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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 September 30, 1996, or
( ) 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 September 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
- ------------------------------- ----------------
(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)
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Registrant's telephone number, including area code: (609) 243-4200
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 47,293,014
- ----------------------------- ------------------------
Description of Class Shares Outstanding
as of September 30, 1996
<PAGE>
AMERICAN RE CORPORATION
Index To Form 10-Q
PART I FINANCIAL INFORMATION
Item 1 - Page
----
Consolidated Balance Sheets at September 30, 1996, (unaudited),
and December 31, 1995............................................ 1
Consolidated Statements of Income for the Three-month
and Nine-month periods ended September 30, 1996, and
1995 (unaudited)................................................. 2
Consolidated Statements of Cash Flows for the Nine-month
periods ended September 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...... 8
PART II OTHER INFORMATION
Item 5 -
Other Information................................................ 15
Item 6 -
Exhibits and Reports on Form 8-K................................. 15
ii
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in millions, except per share amounts)
(unaudited)
September December
Assets: 30, 1996 31, 1995
-----------------------
Investments
Fixed Maturities
Bonds held to maturity, at amortized
cost (fair value: December 31,
1995 - $74.6) ................................... $ -- $ 71.8
Bonds available for sale, at fair value
(amortized cost: September 30, 1996
- $3,705.7; December 31, 1995 - $3,422.7) ....... 3,714.2 3,520.2
Preferred stock available for sale, at
fair value (amortized cost: September 30,
1996 - $59.6; December 31, 1995 - $43.6) ........ 59.7 43.6
Equity securities available for sale, at
fair value (cost: September 30, 1996
- $8.9; December 31, 1995 - $8.7) ............... 19.6 19.6
Other invested assets ............................... 7.3 8.1
Cash and cash equivalents .............................. 274.6 294.2
---------------------
Total investments and cash .................. 4,075.4 3,957.5
Accrued investment income .............................. 58.2 67.0
Premiums and other receivables ......................... 791.6 597.0
Deferred policy acquisition costs ...................... 265.0 235.2
Reinsurance recoverables on paid and unpaid losses ..... 2,128.5 2,025.5
Funds held by ceding companies ......................... 260.2 264.5
Prepaid reinsurance premiums ........................... 152.9 90.2
Deferred federal income taxes .......................... 65.8 54.0
Other assets ........................................... 598.0 523.5
---------------------
Total assets ................................ $8,395.6 $7,814.4
=====================
Liabilities:
Loss and loss adjustment expense reserves .............. $4,938.1 $4,790.0
Unearned premium reserve ............................... 1,071.6 858.6
---------------------
Total insurance reserves .................... 6,009.7 5,648.6
Loss balances payable .................................. 122.2 112.6
Funds held under reinsurance treaties .................. 305.9 222.1
Senior bank debt ....................................... 75.0 75.0
Senior subordinated debt ............................... 450.0 450.0
Other liabilities ...................................... 286.5 221.5
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Total liabilities ........................... 7,249.3 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
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Stockholders' Equity:
Common stock, par value: $0.01 per share;
authorized: 125,000,000 shares; issued
and outstanding: September 30, 1996, and
December 31, 1995 - 47,293,014 and
47,051,741 shares, respectively ...................... 0.5 0.5
Additional paid-in capital ............................. 715.6 710.5
Retained earnings ...................................... 218.0 87.3
Net unrealized appreciation of investments ............. 12.5 71.0
Net unrealized loss on foreign exchange ................ (37.8) (22.2)
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Total stockholders' equity .................. 908.8 847.1
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Total liabilities, Company-obligated
mandatorily redeemable preferred
securities of subsidiary trust and
stockholders' equity ...................... $8,395.6 $7,814.4
=====================
See accompanying notes to consolidated interim financial statements.
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<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in millions, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three-month period Nine-month period
ended September 30, ended September 30,
1996 1995 1996 1995
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Premiums written ................................................. $ 467.2 $ 409.7 $ 1,432.8 $ 1,238.2
Change in unearned premium reserve ............................... (44.8) (25.6) (150.5) (87.2)
---------------------------------------------------------
Premiums earned .............................................. 422.4 384.1 1,282.3 1,151.0
Net investment income ............................................ 66.0 57.7 186.0 166.0
Net realized capital gains ....................................... 1.0 2.3 2.2 4.4
Other income ..................................................... 12.0 8.8 35.1 26.2
---------------------------------------------------------
Total revenue ................................................ 501.4 452.9 1,505.6 1,347.6
---------------------------------------------------------
Losses and expenses:
Losses and loss adjustment expenses .............................. 252.2 265.8 820.8 771.2
Commission expense ............................................... 115.5 76.9 274.6 240.7
Operating expense ................................................ 31.3 30.3 99.6 96.8
Interest expense ................................................. 13.4 15.1 40.5 47.7
Other expense .................................................... 18.5 11.1 55.1 41.5
---------------------------------------------------------
Total losses and expenses .................................... 430.9 399.2 1,290.6 1,197.9
---------------------------------------------------------
Income before income taxes, distributions
on preferred securities of subsidiary
trust and extraordinary loss ............................... 70.5 53.7 215.0 149.7
Federal and foreign income taxes ................................. 19.9 13.6 60.3 37.4
---------------------------------------------------------
Income before distributions on preferred
securities of subsidiary trust and
extraordinary loss ......................................... 50.6 40.1 154.7 112.3
Distributions on preferred securities of
subsidiary trust, net of applicable income
tax of $1.7, $0.6, $5.3, and
$0.6, respectively ......................................... (3.3) (1.1) (9.8) (1.1)
---------------------------------------------------------
Income before extraordinary loss ......................... 47.3 39.0 144.9 111.2
Extraordinary loss, net of applicable income
taxes of $0.2 and $0.2, respectively ....................... -- (0.3) -- (0.3)
---------------------------------------------------------
Net income to common stockholders ........................ $ 47.3 $ 38.7 $ 144.9 $ 110.9
=========================================================
Primary earnings per share:
Income before extraordinary loss ................................. $ 0.96 $ 0.81 $ 2.96 $ 2.29
Extraordinary loss ............................................... -- (0.01) -- (0.01)
---------------------------------------------------------
Net income per common share .............................. $ 0.96 $ 0.80 $ 2.96 $ 2.28
=========================================================
Weighted average shares and common stock
equivalents outstanding ........................................ 49.2 48.6 49.0 48.6
=========================================================
</TABLE>
See accompanying notes to consolidated interim financial statements.
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<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
Nine-month period ended September 30,
1996 1995
-------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ................................................ $ 144.9 $ 110.9
Adjustments to reconcile net income to net cash provided by
operating activities:
Decrease in accrued investment income .................. 8.8 4.3
Increase in premiums and other receivables ............. (194.6) (12.0)
Increase in deferred policy acquisition costs .......... (29.8) (19.6)
Increase in insurance reserves ......................... 361.0 359.5
Decrease in current and deferred federal and foreign
income tax assets .................................... 57.4 29.9
Increase in other assets and liabilities, net .......... (124.4) (215.6)
Depreciation expense on property and equipment ......... 6.0 5.8
Increase in other, net ................................. (7.4) (0.4)
-------------------------------------
Net cash provided by operating activities ............ 221.9 262.8
-------------------------------------
Cash Flows From Investing Activities:
Investments held to maturity:
Maturities ............................................. 75.0 25.8
Investments available for sale:
Purchases .............................................. (1,357.5) (1,215.7)
Maturities ............................................. 265.7 141.9
Sales .................................................. 803.9 749.9
Other investments:
Purchases .............................................. (1.0) (13.9)
Sales .................................................. 0.8 14.6
Cost of additions to property and equipment ............... (16.1) (6.9)
-------------------------------------
Net cash used in investing activities .................. (229.2) (304.3)
-------------------------------------
Cash Flows From Financing Activities:
Repayment of senior bank debt ............................. -- (200.0)
Proceeds from Company-obligated mandatorily redeemable
preferred securities of subsidiary trust ................. -- 237.5
Dividend to common stockholders ........................... (14.2) (11.3)
Other capital contributions ............................... 5.1 --
-------------------------------------
Net cash provided by (used in) financing activities .... (9.1) 26.2
-------------------------------------
Effect of exchange rate changes on cash and cash equivalents .. (3.2) (6.8)
-------------------------------------
Net decrease in cash and cash equivalents .............. (19.6) (22.1)
Cash and cash equivalents, beginning of period ................ 294.2 280.5
-------------------------------------
Cash and cash equivalents, end of period ...................... $ 274.6 $ 258.4
=====================================
</TABLE>
See accompanying notes to consolidated interim financial statements.
-3-
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
September 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 September 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 periods
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. Agreement and Plan of Merger
On August 13, 1996, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with MUNCHENER RUCKVERSICHERUNGS-
GESELLSCHAFT AKTIENGESELLSCHAFT IN MUNCHEN, a company organized under the
laws of Germany ("Munich Re"), and Puma Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of Munich Re ("Sub"), pursuant to
which Sub will merge with and into the Company (the "Merger"). As a result
of the Merger, the outstanding shares of the Company's common stock, $.01
par value (the "Common Stock") will be converted into the right to receive
$65.00 per share in cash. The Merger is conditioned upon, among other
things, approval by holders of a majority of the Common Stock and receipt
of certain regulatory and governmental approvals.
Pursuant to a Stockholders Agreement dated as of August 13, 1996, among
American Re Associates, L.P. and KKR Partners II, L.P., who collectively
own 64.1% of the Common Stock (the "Majority Stockholders"), and Munich Re
and Sub, the Majority Stockholders have agreed, among other things, to vote
their shares of Common Stock in favor of the Merger and have granted an
option to Munich Re to purchase their shares in certain circumstances.
On October 23, 1996, the Company filed with the Securities and Exchange
Commission and mailed to its common stockholders of record as of October
21, 1996, its definitive proxy statement relating to a special meeting of
the common stockholders of the Company to be held on November 21, 1996 at
which they will be asked to approve and adopt the Merger Agreement.
Assuming such stockholder approval is obtained, the closing of the
transaction will be set to occur on November 25, 1996.
On October 24, 1996, and November 4, 1996, respectively, the Delaware
Department of Insurance and the New York State Insurance Department
approved Munich Re's application for approval of the Merger.
No significant costs associated with the proposed merger have been
reflected in the Company's third quarter financial statements.
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<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
September 30, 1996
(Dollars in millions, except per share amounts)
(unaudited)
3. 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 4.7 million
management and directors' stock options outstanding at September 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:
Three-month period Nine-month period
ended September 30, ended September 30,
(in millions) 1996 1995 1996 1995
------------------------------------------------
Weighted average
shares outstanding ..... 47.3 47.1 47.3 47.1
Common stock
equivalents outstanding 1.9 1.5 1.7 1.5
------------------------------------------------
Weighted average shares and
common stock equivalents 49.2 48.6 49.0 48.6
================================================
Average market price
per share ............ $ 56.53 $ 38.38 $ 46.79 $ 36.15
================================================
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<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
September 30, 1996
(Dollars in millions, except per share amounts)
(unaudited)
4. 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:
Three-month period Nine-month period
ended September 30, ended September 30,
1996 1995 1996 1995
------------------------------------------------------
Premiums written
Direct ........ $ 37.8 $ 3.4 $ 45.4 $ 6.5
Assumed ....... 580.9 538.9 1,769.8 1,532.5
Ceded ......... (151.5) (132.6) (382.4) (300.8)
------------------------------------------------------
Net ........... 467.2 409.7 1,432.8 1,238.2
======================================================
Premiums earned
Direct ........ 10.8 2.0 16.8 4.5
Assumed ....... 535.1 486.6 1,595.9 1,420.7
Ceded ......... (123.5) (104.5) (330.4) (274.2)
------------------------------------------------------
Net ........... 422.4 384.1 1,282.3 1,151.0
======================================================
Losses incurred
Direct ........ (1.0) 4.0 (11.6) 15.9
Assumed ....... 358.2 317.6 1,039.6 929.4
Ceded ......... (105.0) (55.8) (207.2) (174.1)
------------------------------------------------------
Net ........... $ 252.2 $ 265.8 $ 820.8 $ 771.2
======================================================
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<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
September 30, 1996
(Dollars in millions, except per share amounts)
(unaudited)
5. 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 nine-month
period ended September 30, 1996.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1996, COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1995
The Company's net premiums written increased 14.1% to $467.2 million for
the quarter ended September 30, 1996, from $409.7 million for the same period in
1995. The increase in net premiums written was attributable to an 81.2% increase
in total facultative net premiums written to $196.8 million for the third
quarter of 1996 from $108.6 million for the same period in 1995. Accounting for
this increase was the Company's Domestic Insurance Company Operations, ("DICO"),
whose facultative net premiums written increased 100.2% to $128.9 million for
the third quarter of 1996, from $64.4 million for the same period in 1995, due
to one large finite risk program of $79.6 million written in the third quarter
1996. This increase was partially offset by a 10.2% decrease in treaty net
premiums written, to $270.4 million for the third quarter of 1996 from $301.1
million for the same period in 1995.
The Company's net premiums earned increased 10.0% to $422.4 million for the
quarter ended September 30, 1996, from $384.1 million for the same period in
1995. The increase in net premiums earned was attributable to a 15.0% increase
in total treaty net premiums earned to $312.8 million for the third quarter of
1996 from $271.9 million for the same period in 1995, while facultative net
premiums earned decreased 2.3% to $109.6 million for the third quarter of 1996,
from $112.2 million for the same period in 1995. The increase in net premiums
earned was primarily attributable to the increase in net premiums written in the
third quarter of 1996, in addition to the timing of premiums earned on business
in force.
Net losses and LAE incurred decreased 5.1% to $252.2 million for the
quarter ended September 30, 1996, from $265.8 million for the same period in
1995. This decrease was primarily attributable to the 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 third quarter of 1996, compared to $18.0
million for the same period in 1995.
Underwriting expense, consisting of commission expense plus operating
expense, increased 36.9% to $146.8 million for the quarter ended September 30,
1996, from $107.2 million for the same period in 1995. Commission expense
increased 50.1% to $115.5 million for the quarter ended September 30, 1996,
compared to $76.9 million for the same period in 1995. This result was primarily
due to the increase in net premiums earned, in addition to a $13.5 million
decrease in commission expenses capitalized to deferred policy acquisition costs
in the third quarter of 1996, compared to the same period in 1995. Operating
expenses increased 3.2% to $31.3 million for the quarter, from $30.3 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 $23.4 million for the
quarter ended September 30, 1996, compared to an underwriting gain of $11.0
million for the same period in 1995. On a GAAP basis, the Company's loss ratio
decreased to 59.7% for the third quarter of 1996 from 69.2% for the same period
in 1995 (which included 4.7 points for adverse development for Latent Liability
Exposures), while the underwriting expense ratio increased to 34.7% for the
third quarter of 1996 from 27.9% for the same period in 1995. As a result of the
decrease in the loss ratio, the combined
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<PAGE>
ratio for the quarter ended September 30, 1996, decreased to 94.4% from 97.1%
for the same period in 1995.
Pre-tax net investment income increased 14.5% to $66.0 million for the
quarter ended September 30, 1996, from $57.7 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
12.6% to $48.3 million for the quarter ended September 30, 1996, from $42.9
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 11.6% to $13.4 million for the
quarter ended September 30, 1996, from $15.1 million for the same period in
1995. This decrease was primarily attributable to the lower level of senior bank
debt outstanding during the three months ended September 30,1996 compared to the
1995 period, under the Company's revolving credit facility.
The Company realized net capital gains of $1.0 million for the quarter
ended September 30, 1996, compared to net capital gains of $2.3 million for the
same period in 1995. This change was primarily due to $0.9 million in net
capital gains realized on bonds sold for the third quarter of 1996, as compared
to net capital gains of $0.5 million on bonds sold and $1.8 million related to
the sale of a mortgage for the same period of 1995.
Other income increased by 35.1% to $12.0 million for the quarter ended
September 30, 1996, from $8.8 million for the same period in 1995. The increase
in the 1996 period was attributable to an increase in fee subsidiary revenue of
$2.2 million. Other expenses increased by 67.7% to $18.5 million for the third
quarter of 1996 from $11.1 million for the same period in 1995. The increase in
the 1996 period was attributable to increases in fee subsidiary expenses of $4.2
million and foreign exchange losses of $1.0 million in the 1996 period and
recoveries of $1.4 million in the provision for the allowance for doubtful
accounts in the third quarter of 1995. There were no comparable recoveries in
the 1996 period.
Income before income taxes, distributions on preferred securities, and
extraordinary loss increased by 26.0% to $70.5 million for the quarter ended
September 30, 1996, from $53.7 million for the same period in 1995. Federal and
foreign income taxes increased by 47.2% to $19.9 million for the quarter ended
September 30, 1996, from $13.6 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 quarter
ended September 30, 1996, compared to $1.1 million for the same period in 1995,
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.
In the third quarter of 1995, the Company recognized an extraordinary
non-cash after-tax loss of $0.3 million representing the write-off of
capitalized financing fees for the Company's prepaid revolving bank credit
agreement. There was no comparable charge for the Company in 1996.
-9-
<PAGE>
Net income to common stockholders increased 22.2% to $47.3 million for the
quarter ended September 30, 1996, from $38.7 million for the same period in
1995. Primary earnings per share to common stockholders increased to $0.96 per
share for the quarter ended September 30, 1996, from $0.80 per share for the
same period in 1995. There were 49.2 million weighted average shares and common
stock equivalents outstanding during the third quarter of 1996, compared to 48.6
million outstanding during the same period in 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995
The Company's net premiums written increased 15.7% to $1,432.8 million for
the nine months ended September 30, 1996, from $1,238.2 million for the same
period in 1995. The increase in net premiums written was primarily attributable
to increased writings in both treaty and facultative business. Total treaty net
premiums written increased 14.8% to $1,020.5 million for the nine months ended
September 30, 1996 from $888.6 million for the same period in 1995. In this
connection, DICO's treaty net premiums written increased 13.7% to $618.5 million
for the nine months ended September 30, 1996, from $544.1 million for the same
period in 1995. Total facultative net premiums written increased 17.9% to $412.3
million for the nine months ended September 30, 1996 from $349.6 million for the
same period in 1995. Accounting for this increase was DICO's large finite risk
program of $79.6 million written in the third quarter 1996.
The Company's net premiums earned increased 11.4% to $1,282.3 million for
the nine months ended September 30, 1996, from $1,151.0 million for the same
period in 1995 The increase in net premiums earned was attributable to a 16.0%
increase in total treaty net premiums earned to $937.5 million for the 1996
period from $808.5 million for the 1995 period, while facultative net premiums
earned increased 0.7% to $344.8 million for the 1996 period, from $342.5 million
for the 1995 period. The increase in net premiums earned was primarily
attributable to the increase in net premiums written for the nine months ended
September 30, 1996, as well as the timing of premiums earned on business in
force.
Losses and LAE incurred increased 6.4% to $820.8 million for the nine
months ended September 30, 1996, from $771.2 million for the same period in
1995. This increase was primarily attributable to the increase in the proportion
of net 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 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 nine-month period ended September 30, 1996,
compared to $54.7 million for the same period in 1995.
Underwriting expense, comprised of commission expense plus operating
expense, increased 10.9% to $374.3 million for the nine months ended September
30, 1996, from $337.5 million for the same period in 1995. This increase was
primarily due to an increase in commission expense of 14.1% to $274.6 million
for the nine months ended September 30, 1996 from $240.7 million for the same
period in 1995. This result was partially due to an increase in writings of pro
rata treaty premiums. Operating expenses increased 2.9% to $99.6 million for the
nine months ended September 30, 1996 from $96.8 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 $87.3 million for the nine
months ended September 30, 1996, compared to $42.3 million for the same period
in 1995. On a GAAP basis, the Company's
-10-
<PAGE>
loss ratio decreased to 64.0% for the nine months ended September 30, 1996 from
67.0% for the same period in 1995 (which included 4.8 points for adverse
development for Latent Liability Exposures), while the underwriting expense
ratio decreased to 29.2% for the nine months ended September 30, 1996 from 29.3%
for the same period in 1995. The reduction in adverse loss development for
Latent Liability Exposures in the 1996 period was partially offset by the
increase in the proportion of net premiums earned that relate to treaties, which
contain a higher accident year loss ratio than facultative. As a result of the
decrease in the loss ratio, the GAAP combined ratio for the nine months ended
September 30, 1996, decreased to 93.2% from 96.3% for the same period in 1995.
Pre-tax net investment income increased 12.0% to $186.0 million for the
nine months ended September 30, 1996, from $166.0 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
10.5% to $137.6 million for the nine months ended September 30, 1996, from
$124.5 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 15.0% to $40.5 million for the
nine months ended September 30, 1996, from $47.7 million for the same period in
1995. This decrease was primarily attributable to the lower level of senior bank
debt outstanding during the nine months ended September 30, 1996 compared to the
1995 period, under the Company's revolving credit facility.
The Company realized net capital gains of $2.2 million for the nine months
ended September 30, 1996, compared to net capital gains of $4.4 million for the
same period in 1995. This change was primarily due to net capital gains of $2.1
million realized on bond sales for the nine months ended September 30, 1996,
compared to net capital gains of $3.4 million realized on bond sales for the
same period in 1995.
Other income increased by 34.0% to $35.1 million for the nine months ended
September 30, 1996, from $26.2 million for the same period in 1995. The increase
in the 1996 period was primarily attributable to an increase of $12.3 million in
fee subsidiary revenue. Other expenses increased by 32.4% to $55.0 million for
the nine months ended September 30, 1996 from $41.5 million for the same period
in 1995. The increase in the 1996 period was attributable to an increase in fee
subsidiary expenses of $15.4 million, partially offset by a decrease of $1.5
million in the provision for the allowance for doubtful accounts.
Income before income taxes increased by 43.6% to $215.0 million for the
nine months ended September 30, 1996, from $149.7 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 61.3% to
$60.3 million for the nine months ended September 30, 1996, from $37.4 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 $9.8 million for the nine
months ended September 30, 1996, compared to $1.1 million for the same period in
1995, 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, which were issued August 30, 1995.
-11-
<PAGE>
In the third quarter of 1995, the Company recognized an extraordinary
non-cash after-tax loss of $0.3 million representing the write-off of
capitalized financing fees for the Company's prepaid revolving bank credit
agreement. There was no comparable charge for the Company in 1996.
Net income to common stockholders increased by 30.7% to $144.9 million for
the nine months ended September 30, 1996, from $110.9 million for the same
period in 1995. Primary earnings per share to common stockholders increased by
29.8% to $2.96 per share for the nine months ended September 30, 1996, from
$2.28 per share for the same period in 1995. There were 49.0 million weighted
average shares and common stock equivalents outstanding during the nine months
ended September 30, 1996, compared to 48.6 million outstanding during the same
period in 1995.
FINANCIAL CONDITION
Total consolidated assets increased by 7.4% to $8,395.6 million at
September 30, 1996, from $7,814.4 million at December 31, 1995. This increase
was primarily due to increases in investments and cash of $117.9 million,
premiums due and other receivables of $194.6 million, reinsurance recoverable on
paid and unpaid losses of $103.0 million and prepaid reinsurance premiums of
$62.7 million.
The total financial statement value of investments and cash increased 3.0%
to $4,075.4 million at September 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 91.1% 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 September 30, 1996, included a net increase
from amortized cost to fair value of $19.3 million for debt and equity
investments, compared to a net increase of $109.2 million at December 31, 1995.
At September 30, 1996, the Company recognized a cumulative unrealized gain of
$12.5 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 $58.5 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 7.7% to $7,249.3 million at
September 30, 1996, from $6,729.8 million at December 31, 1995. This increase
was primarily due to increases in unearned premium reserves of $213.0 million,
loss and loss adjustment expense reserves of $148.1 million and funds held under
reinsurance contracts of $83.8 million.
Common stockholders' equity increased 7.3% to $908.8 million at September
30, 1996, from $847.1 million at December 31, 1995. This increase was primarily
attributable to net income of $144.9 million, offset by the net market
depreciation of $58.5 million on debt and equity securities, after applicable
income tax effect, and dividends to common stockholders of $14.2 million.
The Company's insurance/reinsurance subsidiaries' statutory surplus
increased to $1,182.7 million at September 30, 1996, from $1,109.6 million at
December 31, 1995. Operating leverage,
-12-
<PAGE>
as measured by such subsidiaries' premiums-to-surplus ratio, on an annualized
basis was 1.54 to 1 and 1.45 to 1 at September 30, 1996, and December 31, 1995,
respectively.
On March 29, June 28, and September 30, 1996, the Company paid cash
dividends of $.08, $.11 and $.11, respectively, per share on all outstanding
common shares.
On August 13, 1996, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with MUNCHENER RUCKVERSICHERUNGS-GESELLSCHAFT
AKTIENGESELLSCHAFT IN MUNCHEN, a company organized under the laws of Germany
("Munich Re"), and Puma Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of Munich Re ("Sub"), pursuant to which Sub will merge
with and into the Company (the "Merger"). As a result of the Merger, the
outstanding shares of the Company's common stock, $.01 par value (the "Common
Stock") will be converted into the right to receive $65.00 per share in cash.
The Merger is conditioned upon, among other things, approval by holders of a
majority of the Common Stock and receipt of certain regulatory and governmental
approvals.
On October 23, 1996, the Company filed with the Securities and Exchange
Commission and mailed to its common stockholders of record as of October 21,
1996, its definitive proxy statement relating to a special meeting of the common
stockholders of the Company to be held on November 21, 1996 at which they will
be asked to approve and adopt the Merger Agreement. Assuming such stockholder
approval is obtained, the closing of the transaction will be set to occur on
November 25, 1996.
On October 24, 1996, and November 4, 1996, respectively, the Delaware
Department of Insurance and the New York State Insurance Department approved
Munich Re's application for approval of the Merger.
No significant costs associated with the proposed merger have been reflected in
the Company's third quarter financial statements.
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 $221.9 million for the nine-month period ended September 30,
1996, down slightly from $262.8 million for the same period in 1995.
-13-
<PAGE>
Cash and cash equivalents were $274.6 million and $294.2 million at
September 30, 1996, and December 31, 1995, respectively. Cash and short-term
investments are maintained for liquidity purposes and represented 6.7% and 7.4%
of total financial statement investments and cash on September 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.
-14-
<PAGE>
PART II. OTHER INFORMATION
AMERICAN RE CORPORATION
Items 1 - 4 have been omitted as they are either inapplicable or the answer is
negative.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The exhibits listed in the accompanying Index to Exhibits are filed as
part of this report.
(b) A report on Form 8-K was filed on August 14, 1996, pertaining to the
Company's announcement that it had entered into an Agreement and Plan of
Merger (the "Merger Agreement") with MUNCHENER RUCKVERSICHERUNGS-
GESELLSCHAFT AKTIENGESELLSCHAFT IN MUNCHEN, ("Munich Re"), and Puma
Acquisition Corp., a wholly-owned subsidiary of Munich Re ("Sub") dated
as of August 13, 1996.
-15-
<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: November 14, 1996
-16-
<PAGE>
AMERICAN RE CORPORATION
INDEX TO EXHIBITS
Page Number in
Sequential Numbering
Exhibit No. Description System
- ---------- ------------------------------ ------------
2 Agreement and Plan of Merger dated as
of August 13, 1996 among Munchener
Ruckversicherungs-Gesellschaft
Aktiengesellschaft in Munchen, Puma
Acquisition Corp. and American Re
Corporation, is incorporated by reference
from the Company's Form 8-K as filed
with the Securities and Exchange
Commission of August 14, 1996.
4 Stockholders Agreement dated as of
August 13, 1996 among American Re
Associates, L.P., KKR Partners II, L.P.,
Munchener Ruckversicherungs-Gesellschaft
Aktiengesellschaft in Munchen and Puma
Acquisition Corp., is incorporated by
reference from the Company's Form 8-K as
filed with the Securities and Exchange
Commission of August 14, 1996.
27 Financial Data Schedule
99 Press Release dated August 14, 1996, is
incorporated by reference from the Company's
Form 8-K as filed with the Securities and
Exchange Commission of August 14, 1996.
<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 NINE MONTHS ENDED SEPTEMBER 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 3,774
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 20
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<TOTAL-INVEST> 3,801
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<TOTAL-ASSETS> 8,396
<POLICY-LOSSES> 4,938
<UNEARNED-PREMIUMS> 1,072
<POLICY-OTHER> 122
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<NOTES-PAYABLE> 525
238<F1>
0
<COMMON> 1
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1,282
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<FN>
<F1>REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
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