SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
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(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT of 1934 for the quarterly period ended June 30, 1996, or
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from _______ to _______.
For the Quarter Ended June 30, 1996 Commission file number 1-11688
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AMERICAN RE CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 13-3672116
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 College Road East
Princeton, New Jersey 08543-5241
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(Address of principal executive offices) (zip code)
------------------
Registrant's telephone number, including area code: (609) 243-4200
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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.
Common Stock -$.01 par value 47,284,453
---------------------------- ------------------------
Description of Class Shares Outstanding
as of June 28, 1996
<PAGE>
AMERICAN RE CORPORATION
Index To Form 10-Q
PART I FINANCIAL INFORMATION
Item 1 -
Page
----
Consolidated Balance Sheets at June 30, 1996 (unaudited),
and December 31, 1995............................................ 1
Consolidated Statements of Income for the Three-month and Six-month
periods ended June 30, 1996, and 1995 (unaudited)................ 2
Consolidated Statements of Cash Flows for the Six-month
periods ended June 30, 1996, and 1995 (unaudited)................ 3
Notes to Consolidated Interim Financial Statements.................. 4
Item 2 -
Management's Discussion and Analysis of
the Company's Results of Operations and Financial Condition...... 7
PART II OTHER INFORMATION
Item 4 -
Submission of Matters to a Vote of Security Holders................ 13
Item 5 -
Other Information.................................................. 13
ii
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
(unaudited)
Assets: June 30, 1996 December 31, 1995
Investments ----------------------------------------
<S> <C> <C>
Fixed Maturities
Bonds held to maturity, at amortized cost (fair value:
June 30, 1996 - $74.0; December 31, 1995 - $74.6) . . . . . . . $ 74.3 $ 71.8
Bonds available for sale, at fair value (amortized cost:
June 30, 1996 - $3,665.3; December 31, 1995 - $3,422.7) . . . . 3,649.3 3,520.2
Preferred stock available for sale, at fair value (amortized cost:
June 30, 1996 and December 31, 1995 - $43.6) . . . . . . . . . . 43.7 43.6
Equity securities available for sale, at fair value (cost: June 30,
1996 - $8.9 and December 31, 1995 - $8.7) . . . . . . . . . . . . 18.5 19.6
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 8.1
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 212.4 294.2
-----------------------------------
Total investments and cash . . . . . . . . . . . . . . . . . . 4,006.3 3,957.5
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . 63.1 67.0
Premiums and other receivables . . . . . . . . . . . . . . . . . . . . . 726.7 597.0
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . 268.3 235.2
Reinsurance recoverables on paid and unpaid losses . . . . . . . . . . . 2,075.5 2,025.5
Funds held by ceding companies . . . . . . . . . . . . . . . . . . . . . 252.8 264.5
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . 116.1 90.2
Deferred federal income taxes . . . . . . . . . . . . . . . . . . . . . . 79.0 54.0
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543.5 523.5
-----------------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,131.3 $ 7,814.4
===================================
Liabilities:
Loss and loss adjustment expense reserves . . . . . . . . . . . . . . . . $ 4,884.7 $ 4,790.0
Unearned premium reserve . . . . . . . . . . . . . . . . . . . . . . . . 989.2 858.6
-----------------------------------
Total insurance reserves . . . . . . . . . . . . . . . . . . . 5,873.9 5,648.6
Loss balances payable . . . . . . . . . . . . . . . . . . . . . . . . . . 128.0 112.6
Funds held under reinsurance treaties . . . . . . . . . . . . . . . . . . 273.1 222.1
Senior bank debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75.0 75.0
Senior subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . 450.0 450.0
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237.9 221.5
-----------------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 7,037.9 6,729.8
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding as all of its assets
Junior Subordinated Debentures . . . . . . . . . . . . . . . . . . . . 237.5 237.5
-----------------------------------
Stockholders' Equity:
Common stock, par value: $0.01 per share; authorized:
125,000,000 shares; issued and outstanding: June 30, 1996 and
December 31, 1995 - 47,284,453 and 47,051,741 shares, respectively . 0.5 0.5
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 715.4 710.5
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175.8 87.3
Net unrealized appreciation (depreciation) of investments . . . . . . . . (4.0) 71.0
Net unrealized loss on foreign exchange . . . . . . . . . . . . . . . . . (31.8) (22.2)
-----------------------------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . 855.9 847.1
-----------------------------------
Total liabilities, Company-obligated mandatorily redeemable
preferred securities of subsidiary trust and stockholders'
equity . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,131.3 $ 7,814.4
===================================
See accompanying notes to consolidated interim financial statements.
</TABLE>
- 1 -
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in millions, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three-month period Six-month period
ended June 30, ended June 30,
1996 1995 1996 1995
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Premiums written . . . . . . . . . . . . . . . . . $ 452.5 $ 393.8 $ 965.5 $ 828.6
Change in unearned premium reserve . . . . . . . . (8.8) (21.8) (105.7) (61.7)
------------------------------------------------------
Premiums earned . . . . . . . . . . . . . . . 443.7 372.0 859.8 766.9
Net investment income . . . . . . . . . . . . . . 60.8 56.6 120.0 108.3
Net realized capital gains . . . . . . . . . . . (0.8) 1.5 1.2 2.1
Other income . . . . . . . . . . . . . . . . . . . 11.8 9.4 23.1 17.3
------------------------------------------------------
Total revenue . . . . . . . . . . . . . . . . 515.5 439.5 1,004.1 894.6
------------------------------------------------------
Losses and expenses:
Losses and loss adjustment expenses . . . . . . . 291.9 240.0 568.6 505.4
Commission expense . . . . . . . . . . . . . . . . 84.7 84.3 159.2 163.7
Operating expense . . . . . . . . . . . . . . . . 35.6 33.6 68.3 66.5
Interest expense . . . . . . . . . . . . . . . . . 13.4 16.5 27.1 32.5
Other expense . . . . . . . . . . . . . . . . . . 18.3 16.2 36.4 30.5
------------------------------------------------------
Total losses and expenses . . . . . . . . . . 443.9 390.6 859.6 798.6
------------------------------------------------------
Income before income taxes and distributions
on preferred securities of subsidiary trust 71.6 48.9 144.5 96.0
Federal and foreign income taxes . . . . . . . . . 19.9 11.9 40.4 23.8
------------------------------------------------------
Income before distributions on preferred
securities of subsidiary trust . . . . . 51.7 37.0 104.1 72.2
Distributions on preferred securities of subsidiary
trust, net of applicable income tax of $1.7 and
$3.5, respectively (3.3) --- (6.6) ---
------------------------------------------------------
Net income to common stockholders . . . . . . $ 48.4 $ 37.0 $ 97.5 $ 72.2
======================================================
Primary earnings per share:
Net income per common share . . . . . . . . . $ 0.99 $ 0.76 $ 2.00 $ 1.49
======================================================
Weighed average shares and common stock
equivalents outstanding . . . . . . . . . . . . 48.9 48.7 48.8 48.6
======================================================
See accompanying notes to consolidated interim financial statements.
</TABLE>
- 2 -
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
Six-month period ended June 30,
1996 1995
---------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 97.5 $ 72.2
Adjustments to reconcile net income to net cash provided by
operating activities:
Decrease in accrued investment income . . . . . . . . . . . . 3.9 2.2
Increase in premiums and other receivables . . . . . . . . . (129.6) (1.6)
Increase in deferred policy acquisition costs . . . . . . . . (33.1) (10.3)
Increase in insurance reserves . . . . . . . . . . . . . . . 225.2 250.6
Decrease in current and deferred federal and foreign
income tax assets . . . . . . . . . . . . . . . . . . . . . 59.9 13.0
Increase in other assets and liabilities, net . . . . . . . . (43.8) (136.8)
Depreciation expense on property and equipment . . . . . . . 3.9 4.0
Decrease (increase) in other, net . . . . . . . . . . . . . . (3.1) 1.4
---------------------------------
Net cash provided by operating activities . . . . . . . . . 180.8 194.7
---------------------------------
Cash Flows From Investing Activities:
Investments held to maturity:
Maturities . . . . . . . . . . . . . . . . . . . . . . . . . --- 14.3
Investments available for sale:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . (1,015.7) (734.7)
Maturities . . . . . . . . . . . . . . . . . . . . . . . . . 189.6 104.4
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 580.5 462.9
Other investments:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . (0.6) ---
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- 1.0
Cost of additions to property and equipment . . . . . . . . . . (8.9) (4.3)
--------------------------------
Net cash used in investing activities . . . . . . . . . . . (255.1) (156.4)
--------------------------------
Cash Flows From Financing Activities:
Repayment of senior bank debt . . . . . . . . . . . . . . . . . --- (50.0)
Dividend to common stockholders . . . . . . . . . . . . . . . . (9.0) (7.5)
Other capital contributions . . . . . . . . . . . . . . . . . . 4.9 ---
--------------------------------
Net cash used in financing activities . . . . . . . . . . . (4.1) (57.5)
--------------------------------
Effect of exchange rate changes on cash and cash equivalents . . . (3.4) (4.7)
--------------------------------
Net decrease in cash and cash equivalents . . . . . . . . . (81.8) (23.9)
Cash and cash equivalents, beginning of period . . . . . . . . . . 294.2 280.5
--------------------------------
Cash and cash equivalents, end of period . . . . . . . . . . . . . $ 212.4 $ 256.6
================================
See accompanying notes to consolidated interim financial statements.
</TABLE>
- 3 -
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
June 30, 1996
(Dollars in millions, except per share amounts)
(unaudited)
1. Basis of Presentation
---------------------
American Re Corporation ("American Re" or the "Company")
primarily acts as the holding company for American Re-Insurance
Company ("American Re-Insurance"), currently the third largest
property and casualty reinsurance company in the United States,
based on 1995 premiums written and statutory surplus. American
Re-Insurance underwrites property and casualty reinsurance on a
direct basis in both the domestic and international markets.
The information for the interim periods ended June 30, 1996, and
1995, is unaudited. The interim consolidated financial statements
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 and cash flows for any interim period are not
necessarily indicative of results for the full year. Intercompany
accounts and transactions have been eliminated. These financial
statements should be read in conjunction with the financial
statements and related notes in the Company's 1995 Form 10-K.
2. Earnings Per Share
------------------
Net income per common share is determined by dividing net income
by the weighted average number of common shares and common stock
equivalents outstanding during the period. Conversion of the
approximately 4.6 million and 3.5 million management and
directors' stock options outstanding at June 30, 1996, and 1995,
respectively, into additional shares of outstanding common stock
was assumed, as the inclusion of common stock equivalents
resulted in dilution of net income on a per share basis.
The following amounts were used to determine net income per
common share:
<TABLE>
<CAPTION>
Three-month period Six-month period
ended June 30, ended June 30,
(in millions) 1996 1995 1996 1995
-------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average
shares outstanding . . . 47.3 47.1 47.2 47.1
Common stock
equivalents outstanding . 1.6 1.6 1.6 1.5
-------------------------------------------------------
Weighted average shares and
common stock equivalents . 48.9 48.7 48.8 48.6
=======================================================
Average market price . . . . $42.77 $37.63 $41.86 $35.01
=======================================================
</TABLE>
- 4 -
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
June 30, 1996
(Dollars in millions, except per share amounts)
(unaudited)
3. Reinsurance
-----------
The Company reinsures certain risks to limit its exposure to
catastrophes and large or unusually hazardous risks. Although
reinsurance agreements contractually obligate the Company's reinsurers
to reimburse it for the agreed-upon portion of its gross paid losses,
they do not discharge the primary liability of the Company. The income
statement amounts for premiums written, premiums earned and losses
and loss adjustment expenses are net of reinsurance. Direct, assumed,
ceded and net amounts for these items are as follows:
<TABLE>
<CAPTION>
Three-month period Six-month period
ended June 30, ended June 30,
1996 1995 1996 1995
-----------------------------------------------------
<S> <C> <C> <C> <C>
Premiums written
Direct . . . . . $ 4.4 $ 1.1 $ 7.6 $ 3.1
Assumed . . . . 542.3 461.9 1,188.9 993.5
Ceded . . . . . . (94.2) (69.2) (231.0) (168.0)
-----------------------------------------------------
Net . . . . . . . 452.5 393.8 965.5 828.6
=====================================================
Premiums earned
Direct . . . . . 3.5 1.3 6.1 2.5
Assumed . . . . . 554.1 464.8 1,060.5 933.9
Ceded . . . . . . (113.9) (94.1) (206.8) (169.5)
-----------------------------------------------------
Net . . . . . . . 443.7 372.0 859.8 766.9
=====================================================
Losses incurred
Direct . . . . . (0.3) 3.6 (10.6) 11.9
Assumed . . . . . 371.1 267.7 681.4 611.8
Ceded . . . . . . (78.9) (31.3) (102.2) (118.3)
-----------------------------------------------------
Net . . . . . . . $ 291.9 $ 240.0 $ 568.6 $ 505.4
=====================================================
</TABLE>
- 5 -
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
June 30, 1996
(Dollars in millions, except per share amounts)
(unaudited)
4. Application of Accounting Standards
-----------------------------------
In October 1995, the FASB adopted Financial Accounting Standard No.
123, "Accounting for Stock- Based Compensation" ("FAS No. 123"). FAS
No. 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other
equity investments of the employer or the employer incurs liabilities
to employees in amounts based on the price of the employer's stock.
FAS No. 123 defines a fair value based method of accounting for an
employee stock option or similar equity instrument. However, it also
allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). Entities electing to remain with
the accounting prescribed by APB No. 25 must make pro forma
disclosures of net income and earnings per share as if the fair value
based method of accounting defined in FAS No. 123 had been applied.
The disclosure requirements of FAS No. 123 are effective for financial
statements for fiscal years beginning after December 31, 1995, but are
not required for interim reporting.
The Company has decided to continue to use the intrinsic value based
method of accounting, as prescribed by APB No. 25, and the disclosures
required by FAS No. 123 will be made in the 1996 report on Form 10-K.
The effect on the Company's net earnings and cash flows was not
material for the six-month period ended June 30, 1996.
- 6 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1996, COMPARED WITH QUARTER ENDED JUNE 30, 1995
The Company's net premiums written increased 14.9% to $452.5
million for the quarter ended June 30, 1996, from $393.8 million for
the same period in 1995. The increase in net premiums written was
attributable to a 23.1% increase in total treaty net premiums written
to $325.6 million for the second quarter of 1996 from $264.4 million
for the same period in 1995. Accounting for this increase was the
Company's Domestic Insurance Company Operations, ("DICO"), whose
treaty net premiums written increased 16.8% to $204.1 million for the
second quarter of 1996, from $174.7 million for the same period in
1995, and the Company's International Operations, whose treaty net
premiums written increased 38.3% to $111.6 million for the second
quarter of 1996, from $80.7 million. This treaty growth resulted from
both expanding existing business and adding new accounts. This
increase was partially offset by a 1.9% decrease in facultative net
premiums written, to $126.9 million for the second quarter of 1996 from
$129.4 million for the same period in 1995.
The Company's net premiums earned increased 19.3% to $443.7 million for
the quarter ended June 30, 1996, from $372.0 million for the same period in
1995. The increase in premiums earned was primarily attributable to the
increase in premiums written in the second quarter of 1996, in addition to the
timing of premiums earned on business in force.
Net losses and LAE incurred increased 21.6% to $291.9 million for the
quarter ended June 30, 1996, from $240.0 million for the same period in 1995.
This increase was primarily attributable to the increase in the proportion of
earned premium exposures that relate to treaties, which contain a higher
ultimate accident year loss ratio than facultative business, partially offset
by a decrease in losses due to adverse development from claims covering
asbestos, environmental-related and other latent liabilities coverage
exposures ("Latent Liability Exposures"). Due to the provision made for
loss reserve strengthening for Latent Liability Exposures in the fourth
quarter of 1995, the Company incurred no losses for Latent Liability
Exposures in the second quarter of 1996, compared to $16.3 million
for the same period in 1995.
Underwriting expense, consisting of commission expense plus operating
expense, increased 2.0% to $120.2 million for the quarter ended June 30, 1996,
from $117.9 million for the same period in 1995. Commission expense remained
relatively unchanged at $84.7 million for the quarter ended June 30, 1996,
compared to $84.3 million for the same period in 1995. This result was
partially due to an increase in writings of finite risk excess of loss treaty
premiums. Excess of loss premiums generally contain no commission expense.
Operating expenses increased 5.8% to $35.6 million for the quarter, from $33.6
for the same period in 1995, due to an increase in overhead expenses.
The Company experienced an underwriting gain (net premiums earned minus
losses and LAE incurred and underwriting expenses) of $31.6 million for the
quarter ended June 30, 1996, compared to an underwriting gain of $14.1 million
for the same period in 1995. On a GAAP basis, the Company's loss ratio
increased
to 65.8% for the second quarter of 1996 from 64.5% for the same period in 1995
(which included 4.4 points for adverse development for Latent Liability
Exposures), while the underwriting expense ratio decreased to 27.1% for the
second quarter of 1996 from 31.7% for the same period in 1995. The loss ratio
increase in the 1996 period was primarily due to the increase in the
proportion of earned premiums that relate to treaties, which contain a
-7-
<PAGE>
higher ultimate accident year loss ratio than facultative. As a result of the
decrease in the expense ratio, the combined ratio for the quarter ended
June 30, 1996, decreased to 92.9% from 96.2% for the same period in 1995.
Pre-tax net investment income increased 7.4% to $60.8 million for the
quarter ended June 30, 1996, from $56.6 million for the same period in 1995.
This increase was primarily attributable to an increase in the invested asset
base, in addition to a higher overall effective interest rate in the investment
portfolio. The Company's after-tax net investment income increased by 6.6% to
$45.1 million for the quarter ended June 30, 1996, from $42.3 million for the
same period in 1995. The after-tax net investment income increase was less
than the pre-tax net investment increase due to the Company's decision to
continue to increase the percentage of taxable fixed maturity investments
in its
portfolio, based on the relative attractiveness of investment yields on highly
rated taxable instruments, in addition to tax-planning considerations.
The Company's interest expense decreased by 18.7% to $13.4 million for
the quarter ended June 30, 1996, from $16.5 million for the same period
in 1995.
This decrease was primarily attributable to the lower level of senior
bank debt;
the Company had $75.0 million outstanding at June 30, 1996, as compared to
$150.0 million at June 30, 1995.
The Company realized net capital losses of $0.8 million for the quarter
ended June 30, 1996, compared to net capital gains of $1.5 million for the
same period in 1995. This change was primarily due to $0.8 million in net
capital losses realized on bonds sold for the second quarter of 1996, as
compared to net capital gains of $2.2 on bonds sold for the same period of
1995.
Other income increased by 26.2% to $11.8 million for the quarter ended
June 30, 1996, from $9.4 million for the same period in 1995. The increase
in the 1996 period was attributable to an increase in fee subsidiary revenue
of $3.9 million. Other expenses increased by 13.3% to $18.3 million for the
second quarter of 1996 from $16.2 million for the same period in 1995. The
increase in the 1996 period was attributable to an increase in fee subsidiary
expenses of $5.0 million, partially offset by decreases of $1.2 million in
foreign exchange losses and $1.0 million in the provision for the allowance
for doubtful accounts.
Income before income taxes and distributions on preferred securities
increased by 46.4% to $71.6 million for the quarter ended June 30, 1996, from
$48.9 million for the same period in 1995. Federal and foreign income taxes
increased by 67.7% to $19.9 million for the quarter ended June 30, 1996, from
$11.9 million for the same period in 1995. This increase was due to the
increase in income before income taxes, along with a decrease in tax-exempt
income earned by the Company.
The Company recognized an after-tax charge of $3.3 million for the
three-month period ended June 30, 1996, representing the Company's minority
interest in the earnings of American Re Capital, a single-purpose wholly owned
subsidiary trust. The charge is due to the obligations incurred by American
Re Capital on the Cumulative Quarterly Income Preferred Securities ("QUIPS"),
issued August 30, 1995. There was no comparable charge for the Company in
the 1995 period.
Net income to common stockholders increased 30.8% to $48.4 million for
the quarter ended June 30, 1996, from $37.0 million for the same period in
1995. Primary earnings per share to common stockholders increased to $0.99 per
share for the quarter ended June 30, 1996, from $0.76 per share for the same
period in 1995. There were 48.9 million weighted average shares and common
stock equivalents outstanding during the second quarter of 1996, compared to
48.7 million outstanding during the same period in 1995.
-8-
<PAGE>
SIX MONTHS ENDED JUNE 30, 1996, COMPARED WITH SIX MONTHS ENDED JUNE
30, 1995
The Company's net premiums written increased 16.5% to $965.5 million for
the six months ended June 30, 1996, from $828.6 million for the same period in
1995. The increase in net premiums written was primarily attributable to
increased writings in both domestic and international treaty business. Total
treaty net premiums written increased 27.7% to $750.1 million for the six
months ended June 30, 1996 from $587.5 million for the same period in 1995.
Accounting for this increase was the Company's Domestic Insurance Company
Operations, ("DICO"), whose treaty net premiums written increased 33.8% to
$478.2 million for the six months ended June 30, 1996, from $357.2 million
for the same period in 1995. This treaty increase was partially offset by a
10.6% decrease in facultative net premiums written, to $215.4 million for the
six months ended June 30, 1996 from $241.1 million for the same
period in 1995.
Accounting for this decrease was the Company's alternative market operations,
or Am-Re Managers, Inc., ("ARMI"), whose facultative net premiums written
decreased 42.5% to $63.0 million for the six months ended June 30, 1996, from
$109.6 million for the same period in 1995. This decrease was primarily due to
what the Company perceives as a weak pricing environment that exists in the
current facultative marketplace.
The Company's net premiums earned increased 12.1% to $859.8 million for
the six months ended June 30, 1996, from $766.9 million for the same period
in 1995. This increase in premiums earned was primarily attributable to the
increase in premiums written for the six months ended June 30, 1996, as well
as the timing of premiums earned on business in force.
Losses and LAE incurred increased 12.5% to $568.6 million for the six
months ended June 30, 1996, from $505.4 million for the same period in 1995.
This increase was primarily attributable to the increase in the proportion
of earned premium exposures that relate to treaties, which contain a higher
ultimate accident year loss ratio than facultative business, partially offset
by a decrease in losses due to adverse development from claims covering
asbestos, environmental-related and other latent liabilities coverage
exposures ("Latent Liability Exposures"). Due to the provision made for
loss reserve strengthening for Latent Liability Exposures in the fourth
quarter of 1995, the Company incurred no losses for Latent Liability Exposures
in the six-month period ended June 30, 1996, compared to $36.7 million for
the same period in 1995.
Underwriting expense, comprised of commission expense plus operating
expense, decreased 1.2% to $227.5 million for the six months ended June 30,
1996, from $230.2 million for the same period in 1995. This decrease was
primarily due to a decrease in commission expense of 2.8% to $159.2 million
for the six months ended June 30, 1996 from $163.7 million for the same period
in 1995. This result was partially due to an increase in writings of finite
risk excess of loss treaty premiums. Excess of loss premiums generally contain
no commission expense. Operating expenses increased 2.8% to $68.3 million for
the six months ended June 30, 1996 from $66.5 million for the same period in
1995, due to an increase in overhead expenses.
The Company experienced an underwriting gain (net premiums earned minus
losses and LAE incurred and underwriting expenses) of $63.8 million for the
six months ended June 30, 1996, compared to $31.3 million for the same period
in 1995. On a GAAP basis, the Company's loss ratio increased to 66.1% for the
six months ended June 30, 1996 from 65.9% for the same period in 1995 (which
included 4.4 points for adverse development for Latent Liability Exposures),
while the underwriting expense ratio decreased to 26.4% for the six months
ended June 30, 1996 from 30.0% for the same period in 1995. The loss ratio
increase in the 1996 period was primarily due to the increase in the proportion
of earned premiums that relate to treaties, which contain a higher ultimate
accident year loss ratio than facultative. As a result of the decrease in the
expense ratio,
-9-
<PAGE>
the GAAP combined ratio for the six months ended June 30, 1996,
decreased to 92.5% from 95.9% for the same period in 1995.
Pre-tax net investment income increased 10.8% to $120.0 million
for the six months ended June 30, 1996, from $108.3 million for the
same period in 1995. This increase was primarily attributable to an
increase in the invested asset base, in addition to a higher
overall effective interest rate in the investment portfolio. The
Company's after-tax net investment income increased by 9.6% to $89.3
million for the six months ended June 30, 1996, from $81.5 million for
the same period in 1995. The after-tax net investment income increase
was less than the pre-tax net investment increase due to the Company's
decision to continue to increase the percentage of taxable fixed
maturity investments in its portfolio, based on the relative
attractiveness of investment yields on highly rated taxable
instruments, in addition to tax-planning considerations
The Company's interest expense decreased by 16.5% to $27.1
million for the six months ended June 30, 1996, from $32.5 million for
the same period in 1995. This increase was primarily attributable to
the lower level of senior bank debt (the Company had $75 million and
$150 million outstanding at June 30, 1996, and 1995, respectively),
under the Company's revolving credit facility.
The Company realized net capital gains of $1.2 million for the
six months ended June 30, 1996, compared to net capital gains of $2.1
million for the same period in 1995. This change was primarily due to
net capital gains of $1.2 million realized on bond sales for the six
months ended June 30, 1996, compared to net capital gains of $2.9
million realized on bond sales for the same period in 1995.
Other income increased by 33.4% to $23.1 million for the six
months ended June 30, 1996, from $17.3 million for the same period in
1995. The increase in the 1996 period was primarily attributable to an
increase in fee subsidiary revenue, partially offset by a $2.2 million
decrease in revenue associated with financing arrangements. Other
expenses increased by 19.6% to $36.5 million for the six months ended
June 30, 1996 from $30.5 million for the same period in 1995. The
increase in the 1996 period was attributable to an increase in fee
subsidiary expenses of $11.3 million, partially offset by decreases of
$2.9 million in the provision for the allowance for doubtful accounts,
$1.1 million in foreign exchange losses, and a $1.0 million decrease
in expense associated with financing arrangements.
Income before income taxes increased by 50.4% to $144.5 million
for the six months ended June 30, 1996, from $96.0 million for the
same period in 1995. This increase was primarily attributable to
increased underwriting gain and investment income. Federal and foreign
income taxes increased by 69.3% to $40.4 million for the six months
ended June 30, 1996, from $23.8 million for the same period in 1995.
This increase was due to the increase in income before income taxes,
in addition to a decrease in tax-exempt investment income earned by
the Company.
The Company recognized an after-tax charge of $6.6 million for
the six months ended June 30, 1996, representing the Company's
minority interest in the earnings of American Re Capital. The charge
is due to the obligations incurred by American Re Capital on the QUIPS.
There was no comparable charge for the Company in the 1995 period.
Net income to common stockholders increased by 35.0% to $97.5
million for the six months ended June 30, 1996, from $72.2 million for
the same period in 1995. Primary earnings per share to common
stockholders increased by 34.2% to $2.00 per share for the six months
ended June 30, 1996, from $1.49 per share for the same period in 1995.
There were 48.8 million weighted average
-10-
<PAGE>
shares and common stock equivalents outstanding during the six months
ended June 30, 1996, compared to 48.6 million outstanding during the
same period in 1995.
FINANCIAL CONDITION
Total consolidated assets increased by 4.1% to $8,131.3 million
at June 30, 1996, from $7,814.4 million at December 31, 1995. This
increase was primarily due to increases in investments and cash of
$48.8 million, premiums due and other receivables of $129.7 million,
and prepaid reinsurance premiums of $25.9 million.
The total financial statement value of investments and cash
increased 1.2% to $4,006.3 million at June 30, 1996, from $3,957.5
million at December 31, 1995, due to cash flows from operating
activity, partially offset by a decrease in the fair value of
investments held. The Company's bond and short-term investment
portfolio, which represented 95.0% of the total financial statement
value of cash and investments, had an average Standard and Poor's
quality rating of AA+, which remained unchanged from December 31,
1995. The financial statement value of the investment portfolio at
June 30, 1996, included a net decrease from amortized cost to fair
value of $6.2 million for debt and equity investments, compared to a
net increase of $109.2 million at December 31, 1995. At June 30, 1996,
the Company recognized a cumulative unrealized loss of $4.0 million
due to the net adjustment to fair value of debt and equity
investments, after the applicable income tax effects, which was
reflected as a separate component of stockholders' equity. This
represents a net decrease to stockholders' equity of $75.0 million
from the cumulative unrealized gain on debt and equity securities at
December 31, 1995, of $71.0 million, after the applicable income tax
effect.
Total consolidated liabilities increased by 4.6% to $7,037.9
million at June 30, 1996, from $6,729.8 million at December 31, 1995.
This increase was primarily due to increases in unearned premium
reserves of $130.6 million and loss and loss adjustment expense
reserves of $94.7 million.
Common stockholders' equity increased 1.0% to $855.9 million at
June 30, 1996, from $847.1 million at December 31, 1995. This increase
was primarily attributable to net income of $97.5 million, offset by
the net market depreciation of $75.0 million on debt and equity
securities, after applicable income tax effect, net unrealized loss on
foreign exchange of $9.6 million, and dividends to common stockholders
of $9.0 million.
The Company's insurance/reinsurance subsidiaries' statutory
surplus increased to $1,150.8 million at June 30, 1996, from $1,109.6
million at December 31, 1995. Operating leverage, as measured by such
subsidiaries' premiums-to-surplus ratio, on an annualized basis was
1.53 to 1 and 1.45 to 1 at June 30, 1996, and December 31, 1995,
respectively.
On March 29, and June 28, 1996, the Company paid cash dividends
of $.08 and $.11, respectively, per share on all outstanding common
shares. Future dividends will be considered in conjunction with
building stockholder value and will be dependent upon a number of
factors, such as future financial condition, results of operation and
property and casualty reinsurance market conditions.
-11-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company is an insurance holding company whose only material
investment is in the capital stock of American Re-Insurance. The
Company is dependent on dividends and tax allocation payments,
primarily from American Re-Insurance, to meet its short- and long-term
liquidity requirements, including its debt service obligations.
The Company's cash flow from operations may be influenced by a
variety of other factors, including cyclical changes in the property
and casualty reinsurance market, insurance regulatory initiatives, and
changes in general economic conditions. Liquidity requirements are met
on a short- and long-term basis by funds provided by operations and
from the maturity and the sale of investments. Cash provided by
operations primarily consists of premiums collected, investment
income, and reinsurance recoverable balances collected, less paid
claims (including payments made to commute or settle reinsurance
arrangements), retrocession payments, underwriting and interest
expenses, QUIPS distributions, and income tax payments. Cash flows
provided by operations for the Company were $180.8 million for the six
month period ended June 30, 1996, down slightly from $194.7 million
for the same period in 1995.
Cash and cash equivalents were $212.4 million and $294.2 million
at June 30, 1996, and December 31, 1995, respectively. Cash and
short-term investments are maintained for liquidity purposes and
represented 5.3% and 7.4% of total financial statement investments and
cash on June 30, 1996, and December 31, 1995, respectively. The level
of cash and cash equivalents decreased in order to benefit from higher
rates of return from longer term securities, and was influenced by the
Company's investment portfolio duration targets.
- 12 -
<PAGE>
PART II. OTHER INFORMATION
AMERICAN RE CORPORATION
Items 1 - 3 have been omitted as they are either inapplicable or the
answer is negative.
Item 4. Submissions of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on Tuesday, May
14, 1996, at 10:00 a.m. at the Merrill Lynch Conference Center,
Plainsboro, New Jersey.
There were 47,264,601 shares of Common Stock issued and outstanding
and entitled to vote at the meeting. There were represented in person
or by proxy a total of 45,235,303 shares of Common Stock at the Annual
Meeting of Stockholders.
The results of the vote for the election of Directors was as follows:
Name For Vote Withheld
---- --- -------------
Saul A. Fox 44,759,844 475,459
Perry Golkin 44,759,130 476,173
Paul H. Inderbitzin 45,016,589 218,714
Edward B. Jobe 44,758,973 476,330
Henry R. Kravis 43,575,062 1,660,241
James A. Lawrence 45,043,540 191,763
Michael R. Zucchini 45,043,675 191,628
The second matter submitted to the stockholders for a vote was the
ratification of the appointment of Deloitte & Touche LLP by the Board
of Directors as the Company's independent auditor for its fiscal year
1996. This matter was approved by 45,112,606 votes, 95.4% of the
shares represented. 9,581 shares voted against the matter with 113,116
shares abstaining.
There were no broker non-votes with respect to any of these matters.
Item 5. Other Information.
On August 5, 1996, the Company issued a press release announcing
that its Board of Directors had determined that it was in the best interests
of the Company and its stockholders to explore strategic alternatives,
including the possible merger or sale of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
-13-
<PAGE>
AMERICAN RE CORPORATION
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.
AMERICAN RE CORPORATION
(Registrant)
/S/ James R. Fisher
-----------------------------------------------------
James R. Fisher
Duly Authorized Officer, Senior Vice President,
Chief Financial and Accounting Officer
Dated: August 12, 1996
- 14 -
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN RE
CORPORATION'S REPORT ON FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 3,693
<DEBT-CARRYING-VALUE> 74
<DEBT-MARKET-VALUE> 74
<EQUITIES> 19
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,794
<CASH> 212
<RECOVER-REINSURE> 2,076
<DEFERRED-ACQUISITION> 268
<TOTAL-ASSETS> 8,131
<POLICY-LOSSES> 4,885
<UNEARNED-PREMIUMS> 989
<POLICY-OTHER> 128
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 525
238<F1>
0
<COMMON> 1
<OTHER-SE> 855
<TOTAL-LIABILITY-AND-EQUITY> 8,131
860
<INVESTMENT-INCOME> 120
<INVESTMENT-GAINS> 1
<OTHER-INCOME> 23
<BENEFITS> 569
<UNDERWRITING-AMORTIZATION> 228
<UNDERWRITING-OTHER> 64
<INCOME-PRETAX> 145
<INCOME-TAX> 40
<INCOME-CONTINUING> 98
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 98
<EPS-PRIMARY> 2.00
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
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<FN>
<F1>REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING AS ALL OF ITS ASSETS JUNIOR SUBORDINATED
DEBENTURES.
</FN>
</TABLE>
