provides investment, integrated risk and capital management services primarily
to insurance companies. GR-NEAM has approximately 52 insurance company clients
and approximately $9 billion of client assets under management or advisement
at December 31, 1997.
The number of General Re's competitors in the financial services industry is
not known. As a dealer in derivative products, GRFP competes predominantly on
the basis of pricing, financial strength, risk management capabilities,
service and product innovation. GRFP's principal competitors include
investment and commercial banks, and other specialty companies dealing in
derivatives. GR-NEAM's principal competitors include general investment
managers, investment managers specializing in insurance company asset
management and actuarial and other consulting firms.
OTHER INFORMATION
For additional information on General Re's businesses, see Item 7,
Management's Discussion and Analysis, and Note 19 to the consolidated
financial statements, "Segment Information," included in this report. Also,
see the section "Property/Casualty Insurance Claim Disclosures," on pages 29
of this report.
ITEM 2. PROPERTIES
The main offices of General Re are located in a six-story building in
Stamford, Connecticut. This building, consisting of approximately 560,000
square feet of office space and a multiple-level parking garage, on
approximately eight acres of land, was originally owned by Elm Street
Corporation, a wholly owned financial services subsidiary of General Re. In
November 1984, the land was leased and the improvements were sold to Stamford
Investment Partners. Subsequently, the land and improvements were leased back
by General Re. Under the terms of the lease, General Re has the option to
purchase the improvements upon expiration of the 25-year lease or at an
earlier date upon the occurrence of certain events. General Re has guaranteed
the rental obligations of Elm Street Corporation in connection with this
transaction.
The principal operations of Cologne Re, the largest subsidiary in the
international property/casualty segment, are based in an office building of
approximately 130,000 square feet in Cologne, Germany. The North American
life/health operations of Cologne Re are based in an office building in
Stamford, Connecticut. Cologne Re owns both of these office buildings.
GRC Realty Corporation, also a wholly owned financial services subsidiary of
General Re, has retained title to General Re's former home office site in
Greenwich, Connecticut. This site consists of approximately four acres of land
and an office building which has about 160,000 square feet of office space
that is leased to nonaffiliates. The Greenwich site is subject to a mortgage
expiring December 31, 1998, which had a remaining principal of $2 million at
December 31, 1997.
In addition, General Re's North American property/casualty, financial
services, international property/casualty and global life/health operations
have branch and affiliate operations conducted from leased premises in various
cities in the United States and foreign countries. At this time, General Re
believes its facilities are suitable for its purpose and provide adequate
capacity for General Re's present and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
Certain of General Re's subsidiaries have been named as defendants in
litigation or respondents in arbitration in the ordinary course of conducting
their insurance and reinsurance business. These lawsuits generally seek to
establish liability under insurance or reinsurance contracts issued by the
subsidiaries, and occasionally seek
6
<PAGE>
punitive or exemplary damages. General Re's reinsurance subsidiaries are also
indirectly involved in coverage litigation. In those cases, plaintiffs seek
coverage for their liabilities under insurance policies from insurance
companies reinsured by General Re's reinsurance subsidiaries. In the judgment
of management, none of these cases, individually or collectively, is likely to
result in judgments for amounts which, net of claim and claim expense
liabilities previously established and applicable reinsurance, or any other
litigation, would be material to the financial position, results of operations
or cash flow of General Re.
On July 1, 1996, U.S. Aviation Underwriters, Inc. ("USAU"), a subsidiary of
General Re, and the former chief executive officer of USAU, were convicted of
mail fraud in connection with the allocation of liability between two
policyholders arising from the settlement of claims for a December 7, 1987
airline crash. USAU's sentence included a $20.5 million fine, payable in
installments over a five year probation period, and restitution in accordance
with previously paid civil settlements. These amounts were accrued in prior
periods. USAU is appealing both its conviction and sentence. Payment of the
fine by USAU is stayed pending the determination of the appeal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR GENERAL RE CORPORATION'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) The common stock of General Re Corporation is traded on the New York Stock
Exchange. The following table sets forth information as to the high and
low closing prices of General Re Corporation's common stock on the New
York Stock Exchange during 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
First Quarter................................ $176.38 $151.25 $156.00 $142.38
Second Quarter............................... 189.00 154.00 153.25 139.13
Third Quarter................................ 208.50 185.50 154.50 140.83
Fourth Quarter............................... 219.38 193.19 169.38 142.50
</TABLE>
(b)The number of registered holders of common stock at December 31, 1997 was
4,080.
(c) The following table sets forth information as to the cash dividends paid
by General Re Corporation on shares of its common stock during each of the
past two years.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
First Quarter................................................... $.55 $.51
Second Quarter.................................................. .55 .51
Third Quarter................................................... .55 .51
Fourth Quarter.................................................. .55 .51
</TABLE>
It is the intention of General Re Corporation to declare quarterly dividends
to the extent deemed appropriate by its Board of Directors. Dividends are paid
principally from amounts received by General Re Corporation as dividends from
GRC and the other operating subsidiaries.
7
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA: ELEVEN-YEAR SUMMARY
<TABLE>
<CAPTION>
5 YEAR
1997 1996 1995 1994 1993 CAGR/1/
------- ------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND
RATIOS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
Total revenues............ $ 8,251 $ 8,296 $ 7,210 $ 3,837 $ 3,560 19.5%
Net premiums written/6/... 6,545 6,661 6,102 3,001 2,524 22.7
Net income................ 968 894 825 665 711 8.1
Per basic share.......... 12.04 11.00 9.92 7.97 8.28 9.8
Per diluted share........ 11.76 10.78 9.74 7.86 8.16 9.6
After-tax income, exclud-
ing realized
gains/losses/2/,/3/...... 965 877 788 621 604 15.7
Per basic share.......... 12.00 10.79 9.47 7.43 7.01 17.8
Per diluted share........ 11.72 10.57 9.30 7.33 6.91 17.4
Investment income before
tax...................... 1,288 1,205 1,017 749 755 11.3
Investment income after
tax...................... 969 909 787 622 619 9.3
Insurance investments..... 24,576 23,168 21,061 17,237 12,012 17.5
Total assets.............. 41,459 40,161 34,263 28,116 19,419 23.0
Long-term debt/8/......... 285 286 150 150 184 8.4
Common shareowners' equi-
ty....................... 8,161 7,326 6,587 4,859 4,761 14.1
Operating return on equi-
ty/4/.................... 16.9% 16.2% 16.5% 14.5% 15.4% --
Total return on equi-
ty/4/.................... 23.4% 14.5% 32.9% 9.5% 18.3% --
-------------------------------------------------
NORTH AMERICAN
PROPERTY/CASUALTY
OPERATIONS
Net premiums written/6/... $ 3,058 $ 3,081 $ 2,964 $ 2,581 $ 2,275 7.0%
Investment income before
tax...................... 814 727 711 686 705 3.0
Pretax income, excluding
realized
gains/losses/2/,/5/...... 849 741 716 599 644 11.7
Statutory surplus......... 6,309 5,326 4,607 3,770 3,836 12.8
Investments............... 15,995 14,879 13,481 11,177 11,601 8.8
Net claims and claim ex-
pense liabilities/6/..... 8,881 8,741 7,385 7,029 6,803 6.0
Loss ratio................ 68.4% 69.0% 67.3% 71.4% 70.0% --
Expense ratio............. 30.8% 30.1% 32.3% 30.5% 31.1% --
Underwriting combined ra-
tio...................... 99.2% 99.1% 99.6% 101.9% 101.1% --
-------------------------------------------------
INTERNATIONAL
PROPERTY/CASUALTY OPERA-
TIONS
Net premiums written/6/... $ 2,268 $ 2,505 $ 2,429 $ 420 $ 249 67.5%
Investment income before
tax...................... 369 394 247 52 43 51.0
Pretax income, excluding
realized
gains/losses/2/,/5/,/9/.. 315 320 200 46 25 67.3
Investments/7/............ 8,581 8,290 7,535 6,060 589 75.9
Net claims and claim ex-
pense liabilities/6/..... 4,560 4,664 4,352 3,289 253 86.5
Loss ratio................ 72.1% 73.2% 77.0% 69.2% 75.1% --
Expense ratio............. 30.3% 28.9% 25.8% 29.4% 30.9% --
Underwriting combined ra-
tio...................... 102.4% 102.1% 102.8% 98.6% 106.0% --
-------------------------------------------------
GLOBAL LIFE/HEALTH OPERA-
TIONS
Net premiums written/6/... $ 1,219 $ 1,075 $ 709 -- -- --
Investment income before
tax...................... 73 59 40 -- -- --
Pretax income, excluding
realized
gains/losses/2/,/5/,/9/.. 83 53 50 -- -- --
Net policy benefits for
life/health con-
tracts/6/................ 637 523 379 $ 330 -- --
-------------------------------------------------
FINANCIAL SERVICE OPERA-
TIONS
Revenues, excluding net
realized gains/losses.... $ 300 $ 269 $ 250 $ 229 $ 211 21.1%
Pretax income, excluding
realized
gains/losses/2/,/5/...... 105 100 100 85 58 60.0
-------------------------------------------------
COMMON SHAREOWNERS' INFOR-
MATION
Average common shares out-
standing--basic.......... 79.5 80.3 82.1 82.1 84.5 --
--diluted................. 81.9 82.5 84.2 84.0 86.6 --
Dividend per common
share.................... $ 2.20 $ 2.04 $ 1.96 $ 1.92 $ 1.88 4.1%
Total common dividends.... 174 163 161 157 159 2.6
Cost of common share re-
purchases................ 864 735 35 207 134 --
Common shareowners' equity
per share................ 105.40 89.82 80.22 59.35 56.92 16.1
Common share price: High.. 219.38 169.38 157.88 128.50 132.75 12.2
Low....................... 151.25 139.13 122.88 102.50 105.38 14.0
Year end.................. 212.00 157.75 155.00 123.50 107.00 12.9
</TABLE>
See page 10 and notes to consolidated financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
10 YEAR
1992 1991 1990 1989 1988 1987 CAGR/1/
------- ------- ------- ------- ------ ------ -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
Total revenues........... $ 3,387 $ 3,207 $ 2,954 $ 2,742 $2,719 $3,115 10.2%
Net premiums written/6/.. 2,349 2,249 2,150 1,898 1,903 2,365 10.7
Net income............... 657 657 614 599 480 511 6.6
Per basic share......... 7.55 7.46 6.89 6.52 5.04 5.04 9.1
Per diluted share....... 7.45 7.32 6.76 6.40 5.03 5.03 8.9
After-tax income,
excluding realized
gains/losses/2/,/3/..... 465 563 566 559 518 458 7.7
Per basic share......... 5.30 6.37 6.35 6.08 5.44 4.52 10.3
Per diluted share....... 5.25 6.25 6.23 5.97 5.44 4.52 10.0
Investment income before
tax..................... 755 752 706 673 570 506 9.8
Investment income after
tax..................... 620 618 581 558 494 435 8.3
Insurance investments.... 10,986 10,471 9,291 8,758 7,831 6,945 13.5
Total assets............. 14,700 12,416 11,033 10,390 9,394 8,902 16.6
Long-term debt/8/........ 190 290 290 250 100 100 11.0
Common shareowners'
equity.................. 4,227 3,911 3,270 3,084 2,695 2,563 12.3
Operating return on
equity/4/............... 13.1% 17.7% 20.0% 21.9% 21.9% 20.4% --
Total return on
equity/4/............... 15.8% 23.6% 17.4% 24.7% 19.5% 21.2% --
--------------------------------------------------------
NORTH AMERICAN
PROPERTY/CASUALTY
OPERATIONS
Net premiums written/6/.. $ 2,177 $ 2,122 $ 2,040 $ 1,789 $1,780 $2,251 3.1%
Investment income before
tax..................... 703 703 662 638 539 479 5.4
Pretax income, excluding
realized
gains/losses/2/,/5/..... 489 647 649 612 511 449 6.6
Statutory surplus........ 3,452 3,363 2,902 2,684 2,319 2,009 12.1
Investments.............. 10,477 10,003 8,848 8,417 7,532 6,666 9.1
Net claims and claim
expense liabilities/6/.. 6,635 6,230 5,816 5,535 5,218 4,739 6.5
Loss ratio............... 78.8% 72.0% 67.5% 69.7% 70.7% 74.5% --
Expense ratio............ 29.9% 29.3% 31.5% 28.3% 28.8% 24.7% --
Underwriting combined
ratio................... 108.7% 101.3% 99.0% 98.0% 99.5% 99.2% --
--------------------------------------------------------
INTERNATIONAL
PROPERTY/CASUALTY
OPERATIONS
Net premiums written/6/.. $ 172 $ 127 $ 110 $ 109 $ 123 $ 114 34.9%
Investment income before
tax..................... 47 44 39 31 27 24 31.4
Pretax income, excluding
realized
gains/losses/2/,/5/,/9/.. 24 30 25 35 33 26 28.3
Investments/7/........... 509 469 442 342 299 279 40.9
Net claims and claim
expense liabilities/6/.. 202 164 156 121 109 105 45.8
Loss ratio............... 80.2% 75.8% 71.5% 62.4% 64.4% 64.2% --
Expense ratio............ 32.8% 35.2% 37.5% 33.4% 31.3% 31.9% --
Underwriting combined
ratio................... 113.0% 111.0% 109.0% 95.8% 95.7% 96.1% --
--------------------------------------------------------
GLOBAL LIFE/HEALTH OPERA-
TIONS
Net premiums written/6/.. -- -- -- -- -- -- --
Investment income before
tax..................... -- -- -- -- -- -- --
Pretax income, excluding
realized
gains/losses/2/,/5/,/9/.. -- -- -- -- -- -- --
Net policy benefits for
life/health
contracts/6/............ -- -- -- -- -- -- --
--------------------------------------------------------
FINANCIAL SERVICE OPERA-
TIONS
Revenues, excluding net
realized gains/losses... $ 115 $ 100 $ 88 $ 90 $ 101 $ 106 11.0%
Pretax income, excluding
realized
gains/losses/2/,/5/..... 10 1 6 14 27 30 13.3
--------------------------------------------------------
COMMON SHAREOWNERS' INFOR-
MATION
Average common shares
outstanding--basic...... 85.7 87.1 88.0 91.3 95.3 101.4 --
--diluted................ 87.6 89.0 89.9 93.2 95.3 101.5 --
Dividend per common
share................... $ 1.80 $ 1.68 $ 1.52 $ 1.36 $ 1.20 $ 1.00 8.2%
Total common dividends... 153 146 133 124 114 101 5.6
Cost of common share
repurchases............. 179 59 236 206 268 274 --
Common shareowners'
equity per share........ 49.89 45.14 37.50 34.28 29.04 26.20 14.9
Common share price:High.. 123.13 101.88 93.00 95.75 59.25 68.38 12.4
Low...................... 78.63 84.88 69.00 55.00 45.88 48.75 12.0
Year end................. 115.75 101.88 93.00 87.13 55.25 55.88 14.3
</TABLE>
See page 10 and notes to consolidated financial statements.
9
<PAGE>
NOTES TO THE ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
Only continuing operations are presented. Balance sheet data are as of
December 31st. The 1996 North American property/casualty operations include
the balance sheet of National Re as of December 31, 1996 and income statement
amounts since the October 3, 1996 acquisition. International property/casualty
and life/health operations are reported on a one-quarter lag. The
international property/casualty operations include Cologne Re's balance sheet
beginning at December 31, 1994 and its income statement beginning in 1995.
Only nine months of Cologne Re's 1995 results are included in General Re's
1995 results due to the one-quarter reporting lag. Loss ratios, expense ratios
and combined ratios shown in the table are computed in relation to net
premiums earned (referred to as a "GAAP" combined ratio).
(1) Represents the five-year and ten-year compound annual growth rates.
(2) Excludes cumulative effect of accounting changes. The balance sheet data
in the table on pages 8 and 9 reflect the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting For Certain
Investments in Debt and Equity Securities in 1994. In 1993, General Re
adopted the accounting prescribed by the Emerging Issues Task Force for
multiple-year, retrospectively rated reinsurance contracts. The
cumulative effect from prior years recorded in 1993 increased net income
by $14 million, or $.17 per share. In 1992, General Re adopted SFAS No.
109, Accounting for Income Taxes. The cumulative effect from prior years
recorded in 1992 increased net income by $61 million, or $.71 per share.
(3) After deducting minority interest.
(4) Operating return on equity is computed based on after-tax income,
excluding realized gains/losses and cumulative effects of accounting
changes, divided by average common shareowners' equity, excluding
unrealized investment gains, at the beginning and end of the year. Prior
years' operating return on equity have been revised to exclude the effect
of unrealized investment gains/losses consistent with the new
calculation. Total return on equity is computed based on net income plus
the change in unrealized appreciation of investments and currency
translation adjustments, net of deferred income taxes, divided by average
common shareowners' equity at the beginning and end of the year.
(5) Excludes amortization of goodwill.
(6) Net of reinsurance.
(7) Also includes investments for life/health operations.
(8) Excludes financial services.
(9) Excludes deduction of minority interest.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED OPERATING RESULTS
Comparison of 1997 with 1996
Net income of General Re Corporation and its subsidiaries ("General Re") was
$968 million, or $12.04 per basic share, in 1997, an increase of 9.5 percent
over the $11.00 per basic share earned in 1996. These results include after-
tax realized gains of $.04 per basic share in 1997 and $.21 per basic share in
1996. Net income for 1997 on a diluted basis was $11.76 per share, an increase
of 9.1 percent over $10.78 per share in 1996. The increase in 1997 earnings
was primarily attributable to growth in investment income in the North
American property/casualty operations, increased profitability in the global
life/health operations, and higher trading revenues in the financial services
operations. The North American property/casualty operations included the
earnings from National Re Corporation and its subsidiaries ("National Re") for
a full year in 1997, while General Re's 1996 operating results included the
earnings of National Re only since its acquisition on October 3, 1996.
General Re's consolidated underwriting combined ratio was 100.6 percent in
1997, compared with 100.5 percent in 1996. Neither year was significantly
affected by catastrophes.
Consolidated net premiums written in 1997 were $6,545 million, a decrease of
$116 million, or 1.7 percent, from $6,661 million in 1996. Adjusted for the
effects of foreign exchange, 1997 consolidated net premiums written increased
2.8 percent over 1996. North American property/casualty premium volume was
$3,058 million in 1997, compared with $3,081 million in 1996, a decrease of
0.7 percent. Adjusted for the timing of the National Re acquisition, North
American property/casualty net premiums written decreased approximately 5.3
percent during 1997. Net premiums written in the international
property/casualty reinsurance operations were $2,268 million in 1997, compared
to $2,505 million in 1996. Adjusted for the effects of foreign exchange,
international property/casualty premiums written decreased approximately 1.0
percent for the year. Net premiums written for the global life/health segment
were $1,219 million for 1997, compared to $1,075 million in 1996.
Consolidated investment income was $1,288 million in 1997, compared with
$1,205 million in 1996. Investment income for the North American
property/casualty operations was $814 million in 1997, an increase of 11.8
percent over $727 million earned in 1996. Investment income for the
international property/casualty operations decreased 6.3 percent to $369
million in 1997, compared with $394 million in 1996. The decline in global
interest rates and the strengthening of the U.S. dollar, principally against
the German mark, were the major factors in the decline of investment income.
Adjusted for the effects of foreign exchange, international investment income
would have been unchanged from 1996. The life/health operations earned
investment income of $73 million in 1997, compared to $59 million in 1996. The
financial services operations earned investment income of $32 million in 1997,
compared with $25 million in 1996.
Comparison of 1996 with 1995
In 1996, General Re's net income was $894 million, or $11.00 per basic share,
an increase of 10.9 percent over the $9.92 per basic share earned in 1995.
These results include after-tax realized gains of $.21 per basic share in 1996
and $.45 per basic share in 1995. The increase in 1996 earnings was primarily
attributable to improved property/casualty underwriting results and growth in
investment income in the North American and international property/casualty
operations. Due to General Re's reporting of its international operations on a
quarter lag, the 1996 results also benefited from a full year of results for
Kolnische Ruckversicherungs-Gesellschaft AG ("Cologne Re") and the related
joint-venture company, General Re-CKAG Reinsurance and Investment S.a r.l.
("GR-CK"), compared to only three quarters in 1995.
General Re's consolidated underwriting combined ratio was 100.5 percent in
1996 compared with 101.0 percent in 1995. Both the North American and
international property/casualty operations had an improved underwriting result
compared with the prior year.
11
<PAGE>
Consolidated net premiums written in 1996 were $6,661 million, an increase of
$559 million, or 9.2 percent, from $6,102 million in 1995. North American
property/casualty premium volume was $3,081 million in 1996, compared with
$2,964 million in 1995, an increase of 3.9 percent. North American
property/casualty net premiums written in 1996 included approximately $89
million from National Re. Net premiums written in the international
property/casualty reinsurance operations were $2,505 million in 1996, compared
to $2,429 million in 1995. Net premiums written for the life/health operations
were $1,075 million for 1996, as compared to $709 million in 1995.
Consolidated investment income was $1,205 million in 1996, compared with
$1,017 million in 1995. The consolidation of a full year of Cologne Re in 1996
accounts for approximately $90 million of the $188 million increase in
consolidated investment income in 1996. Investment income for the North
American property/casualty operations was $727 million in 1996, an increase of
2.3 percent over $711 million earned in 1995. Investment income for the
international property/casualty operations increased 59.5 percent to $394
million in 1996, compared with $247 million in 1995. The life/health
operations earned investment income of $59 million in 1996, compared to $40
million in 1995. The financial service operations earned investment income of
$25 million in 1996, compared with $19 million in 1995.
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 OPERATING RESULTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Income before taxes and realized gains/losses.... $ 849 $ 741 $ 716
Net premiums written............................. 3,058 3,081 2,964
Net underwriting income.......................... 23 27 13
Loss ratio....................................... 68.4% 69.0% 67.3%
Expense ratio.................................... 30.8% 30.1% 32.3%
-------- -------- --------
Underwriting combined ratio...................... 99.2% 99.1% 99.6%
======== ======== ========
Investment income................................ $ 814 $ 727 $ 711
Net other income (loss).......................... 12 (13) (8)
</TABLE>
North American property/casualty pretax income in 1997, excluding realized
gains/losses, increased 14.4 percent over 1996 primarily due to growth in
investment income of $87 million and increased other income of $25 million.
The growth of pretax investment income in the North American operations was
due to higher invested assets in existing operations and investment income
from National Re. The growth in investment income was adversely affected by
(1) the shift in assets from taxable to tax-advantaged securities over the
past few years in response to General Re's tax planning strategies; (2) the
maturity and calls of higher yielding fixed income securities; and (3) the use
of North American cash flow from operations to fund common dividends and share
repurchases. The growth in other income was from increased financial
reinsurance fees and lower corporate expenses.
The combined underwriting ratio is computed based on the relationship of
losses and underwriting expenses to premiums earned. This ratio is General
Re's principal indicator of underwriting performance, with less than 100
percent indicating an underwriting profit. In 1997, the combined ratio for the
North American property/casualty segment was 99.2 percent, compared to 99.1
percent in 1996 and 99.6 percent in 1995. Underwriting results for each year
from 1995 through 1997 were consistent with General Re's operating objective
of achieving an underwriting profit and were not significantly affected by
catastrophes.
12
<PAGE>
On October 3, 1996, General Re acquired all of the outstanding shares of
National Re, a North American property/casualty reinsurance group, in exchange
for 4,023,901 shares of General Re's common stock and $313 million in cash,
for a total cost of $900 million. National Re provides property and casualty
reinsurance to insurers on a direct basis. In 1996, National Re's full-year
gross premiums written were $364 million, of which approximately 70 percent
was casualty business and 30 percent was property business. National Re's
clients were predominantly small- to medium-sized, regional and specialty
property/casualty insurers. Like General Re, National Re principally writes
treaty and facultative reinsurance predominantly on an excess basis.
1997 NET PREMIUMS WRITTEN
Net premiums written in 1997 for the
North American property/casualty
operations of $3,058 million decreased
0.7 percent from $3,081 million in 1996,
as the effects of competitive market
conditions offset the growth in premiums
arising from the National Re acquisition.
The pie chart to the right depicts the
relative share of property/casualty
premium by operating unit and the table
below shows net premiums for the past
three years by operating unit.
PIE CHART
Reinsurance 87%
General Star 9%
Genesis 4%
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Reinsurance......................................... $ 2,662 $ 2,696 $ 2,643
General Star Companies (excess and surplus lines)... 270 256 210
Genesis Companies (direct excess and alternative
markets)........................................... 126 129 111
-------- -------- -------
Total.............................................. $ 3,058 $ 3,081 $ 2,964
======== ======== =======
</TABLE>
General Re's reinsurance business includes both portfolio and facultative
premiums. Portfolio business includes reinsurance treaties and programs.
Programs are similar to treaties in that they reinsure a group, or portfolio,
of policies, but exhibit the higher risk volatility characteristics more often
associated with facultative reinsurance, and accordingly are structured on a
per policy rather than per occurrence basis. Net premiums written by the
reinsurance operations declined by 1.2 percent in 1997. The decline in 1997
was primarily attributable to a competitive environment in both the primary
and reinsurance markets, which together resulted in downward pressure on
reinsurance rates and terms. General Re has continued to emphasize
underwriting discipline in this competitive market.
In 1996 and 1997, the North American operations experienced favorable
portfolio premium growth from regional and specialty insurance companies. In
1997, portfolio business with regional and specialty companies increased 10.2
percent due to organic growth and the acquisition of National Re. Regional
company business has increased from approximately 65 percent to 77 percent of
General Re's North American portfolio business. This growth was offset by a
continued decline in portfolio business from large national companies. The
decline in large company premium cessions has been primarily due to increased
risk retentions and consolidation activity within this segment of the primary
insurance industry.
The wholesale nature of reinsurance transactions periodically results in
somewhat volatile premium trends between quarters and years. The addition or
loss of a large contract may significantly affect General Re's premium growth,
although large contracts generally have a smaller effect on earnings than on
premium trends. General Re's treaty contracts usually include short-term
cancellation provisions. During 1997, General Re's largest treaty, which had
annualized net premiums written of approximately $250 million and contributed
less
13
<PAGE>
than one half of one percent of General Re's 1997 net income, was terminated as
of September 30, 1997 as a result of the cedent's decision to retain the
related risk.
For the General Star operations, which primarily write excess, surplus and
specialty insurance, net premiums written grew 5.3 percent in 1997 due to
increased direct writings and higher retention levels. General Star has
produced an underwriting profit for thirteen consecutive years.
The Genesis operations provide direct excess insurance and reinsurance to
companies with self-insurance programs. Net premiums written for Genesis
decreased during the year by 2.2 percent from 1996 levels, principally due to a
decline in specialty liability business.
INTERNATIONAL PROPERTY / CASUALTY OPERATING RESULTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Income before taxes and realized gains/losses.... $ 315 $ 320 $ 200
Net premiums written............................. 2,268 2,505 2,429
Net underwriting loss............................ (55) (53) (63)
Loss ratio....................................... 72.1% 73.2% 77.0%
Expense ratio.................................... 30.3% 28.9% 25.8%
-------- -------- --------
Underwriting combined ratio...................... 102.4% 102.1% 102.8%
Investment income................................ $ 369 $ 394 $ 247
Net other income (loss).......................... 1 (22) 16
</TABLE>
Income before taxes and realized gains/losses for the international
property/casualty operations was $315 million in 1997, a decrease of 1.3
percent from 1996. The comparisons of 1997 to 1996 were affected adversely by
the 11.5 percent strengthening of the U.S. dollar relative to the German mark,
the most important currency in this segment. Adjusted for the effects of
foreign exchange, income before taxes and realized gains/losses of the
international property/casualty segment would have increased by approximately
4.0 percent.
International net premiums written were
$2,268 million in 1997, compared with
$2,505 million in 1996. The composition
of international property/casualty
premiums by currency presented in the
chart to the left displays the geographic
diversification of General Re's
international business. The category
labeled "Other" represents more than 100
currencies.
PIE CHART
Germany 46%
US$ Foreign 13%
Other 12%
United Kingdom 9%
Australia 6%
France 6%
Japan 3%
Hong Kong 3%
Spain 2%
The reported decline in premiums was
affected by a stronger U.S. dollar which
reduced international premiums when
translated into U.S. dollars. Adjusted
for the effects of foreign exchange,
international property/casualty premiums
written decreased approximately 1.0
percent in 1997. The decline in
international property/casualty premiums
was primarily due to higher ceding
company retention levels and disciplined
underwriting in the face of increased
competition in European insurance
markets.
International property/casualty investment income decreased 6.3 percent from
1996. Adjusted for the effects of foreign exchange, investment income was
essentially flat, despite positive cash flow, due to the decline in global
interest rates over the last few years.
14
<PAGE>
GLOBAL LIFE/HEALTH OPERATING RESULTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Income before taxes and realized gains/losses..... $ 83 $ 53 $ 50
Net premiums written
Life............................................. 859 812 542
Health........................................... 360 263 167
Net underwriting income........................... 13 2 10
Investment income................................. 73 59 40
Net other income (loss)........................... (3) (7) 0
</TABLE>
This segment includes the North American and international life/health
operations of Cologne Re. During 1997, the life/health operations' income
before taxes and realized gains increased by 56.7 percent primarily due to
increased investment income derived from growth in the business, improved
mortality experience in the North American individual life operations and
improved health underwriting experience.
Net premiums written in 1997 were $1,219 million, an increase of 13.4 percent
over 1996. Approximately 38 percent of General Re's life/health net premiums
were written in Europe, another 47 percent were written in North America and
the remaining 15 percent were written throughout the rest of the world. The
segment experienced strong premium growth both in North America and
internationally. The North American operation's growth was primarily in the
individual life, group life and individual health segments. The international
operation's growth was spread throughout continental Europe, the United
Kingdom and Australia. Adjusted for the effects of foreign exchange, 1997
global life reinsurance premiums increased approximately 16.0 percent compared
to 1996. Health reinsurance premiums written increased 36.5 percent in 1997
compared to 1996. This growth was primarily due to two new blocks of
individual health reinsurance business written in the United States. Premium
growth rates for global life/health operations for 1998 may be lower than
those experienced in 1997.
Investment income for the global life/health operations was $73 million in
1997, compared to $59 million in 1996. The increase in investment income was
due to the significant growth in premium volume and invested cash flow.
FINANCIAL SERVICES OPERATING RESULTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Income before taxes and realized gains/losses....... $ 105 $ 100 $ 100
Total revenues...................................... 300 269 250
Net investment income............................... 32 25 19
Other income........................................ 73 75 81
</TABLE>
The financial service operations include General Re's derivative products,
insurance brokerage and management, investment management, reinsurance
brokerage and real estate management operations. Pretax income for the
financial service operations was $105 million and $100 million in 1997 and
1996, respectively. The 4.8 percent growth in pretax income was due to higher
1997 income in General Re's derivative products operations, General Re
Financial Products Corporation and affiliates ("GRFP").
GRFP is a dealer in derivative products and offers a full line of interest
rate, currency, credit and equity swaps, options and other derivative
products. GRFP's gross trading revenue was $175 million in 1997, compared to
$144 million in 1996 and $142 million in 1995. The growth in 1997 revenues was
principally attributable to growth in GRFP's European fixed income and foreign
exchange options business.
15
<PAGE>
GRFP closely controls its derivatives operations and actively manages its open
positions to limit its risk exposures. GRFP hedges its exposure to market risk
(which includes foreign exchange, interest rate, credit spread, equity, swap
spread, volatility, correlation, and yield curve risks) in connection with its
dealer activities by purchasing or selling futures contracts, entering into
forward foreign exchange contracts, purchasing or selling U.S. and foreign
government securities or entering into offsetting derivative transactions.
CONSOLIDATED FINANCIAL CONDITION
Assets/Investments
At December 31, 1997, total assets were $41,459 million, compared with $40,161
million at December 31, 1996. The $1,298 million growth in assets was
attributable to an increase of $893 million in the total assets of the North
American property/casualty operations and $755 million in the financial
services segment, offset by a $350 million decrease in the international
reinsurance operations due to foreign exchange.
At December 31, 1997, total insurance invested assets were $24,576 million,
compared with $23,168 million at December 31, 1996, an increase of 6.1
percent. The $1,408 million increase in insurance invested assets was the
result of an increase of $1,116 million in the North American
property/casualty segment and an increase of $291 million in the international
reinsurance operations. This increase was primarily the result of unrealized
appreciation in the fixed income and common equity portfolios and operating
cash flow, partly offset by common stock repurchases and dividend payments.
The financial service operations had $2,780 million of invested assets at
December 31, 1997, a decrease of $613 million compared to December 31, 1996.
The $613 million decrease in financial services invested assets results from
changes in the hedging needs and activities of GRFP.
Included in General Re's invested assets was $2,460 million and $1,625 million
of unrealized appreciation, after deferred income taxes, at December 31, 1997
and December 31, 1996, respectively. The increase was due to the appreciation
of equities and bonds held in the North American and the international
operations.
NORTH AMERICAN PROPERTY/CASUALTY INVESTED ASSETS
General Re's North American property/casualty investment portfolios are
managed for both after-tax total return and after-tax investment income. These
investment objectives recognize that a significant portion of the fixed income
portfolio supports the claim and claim expense liabilities, and therefore, is
subject to appropriate liquidity, duration, currency, quality and other
constraints. At December 31, 1997, total invested assets of the North American
property/casualty operations were $15,995 million, a 7.5 percent increase over
1996 invested assets.
The composition of the North American property/casualty invested assets as a
percentage of the total North American property/casualty portfolio at December
31, 1997 is shown in the pie chart below.
As in 1996, almost all newly
generated cash flow in 1997 was used
to pay dividends to shareowners and
repurchase General Re's common
stock. Within the portfolio, General
Re continued to shift assets from
taxable to tax-advantaged securities
as part of its tax planning
strategies. As new cash flow becomes
available for investment, General Re
anticipates it will be allocated to
share repurchases and to those areas
with the highest after-tax returns
or income.
PIE CHART
U.S. Tax-exempt bonds 48%
Common equities 23%
Corporate bonds 7%
Preferred Stock 7%
Mortgage and asset-backed 7%
U.S. Government bonds 3%
Foreign bonds 2%
Other 3%
To minimize its exposure to shifts
in interest rates, General Re
balances, within a range, the
duration of the fixed maturity
investments (present-value weighted
measure of average life) to match
the duration of the
property/casualty claim liabilities.
16
<PAGE>
At December 31, 1997, the effective average maturity of the fixed-maturity
portfolio was 11.5 years, compared to an estimated average life of 9.2 years
for General Re's property/casualty claim liabilities. The duration of
property/casualty assets was 4.8 years, compared with 4.5 years for the
property/casualty claim liabilities. This compares with 1996 durations of 5.1
years and 4.5 years, respectively.
Included in fixed-maturity investments were mortgage-backed securities of $952
million (3.9 percent of consolidated insurance investments) and other asset-
backed securities of $84 million (0.3 percent of consolidated insurance
investments) at December 31, 1997. These securities have interest and
principal repayment patterns that differ from typical fixed maturities, since
their duration and ultimate yield are exposed to the effect of prepayments.
Mortgage-backed securities are generally issued by quasi-federal agencies or
federally supported institutions, which results in relatively low credit risk.
Most of the mortgage-backed and other asset-backed securities are publicly
traded and market values were obtained from an external pricing service.
At December 31, 1997, common equity investments in the North American
portfolio totaled $3,695 million, representing 23.1 percent of the North
American property/casualty investment portfolio. The North American common
equity portfolio is well diversified and primarily consists of holdings in
companies with large market capitalizations, which collectively have a
calculated volatility approximating the Standard & Poor's 500 index. General
Re has purchased futures contracts to hedge approximately 10 percent of the
common equity portfolio as a means to achieve target asset allocations within
the North American portfolio. To the extent that General Re's portfolio held
the same securities as the futures contracts, related gains and losses on the
futures contracts were treated as basis adjustments to those securities held.
Otherwise, gains and losses on the futures contracts were not deemed to
qualify for such hedge accounting treatment. Included in realized gains and
losses for 1997 and 1996, respectively, were $57 million and $72 million of
losses from these futures contracts, while $64 million and $53 million,
respectively, of losses were recorded as basis adjustments for hedged equities
and, accordingly, reduced shareowners' equity.
The North American investment portfolio includes nontraditional, private
investments. These alternative investments, included in the balance sheet
caption, "Other invested assets," were $558 million (2.3 percent of
consolidated insurance investments) and $435 million (1.9 percent of
consolidated insurance investments) at December 31, 1997 and 1996,
respectively. Most of these investments are interests in limited partnerships
managed by outside professional managers. Over time, these investments are
expected to provide a higher return than the overall North American
property/casualty investment portfolio. This segment, however, also may entail
a greater amount of risk, both in terms of limited liquidity and greater
uncertainty of returns, compared to the rest of General Re's portfolio.
General Re evaluates the fair value of these alternative investments on a
quarterly basis by reviewing available financial information of the investee
and performing other financial analyses in consultation with external
advisors.
Credit Quality
Credit considerations are an
BAR CHART important part of General Re's
fixed-maturity investment
Nonrated 3.9% strategy. The overall fixed-
Below BBB 1.0% maturity portfolio continued to
BBB 2.6% have an average credit rating of
A 17.9% AA at December 31, 1997. The
AA 30.0% distribution of General Re's North
AAA 44.6% American property/casualty fixed-
maturity portfolio by credit
quality is presented in the chart
on the left. Management estimates
that the credit quality of
nonrated securities is equivalent
of A.
17
<PAGE>
Investment Returns
Pretax yields on the North American property/casualty bond portfolios were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996 CHANGE
------ ------ ------
<S> <C> <C> <C>
Taxable.................................................. 7.57% 7.62% (5)bps
Tax-exempt............................................... 6.00% 5.95% 5 bps
</TABLE>
During 1997 calls and maturities on grandfathered tax-exempt bonds were
approximately $73 million and preferred equity calls were $251 million. The
called bonds had an average yield of approximately 7.93 percent and the
proceeds from the calls were reinvested at an average yield of approximately
5.40 percent. The preferred equities had an average yield of approximately 7.82
percent and the proceeds from the calls were reinvested at an average yield of
approximately 7.20 percent. Based on its current investment portfolio and the
current yield curve, General Re presently anticipates additional calls and
maturities through the end of 1998 of approximately $89 million for
grandfathered tax-exempt bonds and $109 million for preferred equities, with
average yields of approximately 7.40 percent and 8.15 percent, respectively.
Reinvestment of these funds may occur at lower yields.
Pretax total return for North American investments was 12.6 percent in 1997,
compared with 7.1 percent in 1996 and 18.9 percent in 1995. Almost all
investment sectors recorded higher returns in 1997 than in 1996, primarily due
to lower interest rates and higher common equity values in 1997. The total
pretax returns on the North American investment portfolio by major asset class
were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Short-term securities......................................... 5.9% 5.6% 6.0%
Taxable bonds................................................. 9.8 3.6 17.5
Tax-exempt bonds.............................................. 9.0 3.9 15.1
Foreign bonds................................................. 5.6 9.5 13.7
Common equities............................................... 32.3 22.6 37.9
Foreign equities.............................................. 7.5 18.5 9.2
Preferred equities............................................ 11.5 9.1 17.6
</TABLE>
The total after-tax return for the North American investment portfolio was 12.1
percent in 1997 and 6.0 percent in 1996.
INTERNATIONAL INVESTED ASSETS
General Re's international
property/casualty and life/health
reinsurance operations held invested
assets of $8,581 million at December
31, 1997, an increase of $291 million
from December 31, 1996. These
portfolios include $6,851 million of
Cologne Re's investments, $1,334
million in wholly owned international
operations' investments and $396
million of GR-CK investments. Most of
the international invested assets are
managed internally.
PIE CHART
Corporate & other bonds 33%
Other foreign government 21%
Common equities 12%
Short-term 11%
U.S. Government bonds 10%
German federal and state
government 10%
Other 3%
General Re's international investment
portfolios are managed for both
after-tax total return and after-tax
investment income, taking into
consideration the duration and
currency structure of the operations'
reinsurance liabilities. The
investment objectives of each
individual subsidiary within the
segment are determined by specific
investment guidelines which consider
the different legal and tax
requirements in their respective
jurisdictions.
18
<PAGE>
The composition of the international investment portfolio by major asset class
at December 31, 1997 is presented in the chart above. The composition of the
international investment portfolio did not change significantly from the prior
period with slightly over 85 percent of the portfolio invested in fixed income
securities. The fixed income investment policy is increasingly focused on
earning a stable yield spread relative to Government bond markets by
concentrating on the management of credit risk.
To minimize its exposure to shifts in interest rates, General Re's
international operations balance, within a range, the duration of the fixed
maturity investments to match the duration of their claim liabilities. The
international operations write a greater portion of their business in property
lines of business than General Re's North American operations and,
accordingly, invest in shorter duration securities as part of their program to
match asset and liability durations. The sharing of investment income under
certain reinsurance agreements also lowers the duration of the international
operations' liabilities. At December 31, 1997, the average duration of the
fixed income portfolio including short-term securities was 3.5 years.
The fixed income portfolio of the
international operations consists of high
credit quality securities. Substantially
all bonds were investment grade; the
average rating of the portfolio was above
AA. The table to the left presents the
credit ratings of fixed-maturity
securities held in the international
investment portfolios. The common equity
portfolio was well diversified with
holdings principally from the major stock
markets in Europe, the United States and
Japan. The real estate portfolio of $161
million was internationally diversified
with principal holdings in Germany. The
relatively high share of short-term
investments in the portfolio is due to
the need to hedge investment crediting
provisions in certain deposit contracts.
BAR CHART
Nonrated 2.8%
Below BBB 0.6%
BBB 1.5%
A 5.4%
AA 31.8%
AAA 57.9%
The currency structure of the
international investment portfolio is
globally diversified according to the
currency of the underlying reinsurance
liabilities. General Re hedges its
currency risk by seeking to match its
assets and liabilities by currency. The
composition of the international
operation's invested assets by currency
is presented in the chart to the left.
PIE CHART
German Mark 35%
U.S. Dollar 31%
U.K. Sterling 15%
Australian Dollar 6%
French Franc 3%
Japanese Yen 1%
Other 9%
CONSOLIDATED LIABILITIES
The gross liability for claims and claim
expenses, which provides for estimated
future payments arising from current and
prior property/casualty reinsurance
transactions,
amounted to $15,797 million and $15,977 million at December 31, 1997 and 1996,
respectively. The decrease in the liability of $180 million during 1997 was
due to a decrease of $83 million in the North American property/casualty
segment and a decrease of $97 million in the international property/casualty
segment. The decline in the North American property/casualty gross liability
for claims and claim expenses was due to slower premium growth and commutation
activity. Adjusted for the effects of foreign exchange, the international
liability for claims and claim expenses increased approximately 8.0 percent.
In addition to the gross liability for property/casualty claim and claim
expenses, General Re had a gross liability for policy benefits for life/health
contracts of $907 million and $751 million at December 31, 1997 and 1996,
respectively.
The gross liability and reinsurance recoverable for claims and claim expenses
were based on General Re's analysis of reports and individual case estimates
received from ceding companies. The liability and related recoverables, which
include an amount estimated by General Re for claims and claim expenses
incurred but not
19
<PAGE>
reported ("IBNR"), are evaluated continuously by management, annually by
General Re's independent accountants in conjunction with their audit and
periodically by independent consulting actuaries at the discretion of the
Board of Directors. Any resulting adjustments are included in the current
period's income.
Consolidated net claims and claim expenses for 1996 and prior accident years
experienced favorable development of $168 million in 1997. Net claims and
claim expenses for 1996 and prior accident years for the North American
operations experienced favorable development of $178 million in 1997. The net
favorable loss development was due to favorable development on casualty lines
of business, partially offset by losses related to environmental, asbestos and
other mass tort claims. Net claims and claim expenses for 1996 and prior
accident years for the international operations, adjusted for the effects of
foreign exchange, had adverse development of $10 million in 1997. The net
adverse loss development for the international operations was primarily
related to strengthening of reserves for certain casualty business. Due to
customary lags in underwriting activity reports from European ceding
companies, there may be correlated development of premium and losses in the
international property/casualty operations. These premiums may not be included
in the reserve development discussed above.
Included in General Re's liability for claims and claim expenses are
liabilities for environmental and latent injury damage claims. These claims
are principally related to claims arising from remediation costs associated
with hazardous waste sites and bodily injury claims relating to asbestos
products and environmental hazards. These amounts include provisions for both
reported and IBNR claims. The table below presents the three-year development
of the balance sheet liability for environmental and latent injury claims:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Gross liability, beginning of year........................ $1,989 $1,756 $1,478
Reinsurance recoverable................................... 635 498 382
------ ------ ------
Liability, net of reinsurance, beginning of year.......... 1,354 1,258 1,096
Amount incurred during year.............................. 227 179 298
Less: amount paid during year............................ 145 108 136
Acquisition of National Re in 1996....................... -- 25 --
------ ------ ------
Liability, net of reinsurance, end of year................ 1,436 1,354 1,258
Reinsurance recoverable................................... 611 635 498
------ ------ ------
Gross liability, end of year.............................. $2,047 $1,989 $1,756
====== ====== ======
</TABLE>
General Re continuously estimates its liabilities and related reinsurance
recoverable for environmental and latent injury claims and claim expenses.
While most of its liabilities for such claims arise from exposures in North
America, General Re has also provided for international environmental and
latent injury exposures. Environmental and latent injury exposures do not lend
themselves to traditional methods of loss development determination and
therefore reserves related to these exposures may be considered less reliable
than reserves for standard lines of business (e.g., automobile). The estimate
for environmental and latent injury losses is composed of four parts: known
claims, development on known claims, IBNR and direct excess coverage
litigation expenses. General Re's estimate for IBNR is based on fitted curves
of estimated future claim emergence; this estimate is less reliable than the
estimated liability for reported claims. The effect of joint and several
liability on the severity of claims and a provision for future claims
inflation have been included in the loss development estimate.
General Re has established a liability for litigation costs associated with
coverage disputes arising out of direct excess insurance policies (rather than
from reinsurance assumed). Such coverage litigation expenses are estimated
using an actuarial estimate of actionable items and their projected costs.
General Re paid $6 million in such costs during 1997, and as of December 31,
1997, the liability for future litigation costs related to coverage disputes
for environmental and latent injury claims was $96 million (included in the
table above). As coverage disputes are tried and verdicts rendered, General Re
expects that the settled case law will result in a downward
20
<PAGE>
trend in future direct excess litigation expenses. Because reinsurance
contracts generally contain arbitration clauses which control disputes between
the ceding company and the reinsurer, General Re does not expect the future
litigation costs associated with reinsurance disputes to be material.
Comprehensive environmental laws have been enacted in many foreign countries,
generally imposing sanctions in the form of cleanup costs, civil damage
awards, fines and/or imprisonment. Changes in environmental regulations and
environmental verdicts may affect future claim development.
The liability for environmental and latent injury claims and claim expenses is
management's best estimate of future claim and claim expense payments and
recoveries which are expected to develop over the next several decades.
General Re continuously monitors evolving case law and its effect on
environmental and latent injury claims. Changing government regulations, newly
identified toxins, newly reported claims, new theories of liability, new
contract interpretations and other factors could significantly affect future
claim development. While General Re has recorded its current best estimate of
its liabilities for unpaid claims and claim expenses, it is reasonably
possible that these estimated liabilities, net of estimated reinsurance
recoveries, may increase in the future and that the increase may be material
to General Re's results from operations, cash flows and financial position. It
is not possible to estimate reliably the amount of additional net loss, or the
range of net loss, that is reasonably possible.
General Re discounts certain liabilities associated with workers' compensation
claims. Current statutory rules allow the discounting of "tabular reserves" as
defined and allow discounting of nontabular reserves if permitted by the
insurer's state of domicile. As of December 31, 1997, General Re recorded
$1,658 million in claim liability discount, of which $1,047 million relates to
tabular reserves and $611 million relates to nontabular reserves for medical
costs associated with tabular reserve claims. The Delaware Insurance
Department has confirmed that General Re may discount both its tabular
reserves and the medical expenses associated with such tabular reserves at 4.5
percent per year.
Catastrophe losses may have a significant effect on the insurance and
reinsurance industry. General Re has exposure to windstorm, hail, earthquake
and other catastrophic events, all of which are managed through several
measures, including underwriting controls, occurrence caps on certain property
treaties, modeling and monitoring its accumulations and imposing zonal limits.
In addition, General Re uses its retrocessional programs to limit its net
losses from catastrophes.
FINANCIAL SERVICES ASSETS AND LIABILITIES
The asset and liability positions of the financial service operations
fluctuate based on ongoing derivatives transactions and related risk
management activities. The purchase of U.S. and foreign government securities
(fixed maturities at fair value), which are primarily financed through
collateralized repurchase agreements (securities sold under agreements to
repurchase), and the "short" sale of U.S. and foreign government securities
(securities sold but not yet purchased), whose proceeds are invested in
reverse repurchase agreements (securities purchased under agreements to
resell), contribute to the short-term fluctuations in the operations' total
assets and liabilities, while generally not having any material effect on
common shareowners' equity. During 1997, invested assets of these operations
decreased $613 million to $2,780 million. Securities purchased under
agreements to resell (an asset) increased $903 million in 1997. Securities
sold under agreements to repurchase (a liability) decreased $955 million in
1997 to $1,030 million. Securities sold but not yet purchased represent
obligations of General Re to deliver the specified security at the contracted
price, thereby creating a liability to repurchase the security in the market
at prevailing prices. Accordingly, General Re's ultimate obligation to satisfy
the sale of securities sold but not yet purchased may exceed the amount
recognized in the balance sheet. The liability for securities sold but not yet
purchased increased $321 million in 1997 to $1,190 million at December 31,
1997.
VALUE AT 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
21
<PAGE>
interest and foreign exchange rates, and changes in credit spreads and in
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 conditions can be estimated through statistical models that attempt
to predict within a specified confidence level the "value at risk" based on
historical price and volatility movements. For example, if historical
probabilities indicate that the change in the value of a fixed income security
would not be expected to exceed $1 million with a 95 percent probability
within a given time period, then the security's value at risk at a 95 percent
confidence level for that period is $1 million.
Market and Interest Rate Risk: Reinsurance Operations
The major components of market risk affecting the reinsurance operations
are interest rate, foreign currency and equity risk. The reinsurance
operations have fixed income investment portfolios with a value of $16,847
million at December 31, 1997 that are subject to changes in value due to
changes in market interest rates. In addition, certain mortgage-backed and
asset-backed securities are exposed to accelerated prepayment risk
generally caused by interest rate movements. Should interest rates decline,
mortgage holders are more likely to refinance existing mortgages at lower
rates. Acceleration of repayments could adversely affect future investment
income, if reinvestment of the cash received from repayments is in lower
yielding securities.
In addition to interest rate risk, General Re's common equity portfolio of
$4,748 million at December 31, 1997 is subject to changes in value based on
changes in equity prices, predominately from the United States and European
equity markets. General Re's U.S. and European common equity portfolios are
highly correlated with the S&P 500 and Eurotop 100 indices, respectively.
The unrealized change in value of the equity portfolios would be included
net of deferred taxes in shareowners' equity. To hedge a portion of its
exposure to movement in the value of its North American equity portfolio,
General Re entered into futures contracts which had a notional value of
$379 million at December 31, 1997.
General Re's reinsurance operations have exposure to movements in various
currencies around the world, particularly the German mark, British pound
and Australian dollar. Changes in currency exchange rates primarily affect
the international components of General Re's balance sheet, income
statement and statement of cash flows. This exposure is somewhat mitigated
by the fact that General Re's reinsurance premiums and invested assets are
partially offset by claims incurred and claim liabilities, respectively,
denominated generally in the same currency.
Value at risk estimates are presented in the table below and represent the
potential after-tax change in value of General Re's invested assets, which,
to the extent unrealized, would be included directly in shareowners'
equity. These estimates exclude any potentially offsetting effect resulting
from movements in the economic value of General Re's liabilities, most
importantly, loss reserves and minority interest. The estimates shown in
the table were calculated using Monte Carlo simulation involving 5,000
stochastic paths with a 95 percent confidence level based on weekly
correlations and volatilities observed for 1993-1997. Mean assumptions
included no change in weekly interest and foreign exchange rates and an 8
percent annual appreciation for the common equity portfolio. General Re's
total value at risk includes a diversification benefit since interest rate,
equity and currency risks are only partially correlated. The overall after-
tax value at risk for General Re at December 31, 1997 was as follows:
<TABLE>
<CAPTION>
IN MILLIONS
<S> <C>
Interest rate risk............................................ $ 80
Equity risk................................................... 82
Foreign exchange risk......................................... 47
Diversification benefit....................................... (73)
----
Total....................................................... $136
====
</TABLE>
Market and Interest Rate Risk: Financial Services
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
22
<PAGE>
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 done 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 simulations to
obtain the required degree of confidence. GRFP's 1997 aggregate weekly
market risk limit across all trading books increased from $10 million to
$15 million from April 1997 onward, consistent with the growth in GRFP's
business. In addition to these daily and weekly assessments of risk, GRFP
prepares periodic stress tests to assess its exposure to extreme movements
in various market risk factors.
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. The table also shows the highest, lowest and average
profit and losses recorded over one week periods. There was no one-week
period during the year in which reported profit or loss exceeded the risk
limit.
VALUE AT RISK
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- ---------
FOREIGN
INTEREST RATE EXCHANGE RATE EQUITY ALL RISKS ALL RISKS
------------- ------------- ------ --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Highest.............. $11 $ 6 $ 5 $13 $11
Lowest............... 6 3 0 7 7
Average.............. 9 4 2 10 9
</TABLE>
For 1997 and 1996, respectively, the largest weekly pretax gains were $5
million and $4 million, respectively, while the largest weekly pretax loss
was $3 million in both years. The average effect of these risks on income
was neutral.
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 continually monitored and adjusted due to
changes in the credit quality of the counterparty, changes in interest and
currency rates or changes in other factors affecting credit exposure. The
fair value allowance for counterparty credit exposures and future
administrative costs on existing contracts was $93 million and $77 million
at December 31, 1997 and 1996, respectively. Since inception, GRFP has not
experienced any credit losses
YEAR 2000 ISSUES
Companies with automated systems generally are facing the problem that certain
computer programs may experience software malfunctions with the advent of the
Year 2000. Since many business software programs use only two digits to
specify the year, rather than four, such programs would likely treat "00"
associated with the Year 2000 as the year 1900.
General Re has a project under way to modify its internal mainframe, server
and personal computer hardware and software applications that may be affected
by the Year 2000 change. In addition, General Re is reviewing the related
initiatives of its principal vendors and other important third-party
relationships. Both internal and external resources have been engaged to
modify General Re's computer systems for Year 2000 compliance. Included in
consolidated operating results was approximately $6 million and $1 million for
the cost of these procedures in 1997 and 1996, respectively. An additional $13
million is the anticipated cost to complete the modifications.
23
<PAGE>
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 insurance policies for damages caused by companies'
failure to address their Year 2000 computer problem. 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 insurance coverage for losses is likely to differ from jurisdiction
to jurisdiction.
SHAREOWNERS' EQUITY
Common shareowners' equity at December 31, 1997 was $8,161 million, or $105.40
per basic share, an increase of 17.3 percent over $89.82 per basic share at
December 31, 1996. The increase was primarily due to net income of $968
million, an increase in after-tax unrealized investment gains of $835 million,
a decrease in unrealized foreign currency translation losses of $11 million
and the reissuance of common stock of $48 million under employee compensation
and benefit plans, partially offset by common share repurchases of $864
million and common and preferred stock dividends of $184 million. Common
shareowners' equity at December 31, 1996 increased 11.2 percent over the
$6,587 million at year-end 1995.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
A summary of General Re's cash flow by business segment was as follows:
<TABLE>
<S> <C> <C> <C>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING
ACTIVITIES:
North American
property/casualty.. $ 827 $ 930 $ 985
International
property/casualty
and life/health... 627 740 740
Financial
services.......... 14 8 49
-------- -------- --------
Consolidated
operating cash
flow............... 1,468 1,678 1,774
-------- -------- --------
INVESTING ACTIVI-
TIES:
North American
property/casualty.. (218) 93 (848)
International
property/casualty
and life/health... (286) (826) (936)
Financial
services.......... (498) (13) 21
Cash used for
acquisitions...... -- (313) --
Cash obtained in
acquisitions...... -- 3 --
-------- -------- --------
Consolidated invest-
ing cash flow...... (1,002) (1,056) (1,763)
-------- -------- --------
FINANCING ACTIVI-
TIES:
North American
property/casualty.. (594) (733) (149)
International
property/casualty.. (318) 88 162
Financial
services.......... 433 130 (8)
-------- -------- --------
Consolidated financ-
ing cash flow...... (479) (515) 5
-------- -------- --------
Consolidated change
in cash............ $ (13) $ 107 $ 16
======== ======== ========
</TABLE>
Cash flow from operations was $1,468 million in 1997, compared with $1,678
million in 1996, and $1,774 million in 1995. The decline was principally due
to claim commutation activity, foreign exchange and generally lower
underwriting cash flow. North American property/casualty financing cash flows
include General Re's share repurchases and dividends to shareowners. During
1996, General Re utilized $313 million in cash for the acquisition of National
Re.
General Re's property/casualty and life/health operations enter into contracts
that are recorded as deposits. Cash flows from these transactions, which are
included in financing activities, can be volatile from year to year, but
generally do not have a material effect on consolidated net income. During
1998, General Re expects approximately $300 million of deposits to mature. The
effect of these maturities is net likely to be material to the financial
position or results from operations of General Re.
General Re's financial service operations have issued various debt instruments
in connection with their match-funded investment operations. The obligations
and related investments have been swapped into variable rate U.S. dollar LIBOR
instruments.
Dividends paid to General Re common and preferred shareowners were $185
million, $174 million and $172 million in 1997, 1996 and 1995, respectively.
General Re used $864 million, $735 million and $35 million to repurchase
4,692,300 shares, 4,989,000 shares and 235,200 shares of its common stock in
the years ended December 31, 1997, 1996 and 1995, respectively. Through
December 31, 1997, General Re has used $3.2 billion to repurchase 31,825,800
shares of its common stock since the inception of its repurchase program in
1987. On December 10, 1997, General Re's Board of Directors authorized $750
million of share repurchases, in addition to the standing authority to
repurchase shares in anticipation of shares to be issued under various
compensation plans. The December 1997 repurchase authorization had $696
million of remaining capacity as of December 31, 1997. On February 11, 1998,
the Board of Directors declared a regular quarterly dividend of $.59 per share
on
25
<PAGE>
the common stock of General Re. This represents an increase of 7.3 percent
over the $.55 per share dividend paid in prior quarters during 1997 and the
22nd consecutive year in which General Re has increased its dividend.
CREDIT RATINGS
At December 31, 1997, General Re had $275 million of senior debt outstanding
of which $150 million was issued by General Re Corporation and is rated AAA by
Standard & Poor's and Aa1 by Moody's, and $125 million was issued by National
Re and is rated AA by Standard and Poor's and Aa2 by Moody's. General Re
Corporation issues commercial paper to provide additional financial
flexibility for its operations. Commercial paper offered by General Re
Corporation has been rated A1+ by Standard & Poor's and Prime 1 by Moody's. At
December 31, 1997, $689 million of commercial paper was outstanding, all of
which was used by the financial service operations for various funding needs.
General Re has $1.8 billion of available lines of credit, which provide
financial flexibility and support its commercial paper program. The credit
lines consist of a 364-day facility of $800 million and a five-year credit
facility for the remaining $1 billion. The credit agreements with the banks
require General Re to maintain a minimum consolidated tangible net worth, as
defined, of $2.7 billion. All available lines of credit were unused at
December 31, 1997 and 1996.
On December 18, 1997 General Re Corporation and General Re Funding Corporation
("GRFC") established a $1 billion European Medium Term Note Program. Notes
issued under the program by GRFC will be guaranteed by General Re Corporation
and will be primarily used for match-funded transactions. The program allows
for issuance of debt with maturities up to 30 years and denominated in a
number of major currencies. With certain exceptions, the instruments may not
be offered, sold or delivered in the United States or to U.S. persons. There
were no notes outstanding under the program at December 31, 1997. Notes issued
under the European Medium Term Note Program are expected to be rated AAA by
Standard & Poor's and Aa1 by Moody's.
GRC, General Star and Genesis have a claims-paying ability rating of AAA by
Standard & Poor's and are also rated A++ by A.M. Best Company, a leading
insurance industry rating agency. GRC has a financial strength rating of Aaa
by Moody's. Each of these ratings represents the highest category for the
respective rating agency. Cologne Re has a claims-paying ability rating of AAA
by Standard & Poor's and an A+ rating from A.M. Best Company. National Re has
a claims-paying ability rating of AA+ by Standard & Poor's and is rated A+ by
A.M. Best Company.
NEW ACCOUNTING STANDARDS
See Note 2 to the consolidated financial statements on page 41 for a
discussion of new accounting standards.
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
26
<PAGE>
any specific projections as to future earnings nor does it endorse any
projections regarding future performance that may be made by others.
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;
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;
27
<PAGE>
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GENERAL RE CORPORATION
INDEX TO RESERVE DISCLOSURES, FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RESERVE DISCLOSURES
Property/Casualty Insurance Claim Disclosures (Unaudited).................. 29
FINANCIAL STATEMENTS
Report of Independent Accountants.......................................... 33
Consolidated Statements of Income.......................................... 34
Consolidated Balance Sheets................................................ 35
Consolidated Statements of Common Shareowners' Equity...................... 36
Consolidated Statements of Cash Flows...................................... 37
Notes to Consolidated Financial Statements................................. 38
FINANCIAL STATEMENT SCHEDULES
I. Condensed Financial Information of General Re Corporation............... 71
V. Supplementary Insurance Information..................................... 74
</TABLE>
Schedules other than those listed above have been omitted since they are
either not required, not applicable or repeat information disclosed in the
notes to financial statements.
28
<PAGE>
PROPERTY/CASUALTY INSURANCE CLAIM DISCLOSURES
The consolidated financial statements include estimated liabilities for unpaid
claims and claim expenses of General Re's North American and international
property/casualty reinsurance subsidiaries. The provision for reported but
unpaid claims and claim expenses is based on client reports and individual
case estimates, including anticipated salvage and subrogation recoverable. A
provision is included for incurred but not reported ("IBNR") claims and claim
expenses on the basis of past experience. Historic premium, claim and claim
expense data are organized in actuarial formats, analyzed for credibility, and
processed through actuarial formulae. Using actuarial judgment, forecasts of
IBNR claims and claim expenses are determined and tested for validity. General
Re strives for accuracy in its reserving structure and closely monitors its
estimates against actual claims and claim expense emergence. The methods of
making such estimates and for establishing the resulting liabilities are
continually reviewed and updated. All adjustments to the reserve structure
(which encompasses claims from up to 50 years ago) are included in current
operating results.
The actuary relied upon by management in forming the basis of its belief as to
the reasonableness of claim and claim expense liabilities is Lee R. Steeneck,
FCAS, MAAA, Vice President and Actuary of General Re Corporation. In addition
to the ongoing review by management, these liabilities are subject to
independent review on a regular basis. General Re's independent public
accountants use actuaries during their annual financial statement audit to
review both current balance sheet liabilities and income statement provisions.
In addition, the Audit Committee of the Board of Directors has periodically
engaged the services of an actuarial consulting firm to compare the claim
liabilities established by management with the estimates of an independent
consulting actuary.
LOSS RESERVE TABLES
Table 1 presents the development of net balance sheet liabilities for General
Re's North American property/casualty operations from 1987 through 1997. Table
2 presents the development of the gross balance sheet liability for General
Re's North American property/casualty operations from 1992 through 1997.
The first data row shows the estimated net liability for unpaid claims and
claim expenses recorded at the balance sheet date for each of the indicated
years. This liability represents the estimated amount of claims and claim
expenses, including IBNR, that are outstanding as of the balance sheet date.
The upper "triangle" of data shows the reestimated amount of the previously
recorded net liability based on experience as of the end of each succeeding
year. The estimate is increased or decreased as more information becomes known
about the frequency and severity of claims for individual years.
The "cumulative (deficiency) redundancy" represents the aggregate change in
the initial estimates from the original balance sheet date through December
31, 1997. Annual changes in the estimates are included in current operating
results each year as the liabilities are reevaluated. The deficiencies shown
in the tables represent cumulative differences between the original estimate
and the current balance sheet liabilities and therefore they should not be
summed. The lower "triangle" of data shows the cumulative amount paid with
respect to the previously recorded liability as of the end of each succeeding
year.
General Re's liabilities for claims and claim expenses displayed in Tables 1
and 2 have been significantly affected by the emergence of environmental and
latent injury claims. Starting in 1979, General Re considerably strengthened
the liability for claims and claim expenses for latent injury (e.g., asbestos-
related) and environmental (e.g., hazardous waste) claims. When originally
written, these exposures, some dating back to the 1940s, were not known to
cause bodily harm or property damage. Coverage, if any, was provided to
policyholders on a very limited basis. Liberal interpretations of very
carefully worded insurance policy contract language have, in retrospect,
created unanticipated liabilities for the property/casualty insurance
industry. Adjustments to General Re's liabilities have been made in each
year's current operating results since 1979 to reflect the evolution of case
law which has widened the nature and extent of insurance and reinsurance
coverage
29
<PAGE>
for these exposures. In recent years, reserve strengthening on environmental
and mass tort claims has been offset by favorable development on reinsurance
of liability business.
Social and economic inflation have a leveraged effect on liabilities for
claims and claim expenses. Implicit within the reserve structure is an
increase in both the frequency and severity of claims between years. In recent
years, some of General Re's clients have increased the amount of their
retained risk, which partially offsets the effect of social and economic
inflation.
General Re purchases reinsurance, in both the North American and international
markets, which provides protection from large property, liability or workers'
compensation claims and allows General Re to offer greater capacity to clients
for certain lines of business. General Re increased its capacity over time by
retaining more risk and by purchasing additional reinsurance protection above
its retentions. General Re believes it has selected financially sound
reinsurers and anticipates receiving the full amounts recoverable, net of
allowances provided for uncollectible reinsurance recoverables.
Table 3 and Table 4 present the development of net and gross balance sheet
liabilities for General Re's international property/casualty operations
beginning in 1994. Although the accident-year information required to complete
Table 3 and Table 4 for General Re's wholly owned international subsidiaries
was not available in prior years, these liabilities were not significant for
these periods. Due to lags in receiving underwriting activity reports from
ceding companies in Europe, there may be correlated development of both
premiums and claims in the international operations and fluctuations due to
currency movements. The effect of currency movements on these liabilities has
been separately reported in these two tables.
With respect to the information included in Tables 1-4, conditions and trends
affecting the development of liabilities in the past may not occur in the
future. Accordingly, it is not appropriate to extrapolate future redundancies
or deficiencies based on these tables. Current actuarial studies indicate that
liabilities for claims and claim expense as of December 31, 1997, net and
gross of reinsurance, are adequate.
General Re discounts certain North American workers' compensation loss
reserves at an interest rate of 4.5 percent per annum, the same rate used for
reporting to state regulatory authorities with respect to the same claim
liabilities. These claims are characterized by periodic indemnity payments
principally for wage loss and medical/rehabilitation expenses which are
generally fixed or determinable, both in amount and duration. The amortization
of the discount is included in current operating results as part of the
development of prior years' liabilities. The effect of discounting reduced
liabilities for claims and claim expenses, net of reinsurance, is shown in
Table 5.
30
<PAGE>
TABLE 1
ANALYSIS OF NORTH AMERICAN
NET CLAIMS AND CLAIM EXPENSE DEVELOPMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for unpaid
claims and claim
expenses............... $ 4,738 $ 5,217 $ 5,549 $ 5,842 $ 6,230 $ 6,635 $ 6,803 $ 7,029 $ 7,385 $ 8,741 $8,881
Net liability
reestimated as of:
1 year later.......... 4,903 5,185 5,537 5,856 6,286 6,775 6,767 7,042 7,337 8,563
2 years later......... 4,927 5,247 5,481 5,778 6,352 6,850 6,845 6,868 7,055
3 years later......... 4,991 5,166 5,502 5,906 6,475 6,994 6,739 6,731
4 years later......... 4,983 5,236 5,683 6,091 6,638 6,935 6,703
5 years later......... 5,044 5,420 5,900 6,319 6,635 6,979
6 years later......... 5,284 5,642 6,173 6,326 6,720
7 years later......... 5,528 5,958 6,190 6,442
8 years later......... 5,855 5,979 6,319
9 years later......... 5,882 6,139
10 years later......... 6,066
Cumulative (deficiency)
redundancy*........... $(1,328) $ (922) $ (770) $ (600) $ (490) $ (344) $ 100 $ 298 $ 330 $ 178 XXX
Cumulative amount of net
liability paid through:
1 year later.......... $ 747 $ 812 $ 927 $ 905 $ 1,044 $ 1,291 $ 1,207 $ 1,176 $ 1,253 $ 1,584
2 years later......... 1,354 1,436 1,584 1,613 1,955 2,195 2,063 1,959 2,142
3 years later......... 1,846 1,903 2,115 2,332 2,570 2,850 2,617 2,677
4 years later......... 2,209 2,320 2,689 2,769 3,072 3,300 3,179
5 years later......... 2,546 2,814 3,025 3,184 3,437 3,754
6 years later......... 2,965 3,085 3,362 3,481 3,808
7 years later......... 3,203 3,375 3,618 3,806
8 years later......... 3,472 3,611 3,890
9 years later......... 3,695 3,858
10 years later......... 3,923
</TABLE>
- --------
* The liability for workers' compensation tabular reserves for claims and
claim expenses is discounted as discussed herein. Therefore, the liability
reestimated for each year includes the effect of the discount and its
amortization.
TABLE 2
ANALYSIS OF NORTH AMERICAN
GROSS CLAIMS AND CLAIM EXPENSE DEVELOPMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Gross liability for unpaid
claims and claim expenses.. $ 7,968 $ 8,122 $ 8,578 $ 9,356 $ 10,767 $10,684
Gross liability reestimated
as of:
1 year later............... 8,087 8,180 8,865 9,326 10,518
2 years later.............. 8,149 8,438 8,781 8,870
3 years later.............. 8,570 8,502 8,263
4 years later.............. 8,723 8,110
5 years later.............. 8,460
Cumulative (deficiency) re-
dundancy................... $ (492) $ 12 $ 315 $ 486 $ 249 xxx
Cumulative amount of gross
liability paid through:
1 year later............... $ 1,620 $ 1,351 $ 1,502 $ 1,575 2,022
2 years later.............. 2,641 2,419 2,416 2,828
3 years later.............. 3,432 3,090 3,419
4 years later.............. 3,964 3,900
5 years later.............. 4,645
</TABLE>
31
<PAGE>
TABLE 3
ANALYSIS OF INTERNATIONAL
NET CLAIMS AND CLAIM EXPENSE DEVELOPMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net liability for unpaid claims and claim ex-
penses........................................ $3,289 $4,352 $4,664 $4,560
Net liability reestimated as of:
1 year later.................................. 3,545 4,134 4,141
2 years later................................. 3,316 3,776
3 years later................................. 3,100
Cumulative increase (decrease) in net
liability, including foreign exchange......... (189) (576) (523)
Less: (increase) decrease due to foreign ex-
change........................................ 285 591 533
------ ------ ------
Cumulative (deficiency), adjusted for foreign
exchange...................................... $ (96) $ (15) $ (10)
------ ------ ------
Cumulative amount of net liability paid
through:
1 year later.................................. $ 408 $ 800 $1,060
2 years later................................. 704 1,569
3 years later................................. 1,571
</TABLE>
TABLE 4
ANALYSIS OF INTERNATIONAL
GROSS CLAIMS AND CLAIM EXPENSE DEVELOPMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Gross liability for unpaid claims and claim ex-
penses........................................ $3,580 $4,896 $5,210 $5,113
Gross liability reestimated as of:
1 year later.................................. 3,858 4,667 4,685
2 years later................................. 3,625 4,250
3 years later................................. 3,404
Cumulative increase (decrease) in gross
liability, including foreign exchange......... (176) (646) (525)
Less: (increase) decrease due to foreign ex-
change........................................ 305 679 502
------ ------ ------
Cumulative (deficiency) redundancy, adjusted
for foreign exchange.......................... $ (129) $ (33) $ 23
------ ------ ------
Cumulative amount of gross liability paid
through:
1 year later.................................. $ 474 $ 842 $1,203
2 years later................................. 760 1,810
3 years later................................. 1,816
</TABLE>
TABLE 5
RECONCILIATION OF DISCOUNTING
NET LIABILITY FOR CLAIMS AND CLAIM EXPENSES
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Cumulative discount, beginning of the year.............. $1,662 $1,406 $1,328
Acquisition of National Re.............................. -- 150 --
Additional discount..................................... 62 162 131
Amortization of discount................................ (67) (56) (53)
------ ------ ------
Cumulative discount, end of the year.................... $1,657 $1,662 $1,406
====== ====== ======
</TABLE>
32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of General Re Corporation Stamford,
Connecticut
We have audited the consolidated financial statements and schedules of General
Re Corporation and subsidiaries listed in the index on page 28 of this Form
10-K. These financial statements and schedules are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of General Re Corporation and subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
New York, New York
January 30, 1998
33
<PAGE>
GENERAL RE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES
Net premiums written
Property/casualty.......................... $ 5,326 $ 5,586 $ 5,393
Life/health................................ 1,219 1,075 709
---------- ---------- ----------
Total net premiums written.................. $ 6,545 $ 6,661 $ 6,102
========== ========== ==========
Net premiums earned
Property/casualty.......................... $ 5,414 $ 5,618 $ 5,141
Life/health................................ 1,193 1,060 696
---------- ---------- ----------
Total net premiums earned................... 6,607 6,678 5,837
Investment income........................... 1,288 1,205 1,017
Other revenues.............................. 352 309 292
Net realized gains on investments........... 4 104 64
---------- ---------- ----------
Total revenues........................... 8,251 8,296 7,210
---------- ---------- ----------
EXPENSES
Claims and claim expenses................... 3,788 3,984 3,680
Life/health benefits........................ 883 789 505
Acquisition costs........................... 1,414 1,478 1,345
Other operating costs and expenses.......... 810 727 550
Goodwill amortization....................... 29 21 13
---------- ---------- ----------
Total expenses........................... 6,924 6,999 6,093
---------- ---------- ----------
Income before income taxes and minority
interest................................ 1,327 1,297 1,117
Income tax expense (benefit):
Current.................................... 254 327 288
Deferred................................... 48 (4) (41)
---------- ---------- ----------
Income tax expense.......................... 302 323 247
---------- ---------- ----------
Income before minority interest.......... 1,025 974 870
Minority interest........................... 57 80 45
---------- ---------- ----------
Net income............................... $ 968 $ 894 $ 825
========== ========== ==========
SHARE DATA:
Net income per common share:
Basic...................................... $ 12.04 $ 11.00 $ 9.92
========== ========== ==========
Diluted.................................... $ 11.76 $ 10.78 $ 9.74
========== ========== ==========
Average common shares outstanding:
Basic...................................... 79,502,845 80,251,342 82,085,315
Diluted.................................... 81,947,547 82,466,750 84,227,806
Dividends per share to common shareowners... $ 2.20 $ 2.04 $ 1.96
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
GENERAL RE CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
ASSETS
INVESTMENTS:
Fixed maturities, available-for-sale (cost: $15,859 in 1997;
$16,298 in 1996)........................................... $16,847 $16,992
Preferred equities, at fair value (cost: $980 in 1997; $771
in 1996)................................................... 1,041 789
Common equities, at fair value (cost: $2,098 in 1997; $1,940
in 1996)................................................... 4,748 3,672
Short-term investments, at amortized cost which approximates
fair value................................................. 1,172 1,019
Other invested assets....................................... 768 696
------- -------
Total insurance investments................................. 24,576 23,168
Cash......................................................... 193 154
Accrued investment income.................................... 358 350
Accounts receivable.......................................... 1,858 2,663
Funds held by reinsured companies............................ 488 474
Reinsurance recoverable...................................... 2,706 2,935
Deferred acquisition costs................................... 476 457
Goodwill..................................................... 968 1,038
Other assets................................................. 962 804
FINANCIAL SERVICES ASSETS:
Investment securities, at fair value (cost: $790 in 1997;
$176 in 1996).............................................. 792 179
Trading securities, at fair value (cost: $1,908 in 1997;
$2,994 in 1996)............................................ 1,859 2,967
Short-term investments, at fair value....................... 129 248
Cash........................................................ 159 211
Trading account assets...................................... 4,313 3,962
Securities purchased under agreement to resell.............. 903 --
Other assets................................................ 719 551
------- -------
Total assets.............................................. $41,459 $40,161
======= =======
LIABILITIES
Claims and claim expenses.................................... $15,797 $15,977
Policy benefits for life/health contracts.................... 907 751
Unearned premiums............................................ 1,874 1,957
Other reinsurance balances................................... 2,948 3,388
Notes payable................................................ 285 286
Income taxes................................................. 1,104 732
Other liabilities............................................ 997 963
Minority interest............................................ 1,032 1,166
FINANCIAL SERVICES LIABILITIES:
Securities sold under agreements to repurchase, at contract
value...................................................... 1,030 1,985
Securities sold but not yet purchased, at market value...... 1,190 869
Trading account liabilities................................. 3,664 3,785
Commercial paper............................................ 689 140
Notes payable............................................... 746 4
Other liabilities........................................... 1,032 830
------- -------
Total liabilities......................................... 33,295 32,833
------- -------
Cumulative convertible preferred stock (shares issued:
1,700,231 in 1997 and 1,711,907 in 1996; no par value)...... 145 146
Loan to employee savings and stock ownership plan............ (142) (144)
------- -------
3 2
------- -------
COMMON SHAREOWNERS' EQUITY
Common stock (102,827,344 shares issued in 1997 and 1996; par
value $.50)................................................. 51 51
Paid-in capital.............................................. 1,109 1,041
Unrealized appreciation of investments, net of deferred in-
come taxes.................................................. 2,460 1,625
Currency translation adjustments, net of deferred income tax-
es.......................................................... (42) (53)
Retained earnings............................................ 7,492 6,708
Less common stock in treasury, at cost (shares held:
25,393,840 in 1997 and 21,262,113 in 1996).................. (2,909) (2,046)
------- -------
Total common shareowners' equity.......................... 8,161 7,326
------- -------
Total liabilities, cumulative convertible preferred stock
and common shareowners' equity........................... $41,459 $40,161
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
GENERAL RE CORPORATION
CONSOLIDATED STATEMENTS OF COMMON SHAREOWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
COMMON STOCK:
Beginning of year.................................... $ 51 $ 51 $ 51
Change for the year.................................. -- -- --
------ ------ ------
End of year......................................... 51 51 51
------ ------ ------
PAID-IN CAPITAL:
Beginning of year.................................... 1,041 635 604
Stock issued under stock option and other incentive
arrangements........................................ 47 30 24
Stock issued for acquisition of National Re.......... -- 369 --
Other................................................ 21 7 7
------ ------ ------
End of year......................................... 1,109 1,041 635
------ ------ ------
UNREALIZED APPRECIATION OF INVESTMENTS, NET OF
DEFERRED INCOME TAXES:
Beginning of year.................................... 1,625 1,468 421
Change for the year.................................. 1,318 242 1,641
Deferred income taxes................................ (483) (85) (594)
------ ------ ------
End of year......................................... 2,460 1,625 1,468
------ ------ ------
CURRENCY TRANSLATION ADJUSTMENTS, NET OF DEFERRED
INCOME TAXES:
Beginning of year.................................... (53) (11) (20)
Change for the year.................................. 11 (42) 9
------ ------ ------
End of year......................................... (42) (53) (11)
------ ------ ------
RETAINED EARNINGS:
Beginning of year.................................... 6,708 5,986 5,330
Net income........................................... 968 894 825
Dividends paid on common stock....................... (174) (163) (161)
Dividends paid on preferred stock, net of income
taxes............................................... (10) (9) (8)
------ ------ ------
End of year......................................... 7,492 6,708 5,986
------ ------ ------
COMMON STOCK IN TREASURY:
Beginning of year.................................... (2,046) (1,542) (1,527)
Cost of shares acquired during year.................. (864) (735) (35)
Stock issued for acquisition of National Re.......... -- 218 --
Stock issued under stock option and other incentive
arrangements........................................ 1 13 20
------ ------ ------
End of year......................................... (2,909) (2,046) (1,542)
------ ------ ------
Total common shareowners' equity.................. $8,161 $7,326 $6,587
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
GENERAL RE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 968 $ 894 $ 825
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in claim and claim expense liabilities........ (180) 689 1,671
Increase in policy benefits for life/health
contracts........................................... 156 171 96
Change in reinsurance recoverable.................... 229 (49) (305)
Change in unearned premiums.......................... (83) (64) 272
Amortization of acquisition costs.................... 1,414 1,478 1,345
Acquisition costs deferred........................... (1,433) (1,478) (1,455)
Trading account activities:
Change in trading account securities................ 1,515 (660) (1,602)
Securities purchased under agreements to resell..... (903) 66 747
Securities sold under agreements to repurchase...... (955) 722 325
Change in other trading balances.................... 301 (42) 521
Other changes in assets and liabilities.............. 443 55 (602)
Net realized gains on investments.................... (4) (104) (64)
------ ------ ------
Net cash from operating activities................. 1,468 1,678 1,774
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed maturities: available-for-sale
Purchases............................................ (6,664) (8,612) (5,837)
Calls and maturities................................. 564 857 811
Sales................................................ 5,751 6,531 3,900
Equity securities
Purchases............................................ (1,119) (1,166) (900)
Sales................................................ 652 1,337 723
Net (purchases) sales of other invested assets........ (43) 12 (101)
Net (purchases) sales of short-term investments....... (143) 295 (359)
Cash used for acquisitions............................ -- (313) --
Cash obtained in acquisitions......................... -- 3 --
------ ------ ------
Net cash used in investing activities.............. (1,002) (1,056) (1,763)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable........................... -- (86) --
Commercial paper borrowing (repayment), net........... 549 140 (31)
Increase in contract deposits......................... 42 290 64
Cash dividends paid to shareowners: Common............ (174) (163) (161)
Preferred............................................. (11) (11) (11)
Acquisition of treasury stock......................... (867) (729) (30)
Other................................................. (18) 44 174
------ ------ ------
Net cash (used in) from financing activities....... (479) (515) 5
------ ------ ------
Change in cash......................................... (13) 107 16
Cash, beginning of year................................ 365 258 242
------ ------ ------
Cash, end of year...................................... $ 352 $ 365 $ 258
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
General Re Corporation and its subsidiaries ("General Re") have global
reinsurance and financial service operations in 61 cities in 31 countries on
six continents and provide reinsurance coverage in approximately 150
countries. General Re operates four principal businesses: North American
property/casualty reinsurance, international property/casualty reinsurance,
global life/health reinsurance and financial services. General Re's principal
reinsurance operations are based in North America and Germany, with other
major operations in Asia, Australia, Europe and South America. General Re's
principal financial service operations are located in the United States, the
United Kingdom, Japan, Hong Kong and Canada. General Re is the largest North
American professional property/casualty reinsurer, and is among the three
largest reinsurers in the world based on net premiums written and capital.
General Re's North American property/casualty operations produced revenues of
$3,967 million, or 48 percent, of consolidated revenues in 1997. The principal
business of these subsidiaries is treaty and facultative reinsurance
underwritten on a direct basis throughout North America. General Re
predominately writes excess reinsurance across various lines of business.
General Re's international property/casualty operations produced revenues of
$2,706 million, or 33 percent, of consolidated revenues in 1997. The
international property/casualty operations write proportional and excess
reinsurance for both property and casualty risks throughout the world.
General Re's global life/health reinsurance operations produced revenues of
$1,277 million, or 15 percent, of consolidated revenues in 1997. These
operations include the North American and international life/health
reinsurance operations of Cologne Re.
General Re's financial services operations include derivative products,
insurance brokerage and management, investment management, reinsurance
brokerage and real estate management operations. Through General Re Financial
Products Corporation and its affiliates ("GRFP"), General Re offers a full
line of interest rate, currency credit and equity swaps and options, as well
as structured finance products. The financial services operations produced
$301 million, or 4 percent, of General Re's 1997 revenues.
ACCOUNTING POLICIES
BASIS OF PRESENTATION: General Re's consolidated financial statements have
been prepared on the basis of generally accepted accounting principles in the
United States. The consolidated financial statements include General Re
Corporation and its subsidiaries. All significant intercompany transactions
have been eliminated. International property/casualty and global life/health
subsidiaries report their results on a quarter lag. Certain reclassifications
have been made to prior years' financial statements to conform to the 1997
presentation.
INVESTMENTS: Fixed maturity securities that General Re may sell prior to
maturity in response to changes in market interest rates, changes in liquidity
needs, or other factors and equity securities are classified as available-for-
sale and carried at fair value, with unrealized gains and losses, net of
deferred income taxes, excluded from income and reported in a separate
component of common shareowners' equity. Fixed maturity securities that are
held for resale are classified as trading and carried at fair value, with
unrealized gains and losses included in income.
Realized gains or losses on sales of investments are primarily determined on
the basis of identified cost and include adjustments to the net realizable
value of investments for declines in value that are considered to be other
than temporary. Realized gains or losses include gains and losses arising from
the translation into U.S. dollars of
38
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
investments held by the North American operations and denominated in foreign
currencies. General Re periodically uses derivatives to hedge certain risks in
its investment portfolio. To the extent the derivatives are considered hedges
for accounting purposes, these derivatives must be designated as a hedge of
specific securities at their inception and must remain a hedge throughout the
hedge period. Related gains or losses are treated as basis adjustments of the
hedged securities and are included net of taxes in shareowners' equity. Gains
and losses on derivatives not qualifying for hedge accounting treatment are
included in income in the current period.
Investment income is recognized as earned and includes the accretion of bond
discount and amortization of bond premium. Included in other invested assets
are investments in reinsurance joint ventures, limited partnerships and real
estate. Reinsurance ventures reported under the equity method are carried at
initial cost with adjustment after acquisition for General Re's proportionate
share of the venture's earnings. The amount of the adjustment is included in
"Other revenues". Limited partnership investments are carried at estimated
fair value. Real estate is valued at cost and depreciated over its estimated
useful life.
PROPERTY/CASUALTY OPERATIONS
PREMIUMS EARNED: Premiums are recognized in income over the contract period
in proportion to the amount of insurance or reinsurance provided. Unearned
premium liabilities are established to cover the unexpired portion of
premiums written. Such liabilities are computed by pro rata methods based
on statistical data and reports received from ceding companies. In the
absence of ceding company reports, premiums are estimated using historical
information and management judgment. Premium adjustments on contracts and
audit premiums are accrued on an estimated basis throughout the contract
term. Premiums are reported net of retrocessions.
ACQUISITION COSTS: Acquisition costs, consisting principally of commissions
and brokerage expenses incurred at contract issuance, are deferred and
amortized over the contract period in which the related premiums are
earned, generally one year. Deferred acquisition costs are reviewed to
determine that they do not exceed recoverable amounts, after considering
investment income.
CLAIMS AND CLAIM EXPENSES: The liability for claims and claim expenses is
based on reports and individual case estimates received from ceding
companies. The liability also includes incurred but not reported claims and
claim expenses, which are actuarially estimated based on past experience
and are reduced by anticipated salvage and subrogation recoverable. The
methods of determining such estimates and establishing the related
liabilities are regularly reviewed and updated, and any resulting
adjustments are included in income currently. Reinsurance recoveries on
unpaid claims and claim expenses, net of uncollectible amounts, are
recognized as assets at the same time and in a manner consistent with
General Re's method for establishing the related liability.
LIFE/HEALTH OPERATIONS
PREMIUMS EARNED: Premiums for life contracts are recognized in income when
due. Premiums for health contracts are earned over the contract period in
proportion to the amount of insurance or reinsurance provided. Unearned
premium liabilities are established to cover the unexpired portion of
health premiums written. Premiums are reported net of retrocessions.
ACQUISITION COSTS: Acquisition costs, principally commissions that vary
with and are primarily related to the acquisition of new business, are
deferred and amortized with interest over the premium-paying period of
traditional life and health insurance policies.
POLICY BENEFITS FOR LIFE/HEALTH CONTRACTS: The liability for policy
benefits for life contracts has been computed based upon estimated future
investment yields, expected mortality and withdrawal rates anticipated at
the later of either the acquisition of Cologne Re or at the date of
contract issuance. These
39
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
assumptions include a margin for adverse deviation and vary with the
characteristics of the reinsurance contract's date of issuance, policy
duration and country of risk. The interest rate assumptions used vary by
country ranging principally from 3.0 percent to 7.0 percent. Accrued
profit-sharing commissions to ceding companies have been provided based on
contractual terms for experience through the balance sheet date.
PRESENT VALUE OF FUTURE PROFITS: The present value of future profits
("PVP") is the actuarially determined present value of the projected
profits from the continuation of in-force reinsurance on existing insurance
policies on the date Cologne Re was acquired. The calculation of the
estimated profits includes anticipated future premiums, death and benefit
payments, reserve changes, profit sharing amounts, expenses and related
investment income. PVP was determined using risk-adjusted discount rates
ranging primarily from 10.0 percent through 16.0 percent. The interest
rates selected for the valuation were determined based on the applicable
interest rates in the country of risk and the risk inherent in the
realization of the estimated future profits. PVP of $100 million and $112
million at December 31, 1997 and 1996, respectively, is included in "Other
assets" and is being amortized over the duration of the related life
business, based upon the assumed underlying profits of the business
acquired using a 7.0 percent interest rate.
FUNDS HELD BY REINSURED COMPANIES: Funds held by reinsured companies represent
ceded premiums retained by the ceding company for a period according to
contractual terms. General Re generally earns investment income on these
balances during the period funds are held.
GOODWILL: General Re amortizes goodwill arising from its business combinations
on a straight-line basis predominantly over 40 years. The amount of goodwill
associated with Cologne Re fluctuates based on changes in the value of the
German mark relative to the U.S. dollar during the period.
DEFERRED INCOME TAXES: Deferred income taxes have been provided for all
temporary differences between the bases of assets and liabilities used in the
financial statements and General Re's United States and foreign tax returns.
Deferred income taxes are also provided for unrealized appreciation
(depreciation) of equity securities and available-for-sale fixed maturities,
and for foreign currency translation gains or losses by a charge or credit
directly to the applicable component of common shareowners' equity.
FOREIGN CURRENCY TRANSLATION: Revenues and expenses denominated in foreign
currencies are translated at the average rate of exchange during the period.
Assets and liabilities are translated at the rate of exchange in effect at the
close of the period. Gains or losses resulting from translating foreign
currency financial statements are accumulated in a separate component of
common shareowners' equity. General Re's international operations have
exposures to major European currencies, principally the German mark and
British pound. A deterioration in the value of these currencies could have an
adverse effect on General Re's financial position and operating results. Gains
or losses resulting from foreign currency transactions (transactions
denominated in a currency other than the entity's functional currency) are
included in net income.
DEPOSITS: Reinsurance contracts that do not meet insurance accounting risk
transfer requirements are classified as deposits and included in "Other
reinsurance balances." These deposits are treated as financing transactions
and are credited or charged with interest income or expense according to
contract terms. Cash flows from these deposit transactions are included in
"financing activities" in the statement of cash flows.
ALLOWANCE FOR DOUBTFUL ACCOUNTS: Allowances are provided for uncollectible
reinsurance recoverables and other doubtful receivables. Write-offs of
receivables reduce the allowance. At December 31, 1997 and 1996, the allowance
was $119 million and $126 million, respectively.
FINANCIAL SERVICES: GRFP's derivative contracts are carried at estimated fair
value based on financial models which incorporate current interest rates,
currency rates, and security values. Securities owned, securities sold but
40
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
not yet purchased and futures contracts are carried at fair value. Realized
and unrealized gains or losses from selling or valuing securities and
contractual commitments at fair value are included in "Other revenues."
Included in trading account assets and liabilities are the unrealized gains
and losses on interest rate and currency swaps, forward currency commitments
and option products. These estimated unrealized gains and losses, which have
been included in income, represent the fair value of estimated future cash
flows for these transactions. Purchases of securities under agreements to
resell and sales of securities under agreements to repurchase are accounted
for as collateralized investing and financing transactions and are recorded at
their contractual resale or repurchase amounts, plus accrued interest.
STOCK-BASED COMPENSATION: General Re's expense from stock-based compensation
plans is measured based on accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. General Re
discloses the pro forma effects on net income and earnings per share of the
fair-value based method under Statement of Financial Standard No. 123.
ACCOUNTING ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. General Re's principal estimates include
property/casualty claims and claim expenses, policy benefits for life/health
contracts, estimated premiums when General Re has not received ceding company
reports and valuation of nonexchange traded financial instruments. General Re
utilizes historical information, actuarial analyses, financial modeling and
other analytical techniques to prepare these estimates. Actual results for all
these items could differ from the estimates included in General Re's income
statements and balance sheets.
2. ACCOUNTING CHANGES
In the fourth quarter of 1997, General Re adopted Statement of Financial
Accounting Standards No. 128, Earnings Per Share, which established a new
standard for computing and disclosing earnings per share data. As a result,
General Re presented both basic and diluted earnings per share as computed
under the new standard. Under previous guidance, General Re only reported
primary earnings per share, which was the same result for General Re as basic
earnings per share. Basic earnings per share excludes dilution and is computed
by dividing income available to common shareowners by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
include the effect of all potentially dilutive securities.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income, which establishes standards for the
reporting and display of comprehensive income and its components in the
consolidated financial statements. After-tax unrealized appreciation of
investments and currency translation adjustments are among the principal items
that will be added to net income to arrive at comprehensive income. The
statement is effective in 1998 and will change the presentation of certain
information in General Re's financial statements but will not have any effect
on financial position, results from operations or cash flows.
Also 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 the interim and annual financial statements, including
information about the products and services from which revenues are derived,
the geographic areas of operation, and information about major customers. 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.
41
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACQUISITIONS AND REINSURANCE VENTURES
National Re
On October 3, 1996, General Re acquired all of the outstanding shares of
National Re, a North American property/casualty reinsurance group, in exchange
for 4,023,901 shares of General Re's common stock and $313 million in cash for
a total cost of $900 million. The acquisition of National Re has been
accounted for as a purchase. The results of operations subsequent to the date
of acquisition are included in General Re's consolidated operating results. At
December 31, 1996, National Re's assets and liabilities at acquisition were
included in General Re's consolidated balance sheet. Pro forma figures showing
the effect of this acquisition on General Re's 1995 and 1996 net income and
shareowners' equity have not been presented due to immateriality.
Cologne Re
On December 28, 1994, General Re and Colonia Konzern AG formed a new company
that acquired 75 percent of the ordinary shares and approximately 30 percent
of the preference shares of Cologne Re, which collectively represents a 66.3
percent economic interest in Cologne Re. In exchange for its Cologne Re
shares, Colonia Konzern AG, for itself and as trustee for Nordstern Allgemeine
Versicherungs AG (collectively, "CKAG"), received 100 percent of the Class A
shares of the new company, General Re-CKAG Reinsurance and Investment S.a r.1.
("GR-CK"). General Re initially contributed $884 million (DM 1,377 million) to
GR-CK in exchange for 100 percent of the Class B shares of GR-CK. On December
30, 1994, GR-CK paid $302 million (DM 475 million) to General Re in exchange
for notes in the principal amount of DM 475 million. The notes pay interest of
8.0 percent annually to GR-CK and are due on December 30, 2004. The
intercompany notes have been eliminated in consolidation. The funds invested
in GR-CK are subject to certain restrictions according to the joint venture
agreement.
The Class A shares have 49.9 percent of the votes of GR-CK and are entitled to
an annual Class A dividend, which is based on a formula and is subject to a
minimum of approximately DM 36 million, while the Class B shares have 50.1
percent of the votes of GR-CK and are entitled to the earnings of GR-CK in
excess of the Class A dividend. General Re also receives an annual Class B
cash dividend of 50.1 percent of GR-CK's distributable income, as defined in
the joint-venture agreement. Dividends related to the 1996 calendar result,
which were paid in 1997 with respect to the Class A and B shares, were $22
million and $14 million, respectively.
General Re has an option to purchase from January 1, 2002 to January 1, 2004
the Class A shares of GR-CK owned by the CKAG at a formula price. The option
has a minimum exercise price of DM 1,306 million and a maximum of DM 1,509
million, subject to certain warranty and other adjustments that may affect the
exercise price. If General Re does not exercise its option to purchase the
Class A shares of GR-CK from CKAG, CKAG has an option to purchase the Class B
shares of GR-CK from General Re under a similar exercise price formula.
The acquisition of the shares of Cologne Re through GR-CK has been accounted
for as a purchase. General Re has consolidated GR-CK and Cologne Re in its
financial statements and recorded as minority interests the share of CKAG in
GR-CK and of the other shareowners in Cologne Re.
In addition to its ownership in Cologne Re through GR-CK, General Re has
purchased for its own account an additional 11.2 percent of the ordinary and
preference shares of Cologne Re through December 31, 1997 for aggregate
consideration of $127 million, which increased General Re's consolidated
economic interest in Cologne Re to 77.5 percent. The purchases of additional
Cologne Re shares are accounted for as a step acquisition, under which the
fair value of assets and liabilities are recorded at each acquisition date,
with the excess of cost over fair value recorded as incremental goodwill.
42
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Tempest Reinsurance Company Limited
In September 1993, General Re acted as sponsor in the formation of Tempest
Reinsurance Company Limited ("Tempest"), a Bermuda-based reinsurance company
specializing in property catastrophe reinsurance. On July 1, 1996, General Re
sold its 20.7 percent interest in Tempest and its stock options, and
terminated its underwriting services agreement with Tempest for $216 million
in aggregate consideration.
4. STATUTORY FINANCIAL INFORMATION
General Re's North American reinsurance and insurance subsidiaries file
financial statements prepared in accordance with statutory accounting
practices prescribed or permitted by insurance regulators. Statutory
accounting differs from generally accepted accounting principles in the
reporting of certain reinsurance contracts, investments, subsidiaries,
acquisition expenses, fixed assets, deferred income taxes and certain other
items. Combined statutory surplus of General Re's North American
property/casualty operations at December 31, 1997 and 1996 was $6,309 million
and $5,326 million, respectively. Combined statutory net income of these
operations for 1997, 1996 and 1995 was $968 million, $777 million and $621
million, respectively.
Prescribed accounting practices include a variety of publications of the
National Association of Insurance Commissioners, as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed that have been
permitted by the insurance department of the insurer's domiciliary state.
General Re discounts certain workers' compensation liabilities at an annual
rate of 4.5 percent. These discounted liabilities were $1,501 million and
$1,490 million at December 31, 1997 and 1996, respectively. Included in the
discount recognized for statutory purposes at December 31, 1997 was $611
million resulting from discounting permitted by the domiciliary insurance
department.
General Re's international subsidiaries prepare statutory financial statements
based on local laws and regulations. Some jurisdictions, such as the United
Kingdom, impose complex regulatory requirements on reinsurance companies,
while other jurisdictions, such as Germany, impose fewer requirements. Local
reinsurance business conducted by General Re in some countries require
licenses issued by governmental authorities. These licenses may be subject to
modification or revocation dependent on such factors as amount and types of
reserves and minimum capital and solvency tests. Jurisdictions may impose
fines, censure and/or criminal sanctions for violation of regulatory
requirements.
General Re Corporation is dependent upon the ability of its operating
subsidiaries to provide it funds, predominantly through dividends. Insurance
holding company laws require prior regulatory approval for extraordinary
distributions made to insurance company shareowners. General Reinsurance
Corporation ("GRC") is subject to the insurance laws of Delaware, its state of
domicile. Under Delaware law, dividends or distributions in a rolling twelve-
month period exceeding the greater of 10 percent of an insurance company's
surplus or 100 percent of net income, excluding realized gains, for the
previous calendar year are generally considered extraordinary and require
prior regulatory approval.
During 1997, GRC paid $850 million in dividends to General Re Corporation. The
proceeds from these dividends were primarily used by General Re Corporation
for the payment of common dividends and the repurchase of its common stock.
This dividend amount was approved by the domiciliary insurance department and
exceeded GRC's 1997 ordinary dividend capacity of $607 million. During 1998,
GRC's ordinary dividend capacity will be $755 million. As a result of the
extraordinary dividend payments in 1997, dividend payments by GRC to General
Re Corporation prior to May 1, 1998 will be considered extraordinary and will
require regulatory approval prior to payment. The statutory standard for such
approval requires that GRC's statutory surplus must be reasonable in relation
to its outstanding liabilities and adequate relative to its financial needs
following
43
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
payment of the dividend. Dividends subsequent to May 1, 1998 will be
considered ordinary to the extent they do not exceed the rolling ordinary
dividend capacity of $755 million.
5. INVESTMENTS
The cost, fair value and gross unrealized appreciation and depreciation of
investments were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1997 COST/1/ APPRECIATION DEPRECIATION VALUE
----------------- ------- ------------ ------------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
INSURANCE INVESTMENTS
SHORT-TERM INVESTMENTS............... $ 1,172 -- -- $ 1,172
FIXED MATURITIES -- AVAILABLE-FOR-
SALE
U.S. Government..................... 1,212 $ 38 $ 1 1,249
German federal and state govern-
ments.............................. 750 52 -- 802
Tax-exempt.......................... 7,179 600 1 7,778
Corporate........................... 3,261 163 19 3,405
Mortgage-backed..................... 908 49 5 952
Asset-backed........................ 81 2 -- 83
Other foreign government............ 2,468 114 4 2,578
------- ------ --- -------
Fixed maturities -- available-for-
sale.............................. 15,859 1,018 30 16,847
PREFERRED EQUITIES................... 980 63 2 1,041
COMMON EQUITIES...................... 2,098 2,688 38 4,748
OTHER INVESTED ASSETS................ 616 165 13 768
------- ------ --- -------
TOTAL INSURANCE INVESTMENTS...... $20,725 $3,934 $83 $24,576
======= ====== === =======
TOTAL FINANCIAL SERVICES
INVESTMENTS..................... $ 2,827 $ 21 $68 $ 2,780
======= ====== === =======
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C> <C> <C> <C>
INSURANCE INVESTMENTS
SHORT-TERM INVESTMENTS............... $ 1,019 -- -- $ 1,019
FIXED MATURITIES -- AVAILABLE-FOR-
SALE
U.S. Government..................... 1,575 $ 45 $ 9 1,611
German federal and state govern-
ments.............................. 868 56 -- 924
Tax-exempt.......................... 7,416 379 7 7,788
Corporate........................... 2,939 114 6 3,047
Mortgage-backed..................... 947 21 2 966
Asset-backed........................ 51 2 -- 53
Other foreign government............ 2,502 103 2 2,603
------- ------ --- -------
Fixed maturities -- available-for-
sale.............................. 16,298 720 26 16,992
PREFERRED EQUITIES................... 771 23 5 789
COMMON EQUITIES...................... 1,940 1,745 13 3,672
OTHER INVESTED ASSETS................ 612 104 20 696
------- ------ --- -------
TOTAL INSURANCE INVESTMENTS...... $20,640 $2,592 $64 $23,168
======= ====== === =======
TOTAL FINANCIAL SERVICES INVESTED
ASSETS.......................... $ 3,418 $ 44 $68 $ 3,394
======= ====== === =======
</TABLE>
/1Cost/is amortized cost for short-term investments and fixed maturities and
original cost for equity securities and other invested assets.
- --------
44
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The contractual maturities of available-for-sale fixed maturity investments
for both reinsurance and financial services segments are shown in the
following table. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay certain obligations.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
AMORTIZED FAIR
COST VALUE
--------- -------
(IN MILLIONS)
<S> <C> <C>
Due in one year or less...................................... $ 712 $ 717
Due after one year through five years........................ 4,083 4,178
Due after five years through ten years....................... 5,373 5,712
Due after ten years.......................................... 5,491 5,992
Mortgage and asset-backed.................................... 989 1,036
------- -------
Total....................................................... $16,648 $17,635
======= =======
</TABLE>
The components of realized gains (losses) on available-for-sale securities and
total investment income were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
REALIZED GAINS (LOSSES)
FIXED MATURITIES:
Gross realized gains.............................. $ 95 $ 148 $ 117
Gross realized losses............................. (55) (93) (73)
-------- -------- --------
Total fixed maturities........................... $ 40 $ 55 $ 44
EQUITY SECURITIES:
Gross realized gains.............................. 64 161 72
Gross realized losses............................. (100) (112) (52)
-------- -------- --------
Total equity securities.......................... (36) 49 20
-------- -------- --------
Total realized gains............................. $ 4 $ 104 $ 64
======== ======== ========
INVESTMENT INCOME
Fixed maturities.................................. $ 1,065 $ 1,041 $ 850
Equity securities................................. 183 134 111
Short-term investments............................ 53 52 62
Other............................................. 45 24 26
-------- -------- --------
Investment income before expenses................. 1,346 1,251 1,049
Investment expenses............................... (58) (46) (32)
-------- -------- --------
Net investment income............................ $ 1,288 $ 1,205 $ 1,017
======== ======== ========
</TABLE>
Securities with a market value of approximately $984 million at December 31,
1997 were on deposit with various state or governmental departments to comply
with insurance laws.
45
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. CLAIMS AND CLAIM EXPENSES
The table below provides a reconciliation of the beginning and ending
property/casualty claim and claim expense liability for the past three years:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Gross claim and claim expense liability, January 1.. $15,977 $14,252 $12,158
Reinsurance recoverables on unpaid claims and claim
expenses.......................................... (2,572) (2,515) (1,840)
------- ------- -------
Net liability at January 1.......................... 13,405 11,737 10,318
Incurred claims and claim expenses related to:
Current year....................................... 3,956 4,023 3,666
Prior years........................................ (168) (39) 14
------- ------- -------
Total incurred claims and claim expenses............ 3,788 3,984 3,680
------- ------- -------
Claim and claim expense payments related to:
Current year....................................... 773 1,061 773
Prior years........................................ 2,644 2,052 1,584
------- ------- -------
Total payments...................................... 3,417 3,113 2,357
------- ------- -------
Effect of foreign exchange.......................... (335) (150) 96
Net unpaid claims and claim expenses from
acquisitions....................................... -- 947 --
------- ------- -------
Net liability at December 31........................ 13,441 13,405 11,737
Reinsurance recoverables on unpaid claims and claim
expenses.......................................... 2,356 2,572 2,515
------- ------- -------
Gross claim and claim expense liability, December
31................................................. $15,797 $15,977 $14,252
======= ======= =======
</TABLE>
Consolidated net claims and claim expenses for 1996 and prior accident years
experienced favorable development of $168 million in 1997. Net claims and
claim expenses for 1996 and prior accident years for the North American
operations experienced favorable development of $178 million in 1997. The net
favorable loss development was due to favorable development on casualty lines
of business, partially offset by losses related to environmental, asbestos and
other mass tort claims. Net claims and claim expenses for 1996 and prior
accident years for the international operations, adjusted for the effects of
foreign exchange, had adverse development of $10 million in 1997. The net
adverse loss development for the international operations was primarily
related to strengthening of reserves for certain casualty business. Due to
customary lags in underwriting activity reports from European ceding
companies, there may be correlated development of premium and losses in the
international property/casualty operations. These premiums may not be included
in the reserve development discussed above.
General Re continuously estimates its liabilities and related reinsurance
recoverable for environmental and latent injury claims and claim expenses.
While most of its liabilities for such claims arise from exposures in North
America, General Re has also provided for international environmental and
latent injury exposures. Environmental and latent injury exposures do not lend
themselves to traditional methods of loss development determination and
therefore reserves related to these exposures may be considered less reliable
than reserves for standard lines of business (e.g., automobile). The estimate
for environmental and latent injury losses is composed of four parts: known
claims, development on known claims, IBNR and direct excess coverage
litigation expenses. General Re's estimate for IBNR is based on fitted curves
of estimated future claim emergence; this estimate is less reliable than the
estimated liability for reported claims. The effect of joint and several
liability on the severity of claims and a provision for future claims
inflation have been included in the loss development estimate. General Re has
established a liability for litigation costs associated with coverage disputes
arising out
46
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of direct excess insurance policies, rather than from reinsurance assumed.
Direct excess coverage litigation expenses are estimated using a modified
count and amount actuarial study.
The gross liability for environmental and latent injury claims and claim
expenses and the related reinsurance recoverable were $2,047 million and $611
million, respectively, at December 31, 1997. The liability for environmental
and latent injury claims and claim expenses is management's best estimate of
future claim and claim expense payments and recoveries which are expected to
develop over the next several decades. General Re continuously monitors
evolving case law and its effect on environmental and latent injury claims.
Changing government regulations, newly identified toxins, newly reported
claims, new theories of liability, new contract interpretations and other
factors could significantly affect future claim development. While General Re
has recorded its current best estimate of its liabilities for unpaid claims
and claim expenses, it is reasonably possible that these estimated
liabilities, net of estimated reinsurance recoveries, may increase in the
future and that the increase may be material to General Re's results from
operations, cash flows and financial position. It is not possible to estimate
reliably the amount of additional net loss, or the range of net loss, that is
reasonably possible.
7. REINSURANCE
Premiums, claims and claim expenses and life/health benefits are reported net
of reinsurance in General Re's statements of income. Direct, assumed, ceded
and net amounts for these items were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
PROPERTY/CASUALTY LIFE/HEALTH
------------------------- -------------------------
PREMIUMS PREMIUMS
--------------- CLAIMS ---------------
WRITTEN EARNED EXPENSES WRITTEN EARNED BENEFITS
------- ------ -------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
1997
Direct........................ $ 513 $ 512 $ 353 -- -- --
Assumed....................... 5,668 5,749 3,964 $1,388 $1,342 $963
Ceded......................... (855) (847) (529) (169) (149) (80)
------ ------ ------ ------ ------ ----
Net.......................... $5,326 $5,414 $3,788 $1,219 $1,193 $883
====== ====== ====== ====== ====== ====
1996
Direct........................ $ 525 $ 477 $ 382 -- -- --
Assumed....................... 5,887 5,987 4,237 $1,180 $1,165 $915
Ceded......................... (826) (846) (635) (105) (105) (126)
------ ------ ------ ------ ------ ----
Net.......................... $5,586 $5,618 $3,984 $1,075 $1,060 $789
====== ====== ====== ====== ====== ====
1995
Direct........................ $ 405 $ 364 $ 207 -- -- --
Assumed....................... 6,091 5,900 4,372 $ 793 $ 780 $558
Ceded......................... (1,103) (1,123) (899) (84) (84) (53)
------ ------ ------ ------ ------ ----
Net.......................... $5,393 $5,141 $3,680 $ 709 $ 696 $505
====== ====== ====== ====== ====== ====
</TABLE>
General Re utilizes reinsurance to reduce its exposure to large claims. These
agreements provide for recovery of a portion of certain claims and claim
expenses from reinsurers. If the reinsurers are unable to meet their
obligations under the agreements, General Re would be liable for such
defaulted amounts. General Re holds partial collateral under these agreements
and has never suffered a significant loss because of defaults. General Re
utilizes various North American and international reinsurers as part of its
retrocessional program. Prior to being included in General Re's retrocessional
program, reinsurers are reviewed for their anticipated long-term
creditworthiness by General Re's Retrocessional Market Committee.
47
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As part of its retrocessional program, General Re has placed a portion of its
reinsurance with various Lloyd's of London syndicates. The syndicates act as
managing agents for individual Names who bear the risks and rewards of the
syndicates' underwriting results. At December 31, 1997, General Re's
reinsurance recoverables on paid and unpaid claims and claim expenses from all
Lloyd's syndicates aggregated to approximately $270 million.
8. FEDERAL, FOREIGN AND LOCAL INCOME TAXES
Income tax expense (benefit) was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
UNITED STATES FOREIGN TOTAL UNITED STATES FOREIGN TOTAL UNITED STATES FOREIGN TOTAL
------------- ------- ----- ------------- ------- ----- ------------- ------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current................. $112 $142 $254 $179 $148 $327 $169 $119 $288
Deferred................ (22) 70 48 (64) 60 (4) (90) 49 (41)
---- ---- ---- ---- ---- ---- ---- ---- ----
Total.................. $ 90 $212 $302 $115 $208 $323 $ 79 $168 $247
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
Income taxes were established on a consolidated basis for all United States
and international operations of General Re. No provisions have been made for
U.S. income taxes relating to $213 million of cumulative undistributed income
of wholly owned international subsidiaries as of December 31, 1997 which is
considered permanently reinvested. Applicable U.S. income taxes have been
recorded for Cologne Re's income since it distributes dividends to its
shareholders on an annual basis. Income taxes paid were $262 million, $219
million and $216 million in 1997, 1996 and 1995, respectively.
An analysis comparing the U.S. statutory income tax rate to General Re's
effective tax rate based on percentages of pretax income is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
U.S. statutory tax rate............................. 35.0% 35.0% 35.0%
Reduction in taxes resulting from:
Tax-exempt bond interest........................... (9.5) (9.6) (10.3)
Dividends received deduction....................... (1.9) (1.4) (1.5)
Foreign tax rate differential/credits.............. 0.3 1.1 0.4
Miscellaneous...................................... (1.0) (0.2) (1.5)
------- ------- --------
Effective tax rate.................................. 22.9% 24.9% 22.1%
======= ======= ========
</TABLE>
48
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the net deferred income tax liability were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
DEFERRED INCOME TAX ASSETS:
Claim and claim expense liabilities............................. $ 69 $ 131
Unearned premiums............................................... 73 82
Accruals not currently deductible............................... 95 78
U.S. temporary differences from foreign operations.............. 195 114
Foreign exchange................................................ 97 1
Other........................................................... 37 50
------ ------
Total deferred tax assets...................................... 566 456
------ ------
DEFERRED INCOME TAX LIABILITIES:
Unrealized appreciation of investments.......................... 1,350 798
Deferred acquisition costs...................................... 156 165
Deferred charges................................................ 8 12
Discount on fixed maturity investments.......................... 29 32
Derivative financial instruments................................ 36 22
Other........................................................... 9 33
------ ------
Total deferred tax liabilities................................. 1,588 1,062
------ ------
Net deferred income tax liability................................ $1,022 $ 606
====== ======
</TABLE>
9. NOTES PAYABLE AND COMMERCIAL PAPER
PARENT AND REINSURANCE OPERATIONS
Notes payable and commercial paper of the Parent company, General Re
Corporation, and its reinsurance operations are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
9.00% Note due in 2009............................................ $ 150 $ 150
8.85% Note due in 2005............................................ 109 110
7.50% Note due in 2005............................................ 26 26
------ ------
Total notes payable.............................................. $ 285 $ 286
====== ======
</TABLE>
The 9.00 percent note was issued in 1989 by General Re Corporation in
connection with establishing the Employee Savings and Stock Ownership Plan
(Note 11). The note is noncallable and has a covenant requiring General Re not
to encumber its common stock holding in GRC, the largest subsidiary of General
Re. The 8.85 percent and 7.50 percent noncallable notes were issued by
National Re on January 19, 1995 and July 31, 1995, respectively. These notes
have a par value of $100 million and $25 million, respectively, and were
included in General Re's balance sheet at fair value on the date National Re
was acquired. The difference between their fair value and par value is
recognized as an adjustment to interest expense over the life of the notes.
49
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
General Re Corporation issues commercial paper periodically to meet its short-
term funding needs or those of the reinsurance operations. Related commercial
paper activity is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Outstanding at end of year...................................... -- --
Average outstanding balance during the year..................... $2 $ 119
Average interest rate for the year.............................. 5.69% 5.30%
</TABLE>
General Re has $1.8 billion of available lines of credit which provide
financial flexibility and support its commercial paper program. The credit
lines consist of a 364-day facility of $800 million and a five-year credit
facility for the remaining $1.0 billion. The credit agreements with the banks
require General Re to maintain a minimum consolidated tangible net worth, as
defined, of $2.7 billion. All available lines of credit were unused at
December 31, 1997.
FINANCIAL SERVICES
Notes and commercial paper of the financial service operations were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
General Re Funding Corporation Global Bond 3.0% due in 2026..... $ 27 --
General Re Funding Corporation Senior Accreting Notes 8.375% due
in 2037........................................................ 51 --
Structured finance notes........................................ 666 --
7.70% Mortgage payable through 1998............................. 2 $ 4
------ -----
Total notes payable............................................ $ 746 $ 4
====== =====
</TABLE>
The financial service operations issue notes payable and commercial paper to
meet their funding and liquidity needs. Notes issued by General Re Funding
Corporation ("GRFC") and the structured finance notes are supported by GRFC's
match-funded investments. The 8.375% senior accreting note issued by GRFC
matures on July 30, 2037 but is redeemable semiannually beginning July 30,
2004.
GRFC and its affiliates also had outstanding $666 million of structured
finance notes at December 31, 1997 with interest rates ranging from 5.9 to 6.3
percent and maturities from one to three years. GRFC has entered into swap
transactions that convert the associated fixed interest expense into floating
rates. GRFC's debt obligations are guaranteed by General Re Corporation.
Principal maturities on the outstanding notes and mortgage payable of the
financial service operations at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
1998.............................................................. $415
1999.............................................................. --
2000.............................................................. 248
2001.............................................................. --
2002.............................................................. --
Remaining years after 2002........................................ 83
----
Total............................................................. $746
====
</TABLE>
50
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
General Re Corporation has issued commercial paper on behalf of GRFP and GRFC
to fund short-term liquidity needs. A summary of the commercial paper
borrowings for these companies was as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Year-end balance................................................ $ 689 $ 140
Average interest rate at year end............................... 5.73% 5.30%
Average maturity at year end (in days).......................... 87.2 76.8
Average outstanding balance during the year..................... $ 446 $ 107
Average interest rate for the year.............................. 5.54% 5.38%
</TABLE>
On December 18, 1997, General Re Corporation and GRFC established a $1 billion
European Medium Term Note Program. Notes issued under the program by GRFC will
be guaranteed by General Re Corporation and will be primarily used for match-
funded investment transactions. The program allows for issuance of debt with
maturities up to 30 years and denominated in a number of major currencies.
With certain exceptions, the instruments may not be offered, sold, or
delivered in the United States or to U.S. persons. There were no notes
outstanding under the Program at December 31, 1997.
Consolidated interest expense and interest paid for loans payable and
commercial paper were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Interest expense.................................... $ 58 $ 30 $ 15
Interest paid....................................... 63 28 15
</TABLE>
10. RETIREMENT PLANS
General Re has noncontributory pension plans covering substantially all
employees. Plans for U.S. employees provide pension benefits that are
generally computed on the basis of the average earnings during the three
consecutive years of highest earnings during the employee's service. General
Re's funding policy is to contribute sufficient amounts to meet the minimum
annual funding required by applicable regulations, plus such additional
amounts as it may determine to be appropriate from time to time. Through
unfunded plans, General Re provides pension benefits for certain employees
above amounts allowed under tax qualified plans. Pension plan assets are
principally invested in investment-grade fixed maturities and equities.
Cologne Re provides unfunded pension benefits to its employees based on years
of service and age at retirement.
The components of pension expense related to both funded and unfunded plans
were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost for benefits earned during the
year......................................... $ 19 $ 17 $ 13
Interest cost on projected benefit
obligation................................... 23 19 16
Actual return on plan assets.................. (39) (22) (29)
Net amortization and deferral................. 26 11 22
-------- -------- --------
Pension expense............................... $ 29 $ 25 $ 22
======== ======== ========
</TABLE>
The projected benefit obligation for U.S. employees was determined using an
assumed discount rate of 7.00 percent in 1997, 7.50 percent in 1996 and 7.00
percent for 1995, and an assumed long-term compensation
51
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
increase of 5.50 percent in 1997, 6.00 percent for 1996 and 5.75 percent for
1995. An assumed long-term rate of return on plan assets of 8.50 percent was
used in determining pension expense in 1997, 1996 and 1995. The projected
benefit obligation for most Cologne Re employees was determined using an
assumed discount rate of 7.00 percent in 1997, 1996 and 1995 and an assumed
long-term compensation increase of 3.50 percent in 1997, 1996 and 1995.
The following table sets forth the plans' funded status and amount recognized
in General Re's consolidated balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
--------------- ---------------
FUNDED UNFUNDED FUNDED UNFUNDED
------ -------- ------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Accumulated benefit obligation:
Vested....................................... $134 $ 78 $100 $ 72
Nonvested.................................... 20 11 16 10
---- ----- ---- -----
Accumulated benefit obligation................ 154 89 116 82
Effect of projected salary increases.......... 62 34 64 42
---- ----- ---- -----
Projected benefit obligation................. 216 123 180 124
Plan assets at fair value..................... 196 -- 161 --
---- ----- ---- -----
Projected benefit obligation in excess of plan
assets....................................... (20) (123) (19) (124)
Unrecognized net (gain) loss.................. (31) 22 (20) 22
Unrecognized prior service cost............... (4) 5 (4) 6
Unrecognized net (asset) obligation at
transition................................... (4) 1 (5) 1
Adjustment to recognize minimum liability..... -- (3) -- --
---- ----- ---- -----
Accrued pension liability.................... $(59) $ (98) $(48) $ (95)
==== ===== ==== =====
</TABLE>
Substantially all of General Re's employees in the United States will become
eligible for certain health care and group life insurance benefits upon
retirement from General Re. General Re has funded the benefit cost of current
retirees, with the retiree paying a portion of the costs. The retiree's
portion of the costs varies depending upon the individual's length of service
with General Re upon retirement. Through a trust, General Re funded $3 million
for postretirement health care benefits for current retirees at December 31,
1997 and 1996, and had an accrued liability of $32 million and $30 million,
respectively, for current employees.
11. EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN
General Re has a leveraged Employee Savings and Stock Ownership Plan
("ESSOP"), in which substantially all U.S. employees may participate. This is
a defined contribution plan which allows employees to make regular
contributions that the ESSOP matches up to a maximum of 6 percent of the
employee's salary. In 1989, the ESSOP borrowed $150 million from General Re at
9.25 percent, payable annually through 2014. The proceeds of this borrowing
were used by the ESSOP to purchase 1,754,386 shares of 7.25 percent ($6.20
dividend per share) cumulative convertible preferred stock of General Re. All
preferred stock outstanding is held by the ESSOP and is convertible into
common stock, under certain conditions, on a one-to-one basis. The preferred
stock is held by the ESSOP trustee as collateral for the loan from General Re.
General Re makes contributions to the ESSOP which, together with the dividend
on shares of the preferred stock, are sufficient to make loan interest and
principal repayments back to General Re. As interest and principal are repaid,
a portion of the preferred stock is released for allocation to participating
employees. Annual compensation
52
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
expense for the ESSOP is based on the amount of contributions made to the
plan, subject to a floor related to the percentage of allocated shares to
total shares. During 1997 General Re recognized compensation expense for the
ESSOP based on the shares-allocated floor.
The following summarizes ESSOP activity:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Dividends paid on preferred stock:
Allocated shares............................ $ 3 $ 2 $ 2
Unallocated shares.......................... 8 9 9
Compensation expense......................... 4 4 4
Contribution to ESSOP........................ 5 4 4
Interest income from ESSOP................... 14 14 14
ESSOP SHARE INFORMATION AT DECEMBER 31
Fair value per share......................... $ 213.78 $ 159.50 $ 157.00
Shares allocated to employees during the
year........................................ 62,012 62,826 59,672
Committed to be released..................... 25 40 2,602
</TABLE>
12. INCENTIVE PLANS
General Re has a Long-Term Compensation Plan (the "Plan") which provides for
the granting of incentive and nonqualified stock options to officers and
members of the Board of Directors. The Plan provides that the exercise price
of the options granted may not be less than the fair market value of General
Re's common stock on the date the options are granted. The options are
exercisable cumulatively, 20 percent each year commencing one year from the
date of grant and expire ten years from the grant date. In certain
circumstances, replacement options may be granted upon exercise of an original
option, with the exercise price equal to the current market price and with a
term extending to the expiration date of the original option.
In celebration of its 75th Anniversary during 1996, General Re issued 75
option shares or stock appreciation rights ("SARs") to most of its employees.
These options are exercisable cumulatively 33 percent each year commencing one
year from March 21, 1996. As part of the acquisition of National Re, holders
of National Re stock options had the opportunity to roll over their options
into options to purchase General Re's common stock. These rollover options are
fully vested and have exercise prices that maintain the holder's intrinsic
value in the options held.
The Plan also permits the granting of SARs in connection with options granted
under the Plan. SARs permit the grantee to surrender an exercisable option for
an amount equal to the excess of the market price of the common stock over the
option price when the right is exercised.
53
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The table that follows provides a summary of the activity for options and SARs:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
STOCK OPTIONS
Outstanding, beginning
of year................ 4,559,411 $122.96 3,647,929 $115.26 3,107,851 $102.06
Granted................. 1,158,289 178.59 921,738 149.58 944,987 146.36
Granted: 75th
Anniversary............ -- -- 171,000 146.75 -- --
Granted: National Re
acquisition............ -- -- 262,269 85.27 -- --
Exercised............... (721,019) 99.28 (341,765) 153.71 (360,074) 139.31
Canceled................ (103,994) 147.86 (100,460) 139.24 (43,635) 112.99
Voided due to SARs
exercise............... (2,900) 55.56 (1,300) 156.33 (1,200) 141.24
--------- ------- --------- ------- --------- -------
Outstanding, end of
year................... 4,889,787 $139.08 4,559,411 $122.96 3,647,929 $115.26
========= ======= ========= ======= ========= =======
Options exercisable, end
of year................ 2,177,771 $118.17 2,150,751 $104.58 1,628,404 $ 97.51
========= ======= ========= ======= ========= =======
Shares available for
future options......... 1,855,841 -- 2,938,838 -- 3,881,185 --
========= ========= =========
STOCK APPRECIATION
RIGHTS
Outstanding, beginning
of year................ 12,525 $114.48 8,000 $ 55.94 9,200 $ 55.49
Granted................. 12,700 177.00 5,825 149.20 -- --
Exercised............... (2,900) 55.56 (1,300) 156.33 (1,200) 141.24
Cancelled............... (75) 146.75 -- -- -- --
--------- ------- --------- ------- --------- -------
Outstanding, end of
year................... 22,250 $143.12 12,525 $114.48 8,000 $ 55.94
========= ======= ========= ======= ========= =======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 50.65 -- $99.13....... 574,727 3.5 years $ 85.17 574,727 $ 85.17
100.81 -- 124.19....... 1,357,288 6.0 116.19 924,066 115.54
126.38 -- 149.44....... 1,100,052 8.1 145.98 288,732 143.00
150.18 -- 174.31....... 857,067 7.6 154.26 390,246 154.63
177.00 -- 300.00....... 1,000,653 8.9 180.51 -- --
--------- ---------
Total.................. 4,889,787 5.0 $139.08 2,177,771 $118.17
========= =========
</TABLE>
54
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of options granted during 1997, 1996 and 1995 were $58 million,
$48 million and $39 million, respectively. The fair value of the options
granted was determined using the binomial option-pricing model using the
following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Volatility of General Re stock price.......................... 20.0% 20.0% 20.0%
Annual dividend increase...................................... 4.2 4.2 4.2
Expected term of options (in years):
Non-qualified stock options.................................. 6.0 6.0 6.0
Restricted stock options..................................... 6.5 6.5 6.5
</TABLE>
The expected term of replacement options is equal to the time remaining to
maturity with a maximum of 6 years. In addition, the risk free interest rate
on the date of grant is used, with the maturity equal to the expected term.
General Re has elected to continue accounting for stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25 for all of its
compensatory plans. Accordingly, no compensation expense has been recognized
for its nonqualified stock option plan. Had compensation expense for General
Re's nonqualified stock option plan been recognized in accordance with FASB
Statement No. 123, General Re's net income and basic earnings per share would
have been $952 million, or $11.84 per basic share in 1997, $882 million, or
$10.86 per basic share in 1996, and $823 million, or $9.90 per basic share in
1995.
The Plan also permits the granting of restricted stock awards as compensation
to officers of General Re. Shares of restricted stock become outstanding upon
grant, receive dividends and have voting rights identical to other outstanding
shares of common stock. Restrictions lapse upon termination of the restriction
period or upon death, disability or normal retirement. During 1997, 1996 and
1995, General Re made aggregate compensatory restricted stock awards of
16,715, 96,153 and 31,900 shares, respectively. At December 31, 1997 total
restricted shares outstanding were 307,322 shares. The cost of restricted
stock awards is based on the market value of the common stock at the date of
grant and is recognized as an expense over the restriction period.
The Plan also provides for bonus awards to be made in cash, common stock,
share units or restricted stock options ("RSOs"). RSOs restrictions lapse five
years after the grant date and RSOs expire ten years after the grant date.
RSOs are included in the tables above. Share units are paid in shares of
common stock at a future date designated in advance of the bonus award period.
The expense of the Plan was $15 million in 1997, $7 million in 1996 and $4
million in 1995.
13. LEASES
General Re leases office space and computer equipment under noncancelable
leases expiring in various years through 2010. Several of the leases have
renewal options with various terms and rental rate adjustments. Rental expense
was $35 million in 1997, $32 million in 1996 and $31 million in 1995. At
December 31, 1997, the future minimum annual rental commitments under
noncancelable leases were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
1998........................... $ 39
1999........................... 33
2000........................... 31
2001........................... 28
2002........................... 23
Subsequent to 2002............. 143
----
Total......................... $297
====
</TABLE>
55
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum rental payments above have not been reduced by $41 million of
anticipated sublease rental income on noncancelable leases.
14. GENERAL RE FINANCIAL PRODUCTS
GRFP is engaged as a dealer in various types of derivative instruments,
including interest rate, currency and equity swaps and options, as well as
structured finance products. These instruments are carried at their current
estimates of fair value, which is a function of underlying interest rates,
currency rates, security values, volatilities and the creditworthiness of
counterparties. Future changes in these factors or a combination thereof may
affect the fair value of these instruments with any resulting adjustment,
including amounts in excess of those previously recognized in the financial
statements, being included currently in the income statement.
TRADING REVENUES
The results of GRFP's trading activities are summarized in the following
table. Trading revenues include any associated gains and losses on hedging
instruments. Trading revenue is included in "Other revenues" in the income
statement.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Fixed income.................................................... $155 $143 $142
Other........................................................... 20 1 --
---- ---- ----
Gross trading revenues.......................................... $175 $144 $142
==== ==== ====
</TABLE>
NATURE OF TRANSACTIONS AND TERMS
Interest rate, currency and equity swaps are agreements between two parties to
exchange, at particular intervals, payment streams calculated on a specified
notional amount. The parties to a currency swap typically exchange a principal
amount in two currencies at inception of the contract, agreeing to re-exchange
the currencies at a future date and agreed exchange rate.
Interest rate, currency and equity options grant the purchaser the right, but
not the obligation, to either purchase from or sell to the writer a specified
financial instrument under agreed terms. Interest rate caps and floors require
the writer to pay the purchaser at specified future dates the amount, if any,
by which the option's underlying market interest rate exceeds the fixed cap or
falls below the fixed floor, applied to a notional amount.
Futures contracts are commitments to either purchase or sell a financial
instrument at a future date for a specified price and are generally settled in
cash. Forward-rate agreements are financial instruments that settle in cash at
a specified future date based on the differential between agreed interest
rates applied to a notional amount. Foreign exchange contracts generally
involve the exchange of two currencies at agreed rates on a specified date;
spot contracts usually require the exchange to occur within two business days
of the contract date.
A summary of notional amounts of derivative contracts at December 31, 1997 and
1996 is included in the table below. For these transactions, the notional
amount represents the principal volume, which is referenced by the
counterparties in computing payments to be exchanged, and are not indicative
of GRFP's exposure to market or credit risk, future cash requirements or
receipts from such transactions. Approximately 64 percent of the notional
56
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
volume outstanding for derivative contracts at December 31, 1997 have a term
of five years or less and approximately 93 percent of the contracts have a
term of less than ten years.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN MILLIONS)
<S> <C> <C>
Interest rate and currency swap agreements................... $442,771 $322,836
Options written.............................................. 62,325 51,547
Options purchased............................................ 63,542 54,871
Financial futures contracts:
Commitments to purchase..................................... 13,668 12,057
Commitments to sell......................................... 18,179 17,427
Forward rate agreements...................................... 5,264 9,565
Foreign exchange spot and forward contracts.................. 26,826 15,615
</TABLE>
FAIR VALUE OF TRADING INSTRUMENTS
The table below discloses the net fair value or carrying amount at the
reporting date for each class of derivative financial contract held or issued
by GRFP for trading purposes, as well as the average fair value during the
year, based on monthly observations. The net fair values reflect rights of
setoff and qualifying master netting arrangements with various counterparties
in accordance with FASB Interpretation 39, Offsetting Amounts Related to
Certain Contracts. Interest rate and foreign currency swaps shown in the table
below include forward rate agreements and foreign exchange spot and forward
contracts.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1997 1996
------------------ ------------------
ASSET LIABILITY ASSET LIABILITY
------- --------- ------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Interest rate and foreign currency
swaps.................................. $18,207 $17,646 $14,680 $14,693
Interest rate and foreign currency
options................................ 1,864 1,764 1,101 935
------- ------- ------- -------
Gross fair value........................ 20,071 19,410 15,781 15,628
Adjustment for counterparty netting..... (15,987) (15,987) (12,445) (12,445)
------- ------- ------- -------
Net fair value.......................... 4,084 3,423 3,336 3,183
Security receivables/payables........... 229 241 626 602
------- ------- ------- -------
Trading account assets/liabilities...... $ 4,313 $ 3,664 $ 3,962 $ 3,785
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AVERAGE 1997 AVERAGE 1996
------------------ ------------------
ASSET LIABILITY ASSET LIABILITY
------- --------- ------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Interest rate and foreign currency
swaps.................................. $15,985 $15,832 $11,171 $11,495
Interest rate and foreign currency
options................................ 1,336 1,228 815 724
------- ------- ------- -------
Gross fair value........................ 17,321 17,060 11,986 12,219
Adjustment for counterparty netting..... (13,951) (13,951) (9,650) (9,650)
------- ------- ------- -------
Net fair value.......................... 3,370 3,109 2,336 2,569
Security receivables/payables........... 314 293 197 213
------- ------- ------- -------
Trading account assets/liabilities...... $ 3,684 $ 3,402 $ 2,533 $ 2,782
======= ======= ======= =======
</TABLE>
57
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
RISK MANAGEMENT
Market Risk
Market risk is the potential change in value of the portfolio caused by
movements in foreign exchange, interest rate and equity markets. The level of
market risk is influenced by factors such as volatility, correlation and
liquidity. GRFP controls market risk exposures by taking offsetting positions
in either cash instruments or other derivatives to reduce its overall exposure
due to movements in these variables. For securities sold, but not yet
purchased, GRFP may incur a loss if the market value of the security increases
prior to the purchase of the instruments. GRFP manages its exposures on a
portfolio basis. GRFP monitors its market risk on a daily basis across all
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, GRFP sets market risk
limits for each trading book based on a 95 percent probability that movements
in market rates will not affect the results from operations in excess of the
limit over a one week holding period. GRFP also monitors its consolidated
market risk across all broad risk types on a weekly basis. It has established
limits, and measures market risk against them primarily using Monte Carlo
simulations to a 99 percent confidence level. When a risk limit is exceeded,
appropriate action is taken, dependent upon the amount and duration of the
excess, to monitor, control, and reduce the excess within approved levels. The
weekly market risk limit across all trading books increased from $10 million
to $15 million from April 1997 onward, consistent with the growth in GRFP's
business .
Since inception, GRFP has not experienced a weekly position change in excess
of the aggregate weekly market risk limit. In addition to these daily and
weekly assessments of risk, GRFP prepares periodic stress tests to assess its
exposure to movements in various market risk factors such as volatilities,
shifts in yield curves and foreign currency exchange rates.
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. The fair value
adjustment for counterparty credit exposures and future administrative costs
on existing contracts was $93 million at December 31, 1997. 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.
Counterparties to the financial instruments are, in decreasing order of
magnitude, foreign and domestic commercial banks, corporations, sovereigns,
foreign and domestic brokers/dealers and government-chartered organizations.
GRFP evaluates the creditworthiness of its counterparties by performing formal
internal credit analyses and by referring to ratings of widely-accepted credit
rating services. Counterparty credit limits are determined based on this
analysis and counterparty credit exposures are monitored in accordance with
these limits. GRFP receives cash and/or investment grade securities from
certain counterparties as collateral and, where appropriate, may purchase
credit insurance or enter into other transactions to mitigate its credit
exposure. GRFP also incorporates into contracts with certain counterparties
provisions which allow the unwinding of these transactions in the event of a
downgrade in credit rating or other indications of decline in creditworthiness
of either the counterparty or GRFP.
58
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
GRFP assesses credit risk by counterparty across all transactions with each
respective counterparty. Assuming non-performance by all counterparties on all
contracts potentially subject to a loss, the maximum potential loss, based on
the cost of replacement, net of collateral held, at market rates prevailing at
December 31, 1997, approximated $3,075 million. This value represents
unrealized gains on financial instrument contracts in gain positions, net of
any unrealized losses with these counterparties from offsetting positions. The
maximum potential loss will increase or decrease during the life of the
transaction as a function of contract terms and market conditions such as
interest and currency rates. In the judgment of management, the likelihood
that all counterparties would default, resulting in a maximum potential loss,
is remote. Since inception, GRFP has not had any credit losses.
The following table presents GRFP's derivatives portfolio by counterparty
credit quality and maturity at December 31, 1997. The amounts shown under
gross exposure in the table are before consideration of netting arrangements
and collateral held by GRFP. Net fair value shown on the table represents
unrealized gains on financial instrument contracts in gain positions, net of
any unrealized loss owed to these counterparties on offsetting positions. Net
exposure shown on the table is net fair value less collateral held by GRFP.
<TABLE>
<CAPTION>
GROSS AMOUNTS
-------------------------------------------
DUE AFTER FIVE NET
DUE BEFORE YEARS THROUGH DUE AFTER FAIR NET
FIVE YEARS TEN YEARS TEN YEARS TOTAL VALUE EXPOSURE
---------- -------------- --------- ------- ------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Counterparty credit
quality
AAA.................... $1,486 $1,319 $ 863 $ 3,668 $ 456 $ 456
AA..................... 4,185 2,647 1,901 8,733 1,197 1,197
A...................... 2,953 2,513 702 6,168 1,821 1,205
BBB.................... 343 255 421 1,019 498 198
Below BBB and non-
rated................. 357 126 -- 483 112 19
------ ------ ------ ------- ------- -------
Total................. $9,324 $6,860 $3,887 $20,071 $ 4,084 $ 3,075
====== ====== ====== ======= ======= =======
</TABLE>
In connection with certain purchases and sales of government securities, GRFP
enters into collateralized repurchase and reverse repurchase agreements which
may result in credit losses in the event the counterparty to the transaction
is unable to fulfill its contractual obligations. All of these transactions
are collateralized by U.S. and foreign government securities. In addition to
interest amounts shown in Note 9, GRFP had $30 million, $96 million and $90
million of interest expense in 1997, 1996 and 1995, respectively, on related
collateralized borrowings. GRFP's exposure to credit risks associated with the
nonperformance of counterparties in fulfilling these contractual obligations
can be directly affected by market fluctuations, which may affect the
counterparties' ability to satisfy their obligations. It is GRFP's policy to
take possession of securities purchased under agreements to resell. GRFP
monitors the market value of the underlying securities as compared to the
related receivable, including accrued interest, and requests additional
collateral when appropriate. Counterparties to repurchase agreements and
futures transactions are commercial banks and securities brokers and dealers.
GRFP enters into exchange traded futures contracts for delayed delivery of
foreign currencies or securities in which the seller/purchaser agrees to
make/take delivery at a specified future date of a specified instrument, at a
specified price or yield. Risks arise from the inability of the futures
exchange to meet the terms of the contracts and from counterparties' inability
to meet their margin requirements.
Legal Risk
Legal risk arises from the uncertainty of the enforceability, through legal or
judicial processes, of the obligations of GRFP's counterparties, including
contractual provisions intended to reduce credit exposure by providing for
59
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the offsetting or netting of mutual obligations. GRFP seeks to reduce legal
risk by consulting with internal and external legal counsel (in relevant
jurisdictions) to determine legality and enforceability of various
transactions with different types of counterparties.
Liquidity Risk
GRFP is subject to liquidity risk in funding its portfolio of open
transactions. Movements in underlying market variables affect both future cash
flows related to the transactions and collateral required to cover the value
of open positions. General Re has taken action to ensure GRFP has sufficient
resources to cover its potential liquidity needs through its access to General
Re's internal sources of liquidity, commercial paper program, lines of credit
and medium-term program.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. l07, Disclosures about Fair
Value of Financial Instruments, requires disclosures of fair values for
certain financial instruments. Insurance contracts are among certain types of
transactions which were considered difficult to fair value and therefore were
specifically excluded from the statement's disclosures. General Re carries
other financial instruments generally at fair values on its balance sheet,
with the exception of those financial instruments listed below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
--------------- ---------------
STATEMENT FAIR STATEMENT FAIR
VALUE VALUE VALUE VALUE
--------- ----- --------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Mortgage receivable (included in other
assets)...................................... $ 82 $114 $ 84 $116
Loan to ESSOP................................. 142 183 144 175
FINANCIAL LIABILITIES
Reinsurance operations notes payable.......... 285 321 286 309
Financial services notes payable.............. 746 746 4 4
</TABLE>
General Re uses various methods and assumptions in estimating the fair value
of financial instruments. The following valuation methods and assumptions were
utilized by General Re in estimating the fair value of financial instruments.
Investments--Fair values for fixed maturities and equity securities were
generally based on quoted market prices or dealer quotes. The fair value of
investments in limited partnerships, which were included in other invested
assets on the balance sheet, was determined by reviewing available
financial information of the investee and by performing other financial
analyses in consultation with external advisors. Fair values for
investments in real estate were determined using discounted cash flow
analyses for each property. Fair values for reinsurance ventures were based
on General Re's proportionate share in the entity's shareowners' equity,
since the cost of determining fair value exceeds the benefits derived. The
carrying amounts for short-term investments approximate their fair values.
Mortgage and loans receivable/payable--The fair value of General Re's
mortgage and notes receivable/payable was estimated using discounted cash
flow analyses, based on General Re's current incremental borrowing rates
for similar types of arrangements. The fair value of General Re's debt was
based on market price quotations.
Contract deposit assets/liabilities--The fair value of contract deposit
assets and liabilities approximates their carrying value.
60
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Securities purchased under agreements to resell and securities sold under
agreements to repurchase--The carrying value for these financial
instruments approximates their fair value.
Trading account assets/liabilities--The fair value for trading account
assets/liabilities was based on the use of valuation models that utilize,
among other factors, current interest and foreign exchange rates and market
volatility data.
Securities sold but not yet purchased--The fair value for securities sold
but not yet purchased was based on quoted market prices.
16. LEGAL PROCEEDINGS
General Re, through its subsidiaries, has been named as a defendant in
litigation or a respondent in arbitration in the ordinary course of conducting
its insurance and reinsurance business. These lawsuits generally seek to
establish liability under insurance or reinsurance contracts issued by the
subsidiaries, and occasionally seek punitive or exemplary damages. General
Re's reinsurance subsidiaries are also indirectly involved in coverage
litigation. In those cases, plaintiffs seek coverage for their liabilities
under insurance policies from insurance companies reinsured by General Re's
reinsurance subsidiaries. In the judgment of management, none of these cases,
individually or collectively, is likely to result in judgments for amounts
which, net of claim and claim expense liabilities previously established and
applicable reinsurance, or any other litigation, would be material to the
financial position, results of operations or cash flow of General Re.
On July 1, 1996, U.S. Aviation Underwriters, Inc. ("USAU"), a subsidiary of
General Re, and the former chief executive officer of USAU, were convicted of
mail fraud in connection with the allocation of liability between two
policyholders arising from the settlement of claims for a December 7, 1987
airline crash. USAU's sentence included a $20.5 million fine, payable in
installments over a five year probation period and restitution in accordance
with previously paid civil settlements. These amounts were accrued in prior
periods. USAU is appealing both its conviction and sentence. Payment of the
fine by USAU is stayed pending the determination of the appeal.
17. COMMON AND PREFERRED STOCK
General Re has the authority to issue 250 million shares of $.50 par value
common stock, of which 103 million have been issued. Common stock purchased in
the open market is carried at cost and shown as a reduction to common
shareowners' equity. When treasury shares are reissued, the treasury stock
account is reduced for the cost of the common stock reissued on a first-in,
first-out basis. No treasury stock of General Re is held by any subsidiary.
The number of shares included in treasury stock were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Treasury shares, beginning of year.......... 21,262,113 20,714,069 20,955,202
Additional purchases........................ 4,692,300 4,989,000 235,200
Reissuances................................. (560,573) (4,440,956) (476,333)
---------- ---------- ----------
Treasury shares, end of year................ 25,393,840 21,262,113 20,714,069
========== ========== ==========
</TABLE>
General Re also has the authority to issue 20 million shares of preferred
stock, of which 1,700,231 are issued and outstanding and held by the ESSOP,
and 1 million (Series A Junior Participating Preferred) are reserved for the
Stockholders' Rights Plan. Under the Stockholders' Rights Plan, one Right
attaches to each outstanding share of common stock. In the event a person or
group acquires or commences a tender or exchange offer for 20 percent or more
of General Re's common stock, each Right entitles common shareowners to
purchase Series A Junior Participating Stock, which is convertible to common
stock having a value equal to two times the rights exercise price.
61
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. EARNINGS PER SHARE
Basic earnings per common share were based on earnings less preferred
dividends, divided by the weighted average common shares outstanding during
each year. 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
1997, 1996 and 1995.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE INCOME SHARES PER SHARE
------ ------ --------- ------ ------ --------- ------ ------ ---------
(IN MILLIONS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income.............. $968 $894 $825
Less: preferred divi-
dends.................. (11) (11) (11)
---- ---- ----
BASIC EARNINGS......... 957 79.5 $12.04 883 80.3 $11.00 814 82.1 $9.92
====== ====== =====
EFFECT OF DILUTIVE
SECURITIES
Stock options........... -- 0.7 -- 0.5 -- 0.4
Conversion of preferred
stock.................. 11 1.7 11 1.7 11 1.7
Conversion expense...... (4) -- (5) -- (5) --
---- ---- ---- ---- ---- ----
DILUTED EARNINGS....... $964 81.9 $11.76 $889 82.5 $10.78 $820 84.2 $9.74
==== ==== ====== ==== ==== ====== ==== ==== =====
</TABLE>
The effect of stock options on the denominator in the diluted earnings per
share calculation was calculated using the treasury stock method. The treasury
stock method assumes all potentially dilutive options are exercised as of the
beginning of the period and the cash proceeds from assumed exercise are used
to purchase common stock at the average market price for the period. The
incremental difference between the number of shares assumed to be issued and
the number of shares assumed to be purchased are included in the denominator
of the diluted earnings per share calculation.
The additional expense due to conversion of preferred stock to common stock
relates to the compensation expense recorded for the ESSOP as discussed in
Note 11. Subject to certain thresholds, General Re's ESSOP compensation
expense equals principal and interest payments made by the ESSOP to General Re
less preferred dividends received from General Re. The preferred stock had an
annual per share dividend of $6.20 for the years included in the table above
compared with a common dividend per share of $2.20, $2.04 and $1.96 in 1997,
1996 and 1995, respectively. When the preferred stock is assumed to be
converted for the diluted earnings per share calculation, the after-tax
difference between the preferred stock dividend and the common stock dividend
increases ESSOP compensation expense, and thus lowers income available to
common shareowners.
62
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. SEGMENT INFORMATION
The following is summarized financial information for General Re's business
segments for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
PROPERTY/CASUALTY
----------------------
NORTH GLOBAL FINANCIAL
AMERICAN INTERNATIONAL LIFE/HEALTH SERVICES CONSOLIDATED
-------- ------------- ----------- --------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net premiums written
Property/casualty...... $ 3,058 $ 2,268 -- -- $ 5,326
Life/health............ -- -- $1,219 -- 1,219
------- ------- ------ ------ -------
Total net premiums
written.............. $ 3,058 $ 2,268 $1,219 -- $ 6,545
======= ======= ====== ====== =======
Total revenues.......... $ 3,967 $ 2,706 $1,277 $ 301 $ 8,251
Income before taxes,
goodwill, minority
interest and realized
gains/losses........... 849 315 83 105 1,352
Total assets --
December 31.......... 20,562 12,104 -- 8,793 41,459
<CAPTION>
1996
---------------------------------------------------------
PROPERTY/CASUALTY
----------------------
NORTH GLOBAL FINANCIAL
AMERICAN INTERNATIONAL LIFE/HEALTH SERVICES CONSOLIDATED
-------- ------------- ----------- --------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net premiums written
Property/casualty...... $ 3,081 $ 2,505 -- -- $ 5,586
Life/health............ -- -- $1,075 -- 1,075
------- ------- ------ ------ -------
Total net premiums
written.............. $ 3,081 $ 2,505 $1,075 -- $ 6,661
======= ======= ====== ====== =======
Total revenues.......... $ 3,887 $ 3,004 $1,134 $ 271 $ 8,296
Income before taxes,
goodwill, minority
interest and realized
gains/losses........... 741 320 53 100 1,214
Total assets --
December 31.......... 19,669 12,454 -- 8,038 40,161
<CAPTION>
1995
---------------------------------------------------------
PROPERTY/CASUALTY
----------------------
NORTH GLOBAL FINANCIAL
AMERICAN INTERNATIONAL LIFE/HEALTH SERVICES CONSOLIDATED
-------- ------------- ----------- --------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net premiums written
Property/casualty...... $ 2,964 $ 2,429 -- -- $ 5,393
Life/health............ -- -- $ 709 -- 709
------- ------- ------ ------ -------
Total net premiums
written.............. $ 2,964 $ 2,429 $ 709 -- $ 6,102
======= ======= ====== ====== =======
Total revenues.......... $ 3,641 $ 2,573 $ 742 $ 254 $ 7,210
Income before taxes,
goodwill, minority
interest and realized
gains/losses........... 716 200 50 100 1,066
Total assets --
December 31.......... 17,420 11,432 -- 5,411 34,263
</TABLE>
63
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table is a summary of General Re's business by geographic area.
Allocations to geographic area have been made on the basis of subsidiary
location.
<TABLE>
<CAPTION>
GEOGRAPHIC AREA
----------------------------------------
NORTH AMERICA INTERNATIONAL CONSOLIDATED
------------- ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
1997
Revenues............................. $ 4,739 $ 3,512 $ 8,251
Income before taxes, goodwill,
minority interest and realized
gains/losses........................ 967 385 1,352
Identifiable assets at December 31... 29,947 11,512 41,459
1996
Revenues............................. $ 4,593 $ 3,703 $ 8,296
Income before taxes, goodwill,
minority interest and realized
gains/losses........................ 834 380 1,214
Identifiable assets at December 31... 29,041 11,120 40,161
1995
Revenues............................. $ 4,150 $ 3,060 $ 7,210
Income before taxes, goodwill,
minority interest and realized
gains/losses........................ 763 303 1,066
Identifiable assets at December 31... 23,839 10,424 34,263
</TABLE>
64
<PAGE>
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial results and other data were as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1997
Net premiums written
Property/casualty..................... $ 1,263 $ 1,551 $ 1,294 $ 1,218
Life/health........................... 298 284 327 310
Net premiums earned
Property/casualty..................... 1,370 1,389 1,338 1,317
Life/health........................... 286 280 327 300
Investment income...................... 318 316 321 333
Expenses............................... 1,734 1,751 1,746 1,693
Net income............................. 244 233 244 247
Per common share:
Basic earnings per share.............. 2.97 2.88 3.06 3.13
Diluted earnings per share............ 2.91 2.81 2.98 3.05
Common dividends...................... .55 .55 .55 .55
<CAPTION>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Net premiums written
Property/casualty..................... $ 1,210 $ 1,579 $ 1,390 $ 1,407
Life/health........................... 251 259 275 290
Net premiums earned
Property/casualty..................... 1,294 1,424 1,378 1,522
Life/health........................... 245 254 276 285
Investment income...................... 285 288 302 330
Expenses............................... 1,595 1,754 1,744 1,906
Net income............................. 237 224 184 249
Per common share:
Basic earnings per share.............. 2.87 2.80 2.31 3.00
Diluted earnings per share............ 2.82 2.74 2.27 2.94
Common dividends...................... .51 .51 .51 .51
</TABLE>
65
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF GENERAL RE CORPORATION
Reference is made to the captions "Board of Directors" and "Election of
Directors" in the Proxy Statement.
The Executive Officers of General Re as of March 1, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Charles F. Barr......... 48 Vice President, General Counsel and Secretary of
General Re Corporation since 1994; previously Vice
President and Assistant General Counsel of General
Reinsurance Corporation 1992-1994. With General Re
since 1989.
Joseph P. Brandon....... 39 Senior Vice President and Chief Financial Officer of
General Re Corporation since 1997; previously Vice
President and Chief Financial Officer of General Re
Corporation 1991-1997. With General Re since 1989.
I. John Cholnoky........ 40 Vice President of General Re Corporation since 1996;
Senior Vice President of General Reinsurance
Corporation since 1993. With General Re since 1981.
Dr. Wolfgang Droste..... 45 Vice President of General Re Corporation since 1998;
previously Cologne Re's Head of Southeast Asia
Life/Health Business Unit 1994-1997, with General Re
since 1994; joined Cologne Re in 1984.
Ronald E. Ferguson...... 56 Chairman and Chief Executive Officer of General Re
Corporation since 1987. With General Re since 1969.
Ernest C. Frohboese..... 57 Vice President of General Re Corporation and Senior
Vice President and Chief Investment Officer of General
Reinsurance Corporation since 1990. With General Re
since 1990.
Christopher P. Garand... 50 Vice President of General Re Corporation since 1995 and
Senior Vice President of General Reinsurance
Corporation since 1994; previously Vice President and
Manager, Financial Products and Services of General
Reinsurance Corporation 1988-1994. With General Re
since 1985.
Hans Peter Gerhardt..... 43 Senior Vice President of General Re Corporation since
1997; previously Vice President of General Re
Corporation 1996-1997; Senior Vice President of Cologne
Re since 1993; Member of the Board of Executive
Directors of Cologne Re since 1993. With General Re
since 1994; joined Cologne Re in 1983.
James E. Gustafson...... 51 President and Chief Operating Officer of General Re
Corporation since 1995 and Chairman and Chief Executive
Officer of General Reinsurance Corporation since 1995;
previously Executive Vice President of General
Reinsurance Corporation 1991-1995. President and Chief
Executive Officer of General Re Services Corporation
since 1987. With General Re since 1969.
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Tom N. Kellogg.......... 61 Executive Vice President of General Re Corporation
since 1995 and President and Chief Operating Officer of
General Reinsurance Corporation since 1995; previously
Executive Vice President and Chief Marketing Officer of
General Reinsurance Corporation 1991-1995. With General
Re since 1968.
Victor Li............... 46 Vice President of General Re Corporation since 1997.
Member of the Board of Directors of Cologne Re since
1997. Co-Chairman, Asia-Pacific Consulting Group since
1993. With General Re since 1997.
Dr. Peter Lutke- 51 Executive Vice President of General Re Corporation
Bornefeld.............. since 1995 and Chief Executive Officer of Cologne Re
since 1993; Member of the Board of Directors of Cologne
Re since 1990. With General Re since 1994; joined
Cologne Re in 1979.
Elke Mai................ 53 Assistant Vice President of General Re Corporation
since February 1998. Senior Vice President of Cologne
Re since 1993. With General Re since 1994; joined
Cologne Re in 1972.
Jurgen Meisch........... 37 Vice President of General Re Corporation since 1997.
Chief Investment Officer and member of the Board of
Executive Directors of Cologne Re since 1996.
Previously Head of Business Development for the
insurance industry for Swiss Bank, Germany 1995-1996;
and Head of Asset Management, U.K., Ireland, non
European Countries, 1994-1995 and U.S. Branch Treasurer
1990-1994 for Munich Re. With General Re since 1996.
Peter Minton............ 39 Vice President of General Re Corporation and Senior
Vice President of General Reinsurance Corporation since
1997; Vice President of General Re--New England Asset
Management since 1996. Previously, Head of Worldwide
Fixed Income Portfolio Strategy for Morgan Stanley &
Company 1992-1996. With General Re since 1996.
Elizabeth A. Monrad..... 43 Vice President and Treasurer of General Re Corporation
since 1995; Senior Vice President, Chief Financial
Officer and Treasurer of General Reinsurance
Corporation since 1997, previously a partner with
Coopers & Lybrand, 1989-1992. With General Re since
1992.
Franklin Montross, IV... 42 Senior Vice President of General Re Corporation since
1997; Member of the Board of Executive Directors of
Cologne Re since 1995; Chief Underwriting Officer and
Senior Vice President of General Reinsurance since
1992; previously Vice President of General Re
Corporation 1996-1997. With General Re since 1978.
Stephen P. Raye......... 54 Vice President of General Re Corporation since 1995;
Senior Vice President of General Re Services
Corporation since 1993; previously Vice President
Information Systems Division of General Re Services
Corporation 1985-1993. With General Re since 1977.
Katherine E. Stallfort.. 37 Assistant Vice President, Director of Investor
Relations of General Re Corporation since 1995; Vice
President of General Reinsurance Corporation since
1997; previously property facultative underwriter
General Reinsurance Corporation. With General Re 1982-
91 and since 1993.
Lee R. Steeneck......... 50 Vice President and Actuary of General Re Corporation
since 1995; Senior Vice President of General
Reinsurance Corporation since 1996. With General Re
since 1975.
William E. Thiele....... 55 Vice President of General Re Corporation since 1996.
Previously, Chief Executive Officer and President of
Swiss Re America Corporation 1993-1996. With General Re
1968-1983, and since 1996.
</TABLE>
67
<PAGE>
The Chairman, President, Secretary and Treasurer are elected by the Board of
Directors for one-year terms. Officers are appointed and serve at the
discretion of the Board. Other officers may be appointed by and serve at the
discretion of the Chief Executive Officer.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the caption, "Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the caption, "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
68
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS SCHEDULES AND EXHIBITS
1. The Financial Statements, Reserve Disclosures (unaudited) and Financial
Statement Schedules listed in Item 8 are filed as part of this Report.
2. Exhibits
<TABLE>
<C> <S>
3.1 The Restated Certificate of Incorporation of General Re Corporation,
as amended, is incorporated by reference herein from General Re's
Annual Report on Form 10-K for the fiscal year ended December 31,
1987.
3.2 The By-Laws of General Re Corporation, as amended and restated, is
incorporated by reference from General Re's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
4.1 Rights Agreement, dated as of September 11, 1991 between General Re
Corporation and The Bank of New York, as Rights Agent, is
incorporated by reference from General Re's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
10.2 Form of Indemnity Agreement among General Re Corporation and
directors and executive officers is incorporated by reference from
General Re's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.(/1/)
10.3 The General Reinsurance Supplemental Benefit Equalization Plan, is
incorporated by reference from General Re's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.(/1/)
10.4 The General Re Corporation Retirement Plan for Directors, is
incorporated by reference from General Re's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.(/1/)
10.5 The General Re Corporation Deferred Compensation Plan for Directors,
is incorporated by reference from General Re's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.(/1/)
10.6 Form of Severance Agreement among General Re Corporation and certain
executive officers is incorporated by reference from General Re's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996.(/1/)
10.7.1 Employment Agreement between Cologne Re and Peter Lutke-Bornefeld,
is incorporated by reference from General Re's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.(/1/)
10.7.2 Employment agreement between General Re Corporation and Ronald E.
Ferguson, is incorporated by reference from General Re's Report on
Form 10-Q for the period ended June 30, 1997.(/1/)
21. Subsidiaries of the Registrant.
23. Consent of Independent Accountants.
24. Powers of Attorney of Directors.
27. Financial Data Schedule.
</TABLE>
- --------
(/1/Management)contracts or compensatory plans filed pursuant to Item 14(c).
(B) REPORTS ON FORM 8-K
None
69
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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)
By: Elizabeth A. Monrad
(Elizabeth A. Monrad, Vice
President and Treasurer)
Dated: March 25, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<S> <C>
SIGNATURE TITLE
DATE
Ronald E. Ferguson Chairman and Chief Executive February 11,
(Ronald E. Ferguson) Officer and Director 1998
Joseph P. Brandon Senior Vice President and February 11,
(Joseph P. Brandon) Chief Financial Officer 1998
(Principal Financial Officer)
Elizabeth A. Monrad Vice President and Treasurer February 11,
(Elizabeth A. Monrad) (Principal Accounting Officer) 1998
*Lucy Wilson Benson Director February 11,
(Lucy Wilson Benson) 1998
*Walter M. Cabot Director February 11,
(Walter M. Cabot) 1998
*William C. Ferguson Director February 11,
(William C. Ferguson) 1998
*Donald J. Kirk Director February 11,
(Donald J. Kirk) 1998
*Kay Koplovitz Director February 11,
(Kay Koplovitz) 1998
*Andrew W. Mathieson Director February 11,
(Andrew W. Mathieson) 1998
*Martin G. McGuinn Director February 11,
(Martin G. McGuinn) 1998
*David E. McKinney Director February 11,
(David E. McKinney) 1998
# Director
(James S. Riepe)
*Stephen A. Ross Director February 11,
(Stephen A. Ross) 1998
*Walter F. Williams Director February 11,
(Walter F. Williams) 1998
</TABLE>
- --------
*By either Charles F. Barr or Robert D. Graham pursuant to a power of
attorney.
#Mr. Riepe joined the board of directors on February 11, 1998, did not serve
as a director during the period covered by this report, and consequently has
not signed the report.
70
<PAGE>
GENERAL RE CORPORATION
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF GENERAL RE CORPORATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GENERAL RE CORPORATION
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(PARENT COMPANY)
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
ASSETS
Fixed maturities, available-for-sale......................... $ 51 $ 85
Short-term investments, at amortized cost which approximates
fair value.................................................. 16 159
Investment in subsidiaries, at equity........................ 8,312 7,361
Other invested assets........................................ 34 39
Other assets................................................. 56 31
Due from subsidiaries........................................ 739 178
------- -------
Total assets............................................... $ 9,208 $ 7,853
======= =======
LIABILITIES
Commercial paper............................................. $ 689 $ 140
Notes payable due 2009....................................... 150 150
Income taxes................................................. 80 135
Other liabilities............................................ 125 100
------- -------
Total liabilities.......................................... 1,044 525
------- -------
Cumulative convertible preferred stock (shares issued:
1,700,231 in 1997 and 1,711,907 in 1996; no par value)...... 145 146
Loan to employee savings and stock ownership plan............ (142) (144)
------- -------
3 2
------- -------
COMMON SHAREOWNERS' EQUITY
Common stock (102,827,344 shares issued in 1997 and 1996; par
value $.50)................................................. 51 51
Paid-in capital.............................................. 1,109 1,041
Unrealized appreciation of investments, net of deferred in-
come taxes.................................................. 2,460 1,625
Currency translation adjustments, net of deferred income tax-
es.......................................................... (42) (53)
Retained earnings............................................ 7,492 6,708
Less common stock in treasury, at cost (shares held:
25,393,840 in 1997
and 21,262,113 in 1996)..................................... (2,909) (2,046)
------- -------
Total common shareowners' equity........................... 8,161 7,326
------- -------
Total liabilities, cumulative convertible preferred stock
and
common shareowners' equity................................ $ 9,208 $ 7,853
======= =======
</TABLE>
71
<PAGE>
GENERAL RE CORPORATION
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(PARENT COMPANY)
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ------ ----
<S> <C> <C> <C>
REVENUES
Distributions from subsidiaries
Insurance subsidiaries................................. $850 $1,038 $420
Other subsidiaries..................................... 7 75 8
---- ------ ----
Total distributions from subsidiaries................ 857 1,113 428
Investment income........................................ 7 9 11
Other revenues........................................... 32 15 22
Net realized gains (losses) on investments............... (8) 1 (6)
---- ------ ----
Total revenues....................................... 888 1,138 455
---- ------ ----
EXPENSES
Other operating costs and expenses....................... 2 36 29
Income tax expense (benefit)............................. 10 (4) 4
---- ------ ----
Total expenses....................................... 12 32 33
---- ------ ----
Income before equity income.......................... 876 1,106 422
---- ------ ----
Equity in net income of subsidiaries less dividends re-
ceived of
$857 in 1997, $1,113 in 1996 and $428 in 1995............. 92 (212) 403
---- ------ ----
Net income........................................... $968 $ 894 $825
==== ====== ====
</TABLE>
72
<PAGE>
GENERAL RE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(PARENT COMPANY)
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $968 $894 $ 825
Equity in net income of subsidiaries less dividends
received................................................. (92) 212 (403)
Change in due to/due from subsidiaries.................... (484) (150) 26
Other..................................................... (66) 43 (18)
---- ---- -----
Net cash from operating activities.................... 326 999 430
---- ---- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturities:
Purchases............................................... (162) (172) (344)
Sales................................................... 208 326 146
Maturities.............................................. -- -- 74
Equity securities:
Purchases............................................... (23) (60) --
Sales................................................... 7 111 --
Other invested assets....................................... (5) -- --
Net sales (purchases) of short-term investments............. 143 (138) 3
Cash used in acquisitions................................... -- (313) --
Capital contribution to subsidiaries........................ (46) (28) (125)
---- ---- -----
Net cash used in investing activities................. 122 (274) (246)
---- ---- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper borrowing (repayment), net............... 549 140 (31)
Cash dividends paid to shareowners
Common.................................................. (174) (163) (161)
Preferred............................................... (11) (11) (11)
Acquisition of treasury stock............................. (867) (729) (30)
Other..................................................... 50 44 45
---- ---- -----
Net cash used in financing activities................. (453) (719) (188)
---- ---- -----
Change in cash.............................................. (5) (6) (4)
Cash, beginning of year..................................... 6 -- 4
---- ---- -----
Cash, end of year........................................... $ 1 $ 6 $ --
==== ==== =====
</TABLE>
73
<PAGE>
GENERAL RE CORPORATION
SCHEDULE V--SUPPLEMENTARY INSURANCE INFORMATION
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
- ------------------- ----------- -------- -------- ----------- -------- ---------- ---------- ------------ --------- --------
BENEFITS,
GROSS POLICY CLAIMS, AMORTIZATION
DEFERRED CLAIMS BENEFITS LOSSES OF DEFERRED
YEAR POLICY AND FOR NET NET AND POLICY OTHER NET
AND ACQUISITION CLAIM UNEARNED LIFE/HEALTH PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS
SEGMENT COST EXPENSES PREMIUMS CONTRACTS REVENUE INCOME EXPENSES COSTS EXPENSES WRITTEN
- ------------------- ----------- -------- -------- ----------- -------- ---------- ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997
Property/Casualty
North America..... $214 $10,684 $1,081 -- $3,144 $ 814 $2,152 $ 662 $339 $3,058
International..... 142 5,113 589 -- 2,270 369 1,636 514 197 2,268
Life/health........ 120 -- 204 $907 1,193 73 883 238 78 1,219
---- ------- ------ ---- ------ ------ ------ ------ ---- ------
Total........... $476 $15,797 $1,874 $907 $6,607 $1,256 $4,671 $1,414 $614 $6,545
==== ======= ====== ==== ====== ====== ====== ====== ==== ======
1996
Property/Casualty
North America..... $232 $10,767 $1,151 -- $3,104 $ 727 $2,143 $ 682 $303 $3,081
International..... 158 5,210 639 -- 2,514 394 1,841 576 195 2,505
Life/health........ 67 -- 167 $751 1,060 59 789 220 60 1,075
---- ------- ------ ---- ------ ------ ------ ------ ---- ------
Total........... $457 $15,977 $1,957 $751 $6,678 $1,180 $4,773 $1,478 $558 $6,661
==== ======= ====== ==== ====== ====== ====== ====== ==== ======
1995
Property/Casualty
North America..... $226 $ 9,356 $1,115 -- $2,853 $ 711 $1,919 $ 706 $266 $2,964
International..... 183 4,896 667 -- 2,288 247 1,761 490 111 2,429
Life/health........ 25 -- 131 $580 696 40 505 149 36 709
---- ------- ------ ---- ------ ------ ------ ------ ---- ------
Total........... $434 $14,252 $1,913 $580 $5,837 $ 998 $4,185 $1,345 $413 $6,102
==== ======= ====== ==== ====== ====== ====== ====== ==== ======
</TABLE>
- ----
Note: The totals shown in the Schedule include only the property/casualty and
life/health operations of General Re and may not correspond with
consolidated amounts.
74
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
21 Subsidiaries and Registrant..............................
23 Consent of Independent Accountants.......................
24 Powers of Attorney of Directors..........................
27 Financial Data Schedule..................................
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Significant subsidiaries of General Re Corporation at December 31, 1997 were
as follows:
<TABLE>
<CAPTION>
JURIDISCTION
OF
NAME NATURE OF BUSINESS INCORPORATION
- ----------------------------------------- ---------------------- --------------
<S> <C> <C>
General Re Corporation Holding Company Delaware
General Reinsurance Corporation Reinsurer Delaware
Elm Street Corporation Real Estate Delaware
General Star Indemnity Company Insurer Connecticut
General Star International Indemnity
Ltd. Insurer UK
General Star National Insurance Company Insurer Ohio
General Star Management Company Management Delaware
Genesis Underwriting Management Company Management Delaware
Genesis D & O Liability Insurance Pro-
gram, Inc. Agency Ohio
Broker Markets Agency, Inc. Agent Connecticut
Genesis Insurance Company Insurer Connecticut
Genesis Indemnity Insurance Company Insurer North Dakota
GRC Realty Corporation Real Estate Connecticut
Gen Re Holdings, Inc. Holding Company Delaware
Reinsurance Underwriting Services Lim-
ited Manager UK
General Re Europe Services Ltd. Management UK
General Re Europe Limited Reinsurer UK
General Re, Correduria de Reaseguros,
S.A. Intermediary Spain
General and Cologne Re Management Lim-
ited Management Australia
General & Cologne Re Brasil Ltda. General Business Corp. Brazil
General and Cologne Reinsurance Aus-
tralasia Limited Reinsurer Australia
Recoa Investments Pty. Limited Investment Company Australia
General Re Compania de Reaseguros, S.A. Reinsurer Uruguay
Mandataria General Re, S.A. Agent Argentina
Die Kolnische Ruck Compania de
Reaseguros, S.A. Reinsurer Argentina
National Re Corporation Holding Company Delaware
National Reinsurance Corporation Reinsurer Delaware
Fairfield Insurance Company Insurer Connecticut
National Intermediaries, Inc. Intermediary New York
Global Resolution, Inc. Manager New Jersey
National Risk Services, Inc. Broker Connecticut
RIC Corporation of Delaware General Business Corp. Delaware
North Star Reinsurance Corporation Reinsurer Delaware
General Re-New England Asset Management,
Inc. Investment Adviser Delaware
North Star Syndicate, Ltd. Insurance Syndicate Delaware
United States Aviation Underwriters,
Inc. Manager New York
Canadian Aviation Insurance Managers
Ltd. Manager Montreal, Can.
Airsurance Limitee Manager Montreal, Can.
General Re Services Corporation General Business Corp. Delaware
General Re Financial Products (Japan)
Inc. Agent/Swap Dealer Delaware
Herbert Clough Inc. Intermediary New York
Genplus Managers, Inc. Manager Delaware
Cresset Capital Limited Partnership Venture Capital NY Partnership
GRD Corporation General Business Corp. Delaware
General Re-CKAG Reinsurance and Invest-
ment S.a.r.L. Holding Company Luxembourg
Kolnische Ruckversicherungs-Gesell-
schaft AG Reinsurer Germany
Cologne Holding Company of America Holding Company Connecticut
Cologne Re Managers Corporation Management Delaware
Cologne Reinsurance Company of Amer-
ica Reinsurer Connecticut
Cologne Life Reinsurance Company Reinsurer Connecticut
Cologne Life Underwriting Management
Company Management Connecticut
Health Reinsurance Management Part-
nership Partnership Massachusetts
AVB Development, Inc. General Business Corp. Connecticut
John Hewitt and Associates Management Maine
Insurance Management Services, Corp. Management Connecticut
Idealife Insurance Company Insurer Connecticut
Europa Ruckversicherung AG Reinsurer Germany
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
JURIDISCTION
OF
NAME NATURE OF BUSINESS INCORPORATION
- ----------------------------------------- ---------------------- -------------
<S> <C> <C>
Europa Re International Securities Trader Ireland
Kolnische Versicherungs-Beratungs- und
Service GmbH General Business Corp. Germany
The Cologne Reinsurance Company Ltd. Reinsurer UK
Cologne Reinsurance Company Ltd. Reinsurer Ireland
La Kolnische Italia Servizi
Riassicurativi SRL Agent Italy
Cologne Reinsurance Finance Holdings
B.V. Holding Company Netherlands
Cologne Reinsurance Company Ltd. Reinsurer Bermuda
Cologne Reinsurance Ltd. Reinsurer Barbados
La Kolnische Latina S.A. Agent Mexico
Kolnische Ruck Wien Reinsurer Austria
Cologne Reinsurance Company of South
Africa Ltd. Reinsurer South Africa
General and Cologne Re Management Lim-
ited Management Australia
General & Cologne Re Brasil Ltda. General Business Corp. Brazil
Cologne Life Reinsurance Company of
Australia Ltd. Reinsurer Australia
Die Kolnische Ruck Riga GmbH Agent Latvia
La Kolnische Iberica S.A. Agent Spain
Kolnische Ruck Buenos Aires S.A. Agent Argentina
Cologne Life Reinsurance Company Lim-
ited Reinsurer UK
Kolnische Gestion Immobiliere Real Estate France
Cologne Re Consultants Consultants Hong Kong
Insiders GmbH General Business Corp. Germany
Kolnische Norden Reinsurer Denmark
La Kolnische de Venezuela Reinsurer Venezuela
Universal Risk Partners Broker Luxembourg
General Re London Limited General Business Corp. UK
GRD Global, Inc. Management Delaware
General Re Financial Products Corpora-
tion Swap Dealer Delaware
General Re Financial Products (Canada)
Limited Agent Ontario
General Re Securities (Canada) Corpo-
ration Limited Market Dealer Ontario
General Re Financial Products Limited Agent UK
General Re Financial Securities Lim-
ited Swap Dealer UK
General Re Securities Corporation Broker-Dealer Delaware
General Re Underwriting Services Lim-
ited Underwriting Services Bermuda
General Re (Bermuda) Limited. Reinsurer Bermuda
General Re Investment Holdings Corpo-
ration Holding Company Delaware
General Re Funding Corporation General Business Corp. Delaware
General Re Corporate Finance, Inc. General Business Corp. Delaware
General Re Strategic Solutions, Inc. General Business Corp. Delaware
General Re Financial Products (Hong
Kong) Limited Swap Dealer Hong Kong
Ardent Risk Services, Inc. General Business Corp. Delaware
</TABLE>
- --------
Legend:
(1)Percentages include any director qualifying shares
(2)Partnership Percentage
(3) Cologne Reinsurance Company Ltd. (Bermuda) owns 75% and Cologne Life
Reinsurance Company (Connecticut) owns 25% of Cologne Reinsurance Ltd.
(Barbados)
(4) General Reinsurance Corporation and Kolnische Ruckversicherungs-
Gesellschaft AG each own 50% of General and Cologne Re Management Limited
(5) Kolnische Ruckversicherungs-Gesellschaft AG owns 70% and non affiliates -
Wiener Stadtische Allgemeine Versicherung Aktiengesellschaft and
Versicherungsanstalt der osterreichischen Bundeslander
Versicherungsaktiengesellschaft each own 15% of Kolnische Ruck Wien
(6) In addition to its ownership of Cologne Re through GR-CK, GRD Corporation
purchased for its own account an additional 11.2% of the shares of Cologne
Re through December 31, 1997, which increased GRD Corporation's
consolidated economic interest in Cologne Re to 77.5%
(7) 50.1% controlling interest held by GRD Corporation and a 49.9% non-
controlling minority interest held by Colonia Konzern, AG of Germany
(37.8%) and Nordstern Allgemeine Versicherungs, AG of Germany (12.1%)
(8) Cologne Life Underwriting Management Company owns 51% and Health
Reinsurance Management, Inc. (a nonaffiliate) owns 49% of Health
Reinsurance Management Partnership
(9) Kolnische Ruckversicherungs-Gesellschaft AG owns 75% and non-affiliates -
ProFin Beteiligungsgesellschaft mbH owns 16%, Iron Trades Insurance Ltd.
owns 8% and Mutuell Assurance Artisanale de France owns 1% of Europa
Ruckversicherung AG
(10) Kolnische Ruckversicherungs-Gesellschaft AG owns 85% and two Managers own
the remaining 15% of Insiders GmbH
(11) Cologne Life Underwriting Management Company owns 92.63% and Robert Taylor
owns 7.37% of John Hewitt and Associates
(12) General Reinsurance Corporation and Kolnische Ruckversicherungs-
Gesellschaft AG each own 50% of General & Cologne Re Brasil Ltda.
(Indentation Shows Ownership)
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
of General Re Corporation and Subsidiaries on Form S-8 (File Numbers 2-62106,
275489, 33-60867, 33-6483, 33-33102 and 333-13341) of our report, dated
January 30, 1998, on our audits of the consolidated financial statements and
financial statement schedules of General Re Corporation and Subsidiaries as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997, which is included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
New York, New York
March 20, 1998
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
The Undersigned, a Director of General Re Corporation, a Delaware
Corporation (the "Corporation"), Hereby Designates each of Charles F. Barr and
Robert D. Graham as his attorney in fact to execute on his behalf, as a
Director of General Re, General Re's Annual Report on Form 10-K under the
Securities Exchange Act of 1934, as amended.
-------------------------------------
Original powers of attorney in this
form signed by each of the
following:
Lucy Wilson Benson
Walter M. Cabot
William C. Ferguson
Donald J. Kirk
Kay Koplovitz
Andrew W. Mathieson
Martin G. McGuinn
David E. McKinney
Stephen A. Ross
Walter F. Williams
Dated as of February 11, 1998.
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 19,493
<DEBT-CARRYING-VALUE> 0
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<EQUITIES> 5,794
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<REAL-ESTATE> 0
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<TOTAL-ASSETS> 41,459
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