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<PAGE>
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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, 1999, 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, 1999 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, 1999
<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, 1999 (unaudited),
and December 31, 1998........................................................ 1
Consolidated statements of income for the three-month and nine-month
periods ended September 30, 1999, and 1998 (unaudited)....................... 2
Consolidated statements of cash flows for the nine-month
periods ended September 30, 1999, and 1998 (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.................. 10
PART II OTHER INFORMATION................................................................. 17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
AMERICAN RE CORPORATION AND SUBSIDIARIES
- 1 -
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED)
ASSETS: SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------------------------------------
<S> <C> <C>
Investments
Fixed Maturities
Bonds available for sale, at fair value (amortized cost:
September 30, 1999 - $6,643.2; December 31, 1998 - $6,688.6)............ $ 6,527.8 $ 6,876.0
Preferred stock available for sale, at fair value (amortized cost:
September 30, 1999 - $66.9; December 31, 1998 - $76.7)................... 67.1 77.3
Equity securities available for sale, at fair value (cost: September 30,
1999 - $357.8; December 31, 1998 - $488.7)............................... 364.7 545.2
Other invested assets.......................................................... 31.4 27.9
Cash and cash equivalents......................................................... 542.5 274.9
------------------------------------------
Total investments and cash............................................. 7,533.5 7,801.3
Accrued investment income......................................................... 91.5 85.4
Premiums and other receivables ................................................... 1,267.9 1,315.5
Deferred policy acquisition costs................................................. 377.6 357.7
Reinsurance recoverables on paid and unpaid losses................................ 2,475.6 2,343.1
Funds held by ceding companies.................................................... 613.0 408.9
Prepaid reinsurance premiums...................................................... 134.9 148.2
Deferred federal income taxes..................................................... 282.2 142.6
Other assets...................................................................... 1,016.1 941.3
------------------------------------------
Total assets........................................................... $ 13,792.3 $ 13,544.0
==========================================
LIABILITIES:
Loss and loss adjustment expense reserves......................................... $ 7,466.2 $ 7,334.1
Unearned premium reserve.......................................................... 1,394.2 1,280.5
------------------------------------------
Total insurance reserves............................................... 8,860.4 8,614.6
Loss balances payable............................................................. 300.3 412.1
Funds held under reinsurance treaties............................................. 345.2 273.7
Senior bank debt.................................................................. 75.0 75.0
Senior notes...................................................................... 498.5 498.5
Other liabilities................................................................. 740.9 579.5
------------------------------------------
Total liabilities...................................................... 10,820.3 10,453.4
------------------------------------------
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, 1999, and
December 31, 1998 - 149.49712 shares.......................................... --- ---
Additional paid-in capital........................................................ 1,332.4 1,332.4
Retained earnings................................................................. 1,504.7 1,397.6
Accumulated other comprehensive income............................................ (102.6) 123.1
------------------------------------------
Total stockholders' equity............................................. 2,734.5 2,853.1
==========================================
Total liabilities, Company-obligated mandatorily redeemable
preferred securities of subsidiary trust and stockholders' equity... $ 13,792.3 $ 13,544.0
==========================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS.
<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,
1999 1998 1999 1998
--------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Premiums written ........................................ $ 757.7 $ 557.6 $ 2,182.4 $ 1,803.9
Change in unearned premium reserve ...................... 35.2 24.2 (132.9) (53.1)
--------------------------------------------------------
Premiums earned ................................... 792.9 581.8 2,049.5 1,750.8
Net investment income ................................... 104.7 103.3 313.4 319.4
Net realized capital gains .............................. 16.3 20.1 74.5 79.9
Other income ............................................ 2.9 7.9 19.7 26.2
--------------------------------------------------------
Total revenue ..................................... 916.8 713.1 2,457.1 2,176.3
--------------------------------------------------------
LOSSES AND EXPENSES:
Losses and loss adjustment expenses ..................... 677.3 441.4 1,585.3 1,231.6
Commission expense ...................................... 138.3 136.5 437.5 413.8
Operating expense ....................................... 71.5 53.4 196.4 164.0
Interest expense ........................................ 10.8 10.5 31.3 31.6
Other expense ........................................... 22.3 28.1 64.4 77.2
--------------------------------------------------------
Total losses and expenses ......................... 920.2 669.9 2,314.9 1,918.2
--------------------------------------------------------
Income before income taxes and distributions
on preferred securities of subsidiary trust ... (3.4) 43.2 142.2 258.1
Federal and foreign income taxes ........................ (11.1) 7.3 25.3 68.6
--------------------------------------------------------
Income before distributions on preferred
securities of subsidiary trust ................ 7.7 35.9 116.9 189.5
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 ................. $ 4.4 $ 32.6 $ 107.1 $ 179.7
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
-2-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED SEPTEMBER 30,
1999 1998
------------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 107.1 $ 179.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease (increase) in accrued investment income..................... (6.1) 3.9
Decrease (increase) in premiums and other receivables................ 47.6 (282.0)
Increase in deferred policy acquisition costs........................ (19.9) (29.4)
Increase in insurance reserves....................................... 245.8 202.6
Increase (decrease) in current and deferred federal and foreign
income tax assets................................................ (25.8) (12.6)
Increase in net funds held balances.................................. (132.6) (4.7)
Change in other assets and liabilities, net.......................... (190.4) 72.9
Depreciation expense on property and equipment....................... 7.4 5.0
Net realized capital gains........................................... (74.5) (79.9)
Change in other, net................................................. 9.5 41.7
---------------------------------------------
Net cash provided by (used in) operating activities................ (31.9) 97.2
---------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments available for sale:
Purchases .......................................................... (2,535.9) (5,986.8)
Maturities 277.1 314.7
Sales................................................................ 2,572.8 5,285.7
Other investments:
Purchases .......................................................... (20.9) (1.6)
Sales................................................................ 14.7 ---
Cost of additions to property and equipment............................. (7.9) (14.3)
---------------------------------------------
Net cash provided by (used in) investing activities................ 299.9 (402.3)
---------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS................ (0.4) (3.3)
---------------------------------------------
Net increase (decrease) in cash and cash equivalents............... 267.6 (308.4)
Cash and cash equivalents, beginning of period.............................. 274.9 641.6
---------------------------------------------
Cash and cash equivalents, end of period.................................... $ 542.5 $ 333.2
=============================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS.
-3-
<PAGE>
AMERICAN RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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 93% 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, 1999, and
1998, 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 1998 Form 10-K.
2. COMPREHENSIVE INCOME
The Company experienced a comprehensive loss of $52.2 million for the
three-month period ended September 30, 1999, compared to comprehensive
income of $72.4 million for the same period in 1998, and a comprehensive
loss of $118.6 million for the nine-month period ended September 30,
1999, compared to comprehensive income of $212.8 million for the same
period in 1998. The components of accumulated other comprehensive income
are as follows:
<TABLE>
<CAPTION>
Net unrealized Net unrealized
appreciation of loss on foreign
investments exchange Total
------------------- ------------------ ------------------
<S> <C> <C> <C>
Balance at December 31, 1998 $158.9 $(35.8) $123.1
Period change (278.3) 5.5 (272.8)
Tax effect 97.4 (1.9) 95.5
Reclassification adjustment for gain/loss
included in net income (74.5) -- (74.5)
Tax effect 26.1 -- 26.1
------------------- ------------------ ------------------
Balance at September 30, 1999 $(70.4) $(32.2) $(102.6)
=================== ================== ==================
</TABLE>
-4-
<PAGE>
AMERICAN RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLARS IN MILLIONS)
(UNAUDITED)
3. 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,
1999 1998 1999 1998
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums written
Direct........................ $ 85.4 $ 58.9 $ 204.9 $ 136.8
Assumed .................... 816.6 679.8 2,469.9 2,172.0
Ceded......................... (144.3) (181.1) (492.4) (504.9)
---------------------------------------------------------------------------------
Net 757.7 557.6 2,182.4 1,803.9
=================================================================================
Premiums earned
Direct........................ 80.1 49.6 198.1 125.8
Assumed....................... 878.3 708.5 2,358.3 2,106.5
Ceded......................... (165.5) (176.3) (506.9) (481.5)
---------------------------------------------------------------------------------
Net 792.9 581.8 2,049.5 1,750.8
=================================================================================
Losses incurred
Direct........................ 32.0 55.1 131.1 129.2
Assumed....................... 661.9 460.1 1,747.4 1,410.4
Ceded......................... (16.6) (73.8) (293.2) (308.0)
---------------------------------------------------------------------------------
Net $ 677.3 $ 441.4 $ 1,585.3 $ 1,231.6
=================================================================================
</TABLE>
-5-
<PAGE>
AMERICAN RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLARS IN MILLIONS)
(UNAUDITED)
4. SEGMENT REPORTING
American Re's Domestic Insurance Company Operations ("DICO") serves U.S.
insurance companies by providing them with customized, integrated treaty,
facultative and finite risk reinsurance programs primarily on a direct
basis. American Re's alternative market strategic business unit,
Munich-American RiskPartners, Inc. ("RiskPartners") provides customized
risk transfer, risk sharing, and risk management solutions to
self-insured clients worldwide. International Operations
("International") provides treaty, facultative and finite risk
reinsurance along with a range of other customized products and services
to insurance companies and other entities worldwide. In addition to its
core reinsurance business, American Re, through various subsidiaries
("Fee Subs"), offers a broad array of related services including
investment management, actuarial and financial analysis, due diligence
consulting for mergers and acquisitions, rent-a-captive facilities, and
reinsurance and insurance brokerage. The financial results of these
subsidiaries have been aggregated along with holding company operations
for presentation of segment results.
THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
TOTAL
INSURANCE FEE SUBS &
DICO RISKPARTNERS INTERNATIONAL OPERATIONS HOLDING CO. TOTAL
----------- ------------- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
GROSS PREMIUMS WRITTEN $601.6 $144.5 $154.8 $900.9 $1.2 $902.1
----------- ------------- -------------- ------------ ------------- -------------
NET PREMIUMS WRITTEN 525.7 95.5 135.3 756.5 1.2 757.7
----------- ------------- -------------- ------------ ------------- -------------
PREMIUMS EARNED 517.7 130.4 143.9 792.0 0.9 792.9
Net investment income 100.0 4.7 104.7
Net realized capital gains 16.3 -- 16.3
Other income (1.6) 4.5 2.9
------------- ------------- -------------
Total revenue 906.7 10.1 916.8
------------- ------------- -------------
LOSSES AND EXPENSES
LOSSES AND LAE 426.8 95.5 154.9 677.2 0.1 677.3
UNDERWRITING EXPENSES 121.4 39.5 47.7 208.6 1.2 209.8
Interest expense -- 10.8 10.8
Other expense 3.2 19.1 22.3
------------- ------------- -------------
Total losses and expenses 889.0 31.2 920.2
------------- ------------- -------------
Income before income
taxes and distributions on
preferred securities (3.4)
============
UNDERWRITING GAIN (LOSS) (30.5) (4.6) (58.7) (93.8) (0.4) (94.2)
=========== ============= ============== ============ ============= =============
LOSS AND LAE RATIO 82.4% 73.2% 107.6% 85.5% 11.1% 85.4%
UNDERWRITING EXPENSE RATIO 23.4 30.3 33.1 26.3 133.3 26.5
----------- ------------- -------------- ------------ ------------- -------------
COMBINED RATIO 105.8% 103.5% 140.7% 111.8% 144.4% 111.9%
=========== ============= ============== ============ ============= =============
</TABLE>
-6-
<PAGE>
AMERICAN RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
TOTAL
INSURANCE EE SUBS &
DICO RISKPARTNERS INTERNATIONAL OPERATIONS FHOLDING CO. TOTAL
----------- ------------- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES
GROSS PREMIUMS WRITTEN $476.5 $136.0 $126.2 $738.7 -- $738.7
----------- ------------- -------------- ------------ ------------- -------------
NET PREMIUMS WRITTEN 391.3 59.8 106.5 557.6 -- 557.6
----------- ------------- -------------- ------------ ------------- -------------
PREMIUMS EARNED 396.2 70.5 115.1 581.8 -- 581.8
Net investment income 104.0 (0.7) 103.3
Net realized capital gains 20.1 -- 20.1
Other income 0.3 7.6 7.9
------------- ------------- -------------
Total revenue 706.2 6.9 713.1
------------- ------------- -------------
LOSSES AND EXPENSES
LOSSES AND LAE 290.3 47.4 103.7 441.4 -- 441.4
UNDERWRITING EXPENSES 132.8 30.4 26.7 189.9 -- 189.9
Interest expense -- 10.5 10.5
Other expense 8.4 19.7 28.1
------------- ------------- -------------
Total losses and expenses 639.7 30.2 669.9
------------- ------------- -------------
Income before income
taxes and distributions on
preferred securities 43.2
============
UNDERWRITING GAIN (LOSS) (26.9) (7.3) (15.3) (49.5) -- (49.5)
=========== ============= ============== ============ ============= =============
LOSS AND LAE RATIO 73.3% 67.2% 90.1% 75.9% -- 75.9%
UNDERWRITING EXPENSE RATIO 33.5 43.1 23.2 32.6 -- 32.6
----------- ------------- -------------- ------------ ------------- -------------
COMBINED RATIO 106.8% 110.3% 113.3% 108.5% -- 108.5%
=========== ============= ============== ============ ============= =============
</TABLE>
-7-
<PAGE>
AMERICAN RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLARS IN MILLIONS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
TOTAL
INSURANCE EE SUBS &
DICO RISKPARTNERS INTERNATIONAL OPERATIONS FHOLDING CO. TOTAL
----------- ------------- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
GROSS PREMIUMS WRITTEN $1,612.5 $604.4 $448.6 $2,665.5 $9.4 $2,674.9
----------- ------------- -------------- ------------ ------------- -------------
NET PREMIUMS WRITTEN 1,368.9 401.9 402.2 2,173.0 9.4 2,182.4
----------- ------------- -------------- ------------ ------------- -------------
PREMIUMS EARNED 1,270.4 382.6 387.4 2,040.4 9.1 2,049.5
Net investment income 304.8 8.6 313.4
Net realized capital gains 74.5 -- 74.5
Other income (1.9) 21.6 19.7
------------- ------------- -------------
Total revenue 2,417.8 39.3 2,457.1
------------- ------------- -------------
LOSSES AND EXPENSES
LOSSES AND LAE 960.3 279.2 337.6 1,577.1 8.2 1,585.3
UNDERWRITING EXPENSES 392.6 115.5 125.0 633.1 0.8 633.9
Interest expense -- 31.3 31.3
Other expense 6.7 57.7 64.4
------------- ------------- -------------
Total losses and expenses 2,216.9 98.0 2,314.9
------------- ------------- -------------
Income before income
taxes and distributions on
preferred securities 142.2
============
UNDERWRITING GAIN (LOSS) (82.5) (12.1) (75.2) (169.8) 0.1 (169.7)
=========== ============= ============== ============ ============= =============
LOSS AND LAE RATIO 75.6% 73.0% 87.1% 77.3% 90.1% 77.4%
UNDERWRITING EXPENSE RATIO 30.9 30.2 32.3 31.0 8.8 30.9
----------- ------------- -------------- ------------ ------------- -------------
COMBINED RATIO 106.5% 103.2% 119.4% 108.3% 98.9% 108.3%
=========== ============= ============== ============ ============= =============
</TABLE>
-8-
<PAGE>
AMERICAN RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLARS IN MILLIONS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
TOTAL
INSURANCE EE SUBS &
DICO RISKPARTNERS INTERNATIONAL OPERATIONS FHOLDING CO. TOTAL
----------- ------------- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES
GROSS PREMIUMS WRITTEN $1,422.0 $486.5 $400.2 $2,308.7 -- $2,308.7
----------- ------------- -------------- ------------ ------------- -------------
NET PREMIUMS WRITTEN 1,169.8 305.3 328.8 1,803.9 -- 1,803.9
----------- ------------- -------------- ------------ ------------- -------------
PREMIUMS EARNED 1,177.3 247.2 326.3 1,750.8 -- 1,750.8
Net investment income 322.1 (2.7) 319.4
Net realized capital gains 79.9 -- 79.9
Other income 4.0 22.2 26.2
------------- ------------- -------------
Total revenue 2,156.8 19.5 2,176.3
------------- ------------- -------------
LOSSES AND EXPENSES
LOSSES AND LAE 825.1 165.4 241.1 1,231.6 -- 1,231.6
UNDERWRITING EXPENSES 402.4 91.2 84.2 577.8 -- 577.8
Interest expense -- 31.6 31.6
Other expense 18.0 59.2 77.2
------------- ------------- -------------
Total losses and expenses 1,827.4 90.8 1,918.2
------------- ------------- -------------
Income before income
taxes and distributions on
preferred securities 258.1
============
UNDERWRITING GAIN (LOSS) (50.2) (9.4) 1.0 (58.6) -- (58.6)
=========== ============= ============== ============ ============= =============
LOSS AND LAE RATIO 70.1% 66.9% 73.9% 70.3% -- 70.3%
UNDERWRITING EXPENSE RATIO 34.2 36.9 25.8 33.0 -- 33.0
----------- ------------- -------------- ------------ ------------- -------------
COMBINED RATIO 104.3% 103.8% 99.7% 103.3% -- 103.3%
=========== ============= ============== ============ ============= =============
</TABLE>
-9-
<PAGE>
MANAGEMENTS' DISCUSSION AND ANALYSIS OF THE COMPANY'S RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1999, COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1998
The Company's net premiums written increased 35.9% to $757.7 million
for the quarter ended September 30, 1999, from $557.6 million for the same
period in 1998. The increase in net premiums written was attributable to
increases in treaty and facultative net premium writings. Treaty net premium
writings increased 33.2% to $501.4 million for the third quarter of 1999 from
$376.3 million for the same period in 1998. This increase was primarily
attributable to the Company's Domestic Insurance Company Operations ("DICO")
which increased 46.9% to $388.5 million for the third quarter of 1999, from
$264.5 million for the same period in 1998, as a result of retrospective premium
adjustments on several reinsurance contracts.
Facultative net premiums written increased 41.4% to $256.3 million for
the third quarter of 1999, from $181.3 million for the same period in 1998. This
increase was partially due to a change in the Company's facultative
retrocessional program to retain more of this business. Net facultative premiums
written changes included (i) an 8.2% increase in DICO facultative net premiums
written to $137.2 million for the third quarter of 1999, from $126.8 million for
the same period in 1998; (ii) a significant increase in net premiums written by
the Company's alternative market operation, Munich-American RiskPartners, Inc.
("RiskPartners"), to $102.9 million for the third quarter of 1999, from $47.1
million for the same period in 1998; and (iii) an increase in net premiums
written by International Operations, to $16.2 million for the third quarter of
1999, from $7.4 million for the same period in 1998.
The Company's net premiums earned increased 36.3% to $792.9 million for
the quarter ended September 30, 1999, from $581.8 million for the same period in
1998. The increase in premiums earned was primarily attributable to the increase
in premiums written in the third quarter of 1999.
Net losses and LAE incurred increased 53.4% to $677.3 million for the
quarter ended September 30, 1999, from $441.4 million for the same period in
1998. This increase was primarily attributable to increased net premiums earned
during the period, in addition to increases in the Company's ultimate current
accident year loss ratios for certain types of business, and adverse loss
development on several retrospectively rated treaties. Net losses and LAE also
included $86.5 million of catastrophe losses in the quarter ended September 30,
1999, compared to $50.0 million for the same period in 1998.
Underwriting expense, consisting of commission expense plus operating
expense, increased 10.5% to $209.8 million for the quarter ended September 30,
1999, from $189.9 million for the same period in 1998. Commission expense
increased 1.3% to $138.3 million for the third quarter of 1999 from $136.5
million for the same period in 1998. Operating expenses increased 33.9% to $71.5
million for the third quarter of 1999 from $53.4 million for the third quarter
of 1998. This increase was primarily due to a decrease in the capitalization of
deferred acquisition costs.
The Company experienced an underwriting loss (net premiums earned minus
losses and LAE incurred and underwriting expenses) of $94.2 million for the
quarter ended September 30, 1999, compared to an underwriting loss of $49.5
million for the same period in 1998. On a GAAP basis, the Company's loss ratio
increased to 85.4% for the third quarter of 1999 from 75.9% for the same period
in 1998, while the underwriting expense ratio decreased to 26.5% for the third
quarter of 1999 from 32.6% for the same period in 1998. As a result of these
changes, the combined ratio for the quarter ended September 30, 1999, increased
to 111.9% from 108.5% for the same period in 1998.
-10-
<PAGE>
Pre-tax net investment income increased 1.4% to $104.7 million for the
quarter ended September 30, 1999, from $103.3 million for the same period in
1998. This increase is attributable to higher overall portfolio yields during
the period. The Company's after-tax net investment income increased slightly to
$76.5 million for the quarter ended September 30, 1999, from $76.0 million for
the same period in 1998.
The Company realized net capital gains of $16.3 million for the quarter
ended September 30, 1999, compared to net capital gains of $20.1 million for the
same period in 1998. The 1999 period included capital gains of $21.3 million on
the sale of common equities, offset by capital losses of $4.7 million on the
sale of bonds. 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.
Other income decreased 63.3% to $2.9 million for the quarter ended
September 30, 1999, from $7.9 million for the same period in 1998. This decrease
was primarily attributable to a decrease in revenues from fee subsidiaries.
Other expenses decreased 20.6% to $22.3 million for the third quarter of 1999
from $28.1 million for the same period in 1998. This decrease was primarily
attributable to lower expenses from fee subsidiaries during the third quarter of
1999, and the write-off of $3.5 million of certain company balances during the
1998 period.
The Company experienced a loss before income taxes and distributions on
preferred securities of $3.4 million for the quarter ended September 30, 1999,
compared to income of $43.2 million for the same period in 1998. Federal and
foreign income taxes decreased to a tax benefit of $11.1 million for the quarter
ended September 30, 1999, from tax expense of $7.3 million for the same period
in 1998.
The Company recognized an after-tax charge of $3.3 million for each of
the three-month periods ended September 30, 1999 and 1998, 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 86.5% to $4.4 million for
the quarter ended September 30, 1999, from $32.6 million for the same period in
1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998
The Company's net premiums written increased 21.0% to $2,182.4 million
for the nine months ended September 30, 1999, from $1,803.9 million for the same
period in 1998. The increase in net premiums written was attributable to
increases in both treaty and facultative business. Treaty net premiums written
increased 22.4% to $1,484.6 million for the nine months ended September 30, 1999
from $1,213.1 million for the same period in 1998. This increase in treaty
premiums was primarily attributable to (i) a 20.7% increase in net premiums
written by DICO to $958.5 million for the nine months ended September 30, 1999,
from $793.9 million for the same period in 1998, as a result of retrospective
premium adjustments on several reinsurance contracts; (ii) a 32.2% increase in
net premiums written by RiskPartners, to $149.2 million for the nine months
ended September 30, 1999, from $112.9 million for the same period in 1998; and
(iii) a 20.0% increase in net premiums written by International Operations, to
$367.5 million for the nine months ended September 30, 1999, from $306.3 million
for the same period in 1998.
Facultative net premiums written increased 18.1% to $697.8 million for
the nine months ended September 30, 1999, from $590.8 million for the same
period in 1998. This increase was partially due to a change in the Company's
facultative retrocessional program to retain more of this business. Net
facultative premiums written changes included (i) a 9.2% increase in net
premiums written by DICO to
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$410.4 million for the nine months ended September 30, 1999, from $375.9 million
for the same period in 1998; (ii) a 31.3% increase in net premiums written by
RiskPartners to $252.7 million for the nine months ended September 30, 1999,
from $192.4 million for the same period in 1998; and (iii) a 54.2% increase in
net premiums written by International Operations to $34.7 million for the nine
months ended September 30, 1999, from $22.5 million for the same period in 1998.
The Company's net premiums earned increased 17.1% to $2,049.5 million
for the nine months ended September 30, 1999, from $1,750.8 million for the same
period in 1998. The increase in premiums earned was primarily attributable to
increases in net premiums written, somewhat offset by the timing of premiums
earned on business in force.
Net losses and LAE incurred increased 28.7% to $1,585.3 million for the
nine months ended September 30, 1999, from $1,231.6 million for the same period
in 1998. This increase was primarily attributable to the increase in net
premiums earned during the period, increases in the Company's ultimate accident
year loss ratios for certain types of business, and adverse loss development on
several retrospectively rated treaties. Net losses and LAE also included $114.0
million of catastrophe losses in the nine months ended September 30, 1999,
compared to $62.0 million for the same period in 1998.
Underwriting expense, consisting of commission expense plus operating
expense, increased 9.7% to $633.9 million for the nine months ended September
30, 1999, from $577.8 million for the same period in 1998. Commission expense
increased 5.7% to $437.5 million for the nine months ended September 30, 1999
from $413.8 million for the same period in 1998. This increase was primarily
attributable to the increase in net premiums earned in the 1999 period.
Operating expenses increased 19.8% to $196.4 million for the nine months ended
September 30, 1999 from $164.0 million for the nine months ended September 30,
1998. This increase was primarily due to a decrease in the capitalization of
deferred acquisition costs.
The Company experienced an underwriting loss (net premiums earned minus
losses and LAE incurred and underwriting expenses) of $169.7 million for the
nine months ended September 30, 1999, compared to an underwriting loss of $58.6
million for the same period in 1998. On a GAAP basis, the Company's loss ratio
increased to 77.4% for the nine months ended September 30, 1999 from 70.3% for
the same period in 1998, while the underwriting expense ratio decreased to 30.9%
for the nine months ended September 30, 1999 from 33.0% for the same period in
1998. As a result of these changes, the combined ratio for the nine months ended
September 30, 1999, increased to 108.3% from 103.3% for the same period in 1998.
Pre-tax net investment income decreased 1.9% to $313.4 million for the
nine months ended September 30, 1999, from $319.4 million for the same period in
1998. This decrease is attributable to a decrease in invested assets from the
1998 period and overall lower portfolio yields. The Company's after-tax net
investment income decreased slightly to $230.8 million for the nine months ended
September 30, 1999, from $232.0 million for the same period in 1998.
The Company realized net capital gains of $74.5 million for the nine
months ended September 30, 1999, compared to net capital gains of $79.9 million
for the same period in 1998. The 1999 period included capital gains of $5.6
million on the sale of bonds and $69.8 million on the sale of common equities.
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 equities, 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 was considered to be other than temporary.
Other income decreased 24.8% to $19.7 million for the nine months ended
September 30, 1999, from $26.2 million for the same period in 1998. This
decrease was primarily attributable to a decrease in
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income from deposit liabilities. Other expenses decreased 16.6% to $64.4 million
for the nine months ended September 30, 1999 from $77.2 million for the same
period in 1998. This decrease was primarily attributable to a decrease in
non-insurance related expenses, and the write-off of $3.5 million of certain
company balances during the 1998 period.
Income before income taxes and distributions on preferred securities
decreased by 44.9% to $142.2 million for the nine months ended September 30,
1999, from $258.1 million for the same period in 1998. Federal and foreign
income taxes decreased to $25.3 million for the nine months ended September 30,
1999, from $68.6 million for the same period in 1998.
The Company recognized an after-tax charge of $9.8 million for each of
the nine-month periods ended September 30, 1999 and 1998, 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 40.4% to $107.1 million for
the nine months ended September 30, 1999, from $179.7 million for the same
period in 1998.
FINANCIAL CONDITION
Total consolidated assets increased to $13,792.3 million at September
30, 1999, from $13,544.0 million at December 31, 1998. Total consolidated
liabilities also increased to $10,820.3 million at September 30, 1999, from
$10,453.4 million at December 31, 1998.
The total financial statement value of investments and cash decreased
3.4% to $7,533.5 million at September 30, 1999, from $7,801.3 million at
December 31, 1998, primarily due to a decrease in the fair value of investments
held. The financial statement value of the investment portfolio at September 30,
1999, included a net decrease from amortized cost to fair value of $108.3
million for debt and equity investments, compared to a net increase of $244.5
million at December 31, 1998. At September 30, 1999, the Company recognized a
cumulative unrealized loss of $70.4 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
$229.3 million from the cumulative unrealized gain on debt and equity securities
of $158.9 million recognized at December 31, 1998.
Common stockholders' equity decreased 4.2% to $2,734.5 million at
September 30, 1999, from $2,853.1 million at December 31, 1998. This decrease
was primarily attributable to a $225.7 million decrease in accumulated other
comprehensive income, net of tax, offset by net income of $107.1 million.
The Company's insurance/reinsurance subsidiaries' statutory surplus
decreased to $2,431.6 million at September 30, 1999, from $2,631.1 million at
December 31, 1998. Operating leverage, as measured by such subsidiaries'
premiums-to-surplus ratio, on an annualized basis was 1.10 to 1 and 0.87 to 1 at
September 30, 1999, and December 31, 1998, 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.
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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 used in operations for the
Company were $31.9 million for the nine-month period ended September 30, 1999,
compared to cash flows provided by operations of $97.2 million for the same
period in 1998. This decrease is primarily attributable to higher paid losses
during the 1999 period.
Cash and cash equivalents were $542.5 million and $274.9 million at
September 30, 1999, and December 31, 1998, respectively. Cash and short-term
investments are maintained for liquidity purposes and represented 7.2% and 3.5%,
respectively, of total financial statement investments and cash on such dates.
MARKET AND INTEREST RATE RISK
The Company is subject to market risk arising from the potential change
in the value of its various financial instruments. These changes may be due to
fluctuations in interest and foreign exchange rate and equity prices. The major
components of market risk affecting the Company are interest rate, foreign
currency and equity risk.
The Company has both fixed and variable (primarily mortgage backed
securities and collateralized mortgage obligations) income investments with a
value of $6,594.9 million at September 30, 1999 that are subject to changes in
value due to market interest rates. The Company also has Senior Bank Debt of
$75.0 million, Senior Notes of $498.5 million, and QUIPS of $237.5 million. The
Senior Bank Debt is a variable rate loan, while the Senior Notes, and QUIPS are
fixed rate instruments.
The Company has exposure to movements in various currencies around the
world, particularly the Belgium Franc and the Australian dollar. Changes in
currency exchange rates primarily affect the international components of the
Company's balance sheet, income statement, and statement of cash flows. This
exposure is somewhat offset because the Company's reinsurance premiums and
invested assets are partially offset by losses incurred and loss reserves,
respectively, generally denominated in the same currency. At September 30, 1999,
the Company had no material currency rate exposure.
In addition to interest rate and foreign exchange risk, the Company's
common equity portfolio of $364.7 million at September 30, 1999 is subject to
changes in value based on changes in equity prices, predominately from the
United States. To hedge a portion of its exposure to movements in its equity
portfolio, the Company entered into options contracts with a notional value of
$0.6 million at September 30, 1999.
The Company established American Re Capital Markets, Inc. ("ARCM"), to
provide its clients with integrated solutions for mitigating risk in the
financial markets. Currently, American Re Capital Markets focuses on the weather
derivative market, which exposes the Company to movement in weather related
indexes. At September 30, 1999, ARCM was a counterparty under 75 contracts with
a notional value of $123.5 million. At September 30, 1999, the maximum payment
amount of these contracts was $73.7 million, and the maximum receivable amount
was $92.3 million.
THE YEAR 2000 PROBLEM
IMPACT OF THE YEAR 2000 PROBLEM. The "Year 2000 problem" refers to the
potential failure of
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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 Compliance, pursuant to which, among
other things, the Company is seeking representations from vendors that their
products are Year 2000 compliant or modifications to make such products 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, Phase II in May 1998, Phases IV and V in August 1999, and Phase
III in the beginning of November 1999, except that with respect to Phase IV the
Company continues seeking representations from certain vendors as to the Year
2000 compliance of some products used at the Company. Notwithstanding the fact
that the Company continues to seek such representations, the Company's Year 2000
compliance testing has indicated that all critical such products are Year 2000
compliant to the extent of such products' components and features actually used
by the Company.
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. Based upon the completion of the Year 2000 Compliance
Program in all material respects, 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 for power, certain facilities
infrastructure, and computer systems and has response procedures in place with
vendors in the event of such "ordinary" failures. Unlike other businesses such
as banking or computer based, transaction intensive retail operations, in the
worst case scenario, the Company could briefly cease computer-related business
operations without significant legal, regulatory, or financial impact. However,
the Company, with the assistance of an independent accounting firm, has
developed and implemented an updated business continuity plan which contemplates
manual and other backup procedures to maintain the Company's operations in the
event of systems failure for any reason, including failure as a result of a Year
2000 problem.
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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 quantified. These variables include actual pervasiveness
and severity of Year 2000 system flaws, 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, (2) performing an underwriting evaluation of each
individual client's potential Year 2000 exposure, (3) structuring reinsurance
and insurance contract language where possible 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 for
the year to date as of the quarter ended September 30, 1999, not including
in-house resources, were approximately $2.7 million. These expenses are paid out
of working capital. The Company currently has budgeted $4.0 million in 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.
SAFE HARBOR DISCLOSURE
The Company has disclosed certain forward-looking statements concerning its
operations, economic performance and financial condition, including, in
particular the likelihood of the Company's success in developing and expanding
its business and the Company's readiness to handle issues related to Year 2000
and risks related thereto. 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. Such statements may also 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SUPERIOR NATIONAL INSURANCE GROUP, INC. V. AMERICAN RE INSURANCE COMPANY, ET AL.
In connection with the sale of Business Insurance Group ("BIG") by Foundation
Health Systems, Inc., to Superior National Insurance Group, Inc. ("Superior
National") effective as of December 10, 1998, Inter-Ocean Reinsurance Company,
Ltd. ("Inter-Ocean") entered into an Aggregate Excess of Loss Reinsurance
Agreement with BIG ("the AEOL Agreement"), pursuant to which Inter-Ocean agreed
to reinsure up to $175 million of losses under certain workers' compensation
policies written by BIG. Effective as of the same date, American Re, entered
into a retrocessional agreement with Inter-Ocean reinsuring the AEOL Agreement
(the "Retrocessional Agreement"). Under the terms of the Retrocessional
Agreement, American Re agreed to provide coverage to Inter-Ocean in the event of
an accelerated payout of losses that exhaust the experience fund established
under the AEOL Agreement. Under a separate agreement, Inter-Ocean assigned to
BIG its right to collect any retrocessional recoveries from American Re (the
"Assignment Agreement"). In February, 1999, Inter-Ocean was informed that based
upon BIG's December 31, 1998 estimate of its reserves, the entire $175 million
limit of its cover would be exhausted.
Effective July 28, 1999, Inter-Ocean filed a demand for arbitration (the "First
Arbitration") pursuant to the AEOL Agreement, seeking rescission of the AEOL
Agreement on the grounds that BIG failed to disclose information that was
material to the risk. In August, 1999, BIG filed an answer to the demand for
arbitration and counterclaims against Inter-Ocean seeking, among other things, a
declaration that the AEOL Agreement is valid and binding, injunctive relief and
compensatory and punitive damages of at least $200 million. A hearing in the
First Arbitration is currently scheduled for May, 2000.
In August, 1999, BIG filed a demand for arbitration against American Re (the
"Second Arbitration"), allegedly pursuant to the Assignment Agreement, seeking,
among other things, a declaration that the Retrocessional Agreement and the AEOL
Agreement are valid and binding, injunctive relief and compensatory and punitive
damages of at least $200 million. In September, 1999, American Re brought an
action in the United States District Court for the Southern District of New
York, seeking dismissal of the Second Arbitration on the grounds that BIG's
claims against American Re are not arbitrable.
On September 10, 1999, Superior National brought an action in the Los Angeles
County Superior Court against American Re and Inter-Ocean alleging causes of
action for, among other things, fraud, and negligent misrepresentation, and
seeking compensatory and punitive damages in excess of $200 million as well as
injunctive relief.
Although there can be no assurance of a favorable outcome in these matters,
American Re believes that the First Arbitration against BIG has merit, that the
Second Arbitration and the California lawsuit filed by Superior National are
wholly without legal or factual foundation, that it will ultimately prevail in
these actions and that they will not have a material adverse effect on American
Re.
ITEMS 2, 3 AND 4 HAVE BEEN OMITTED AS THEY ARE EITHER INAPPLICABLE OR THE ANSWER
IS NEGATIVE.
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ITEM 5. OTHER INFORMATION
HOLOCAUST VICTIMS INSURANCE CLAIMS
Several states have enacted legislation pertaining to insurance policies that
were issued in Nazi Germany or allied areas in Europe to Holocaust victims
during the 1920 through 1945 era. Florida, New York and Washington have statutes
that seek reports of information on such insurance. California's statute (the
"California Holocaust Law") purports to authorize the Insurance Department
("CID") to conduct investigations of such insurance to determine whether there
remain outstanding claims, and to suspend the certificates of authority of
California licensed insurers who still have outstanding unpaid valid claims or
who are affiliated with insurers that have such outstanding claims. Most state
insurance commissioners have subscribed to the charter of the International
Commission on Holocaust Era Insurance Claims ("ICHEIC"), a private organization
established for the purpose of identifying and resolving claims against such
policies issued by members of the ICHEIC. While none of the American Re
companies ever issued insurance policies in Europe during this era, and Munich
Re also never issued such insurance, some European insurers in which Munich Re
currently has an investment interest may have issued such insurance policies.
American Re has filed reports in Florida, New York and Washington with
information voluntarily provided by the European insurers in which Munich Re has
an investment interest, in an effort to cooperate with the insurance departments
and assist them in obtaining the information sought. American Re also is
cooperating with the CID by means of an exchange of information and documents,
including information voluntarily provided by these European insurers, in
response to the CID's issuance of a notice of examination and hearing to the
Company, Munich Re and other U.S. based Munich Re companies under the California
Holocaust Law. The Company has also received from the Florida Insurance
Department a subpoena (reportedly one of 40 companies issued such subpoenas) for
records in connection with insurance issued to Holocaust victims, and is also
cooperating with the Florida department in response to such subpoena.
It appears that the objective of the various insurance commissioners, and the
state laws related to Holocaust-era insurance policies and claims, is to attempt
to force membership in the ICHEIC by policy issuing carriers, and that the
objective of the actions against American Re-Insurance Company in particular is
to attempt to force Munich Re, notwithstanding the fact that it never issued any
such policies and that it does not control the European insurers in which it has
an investment interest, to join the ICHEIC. Although American Re-Insurance
Company believes that these laws and/or their application to the American Re
companies and Munich Re are subject to challenge on constitutional or other
grounds, American Re-Insurance Company has to date chosen to cooperate with the
insurance commissioners. There can be no assurance that these matters will be
ultimately resolved through cooperation and/or compromise or that any action
taken by any of the insurance commissioners against any of the American Re
companies will not have a material adverse effect on the business, financial
condition or results of operations of American Re or any of such companies.
UNITED NATIONAL ACQUISITION
In August, 1999, American Re signed a definitive agreement (the "Agreement") to
acquire all of the outstanding shares of American Insurance Service, Inc.
("AIS"), the holding company that owns the United National Group of Companies
("UNG"). UNG includes United National Insurance Company, Diamond State Insurance
Company, and Hallmark Insurance Company. UNG has admitted and non-admitted
capabilities through three risk bearing entities to write business in all states
except Alaska, and holds an A+ (Superior) rating from the insurance
industry-rating firm A.M. Best. For the year ending December 31 1998, UNG
reported net income of $24.6 million and had shareholders' equity of $278.8
million.
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The amount of consideration to be paid to the shareholders of AIS ("Sellers") by
American Re is three hundred fifty million dollars ($350,000,000) in cash
("Purchase Price"), subject to certain adjustments not expected to increase the
Purchase Price in excess of five million dollars ($5,000,000). Under the
Agreement, the transaction is contingent upon AIS's purchase of certain shares
currently owned by the Sellers (the "Redemption"), for a price of one hundred
fifty million dollars ($150,000,000) (the "Redemption Price"). The Redemption is
expected to occur simultaneously with or immediately prior to American Re's
purchase of the remaining outstanding shares from the Sellers.
Approximately one hundred ninety million dollars ($190,000,000) of the Purchase
Price is currently in readily available funds held by American Re, and American
Re anticipates receiving funds to pay the balance of the Purchase Price, from an
extraordinary dividend in such amount from American Re-Insurance, upon the
approval of such dividend from the Delaware Insurance Department. It is
anticipated that the funds to effectuate the Redemption by AIS will be from
dividends totaling one hundred fifty million dollars ($150,000,000) (including
an extraordinary dividend of approximately $124,000,000) to be paid to AIS by
its wholly owned insurer, United National, upon the approval of the Pennsylvania
Insurance Department. In the event that sufficient funds are not available for
AIS to achieve the full Redemption Price, under the Agreement, American Re may
elect to increase the Purchase Price in order to adjust for any such deficiency
in the Redemption Price.
The transaction is expected to be completed in the fourth quarter of 1999,
subject to regulatory approval and other customary closing conditions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule is filed as part of this
report.
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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.
MERICAN RE CORPORATION
(Registrant)
/s/ GEORGE T. O'SHAUGHNESSY, JR.
------------------------------------------
GEORGE T. O'SHAUGHNESSY, JR.
Executive Vice President and
Chief Financial and Accounting Officer
Dated: November 12, 1999
-20-
<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, 1999
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-31-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 6,595
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 365
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 6,991
<CASH> 543
<RECOVER-REINSURE> 2,476
<DEFERRED-ACQUISITION> 378
<TOTAL-ASSETS> 13,792
<POLICY-LOSSES> 7,466
<UNEARNED-PREMIUMS> 1,394
<POLICY-OTHER> 300
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 574
238<F1>
0
<COMMON> 0
<OTHER-SE> 2,735
<TOTAL-LIABILITY-AND-EQUITY> 13,792
2,050
<INVESTMENT-INCOME> 313
<INVESTMENT-GAINS> 75
<OTHER-INCOME> 20
<BENEFITS> 1,585
<UNDERWRITING-AMORTIZATION> 634
<UNDERWRITING-OTHER> 96
<INCOME-PRETAX> 142
<INCOME-TAX> 25
<INCOME-CONTINUING> 117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107
<EPS-BASIC> 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>
