<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
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(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended June 30, 1997, or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _______ to _______.
For the Quarter Ended June 30, 1997 Commission file number 1-11688
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AMERICAN RE CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 13-3672116
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 College Road East
Princeton, New Jersey 08543-5241
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(Address of principal executive offices) (zip code)
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Registrant's telephone number, including area code: (609) 243-4200
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock -$.01 par value 149.49712
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Description of Class Shares Outstanding
as of August 13, 1997
<PAGE>
AMERICAN RE CORPORATION
Index To Form 10-Q
PART I FINANCIAL INFORMATION
Item 1 -
Page
Consolidated balance sheets at June 30, 1997 (unaudited),
and December 31, 1996..................................... 1
Consolidated statements of income for the three-month and
six-month periods ended June 30, 1997, and 1996 (unaudited) 2
Consolidated statements of cash flows for the six-month
periods ended June 30, 1997, and 1996 (unaudited)......... 3
Notes to consolidated interim financial statements........ 4
Item 2 -
Management's discussion and analysis of
the Company's Results of Operations and Financial Condition 6
PART II OTHER INFORMATION 12
<PAGE>
PART I. FINANCIAL INFORMATION
AMERICAN RE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, 1997 DECEMBER 31, 1996
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<S> <C> <C>
ASSETS:
Investments
Fixed Maturities
Bonds available for sale, at fair value (amortized cost: June 30, 1997--
$3,822.2; December 31, 1996 - $3,825.8)................................... $ 3,868.5 $ 3,877.1
Preferred stock available for sale, at fair value (amortized cost: June 30,
1997--$69.5; December 31, 1996--$69.6).................................. 69.5 69.6
Equity securities available for sale, at fair value (cost: June 30, 1997--
$27.8; December 31, 1996--$11.4)............................................ 28.4 13.4
Other invested assets......................................................... 16.1 17.5
Cash and cash equivalents....................................................... 318.7 324.9
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Total investments and cash.............................................. 4,301.2 4,302.5
Accrued investment income....................................................... 63.4 65.3
Premiums and other receivables.................................................. 906.8 728.2
Deferred policy acquisition costs............................................... 283.7 259.6
Reinsurance recoverables on paid and unpaid losses.............................. 1,908.6 1,882.2
Funds held by ceding companies.................................................. 294.9 286.4
Prepaid reinsurance premiums.................................................... 141.0 134.5
Deferred federal income taxes................................................... 107.2 96.4
Other assets.................................................................... 619.4 648.5
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Total assets............................................................ $ 8,626.2 $ 8,403.6
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LIABILITIES:
Loss and loss adjustment expense reserves....................................... 4,936.1 4,891.5
Unearned premium reserve........................................................ 1,125.2 1,007.4
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Total insurance reserves................................................ 6,061.3 5,898.9
Loss balances payable........................................................... 159.2 125.1
Funds held under reinsurance treaties........................................... 225.9 165.2
Senior bank debt................................................................ 75.0 75.0
Senior notes.................................................................... 498.4 498.4
Other liabilities............................................................... 382.4 434.0
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Total liabilities....................................................... 7,402.2 7,196.6
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Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding as all of its assets
Junior Subordinated Debentures................................................ 237.5 237.5
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STOCKHOLDERS' EQUITY:
Common stock, par value: $0.01 per share; authorized: 1,000 shares; issued and
outstanding: June 30, 1997, and December 31, 1996--100 shares................. -- --
Additional paid-in capital...................................................... 785.6 785.6
Retained earnings............................................................... 207.1 184.8
Net unrealized appreciation of investments...................................... 30.5 34.7
Net unrealized loss on foreign exchange......................................... (36.7) (35.6)
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Total stockholders' equity.............................................. 986.5 969.5
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Total liabilities, Company-obligated mandatorily redeemable preferred
securities of subsidiary trust and stockholders' equity................. $ 8,626.2 $ 8,403.6
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</TABLE>
See accompanying notes to consolidated interim financial statements.
-1-
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD SIX-MONTH PERIOD
ENDED JUNE 30, ENDED JUNE 30,
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<S> <C> <C> <C> <C>
1997 1996 1997 1996
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REVENUE:
Premiums written...................................................... $ 442.0 $ 452.5 $ 1,055.8 $ 965.5
Change in unearned premium reserve.................................... 37.6 (8.8) (114.1) (105.7)
--------- --------- --------- ---------
Premiums earned..................................................... 479.6 443.7 941.7 859.8
Net investment income................................................. 66.0 60.8 131.1 120.0
Net realized capital gains (losses)................................... (0.1) (0.8) (2.0) 1.2
Other income.......................................................... 12.5 11.8 23.3 23.1
--------- --------- --------- ---------
Total revenue....................................................... 558.0 515.5 1,094.1 1,004.1
--------- --------- --------- ---------
LOSSES AND EXPENSES:
Losses and loss adjustment expenses................................... 331.6 291.9 648.8 568.6
Commission expense.................................................... 108.1 84.7 212.0 159.2
Operating expense..................................................... 50.2 35.6 89.6 68.3
Interest expense...................................................... 10.5 13.4 21.6 27.1
Other expense......................................................... 68.6 18.3 89.4 36.4
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Total losses and expenses........................................... 569.0 443.9 1,061.4 859.6
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Income before income taxes and distributions on preferred
securities of subsidiary trust.................................... (11.0) 71.6 32.7 144.5
Federal and foreign income taxes...................................... (6.7) 19.9 3.8 40.4
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Income before distributions on preferred securities of
subsidiary trust.................................................. (4.3) 51.7 28.9 104.1
Distributions on preferred securities of subsidiary trust,
net of applicable income tax of $1.7 and $3.5, respectively......... (3.3) (3.3) (6.6) (6.6)
--------- --------- --------- ---------
Net income (loss) to common stockholders............................ $ (7.6) $ 48.4 $ 22.3 $ 97.5
--------- --------- --------- ---------
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</TABLE>
See accompanying notes to consolidated interim financial statements.
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<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
JUNE 30,
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 22.3 $ 97.5
Adjustments to reconcile net income to net cash provided
by operating activities:
Decrease in accrued investment income................... 1.9 3.9
Increase in premiums and other receivables.............. (178.6) (129.6)
Increase in deferred policy acquisition costs........... (24.1) (33.1)
Increase in insurance reserves.......................... 162.3 225.2
Increase (decrease) in current and deferred federal
and foreign income tax assets......................... (11.4) 59.9
Decrease (increase) in other assets and liabilities, net 44.5 (43.8)
Depreciation expense on property and equipment.......... 4.6 3.9
Write-off of property and equipment..................... 22.7 --
Decrease (increase) in other, net....................... 25.2 (3.1)
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Net cash provided by operating activities........... 69.4 180.8
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Cash Flows From Investing Activities:
Investments available for sale:
Purchases............................................... (969.7) (1,015.7)
Maturities.............................................. 223.3 189.6
Sales................................................... 720.9 580.5
Other investments:
Purchases............................................... (0.7) (0.6)
Sales................................................... 1.5 --
Cost of additions to property and equipment............... (11.3) (8.9)
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Net cash used in investing activities................. (36.0) (255.1)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend to common stockholders........................... -- (9.0)
Repayment of loan from parent company..................... (35.9) --
Other capital contributions............................... -- 4.9
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Net cash used in financing activities................... (35.9) (4.1)
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Effect of exchange rate changes on cash and cash
equivalents................................................ (3.7) (3.4)
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Net decrease in cash and cash equivalents............... (6.2) (81.8)
Cash and cash equivalents, beginning of period.............. 324.9 294.2
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Cash and cash equivalents, end of period.................... $318.7 $212.4
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</TABLE>
See accompanying notes to consolidated interim financial statements.
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<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
June 30, 1997
(Dollars in millions, except per share amounts)
(unaudited)
1. BASIS OF PRESENTATION
American Re Corporation ("American Re" or the "Company") primarily
acts as the holding company for American Re-Insurance Company
("American Re-Insurance"), currently the second largest property
and casualty reinsurance company in the United States, based on
1996 premiums written. American Re-Insurance underwrites property
and casualty reinsurance on a direct basis in both the domestic and
international markets.
At June 30, 1997, the Company was a wholly-owned subsidiary of
Munich Reinsurance Company ("Munich Re"), a company organized under
the laws of Germany. (See Note 3 -"Subsequent Event".) Munich Re
is the world's largest reinsurance company, based on 1995 net
premiums written, according to Business Insurance.
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 the financial
statements and related notes in the Company's 1996 Form 10-K.
2. REINSURANCE
The Company reinsures certain risks to limit its exposure to
catastrophes and large or unusually hazardous risks. Although
reinsurance agreements contractually obligate the Company's
reinsurers to reimburse it for the agreed-upon portion of its gross
paid losses, they do not discharge the primary liability of the
Company. The income statement amounts for premiums written,
premiums earned and losses and loss adjustment expenses are net of
reinsurance. Direct, assumed, ceded and net amounts for these
items are as follows:
Three-month period Six-month period
ended June 30, ended June 30,
1997 1996 1997 1996
-------- -------- -------- --------
Premiums written
Direct............... $ 31.2 $ 4.4 $ 65.1 $ 7.6
Assumed.............. 520.6 542.3 1,210.9 1,188.9
Ceded................ (109.8) (94.2) (220.2) (231.0)
-------- -------- -------- --------
Net.................. 442.0 452.5 1,055.8 965.5
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-------- -------- -------- --------
Premiums earned
Direct............... 35.5 3.5 59.0 6.1
Assumed.............. 582.6 554.1 1,098.9 1,060.5
Ceded................ (138.5) (113.9) (216.2) (206.8)
-------- -------- -------- --------
Net.................. 479.6 443.7 941.7 859.8
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-------- -------- -------- --------
Losses incurred
Direct............... 33.8 (0.3) 47.5 (10.6)
Assumed.............. 388.2 371.1 692.8 681.4
Ceded................ (90.4) (78.9) (91.5) (102.2)
-------- -------- -------- --------
Net.................. $ 331.6 $ 291.9 648.8 568.6
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-4-
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
June 30, 1997
(Dollars in millions, except per share amounts)
(unaudited)
3. SUBSEQUENT EVENT
On July 1, 1997, American Re, and its parent company, Munich Re,
completed the merger of Munich American Reinsurance Company
("MARC") into American Re-Insurance, 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 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 had, on a pro forma basis, statutory net premiums
written of $1,469.6 million for the six months ended June 30, 1997,
compared to $1,303.4 million for the 1996 period. The pro forma
statutory combined ratio of the companies was 101.6% million for
the six months ended June 30, 1997, compared to 97.3% million for
the 1996 period. At June 30, 1997, pro forma statutory admitted
assets were $9,038.8 million and pro forma statutory surplus was
$2,161.1 million, compared to $8,622.0 million and $2,178.1
million, respectively, at December 31, 1996.
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<PAGE>
MANAGEMENT'S' DISCUSSION AND ANALYSIS OF THE COMPANY'S RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
EXCEPT AS EXPRESSLY INDICATED BELOW, THE FOLLOWING DISCUSSION DOES
NOT REFLECT THE TRANSACTION REFERRED TO IN FOOTNOTE 3 TO THE NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1997, COMPARED WITH QUARTER ENDED JUNE 30, 1996
The Company's net premiums written decreased 2.3% to $442.0
million for the quarter ended June 30, 1997, from $452.5 million
for the same period in 1996. The decrease in net premiums written
was primarily attributable to a 13.7% decrease in facultative net
premiums written to $109.5 million for the second quarter of 1997
from $126.9 million for the same period in 1996. The Company's
Domestic Insurance Company Operations ("DICO"), facultative net
premiums written decreased 18.8% to $68.3 million for the second
quarter of 1997 from $84.1 million for the same period in 1996.
This decrease was primarily attributable to increased
retrocessional costs, in addition to what the Company perceives to
be deteriorating market conditions in the facultative market in the
1997 period. The decrease in facultative net premiums written was
offset by a 2.1% increase in total treaty net premiums written to
$332.5 million for the second quarter of 1997 from $325.6 million
for the same period in 1996.
The Company's net premiums earned increased 8.1% to $479.6
million for the quarter ended June 30, 1997, from $443.7 million
for the same period in 1996. The increase in premiums earned was
primarily attributable to the timing of premiums earned on business
in force.
Net losses and LAE incurred increased 13.6% to $331.6 million
for the quarter ended June 30, 1997, from $291.1 million for the
same period in 1996. This increase was primarily attributable to
the increase in earned premium exposures in the second quarter of
1997, higher losses associated with such exposures, and a decrease
in facultative premiums earned in the 1997 period, which carries a
lower overall loss ratio than treaty.
Underwriting expense, consisting of commission expense plus
operating expense, increased 31.7% to $158.3 million for the
quarter ended June 30, 1997, from $120.3 million for the same
period in 1996. This increase was due to a 27.7% increase in
commission expense to $108.1 million for the second quarter of 1997
from $84.7 million for the same period in 1996. This increase was
partially due to the increase in premiums earned in the second
quarter of 1997, and a higher overall commission rate on treaty
business during the second quarter of 1997 compared to the 1996
period, in particular on new business written. Operating expenses
increased 41.2% to $50.2 million for the second quarter of 1997
from $35.6 million for the second quarter of 1996. This increase
is primarily the result of increased overhead costs, and the costs
associated with the Company's ongoing information systems and
process re-engineering effort.
The Company experienced an underwriting loss (net premiums
earned minus losses and LAE incurred and underwriting expenses) of
$10.3 million for the quarter ended June 30, 1997, compared to an
underwriting gain of $31.5 million for the same period in 1996.
The change in the underwriting result was primarily attributable to
the increases in losses and LAE and underwriting expenses. As a
result of the above, the Company's loss ratio increased to 69.1%
for the second quarter of 1997 from 65.8% for the same period in
1996, while the underwriting expense ratio increased to 33.1% for
the second quarter of 1997 from 27.1% for the same period in 1996.
The combined ratio for the quarter ended June 30, 1997, increased
to 102.2% from 92.9% for the same period in 1996.
Pre-tax net investment income increased 8.4% to $66.0 million
for the quarter ended June 30,
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<PAGE>
1997, from $60.8 million for the same period in 1996. This
increase was primarily attributable to an increase in the invested
asset base for the comparative periods. The Company's after-tax
net investment income increased by 5.3% to $47.5 million for the
quarter ended June 30, 1997, from $45.1 million for the same period
in 1996. The increase in after-tax net investment income was less
than the increase in pre-tax net investment income due to the
Company's decision to continue to increase the percentage of
taxable fixed maturity investments in its portfolio, based on tax
planning considerations.
The Company's interest expense decreased by 21.7% to $10.5
million for the quarter ended June 30, 1997, from $13.4 million for
the same period in 1996. This decrease was primarily attributable
to the lower interest rate on the senior notes outstanding during
the 1997 period, as compared to that of the senior subordinated
debt outstanding during the 1996 period. In December 1996, the
Company sold 7.45% Senior Notes, and in-substance defeased its
existing issue of 10-7/8% Senior Subordinated Debentures.
The Company realized net capital losses of $0.1 million for the
quarter ended June 30, 1997, compared to net capital losses of $0.8
million for the same period in 1996. This change was primarily due
to net capital gains of $1.2 million realized on bonds sold in the
second quarter of 1997, as compared to net capital losses of $0.8
million for same period of 1996, offset by net capital losses of
$1.0 million realized on preferred stocks sold in the second
quarter of 1997.
Other income increased by 5.9% to $12.5 million for the quarter
ended June 30, 1997, from $11.8 million for the same period in
1996. The increase in the 1997 period was attributable to an
increase in fee subsidiary revenue of $0.4 million. Other expenses
increased to $68.6 million for the second quarter of 1997 from
$18.3 million for the same period in 1996. The increase in the
1997 period was primarily attributable to one-time charges of $36.0
million associated with write-off of the value of data processing
and related equipment, and lease-related expenses. The Company
also recognized one-time employment severance and other
personnel-related charges of $6.2 million in the 1997 period. In
addition to these one-time charges, the Company also incurred an
expense of $10.1 million related to a new long-term incentive
compensation program established in the 1997 period; there was no
similar program in effect in the 1996 period.
The Company incurred a loss before income taxes and
distributions on preferred securities of $11.0 million for the
quarter ended June 30, 1997, compared to income of $71.6 million
for the same period in 1996. This resulted in federal and foreign
income tax benefits of $6.7 million for the quarter ended June 30,
1997, compared to tax expenses of $19.9 million for the same period
in 1996.
The Company recognized an after-tax charge of $3.3 million for
each of the three-month periods ended June 30, 1997 and 1996,
representing the Company's minority interest in the earnings of
American Re Capital, a single-purpose wholly owned subsidiary
trust. The charge is due to the distributions incurred by American
Re Capital on the Cumulative Quarterly Income Preferred Securities
("QUIPS").
The Company experienced a net loss to common stockholders of
$7.6 million for the quarter ended June 30, 1997, compared to net
income of $48.4 million for the same period in 1996.
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<PAGE>
SIX MONTHS ENDED JUNE 30, 1997, COMPARED WITH SIX MONTHS ENDED JUNE
30, 1996
The Company's net premiums written increased 9.4% to $1,055.8 million for
the six months ended June 30, 1997, from $965.5 million for the same period
in 1996. The increase in net premiums written was primarily attributable to
an increase in treaty net premiums written of 11.4% to $835.3 million for the
six months ended June 30, 1997 from $750.0 million for the same period in
1996. This was due to increases in both traditional treaty and treaty finite
risk premium writings. The increase in traditional treaty premiums was
primarily attributable to DICO, which increased 10.8% to $384.5 million for
the six months ended June 30, 1997, from $347.0 million for the same period
in 1996. The increase in treaty finite risk premiums was also attributable
to DICO, which increased 15.7% to $151.8 million for the six months ended
June 30, 1997, from $131.2 million for the same period in 1996, and the
Company's International Operations, which increased to $66.7 million for the
six months ended June 30, 1997, from $43.2 million for the same period in
1996. This growth resulted from both expanding existing business and adding
new accounts.
Facultative net premiums written increased 2.3% to $220.5 million for the six
months ended June 30, 1997, from $215.5 million for the same period in 1996.
Accounting for this increase was the Company's alternative market operations,
or Am-Re Managers, Inc., ("ARMI"), whose facultative net premiums written
increased 41.4% to $89.1 million for the six months ended June 30, 1997 from
$63.0 million for the same period in 1996, offset by DICO's 14.6% decrease in
facultative net premiums written to $120.4 million for the six months ended
June 30, 1997, from $141.0 million for the same period in 1996.
The Company's net premiums earned increased 9.5% to $941.7 million for
the six months ended June 30, 1997, from $859.8 million for the same period
in 1996. The increase in premiums earned was primarily attributable to the
increase in premiums written in the six months ended June 30, 1997, and the
timing of premiums earned on business in force.
Net losses and LAE incurred increased 14.1% to $648.8 million for the six
months ended June 30, 1997, from $568.6 million for the same period in 1996.
This increase was primarily attributable to the increase in earned premium
exposures in the six months ended June 30, 1997, higher losses associated
with such exposures, and a decrease in facultative premiums earned, which
carries a lower overall loss ratio than treaty.
Underwriting expense, consisting of commission expense plus operating
expense, increased 32.6% to $301.6 million for the six months ended June 30,
1997, from $227.5 million for the same period in 1996. This increase was due
to a 33.2% increase in commission expense to $212.0 million for the six
months ended June 30, 1997, from $159.2 million for the same period in 1996.
This increase was partially due to the increase in premiums earned in the six
months ended June 30, 1997, and a higher overall commission rate on treaty
business during the second quarter of 1997 compared to the 1996 period,
especially on new business written. Operating expenses increased 31.1% to
$89.6 million for the six months ended June 30, 1997 from $68.3 million for
the six months of 1996. This increase is primarily the result of increased
overhead costs, and the costs associated with the Company's ongoing
information systems and process re-engineering effort.
The Company experienced an underwriting loss (net premiums earned minus
losses and LAE incurred and underwriting expenses) of $8.8 million for the
six months ended June 30, 1997, compared to an underwriting gain of $63.7
million for the same period in 1996. The change in the underwriting result
was primarily attributable to the increases in losses and LAE and
underwriting expenses. As a result of the above, the Company's loss ratio
increased to 68.9% for the six months ended June 30, 1997 from 66.1% for the
same period in 1996, while the underwriting expense ratio increased to 32.0%
for the six months ended June 30, 1997 from 26.4% for the same period in
1996. The combined ratio for the six months ended June 30, 1997, increased
to 100.9% from 92.5% for the same period in 1996.
-8-
<PAGE>
Pre-tax net investment income increased 9.3% to $131.1 million for the
six months ended June 30, 1997, from $120.0 million for the same period in
1996. This increase was primarily attributable to an increase in the
invested asset base for the comparative periods. The Company's after-tax net
investment income increased by 6.2% to $94.8 million for the six months ended
June 30, 1997, from $89.3 million for the same period in 1996. The increase
in after-tax net investment income was less than the increase in pre-tax net
investment income due to the Company's decision to continue to increase the
percentage of taxable fixed maturity investments in its portfolio, based on
tax planning considerations.
The Company's interest expense decreased by 20.1% to $21.6 million for
the six months ended June 30, 1997, from $27.1 million for the same period in
1996. This decrease was primarily attributable to the lower interest rate on
the senior notes outstanding during the 1997 period, as compared to that of
the senior subordinated debt outstanding during the 1996 period. In December
1996, the Company sold 7.45% Senior Notes, and in-substance defeased its
existing issue of 10-7/8% Senior Subordinated Debentures.
The Company realized net capital losses of $2.0 million for the six
months ended June 30, 1997, compared to net capital gains of $1.2 million for
the same period in 1996. This change was primarily due to a $4.5 million
loss on the sale of a preferred stock holding. This capital loss was offset
net capital gains of $2.8 million realized on bonds sold in the six months
ended June 30, 1997, as compared to net capital gains of $1.2 million
realized during the same period of 1996.
Other income increased slightly to $23.3 million for the six months ended
June 30, 1997, from $23.1 million for the same period in 1996. Other
expenses increased to $89.4 million for the six months ended June 30, 1997
from $36.5 million for the same period in 1996. The increase in the 1997
period was primarily attributable to one-time charges of $36.0 million
incurred during the second quarter of 1997 related to the write-off of the
value of data processing equipment, as discussed above, and one-time
severance and other personnel related charges of $9.7 million. In addition
to these one-time charges, the Company also incurred an expense of $10.1
million related to a new long-term incentive compensation program established
in the 1997 period; there was no similar program in effect in the 1996 period.
Income before income taxes and distributions on preferred securities
decreased to $32.7 million for the six months ended June 30, 1997, from
$144.5 million for the same period in 1996. Federal and foreign income taxes
decreased to $3.8 million for the six months ended June 30, 1997, from $40.4
million for the same period in 1996.
The Company recognized an after-tax charge of $6.6 million for each of
the six-month periods ended June 30, 1997 and 1996, representing the
Company's minority interest in the earnings of American Re Capital, a
single-purpose wholly owned subsidiary trust. The charge is due to the
distributions incurred by American Re Capital on the Cumulative Quarterly
Income Preferred Securities ("QUIPS").
Net income to common stockholders decreased 77.1% to $22.3 million for
the six months ended June 30, 1997, from $97.5 million for the same period in
1996.
FINANCIAL CONDITION
Total consolidated assets increased by 2.7% to $8,626.2 million at June
30, 1997, from $8,403.6 million at December 31, 1996. This increase was
primarily due to an increase in premiums due and other receivables of $178.6
million.
The total financial statement value of investments and cash decreased
slightly to $4,301.2 million at June 30, 1997, from $4,302.5 million at
December 31, 1996, primarily due to a decrease in the fair value of
investments held. The financial statement value of the investment portfolio
at June 30, 1997,
-9-
<PAGE>
included a net increase from amortized cost to fair value of $46.9 million
for debt and equity investments, compared to a net increase of $53.4 million
at December 31, 1996. At June 30, 1997, the Company recognized a cumulative
unrealized gain of $30.5 million due to the net adjustment to fair value on
debt and equity investments, after applicable income tax effects, which was
reflected as a separate component of stockholders' equity. This represents a
net decrease to stockholders' equity of $4.2 million from the cumulative
unrealized gain on debt and equity securities of $34.7 million recognized at
December 31, 1996.
Total consolidated liabilities increased by 2.9% to $7,402.2 million at
June 30, 1997, from $7,196.6 million at December 31, 1996. This increase was
primarily due to increases in unearned premium reserves of $117.8 million,
loss and LAE reserves of $44.6 million, funds held under reinsurance
contracts of $60.7 million, and loss balances payable of $34.1 million.
These increases were offset by a $51.6 million decrease in other liabilities,
which included the repayment of a $35.9 million loan to the Company's parent,
Munich Re.
Common stockholders' equity increased 1.8% to $986.5 million at June 30,
1997, from $969.5 million at December 31, 1996. This increase was primarily
attributable to net income of $22.3 million, offset by the net market
depreciation of $4.2 million on debt and equity securities, after applicable
income tax effect, and net unrealized loss on foreign exchange of $1.1
million.
The Company's insurance/reinsurance subsidiaries' statutory surplus
decreased to $1,231.4 million at June 30, 1997, from $1,272.4 million at
December 31, 1996. Operating leverage, as measured by such subsidiaries'
premiums-to-surplus ratio, on an annualized basis was 1.62 to 1 and 1.50 to 1
at June 30, 1997, and December 31, 1996, respectively.
On July 1, 1997, American Re, and its parent company, Munich Re,
completed the merger of Munich American Reinsurance Company ("MARC") into
American Re-Insurance, 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 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 had, on a pro forma basis, statutory net premiums written of
$1,469.6 million for the six months ended June 30, 1997, compared to $1,303.4
million for the 1996 period. The pro forma statutory combined ratio of the
companies was 101.6% million for the six months ended June 30, 1997, compared
to 97.3% million for the 1996 period. At June 30, 1997, pro forma statutory
admitted assets were $9,038.8 million and pro forma statutory surplus was
$2,161.1 million, compared to $8,622.0 million and $2,178.1 million,
respectively, at December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company is an insurance holding company whose only material
investment is in the capital stock of American Re-Insurance. The Company is
dependent on dividends and tax allocation payments, primarily from American
Re-Insurance, to meet its short- and long-term liquidity requirements,
including its debt service obligations.
The Company's cash flow from operations may be influenced by a variety of
other factors, including cyclical changes in the property and casualty
reinsurance market, insurance regulatory initiatives, and changes in general
economic conditions. Liquidity requirements are met on a short- and
long-term basis by funds provided by operations and from the maturity and the
sale of investments. Cash provided by operations primarily consists of
premiums collected, investment income, and reinsurance
-10-
<PAGE>
recoverable balances collected, less paid claims (including payments made to
commute or settle reinsurance arrangements), retrocession payments,
underwriting and interest expenses, QUIPS distributions, and income tax
payments. Cash flows provided by operations for the Company were $69.4
million for the six-month period ended June 30, 1997, down from $180.8
million for the same period in 1996. This decrease was primarily due to an
increase in paid losses and underwriting expenses during the six month period
ended June 30, 1997, as compared to the same period in 1996.
Cash and cash equivalents were $318.7 million and $324.9 million at June
30, 1997, and December 31, 1996, respectively. Cash and short-term
investments are maintained for liquidity purposes and represented 7.4% and
7.5%, respectively, of total financial statement investments and cash on such
dates.
-11-
<PAGE>
PART II. OTHER INFORMATION
AMERICAN RE CORPORATION
Items 1 - 5 have been omitted as they are either inapplicable or the answer
is negative.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule is filed as part of this report.
-12-
<PAGE>
AMERICAN RE CORPORATION
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN RE CORPORATION
(Registrant)
/S/ Robert K. Burgess
----------------------------------
Robert K. Burgess
Duly Authorized Officer,
Executive Vice President,
General Counsel, and Secretary
/S/ George T. O'Shaughnessy, Jr.
-----------------------------------
George T. O'Shaughnessy, Jr.
Senior Vice President and
Chief Financial and Accounting Officer
Dated: August 13, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN RE
CORPORATION'S REPORT ON FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 3,869
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 28
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,983
<CASH> 319
<RECOVER-REINSURE> 1,909
<DEFERRED-ACQUISITION> 284
<TOTAL-ASSETS> 8,626
<POLICY-LOSSES> 4,936
<UNEARNED-PREMIUMS> 1,125
<POLICY-OTHER> 159
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 573
238<F1>
0
<COMMON> 0
<OTHER-SE> 987
<TOTAL-LIABILITY-AND-EQUITY> 8,626
942
<INVESTMENT-INCOME> 131
<INVESTMENT-GAINS> (2)
<OTHER-INCOME> 23
<BENEFITS> 649
<UNDERWRITING-AMORTIZATION> 302
<UNDERWRITING-OTHER> 111
<INCOME-PRETAX> 33
<INCOME-TAX> 4
<INCOME-CONTINUING> 29
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSUBSDIARY TRUST HOLDING AS ALL OF ITS ASSETS JUNIOR SUBORDINATED DEBENTURES.
<F2>DUE TO THE ACQUISITION OF THE COMPANY BY MUNICH RE EARNINGS PER SHARE
INFORMATION IS NO LONGER APPLICABLE.
</FN>
</TABLE>
