<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-Q
---------------
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000,
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
</TABLE>
FOR THE QUARTER ENDED MARCH 31, 2000
COMMISSION FILE NUMBER 1-11688
------------------------
AMERICAN RE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3672116
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
555 COLLEGE ROAD EAST 08543-5241
PRINCETON, NEW JERSEY (zip code)
(Address of principal executive offices)
</TABLE>
(609) 243-4200
Registrant's telephone number, including area code:
------------------------
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.
<TABLE>
<CAPTION>
SHARES OUTSTANDING
DESCRIPTION OF CLASS AS OF MAY 12, 2000
-------------------- ------------------
<S> <C>
Common Stock -$.01 par value 149.49712
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN RE CORPORATION
INDEX TO FORM 10-Q
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Item 1--
Consolidated balance sheets at March 31, 2000
(unaudited),
and December 31, 1999................................. 3
Consolidated statements of income for the three-month
periods ended March 31, 2000, and 1999 (unaudited).... 4
Consolidated statements of cash flows for the
three-month
periods ended March 31, 2000, and 1999 (unaudited).... 5
Notes to consolidated interim financial statements...... 6
Item 2--
Management's discussion and analysis of
the Company's Results of Operations and Financial
Condition.............................................. 10
PART II OTHER INFORMATION.................................. 14
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
AMERICAN RE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
ASSETS:
Investments
Fixed Maturities
Bonds available for sale, at fair value (amortized cost:
March 31, 2000--$6,174.5; December 31,
1999--$6,511.6)........................................ $ 6,021.4 $ 6,315.2
Preferred stock available for sale, at fair value
(amortized cost: March 31, 2000--$84.4; December 31,
1999--$84.4)........................................... 83.4 84.6
Equity securities available for sale, at fair value (cost:
March 31, 2000--$397.0; December 31, 1999--$367.1)...... 415.5 402.1
Other invested assets..................................... 12.0 40.5
Cash and cash equivalents................................... 1,100.0 597.5
--------- ---------
Total investments and cash............................ 7,632.3 7,439.9
Accrued investment income................................... 81.4 83.5
Premiums and other receivables.............................. 1,206.1 1,181.2
Deferred policy acquisition costs........................... 311.4 324.5
Reinsurance recoverables on paid and unpaid losses.......... 3,119.6 3,034.9
Funds held by ceding companies.............................. 611.5 609.7
Prepaid reinsurance premiums................................ 125.8 138.8
Deferred federal income taxes............................... 411.7 376.0
Other assets................................................ 1,015.0 1,090.3
--------- ---------
Total assets.......................................... $14,514.8 $14,278.8
========= =========
LIABILITIES:
Loss and loss adjustment expense reserves................... $ 8,558.8 $ 8,369.0
Unearned premium reserve.................................... 1,230.1 1,223.4
--------- ---------
Total insurance reserves.............................. 9,788.9 9,592.4
Loss balances payable....................................... 426.3 421.3
Funds held under reinsurance treaties....................... 371.8 322.6
Senior bank debt............................................ 75.0 75.0
Senior notes................................................ 498.5 498.5
Other liabilities........................................... 657.1 642.5
--------- ---------
Total liabilities......................................... 11,817.6 11,552.3
--------- ---------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding as all of its
assets Junior Subordinated Debentures..................... 237.5 237.5
--------- ---------
STOCKHOLDER'S EQUITY:
Common stock, par value: $0.01 per share; authorized: 1,000
shares; issued and outstanding: March 31, 2000, and
December 31, 1999--149.49712 shares....................... -- --
Additional paid-in capital.................................. 1,332.4 1,332.4
Retained earnings........................................... 1,237.7 1,296.6
Accumulated other comprehensive income...................... (110.4) (140.0)
--------- ---------
Total stockholder's equity............................ 2,459.7 2,489.0
--------- ---------
Total liabilities, Company-obligated mandatorily
redeemable preferred securities of subsidiary trust
and stockholder's equity............................. $14,514.8 $14,278.8
========= =========
</TABLE>
See accompanying notes to consolidated interim financial statements.
3
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
ENDED MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
REVENUE:
Premiums written.......................................... $747.7 $ 757.5
Change in unearned premium reserve........................ 2.8 (177.7)
------ -------
Premiums earned......................................... 750.5 579.8
Net investment income..................................... 107.3 107.0
Net realized capital gains................................ 13.7 20.7
Other income.............................................. 9.6 14.5
------ -------
Total revenue........................................... 881.1 722.0
------ -------
LOSSES AND EXPENSES:
Losses and loss adjustment expenses....................... 686.3 396.7
Commission expense........................................ 201.3 150.9
Operating expense......................................... 56.6 59.2
Interest expense.......................................... 10.6 10.5
Other expense............................................. 21.7 25.5
------ -------
Total losses and expenses............................... 976.5 642.8
------ -------
Income (loss) before income taxes and distributions on
preferred securities of subsidiary trust.............. (95.4) 79.2
Federal and foreign income taxes.......................... (39.8) 18.9
------ -------
Income (loss) before distributions on preferred
securities of subsidiary trust........................ (55.6) 60.3
Distributions on preferred securities of subsidiary trust,
net of applicable income tax of $1.7.................... (3.3) (3.3)
------ -------
Net income (loss) to common stockholder................. $(58.9) $ 57.0
====== =======
</TABLE>
See accompanying notes to consolidated interim financial statements.
4
<PAGE>
AMERICAN RE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
ENDED MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (58.9) $ 57.0
Adjustments to reconcile net income to net cash provided
by operating activities:
Decrease (increase) in accrued investment income........ 2.1 (4.1)
Decrease (increase) in premiums and other receivables... (24.9) 17.0
Decrease (increase) in deferred policy acquisition
costs................................................. 13.1 (41.3)
Increase in reinsurance recoverables.................... (84.6) (215.5)
Increase in insurance reserves.......................... 196.5 221.6
Decrease (increase) in current and deferred federal and
foreign income tax assets............................. (1.9) 13.9
Change in other assets and liabilities, net............. 23.0 (10.5)
Depreciation expense on property and equipment.......... 2.6 2.4
Net realized capital gains.............................. (13.7) (20.7)
Change in other, net.................................... 35.0 4.3
-------- -------
Net cash provided by operating activities............. 88.3 24.1
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments available for sale:
Purchases............................................... (744.3) (948.1)
Maturities.............................................. 63.3 121.9
Sales................................................... 1,070.3 868.0
Other investments:
Purchases............................................... (0.1) (0.3)
Sales................................................... 27.9 1.3
Cost of additions to property and equipment............... (1.1) (3.3)
-------- -------
Net cash provided by investing activities............. 416.0 39.5
-------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (1.8) 0.1
-------- -------
Net increase in cash and cash equivalents............. 502.5 63.7
Cash and cash equivalents, beginning of period.............. 597.5 274.9
-------- -------
Cash and cash equivalents, end of period.................... $1,100.0 $ 338.6
======== =======
</TABLE>
See accompanying notes to consolidated interim financial statements.
5
<PAGE>
AMERICAN RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2000
(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
wholly-owned subsidiary of Munich Reinsurance Company ("Munich Re"), a company
organized under the laws of Germany.
The information for the interim periods ended March 31, 2000, and 1999, 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 1999 Form 10-K.
2. COMPREHENSIVE INCOME
The Company experienced a comprehensive loss of $29.3 million for the
three-month period ended March 31, 2000, compared to a comprehensive loss of
$20.7 million for the same period in 1999. The components of accumulated other
comprehensive income are as follows:
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION NET UNREALIZED
(DEPRECIATION) OF LOSS ON FOREIGN
INVESTMENTS EXCHANGE TOTAL
----------------- --------------- --------
<S> <C> <C> <C>
Balance at December 31, 1998............................ $ 158.9 $(35.8) $ 123.1
Period change......................................... (91.4) (7.4) (98.8)
Tax effect.......................................... 32.0 2.6 34.6
Reclassification adjustment for gain/lossincluded in
net income.......................................... (20.7) -- (20.7)
Tax effect.......................................... 7.2 -- 7.2
------- ------ -------
Balance at March 31, 1999............................... $ 86.0 $(40.6) $ 45.4
======= ====== =======
Balance at December 31, 1999............................ $(104.8) $(35.2) $(140.0)
Period change......................................... 39.4 19.9 59.3
Tax effect.......................................... (13.8) (7.0) (20.8)
Reclassification adjustment for gain/loss included in
net income.......................................... (13.7) -- (13.7)
Tax effect.......................................... 4.8 -- 4.8
------- ------ -------
Balance at March 31, 2000............................... $ (88.1) $(22.3) $(110.4)
======= ====== =======
</TABLE>
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
6
<PAGE>
AMERICAN RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2000
(DOLLARS IN MILLIONS)
(UNAUDITED)
(CONTINUED)
3. REINSURANCE (CONTINUED)
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
ENDED MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Premiums written
Direct.................................................. $ 66.5 $ 67.5
Assumed................................................. 744.8 847.2
Ceded................................................... (63.6) (157.2)
------- -------
Net..................................................... 747.7 757.5
======= =======
Premiums earned
Direct.................................................. 59.9 63.5
Assumed................................................. 741.5 677.1
Ceded................................................... (50.9) (160.8)
------- -------
Net..................................................... 750.5 579.8
======= =======
Losses incurred
Direct.................................................. 23.7 11.6
Assumed................................................. 801.1 606.6
Ceded................................................... (138.5) (221.5)
------- -------
Net..................................................... $ 686.3 $ 396.7
======= =======
</TABLE>
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 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. American Re
Financial Products ("ARFP") provides clients with an array of highly customized
financial risk management products and services, including credit enhancement,
integrated risk management, and entertainment financing. American Re HealthCare
("HealthCare") integrates risk transfer products and specialized services to
help insurance companies and self-insureds predict, prevent, and manage
catastrophic medical events. In addition to its core reinsurance business,
American Re, through various subsidiaries, offers a broad array of related
services including actuarial and financial analysis, due diligence consulting
for mergers and acquisitions, rent-a-captive
7
<PAGE>
AMERICAN RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2000
(DOLLARS IN MILLIONS)
(UNAUDITED)
(CONTINUED)
4. SEGMENT REPORTING (CONTINUED)
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. Segment information for the three months
ended March 31, 1999, as filed in the Company's March 1999 Form 10Q, has been
restated to reflect management's increased focus on the Company's ARFP and
HealthCare segments.
THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
TOTAL
REINSURANCE/ HOLDING
INSURANCE COMPANY
DICO RISKPARTNERS INTERNATIONAL HEALTHCARE ARFP OPERATIONS & OTHER TOTAL
-------- ------------ ------------- ---------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Gross premiums written.... $ 397.8 $166.5 $151.4 $ 65.5 $ 30.1 $ 811.3 $ -- $ 811.3
------- ------ ------ ------ ------- ------- ------ -------
Net premiums written...... 408.9 112.2 148.6 61.1 16.9 747.7 -- 747.7
------- ------ ------ ------ ------- ------- ------ -------
Premiums earned........... 439.8 117.7 123.7 60.8 8.4 750.4 0.1 750.5
Net investment income..... 101.8 5.5 107.3
Net realized capital
gains................... 13.6 0.1 13.7
Other income.............. -- 9.6 9.6
------- ------ ------ ------ ------- ------- ------ -------
Total revenue........... 865.8 15.3 881.1
------- ------ -------
LOSSES AND EXPENSES
Losses and LAE............ 407.2 97.8 131.7 42.6 7.0 686.3 -- 686.3
Underwriting expense...... 157.7 35.9 43.6 19.2 1.4 257.8 0.1 257.9
Interest expense.......... -- 10.6 10.6
Other expense............. 7.6 14.1 21.7
------- ------ ------ ------ ------- ------- ------ -------
Total losses and
expenses.............. 951.7 24.8 976.5
------- ------ -------
Income (loss) before
income taxes.......... $ (95.4)
=======
Underwriting gain
(loss)................ $(125.1) $(16.0) $(51.6) $ (1.0) $ 0.0 $(193.7) $ 0.0 $(193.7)
======= ====== ====== ====== ======= ======= ====== =======
Loss and LAE Ratio........ 92.6% 83.1% 106.5% 70.1% 83.9% 91.5% N/M 91.4%
Underwriting Expense
Ratio................... 35.9 30.5 35.2 31.3 16.5 34.4 N/M 34.4
------- ------ ------ ------ ------- ------- ------ -------
Combined Ratio............ 128.5% 113.6% 141.7% 101.4% 100.4% 125.9% N/M 125.8%
======= ====== ====== ====== ======= ======= ====== =======
</TABLE>
8
<PAGE>
AMERICAN RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2000
(DOLLARS IN MILLIONS)
(UNAUDITED)
(CONTINUED)
4. SEGMENT REPORTING (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
TOTAL
REINSURANCE/ HOLDING
INSURANCE COMPANY
DICO RISKPARTNERS INTERNATIONAL HEALTHCARE ARFP OPERATIONS & OTHER TOTAL
-------- ------------ ------------- ---------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Gross premiums written..... $ 494.1 $227.7 $151.2 $ 33.8 $ 6.6 $913.4 $ 1.3 $ 914.7
------- ------ ------ ------ ------ ------ ------- -------
Net premiums written....... 421.5 150.0 142.8 35.3 6.6 756.2 1.3 757.5
------- ------ ------ ------ ------ ------ ------- -------
Premiums earned............ 342.4 106.4 109.7 16.7 3.3 578.5 1.3 579.8
Net investment income...... 105.6 1.4 107.0
Net realized capital
gains.................... 20.7 0.0 20.7
Other income............... (1.0) 15.5 14.5
------- ------ ------ ------ ------ ------ ------- -------
Total revenue............ 703.8 18.2 722.0
------ ------- -------
LOSSES AND EXPENSES
Losses and LAE............. 226.1 79.9 77.3 11.3 0.8 395.4 1.3 396.7
Underwriting expense....... 124.1 34.4 41.3 8.3 1.9 210.0 0.1 210.1
Interest expense........... 0.0 10.5 10.5
Other expense.............. 1.6 23.9 25.5
------ ------- -------
Total losses and
expenses............... 607.0 35.8 642.8
------ ------- -------
Income before income
taxes.................. $ 79.2
=======
Underwriting gain
(loss)................. $ (7.8) $ (7.9) $ (8.9) $ (2.9) $ 0.6 $(26.9) $ (0.1) $ (27.0)
======= ====== ====== ====== ====== ====== ======= =======
Loss and LAE Ratio......... 66.0% 75.1% 70.5% 67.9% 23.7% 68.3% 101.2% 68.4%
Underwriting Expense
Ratio.................... 36.3 32.3 37.7 49.5 57.2 36.3 10.0 36.2
------- ------ ------ ------ ------ ------ ------- -------
Combined Ratio............. 102.3% 107.4% 108.2% 117.4% 80.9% 104.6% 111.2% 104.6%
======= ====== ====== ====== ====== ====== ======= =======
</TABLE>
9
<PAGE>
MANAGEMENTS' DISCUSSION AND ANALYSIS OF THE COMPANY'S RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2000, COMPARED WITH QUARTER ENDED MARCH 31, 1999
The Company's net premiums written decreased 1.3% to $747.7 million for the
quarter ended March 31, 2000, from $757.5 million for the same period in 1999.
The Company attributes the decrease in net premiums written to the substantial
decrease in its gross premiums written which was due primarily to the Company's
non-renewal of inadequately priced U.S. business. A large part of this decrease
in gross premiums written was offset by decreased ceded premiums as a result of
long-term changes in the Company's retrocessional programs. The decrease in net
premiums written was comprised of decreases in net premiums written in DICO and
RiskPartners, offset by an increase in net premiums written in HealthCare.
DICO experienced a 3.0% decrease in net premiums written to $408.9 million
for the first quarter of 2000, from $421.5 million for the same period in 1999.
This decrease was primarily attributable to a 7.1% decrease in DICO's treaty
business. RiskPartners experienced a 25.2% decrease in net premiums written to
$112.2 million for the first quarter of 2000, from $150.0 million for the same
period in 1999. This decrease was primarily attributable to a 38.6% decline in
RiskPartners' treaty business and a 76.5% decline in its finite risk business,
somewhat offset by a 27.8% increase in facultative writings. These decreases
were partially offset by a 73.1% increase in HealthCare net premiums written to
$61.1 million for the first quarter of 2000, from $35.3 million for the same
period in 1999.
The Company's net premiums earned increased 29.4% to $750.5 million for the
quarter ended March 31, 2000, from $579.8 million for the same period in 1999.
The increase in premiums earned was primarily attributable to the timing of
premiums earned on business in force.
Net losses and LAE incurred increased 73.0% to $686.3 million for the
quarter ended March 31, 2000, from $396.7 million for the same period in 1999.
This increase includes provisions for increased losses for the current accident
year to reflect adverse market conditions, and additional loss provisions of
$48.5 million for certain finite risk losses from prior accident years. In
addition, the Company incurred $47.1 million of catastrophe losses during the
quarter ended March 31, 2000. There were no catastrophe losses in the 1999
period.
Underwriting expense, consisting of commission expense plus operating
expense, increased 22.8% to $257.9 million for the quarter ended March 31, 2000,
from $210.0 million for the same period in 1999. This increase was due to a
33.4% increase in commission expense to $201.3 million for the first quarter of
2000 from $150.9 million for the same period in 1999. This increase was
primarily attributable to the increase in premiums earned. Operating expenses
decreased 4.4% to $56.6 million for the first quarter of 2000 from
$59.2 million for the first quarter of 1999.
The Company experienced an underwriting loss (net premiums earned minus
losses and LAE incurred and underwriting expenses) of $193.7 million for the
quarter ended March 31, 2000, compared to an underwriting loss of $27.0 million
for the same period in 1999. On a GAAP basis, the Company's loss ratio increased
to 91.4% for the first quarter of 2000 from 68.4% for the same period in 1999,
while the underwriting expense ratio decreased to 34.4% for the first quarter of
2000 from 36.2% for the same period in 1999. As a result of these changes, the
combined ratio for the quarter ended March 31, 2000, increased to 125.8% from
104.6% for the same period in 1999.
Pre-tax net investment income increased 0.3% to $107.3 million for the
quarter ended March 31, 2000, from $107.0 million for the same period in 1999.
The Company's after-tax net investment income decreased 2.8% to $76.8 million
for the quarter ended March 31, 2000, from $79.0 million for the same period in
1999. This decrease was partially attributable to a repositioning of the
investment portfolio.
10
<PAGE>
The Company realized net capital gains of $13.7 million for the quarter
ended March 31, 2000, compared to net capital gains of $20.7 million for the
same period in 1999. The 2000 period included capital gains of $27.4 million on
the sale of common equities, offset by net capital losses of $13.7 million on
the sale of bonds. The 1999 period included capital gains of $9.3 million on the
sale of bonds and $14.9 million on the sale of common equities, offset by net
capital losses of $3.5 million on the sale of other invested assets.
Other income decreased 33.8% to $9.6 million for the quarter ended
March 31, 2000, from $14.5 million for the same period in 1999. This decrease
was primarily attributable to a decrease in revenues from fee subsidiaries.
Other expenses decreased 14.9% to $21.7 million for the first quarter of 2000
from $25.5 million for the same period in 1999.
The Company experienced a loss before income taxes and distributions on
preferred securities of $95.4 million for the quarter ended March 31, 2000,
compared to income of $79.2 million for the same period in 1999. Federal and
foreign income taxes are calculated based on the federal statutory tax rate
adjusted for tax preference items.
FINANCIAL CONDITION
Total consolidated assets increased 3.2% to $14,514.8 million at March 31,
2000, from $14,278.8 million at December 31, 1999. Total consolidated
liabilities also increased 3.0% to $11,817.6 million at March 31, 2000, from
$11,552.3 million at December 31, 1999.
The total financial statement value of investments and cash increased
slightly to $7,632.3 million at March 31, 2000, from $7,439.9 million at
December 31, 1999, primarily due to cash flow from operations for the period, in
addition to an increase in the fair value adjustment of investments held. The
financial statement value of the investment portfolio at March 31, 2000,
included a net decrease from amortized cost to fair value of $135.6 million for
debt and equity investments, compared to a net decrease of $161.2 million at
December 31, 1999. At March 31, 2000, the Company recognized a cumulative
unrealized loss of $88.1 million due to the net adjustment to fair value on debt
and equity investments, after applicable income tax effects, which was reflected
in stockholder's equity as a component of accumulated other comprehensive
income. This represents a net increase to stockholder's equity of $16.7 million
from the cumulative unrealized loss on debt and equity securities of
$104.8 million recognized at December 31, 1999.
Common stockholder's equity decreased slightly to $2,459.7 million at
March 31, 2000, from $2,489.0 million at December 31, 1999. This decrease was
primarily attributable to the net loss of $58.9 million offset by a
$29.6 million increase in accumulated other comprehensive income, net of tax.
The Company's insurance/reinsurance subsidiaries' statutory surplus
decreased to $2,063.6 million at March 31, 2000, from $2,166.0 million at
December 31, 1999. Operating leverage, as measured by such subsidiaries'
premiums-to-surplus ratio, on an annualized basis was 1.38 to 1 and 1.31 to 1 at
March 31, 2000, and December 31, 1999, 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
11
<PAGE>
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 $88.3 million
for the three-month period ended March 31, 2000, up from $24.1 million for the
same period in 1999. The increase in the 2000 period is attributable to an
increase in loss balance recoveries and federal income tax refunds received
resulting from the net loss recognized in 1999.
Cash and cash equivalents were $1,100.0 million and $597.5 million at
March 31, 2000, and December 31, 1999, respectively. Cash and short-term
investments are maintained for liquidity purposes and represented 14.4% and
8.0%, respectively, of total financial statement investments and cash on such
dates. The increase in the level of cash and cash equivalents reflects a
repositioning of the investment portfolio.
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 (including mortgage backed
securities and collateralized mortgage obligations) income investments with a
value of $6,104.8 million at March 31, 2000 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 Euro 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 March 31, 2000, the Company had
no material currency rate exposure.
In addition to interest rate and foreign exchange risk, the Company's common
equity portfolio of $415.5 million at March 31, 2000 is subject to changes in
value based on changes in equity prices, predominately from the United States.
In November 1999, American Re Capital Markets, Inc. ("ARCM"), a subsidiary
of the Company, entered into certain index-based catastrophe-related swaps.
Under the terms of the catastrophe swaps, ARCM may receive approximately
$182.0 million of potential payments in the event of three types of certain
catastrophic events: California earthquakes, Midwest earthquakes, or Eastern and
Gulf Coast windstorms. The Company adjusts the catastrophe swaps to fair value
using a model pricing based upon interest rate spreads above comparable U.S.
Treasury investments, applied to a notional value of $182.1 million.
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 risks related thereto. These statements are based upon a
number of assumptions and estimates that are inherently subject to significant
uncertainties and contingencies, many of which are beyond the control of the
Company, and reflect future business decisions that 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,
12
<PAGE>
projections of premium revenue, investment income, other revenue, losses,
expenses, earnings, cash flows, plans for future operations, common
stockholder's equity, investments, capital plans, dividends, plans relating to
products or services of American Re, estimates concerning the effects of
litigation or other disputes, adverse state or federal legislation or
regulation, adverse publicity or news coverage or changes in general economic
factors as well as the 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.
13
<PAGE>
AMERICAN RE CORPORATION
PART II. OTHER INFORMATION
ITEMS 1 - 4 HAVE BEEN OMITTED AS THEY ARE EITHER INAPPLICABLE OR THE ANSWER IS
NEGATIVE.
ITEM 5. OTHER INFORMATION.
HOLOCAUST VICTIMS INSURANCE LAWS. Several states (including California,
Maryland, Minnesota, New York, and Washington) have enacted legislation
pertaining to insurance policies that were issued in Europe to Holocaust victims
during the period 1920 through 1945, and legislation on this subject matter is
under consideration in other states (including New Jersey). Insurance regulators
in some of these states have taken actions or threatened to take actions to
sanction insurance companies licensed in such states for alleged failure to
comply with such laws. Most state insurance regulators have subscribed to a
private, non-governmental, voluntary organization named the International
Commission on Holocaust Era Insurance Claims ("Holocaust Commission") that is
dedicated to identifying and resolving outstanding insurance claims from the
Holocaust era for its members. Under some of the recently enacted state laws, an
insurer's participation in the Holocaust Commission confers certain statutory
benefits.
CALIFORNIA. California has two Holocaust era insurance related statutes.
The first purports to permit the suspension of an insurer's license if it or any
of its affiliates has failed to pay any claim of Holocaust victims proven to be
valid and unpaid. This statute also authorizes the Commissioner to include
consideration of whether an insurer is participating in the Holocaust Commission
in deciding whether to suspend the insurer's license. In July, 1999, the
California Insurance Department ("CID") initiated an examination and hearing
involving the Company's California licensed insurers and Munich Re in order to
investigate whether these companies or affiliated companies in Europe had
outstanding Holocaust era insurance claims. While the licensees named in the
examination and hearing process either were not in existence or did not do
business in Europe during the Holocaust era, and Munich Re, as a reinsurer,
never issued any insurance policies, the CID sought information on Holocaust era
insurance from European insurers in which Munich Re has an indirect investment
interest. The hearing and examination are ongoing.
The second California statute is the Holocaust Victim Insurance Relief Act
of 1999 ("California Registry Law") designed to create a publicly accessible
registry of Holocaust era policyholder information. The California Registry Law
requires California licensed insurers to report Holocaust era policyholder
information in their possession or in the possession of their "related
companies," as that term is defined in the California Registry Law. The CID
interprets this statute to require information even from companies that are not
controlled by the licensed insurers or their parent companies. In March 2000,
American Re-Insurance and the American Insurance Association, an insurance trade
association, many of whose members are California licensed insurers, initiated
litigation in California challenging the validity of the California Registry Law
on constitutional and other grounds. That litigation is pending, and a stay of
enforcement by the CID of the challenged law is in effect during the pendency of
the litigation.
FLORIDA. Florida has enacted a statute ("Florida Holocaust Law") that seeks
reports of information on Holocaust era insurance. The Florida Holocaust Law
requires Florida licensed insurers to report certain information on insurance
policies issued in Europe during the Holocaust era by such licensees and their
affiliates. American Re-Insurance and American Alternative Insurance Corporation
("American Alternative") have no information to report because they did not
issue insurance policies in Europe during the relevant time period. However, the
companies have timely filed reports disclosing information voluntarily provided
by European insurers in which Munich Re has an investment interest. The Florida
Insurance Department has issued subpoenas to American Re-Insurance, American
Alternative, and approximately 40 other insurance companies seeking policyholder
information in connection with the Florida Holocaust Law. An unaffiliated
company initiated litigation against the Florida Insurance Department
challenging the validity of the subpoenas and the constitutionality of the
Florida Holocaust Law. That litigation is pending.
14
<PAGE>
NEW YORK. New York has enacted a statute ("New York Holocaust Law") similar
to the Florida Holocaust Law. American Re-Insurance and American Alternative
timely filed reports responsive to the New York Holocaust Law disclosing
information voluntarily provided by European insurers in which Munich Re has an
investment interest. The New York Insurance Department subsequently requested
additional information in connection with Holocaust era insurance, and American
Re promptly forwarded these requests to the European insurers which responded
directly to the Department. Notwithstanding this, the Department has threatened
to attempt to fine American Re up to $1,000 per day for alleged reporting
violations unless Munich Re joins the Holocaust Commission, or agrees to pay
alleged Holocaust claims involving companies that Munich Re does not control, or
contributes to a humanitarian fund for the benefit of Holocaust survivors, and
American Re-Insurance has received a letter from the Department's Disciplinary
Unit that disciplinary action against American Re-Insurance and/or its officers
is being considered. However, no formal action has been taken by the Department
to date.
WASHINGTON. Washington has enacted a statute similar to the California
Registry Law. American Re-Insurance and American Alternative have reported to
the Washington Insurance Department that they have nothing to report under the
statute. The Department has asserted that the companies' report is not in
compliance with the law and has indicated that it may initiate enforcement
action against American Re, although no action has been commenced to date.
Recently, an unaffiliated company initiated litigation challenging the
Washington statute, and that litigation is pending.
* * * * *
American Re believes that it has fully complied with the requirements of
these statutes. However, there can be no assurance that insurance regulators
will not initiate administrative or other actions against American Re under
these laws. American Re does not believe that the ultimate resolution of these
matters will have a material adverse effect on the business, financial condition
or results of operations of American Re and its subsidiaries taken as a whole.
PENNSYLVANIA. In connection with American Re's efforts to acquire all of
the outstanding shares of American Insurance Service, Inc., the holding company
that owns United National Insurance Company ("United National"), Diamond State
Insurance Company, and Hallmark Insurance Company, American Re is required to
obtain the approval of three insurance departments which have regulatory
authority over the transaction.
Two of the three insurance departments that must approve the transaction
(Indiana and Wisconsin) have conducted hearings, completed their reviews and
granted their approvals of the transaction. However, the Pennsylvania Insurance
Department has subjected American Re to an excessive delay in reviewing the
application regarding United National, which is domiciled in Pennsylvania,
allegedly based on the fact that Munich Re has not joined the Holocaust
Commission.
As a result of this delay, on February 8, 2000, American Re filed suit in
Pennsylvania Commonwealth Court against the Pennsylvania Insurance Department
and the Pennsylvania Insurance Commissioner, seeking to compel the Department to
complete its review of American Re's application to acquire United National. At
the present time, no assurance can be given as to the ability of American Re to
prevail in the litigation against the Department. Furthermore, even if American
Re is successful in the litigation seeking to compel the Department to complete
its review, there can be no assurance that such review would result in a timely
approval of the transaction by the Department since, under the terms of the
Agreement, the Sellers have had the right to terminate the Agreement since
March 10, 2000 and they may elect to do so at any time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27--Financial Data Schedule is filed as part of this report.
15
<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.
<TABLE>
<S> <C> <C>
AMERICAN RE CORPORATION
(Registrant)
/s/ GEORGE T. O'SHAUGHNESSY, JR.
-----------------------------------------
GEORGE T. O'SHAUGHNESSY, JR.
Executive Vice President and
Chief Financial and Accounting Officer
</TABLE>
Dated: May 12, 2000
16
<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 QUARTER ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 6,105
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 416
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 6,532
<CASH> 1,100
<RECOVER-REINSURE> 3,120
<DEFERRED-ACQUISITION> 311
<TOTAL-ASSETS> 14,515
<POLICY-LOSSES> 8,559
<UNEARNED-PREMIUMS> 1,230
<POLICY-OTHER> 426
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 574
238<F1>
0
<COMMON> 0
<OTHER-SE> 2,460
<TOTAL-LIABILITY-AND-EQUITY> 14,515
751
<INVESTMENT-INCOME> 107
<INVESTMENT-GAINS> 14
<OTHER-INCOME> 10
<BENEFITS> 686
<UNDERWRITING-AMORTIZATION> 260
<UNDERWRITING-OTHER> 32
<INCOME-PRETAX> (95)
<INCOME-TAX> (40)
<INCOME-CONTINUING> (56)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (59)
<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>
