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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
------------------------------
Commission file number 1-8026
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GENERAL RE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1026471
----------- ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Financial Centre, P.O. Box 10350
Stamford, Connecticut 06904-2350
--------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, with area code (203) 328-5000
--------------------
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 1998
Common Stock, $.50 par value 75,652,487 Shares
- --------------------------------------- --------------------------------
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GENERAL RE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Statements of Income
Three and six months ended June 30, 1998 and 1997 3
Consolidated Statements of Comprehensive Income
Six months ended June 30, 1998 and 1997 4
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 5
Consolidated Statements of Common Shareowners' Equity
Six months ended June 30, 1998 and 1997 6
Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997 7
Notes to Consolidated Interim Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K 21
Exhibit 27 - Financial Data Schedule 23
2
GENERAL RE CORPORATION
Consolidated Statements of Income
(in millions, except per share data)
(Unaudited)
--------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
Premiums and other revenues
Net premiums written
Property/casualty $1,399 $1,551 $2,486 $2,814
Life/health 295 284 619 582
----- ------- ------- -------
Total net premiums written $1,694 $1,835 $3,105 $3,396
====== ====== ====== ======
Net premiums earned
Property/casualty $1,185 $1,389 $2,352 $2,759
Life/health 287 280 594 566
----- ------ ------ ------
Total net premiums earned 1,472 1,669 2,946 3,325
Investment income 323 316 645 634
Other revenues 111 96 204 183
Net realized gains (losses) (3) (7) 34 4
----- ----- ----- ----
Total revenues 1,903 2,074 3,829 4,146
----- ----- ----- -----
Expenses
Claims and claim expenses 794 962 1,576 1,929
Life/health benefits 206 207 429 407
Acquisition costs 339 372 683 726
Other operating costs and expenses 214 203 399 409
Goodwill amortization 7 7 14 14
----- ----- ----- -----
Total expenses 1,560 1,751 3,101 3,485
----- ----- ----- -----
Income before income taxes and
minority interest 343 323 728 661
Income tax expense 74 74 170 155
-- -- --- ---
Income before minority interest 269 249 558 506
Minority interest 15 16 32 29
-- -- -- --
Net income $254 $233 $526 $477
==== ==== ==== ====
Share Data:
Net income per common share:
Basic $3.32 $2.88 $6.81 $5.85
===== ===== ===== =====
Diluted $3.22 $2.81 $6.62 $5.72
===== ===== ===== =====
Average common shares outstanding:
Basic 76,023,316 80,114,284 76,505,750 80,603,471
========== ========== ========== ==========
Diluted 78,815,591 82,522,691 79,241,691 82,970,201
========== ========== ========== ==========
Dividend per share to common
shareowners $ .59 $ .55 $1.18 $1.10
===== ===== ===== =====
See notes to the consolidated interim financial statements.
3
<PAGE>
GENERAL RE CORPORATION
Consolidated Statements of Comprehensive Income
(in millions, except share data)
(Unaudited)
Six months ended
June 30,
1998 1997
---- ----
Net income $526 $477
Unrealized appreciation (depreciation) of
investments, after tax:
Common equities 328 335
Preferred equities 5 10
Fixed maturities 19 (21)
Less: Reclassification for prior periods'
appreciation included in current
period's realized gains (40) -
Foreign currency translation gains (losses) (12) 37
----- -----
Comprehensive income $826 $838
==== ====
Share data:
Comprehensive income per diluted common share $10.41 $10.06
====== ======
See notes to the consolidated interim financial statements.
4
GENERAL RE CORPORATION
Consolidated Balance Sheets
(in millions, except share data)
(Unaudited)
Assets June 30, 1998 Dec. 31, 1997
------------- -------------
Insurance investments:
Fixed maturities, available-for-sale (cost:
$15,726 in 1998; $15,859 in 1997) $16,773 $16,847
Preferred equities, at fair value (cost
$871 in 1998; $980 in 1997) 938 1,041
Common equities, at fair value (cost:
$2,122 in 1998; $2,098 in 1997) 5,337 4,748
Short-term investments, at amortized cost
which approximates fair value 923 1,172
Other invested assets 785 768
------- --------
Total insurance investments 24,756 24,576
Cash 222 193
Accrued investment income 328 358
Accounts receivable 2,216 1,858
Funds held by reinsured companies 436 488
Reinsurance recoverable 2,490 2,706
Deferred acquisition costs 513 476
Goodwill 943 968
Other assets 785 962
Financial services assets:
Investment securities, at fair value (cost:
$1,152 in 1998; $790 in 1997) 1,156 792
Trading securities, at fair value (cost:
$2,291 in 1998; $1,908 in 1997) 2,324 1,859
Short-term investments, at fair value 209 129
Cash 71 159
Trading account assets 5,282 4,313
Securities purchased under agreements to resell 563 903
Other assets 968 719
------- ----------
Total assets $43,262 $41,459
======= =======
Liabilities
Claims and claim expenses $15,646 $15,797
Policy benefits for life/health contracts 971 907
Unearned premiums 2,003 1,874
Other reinsurance balances 2,619 2,948
Commercial paper 50 -
Notes payable 284 285
Income taxes 1,361 1,104
Other liabilities 848 997
Minority interest 1,001 1,032
Financial services liabilities:
Securities sold under agreements to repurchase,
at contract value 1,303 1,030
Securities sold but not yet purchased, at
market value 970 1,190
Trading account liabilities 4,243 3,664
Commercial paper 1,021 689
Notes payable 1,173 746
Other liabilities 1,288 1,032
------- -------
Total liabilities 34,781 33,295
------ ------
Cumulative convertible preferred stock (shares
issued: 1,693,181 in 1998 and 1,700,231 in 1997;
no par value) 144 145
Loan to employee savings and stock ownership plan (142) (142)
------- -------
2 3
------- ---------
Common Shareowners' Equity
Common stock (102,827,344 shares issued in 1998
and 1997; par value $.50) 51 51
Paid-in capital 1,153 1,109
Accumulated other comprehensive income, net of
deferred income taxes 2,718 2,418
Retained earnings 7,923 7,492
Less common stock in treasury, at cost (shares
held: 27,174,857 in 1998 and 25,393,840 in 1997) (3,366) (2,909)
------- --------
Total common shareowners' equity 8,479 8,161
------- -------
Total liabilities, cumulative convertible
preferred stock and common shareowners' equity $43,262 $41,459
======= =======
See notes to the consolidated interim financial statements.
5
<PAGE>
GENERAL RE CORPORATION
Consolidated Statements of Common Shareowners' Equity
(in millions)
(Unaudited)
Six months ended
June 30,
1998 1997
---- ----
Common stock:
Beginning of period $51 $51
Change for the period - -
--- ---
End of period 51 51
-- --
Paid-in capital:
Beginning of period 1,109 1,041
Stock issued under stock option and other
incentive arrangements 29 23
Other 15 8
----- -----
End of period 1,153 1,072
----- -----
Accumulated other comprehensive income
net of deferred income taxes:
Unrealized appreciation of investments,
net of adjustment for appreciation
(depreciation) related to realized gains
included in net income
Beginning of period 2,460 1,625
Change for the period 521 508
Deferred income taxes (209) (184)
----- -----
End of period 2,772 1,949
----- -----
Currency translation adjustments
Beginning of period (42) (53)
Change for the period (45) (12)
Deferred income taxes 33 49
--- ---
End of period (54) (16)
--- ---
Accumulated other comprehensive income
Beginning of period 2,418 1,572
Change for the period 476 496
Deferred income taxes (176) (135)
----- -----
End of period 2,718 1,933
----- -----
Retained earnings:
Beginning of period 7,492 6,708
Net income 526 477
Dividends on common stock (90) (88)
Dividends on preferred stock, net of
income taxes (5) (5)
----- -----
End of period 7,923 7,092
----- -----
Common stock in treasury:
Beginning of period (2,909) (2,046)
Cost of shares acquired during period (454) (377)
Stock issued under stock option and other
incentive arrangements (3) 7
------ ------
End of period (3,366) (2,416)
------ ------
Total common shareowners' equity $8,479 $7,732
====== ======
See notes to the consolidated interim financial statements.
6
GENERAL RE CORPORATION
Consolidated Statements of Cash Flows
(in millions)
(Unaudited)
Six months ended
June 30,
1998 1997
---- ----
Cash flows from operating activities:
Net income $526 $477
Adjustments to reconcile net income to net
cash provided by operating activities:
Change in claim and claim expense liabilities (151) 126
Increase in policy benefits for life/health
contracts 64 143
Change in reinsurance recoverable 216 (18)
Increase in unearned premiums 129 30
Amortization of acquisition costs 683 726
Acquisition costs deferred (720) (750)
Trading account activities
Change in trading account securities (792) 1,037
Securities purchased under agreements
to resell 340 (243)
Securities sold under agreements to
repurchase 273 (638)
Change in other trading balances (334) (228)
Other changes in assets and liabilities 43 (120)
Net realized gains on investments (34) (4)
--- ----
Net cash from operating activities 243 538
--- ---
Cash flows from investing activities:
Fixed maturities: available-for-sale
Purchases (3,670) (3,067)
Calls and maturities 278 246
Sales 3,074 3,332
Equity securities
Purchases (511) (682)
Sales 481 263
Net sales (purchases) of short-term investments 228 (55)
Net purchases of other invested assets (9) (33)
------ ---
Net cash (used in) from investing activities (129) 4
----- ---
Cash flows from financing activities:
Issuance of structured notes 411 -
Commercial paper borrowing, net 382 (140)
Change in contract deposits (425) 34
Cash dividends paid to common shareowners (90) (88)
Acquisition of treasury stock (463) (375)
Other 12 31
----- -----
Net cash used in financing activities (173) (538)
---- ----
Change in cash (59) 4
Cash, beginning of period 352 365
--- ---
Cash, end of period $293 $369
==== ====
See notes to the consolidated interim financial statements.
7
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. General - The interim financial statements of General Re Corporation and
its subsidiaries ("General Re") have been prepared on the basis of
generally accepted accounting principles and, in the opinion of management,
reflect all adjustments (consisting of normal, recurring accruals)
necessary for a fair presentation of results for such periods. The results
of operations for any interim period are not necessarily indicative of
results for the full year. These financial statements and related notes
should be read in conjunction with the financial statements and related
notes in General Re's 1997 Annual Report filed on Form 10-K. Certain
reclassifications have been made to 1997 balances to conform to the 1998
presentation. The operating results of General Re's international
reinsurance operations are reported on a quarter lag.
2. Income Taxes - General Re's effective income tax rate differs from current
statutory rates principally due to tax-exempt interest income and dividends
received deductions. General Re paid income taxes of $111 million and $163
million in the first six months of 1998 and 1997, respectively.
3. Reinsurance Ceded - General Re utilizes reinsurance to reduce its exposure
to large losses. The income statement amounts for premiums written,
premiums earned, claims and claim expenses incurred and life/health
benefits are reported net of reinsurance. Direct, assumed, ceded and net
amounts for the first six months of 1998 and 1997 were as follows (in
millions):
Property/Casualty Life/Health Claims and Life/Health
Written Earned Written Earned Claim Expenses Benefits
1998
Direct $ 251 $ 254 - - $ 198 -
Assumed 2,630 2,482 $699 $676 1,566 $492
Ceded (395) (384) (80) (82) (188) (63)
-------- ------- ----- ----- ------- -----
Net $2,486 $2,352 $619 $594 $1,576 $429
====== ====== ==== ==== ====== ====
1997
Direct $237 $255 - - $208 -
Assumed 2,996 2,919 $649 $614 1,933 $442
Ceded (419) (415) (67) (48) (212) (35)
------- ------- ----- ----- ------- -----
Net $2,814 $2,759 $582 $566 $1,929 $407
====== ====== ==== ==== ====== ====
8
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued)
4. Per Common Share Data - Basic earnings per common share were based on
earnings less preferred dividends, divided by the weighted average common
shares outstanding during each period. Diluted earnings per share assume
the conversion of all outstanding convertible preferred stock and the
maximum dilutive effect of common stock equivalents. The following is a
reconciliation of the numerators and denominators used in the basic and
diluted earnings per share calculations for the three months and six months
ended June 30, 1998 and 1997.
Income Shares Per share Income Shares Per share
------ ------ --- ----- ------ ------ --- -----
Three Months Ended
----------------------------------------------------
June 30, 1998 June 30, 1997
------------- -------------
(in millions, except
per share information)
Net income $254 $233
Less: preferred
dividends (2) (2)
---- ----
Basic earnings 252 76.0 $3.32 231 80.1 $2.88
===== =====
Effect of dilutive
securities
Stock options - 1.1 - 0.7
Conversion of
preferred stock 2 1.7 2 1.7
Conversion expense - - (1)
----- ------ ----
Diluted earnings $254 78.8 $3.22 $232 82.5 $2.81
==== ==== ===== ==== ==== =====
Six Months Ended
June 30, 1998 June 30, 1997
------------- -------------
Net income $526 $477
Less: preferred
dividends (5) (5)
----- ----
Basic earnings 521 76.5 $6.81 472 80.6 $5.85
==== ==== =====
Effect of dilutive
securities
Stock options - 1.0 - 0.7
Conversion of
preferred stock 5 1.7 5 1.7
Conversion expense (2) (2)
----- ----- -----
Diluted earnings $524 79.2 $6.62 $475 83.0 $5.72
==== ==== ===== ==== ==== =====
5. New Accounting Standards - In June 1997, the Financial Accounting Standards
Board issued Statement No. 131, Disclosure about Segments of an Enterprise
and Related Information. This statement requires that companies report
certain information about their operating segments in their interim and
annual financial statements, including information about the products and
services from which revenues are derived, the geographic areas of
operation, and information about major customers. The statement defines
operating segments based on internal management reporting and management's
method of allocating resources and assessing performance. The statement is
effective for year end 1998 and is not expected to change the four segments
now reported by General Re.
9
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued)
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts. It requires that all derivatives be recognized as either assets
or liabilities in the balance sheet and measure those instruments at fair
value. If certain conditions are satisfied, the derivative may be
designated as a hedge of an exposure to changes in the value of an asset or
liability, variable cash flows for forecasted transactions, or the foreign
currency exposure of the net investment in a foreign operation. For
derivatives designated as hedging instruments, net income will be affected
by the extent to which the derivative is not effective as a hedge of the
underlying instrument. For derivatives designated as a hedge of the net
investment in a foreign operation, the gain or loss on the derivative would
be included in other comprehensive income. For derivatives not designated
as hedges, the gain or loss would be recognized in income in the period of
change.
The statement is effective for all fiscal quarters beginning after June 15,
1999. General Re is currently assessing the effect of adopting this
statement on its financial position and operating results. It is not
expected, however, that the adoption of this statement will have a material
effect on General Re's financial position or results from operations.
6. Berkshire Hathaway Transaction - On June 19, 1998, General Re and Berkshire
Hathaway Inc. ("Berkshire") announced that they had entered into an
Agreement and Plan of Mergers. The transaction is subject to regulatory
approvals and the approvals of both companies' shareholders. Under the
terms of the agreement, General Re shareholder will receive at their
election either 0.0035 shares of Berkshire Class A common stock or 0.105
shares of Berkshire Class B common stock for each share of General Re
common stock they own at the time the transaction is consummated.
The agreement also provides that if Berkshire and General Re are unable to
receive certain tax rulings from the Internal Revenue Service prior to
February 19, 1999, Berkshire may elect to have an alternative form of
transaction, under which General Re shareholders will receive the same
aggregate value in consideration as stated in the prior paragraph, although
3 percent of the consideration would be received in cash rather than stock.
The total consideration for the transaction, based upon the closing price
of Berkshire Class A common stock on July 31, 1998 is approximately $19
billion.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MERGER
On June 19, 1998, General Re and Berkshire Hathaway Inc. ("Berkshire") announced
they had reached a definitive agreement to merge. See Note 6 to the consolidated
interim financial statements for more information on the transaction. The merger
is expected to close in the fourth quarter of 1998.
CONSOLIDATED
Income from operations, excluding after-tax realized gains and losses, was $3.20
per diluted share in the second quarter of 1998, an increase of 10.7 percent
from the $2.89 per diluted share earned in the comparable period in 1997. Net
income for the second quarter of 1998 was $3.22 per diluted share, compared with
$2.81 per diluted share in 1997. Net income for the second quarter of 1998
included after-tax realized gains of $.02 per diluted share, compared with
after-tax realized losses of $.08 per diluted share in the second quarter of
1997. The improved results in the second quarter of 1998 were primarily due to
increased earnings in the financial services, international property/casualty
and life/health operations.
For the first six months of 1998, income from operations, excluding after-tax
realized gains and losses, was $6.32 per diluted share compared with $5.73 per
diluted share in 1997, an increase of 10.3 percent. Net income for the first six
months of 1998 was $6.62 per share, compared with $5.72 per share for the same
period in 1997. Included in net income were after-tax realized gains of $.30 per
share in the first six months of 1998, compared with after-tax realized losses
of $.01 per share in the same period of 1997. Improved international
property/casualty underwriting results and growth in trading revenues in the
financial services operations were the primary contributors to the increased
earnings for the first six months of 1998.
As required by Financial Accounting Statement No. 130, Reporting Comprehensive
Income, General Re's financial statements for 1998 include a statement of
comprehensive income. Comprehensive income consists of net income, unrealized
changes in investment appreciation and foreign currency translation gains or
losses. Comprehensive income for the first six months of 1998 was $826 million,
or $10.41 per diluted share, compared with $838 million, or $10.06 per diluted
share for the same period in 1997. The difference between comprehensive income
and net income for the periods was primarily due to unrealized appreciation in
the common equity investment portfolio.
Consolidated net premiums written for the second quarter of 1998 were $1,694
million, a decrease of 7.7 percent from $1,835 million in 1997. Consolidated net
premiums written for the first six months of 1998 decreased 8.6 percent from
$3,396 million in 1997 to $3,105 million in 1998. Adjusted for the effects of
foreign exchange, consolidated traditional net premiums written increased 3.0
percent and 2.2 percent in the second quarter and first six months of 1998,
respectively.
General Re's consolidated underwriting combined ratio was 100.5 percent in the
second quarter of 1998, compared with 100.4 percent in the second quarter of
1997. For the first six months of 1998 and 1997, the consolidated underwriting
combined ratio was 100.4 percent and 100.7 percent, respectively.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Consolidated pretax investment income was $323 million in the second quarter of
1998, compared with $316 million in the same period of 1997. For the first six
months, consolidated pretax investment income was $645 million and $634 million
in 1998 and 1997, respectively. The 1.7 percent increase in consolidated pretax
investment income in the first six months of 1998 was due to the investment of
operating cash flow over the last year, partially offset by common stock
repurchases, dividend payments and the strengthening of the U.S. dollar,
principally against the German mark.
The consolidated effective tax rate was 21.4 percent for the second quarter of
1998, compared with 22.7 percent in the second quarter of 1997. For the first
six months, the effective tax rate was 23.3 percent and 23.4 percent in 1998 and
1997, respectively.
Excluding the financial services operations, consolidated net cash flow from
operations was $715 million in the first six months of 1998, compared to $581
million in the same period in 1997. The increase of $134 million in the first
six months of 1998 was due to lower paid claims, partially offset by the effect
of the strengthening U.S. dollar which decreased reported international cash
flow.
At June 30, 1998, insurance invested assets were $24,756 million, an increase of
$180 million compared to $24,576 million at December 31, 1997, primarily the
result of unrealized appreciation in the equity portfolio, reduced by common
stock repurchases and dividend payments. The financial services operations had
$3,689 million of invested assets at June 30, 1998, an increase of $909 million
compared to December 31, 1997. The increase in financial services invested
assets in the first six months of 1998 results from changes in the hedging
activities of General Re Financial Products Corporation ("GRFP") and growth in
GRFP's match-funded business.
The consolidated gross liability for claims and claim expenses for the
property/casualty operations was $15,646 million at June 30, 1998, a decrease of
$151 million from the year-end 1997 liability. Adjusted for the effects of
foreign exchange, the gross liability would have increased $240 million, or 1.5
percent.
The asset for reinsurance recoverable on unpaid claims was $2,138 million at
June 30, 1998, compared to $2,356 million at December 31, 1997. At June 30,
1998, the gross liability for claims and claim expenses and the related asset
for reinsurance recoverables include $2,034 million and $616 million,
respectively, for environmental and latent injury claims. These amounts include
provisions for both reported and incurred but not reported claims.
Common shareowners' equity at June 30, 1998 was $8,479 million, an increase of
$318 million, or 3.9 percent, from the $8,161 million at December 31, 1997. The
increase was principally the result of net income of $526 million, an increase
in after-tax unrealized investment gains of $312 million, and the reissuance of
common stock of $27 million under employee compensation and benefit plans,
partially offset by common share repurchases of $454 million and common and
preferred stock dividends of $95 million. On a per share basis, common
shareowners' equity was $112.08 at June 30, 1998, an increase of 6.3 percent
from $105.40 at December 31, 1997.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
General Re repurchased 2,076,600 shares of common stock from January 1, 1998
through June 18, 1998 for aggregate consideration of $454 million. No shares
have been repurchased since the announcement of General Re's merger with
Berkshire Hathaway Inc. Since the inception of the repurchase program in 1987,
General Re has repurchased 33,902,400 common shares for total consideration of
$3.7 billion.
General Re periodically issues commercial paper to meet the short-term financing
needs of its various operations. Commercial paper offered by General Re has been
rated A1+ by Standard & Poor's and Prime 1 by Moody's. At June 30, 1998, General
Re had $1,071 million of commercial paper outstanding, $1,021 million of which
was used to support GRFP's liquidity needs and $50 million was used by General
Reinsurance Corporation for its liquidity needs. At June 30, 1998, General Re
had $1.8 billion in available lines of credit that provide General Re with
additional financial flexibility and support the commercial paper program. The
credit lines consist of a five-year credit facility of $1.0 billion and a
364-day facility for the remaining $0.8 billion. The credit agreements with the
participating banks require General Re to maintain a minimum consolidated
tangible net worth, as defined, of $2.7 billion. To date, General Re has not
drawn against its corporate credit facilities. In July 1998, General Re
increased available commitments under the lines to $2.7 billion.
Pretax income discussed in each of the segment sections that follow is before
minority interest deductions and goodwill amortization, both of which are deemed
corporate expenses that have not been allocated to the segments.
NORTH AMERICAN PROPERTY / CASUALTY
(in millions)
Second Quarter Year-to-date
-------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Income before income taxes and
realized gains $209 $211 $429 $416
Net premiums written 612 728 1,284 1,523
Net underwriting income 4 6 9 12
Loss ratio 65.1% 67.1% 65.9% 67.5%
Expense ratio 34.2 32.2 33.4 31.8
---- ---- ---- ----
Underwriting combined ratio 99.3% 99.3% 99.3% 99.3%
Investment income $203 $200 $409 $399
Other income 1 5 11 5
Operating cash flow 132 136 427 253
Pretax income for the North American property/casualty operations, excluding
realized gains/losses, decreased 1.1 percent in the second quarter of 1998, as
compared to the same quarter of 1997, and increased 3.1 percent for the first
six months of 1998. The relatively unchanged operating result was due to over
$1.1 billion of cash flows being used to repurchase common stock and pay
dividends during the past twelve months. In addition, underwriting results were
substantially unchanged for the period.
Net premiums written for the North American property/casualty operations were
$612 million in the second quarter of 1998 and $1,284 million in the first six
months of 1998, representing a decrease of 16.0 percent and 15.7 percent from
the comparable 1997 amounts. The decline in premium reflects the current
competitive market and General Re's adherence to underwriting discipline.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The wholesale nature of reinsurance transactions periodically results in
somewhat volatile premium trends between quarters and years. The addition or
loss of a large contract may significantly affect General Re's premium growth,
although large contracts generally have a smaller effect on earnings than on
premium trends. General Re's largest treaty, which had annualized premiums
written of approximately $250 million in 1997 and contributed approximately one
half of one percent of General Re's 1997 net income, was terminated as of
September 30, 1997 and thus impacts premium comparisons, since premiums from
this contract were included in the first six months of 1997, but were not in the
first six months of 1998. Excluding this contract, General Re's North American
premiums written declined 8.1 percent for the quarter. Based on current
estimates of premium inforce, General Re expects North American
property/casualty net premiums, excluding this contract, to decline in the
mid-single digits during 1998.
For the General Star companies, which primarily write excess, surplus and
specialty insurance, net premiums written increased by 12.5 percent for the
quarter and 8.9 percent for the first half of 1998. This growth was primarily
due to increased property business. General Star is experiencing increased
competition from insurers predominantly writing standard coverages for business
in the excess and surplus lines market. For the Genesis operations, which
provide direct excess coverage to companies with qualified self-insurance
programs, net premiums written increased by 22.2 percent for the quarter and
17.0 percent for the first half of 1998 principally due to greater liability
business and accident and health business.
Pretax investment income for the North American property/casualty operations
increased 1.5 percent compared to the second quarter of 1997 and 2.4 percent
year-to-date. Investment income for the North American property/casualty
operations grew slightly during the periods due to positive operating cash flow
in the prior twelve months, offset by share repurchases and common dividends.
The overall pretax total return on the North American property/casualty invested
asset portfolio was 4.8 percent in the first six months of 1998, compared with
5.2 percent in the same period in 1997.
Operating cash flow for the North American property/casualty operations was $427
million in the first six months of 1998, compared to $253 million in the same
period of 1997. The increase was primarily due to lower paid claims. Due to the
nature of General Re's reinsurance operations, paid claims may be volatile from
quarter to quarter. In addition to operating cash flow, the North American
property/casualty operations had $298 million of cash outflows related to
contract deposits that matured during the first half of 1998 (included in
"change in contract deposits" in the statement of cash flows). These types of
contracts generally have a provision that requires most of the investment income
earned on the funds held by General Re to be shared with the ceding company.
Thus, the effect of the return of these funds was not material to investment
income and earnings.
North American property/casualty invested assets were $16,067 million at June
30, 1998, an increase of 0.5 percent from December 31, 1997. The increase in
invested assets was primarily the result of positive operating cash flow,
unrealized appreciation in the equity portfolio, reduced by repurchases of
General Re's common stock and common stock dividends. The gross liability for
claims and claim expenses for the North American property/casualty operations
was $10,576 million at June 30, 1998, a decrease of $108 million, or 1.0
percent, compared to the year-end 1997 liability. The asset for reinsurance
recoverable on unpaid claims was $1,599 million at June 30, 1998, compared to
$1,803 million at December 31, 1997.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
INTERNATIONAL PROPERTY / CASUALTY
(in millions)
Second Quarter Year-to-date
-------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Income before income taxes and
realized gains $82 $78 $173 $149
Net premiums written 788 823 1,202 1,291
Net underwriting (loss) (10) (12) (18) (32)
Loss ratio 69.5% 72.3% 68.4% 73.3%
Expense ratio 32.4 29.7 33.3 29.4
----- ----- ----- -----
Underwriting combined ratio 101.9% 102.0% 101.7% 102.7%
Investment income $90 $91 $177 $184
Other income (loss) 3 (1) 14 (3)
Operating cash flow 121 100 288 328
Income before income taxes and realized gains of the international
property/casualty operations increased 6.2 percent for the second quarter of
1998, compared with the second quarter of 1997 and increased 16.2 percent
compared with the first six months of 1997. For the first six months of 1998,
income for the international property/casualty operations increased due to
improved underwriting results and higher other income. The comparisons for the
second quarter and year-to-date 1998 were adversely affected by the
strengthening of the U.S. dollar (9.0 percent and 11.0 percent, respectively)
relative to the German mark.
The underwriting combined ratio in the international property/casualty
operations was 101.9 percent in the second quarter, which compares favorably to
the 102.0 percent for the second quarter of 1997 and 102.4 percent reported for
the full year 1997. For the first six months of 1998 and 1997, the combined
ratio was 101.7 percent and 102.7 percent, respectively. Catastrophe losses were
not significant during the quarter. The improved underwriting result for the
past six months was primarily due to lower property claims and favorable
development on previously reported case reserves.
International net premiums written were $788 million in the second quarter of
1998 and $1,202 million for the first six months of 1998, compared with $823
million and $1,291 million, respectively, in 1997. Adjusted for the effects of
foreign exchange, international property/casualty premiums written increased 3.2
percent and 1.9 percent in the second quarter and first six months of 1998,
respectively. The relatively flat premium growth in international premiums was
due to competitive market conditions.
Pretax investment income for the international property/casualty operations was
$90 million for the second quarter of 1998, compared with $91 million in the
same period of 1997. The decline in investment income was due to a decline in
global interest rates and the effect of foreign exchange. Adjusted for the
effects of foreign exchange, pretax investment income increased 6.4 percent and
4.8 percent for the second quarter and year-to-date, respectively.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The international property/casualty and global life/health operations had cash
flow from operating activities of $288 million for the first six months of 1998,
compared with $328 million in 1997. The decline in operating cash flow was
principally due to the effect of foreign exchange and lower underwriting cash
flow. In addition to operating cash flow, the international property/casualty
operations had net cash outflows related to contract deposits during the period
of $127 million. Similar to North American deposit transactions, these types of
contracts generally have a provision that requires most of the investment income
earned on the funds held by General Re to be shared with the ceding company.
Thus, the effect of the return of these funds is not material to investment
income and earnings. General Re anticipates that approximately an additional $45
million of international property/casualty deposit contracts will mature during
the remainder of 1998.
International property/casualty and life/health invested assets were $8,689
million at June 30, 1998, compared with $8,581 million at December 31, 1997. The
increase in invested assets was due to investment of operating cash flows offset
by the stronger U.S. dollar, which appreciated 4.8 percent against the German
mark in the first six months of 1998.
The gross liability for claims and claim expenses was $5,070 million at June 30,
1998, compared with $5,113 million at December 31, 1997. The asset for
reinsurance recoverable on unpaid claims was $539 million at June 30, 1998 and
$553 million at December 31, 1997. Growth in these amounts was reduced by the
effect of foreign exchange.
GLOBAL LIFE / HEALTH
(in millions)
Second Quarter Year-to-date
-------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Income before income taxes and
realized gains $17 $15 $37 $43
Net premiums written
Life reinsurance 192 207 408 414
Health reinsurance 103 77 211 168
--- ---- --- ---
Total life/health net premiums written 295 284 619 582
Net underwriting income (loss) (3) (1) (3) 9
Investment income 20 18 41 36
Other income (loss) - (2) (1) (1)
Income before income taxes and realized gains for the global life/health
operations increased 7.8 percent for the second quarter of 1998 and declined
15.2 percent for the first half of 1998. The decline in operating income for the
six months was due to lower underwriting results, principally in the group
health reinsurance sector.
Life reinsurance premiums written were $192 million for the second quarter of
1998, compared with $207 million in the second quarter of 1997. For the first
six months, life reinsurance premiums written were $408 million and $414 million
in 1998 and 1997, respectively. Adjusted for the effects of foreign exchange,
global life reinsurance premiums decreased approximately 0.9 percent in the
quarter and increased 7.2 percent year-to-date. Growth in life reinsurance
business has slowed during 1998 as a result of product mix changes in Germany
and the loss of one contract with approximately $28 million of annual premium
due to merger and acquisition activity.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Investment income for the global life/health operations was $20 million and $41
million in the second quarter and first six months of 1998, respectively,
compared to $18 million and $36 million in 1997. The increase in investment
income was due to invested cash flow from higher premium volume over the prior
twelve months.
The liability for policy benefits for life/health contracts was $971 million at
June 30, 1998, compared with $907 million at December 31, 1997. The asset for
reinsurance recoverable on unpaid losses was $298 million at June 30, 1998,
compared to $271 million at December 31, 1997. Cologne Re manages its invested
assets and total assets on an aggregate basis for the life/health and
property/casualty business and does not disaggregate its investments by segment.
The invested assets and total assets disclosures in the international
property/casualty segment includes the assets of the global life/health segment.
FINANCIAL SERVICES
(in millions)
Second Quarter Year-to-date
-------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Income before income taxes and realized gains $44 $33 $69 $63
Total revenues (excluding realized gains) 105 82 189 164
Investment income 9 7 18 15
Other income 35 25 51 47
Financial services operations include General Re's derivative products,
investment management, insurance brokerage and management, reinsurance
brokerage, and real estate management operations. In the second quarter and
first six months of 1998, financial services revenues of $105 million and $189
million, respectively, increased 27.5 percent and 15.0 percent from the $82
million and $164 million in the second quarter and first six months of 1997,
respectively. The growth in 1998 revenues was principally attributable to growth
in GRFP's global equity business and fixed income business in North America.
Invested assets held for trading purposes in the first six months of 1998
increased $465 million to $2,324 million at June 30, 1998. The increase
primarily relates to the hedging activities of GRFP and growth in GRFP's
match-funded business. At June 30, 1998, total assets of the financial service
operations were $10,573 million, compared with $8,874 million at December 31,
1997. The amount and nature of the financial service segment's assets and
liabilities are significantly affected by the risk management strategies
utilized by GRFP to reduce its market risks. GRFP's market exposures arising
from derivative products are managed through the purchase and sale of government
securities, futures and forward contracts, or by entering into offsetting
derivatives transactions. The purchase of government securities, usually
financed through collateralized repurchase agreements (securities sold under
agreements to repurchase), and the sale of government securities, whose proceeds
are invested in reverse repurchase agreements (securities purchased under
agreements to resell), are used to offset GRFP's market exposures. While the use
of these instruments for risk management purposes may cause significant
short-term fluctuations in GRFP's assets and liabilities, they do not have a
material effect on General Re's results from operations or common shareowners'
equity.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
MARKET RISK
As a global reinsurance and financial services company, General Re is subject to
market risk arising from the potential change in the value of its various
financial instruments. These changes may be due to fluctuations in interest and
foreign exchange rates, credit spreads and equity prices. The level of market
risk is influenced by many factors, such as volatility, correlation and
liquidity. Potential gains or losses from changes in market rates can be
estimated through statistical models that project within a specified confidence
level the "value at risk" based on historical price and volatility movements.
General Re's 1997 Form 10-K provides a more detailed discussion of the market
risks affecting the reinsurance and financial service operations. Based on
General Re's estimates as of June 30, 1998, no material change has occurred in
its value at risk in the reinsurance operations, as compared to amounts
disclosed in its 1997 Form 10-K.
General Re's financial service operations are subject to market risk principally
through GRFP. GRFP monitors its market risk on a daily basis across all swap and
option products by calculating the effect on operating results of potential
changes in market variables over a one-week period, based on historical market
volatility, correlation data and informed judgment. This evaluation is performed
on an individual trading book basis, against limits set by individual book, to a
95 percent probability level. GRFP sets market risk limits for each type of
risk, and for an aggregate measure of risk, based on a 99 percent probability
that movements in market rates will not affect the results from operations in
excess of the limit over a one week period. Risk is measured primarily by Monte
Carlo simulations to obtain the required degree of confidence. In addition to
daily and weekly assessments of value at risk, GRFP performs stress tests to
estimate its exposure to extreme movements in various market risk factors.
The table below shows the highest, lowest and average value-at-risk amounts for
each type of market risk to which GRFP is exposed. Since 1992, when GRFP
initiated these calculations, there has been no one-week period for which GRFP
experienced a loss that exceeded its estimated market risk exposure.
Value at Risk
--------------------------------------------------------
First Six Months of 1998
--------------------------------------------------------
Interest Foreign
(in millions) Rate Exchange Rate Equity All Risks
---- ------------- ------ ---------
Highest $9 $4 $7 $13
Lowest 7 2 3 6
Average 8 3 4 9
Full Year 1997
---------------------------------------------------------
Interest Foreign
(in millions) Rate Exchange Rate Equity All Risks
---- ------------- ------ ---------
Highest $11 $6 $5 $13
Lowest 6 3 0 7
Average 9 4 2 10
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
For the first six months of 1998, the largest weekly pretax gains and losses due
to market risk were $5 million and $2 million, respectively. The largest weekly
pretax gain due to market risk was $5 million and the largest weekly pretax loss
due to market risk was $3 million for the full year 1997. The average effect of
the change in market risk on income was a pretax gain of $1 million in the first
six months of 1998 and was neutral for the full year 1997.
SAFE HARBOR DISCLOSURE
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "Act"), General Re sets forth below
cautionary statements identifying important risks and uncertainties that could
cause its actual results to differ materially from those that might be
projected, forecasted or estimated in its forward-looking statements, as defined
in the Act, made by or on behalf of General Re in press releases, written
statements or documents filed with the Securities and Exchange Commission, or in
its communications and discussions with investors and analysts in the normal
course of business through meetings, phone calls and conference calls. Such
statements may include, but are not limited to, projections of premium revenue,
investment income, other revenue, losses, expenses, earnings (including earnings
per share), cash flows, plans for future operations, common shareowners' equity
(including book value per share), investments, financing needs, capital plans,
dividends, plans relating to products or services of General Re and estimates
concerning the effects of litigation or other disputes, as well as assumptions
for any of the foregoing and are generally expressed with words such as
"believes," "estimates," "expects," "anticipates," "plans," "projects,"
"forecasts," "goals," "could have," "may have" and similar expressions. General
Re, as a matter of policy, does not make any specific projections as to future
earnings nor does it endorse any projections regarding future performance that
may be made by others.
Forward-looking statements involve known and unknown risks and uncertainties,
which may cause General Re's results to differ materially from such
forward-looking statements. These risks and uncertainties include, but are not
limited to, the following:
1) Changes in the level of competition in the North American and
international reinsurance or primary insurance markets that affect the
volume or profitability of General Re's property/casualty or life/health
businesses. These changes include, but are not limited to, changes in the
intensity of price competition, the entry of new competitors, existing
competitors exiting the market, and the development of new products by new
and existing competitors;
2) Changes in the demand for reinsurance, including changes in ceding
companies' risk retentions, and changes in the demand for excess and
surplus lines insurance coverages in North America, and changes in the
demand for financial service operations' products.
3) The ability of General Re to execute its strategies in its
property/casualty, life/health and financial service operations;
4) Catastrophe losses in General Re's North American or international
property/casualty businesses;
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
5) Adverse development on property/casualty claim and claim expense
liabilities related to business written in prior years, including, but not
limited to, evolving case law and its effect on environmental and other
latent injury claims, changing government regulations, newly identified
toxins, newly reported claims, new theories of liability, such as possible
Year 2000 computer-related losses, or new insurance and reinsurance
contract interpretations;
6) Changes in inflation that affect the profitability of General Re's current
property/casualty and life/health businesses or the adequacy of its
property/casualty claim and claim expense liabilities and life/health
policy benefit liabilities related to prior years' business;
7) Changes in General Re's property/casualty and life/health retrocessional
arrangements;
8) Lower than estimated retrocessional or reinsurance recoveries on unpaid
losses, including, but not limited to, losses due to a decline in the
creditworthiness of General Re's retrocessionaires or reinsurers;
9) Increases in interest rates, which cause a reduction in the market value
of General Re's fixed income investment portfolio, and its common
shareowners' equity;
10) Decreases in interest rates causing a reduction of income earned on new
cash flow from operations and the reinvestment of the proceeds from sales,
calls or maturities of existing investments;
11) Decline in the value of General Re's common equity investments;
12) Changes in the composition of General Re's investment portfolio;
13) Changes in mortality or morbidity levels that affect General Re's
life/health business;
14) Credit losses on General Re's investment portfolio; credit and market
losses on GRFP's portfolio of derivatives and other transactions;
15) Adverse results in litigation matters, including, but not limited to,
litigation related to environmental, asbestos and other potential mass
tort claims;
16) Gains or losses related to changes in foreign currency exchange rates; and
17) Changes in General Re's capital needs.
In addition to the factors outlined above that are directly related to General
Re's businesses, General Re is also subject to general business risks,
including, but not limited to, adverse state, federal or foreign legislation and
regulation, adverse publicity or news coverage, changes in general economic
factors and the loss of key employees.
20
<PAGE>
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
(a) The Annual Meeting of Stockholders of General Re was held on May 22, 1998.
(b) All director nominees were elected.
(c) Certain additional matters voted upon at the meeting:
(1) The proposal to adopt the General Re Corporation 1998 Employee Stock
Purchase Plan was ratified.
(2) The proposal for the selection of independent public accountants was
ratified.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Reports on Form 8-K - A report on Form 8-K dated June 26, 1998 was
filed describing the Agreement and Plan
of Mergers dated June 19, 1998 between
General Re and Berkshire Hathaway Inc.
(b) Exhibit 27.1 - Financial Data Schedule for the Period Ended
June 30, 1998
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL RE CORPORATION
----------------------
(Registrant)
Date: August 6, 1998 JOSEPH P. BRANDON
Joseph P. Brandon
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 6, 1998 ELIZABETH A. MONRAD
Elizabeth A. Monrad
Vice President and Treasurer
(Principal Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Financial Data Schedule for the Period Ended June 30, 1998
The schedule contains summary financial information extracted from General Re's
consolidated balance sheets and consolidated statements of income included in
Item 1 of Part I of the June 30, 1998 Form 10-Q. Reference should also be made
to these financial statements and related notes.
</LEGEND>
<CIK>0000317745
<NAME>General Re Corporation
Exhibit 27
<MULTIPLIER> 1,000,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1998
<PERIOD-END> Jun-30-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 20,248
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 6,280
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 28,445
<CASH> 293
<RECOVER-REINSURE> 54
<DEFERRED-ACQUISITION> 513
<TOTAL-ASSETS> 43,262
<POLICY-LOSSES> 13,508
<UNEARNED-PREMIUMS> 2,003
<POLICY-OTHER> 673
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 2,528
2
0
<COMMON> 51
<OTHER-SE> 8,428
<TOTAL-LIABILITY-AND-EQUITY> 43,262
2,946
<INVESTMENT-INCOME> 645
<INVESTMENT-GAINS> 34
<OTHER-INCOME> 204
<BENEFITS> 2,005
<UNDERWRITING-AMORTIZATION> 683
<UNDERWRITING-OTHER> 399
<INCOME-PRETAX> 728
<INCOME-TAX> 170
<INCOME-CONTINUING> 526
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 526
<EPS-PRIMARY> 6.81
<EPS-DILUTED> 6.62
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
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</TABLE>
