================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
July 1, 1997
Date of report (Date of earliest event reported)
American Re Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 1-11688 13-3672116
(State or Other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
555 College Road East
Princeton, New Jersey 08543
(609) 243-4200
(Address including zip code, and telephone number, including area code, of
registrant's principal executive office)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On July 1, 1997, American Re Corporation ("American Re"), and its parent
company, Muenchener Rueckversicherungs-Gesellschaft Aktiengesellschaft in
Muenchen ("Munich Re"), completed the merger of Munich American Reinsurance
Company ("MARC") into American Re-Insurance Company, the principal reinsurance
subsidiary of American Re (the "Merger"). Prior to the Merger, MARC was owned
50% by Munich Re, 40% by Allianz Aktiengesellschaft and 10% by VICTORIA
Versicherung AG. In addition, on July 3, 1997, Munich Re contributed the assets
and liabilities of its U.S. Branch to American Re-Insurance Company in exchange
for additional shares of American Re. As a result of these transactions, the
minority interests in MARC held by Allianz Aktiengesellschaft and VICTORIA
Versicherung AG were exchanged for minority interests in American Re common
stock equal to less than 9% on an aggregate basis, and Munich Re continues to
own over 91% of the outstanding common stock of American Re. As a result of
these transactions, American Re-Insurance Company had, on a pro forma basis, as
of March 31, 1997, statutory admitted assets of more than $8 billion and
statutory surplus of more than $2 billion.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements.
1. The financial statements listed in the accompanying Index to Financial
Statements are hereby incorporated herein by this reference.
2. The reports of independent auditors listed in the accompanying Index to
Financial Statements are filed as part of this report.
(c) Exhibits.
The accompanying Exhibit Index is hereby incorporated herein by this
reference. The exhibits listed in the accompanying Exhibit Index are
filed herewith or incorporated by reference as part of this report.
<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.
AMERICAN RE CORPORATION
(Registrant)
/S/ ROBERT K. BURGESS
---------------------
Robert K. Burgess
Executive Vice President, General Counsel
and Secretary
Dated: September 11, 1997
/S/ GEORGE T. O'SHAUGHNESSY JR.
--------------------------------
George T. O'Shaughnessy Jr.
Senior Vice President and
Chief Financial Officer
<PAGE>
INDEX TO FINANCIAL STATEMENTS
For American Re Corporation, Munich American Reinsurance Company and
Munich Reinsurance Company - United States Branch:
Pro Forma Consolidated Financial Information of the Company ...............F-1
Munich American Reinsurance Company Consolidated Financial Statements
for the years ended December 31, 1996, 1995 and 1994, and Independent
Auditors' Report ..........................................................F-8
Munich Reinsurance Company - United States Branch Financial Statements
for the years ended December 31, 1996, 1995 and 1994, and Independent
Auditors' Report ..........................................................F-26
Interim Financial Statements for Munich American Reinsurance Company
and Munich Reinsurance Company - United States Branch for the periods
ended March 31, 1997 and June 30, 1997 ....................................F-44
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
On July 1, 1997, American Re Corporation ("American Re" or the "Company"), and
its parent company Muenchener Rueckversicherungs Gesellschaft Aktiengesellschaft
in Muenchen ("Munich Re"), completed the merger of Munich American Reinsurance
Company ("MARC") into American Re-Insurance Company, the principal reinsurance
subsidiary of American Re (the "Merger"). Prior to the Merger, MARC was owned
50% by Munich Re, 40% by Allianz Aktiengesellschaft ("Allianz") and 10% by
VICTORIA Versicherung AG ("Victoria"). In addition, on July 3, 1997, Munich Re
contributed to the assets and liabilities of its U.S. Branch ("U.S. Branch") to
American Re-Insurance Company in exchange for additional shares of American Re
(the "Domestication"). As a result of these transactions, the minority interests
in MARC held by Allianz and Victoria were exchanged for minority interests in
American Re common stock equal to less than 9% on a aggregate basis, and Munich
Re continues to own over 91% of the outstanding common stock of American Re.
The following pro forma consolidated statements of income for the year ended
December 31, 1996, and the six months ended June 30, 1997, present the operating
results for the Company as if the Merger and Domestication had occurred at
January 1, 1996. Pro forma adjustments to reflect such transactions have been
applied to the respective historical income statements of the Company. The
following pro forma consolidated balance sheet at June 30, 1997, gives effect to
the Merger and Domestication as if it had occurred on June 30, 1997.
The pro forma consolidated data does not purport to represent what the Company's
financial position or results of operations would have been had the Merger or
Domestication in fact occurred on the dates indicated, or to project the
Company's financial position or results of operations for any future dates or
periods. The pro forma adjustments are based upon available information and
certain assumptions that the Company believes are reasonable in the
circumstances.
The pro forma consolidated financial data should be read in conjunction with the
financial statements and related notes in the Company's Form 10-Q for the
quarter ended June 30, 1997, the Company's 1996 Form 10-K, in addition to the
consolidated financial statements and related notes for MARC and the financial
statements and related notes for the U.S. Branch, which are included elsewhere
in this Form 8-K filing.
F-1
<PAGE>
American Re Corporation & Subsidiaries
Pro Forma Consolidated Statements of Income
Year Ended December 31, 1996
(Dollars in millions)
<TABLE>
<CAPTION>
Historical Financial Statements
-------------------------------
American U.S. Eliminations/ Pro Forma Pro Forma
Re MARC Branch Consolidations Adjustment Company
--------------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Net premiums written ............. $1,902.4 $ 452.4 $ 266.4 $ -- $ -- $2,621.2
Change in unearned premiums ...... (105.7) (24.2) 2.9 -- -- (127.0)
-------------------------------------------------------- --------
Premiums earned ................ 1,796.7 428.2 269.3 -- -- 2,494.2
Net investment income ............ 248.2 69.4 74.5 -- -- 392.1
Net realized capital gains ....... 4.8 9.2 13.9 -- -- 27.9
Other income ..................... 47.5 0.2 9.3 (9.3) -- 47.7
-------------------------------------------------------- --------
Total revenues ................. 2,097.2 507.0 367.0 (9.3) -- 2,961.9
-------------------------------------------------------- --------
Losses and expenses
Loss and loss adjustment
expenses ....................... 1,167.8 312.4 194.9 -- -- 1,675.1
Commission expense ............... 390.1 108.4 67.1 -- -- 565.6
Operating expense ................ 143.4 22.7 16.3 -- -- 182.4
Interest expense ................. 54.1 -- -- -- -- 54.1
Other expense .................... 109.2 3.5 -- -- 1.1 (a) 113.8
Minority interest ................ -- -- -- 22.2 (22.2)(b) --
-------------------------------------------------------- --------
Total losses and expenses ...... 1,864.6 447.0 278.3 22.2 (21.1) 2,591.0
-------------------------------------------------------- --------
Income before income taxes ..... 232.6 60.0 88.7 (31.5) 21.1 370.9
Federal and foreign income
tax expense .................. 73.8 15.6 (1.0) (0.4) 1.2 (c) 89.2
-------------------------------------------------------- --------
Income before preferred dividend 158.8 44.4 89.7 (31.1) 19.9 281.7
QUIPS preferred dividend ......... (13.1) -- -- -- -- (13.1)
-------------------------------------------------------- --------
Income from continuing
operations ................... $ 145.7 $ 44.4 $ 89.7 $ (31.1) $ 19.9 $ 268.6
======================================================== ========
</TABLE>
F-2
<PAGE>
Pro Forma Consolidated Statements of Income
For Six Months Ended June 30,1997
(Dollars in millions)
<TABLE>
<CAPTION>
Historical Financial Statements
-------------------------------
American U.S. Eliminations/ Pro Forma Pro Forma
Re MARC Branch Consolidations Adjustment Company
--------------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Net premiums written .............. $1,055.8 $ 208.7 $ 212.1 $ -- $ -- $1,476.6
Change in unearned premiums ....... (114.1) 3.3 (31.7) -- -- (142.5)
------------------------------------------------------- --------
Premiums earned ............... 941.7 212.0 180.4 -- -- 1,334.1
Net investment income ............. 131.1 38.8 40.0 -- -- 209.9
Net realized capital gains (losses) (2.0) 17.5 28.2 -- -- 43.7
Other income ...................... 23.3 (0.2) (3.4) 3.4 -- 23.1
------------------------------------------------------- --------
Total revenues ................ 1,094.1 268.1 245.2 3.4 -- 1,610.8
------------------------------------------------------- --------
Losses and expenses
Loss and loss adjustment
expenses ........................ 648.8 149.4 121.1 -- -- 919.3
Commission expense ................ 212.0 59.2 44.4 -- -- 315.6
Operating expense ................. 89.6 10.1 9.5 -- -- 109.2
Interest expense .................. 21.6 -- -- -- -- 21.6
Other expense ..................... 89.4 77.4 -- -- (72.8)(a) 94.0
Minority interest ................. -- -- -- (6.8) 6.8 (b) --
------------------------------------------------------- --------
Total losses and expenses ..... 1,061.4 296.1 175.0 (6.8) (66.0) 1,459.7
------------------------------------------------------- --------
Income before income taxes .... 32.7 (28.0) 70.2 10.2 66.0 151.1
Federal and foreign income tax
expense ......................... 3.8 (14.3) 3.1 0.2 26.3 (c) 19.1
------------------------------------------------------- --------
Income before preferred
dividend .................... 28.9 (13.7) 67.1 10.0 39.7 132.0
QUIPS preferred dividend .......... (6.6) -- -- -- -- (6.6)
------------------------------------------------------- --------
Income from continuing
operations .................. $ 22.3 $ (13.7) $ 67.1 $ 10.0 $ 39.7 $ 125.4
======================================================= ========
</TABLE>
F-3
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED
INCOME STATEMENT
The following is a summary of the adjustments reflected in the Pro Forma
Consolidated Income Statement:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, 1996 June 30, 1997
----------------- -------------
<S> <C> <C>
(a) One time merger related expenses, primarily
due to personnel related costs ................. (3.5) (75.1)
Amortization of indefinite lived intangibles,
exclusively goodwill, over 40 years ............ 4.6 2.3
----- -----
Total ....................................... 1.1 (72.8)
===== =====
(b) Elimination of the minority interest held by
Allianz and Victoria in the net income
(loss) of MARC ................................. (22.2) 6.8
(c) Income tax benefits resulting from the above
transactions ................................... 1.2 26.3
</TABLE>
F-4
<PAGE>
American Re Corporation & Subsidiaries
Pro Forma Consolidated Balance Sheet
June 30, 1997
(Dollars in millions)
<TABLE>
<CAPTION>
Historical Financial Statements
-------------------------------
American U.S. Eliminations/ Pro Forma Pro Forma
Re MARC Branch Consolidations Adjustment Company
=======================================================================
<S> <C> <C> <C> <C> <C> <C>
Assets
Investments
Fixed maturities
Bonds available for sale, at fair value ........... $ 3,868.5 $ 1,249.3 $ 1,366.4 $ -- $ -- $ 6,484.2
Preferred stock available for sale, at fair value . 69.5 -- -- -- -- 69.5
Equity securities available for sale, at fair value . 28.4 178.7 108.2 (108.2) -- 207.1
Other invested assets ............................... 16.1 4.7 1.8 -- -- 22.6
Cash and cash equivalents ............................. 318.7 24.4 6.6 -- 85.0 (c) 434.7
-----------------------------------------------------------------------
Total investments and cash ........................ 4,301.2 1,457.1 1,483.0 (108.2) 85.0 7,218.1
Accrued investment income ............................. 63.4 16.4 24.1 -- -- 103.9
Premiums and other receivables ........................ 906.8 152.0 83.5 (45.9) -- 1,096.4
Deferred policy acquisition costs ..................... 283.7 52.6 39.5 -- -- 375.8
Reinsurance recoverable on paid and unpaid losses ..... 1,908.6 771.6 365.3 (629.6) -- 2,415.9
Funds held by ceding companies ........................ 294.9 18.7 10.0 -- -- 323.6
Prepaid reinsurance premiums .......................... 141.0 78.5 16.0 (53.2) -- 182.3
Deferred federal income taxes ......................... 107.2 70.6 -- 5.5 -- 183.3
Other assets .......................................... 619.4 10.6 1.2 (0.9) -- 630.3
Merger-related goodwill ............................... -- -- -- -- 184.8 (a) 184.8
-----------------------------------------------------------------------
Total assets ...................................... 8,626.2 2,628.1 2,022.6 (832.3) 269.8 12,714.4
=======================================================================
Liabilities
Loss and loss adjustment expense reserves ............. 4,936.1 1,802.6 1,111.5 (604.3) -- 7,245.9
Unearned premium reserve .............................. 1,125.2 268.0 142.6 (99.1) -- 1,436.7
-----------------------------------------------------------------------
Total insurance reserves .......................... 6,061.3 2,070.6 1,254.1 (703.4) -- 8,682.6
Loss balances payable ................................. 159.2 3.1 28.0 (25.3) -- 165.0
Funds held under reinsurance contracts ................ 225.9 -- -- -- -- 225.9
Senior bank debt ...................................... 75.0 -- -- -- -- 75.0
Senior notes .......................................... 498.4 -- -- -- -- 498.4
Other liabilities ..................................... 382.4 74.0 5.2 (0.8) -- 460.8
-----------------------------------------------------------------------
Total liabilities ................................. 7,402.2 2,147.7 1,287.3 (729.5) -- 10,107.7
-----------------------------------------------------------------------
Minority interest ..................................... -- -- -- 240.2 (240.2)(a) --
Company obligated preferred securities of subsidiary
trust ............................................... 237.5 -- -- -- -- 237.5
Stockholders' equity
MARC common stock ..................................... -- 7.0 -- (3.5) (3.5)(b) --
MARC preferred stock .................................. -- 71.0 -- (35.5) (35.5)(b) --
ARC common stock & additional paid-in capital ......... 785.6 -- -- -- 576.9 (d) 1,362.5
MARC additional paid-in capital ....................... -- 55.8 -- (27.9) (27.9)(b) --
Retained earnings ..................................... 207.1 330.4 732.1 (264.2) -- 1,005.4
Unrealized appreciation of equity securities .......... 30.5 16.2 3.2 (11.9) -- 38.0
Net unrealized loss on foreign exchange ............... (36.7) -- -- -- -- (36.7)
-----------------------------------------------------------------------
Total stockholders' equity ........................ 986.5 480.4 735.3 (343.0) 510.0 2,369.2
-----------------------------------------------------------------------
Total liabilities, minority interest, company
obligated preferred securities of subsidiary trust,
and stockholders' equity .......................... $ 8,626.2 $ 2,628.1 $ 2,022.6 $ (832.3) $ 269.8 $12,714.4
=======================================================================
</TABLE>
F-5
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED
BALANCE SHEET
The exchange of ARC shares for MARC shares with Allianz and Victoria will
be accounted for as a purchase. The exchange of ARC shares for MARC shares
between Munich Re and U.S. Branch will be accounted for as an "as-if-pooling of
interests" business combination between parties under common control. The
exchange of ARC shares for U.S. Branch domestication will be accounted for as an
"as-if-pooling of interests" business combination between parties under common
control.
The pro forma adjustments to reflect the Merger and Domestication are summarized
as follows:
June 30, 1997
-------------
(a) Merger:
For exchange of MARC shares for ARC shares
with Allianz and Victoria:
Purchase price:
Consideration for the Common
Stock of MARC:
ARC common stock issued and additional
Paid-in capital ......................................... $425.0
------
Total purchase price .................................. 425.0
Less: Minority interest of MARC at
June 30, 1997 ........................................... (240.2)
------
Excess of purchase cost over net assets
acquired ................................................ $184.8
======
Allocation to assets and liabilities of the Company:
Increase in assets:
Goodwill .................................................. $184.8
======
F-6
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED
BALANCE SHEET
June 30, 1997
-------------
(b) Merger:
For the exchange of MARC
shares for ARC shares for
Munich Re and U.S. Branch
Holdings:
ARC (common stock issued
and additional paid-in
capital) ................................................ $ 66.9
======
MARC common stock retired ................................. $ (3.5)
MARC preferred stock retired .............................. (35.5)
MARC additional paid-in capital retired ................... (27.9)
------
$(66.9)
======
(c) Domestication:
For domestication of the
U.S. Branch:
For the exchange of MARC shares for ARC
shares with Munich Re:
Cash Received ............................................. $ 85.0
======
ARC common stock issued
and additional paid-in capital .......................... $ 85.0
======
(d) Sum of ARC common stock
and additional paid-in capital
issued
Exchange of MARC shares for ARC shares
with Allianz and Victoria ................................... 425.0
Exchange of MARC shares for ARC shares
with and Munich Re and U.S. Branch
holdings .................................................... 66.9
U.S. Branch additional paid in capital retired
and exchange of MARC shares for ARC
shares with Munich Re ....................................... 85.0
------
$576.9
======
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
Munich American Reinsurance Company
We have audited the accompanying consolidated balance sheets of Munich American
Reinsurance Company as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Munich American Reinsurance Company
as of December 31, 1996, and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company was
merged into American Re-Insurance Company, an affiliate of the Company's parent,
on July 1, 1997.
Deloitte & Touche LLP
New York, New York
August 18, 1997
F-8
<PAGE>
MUNICH AMERICAN REINSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
INVESTMENTS AND CASH:
Fixed maturities available for sale, at fair value (amortized
cost: December 31, 1996 and 1995 - $1,114,914 and
$1,146,073, respectively) $ 1,121,318 $ 1,177,314
Equities available for sale, at fair value (cost: December 31,
1996 and 1995 - $124,599 and $106,577, respectively) 142,343 118,324
Other invested assets 4,862 1,186
Cash and cash equivalents 120,950 18,693
----------- -----------
Total investments and cash 1,389,473 1,315,517
OTHER ASSETS:
Accrued investment income 17,991 18,919
Reinsurance balances receivable 148,996 109,805
Deferred policy acquisition costs 51,260 44,824
Reinsurance recoverable on paid and unpaid losses 795,400 747,381
Funds held by or deposited with reinsureds 17,868 7,596
Prepaid reinsurance premiums 60,483 41,959
Deferred federal income taxes 55,676 45,593
Other assets 25,054 34,115
----------- -----------
TOTAL ASSETS $ 2,562,201 $ 2,365,709
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss expenses $ 1,763,958 $ 1,643,794
Unearned premiums 275,977 239,313
Reinsurance payable on paid losses 10,748 4,188
Federal income taxes payable 2,037 1,816
Funds withheld for account of others 1,608 1,019
Other liabilities 11,667 8,558
----------- -----------
Total liabilities 2,065,995 1,898,688
STOCKHOLDERS' EQUITY:
Common stock (7,000 shares issued and outstanding, par value $1,000) 7,000 7,000
Preferred stock (71,000 shares issued and outstanding, par value $1,000) 71,000 71,000
Additional paid-in capital 55,800 55,800
Retained earnings 345,756 304,260
Unrealized appreciation on investments (net of tax) 16,667 29,000
Translation adjustments (net of tax) (17) (39)
----------- -----------
Total stockholders' equity 496,206 467,021
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,562,201 $ 2,365,709
=========== ===========
</TABLE>
See notes to consolidated financial statements.
- -2-
F-9
<PAGE>
MUNICH AMERICAN REINSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In Thousands)
- --------------------------------------------------------------------------------
1996 1995 1994
REVENUE:
Premiums written $ 452,399 $ 416,243 $ 384,913
Change in unearned premiums (24,230) (16,395) (5,758)
--------- --------- ---------
Premiums earned 428,169 399,848 379,155
Net investment income 69,478 63,677 59,900
Net realized capital gains 9,185 8,046 11,260
Other income 199 633 449
--------- --------- ---------
Total revenue 507,031 472,204 450,764
--------- --------- ---------
LOSSES AND EXPENSES:
Losses 281,428 254,174 282,381
Loss expenses 30,943 26,416 25,233
Commissions 108,444 109,364 106,719
Operating expenses 22,737 23,431 21,971
Other expenses 3,500 -- --
--------- --------- ---------
Total losses and expenses 447,052 413,385 436,304
--------- --------- ---------
INCOME BEFORE FEDERAL INCOME TAXES 59,979 58,819 14,460
FEDERAL INCOME TAXES (BENEFIT) 15,549 13,171 (390)
--------- --------- ---------
NET INCOME $ 44,430 $ 45,648 $ 14,850
========= ========= =========
See notes to consolidated financial statements.
- -3-
F-10
<PAGE>
MUNICH AMERICAN REINSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net
Unrealized Net
Appreciation Unrealized
Additional (Depreciation) Loss on
Common Preferred Paid-in Retained on Foreign
Stock Stock Capital Earnings Investments Exchange Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $ 7,000 $ 71,000 $ 55,800 $ 249,784 $ 25,959 $ -- $ 409,543
Net income -- -- -- 14,850 -- -- 14,850
Net change in unrealized loss on
foreign exchange -- -- -- -- -- -- --
Net change in unrealized
appreciation (depreciation)
of investments:
Fixed maturities -- -- -- -- (78,953) -- (78,953)
Equity securities -- -- -- -- 17,132 -- 17,132
Dividends to stockholders -- -- -- (3,235) -- -- (3,235)
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1994 7,000 71,000 55,800 261,399 (35,862) -- 359,337
Net income -- -- -- 45,648 -- -- 45,648
Net change in unrealized loss on
foreign exchange -- -- -- -- -- (39) (39)
Net change in unrealized
appreciation (depreciation)
of investments:
Fixed maturities -- -- -- -- 53,708 -- 53,708
Equity securities -- -- -- -- 11,154 -- 11,154
Dividends to stockholders -- -- -- (2,787) -- -- (2,787)
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 7,000 71,000 55,800 304,260 29,000 (39) 467,021
Net income -- -- -- 44,430 -- -- 44,430
Net change in unrealized loss on
foreign exchange -- -- -- -- -- 22 22
Net change in unrealized
appreciation (depreciation)
of investments:
Fixed maturities -- -- -- -- (16,129) -- (16,129)
Equity securities -- -- -- -- 3,796 -- 3,796
Dividends to stockholders -- -- -- (2,934) -- -- (2,934)
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 $ 7,000 $ 71,000 $ 55,800 $ 345,756 $ 16,667 $ (17) $ 496,206
========= ========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
- -5-
F-11
<PAGE>
MUNICH AMERICAN REINSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,430 $ 45,648 $ 14,850
Adjustments to reconcile net income to net cash provided
by operating activities:
Change in accrued investment income 928 (494) (794)
Change in premiums and other reinsurance receivables (109,660) (34,342) 25,751
Change in deferred policy acquisition costs (6,436) (3,804) (977)
Change in insurance reserves 156,828 108,669 104,631
Change in current and deferred federal
income tax assets and liabilities (3,256) 1,996 (14,638)
Change in receivables from affiliates (7,914) (8,743) (1,471)
Change in other assets and liabilities 2,706 3,123 (7,281)
--------- --------- ---------
Net cash provided by operating activities 77,626 112,053 120,071
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments available for sale:
Purchases (653,536) (982,852) (615,732)
Sales and maturities 683,930 887,211 482,972
Proceeds from sale of property and equipment 32 61 --
Cost of additions to property and equipment (2,861) (5,173) (370)
--------- --------- ---------
Net cash provided by (used in) investing activities 27,565 (100,753) (133,130)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES -
Dividends to stockholders (2,934) (2,787) (3,235)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 102,257 8,513 (16,294)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 18,693 10,180 26,474
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 120,950 $ 18,693 $ 10,180
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid - net $ 18,694 $ 10,915 $ --
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
MUNICH AMERICAN REINSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. ORGANIZATION
Munich American Reinsurance Company (the "Company") was formed in 1975 as the
domestic successor to the U.S. Branch of Munich Reinsurance Company, Munich. At
December 31, 1996, the Company was wholly-owned by three large German
insurance-related companies: Munich Reinsurance Company, Munich; Allianz AG,
Munich; and VICTORIA Versicherung AG, Duesseldorf. The Company was engaged in
the business of property and casualty reinsurance and through its wholly-owned
subsidiary, 111 East 50th Street, holds an ownership interest in its home office
building. Munich Reinsurance Company was the managing partner of the Company,
holding a 50% ownership interest.
On November 25, 1996, Munich Reinsurance Company acquired American Re
Corporation and its subsidiaries. On July 1, 1997, Munich Reinsurance Company
merged the Company into American Re-Insurance Company, the principal reinsurance
subsidiary of American Re Corporation. The minority interests in the Company's
stock held by Allianz AG and VICTORIA Versicherung AG were exchanged for
minority interests in American Re Corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Basis of Presentation - The consolidated financial statements of the Company
have been prepared on the basis of generally accepted accounting principles and
include the accounts of the Company and its subsidiary, 111 East 50th Street.
Intercompany accounts and transactions have been eliminated. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent asset and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand,
money market instruments and other debt issues purchased with a maturity of
ninety days or less when purchased.
Investments - The Company has classified all its debt and equity securities as
available for sale and carries them at fair value in accordance with the
provisions of SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Unrealized gains and losses on securities available for sale
are reported, net of deferred taxes, as a separate component of stockholders'
equity.
Realized gains and losses on the sale or maturity of investments are determined
on the basis of specific identification and are included in net income.
F-13
<PAGE>
The estimated fair value of financial instruments has been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value. Accordingly,
the Company's estimates of fair value are not necessarily indicative of the
amounts that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts. Furthermore, fair value estimates
disclosed are based on pertinent information available to the Company as of
December 31, 1996 and 1995. Although the Company is not aware of any factors
that would significantly affect the fair value estimated amounts, such amounts
have not been comprehensively revalued for purposes of these financial
statements since that date; therefore, current estimates of fair value may
differ significantly from the amounts disclosed in the financial statements.
The following methods and assumptions were used by the Company in estimating
fair value.
o Fixed maturities - Fair values for fixed maturities were based on
quoted market prices, where available. If quoted market prices were
not available, fair values were based on quoted market prices of
comparable instruments.
o Equity Securities - The fair values of these securities were based
on quoted market price, where available.
o Cash and Cash Equivalents - The carrying amount of these financial
instruments approximates their fair market value.
o Other Invested Assets - The fair value of these investments was
determined by dealers specializing in these types of investments.
Deferred Policy Acquisition Costs - Deferred policy acquisition costs represent
acquisition costs, primarily commissions and certain operating expenses. These
costs were deferred and were limited to their estimated realizable value based
on the related unearned premiums, anticipated losses and loss expenses, and
anticipated investment income. These costs will be amortized ratably over the
terms of the related contracts, which are generally a year in duration.
Furniture, Equipment and Leasehold Improvements - The Company generally uses
straight-line depreciation for all of its depreciable assets with the useful
lives varying depending on the type of asset. Accumulated depreciation was
approximately $11,425,000 and $10,825,000 at December 31, 1996 and 1995,
respectively.
Loss and Loss Adjustment Expense Reserves - The liability for unpaid losses and
loss expenses is based upon reports received from other insurers supplemented
with the Company's own case reserve estimates provided by the Company's claims
department. Such reserves also include estimates of incurred but not reported
losses based on past experience modified for current trends, and estimates of
expenses for investigating and settling claims, reduced for anticipated salvage
and subrogation.
Management believes that the liability for unpaid losses and loss expenses as of
December 31, 1996 and 1995, respectively, are adequate to cover the ultimate
gross cost of losses and loss expenses incurred through December 31, 1996. The
reserves are based on estimates of losses and loss expenses incurred and,
therefore, the amount ultimately paid may be more or less than such estimates.
The inherent uncertainties of estimating loss reserves are compounded for
reinsurers by the significant periods of time that often elapse between the
occurrence of an insured loss, the reporting of the loss to the primary insurer
and, ultimately, to the reinsurer, and the primary insurer's payment of that
loss and subsequent indemnification by the reinsurer. As a consequence,
F-14
<PAGE>
actual losses and loss expenses paid may deviate, perhaps substantially, from
estimates reflected in the insurance/reinsurance companies' reserves in their
financial statements. Any adjustments to these estimates and amounts
subsequently paid or collected are reflected in income as they occur.
Reinsurance Recoverable on Unpaid Losses - Reinsurance recoverable on unpaid
losses and loss expenses were approximately $744,300,000 and $703,100,000 at
December 31, 1996 and 1995, respectively. These recoverables were based upon the
application of estimates of unpaid loss and loss expense reserves in conjunction
with collection terms specified under individual retrocessional contracts. The
amounts ultimately collected may be more or less than such estimates. Any
adjustments of these estimates or differences between estimates and amounts
subsequently collected are reflected in income as they occur.
Income Taxes - The Company and its subsidiary file a consolidated United States
income tax return. The Company uses the liability method of accounting for
income taxes in accordance with SFAS No. 109, Accounting for Income Taxes.
Income tax provisions are based on income reported for financial statement
purposes. Deferred federal income taxes arise from the recognition of temporary
differences between income determined for financial reporting purposes and
income tax purposes.
Foreign Currency Translation - Foreign currency revenue and expenses are
translated at average exchange rates during the year. Assets and liabilities are
translated at the rate of exchange in effect at the close of the respective
year-end. Translation gains and losses are recorded as a separate component of
stockholders' equity, net of tax, while transaction gains and losses are
included in underwriting and investment expense.
Premiums and Unearned Premiums - Premiums are recognized as revenue ratably over
the terms of the contracts. Unearned premiums are based principally on reports
received from ceding companies or are computed using the monthly pro rata method
on a gross of reinsurance premiums ceded basis for balance sheet purposes, and
on a net of reinsurance premiums ceded basis for income statement purposes.
Expense Sharing - Under the terms of an expense sharing agreement, certain
expenses incurred by the Company are allocated to a stockholder of the Company.
F-15
<PAGE>
3. INVESTMENTS
Investments in available for sale fixed maturities, are as follows (in
thousands):
December 31, 1996
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities
and obligations of U.S.
government agencies $ 300,930 $ 2,125 $ 2,651 $ 300,404
Obligations of states and
political subdivisions 350,565 6,437 262 356,740
Mortgage backed securities 364,028 2,875 2,308 364,595
Corporate securities 91,543 301 113 91,731
Other debt securities 7,848 -- -- 7,848
---------- ---------- ---------- ----------
Total $1,114,914 $ 11,738 $ 5,334 $1,121,318
========== ========== ========== ==========
December 31, 1995
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities
and obligations of U.S.
government agencies $ 384,442 $ 12,161 $ 237 $ 396,366
Obligations of states and
political subdivisions 391,566 10,567 23 402,110
Mortgage backed securities 205,706 4,788 49 210,445
Corporate securities 149,729 4,821 523 154,027
Other debt securities 14,630 36 300 14,366
---------- ---------- ---------- ----------
Total $1,146,073 $ 32,373 $ 1,132 $1,177,314
========== ========== ========== ==========
F-16
<PAGE>
The amortized cost and fair value of fixed maturities at December 31, 1996 and
1995 are shown below by contractual maturity (in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due to mature:
One year or less $ 139,058 $ 140,418 $ 149,302 $ 152,331
After one year through five years 259,611 260,540 313,030 318,500
After five years through ten years 268,419 270,190 264,311 275,235
After ten years 83,798 85,575 213,727 220,803
---------- ---------- ---------- ----------
Mortgage backed securities 364,028 364,595 205,703 210,445
---------- ---------- ---------- ----------
Total $1,114,914 $1,121,318 $1,146,073 $1,177,314
========== ========== ========== ==========
</TABLE>
Actual maturities may differ from contractual maturities because securities may
be called or prepaid with or without call or prepayment penalties.
Proceeds from sales and maturities of investments in fixed maturities and the
related gains and losses realized on those sales were as follows (in thousands):
Year Ended December 31,
1996 1995 1994
Proceeds from sales $521,335 $770,564 $340,675
Gross gain realized 3,073 7,325 1,969
Gross losses realized 6,259 6,651 3,532
Net unrealized appreciation (depreciation) on investments included within
stockholders' equity was as follows (in thousands):
Year Ended December 31,
1996 1995 1994
Change in unrealized appreciation
(depreciation):
Fixed maturities $(24,913) $ 82,627 $(78,953)
Equity securities 5,978 17,114 (16,165)
-------- -------- --------
Subtotal (18,935) 99,741 (95,118)
Income tax effect 6,602 (34,879) 33,297
-------- -------- --------
Net change (12,333) 64,862 (61,821)
Balance, beginning of year 29,000 (35,862) 25,959
-------- -------- --------
Balance, end of year $ 16,667 $ 29,000 $(35,862)
======== ======== ========
At December 31, 1996 and 1995, the Company's investments in fixed maturities on
a financial statement basis were $1,121 million or 80.7% and $1,177 million or
89.5%, respectively, of total investments and cash. The fixed maturity portfolio
is well diversified within various industry segments.
F-17
<PAGE>
Fixed maturity investments by market sector are as follows (in thousands):
December 31, 1996 December 31, 1995
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. government $ 300,930 $ 300,404 $ 384,442 $ 396,366
Foreign government 901 901 -- --
State and municipal 350,565 356,740 391,566 402,110
Mortgage backed securities 364,028 364,595 205,703 210,445
Financial 26,115 26,110 85,150 86,412
Utilities 2,600 2,600 4,630 4,666
Transportation/capital 33,148 33,271 6,509 6,802
Other corporate securities 36,627 36,697 68,073 70,513
---------- ---------- ---------- ----------
Total $1,114,914 $1,121,318 $1,146,073 $1,177,314
========== ========== ========== ==========
Sources of net investment income were as follows (in thousands):
Year Ended December 31,
1996 1995 1994
Fixed maturities $ 65,273 $ 63,676 $ 60,050
Short-term investments 7,554 2,863 1,767
Other 2,586 2,842 2,176
-------- -------- --------
Gross investment income 75,413 69,381 63,993
Investment expenses (5,935) (5,704) (4,093)
-------- -------- --------
Net investment income $ 69,478 $ 63,677 $ 59,900
======== ======== ========
Net realized capital investment gains (losses) were as follows (in thousands):
Year Ended December 31,
1996 1995 1994
Fixed maturities $ (3,185) $ 674 $ (1,608)
Common stock 17,193 15,460 12,506
Other (4,823) (8,088) 362
-------- -------- --------
Net realized capital gains $ 9,185 $ 8,046 $ 11,260
======== ======== ========
At December 31, 1996 and 1995, securities in the amount of $7,559,000 (par
value) were on deposit with governmental authorities as required by law.
F-18
<PAGE>
4. LIABILITY FOR UNPAID LOSSES AND LOSS EXPENSES
Activity in the liability for unpaid losses and loss expenses is summarized as
follows (in thousands):
Year Ended December 31,
1996 1995 1994
Balance as of January 1 $ 1,643,794 $ 1,560,990 $ 1,449,306
Less reinsurance recoverables (703,075) (670,239) (689,517)
----------- ----------- -----------
Net balance at January 1 940,719 890,751 759,789
----------- ----------- -----------
Incurred related to:
Current year 307,111 276,287 312,686
Prior years 5,260 4,303 (5,072)
----------- ----------- -----------
Total incurred 312,371 280,590 307,614
----------- ----------- -----------
Paid related to:
Current year 71,742 59,690 96,989
Prior years 161,718 170,932 79,663
----------- ----------- -----------
Total paid 233,460 230,622 176,652
----------- ----------- -----------
Net balance at December 31 1,019,630 940,719 890,751
Plus reinsurance recoverables 744,328 703,075 670,239
----------- ----------- -----------
Balance at December 31 $ 1,763,958 $ 1,643,794 $ 1,560,990
=========== =========== ===========
Asbestos and Environmental-Related Claims - The Company establishes reserves for
known asbestos and environmental pollution claims when sufficient information
has been developed to indicate the involvement of a specific reinsurance
contract and a liability can be reasonably estimated. Additionally, reserves
have been established to cover future adverse development on claims reported
thus far and/or the reporting of additional claims beyond what is currently
known. Estimation of ultimate liabilities for these claims is subject to
outstanding issues, such as whether coverage exists, definition of an
occurrence, determination of ultimate damages, and allocation of such damages to
financially responsible parties. Therefore, estimation of these liabilities is
subject to some uncertainty. Management believes, however, that the future
development of such claims will not be material to the financial condition of
the Company.
5. REINSURANCE
The Company purchases reinsurance (retrocessional agreements) for certain risks.
Reinsurance companies enter into retrocessional agreements for reasons similar
to those that cause primary insurers to purchase reinsurance, namely, to reduce
net liability on individual risks, to protect against catastrophic losses, to
stabilize their financial ratios and to obtain additional underwriting capacity.
Retrocessional agreements generally are continuous contracts that have no fixed
termination date, but may be terminated by either party upon notice stated in
the agreement.
F-19
<PAGE>
The Company believes that it has minimized the credit risk with respect to its
retrocessions by monitoring its retrocessionaires, diversifying its
retrocessions and collateralizing obligations from foreign retrocessionaires.
Potential deterioration of the financial condition of retrocessional markets is
carefully monitored and appropriate actions are taken to eliminate or minimize
exposures. The Company generally requires that unpaid losses and loss expenses
(including IBNR) for certain admitted and nonadmitted reinsurers (unregulated by
United States insurance regulatory authorities) be collateralized by letters of
credit, funds withheld or pledged trust agreements. Actions such as drawdowns of
letters of credit provided as collateral, cessation of relationships and
communications may be taken to reduce or eliminate exposure when necessary.
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 incurred are net of
reinsurance. Assumed, ceded and net amounts for these items are as follows (in
thousands):
Year Ended December 31,
1996 1995 1994
Premiums written:
Assumed $797,937 $748,849 $720,445
Ceded 345,538 332,606 335,532
-------- -------- --------
Net $452,399 $416,243 $384,913
======== ======== ========
Premiums earned:
Assumed $761,273 $722,981 $727,504
Ceded 333,104 323,133 348,349
-------- -------- --------
Net $428,169 $399,848 $379,155
======== ======== ========
Losses incurred:
Assumed $561,528 $474,331 $531,657
Ceded 249,157 193,741 224,043
-------- -------- --------
Net $312,371 $280,590 $307,614
======== ======== ========
6. FEDERAL INCOME TAXES
The net deferred tax asset recorded at December 31, 1996 and 1995 represents the
net temporary differences between the tax bases of assets and liabilities and
their amounts for financial reporting. The
F-20
<PAGE>
components of the net deferred tax asset, based on a tax rate of 35% at December
31, 1996 and 1995 are as follows (in thousands):
1996 1995
Loss reserves $72,199 $68,047
Unearned premiums 11,657 9,961
Other 1,845 1,377
------- -------
Total deferred tax asset 85,701 79,385
------- -------
Deferred policy acquisition costs 17,941 15,689
Investments 9,824 16,128
Other 2,260 1,975
------- -------
Total deferred tax liability 30,025 33,792
------- -------
Net deferred tax asset $55,676 $45,593
======= =======
The Company believes it is more likely than not that the deferred tax asset is
fully realizable and, therefore, no valuation allowance has been recorded.
Realization of the deferred tax asset is dependent on generating sufficient
taxable income in future periods. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income are reduced.
Income tax expense (benefit) was as follows (in thousands):
Year Ended December 31, 1996
Current Deferred Total
Income - federal tax expense (benefit) $ 22,245 $ (3,368) $ 18,877
Taxes on net realized capital gains (3,215) (113) (3,328)
-------- -------- --------
Total federal tax expense (benefit) $ 19,030 $ (3,481) $ 15,549
======== ======== ========
Year Ended December 31, 1995
Current Deferred Total
Income - federal tax expense (benefit) $ 18,236 $ (2,057) $ 16,179
Taxes on net realized capital gains (2,786) (222) (3,008)
-------- -------- --------
Total federal tax expense (benefit) $ 15,450 $ (2,279) $ 13,171
======== ======== ========
Year Ended December 31, 1994
Current Deferred Total
Income - federal tax expense (benefit) $ 12,060 $ (8,494) $ 3,566
Taxes on net realized capital gains (3,940) (16) (3,956)
-------- -------- --------
Total federal tax expense (benefit) $ 8,120 $ (8,510) $ (390)
======== ======== ========
F-21
<PAGE>
The sources of deferred tax expense (benefit) and their tax effects were as
follows (in thousands):
Year Ended December 31,
1996 1995 1994
Net loss reserve discounting for tax $ (4,152) $ (2,807) $ (9,163)
Acceleration of premiums earned for tax (1,696) (1,148) (403)
Increase in deferred policy acquisition costs 2,253 1,331 342
Net investment adjustments 309 (510) 124
Realized capital gains/losses (113) (222) (16)
Other - net (82) 1,077 606
-------- -------- --------
Total deferred tax expense (benefit) $ (3,481) $ (2,279) $ (8,510)
======== ======== ========
Reconciliation of the differences between income taxes computed at the federal
statutory tax rates and provisions for income taxes were as follows (in
thousands):
Year Ended December 31,
1996 1995 1995
Income before taxes $ 59,979 $ 58,819 $ 14,460
Income tax rate 35 % 35 % 35 %
-------- -------- --------
Tax expense at federal statutory
income tax rate 20,993 20,587 5,061
Tax effect of:
Tax-exempt investment income (6,844) (7,070) (6,783)
Other - net 1,400 (346) 1,332
-------- -------- --------
Federal and foreign income tax expense $ 15,549 $ 13,171 $ (390)
======== ======== ========
7. BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan covering
substantially all of its employees. Benefits are based on years of service and
the employee's final compensation. Accrued costs represent estimates based upon
current information. Those estimates are subject to change due to changes in the
underlying information supporting such estimates in the future. The Company's
policy is to fund pension costs as required, subject to the amounts that are
currently deductible for tax reporting purposes.
F-22
<PAGE>
The following table sets forth the plan's funded status for all companies
participating in the plan at December 31, 1996 and 1995 (in thousands):
1996 1995
Actuarial present value of benefit obligations:
Accumulated benefits obligation, including vested
benefits of $20,132 for 1996 and $18,223 for 1995 $ 20,388 $ 18,463
======== ========
Projected benefit obligation for service rendered to date $ 34,373 $ 31,721
Plan assets at fair value, listed stocks and U.S. bonds (26,247) (22,126)
-------- --------
Projected benefit obligation in excess of plan assets 8,126 9,595
Unrecognized net loss (1,586) (4,087)
-------- --------
Accrued pension cost $ 6,540 $ 5,508
======== ========
The Company shares the cost of the pension plan with affiliates companies to
which the Company provides services. The Company's share of accrued pension cost
at December 31, 1996 and 1995 is approximately $3,740,000 and $3,151,000
respectively.
Net periodic pension cost included the following components (in thousands):
1996 1995 1994
Service cost - benefits earned during the period $ 2,215 $ 1,665 $ 443
Interest cost on projected benefit obligation 2,281 1,799 479
Actual return on plan assets (2,006) (1,627) (433)
Net amortization and deferral 52 -- --
------- ------- -------
Net periodic pension cost $ 2,542 $ 1,837 $ 489
======= ======= =======
The Company's share of net periodic pension cost for the years ended December
31, 1996, 1995 and 1994 is approximately $1,454,000, $1,051,000 and $280,000,
respectively. Pension costs are shared proportionately among participants in the
group's pension plan.
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 7.5% and 5.5%, respectively, for 1996 and 7.25% and 5.5%,
respectively, for 1995. The projected long-term rate of return on assets was
9.0% for both 1996 and 1995. Plan assets consist of ownership interests in
various commingled bond and equity trust funds.
Substantially all employees are eligible to participate in a savings plan under
which designated contributions, which are invested in various investment
programs, are matched, up to 6% of compensation, by the Company. The costs of
the Company's matching contributions were approximately $677,000, $606,000 and
$544,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
8. CAPITAL AND SURPLUS AND STOCKHOLDER DIVIDEND RESTRICTIONS
Statutory surplus for the reinsurance Company at December 31, 1996 and 1995 was
F-23
<PAGE>
approximately $360,973,000 and $323,086,000, respectively. Statutory net income
for the years ended December 31, 1996, 1995 and 1994 was approximately
$35,508,000, $39,999,000 and $5,893,000, respectively. Dividends declared and
paid by the Company to the stockholders were approximately $2,934,000,
$2,787,000 and $3,235,000 in 1996, 1995 and 1994, respectively.
The maximum amount of dividends which can be paid to stockholders under New York
insurance law without prior approval of the Insurance Commissioner is limited to
the lesser of (i) 10% of statutory surplus or (ii) statutory net investment
income from the immediately preceding year, as defined by statute.
9. COMMITMENTS AND CONTINGENT LIABILITIES
Derivative and Off-Balance-Sheet Financial Instruments
Futures and Options - The Company enters into indexed futures, put and call
option contracts to reduce general market risks, thereby limiting the volatility
of returns on its equity portfolio. Under indexed futures contracts the Company
agrees with other parties to exchange the fluctuation in value of general market
indexes during the term of the contracts. Generally, no cash is exchanged at the
outset of the contract; however, the fluctuation in the value of the index is
settled on a daily basis. Under put option contracts, the Company negotiates the
right to sell a specified future contract to another party at a specified
exercise or strike price. Under call option contracts, the Company negotiates
the right to buy a specified future contract to another party at a specified
exercise or strike price. The Company pays a premium at the outset of the
contract to the writer or (seller).
The Company is exposed to credit-related losses in the event of nonperformance
by counterparties to financial instruments, but it does not expect any
counterparties to fail to meet their obligations based on their high credit
ratings. The credit exposure of indexed futures contracts is represented by the
fair value (market value of contracts based on the futures index at the
reporting date). The put and call options risk is limited to the premium paid at
the outset of the contract. At December 31, 1996, there were no indexed futures
or options contracts outstanding.
During the years ended December 31, 1996, 1995 and 1994, the Company realized
gains (losses) on its futures and options contracts of approximately
$(4,823,000), $(8,088,000) and $362,000, respectively.
Securities Lending - The Company entered into an agreement to loan certain
investment securities to selected broker/dealers. In turn, the broker/dealers
pledged collateral (either cash or short-term investments) equal to 102% of the
market value of the securities loaned, plus accrued interest. The market value
of the investments loaned is monitored daily by the Company, and adjustments to
the collateral are made accordingly. The Company bears the risk of loss to the
extent that the securities are not returned and the value of the collateral is
less than the amount of the securities loaned. The Company believes that this
event would be unlikely. There were no securities on loan at December 31, 1996
and 1995.
Severance and Related Expenses - In connection with Munich Reinsurance Company's
November 1996 acquisition of American Re Corporation, and in anticipation of
Munich Reinsurance Company's intention to integrate the operations of the
Company into American Re-Insurance Company, the Company entered into
arrangements with all of its employees providing specified benefits upon
severance of employment. Such benefits were contingent upon
F-24
<PAGE>
employment through July 1, 1997 or termination of employment by the Company. The
Company's estimated contingent liability at December 31, 1996 was $24,500,000.
During the period January 1 to July 1, 1997, the Company recognized severance
and related expenses of approximately $22,000,000 and transition bonus expense
of $21,300,000.
Leases - The Company has operating leases for certain of its equipment and
office space, which expire through 2005. Lease expense was approximately
$4,622,000, $4,721,000 and $4,453,000 for the years ended December 31, 1996,
1995 and 1994, respectively. Future minimum lease payments for the years ending
December 31 under such leases are approximately as follows (in thousands):
1997 $ 4,500
1998 4,400
1999 4,000
2000 4,000
2001 3,900
Thereafter 11,500
------
Total $32,300
=======
Unamortized leasehold improvements at December 31, 1996 are approximately
$7,600,000.
10. RELATED PARTY TRANSACTIONS
Various reinsurance agreements exist between the Company and its stockholders.
The net effect of such agreements on the Company's net income before federal
income taxes was approximately $32,400,000, ($4,700,000) and $30,000,000 for
December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, the Company's assets included reinsurance
recoverables of approximately $45,500,000 and $37,300,000, respectively, and
reinsurance balances receivable of $55,100,000 and $60,200,000 million,
respectively, relating to these agreements. In addition, the Company has a trust
agreement and a letter of credit with a stockholder, under which funds in the
trust are held as security for the unearned premium reserves and outstanding
losses ceded to the stockholder. At December 31, 1996 and 1995, amounts held in
the trust were approximately $68,600,000 and $169,700,000, respectively. At
December 31, 1996 the amount secured by the letter of credit was approximately
$103,900,000.
During 1996, 1995 and 1994, the Company charged a stockholder expenses of
approximately $27,500,000, $25,100,000 and $21,500,000, respectively, pursuant
to an expense-sharing agreement. At December 31, 1996 and 1995, the Company had
a receivable from this stockholder pertaining to this agreement of approximately
$7,800,000 and $5,900,000, respectively.
******
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
Munich Reinsurance Company - United States Branch
We have audited the accompanying balance sheets of Munich Reinsurance Company -
United States Branch as of December 31, 1996 and 1995, and the related
statements of income, equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Munich Reinsurance Company - United States
Branch as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1996
in conformity with the generally accepted accounting principles.
As discussed in Note 1 to the financial statement, the assets and liabilities of
the Company were contributed to American Re-Insurance, an affiliate of Munich
Reinsurance Company, Munich, on July 3, 1997.
Deloitte & Touche LLP
New York, New York
August 18, 1997
F-26
<PAGE>
MUNICH REINSURANCE COMPANY - UNITED STATES BRANCH
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
INVESTMENTS AND CASH:
Fixed maturities available for sale at fair value (amortized
cost: December 31, 1996 and 1995 - $1,149,307
and $1,069,590) $1,150,476 $1,108,064
Equities available for sale at fair value (cost: December 31,
1996 and 1995 - $146,183 and $211,594) 167,407 232,618
Other invested assets 1,946 --
Cash and cash equivalents 107,216 20,061
---------- ----------
Total investments and cash 1,427,045 1,360,743
OTHER ASSETS:
Accrued investment income 21,902 17,668
Reinsurance balances receivable 95,854 102,566
Deferred policy acquisition costs 26,013 29,337
Reinsurance recoverable on paid and unpaid losses 416,451 394,471
Funds held by or deposited with reinsureds 5,788 6,473
Prepaid reinsurance premiums 26,690 17,421
Other assets 4,896 2,345
---------- ----------
TOTAL ASSETS $2,024,639 $1,931,024
========== ==========
LIABILITIES AND EQUITY
LIABILITIES:
Unpaid losses and loss expenses $1,122,731 $1,092,661
Unearned premiums 157,733 155,003
Reinsurance payable on paid losses 45,082 38,913
Deferred federal income taxes 2,733 16,974
Funds withheld for account of others 4,307 4,883
Other liabilities 11,188 6,347
---------- ----------
Total liabilities 1,343,774 1,314,781
EQUITY:
Retained earnings 664,998 575,288
Unrealized appreciation on investments (net of tax) 15,867 40,955
---------- ----------
Total equity 680,865 616,243
---------- ----------
TOTAL LIABILITIES AND EQUITY $2,024,639 $1,931,024
========== ==========
</TABLE>
See notes to financial statements.
F-27
<PAGE>
MUNICH REINSURANCE COMPANY - UNITED STATES BRANCH
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In Thousands)
- --------------------------------------------------------------------------------
1996 1995 1994
REVENUE:
Premiums written $ 266,390 $ 300,639 $ 280,851
Change in unearned premiums 2,886 (7,381) 6,693
--------- --------- ---------
Premiums earned 269,276 293,258 287,544
Net investment income 74,519 72,172 65,371
Realized capital gains 13,905 10,360 3,782
Equity in net income of affiliate 9,337 9,644 2,614
--------- --------- ---------
Total revenue 367,037 385,434 359,311
--------- --------- ---------
LOSSES AND EXPENSES:
Losses 173,531 193,611 232,909
Loss expenses 21,395 20,086 19,622
Commissions 67,120 77,163 70,713
Operating expenses 16,255 15,051 14,808
--------- --------- ---------
Total losses and expenses 278,301 305,911 338,052
--------- --------- ---------
INCOME BEFORE FEDERAL INCOME TAXES 88,736 79,523 21,259
FEDERAL INCOME TAXES (BENEFIT) (974) 3,202 1,173
--------- --------- ---------
NET INCOME $ 89,710 $ 76,321 $ 20,086
========= ========= =========
See notes to financial statements.
F-28
<PAGE>
MUNICH REINSURANCE COMPANY - UNITED STATES BRANCH
STATEMENTS OF EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
Retained (Depreciation)
Earnings on Investments Total
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $ 478,881 $ 30,445 $ 509,326
Net income 20,086 -- 20,086
Net change in unrealized appreciation (depreciation)
of investments:
Fixed maturities -- (45,005) (45,005)
Equity securities -- (25,465) (25,465)
--------- --------- ---------
BALANCE, DECEMBER 31, 1994 498,967 (40,025) 458,942
Net income 76,321 -- 76,321
Net change in unrealized appreciation (depreciation)
of investments:
Fixed maturities -- 54,283 54,283
Equity securities -- 26,697 26,697
--------- --------- ---------
BALANCE, DECEMBER 31, 1995 575,288 40,955 616,243
Net income 89,710 -- 89,710
Net change in unrealized appreciation (depreciation)
of investments:
Fixed maturities -- (24,248) (24,248)
Equity securities -- (840) (840)
--------- --------- ---------
BALANCE, DECEMBER 31, 1996 $ 664,998 $ 15,867 $ 680,865
========= ========= =========
</TABLE>
See notes to financial statements.
F-29
<PAGE>
MUNICH REINSURANCE COMPANY - UNITED STATES BRANCH
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 89,710 $ 76,321 $ 20,086
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in accrued investment income (4,234) (2,192) 1,181
Change in premiums and other reinsurance
receivables (16,199) (22,046) (49,418)
Change in deferred policy acquisition costs 3,324 (976) (4,078)
Change in insurance reserves 32,800 22,388 39,027
Change in current and deferred federal and
foreign income tax assets and liabilities (3,299) 2,602 415
Change in other, net (14,180) (18,386) (2,265)
----------- ----------- -----------
Net cash provided by operating activities 87,922 57,711 4,948
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments available for sale:
Purchases (1,038,485) (745,256) (1,018,527)
Sales and maturities 1,047,038 709,359 996,753
Equity in net income of affiliate (9,337) (9,644) (2,614)
Proceeds from the sale of property and equipment -- 41 --
Cost of additions to property and equipment 17 (9) (77)
----------- ----------- -----------
Net cash used in investing activities (767) (45,509) (24,465)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 87,155 12,202 (19,517)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 20,061 7,859 27,376
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF
YEAR $ 107,216 $ 20,061 $ 7,859
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid, net $ 2,379 $ 600 $ --
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-30
<PAGE>
MUNICH REINSURANCE COMPANY - UNITED STATES BRANCH
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. ORGANIZATION
Munich Reinsurance Company - United States Branch (the "Company") was
established under the laws of the State of New York on December 23, 1955. The
Company was established as a branch of Munich Reinsurance Company, Munich. The
Company was engaged in the business of property and casualty reinsurance.
During November 1996, Munich Reinsurance Company acquired American Re
Corporation and its subsidiaries. On July 3, 1997, Munich Reinsurance Company
contributed the assets and liabilities of the Company to American Re-Insurance
Company, the principal reinsurance subsidiary of American Re Corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The financial statements of the Company have been
prepared on the basis of generally accepted accounting principles. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand,
money market instruments and other debt issues, with a maturity of ninety days
or less when purchased.
Investments - The Company has classified all its debt and equity securities as
available for sale and carries them at fair value in accordance with the
provisions of SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Unrealized gains and losses on securities available for sale
are reported, net of deferred taxes, as a separate component of equity.
Realized gains and losses on the sale or maturity of investments are determined
on the basis of the specific identification method and are included in net
income.
The Company's investment in Munich American Reinsurance Company ("MARC") is
accounted for on the equity basis of accounting. The investment in MARC's common
and preferred stock (amounting to 22-1/2% of its outstanding common and
preferred stock) is stated as the Company's proportionate share of MARC's
stockholders' equity. Changes in the Company's share of MARC's equity relating
to MARC's undistributed earnings are presented as increases or decreases to the
Company's net income. Changes in the Company's share of MARC's equity relating
to other changes in MARC's equity are presented as increases or decreases in the
Company's equity.
The estimated fair value of financial instruments has been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value. Accordingly,
the Company's estimates of fair value are not necessarily indicative of the
amounts that the Company
F-31
<PAGE>
MUNICH AMERICAN REINSURANCE COMPANY
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts. Furthermore, fair value estimates disclosed are
based on pertinent information available to the Company as of December 31, 1996
and 1995. Although the Company is not aware of any factors that would
significantly affect the fair value estimated amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date: therefore, current estimates of fair value may differ significantly
from the amounts disclosed in the financial statements.
The following methods and assumptions were used by the Company in estimating
fair value:
o Fixed Maturities - Fair values for fixed maturities were based on quoted
market prices, where available. If quoted market prices were not
available, fair values were based on quoted market prices of comparable
instruments.
o Equity Securities - The fair values of these securities were based on
quoted market price, where available.
o Cash and Cash Equivalents - The carrying amount of these financial
instruments approximates their fair value.
o Other lnvested Assets - The fair value of these investments was determined
by dealers specializing in these types of investments.
Deferred Policy Acquisition Costs - Deferred policy acquisition costs represent
acquisition costs, primarily commissions and certain operating expenses. These
costs were deferred and were limited to their estimated realizable value based
on the related unearned premiums, anticipated losses and loss expenses, and
anticipated investment income. These costs will be amortized ratably over the
terms of the related contracts, which are generally a year in duration.
Loss and Loss Adjustment Expense Reserves - The liability for unpaid losses and
loss expenses is based upon reports received from other insurers supplemented
with the Company's own case reserve estimates provided by the Company's claims
department. Such reserves also include estimates of incurred but not reported
losses based on past experience modified for current trends, and estimates of
expenses for investigating and settling claims, reduced for anticipated salvage
and subrogation.
Management believes that the liability for unpaid losses and loss expenses as of
December 31, 1996 and 1995, respectively, are adequate to cover the ultimate
gross cost of losses and loss expenses incurred through December 31, 1996. The
reserves are based on estimates of losses and loss expenses incurred and,
therefore, the amount ultimately paid may be more or less than such estimates.
The inherent uncertainties of estimating loss reserves are compounded for
reinsurers by the significant periods of time that often elapse between the
occurrence of an insured loss, the reporting of the loss to the primary insurer
and, ultimately, to the reinsurer, and the primary insurer's payment of that
loss and subsequent indemnification by the reinsurer. As a consequence, actual
losses and loss expenses paid may deviate, perhaps substantially, from estimates
reflected in the insurance/reinsurance companies' reserves in their financial
statements. Any adjustments to these estimates and amounts subsequently paid or
collected are reflected in income as they occur.
Reinsurance Recoverable on Unpaid Losses - Reinsurance recoverable on unpaid
losses and loss expenses were approximately $396,086,000 and $376,346,000 at
December 31, 1996 and 1995,
F-32
<PAGE>
respectively. These recoverables were based upon the application of estimates of
unpaid loss and loss expense reserves in conjunction with collection terms
specified under individual retrocessional contracts. The amounts ultimately
collected may be more or less than such estimates. Any adjustments of these
estimates or differences between estimates and amounts subsequently collected
are reflected in income as they occur.
Income Taxes - The Company files a United States income tax return. The Company
uses the liability method of accounting for income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes. Income tax provisions are based on income
reported for financial statement purposes. Deferred federal income taxes arise
from the recognition of temporary differences between income determined for
financial reporting purposes and income tax purposes.
Premiums and Unearned Premiums - Premiums are recognized as revenue ratably over
the terms of the contracts. Unearned premiums are based principally on reports
received from ceding companies or are computed using the monthly pro rata method
on a gross of reinsurance premiums ceded basis for balance sheet purposes, and
on a net of reinsurance premiums ceded basis for income statement purposes.
Expense Sharing - Under the terms of an expense sharing agreement, certain
expenses incurred by MARC are allocated to the Company.
3. INVESTMENTS
Investments in available for sale fixed maturities, are as follows (in
thousands):
December 31, 1996
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities
and obligations of U.S.
government agencies $ 489,492 $ 908 $ 1,953 $ 488,447
Obligations of states and
political subdivisions 112 112
Mortgage backed securities 119,640 414 222 119,832
Corporate securities 516,313 4,423 2,401 518,335
Other debt securities 23,750 23,750
---------- ---------- ---------- ----------
Total $1,149,307 $ 5,745 $ 4,576 $1,150,476
========== ========== ========== ==========
F-33
<PAGE>
December 31, 1995
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities
and obligations of U.S.
government agencies $ 383,257 $ 10,341 $ 43 $ 393,555
Obligations of states and
political subdivisions 11,042 1,050 -- 12,092
Mortgage-backed securities 122,246 3,393 165 125,474
Corporate securities 525,027 25,212 1,424 548,815
Other debt securities 28,018 156 46 28,128
---------- ---------- ---------- ----------
Total $1,069,590 $ 40,152 $ 1,678 $1,108,064
========== ========== ========== ==========
The amortized cost and fair value of fixed maturities at December 31, 1996 and
1995 are shown below by contractual maturity (in thousands).
1996 1995
Amortized Fair Amortized Fair
Cost Value Cost Value
Due to mature:
One year or less $ 50,585 $ 50,615 $ 80,579 $ 81,724
After one year through five
years 403,640 403,318 261,376 265,815
After five years through ten
years 533,090 534,461 467,468 489,235
After ten years 42,352 42,250 137,921 145,816
---------- ---------- ---------- ----------
Mortgage-backed securities 119,640 119,832 122,246 125,474
---------- ---------- ---------- ----------
Total $1,149,307 $1,150,476 $1,069,590 $1,108,064
========== ========== ========== ==========
Actual maturities may differ from contractual maturities because securities may
be called or prepaid with or without call or prepayment penalties.
Proceeds from maturities and sales of investments in fixed maturities and the
related gains and losses realized on those sales were as follows (in thousands):
Year Ended December 31,
1996 1995 1994
Proceeds from sales $893,731 $608,320 $869,298
Gross gain realized 14,535 10,185 7,480
Gross losses realized 6,323 5,065 17,952
F-34
<PAGE>
Net unrealized appreciation (depreciation) on investments included within equity
was as follows (in thousands):
Year Ended
December 31,
1996 1995 1994
Change in unrealized
appreciation (depreciation):
Fixed maturities ($ 37,304) $ 83,513 ($ 69,238)
Equity securities 199 32,902 (31,371)
--------- --------- ---------
Subtotal (37,105) 116,415 (100,609)
Income tax effect 12,017 (35,435) 30,139
--------- --------- ---------
Net change (25,088) 80,980 (70,470)
Balance, beginning of year 40,955 (40,025) 30,445
--------- --------- ---------
Balance, end of year $ 15,867 $ 40,955 ($ 40,025)
========= ========= =========
At December 31, 1996 and 1995, the Company's investments in fixed maturities on
a financial statements basis were $1,150 or 80.6% and $1,108 million or 81.4%,
respectively, of total investments and cash. The fixed maturity portfolio is
well diversified within various industry segments.
Fixed maturity investments by market sector are as follows (in thousands):
December 31, 1996 December 31, 1995
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. government $ 489,492 $ 488,447 $ 383,257 $ 393,555
Foreign government
State and municipal 112 112 11,042 12,092
Mortgage backed securities 119,640 119,832 122,246 125,474
Financial 239,443 240,892 266,144 276,438
Utilities 29,287 29,598 34,955 36,561
Transportation/capital 42,496 43,977
Natural resources 8,361 8,320
Other corporate securities 262,972 263,275 209,450 219,967
---------- ---------- ---------- ----------
Total $1,149,307 $1,150,476 $1,069,590 $1,108,064
========== ========== ========== ==========
F-35
<PAGE>
Sources of net investment income were as follows (in thousands):
Year Ended December 31,
1996 1995 1994
Fixed maturities $ 67,010 $ 68,314 $ 62,013
Short-term investments 6,480 1,906 1,012
Other 3,847 4,547 4,096
-------- -------- --------
Gross investment income 77,337 74,767 67,121
Investment expenses (2,818) (2,595) (1,750)
-------- -------- --------
Net investment income $ 74,519 $ 72,172 $ 65,371
======== ======== ========
Net realized capital investment gains (losses) were as follows (in thousands):
Year Ended December 31,
1996 1995 1994
Fixed maturities $ 8,212 $ 5,121 $(10,472)
Common stock 5,607 12,338 13,891
Other 86 (7,099) 363
-------- -------- --------
Net realized capital gains $ 13,905 $ 10,360 $ 3,782
======== ======== ========
At December 31, 1996 and 1995, securities in the amounts of $10,005,000 and
$8,834,000 (par value), respectively, were on deposit with governmental
authorities as required by law.
At December 31, 1996, the total assets and liabilities of MARC, the Company's
affiliate, were approximately $2,562,000,000 and $2,066,000,000, respectively.
MARC's total assets and liabilities at December 31, 1995 were approximately
$2,366,000,000 and $1,899,000,000, respectively. MARC's net income for the years
ended December 31, 1996, 1995 and 1994, was approximately $44,430,000,
$45,648,000 and $14,850,000, respectively.
The Company received dividends from MARC during 1996, 1995 and 1994 of
approximately $660,000, $627,000 and $728,000, respectively. The Company's
retained earnings at 1996 and 1995 included undistributed earnings of MARC of
approximately $68,459,000 and $77,795,000, respectively.
F-36
<PAGE>
4. LIABILITY FOR UNPAID LOSSES AND LOSS EXPENSES
Activity in the liability for unpaid losses and loss expenses is summarized as
follows (in thousands):
Year Ended December 31,
1996 1995 1994
Balance as of January 1 $ 1,092,661 $ 1,081,147 $ 1,081,432
Less reinsurance recoverables (376,346) (371,853) (366,177)
----------- ----------- -----------
Net balance at January 1 716,315 709,294 715,255
----------- ----------- -----------
Net incurred related to:
Current year 189,581 206,196 253,424
Prior years 5,345 7,501 (893)
----------- ----------- -----------
Total incurred 194,926 213,697 252,531
----------- ----------- -----------
Paid related to:
Current year 41,900 44,572 86,856
Prior years 142,697 162,103 171,636
----------- ----------- -----------
Total paid 184,597 206,675 258,492
----------- ----------- -----------
Net balance at December 31 726,645 716,316 709,294
Plus reinsurance recoverables 396,086 376,345 371,853
----------- ----------- -----------
Balance at December 31 $ 1,122,731 $ 1,092,661 $ 1,081,147
=========== =========== ===========
Asbestos and Environmental-Related Claims - The Company establishes reserves for
known asbestos and environmental pollution claims when sufficient information
has been developed to indicate the involvement of a specific reinsurance
contract and a liability can be reasonably estimated. Additionally, reserves
have been established to cover future adverse development on claims reported
thus far and/or the reporting of additional claims beyond what is currently
known. Estimation of ultimate liabilities for these claims is subject to
outstanding issues, such as whether coverage exists, definition of an
occurrence, determination of ultimate damages, and allocation of such damages to
financially responsible parties. Therefore, estimation of these liabilities is
subject to some uncertainty. Management believes, however, that the future
development of such claims will not be material to the financial condition of
the Company.
5. REINSURANCE
The Company purchases reinsurance (retrocessional agreements) for certain risks.
Reinsurance companies enter into retrocessional agreements for reasons similar
to those that cause primary insurers to purchase reinsurance, namely, to reduce
net liability on individual risks, to protect against catastrophic losses, to
stabilize their financial ratios and to obtain additional underwriting capacity.
Retrocessional agreements generally are continuous contracts that have no fixed
termination date, but may be terminated by either party upon notice stated in
the agreement.
F-37
<PAGE>
The Company believes that it has minimized the credit risk with respect to its
retrocessions by monitoring its retrocessionaires, diversifying its
retrocessions and collateralizing obligations from foreign retrocessionaires.
Potential deterioration of the financial condition of retrocessional markets is
carefully monitored and appropriate actions are taken to eliminate or minimize
exposure. The Company generally requires that unpaid losses and expenses
(including IBNR) for certain admitted and nonadmitted reinsurers (unregulated by
United States insurance regulatory authorities) be collateralized by letters of
credit, funds withheld or pledged trust agreements. Actions such as drawdowns of
letters of credit provided as collateral, cessation of relationships and
communications may be taken to reduce or eliminate exposure when necessary.
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 incurred are net of
reinsurance. Assumed, ceded and net amounts for these items are as follows (in
thousands):
Year Ended December 31,
1996 1995 1994
Premiums written:
Assumed $ 453,380 $ 489,748 $ 464,983
Ceded 186,990 189,109 184,132
----------- ----------- -----------
Net $ 266,390 $ 300,639 $ 280,851
=========== =========== ===========
Premiums earned:
Assumed $ 450,651 $ 478,875 $ 474,223
Ceded 181,375 185,617 186,679
----------- ----------- -----------
Net 269,276 293,258 287,544
=========== =========== ===========
Losses incurred:
Assumed $ 320,987 $ 327,722 $ 415,443
Ceded 126,061 114,025 162,912
----------- ----------- -----------
Net $ 194,926 $ 213,697 $ 252,531
=========== =========== ===========
F-38
<PAGE>
6. FEDERAL AND FOREIGN INCOME TAXES
The net deferred tax liability recorded at December 31, 1996 and 1995 represents
the net temporary differences between the tax bases of assets and liabilities
and their amounts for financial reporting. The components of the net deferred
tax liability, based on a tax rate of 35% at December 31, 1996 and 1995 are as
follows (in thousands):
1996 1995
Loss reserves $ 50,314 $ 50,386
Unearned premiums 6,874 7,076
Net operating loss carryforward 114,517 142,237
AMT credit carryforward 5,700 4,200
Other 679 572
--------- ---------
Total deferred tax assets 178,084 204,471
Valuation allowance (157,953) (184,228)
--------- ---------
Net deferred tax asset 20,131 20,243
--------- ---------
Deferred policy acquisition costs 9,105 10,268
Investments 7,383 21,117
Affiliate income 5,708 5,248
Other 668 584
--------- ---------
Total deferred tax liabilities 22,864 37,217
--------- ---------
Net deferred tax liability $ 2,733 $ 16,974
========= =========
The Company has a tax loss carryforward of approximately $327,200,000 available
to offset future taxable income, that expires between 2001 and 2006. The Company
has an Alternative Minimum Tax ("AMT") credit carryforward of approximately
$5,700,000 million available to offset future income taxes, with no expiration.
SFAS No. 109 requires deferred tax assets to be reduced by a valuation allowance
if it is more likely than not that some portion or all of the deferred tax
assets will not be realized. As of December 31, 1996 and 1995, the Company has
recorded a valuation allowance to reflect the estimated amount of deferred tax
assets which may not be realized due to the expiration of net operating losses,
tax credit carryforwards and loss reserve discounting.
Income tax expense (benefit) was as follows (in thousands):
Year Ended December 31, 1996
Current Deferred Total
Income - federal tax expense (benefit) $ 4,031 $ (1,201) $ 2,830
Taxes on net realized capital gains (2,781) (1,023) (3,804)
----------- ----------- -----------
Total federal tax expense (benefit) $ 1,250 $ (2,224) $ (974)
=========== =========== ===========
F-39
<PAGE>
Year Ended December 31, 1995
Current Deferred Total
Income - federal tax expense $ 3,973 $ 2,101 $ 6,074
Taxes on net realized capital gains (2,072) (800) (2,872)
----------- ----------- -----------
Total federal tax expense $ 1,901 $ 1,301 $ 3,202
=========== =========== ===========
Year Ended December 31, 1994
Current Deferred Total
Income - federal tax expense $ 1,134 $ 1,413 $ 2,547
Taxes on net realized capital gains (1,323) (51) (1,374)
----------- ----------- -----------
Total federal tax expense $ (189) $ 1,362 $ 1,173
=========== =========== ===========
The sources of deferred tax expense (benefit) and their tax effects were as
follows (in thousands):
Year Ended December 31,
1996 1995 1994
Net loss reserve discounting for tax $ 72 $ (629) $ 417
Acceleration of premiums earned for tax 202 (7) 469
Deferred policy acquisition costs (1,163) 342 1,427
Net investment adjustments (1,139) 1,383 (692)
Net operating loss carryforward 27,720 25,027 3,416
AMT credit 1,500 1,454 220
Change in valuation allowance (26,275) (26,011) (4,438)
Other, net (3,141) (258) 543
----------- ----------- -----------
Total $ (2,224) $ 1,301 $ 1,362
=========== =========== ===========
The change in the valuation allowance is due to the utilization of the net
operating loss carryforward and the increase in the AMT credit.
F-40
<PAGE>
Reconciliation of the differences between income taxes computed at the federal
statutory tax rates and provisions for income taxes were as follows (in
thousands):
Year Ended
December 31,
1996 1995 1994
Income before taxes $ 88,736 $ 79,523 $ 21,259
Income tax rate 35% 35% 35%
-------- -------- --------
Tax expense at federal statutory income tax rate 31,058 27,833 7,441
-------- -------- --------
Tax effect of:
Net operating loss deduction (27,720) (25,027) (3,416)
Other - net (4,312) 396 (2,852)
-------- -------- --------
Federal and foreign income tax expense (benefit) $ (974) $ 3,202 $ 1,173
======== ======== ========
7. BENEFIT PLANS
The Company participates in a noncontributory defined benefit pension plan
covering substantially all of its and MARC's employees. Benefits are based on
years of service and the employee's final compensation. Accrued costs represent
estimates based upon current information. Those estimates are subject to change
due to changes in the underlying information supporting such estimates in the
future. The Company's policy is to fund pension costs as required, subject to
the amounts that are currently deductible for tax reporting purposes.
The Company's share of accrued pension cost at December 31, 1996 and 1995 is
$1,892,000 and $1,593,000, respectively.
The Company's share of net periodic pension cost the years ended December 31,
1996, 1995 and 1994 is $736,000, $531,000 and $142,000, respectively.
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 7.5% and 5.5%, respectively, for 1996 and 7.25% and 5.50%,
respectively, for 1995. The projected long-term rate of return on assets was
9.0% for both 1996 and 1995.
8. CAPITAL AND SURPLUS AND STOCKHOLDER DIVIDEND RESTRICTIONS
Statutory surplus for the Company at December 31, 1996 and 1995 was
approximately $625,900,000 and $532,800,000, respectively. Statutory net income
for the years ended December 31, 1996, 1995 and 1994 was approximately
$81,500,000, $66,100,000 and $15,200,000, respectively.
The maximum amount of dividends which can be paid to the Parent under New York
insurance law without prior approval of the Insurance Commissioner is limited to
the lesser of: (i) 10% of statutory surplus or (ii) statutory net investment
income from the immediately preceding year, as defined by statute. No amounts
were paid by the Company during 1996, 1995 and 1994.
F-41
<PAGE>
9. COMMITMENTS AND CONTINGENT LIABILITIES
Derivative and Off-Balance Sheet Financial Instruments
Futures and Options - The Company enters into indexed futures, put and option
contracts to reduce general market risks, thereby limiting the volatility of
returns on its equity portfolio. Under indexed futures contracts the Company
agrees with other parties to exchange the fluctuation in value of general market
indexes during the term of the contracts. Generally, no cash is exchanged at the
outset of the contract; however, the fluctuation in the value of the index is
settled on a daily basis. Under put option contracts, the Company negotiates the
right to sell a specified future contract to another party at a specified
exercise or strike price. Under call option contracts, the Company negotiates
the right to buy a specified future contract to another party at a specified
exercise or strike price. The Company pays a premium at the outset of the
contract to the writer (seller).
The Company is exposed to credit-related losses in the event of nonperformance
by counterparties to financial instruments, but it does not expect any
counterparties to fail to meet their obligations based on their high credit
ratings. The credit exposure of indexed futures contracts is represented by the
fair value (market value of contracts based on the futures index at the
reporting date). The put and call options risk is limited to the premium paid at
the outset of the contract. At December 31, 1996 and 1995, there were no indexed
futures or options contracts outstanding.
During the year ended December 31, 1995 and 1994, the Company realized gains
(losses) on its futures and options contracts of approximately $(7,200,000) and
$363,000, respectively.
Securities Lending - The Company entered into an agreement to loan certain
investment securities to selected broker/dealers. In turn, the broker/dealers
pledged collateral (either cash or short-term investments) equal to 102% of the
market value of the securities loaned, plus accrued interest. The market value
of the investments loaned is monitored daily by the Company, and adjustments to
the collateral are made accordingly. The Company bears the risk of loss to the
extent that the securities are not returned and the value of the collateral is
less than the amount of the securities loaned. The Company believes that this
event would be unlikely. There were no securities on loan at December 31, 1996
and 1995.
Leases - The Company has operating leases for certain of its equipment and
office space, which expire through 2005. Lease expense was $4,622,000,
$4,721,000 and $4,453,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. Future minimum lease payments for the years ending December 31
under such leases are approximately as follows (in thousands):
1997 $ 3,100
1998 3,100
1999 3,100
2000 3,100
2001 3,100
Thereafter 11,000
-------
Total $26,500
=======
F-42
<PAGE>
10. RELATED PARTY TRANSACTIONS
Various reinsurance agreements exist between the Company and MARC. The net
effect of such agreements on the Company's net income before federal income
taxes was approximately $(2,400,000), $6,600,000 and $(27,500,000) for December
31, 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, the Company's assets included reinsurance
recoverable of approximately $57,100,000 and $55,400,000, respectively, and the
Company's liabilities included reinsurance balances payable of $39,600,000 and
$35,800,000, respectively, relating to these agreements.
During 1996, 1995 and 1994, the Company was charged expenses of approximately
$27,500,000, $25,100,000 and $21,500,000, respectively, pursuant to an
expense-sharing agreement. At December 31, 1996 and 1995, the Company had a
payable to MARC pertaining to this agreement of approximately $7,800,000 and
$5,900,000, respectively.
******
F-43
<PAGE>
MUNICH AMERICAN REINSURANCE COMPANY
Consolidated Balance Sheets
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
(unaudited)
Assets: March 31, 1997 December 31, 1996
---------------------------------
<S> <C> <C>
Investments
Fixed Maturities
Bonds available for sale, at fair value (amortized cost:
March 31, 1997 - $1,251.2; December 31, 1996 - $1,114.9) ..... $1,237.5 $1,121.3
Equity securities available for sale, at fair value (cost: March 31,
1997 - $138.2; December 31, 1996 - $124.6) ................... 150.5 142.3
Other invested assets .............................................. 4.6 4.9
Cash and cash equivalents ............................................. 35.1 121.0
----------------------
Total investments and cash ................................... 1,427.7 1,389.5
Accrued investment income ............................................. 15.6 18.0
Premiums and other receivables ........................................ 118.1 149.0
Deferred policy acquisition costs ..................................... 51.0 51.2
Reinsurance recoverables on paid and unpaid losses .................... 761.7 795.4
Funds held by ceding companies ........................................ 18.6 17.9
Prepaid reinsurance premiums .......................................... 70.5 60.5
Deferred federal income taxes ......................................... 67.2 55.7
Other assets .......................................................... 27.3 25.0
----------------------
Total assets ................................................. $2,557.7 $2,562.2
======================
Liabilities:
Loss and loss adjustment expense reserves ............................. $1,754.0 $1,764.0
Unearned premium reserve .............................................. 268.4 276.0
----------------------
Total insurance reserves ..................................... 2,022.4 2,040.0
Loss balances payable ................................................. 5.1 10.7
Other liabilities ..................................................... 37.4 15.3
----------------------
Total liabilities ............................................ 2,064.9 2,066.0
----------------------
Stockholder's Equity:
Common stock, par value: $1,000 per share; issued and outstanding:
March 31, 1997, and December 31, 1996 - 7,000 shares ............... 7.0 7.0
Preferred stock, par value: $1,000 per share; issued and outstanding:
March 31, 1997, and 1996 - 71,000 shares ........................... 71.0 71.0
Additional paid-in capital ............................................ 55.8 55.8
Retained earnings ..................................................... 359.9 345.7
Net unrealized appreciation of investments ............................ (0.9) 16.7
----------------------
Total stockholders' equity ................................... 492.8 496.2
----------------------
Total liabilities and stockholders' equity ................... $2,557.7 $2,562.2
======================
</TABLE>
See accompanying notes to consolidated interim financial statements.
F-44
<PAGE>
MUNICH AMERICAN REINSURANCE COMPANY
Consolidated Statements of Income
(Dollars in millions)
(unaudited)
Three-month period
ended March 31,
1997 1996
-------------------------
Revenue:
Premiums written ................................. $100.0 $109.2
Change in unearned premium reserve ............... 2.4 (5.2)
-------------------
Premiums earned ............................... 102.4 104.0
Net investment income ............................ 19.0 17.2
Net realized capital gains (losses) .............. 10.9 4.6
Other income ..................................... (5.9) --
-------------------
Total revenue ................................. 126.4 125.8
-------------------
Losses and expenses:
Losses and loss adjustment expenses .............. 73.0 72.6
Commission expense ............................... 29.7 26.6
Operating expense ................................ 6.2 5.8
-------------------
Total losses and expenses ..................... 108.9 105.0
-------------------
Income (loss) before income ................... 17.5 20.8
Federal and foreign income taxes ................. 3.3 4.0
-------------------
Net income to common stockholders ............. $ 14.2 $ 16.8
===================
See accompanying notes to consolidated interim financial statements.
F-45
<PAGE>
MUNICH AMERICAN REINSURANCE COMPANY
Consolidated Statements of Cash Flows
(Dollars in millions)
(unaudited)
Three-month period
ended March 31,
1997 1996
------------------
Cash Flows From Operating Activities:
Net income ................................................ $ 14.2 $ 16.8
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in accrued investment income .................. 2.4 3.4
Decrease (increase) in premiums and other receivables .. 45.8 (16.5)
Decrease (increase) in deferred policy acquisition costs 0.3 (1.6)
Increase (decrease) in insurance reserves .............. (17.5) 7.7
Decrease in current and deferred federal and foreign
income tax assets .................................. 3.8 14.9
Decrease (increase) in other assets and liabilities, net 5.8 (3.5)
Decrease (increase) in other, net ...................... (10.5) (4.0)
------------------
Net cash provided by operating activities ........... 44.3 17.2
------------------
Cash Flows From Investing Activities:
Investments available for sale:
Purchases .............................................. (490.1) (188.2)
Sales and maturities ................................... 359.4 166.5
Proceeds from sales of property and equipment ............. 0.5 --
Cost of additions to property and equipment ............... -- (0.6)
------------------
Net cash used in investing activities ............... (130.2) (22.3)
------------------
Net decrease in cash and cash equivalents ........... (85.9) (5.1)
Cash and cash equivalents, beginning of period ............... 121.0 18.7
------------------
Cash and cash equivalents, end of period ..................... $ 35.1 $ 13.6
==================
See accompanying notes to consolidated interim financial statements.
F-46
<PAGE>
MUNICH AMERICAN REINSURANCE COMPANY
Notes to Consolidated Interim Financial Statements
March 31,1997
(unaudited)
1. Basis of Presentation
Munich American Reinsurance Company ("MARC") was formed in 1975 as the domestic
successor to the U.S. Branch of Munich Reinsurance Company, Munich Germany. At
December 31, 1996, MARC was wholly-owned by three large German insurance-related
companies: Munich Reinsurance Company, Munich; Allianz AG, Munich; and VICTORIA
Versicherung AG, Duesseldorf. MARC was engaged in the business of property and
casualty reinsurance and through its wholly-owned subsidiary, 111 East 50th
Street, holds an ownership interest in its home office building. Munich
Reinsurance Company was the managing partner of MARC, holding a 50% ownership
interest.
On November 25, 1996, Munich Reinsurance Company acquired American Re
Corporation and its subsidiaries. On July 1, 1997, Munich Reinsurance Company
merged MARC into American Re-Insurance Company, the principal reinsurance
subsidiary of American Re Corporation. The minority interests in MARC's stock
held by Allianz AG and VICTORIA Versicherung AG were exchanged for minority
interests in American Re Corporation.
The information for the interim periods ended March 31, 1997, and 1996, 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 MARC's
consolidated financial statements and related notes for the years ended December
31, 1996, 1995, and 1994, which are located elsewhere in this Form 8-K filing.
F-47
<PAGE>
MUNICH AMERICAN REINSURANCE COMPANY
Consolidated Balance Sheets
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
(unaudited)
Assets: June 30, 1997 December 31, 1996
--------------------------------
<S> <C> <C>
Investments
Fixed Maturities
Bonds available for sale, at fair value (amortized cost:
June 30, 1997 - $1,249.3; December 31, 1996 - $1,114.9) ...... $1,249.3 $1,121.3
Equity securities available for sale, at fair value (cost: June 30,
1997 - $153.8; December 31, 1996 - $124.6) ................... 178.7 142.3
Other invested assets .............................................. 4.7 4.9
Cash and cash equivalents ............................................. 24.4 121.0
------------------------
Total investments and cash ................................ 1,457.1 1,389.5
Accrued investment income ............................................. 16.4 18.0
Premiums and other receivables ........................................ 152.0 149.0
Deferred policy acquisition costs ..................................... 52.6 51.2
Reinsurance recoverables on paid and unpaid losses .................... 771.6 795.4
Funds held by ceding companies ........................................ 18.7 17.9
Prepaid reinsurance premiums .......................................... 78.5 60.5
Deferred federal income taxes ......................................... 70.6 55.7
Other assets .......................................................... 10.6 25.0
------------------------
Total assets .............................................. $2,628.1 $2,562.2
========================
Liabilities:
Loss and loss adjustment expense reserves ............................. $1,802.6 $1,764.0
Unearned premium reserve .............................................. 268.0 276.0
------------------------
Total insurance reserves .................................. 2,070.6 2,040.0
Loss balances payable ................................................. 3.1 10.7
Other liabilities ..................................................... 74.0 15.3
------------------------
Total liabilities ......................................... 2,147.7 2,066.0
------------------------
Stockholders' Equity:
Common stock, par value: $1,000 per share; issued and outstanding:
June 30, 1997, and December 31, 1996 - 7,000 shares ................ 7.0 7.0
Preferred stock, par value: $1,000 per share; issued and outstanding:
June 30, 1997, and 1996 - 71,000 shares ............................ 71.0 71.0
Additional paid-in capital ............................................ 55.8 55.8
Retained earnings ..................................................... 330.4 345.7
Net unrealized appreciation of investments ............................ 16.2 16.7
------------------------
Total stockholders' equity ................................ 480.4 496.2
------------------------
Total liabilities and stockholders' equity ................ $2,628.1 $2,562.2
========================
</TABLE>
See accompanying notes to consolidated interim financial statements.
F-48
<PAGE>
MUNICH AMERICAN REINSURANCE COMPANY
Consolidated Statements of Income
(Dollars in millions)
(unaudited)
Three-month period Six-month period
ended June 30, ended June 30,
1997 1996 1997 1996
-------------------------------------
Revenue:
Premiums written ...................... $108.7 $103.6 $208.7 $212.8
Change in unearned premium reserve .... 0.9 (0.3) 3.3 (5.5)
-----------------------------------
Premiums earned .................... 109.6 103.3 212.0 207.3
Net investment income ................. 19.8 16.8 38.8 33.9
Net realized capital gains (losses) ... 6.6 (0.3) 17.5 4.3
Other income .......................... 5.7 -- (0.2) 0.1
-----------------------------------
Total revenue ...................... 141.7 119.8 268.1 245.6
-----------------------------------
Losses and expenses:
Losses and loss adjustment expenses ... 76.4 76.7 149.4 149.3
Commission expense .................... 29.5 25.1 59.2 51.7
Operating expense ..................... 81.3 6.4 87.5 12.2
-----------------------------------
Total losses and expenses .......... 187.2 108.2 296.1 213.2
-----------------------------------
Income (loss) before income ........ (45.5) 11.6 (28.0) 32.4
Federal and foreign income taxes ...... (17.6) 2.2 (14.3) 6.2
-----------------------------------
Net income (loss) to common
stockholders...................... $(27.9) $ 9.4 $(13.7) $ 26.2
===================================
See accompanying notes to consolidated interim financial statements.
F-49
<PAGE>
MUNICH AMERICAN REINSURANCE COMPANY
Consolidated Statements of Cash Flows
(Dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
Six-month period ended June 30,
1997 1996
-------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ................................................. $(13.7) $ 26.2
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in accrued investment income .................... 1.6 1.3
Decrease (increase) in premiums and other receivables .... 4.8 (29.0)
Increase in deferred policy acquisition costs ............ (1.3) (3.2)
Increase in insurance reserves ........................... 30.6 35.6
Decrease (increase) in current and deferred federal
and foreign income tax assets .......................... (24.8) 8.6
Decrease (increase) in other assets and liabilities, net . 26.9 (3.1)
Decrease (increase) in other, net ........................ (0.4) (2.4)
--------------------
Net cash provided by operating activities .............. 23.7 34.0
--------------------
Cash Flows From Investing Activities:
Investments available for sale:
Purchases ................................................ (912.9) (278.8)
Sales and maturities ..................................... 794.2 351.1
Cost of additions to property and equipment ................ -- (1.2)
--------------------
Net cash used in investing activities .................. (118.7) 71.1
--------------------
Cash Flows From Financing Activities:
Dividend to stockholders ................................... (1.6) (1.5)
--------------------
Net cash used in financing activities .................. (1.6) (1.5)
--------------------
Net decrease in cash and cash equivalents .............. (96.6) 103.6
Cash and cash equivalents, beginning of period ............... 121.0 18.7
--------------------
Cash and cash equivalents, end of period ..................... $ 24.4 $122.3
====================
</TABLE>
See accompanying notes to consolidated interim financial statements.
F-50
<PAGE>
MUNICH AMERICAN REINSURANCE COMPANY
Notes to Consolidated Interim Financial Statements
June 30, 1997
(unaudited)
1. Basis of Presentation
Munich American Reinsurance Company ("MARC") was formed in 1975 as the domestic
successor to the U.S. Branch of Munich Reinsurance Company, Munich Germany. At
December 31, 1996, MARC was wholly-owned by three large German insurance-related
companies: Munich Reinsurance Company, Munich; Allianz AG, Munich; and VICTORIA
Versicherung AG, Duesseldorf. MARC was engaged in the business of property and
casualty reinsurance and through its wholly-owned subsidiary, 111 East 50th
Street, holds an ownership interest in its home office building. Munich
Reinsurance Company was the managing partner of MARC, holding a 50% ownership
interest.
On November 25, 1996, Munich Reinsurance Company acquired American Re
Corporation and its subsidiaries. On July 1, 1997, Munich Reinsurance Company
merged MARC into American Re-Insurance Company, the principal reinsurance
subsidiary of American Re Corporation. The minority interests in MARC's stock
held by Allianz AG and VICTORIA Versicherung AG were exchanged for minority
interests in American Re Corporation.
The information for the interim periods ended June 30, 1997, and 1996, 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 MARC's
consolidated financial statements and related notes for the years ended December
31, 1996, 1995, and 1994, which are located elsewhere in this Form 8-K filing.
F-51
<PAGE>
MUNICH REINSURANCE COMPANY-UNITED STATES BRANCH
Balance Sheets
(Dollars in millions)
<TABLE>
<CAPTION>
(unaudited)
Assets: March 31, 1997 December 31, 1996
---------------------------------
<S> <C> <C>
Investments
Fixed Maturities
Bonds available for sale, at fair value (amortized cost:
March 31, 1997 - $1,237.2; December 31, 1996 - $1,149.3) ........ $1,221.8 $1,150.5
Equity securities available for sale, at fair value (cost: March 31,
1997 - $149.2; December 31, 1996 - $146.2) ...................... 167.1 167.4
Other invested assets ............................................... 1.8 1.9
Cash and cash equivalents ............................................. 35.9 107.2
------------------------
Total investments and cash .................................... 1,426.6 1,427.0
Accrued investment income ............................................. 19.7 21.9
Premiums and other receivables ........................................ 114.9 95.9
Deferred policy acquisition costs ..................................... 38.9 26.0
Reinsurance recoverables on paid and unpaid losses .................... 313.5 416.5
Funds held by ceding companies ........................................ 6.6 5.8
Prepaid reinsurance premiums .......................................... 14.9 26.7
Other assets .......................................................... 1.4 4.8
------------------------
Total assets .................................................. $1,936.5 $2,024.6
========================
Liabilities:
Loss and loss adjustment expense reserves ............................. $1,045.7 $1,122.7
Unearned premium reserve .............................................. 148.2 157.7
------------------------
Total insurance reserves ...................................... 1,193.9 1,280.4
Loss balances payable ................................................. 38.7 45.1
Other liabilities ..................................................... 18.6 18.2
------------------------
Total liabilities ............................................. 1,251.2 1,343.7
------------------------
Stockholders' Equity:
Retained earnings ..................................................... 683.9 665.0
Net unrealized appreciation of investments ............................ 1.4 15.9
------------------------
Total stockholders' equity .................................... 685.3 680.9
------------------------
Total liabilities and stockholders' equity .................... $1,936.5 $2,024.6
========================
</TABLE>
See accompanying notes to interim financial statements.
F-52
<PAGE>
MUNICH REINSURANCE COMPANY-UNITED STATES BRANCH
Statements of Income
(Dollars in millions)
(unaudited)
Three-month period
ended March 31,
1997 1996
-----------------------
Revenue:
Premiums written ............................... $126.8 $ 66.8
Change in unearned premium reserve ............. (37.0) 0.6
-----------------------
Premiums earned .............................. 89.8 67.4
Net investment income .......................... 19.4 17.5
Net realized capital gains (losses) ............ (0.5) 11.5
Other income ................................... 3.2 3.8
-----------------------
Total revenue ................................ 111.9 100.2
-----------------------
Losses and expenses:
Losses and loss adjustment expenses ............ 59.7 46.3
Commission expense ............................. 21.2 17.2
Operating expense .............................. 10.7 4.1
-----------------------
Total losses and expenses .................... 91.6 67.6
-----------------------
Income before income taxes ................... 20.3 32.6
Federal and foreign income taxes ............... 1.4 (1.4)
-----------------------
Net income to common stockholders............. $ 18.9 $ 34.0
=======================
See accompanying notes to interim financial statements.
F-53
<PAGE>
MUNICH REINSURANCE COMPANY-UNITED STATES BRANCH
Statements of Cash Flows
(Dollars in millions)
(unaudited)
Three-month period
ended March 31,
1997 1996
------------------
Cash Flows From Operating Activities:
Net income ................................................. $ 18.9 $ 34.0
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in accrued investment income .................... 2.1 3.6
Increase in premiums and other receivables ............... 95.0 53.9
Decrease (increase) in deferred policy acquisition costs . (12.9) 0.8
Decrease in insurance reserves ........................... (86.5) (46.1)
Decrease (increase) in current and deferred federal
and foreign income tax assets .......................... 0.6 (2.9)
Decrease (increase) in other assets and liabilities, net . -- 0.7
Decrease (increase) in other, net ........................ 1.2 (11.4)
----------------
Net cash provided by operating activities .............. 18.4 32.6
----------------
Cash Flows From Investing Activities:
Investments available for sale:
Purchases ................................................ (313.5) (374.5)
Sales and maturities ..................................... 227.0 357.0
Income from subsidiary investment .......................... (3.2) (3.8)
----------------
Net cash used in investing activities .................. (89.7) (21.3)
----------------
Net decrease in cash and cash equivalents .............. (71.3) 11.3
Cash and cash equivalents, beginning of period ............... 107.2 20.1
----------------
Cash and cash equivalents, end of period ..................... $ 35.9 $ 31.4
================
See accompanying notes to interim financial statements.
F-54
<PAGE>
MUNICH AMERICAN REINSURANCE COMPANY
MUNICH REINSURANCE COMPANY-UNITED STATES BRANCH
Notes to Interim Financial Statements
March 31, 1997
(unaudited)
1. Basis of Presentation
Munich Reinsurance Company - United States Branch ("U.S. Branch") was
established under the laws of the State of New York on December 23, 1955.
The U.S. Branch was established as a branch of Munich Reinsurance Company,
Munich. The U.S. Branch was engaged in the business of property and
casualty reinsurance.
On November 25, 1996, Munich Reinsurance Company acquired American Re
Corporation and its subsidiaries. On July 3, 1997, Munich Reinsurance
Company contributed the assets and liabilities of the U.S. Branch to
American Re-Insurance Company, the principal reinsurance subsidiary of
American Re Corporation.
The information for the interim periods ended March 31, 1997, and 1996, is
unaudited. The interim 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. These financial
statements should be read in conjunction with the U.S. Branch's financial
statements and related notes for the years ended December 31, 1996, 1995,
and 1994, which are located elsewhere in this Form 8-K filing.
F-55
<PAGE>
MUNICH REINSURANCE COMPANY-UNITED STATES BRANCH
Balance Sheets
(Dollars in millions)
<TABLE>
<CAPTION>
(unaudited)
Assets: June 30, 1997 December 31, 1996
--------------------------------
<S> <C> <C>
Investments
Fixed Maturities
Bonds available for sale, at fair value (amortized cost:
June 30, 1997 - $1,367.2; December 31, 1996 - $1,149.3) ........ $1,366.4 $1,150.5
Equity securities available for sale, at fair value (cost: June 30,
1997 - $104.4; December 31, 1996 - $146.2) ..................... 108.2 167.4
Other invested assets .............................................. 1.8 1.9
Cash and cash equivalents ............................................ 6.6 107.2
------------------------
Total investments and cash ................................... 1,483.0 1,427.0
Accrued investment income ............................................ 24.1 21.9
Premiums and other receivables ....................................... 83.5 95.9
Deferred policy acquisition costs .................................... 39.5 26.0
Reinsurance recoverables on paid and unpaid losses ................... 365.3 416.5
Funds held by ceding companies ....................................... 10.0 5.8
Prepaid reinsurance premiums ......................................... 16.0 26.7
Other assets ......................................................... 1.2 4.8
------------------------
Total assets ................................................. $2,022.6 $2,024.6
========================
Liabilities:
Loss and loss adjustment expense reserves ............................ $1,111.5 $1,122.7
Unearned premium reserve ............................................. 142.6 157.7
------------------------
Total insurance reserves ..................................... 1,254.1 1,280.4
Loss balances payable ................................................ 28.0 45.1
Other liabilities .................................................... 5.2 18.2
------------------------
Total liabilities ............................................ 1,287.3 1,343.7
------------------------
Stockholders' Equity:
Retained earnings .................................................... 732.1 665.0
Net unrealized appreciation of investments ........................... 3.2 15.9
------------------------
Total stockholders' equity ................................... 735.3 680.9
------------------------
Total liabilities and stockholders' equity ................... $2,022.6 $2,024.6
========================
</TABLE>
See accompanying notes to interim financial statements.
F-56
<PAGE>
MUNICH REINSURANCE COMPANY-UNITED STATES BRANCH
Statements of Income
(Dollars in millions, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three-month Six-month
Period Period
ended June 30, ended June 30,
1997 1996 1997 1996
------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Premiums written .......................... $ 85.3 $ 58.6 $212.1 $125.4
Change in unearned premium reserve ........ 5.3 4.2 (31.7) 4.8
--------------------------------------
Premiums earned ......................... 90.6 62.8 180.4 130.2
Net investment income ..................... 20.6 18.3 40.0 35.8
Net realized capital gains (losses) ....... 28.7 2.0 28.2 13.5
Other income .............................. (6.6) 1.8 (3.4) 5.6
--------------------------------------
Total revenue ........................... 133.3 84.9 245.2 185.1
--------------------------------------
Losses and expenses:
Losses and loss adjustment expenses ....... 61.3 46.5 121.1 92.8
Commission expense ........................ 23.3 14.4 44.4 31.6
Operating expense ......................... (1.2) 4.2 9.5 8.3
--------------------------------------
Total losses and expenses ............... 83.4 65.1 175.0 132.7
--------------------------------------
Income before income taxes .............. 49.9 19.8 70.2 52.4
Federal and foreign income taxes .......... 1.7 0.5 3.1 (0.9)
--------------------------------------
Net income (loss) to common stockholders. $ 48.2 $ 19.3 $ 67.1 $ 53.3
======================================
</TABLE>
See accompanying notes to interim financial statements.
F-57
<PAGE>
MUNICH REINSURANCE COMPANY-UNITED STATES BRANCH
Statements of Cash Flows
(Dollars in millions)
(unaudited)
Six-month period
ended June 30,
1997 1996
---------------
Cash Flows From Operating Activities:
Net income ................................................. $ 67.1 $ 53.3
---------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accrued investment income .................... (2.1) (0.5)
Decrease in premiums and other receivables ............... 47.8 70.9
Decrease (increase) in deferred policy acquisition costs . (13.5) 1.7
Decrease (increase) in insurance reserves ................ (26.3) (52.4)
Decrease (increase) in current and deferred federal
and foreign income tax assets .......................... 0.4 (3.0)
Decrease (increase) in other, net ........................ (27.2) (13.6)
---------------
Net cash provided by operating activities .............. 46.2 56.4
---------------
Cash Flows From Investing Activities:
Investments available for sale:
Purchases ................................................ (723.0) (602.8)
Sales and maturities ..................................... 572.8 602.1
Income from subsidiary investment .......................... 3.4 (5.5)
---------------
Net cash used in investing activities .................. (146.8) (6.2)
---------------
Net decrease in cash and cash equivalents .............. (100.6) 50.2
Cash and cash equivalents, beginning of period ............... 107.2 20.1
---------------
Cash and cash equivalents, end of period ..................... $ 6.6 $ 70.3
===============
See accompanying notes to interim financial statements.
F-58
<PAGE>
MUNICH AMERICAN REINSURANCE COMPANY
MUNICH REINSURANCE COMPANY-UNITED STATES BRANCH
Notes to Interim Financial Statements
June 30, 1997
(unaudited)
1. Basis of Presentation
Munich Reinsurance Company - United States Branch ("U.S. Branch") was
established under the laws of the State of New York on December 23, 1955.
The U.S. Branch was established as a branch of Munich Reinsurance Company,
Munich. The U.S. Branch was engaged in the business of property and
casualty reinsurance.
On November 25, 1996, Munich Reinsurance Company acquired American Re
Corporation and its subsidiaries. On July 3, 1997, Munich Reinsurance
Company contributed the assets and liabilities of the U.S. Branch to
American Re-Insurance Company, the principal reinsurance subsidiary of
American Re Corporation.
The information for the interim periods ended June 30, 1997, and 1996, is
unaudited. The interim 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. These financial
statements should be read in conjunction with the U.S. Branch's financial
statements and related notes for the years ended December 31, 1996, 1995,
and 1994, which are located elsewhere in this Form 8-K filing.
F-59
<PAGE>
INDEX TO EXHIBITS
Page
Number in
Sequential
Numbering
Exhibit No. Description System
- ----------- -------------------------------- ------
4 Agreement and Plan of Merger by and among
American Re-Insurance Company, American Re
Corporation, Munich American Reinsurance
Company, Munich Re, Munich Re U. S. Branch,
Allianz Aktiengesellschaft and VICTORIA
Versicherung AG dated as of July 1, 1997 is
incorporated by reference from the Company's
Form 8-K dated July 1, 1997 as filed with the
Securities and Exchange Commission on July 15, 1997.
10 Domestication Agreement between Munich Re,
American Re Corporation and American
Re-Insurance Company, dated as of June 24, 1997
and made effective as of July 3, 1997 is
incorporated by reference from the Company's
Form 8-K dated July 1, 1997 as filed with the
Securities and Exchange Commission on July 15, 1997.
99 American Re Press Release dated July 7, 1997 is
incorporated by reference from the Company's
Form 8-K dated July 1, 1997 as filed with the
Securities and Exchange Commission on July 15, 1997.
