AMERICAN RE CORP, 10-K405, 1998-03-30

AMERICAN RE CORP
10-K405, 1998-03-30
FIRE, MARINE & CASUALTY INSURANCE

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

FORM 10-K
---------------

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997 Commission File #1-11688

AMERICAN RE CORPORATION

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 13-3672116
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>

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)

------------------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

<TABLE>
<CAPTION>
Title of Each Class Name of Each Exchange on Which Registered
<S> <C>
AMERICAN RE CAPITAL--8.5% CUMULATIVE QUARTERLY NEW YORK STOCK EXCHANGE
INCOME PREFERRED SECURITIES (AND THE GUARANTEE BY
AMERICAN RE CORPORATION WITH RESPECT THERETO)
</TABLE>

------------------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

------------------------

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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

91.33% of the Company's voting stock is owned by Munich Reinsurance Company. At
March 27, 1998, the number of shares outstanding of the registrant's common
stock was 149.49712.

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<PAGE>
AMERICAN RE CORPORATION

TABLE OF CONTENTS

PART I

1. Business........................................................................................... 1

2. Properties......................................................................................... 24

3. Legal Proceedings.................................................................................. 25

4. Submission of Matters to a Vote of Security Holders................................................ 25

PART II

5. Market for the Company's Common Equity and Related Stockholder Matters............................. 26

6. Selected Financial Information of the Company and American Re-Insurance............................ 26

7. Management's Discussion and Analysis of the Company's Results of Operations and Financial 28
Condition..........................................................................................

8. Financial Statements and Supplementary Data........................................................ 35

9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 35

PART III

10. Directors and Executive Officers of the Registrant................................................. 37

11. Executive Compensation............................................................................. 39

12. Security Ownership of Certain Beneficial Owners and Management..................................... 42

13. Certain Relationships and Related Transactions..................................................... 42

PART IV

14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................... 43
</TABLE>

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PART I

Unless indicated otherwise, all financial data presented herein are derived
from or based on the Company's consolidated financial statements prepared in
accordance with generally accepted accounting principles ("GAAP"). Statutory
data, where specifically identified as such, is presented on a combined basis
for American Re-Insurance Company and American Alternative Insurance
Corporation.

The Company's consolidated statements of income and cash flows for the year
ended December 31, 1997, represent the fully consolidated operations of American
Re, MARC, and the U.S. Branch for the period then ended, with 50% of MARC's net
loss for the six-month period ended June 30, 1997, accounted for as minority
interest. As a result, significant variances exist when comparing the results of
operations for the year ended December 31, 1997, with the same period in 1996.

This report contains certain forward-looking statements concerning the
Company's operations, economic performance and financial condition, including,
in particular the likelihood of the Company's success in developing and
expanding its business. These statements are based upon a number of assumptions
and estimates which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. Some of these assumptions
inevitably will not materialize, and unanticipated events will occur which will
affect the Company's results. Such statements may include, but are not limited
to, projections of premium revenue, investment income, other revenue, losses,
expenses, earnings, cash flows, plans for future operations, common
stockholders' equity, investments, capital plans, dividends, plans relating to
products or services of American Re, and estimates concerning the effects of
litigation or other disputes, as well as assumptions for any of the foregoing
and are generally expressed with words such as "believes," "estimates,"
"expects," "anticipates," "plans," "projects," "forecasts," "goals," "could
have," "may have" and similar expressions.

ITEM 1. BUSINESS

THE COMPANY AND AMERICAN RE-INSURANCE

American Re Corporation (the "Company" or "American Re"), is the holding
company for American Re-Insurance Company ("American Re-Insurance"), a
reinsurance company that underwrites property and casualty reinsurance on a
direct basis in the United States and international markets. American Re-
Insurance was founded in 1917 as the first U.S.-owned reinsurance company.
American Re-Insurance is one of only four direct writers of reinsurance in the
United States at December 31, 1997. Based on statutory net premiums written of
$2,491.7 million in 1997, American Re-Insurance ranked as the second largest
property and casualty reinsurer in the United States, according to the
Reinsurance Association of America. The Company had total assets of $13,288.8
million and stockholders' equity of $2,586.4 million at December 31, 1997.

The Company is a subsidiary of Munchener Ruckversicherungs-Gesellschaft
Aktiengesellschaft in Munchen ("Munich Re"), a company organized under the laws
of Germany. Munich Re is the world's largest reinsurance company, based on 1996
net premiums written, according to BUSINESS INSURANCE.

In July, 1997, American Re and Munich Re completed a series of transactions
designed to consolidate the U.S. operations of Munich Re, including (i) the
merger of Munich American Reinsurance Company ("MARC") into American
Re-Insurance, (ii) the exchange by Munich Re's United States Branch (the "U.S.
Branch"), of shares of the Company acquired in connection with the foregoing
merger and (iii) the contribution by Munich Re of the insurance-related assets
and liabilities of the U.S. Branch to American Re-Insurance in exchange for
additional shares of the Company. Prior to these transactions, MARC was owned
27.5% by Munich Re, 22.5% by the U.S. Branch, 40% by Allianz Aktiengesellschaft
("Allianz"), and 10% by VICTORIA Versicherung AG ("Victoria").

1
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As a result of these transactions (collectively, the "Merger"), the shares
of common stock held by Allianz and Victoria represent minority interests in the
Company's common stock equal to less than 9% on an aggregate basis. Munich Re
continues to own over 91% of the outstanding common stock of the Company.

On July 21, 1997, A.M. Best raised its rating of American Re-Insurance to
"A++ (Superior)", the highest of A.M. Best's 15 qualitative ratings. "A++
(Superior)" is assigned by A.M. Best to those companies which, in its opinion,
have demonstrated superior overall performance when compared to the standards
established by A.M. Best and have demonstrated a very strong ability to meet
their policyholder and other contractual obligations over a long period of time.
According to A.M. Best, the objectives of its rating system are to evaluate the
factors affecting overall performance of an insurance or reinsurance company and
to provide A.M. Best's opinion of the company's relative financial strength and
ability to meet its obligation to policyholders currently and in the future.

On December 20, 1997, Standard & Poor's Corporation ("S&P") raised American
Re-Insurance's claims paying ability rating to "AAA." A "AAA" rating represents
the highest of S&P's ratings. A rating of "AAA" is assigned by S&P to those
companies which, in its opinion, have superior financial security on an absolute
and relative basis and their capacity to meet policyholder obligations is
overwhelming under a variety of economic and underwriting conditions.

On December 13, 1996, Moody's Investors Service ("Moody's") raised American
Re-Insurance's financial strength rating to "Aaa." The "Aaa" rating represents
the highest of Moody's 19 qualitative ratings. A rating of "Aaa" is assigned by
Moody's to those companies which, in Moody's opinion, offer exceptional
financial security.

There can be no assurance that American Re-Insurance will continue to be
rated "A++ (Superior)" by A.M. Best, "AAA" by S&P, or Aaa by Moody's.

2
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OVERVIEW OF THE REINSURANCE INDUSTRY

Reinsurance is a form of insurance in which a reinsurer indemnifies a
primary insurer against part or all of the liability assumed by the primary
insurer under one or more insurance policies. Reinsurance provides a primary
insurer with several major benefits, including a reduction in net liability on
individual risks, protection against catastrophic losses and assistance in
maintaining acceptable financial ratios. Reinsurance also provides a primary
insurer with additional underwriting capacity in that the primary insurer can
accept larger risks and can expand the book of business it underwrites at a
faster rate than would be possible while maintaining acceptable financial ratios
without a corresponding increase in its capital and surplus position.

There are two basic types of reinsurance agreements: treaty contracts and
facultative certificates. A treaty is an agreement between a primary insurer and
a reinsurer under which the primary insurer is required to cede and the
reinsurer is required to assume a specified portion of a type or category of
risks insured by the primary insurer under designated types of policies issued
during the term of the treaty contract. Under a facultative certificate, the
primary insurer cedes and the reinsurer assumes all or part of the risks insured
under a single primary insurance policy. A facultative certificate is separately
negotiated for each risk or group of risks ceded. Facultative reinsurance is
normally purchased by insurance companies for individual risks not covered by
their reinsurance treaties, for limits in excess of those provided in their
reinsurance treaties, and for unusual risks.

Reinsurers indemnify primary insurers in treaties and facultative
certificates on either a pro rata or excess of loss basis. In the case of pro
rata reinsurance, the reinsurer, in return for a predetermined portion or share
of the insurance premium charged by the primary insurer, indemnifies the primary
insurer against a predetermined portion of the losses and loss adjustment
expenses ("LAE") of the primary insurer under the covered primary policy or
policies. In the case of excess of loss reinsurance, the reinsurer indemnifies
the primary insurer against all or a specific portion of losses on underlying
insurance policies in excess of a specified dollar amount, known as the
"retention" or "attachment point," most often subject to a negotiated limit.
Premiums payable to the reinsurer by the primary insurer for excess of loss
coverage are not directly proportional to the premiums the primary insurer
receives because the reinsurer does not assume a proportionate risk.

Excess of loss reinsurance is often written in layers, possibly involving
multiple reinsurers. Excess of loss reinsurance allows the reinsurer to better
control the relationship of the premium charged to the exposures assumed. The
reinsurer taking on the risk just above the primary insurer's retention layer is
said to write "working layer" or "low layer" excess of loss reinsurance. A loss
that reaches just beyond the primary insurer's retention layer will create a
loss for the lower layer reinsurer, but not for the reinsurers on higher layers.
Losses incurred in low layer reinsurance tend to be more predictable than those
in high layers due to a higher expected frequency of losses.

Reinsurers typically purchase reinsurance to cover their own risk exposure.
The insurance or indemnification of reinsurance is called a retrocession.
Reinsurance companies cede risks under retrocessional agreements to other
reinsurers, commonly referred to as retrocessionaires, 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 financial ratios and to obtain additional underwriting capacity. See
"--Risk Management and Retrocession Arrangements."

BUSINESS STRATEGY

The Company's business objective is to maximize profitability throughout the
property and casualty underwriting cycle. The Company seeks to achieve this
objective through a strategy of (i) marketing based upon client needs, referred
to as its "whole account" approach, (ii) capitalizing on its financial resources

3
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and position as a direct writer by emphasizing long-term client relationships,
(iii) adjusting its mix of business to react to changing market conditions, (iv)
maintaining a conservative investment portfolio and (v) utilizing prudent
actuarial practices in pricing its business and establishing its loss and LAE
reserves.

In marketing its products, the Company has developed the whole account
approach pursuant to which each client is assigned a team of specialists
including treaty, facultative and other services specialists, headed by a client
relationship manager. The Company's financial resources and client base allow it
to maintain a large staff of talented specialists focusing on these service
areas. The whole account approach allows the Company to make available to
clients products and services closely tailored to their needs, and to integrate
the marketing of its products and services with the underwriting of reinsurance
risks. These services include investment management, risk management, actuarial
analysis, financial analysis, claims management, data processing, due diligence
for mergers and acquisitions, reinsurance and insurance brokerage, captive and
risk retention group management services and underwriting management services.
See "--Fee-Based Services."

The Company adjusts its mix of business as market conditions change and
opportunities arise (e.g., property versus casualty, excess of loss versus pro
rata, low versus moderate versus high hazard and attachment point). In the
protracted soft market that currently exists, the Company tends to write more
excess of loss business and opportunistic pro-rata treaties in order to better
control the relationship between premiums received and the risk exposure
underwritten. The Company also seeks to adjust its premiums written from period
to period between the traditional and alternative markets, and domestic and
international markets, based on opportunities presented.

The Company follows a conservative investment strategy that primarily
emphasizes maintaining a high-quality fixed income investment portfolio that
generates high current income. The Company's current investment strategy does
not contemplate material investment in non-investment grade securities,
commercial real estate, or commercial mortgages. However, the Company has
recently begun investing a prudent portion of its investment portfolio in
publicly traded equity securities.

The Company employs a staff of actuaries who are integrated into all of its
major operating processes that include: account selection; risk evaluation;
rating and pricing; return on equity modeling; consulting assistance to clients;
and establishment of the Company's loss and LAE reserves. The Company believes
this integration allows for a comprehensive, technical approach to pricing its
business. Different actuarial units support the pricing for each of the
Company's operating divisions. The Company also maintains a Reserve Analysis
Unit which is responsible for continuously monitoring the Company's loss reserve
position. This Unit works together with the rating and pricing actuaries in
evaluating the Company's loss reserve position relative to its pricing levels
and mix of business.

The Company manages and diversifies its risk through the careful
underwriting of risks, active claims management, the purchase of its
retrocessional coverage and the selective commutation of certain reinsurance
contracts. The Company's normal business practice is to retrocede that portion
of risks presenting severity loss potential and to purchase additional
reinsurance for catastrophic events. See "-- Risk Management and Retrocessional
Arrangements."

MARKETING AND CUSTOMERS

American Re's treaty and facultative products are marketed domestically to
insurance companies by the Company's Domestic Insurance Company Operations
("DICO") and to the alternative market by AM-RE Managers ("ARMI").
Internationally, both types of products are marketed through International

4
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Operations. See "--International Operations." Net written premium by operating
unit by reinsurance type was as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
$ % $ % $ %
--------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
DICO
Treaty........................... $ 1,304.1 52.2% $ 847.8 44.6% $ 672.9 41.3%
Facultative...................... 486.7 19.5 329.7 17.3 282.5 17.3
--------- --------- --------- --------- --------- ---------
Total........................ 1,790.8 71.7 1,177.5 61.9 955.4 58.6
ARMI
Treaty........................... 96.4 3.9 99.5 5.2 101.1 6.2
Facultative...................... 177.4 7.1 182.8 9.6 192.5 11.8
--------- --------- --------- --------- --------- ---------
Total........................ 273.8 11.0 282.3 14.8 293.6 18.0
International Operations
Treaty........................... 405.5 16.2 411.4 21.6 354.2 21.8
Facultative...................... 27.6 1.1 31.2 1.7 26.3 1.6
--------- --------- --------- --------- --------- ---------
Total........................ 433.1 17.3 442.6 23.3 380.5 23.4
Consolidated
Treaty........................... 1,806.0 72.3 1,358.7 71.4 1,128.2 69.3
Facultative...................... 691.7 27.7 543.7 28.6 501.3 30.7
--------- --------- --------- --------- --------- ---------
Grand Total.................. $ 2,497.7 100.0% $ 1,902.4 100.0% $ 1,629.5 100.0%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>

Treaty marketing to insurance company clients through DICO currently focuses
on small to medium sized regional property and casualty insurers with annual
gross premiums of less than $500 million. In addition, DICO's recent marketing
strategy has been broadened, to include a variety of differing insurance
concerns, which include: large account specialists, national multiline insurers,
personal lines companies, excess and specialty writers and professional line
specialists. DICO's facultative business is marketed to both large primary
insurers that comprise the largest segment of the commercial insurance market
and smaller regional primary insurers whose commercial insurance risks are more
limited in volume and scope.

The Company's insurance and reinsurance marketing efforts in the alternative
market through ARMI focus on large commercial insurance buyers, such as major
corporations and governmental entities, seeking alternatives to the primary
insurance companies that traditionally service these insurance buyers. These
large commercial enterprises, which retain or self-insure risks (through
captives, risk retention groups or other means) as an alternative to procuring
traditional insurance, are developing the same financial concerns and
administrative characteristics as insurance companies as they retain increasing
levels of risk. ARMI works with insurance brokers, ultimate insureds and their
captives or risk retention groups to provide specialized insurance/reinsurance
coverages to fit their particular needs. To assist in its reinsurance business,
American Re also operates with a primary insurance company, American Alternative
Insurance Corporation ("American Alternative"), which primarily serves
alternative market clients in addition to some DICO clients. (American
Alternative and American Re-Insurance together are the "insurance/ reinsurance
subsidiaries.")

International Operations markets both treaty and facultative reinsurance
outside the United States. International Operations maintains offices in
fourteen major international cities: Beijing, Bogota, Brussels, Buenos Aires,
Cairo, London, Melbourne, Mexico City, Montreal, Santiago, Singapore, Sydney,
Tokyo and Toronto. The geographic diversity of the international market for
reinsurance requires decentralized

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operations. To maintain quality performance under these circumstances,
International Operations has staffed its offices with experienced local
personnel. Approximately 59% of International Operations' business is treaty
property, which includes ocean marine and aviation business.

The Company underwrites its business on a worldwide basis for many different
clients and for many lines of property/casualty business. Its products provide a
broad array of coverages. However, the amount of business written with respect
to a particular customer is not the sole basis for determining the risk in the
Company's exposure to such customer. Many factors such as net retentions, loss
exposures and loss expense ratios must be evaluated to determine such exposure.
Taking all of these factors into account, the net income of the Company is not
materially dependent on a single customer, small group of customers, line of
business or geographical area. The Company believes the loss of any single
customer would not have a material adverse effect on its financial condition or
earnings.

INSURANCE/REINSURANCE UNDERWRITING

The Company's property and casualty insurance/reinsurance business includes
the insurance/reinsurance of risks set forth in the following table by statutory
annual statement line of business classifications for the years ended December
31, as indicated:

<TABLE>
<CAPTION>
GAAP NET PREMIUMS WRITTEN
----------------------------------------------------------------
% OF % OF % OF
LINE OF BUSINESS 1997 TOTAL 1996 TOTAL 1995 TOTAL
- ---------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Fire.......................................... $ 194.1 7.8% $ 161.3 8.5% $ 170.0 10.4%
Allied lines.................................. 35.2 1.4 29.0 1.5 26.7 1.6
Homeowners multi peril........................ 69.2 2.8 53.9 2.8 34.5 2.1
Commercial multi peril........................ 288.5 11.5 179.2 9.4 177.7 10.9
Ocean marine.................................. 86.5 3.4 65.5 3.4 62.2 3.8
Inland marine................................. 46.6 1.9 23.1 1.2 26.0 1.6
Earthquake.................................... 25.8 1.0 26.8 1.4 24.2 1.5
Workers' compensation......................... 367.6 14.7 411.1 21.6 338.3 20.8
Other liability............................... 407.2 16.3 384.7 20.2 310.6 19.1
Auto liability................................ 586.7 23.5 367.8 19.3 282.0 17.3
Auto physical damage.......................... 144.3 5.8 48.9 2.6 30.6 1.9
Fidelity and surety........................... 52.0 2.1 48.7 2.6 37.3 2.3
Other(1)...................................... 194.0 7.8 102.4 5.5 109.4 6.7
--------- --------- --------- --------- --------- ---------
Line of business total........................ $ 2,497.7 100.0% $ 1,902.4 100.0% $ 1,629.5 100.0%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>

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(1) Includes premium amounts for lines of business such as, group and other
accident and health, aircraft, glass, burglary and theft, boiler and
machinery, credit, international bulk class codes, and American Re-Insurance
Company (Chile) S.A.

The Company generally seeks to avoid assuming material exposures for
asbestos, environmental and other difficult risks. When, in the opinion of
management, such exposures may be material under a particular contract, the
insurance/reinsurance subsidiaries either exclude the exposure, set a limit for
the potential for losses, or gain assurance that the ceding company is following
conservative and professional claims and underwriting practices. See "--Reserves
for Unpaid Losses and Loss Adjustment Expenses."

In 1997, approximately 72%, or $1,806.0 million, of net premiums written
were on a treaty basis, with the balance written on a facultative basis. This is
consistent with the trend since 1993, when approximately 70%, or $952.5 million,
of net premiums were written on a treaty basis and the remainder on a
facultative basis. See the table "Summary Underwriting Data".

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The mix of insurance/reinsurance business based on statutory gross premiums
written is set forth in the following table for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- -------------------- -------------------- -------------------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Treaty Property
Pro Rata................ $ 658.6 21.5% $ 467.1 20.3% $ 419.4 20.9% $ 353.3 18.4% $ 320.0
Excess.................. 311.5 10.1 212.3 9.2 245.2 12.2 212.0 11.0 218.9
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total............... 970.1 31.6 679.4 29.5 664.6 33.1 565.3 29.4 538.9
Treaty Casualty
Pro rata................ 686.3 22.4 583.2 25.3 374.5 18.6 410.8 21.4 345.1
Excess.................. 452.3 14.7 311.3 13.5 320.2 16.0 360.9 18.8 245.3
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total............... 1,138.6 37.1 894.5 38.8 694.7 34.6 771.7 40.2 590.4
Facultative Property
Pro rata................ 71.5 2.3 73.0 3.2 59.1 3.0 56.0 2.9 51.1
Excess.................. 200.9 6.5 107.6 4.7 88.8 4.4 63.2 3.3 62.2
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total............... 272.4 8.8 180.6 7.9 147.9 7.4 119.2 6.2 113.3
Facultative Casualty
Pro rata................ 34.3 1.1 2.5 0.1 0.2 0.0 0.6 0.0 1.7
Excess.................. 655.5 21.4 546.6 23.7 499.2 24.9 466.3 24.2 393.3
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total............... 689.8 22.5 549.1 23.8 499.4 24.9 466.9 24.2 395.0
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Grand Total......... $ 3,070.9 100.0% $ 2,303.6 100.0% $ 2,006.6 100.0% $ 1,923.1 100.0% $ 1,637.6
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------

<S> <C>
Treaty Property
Pro Rata................ 19.5%
Excess.................. 13.4
---------
Total............... 32.9
Treaty Casualty
Pro rata................ 21.1
Excess.................. 15.0
---------
Total............... 36.1
Facultative Property
Pro rata................ 3.1
Excess.................. 3.8
---------
Total............... 6.9
Facultative Casualty
Pro rata................ 0.0
Excess.................. 24.1
---------
Total............... 24.1
---------
Grand Total......... 100.0%
---------
---------
</TABLE>

Excess of loss reinsurance is written on all layers of reinsurance, from the
lower ("working") layers to the higher layers where claims are not reported
until working layer coverage has been exhausted. Much of the Company's recent
pro rata treaty growth emanates from several new treaties with growth-oriented,
regional insurance companies, and various managing general agency arrangements.

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The following table sets forth certain information with respect to the
treaty and facultative reinsurance written by American Re-Insurance for the
periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Net Premiums Written:
Treaty................................................ $ 1,806.0 $ 1,358.7 $ 1,128.2 $ 1,103.1 $ 952.5
Facultative........................................... 691.7 543.7 501.3 450.2 410.9
--------- --------- --------- --------- ---------
Total net premiums written............................ $ 2,497.7 $ 1,902.4 $ 1,629.5 $ 1,553.3 $ 1,363.4
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net premiums earned:
Treaty................................................ 1,782.6 $ 1,304.8 $ 1,075.6 $ 1,047.4 $ 886.1
Facultative........................................... 703.5 491.9 455.3 414.0 363.8
--------- --------- --------- --------- ---------
Total net premiums earned............................. $ 2,486.1 $ 1,796.7 $ 1,530.9 $ 1,461.4 $ 1,249.9
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Losses and LAE:
Treaty................................................ $ 1,273.1 $ 909.4 $ 876.1 $ 761.6 $ 605.6
Facultative........................................... 443.2 258.4 464.1 249.4 191.3
--------- --------- --------- --------- ---------
Total losses and LAE.................................. $ 1,716.3 $ 1,167.8 $ 1,340.2(1) $ 1,011.0 $ 796.9
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Underwriting expenses:
Treaty................................................ $ 573.0 $ 377.9 $ 309.1 $ 298.3 $ 280.0
Facultative........................................... 265.4 155.6 143.3 141.0 123.5
--------- --------- --------- --------- ---------
Total underwriting expenses........................... $ 838.4 $ 533.5 $ 452.4 $ 439.3 $ 403.5
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Underwriting gains (losses):
Treaty................................................ $ (63.5) $ 17.5 $ (109.6) $ (12.5) $ 0.5
Facultative........................................... (5.1) 77.9 (152.1) 23.6 49.0
--------- --------- --------- --------- ---------
Total underwriting gains (losses)..................... $ (68.6) $ 95.4 $ (261.7) $ 11.1 $ 49.5
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Loss and LAE ratios:
Treaty................................................ 71.4% 69.7% 81.4% 72.7% 69.3%
Facultative........................................... 63.0 52.5 101.9 60.3 52.3
Total loss and LAE ratios............................. 69.0% 65.0% 87.5%(1) 69.2% 63.8%
Underwriting expense ratios:
Treaty................................................ 32.1% 29.0% 28.7% 28.5% 31.6%
Facultative........................................... 37.7 31.6 31.5 34.1 34.0
Total underwriting expense ratios..................... 33.8% 29.7% 29.6% 30.0% 32.3%
Combined ratios:
Treaty................................................ 103.5% 98.7% 110.1% 101.2% 99.9%
Facultative........................................... 100.7 84.1 133.4 94.4 86.3
Total combined ratios................................. 102.8% 94.7% 117.1% 99.2% 96.1%
Statutory combined ratios:
Treaty................................................ 106.3% 101.1% 115.7% 106.3% 103.9%
Facultative........................................... 98.1 84.9 133.0 96.7 87.9
Total statutory combined ratios........................... 103.9% 96.6% 121.0% 103.8% 99.5%
</TABLE>

- ------------------------

(1) The increase in 1995 was primarily due to the charge for loss reserve
strengthening for Latent Liability Exposures. See "Reserves for Unpaid
Losses and Loss Adjustment Expenses--CHARGE FOR LOSS RESERVE STRENGTHENING."

FACULTATIVE REINSURANCE. Under a facultative certificate, the primary
insurer cedes and the reinsurer assumes part or all of the risks insured by the
primary insurer under a single primary insurance policy. Facultative
reinsurance, therefore, involves a review of each individual risk, with the
reinsurer having the right to accept or reject each risk. Because facultative
reinsurance usually involves the assumption of greater risks than treaty
reinsurance and is sold in separate transactions, facultative reinsurance is
typically priced for higher profit margins than treaty business. However, the
reinsurer's losses may be higher for facultative business because the reinsurer
may assume a higher potential liability and because the risks

8
<PAGE>
involved may be more volatile. In addition, underwriting expenses and, in
particular, personnel costs, are higher on facultative business because each
risk is individually underwritten and administered.

The Company's emphasis on direct underwriting has enabled it to develop many
stable facultative relationships, which allow a large proportion of the
facultative risks to be assumed on a "program" basis. Under this approach, which
encompasses treaty concepts, pricing is agreed upon in advance for homogeneous
risks and such risks are assumed without individual review, subject only to
after-the-fact review and rejection as appropriate.

Facultative underwriters are given underwriting guidelines specifying the
classes of risks that may be underwritten and outlining the limits and risk
exposure sought. Specified classes of risks and large premium risks must be
referred to the home office for specific review before premium quotations are
given to clients. In addition, certain classes of risks must be submitted for
review regardless of the size of the reinsurance premium or size of the insured
on the underlying policy being reinsured because of their aggregate limits,
complexity or volatility. The Company utilizes internal control review
procedures to verify that these guidelines are adhered to.

TREATY REINSURANCE. A treaty is a contractual arrangement between a primary
insurer and a reinsurer under which the primary insurer must cede and the
reinsurer must assume a specified portion of a type or category of risks.
Accordingly, under its treaties, the Company assumes risks without having
reviewed them individually, but rather, the review is on an overall portfolio
basis.

The Company actively solicits treaty clients that meet its underwriting
criteria. Net treaty premium volume has grown approximately 90% from 1993 to
1997 due to premiums written from new clients, expansion of existing client
accounts, and in 1997, the combination of results from MARC and the U.S. Branch.

Through underwriting procedures, treaties are screened for compliance with
general standards for ceding insurers and risks to be assumed and are then
priced based on actuarial models the Company has developed. The actuarial models
are tailored in each case to the risk exposures underlying the specific treaty
and the loss experience for the risk covered thereunder. The Company determines
whether to write or renew a particular treaty by considering many factors,
including its past experience with the client, the types of risks to be covered,
total exposure to risks underwritten by the client or to the type of risk to be
assumed, and its evaluation of the client's financial strength, claims handling
ability, and overall underwriting capability.

Generally, it is the Company's policy to conduct underwriting and claims
audits of a client company before entering into any treaty with that client.
Underwriting audits focus on the quality of the potential client's underwriting
staff, the selection and pricing of risks, and its price monitoring system.
Claims audits measure the success of the potential client in controlling claims
and related costs and its ability to evaluate exposures quickly and to report
them promptly. Once a treaty has been entered into, underwriting and claims
audits of the client are regularly conducted as needed. Periodic reviews of
clients' compliance with their reporting obligations under their reinsurance
agreements are made.

9
<PAGE>
INTERNATIONAL OPERATIONS

The following table presents information with respect to the International
Operations net premiums written by region for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
REGION 1997 TOTAL 1996 TOTAL 1995 TOTAL
- --------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Australia.................................... $ 23.8 5.5% $ 30.4 6.9% $ 19.8 5.2%
Canada....................................... 31.7 7.3 29.0 6.6 26.0 6.8
Europe....................................... 88.4 20.4 108.5 24.5 102.0 26.8
Far East..................................... 15.7 3.6 20.6 4.7 21.2 5.6
Latin America................................ 128.2 29.6 110.9 25.0 97.5 25.6
Middle East.................................. 12.5 2.9 17.4 3.9 14.9 3.9
Southeast Asia............................... 20.3 4.7 18.9 4.3 19.0 5.0
Ocean Marine/Other(1)........................ 112.5 26.0 106.9 24.1 80.1 21.1
--------- --------- --------- --------- --------- ---------
Region total................................. $ 433.1 100.0% $ 442.6 100.0% $ 380.5 100.0%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>

- ------------------------
(1) Includes ocean marine net premiums written that were underwritten in the New
York office of $78.9 million, $47.5 million, and $44.3 million, for the
years ended 1997, 1996, and 1995 respectively. Includes other international
net premiums written, that were underwritten in the Princeton, New Jersey
office of $87.5 million, $76.3 million, and $49.4 million, for the years
ended 1997, 1996, and 1995 respectively. Also includes corporate
retrocessional charges of $(54.0) million, $(16.9) million, and $(13.6)
million, for the years ended 1997, 1996, and 1995 respectively.

Substantially the same underwriting and reserve procedures are utilized for
domestic and international reinsurance operations, although local political,
economic and other factors are considered in pricing models, reserving
evaluations and underwriting decisions. Underwriting standards for International
Operations are maintained through a series of written guidelines authorized by
the senior management of International Operations. Similarly, local limitations
on the commitment of resources granted to each international location are
controlled by International Operations' senior management and reviewed at least
annually. Underwriting opportunities that fall outside the established class
and/or limit parameters are referred to home office underwriters for evaluation
prior to commitment.

FEE-BASED SERVICES

In addition to its core reinsurance business, the Company, through various
subsidiaries, offers a broad array of related services. These services include
investment management, risk management, underwriting management, actuarial
analysis, financial analysis, claims management, data processing, due diligence
consulting for mergers and acquisitions, reinsurance and insurance brokerage,
and captive and risk retention group management services. Such services have
generated fees from clients of $41.2 million, $46.7 million, and $34.0 million
in 1997, 1996, and 1995, respectively.

INVESTMENTS

Munich Re Capital Management ("MRCM"), an affiliated investment advisor, is
responsible for the management of the fixed income portion of the Company's
portfolio. American Re Asset Management ("ARAM"), the Company's registered
investment advisor, which was previously responsible for a portion of the fixed
income portion of the portfolio, is now responsible for the Company's equity
investments, in addition to providing operational support and advisory services
to the Company. The Company employs two other investment advisory firms that
manage portions of the Company's investment portfolio, one of whom specializes
in foreign currency-denominated investments. These firms were chosen for their
extensive experience with portfolio management, and the particular requirements
of American Re.

10
<PAGE>
The Company follows a conservative investment strategy that emphasizes
maintaining a high-quality investment portfolio and maximizing after-tax current
income. The composition of the Company's investment portfolio for the periods
ending December 31, was as follows:

FAIR VALUE BASIS

<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Fixed Maturities:
U.S. Government and government agency bonds..... $ 1,150.6 15.0% $ 1,242.4 17.7%
Municipal bonds................................. 1,763.8 23.0 1,587.7 22.7
Mortgage backed securities...................... 1,023.5 13.3 1,164.9 16.6
Domestic corporate bonds........................ 1,889.3 24.6 1,615.9 23.0
Foreign bonds................................... 817.0 10.6 538.0 7.7
Redeemable preferred stock...................... 71.4 1.0 69.6 1.0
Equity securities................................... 293.3 3.8 211.5 3.0
Other investments................................... 22.9 0.3 24.2 0.4
Cash and cash equivalents........................... 641.6 8.4 553.1 7.9
--------- --------- --------- ---------
Total fair value............................ $ 7,673.4 100.0% $ 7,007.3 100.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

The net increase in the financial statement value of investments and cash
reflects underwriting results, reinvestment of investment income received,
interest expense, income tax payments, and fair value adjustments on bonds
classified as available for sale. There were $6,644.2 million and $6,148.9
million of bonds carried at fair value as available for sale securities at
December 31, 1997 and 1996, respectively.

The modified duration of the Company's bond portfolio, was estimated at 4.25
and 4.65 years at December 31, 1997, and 1996, respectively. The Company
monitors the estimated duration of its insurance/reinsurance subsidiaries' asset
position (3.5 years at December 31, 1997) and its insurance/reinsurance
subsidiaries' liability position (3.1 years at December 31, 1997) to determine
the strategic direction of its investment portfolio. In 1997, the Company
primarily purchased taxable investments and increased purchases of tax-exempt
investments, based on tax planning considerations. In 1996, the Company also
primarily purchased taxable investments.

The following table reflects investment results for the three-year period
indicated:

INVESTMENT RESULTS

<TABLE>
<CAPTION>
AVERAGE PRE-TAX NET PRE-TAX
INVESTMENTS INVESTMENT EFFECTIVE REALIZED NET
(1) INCOME (2) YIELD (3) CAPITAL GAINS
-------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Year ended December 31,
1997..................................................... $ 7,340.4 $ 427.5 5.8% $ 87.7
1996..................................................... 4,130.0 248.2 6.0 4.8
1995..................................................... 3,633.2 222.6 6.1 4.7
</TABLE>

- ------------------------

(1) Simple average of beginning-of-period and end-of-period financial statement
investments and cash for applicable periods. 1996 end-of-period total is not
restated for the effects of the Merger. 1997 beginning-of-period total has
been restated for the effects of the Merger. See "Management's Discussion
and Analysis of the Company's Results of Operations and Financial
Condition."

(2) After investment expenses, excluding net realized capital gains.

(3) Net pre-tax investment income for the period divided by average investments
for the same period.

11
<PAGE>
The following table indicates the composition of the Company's bond
portfolio by rating as assigned by Standard & Poor's at December 31:

FAIR VALUE BASIS

<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
AAA.................................................... $ 3,815.7 57.4% $ 3,659.9 59.5%
AA..................................................... 1,598.9 24.1 1,478.6 24.1
A...................................................... 915.3 13.8 681.4 11.1
BBB.................................................... 121.0 1.8 124.0 2.0
BB and below and not rated............................. 193.3 2.9 205.0 3.3
--------- --------- --------- ---------
Total fair value................................. $ 6,644.2 100.0% $ 6,148.9 100.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

The following table indicates the composition of the Company's bond
portfolio by contractual maturity date at December 31:

FAIR VALUE BASIS

<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
One year or less....................................... $ 433.0 6.5% $ 401.5 6.5%
Over one year through five years....................... 1,691.8 25.5 1,648.7 26.8
Over five years through ten years...................... 2,275.7 34.3 2,141.6 34.9
Over ten years......................................... 1,220.2 18.3 792.2 12.9
Mortgage backed securities............................. 1,023.5 15.4 1,164.9 18.9
--------- --------- --------- ---------
Total fair value................................. $ 6,644.2 100.0% $ 6,148.9 100.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

At December 31, 1997 American Re-Insurance held approximately $101.8 million
of strategic investments, mostly in its client companies, in the form of senior
debt, subordinated debt, and preferred or common securities. The Company
considers client company investments to be an important part of its whole
account marketing approach. These client company investments allow American
Re-Insurance an opportunity to integrate its various products and services, such
as investment management and reinsurance brokerage, with the underwriting of
reinsurance risks, adding value to these client relationships. While such
investments are not expected to become a material part of the overall investment
portfolio, American Re-Insurance will continue to engage in client company
investment opportunities on a selected basis.

The Company continues to seek opportunities to enhance investment yield
primarily through a conservative, fixed maturity investment strategy, while
investigating various nontraditional investment opportunities. The Company also
monitors investment and liability duration to ensure optimal investment
performance. In addition, the Company continues to invest at a range of
maturities to ensure a consistent maturity profile, thereby minimizing the need
for security sales to raise liquidity levels. The Company continually tracks the
allocation of the bond portfolio invested in tax-advantaged securities, based on
tax planning considerations and their value relative to taxable investments.

RESERVES FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

GENERAL. The insurance/reinsurance subsidiaries are required to maintain
reserves to cover their estimated ultimate liability for losses and LAE with
respect to reported and unreported claims incurred as of the end of each
accounting period (net of estimated related salvage and subrogation claims).
These

12
<PAGE>
reserves are estimates that involve actuarial and statistical projections of the
expected cost of the ultimate settlement and administration of claims based on
facts and circumstances then known, predictions of future events, estimates of
future trends in claims severity and other variable factors. The inherent
uncertainties of estimating loss reserves are exacerbated 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 (the "tail"). As a consequence, actual losses
and LAE paid may deviate, perhaps substantially, from estimates reflected in the
insurance/reinsurance subsidiaries' reserves in their financial statements. If
actual net losses and LAE paid exceed the insurance/reinsurance subsidiaries'
net reserves, the Company's net income will be reduced in the year determined.

When a claim is reported to a ceding company, its claims personnel establish
a "case reserve" for the estimated amount of the ultimate payment. The estimate
reflects the informed judgment of such personnel based on general insurance
reserving practices and on the experience and knowledge of such personnel
regarding the nature and value of the specific type of claim. The Company, in
turn, typically establishes a case reserve when it receives notice of a claim
from the ceding company. Such reserves are based on an independent evaluation by
the Claims Division, taking into consideration coverage, liability, severity of
injury or damage, jurisdiction, an assessment of the ceding company's ability to
evaluate and handle the claim and the amount of reserves recommended by the
ceding company. Case reserves are adjusted periodically by the Claims Division
based on subsequent developments and audits of ceding companies.

In accordance with industry practice, the Company maintains incurred but not
reported ("IBNR") loss reserves. Such reserves are established to provide for
future case reserves and loss payments on incurred claims that have not yet been
reported to an insurer or reinsurer. In calculating its IBNR reserves, the
insurance/reinsurance companies use generally accepted actuarial reserving
techniques that take into account quantitative loss experience data, together,
where appropriate, with qualitative factors. IBNR reserves are based on loss
experience and are grouped both by class of business and by accident year. IBNR
reserves are also adjusted to take into account certain factors such as changes
in the volume of business written, reinsurance contract terms and conditions,
the type of business, claims processing and other variable factors that can be
expected to affect the Company's liability for losses over time.

The management of the Company believes that its reserves for losses and LAE
are adequate. To the extent reserves prove to be inadequate after taking into
account available retrocessional coverage, the Company would have to augment
such reserves and incur a charge to earnings.

CHANGES IN HISTORICAL RESERVES. The following table shows the year-end
reserves from 1987 through 1997, and the subsequent changes in those reserves,
presented on a combined basis for the Company, MARC, and the U.S. Branch. The
following data is not accident year data, but a display of 1987 through 1997
year-end reserves and the subsequent changes in those reserves. For instance,
the "Redundancy (Deficiency)" shown in the table for each year represents the
aggregate amount by which original estimates of reserves at that year-end have
changed in subsequent years. Accordingly, the cumulative deficiency for a year
relates only to reserves at that year-end and such amounts are not additive. For
example, the initial year end 1987 reserves have developed a $836 million
deficiency through December 31, 1997.

13
<PAGE>
CHANGES IN HISTORICAL RESERVES FOR UNPAID LOSSES AND LAE
FOR THE LAST TEN YEARS--GAAP BASIS AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1987 1988 1989 1990 1991 1992 1993 1994
--------- --------- --------- --------- --------- --------- --------- ---------

<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for unpaid losses and LAE.... $ 2,555 $ 2,936 $ 3,025 $ 3,203 $ 3,267 $ 3,254 $ 3,573 $ 3,922
Paid (cumulative) as of:
One year later............................. $ 590 $ 821 $ 634 $ 811 $ 864 $ 739 $ 889 $ 1,076
Two years later............................ 1,155 1,211 1,201 1,423 1,318 1,316 1,566 1,787
Three years later.......................... 1,441 1,604 1,700 1,755 1,667 1,791 2,058 2,303
Four years later........................... 1,738 1,995 1,949 2,004 1,985 2,137 2,421
Five years later........................... 2,049 2,179 2,131 2,243 2,252 2,414
Six years later............................ 2,211 2,327 2,326 2,463 2,483
Seven years later.......................... 2,335 2,491 2,511 2,669
Eight years later.......................... 2,474 2,663 2,688
Nine years later........................... 2,633 2,824
Ten years later............................ 2,781
Net liability re-estimated as of:

End of year................................ $ 2,555 $ 2,936 $ 3,025 $ 3,203 $ 3,267 $ 3,254 $ 3,573 $ 3,922
One year later............................. 2,691 3,012 3,073 3,258 3,194 3,317 3,640 4,369
Two years later............................ 2,731 3,055 3,113 3,183 3,224 3,363 3,986 4,397
Three years later.......................... 2,803 3,107 3,048 3,216 3,244 3,666 4,017 4,347
Four years later........................... 2,878 3,061 3,077 3,225 3,474 3,686 4,009
Five years later........................... 2,870 3,086 3,087 3,472 3,493 3,705
Six years later............................ 2,904 3,107 3,357 3,489 3,558
Seven years later.......................... 2,935 3,388 3,391 3,600
Eight years later.......................... 3,240 3,431 3,505
Nine years later........................... 3,293 3,515
Ten years later............................ 3,391

Redundancy (Deficiency).................... $ (836) $ (579) $ (480) $ (397) $ (291) $ (451) $ (436) $ (425)

<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------

<S> <C> <C> <C>
Net liability for unpaid losses and LAE.... $ 4,501 $ 4,849 $ 5,103
Paid (cumulative) as of:
One year later............................. $ 1,124 $ 1,295
Two years later............................ 1,895
Three years later..........................
Four years later...........................
Five years later...........................
Six years later............................
Seven years later..........................
Eight years later..........................
Nine years later...........................
Ten years later............................
Net liability re-estimated as of:
End of year................................ $ 4,501 $ 4,849 $ 5,103
One year later............................. 4,512 4,920
Two years later............................ 4,610
Three years later..........................
Four years later...........................
Five years later...........................
Six years later............................
Seven years later..........................
Eight years later..........................
Nine years later...........................
Ten years later............................
Redundancy (Deficiency).................... $ (109) $ (71)
</TABLE>

14
<PAGE>

<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Gross liability--end of year..................................... $ 5,730 $ 6,080 $ 7,043 $ 7,192 $ 7,509
Reinsurance recoverables on unpaid losses........................ 2,157 2,158 2,542 2,343 2,406
--------- --------- --------- --------- ---------
Net liability--end of year....................................... 3,573 3,922 4,501 4,849 5,103

Gross re-estimated liability--latest............................. $ 6,274 $ 6,456 $ 7,012 $ 7,276
Re-estimated reinsurance recoverables on latest unpaid losses.... 2,265 2,109 2,402 2,356
--------- --------- --------- ---------
Net re-estimated liability--latest............................... 4,009 4,347 4,610 4,920
Gross cumulative redundancy (deficiency)......................... $ (544) $ (376) $ 32 $ (84)
</TABLE>

The reconciliation between statutory basis and GAAP basis reserves for each
of the three years in the period ended December 31, 1997, is shown below:

RECONCILIATION OF RESERVES FOR UNPAID LOSSES AND LAE
FROM STATUTORY BASIS TO GAAP BASIS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Statutory reserves............................................. $ 5,196.1 $ 3,129.5 $ 2,856.9
Adjustments to a GAAP basis(1)................................. (93.3) (27.1) (12.3)
Reinsurance recoverables on unpaid losses...................... 2,406.1 1,789.1 1,945.4
--------- --------- ---------
Reserves on a GAAP basis....................................... 7,508.9 4,891.5 4,790.0
Merger-related adjustment(2)................................... -- 2,300.8 --
--------- --------- ---------
Reserves (1996 restated)....................................... $ 7,508.9 $ 7,192.3 $ 4,790.0
--------- --------- ---------
--------- --------- ---------
</TABLE>

- ------------------------

(1) Consists primarily of the application of risk transfer rules of FAS No. 113
for all three years and the addition of American Re-Insurance Company
(Chile) S.A. loss reserves at December 31 for 1995.

(2) 1996 Balance Sheet data has been restated to reflect the July 1997 Merger.
See "Management's Discussion and Analysis of the Company's Results of
Operation and Financial Condition."

15
<PAGE>
RECONCILIATION OF RESERVES FOR UNPAID LOSSES AND LAE
(GAAP BASIS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Reserves at beginning of period.............................. $ 7,192.3 $ 4,790.0 $ 3,971.9
Reinsurance recoverable on unpaid losses..................... (2,343.6) (1,945.4) (1,650.0)
--------- --------- ---------
Net reserves at beginning of period.......................... 4,848.7 2,844.6 2,321.9
Net incurred related to:
Current period............................................. 1,642.1 1,167.7 902.3
Prior periods.............................................. 74.2 0.1 437.9
--------- --------- ---------
Total net incurred........................................... 1,716.3 1,167.8 1,340.2
--------- --------- ---------
Net paid related to:
Current period............................................. 167.5 89.5 75.4
Prior periods.............................................. 1,294.7 820.5 742.1
--------- --------- ---------
Total net paid............................................... 1,462.2 910.0 817.5
--------- --------- ---------

Net reserves at end of period................................ 5,102.8 3,102.4 2,844.6
Merger-related adjustment(1)............................... -- 1,746.3 --
--------- --------- ---------
Net reserves at end of period (1996 restated)................ 5,102.8 4,848.7 2,844.6

Reinsurance recoverables on unpaid losses.................... 2,406.1 1,789.1 1,945.4
Merger-related adjustment(1)............................... -- 554.5 --
--------- --------- ---------
Reinsurance recoverables on unpaid losses (1996 restated).... 2,406.1 2,343.6 1,945.4

Reserves at end of year...................................... $ 7,508.9 $ 7,192.3 $ 4,790.0
--------- --------- ---------
--------- --------- ---------
</TABLE>

- ------------------------

(1) 1996 Balance Sheet data has been restated to reflect the July 1997 Merger.
See "Management's Discussion and Analysis of the Company's Results of
Operation and Financial Condition."

16
<PAGE>
CHARGE FOR LOSS RESERVE STRENGTHENING. Since the early 1980s, American
Re-Insurance's underwriting results have been adversely affected by claims
developing from asbestos, environmental and other latent liabilities ("Latent
Liability Exposures"). During this period, reserves established by American Re-
Insurance for Latent Liability Exposures necessarily reflected the uncertainty
inherent in estimating the ultimate future claim amounts arising from these
types of exposures and the lack of credible actuarial methods to measure and
quantify these exposures. The Company's difficulty in accurately quantifying
these exposures was attributable to the need for Latent Liability Exposures to
be first quantified by the insured party and then the primary insurer before the
information was made available to the reinsurer. In the Company's opinion, until
recent years, information regarding potential Latent Liability Exposures was not
openly shared between insured parties and their insurers and reinsurers.

As this information flow improved and actuarial and claims methodologies
evolved, the Company undertook and concluded a major initiative to reevaluate
its reserves for Latent Liability Exposures in the fourth quarter of 1995. As a
result of this reevaluation in the fourth quarter of 1995, the Company increased
its gross IBNR loss reserves for Latent Liability Exposures, which primarily
relate to accident years prior to 1986, by $587.0 million. Cessions to specific
retrocessional arrangements, net of a reserve for uncollectible reinsurance for
this reserve charge, were $119.0 million. As a result, the net increase to loss
reserves for Latent Liability Exposures recognized by the Company at December
31, 1995, was $468.0 million. After cession to the Cover (as discussed below),
the net charge for loss reserve strengthening was $347.4 million ($231.0
million, net of tax.)

The charge for loss reserve strengthening, prior to cession to the Cover,
for Latent Liability Exposures recorded at December 31, 1995, was as follows:

<TABLE>
<CAPTION>
ENVIRONMENTAL-
RELATED & OTHER
ASBESTOS LATENT LOSSES TOTAL
-------------------- -------------------- --------------------
GROSS NET GROSS NET GROSS NET
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Reserve for incurred but not reported losses.................... $ 306.0 $ 227.0 $ 281.0 $ 206.0 $ 587.0 $ 433.0
Uncollectible reinsurance....................................... -- -- -- -- -- 35.0
--------- --------- --------- --------- --------- ---------
Total........................................................... $ 306.0 $ 227.0 $ 281.0 $ 206.0 $ 587.0 $ 468.0
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>

The Company had no adverse loss development for Latent Liability Exposures
during 1997 or 1996.

The Company had Latent Liability Exposure Loss Reserves, prior to cession to
the Cover, at December 31, as follows:

<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
GROSS NET GROSS NET
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Asbestos................................................................... $ 457.7 $ 297.1 $ 499.9 $ 326.6
Environmental-Related and Other Latent Liability........................... 327.9 218.6 391.6 273.9
--------- --------- --------- ---------
Total...................................................................... $ 785.6 $ 515.7 $ 891.5 $ 600.5
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

The provision for unrecoverable reinsurance is principally due to the
possible failure of reinsurers to indemnify American Re-Insurance, primarily
because of reinsurer insolvencies. Allowances have been established for amounts
estimated to be uncollectible. In connection with the charge for loss reserve
strengthening, American Re-Insurance increased the allowance for uncollectible
reinsurance by $35.0 million pre-tax, and this increase is reflected as a
component of "other expense" in the Consolidated Statement of Income for the
year ended December 31, 1995. There can be no assurances future charges for
unrecoverable reinsurance will not materially adversely affect results of
operations in any future period,

16
<PAGE>
although any such charges would not be expected to have a material adverse
effect on American Re-Insurance's liquidity or financial condition.

Travelers Property Casualty Corp., as successor to Aetna Casualty and Surety
Company ("Aetna Casualty") ("Travelers") provides indemnification in the form of
an Adverse Loss Agreement (the "Cover") for adverse development of losses and
allocated loss adjustment expenses of $500.0 million representing an 80% pro
rata share (American Re-Insurance retains the remaining 20%) of up to $625.0
million of losses in excess of $2,700.0 million incurred on or prior to December
31, 1991. The charge for the Latent Liability Exposure resulted in a cession by
American Re to the Cover. At December 31, 1997, the reinsurance recoverable
balance from Travelers was $252.5; thus there is $247.5 of limit remaining to
cover additional adverse loss development for losses incurred on or prior to
December 31, 1991.

Latent Liability Exposure loss reserves at December 31, 1997 and 1996,
represent best estimates drawn from a range of possible outcomes based upon
currently known facts, projected forward for additional claimants using
assumptions and methodologies considered reasonable. Notwithstanding this
addition to reserves and the remaining protection under the Cover, there can be
no assurance that future losses resulting from these exposures will not
materially adversely affect future earnings.

The following table presents three calendar years of development of losses
and LAE reserves associated with Latent Liability Exposures, including case and
IBNR reserves. The application of reinsurance recoveries to calculate net
incurred and net paid losses, and the reinsurance recoverables on unpaid losses,
are based on specific reinsurance contracts only, before the application of any
adverse loss coverage for 1992 and prior years, which are not allocated to
specific causative events. --SEE TRAVELERS ADVERSE LOSS COVER.

THREE YEAR DEVELOPMENT
ASBESTOS LIABILITIES

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Gross Basis:
Beginning net reserve balance................................... $ 499.8 $ 519.9 $ 263.8
Incurred loss and LAE........................................... -- -- 352.3
Loss and LAE paid............................................... 42.1 65.8 96.2
--------- --------- ---------
Ending reserve balance.......................................... 457.7 454.1 519.9
Merger-related adjustment(1).................................... -- 45.7 --
--------- --------- ---------
Ending reserve balance (1996 restated).......................... $ 457.7 $ 499.8 $ 519.9
--------- --------- ---------
--------- --------- ---------
Net Basis:
Beginning net reserve balance................................... $ 326.6 $ 328.5 $ 117.6
Incurred loss and LAE........................................... -- -- 252.4
Loss and LAE paid............................................... 29.5 37.2 41.5
--------- --------- ---------
Ending reserve balance.......................................... 297.1 291.3 328.5
Merger-related adjustment(1).................................... -- 35.3 --
--------- --------- ---------
Ending reserve balance (1996 restated).......................... $ 297.1 $ 326.6 $ 328.5
--------- --------- ---------
--------- --------- ---------
</TABLE>

- ------------------------

(1) 1996 Balance Sheet data has been restated to reflect the July 1997 Merger.
See "Management's Discussion and Analysis of the Company's Results of
Operation and Financial Condition."

17
<PAGE>
ENVIRONMENTAL-RELATED AND
OTHER LATENT LIABILITIES

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN MILLIONS)
Gross Basis:
Beginning net reserve balance.................................................... $ 391.6 $ 427.2 $ 145.3
Incurred loss and LAE............................................................ -- -- 315.7
Loss and LAE paid................................................................ 63.7 91.2 33.8
--------- --------- ---------
Ending reserve balance........................................................... 327.9 336.0 427.3
Merger-related adjustment(1)................................................... -- 55.6 --
--------- --------- ---------
Ending reserve balance (1996 restated)........................................... $ 327.9 $ 391.6 $ 427.2
--------- --------- ---------
--------- --------- ---------
Net Basis:
Beginning net reserve balance.................................................... $ 273.9 $ 282.6 $ 73.2
Incurred loss and LAE............................................................ -- -- 229.0
Loss and LAE paid................................................................ 55.3 50.7 19.6
--------- --------- ---------
Ending reserve balance........................................................... 218.6 231.9 282.6
Merger-related adjustment(1)................................................... -- 42.0 --
--------- --------- ---------
Ending reserve balance (1996 restated)........................................... $ 218.6 $ 273.9 $ 282.6
--------- --------- ---------
--------- --------- ---------
</TABLE>

- ------------------------

(1) 1996 Balance Sheet data has been restated to reflect the July 1997 Merger.
See "Management's Discussion and Analysis of the Company's Results of
Operation and Financial Condition."

In the normal course of business, notification is received from client
companies, in a "precautionary notice" format, of potential exposure in regard
to Latent Liability Exposures. Most of this preliminary notification is of a
non-specific nature; client companies do not usually attempt to quantify the
amount, timing or nature of the potential exposure. Given the indefiniteness of
this communication, the Company cannot attempt to quantify any meaningful
information regarding claim counts reported.

In managing its business, the Company actively monitors all of its accounts,
both ongoing or terminated. As a part of this activity, attempts are made to
reduce its administrative and legal costs by commuting (buying out) certain
accounts. Since 1985, several major commutations have been negotiated, whereby
certain reinsurance contracts were terminated and American Re-Insurance was
discharged from all future liability in exchange for a current payment of cash
to the primary insurer. Existing liabilities associated with these contracts
were consequently removed from American Re-Insurance's balance sheet. The
potential ultimate losses which were removed as a result of commutations
attributable to potential latent exposure liabilities cannot be determined and
are not included in the above development table. The Company pursues
opportunities to commute contracts with potential Latent Liability Exposures to
the extent feasible.

TRAVELERS ADVERSE LOSS COVER. Travelers provides indemnification in the
form of the Cover for adverse development of losses and allocated loss
adjustment expenses of $500.0 million, representing an 80% pro rata share
(American Re-Insurance will retain the remaining 20%) of up to $625.0 million of
losses in excess of $2.7 billion incurred on or prior to December 31, 1991.

For purposes of calculating when the Cover attachment point of $2.7 billion
is reached, American Re-Insurance's statutory loss reserves of $2.05 billion at
December 31, 1991, are grossed up for the $285.0 million aggregate limit under
American Re-Insurance's 1988 and 1990 National Indemnity adverse loss covers,
which are retrocessions that provide supplemental protection to existing loss
reserves. The addition of the 1988 and 1990 National Indemnity adverse loss
covers brings the effective amount of loss reserves

18
<PAGE>
for pre-1992 losses to $2,338.0 million. Coverage for financial guarantee
reinsurance losses on business written on or prior to December 31, 1991, is
available under the agreement for net losses and ALAE in excess of the financial
guarantee unearned premium reserve of $9.4 million held at December 31, 1991,
regardless of the accident date of loss, subject to the $2.7 billion attachment
point being reached. The Cover provides that Travelers will retrocede all of its
liabilities and obligations under the agreement to Aetna, Inc. (the former
parent of Aetna Casualty which was merged into Travelers) ("Aetna") pursuant to
a separate retrocessional agreement and Aetna will become obligated to pay all
such retroceded liabilities if Travelers does not pay such liabilities. The
Cover remains effective through the natural expiration of all covered
liabilities but may be commuted commencing in 1998 in accordance with its terms.
The 1997 and 1996 cessions to the Cover are described in "--CHARGE FOR LOSS
RESERVE STRENGTHENING" above.

CLAIMS

Specific claims are reviewed and monitored by the Claims Division. The
Claims Division is centralized in the home office. Claims are also handled
regionally by various claims personnel in certain domestic and international
offices, namely Chicago, Columbus, New York, and San Francisco (domestically)
and Brussels, Santiago, Sydney, and Toronto (internationally). Claims
administration includes reviewing initial loss reports, monitoring claims
handling activities of clients, requesting additional information where
appropriate, recommending proper reinsurance case reserves and approving payment
of individual claims. In addition to reviewing claims and discussing claims
issues with ceding companies, the Claims Division conducts periodic reviews of
both specific claims and overall claims handling procedures at the offices of
client companies. Before entering into a reinsurance agreement with a
prospective primary insurer, the Claims Division is usually requested to conduct
an on-site claims review of the client's claims operations. These reviews are
designed to determine whether the prospective client uses proper investigatory
techniques, is reserving properly, has sufficient staff and follows appropriate
claims processing procedures. The Company relies upon its ability to monitor
effectively the claims handling and claims reserving practices of ceding
companies in order to establish the proper reinsurance premium for reinsurance
agreements and to establish proper loss reserves. See also
"--Insurance/Reinsurance Underwriting."

RISK MANAGEMENT AND RETROCESSION ARRANGEMENTS

The Company purchases reinsurance to manage its own risk exposures. The
insurance or indemnification of reinsurance is called a retrocession, and a
reinsurer of a reinsurer is called a retrocessionaire. 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. Generally,
retrocessional agreements are contracts that are renewable on an annual basis,
but that may be terminated by either party upon notice stated in the agreement.
A retrocessionaire that does not renew a retrocession with a reinsurer is not
discharged from existing liabilities to the reinsurer under the contract. A
retrocession does not discharge a reinsurer from liability to its clients.

The retrocessional coverages purchased by the Company include (i) routine
coverage for its property and casualty business, (ii) casualty clash coverage
for potential accumulation of liability in its casualty business from treaties
and facultative agreements covering losses arising from the same event or
occurrence, (iii) catastrophe retrocessions for its property business, (iv) stop
loss protection (excess of loss reinsurance that indemnifies the company against
losses that exceed a specific retention), and (v) quota share treaties that
enhance underwriting capacity.

In conformity with Financial Accounting Standard No. 113, the Company has
stated reinsurance recoverables (including amounts related to claims incurred
but not reported) and prepaid reinsurance premiums as assets. The Company will
record an uncollectible reserve when it believes that it is probable that it
will not be able to collect a receivable from a retrocessionaire. At December
31, 1997, the Company maintained a reserve for uncollectible reinsurance and
premiums and other receivables of $80.1 million.

19
<PAGE>
The Company adheres to specified limits on the amount of exposure to single
risks that it will accept and purchases retrocessions to reduce its per risk
exposure. Generally, for treaty and facultative casualty, the per risk limit
accepted is $10.0 million, on selected cases up to $25.0 million, with capacity
to $50.0 million. For property business, the per risk limit accepted for treaty
business is $10.0 million and on selected cases up to $41.0 million and for
facultative business is $10.0 million and on selected cases up to $166.0
million. After retrocessions, for casualty business, $10.0 million net is
retained per treaty risk, but can expand to $15.0 million on a selected basis,
and up to $6.5 million net per risk for facultative. After retrocessions, and
prior to co-participation, if any, for its property business, $2.5 million net
is generally retained per risk for treaty and up to $3.5 million net per risk
for facultative. The Company will consider expanding both its maximum per risk
acceptance, and its net retentions for both property and casualty business, on a
selected basis, dependent upon a specific client's needs.

Currently, the Company maintains retrocessional coverage for property and
casualty clash events for treaty and facultative business, where treaty or
facultative agreements are exposed to a loss from two or more products and/or
reinsureds involved in a common occurrence. For property business, treaty and
facultative agreements are covered in excess of $15.0 million each and every
occurrence. For casualty business, treaty and facultative agreements are covered
in excess of $10.0 million each and every occurrence.

The Company purchases catastrophe retrocessions for both its treaty and
facultative property business. Property catastrophe retrocessions cover the
potential accumulation of all property exposures that may be involved in the
same catastrophe, such as an earthquake or hurricane. Catastrophe retrocessions
provide $400.0 million of coverage, for a catastrophic event in excess of $100.0
million of retained losses. The $400.0 million of retrocessional coverage is
reduced by two factors: (i) a reduction of $26.49 million, due to shortfalls in
the placement of the retrocessional program; and (ii) co-participation of $0.26
million by the Company, which is customary in the industry. Thus, if the
Company's exposure to a domestic catastrophe loss aggregated $500 million, the
Company would retain $126.75 million of catastrophe losses. Upon payment of
additional premiums, the coverage may be reinstated for additional events.

In July 1997 as part of the catastrophe retrocessional program, the Company
renewed the quota share retrocessional program whereby the Company ceded 1.719%
of its consolidated net premiums written to the quota share participants. In
return, the Company received commission offset as well as catastrophe
reinsurance protection. The cession of premiums written in 1997 for the quota
share portion of the program was $42.4 million.

Changing domestic and international reinsurance markets impact the
retrocessional capacity available to all companies. This is particularly true
following years in which worldwide catastrophic events have placed considerable
pressure on profitability and returns on equity throughout the industry. The
Company has successfully managed its exposure to changing retrocessional
capacity levels in the past by diversifying it selection of retrocessionaires
and expects to continue to minimize risks associated with fluctuations in the
underwriting cycle. In accordance with the Company's underwriting guidelines,
diversified retrocessional capacity is obtained through Munich Re and its
affiliated companies, through existing trading relationships with retrocessional
markets accessed on a direct basis or through Am-Re Brokers, and through
additional potential retrocessional markets surfaced through the Company's
continuing global expansion.

Historically, 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 selects retrocessionaires
carefully. The most important factor is financial stability. Retrocessionaires
are approved by the Reinsurance Security Committee which is comprised of several
members of senior management. Reporting to the Reinsurance Security Committee is
the Reinsurance Security Analysis

20
<PAGE>
Department, which has a staff of four professionals. As a general rule, the
Company requires that unpaid losses and LAE (including IBNR) for certain
admitted and non-admitted reinsurers (unregulated by United States insurance
regulatory authorities) be collateralized by letters of credit, funds withheld
or pledged trust agreements. In certain cases, the full limit ceded to
non-admitted reinsurers is required to be collateralized regardless of actual
claim activity. Actions such as draw downs of letters of credit provided as
collateral, cessation of relationships and commutations may be taken to reduce
or eliminate exposure when necessary.

As of December 31, 1997, the insurance/reinsurance subsidiaries had in place
retrocessional arrangements with approximately 750 retrocessionaires, and
$2,491.7 million of accrued retrocessional recoverables on paid and unpaid
losses and LAE (including IBNR). In structuring their retrocessional programs,
the insurance/reinsurance subsidiaries have placements with certain
retrocessionaires that result in sizable reinsurance recoverable obligations to
the insurance/reinsurance subsidiaries. Certain select retrocessionaires
participate in many of the insurance/reinsurance subsidiaries' retrocessional
coverages including quota share, working layer excess of loss, catastrophe, and
stop loss programs as well as specific cessions of assumed business. Cessions of
significant amounts to a single retrocessionaire are contemplated only when
excellent financial strength and/or the ability to collateralize obligations are
clearly demonstrated. As of December 31, 1997, a total of $604.9 million of
accrued retrocessional recoverables on paid and unpaid losses (24.3% of total
retrocessional recoverables) were attributable to National Indemnity Company
(which had an A.M. Best rating of "A++ (Superior)" at December 31, 1997), $293.0
million (11.8% of total retrocessional recoverables) to Allianz A.G. Holdings
(which had an A.M. Best rating of "A+" at December 31, 1997). Except as
described above, recoverable amounts attributable to any one or related groups
of retrocessionaires did not in the aggregate exceed 10% of the
insurance/reinsurance subsidiaries' statutory surplus.

COMPETITION

The property and casualty reinsurance business is highly competitive.
Competition with respect to the types of reinsurance in which the Company is
engaged is based on many factors, including the perceived overall financial
strength of the reinsurer, ratings of the reinsurer, underwriting expertise,
premiums charged, contract terms and conditions, services offered, speed of
claims payment, reputation and experience. The Company competes in the United
States and international reinsurance markets with independent reinsurance
companies, subsidiaries or affiliates of established worldwide insurance
companies, reinsurance departments of primary insurance companies and
underwriting syndicates from the United States and abroad, some of which have
greater financial resources than the Company. The Company also competes with
providers of alternative forms of risk transfer, such as investment banks which
offer capital market mechanisms for primary insurers to transfer insurance risks
directly to investors.

EMPLOYEES

At December 31, 1997, the Company and its subsidiaries employed a total of
approximately 1,557 persons. None of these employees are represented by a labor
union and the Company believes that its employee relations are good.

No employees of the Company receive commissions or similar compensation
based on volume. There are no minimum volume production requirements.

21
<PAGE>
REGULATORY MATTERS

The Company is subject to regulation under the insurance statutes, including
insurance holding company statutes, of various states, including Delaware and
New York, the domiciliary states of American Re-Insurance and American
Alternative, respectively.

GENERAL. U.S. domestic property and casualty insurers, including
reinsurers, are subject to regulation by their states of domicile and by those
states in which they are licensed. The rates and policy terms of primary
insurance policies and agreements generally are closely regulated by state
insurance departments. Unlike many primary insurance policies, the terms and
conditions of reinsurance agreements generally are not subject to regulation by
any governmental authority with respect to rates or policy terms. As a practical
matter, however, the rates charged by primary insurers do have an effect on the
rates that can be charged by reinsurers.

AMERICAN RE-INSURANCE. The regulation and supervision to which reinsurance
is subject relate primarily to licensing requirements of reinsurers, the
standards of solvency that must be met and maintained, the nature of and
limitations on investments, restrictions on the size of risks which may be
insured, deposits of securities for the benefit of ceding companies, methods of
accounting, periodic examinations of the financial condition and affairs of
reinsurers, the form and content of financial statements required to be filed
with state insurance regulators, and reserves for unearned premiums, losses and
other purposes. In general, such regulation is for the protection of the ceding
companies and, ultimately, their policyholders, rather than security holders.
American Re-Insurance's management believes that American Re-Insurance and its
subsidiaries are in material compliance with all applicable laws and regulations
pertaining to their business and operations.

AMERICAN ALTERNATIVE. In order to write primary insurance business
primarily for the alternative market, American Alternative must comply with
substantial regulatory requirements in each state where it does business. In
addition to the rate and policy form requirements mentioned above, depending
upon the nature of the primary business being written and the production sources
for the business, these regulatory requirements include, but are not limited to,
requirements with regard to licensing, the producer distribution system, the
rate and policy form filing process, participation in residual markets, and
claims handling procedures. This regulation is primarily designed for the
protection of policyholders. The Company's management believes that American
Alternative is in material compliance with all applicable laws and regulations
pertaining to its business and operations.

LICENSES. American Re-Insurance is licensed to transact insurance or
reinsurance business in all fifty states, the District of Columbia, Puerto Rico,
Canada (including the provinces of Ontario and Quebec), Australia, Singapore and
the United Kingdom. American Re-Insurance Company (Chile) S.A. is a licensed
reinsurer in Chile. In addition, American Re-Insurance and/or one or more of its
subsidiaries or affiliates is licensed or registered to transact business in
Argentina, Australia, Belgium, Bermuda, Bolivia, Canada, Chile, China, Columbia,
Ecuador, Egypt, Japan, Mauritius, Mexico, New Zealand, Paraguay, Peru,
Singapore, South Africa, the United Kingdom, Uruguay and Venezuela.

American Alternative is licensed to transact insurance or reinsurance
business in all fifty states and the District of Columbia.

The Company's subsidiaries also maintain necessary licenses for their
reinsurance intermediary and other operations.

INVESTMENT LIMITATIONS. The Insurance Codes of Delaware and New York
contain rules governing the types and amounts of investments that are
permissible for American Re-Insurance and American Alternative, respectively.
These rules are designed to ensure the safety and liquidity of the insurer's
investment portfolio.

22
<PAGE>
In general, these rules only permit insurers to purchase investments that
are interest bearing, interest accruing, entitled to dividends or otherwise
income earning and not then in default in any respect, and the insurer must be
entitled to receive for its exclusive account and benefit the interest or income
accruing thereon. No security or investment is eligible for purchase at a price
above its fair value or market value. In addition, these rules require
investments to be diversified.

Subject to the restrictions described above, insurers generally may only
invest in certain types of investments, including certain U.S., state and
municipal government obligations, secured and unsecured debt instruments and
preferred and common stocks of solvent U.S. and certain foreign corporations
(including insurers), limited partnership interests, insured savings accounts,
collateralized mortgage obligations and real estate. In addition to specifically
permitted types of investments, insurers generally may make other loans or
investments in an aggregate amount not exceeding a fixed percentage of their
assets, provided that any such loan or investment is not expressly prohibited
under the Insurance Codes.

American Re-Insurance and American Alternative are prohibited from investing
in securities issued by any corporation or enterprise the controlling interest
of which is, or after such investment will be, held directly or indirectly by or
for the benefit of their directors or officers.

TRIENNIAL EXAMINATIONS. Insurance Departments usually conduct examinations
of domiciled insurers and reinsurers every three years, and may do so at such
other times as are deemed advisable by the Insurance Commissioner. The most
recent examination of American Re-Insurance by the Delaware Insurance Department
(which concluded in 1996) covers the period January 1, 1992 to December 31,
1994. The examination report was issued by the Department on August 25, 1997 and
had no material adverse findings. The most recent examination of American
Alternative by the New York Insurance Department (which concluded in 1996)
covers the period January 1, 1994 to December 31, 1994. The Department's report
on such examination has been issued and had no material adverse findings.

INSURANCE REGULATORY INFORMATION SYSTEM RATIOS. The National Association of
Insurance Commissioners (the "NAIC") annually calculates 12 financial ratios to
assist state insurance departments in monitoring the financial condition of
insurance companies. Results are compared against a "usual range" of results for
each ratio, established by the NAIC. Although American Re has not received the
official IRIS test results for 1997, American Re believes that no 1997 test
results are outside of the usual range of results for each test. In 1997,
American Alternative had one ratio outside of the usual range: the change in net
writings ratio favorably exceeded the ceiling ratio value of 33%; the 1997 ratio
result of 122% is attributable to expanded writings as the company continues to
grow.

RISK BASED CAPITAL. The NAIC has adopted a risk based capital standard for
property and casualty insurance (and reinsurance) companies. American
Re-Insurance included in its 1997 annual statement filing with the Insurance
Department of the State of Delaware an adjusted surplus to policyholders of
$2,046.3 million, well in excess of the authorized control level risk based
capital total of $698.0 million. American Alternative included in its 1997
annual statement filing with the New York Insurance Department an adjusted
surplus to policyholders of $100.4 million, well in excess of the authorized
control level risk based capital total of $2.8 million.

INSURANCE HOLDING COMPANY REGULATIONS. The insurance holding company laws
and regulations vary from state to state, but generally require an insurance
holding company to register with the state regulatory authorities and file
certain reports that include current information concerning the capital
structure, ownership, management, financial condition and general business
operations of the insurance holding company and its subsidiary insurers which
are licensed in the state. State holding company laws and regulations with
respect to domestic insurers also require prior notice or regulatory approval of
changes in control of an insurer or its holding company and of material
inter-affiliate transactions within the holding company structure. See
"--Dividends."

23
<PAGE>
DIVIDENDS

Because the operations of the Company are conducted primarily through its
insurance/reinsurance subsidiaries, the Company is dependent upon dividends and
tax allocation payments primarily from American Re-Insurance and American
Alternative to meet its debt and other obligations and to pay dividends in the
future if the Company's Board of Directors so determines. The payment of
dividends to the Company by American Re-Insurance and American Alternative is
subject to limitations imposed by the Delaware Insurance Code and the New York
Insurance Code, respectively.

Under the Delaware Insurance Code, no Delaware insurer may pay any (i)
dividend or distribution without 10 days' prior notice to the Delaware Insurance
Department or (ii) "extraordinary" dividend or distribution until (a) 30 days
after the Delaware Insurance Commissioner has received notice of the declaration
thereof and has not within such period disapproved such payment or (b) the
Delaware Insurance Commissioner has approved such payment within the 30-day
period. Under the Delaware Insurance Code, an "extraordinary" dividend for a
property and casualty insurer is a dividend, the amount of which, when taken
together with all other dividends made in the preceding twelve months, exceeds
the greater of (i) 10% of an insurer's statutory surplus as of the end of the
prior calendar year or (ii) the insurer's statutory net income, not including
realized capital gains, for the prior calendar year. Under this definition, as
of December 31, 1997, the maximum amount available for the payment of dividends
by American Re-Insurance during 1998 without prior approval of regulatory
authorities will be $230.1 million. No prediction can be made as to whether any
legislative proposals relating to dividend rules in Delaware will be made,
whether any such legislative proposal will be adopted in the future, or the
effect, if any, any such proposal would have on the Company or American
Re-Insurance.

As of December 31, 1997, American Alternative could declare dividends of
$10.7 million during 1998, to the extent it had earned surplus available at the
date of declaration, without approval of the Superintendent of Insurance for the
State of New York.

LEGISLATIVE AND REGULATORY PROPOSALS

From time to time, various regulatory and legislative changes have been
proposed in the insurance and reinsurance industry, which may have an effect on
reinsurers. Some states have adopted, or are considering adopting, laws,
regulations and administrative practices which, among other things, may limit
the ability of primary insurance companies to effect premium rate increases or
to cancel or not renew existing policies. Additionally, a number of states are
considering insurance company liquidation procedures that may significantly
increase and accelerate the payment of reinsurance obligations, or otherwise
alter contractual rights of reinsurers. The Company is unable to predict whether
any of these laws, regulations and administrative packages will be adopted in
additional states, the form in which any such laws and regulations would be
adopted in additional states, or the effect, if any, these developments will
have on the operations and financial condition of the Company, American
Re-Insurance or American Alternative.

The U.S. Congress is considering amendments to the Comprehensive
Environmental Response, Compensation and Liability Act. The proposed amendments
would reform the Superfund clean-up program by limiting the application of
retroactive liability, developing risk based clean-up standards, and
establishing administrative procedures for determining how liability should be
apportioned among potentially responsible parties. At this time, the Company is
unable to predict whether any amendments will be adopted, or the effect any
changes would have on the Company.

ITEM 2. PROPERTIES

The Company owns approximately 424,000 square feet of space in four
contiguous executive office properties in Princeton, New Jersey, on land owned
by Princeton University and subject to long-term

24
<PAGE>
ground leases. The Company also owns properties for its foreign subsidiaries and
representative offices totaling 18,545 square feet in Mexico City, Cairo,
Santiago, Bogota and Buenos Aires.

The Company also rents office space totaling approximately 450,000 square
feet in Atlanta, Boston, Burlington (VT), Chicago, Columbus, Dallas, Denver,
Florham Park (NJ), Hartford, Honolulu, Kansas City (KS), Los Angeles,
Minneapolis, New York, Philadelphia, San Francisco, Seattle, Woodland Hills
(CA), Brussels, Beijing, Melbourne, Sydney, Bermuda, Montreal, Toronto, Tokyo,
Singapore and London. As a result of the Merger, American Re-Insurance assumed
the lease obligations of MARC. American Re-Insurance is in the process of
determining its needs with respect to such space which may include terminating
certain leases.

The Company believes that its office space is adequate for its current needs
and will enter into new leases to meet future needs as such needs arise and as
general market conditions permit.

The Company has invested significant amounts in computer resources,
including electronic data processing equipment and the development of
proprietary software to support its business. The Company's mainframe computer
system is linked by a network to its domestic and most international branch
operations. The Company utilizes its proprietary and other software systems in
its day-to-day operations to support its businesses. For facultative operations,
the Company uses proprietary facultative risk clearance, risk processing,
accounts receivable, pro rata loss, excess of loss and management information
systems. On-line facilities are available for (a) maintaining retrocessional
participant information for financial reporting purposes, (b) treasury and
claims services and (c) managing and administering treaty reinsurance. As part
of the Company's disaster control strategy, all key data is backed up regularly
for off site storage.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in non-claim litigation incidental to its business
principally related to insurance company insolvencies or liquidation proceedings
in the ordinary course of business. Also, in the ordinary course of business,
the Company is sometimes involved in adversarial proceedings incidental to its
insurance and reinsurance business.

Based upon its familiarity with or review and analysis of such matters, the
Company believes that none of the pending litigation matters will have a
material adverse effect on the consolidated financial statements of the Company.
However, no assurance can be given as to the ultimate outcome of any such
litigation matters.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

25
<PAGE>
PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) There is no established public trading market for the Company's equity.

(b) 91.33% of the Company's Common Stock is owned by Munich Re, 6.94% of the
Company's Common Stock is owned by Allianz Aktiengesellschaft and 1.73% is owned
by VICTORIA Versicherung AG.

(c) It is the Company's understanding that Munich intends to further
strengthen the capital position of the Company by allowing net income to be
retained; therefore, at this time no cash dividends on the Common Stock are
anticipated. The capacity of American Re-Insurance and American Alternative to
pay dividends is discussed in Part I, Item 1, Business--Dividends.

ITEM 6. SELECTED FINANCIAL INFORMATION OF THE COMPANY AND AMERICAN RE-INSURANCE

Set forth below are five years of selected financial information derived
from the audited consolidated financial statements and related notes of the
Company. The statutory data have been derived from statutory financial
statements. Such statutory financial statements are prepared in accordance with
statutory accounting principles, which differ from GAAP. For additional
information, see the Consolidated Financial Statements of the Company, and the
related notes thereto included elsewhere in this report.

<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
OPERATING DATA:
Net premiums written.................................. $ 2,497.7 $ 1,902.4 $ 1,629.5 $ 1,553.3 $ 1,363.4
Net premiums earned................................... 2,486.1 1,796.7 1,530.9 1,461.4 1,249.9
Losses and LAE (2).................................... 1,716.3 1,167.8 1,340.2 1,011.0 796.9
Underwriting expenses................................. 838.4 533.5 452.5 439.3 403.5
Underwriting gain (loss).............................. (68.6) 95.4 (261.7) 11.1 49.5
Net investment income................................. 427.5 248.2 222.6 188.7 165.1
Net realized capital gains (losses)................... 87.7 4.8 4.7 (0.2) 5.1
Interest expense...................................... 42.8 54.1 60.7 60.0 66.1
Income (loss) before income taxes..................... 224.3 232.6 (159.5) 120.7 144.0
Income taxes (benefits)............................... (3.4) 73.8 (76.6) 23.2 36.0
Income (loss) before minority interest, distributions
on preferred securities of subsidiary trust,
extraordinary loss, and cumulative effect of
accounting change................................... 227.7 158.8 (82.9) 97.5 108.0
Minority interest..................................... 6.8 -- -- -- --
Distributions on preferred securities of subsidiary
trust............................................... (13.1) (13.1) (4.4) -- --
Income (loss) before extraordinary loss and cumulative
effect of accounting change......................... 221.4 145.7 (87.3) 97.5 108.0
Extraordinary loss, net of applicable income tax
effect.............................................. -- (34.0) (0.3) -- (26.6)
Cumulative effect of accounting change, net of
applicable income tax effect........................ -- -- -- -- 17.8
Net income (loss) before paid-in-kind preferred
dividend............................................ 221.4 111.7 (87.6) 97.5 99.3
Paid-in-kind preferred dividends...................... -- -- -- -- 0.9
Net income (loss) available to common shareholders.... 221.4 111.7 (87.6) 97.5 98.4
</TABLE>

26
<PAGE>

<TABLE>
<CAPTION>
RESTATED
(1)
1997 1996 1995 1994 1993
--------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
OTHER GAAP OPERATING DATA (3):
Loss and LAE ratio.................................. 69.0% 65.0% 87.5% 69.2% 63.8%
Underwriting expense ratio.......................... 33.8 29.7 29.6 30.0 32.3
--------- ----------- --------- --------- ---------
Combined ratio...................................... 102.8% 94.7% 117.1% 99.2% 96.1%
STATUTORY DATA (1) (4):
Ratio of net premiums written to surplus............ 1.07x 1.21x 1.23x 1.26x 1.16x
Policyholders' surplus.............................. $ 2,323.4 $ 2,178.1 $ 1,892.8 $ 1,753.7 $ 1,747.9
Loss and LAE ratio.................................. 68.8% 67.5% 83.5% 75.2% 70.7%
Underwriting expense ratio.......................... 35.1 31.0 32.1 32.6 34.1
--------- ----------- --------- --------- ---------
Combined ratio...................................... 103.9% 98.5% 115.6% 107.8% 104.8%
BALANCE SHEET DATA (AT END OF PERIOD):
Total investments and cash.......................... $ 7,673.4 $ 7,007.3 $ 3,957.5 $ 3,308.9 $ 3,153.3
Total assets........................................ 13,288.8 12,143.0 7,814.4 6,677.9 6,231.4
Loss and LAE reserves............................... 7,508.9 7,192.3 4,790.0 3,971.9 3,685.7
Senior bank debt.................................... 75.0 75.0 75.0 200.0 275.0
Senior notes........................................ 498.5 498.4 -- -- --
Senior subordinated debt............................ -- -- 450.0 450.0 450.0
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding as all its
assets Junior Subordinated Debentures............. 237.5 237.5 237.5 -- --
Stockholders' equity................................ 2,586.4 1,792.5 847.1 789.2 797.2
</TABLE>

- ------------------------------

(1) 1996 balance sheet data and statutory data for all years has been restated
to reflect the July 1997 Merger. See "Management's Discussion and Analysis
of the Company's Results of Operations and Financial Condition."

(2) "LAE" means loss adjustment expenses.

(3) GAAP loss and LAE ratio represents the sum of losses and LAE as a percentage
of net premiums earned. GAAP underwriting expense ratio represents
underwriting expenses as a percentage of net premiums earned. GAAP combined
ratio represents the sum of the GAAP loss and LAE ratio and GAAP
underwriting expense ratio. See "Management's Discussion and Analysis of the
Company's Results of Operations and Financial Condition."

(4) Represents statutory data for the applicable period. Ratio of net premiums
written to surplus represents statutory net premiums written for the period
over statutory policyholders' surplus at the end of such period. Statutory
loss and LAE ratio represents the sum of statutory losses and LAE as a
percentage of statutory net premiums earned. Statutory underwriting expense
ratio represents statutory underwriting expenses as a percentage of
statutory net premiums written. Statutory combined ratio represents the sum
of the statutory loss and LAE ratio and the statutory underwriting expense
ratio. See "Management's Discussion and Analysis of the Company's Results of
Operations and Financial Condition."

27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S RESULTS OF
OPERATIONS AND FINANCIAL CONDITION

THE MERGER

On July 1, 1997, American Re and Munich Re completed the merger of MARC into
American Re-Insurance. Prior to this transaction, MARC was owned 27.5% by Munich
Re, 22.5% by the U.S. Branch, 40% by Allianz, and 10% by Victoria. This
transaction was effected by exchanging 100% of the common shares of MARC for
newly issued shares of the Company. On July 2, 1997, the U.S. Branch exchanged
its newly acquired shares of the Company with Munich Re for cash in the amount
of $85.0 million. This amount approximated the statutory accounting value of the
U.S. Branch's ownership in MARC at the time of the Merger. On July 3, 1997,
Munich Re contributed the insurance-related assets and liabilities of the U.S.
Branch to American Re-Insurance in exchange for additional shares of the
Company. As a result of these transactions (collectively, the "Merger"), the
shares of common stock held by Allianz and Victoria represent minority interests
in the Company's common stock equal to less than 9% on an aggregate basis.
Munich Re continues to own over 91% of the outstanding common stock of the
Company.

The exchange of MARC shares for American Re shares by Allianz and Victoria
(totaling 50% of MARC's ownership) was accounted for using the purchase method
for business combinations. The exchange of MARC shares for the Company's shares
by Munich Re and the U.S. Branch (the remaining 50% of MARC's ownership) was
accounted for as an "as-if-pooling of interests" business combination between
parties under common control of the same parent company, Munich Re. The exchange
of the insurance assets and liabilities of the U.S. Branch for the Company's
shares was also accounted for as an "as-if-pooling of interests" business
combination between parties under common control. Common control for American
Re, MARC and the U.S. Branch was considered effective at December 31, 1996. As
such, the Company's December 31, 1996, balance sheet and related footnote
disclosures as originally filed in its 1996 Form 10-K, have been restated to
reflect a 50% ownership of MARC, a 50% minority interest in the ownership of
MARC by Allianz and Victoria, and a 100% ownership of the U.S. Branch.

As common control was considered effective at December 31, 1996, the
Company's consolidated statements of income and cash flows for the year ended
December 31, 1996, have not been restated. The Company's consolidated statements
of income and cash flows for the year ended December 31, 1997, represent the
fully consolidated operations of American Re, MARC, and the U.S. Branch for the
period then ended, with 50% of MARC's net loss for the six-month period ended
June 30, 1997, accounted for as minority interest. As a result, significant
variances exist when comparing the results of operations for the year ended
December 31, 1997, with the same period in 1996. Accordingly, selected financial
results have been presented below on a pro forma basis for the year ended
December 31, 1996, as if the merger transactions which took place in July 1997
had occurred on January 1, 1996. Pro forma adjustments to reflect such
transactions have been applied to the respective historical income statements of
the Company.

The pro forma consolidated data does not purport to represent what the
Company's financial position or results would have been had the Merger in fact
occurred on the dates indicated above, 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.

For statutory financial data, all totals have been restated to reflect the
combination of financial results of the insurance/reinsurance subsidiaries,
MARC, and the U.S. Branch.

28
<PAGE>
RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997, COMPARED WITH YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
ACTUAL PRO FORMA
1997 1996 VARIANCE
--------- ----------- --------------------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
REVENUE:
Premiums written...................................................... $ 2,497.7 $ 2,621.2 $ (123.5) (4.7)%
Change in unearned premium reserve.................................... (11.6) (127.1 ) 115.5 (90.9)
--------- ----------- --------- ---------
Premiums earned................................................... 2,486.1 2,494.1 (8.0) (0.3)
Net investment income................................................. 427.5 392.2 35.3 9.0
Net realized capital gains............................................ 87.7 27.8 59.9 N/M
Other income.......................................................... 41.7 47.9 (6.2) (12.9)
--------- ----------- --------- ---------
Total revenue....................................................... 3,043.0 2,962.0 81.0 2.7
--------- ----------- --------- ---------
LOSSES AND EXPENSES:
Losses and loss adjustment expenses................................... 1,716.3 1,675.1 41.2 2.5
Commission expense.................................................... 623.5 565.7 57.8 10.2
Operating expense..................................................... 214.9 182.4 32.5 17.8
Interest expense...................................................... 42.8 54.1 (11.3) (20.9)
Other expense......................................................... 221.2 113.8 107.4 94.4
--------- ----------- --------- ---------
Total losses and expenses........................................... 2,818.7 2,591.1 227.6 8.8
--------- ----------- --------- ---------
Income before income taxes, minority interest, distributions on
preferred securities of subsidiary trust and extraordinary loss... $ 224.3 $ 370.9 $ (146.6) (39.5)%
--------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>

The Company's net premiums written increased 31.3% to $2,497.7 million for
the year ended December 31, 1997, from $1,902.4 million in 1996. On a pro forma
basis, 1996 net premiums written for the period were $2,621.2 million, resulting
in a decrease of 4.7%. The pro forma decrease in net premiums written was
attributable to a 15.7% decrease in facultative net premiums written to $691.7
million for the year ended December 31, 1997, from $820.7 million in 1996,
offset slightly by a 0.3% increase in treaty net premiums written to $1,806.0
million for 1997 from $1,800.5 million in 1996.

The decrease in facultative premiums was attributable to decreases of $107.0
million or 18.0% in the Company's Domestic Insurance Company Operations
("DICO"), $11.2 million or 5.9% in the Company's alternative market operations,
AM-RE Managers, Inc., ("ARMI"), and $10.8 million or 28.1% in the Company's
International Operations. These decreases generally were the result of what the
Company perceives to be deteriorating market conditions in the facultative
market in the 1997 period, which include depressed reinsurance prices and
premiums, lower renewal retention ratios on existing business, increased net
retentions by primary companies, and new entrants into the facultative market.

The increase in treaty net premiums written for the year ended December 31,
1997, from the same period in 1996 on a pro forma basis, was primarily
attributable to an increase in DICO of $46.4 million or 3.7%, offset by
decreases in International Operations of $37.8 million or 8.5%, and ARMI of $3.1
million or 3.1%. The slight growth in treaty premiums also was attributable to
what the Company perceives as deteriorating market conditions, which include
decreased pricing on the primary insurance company level, primary companies
increasing net retentions on excess of loss business as a result of surplus
growth, and conversion of certain reinsurance programs from a pro rata to an
excess of loss basis, which generally result in a reduction of reinsurance
premiums. The decrease in International Operations' net premium written was
primarily due to the assumption or renewal of certain aviation treaties by
Munich Re in the 1997

29
<PAGE>
period, which were previously written through MARC and the U.S. Branch in the
1996 period, in addition to the effect of foreign exchange translations from
other currencies into the strengthening U.S. dollar.

The Company's net premiums earned increased 38.4% to $2,486.1 million for
the year ended December 31, 1997, from $1,796.7 million in 1996. On a pro forma
basis, 1996 net premiums earned were $2,494.1 million, resulting in a decrease
of 0.3%. The pro forma decrease in premiums earned was primarily attributable to
the pro forma decrease in net premiums written, offset by the timing of premiums
earned on business in force.

Net losses and LAE incurred increased 47.0% and $1,716.3 million for the
year ended December 31, 1997, from $1,167.8 million in 1996. On a pro forma
basis, 1996 net losses and LAE incurred were $1,675.1 million, resulting in an
increase of 2.5%. This increase was primarily attributable to an overall
increase in the proportion of treaty net premiums earned in the 1997 period,
which carries a higher overall loss ratio than facultative business.

Underwriting expense, consisting of commission expense plus operating
expense, increased 57.2% to $838.4 million for the year ended December 31, 1997,
from $533.5 million in 1996. On a pro forma basis, underwriting expense for the
1996 period was $748.1 million, resulting in an increase of 12.1%. This increase
included a 10.2% increase in commission expense to $623.5 million for the year
ended December 31, 1997 from $565.7 million on a pro forma basis in 1996. This
increase was due to a higher overall commission rate on treaty business during
1997 compared to 1996, especially on new business written, in addition to
changes in the structure of the Company's retrocessional programs to include
more excess of loss arrangements, which generally provide less offset to
commission expense. Operating expenses increased 17.8% to $214.9 million for the
year ended December 31, 1997 from $182.4 million on a pro forma basis for 1996.
This increase is primarily the result of increased overhead costs, including
expenditures for technological and process improvements.

The Company experienced an underwriting loss (net premiums earned minus
losses and LAE incurred and underwriting expenses) of $68.6 million for the year
ended December 31, 1997, compared to an underwriting gain of $95.4 million in
1996. On a pro forma basis, the Company experienced an underwriting gain of
$71.0 million in 1996. The Company's loss ratio increased to 69.0% for the year
ended December 31, 1997 from 67.2% on a pro forma basis in 1996, while the
underwriting expense ratio increased to 33.8% in 1997 from 30.0% on a pro forma
basis in 1996. The combined ratio for the year ended December 31, 1997,
increased to 102.8% from 97.2% on a pro forma basis in 1996.

Net investment income increased 72.3% to $427.5 million for the year ended
December 31, 1997, from $248.2 million in 1996. On a pro forma basis, net
investment income was $392.2 million for the 1996 period, resulting in an
increase of 9.0%. This increase was primarily attributable to an increase in the
invested asset base in the 1997 period, as compared to the 1996 period.

The Company's interest expense decreased by 20.9% to $42.8 million for the
year ended December 31, 1997, from $54.1 million 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 issued $500.0 million principal amount of 7.45% Senior Notes, and
in-substance defeased its existing issue of 10 7/8% Senior Subordinated
Debentures in the principal amount of $450.0 million, which were redeemed in
September 1997.

The Company realized net capital gains of $87.7 million for the year ended
December 31, 1997, compared to net capital gains of $4.8 million in 1996. On a
pro forma basis, the Company experienced net capital gains of $27.8 million in
1996. This increase was primarily due to net capital gains of $67.9 million
realized on equity securities sold in 1997, as compared to net capital gains of
$22.8 million realized for the same period of 1996, and net capital gains
realized on bonds sold of $26.2 million as compared to net capital gains of $9.8
million realized in 1996. MARC and the U.S. Branch had combined realized capital
losses of $5.0 million in futures contracts during the 1996 period.

30
<PAGE>
Other income decreased 12.5% to $41.7 million for the year ended December
31, 1997, from $47.5 million in 1996. The decrease in the 1997 period was
attributable to a decrease in fee subsidiary revenue of $5.5 million. Other
expenses increased substantially to $221.2 million for the year ended December
31, 1997 from $109.2 million in 1996. The increase in the 1997 period was
primarily attributable to one-time charges incurred during the second quarter of
1997 of $38.2 million related to the write-down of the value of data processing
equipment, one-time severance and other personnel related charges of $72.8
million, and $13.3 million of other miscellaneous charges primarily due to the
Merger, compared to $36.1 million of acquisition-related expenses incurred
during 1996. In addition to these one-time charges, the Company also incurred an
expense of $20.3 million related to the Company's long-term incentive
compensation program established in the 1997 period; there was no similar
program in effect in 1996.

Income before income taxes, minority interest, distributions on preferred
securities of subsidiary trust and extraordinary loss decreased slightly to
$224.3 million for the year ended December 31, 1997, compared to $232.6 million
in 1996. On a pro forma basis, this total was $370.9 million.

Federal and foreign income tax benefits were $3.4 million for the year ended
December 31, 1997, compared to tax expense of $73.8 million in 1996. The
decrease in Federal and foreign taxes was primarily due to recognition of net
operating losses by the U.S. Branch prior to the Merger, resulting in a tax
benefit of $24.4 million, in addition to the reversal of a valuation allowance
that reduced the deferred tax asset associated with the U.S. Branch's loss
reserve discount. This reversal of the valuation allowance resulted in a tax
benefit of $37.7 million; the valuation allowance was reversed as the Company
believes that the recognition of the deferred tax asset is more likely than not,
based on its consolidated tax position.

The Company recognized an after-tax increase to income of $6.8 million
representing the minority interest in the net loss of MARC for the six months
ended June 30, 1997, prior to the Merger.

The Company recognized an after-tax charge of $13.1 million for each of the
years ended December 31, 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 was $221.4 million for the year ended
December 31, 1997, compared to net income of $111.7 million in 1996.

YEAR ENDED DECEMBER 31, 1996, COMPARED WITH YEAR ENDED DECEMBER 31, 1995

The Company's net premiums written increased 16.7% to $1,902.4 million for
the year ended December 31, 1996, from $1,629.5 million in 1995. Total treaty
net premiums written increased 20.4% to $1,358.7 million for the year ended
December 31, 1996, from $1,128.2 million in 1995, with increases in DICO's and
International Operations' treaty net premiums written, partially offset by a
decline in ARMI's treaty net premiums written. Facultative net premiums written
increased 8.5% to $543.7 million for the year ended December 31, 1996, from
$501.3 million in 1995, primarily due to both new accounts and the expansion of
existing accounts. International net premiums written, which are included in the
treaty and facultative amounts stated above, were $442.6 million, or 23.3% of
total net premiums written for the year ended December 31, 1996, compared to
$380.5 million, or 23.4% of total net premiums written in 1995. The Company
believes the increase in international premium writings were attributable to its
continued success in implementing its direct whole account marketing approach,
as well as increasing opportunities in Latin America and Australia.

31
<PAGE>
The Company's net premiums earned increased 17.4% to $1,796.7 million for
the year ended December 31, 1996, from $1,530.9 million in 1995. This increase
in premiums earned was primarily due to the increase in premiums written for the
year ended December 31, 1996, as well as the timing of premiums earned on
business in force.

Net losses and loss adjustment expenses ("LAE") incurred decreased 12.9% to
$1,167.8 million for the year ended December 31, 1996, from $1,340.2 million in
1995. This decrease was primarily due to a decrease in losses due to adverse
development from Latent Liability Exposures. The Company incurred a $347.4
million charge for loss reserve strengthening, primarily due to increases in
reserves for Latent Liability Exposures, in the fourth quarter of 1995. (See
"Reserves for Unpaid Losses and Loss Adjustment Expenses".) The Company had no
adverse loss development for Latent Liability Exposures in 1996. The year ended
December 31, 1996, also included $16.5 million of catastrophe losses, compared
to $10.0 million of catastrophe losses incurred in 1995.

Underwriting expenses, consisting of commission expense plus operating
expenses, increased 17.9% to $533.5 million for the year ended December 31,
1996, from $452.5 million in 1995. This increase was primarily due to an
increase in commission expense of 21.0% to $390.1 million for the year ended
December 31, 1996, from $322.4 million in 1995. This increase was primarily due
to the increase in writings of pro rata treaty premiums. Operating expenses
increased 10.3% to $143.4 million for the year ended December 31, 1996, from
$130.1 million in 1995, due to an increase in overhead expenses.

The Company experienced an underwriting gain (net premiums earned minus
losses and LAE incurred and underwriting expenses) of $95.4 million for the year
ended December 31, 1996, compared to an underwriting loss of $261.7 million in
1995. The change in the underwriting result was primarily due to the charge for
loss reserve strengthening recognized in 1995. On a GAAP basis, the Company's
loss ratio decreased to 65.0% for the year ended December 31, 1996 (inclusive of
0.9 points due to catastrophe losses), from 87.5% in 1995 (inclusive of 20.4
points due to the charge for loss reserve strengthening and 0.6 points due to
catastrophe losses). The underwriting expense ratio increased slightly to 29.7%
for the year ended December 31, 1996, from 29.6% in 1995. As a result of the
decrease in the loss ratio, the GAAP combined ratio for the year ended December
31, 1996, decreased to 94.7% from 117.1% in 1995.

Pre-tax net investment income increased 11.5% to $248.2 million for the year
ended December 31, 1996, from $222.6 million in 1995. This increase was
primarily due to the increase in invested assets. The Company's after-tax net
investment income increased by 9.7% to $183.0 million for the year ended
December 31, 1996, from $166.8 million in 1995. The after-tax net investment
income increase was less than the pre-tax net investment income increase due to
the Company's decision to continue to increase the percentage of taxable fixed
maturity investments in its portfolio, based on the relative attractiveness of
investment yields on highly rated taxable instruments, in addition to tax
planning considerations.

The Company's interest expense decreased by 10.9% to $54.1 million for the
year ended December 31, 1996, from $60.7 million in 1995. This decrease was
primarily attributable to the lower level of senior bank debt outstanding during
the year ended December 31, 1996, compared to the 1995 period, under the
Company's revolving credit facility. See "Financial Condition."

The Company realized net capital gains of $4.8 million for the year ended
December 31, 1996, comprised of net capital gains of $3.9 million realized on
bond sales and $0.9 million realized on the sale of other miscellaneous
investments. The Company realized net capital gains of $4.7 million for the year
ended December 31, 1995, comprised of net capital gains of $4.3 million on bond
sales and $0.4 million realized on the sale of other miscellaneous investments.

Other income increased by 21.5% to $47.5 million for the year ended December
31, 1996, from $39.1 million in 1995. The increase in the 1996 period was
primarily attributable to a $12.7 million increase in fee subsidiary revenue.
Other expenses increased 5.6% to $109.2 million for the year ended December 31,
1996, from $103.4 million in 1995. The increase was primarily attributable to
$36.1 million in acquisition-

32
<PAGE>
related expenses incurred during 1996, and a $16.5 million increase in
subsidiary expenses from $39.3 million in 1995, to $55.8 million in 1996. The
1995 period included a $36.5 million increase in the provision for the allowance
for uncollectible reinsurance primarily related to the charge for loss reserve
strengthening in 1995; there was no similar charge during the 1996 period.

The Company recorded income before income taxes, distributions on preferred
securities of subsidiary trust, and extraordinary loss of $232.6 million for the
year ended December 31, 1996, compared to a loss of $159.5 million in 1995.
Federal and foreign income tax expenses were $73.8 million for the year ended
December 31, 1996, compared to income tax benefits of $76.6 million in 1995.

The Company incurred an after-tax expense of $13.1 million for the year
ended December 31, 1996, compared to $4.4 million in 1995, representing the
Company's minority interest in the earnings of American Re Capital, a
single-purpose, wholly owned subsidiary trust. The expense was due to the
distributions paid by American Re Capital on the QUIPS, which were issued August
30, 1995.

In 1996, the Company recognized an extraordinary loss of $34.0 million
after-tax, resulting from the in-substance defeasance of the senior subordinated
debentures. This amount represents the write-off of the remaining unamortized
financing fees from the senior subordinated debentures, interest payable through
the redemption date of September 19, 1997, and a call premium of 4.75% of the
redemption price. See "Financial Condition." In 1995, the Company recognized an
extraordinary, non-cash after-tax loss of $0.3 million, representing the
write-off of capitalized financing fees from the revolving bank credit agreement
after the obligation was paid in full.

The Company realized net income to common stockholders of $111.7 million for
the year ended December 31, 1996, compared to a net loss of $87.6 million in
1995.

FINANCIAL CONDITION

The Company is a holding company which includes its principal subsidiary,
American Re-Insurance. Based on statutory net premiums written of $2,491.7
million in 1997, American Re-Insurance ranked as the second largest property and
casualty reinsurer in the U.S., according to Reinsurance Association of America
statistics. The Company had total assets of $13,288.8 million and stockholders'
equity of $2,586.4 million at December 31, 1997.

The Company is a subsidiary of Munich Re, a company organized under the laws
of Germany. Munich Re is the world's largest reinsurance company, based on 1996
net premiums written, according to Business Insurance.

Total consolidated assets increased by 9.4% to $13,288.8 million at December
31, 1997, from $12,143.0 million at December 31, 1996. This increase was
primarily due to an increase in cash and investments of $666.1 million and
premiums due and other receivables of $167.6 million and goodwill associated
with the Merger, due to the purchase of the MARC minority interest from Allianz
and Victoria, of $182.5 million.

The total financial statement value of investments and cash increased to
$7,673.4 million at December 31, 1997, from $7,007.3 million at December 31,
1996, primarily due to operating cash flows, the cash capital contribution from
the Merger of $85.0 million, and an increase in the fair value of investments
held. The financial statement value of the investment portfolio at December 31,
1997, included a net increase from amortized cost to fair value of $181.5
million for debt and equity investments, compared to a net increase of $84.9
million at December 31, 1996. At December 31, 1997, the Company recognized a
cumulative unrealized gain of $118.0 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 increase to stockholders' equity of $62.8 million from the cumulative
unrealized gain on debt and equity securities of $55.2 million recognized at
December 31, 1996.

33
<PAGE>
Total consolidated liabilities increased by 6.1% to $10,464.9 million at
December 31, 1997, from $9,864.9 million at December 31, 1996. This increase was
primarily due to increases in loss and LAE reserves of $316.6 million, loss
balances payable of $75.9 million, and amounts payable for investment securities
purchased of $139.9 million.

Common stockholders' equity increased 44.3% to $2,586.4 million at December
31, 1997, from $1,792.5 million at December 31, 1996. This increase was
primarily attributable to the Merger-related transactions, with the non-cash
purchase of the MARC minority interest of $425.0 million, and the capital
contribution to the U.S. Branch of $85.0 million. In addition, the Company
realized net income of $221.4 million for the year ended December 31, 1997, and
recognized net market appreciation of $62.8 million on debt and equity
securities, after applicable income tax effect.

The Company's insurance/reinsurance subsidiaries' statutory surplus
increased to $2,323.4 million at December 31, 1997, from $2,178.1 million at
December 31, 1996. Operating leverage, as measured by such subsidiaries'
premiums-to-surplus ratio, on an annualized basis was 1.07 to 1 and 1.21 to 1 at
December 31, 1997, and December 31, 1996, respectively.

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. It is the Company's understanding that it is Munich Re's intention
to further strengthen the capital position of the Company by allowing net income
to be retained; therefore, at this time, no cash dividends on the Company's
common stock are anticipated.

The Company is required to apply a portion of its operating cash flow to the
servicing and repayment of its debt obligations. The payment of dividends to the
Company by American Re-Insurance is subject to limitations imposed by the
Delaware Insurance Code. Based upon these restrictions and 1997 operating
results, the maximum amount available for payment of dividends to the Company by
American Re-Insurance in 1998 without approval of regulatory authorities is
estimated to be $230.1 million.

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 both a short- and
long-term basis by funds provided by operations and from the maturity and the
sale of investments. Cash provided by operations primarily consists of premiums
collected, investment income, and reinsurance recoverable balances collected,
less paid claims, retrocession payments, underwriting and interest expenses,
QUIPS distributions, and income tax payments. Cash flows provided by operations
for the Company were $366.1 million for 1997, $365.9 million for 1996, and
$325.7 million in 1995.

Total cash proceeds in 1997 from sales of investments were $4,268.5 million
compared to $1,203.5 million in 1996 and $1,011.3 million in 1995. Much of the
increased activity in 1997 was due to the Merger, as the investment portfolio
was significantly larger than prior years, in addition to a portfolio
restructure, based on new investment managers' decisions and a redeployment into
tax-exempt securities. Much of the activity in 1996 was due to an increase in
the modified duration of the portfolio to 4.65 years at December 31, 1996, from
4.32 years at December 31, 1995, in addition to an overall redeployment out of
tax-advantaged securities. Much of the activity in 1995 occurred due to a
repositioning of the Company's foreign currency-denominated investments into
longer duration securities, in addition to an overall redeployment out of
tax-advantaged securities. Cash and cash equivalents were $641.6 million, $553.1
million, and $294.2 million, at December 31, 1997, 1996, and 1995, respectively.
Cash and short-term investments are maintained for liquidity purposes and
represented 8.4%, 7.9%, and 7.4%, respectively, of total financial statement
investments and cash on such dates.

34
<PAGE>
American Re has a $150 million unsecured bank credit agreement with Bank of
America, NA. At December 31, 1997, $75 million remained available under the bank
credit agreement.

THE YEAR 2000 ISSUE

Much attention has been given to the Year 2000 problem, (i.e., the failure
of computer software and embedded computer chips to properly recognize the Year
2000 and later because such dates are represented only by the last two digits of
the year, resulting in errors during certain computer operations). The Company
has been aware of the Year 2000 problem for several years and has been making
modifications and replacements in its systems as problems have been identified.
Some Year 2000 problems have been eliminated in the course of upgrading the
Company's computer hardware and software as part of its ongoing technology
initiative. However, recognizing that the Company still has some Year 2000 non-
compliant systems, e.g., certain mainframe systems, old software applications,
and some facilities equipment, management has initiated a formal Company-wide
process to identify and correct any remaining Year 2000 problems. The Company
has dedicated in-house information technology staff, retained consultants, and
designated representatives from the major business areas of the Company to
review all systems for Year 2000 compliance and to correct all problems
identified. The Company expects to complete this process by the fourth quarter
of 1998, at which time the Company plans to conduct enterprise-wide testing of
its systems to confirm their Year 2000 compliance. As part of this process, the
Company is communicating with its clients, retrocessionaires, vendors and other
business relationships regarding their Year 2000 compliance and is requesting
modifications to their systems that are not Year 2000 compliant, as appropriate.
The Company presently believes that with these modifications and replacements,
the Year 2000 problem can be adequately addressed. The Company anticipates that
Year 2000 specific expenditures through 1998, not including in-house resources,
will be approximately $5.8 million. While additional expenses in connection with
the Company's Year 2000 compliance effort are likely, it is anticipated that the
total Year 2000 compliance expenditures will not have a material adverse effect
on the Company's business, operations or financial condition.

Additionally, the Company is in the process of evaluating its underwriting
risk arising from potential losses associated with Year 2000 failures and will
continue to monitor its exposure to such risk. Generally, standard insurance and
reinsurance contracts neither explicitly include nor explicitly exclude coverage
for Year 2000 failures. As a result, some Year 2000-related losses may be
determined to be covered under standard insurance and reinsurance contracts,
depending upon the specific contract language and the facts and circumstances of
each loss. The extent of Year 2000 losses which the Company may incur cannot be
determined at this time, because of the uncertainty in both the nature and scope
of Year 2000 related failures that are likely to occur and whether insurance or
reinsurance may apply to losses arising from such failures. Given the possible
magnitude of the Year 2000 problem, the Company may incur a significant amount
of Year 2000 related losses that may have a material adverse impact on the
Company's business, operations or financial condition. However, the Company
believes it is taking reasonable and appropriate measures in the course of its
business operations and client relationships to avoid or mitigate such Year 2000
related liability exposure.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the items included in Item 14(a) of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Deloitte & Touche LLP was dismissed as principal independent accountants to
the Company and its subsidiaries, effective March 27, 1997. Also effective that
date, the Company engaged KPMG Peat Marwick LLP, the principal independent
accountants for Munich Re, as its principal independent accountants.

35
<PAGE>
No report on the financial statements of the Company by Deloitte & Touche
LLP contained an adverse opinion or a disclaimer of opinion, or was qualified or
modified as to uncertainty, audit scope, or accounting principles during either
of the past two fiscal years or any subsequent period preceding the dismissal.

During American Re's two most recent fiscal years and the subsequent period
preceding the dismissal of Deloitte & Touche LLP, there were no disagreements
with Deloitte & Touche LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Deloitte & Touche LLP,
would have caused Deloitte & Touche LLP to make reference to the subject matter
of such disagreements in connection with its reports on the Company.

The engagement of KPMG Peat Marwick LLP as independent accountants to the
Company is intended to allow the Company and Munich Re to benefit from
efficiencies resulting from the use of KPMG Peat Marwick LLP as principal
independent accountants to both the Company and Munich Re.

36
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

DIRECTORS

DR. JUR. CLAUS HELBIG, age 57, became a Director of the Company on November
25, 1996. Dr. Helbig has been a Member of the Board of Management of Munich Re
since 1993. Dr. Helbig is also currently Vice Chairman of the Board of Directors
of Allgemeine Kreditversicherung AG, Mainz, Germany; a Member of the Board of
Directors of each of Deutsche Gesellschaft fuer Fondsverwaltung (DEGEF)
Frankfurt, Germany (Deutsche Bank Group); and Karlsruher Rendite, Karlsruhe.
From 1989 to 1992 Dr. Helbig was a member of the Board of Directors of each of
Westdeutsche Landesbank (Austria) AG, Vienna, Austria; Westdeutsche Landesbank
International S.A., Luxembourg; Banque Franco Allemande S.A., Paris, France; and
a Member of the Board of Management of Suedwestdeutsche Landesbank.

EDWARD B. JOBE, age 68, retired as Chairman of the Board and Chief Executive
Officer of the Company in January, 1996, positions which he assumed in
September, 1992. From September, 1992, through December, 1994, Mr. Jobe was also
Chairman of the Board and Chief Executive Officer of American Re-Insurance. Mr.
Jobe continues to be a Director of the Company and American Re-Insurance. Prior
to September, 1992, Mr. Jobe was President, Chief Executive Officer and a
Director of American Re-Insurance from March, 1987.

EDWARD J. NOONAN, age 39, became President, Chief Executive Officer and a
director of the Company and Chairman, President and Chief Executive Officer of
American Re-Insurance on March 14, 1997. From February 5, 1997 to March 14,
1997, Mr. Noonan was Executive Vice President of the Company and American
Re-Insurance. From September, 1994 to March 14, 1997, Mr. Noonan was President,
Domestic Insurance Company Operations of American Re-Insurance. Mr. Noonan has
also been a Director of American Re-Insurance since September, 1992. Mr. Noonan
was a Senior Vice President of American Re-Insurance from July, 1991 to
February, 1997. From April, 1990 to July, 1991, Mr. Noonan was Senior Vice
President, Treaty Division. From May, 1987 to April, 1990, he was Vice
President, Treaty Division of American Re-Insurance. From October, 1983 through
December, 1987, he was a Vice President of American Re-Insurance.

HANS RATHNOW, age 63, became a Director of the Company on November 25, 1996.
Mr. Rathnow has been a Member of the Board of Management of Munich Re since
1991. Mr. Rathnow is also currently a Member of the Board of Directors of
Allianz Insurance Company, Los Angeles, California as well as a Member of the
Board of Directors of various companies within the Munich Re holding company
system.

DR. JUR. HANS-JURGEN SCHINZLER, age 57, became a Director of the Company on
November 25, 1996 and Chairman of the Company on March 14, 1997. Dr. Schinzler
has been Chairman of the Board of Management of Munich Re since 1993. From 1981
to 1993 Dr. Schinzler was a Member of the Board of Management of Munich Re. Dr.
Schinzler currently holds positions on the Supervisory Boards of various
subsidiaries within the Munich Re holding company system. Dr. Schinzler is also
Deputy Chairman of the Supervisory Board of Allianz
Versicherungs-Aktiengesellschaft, Munich; a Member of the Supervisory Board of
each of D.A.S., Munich; Degussa Aktiengesellschaft, Frankfurt; Dresdner Bank
Aktiengesellschaft, Frankfurt; Hoechest Aktiengesellschaft, Frankfurt; and MAN
Aktiengesellschaft, Munich. Dr. Schinzler is a Member of the Board of Directors
of Allianz of America Inc., Delaware and Dresdner Securities (USA) Inc., New
York.

EXECUTIVE OFFICERS

In addition to Mr. Noonan, the executive officers of the Company are as
follows:

MAHMOUD M. ABDALLAH, age 49, is President, International Operations for
American Re-Insurance and AM-RE Brokers. He assumed that position in September,
1994. On February 5, 1997, Mr. Abdallah

37
<PAGE>
became an Executive Vice President of the Company and American Re-Insurance. Mr.
Abdallah has been a Director of American Re-Insurance since September, 1992.
From May 1989 to September, 1994, he was Senior Vice President of American
Re-Insurance. From July, 1987 to May, 1989, he was Vice President, responsible
for International Operations. Mr. Abdallah serves on the Board of U.S.
International Insurance Council (IIC) where he was appointed Chairman in 1995.

ALBERT J. BEER, age 47, is Executive Vice President of the Company and
President of AM-RE Managers, Inc. Mr. Beer assumed the position of Executive
Vice President on March 14, 1997 and became President of AM-RE Managers, Inc. on
December 5, 1997. Prior to that, Mr. Beer was President of American Re-
Insurance, Domestic Operations since March 14, 1997. From December, 1992 to
March, 1997, Mr. Beer was Senior Vice President -- Branch Operations of American
Re-Insurance. Mr. Beer has been a Director of American Re-Insurance since
December, 1992. From April 1989, to December 1992, he was Chief Actuary for
Skandia America. Prior to that, Mr. Beer was with Tillinghast & Co.
(professional actuaries) from November 1984 to April, 1989, most recently as a
principal.

ROBERT K. BURGESS, age 49, is Executive Vice President, General Counsel and
Secretary of the Company and American Re-Insurance. He became Executive Vice
President on February 5, 1997, and prior thereto he was Senior Vice President,
General Counsel and Secretary of both companies. Mr. Burgess has been a Director
of American Re-Insurance since May, 1995. Prior to April, 1995, Mr. Burgess was
a Partner in the law firm of Latham & Watkins since 1981 and an associate prior
thereto.

GREGORY T. DOYLE, age 39, became Executive Vice President of the Company and
Executive Vice President and President of Domestic Insurance Company Operations
of American Re-Insurance on December 5, 1997. From February 5, 1997 to December
1997, Mr. Doyle was Senior Vice President of American Re-Insurance and Senior
Vice President of Domestic Insurance Company Operations. From March 26, 1990 to
February 1997, he was Account Management Vice President. Prior to that, Mr.
Doyle had been Assistant Vice President of Account Management, New York, since
August 1, 1988. Mr. Doyle joined American Re-Insurance in May 1987 as Director
of Account Management in New York.

ROBERT E. HUMES, age 54, became Senior Vice President--Human Resources
Division of American Re-Insurance in September, 1994. Prior to that, Mr. Humes
was Vice President--Human Resources Division since July, 1993. He was previously
employed by Bristol-Myers Squibb Company where he was Senior Vice President of
Corporate Resources from October, 1989 to April, 1990. From July, 1971 to
October, 1989, Mr. Humes was employed by Squibb Corporation in numerous
management positions in Human Resources including Senior Vice President of Human
Resources. From April, 1990 to July, 1993, Mr. Humes served as an officer and a
member of the Board of Trustees to numerous non-profit organizations including
the American Red Cross, the United Way and the Princeton Chamber of Commerce
providing expertise to such groups in the areas of human resources, strategic
planning and fund raising.

GEORGE T. O'SHAUGHNESSY, JR., age 43, became Senior Vice President, Chief
Financial and Accounting Officer and Controller of the Company on April 1, 1997.
Mr. O'Shaughnessy is also Senior Vice President and Chief Financial Officer of
American Re-Insurance, which position he assumed in April, 1997. Mr.
O'Shaughnessy became a Director of American Re-Insurance on December 5, 1997.
Mr. O'Shaughnessy has been Vice President and Controller of the Company and
American Re since January, 1995.

ALAN F. NUGENT, age 43, became Senior Vice President and Chief Information
Officer of American Re in September, 1996. Prior to joining American Re, Mr.
Nugent was Executive Vice President and Chief Technology Officer with the Xerox
Corporation's Global Process and Information Technology area since 1993. Prior
to that, he was Vice President of Soft Machine Inc. from 1977 to 1993.

THOMAS E. SMITH, age 45, became Senior Vice President of American Re in
July, 1996. Prior to that Mr. Smith was Vice President and Senior Claim Officer
for the Commercial Division of the Farmers Insurance Group. Mr. Smith was with
Farmers for over 20 years.

38
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth for the Chief Executive Officer of the
Company, and the four other executive officers of the Company who were the most
highly compensated executive officers of the Company for the year ended December
31, 1997, (the "named executive officers"), information concerning compensation
earned in 1997, 1996, and 1995 by such persons for services with the Company and
its subsidiaries.

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------ SECURITIES --------------------------
OTHER ANNUAL UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS PAYOUTS COMPENSATION(2)
- ----------------------------------- ---- -------- -------- ---------------- ---------- -------- ---------------
Edward J. Noonan................... 1997 $475,000 $500,000 0 0 0 $ 497,525
President and Chief 1996 295,000 375,000 0 0 0 9,274,064
Executive Officer 1995 270,000 300,000 0 75,000 0 16,899

Mahmoud M. Abdallah................ 1997 $400,000 $425,000 0 0 0 $ 391,696
Executive Vice President 1996 295,000 375,000 0 0 0 9,266,759
1995 270,000 300,000 0 75,000 0 17,362

Albert J. Beer..................... 1997 $340,000 $400,000 0 0 0 $ 117,444
Executive Vice President 1996 270,000 375,000 0 0 0 1,8881,248
1995 260,000 300,000 0 54,000 0 16,899

Robert K. Burgess.................. 1997 $400,000 $400,000 0 0 0 $ 235,956
Executive Vice President, 1996 365,000 375,000 0 0 0 4,099,806
General Counsel and Secretary 1995 260,000 300,000 0 130,000 0 5,822

Alan F. Nugent..................... 1997 $330,000 $150,000 0 0 0 $ 6,311
Senior Vice President 1996 81,000 150,000 0 0 0 2,714
(American Re-Insurance)
</TABLE>

- ------------------------

(1) During each of the three years ended December 31, 1997, 1996 and 1995,
perquisites for each individual named in the Summary Compensation Table
aggregated less than 10% of the total annual salary and bonus reported for
such individual in the Summary Compensation Table, or $50,000, if lower.

(2) Includes (i) accrued above market or preferential interest earned on
deferred option proceeds under the Company's Senior Executive Deferred
Compensation Plan as follows: Mr. Noonan, $461,702 in 1997 and $43,842 in
1996; Mr. Abdallah, $365,477 in 1997 and $34,704 in 1996; Mr. Beer, $94,927
in 1997 and $9,014 in 1996; Mr. Burgess, $208,803 in 1997 and $19,827 in
1996; ; (ii) employer contributions under the American Re-Insurance Company
Savings Plan, a 401(k) plan, of $8,000 in 1997, $7,500 in 1996, and $7,500
in 1995, for Mr. Noonan; of $6,560 in 1997, $7,500 in 1996, and $7,500 in
1995, for Mr. Abdallah; of $8,023 in 1997, $7,500 in 1996, and $7,500 in
1995, for Mr. Beer; of $6,419 in 1997, $7,500 in 1996, and $7,500 in 1995,
for Mr. Burgess; and of $1,936 in 1997 for Mr. Nugent, of which 100% is
vested as of December 31, 1997, (iv) employer contributions under the
American Re-Insurance Supplemental Savings Plan, a deferred compensation
plan designed to supplement the 401(k) plan, of which 100% is vested as of
December 31, 1997 of $22,285 in 1997,

39
<PAGE>
$7,199 in 1996, and $6,053 in 1995 for Mr. Noonan; of $14,291 in 1997,
$16,292 in 1996, and $14,345 in 1995 for Mr. Abdallah; of $9,530 in 1997,
$6,250 in 1996, and $5,338 in 1995 for Mr. Beer; of $14,563 in 1997, and
$6,968 in 1996 for Mr. Burgess. (v) employer contributions for group term
life, accidental death and dismemberment and disability insurance of $5,538
in 1997, $3,647 in 1996, and $3,345 in 1995 for Mr. Noonan; of $5,368 in
1997, $4,358 in 1996, and $3,986 in 1995 for Mr. Abdallah; of $4,964 in
1997, $4,183 in 1996, and $4,025 in 1995, for Mr. Beer; of $6,171 in 1997,
$6,588 in 1996 and $5,822 in 1995 for Mr. Burgess; and of $4,375 in 1997 and
$2,713 in 1996 for Mr. Nugent; and (vi) amounts paid or elected to be
deferred in 1996 pursuant to canceled options under the Company's two stock
option plans which were terminated as a result of the change in control of
the Company in 1996 as follows: Mr. Noonan, $9,211,877; Mr. Abdallah,
$9,211,877; Mr. Beer, $1,854,301; and Mr. Burgess, $4,078,750.

LONG TERM INCENTIVE PLAN

The following table sets forth for the Chief Executive Officer of the
Company, and the four named executive officers information concerning long term
incentive compensation awards made in 1997 under the Company's Long-term
Incentive Compensation Plan.

<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
- ------------------------------------------------------------------------------------------------------------------------
ESTIMATED FUTURE PAYOUTS
(B) UNDER NON-STOCK PRICE-BASED PLANS
NUMBER OF -------------------------------------------
SHARES, UNITS (C)
OR PERFORMANCE OR OTHER (D) (E) (F)
(A) OTHER RIGHTS PERIOD UNTIL MATURITIES THRESHOLD TARGET MAXIMUM
NAME (#) OR PAYOUT ($ OR #) ($ OR #) ($ OR #)
- --------------------------------- --------------- ----------------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>

Edward J. Noonan................. 2001 0 $ 2,000,000 $ 4,000,000

Mahmoud M. Abdallah.............. 2001 0 $ 1,800,000 $ 3,600,000

Albert J. Beer................... 2001 0 $ 1,800,000 $ 3,600,000

Robert K. Burgess................ 2001 0 $ 1,800,000 $ 3,600,000

Alan F. Nugent................... 2001 0 $ 500,000 $ 1,000,000
</TABLE>

- ------------------------

Under the Company's Long-term Incentive Compensation Plan, performance goals are
selected by the Company's Executive Committee for which performance targets are
chosen. These performance targets are applicable to a performance period
consisting of four fiscal years. The incentive amounts to be earned by each
participant is 100% at risk and will vary from 0% to 200% of the individual
target award based upon the achievement of the applicable performance targets.
The performance goals selected by the Committee for the first performance period
are Aggregate Operating Income and Return on Equity.

COMPENSATION OF DIRECTORS

Directors receive no additional compensation for their Board or Committee
service.

EMPLOYMENT AND SEVERANCE AGREEMENTS

American Re-Insurance has entered into Senior Executive Severance and
Non-Competition Agreements (the "Severance Agreements"), with Messrs. Noonan,
Abdallah, Beer and Burgess. Under their respective agreements, each such
executive has agreed to serve initially in his position held at the time such
agreements were entered into and thereafter in such positions as the Board of
Directors of American Re-Insurance shall designate, on an "at-will" employment
basis, and American Re-Insurance has agreed to pay a severance benefit to such
executive if the executive's employment with American Re-Insurance or an
affiliate is terminated at any time on or before December 31, 2001, pursuant to
an involuntary termination by the Company not for "Cause" or on a voluntary
basis by the executive upon a "Constructive Discharge"

40
<PAGE>
(as such terms are defined in the Severance Agreements). Under the Severance
Agreements, upon such termination, the executive would be entitled to
continuation of annual base salary and annual bonus (equal to the greater of the
amount of the most recent bonus paid to the executive and the amount of the
bonus paid to the executive for 1996) for a period of two years. The executive
would also be entitled to receive any amounts accrued to the date of termination
under any long term compensation plan and all other benefits available under the
Company's personnel policy manual as in effect as of the date of the Severance
Agreements. For a period of two years after the date of termination, the
executive would be subject to a covenant not to compete with American
Re-Insurance or any affiliate thereof.

RETIREMENT PLAN

American Re-Insurance provides for its employees a noncontributory, defined
benefits pension plan (the "American Re Pension Plan") and a nonqualified
supplemental excess pension plan (the "Supplemental Pension Plan"). The table
below shows the combined estimated maximum annual retirement benefits payable
under both plans, at selected earnings levels and after selected periods of
credited service to employees who retire at age 65. The benefits as presented do
not take into account any reduction for joint and survivorship payments or any
offset for Social Security Benefits to be received by the employee. The table
shows benefits computed as in a straight life annuity.

MAXIMUM RETIREMENT BENEFITS PAYABLE

<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ---------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>

$300,000............................................ $ 78,750 $ 105,000 $ 131,25 $ 157,50 $ 183,750

400,000............................................. 105,000 140,000 175,000 210,000 245,000

500,000............................................. 131,250 175,000 218,750 262,500 306,250

600,000............................................. 157,500 210,000 262,500 315,000 367,500

700,000............................................. 183,750 245,000 306,250 367,500 428,750

800,000............................................. 210,000 280,000 350,000 420,000 490,000

900,000............................................. 236,250 315,000 393,750 472,500 551,250

1,000,000........................................... 262,500 350,000 437,500 525,000 612,500

1,100,000........................................... 288,750 385,000 481,250 577,500 673,750

1,200,000........................................... 315,000 420,000 525,000 630,000 735,000
</TABLE>

Compensation covered by the American Re-Insurance Pension Plan, together
with the Supplemental Pension Plan for the named executive officers, corresponds
with the compensation set forth in the annual compensation columns of the
Summary Compensation Table. The credited years of service on December 31, 1997
for the persons named in the Summary Compensation Table are as follows: Mr.
Noonan, 13.2 years; Mr. Abdallah, 15 years; Mr. Beer, 5 years; Mr. Burgess, 2.6
years; and Mr. Nugent, .25 years.

To be eligible to participate in the American Re-Insurance Pension Plan, an
employee must have completed one year of service and attained age 21, or
attained age 45. Retirement benefits are computed by multiplying the average of
an employee's highest five years' base salary by 1.75% and multiplying by the
number of years of covered service, not in excess of 35, with American
Re-Insurance, its subsidiaries and Aetna (after May 8, 1979 and before October
1, 1992). Base salary does not include overtime earnings, service awards, Aetna
Incentive Savings Plan and American Re Savings Plan match awards (supplemental
and non-supplemental), Annual Incentive Compensation Plan bonus awards, and
Aetna Performance Unit

41
<PAGE>
Plan awards. Normal retirement age is 65. A participant is 100% vested in his
retirement benefits after five years of service.

The American Re-Insurance Pension Plan provides for reduced benefits upon
early retirement prior to age 62. Early retirement is available to participants
age 55 to 64 with at least ten years of service. Upon the death of a vested
participant before retirement, the American Re-Insurance Pension Plan provides
for a survivor annuity benefit to the participant's spouse of approximately 50%
of the employee's accrued benefit at the time of death beginning on the date of
the participant's earliest eligibility for retirement. The same benefits are
payable to minor children if there is no surviving spouse.

The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
limits the maximum annual benefit that may be accrued under and paid from a
tax-qualified plan. As a result, and as contemplated by ERISA, American
Re-Insurance has established a supplemental plan to provide benefits (included
in the foregoing table) which would exceed the ERISA limit. The Supplemental
Pension Plan also is used to pay other pension benefits not otherwise payable
under the American Re-Insurance Pension Plan, including benefits attributable to
the Annual Incentive Compensation Plan, and covered compensation in excess of
that permitted under the American Re-Insurance Pension Plan.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Munich Reinsurance Company owns 91.33% of the outstanding Common Stock of
the Company.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company renewed an agreement with Mr. Jobe to provide consulting
services during 1998 for an annual fee of $250,000.

42
<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) DOCUMENTS

1. The financial statements listed in the accompanying Index to Financial
Statements are filed as part of this report. The Schedules to Financial
Statements listed in the accompanying Index to Schedules to Financial Statements
are filed as part of this report.

2. The accompanying Exhibit Index is hereby incorporated herein by this
reference. The exhibits listed in the accompanying Index to Exhibit are filed or
incorporated by reference as part of this report.

(b) REPORTS ON FORM 8-K:

1. The Company filed a report on Form 8-K dated as of March 27, 1997 which
advised that the Company dismissed Deloitte & Touche LLP as the principal
independent accountants to the Company and engaged KPMG Peat Marwick LLP as its
principal independent accountants.

2. The Company filed a report on Form 8-K dated as of July 15, 1997 which
advised of the completion of the merger of Munich American Reinsurance Company
and the U.S. Branch of Munich Re into American Re-Insurance Company.

3. The Company filed a report on Form 8-K/A dated as of September 14, 1997
which amended Form 8-K dated as of July 15, 1997 by providing pro forma
consolidated financials of the combined entity, the audited consolidated
financial statements for the three-year period ended December 31, 1996 for each
of Munich American Reinsurance Company and the U.S. Branch of Munich Re and
interim financial statements for the first two quarters of 1997 for each of MARC
and the U.S. Branch of Munich Re.

43
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized, in the
Township of Plainsboro, State of New Jersey, on March 30, 1997.

<TABLE>
<S> <C> <C>
AMERICAN RE CORPORATION

BY: /S/ ROBERT K. BURGESS
-----------------------------------------
Robert K. Burgess
EXECUTIVE VICE PRESIDENT, GENERAL
COUNSEL AND SECRETARY
</TABLE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.

SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ CLAUS HELBIG Director
- ------------------------------ March 30, 1998
Claus Helbig

/s/ EDWARD J. NOONAN President, Chief Executive
- ------------------------------ Officer and Director March 30, 1998
Edward J. Noonan

/s/ EDWARD B. JOBE Director
- ------------------------------ March 30, 1998
Edward B. Jobe

/s/ HANS RATHNOW Director
- ------------------------------ March 30, 1998
Hans Rathnow

/s/ HANS JURGEN SCHINZLER Chairman of the Board and
- ------------------------------ Director March 30, 1998
Hans Jurgen Schinzler

/s/ GEORGE T. O'SHAUGHNESSY, Senior Vice President and
JR. Chief Financial and
- ------------------------------ Accounting Officer March 30, 1998
George T. O'Shaughnessy, Jr.

44
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-1
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets--December 31, 1997 and 1996............................... F-3
Consolidated Statements of Income--Years ended December 31, 1997, 1996, and 1995...... F-4
Consolidated Statements of Stockholders' Equity--Years ended December 31, 1997, 1996,
and 1995............................................................................ F-5
Consolidated Statements of Cash Flows--Years ended December 31, 1997, 1996 and 1995... F-6
Notes to Consolidated Financial Statements--December 31, 1997......................... F-7
</TABLE>

INDEX TO SCHEDULES TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Summary of Investments Other Than Investments in Related Parties--December 31, 1997.... S-1
Condensed Financial Information of Registrant (Parent Company only):
Condensed Balance Sheets--December 31, 1997 and 1996................................. S-2
Condensed Statements of Operations and Retained Earnings--Years ended December 31,
1997, 1996, and 1995............................................................... S-3
Condensed Statements of Cash Flows--Years ended December 31, 1997, 1996, and 1995.... S-4
Notes to Condensed Financial Information--December 31, 1997.......................... S-5
Supplemental Insurance Information--Years ended December 31, 1997, 1996, and 1995...... S-6
Reinsurance--Years ended December 31, 1997, 1996, and 1995............................. S-7
Supplemental Information (for Property-Casualty Insurance Underwriters)--Years ended
December 31, 1997, 1996, and 1995.................................................... S-8
</TABLE>

45
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of

American Re Corporation

We have audited the accompanying consolidated balance sheet of American Re
Corporation and subsidiaries as of December 31, 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedules as listed in
the accompanying index as of December 31, 1997 and for the year then ended.
These consolidated financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedules based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American Re
Corporation and subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.

KPMG Peat Marwick LLP

Short Hills, New Jersey
February 12, 1998

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
American Re Corporation

We have audited the accompanying consolidated balance sheet of American Re
Corporation and subsidiaries (the "Company") as of December 31, 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the two years in the period ended December 31, 1996. Our audits also
included the financial statement schedules as of December 31, 1996 and for each
of the two years in the period ended December 31, 1996 as listed in the Index at
Item 14. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits. The consolidated balance sheet gives retroactive
effect to the mergers of American Re-Insurance with Munich American Reinsurance
Company, and with Munich Reinsurance Company -United States Branch, which have
been accounted for as a transfer of assets between companies under common
control as described in Note 1B to the consolidated financial statements.

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 American Re Corporation and
subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1996
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.

Deloitte & Touche LLP
Parsippany, New Jersey
February 4, 1997
(March 14, 1997 as to Note 10,
July 3, 1997 as to Note 1B)

F-2
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1997 AND 1996
(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
(RESTATED)
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Investments
Fixed Maturities
Bonds available for sale, at fair value (amortized cost:
December 31, 1997 and 1996--$6,481.4 and $6,090.0, respectively)............... $ 6,644.2 $ 6,148.9
Preferred stock available for sale, at fair value (amortized cost:
December 31, 1997 and 1996--$70.8 and $69.6, respectively)..................... 71.4 69.6
Equity securities available for sale, at fair value (cost: December 31, 1997 and
1996--$275.2 and $174.3, respectively)........................................... 293.3 211.5
Other invested assets.............................................................. 22.9 24.2
Cash and cash equivalents............................................................ 641.6 553.1
------------ ------------
Total investments and cash................................................... 7,673.4 7,007.3
Accrued investment income............................................................ 93.9 105.2
Premiums and other receivables....................................................... 1,083.6 916.0
Deferred policy acquisition costs.................................................... 356.7 336.9
Reinsurance recoverables on paid and unpaid losses................................... 2,491.7 2,469.0
Funds held by ceding companies....................................................... 383.0 310.0
Prepaid reinsurance premiums......................................................... 156.8 173.0
Deferred federal income taxes........................................................ 185.6 155.0
Other assets......................................................................... 864.1 670.6
------------ ------------
Total assets................................................................. $ 13,288.8 $ 12,143.0
------------ ------------
------------ ------------
LIABILITIES
Loss and loss adjustment expense reserves............................................ $ 7,508.9 $ 7,192.3
Unearned premium reserve............................................................. 1,299.1 1,335.3
------------ ------------
Total insurance reserves..................................................... 8,808.0 8,527.6
Loss balances payable................................................................ 217.6 141.7
Funds held under reinsurance treaties................................................ 243.3 171.1
Senior bank debt..................................................................... 75.0 75.0
Senior notes......................................................................... 498.5 498.4
Other liabilities.................................................................... 622.5 451.1
------------ ------------
Total liabilities............................................................ 10,464.9 9,864.9
------------ ------------
Commitments and Contingent Liabilities (Note 14)

Minority interest.................................................................... -- 248.1
------------ ------------
Company-obligated mandatorily redeemable preferred securities of subsidiary trust
holding as all of its assets Junior Subordinated Debentures (Note 11).............. 237.5 237.5
------------ ------------
STOCKHOLDERS' EQUITY
MARC common stock, par value: $1,000 per share....................................... -- 1.9
MARC preferred stock, par value: $1,000 per share.................................... -- 19.5
ARC common stock, par value: $0.01 per share; authorized: 1,000 shares; issued and
outstanding: 149.49712 and 100 shares at December 31, 1997, and 1996,
respectively....................................................................... -- --
Additional paid-in capital........................................................... 1,332.4 801.0
Retained earnings.................................................................... 1,171.6 950.6
Net unrealized appreciation of investments, net of tax............................... 118.0 55.2
Net unrealized loss on foreign exchange, net of tax.................................. (35.6) (35.7)
------------ ------------
Total stockholders' equity................................................... 2,586.4 1,792.5
------------ ------------
Total liabilities, minority interest, Company-obligated mandatorily
redeemable preferred securities of subsidiary trust, and stockholders'
equity....................................................................... $ 13,288.8 $ 12,143.0
------------ ------------
------------ ------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
REVENUE
Premiums written............................................................. $ 2,497.7 $ 1,902.4 $ 1,629.5
Change in unearned premium reserve........................................... (11.6) (105.7) (98.6)
--------- --------- ---------
Premiums earned............................................................ 2,486.1 1,796.7 1,530.9
Net investment income........................................................ 427.5 248.2 222.6
Net realized capital gains................................................... 87.7 4.8 4.7
Other income................................................................. 41.7 47.5 39.1
--------- --------- ---------
Total revenue.............................................................. 3,043.0 2,097.2 1,797.3
--------- --------- ---------
LOSSES AND EXPENSES
Losses and loss adjustment expenses.......................................... 1,716.3 1,167.8 1,340.2
Commission expense........................................................... 623.5 390.1 322.4
Operating expense............................................................ 214.9 143.4 130.1
Interest expense............................................................. 42.8 54.1 60.7
Other expenses............................................................... 221.2 109.2 103.4
--------- --------- ---------
Total losses and expenses.................................................. 2,818.7 1,864.6 1,956.8
--------- --------- ---------
Income (loss) before income taxes, minority interest, distributions on
preferred securities of subsidiary trust and extraordinary loss.......... 224.3 232.6 (159.5)
Federal and foreign income taxes............................................. (3.4) 73.8 (76.6)
--------- --------- ---------
Income (loss) before minority interest, distributions on preferred
securities of subsidiary trust and extraordinary loss.................... 227.7 158.8 (82.9)
Minority interest............................................................ 6.8 -- --
Distributions on preferred securities of subsidiary trust, net of applicable
income tax of $7.1, $7.1 and $2.4, respectively (Note 11).................. (13.1) (13.1) (4.4)
--------- --------- ---------
Income (loss) before extraordinary loss.................................... 221.4 145.7 (87.3)
Extraordinary loss, net of applicable income tax of $18.3 and $0.2,
respectively (Note 2F)..................................................... -- (34.0) (0.3)
--------- --------- ---------
Net income (loss) to common stockholders................................... $ 221.4 $ 111.7 $ (87.6)
--------- --------- ---------
--------- --------- ---------
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NET NET
UNREALIZED UNREALIZED
ARC MARC MARC ADDITIONAL APPRECIATION GAIN (LOSS)
COMMON COMMON PREFERRED PAID IN RETAINED (DEPRECIATION) ON FOREIGN
STOCK STOCK STOCK CAPITAL EARNINGS OF INVESTMENTS EXCHANGE
----------- ----------- ------------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995..... $ 0.5 $ -- $ -- $ 710.9 $ 189.9 $ (94.5) $ (17.6)
Net loss....................... (87.6)
Net change in unrealized loss
on foreign exchange.......... (4.6)
Net change in unrealized
appreciation of
investments..................
Fixed maturities............. 160.2
Equity securities............ 5.3
Dividend to common
stockholders................. (15.0)
Other, net..................... (0.4)
----- ----- ----- ----------- ----------- ------ -----------
Balance at December 31, 1995... 0.5 -- -- 710.5 87.3 71.0 (22.2)

Net income..................... 111.7
Net change in unrealized loss
on foreign exchange.......... (13.4)
Net change in unrealized
appreciation of
investments..................
Fixed maturities............. (30.5)
Equity securities............ (5.8)
Dividend to common
stockholders................. (14.2)
Merger-related capital
restructure (Note 1B)........ (0.5) 0.5
Stock option and award
settlement tax effect (Note
1B).......................... 69.5
Other, net..................... 5.1
----- ----- ----- ----------- ----------- ------ -----------
Balance at December 31, 1996... -- -- -- 785.6 184.8 34.7 (35.6)

Capital restatement resulting
from Merger (Note 1B)........ -- 1.9 19.5 15.4 765.8 20.5 (0.1)
----- ----- ----- ----------- ----------- ------ -----------
Restated balance at
December 31, 1996............ -- 1.9 19.5 801.0 950.6 55.2 (35.7)

Net income..................... 221.4
Net change in unrealized loss
on foreign exchange.......... 0.1
Net change in unrealized
appreciation of
investments..................
Fixed maturities............. 70.0
Equity securities............ (7.2)
Shareholder dividends.......... (0.4)
Acquisition of MARC minority
interest..................... 425.0
Capital contribution........... 85.0
Merger-related capital
restructure (Note 1B)........ (1.9) (19.5) 21.4
----- ----- ----- ----------- ----------- ------ -----------
Balance at December 31, 1997... $ -- $ -- $ -- $ 1,332.4 $ 1,171.6 $ 118.0 $ (35.6)
----- ----- ----- ----------- ----------- ------ -----------
----- ----- ----- ----------- ----------- ------ -----------

TOTAL
---------
<S> <C>
Balance at January 1, 1995..... $ 789.2
Net loss....................... (87.6)
Net change in unrealized loss
on foreign exchange.......... (4.6)
Net change in unrealized
appreciation of
investments..................
Fixed maturities............. 160.2
Equity securities............ 5.3
Dividend to common
stockholders................. (15.0)
Other, net..................... (0.4)
---------
Balance at December 31, 1995... 847.1
Net income..................... 111.7
Net change in unrealized loss
on foreign exchange.......... (13.4)
Net change in unrealized
appreciation of
investments..................
Fixed maturities............. (30.5)
Equity securities............ (5.8)
Dividend to common
stockholders................. (14.2)
Merger-related capital
restructure (Note 1B)........ 0.0
Stock option and award
settlement tax effect (Note
1B).......................... 69.5
Other, net..................... 5.1
---------
Balance at December 31, 1996... 969.5
Capital restatement resulting
from Merger (Note 1B)........ 823.0
---------
Restated balance at
December 31, 1996............ 1,792.5
Net income..................... 221.4
Net change in unrealized loss
on foreign exchange.......... 0.1
Net change in unrealized
appreciation of
investments..................
Fixed maturities............. 70.0
Equity securities............ (7.2)
Shareholder dividends.......... (0.4)
Acquisition of MARC minority
interest..................... 425.0
Capital contribution........... 85.0
Merger-related capital
restructure (Note 1B)........ --
---------
Balance at December 31, 1997... $ 2,586.4
---------
---------
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
<S> <C> <C> <C>
1997 1996 1995
-------- -------- --------

<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss)............................... $ 221.4 $ 111.7 $ (87.6)
Adjustments to reconcile net income (loss) to
net cash and cash equivalents provided by
operating activities:
Decrease (increase) in accrued investment
income....................................... 11.3 1.7 (8.4)
Decrease (increase) in premiums and other
receivables.................................. (167.6) (131.2) 9.6
Increase in deferred policy acquisition
costs........................................ (19.8) (24.4) (21.7)
Increase in insurance reserves................ 280.4 250.3 945.3
Increase (decrease) in current and deferred
federal and foreign income tax assets and
liabilities.................................. (57.5) 68.1 (103.6)
Decrease (increase) in other assets and
liabilities.................................. 96.4 54.8 (417.4)
Depreciation expense on property and
equipment.................................... 8.4 8.5 7.8
Write-down of property and equipment.......... 38.2 -- --
Net realized capital gains.................... (87.7) (4.8) (4.7)
Decrease (increase) in other, net............. 42.6 31.2 6.4
-------- -------- --------
Net cash provided by operating activities... 366.1 365.9 325.7
-------- -------- --------
<CAPTION>
CASH FLOWS FROM INVESTING ACTIVITIES:
<S> <C> <C> <C>
Investments held to maturity
Purchases..................................... -- -- --
Maturities.................................... -- 75.0 39.5
Investments available for sale
Purchases..................................... (5,173.3) (1,981.1) (1,733.6)
Maturities.................................... 606.5 359.6 302.2
Sales......................................... 4,266.6 1,202.7 983.0
Other investments
Purchases..................................... (3.0) (11.3) (14.4)
Sales......................................... 1.9 0.8 28.3
Costs of additions to property and equipment.... (23.1) (22.7) (9.0)
-------- -------- --------
Net cash used in investing activities....... (324.4) (377.0) (404.0)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing of senior notes......... -- 498.4 --
Defeasance of principal of senior subordinated
debentures...................................... -- (450.0) --
Repayment of senior bank debt................... -- -- (200.0)
Borrowing of senior bank debt................... -- -- 75.0
Proceeds from Company-obligated mandatorily
redeemable preferred securities
of subsidiary trust........................... -- -- 237.5
Dividend to common stockholders................. (0.4) (14.2) (15.0)
Stock option and award proceeds received from
parent.......................................... -- 204.2 --
Stock option and award payments................. -- (203.5) --
Merger-related expense payments................. -- (34.1) --
Loan from parent company........................ (35.9) 35.9 --
Capital contribution from parent company........ 85.0 -- --
Other capital contribution sources (uses),
net............................................. -- 5.2 (0.4)
-------- -------- --------
Net cash provided by financing activities... 48.7 41.9 97.1
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents..................................... (1.9) (0.1) (5.1)
-------- -------- --------
Net increase in cash and cash equivalents... 88.5 30.7 13.7
Cash and cash equivalents, beginning of
period.......................................... 553.1 294.2 280.5
-------- -------- --------
Cash and cash equivalents, end of period........ 641.6 324.9 294.2
Merger-related adjustment (Note 1B)........... -- 228.2 --
-------- -------- --------
Cash & cash equivalents, end of period (restated
for 1996)....................................... $ 641.6 $ 553.1 $ 294.2
-------- -------- --------
-------- -------- --------
<CAPTION>
SUPPLEMENTAL CASH FLOW INFORMATION:
<S> <C> <C> <C>
Income taxes paid (refunded), net............... $ 29.3 $ (21.0) $ 24.4
Interest paid and distributions on preferred
securities subsidiary trust..................... $ 63.0 $ 117.1 $ 67.1
</TABLE>

DURING 1995, A TRANSFER OF SECURITIES FROM THE HELD TO MATURITY CLASSIFICATION
TO THE AVAILABLE FOR SALE CLASSIFICATION WAS MADE AT AN AMORTIZED COST OF $358.8
(FAIR VALUE OF $373.1). THE RECLASSIFICATION WAS ATTRIBUTABLE TO A ONE-TIME
REASSESSMENT OF INVESTMENT CLASSIFICATION, AS PERMITTED BY THE FINANCIAL
ACCOUNTING STANDARD BOARD'S SPECIAL REPORT "A GUIDE TO IMPLEMENTATION OF
STATEMENT 115 ON ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES."

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

1. THE COMPANY

A. NATURE OF OPERATIONS

American Re Corporation (the "Company" or "American Re") primarily acts as
the holding company for American Re-Insurance Company ("American Re-Insurance").
American Re-Insurance underwrites property and casualty reinsurance on a direct
basis in both the domestic and international markets. American Re-Insurance is
one of only four direct writers of reinsurance in the United States at December
31, 1997. To assist in its reinsurance business, American Re operates primarily
in the alternative market through a primary insurance company, American
Alternative Insurance Corporation ("American Alternative"). (American
Alternative and American Re-Insurance together are the "insurance/reinsurance
subsidiaries.") American Re conducts its business through 14 domestic and 14
international offices.

B. ACQUISITION BY MUNICH RE

The Company is a subsidiary of Munchener Ruckversicherungs-Gesellschaft
Aktiengesellschaft in Munchen ("Munich Re"), a company organized under the laws
of Germany.

On August 13, 1996, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Munich Re and Puma Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of Munich Re. Pursuant to the terms of
the Merger Agreement, on November 25, 1996, following approval of the Merger by
the Company's stockholders and applicable regulatory authorities, Puma
Acquisition Corp. was merged with and into the Company, which became a wholly
owned subsidiary of Munich Re (the "Acquisition"), and all of the outstanding
shares of the Company's common stock, $.01 par value (the "Common Stock"), were
converted into the right to receive $65.00 per share in cash (the "Merger
Consideration"). In addition, the Merger Agreement canceled all outstanding
Company stock options. Holders of the canceled Company stock options were
entitled to receive a cash payment equal to the product of (i) the number of
Company stock options outstanding at the merger date, and (ii) the excess of the
Merger Consideration, over the cumulative exercise price total of the Company's
stock options outstanding. In addition, certain holders of the Company's stock
options were given the opportunity to defer the receipt of up to 100% of their
option proceeds until 2001.

Aggregate cash consideration paid by Munich Re was $3,278.3, including
aggregate cash payment of canceled stock options of $124.2 and aggregate
canceled stock option proceeds deferred of $79.9. The Company established a
stockholders' equity benefit of $69.5, representing current and deferred tax
benefits associated with the cancellation and settlement of the Company's stock
options. In addition, the Company incurred a one-time charge to operating
earnings of $36.1 ($35.1 on an after-tax basis), primarily consisting of
financial advisory fees in connection with the Acquisition. On November 26,
1996, the Company's Common Stock was voluntarily delisted from the New York
Stock Exchange. As a result of the Acquisition, the 47.3 million shares of
Common Stock previously issued and outstanding, were converted to 100 common
shares issued and outstanding.

On July 1, 1997, American Re and Munich Re, completed the merger of Munich
American Reinsurance Company ("MARC") into American Re-Insurance. Prior to this
transaction, MARC was owned 27.5% by Munich Re, 22.5% by Munich Re's U.S. Branch
(the "U.S. Branch"), 40% by Allianz Aktiengesellschaft ("Allianz"), and 10% by
VICTORIA Versicherung AG ("Victoria"). This transaction was effected by
exchanging 100% of the common shares of MARC for 25.92804 newly issued shares of
the Company. On July 2, 1997, the U.S. Branch exchanged its newly acquired
shares of the Company with Munich Re for cash in the amount of $85.0 million.
This amount approximated the statutory accounting

F-7
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

1. THE COMPANY (CONTINUED)
value of the U.S. Branch's ownership in MARC at the time of the Merger. On July
3, 1997, Munich Re contributed the insurance-related assets and liabilities of
the U.S. Branch to American Re-Insurance in exchange for 23.56908 additional
shares of the Company (the "Redomestication"). As a result of these transactions
(collectively, the "Merger"), the shares of common stock held by Allianz and
Victoria represent minority interests in the Company's common stock equal to
less than 9% on an aggregate basis. Munich Re continues to own over 91% of the
outstanding common stock of the Company.

The exchange of MARC shares for the Company shares by Allianz and Victoria
(totaling 50% of MARC's ownership) was accounted for using the purchase method
for business combinations. The exchange of MARC shares for the Company's shares
by Munich Re and the U.S. Branch (totaling 50% of MARC's ownership) was
accounted for as an "as-if-pooling of interests" business combination between
parties under common control of the same parent company, Munich Re. The exchange
of the insurance assets and liabilities of the U.S. Branch for the Company's
shares was also accounted for as an "as-if-pooling of interests" business
combination between parties under common control. Common control for American
Re, MARC and the U.S. Branch was considered effective at December 31, 1996. As
such, the Company's December 31, 1996, balance sheet and related footnote
disclosures, as originally filed in its 1996 Form 10-K, have been restated to
reflect a 50% ownership of MARC, a 50% minority interest in the ownership of
MARC by Allianz and VICTORIA, and a 100% ownership of the U.S. Branch. As common
control was considered effective at December 31, 1996, the Company's
consolidated statements of income and cash flows for the years ended December
31, 1996 and 1995, have not been restated. All statutory accounting data has
been restated to reflect the combination of financial results of the insurance/
reinsurance subsidiaries, MARC, and the U.S. Branch.

The Company's consolidated statements of income and cash flows for the year
ended December 31, 1997 represent the fully consolidated operations of American
Re, MARC, and the U.S. Branch for the periods then ended, with 50% of MARC's net
loss for the six-month period ended June 30, 1997 accounted for as minority
interest in the net income of the Company. Revenue and net income for the
separate entities for the six-month period ended June 30, 1997, prior to the
Merger were as follows:

<TABLE>
<CAPTION>
SIX-MONTH
PERIOD ENDED
JUNE 30, 1997
-------------
<S> <C>
Revenue:
American Re........................................................ $ 1,094.1
MARC / U.S. Branch................................................. 517.0
-------------
Total............................................................ $ 1,611.1
-------------
-------------
Net income:
American Re........................................................ $ 22.3
MARC / U.S. Branch................................................. 63.5
-------------
Total............................................................ $ 85.8
-------------
-------------
</TABLE>

F-8
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

1. THE COMPANY (CONTINUED)
The purchase of the 50% minority interest in the ownership of MARC was based
upon a purchase price of $425.0, as agreed upon by all parties. The non-cash
transaction was accounted for as follows:

<TABLE>
<S> <C>
Purchase price:
Consideration given as newly issued shares of American Re........... $ 425.0
Less: Book value of minority interest at July 1, 1997............... 240.2
---------
Excess of purchase price over net assets acquired................... $ 184.8
---------
---------
</TABLE>

The excess of the purchase price of the net assets acquired was allocated
entirely to goodwill, which is included in the "Other assets" classification in
the December 31, 1997, Consolidated Balance Sheet (see Note 1H).

During 1997, the Company incurred one-time Merger-related charges, including
the following:

<TABLE>
<CAPTION>
AMERICAN RE MARC/U.S. BRANCH TOTAL
------------- ------------------- ---------
<S> <C> <C> <C>
Severance and other personnel related charges..... $ 8.9 $ 65.7 $ 74.6
Write-down of data processing equipment........... 22.7 15.5 38.2
Sale leaseback write-down......................... 13.3 -- 13.3
----- ----- ---------
$ 44.9 $ 81.2 $ 126.1
----- ----- ---------
----- ----- ---------
</TABLE>

For informational purposes, the pro forma condensed results of operations
shown below are presented as if the Merger transactions which took place in July
1997 had occurred at January 1, 1996. Adjustments have been made to the 1997
amounts to exclude Merger-related expenses, minority interest, and reversal of
the U.S. Branch deferred tax asset valuation allowance (see Note 6), and to the
1997 and 1996 amounts to include goodwill amortization.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenue............................................................. $ 3,043.0 $ 2,962.0
Income before income taxes, distributions on preferred securities of
subsidiary trust and extraordinary loss........................... 348.1 370.9
Net income.......................................................... 256.6 234.6
</TABLE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. BASIS OF PRESENTATION

The Company's primary business is reinsuring property-casualty risks of
domestic and foreign insurance organizations under excess of loss and pro rata
reinsurance contracts. The Company and American Re-Insurance operate on a
calendar year basis.

The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles and include the accounts of the Company
and its subsidiaries. Intercompany accounts and transactions have been
eliminated. The preparation of financial statements in conformity with generally

F-9
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.

B. FUTURE APPLICATION OF ACCOUNTING STANDARDS

REPORTING COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard No. 130 ("FAS No. 130"), "Reporting Comprehensive
Income." FAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in an entity's financial statements.
Comprehensive income is defined as net income adjusted for changes in
stockholders' equity resulting from events other than net income or transactions
related to an entity's capital instruments. The disclosure requirements of FAS
No. 130 are effective for fiscal years beginning after December 15, 1997, with
reclassification of financial statements for earlier years required. The Company
is currently evaluating the presentation alternatives permitted by the
statement.

DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

In June 1997, the FASB issued Financial Accounting Standard No. 131 ("FAS
No. 131"), "Disclosures about Segments of an Enterprise and Related
Information." FAS No. 131 establishes standards for reporting information about
operating segments. Generally, FAS No. 131 requires that financial information
be reported on the basis that is used internally for evaluating performance. The
disclosure requirements of FAS No. 131 are effective for fiscal years beginning
after December 15, 1997, with reclassification of financial statements for
earlier years required. The Company is currently considering what impact, if
any, FAS 131 will have on its current segment reporting.

EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS

In February 1998, the FASB issued Financial Accounting Standard No. 132
("FAS No. 132"), "Employers' Disclosures about Pensions and Other Postretirement
Benefits." FAS No. 132 revises current disclosure requirements for employers'
pension and other retiree benefits. FAS No. 132 does not change the measurement
or recognition of pension or other postretirement benefit plans. The disclosure
requirements of FAS No. 132 are effective for fiscal years beginning after
December 15, 1997, with restatement of disclosures for earlier years required.

C. 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.

D. INVESTMENTS

All debt and equity securities are classified as available for sale and
reported at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders' equity, net of related
income taxes. Realized gains and losses on the sale or maturity of investments
are

F-10
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
determined on the basis of the specific identification method and are included
in net income. Purchases and sales are recorded on a trade date basis.

If a decline in fair value of an invested asset is considered to be other
than temporary, or if the invested asset is deemed to be permanently impaired,
the investment is reduced to its net realizable value and the reduction is
accounted for as a realized investment loss.

The cost for mortgage-backed securities is adjusted for unamortized premiums
and discounts, which are amortized or accreted using the interest method over
the estimated remaining term of the securities, adjusted for anticipated
prepayments.

In November 1995, the FASB issued a special report, "A Guide to
Implementation of Statement 115 on Accounting For Certain Investments In Debt
and Equity Securities". The implementation guide allowed companies a one-time
opportunity to reassess and reclassify their securities holdings, without
penalty, prior to December 31, 1995. As a result, the Company transferred
securities from the held to maturity classification to the available for sale
classification at an amortized cost of $358.8 and a fair value of $373.1,
resulting in an increase in stockholders' equity of $9.3, net of taxes.

E. 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 claims and claims expenses and anticipated investment
income. These costs are amortized ratably over the terms of the related
contracts, which are generally a year in duration.

F. DEFERRED FINANCING FEES

Financing, underwriting, attorneys and accountants fees related to the
issuance of the Senior Notes (see Note 10), the Cumulative Quarterly Income
Preferred Securities (See Note 11), and the senior bank debt (see Note 8) have
been deferred. Such costs are being amortized over the remainder of their
respective lives, using the interest-rate method.

As discussed in Note 10--"Senior Notes," the obligation of the Company's
Senior Subordinated Debentures was extinguished through an in-substance
defeasance in December 1996. Due to this early extinguishment, the Company
recognized an extraordinary charge of $34.0, after applicable federal income tax
effects of $18.3, representing the write-off of the remaining unamortized senior
subordinated debt related financing fees of $14.1, interest payable through the
redemption date of September 19, 1997 of $16.8, and a premium of 4.75% of the
redemption price of $21.4.

As discussed in Note 11--"Cumulative Quarterly Income Preferred Securities
Offering," the obligation of the Company's revolving bank credit facility with
Chase Manhattan Bank, N.A., was paid in full in August 1995. Due to this early
extinguishment of debt, the Company recognized an extraordinary non-cash charge
of $0.3, after applicable federal income tax effects of $0.2, for the year ended
December 31, 1995, representing the write-off of the remaining unamortized
revolving bank credit agreement related financing fees.

The amortization of deferred financing fees was $1.9, $1.9 and $1.7 for the
years ended December 31, 1997, 1996, and 1995, respectively.

F-11
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. PROPERTY AND EQUIPMENT

The Company uses straight-line depreciation for all of its depreciable
assets, with the useful lives varying depending on the type of asset.
Accumulated depreciation was $33.5 and $45.2 at December 31, 1997, and 1996
respectively.

H. GOODWILL

Goodwill represents the cost in excess of net assets acquired for the
acquisitions of American Re-Insurance in 1992 and the minority interests in MARC
in 1997. The goodwill of $265.3 and $85.1 at December 31, 1997 and 1996,
respectively, is amortized over 40 years. The amortization of goodwill was $4.7,
$2.4 and $2.4 for each of the years ended December 31, 1997, 1996, and 1995,
respectively.

The Company regularly evaluates the recoverability of goodwill and other
acquired intangible assets. The carrying value of such assets would be reduced
through a direct write-off if, in management's judgment, it was probable that
projected future operating income, before amortization of goodwill, would not be
sufficient on an undiscounted basis to recover the carrying value.

I. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

The reserve for losses and loss adjustment expenses ("LAE") is based upon
reports received from other insurers supplemented with the Company's own case
reserve estimates provided by the Company's claims department. Loss and LAE
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. Generally, it is the Company's policy to discount all workers'
compensation claims on reported and unreported losses to present value using an
interest rate of 4.5%. Such discount resulted in a reduction in gross loss
reserves of approximately $592.7 and $505.5 as of December 31, 1997, and 1996,
respectively.

As discussed in Note 14D--"Asbestos, Environmental-Related and Other Latent
Liability Claims," during the fourth quarter of 1995, the Company undertook and
concluded a major initiative to reevaluate its reserves for asbestos,
environmental-related and other latent liability coverage exposures ("Latent
Liability Exposures"). As a result of this reevaluation, the Company increased
its gross incurred but not reported ("IBNR") loss reserves in 1995 for Latent
Liability Exposures by $587.0, primarily for accident years prior to 1986.

Management believes that the reserves for losses and LAE as of December 31,
1997, are adequate to cover the ultimate gross cost of losses and LAE incurred
through December 31, 1997. The reserves are based on estimates of losses and LAE
incurred and, therefore, the amount ultimately paid may be more or less than
such estimates. The inherent uncertainties of estimating loss reserves are
exacerbated 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 LAE paid may deviate, perhaps substantially, from
estimates reflected in the insurance/reinsurance companies' reserves in their
financial statements. Any adjustments of these estimates or differences between
estimates and amounts subsequently paid or collected are reflected in income as
they occur.

F-12
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. REINSURANCE RECOVERABLES ON UNPAID LOSSES

Reinsurance recoverables on unpaid losses were $2,406.1 and $2,343.6 at
December 31, 1997, and 1996, respectively. These recoverables were based upon
the application of estimates of unpaid loss and LAE reserves in conjunction with
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.

K. INCOME TAXES

The Company and its subsidiaries generally file a consolidated U.S. income
tax return and separate foreign income tax returns as required. For U.S. income
tax purposes, MARC will file a separate return for the interim period ended June
30, 1997. The U.S. Branch will file a separate return for the year ended
December 31, 1997. The Company will file a consolidated tax return for the year
ended December 31, 1997. The Company uses the liability method of accounting for
income taxes, whereby deferred tax assets and liabilities are determined based
on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws. The Company
is required to establish a "valuation allowance" for any portion of the deferred
tax asset that management believes will not be realized.

L. 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 other expenses. Gains
and losses from contracts hedging foreign translation exposures are reflected in
stockholders' equity, net of tax.

M. PREMIUMS AND UNEARNED PREMIUMS

Premiums are recognized as revenue ratably over the terms of the contracts.
Unearned premiums 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. On
retrospectively rated contracts, estimated additional or return premiums are
accrued.

Assumed reinsurance and retrocessional contracts that do not both transfer
significant insurance risk and result in the reasonable possibility that the
Company or its retrocessionaires may realize a significant loss from the
insurance risk assumed are required to be accounted for as deposits. These
contract deposits are included in other assets and other liabilities in the
Consolidated Balance Sheet and are accounted for as financing transactions with
interest income or expense credited or charged to the contract deposits.

N. FAIR VALUES OF FINANCIAL INSTRUMENTS

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

F-13
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1997, and 1996. Although the Company is not aware of
any factors that would significantly affect the estimated fair value 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
its fair value disclosures (as presented in Note 15--"Fair Value of Financial
Instruments"):

BONDS. Fair values for bonds 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 or were determined by dealers or
a pricing service specializing in "matrix pricing" and modeling techniques.

PREFERRED STOCK. The fair value of these instruments was based on quoted
market price, where available. Where market values were unavailable, the Company
used discounted cash flow models, using discount rates of securities of similar
maturities and credit characteristics.

EQUITY SECURITIES. The fair value of these securities was based on quoted
market price, where available. Securities accounted for on the equity method
represent the Company's ownership portion of respective securities'
stockholders' equity.

CASH AND CASH EQUIVALENTS. The carrying amounts of these financial
instruments were a reasonable estimate of their fair value.

INTEREST RATE SWAPS. The fair value of these financial instruments was
based on a discounted cashflow analysis, based on anticipated future interest
rates at the reporting date.

SENIOR BANK DEBT. Given the fluctuating rate on the senior bank debt, the
carrying amounts for these financial instruments were a reasonable estimate of
their fair value.

SENIOR NOTES. The fair value of this obligation was based on a quoted
market price.

CUMULATIVE QUARTERLY INCOME PREFERRED SECURITIES. The fair value of this
obligation was based on a quoted market price.

FOREIGN EXCHANGE FORWARD CONTRACTS. The fair value for these financial
instruments was based on estimates of current settlement values based on
exchange rates in effect at the reporting dates.

O. FINANCIAL STATEMENT PRESENTATION

Certain 1996 and 1995 financial statement presentations have been
reclassified to conform with the 1997 presentation.

F-14
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

3. INVESTMENTS

Investments in fixed maturities at December 31, were as follows:

<TABLE>
<CAPTION>
1997
--------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ------------- ---------
Bonds available for sale:
U.S. Treasury securities and obligations of U.S. government
agencies and corporations..................................... $ 1,125.1 $ 25.6 $ 0.1 $ 1,150.6
Obligations of states and political subdivisions................ 1,706.6 57.4 0.2 1,763.8
Corporate securities............................................ 2,652.6 57.4 3.7 2,706.3
Mortgage backed securities...................................... 997.1 28.5 2.1 1,023.5
----------- ----------- --- ---------
Total bonds available for sale.............................. 6,481.4 168.9 6.1 6,644.2
Preferred stock................................................... 70.8 0.6 -- 71.4
----------- ----------- --- ---------
Total fixed maturities...................................... $ 6,552.2 $ 169.5 $ 6.1 $ 6,715.6
----------- ----------- --- ---------
----------- ----------- --- ---------
</TABLE>

<TABLE>
<CAPTION>
1996
------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- ---------
Bonds available for sale:
U.S. Treasury securities and obligations of U.S. government
agencies and corporations...................................... $ 1,241.5 $ 7.8 $ 6.9 $ 1,242.4
Obligations of states and political subdivisions................. 1,560.9 29.7 2.9 1,587.7
Corporate securities............................................. 2,099.6 33.4 10.9 2,122.1
Mortgage backed securities....................................... 1,156.3 14.2 5.6 1,164.9
Other debt....................................................... 31.7 0.1 -- 31.8
----------- ----- ----- ---------
Total bonds available for sale............................... 6,090.0 85.2 26.3 6,148.9
Preferred stock.................................................... 69.6 -- -- 69.6
----------- ----- ----- ---------
Total fixed maturities....................................... $ 6,159.6 $ 85.2 $ 26.3 $ 6,218.5
----------- ----- ----- ---------
----------- ----- ----- ---------
</TABLE>

F-15
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

3. INVESTMENTS (CONTINUED)
The amortized cost and fair value of fixed maturities at December 31, 1997,
and 1996, respectively, are shown below by contractual maturity. Actual
maturities may differ from contractual maturities because securities may be
called or prepaid with or without call or prepayment penalties.

<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
<S> <C> <C> <C> <C>
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- --------- ----------- ---------
Due to mature:
One year or less................................................. $ 432.6 $ 432.9 $ 400.2 $ 401.5
After one year through five years................................ 1,683.2 1,705.6 1,645.6 1,662.3
After five years through ten years............................... 2,271.7 2,333.3 2,145.6 2,167.6
After ten years.................................................. 1,167.6 1,220.3 811.9 822.2
Mortgage backed securities....................................... 997.1 1,023.5 1,156.3 1,164.9
----------- --------- ----------- ---------
Total fixed maturities....................................... $ 6,552.2 $ 6,715.6 $ 6,159.6 $ 6,218.5
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>

Proceeds from sales of investments in fixed maturities and the related gains
and losses realized on those sales, and gains and losses on early redemption of
callable securities for bonds held to maturity were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
--------- --------- ------------------------
AVAILABLE AVAILABLE HELD TO AVAILABLE
FOR SALE FOR SALE MATURITY FOR SALE
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Proceeds from sales............................... $ 4,266.6 $ 1,202.7 $ -- $ 983.0
Gross gains realized.............................. 43.2 9.0 0.1 7.8
Gross losses realized............................. 21.8 5.1 -- 3.6
--------- --------- ----------- -----------
</TABLE>

Net unrealized appreciation (depreciation) on investments included within
stockholders' equity was as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Change in unrealized appreciation (depreciation)
Fixed maturities......................................................... $ 107.6 $ (46.9)
Equity securities........................................................ (11.0) (8.9)
--------- ---------
Subtotal............................................................... 96.6 (55.8)
Income tax effect.......................................................... 33.8 (19.5)
--------- ---------
Net change in unrealized appreciation (depreciation)....................... 62.8 (36.3)
Balance, beginning of year................................................. 55.2 71.0
--------- ---------
Balance, end of year....................................................... 118.0 34.7
Merger-related adjustment.................................................. -- 20.5
--------- ---------
Balance, end of year (1996 restated)....................................... 118.0 55.2
--------- ---------
--------- ---------
</TABLE>

F-16
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

3. INVESTMENTS (CONTINUED)
At December 31, 1997, and 1996, the Company's investments in bonds on a
financial statement basis were $6,644.2 or 86.6% and $6,148.9 or 87.7%,
respectively, of total investments and cash. The bond portfolio is well
diversified within various industry segments.

Bond investments by market sector at December 31, were as follows:

<TABLE>
<CAPTION>
1997 1996
AVAILABLE FOR SALE AVAILABLE FOR SALE
---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. government................................ $ 1,125.0 $ 1,150.6 $ 1,241.5 $ 1,242.4
Foreign government............................. 306.0 315.7 279.7 291.3
State and municipal............................ 1,706.6 1,763.8 1,560.9 1,587.7
Mortgage backed securities..................... 997.1 1,023.5 1,156.3 1,164.9
Financial...................................... 1,058.9 1,080.9 870.2 876.3
Utilities...................................... 273.7 278.7 178.0 179.3
Transportation/capital......................... 160.4 163.6 117.6 118.6
Health care.................................... 18.1 18.6 18.4 18.8
Natural resources.............................. 2.4 2.4 8.4 8.3
Other corporate securities..................... 833.2 846.4 659.0 661.3
----------- --------- ----------- ---------
Total...................................... $ 6,481.4 $ 6,644.2 $ 6,090.0 $ 6,148.9
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>

Sources of net investment income were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Fixed maturities................................................. $ 407.7 $ 239.1 $ 209.3
Short-term investments........................................... 21.9 9.6 11.5
Other............................................................ 16.3 13.8 14.6
--------- --------- ---------
Gross investment income........................................ 445.9 262.5 235.4
Investment expenses.............................................. (18.4) (14.3) (12.8)
--------- --------- ---------
Net investment income.......................................... $ 427.5 $ 248.2 $ 222.6
--------- --------- ---------
--------- --------- ---------
</TABLE>

Net realized capital investment gains (losses) were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Fixed maturities................................................. $ 21.4 $ 3.9 $ 4.3
Equity securities................................................ 67.9 -- --
Mortgage loans................................................... -- -- 0.9
Real estate...................................................... -- -- 1.7
Other............................................................ (1.6) 0.9 (2.2)
--------- --------- ---------
Net realized capital gains..................................... $ 87.7 $ 4.8 $ 4.7
--------- --------- ---------
--------- --------- ---------
</TABLE>

At December 31, 1997, and 1996, securities in the amount of $399.9 and $366.3
(par value), respectively, were on deposit with governmental authorities as
required by law.

F-17
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

4. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

The reconciliation of loss and loss adjustment expense reserves for the
years ended December 31, 1997, 1996, and 1995 is shown below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Loss and LAE reserves at beginning of period......................... $ 7,192.3 $ 4,790.0 $ 3,971.9
Reinsurance recoverables on unpaid losses............................ (2,343.6) (1,945.4) (1,650.0)
--------- --------- ---------
Net reserves at beginning of period.................................. 4,848.7 2,844.6 2,321.9

Net incurred related to:
Current period..................................................... 1,642.1 1,167.7 902.3
Prior periods...................................................... 74.2 0.1 437.9
--------- --------- ---------
Total net incurred............................................... 1,716.3 1,167.8 1,340.2
--------- --------- ---------
Net paid related to:
Current period..................................................... 167.5 89.5 75.4
Prior periods...................................................... 1,294.7 820.5 742.1
--------- --------- ---------
Total net paid................................................... 1,462.2 910.0 817.5
--------- --------- ---------

Net reserves at end of period........................................ 5,102.8 3,102.4 2,844.6
Merger-related adjustment.......................................... -- 1,746.3 --
--------- --------- ---------
Net reserves at end of period (1996 restated)........................ 5,102.8 4,848.7 2,844.6

Reinsurance recoverables on unpaid losses............................ 2,406.1 1,789.1 1,945.4
Merger-related adjustment.......................................... -- 554.5 --
--------- --------- ---------
Reinsurance recoverables on unpaid losses (1996 restated)............ 2,406.1 2,343.6 1,945.4

Loss and LAE reserves at end of period............................... $ 7,508.9 $ 7,192.3 $ 4,790.0
--------- --------- ---------
--------- --------- ---------
</TABLE>

As a result of changes in estimates of insured events in prior years, the
losses and LAE incurred (net of reinsurance recoveries of $373.0, $99.2 and
$512.2 for the years ended December 31, 1997, 1996, and 1995, respectively)
increased by $74.2 in 1997, $0.1 in 1996, and $437.9 in 1995. For 1995 the
increase is primarily due to adverse loss development associated with asbestos
and environmental-related claims (See Note 14D).

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.

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

F-18
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

5. REINSURANCE (CONTINUED)
monitored and appropriate actions are taken to eliminate or minimize exposures.
As a general rule, the Company requires that unpaid losses and LAE (including
IBNR) for certain admitted and non-admitted reinsurers (unregulated by United
States insurance regulatory authorities) be collateralized by letters of credit,
funds withheld or pledged trust agreements. In certain cases, the full limit
ceded to non-admitted reinsurers is required to be collateralized regardless of
actual claim activity. Actions such as drawdowns of letters of credit provided
as collateral, cessation of relationships and commutations 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 and loss adjustment
expenses are net of reinsurance. Direct, assumed, ceded and net amounts for
these items are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Premiums written
Direct............................................... $ 146.0 $ 71.2 $ 9.1
Assumed.............................................. 2,935.1 2,262.0 2,034.4
Ceded................................................ (583.4) (430.8) (414.0)
--------- --------- ---------
Net.................................................. 2,497.7 1,902.4 1,629.5
--------- --------- ---------
--------- --------- ---------
Premiums earned
Direct............................................... 119.0 34.7 6.7
Assumed.............................................. 3,003.5 2,161.0 1,916.6
Ceded................................................ (636.4) (399.0) (392.4)
--------- --------- ---------
Net.................................................. 2,486.1 1,796.7 1,530.9
--------- --------- ---------
--------- --------- ---------
Losses incurred
Direct............................................... 56.9 (45.6) 247.5
Assumed.............................................. 2,032.4 1,312.6 1,604.9
Ceded................................................ (373.0) (99.2) (512.2)
--------- --------- ---------
Net.................................................. $ 1,716.3 $ 1,167.8 $ 1,340.2
--------- --------- ---------
--------- --------- ---------
</TABLE>

As discussed in Note 14D--"Asbestos, Environmental-Related and Other Latent
Liability Claims," as a result of the reevaluation of Latent Liability
Exposures, the Company established reinsurance recoverable balances of $228.6 at
December 31, 1995, from Travelers Property Casualty Corp. ("Travelers"). This
recovery was established as a result of indemnification obtained under an
Adverse Loss Agreement (the "Cover"). At December 31, 1997 and 1996, the
reinsurance recoverable balance from Travelers was $252.5 and $247.5,
respectively.

The Company maintains an allowance for doubtful accounts for amounts due
from companies in receivership or believed to be in financial difficulty. The
total allowance reflected in both reinsurance recoverables on paid and unpaid
losses, and premiums and other receivables was $81.0 and $78.0 at December 31,
1997, and 1996, respectively.

F-19
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

5. REINSURANCE (CONTINUED)
National Indemnity Company (which had an A.M. Best rating of "A++" at
December 31, 1997), a subsidiary of Berkshire Hathaway, Inc., accounted for
approximately 24% and 39% of the reinsurance recoverables on paid and unpaid
losses at December 31, 1997, and 1996, respectively. Allianz A.G. Holdings
(which had an A.M. Best rating of "A+" at December 31, 1997), accounted for
approximately 12% and 18% of the reinsurance recoverables on paid and unpaid
losses at December 31, 1997, and 1996, respectively.

6. FEDERAL AND FOREIGN INCOME TAXES

The net deferred tax asset recorded at December 31, 1997, and 1996,
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 asset, based on a tax rate of 35% at December 31, were as follows:

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Loss reserves........................................................................ $ 310.0 $ 266.6
Unearned premiums.................................................................... 79.6 79.3
Alternative minimum tax (AMT) credit carryforward.................................... 19.2 18.4
Net operating loss carryforward (1).................................................. -- 114.5
Non-qualified deferred compensation plan trust (2)................................... 28.2 28.2
In-substance defeasance (3).......................................................... -- 18.3
Other deferred tax assets............................................................ 52.2 25.8
--------- ---------
Gross deferred tax asset........................................................... 489.2 551.1
Valuation allowance (4).............................................................. -- (158.0)
--------- ---------
Deferred tax asset net of valuation allowance...................................... 489.2 393.1

Reinsurance recoverable on paid and unpaid losses.................................... 98.7 55.5
Deferred policy acquisition costs.................................................... 124.9 117.9
Investments.......................................................................... 60.0 42.8
Other deferred liabilities........................................................... 20.0 21.9
--------- ---------

Deferred tax liability............................................................. 303.6 238.1
--------- ---------

Net deferred tax asset............................................................. $ 185.6 $ 155.0
--------- ---------
--------- ---------
</TABLE>

- ------------------------

(1) Represents U.S. Branch's net operating loss carryforward of $327.2.

(2) Represents deferred tax assets established for amounts placed in trust for
certain employees of the Company, who entered into option deferral
agreements. See Note 1B--"Acquisition by Munich Re."

(3) Represents tax assets that were established in 1996 for the in-substance
defeasance of the Company's Debentures and reversed in 1997. See Note 9
-"In-Substance Defeasance."

(4) Represents U.S. Branch's valuation allowance for deferred tax assets at
December 31, 1996.

At December 31, 1997, 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. At December 31, 1996, the U.S.

F-20
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

6. FEDERAL AND FOREIGN INCOME TAXES (CONTINUED)
Branch had a valuation allowance to reflect the estimated amount of the deferred
tax assets that may not be realized due to the expiration of net operating
losses, tax credit carryforwards and loss reserve discounting. As part of the
Redomestication of the U.S. Branch, the remaining net operating losses and the
tax credit carryforwards remained with a successor Federal taxable entity to the
U.S. Branch. As a result, the deferred tax assets for the net operating loss
carryforwards and tax credit carryforwards, and the offsetting valuation
allowances, are not included in the Company's deferred tax asset or liability
calculation at December 31, 1997. However, the loss reserve discount deferred
tax asset and corresponding valuation allowance were transferred to American Re
as a part of the Redomestication. The valuation allowance associated with the
discount on the loss reserves was reversed subsequent to the Redomestication, as
the Company believes, based on its consolidated Federal tax position, that it is
more likely than not that the deferred tax asset is fully realizable. This
reversal resulted in a tax benefit of $37.7 million during the 1997 period.
Realization of the net 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------
<S> <C> <C> <C>
CURRENT DEFERRED TOTAL
----------- ----------- ---------
Income-federal and foreign tax expense (benefit).............................. $ 19.8 $ (49.1) $ (29.3)
Federal tax expense (benefit) on net realized capital gains................... 32.6 (6.7) 25.9
----------- ----------- ---------
Total federal and foreign tax expense (benefit)........................... $ 52.4 $ (55.8) $ (3.4)
----------- ----------- ---------
----------- ----------- ---------

YEAR ENDED DECEMBER 31, 1996
-----------------------------------
CURRENT DEFERRED TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
Income-federal and foreign tax expense........................................ $ 48.3 $ 23.8 $ 72.1
Federal tax expense (benefit) on net realized capital gains................... 3.3 (1.6) 1.7
----------- ----------- ---------
Total federal and foreign tax expense..................................... $ 51.6 $ 22.2 $ 73.8
----------- ----------- ---------
----------- ----------- ---------
<CAPTION>

YEAR ENDED DECEMBER 31, 1995
-----------------------------------
CURRENT DEFERRED TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
Income-federal and foreign tax benefit........................................ $ (18.4) $ (59.9) $ (78.3)
Federal tax expense (benefit) on net realized capital losses.................. (0.4) 2.1 1.7
----------- ----------- ---------
Total federal and foreign tax benefit..................................... $ (18.8) $ (57.8) $ (76.6)
----------- ----------- ---------
----------- ----------- ---------
</TABLE>

F-21
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

6. FEDERAL AND FOREIGN INCOME TAXES (CONTINUED)
The sources of deferred tax expense (benefit) and their tax effects were as
follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Net loss reserve discounting for tax $ (0.1) $ (2.3) $ (24.1)
Acceleration of premiums earned for tax..................................... (0.3) (7.6) (7.1)
Increase in deferred policy acquisition costs............................... 7.0 8.5 7.6
Net investment adjustments.................................................. (2.1) (1.8) (2.4)
Net operating loss carryforward (1)......................................... -- 20.7 (20.7)
AMT credit carryforward..................................................... (6.5) 3.2 (15.9)
Realized capital gains/losses............................................... (6.7) (1.6) 2.1
Reversal of the valuation allowance associated with the loss reserve
discount.................................................................. (37.7) -- --
Severance and other merger-related charges.................................. (15.8) -- --
In-substance defeasance..................................................... 18.3 (18.3) --
Other, net.................................................................. (11.9) 21.4 2.7
--------- --------- ---------
Total deferred tax expense (benefit).................................... $ (55.8) $ 22.2 $ (57.8)
--------- --------- ---------
--------- --------- ---------
</TABLE>

- ------------------------

(1) At December 31, 1995, the Company had tax loss carryforwards of $59.1
available to offset future taxable income expiring in the year 2010, which
were used by the Company in 1996.

Reconciliations of the differences between income taxes computed at the
federal statutory tax rate and consolidated provisions for income taxes were as
follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Income (loss) before taxes................................................ $ 224.3 $ 232.6 $ (159.5)
Income tax rate........................................................... 35% 35% 35%
--------- --------- ---------
Tax expense (benefit) at federal statutory income tax rate.............. 78.5 81.4 (55.8)
Tax effect of:
Tax-exempt investment income............................................ (20.7) (19.9) (21.3)
Goodwill................................................................ 1.6 0.8 0.8
Reversal of the valuation allowance associated with loss reserve
discount--U.S. Branch................................................. (37.7) -- --
Net operating loss utilization -- U.S. Branch........................... (24.4) -- --
Merger-related expenses, not deductible for federal income tax
purposes.............................................................. -- 11.6 --
Other, net.............................................................. (0.6) (0.1) (0.3)
--------- --------- ---------
Federal and foreign income tax expense (benefit).................... $ (3.4) $ 73.8 $ (76.6)
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-22
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

7. BENEFIT PLANS

The Company has a non-contributory 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. Vested benefits are fully
funded.

The following table sets forth the plan's funded status and the amount
reflected in the Company's consolidated balance sheet at December 31:

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefits obligation, including vested benefits of $99.6 and $74.1 for
1997 and 1996, respectively..................................................... $ 102.0 $ 75.7
--------- ---------
--------- ---------
Projected benefit obligation for service rendered to date........................... $ 159.5 $ 127.0
Plan assets at fair value, primarily listed stocks and U.S. bonds................... (109.2) (94.8)
--------- ---------
Projected benefit obligation in excess of plan assets............................... 50.3 32.2
Unrecognized net loss............................................................... (15.5) (5.4)
--------- ---------
Accrued pension cost included in other liabilities.................................. $ 34.8 $ 26.8
--------- ---------
--------- ---------
</TABLE>

Net periodic pension cost included the following components:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Service cost-benefits earned during the period................. $ 9.6 $ 7.1 $ 5.0
Interest cost on projected benefit obligation.................. 9.5 5.9 5.1
Actual return on assets........................................ (16.3) (7.4) (10.6)
Net amortization and deferral.................................. 7.7 1.7 5.7
--------- --------- ---------
Net periodic pension cost.................................... $ 10.5 $ 7.3 $ 5.2
--------- --------- ---------
--------- --------- ---------
</TABLE>

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 7.0% and 5.5%, respectively, for 1997 and 7.5%
and 5.5%, respectively, for 1996. The projected long-term rate of return on
assets was 9% for 1997, 1996 and 1995.

The Company provides post retirement health care benefits to individuals
eligible to receive benefits under the Company's non-contributory defined
benefit pension plan and who are covered under a Company medical insurance plan
at retirement. The Company funds its obligation currently and no contributions
are required by retirees.

F-23
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

7. BENEFIT PLANS (CONTINUED)
The following table sets forth the plan's status and the amount reflected in
the Company's consolidated balance sheet at December 31:

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accumulated post retirement benefit obligation
Retirees............................................................... $ 4.3 $ 4.5
Fully eligible active plan participants................................ 4.1 3.3
Other active plan participants......................................... 17.4 11.8
--------- ---------
Accumulated post retirement benefit obligation....................... 25.8 19.6
Unrecognized net loss.................................................. (2.2) (0.3)
Prior service cost..................................................... (2.9) --
--------- ---------
Accrued post retirement benefit obligation........................... $ 20.7 $ 19.3
--------- ---------
--------- ---------
</TABLE>

Net periodic post retirement benefit cost included the following components:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Service cost--benefits attributed to service during the
period................................................... $ 1.5 $ 1.3 $ 0.9
Interest cost on accumulated post retirement benefit
obligation............................................... 1.4 1.2 1.0
Net periodic amortization and deferral..................... 0.1 -- --
--- --- ---
Net periodic post retirement benefit cost.............. $ 3.0 $ 2.5 $ 1.9
--- --- ---
--- --- ---
</TABLE>

The weighted average discount rate used in determining the accumulated post
retirement benefit obligation was 7.0% and 7.5% and in 1997 and 1996,
respectively.

The assumed health care cost trend rate used in measuring the accumulated
post retirement benefit obligation was 7.5% in 1998, gradually declining to 5.0%
in the year 2016. If the health care cost trend rate assumption was increased by
1%, the accumulated post retirement benefit obligation as of December 31, 1997,
and 1996, would increase by $6.2 and $4.2, respectively, and the aggregate of
the service and interest cost components of net periodic post retirement benefit
cost for the years ended December 31, 1997, 1996, and 1995, would increase by
$0.8, $0.9, and $0.5, respectively.

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 5% of compensation, by the Company. The costs of
the Company's matching contributions were $5.0, $3.6 and $3.6, for the years
ended December 31, 1997, 1996, and 1995, respectively.

Key employees are eligible for plans that provide compensation incentives
based upon operating results and that reward specific individuals for
performance and contribution to the success of the Company. Charges to
operations for such incentives were $23.4, $14.9 and $12.0 for the years ended
December 31, 1997, 1996, and 1995, respectively.

F-24
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

7. BENEFIT PLANS (CONTINUED)
American Re-Insurance entered into Senior Executive Severance and
Non-Competition Agreements (the "Severance Agreements"), with the CEO and three
named executive officers. Under their respective agreements, each such executive
has agreed to serve initially in his position held at the time such agreements
were entered into and thereafter in such positions as the Board of Directors of
American Re-Insurance shall designate, on an "at-will" employment basis, and
American Re-Insurance has agreed to pay a severance benefit to such executive if
the executive's employment with American Re-Insurance or an affiliate is
terminated at any time on or before December 31, 2001, pursuant to an
involuntary termination by the Company not for "Cause" or on a voluntary basis
by the executive upon a "Constructive Discharge" (as such terms are defined in
the Severance Agreements). Under the Severance Agreements, upon such
termination, the executive would be entitled to continuation of annual base
salary and annual bonus (equal to the greater of the amount of the most recent
bonus paid to the executive and the amount of the bonus paid to the executive
for 1996) for a period of two years. The executive would also be entitled to
receive any amounts accrued to the date of termination under any long term
compensation plan and all other benefits available under the Company's personnel
policy manual as in effect as of the date of the Severance Agreements. For a
period of two years after the date of termination, the executive would be
subject to a covenant not to compete with American Re-Insurance or any affiliate
thereof.

At the time of the Acquisition, the Company established the Senior Executive
Deferred Compensation Plan. Participants in the plan were provided the
opportunity to defer, for five years, up to 100% of the option proceeds which
they otherwise were eligible to receive from the cancellation of their options
in accordance with the terms of the Acquisition. Participants elected to defer
an aggregate of $79.9 of option proceeds which the Company used to establish and
fund a trust, the assets of which will be dedicated to the payment of such
future obligations in the absence of insolvency by the Company. At the direction
of the participants, the trust proceeds were invested by the Company in one or
more of two index-related investment vehicles and a fixed rate investment
vehicle. In addition thereto, participants are eligible to receive an additional
return from the Company in the amount of 5% of the participant's original
deferred principal provided certain conditions are met. At December 31, 1997,
and 1996, the Company's consolidated balance sheet reflected $79.9 of deferred
option proceeds, which is reflected in other liabilities.

8. SENIOR BANK DEBT

On December 29, 1995, American Re borrowed $75.0 from Bank of America, N.A.,
in anticipation and as part of a new unsecured bank revolving credit agreement
established on January 29, 1996, which allows the Company to borrow an aggregate
amount up to $150.0. Outstanding amounts under the revolving credit agreement
bear interest, at the election of the Company, currently at (i) the Bank of
America Base Rate (that is a fluctuating rate equal to the greater of (x) Bank
of America's announced rate of interest, identified as its "reference rate" or
(y) the sum of the federal funds rate plus 0.50%), (ii) a Eurodollar reserve
adjusted InterBank Offered Rate ("IBOR"), or (iii) a competitive bid rate as
determined by the participating banks. Any amount not paid when due will bear
interest at a rate of 2.00% in excess of the rate otherwise applicable. The
revolving credit agreement has a term of five years and, except with respect to
amounts outstanding under IBOR or bid loans, may be prepaid at any time at the
option of the Company. The revolving credit agreement contains certain covenants
relating to, among other things, restrictions on debt, liens, disposition of
assets, consolidations, mergers, use of proceeds, changes in business and
minimum statutory surplus. At December 31, 1997, $75.0 remained outstanding
under the bank revolving credit agreement.

F-25
<PAGE>
9. IN-SUBSTANCE DEFEASANCE

On December 24, 1996, the Company defeased in-substance its existing issue
of 10-7/8% Senior Subordinated Debentures due 2004 (the "Debentures"). On
September 19, 1997, the Company redeemed all then outstanding Debentures ($450
million in principal amount) at 104.75% of par, plus accrued interest to the
date of redemption, in accordance with the terms of the indenture under which
the Debentures are issued. As described in Note 2F--"Deferred Financing Fees",
the Company recognized an extraordinary charge of $34.0, after applicable income
tax of $18.3, resulting from the in-substance defeasance.

As described in Note 10--"Senior Notes," funds for the redemption were
raised through a private offering of $500.0 of the Company's 7.45% Senior Notes
due 2026. The Company completed the offering of the Notes on December 24, 1996.
The net proceeds of $494.1 million raised from the offering of the Notes, in
addition to $7.7 million of funds from the working capital of the Company, were
simultaneously deposited with the trustee under the indenture for the Debentures
(the "Indenture"). These funds, plus accrued interest, were used to redeem the
Debentures in full on September 19, 1997.

10. SENIOR NOTES

As described in Note 9--"In-Substance Defeasance," in connection with the
in-substance defeasance of the Debentures, the Company sold $500.0 aggregate
principal amount of its Senior Notes due December 15, 2026 (the "Notes") on
December 24, 1996. The Notes bear interest at a rate of 7.45% annually, payable
on June 15 and December 15 each year. The offering price of the notes was
99.687% of the aggregate principal amount, resulting in a yield to maturity of
7.476%.

The Notes are redeemable in whole or in part, at the option of the Company
at any time, at a redemption price equal to the greater of (i) 100% of the
principal amount of such notes and (ii) the sum of the present values of the
remaining scheduled payments of principal and interest thereon discounted, on a
semiannual basis, at the rate per annum equal to the yield to maturity of the
United States Treasury securities issue with comparable maturities to the
remaining term of the Notes, plus 15 basis points, together with accrued
interest to the date of redemption. The Indenture contains certain covenants,
including, but not limited to, covenants imposing limitations on liens, and
restrictions on mergers and sale of assets.

The Notes were not registered under the Federal Securities Act of 1933 or
registered or qualified under the securities laws of the various states.
Pursuant to the terms of the Senior Notes, the Company agreed to make an offer
to exchange the Notes for a new issue of debt securities of the Company which
would be registered under the Securities Act of 1933, with terms substantially
similar to the Notes (the "Exchange Offer"). The Exchange Offer was completed on
March 14, 1997, with 100% of the holders of the $500.0 aggregate principal
amount of the Notes accepting the Exchange Offer.

11. CUMULATIVE QUARTERLY INCOME PREFERRED SECURITIES OFFERING

On August 30, 1995, American Re Capital, a Delaware business trust formed
and wholly owned by the Company, completed the sale of 9,500,000 Cumulative
Quarterly Income Preferred Securities ("QUIPS") ($237.5 aggregate principal
amount), due in 2025.

The net proceeds from the offering were used by American Re Capital to
purchase a like amount of $244.8 principal amount of 8.5% Junior Subordinated
Debentures of the Company. The $244.8 principal amount of 8.5% Junior
Subordinated Debentures due September 30, 2025, represent all of the assets of
the subsidiary trust. The Company used the proceeds from the sale of the
Debentures to retire the Company's revolving bank credit facility with Chase
Manhattan Bank, N.A., and to contribute $50.0 to the capital and surplus of
American Re-Insurance Company. The remaining net proceeds from the sale were

F-26
<PAGE>
11. CUMULATIVE QUARTERLY INCOME PREFERRED SECURITIES OFFERING (CONTINUED)
used for general corporate purposes. The Junior Subordinated Debentures and
related income statement effects are eliminated in the Company's consolidated
financial statements.

The QUIPS accrue and pay distributions quarterly at a rate of 8.5% per annum
of the stated liquidation value of $25 per preferred security. The Company has,
through a guarantee agreement, a trust agreement, the Junior Subordinated
Debentures and an expense agreement, taken together, fully and unconditionally
guaranteed, on a subordinated basis, the Trust's obligation under the preferred
securities to the extent that funds are available therefor, and as more fully
set forth in such agreements.

The QUIPS are mandatorily redeemable upon the maturity of the Junior
Subordinated Debentures, on September 30, 2025 or upon earlier redemption as
provided in the Indenture. The Company has the right to redeem the Junior
Subordinated Debentures, in whole or in part, on or after September 30, 2000, at
a redemption price of $25 per preferred security plus any accrued but unpaid
interest to the redemption date.

12. CAPITAL AND SURPLUS AND STOCKHOLDER DIVIDEND RESTRICTIONS

Statutory surplus for the insurance/reinsurance subsidiaries on a combined
basis at December 31, 1997, and 1996, was $2,323.4 and $2,178.1 respectively.
Statutory net income (loss) for the years ended December 31, 1997, 1996, and
1995, on a combined basis was $196.7, $356.6 and $(21.0), respectively.
Dividends declared and paid by American Re-Insurance to the Company were $105.0,
$70.0 and $97.5 in 1997, 1996, and 1995, respectively.

The Company is dependent upon dividends received from its
insurance/reinsurance subsidiaries to meet its debt and other obligations.
Dividend payments by American Re-Insurance are restricted by the insurance laws
of the State of Delaware. Dividend payments by American Alternative are
restricted by the insurance laws of the State of New York. As of December 31,
1997, American Re-Insurance could declare dividends of approximately $230.1
during 1998 without approval of the Commissioner of Insurance of the State of
Delaware. As of December 31, 1997, American Alternative could declare dividends
of $10.7 during 1998, to the extent it has earned surplus available at the date
of declaration, without approval of the Commissioner of Insurance for the State
of New York.

13. PERMITTED STATUTORY ACCOUNTING PRACTICES

American Re-Insurance prepares its statutory financial statements in
accordance with accounting practices prescribed or permitted by the Insurance
Department of the State of Delaware. Prescribed statutory accounting practices
include a variety of publications of the National Association of Insurance
Commissioners, as well as state laws, regulations, and general administrative
rules. Permitted statutory accounting practices encompass all rules not so
prescribed.

American Re-Insurance received written approval from the Insurance
Department of the State of Delaware to discount all workers' compensation
reserves for losses and LAE at a rate of 4.5% for statutory accounting purposes.
Delaware statutes allow discounting of certain types of reserves at various
discount rates.

F-27
<PAGE>
14. COMMITMENTS AND CONTINGENT LIABILITIES

A. DERIVATIVES AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

FOREIGN EXCHANGE FORWARD CONTRACTS

Foreign exchange forward contracts are agreements to exchange fixed amounts
of two different currencies at a specified future date and at a specified price.
The Company entered into foreign exchange forward contracts primarily as a
hedge, for other than trading purposes, and such contracts were designed to
offset certain foreign currency net asset positions. Currency risk results
mainly from fluctuations in translation rates and credit risk results from the
possibility of non-performance by counterparties which could result in an
unhedged position. At December 31, 1996, the Company had $132.5 in contracts to
sell, and $49.5 in contracts to buy various foreign currencies, primarily in
Canadian and Australian dollars. The contract amounts of those instruments
reflect the Company's extent of involvement in this type of financial instrument
and do not represent the Company's risk of loss. The Company recognized $4.0 as
an unrealized loss on foreign exchange in stockholders' equity due to foreign
exchange forward contracts for the year ended December 31, 1996. The Company had
no foreign exchange forward contracts at December 31, 1997.

FINANCIAL GUARANTEES

The Company reinsures financial guarantee programs written through December
31, 1986. The aggregate principal and interest amounts of these guarantees
outstanding at December 31, 1997, and 1996, were approximately $49.0 and $84.4,
respectively. The aggregate principal and interest amount reflects the Company's
extent of involvement in financial guarantees.

There were no material concentrations of off-balance sheet financial
instruments at December 31, 1997, and 1996.

B. RELATED PARTY TRANSACTIONS

In November 1996, the Company borrowed $35.9 from Munich Re for the payment
of Acquisition-related expenses. In July 1997, the Company repaid this amount in
full plus accrued interest.

Effective January 1, 1997, the Company purchased an accident year stop loss
cover from Munich Re. The cover provides up to 80% of $200.0 in limit based upon
the Company's 1997 actual accident year loss ratio in excess of a specified loss
ratio. Effective as of January 1, 1997, Munich Re is also participating in the
Company's existing retrocessional programs. Total ceded premiums to Munich Re
relating to such programs, including the accident year stop loss cover, were
approximately $97.0 for 1997.

Commencing September 30, 1997, Munich Re Capital Management, an affiliated
registered investment advisor, is responsible for the management of the fixed
income portion of the Company's investment portfolio.

C. LEASES

The Company has operating leases for certain of its furniture, fixtures, and
computer equipment, and office space used by its branch office and subsidiary
locations. Lease expense was $23.2, $14.8, and $14.4,

F-28
<PAGE>
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
for the years ended December 31, 1997, 1996, and 1995. Future net minimum
payments under noncancellable leases at December 31, 1997, were estimated to be
as follows:

<TABLE>
<CAPTION>
2003 AND
1998 1999 2000 2001 2002 THEREAFTER
- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
$18.9 $ 13.7 $ 9.9 $ 9.2 $ 8.1 $ 14.9
- --------- --------- --- --- --- -----
- --------- --------- --- --- --- -----
</TABLE>

D. ASBESTOS, ENVIRONMENTAL-RELATED AND OTHER LATENT LIABILITY CLAIMS

Since the early 1980s, American Re's underwriting results have been
adversely affected by claims developing from asbestos, environmental-related and
other latent liability coverage exposures ("Latent Liability Exposures"). During
this period, reserves established by American Re for Latent Liability Exposures
necessarily reflected the uncertainty inherent in estimating the ultimate future
claim amounts arising from these types of exposures and the lack of credible
actuarial methods to measure and quantify these exposures. The Company's
difficulty in accurately quantifying these exposures was attributable to the
need for Latent Liability Exposures to be first quantified by the insured party
and then the primary insurer before the information was made available to the
reinsurer. In the Company's opinion, until recent years, information regarding
potential Latent Liability Exposures was not openly shared between insured
parties and their insurers and reinsurers.

As this information flow improved and actuarial and claims methodologies
evolved, the Company undertook and concluded a major initiative to evaluate its
reserves for Latent Liability Exposures in 1995. As a result of this
reevaluation during the fourth quarter of 1995, the Company increased its gross
IBNR loss reserves for Latent Liability Exposures, which primarily relate to
accident years prior to 1986, by $587.0. Cessions to specific retrocessional
arrangements, net of a reserve for uncollectible reinsurance for this reserve
charge, were $119.0. As a result, the net increase to loss reserves for Latent
Liability Exposures recognized by the Company at December 31, 1995, was $468.0.
After cession to the Cover (as discussed below), the net charge for loss reserve
strengthening was $347.4 ($231.0, net of tax).

The charge for loss reserve strengthening, prior to cession to the Cover,
for Latent Liability Exposures recorded at December 31, 1995, was as follows:

<TABLE>
<CAPTION>
ENVIRONMENTAL-
RELATED
AND OTHER LATENT
ASBESTOS LOSSES TOTAL
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
GROSS NET GROSS NET GROSS NET
--------- --------- --------- --------- --------- ---------
Reserve for incurred but not reported claims................ $ 306.0 $ 227.0 $ 281.0 $ 206.0 $ 587.0 $ 433.0
Uncollectible reinsurance................................... -- -- -- -- -- 35.0
--------- --------- --------- --------- --------- ---------
Total....................................................... $ 306.0 $ 227.0 $ 281.0 $ 206.0 $ 587.0 $ 468.0
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>

The Company incurred no additional loss expense for Latent Liability
Exposures during 1997 or 1996.

F-29
<PAGE>
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The Company had Latent Liability Exposure loss reserves, prior to cession to
the Cover, as follows at December 31:

<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
<S> <C> <C> <C> <C>
GROSS NET GROSS NET
--------- --------- --------- ---------
Asbestos..................................................................... $ 457.7 $ 297.1 $ 499.9 $ 326.6
Environmental-Related and Other Latent Liability............................. 327.9 218.6 391.6 273.9
--------- --------- --------- ---------
Total........................................................................ $ 785.6 $ 515.7 $ 891.5 $ 600.5
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

The provision for uncollectible reinsurance is principally due to the
failure of reinsurers to indemnify American Re, primarily because of reinsurer
insolvencies. Allowances have been established for amounts estimated to be
uncollectible. In connection with the charge for loss reserve strengthening,
American Re increased the allowance for uncollectible reinsurance by $35.0
pre-tax, and this increase is reflected as a component of "other expense" in the
Consolidated Statement of Income for the year ended December 31, 1995. There can
be no assurance future charges for uncollectible reinsurance will not materially
adversely affect results of operations in any future period, although any such
charges would not be expected to have a material adverse effect on American
Re-Insurance's liquidity or financial condition.

Travelers Property and Casualty Company ("Travelers") provides
indemnification in the form of an Adverse Loss Agreement (the "Cover") that
covers adverse development of losses and allocated loss adjustment expenses of
$500.0 representing an 80% pro rata share (American Re-Insurance retains the
remaining 20%) of up to $625.0 of losses in excess of $2,700.0 incurred on or
prior to December 31, 1991. The charge for the Latent Liability Exposure
resulted in a cession by American Re to the Cover. As discussed in Note 5
- --"Reinsurance", at December 31, 1997, the reinsurance recoverable balance from
Travelers was $252.5; thus there is $247.5 of limit remaining to cover
additional adverse loss development for losses incurred on or prior to December
31, 1991.

Latent Liability Exposure loss reserves at December 31, 1997, and 1996,
represent best estimates drawn from a range of possible outcomes based on
currently known facts, projected forward using assumptions and methodologies
considered reasonable. Notwithstanding these loss reserves and the remaining
protection under the Cover, there can be no assurance that future losses
resulting from these exposures will not materially adversely affect future
earnings.

E. LITIGATION

F-30
<PAGE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of financial instruments at December 31, 1997, and 1996, were
as follows:

<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
<S> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- --------- --------- ---------
Assets:
Bonds available for sale............................... $ 6,644.2 $ 6,644.2 $ 6,148.9 $ 6,148.9
Preferred stock........................................ 71.4 71.4 69.6 69.6
Equity securities...................................... 293.3 293.3 211.5 211.5
Other invested assets.................................. 22.9 22.9 24.2 24.2
--------- --------- --------- ---------
Total investments.................................... 7,031.8 7,031.8 6,454.2 6,454.2
Cash and cash equivalents.............................. 641.6 641.6 553.1 553.1
Foreign exchange forward contracts (1):
Contracts to sell...................................... -- -- (0.1) (0.1)
Contracts to buy....................................... -- -- 0.2 0.2
Liabilities:
Senior bank debt....................................... 75.0 75.0 75.0 75.0
Senior Notes........................................... 498.5 539.0 498.4 498.4
QUIPS.................................................. 237.5 246.4 237.5 245.6
</TABLE>

- ------------------------

(1) Carrying value included in other liabilities at December 31, 1996.

It is not practicable to estimate a fair value for the Company's financial
guarantees because the Company no longer writes such guarantees, there is no
quoted market price for such contracts, and it is not possible to reliably
estimate the timing and amount of all future cash flows due to the unique nature
of each of these contracts.

16. INTERNATIONAL OPERATIONS

Financial information regarding the Company's operations between domestic
and international operations is summarized below. International totals represent
results for American Re-Insurance's International Operations, which underwrites
reinsurance predominately in foreign branch locations. Net assets represent
those identified and allocated to the International Operations.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------
<S> <C> <C> <C>
DOMESTIC INTERNATIONAL TOTAL
--------- ------------- ---------
Revenues.......................................................... $ 2,559.5 $ 483.5 $ 3,043.0
Income before income taxes........................................ 203.5 20.8 224.3
Identifiable assets at December 31................................ 11,871.4 1,416.8 13,288.8
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------
<S> <C> <C> <C>
DOMESTIC INTERNATIONAL TOTAL
--------- ------------- ---------
Revenues.......................................................... $ 1,648.9 $ 448.3 $ 2,097.2
Income before income taxes........................................ 198.1 34.5 232.6
Identifiable assets at December 31 (restated)..................... 11,201.9 941.1 12,143.0
</TABLE>

F-31
<PAGE>
17. UNAUDITED QUARTERLY FINANCIAL DATA

Summarized quarterly financial data were as follows:

<TABLE>
<CAPTION>
1997
--------------------------------------------
<S> <C> <C> <C> <C>
FIRST(1) SECOND(1) THIRD FOURTH
--------- ----------- --------- ---------
Operating Data
Premiums written............................................. $ 840.6 $ 636.0 $ 550.0 $ 471.1
Premiums earned.............................................. 654.3 679.8 552.8 599.2
Losses and LAE............................................... 449.9 469.4 398.4 398.6
Underwriting expenses........................................ 210.9 213.7 198.2 215.6
Underwriting loss............................................ (6.5) (3.2) (43.9) (15.0)
Net investment income........................................ 103.6 106.3 107.6 110.0
Interest expense............................................. 11.2 10.5 10.6 10.5
Net income to common stockholders............................ $ 52.7 $ 33.1 $ 50.9 $ 84.7
--------- ----------- --------- ---------
</TABLE>

- ------------------------

(1) First and second quarter 1997 results have been restated to reflect the July
1997 Merger.

<TABLE>
<CAPTION>
1996
------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
Operating Data
Premiums written............................................... $ 513.1 $ 452.5 $ 467.2 $ 469.6
Premiums earned................................................ 416.1 443.7 422.4 514.4
Losses and LAE................................................. 276.6 291.9 252.2 347.1
Underwriting expenses.......................................... 107.3 120.3 146.8 159.2
Underwriting gain.............................................. 32.2 31.5 23.4 8.1
Net investment income.......................................... 59.1 60.8 66.0 62.2
Interest expense............................................... 13.7 13.4 13.4 13.6
Income before extraordinary loss (1)........................... 49.1 48.4 47.3 0.8
Extraordinary loss (2)......................................... -- -- -- (34.0)
Net income (loss) to common stockholders....................... $ 49.1 $ 48.4 $ 47.3 $ (33.2)
--------- --------- --------- ---------
</TABLE>

- ------------------------

(1) Fourth quarter 1996 included a one-time charge to operating earnings of
$36.1 ($35.1 on an after-tax basis), consisting primarily of financial
advisory fees in connection with the Acquisition (see Note 1B).

(2) In connection with the in-substance defeasance of the Senior Subordinated
Debentures, a one-time extraordinary loss of $34.0 on an after-tax basis was
recorded (see Note 2F).

F-32
<PAGE>
SCHEDULE I

AMERICAN RE CORPORATION

SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES

DECEMBER 31, 1997
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
AMOUNT
AT WHICH
SHOWN IN THE
AMORTIZED FAIR BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- ----------------------------------------------------------------------------- ----------- --------- ------------
<S> <C> <C> <C>
FIXED MATURITIES:
Bonds available for sale:
U.S. Government and government agencies.................................. $ 1,125.1 $ 1,150.6 $ 1,150.6
States, municipalities and political subdivisions........................ 1,706.6 1,763.8 1,763.8
Mortgage backed securities............................................... 997.1 1,023.5 1,023.5
Foreign governments...................................................... 306.0 315.7 315.7
Public utilities......................................................... 154.5 157.3 157.3
Corporate bonds.......................................................... 2,192.1 2,233.3 2,233.3
----------- --------- ------------
Total bonds available for sale......................................... 6,481.4 6,644.2 6,644.2
----------- --------- ------------
Preferred securities..................................................... 70.8 71.4 71.4
----------- --------- ------------
Total fixed maturities................................................. 6,552.2 6,715.6 6,715.6
----------- --------- ------------

EQUITY SECURITIES:
Common stock:
Public utilities......................................................... 30.6 34.3 34.3
Banks, trust and insurance companies..................................... 34.5 41.4 41.4
Industrial and miscellaneous and all other............................... 210.1 217.6 217.6
----------- --------- ------------
Total equity securities.................................................. 275.2 293.3 293.3
----------- --------- ------------
Other investments.......................................................... 22.9 22.9 22.9
----------- --------- ------------
Total investments...................................................... $ 6,850.3 $ 7,031.8 $ 7,031.8
----------- --------- ------------
----------- --------- ------------
</TABLE>

S-1
<PAGE>
SCHEDULE II

AMERICAN RE CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)

CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
(RESTATED)
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
ASSETS
Investment in subsidiaries............................................... $ 3,337.8 $ 2,582.6
Cash..................................................................... 6.0 21.3
Deferred financing fees.................................................. 26.8 29.1
Current federal income taxes recoverable................................. 57.3 --
Other assets............................................................. 113.2 120.5
-------- --------
Total assets......................................................... $ 3,541.1 $ 2,753.5
-------- --------
-------- --------
LIABILITIES
Interest payable......................................................... $ 0.9 $ 0.9
Bank debt--term loan..................................................... 75.0 75.0
Senior notes............................................................. 498.5 498.4
Junior subordinated debt................................................. 244.8 244.8
Current federal income tax payable....................................... -- 4.4
Other liabilities........................................................ 135.5 137.5
-------- --------
Total liabilities.................................................... 954.7 961.0
-------- --------
STOCKHOLDERS' EQUITY
MARC common stock........................................................ -- 1.9
MARC preferred stock..................................................... -- 19.5
ARC common stock......................................................... -- --
Additional paid in capital............................................... 1,332.4 801.0
Retained earnings........................................................ 1,171.6 950.6
Net unrealized appreciation of investments............................... 118.0 55.2
Net unrealized loss in foreign exchange.................................. (35.6) (35.7)
-------- --------
Total stockholders' equity........................................... 2,586.4 1,792.5
-------- --------
Total liabilities and stockholders' equity........................... $ 3,541.1 $ 2,753.5
-------- --------
-------- --------
</TABLE>

S-2
<PAGE>
SCHEDULE II

AMERICAN RE CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)

CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31,1997 DECEMBER 31,1996 DECEMBER 31,1995
---------------- ---------------- -----------------
<S> <C> <C> <C>
REVENUE
Net investment income................................... $ 1.1 $ 1.0 $ 0.9
Other income............................................ 11.5 11.9 11.0
-------- ------- ------
Total............................................... 12.6 12.9 11.9
-------- ------- ------
EXPENSES
Interest expense........................................ 63.6 74.9 67.7
Operating expenses...................................... 30.6 42.1 5.2
-------- ------- ------
Total expenses...................................... 94.2 117.0 72.9
-------- ------- ------
Operating loss before federal income taxes.......... (81.6) (104.1) (61.0)
Federal income taxes...................................... (27.1) (24.4) (21.0)
-------- ------- ------
Loss before equity in undistributed net income of
subsidiaries...................................... (54.5) (79.7) (40.0)
Equity in undistributed net income (loss) of
subsidiaries............................................ 275.9 225.4 (47.3)
-------- ------- ------
Income (loss) before extraordinary loss............. 221.4 145.7 (87.3)
Extraordinary loss, net of applicable income taxes of
$18.3 and $0.2, respectively............................ -- (34.0) (0.3)
-------- ------- ------
Net income (loss) to common stockholders............ 221.4 111.7 (87.6)
Retained earnings at beginning of period.................. 950.6 87.3 189.9
-------- ------- ------
1,172.0 199.0 102.3
Dividends to common stockholders.................... (0.4) (14.2) (15.0)
-------- ------- ------
Retained earnings at end of period........................ 1,171.6 184.8 87.3
Merger-related adjustment........................... -- 765.8 --
-------- ------- ------
Retained earnings (1996 restated)......................... $ 1,171.6 $ 950.6 $ 87.3
-------- ------- ------
-------- ------- ------
</TABLE>

S-3
<PAGE>
SCHEDULE II

AMERICAN RE CORPORATION

CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)

CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) to common stockholders................. $ 221.4 $ 111.7 $ (87.6)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH AND CASH
EQUIVALENTS PROVIDED BY OPERATING ACTIVITIES:
Equity in undistributed net loss (income) of
subsidiaries........................................... (275.9) (225.4) 47.3
Decrease in interest payable (receivable)................ -- (13.5) (1.5)
Increase (decrease) in intercompany payables............. 15.1 10.0 (3.9)
Increase (decrease) in current and deferred federal
income tax liability................................... (56.4) (27.4) 1.0
Increase (decrease) in other, net........................ 24.3 53.3 (5.7)
------ ------ ------
Net cash used in operating activities activities....... (71.5) (91.3) (50.4)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend received from subsidiary........................ 105.0 70.0 97.5
Proceeds from borrowing of senior notes.................. -- 498.4 --
Defeasance of principal of senior subordinated debt...... -- (450.0) --
Repayment of senior bank debt............................ -- -- (200.0)
Borrowing of senior bank debt............................ -- -- 75.0
Sale of junior subordinated debt......................... -- -- 244.8
Stock option and award proceeds from parent.............. -- 204.2 --
Stock option and award payments.......................... -- (203.5) --
Merger-related expense payments.......................... -- (34.1) --
Loan from parent......................................... (35.9) 35.9 --
Investment in subsidiary................................. (12.5) -- (160.5)
Dividends to common stockholders......................... (0.4) (14.2) (15.0)
Other capital contributions.............................. -- 5.2 (0.4)
------ ------ ------
Net cash provided by financing activities.............. 56.2 111.9 41.4
------ ------ ------
Net increase (decrease) in cash and cash equivalents... (15.3) 20.6 (9.0)
Cash and cash equivalents, beginning of period............. 21.3 0.7 9.7
------ ------ ------
Cash and cash equivalents, end of period................... $ 6.0 $ 21.3 $ 0.7
------ ------ ------
------ ------ ------
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (refunded), net........................ $ 29.3 $ (21.0) $ 24.4
Interest paid............................................ $ 63.6 $ 117.7 $ 67.3
</TABLE>

S-4
<PAGE>
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT

AMERICAN RE CORPORATION (PARENT COMPANY)

NOTES TO CONDENSED FINANCIAL INFORMATION

The condensed financial information of American Re Corporation for the years
ended December 31, 1997, 1996 and 1995, should be read in conjunction with the
consolidated financial statements of American Re Corporation and subsidiaries
and the notes thereto. Investment in subsidiaries is accounted for using the
equity method of accounting.

S-5
<PAGE>
SCHEDULE III

AMERICAN RE CORPORATION

SUPPLEMENTAL INSURANCE INFORMATION

(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NET
FUTURE POLICY
BENEFITS, AMORTIZATION
DEFERRED LOSSES, CLAIMS OF DEFERRED
POLICY CLAIMS, AND NET AND CLAIM POLICY
ACQUISITION LOSS UNEARNED EARNED INVESTMENT ADJUSTMENT ACQUISITION
SEGMENT COSTS(2) EXPENSES(2) PREMIUMS(2) PREMIUMS INCOME (1) EXPENSE COSTS
- --------------------------------- ----------- -------------- ------------ --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1997
Domestic..................... $ 310.8 $ 4,489.8 $ 1,128.1 $ 2,068.4 $ 375.3 $ 1,444.8 $ 295.6
International................ 45.9 613.0 171.0 417.7 52.2 271.5 41.3
----------- -------------- ------------ --------- ----------- ----------- -------------
Total........................ $ 356.7 $ 5,102.8 $ 1,299.1 $ 2,486.1 $ 427.5 $ 1,716.3 $ 336.9
----------- -------------- ------------ --------- ----------- ----------- -------------
----------- -------------- ------------ --------- ----------- ----------- -------------
YEAR ENDED
DECEMBER 31, 1996
Domestic..................... $ 295.6 $ 4,346.1 $ 1,181.4 $ 1,382.3 $ 217.0 $ 914.4 $ 201.1
International................ 41.3 502.6 153.9 414.4 31.2 253.4 34.1
----------- -------------- ------------ --------- ----------- ----------- -------------
Total........................ $ 336.9 $ 4,848.7 $ 1,335.3 $ 1,796.7 $ 248.2 $ 1,167.8 $ 235.2
----------- -------------- ------------ --------- ----------- ----------- -------------
----------- -------------- ------------ --------- ----------- ----------- -------------
YEAR ENDED
DECEMBER 31, 1995
Domestic..................... $ 201.1 $ 2,474.5 $ 729.5 $ 1,164.1 $ 195.3 $ 1,113.1 $ 183.1
International................ 34.1 370.1 129.1 366.8 27.3 227.1 29.5
----------- -------------- ------------ --------- ----------- ----------- -------------
Total........................ $ 235.2 $ 2,844.6 $ 858.6 $ 1,530.9 $ 222.6 $ 1,340.2 $ 212.6
----------- -------------- ------------ --------- ----------- ----------- -------------
----------- -------------- ------------ --------- ----------- ----------- -------------

UNDERWRITING PREMIUMS
SEGMENT EXPENSES WRITTEN
- --------------------------------- ------------- -----------
<S> <C> <C>
YEAR ENDED
DECEMBER 31, 1997
Domestic..................... $ 693.7 $ 2,064.6
International................ 144.7 433.1
------------- -----------
Total........................ $ 838.4 $ 2,497.7
------------- -----------
------------- -----------
YEAR ENDED
DECEMBER 31, 1996
Domestic..................... $ 404.4 $ 1,461.1
International................ 129.1 441.3
------------- -----------
Total........................ $ 533.5 $ 1,902.4
------------- -----------
------------- -----------
YEAR ENDED
DECEMBER 31, 1995
Domestic..................... $ 354.0 $ 1,249.0
International................ 98.4 380.5
------------- -----------
Total........................ $ 452.4 $ 1,629.5
------------- -----------
------------- -----------
</TABLE>

- ------------------------------

(1) Investment income allocation is based on a formula derived from the invested
assets of the Company's business segments.

(2) December 31, 1996 balance sheet amounts have been restated as a result of
the Merger.

S-6
<PAGE>
SCHEDULE IV

AMERICAN RE CORPORATION AND SUBSIDIARIES
REINSURANCE
(DOLLARS IN MILLIONS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
--------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Life insurance in force............................... $ -- $ -- $ -- $ --
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------

PREMIUMS:
Life insurance........................................ $ -- $ -- $ -- $ -- -- %
Accident and health insurance......................... -- -- -- -- --
Property-liability insurance.......................... 119.0 636.4 3,003.5 2,486.1 120.8
Title insurance....................................... -- -- -- -- --
--------- ----------- ----------- --------- -----
Total Premiums.................................... $ 119.0 $ 636.4 $ 3,003.5 $ 2,486.1 120.8%
--------- ----------- ----------- --------- -----
--------- ----------- ----------- --------- -----

PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
--------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Life insurance in force............................... $ -- $ -- $ -- $ --
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------

PREMIUMS:
Life insurance........................................ $ -- $ -- $ -- $ -- -- %
Accident and health insurance......................... -- -- -- -- --
Property-liability insurance.......................... 34.7 399.0 2,161.0 1,796.7 120.3
Title insurance....................................... -- -- -- -- --
--------- ----------- ----------- --------- -----
Total Premiums.................................... $ 34.7 $ 399.0 $ 2,161.0 $ 1,796.7 120.3%
--------- ----------- ----------- --------- -----
--------- ----------- ----------- --------- -----
<CAPTION>

PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
--------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Life insurance in force............................... $ -- $ -- $ -- $ --
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------

PREMIUMS:
Life insurance........................................ $ -- $ -- $ -- $ -- -- %
Accident and health insurance......................... -- -- -- -- --
Property-liability insurance.......................... 6.7 392.4 1,916.6 1,530.9 125.2
Title insurance....................................... -- -- -- -- --
--------- ----------- ----------- --------- -----
Total Premiums.................................... $ 6.7 $ 392.4 $ 1,916.6 $ 1,530.9 125.2%
--------- ----------- ----------- --------- -----
--------- ----------- ----------- --------- -----
</TABLE>

S-7
<PAGE>
SCHEDULE VI

AMERICAN RE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION (FOR PROPERTY-CASUALTY INSURANCE UNDERWRITERS)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
CLAIMS
AND CLAIM
ADJUSTMENT
EXPENSES
INCURRED
RESERVES FOR DISCOUNT, RELATED
DEFERRED UNPAID CLAIMS IF ANY TO:
POLICY AND CLAIMS DEDUCTED NET ---------
ACQUISITION ADJUSTMENT IN PREVIOUS UNEARNED EARNED INVESTMENT CURRENT
AFFILIATION WITH REGISTRANT COSTS (2) EXPENSES (2) COLUMN PREMIUMS (2) PREMIUMS INCOME YEAR
- ----------------------------------- ----------- ------------- ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
(a) Consolidated property-casualty
insurance entities................. $ 356.7 $ 7,508.9 Note (1) $ 1,299.1 $ 2,486.1 $ 427.5 $ 1,636.5
(b) Unconsolidated property-
casualty insurance entities........
----------- ------------- ----------- ------------ --------- ----------- ---------
YEAR ENDED DECEMBER 31, 1996
(a) Consolidated property-casualty
insurance entities................. $ 336.9 $ 7,192.3 Note (1) $ 1,335.3 $ 1,796.7 $ 248.2 $ 1,167.7
(b) Unconsolidated property-
casualty insurance entities........
----------- ------------- ----------- ------------ --------- ----------- ---------
YEAR ENDED DECEMBER 31, 1995
(a) Consolidated property-casualty
insurance entities................. $ 235.2 $ 4,790.0 Note (1) $ 858.6 $ 1,530.9 $ 222.6 $ 902.3
(b) Unconsolidated property-
casualty insurance entities........
----------- ------------- ----------- ------------ --------- ----------- ---------

AMORTIZATION
OF DEFERRED PAID CLAIMS
POLICY AND CLAIMS
PRIOR ACQUISITION ADJUSTMENT PREMIUMS
AFFILIATION WITH REGISTRANT YEAR COSTS EXPENSES WRITTEN
- ----------------------------------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
(a) Consolidated property-casualty
insurance entities................. $ 79.8 $ 336.9 $ 1,462.2 $ 2,497.7
(b) Unconsolidated property-
casualty insurance entities........
--------- ------ ----------- -----------
YEAR ENDED DECEMBER 31, 1996
(a) Consolidated property-casualty
insurance entities................. $ 0.1 $ 235.2 $ 910.0 $ 1,902.4
(b) Unconsolidated property-
casualty insurance entities........
--------- ------ ----------- -----------
YEAR ENDED DECEMBER 31, 1995
(a) Consolidated property-casualty
insurance entities................. $ 437.9 $ 212.6 $ 817.5 $ 1,629.5
(b) Unconsolidated property-
casualty insurance entities........
--------- ------ ----------- -----------
</TABLE>

- ------------------------

(1) Workers' compensation reserves are discounted at 4.5%. The estimated amount
of discount is $592.7, $505.5, and $508.8 as of December 31, 1997, 1996 and
1995, respectively.

(2) December 31, 1996 balance sheet amounts have been restated as a result of
the Merger.

S-8

<PAGE>

AGREEMENT AND PLAN OF MERGER

Munich American Reinsurance Company
and
American Re-Insurance Company

<PAGE>

AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER, dated as of the 1st day of July, 1997,
(the "Agreement"), is by and among American Re-Insurance Company, a Delaware
corporation (the "Company"), American Re Corporation, a Delaware corporation
("Parent"), and Munich American Reinsurance Company, a New York corporation
("MARC") and each shareholder of MARC listed on the signature pages hereof (the
"Seller(s)"). Each of MARC and the Company is sometimes referred to herein as a
"Constituent Corporation," and the Company is sometimes referred to herein as
the "Surviving Corporation."

WHEREAS, the Company was originally incorporated under the laws of
Pennsylvania on March 15, 1917 was formerly known as A.R. Insurance, Inc., and
was reincorporated under the laws of New York on July 25, 1933, and was
redomesticated under the laws of Delaware on January 1, 1978, and pursuant to
its Certificate of Incorporation, has an authorized capital stock of 6,000,000
shares, par value $1.50 per share, one vote per share of which 5,470,713 shares
are issued and outstanding; and

WHEREAS, MARC was incorporated under the laws of New York on September 10,
1975, and pursuant to its Charter, has authorized capital stock of 7,000 common
shares, par value $1,000.00 per share, one vote per share, and 71,000 preferred
shares, par value $1,000.00 per share, nonvoting except as provided by law, all
of which shares of capital stock are issued and outstanding (the "MARC Stock");
and

WHEREAS, Section 7102(a)(2) of the New York Insurance Law authorizes the
merger of an insurance corporation organized under the laws of New York into an
insurance corporation organized under the laws of another state and Section 4930
of the Delaware Insurance Code authorizes the merger of stock insurers organized
under the laws of another state into a stock insurer organized under the laws of
the State of Delaware; and

WHEREAS, the Boards of Directors of each Constituent Corporation have each
determined that it is in the best interests of such Constituent Corporation, and
their respective shareholders and stockholders, that MARC merge with and into
the Company pursuant to this Agreement and pursuant to Article 71 of the New
York Insurance Laws, Chapter 49 of the Delaware Insurance Code, other applicable
laws of the states of New York and Delaware, and the requirements of the New
York State Insurance Department and the Delaware Insurance Department; and

1
<PAGE>

WHEREAS, the parties hereto intend that the merger contemplated by this
Agreement qualify as a tax-free reorganization pursuant to Section 368 of the
Internal Revenue Code of 1986, as amended;

NOW, THEREFORE, in consideration of the premises and the mutual covenants,
representations, warranties and agreements herein contained, and for the purpose
of stating the terms and conditions of the merger, the mode of carrying the same
into effect, the treatment of the MARC Stock, and such other details and
provisions as are deemed desirable, the parties hereto have agreed, and do
hereby agree, subject to the terms and conditions hereinafter set forth, as
follows:

I. THE MERGER

1.1 The Merger; Effective Date. On the Effective Date (defined below) of
the merger and in accordance with the provisions of the laws of Delaware and New
York and subject to the terms and conditions hereof, MARC shall be merged with
and into the Company, and the Company, as the Surviving Corporation, shall
continue to exist and be governed by the General Corporation Law of the State of
Delaware and the Delaware Insurance Code and the name of the Surviving
Corporation shall be American Re-Insurance Company.

As soon as practicable following fulfillment of the terms and conditions
provided herein, and provided that this Agreement has not been terminated or
abandoned pursuant to Article VIII hereof, the Company and/or MARC, as the case
may be, will cause all of the following conditions to be satisfied: (i) the
Company will file a power of attorney with the Superintendent of the New York
Insurance Department in compliance with Section 1212 of the New York Insurance
Law; (ii) the Company and MARC will file a duplicate or certified copy of this
Agreement, duly approved by the Commissioner of Insurance of the State of
Delaware, with the Superintendent of the New York Insurance Department in
compliance with Section 7106 of the New York Insurance Law; (iii) the Company
and MARC will cause the Certificate of Merger in substantially the form of
Exhibit 1 hereto (the "Certificate of Merger") to be executed, verified and
delivered for filing with the office of the Secretary of State of the State of
Delaware as provided in Section 252 of the General Corporation Law of Delaware;
(iv) the Company will cause a signed or conformed copy of the Certificate of
Merger, to be recorded in the Office of the Recorder of New Castle County, State
of Delaware, in accordance with the provisions of Section 103 of the General
Corporation Law of Delaware; and (v) the Company will cause a signed or
conformed copy of the Agreement approved by the Superintendent of the New York
Insurance Department and the

2
<PAGE>

Commissioner of Insurance of the State of Delaware, to be filed with the office
of the Clerk of New York County, State of New York, which is the county where
the principal office of MARC is located and in the office of the recording
officer of each county in which MARC's real property is situated, in accordance
with Section 907(h) of the New York Business Corporation Law.

Assuming all necessary corporate and regulatory approvals have been
obtained, and all necessary filings shall have been made, the merger shall
become effective as of 12:01 a.m, July 1, 1997 (hereinafter the "Effective
Date").

1.2 Effects of the Merger. On the Effective Date, the separate existence
of MARC shall cease. The Surviving Corporation shall possess all the rights,
privileges, immunities, powers and franchises of a public as well as of a
private nature, and be subject to all the restrictions, disabilities and duties
of each of the Constituent Corporations; and all and singular, the rights,
privileges, interests, powers and franchises of each of such Constituent
Corporations, and all property, real, personal and mixed, and all debts due to
either of such Constituent Corporations on whatever account as well as all other
things in action or belonging to each of such Constituent Corporations shall be
vested in such Surviving Corporation; and all property, rights, privileges,
powers and franchises, and all and every other interest shall be thereafter as
effectually the property of such Surviving Corporation as they were of such
Constituent Corporations, and the title to any real estate vested by deed or
otherwise, under the laws of the State of Delaware, New York or any other
jurisdiction, in either of such Constituent Corporations, shall not revert or be
in any way impaired by reason of such laws; but all rights of creditors and all
liens upon any property of either of such Constituent Corporations shall be
preserved unimpaired, and all debts, liabilities, obligations, commitments and
duties of such Constituent Corporations shall thenceforth attach to such
Surviving Corporation, and may be enforced against it to the same extent as if
said debts, liabilities, obligations, commitments and duties had been incurred
or contracted by it. No action or proceeding, civil or criminal, then pending
by or against either Constituent Corporation or any policyholder, shareholder,
officer or director thereof, shall be abated or discontinued by the merger but
may be enforced, prosecuted, settled or compromised as if the merger had not
occurred, or the Surviving Corporation may be substituted in place of MARC by
order of the court in which the action or proceeding may b pending.

1.3 Certificate. The Certificate of Incorporation of the Company as in
effect immediately prior to the Effective Date and as set forth as Exhibit 2
shall be the Certificate of Incorporation of the Surviving Corporation and may
be amended from time to time after the Effective Date as provided by law.

3
<PAGE>

1.4 By-Laws. The By-Laws of the Company as in effect immediately prior to
the Effective Date shall continue unchanged as the By-Laws of the Surviving
Corporation until the same shall thereafter be altered, amended or repealed in
accordance with law, the Certificate of Incorporation of the Surviving
Corporation or said By-Laws.

1.5 Directors and Officers. (a) From and after the Effective Date, the
members of the Board of Directors of the Surviving Corporation shall consist of
Edward J. Noonan, Mahmoud M. Abdallah, Albert J. Beer, Robert K. Burgess, Edward
B. Jobe, Kenneth J. LeStrange and John N. Lombardo, each of such persons to
serve in accordance with the By-Laws of the Surviving Corporation until his
successor is elected and qualified or until his earlier death, resignation or
removal. If on or after the Effective Date a vacancy shall exist in the Board
of Directors of the Surviving Corporation, such vacancy may thereafter be filled
in the manner provided by law and by the By-Laws of the Surviving Corporation.

(b) From and after the Effective Date, the elected officers of the Company
shall be the elected officers of the Surviving Corporation to serve in office at
the pleasure of the Board of Directors of the Surviving Corporation, until their
successors are elected and qualified or until their earlier death, resignation
or removal.

1.6 Approval by Stockholders. This Agreement has been approved by Parent,
as the sole stockholder of the Company and by the Seller(s), as each and every
stockholder of MARC, as provided by the applicable laws of the states of
Delaware and New York, respectively (collectively the "Stockholders").

II. MODE OF CARRYING THE MERGER INTO EFFECT

2.1 Terms of the Merger. On the Effective Date, by virtue of the merger
and without any action on the part of the Company, Parent, MARC, the Seller(s)
or any holder of any of the shares, each share of MARC Stock issued and
outstanding immediately prior to the Effective Date shall by virtue of the
merger be canceled and extinguished. Each share of issued and outstanding
capital stock of the Surviving Corporation, consisting of 5,470,713 shares of
capital stock (par value $1.50 per share; one vote per share), on the Effective
Date shall continue to evidence the same number of shares of the capital stock
of the Surviving Corporation. As a result, the Parent will continue to hold the
same number of issued and outstanding shares of capital stock of the Surviving
Corporation (5,470,713 shares) upon effectiveness of the merger as it did in the
Surviving Corporation prior to the merger. Concurrent with the merger and the
effectiveness of this Agreement, the Parent shall issue to Seller(s) an
additional 25.92804 shares of common stock of Parent ("Parent Shares") with such
rights as are set forth in Parent's amended Certificate of Incorporation with
the

4
<PAGE>

allocation of Parent Shares to each Seller made as specified on Exhibit 3 to
this Agreement.

2.2 Taking of Necessary Action; Further Action. Parent, MARC, Seller(s)
and the Company, respectively, shall take all such lawful action as may be
necessary or appropriate in order to effectuate the merger as promptly as
possible. If at any time after the Effective Date any further action is
necessary or desirable to carry out the purposes of this Agreement, and to vest
the Surviving Corporation with full right, title and possession of all assets,
property, rights, privileges, powers, and franchises of either of the
Constituent Corporations, the officers and directors of such corporation are
fully authorized in the name of their corporation or otherwise to take, and
shall take, all such lawful and necessary action.

III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company hereby represents and warrants to, and agrees with, Seller(s)
and MARC as follows:

3.1 Organization and Qualification, Etc. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, and has full power and authority (corporate and other) to own
its properties and to carry on its business as it is now being conducted.
Copies of the Company's Certificate of Incorporation, as amended, and By-Laws,
as amended, have been delivered to Seller(s) and are complete and correct and,
as so amended, in full force and effect. The Company is duly authorized to
transact insurance and reinsurance under the laws of the States of New York and
Delaware. Copies of the Company's Certificates of Authority in the States of
New York and Delaware have been delivered to Seller(s) and are in full force and
effect.

3.2 Authority. The Company is in compliance with all requirements
relating to foreign corporations doing business in New York. The Company has
full power and authority to execute and deliver this Agreement and to perform
the transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Company and is valid and binding upon the Company in accordance
with its terms.

3.3 Capitalization. The authorized capital stock of the Company consists
of 6,000,000 shares of capital stock. As of March 31, 1997, there were issued
and outstanding 5,470,713 shares of capital stock, all of which shares were
validly issued and fully paid and are nonassessable. Since March 31, 1997 there
have been no changes in the authorized, issued or outstanding shares of the
Company. There are no shares reserved for issuance and the Company has no
commitment to issue or sell any shares or any securities or obligations
convertible into or exchangeable for, or giving any person any right to
subscribe for or

5
<PAGE>

acquire from the Company, any shares and no securities or obligations
representing such rights are outstanding.

3.4 Stockholder Consent. The stockholder vote required by law to approve
and adopt this Agreement on behalf of the Company is a majority of the issued
and outstanding stock of the Company's one class of capital stock entitled to
vote thereon.

IV. REPRESENTATIONS AND WARRANTIES OF PARENT

Parent represents and warrants to, and agrees with, the Seller(s) and MARC
as follows:

4.1 Organization and Qualification, Etc. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has full power and authority (corporate and other) to own its
properties and to carry on its business as it is now being conducted.

4.2 Authority. Parent has full power and authority to execute and deliver
this Agreement and to perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by Parent and is
valid and binding upon Parent in accordance with its terms.

V. REPRESENTATIONS AND WARRANTIES OF MARC

MARC hereby represents and warrants to, and agrees with, Parent and Company
as follows:

5.1 Organization and Qualification, Etc. MARC is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New York. Copies of MARC's Charter and By-Laws have been delivered to the
Company and are complete and correct and in full force and effect. MARC is duly
authorized to transact insurance and reinsurance under the laws of the States of
New York and Delaware. Copies of MARC's Certificates of Authority in the States
of New York and Delaware have been delivered to the Company and are in full
force and effect.

5.2 Authority. MARC has full power and authority to execute and deliver
this Agreement, to perform the transactions contemplated hereby and to
consummate the merger. This Agreement has been duly authorized, executed and
delivered by MARC and is valid and binding upon MARC in accordance with its
terms.

5.3 Capitalization. The authorized capital stock of MARC consists of
71,000 shares of preferred stock and 7,000 shares of common stock. As of March
31, 1997, there

6
<PAGE>

were issued and outstanding 71,000 shares of preferred stock and 7,000 shares of
common stock, all of which shares were validly issued and fully paid and are
nonassessable. Since March 31, 1997, there have been no changes in the
authorized, issued or outstanding shares of MARC. There are no shares reserved
for issuance and MARC has no commitment to issue or sell any shares or any
securities or obligations convertible into or exchangeable for, or giving any
person any right to subscribe for or acquire from MARC, any shares and no
securities or obligations representing such rights are outstanding.

5.4 Shareholder Consent. The shareholder vote required by law to approve
and adopt this Agreement on behalf of MARC is two-thirds of the issued and
outstanding shares of MARC's one class of common shares entitled to vote
thereon.

VI. REPRESENTATIONS AND WARRANTIES OF SELLER(S)

Each Seller represents and warrants to, and agrees with, the Parent and
Company as follows:

6.1 Organization and Qualification, Etc. Each Seller is a limited
liability company duly organized, validly existing and in good standing under
the laws of Germany, and has full power and authority (corporate and other) to
own its properties and to carry on its business as it is now being conducted.

6.2 Authority. Each Seller has full power and authority to execute and
deliver this Agreement and to perform the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by each Seller
and is valid and binding upon such Seller in accordance with its terms.

VII. MUTUAL COVENANTS AND AGREEMENTS

7.1 Reasonable Efforts. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to
promptly take, or cause to be taken, all action and to do, or cause to be done,
all things necessary, proper or advisable under applicable laws and regulations,
or otherwise, including, without limitation, attempting to obtain all necessary
consents and approvals of, permits from, and assurances of no objection to the
merger at other rulings from the appropriate governmental authorities to
consummate and make effective, as soon as practicable, the transactions
contemplated by this Agreement. In case at any time after the Effective Date any
further action is necessary, proper or advisable to carry out the purposes of
this Agreement, as soon as reasonably

7
<PAGE>

practicable, each party to this Agreement shall cause its proper officers and
directors to take all such necessary action to effectuate such purpose.

7.2 Access. From the date hereof to the Effective Date, each party shall
provide the other parties with such information and permit the other parties'
officers and representatives such access to its properties and books and records
as the other parties may from time to time reasonably request.

7.3 Notification of Certain Matters. Each party shall give prompt notice
to the other parties, of (i) the occurrence, or failure to occur, of any event
which occurrence or failure would be likely to cause any representation or
warranty contained in this Agreement to be untrue or inaccurate in any material
respect at any time from the date hereof to the Effective Date and (ii) any
material failure by such party, or any officer, director, employee or agent
thereof, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder.

VIII. TERMINATION OR ABANDONMENT

8.1 Termination or Abandonment. Notwithstanding the approval of the
Stockholders, this Agreement and the merger may be terminated and abandoned at
any time prior to the Effective Date, or as may otherwise be permitted by
applicable law, by the Board of Directors of either of the Constituent
Corporations.

8.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement and the merger pursuant to the foregoing
provisions of this Article VIII, this Agreement shall become void and have no
effect, with no liability on the part of the party electing to cause such
termination or abandonment or its Stockholders or directors or officers in
respect thereof.

IX. MISCELLANEOUS

9.1 Waiver. At any time prior to the Effective Date, any party may (i)
agree to extend the time for performance of any of the obligations or other acts
of the other parties hereto, (ii) waive any inaccuracies in the representations
and warranties of the other parties contained herein or in any document
delivered pursuant hereto, and (iii) waive any conditions or compliance by the
other parties with any of the agreements contained herein. Any agreement on the
part of a party hereto to any such waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.

8
<PAGE>

9.2 Notices. Any notices or other communications required or permitted
hereunder shall be sufficiently given if sent by registered or certified mail,
postage prepaid, addressed,

If to Company: American Re-Insurance Company
555 College Road East
Princeton, New Jersey 08543-5241
Attention: Robert K. Burgess, Executive Vice
President, General Counsel and Secretary

If to Parent: American Re Corporation
555 College Road East
Princeton, New Jersey 08543-5421
Attention: Robert K. Burgess, Executive Vice
President, General Counsel and Secretary

If to MARC: Munich American Reinsurance Company
560 Lexington Avenue
New York, New York 10022-6890
Attention: William J. Albinger, Jr., Senior Vice
President, General Counsel and Secretary

If to Seller(s): Names and Addresses as noted on Exhibit 3

or such other address as shall be furnished in writing by any party to the other
prior to the giving of applicable notice or communication, and such notice or
communication shall be deemed to have been given as of the date so mailed. Any
such notice or communication to or by Parent shall be deemed to be a notice or
communication to or by the Company, and any such notice or communication to or
by any Seller shall be deemed to be a notice or communication by MARC, unless
otherwise specifically stated therein.

9.3 Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

9.4 Headings. The headings or articles and sections herein are for
convenience of reference only, do not constitute a part of this Agreement and
shall not be deemed to limit or affect any of the provisions hereof.

9.5 Variation and Amendment. This Agreement (including the documents and
instruments referred to herein or therein) (a) constitutes the entire agreement
and supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the subject matter hereof, (b) is not
intended to confer upon any other person any rights or remedies hereunder and
(c) shall not be assigned by operation of law or otherwise, except with the
written consent of the other party hereto. This Agreement may be varied or

9
<PAGE>

amended only by written action of the Company, Parent, Seller(s) and MARC at any
time prior to the Effective Date, provided no such variance or amendment after
the Stockholders vote upon the merger shall reduce the consideration to which
each Seller is to become entitled as of the Effective Date pursuant to Section
2.1.

9.6 No Survival of Representations and Warranties. None of the
representations and warranties included or provided for in this Agreement shall
survive the Effective Date.

9.7 Expenses. Whether or not the merger is consummated, all costs and
expenses incurred in connection with this agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses.

9.8 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware without regard to principles
of conflict of laws.

9.9 No Additional Compensation. No director, officer, agent or employee
of Parent, Seller(s), MARC or the Company shall receive any fee, commission,
compensation or other valuable consideration whatsoever for aiding, promoting or
assisting in the merger or in the adoption or approval of this Agreement, other
than normal and routine fees, commissions, compensations, bonuses and employee
benefits currently being paid to such directors, officers, agents and employees
in their usual capacity as such.

[THIS SPACE LEFT INTENTIONALLY BLANK]

10
<PAGE>

IN WITNESS WHEREOF, pursuant to authority duly given by their respective
Board of Directors and consistent with the approvals of the merger by the
Stockholders, this Agreement and Plan of Merger has been signed on behalf of
Parent, MARC, the Seller(s) and the Company by a duly authorized officer of each
corporation, all as of the date first above written.

AMERICAN RE-INSURANCE COMPANY

Attest:_____________________________ By:__________________________________
Secretary Name: Edward J. Noonan
Title: Chairman, President and Chief
Executive Officer
(Seal)

AMERICAN RE CORPORATION

Attest:_____________________________ By:__________________________________
Secretary Name: Edward J. Noonan
Title: President and Chief Executive
Officer
(Seal)

MUNICH AMERICAN REINSURANCE
COMPANY

Attest:_____________________________ By:__________________________________
Secretary Name: John N. Lombardo
Title: President and Chief Executive
Officer
(Seal)

11
<PAGE>

MUNCHENER RUCKVERSICHERUNGS-
GESELLSCHAFT AKTIENGESELLSCHAFT
IN MUNCHEN

Attest:_____________________________ By:__________________________________
Secretary Name:
Title: President
(Seal)

MUNICH MANAGEMENT CORPORATION,
U.S. MANAGER OF MUNICH REINSURANCE
COMPANY, UNITED STATES BRANCH

Attest:_____________________________ By:__________________________________
Secretary Name:
Title: President
(Seal)
ALLIANZ AKTIENGESELLSCHAFT

Attest:_____________________________ By:__________________________________
Secretary Name:
Title: President
(Seal)
VICTORIA VERSICHERUNG AG

Attest:_____________________________ By:__________________________________
Secretary Name:
Title: President
(Seal)

<PAGE>

AMERICAN RE CORPORATION LONG-TERM INCENTIVE PLAN

1. Purposes

The purpose of the American Re Corporation Long-Term Incentive Plan (the
"Plan") is to enable American Re Corporation (the "Company") to attract,
retain, motivate and reward executives and Key Employees of the highest
caliber and quality by providing them with the opportunity to earn
incentive compensation directly linked to the Company's long-term
performance.

2. Definitions

For purposes of the Plan, the following terms shall be defined as follows:

"Aggregate Operating Income" means the sum of the Company's after-tax
operating income from reinsurance and insurance operations and the
after-tax fee income from Subsidiaries for each of the four years of the
performance period as determined under GAAP.

"Beneficiary" shall mean the person a Participant designates as his
beneficiary by a written instrument executed and filed with the Committee,
provided, however, that this term shall include only persons who are living
at the time of a distribution under the Plan. To the extent that a
Participant has no beneficiary, in whole or in part, either because of the
death of a person, designated by him or because of the Participant's
failure to make a designation, Beneficiary shall also mean the person in
the first category of the following categories of beneficiaries which has
living members: (a) spouse, (b) children, (c) grandchildren, (d) parents,
(e) brothers and sisters, and, if none of the above, Participant's estate.

"Board" means the Board of Directors of the Company.

"Cause" means that the Participant shall have (i) been convicted of a
felony; (ii) willfully failed to perform the duties of his position; (iii)
stolen or embezzled property, or (iv) committed an act of willful
misconduct which is damaging or detrimental to the Company or a Subsidiary.

"Code" means the Internal Revenue Code of 1986, as amended, and the
applicable rulings and regulations (including any proposed regulations)
thereunder.

"Committee" means the Executive Committee of the Board, any successor
committee thereto or any other committee appointed by the Board to
administer the Plan.

"Disability" means eligibility for disability benefits under the terms of
the Company's long-term disability plan in effect at the time the
Participant becomes disabled.

"Individual Target Award" of a Participant means the amount to be paid to
the Participant if the Company meets a specified level of achievement
relative to the Performance Targets described in Section 4 hereof.

"Key Employee" means any employee of the Company or Subsidiary who shall
have been designated by the Committee as a Key Employee for purposes of the
Plan.

<PAGE>

"Normal Retirement" means Normal Retirement under the American Re-Insurance
Company Employees' Pension Plan.

"Participant" means each officer or Key Employee of the Company or a
Subsidiary whom the Committee designates as a participant under the Plan.

"Performance Targets" means the targets related to the performance goals
designated in Section 4(c) which Performance Targets will be established by
the Committee for a Performance Period.

"Performance Period" means each period consisting of four fiscal years of
the Company or such other period as may be designated by the Committee.

"Plan" means the American Re Corporation Long-Term Incentive Plan and any
successor plan of the Company.

"Return on Equity" (ROE) is defined as the consolidated arithmetic average
return on equity for each of the four years in the performance period. The
ROE calculation is performed as follows:

(1) A ROE calculation for each of the performance years is made.
This is done by dividing the GAAP after-tax operating income by
the average equity for that year (average equity is determined by
taking the average of the equity at the beginning of the year and
the end of the year). The resulting percentage is the return on
equity for that year.

(2) The resulting four ROE percentages for each of the performance
years are then averaged arithmetically resulting in the
consolidated arithmetic ROE for the four-year performance period.

"Subsidiary" means (i) a corporation or other entity with respect to which
the Company, directly or indirectly, has the power, whether through the
ownership of voting securities, by contract or otherwise, to elect at least
a majority of the members of such corporation's board of directors or other
entity's analogous governing body, or (ii) any other corporation or other
entity in which the Company, whether directly or indirectly, has an equity
or similar interest and which the Committee designates as a Subsidiary for
purposes of the Plan.

3. Administration

(a) Power and Authority of Committee. The Plan shall be administered by
the Committee which shall have full power and authority, subject to
the express provisions hereof:

(i) to select Participants from officers or Key Employees of the
Company;

(ii) to establish the Performance Targets and Individual Target
Awards for achievement during a Performance Period and to
determine whether such Performance Targets have been
achieved;

(iii) to prescribe, amend and rescind rules and procedures
relating to the Plan;

2
<PAGE>

(iv) to vary the terms of awards to take account of tax,
securities law and other regulatory requirements of foreign
jurisdictions;

(v) subject to the provisions of the Plan and subject to such
additional limitations and restrictions as the Committee may
impose, to delegate to one or more officers of the Company
some or all of its authority under the Plan;

(vi) to employ such legal counsel, independent auditors and
consultants as it deems desirable for the administration of
the Plan and to rely upon any opinion or computation
received therefrom; and

(vii) to make all other determinations and to formulate such
procedures as may be necessary or advisable for the
administration of the Plan.

(b) Plan Construction and Interpretation. The Committee shall have full
power and authority, subject to the express provisions hereof, to
construe and interpret the Plan.

(c) Determinations of Committee Final and Binding. All determinations by
the Committee in carrying out and administering the Plan and in
construing and interpreting the Plan and in determining whether there
has been a forfeiture of benefits under this Plan shall be final,
binding and conclusive for all purposes and upon all persons
interested herein.

(d) Liability of the Committee. No member of the Committee shall be
liable for any action nor determination other than willful misconduct,
and the members of the Committee shall be entitled to indemnification
and reimbursement in the manner provided in the Company's Certificate
of Incorporation as it may be amended from time to time. In the
performance of its responsibilities with respect to the Plan, the
Committee shall be entitled to rely upon information and advice
furnished by the Company's officers, the Company's accountants, the
Company's counsel and any other party the Committee deems necessary,
and no member of the Committee shall be liable for any action taken or
not taken in reliance upon any such advice.

4. Awards

(a) Performance Targets and Individual Target Awards. The Committee shall
determine in its sole discretion whether any officer or Key Employee
of the Company shall have the opportunity to earn incentive
compensation under the Plan during any Performance Period. If the
Committee decides to offer such opportunity to one or more officers or
Key Employees of the Company, then no later than ninety (90) days from
the beginning of a Performance Period (or such other time as may be
required or permitted by the Committee), the Committee shall (i)
designate each Participant for the Performance Period, and (ii)
establish specific Performance Targets related to the performance
goals set forth in Section 4(c) below and the Individual Target Awards
which may be earned for the Performance Period by each Participant.
The Committee may specify that the Individual Target Award for a
Performance Period will be earned only if a Performance Target is
achieved. The performance goals, and the incentive amount to be
earned for a

3
<PAGE>

given Performance Period, will vary based upon different levels of
achievement of the applicable Performance Targets.

(b) Following the completion of each Performance Period, the Committee
shall certify in writing whether the applicable Performance Targets
have been achieved for such Performance Period and the incentive
amounts, if any, payable to Participants for such Performance Period.

(c) Performance Goals. For purposes of this Plan, the performance
criteria for which the Committee shall establish Performance Targets
applicable to specific Performance Periods shall be the following:

(i) Aggregate Operating Income;

(ii) Return On Equity;

each of which may be established (1) on a corporate-wide basis or with
respect to one or more operating units, divisions, acquired
businesses, or joint ventures, or, where applicable, or (2) on a
relative or an absolute basis.

(d) Payment of Awards, Maximum Limitation. Notwithstanding anything in
this Plan to the contrary, the maximum aggregate incentive amount that
may be earned under the Plan by a Participant for each Performance
Period shall be two hundred percent (200%) of the Participant's Target
Award.

5. Termination of Employment

If a Participant's employment with the Company or a Subsidiary terminates
during a Performance Period by reason of death, Disability, or Normal
Retirement, the Participant, or the Participant's beneficiary, if
applicable, shall be eligible to receive an award equal to the award the
Participant would have received for the Performance Period if the
Participant had remained in the employ of the Company or a Subsidiary for
the entire Performance Period multiplied by a fraction that equals the
number of full months for which the Participant was employed during the
Performance Period divided by forty-eight (48). In the event a
Participant's employment with the Company terminates due to death,
Disability, or Normal Retirement, prior to distribution under the Plan, the
Participant's payout, if any, will be distributed as soon as practicable,
at or about the time of distribution under the Plan and any and all
deferral elections made prior thereto shall be null and void. If a
Participant's employment with the Company or a Subsidiary terminates during
a Performance Period by voluntary resignation or for Cause, the
Participant's participation in the Plan shall terminate forthwith and he or
she shall not be entitled to an award for such Performance Period. If a
Participant's employment with the Company or a Subsidiary terminates during
a Performance Period for any other reason, including, but not limited to,
early retirement under the American Re-Insurance Company Employees' Pension
Plan, the Participant's participation in the Plan shall terminate forthwith
and he or she shall not be entitled to any award for such Performance
Period unless approved otherwise by the Committee.

4
<PAGE>

6. Payment of Awards

Payment of awards determined under Sections 4 and 5 shall be made to each
Participant as soon as practicable after the Committee determines that the
applicable Performance Targets have been achieved.

7. Deferrals

(a) Election to Defer

Any Participant who is subject to United States taxation may make an
irrevocable election to defer receipt of payment of all or part of a
potential award in the amount of $25,000 or more by submitting a
written notice to the Company by December 31 preceding the beginning
of the fourth year of the Performance Period to which such award
relates. Amounts deferred and interest accrued thereon as provided
below will be credited to a book entry account in the name of the
Participant (the "Deferred Compensation Account").

(b) Interest on Deferrals

Except as set forth below, interest will accrue on the amounts
remaining in a Participant's Deferred Compensation Account at a rate
equal to the annual rate of yield of the longest term United States
Treasury Bond (excluding perpetual bonds and bonds that may be used
for payment of inheritance taxes) outstanding at year end for the year
of the interest accrual, or such other rate determined by the
Committee. Interest on the amounts remaining in a Participant's
Deferred Compensation Account will be determined annually and, to the
extent practicable, distributed in accordance with the same schedule
as amounts deferred.

A Participant whose annual salary is $165,000 or more at the time of
the election may elect any of the following events of distribution
with respect to the Participant's Deferred Compensation Account:

(1) One (1) year following the payment of an award;

(2) Three (3) years following the payment of an award;

(3) Five (5) years following the payment of an award, or

(4) Termination of employment.

A Participant whose annual salary is less than $165,000 at the time of
the election may elect any of the following events of distribution
with respect to the Participant's Deferred Compensation Account, but
in no event shall the distribution date be later than the
Participant's 53rd birthday:

(1) One (1) year following the payment of an award;

(2) Three (3) years following the payment of an award, or

(3) Five (5) years following the payment of an award.

5
<PAGE>

The annual salary limitations specified in this Section and Section
10(e) of the Plan shall be adjusted for each applicable Performance
Period in accordance with the applicable average annual percentage
increase in the officer salary ranges as determined by the Company.

(d) Methods of Distribution

The Participant may elect any of the following methods of distribution
with respect to the Participant's Deferred Compensation Account, with
payments commencing within sixty (60) days after the happening of the
Participant's elected event of distribution described above in Section
7 (c):

(1) A lump sum, or

(2) Annual installments of principal and interest over a period
of:

(a) Three (3) years, or

(b) Five (5) years.

(e) Balance in Participant's Deferred Compensation Account

If the Participant has elected to receive installment payments and the
balance in the Participant's Deferred Compensation Account is less
than $25,000 at the time the applicable event of distribution (as
described in Section 7(c)) occurs, the remainder of the account will
be distributed to the Participant in a single lump sum within sixty
(60) days thereafter.

The Committee may, in its sole discretion, accelerate the payment of a
Participant's Deferred Compensation Account balance, along with
accrued interest.

In the event a Participant's employment with the Company terminates
for any reason other than Normal Retirement or Disability after the
time of distribution to the Participant's Deferred Compensation
Account under the Plan, or such Participant dies prior to receipt of
amounts deferred, the balance in such Participant's Deferred
Compensation Account, along with accrued interest, will be distributed
to the Participant, or, in the event of the Participant's death, to
the Participant's Beneficiary within sixty (60) days of termination.
In the event a Participant's employment with the Company terminates
due to such Participant's Disability, the Committee may, in its
discretion, distribute the balance in such Participant's Deferred
Compensation account along with interest accrued but not yet recorded,
as soon as practicable, at or about the time of distribution under the
Plan, notwithstanding the Participant's election to defer.

8. Effective Date; Term

The Plan shall be effective with respect to Performance Periods
beginning on January 1, 1997 and January 1, 1999. Unless earlier
terminated in accordance with Section 9 below, no award shall be made
under the Plan with respect to Performance Periods beginning after
January 1, 2002.

6
<PAGE>

9. Amendment and Termination

Notwithstanding Section 8, the Board or the Committee may at any time
amend, suspend, discontinue or terminate the Plan, but no such action shall
deprive any Participant of any accrued right hereunder.

10. Miscellaneous

(a) Tax Withholding. The Company may withhold any federal, state or local
taxes of any kind required by law to be withheld with respect to any
payments made hereunder.

(b) No Rights to Awards or Employment. No Participant shall have any
claim or right to receive awards under the Plan. Nothing in the Plan
shall confer upon any employee of the Company any right to continued
employment with the Company or interfere in any way with the right of
the Company to terminate the employment of any of its employees at any
time, with or without cause.

(c) Other Compensation. Nothing in this Plan shall preclude or limit the
ability of the Company to pay any compensation to a Participant under
the Company's other compensation and benefit plans and programs.

(d) No Limitation on Corporate Actions. Nothing contained in the Plan
shall be construed to prevent the Company or any Subsidiary from
taking any corporate action which is deemed by it to be appropriate or
in its best interest, whether or not such action would have an adverse
effect on any awards made under the Plan. No Participant, beneficiary
or other person shall have any claim against the Company or any
Subsidiary as a result of any such action.

(e) Unfunded Plan. This Plan is intended to be an unfunded deferred
compensation plan. More particularly, this Plan is intended to be,
and shall operate as, (1) a bonus program (within the meaning of 29
C.F.R. Section 2510.3-2(c)) for Participants of this Plan receiving an
annual salary not exceeding $165,000, as adjusted over time; and (2) a
plan which is unfunded and is maintained by an employer primarily for
the purpose of providing deferred compensation for a select group of
management or highly compensated employees for Participants of this
Plan receiving an annual salary of $165,000 or more, as adjusted over
time. Prior to the payment of any award, nothing contained herein
shall give any Participant any rights that are greater than those of a
general creditor of the Company.

(f) Non-Transferability. Except as expressly provided herein, no
Participant or Beneficiary shall have the power or right to sell,
transfer, assign, pledge or otherwise encumber or dispose of the
Participant's interest under the Plan. Any attempt or act to so sell,
transfer, assign, pledge, or otherwise encumber or dispose of the
Participant's or Beneficiary's interest shall result in a forfeiture
of the Participant's or Beneficiary's interest in the Plan, unless
consented to by the Committee.

(g) Designation of Beneficiary. A Participant may designate a Beneficiary
or Beneficiaries to receive any payments which may be made following
the Participant's death. Such

7
<PAGE>

designation may be changed or canceled at any time without the consent
of such Beneficiary. Any such designation, change or cancellation
must be made in a form approved by the Committee and shall not be
effective until received by the Committee. If a Participant does not
designate a Beneficiary, or the designated Beneficiary or
Beneficiaries predeceases the Participant, any payments which may be
made following the Participant's death shall be made in accordance
with Section 2 hereof.

(h) Severability. If any provision of this Plan is held unenforceable,
the remainder of the Plan shall continue in full force and effect
without regard to such unenforceable provision and shall be applied as
though the unenforceable provision were not contained in the Plan.

(i) Expenses. The costs and expenses of administering the Plan shall be
borne by the Company.

(j) Governing Law. The Plan and all actions taken thereunder shall be
governed by and construed in accordance with and governed by the laws
of the State of Delaware, without reference to principles of conflict
laws.

AMERICAN RE CORPORATION

By: ___________________________

Title: ________________________

Date: ________________________

<PAGE>

October 28, 1997

Mr. Edward B. Jobe
32 Vreeland Court
Princeton, New Jersey 08540

Dear Ed:

This letter will confirm the terms on which you have agreed to continue to
provide consulting services to American Re Corporation or a successor
organization.

For the period from January 1, 1998 to December 31, 1998 you agree to
provide various consulting services, from time to time, under my direction and
as I may request. We have agreed that these services may involve up to 50% of
your work-time over the course of the year.

As consideration for these services, American Re will pay you an annual fee
of $250,000 payable in equal monthly installations of $20,833.33 on the last day
of each month. Other reasonable expenses related to American Re's business, if
approved in advance, will also be reimbursed.

American Re agrees to indemnify and hold you harmless against any and all
claims, damages, costs, expenses and suits related to your performance of
services for American Re, except those arising out of your intentional
misconduct or gross negligence.

You may terminate this agreement at any time upon 90 days written notice to
American Re. American Re may terminate this agreement only in the event of
fraud, intentional misconduct, gross negligence, or your inability to perform
due to death or disability.

If these terms are acceptable, please sign the agreement in the space
provided below and return it to my attention.

As you know, I am pleased that I can continue my association with you both
personally and professionally.

Sincerely,

Edward J. Noonan

Accepted and Agreed:________________________________,Dated:____________________
Edward B. Jobe

<PAGE>

<TABLE>
<CAPTION>
STATE/COUNTRY/DATE PRIMARY
NAME OF INCORPORATION BUSINESS ACTIVITIES
- ------------------------------------------------------- -------------------- -----------------------------------
<S> <C> <C>
American Re Corporation(1)........................... Delaware/1991 Holding Company
American Re-Insurance Company...................... Delaware/1917 Reinsurance
American Re Inversiones, S.A. ................... Chile/1986 Holding Company
111 East 50th Street Corporation................. New York Real Estate
American Re-Insurance Company (Chile) S.A...... Chile/1981 Reinsurance
American Alternative Insurance Corporation......... New York/1923 Alternative Market Insurance
American Alternative Insurance Corporation of
Delaware......................................... Delaware/1995 Alternative Market Insurance
American Re Asset Management, Inc.................. Delaware/1995 Investment Management
American Re Capital................................ Delaware/1995 Business Trust
AM-RE Managers, Inc................................ Delaware/1988 Alternative Markets
American Alternative Management, Inc............. Delaware/1997 Alternative Markets Consulting
Becher + Carlson Risk Management Inc............. California/1983 Risk Management
Becher + Carlson South Africa, Ltd............. South Africa/1997 Risk Management
Becher + Carlson Management, Ltd................. Bermuda/1981 Captive Management
Becher + Carlson Brokerage, Ltd.................. Bermuda/1986 Brokerage
AM-RE Managers (Bermuda) Ltd................. Bermuda/1990 Underwriting Management
Becher + Carlson Insurance Services, Inc......... California/1981 Agency
AM-RE Brokers, Inc........................... Delaware/1978 Reinsurance Brokerage
Becher + Carlson Insurance Agency
of Ohio........................................ Ohio/1994 Agency
Becher + Carlson South Africa (Pty) Ltd.......... South Africa/1997 Risk Management
Becher + Carlson Mauritius....................... Mauritius/1997 Risk Management
AM-RE Services, Inc................................ Delaware/1980 Consulting Services
AM-RE Consultants, Inc........................... Delaware/1994 Consulting Services
American Re Holdings, Ltd.......................... England/1988 Holding Company
American Re Management, Ltd...................... England/1988 Underwriting Management
American Re Managers International, Ltd.......... England/1988 Representative Office
American Re Management (Vienna) GmbH............. Austria/1991 Representative Office
ARB International, Ltd........................... England/1989 Lloyd's Brokerage
Risk Management Partners, Ltd.(2)................ England/1994 Insurance
Princeton Eagle Holding (Bermuda) Limited.......... Bermuda/1994 Holding Company
Princeton Eagle Insurance Company Limited........ Bermuda/1994 Rent-a-Captive Facility
Princeton Eagle West Holding Inc................... Delaware/1995 Holding Company
Princeton Eagle West Insurance Company........... Bermuda/1995 Rent-a-Captive Facility
The Princeton Excess and Surplus Lines Insurance
Company.......................................... Delaware/1995 Surplus Lines Insurance
</TABLE>

- ------------------------

(1) Indentations indicate subsidiaries. All ownership is 100% of common stock
other than directors(1) qualifying shares or where local laws or customs in
foreign jurisdictions require multiple shareholders (for example, American
Re Managers International, Ltd. owns 1 share of American Re Management
(Vienna) GmbH).

(2) A joint venture 50% owned by American Re Holdings, Ltd. and 50% owned by
Arthur J. Gallagher (UK) Ltd.

<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN RE
CORPORATION'S REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 6,716
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 293
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 7,032
<CASH> 642
<RECOVER-REINSURE> 2,492
<DEFERRED-ACQUISITION> 357
<TOTAL-ASSETS> 13,289
<POLICY-LOSSES> 7,509
<UNEARNED-PREMIUMS> 1,299
<POLICY-OTHER> 218
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 574
238<F1>
0
<COMMON> 0
<OTHER-SE> 2,586
<TOTAL-LIABILITY-AND-EQUITY> 13,289
2,486
<INVESTMENT-INCOME> 428
<INVESTMENT-GAINS> 88
<OTHER-INCOME> 42
<BENEFITS> 1,716
<UNDERWRITING-AMORTIZATION> 838
<UNDERWRITING-OTHER> 264
<INCOME-PRETAX> 224
<INCOME-TAX> (3)
<INCOME-CONTINUING> 228
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 221
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 4,849
<PROVISION-CURRENT> 1,636
<PROVISION-PRIOR> 80
<PAYMENTS-CURRENT> 168
<PAYMENTS-PRIOR> 1,295
<RESERVE-CLOSE> 5,103
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING AS ALL OF ITS ASSETS JUNIOR SUBORDINATED DEBENTURES.
</FN>

</TABLE>