<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------
FORM 10-Q
-------------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended September 30, 1998,
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _______ to _______.
For the Quarter Ended September 30, 1998 Commission file number 1-11688
-------------
American Re Corporation
(Exact name of registrant as specified in its charter)
-------------
Delaware 13-3672116
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 College Road East
Princeton, New Jersey 08543-5241
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (609) 243-4200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock -$.01 par value 149.49712
- ---------------------------- ----------
Description of Class Shares Outstanding
as of November 12, 1998
<PAGE>
AMERICAN RE CORPORATION
Index To Form 10-Q
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1 -
Page
<S> <C>
Consolidated balance sheets at September 30, 1998 (unaudited),
and December 31, 1997........................................................ 1
Consolidated statements of income for the three-month and
nine-month periods ended September 30, 1998,
and 1997 (unaudited)......................................................... 2
Consolidated statements of cash flows for the nine-month
periods ended September 30, 1998, and 1997 (unaudited)....................... 3
Notes to consolidated interim financial statements................................ 4
Item 2 -
Management's discussion and analysis of
the Company's Results of Operations and Financial Condition.................. 6
PART II OTHER INFORMATION................................................................. 11
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
AMERICAN RE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in millions, except share amounts)
<TABLE>
<CAPTION>
(unaudited)
Assets: September 30, 1998 December 31, 1997
------------------------------------------------
<S> <C> <C>
Investments
Fixed Maturities
Bonds available for sale, at fair value (amortized cost:
September 30, 1998 - $6,665.3; December 31, 1997 - $6,481.4)............ $ 6,934.2 $ 6,644.2
Preferred stock available for sale, at fair value (amortized cost:
September 30, 1998 - $55.2; December 31, 1997 - $70.8)................... 55.9 71.4
Equity securities available for sale, at fair value (cost: September 30,
1998 - $436.7; December 31, 1997 - $275.2)............................... 403.6 293.3
Other invested assets.......................................................... 19.2 22.9
Cash and cash equivalents......................................................... 333.2 641.6
------------------------------------------
Total investments and cash............................................. 7,746.1 7,673.4
Accrued investment income......................................................... 90.0 93.9
Premiums and other receivables ................................................... 1,365.6 1,083.6
Deferred policy acquisition costs................................................. 386.1 356.7
Reinsurance recoverables on paid and unpaid losses................................ 2,571.3 2,491.7
Funds held by ceding companies.................................................... 434.0 383.0
Prepaid reinsurance premiums...................................................... 188.6 156.8
Deferred federal income taxes..................................................... 142.3 185.6
Other assets...................................................................... 876.1 864.1
------------------------------------------
Total assets........................................................... $ 13,800.1 $ 13,288.8
------------------------------------------
------------------------------------------
Liabilities:
Loss and loss adjustment expense reserves......................................... $ 7,625.7 $ 7,508.9
Unearned premium reserve.......................................................... 1,384.9 1,299.1
------------------------------------------
Total insurance reserves............................................... 9,010.6 8,808.0
Loss balances payable............................................................. 353.9 217.6
Funds held under reinsurance treaties............................................. 289.8 243.3
Senior bank debt.................................................................. 75.0 75.0
Senior notes...................................................................... 498.5 498.5
Other liabilities................................................................. 535.6 622.5
------------------------------------------
Total liabilities...................................................... 10,763.4 10,464.9
------------------------------------------
Company-obligated mandatorily redeemable preferred securities
of subsidiary trust holding as all of its assets
Junior Subordinated Debentures................................................ 237.5 237.5
------------------------------------------
Stockholders' Equity:
Common stock, par value: $0.01 per share; authorized:
1,000 shares; issued and outstanding: September 30, 1998, and
December 31, 1997 - 149.49712 shares.......................................... --- ---
Additional paid-in capital........................................................ 1,332.4 1,332.4
Retained earnings................................................................. 1,351.3 1,171.6
Accumulated other comprehensive income............................................ 115.5 82.4
------------------------------------------
Total stockholders' equity............................................. 2,799.2 2,586.4
------------------------------------------
Total liabilities, Company-obligated mandatorily redeemable
preferred securities of subsidiary trust and stockholders' equity... $ 13,800.1 $ 13,288.8
------------------------------------------
------------------------------------------
</TABLE>
See accompanying notes to consolidated interim financial statements.
3
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
Three-month period Nine-month period
ended September 30, ended September 30,
1998 1997 1998 1997
-----------------------------------------------------------------
Revenue:
<S> <C> <C> <C> <C>
Premiums written.............................................$ 657.6 $ 550.0 $ 1,803.9 $ 2,026.6
Change in unearned premium reserve........................... 24.2 2.8 (53.1) (139.7)
------------ ---------- ---------- ----------
Premiums earned........................................ 581.8 552.8 1,750.8 1,886.9
Net investment income......................................... 103.3 107.6 319.4 317.5
Net realized capital gains.................................... 20.1 26.3 79.9 70.1
Other income.................................................. 7.9 11.5 26.2 34.8
------------ ---------- ---------- ----------
Total revenue........................................... 713.1 698.2 2,176.3 2,309.3
------------ ---------- ---------- ----------
Losses and expenses:
Losses and loss adjustment expenses........................... 441.4 398.4 1,231.6 1,317.7
Commission expense............................................ 136.5 148.7 413.8 464.3
Operating expense............................................. 53.4 49.5 164.0 158.6
Interest expense.............................................. 10.5 10.6 31.6 32.2
Other expense................................................. 28.1 20.3 77.2 187.4
------------ ---------- ---------- ----------
Total losses and expenses............................... 669.9 627.5 1,918.2 2,160.2
------------ ---------- ---------- ----------
Income before income taxes, minority
interest, and distributions on
preferred securities of subsidiary trust............ 43.2 70.7 258.1 149.1
Federal and foreign income taxes.............................. 7.3 16.5 68.6 9.3
------------ ---------- ---------- ----------
Income before minority interest and
distributions on preferred securities of
subsidiary trust.................................... 35.9 54.2 189.5 139.8
Minority interest............................................. --- -- -- 6.8
Distributions on preferred securities of
subsidiary trust, net of applicable
income tax of $1.7 and $5.3, respectively.................. (3.3) (3.3) (9.8) (9.8)
------------ ---------- ---------- ----------
Net income to common stockholders......................$ 32.6 $ 50.9 $ 179.7 $ 136.8
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated interim financial statements.
4
<PAGE>
Consolidated Statements of Cash Flows
(Dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
Nine-month period ended September 30,
1998 1997
------------------------- -------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income.............................................................. $ 179.7 $ 136.8
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in accrued investment income................................ 3.9 8.3
Increase in premiums and other receivables........................... (282.0) (260.7)
Increase in deferred policy acquisition costs........................ (29.4) (43.8)
Increase in insurance reserves....................................... 202.6 401.5
Increase in current and deferred federal and foreign
income tax assets................................................ (12.6) (23.3)
Decrease in other assets and liabilities, net........................ 68.2 58.2
Depreciation expense on property and equipment....................... 5.0 6.4
Write-down of property and equipment................................. --- 38.2
Net realized capital gains........................................... (79.9) (70.1)
Decrease in other, net............................................... 41.7 33.9
------------- -------------
Net cash provided by operating activities.......................... 97.2 285.4
------------- -------------
Cash Flows From Investing Activities:
Investments available for sale:
Purchases .......................................................... (5,986.8) (3,992.2)
Maturities .......................................................... 314.7 586.7
Sales................................................................ 5,285.7 3,033.0
Other investments:
Purchases .......................................................... (1.6) (1.9)
Sales................................................................ --- 1.9
Cost of additions to property and equipment............................. (14.3) (16.7)
------------- -------------
Net cash used in investing activities............................. (402.3) (389.2)
------------- -------------
Cash Flows From Financing Activities:
Dividend to common stockholders......................................... --- (0.4)
Repayment of loan from parent........................................... --- (35.9)
Capital contribution from parent company............................... --- 85.0
------------- -------------
Net cash used in financing activities............................. --- 48.7
------------- -------------
Effect of exchange rate changes on cash and cash equivalents................ (3.3) (0.3)
------------- -------------
Net decrease in cash and cash equivalents.......................... (308.4) (55.4)
Cash and cash equivalents, beginning of period............................. 641.6 553.1
------------- -------------
Cash and cash equivalents, end of period.................................... $ 333.2 $ 497.7
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated interim financial statements.
5
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
September 30, 1998
(Dollars in millions)
(unaudited)
1. Basis of Presentation
American Re Corporation ("American Re" or the "Company") primarily acts
as the holding company for American Re-Insurance Company ("American
Re-Insurance"). American Re-Insurance underwrites property and casualty
reinsurance on a direct basis in both the domestic and international
markets. The Company is a 91% owned subsidiary of Munich Reinsurance
Company ("Munich Re"), a company organized under the laws of Germany.
The information for the interim periods ended September 30, 1998, and
1997, is unaudited. The interim consolidated financial statements have
been prepared on the basis of generally accepted accounting principles
and, in the opinion of management, reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of results
for such periods. The results of operations and cash flows for any
interim period are not necessarily indicative of results for the full
year. Intercompany accounts and transactions have been eliminated. These
financial statements should be read in conjunction with the financial
statements and related notes in the Company's 1997 Form 10-K.
2. Application of New Accounting Standard
Effective January 1, 1998, the Company adopted Financial Accounting
Standard No. 130 ("FAS No. 130"), "Reporting Comprehensive Income."
FAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in financial statements. FAS
No.130 requires unrealized gains and losses on investments, unrealized
foreign currency translation adjustments, and minimum pension
liability adjustments, if any, to be included as components of other
comprehensive income. Prior to the adoption of FAS No. 130 these
amounts were reported as separate components in stockholders' equity.
Prior years financial statements have been reclassified to conform
with the requirements of FAS No. 130. Total comprehensive income was
$72.4 and $112.7 for the three months ended September 30, 1998, and
1997, respectively, and $212.8 and $180.5 for the nine-month periods
ended September 30, 1998, and 1997, respectively. The adoption of this
statement had no financial impact on the Company's net income or
stockholders' equity. The components of accumulated other
comprehensive income are as follows:
<TABLE>
<CAPTION>
Net unrealized Net unrealized
appreciation of loss on
investments foreign exchange Total
------------------- -------------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1997 $ 118.0 $ (35.6) $ 82.4
Period change 35.7 (2.6) 33.1
--------------- --------------- ----------------
Balance at September 30, 1998 $ 153.7 $ (38.2) $ 115.5
--------------- --------------- ----------------
--------------- --------------- ----------------
</TABLE>
6
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
September 30, 1998
(Dollars in millions)
(unaudited)
3. Future Application of Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 133 ("FAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities." FAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. FAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Currently,
the Company does not expect the adoption of FAS No. 133 to have a
material impact on its consolidated financial statements.
4. Reinsurance
The Company reinsures certain risks to limit its exposure to catastrophes
and large or unusually hazardous risks. Although reinsurance agreements
contractually obligate the Company's reinsurers to reimburse it for the
agreed-upon portion of its gross paid losses, they do not discharge the
primary liability of the Company. The income statement amounts for
premiums written, premiums earned and losses and loss adjustment expenses
are net of reinsurance. Direct, assumed, ceded and net amounts for these
items are as follows:
<TABLE>
<CAPTION>
Three-month period Nine-month period
ended September 30, ended September 30,
1998 1997 1998 1997
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums written
Direct...................... $ 58.9 $ 41.9 $ 136.8 $ 107.0
Assumed .................. 679.8 684.0 2,172.0 2,304.2
Ceded....................... (181.1) (175.9) (504.9) (384.6)
-------------- ------------- ------------- -------------
Net......................... 557.6 550.0 1,803.9 2,026.6
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Premiums earned
Direct...................... 49.6 21.8 125.8 80.8
Assumed..................... 708.5 795.5 2,106.5 2,219.3
Ceded....................... (176.3) (264.5) (481.5) (413.2)
-------------- ------------- ------------- -------------
Net......................... 581.8 552.8 1,750.8 1,886.9
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Losses incurred
Direct...................... 55.1 13.4 129.2 60.9
Assumed..................... 460.1 572.9 1,410.4 1,576.2
Ceded....................... (73.8) (187.9) (308.0) (319.4)
-------------- ------------- ------------- -------------
Net......................... $ 441.4 $ 398.4 $ 1,231.6 $ 1,317.7
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
7
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
September 30, 1998
(Dollars in millions)
(unaudited)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1998, COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1997
The Company's net premiums written increased 1.4% to $557.6 million for
the quarter ended September 30, 1998, from $550.0 million for the same period in
1997. The Company experienced a 6.6% increase in treaty net premiums written to
$376.3 million for the third quarter of 1998 from $352.9 million for the same
period in 1997. The increase in treaty premiums was primarily attributable to
the Company's Domestic Insurance Company Operations ("DICO") which increased
6.8% to $264.5 million for the third quarter of 1998, from $247.6 million for
the same period in 1997, and the Company's International Operations, which
increased 13.3% to $99.1 million for the third quarter of 1998, from $87.5
million for the same period in 1997. The Company attributes this increase
primarily to an increase in finite risk business, which can vary significantly
from period to period. Premiums from non-finite risk business declined due to a
combination of factors in 1998, including generally adverse market conditions
and the non-renewal of or reduction in cessions to American Re under traditional
treaty programs which were related in several instances to mergers of clients,
increases in client retentions, and the Company's declining to write business at
prices it considered inadequate. The increases in DICO and International
Operations were partially offset by a 28.7% decrease in treaty premiums written
by the Company's alternative market operation, Munich-American RiskPartners,
Inc. ("RiskPartners") (formerly known as Am-Re Managers, Inc.), to $12.7 million
for the third quarter of 1998 from $17.8 million for the same period in 1997.
Facultative net premiums written decreased 8.0% to $181.3 million for
the third quarter of 1998 from $197.1 million for the same period in 1997. This
decrease is primarily attributable to DICO, which decreased 11.3% to $126.8
million for the third quarter of 1998, from $142.9 million for the same period
in 1997, somewhat offset by RiskPartners, which increased 4.4% to $47.1 million
for the third quarter of 1998, from $45.1 million for the same period in 1997.
The Company attributes the decrease in DICO primarily to a decrease in program
business, which is reflective of the overall market conditions previously
discussed.
The Company's net premiums earned increased 5.2% to $581.8 million for
the quarter ended September 30, 1998, from $552.8 million for the same period in
1997. The increase in premiums earned was attributable to the increase in
premiums written in the third quarter of 1998, in addition to the timing of
premiums earned on business in force.
Net losses and LAE incurred increased 10.8% to $441.4 million for the
quarter ended September 30, 1998, from $398.4 million for the same period in
1997. This increase was primarily attributable to $50.0 million of catastrophe
losses incurred from Hurricane Georges in the third quarter of 1998. There were
no material catastrophe losses in the 1997 period.
Underwriting expense, consisting of commission expense plus
operating expense, decreased 4.2% to $189.9 million for the quarter ended
September 30, 1998, from $198.2 million for the same period in 1997. This
decrease was due to a 8.3% decrease in commission expense to $136.5 million
for the third quarter of 1998 from $148.7 million for the same period in
1997. This decrease was partially due to the cancellation and non-renewal in
the 1998 period of certain quota share business with high commission ratios.
Operating expenses increased 7.9% to $53.4 million for the third quarter of
1998 from $49.5 million for the third quarter of 1997 due to an increase in
overhead expense.
8
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
September 30, 1998
(Dollars in millions)
(unaudited)
The Company experienced an underwriting loss (net premiums earned minus
losses and LAE incurred and underwriting expenses) of $49.5 million for the
quarter ended September 30, 1998, compared to an underwriting loss of $43.8
million for the same period in 1997. On a GAAP basis, the Company's loss ratio
increased to 75.9% for the third quarter of 1998 from 72.1% for the same period
in 1997, while the underwriting expense ratio decreased to 32.6% for the third
quarter of 1998 from 35.8% for the same period in 1997. As a result of these
changes, the combined ratio for the quarter ended September 30, 1998, increased
to 108.5% from 107.9% for the same period in 1997.
Net investment income decreased 4.0% to $103.3 million for the quarter
ended September 30, 1998, from $107.6 million for the same period in 1997. This
decrease is attributable to a change in the Company's investment strategy to
include a higher proportion of tax-exempt securities in its investment
portfolio, as compared to the 1997 period.
The Company realized net capital gains of $20.1 million for the quarter
ended September 30, 1998, compared to net capital gains of $26.3 million for the
same period in 1997. The net realized capital gain for the 1998 period was
primarily due to the Company's investment strategy, which included sales of
taxable investments, as the Company reallocated a larger portion of its overall
investment portfolio to tax-exempt securities. The 1998 period included net
capital gains of $23.5 million on the sale of bonds, offset by net capital
losses of $3.2 million on the sale of common stock. The 1997 period included net
capital gains of $19.5 million on the sale of common stocks and $7.0 million on
the sale of bonds.
Other income decreased 31.3% to $7.9 million for the quarter ended
September 30, 1998, from $11.5 million for the same period in 1997. This
decrease was primarily attributable to a decrease in fee subsidiary revenue of
$3.9 million. Other expenses increased 38.4% to $28.1 million for the third
quarter of 1998 from $20.3 million for the same period in 1997, which was
partially attributable to a write-off of certain company balances and overhead
expenses in the 1998 period.
Income before income taxes, minority interest, and distributions on
preferred securities decreased to $43.2 million for the quarter ended September
30, 1998, from $70.7 million for the same period in 1997. Federal and foreign
income taxes decreased to $7.3 million for the quarter ended September 30, 1998,
from $16.5 million for the same period in 1997. This decrease is primarily
attributable to lower pre-tax income and the increase in tax-exempt investment
income in the 1998 period.
The Company recognized an after-tax charge of $3.3 million for each of
the three-month periods ended September 30, 1998 and 1997, representing the
Company's minority interest in the earnings of American Re Capital, a
single-purpose wholly owned subsidiary trust. The charge is due to the
distributions incurred by American Re Capital on the Cumulative Quarterly Income
Preferred Securities ("QUIPS").
Net income to common stockholders decreased 36.0% to $32.6 million for
the quarter ended September 30, 1998, from $50.9 million for the same period in
1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1997
The Company's net premiums written decreased 11.0% to $1,803.9 million
for the nine months ended September 30, 1998, from $2,026.6 million for the same
period in 1997. The decrease in net premiums written was generally attributable
to what the Company perceives to be depressed market conditions, increases in
9
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
September 30, 1998
(Dollars in millions)
(unaudited)
client retentions and the Company's declining to write business at prices it
considered inadequate. As a result, the Company experienced a 16.8% decrease
in treaty net premiums written to $1,213.1 million for the nine months ended
September 30, 1998 from $1,457.4 million for the same period in 1997. The
decrease in treaty premiums was primarily attributable to the Company's
Domestic Insurance Company Operations ("DICO") which decreased 23.5% to
$793.9 million for the nine months ended September 30, 1998, from $1,037.6
million for the same period in 1997, and the Company's International
Operations, which decreased 8.9% to $306.3 million for the nine months ended
September 30, 1998, from $336.3 million for the same period in 1997. The
decrease in DICO was primarily attributable to the non-renewal of and
decreases in the amounts ceded to American Re-Insurance under several
traditional and finite risk treaty programs, which were related in several
instances to mergers of clients, in addition to the rescission of a large
retrocession in 1997, which increased prior period net writings. The decrease
in International Operations net premiums written was primarily attributable
to the assumption by Munich Re of certain business previously written by the
Company. The decreases in DICO and International Operations were partially
offset by a 35.2% increase in treaty premiums written by RiskPartners, to
$112.9 million for the nine months ended September 30, 1998, from $83.5
million for the same period in 1997.
Facultative net premiums written increased 3.8% to $590.8 million for
the nine months ended September 30, 1998 from $569.2 million for the same period
in 1997. This increase is primarily attributable to increased program business
from RiskPartners, which increased 41.1% to $192.4 million for the nine months
ended September 30, 1998, from $136.4 million for the same period in 1997,
partially offset by a 8.4% decrease in DICO facultative writings to $375.9
million for the nine months ended September 30, 1998, from $410.3 million for
the same period in 1997.
The Company's net premiums earned decreased 7.2% to $1,750.8 million
for the nine months ended September 30, 1998, from $1,886.9 million for the same
period in 1997. The decrease in premiums earned was primarily attributable to
the decrease in premiums written in the nine months ended September 30, 1998,
partially offset by the timing of premiums earned on business in force.
Net losses and LAE incurred decreased 6.5% to $1,231.6 million for the
nine months ended September 30, 1998, from $1,317.7 million for the same period
in 1997. The Company incurred $62.0 million of catastrophe losses during the
nine months ended September 30, 1998. There were no material catastrophe
losses in the 1997 period.
Underwriting expense, consisting of commission expense plus operating
expense, decreased 7.2% to $577.8 million for the nine months ended September
30, 1998, from $622.9 million for the same period in 1997. This decrease was due
to a 10.9% decrease in commission expense to $413.8 million for the nine months
ended September 30, 1998 from $464.3 million for the same period in 1997. This
decrease was partially due to the decrease in premiums earned in the nine months
ended September 30, 1998, in addition to the non-renewal or decreases of several
large domestic quota share treaties in the 1998 period with high commission
ratios. Operating expenses increased 3.4% to $164.0 million for the nine months
ended September 30, 1998 from $158.6 million for the nine months ended September
30, 1997 due to increases in overhead expenses.
The Company experienced an underwriting loss (net premiums earned
minus losses and LAE incurred and underwriting expenses) of $58.6 million for
the nine months ended September 30, 1998, compared to an underwriting loss of
$53.7 million for the same period in 1997. On a GAAP basis, the Company's
loss ratio increased to 70.3% for the nine months ended September 30, 1998
from 69.8% for the same period in 1997, while the underwriting expense ratio
was constant at 33.0% for the nine months ended September 30, 1998 and 1997.
As a result of these changes, the combined ratio for the nine months ended
September 30, 1998, increased to 103.3% from 102.8% for the same period in
1997.
10
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
September 30, 1998
(Dollars in millions)
(unaudited)
Net investment income increased 0.6% to $319.4 million for the nine
months ended September 30, 1998, from $317.5 million for the same period in
1997. This increase is attributable to the increase in the Company's invested
asset base in the 1998 period as compared to the 1997 period, somewhat offset by
a change in the Company's investment strategy to include a higher percentage of
tax-exempt securities in its portfolio, as compared to the 1997 period.
The Company realized net capital gains of $79.9 million for the nine
months ended September 30, 1998, compared to net capital gains of $70.1 million
for the same period in 1997. This change was primarily due to the Company's
investment strategy, which included sales of taxable investments, as the Company
reallocated a larger portion of its overall investment portfolio to tax-exempt
securities. The 1998 period included net capital gains of $83.3 million on the
sale of bonds and $12.0 million on the sale of common stock, offset by the $15.4
million write-down of common stock and other invested asset holdings, as the
decline in fair value of these securities is considered to be other than
temporary. The 1997 period included capital gains of $64.6 million on the sale
of common stocks and $5.5 million on the sale of bonds in the 1997 period. The
net gains realized in the 1997 period were based on investment management and
tax planning considerations.
Other income decreased 24.7% to $26.2 million for the nine months ended
September 30, 1998, from $34.8 million for the same period in 1997. This
decrease was primarily attributable to a decrease in fee subsidiary revenue of
$11.8 million. Other expenses decreased 58.8% to $77.2 million for the nine
months ended September 30, 1998 from $187.4 million for the same period in 1997.
This decrease was primarily attributable to the inclusion of one-time charges of
$121.4 million, primarily related to the Merger, in the nine months ended
September 30, 1997.
Income before income taxes, minority interest, and distributions on
preferred securities increased 73.1% to $258.1 million for the nine months ended
September 30, 1998, from $149.1 million for the same period in 1997. Federal and
foreign income taxes increased to $68.6 million for the nine months ended
September 30, 1998, from $9.3 million for the same period in 1997. This increase
is primarily attributable to higher pre-tax income, in addition to the
recognition of net operating loss carryforwards in the 1997 period, which
reduced the corresponding federal income tax expense.
The Company recognized an after-tax increase to income of $6.8 million
representing the minority ownership interest in the net loss of Munich American
Reinsurance Company ("MARC") for the six months ended June 30, 1997, prior to
the Merger. There was no comparable amount for the 1998 period.
The Company recognized an after-tax charge of $9.8 million for each of
the nine-month periods ended September 30, 1998 and 1997, 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 increased 31.4% to $179.7 million
for the nine months ended September 30, 1998, from $136.8 million for the
same period in 1997.
11
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
September 30, 1998
(Dollars in millions)
(unaudited)
FINANCIAL CONDITION
Total consolidated assets increased 3.8% to $13,800.1 million at
September 30, 1998, from $13,288.8 million at December 31, 1997. This increase
was primarily due to an increase in premiums and other receivables of $282.0
million, an increase in reinsurance recoverables on paid and unpaid losses of
$79.6 million and an increase in total investments and cash of $72.7 million.
The total financial statement value of investments and cash increased
0.9% to $7,746.1 million at September 30, 1998, from $7,673.4 million at
December 31, 1997, primarily due to cashflows from operating activities, and an
increase in the fair value of investments held. The financial statement value of
the investment portfolio at September 30, 1998, included a net increase from
amortized cost to fair value of $236.5 million for debt and equity investments,
compared to a net increase of $181.5 million at December 31, 1997. At
September 30, 1998, the Company recognized a cumulative unrealized gain of
$153.7 million due to the net adjustment to fair value on debt and equity
investments, after applicable income tax effects, which was reflected in
stockholders' equity as a component of accumulated other comprehensive
income. This represents a net increase to stockholders' equity of $35.7
million from the cumulative unrealized gain on debt and equity securities
of $118.0 million recognized at December 31, 1997.
Total consolidated liabilities increased 2.9% to $10,763.4 million at
September 30, 1998, from $10,464.9 million at December 31, 1997. This increase
was primarily due to increases in loss balances payable of $136.3 million and
loss and loss adjustment expense reserves of $116.8 million.
Common stockholders' equity increased 8.2% to $2,799.2 million at
September 30, 1998, from $2,586.4 million at December 31, 1997. This increase
was primarily attributable to net income of $179.7 million and a $33.1 million
increase in accumulated other comprehensive income, net of tax.
The Company's insurance/reinsurance subsidiaries' statutory surplus
increased to $2,448.0 million at September 30, 1998, from $2,323.4 million at
December 31, 1997. Operating leverage, as measured by such subsidiaries'
premiums-to-surplus ratio, on an annualized basis was 0.90 to 1 and 1.07 to 1 at
September 30, 1998, and December 31, 1997, 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.
The Company's cash flow from operations may be influenced by a
variety of other factors, including cyclical changes in the property and
casualty reinsurance market, insurance regulatory initiatives, and changes in
general economic conditions. Liquidity requirements are met on a short- and
long-term basis by funds provided by operations and from the maturity and the
sale of investments. Cash provided by operations primarily consists of
premiums collected, investment income, and reinsurance recoverable balances
collected, less paid claims (including payments made to commute or settle
reinsurance arrangements), retrocession payments, underwriting and interest
expenses, QUIPS distributions, and income tax payments. Cash flows provided
by operations for the Company were $97.2 million for the nine-month period
ended September 30, 1998, down from $285.4 million for the same period in
1997. This decrease was primarily due to a decrease in net premiums written
and collected and an increase in paid loss and loss adjustment expenses
during the nine-month period ended September 30, 1998, as compared to the
same period in 1997.
12
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
September 30, 1998
(Dollars in millions)
(unaudited)
Cash and cash equivalents were $333.2 million and $641.6 million at
September 30, 1998, and December 31, 1997, respectively. Cash and short-term
investments are maintained for liquidity purposes and represented 4.3% and 8.4%,
respectively, of total financial statement investments and cash on such dates.
IMPACT OF THE YEAR 2000 PROBLEM
The "Year 2000 problem" refers to the potential failure of computer
software and embedded computer chips to properly recognize the year 2000 and
later dates, because such dates are represented only by the last two digits of
the year and may be interpreted during computer operations as preceded by 19
rather than 20. The Company has been aware of the Year 2000 problem for several
years and has assigned a team of dedicated in-house information technology
staff, working with retained consultants and designated representatives from
each of the Company's major business areas, to review all critical systems for
their Year 2000 compliance and to correct all problems identified.
THE COMPANY'S STATE OF READINESS
Some of the Company's Year 2000 problems have been eliminated in the
ordinary course of ongoing upgrades to the Company's technology platforms.
However, in order to address the remainder of the Company's Year 2000
non-compliant systems, (e.g. certain mainframe systems, old software
applications, and some facilities equipment), in 1997 management initiated a
Year 2000 Compliance Program consisting of 5 phases: Phase 1 - Planning,
which consisted of defining the project scope, organizing a project team,
developing a detailed project plan and obtaining management approval; Phase
II -Inventory/Impact Analysis, which consisted of inventorying all of the
Company's technology as well as non-technology-based systems and equipment
containing embedded chips, determining whether there exists a potential Year
2000 problem, and analyzing the impact on the Company of such problem, and
which resulted in the creation of a Year 2000 database including all products
and services that need to be evaluated for Year 2000 compliance; Phase III -
Renovation, which consists of repairing or replacing critical items that are
not Year 2000 compliant; Phase IV - Vendor and Third Party Compliance,
pursuant to which among other things, the Company is seeking representations
from vendors and third parties that their products and services are Year 2000
compliant or modifications to make such products and services Year 2000
compliant and has retained research consultants to independently verify
vendors' Year 2000 compliance; and Phase V - Enterprise Wide Testing and
Compliance Certification, which consists of performing a final integrated
testing of the corrected business operations and underlying technical
infrastructure in a controlled environment. The Company completed Phase I in
January 1998 and Phase II in May 1998. The Company is currently in the final
stages of Phases III and IV which are expected to be completed in the fourth
quarter of 1998. Phase V - Testing and Compliance is expected to begin in the
first quarter of 1999 and be completed by May, 1999.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
The major business risks of a Year 2000 failure facing the Company
are (i) the inability of the Company to maintain critical business operations
dependent on technology or the loss of facilities infrastructure such as
telephone communications, with the potential for lost revenue and profits due
to business disruptions, (ii) the direct costs associated with restoring
operations after disruption, (iii) the loss of competitive market position
due to a significant disruption of long duration, and (iv) potential legal
liabilities of the Company to third parties who may claim dependence on, or
to have been harmed by the failure of, the Company's systems and operations.
13
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
September 30, 1998
(Dollars in millions)
(unaudited)
After Phases III, IV, and V, are completed, the Company believes its systems
will be no more likely to suffer disruptions from the Year 2000 problem than
from any other type of hardware or software failures that can occur from time
to time with many complex systems. The Company has backup systems in place
for power, certain facilities infrastructure and computer systems, and has
response procedures with vendors of many of our systems in the event of such
system failures generally. The Company will continue to monitor the progress
of its Year 2000 compliance effort and is reviewing its above described
response mechanisms for systems failures generally for adequacy with respect
to the Year 2000 problem.
In addition to the risks and costs associated with its internal
systems and third party vendors, the Company continues to evaluate its
underwriting risk arising from potential losses associated with Year 2000
failures. Due to a significant number of variables associated with the extent
and severity of the Year 2000 problem, the Company's underwriting risk
arising from potential Year 2000 losses cannot be determined at this time.
These variables include actual pervasiveness and severity of Year 2000 system
flaws, the magnitude of the amount of costs and expenses directly
attributable to Year 2000 failures, the portion of such amount, if any, that
constitutes insurable losses, and the extent of governmental intervention.
Moreover, 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 or may not be determined to be covered
under standard insurance and reinsurance contracts, depending upon the
specific contract language, the applicable case law, and the facts and
circumstances of each loss. The Company, is proactively seeking to minimize
its potential Year 2000 underwriting exposures by (1) assisting clients in
evaluation of their potential Year 2000 exposure including seeking
representations regarding their own systems Year 2000 compliance, (2)
performing an underwriting evaluation of each individual client's potential
Year 2000 exposure, (3) structuring reinsurance contractual language to
mitigate potential exposure; (4) recommending computer systems and technical
support as appropriate, and (5) providing a combination of financial
protection and risk management solutions. However, the Company cannot be
certain that these steps will adequately minimize its Year 2000 underwriting
exposures, and given the possible magnitude of the Year 2000 problem, the
Company may incur a significant amount of Year 2000 related losses, including
litigation expenses, and such losses may have a material adverse impact on
the Company's business, operations or financial condition. 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.
COSTS ASSOCIATED WITH YEAR 2000 ISSUES
Year 2000 specific expenditures through the third quarter of 1998,
not including in-house resources, were approximately $2.6 million. The
Company anticipates spending an additional $2.5 million in the fourth quarter
of 1998. These expenses are being paid out of working capital. The Company
has budgeted $4.5 million in additional expenses in connection with the
Company's Year 2000 compliance effort in 1999. 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. The
Company's disclosure relating to Year 2000 contains certain forward-looking
statements concerning the Company's operations, economic performance, and
financial condition, including, in particular the Company's readiness to
handle issues related to Year 2000 and the risks related thereto. These
statements are based upon a number of projections, expectations, assumptions
and estimates which are inherently subject to significant uncertainties and
14
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
September 30, 1998
(Dollars in millions)
(unaudited)
contingencies which have been described herein, 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
as expected, and unanticipated events may occur which could affect the
Company's results. Such statements may include, but are not limited to,
projections relating to the Company's ability to complete the various phases
of its Year 2000 Compliance Plan on time; the ability of third party vendors
and client companies to eliminate or minimize their Year 2000 exposures and
the accuracy of their representations and warranties to the Company; the
Company's ability to minimize any possible Year 2000 underwriting losses and
the effects of Year 2000 reinsurance claims, 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.
15
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
September 30, 1998
(Dollars in millions)
(unaudited)
PART II. OTHER INFORMATION
AMERICAN RE CORPORATION
Items 1 - 5 have been omitted as they are either inapplicable or the answer is
negative.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule is filed as part of this
report.
16
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
September 30, 1998
(Dollars in millions)
(unaudited)
AMERICAN RE CORPORATION
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN RE CORPORATION
(Registrant)
/S/ ROBERT K. BURGESS
--------------------------------------------------
Robert K. Burgess
Duly Authorized Officer, Executive Vice President,
General Counsel, and Secretary
/S/ GEORGE T. O'SHAUGHNESSY, JR.
----------------------------------------------------
George T. O'Shaughnessy, Jr.
Executive Vice President and
Chief Financial and Accounting Officer
Dated: November 13, 1998
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN RE
CORPORATION'S REPORT ON FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 6,990
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 404
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 7,413
<CASH> 333
<RECOVER-REINSURE> 2,571
<DEFERRED-ACQUISITION> 386
<TOTAL-ASSETS> 13,800
<POLICY-LOSSES> 7,626
<UNEARNED-PREMIUMS> 1,385
<POLICY-OTHER> 354
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 574
238<F1>
0
<COMMON> 0
<OTHER-SE> 2,799
<TOTAL-LIABILITY-AND-EQUITY> 13,800
1,751
<INVESTMENT-INCOME> 319
<INVESTMENT-GAINS> 80
<OTHER-INCOME> 26
<BENEFITS> 1,232
<UNDERWRITING-AMORTIZATION> 571
<UNDERWRITING-OTHER> 109
<INCOME-PRETAX> 258
<INCOME-TAX> 69
<INCOME-CONTINUING> 190
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 180
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>REPRESENTS COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITES OF
SUBSIDIARY TRUST HOLDING AS ALL OF ITS ASSETS JUNIOR SUBORDINATED DEBENTURES.
</FN>
</TABLE>
