<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 June 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 June 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 August 13, 1998
<PAGE>
Index To Form 10-Q
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1 -
Page
----
<S> <C>
Consolidated balance sheets at June 30, 1998 (unaudited),
and December 31, 1997........................................................ 1
Consolidated statements of income for the three-month and
six-month periods ended June 30, 1998, and 1997 (unaudited).................. 2
Consolidated statements of cash flows for the six-month
periods ended June 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>
ii
<PAGE>
PART I. FINANCIAL INFORMATION
AMERICAN RE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in millions, except share amounts)
<TABLE>
<CAPTION>
(unaudited)
Assets: June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Investments
Fixed Maturities
Bonds available for sale, at fair value (amortized cost:
June 30, 1998 - $6,744.9; December 31, 1997 - $6,481.4)................. $ 6,874.9 $ 6,644.2
Preferred stock available for sale, at fair value (amortized cost:
June 30, 1998 - $61.1; December 31, 1997 - $70.8)........................ 61.1 71.4
Equity securities available for sale, at fair value (cost: June 30,
1998 - $387.6; December 31, 1997 - $275.2)............................... 415.8 293.3
Other invested assets.......................................................... 18.9 22.9
Cash and cash equivalents......................................................... 377.9 641.6
------------- -----------------
Total investments and cash............................................. 7,748.6 7,673.4
Accrued investment income......................................................... 89.5 93.9
Premiums and other receivables ................................................... 1,347.6 1,083.6
Deferred policy acquisition costs................................................. 385.8 356.7
Reinsurance recoverables on paid and unpaid losses................................ 2,564.3 2,491.7
Funds held by ceding companies.................................................... 399.0 383.0
Prepaid reinsurance premiums...................................................... 177.4 156.8
Deferred federal income taxes..................................................... 164.3 185.6
Other assets...................................................................... 851.0 864.1
------------- -----------------
Total assets........................................................... $ 13,727.5 $ 13,288.8
------------- -----------------
------------- -----------------
Liabilities:
Loss and loss adjustment expense reserves......................................... $ 7,592.7 $ 7,508.9
Unearned premium reserve.......................................................... 1,396.4 1,299.1
------------- -----------------
Total insurance reserves............................................... 8,989.1 8,808.0
Loss balances payable............................................................. 290.8 217.6
Funds held under reinsurance treaties............................................. 278.1 243.3
Senior bank debt.................................................................. 75.0 75.0
Senior notes...................................................................... 498.5 498.5
Other liabilities................................................................. 631.7 622.5
------------- -----------------
Total liabilities...................................................... 10,763.2 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: June 30, 1998, and
December 31, 1997 - 149.49712 shares.......................................... --- ---
Additional paid-in capital........................................................ 1,332.4 1,332.4
Retained earnings................................................................. 1,318.7 1,171.6
Accumulated other comprehensive income............................................ 75.7 82.4
------------- -----------------
Total stockholders' equity............................................. 2,726.8 2,586.4
------------- -----------------
Total liabilities, Company-obligated mandatorily redeemable
preferred securities of subsidiary trust and stockholders' equity... $ 13,727.5 $ 13,288.8
------------- -----------------
------------- -----------------
</TABLE>
See accompanying notes to consolidated interim financial statements.
1
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
Three-month period Six-month period
ended June 30, ended June 30,
1998 1997 1998 1997
------------------- ------------------
<S> <C> <C> <C> <C>
Revenue:
Premiums written ................................. $ 564.0 $ 636.0 $ 1,246.3 $ 1,476.6
Change in unearned premium reserve ............... 12.1 43.8 (77.3) (142.5)
--------- -------- ----------- -----------
Premiums earned ............................ 576.1 679.8 1,169.0 1,334.1
Net investment income ............................ 105.5 106.3 216.1 209.9
Net realized capital gains ....................... 27.9 35.3 59.8 43.8
Other income ..................................... 7.0 12.5 18.4 23.3
--------- -------- ----------- -----------
Total revenue .............................. 716.5 833.9 1,463.3 1,611.1
--------- -------- ----------- -----------
Losses and expenses:
Losses and loss adjustment expenses .............. 394.9 469.4 790.3 919.3
Commission expense ............................... 138.6 160.3 277.3 315.5
Operating expense ................................ 55.4 53.4 110.6 109.1
Interest expense ................................. 10.6 10.5 21.1 21.7
Other expense .................................... 25.2 140.3 49.0 167.1
--------- -------- ----------- -----------
Total losses and expenses .................. 624.7 833.9 1,248.3 1,532.7
--------- -------- ----------- -----------
Income before income taxes, minority
interest, and distributions on
preferred securities of subsidiary trust 91.8 0.0 215.0 78.4
Federal and foreign income taxes ................. 24.3 (22.5) 61.3 (7.2)
--------- -------- ----------- -----------
Income before minority interest and
distributions on preferred securities of
subsidiary trust ....................... 67.5 22.5 153.7 85.6
Minority interest ................................ -- 13.9 -- 6.8
Distributions on preferred securities of
subsidiary trust, net of applicable
income tax of $1.7 and $3.5, respectively ..... (3.3) (3.3) (6.6) (6.6)
--------- -------- ----------- -----------
Net income to common stockholders .......... $ 64.2 $ 33.1 $ 147.1 $ 85.8
--------- -------- ----------- -----------
--------- -------- ----------- -----------
</TABLE>
See accompanying notes to consolidated interim financial statements.
2
<PAGE>
Consolidated Statements of Cash Flows
(Dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
Six-month period ended June 30,
1998 1997
-------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ............................................. $ 147.1 $ 85.8
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in accrued investment income ............... 4.4 1.3
Increase in premiums and other receivables .......... (264.0) (126.0)
Increase in deferred policy acquisition costs ....... (29.1) (39.0)
Increase in insurance reserves ...................... 181.1 166.6
Increase in current and deferred federal and foreign
income tax assets ............................... 38.4 (35.5)
Decrease in other assets and liabilities, net ....... 40.9 54.7
Depreciation expense on property and equipment ...... 4.3 5.8
Write-down of property and equipment ................ -- 38.2
Net realized capital gains .......................... (59.8) (43.8)
Decrease (increase) in other, net ................... 34.6 34.6
----------- -----------
Net cash provided by operating activities ......... 97.9 142.7
----------- -----------
Cash Flows From Investing Activities:
Investments available for sale:
Purchases ........................................... (4,551.4) (2,527.5)
Maturities .......................................... 221.9 223.3
Sales ............................................... 3,982.3 2,087.9
Other investments:
Purchases ........................................... (1.1) (0.7)
Sales ............................................... -- 1.5
Cost of additions to property and equipment ............ (9.0) (11.3)
----------- -----------
Net cash used in investing activities ............. (357.3) (226.8)
----------- -----------
Cash Flows From Financing Activities:
Dividend to common stockholders ........................ -- (1.6)
Repayment of loan from parent .......................... -- (35.9)
----------- -----------
Net cash used in financing activities ............ -- (37.5)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (4.3) (3.8)
----------- -----------
Net decrease in cash and cash equivalents ......... (263.7) (125.4)
Cash and cash equivalents, beginning of period ............. 641.6 553.1
----------- -----------
Cash and cash equivalents, end of period ................... $ 377.9 $ 427.7
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated interim financial statements.
3
<PAGE>
AMERICAN RE CORPORATION
Notes to Consolidated Interim Financial Statements
June 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.
In July 1997, the Company and Munich Re completed a series of
transactions that combined the U.S. operations of Munich Re into American
Re-Insurance (the "Merger"). As a result of these transactions the
Company's consolidated statements of income and cash flows for the
periods ended June 30, 1997 have been restated from those originally
filed in the Form 10-Q for the period then ended.
The information for the interim periods ended June 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 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 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
130. Total comprehensive income was $67.3 and $88.1 for the three months
ended June 30, 1998, and 1997, respectively, and $140.4 and $67.8 for the
six-month periods ended June 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 ............... (15.1) 8.4 (6.7)
------------- --------------- -----------
Balance at June 30, 1998 ......... $ 102.9 $ (27.2) $ 75.7
------------- --------------- -----------
------------- --------------- -----------
</TABLE>
4
<PAGE>
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 Six-month period
ended June 30, ended June 30,
1998 1997 1998 1997
-------------------- ------------------------
<S> <C> <C> <C> <C>
Premiums written
Direct .... $ 40.7 $ 31.2 $ 77.9 $ 65.1
Assumed.... 685.7 729.1 1,492.2 1,620.2
Ceded ..... (162.4) (124.3) (323.8) (208.7)
--------- --------- ------------ -----------
Net ....... 564.0 636.0 1,246.3 1,476.6
--------- --------- ------------ -----------
--------- --------- ------------ -----------
Premiums earned
Direct .... 40.8 35.5 76.2 59.0
Assumed ... 695.6 676.4 1,398.0 1,423.8
Ceded ..... (160.3) (32.1) (305.2) (148.7)
--------- --------- ------------ -----------
Net ....... 576.1 679.8 1,169.0 1,334.1
--------- --------- ------------ -----------
--------- --------- ------------ -----------
Losses incurred
Direct .... 51.1 33.8 74.1 47.5
Assumed ... 484.6 659.8 950.4 1,003.3
Ceded ..... (140.8) (224.2) (234.2) (131.5)
--------- --------- ------------ -----------
Net........ $ 394.9 $ 469.4 $ 790.3 $ 919.3
--------- --------- ------------ -----------
--------- --------- ------------ -----------
</TABLE>
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1998, COMPARED WITH QUARTER ENDED JUNE 30, 1997
The Company's net premiums written decreased 11.3% to $564.0 million
for the quarter ended June 30, 1998, from $636.0 million for the same period
in 1997. The decrease in net premiums written was generally attributable to
what the Company perceives to be continued deteriorating market conditions,
increases in client retentions and the Company's declining to write business
at prices it considered inadequate. As a result, the Company experienced a
24.5% decrease in treaty net premiums written to $349.3 million for the second
quarter of 1998 from $462.8 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 37.6% to $213.1 million
for the second quarter of 1998, from $341.6 million for the same period in 1997,
and the Company's International Operations, which decreased 6.3% to $101.9
million for the second quarter of 1998, from $108.8 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 treaty programs which were related in several
instances to mergers of clients. The decrease in International Operations net
premiums written was primarily attributable to decreases in amounts ceded to
American Re-Insurance under several traditional treaty programs in 1998. The
decreases in DICO and International Operations were partially offset by an
increase in treaty premiums written by the Company's alternative market
operation, Am-Re Managers, Inc., ("ARMI"), to $34.3 million for the second
quarter of 1998 from $12.4 million for the same period in 1997.
Facultative net premiums written increased 24.0% to $214.7 million for
the second quarter of 1998 from $173.2 million for the same period in 1997. This
increase is primarily attributable to an increase in certificate business and a
large program written by ARMI in the second quarter of 1998.
The Company's net premiums earned decreased 15.3% to $576.1 million for
the quarter ended June 30, 1998, from $679.8 million for the same period in
1997. The decrease in premiums earned was primarily attributable to the decrease
in premiums written in the second quarter of 1998.
Net losses and LAE incurred decreased 15.9% to $394.9 million for the
quarter ended June 30, 1998, from $469.4 million for the same period in 1997.
This decrease was primarily attributable to the decrease in earned premium
exposures in the second quarter of 1998.
Underwriting expense, consisting of commission expense plus operating
expense, decreased 9.2% to $194.0 million for the quarter ended June 30, 1998,
from $213.7 million for the same period in 1997. This decrease was due to a
13.5% decrease in commission expense to $138.6 million for the second quarter of
1998 from $160.3 million for the same period in 1997. This decrease was
partially due to the decrease in premiums earned in the second quarter of 1998,
in addition to the non-renewal or decreases of several large domestic quota
share treaties with high commission ratios. Operating expenses increased 3.7% to
$55.4 million for the second quarter of 1998 from $53.4 million for the second
quarter of 1997.
The Company experienced an underwriting loss (net premiums earned minus
losses and LAE incurred and underwriting expenses) of $12.8 million for the
quarter ended June 30, 1998, compared to an underwriting loss of $3.3 million
for the same period in 1997. On a GAAP basis, the Company's loss ratio decreased
to 68.5% for the second quarter of 1998 from 69.0% for the same period in 1997,
while the underwriting expense ratio increased to 33.7% for the second quarter
of 1998 from 31.5% for the same period in 1997. As a result of these changes,
the combined ratio for the quarter ended June 30, 1998, increased to 102.2% from
100.5% for the same period in 1997.
6
<PAGE>
Net investment income decreased slightly to $105.5 million for the
quarter ended June 30, 1998, from $106.3 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 $27.9 million for the quarter
ended June 30, 1998, compared to net capital gains of $35.3 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 $23.1 million on the sale of bonds and $15.3 million on the
sale of common stock, offset by the $10.5 million write-down of common stock,
preferred 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 net capital gains of $39.1 million on the sale of common stocks, offset
by capital losses of $2.9 million on the sale of bonds and $1.0 million on the
sale of a preferred stock holding.
Other income decreased 44.0% to $7.0 million for the quarter ended
June 30, 1998, from $12.5 million for the same period in 1997. This decrease
was primarily attributable to a decrease in fee subsidiary revenue of $4.3
million. Other expenses decreased to $25.2 million for the second quarter of
1998 from $140.3 million for the same period in 1997. This decrease was
primarily attributable to the inclusion of one-time charges of $111.7 million
in the quarter ended June 30, 1997, primarily related to the Merger.
Income before income taxes, minority interest, and distributions on
preferred securities increased to $91.8 million for the quarter ended June 30,
1998, from $0.0 million for the same period in 1997. Federal and foreign income
taxes increased to an expense of $24.3 million for the quarter ended June 30,
1998, from a tax benefit of $22.5 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 $13.9 million
representing the minority ownership interest in the net loss of Munich American
Reinsurance Company ("MARC") for the three months ended June 30, 1997, prior to
the Merger. There was no comparable amount for the quarter ended June 30, 1998.
The Company recognized an after-tax charge of $3.3 million for each of
the three-month periods ended June 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 94.0% to $64.2 million for
the quarter ended June 30, 1998, from $33.1 million for the same period in 1997.
SIX MONTHS ENDED JUNE 30, 1998, COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
The Company's net premiums written decreased 15.6% to $1,246.3
million for the six months ended June 30, 1998, from $1,476.6 million for the
same period in 1997. The decrease in net premiums written was generally
attributable to what the Company perceives to be continued deteriorating
market conditions, increases in client retentions and the Company's
declining to write business at prices it considered inadequate. As a result,
the Company experienced a 24.2% decrease in treaty net premiums written to
$836.8 million for the six months ended June 30, 1998 from $1,104.6 million
7
<PAGE>
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 33.0% to $529.5 million for the six months ended June 30, 1998,
from $789.9 million for the same period in 1997, and the Company's
International Operations, which decreased 16.8% to $207.1 million for the six
months ended June 30, 1998, from $248.9 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 offset by an
increase in treaty premiums written by the Company's alternative market
operation, Am-Re Managers, Inc., ("ARMI"), to $100.2 million for the six
months ended June 30, 1998, from $65.8 million for the same period in 1997.
Facultative net premiums written increased 10.1% to $409.5 million for
the six months ended June 30, 1998 from $372.0 million for the same period in
1997. This increase is primarily attributable to increased program business from
both ARMI and DICO, somewhat offset by decreases in certificate business.
The Company's net premiums earned decreased 12.4% to $1,169.0 million
for the six months ended June 30, 1998, from $1,334.1 million for the same
period in 1997. The decrease in premiums earned was primarily attributable to
the decrease in premiums written in the six months ended June 30, 1998,
partially offset by the timing of premiums earned on business in force.
Net losses and LAE incurred decreased 14.0% to $790.3 million for the
six months ended June 30, 1998, from $919.3 million for the same period in 1997.
This decrease was primarily attributable to the decrease in earned premium
exposures in the six months ended June 30, 1998, in addition to a change in the
Company's mix of business to include less excess of loss finite risk business,
which generally carries a higher overall loss ratio.
Underwriting expense, consisting of commission expense plus operating
expense, decreased 8.6% to $387.9 million for the six months ended June 30,
1998, from $424.6 million for the same period in 1997. This decrease was due to
a 12.1% decrease in commission expense to $277.3 million for the six months
ended June 30, 1998 from $315.5 million for the same period in 1997. This
decrease was partially due to the decrease in premiums earned in the six months
ended June 30, 1998, in addition to the non-renewal or decreases of several
large domestic quota share treaties with high commission ratios. Operating
expenses increased 1.4% to $110.6 million for the six months ended June 30, 1998
from $109.1 million for the six months ended June 30, 1997.
The Company experienced an underwriting loss (net premiums earned minus
losses and LAE incurred and underwriting expenses) of $9.2 million for the six
months ended June 30, 1998, compared to an underwriting loss of $9.8 million for
the same period in 1997. On a GAAP basis, the Company's loss ratio decreased to
67.6% for the six months ended June 30, 1998 from 68.9% for the same period in
1997, while the underwriting expense ratio increased to 33.2% for the six months
ended June 30, 1998 from 31.8% for the same period in 1997. As a result of these
changes, the combined ratio for the six months ended June 30, 1998, increased
slightly to 100.8% from 100.7% for the same period in 1997.
Net investment income increased 3.0% to $216.1 million for the six
months ended June 30, 1998, from $209.9 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 $59.8 million for the six
months ended June 30, 1998, compared to net capital gains of $43.8 million for
the same period in 1997. This change was primarily due to the Company's
8
<PAGE>
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 $59.7
million on the sale of bonds and $15.1 million on the sale of common stock,
offset by the $15.1 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, compared to capital gains of $49.5
million on the sale of common stocks in the 1997 period, offset by capital
losses of $11.3 million on the sale of bonds and $4.5 million on the sale of
a preferred stock holding.
Other income decreased 21.0% to $18.4 million for the six months ended
June 30, 1998, from $23.3 million for the same period in 1997. This decrease was
primarily attributable to a decrease in fee subsidiary revenue. Other expenses
decreased 70.7% to $49.0 million for the six months ended June 30, 1998 from
$167.1 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 six months ended June 30, 1997.
Income before income taxes, minority interest, and distributions on
preferred securities increased substantially to $215.0 million for the six
months ended June 30, 1998, from $78.4 million for the same period in 1997.
Federal and foreign income taxes increased to an expense of $61.3 million for
the six months ended June 30, 1998, from a benefit of $7.2 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 six months ended June 30,
1998.
The Company recognized an after-tax charge of $6.6 million for each of
the six-month periods ended June 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 71.4% to $147.1 million for
the six months ended June 30, 1998, from $85.8 million for the same period in
1997.
FINANCIAL CONDITION
Total consolidated assets increased 3.3% to $13,727.5 million at June
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 $264.0
million, and an increase in reinsurance recoverables on paid and unpaid losses
of $72.6 million.
The total financial statement value of investments and cash increased
slightly to $7,748.6 million at June 30, 1998, from $7,673.4 million at December
31, 1997, primarily due to cashflows from operating activities, somewhat offset
by a decrease in the fair value of investments held. The financial statement
value of the investment portfolio at June 30, 1998, included a net increase from
amortized cost to fair value of $158.3 million for debt and equity investments,
compared to a net increase of $181.5 million at December 31, 1997. At June 30,
1998, the Company recognized a cumulative unrealized gain of $102.9 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
decrease to stockholders' equity of $15.1 million from the cumulative unrealized
gain on debt and equity securities of $118.0 million recognized at December 31,
1997.
9
<PAGE>
Total consolidated liabilities increased 2.9% to $10,763.2 million at
June 30, 1998, from $10,464.9 million at December 31, 1997. This increase was
primarily due to increases in unearned premium reserves of $97.3 million, loss
and loss adjustment expense reserves of $83.8 million and loss balances payable
of $73.2 million.
Common stockholders' equity increased 5.4% to $2,726.8 million at June
30, 1998, from $2,586.4 million at December 31, 1997. This increase was
primarily attributable to net income of $147.1 million, offset by a $6.7 million
decrease in accumulated other comprehensive income, net of tax.
The Company's insurance/reinsurance subsidiaries' statutory surplus
increased to $2,484.6 million at June 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
June 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 $97.9 million for the six-month period ended June 30, 1998,
down from $142.7 million for the same period in 1997. This decrease was
primarily due to the timing of collections of premium balances due during the
six-month period ended June 30, 1998, as compared to the same period in 1997.
Cash and cash equivalents were $377.9 million and $641.6 million at
June 30, 1998, and December 31, 1997, respectively. Cash and short-term
investments are maintained for liquidity purposes and represented 4.9% and 8.4%,
respectively, of total financial statement investments and cash on such dates.
10
<PAGE>
PART II. OTHER INFORMATION
AMERICAN RE CORPORATION
Items 1 - 5 have been omitted as they are either inapplicable or the answer is
negative.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule is filed as part of this report.
11
<PAGE>
AMERICAN RE CORPORATION
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN RE CORPORATION
(Registrant)
/S/ ROBERT K. BURGESS
-------------------------------------
Robert K. Burgess
Duly Authorized Officer, Executive Vice President,
General Counsel, and Secretary
/S/ GEORGE T. O'SHAUGHNESSY, JR.
-------------------------------------
George T. O'Shaughnessy, Jr.
Executive Vice President and
Chief Financial and Accounting Officer
Dated: August 13, 1998
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN
RE CORPORATION'S REPORT ON FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 6,936
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 416
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,371
<CASH> 378
<RECOVER-REINSURE> 2,564
<DEFERRED-ACQUISITION> 386
<TOTAL-ASSETS> 13,728
<POLICY-LOSSES> 7,593
<UNEARNED-PREMIUMS> 1,396
<POLICY-OTHER> 291
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 574
238<F1>
0
<COMMON> 0
<OTHER-SE> 2,727
<TOTAL-LIABILITY-AND-EQUITY> 13,728
1,169
<INVESTMENT-INCOME> 216
<INVESTMENT-GAINS> 60
<OTHER-INCOME> 18
<BENEFITS> 790
<UNDERWRITING-AMORTIZATION> 388
<UNDERWRITING-OTHER> 70
<INCOME-PRETAX> 215
<INCOME-TAX> 61
<INCOME-CONTINUING> 154
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 147
<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 SECURITIES OF
SUBSIDIARY TRUST HOLDING AS ALL OF ITS ASSETS JUNIOR SUBORDINATED DEBENTURES.
</FN>
</TABLE>
