-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B2N6MJMY3YIP3KwLFPoLQsLusc2hE5g8xSXHbRfO+akujq0DRWp0kAAQ1GwgPD9S 6EfxXuy/su11wRbxDnNWcg== 0000317745-96-000004.txt : 19960816 0000317745-96-000004.hdr.sgml : 19960816 ACCESSION NUMBER: 0000317745-96-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL RE CORP CENTRAL INDEX KEY: 0000317745 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 061026471 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08026 FILM NUMBER: 96614947 BUSINESS ADDRESS: STREET 1: FINANCIAL CENTRE P O BOX 10351 STREET 2: 695 EAST MAIN STREET CITY: STAMFORD STATE: CT ZIP: 06904-2351 BUSINESS PHONE: 2033285000 MAIL ADDRESS: STREET 1: FINANCIAL CENTRE STREET 2: P O BOX 10350 CITY: STAMFORD STATE: CT ZIP: 06904-2350 10-Q 1 GENERAL RE CORPORATION Financial Centre P.O. Box 10350 Stamford, CT 06904-2350 August 13, 1996 Securities and Exchange Commission 450 Fifth Street, NW Washington, D.C. 20549 Gentlemen/Ladies: Pursuant to the requirements of the Securities Exchange Act of 1934, we are transmitting herewith the attached Form 10-Q. Very truly yours, Elizabeth A. Monrad SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 30, 1996 Commission File Number 1-8026 GENERAL RE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 06-1026471 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Financial Centre, P.O. Box 10350 Stamford, Connecticut 06904-2350 (Address of principal executive offices) (Zip Code) Registrant's telephone number, with area code (203) 328-5000 None _ (Former name, former address and former fiscal year, if changed since last report) 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 * No Indicate the number of shares outstanding of each of the issuer's classes of common stock: Class Outstanding at June 30, 1996 Common Stock, $.50 par value 78,567,804 Shares GENERAL RE CORPORATION INDEX PAGE NO. PART I. FINANCIAL INFORMATION Consolidated Statements of Income Three and six months ended June 30, 1996 and 1995 3 Consolidated Balance Sheets June 30, 1996 and December 31, 1995 4 Consolidated Statements of Common Stockholders' Equity Six months ended June 30, 1996 and 1995 5 Consolidated Statements of Cash Flows Six months ended June 30, 1996 and 1995 6 Notes to Consolidated Interim Financial Statements 7 - 9 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 17 PART II. OTHER INFORMATION 18 - 19 2 GENERAL RE CORPORATION Consolidated Statements of Income (in millions, except per share data)
(Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 Premiums and other revenues Net premiums written Property/casualty $1,579 $1,589 $2,789 $2,595 Life/health 259 220 510 220 Total net premiums written $1,838 $1,809 $3,299 $2,815 Net premiums earned Property/casualty $1,424 $1,345 $2,718 $2,300 Life/health 254 215 499 215 Total net premiums earned 1,678 1,560 3,217 2,515 Net investment income 288 255 573 449 Other revenues 78 91 146 142 Net realized gains on investments 30 24 80 31 Total revenues 2,074 1,930 4,016 3,137 Expenses Claims and claim expenses 1,004 998 1,912 1,661 Life/health benefits 184 148 364 148 Acquisition costs 389 342 744 570 Other operating costs and expenses 177 157 329 255 Total expenses 1,754 1,645 3,349 2,634 Income before income taxes and minority interest 320 285 667 503 Income tax expense 74 59 161 94 Income before minority interest 246 226 506 409 Minority interest 22 12 45 12 NET INCOME $224 $214 $461 $397 Share Data Net income per common share $2.80 $2.58 $5.67 $4.78 Dividend per common share $0.51 $.49 $1.02 $ .98 Average shares outstanding 79.3 82.0 80.4 82.0 See notes to the consolidated interim financial statements.
3 GENERAL RE CORPORATION Consolidated Balance Sheets (in millions, except share data)
(Unaudited) Assets June 30, 1996 Dec. 31, 1995 Investments: Fixed maturities: Available-for-sale (cost: $14,887 in 1996; $14,342 in 1995) $15,370 $15,225 Trading (cost: $3,004 in 1996; $2,316 in 1995) 2,965 2,317 Preferred stocks, at fair value (cost: $368 in 1996; $453 in 1995) 374 472 Common stocks, at fair value (cost: $2,102 in 1996; $1,910 in 1995) 3,661 3,234 Short-term investments, at amortized cost which approximates fair value 1,523 1,449 Other invested assets 853 797 Total investments 24,746 23,494 Cash 407 258 Accrued investment income 386 390 Accounts receivable 2,793 2,368 Funds held by reinsured companies 2,141 2,180 Reinsurance recoverable 2,867 2,794 Deferred acquisition costs 439 434 Securities purchased under agreements to resell 157 66 Trading account assets 2,350 2,434 Other assets 1,527 1,528 Total assets $37,813 $35,946 Liabilities Claims and claim expenses $14,701 $14,252 Policy benefits for life/health contracts 2,378 2,263 Unearned premiums 1,993 1,913 Other reinsurance balances 3,041 3,056 Notes payable and commercial paper 379 155 Income taxes 593 634 Securities sold under agreements to repurchase 2,607 1,263 Securities sold but not yet purchased 568 614 Trading account liabilities 2,664 2,627 Other liabilities 1,407 1,357 Minority interest 1,184 1,224 Total liabilities 31,515 29,358 Cumulative convertible preferred stock (shares issued: 1,719,371 in 1996 and 1,724,037 in 1995; no par value) 147 147 Loan to employee savings and stock ownership plan (146) (146) 1 1 Common stockholders' equity Common stock (102,827,344 shares issued in 1996 and 1995; par value $.50) 51 51 Paid-in capital 654 635 Unrealized appreciation of investments, net of deferred income taxes 1,358 1,468 Currency translation adjustments, net of deferred income taxes (45) (11) Retained earnings 6,361 5,986 Less common stock in treasury, at cost (shares held: 24,259,540 in 1996 and 20,714,069 in 1995) (2,082) (1,542) Total common stockholders' equity 6,297 6,587 Total liabilities, cumulative convertible preferred stock and common stockholders' equity $37,813 $35,946 See notes to the consolidated interim financial statements.
4 GENERAL RE CORPORATION Consolidated Statements of Common Stockholders' Equity (in millions) (Unaudited) Six Months Ended June 30, 1996 1995 Common stock: Beginning of period $51 $51 Change for the period - - End of period 51 51 Paid-in capital: Beginning of period 635 604 Stock issued under stock option and other incentive arrangements 16 5 Other 3 3 End of period 654 612 Unrealized appreciation of investments, net of deferred income taxes: Beginning of period 1,468 421 Change for the period (171) 731 Applicable income taxes 61 (251) End of period 1,358 901 Currency translation adjustments, net of deferred income taxes: Beginning of period (11) (20) Change for the period (34) 42 End of period (45) 22 Retained earnings: Beginning of period 5,986 5,330 Net income 461 397 Dividends paid on common stock (81) (80) Dividends paid on preferred stock, net of income taxes (5) (5) Other - 1 End of period 6,361 5,643 Common stock in treasury: Beginning of period (1,542) (1,527) Cost of shares acquired during period (547) - Issued under stock option and other incentive arrangements 7 6 End of period (2,082) (1,521) Total common stockholders' equity $6,297 $5,708 See notes to the consolidated interim financial statements. GENERAL RE CORPORATION Consolidated Statements of Cash Flows (in millions) (Unaudited) Six months ended June 30, 1996 1995 Cash flows from operating activities Net income $461 $397 Adjustments to reconcile net income to net cash provided by operating activities: Change in claim and claim expense liabilities 449 1,259 Change in policy benefits for life/health contracts 115 190 Change in reinsurance recoverable (73) (272) Change in unearned premiums 149 360 Amortization of acquisition costs 744 570 Acquisition costs deferred (749) (738) Trading account activities Change in trading account securities (1,154) (2,582) Securities purchased under agreements to resell (91) 612 Securities sold under agreements to repurchase 1,344 1,046 Change in other trading balances 13 950 Other changes in assets and liabilities (273) (1,106) Net realized gains on investments (80) (31) Net cash from operating activities 855 655 Cash flows from investing activities Fixed maturities: held-to-maturity Purchases - (24) Calls and maturities - 178 Sales - - Fixed maturities: available-for-sale Purchases (4,066) (2,869) Calls and maturities 461 156 Sales 3,043 2,348 Equity securities: Purchases (584) (438) Sales 378 419 Net purchases of short-term investments 328 (305) Net purchases of other invested assets (14) (81) Net cash used in investing activities (454) (616) Cash flows from financing activities Commercial paper borrowing, net 225 (31) Change in contract deposits 130 (11) Cash dividends paid to common stockholders (81) (80) Acquisition of treasury stock (548) - Other 22 10 Net cash used in financing activities (252) (112) Change in cash 149 (73) Cash, beginning of period 258 242 Cash, end of period $407 $169 See notes to the consolidated interim financial statements. 6 GENERAL RE CORPORATION NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. General - The interim 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 for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and related notes in the Corporation's 1995 Annual Report filed on Form 10-K. Certain reclassifications have been made to 1995 balances to conform to the 1996 presentation. The operating results of the Corporation's international reinsurance operations are reported on a quarter lag. 2. Cologne Re - The comparable 1995 year-to-date amounts include only one quarter of income and cash flows for Cologne Re and GR-CK, since the formation of GR-CK did not occur until December 28, 1994 and the Corporation reports the results of its international operations on a one quarter lag. The minority interest included in the Corporation's statement of income and balance sheet relates to the economic interest of Cologne Re not owned by GR-CK and the Class A shares of GR-CK, which are not owned by the Corporation. 3. Income Taxes - The Corporation's effective income tax rate differs from current statutory rates principally due to tax-exempt interest income and dividends received deductions. The Corporation paid income taxes of $136 million and $86 million in the six months ended June 30, 1996 and 1995, respectively. 4. Reinsurance Ceded - The Corporation utilizes reinsurance to reduce its exposure to large losses. The income statement amounts for premiums written, premiums earned, claims and claim expenses incurred and life/health benefits are reported net of reinsurance. Direct, assumed, ceded and net amounts for the six months ended June 30, 1996 and 1995 were as follows (in millions):
Property/Casualty Life/Health Claims and Life/Health Written Earned Written Earned Claim Expenses Benefits 1996 Direct $225 $211 - - $152 - Assumed 3,006 2,949 $573 $562 2,153 $448 Ceded (442) (442) (63) (63) (393) (84) Net $2,789 $2,718 $510 $499 $1,912 $364 1995 Direct $236 $216 - - $155 - Assumed 2,852 2,576 $244 $239 1,961 $173 Ceded (493) (492) (24) (24) (455) (25) Net $2,595 $2,300 $220 $215 $1,661 $148
7 GENERAL RE CORPORATION NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued) 5. Allowance for Doubtful Accounts - The Corporation establishes an allowance for uncollectible reinsurance recoverables and other doubtful receivables. The allowance was approximately $124 million and $135 million at June 30, 1996 and December 31, 1995, respectively. 6. Per Common Share Data - Income per common share is based on net income less preferred dividends divided by the weighted average common shares outstanding during the period. The weighted average number of common shares outstanding was 79,254,137 and 80,355,796 for the three and six months ended June 30, 1996, and 81,996,173 and 81,957,703 for the three and six months ended June 30, 1995. 7. New Accounting Standards - In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. The Statement establishes financial accounting and reporting standards for stock-based employee compensation plans and is effective in 1996. The Statement defines a fair-value based method of accounting for stock option plans whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. Under the new Statement, companies may continue to measure compensation cost of stock-based plans using the current accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Companies electing to remain with the accounting in Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair-value based method of accounting defined in the Statement were applied. The Corporation has elected to continue its current method of accounting for stock-based compensation plans. The fair-value based disclosures, which are only required in full-year financial statements, will be included in the Corporation's 1996 Annual Report on Form 10-K. In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The Statement established accounting standards for impairment of long-lived assets, certain identifiable intangibles and goodwill. The Statement requires that long-lived assets and intangibles be reviewed for impairment using an estimate of future undiscounted cash flows compared to the carrying amount of the assets. The Statement was effective January 1, 1996 and had no effect on the results from operations, financial position or cash flows of the Corporation in the first six months of 1996. 8. Subsequent Events - On July 1, 1996 the Corporation reached a definitive agreement to acquire all of the outstanding shares of National Re Corporation ("National Re"). Under terms of the merger agreement, National Re shareholders will have the right to receive, at the election of the holder, either: (i) a fraction of a share of the Corporation's common stock determined by dividing $53 by the average closing price of the Corporation's common stock for the ten consecutive trading days immediately preceding the closing date of the merger, but not more than .39259 shares or less than .32121 shares, or (ii) $53 in cash. The transaction provides for a minimum stock component of 50%. There is no minimum cash component. 8 GENERAL RE CORPORATION NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued) For shareholders electing stock, the transaction is expected to be tax free. The total consideration for the acquisition is expected to be approximately $940 million. The Corporation plans to finance the cash component of the transaction from internal sources. The transaction, which is subject to, among other things, regulatory approvals and the approval of National Re shareholders, is expected to be completed in the fourth quarter. On July 1, 1996, ACE Limited finalized the acquisition of Tempest Reinsurance Company Limited ("Tempest"). In exchange for its 20.7 percent interest in Tempest, its sponsor stock options, and early termination of its underwriting services agreement with Tempest, the Corporation received $216 million in cash. The effect of this transaction will be included in the Corporation's third-quarter financial statements. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated Income from operations, excluding after-tax realized gains and losses, was $2.65 per share in the second quarter of 1996, an increase of 11.8 percent from the $2.37 per share earned in the comparable period in 1995. Net income for the second quarter of 1996 included after-tax realized gains of $.15 per share, compared with a gain of $.21 per share in the second quarter of 1995. The improved results in the second quarter of 1996 were primarily due to an increase in underwriting profits and growth in investment income in the international operations. For the first six months of 1996, net income was $5.67 per share, compared with $4.78 per share for the same period in 1995. Included in net income were after-tax realized gains of $.44 per share in the first six months of 1996, compared with $.26 per share in 1995. Due to the reporting of international operations on a quarter lag, the results for the first six months of 1996 include six months of income from operations for Cologne Re and the related joint-venture company GR-CK, compared to only three months of income for the same period in 1995. Consolidated net premiums written for the second quarter of 1996 were $1,838 million, an increase of 1.6 percent from $1,809 million in 1995. Consolidated net premiums written for the first six months of 1996 were $3,299 million, compared with $2,815 million in 1995. United States property/casualty premiums written were $690 million in the second quarter of 1996, compared with $704 million in 1995, a decrease of 2.0 percent. A large quota share treaty contract that was not renewed in 1996 resulted in a decrease of approximately $35 million of net premiums written in the second quarter as compared with 1995. Excluding the impact of this contract, total United States property/casualty premiums grew 3.1 percent. The international property/casualty subsidiaries' net premiums written were $889 million in the second quarter of 1996, compared to $885 million for the same period in 1995. Net premiums written for the life/health segment, which consists of Cologne Re's United States and international life/health operations, were $259 million in the second quarter of 1996, an increase of $39 million from the comparable amount in 1995. This increase was primarily due to growth in the United States' individual life and group medical portfolios and growth in France, Spain and Australia. Consolidated pretax net investment income was $288 million in the second quarter of 1996, compared with $255 million in 1995. Net investment income for the United States property/casualty operations of $172 million in the second quarter of 1996, declined compared with $176 million in the second quarter of 1995 due principally to the effect of tax- exempt bond calls, the reallocation of investments from taxable to tax-exempt bonds, and the repurchase of common shares. Net investment income for the international property/casualty operations was $97 million in the second quarter of 1996, compared with $61 million in the second quarter of 1995. Net investment income for the life/health operations was $13 million in the second quarter of 1996 and 1995. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The consolidated effective tax rate was 23.1 percent for the second quarter of 1996, compared with 20.8 percent in the second quarter of 1995. The consolidated effective tax rate for the first six months of 1996 was 24.1 percent, compared to 18.7 percent in 1995. The increase in the consolidated effective tax rate was the result of an increase in the proportion of the Corporation's income earned by its international subsidiaries in higher tax rate jurisdictions. The Corporation's net cash flow from consolidated operations was $855 million in the first six months of 1996, compared to $655 million in the same period in 1995. Cash flows from operations for the United States property/casualty operations were $350 million and $460 million in the first six months of 1996 and 1995, respectively. The financial services operations had net cash flows from operations of $109 million in the first six months of 1996, compared to $3 million in the first six months of 1995. The international property/casualty and life/health operations had cash flow from operating activities of $396 million for the first six months of 1996, compared with $192 million in 1995. At June 30, 1996, total consolidated assets were $37,813 million, compared with $35,946 million at December 31, 1995. The growth in total assets was due to increases of $1,385 million in the financial services segment, $675 million in the international property/casualty and life/health operations and a reduction of $193 million in the United States property/casualty operations. The increase in the financial services assets primarily relates to the purchase of investment securities to hedge open swap positions. The growth in the assets of the international property/casualty and life/health operations was due to operating cash flow and investment appreciation. The decrease in the United States property/casualty assets was primarily the result of a decline in the unrealized appreciation of the bond portfolio and repurchases of the Corporation's common stock, partially offset by an increase in the unrealized appreciation of the equity portfolio. During the first six months of 1996, total invested assets increased by $1,252 million to $24,746 million. The growth in invested assets was due to increases of $1,026 million in the financial services segment, $304 million in the international property/casualty and life/health operations and a decrease of $78 million in the United States property/casualty operations. The consolidated gross liability for claims and claim expenses for property/casualty operations was $14,701 million at June 30, 1996, an increase of $449 million over the year-end 1995 liability. The asset for reinsurance recoverable on unpaid claims was $2,584 million at June 30, 1996, compared to $2,514 million at December 31, 1995. At June 30, 1996, the gross liability for claims and claim expenses and the related asset for reinsurance recoverables include $1,925 million and $634 million, respectively, for environmental and latent injury claims. These amounts include provisions for both reported and incurred but not reported claims. Common stockholders' equity at June 30, 1996 was $6,297 million, a decrease of 4.4 percent from the $6,587 million at December 31, 1995. The decrease in common stockholders' equity during the first six months of 1996 was principally the result of net income of $461 million offset by common share repurchases of $547 million, a decrease in after-tax unrealized investment gains of $110 million, unrealized foreign currency translation losses of $34 million and common and preferred stock dividends of $86 million. On a per share basis, common stockholders' equity decreased slightly from $80.22 at December 31, 1995 to $80.15 at June 30, 1996. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Dividends paid to common stockholders were $81 million and $80 million in the first six months of 1996 and 1995, respectively. The Corporation repurchased 3,755,300 shares of common stock during the first six months of 1996 for aggregate consideration of $547 million, which equates to an average cost of $145.71 per share. On June 12, 1996, the Corporation's Board of Directors approved a new repurchase program for $500 million. In addition to specific repurchase programs, the Corporation has standing authority to repurchase shares in anticipation of share issuances under various compensation plans. Since the inception of the repurchase program in 1987, the Corporation has repurchased 25,899,800 common shares for total consideration of $2,145 million. During the second quarter of 1995, Cologne Re completed a rights offering that raised DM 437 million ($317 million at the June 30, 1995 exchange rate), which increased its capital under United States generally accepted accounting principles by 62.9 percent over the amount reported at December 31, 1994. In connection with Cologne Re's rights offering, GR-CK subscribed for its pro rata share, approximately DM 297 million ($215 million at the June 30, 1995 exchange rate), of the offering. In addition, the Corporation has purchased through June 30, 1996 an additional 80,523 ordinary and 64,440 preference shares of Cologne Re for aggregate consideration of $77 million. These purchases maintained GR-CK's 66.3 percent ownership interest of Cologne Re and, in addition, gave the Corporation a direct interest of 7.8 percent in Cologne Re, bringing the Corporation's total consolidated interest to 74.1 percent at June 30, 1996. The Corporation's financial statements include the additional percentage ownership in Cologne Re. At June 30, 1996, the Corporation had $150 million of senior debt outstanding which matures in September 2009. This debt is rated AAA by Standard and Poor's Corporation and Aa1 by Moody's Investors Services. Subsequent to the Corporation's announcement to acquire National Re, these senior-debt ratings were placed on credit watch. At June 30, 1996, $225 million of short-term commercial paper was outstanding. Commercial paper offered by the Corporation is rated A1+ by Standard & Poor's Corporation and Prime 1 by Moody's Investors Service. On July 31, 1996, the Corporation increased its credit facility to $1.2 billion, of which $800 million is committed by a group of 24 banks for five years and $400 million for 364 days. The lines of credit provide the Corporation with support for its commercial paper program and enhance the Corporation's financial flexibility. The Corporation has not borrowed against its credit facilities to date. United States Property/Casualty Second Quarter Year-to-date (in millions) 1996 1995 1996 1995 Income before income taxes $175 $204 $365 $392 Pretax realized gains (3) 26 7 38 Income before income taxes and realized gains $178 $178 $358 $354 Net premiums written $690 $704 $1,378 $1,389 Net underwriting gain 6 9 14 1 Net investment income 172 176 340 355 Combined underwriting ratio 99.2% 99.0% 99.1% 99.3% Operating cash flow $75 $149 $350 $460 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Pretax income for the United States property/casualty operations, excluding realized gains, was substantially unchanged in the second quarter of 1996, as compared to the second quarter of 1995, but increased 1.1 percent for the first six months of 1996. The $4 million increase in pretax income excluding realized gains for the first six months was primarily due to improvement of $13 million in the underwriting result, which was partly offset by a decline in investment income and other revenues. In the second quarter of 1996, the GAAP combined underwriting ratio for the United States property/casualty operations was 99.2 percent, compared with 98.8 percent for the second quarter of 1995. The GAAP combined ratio for the first six months of 1996 was 99.1 percent, compared with 100.0 percent for the first six months of 1995 and 99.6 percent for the full-year 1995. Net premiums written for the United States property/casualty operations were $690 million in the second quarter of 1996 and $1,378 million in the first six months of 1996, representing a decline of 2.0 percent and 0.8 percent from the comparable 1995 amounts. Net premiums written in 1996 were adversely impacted in the second quarter by the nonrenewal of a large quota share treaty which resulted in a decrease in net premiums written of approximately $35 million in the second quarter of 1996 and $75 million for the first six months of 1996. Adjusting for the nonrenewal of this treaty, United States property/casualty net premiums grew by 3.1 percent in the quarter and 4.9 percent for the first six months of 1996. Net premiums written by General Reinsurance Corporation, excluding the nonrenewal of the quota share contract, increased by 1.3 percent during the quarter and 3.6 percent year-to-date. These increases reflect a lower rate of growth in the United States property/casualty operations than experienced in the prior three years. The reduced growth rate results from an increasingly competitive pricing environment in both the primary insurance and reinsurance markets, where there are fewer attractive, new business opportunities that would meet the Corporation's underwriting standards. For the General Star companies, which write primary and excess specialty insurance, net premiums written increased by 16.9 percent and 15.9 percent for the quarter and year-to-date. For the Genesis operations, which provide direct excess insurance, net premiums written increased by 12.6 percent for the first six months of 1996 compared to the same period in 1995. Pretax investment income for the United States property/casualty operations decreased 2.3 percent compared to the second quarter of 1995 and 4.2 percent year-to-date. On an after-tax basis, net investment income declined slightly from $153 million to $147 million during the quarter. Average yields for the United States fixed income portfolio as of June 30, 1996 declined in various sectors as compared to June 30, 1995; tax-exempt securities' average yield declined 58 basis points, short-term funds declined 43 basis points and common equities fell 61 basis points. The overall annualized pretax yield on the United States invested asset portfolio was 5.4 percent in the first six months of 1996, compared with 5.9 percent in the same period in 1995. The pretax and after-tax yield in the first six months of 1996 on the segment's fixed maturity portfolio was 6.6 percent and 5.6 percent, respectively, compared with 7.1 percent and 5.9 percent, respectively, in the same period in 1995. During the first six months of 1996, the Corporation had approximately $286 million of calls and maturities on grandfathered tax-exempt bonds. These bonds had an average yield of approximately 8.0 percent and the proceeds from the calls were reinvested at an average yield of approximately 5.6 percent. In addition, based on the Corporation's current investment portfolio and the current yield curve, the Corporation presently anticipates 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) additional calls during 1996 of approximately $240 million of grandfathered tax-exempt bonds with an average yield of approximately 7.8 percent, which will adversely affect average portfolio yields and investment income. The gross liability for claims and claim expenses for the United States property/casualty operations was $9,612 million at June 30, 1996, an increase of $256 million, or 2.7 percent, over the year-end 1995 liability. The asset for reinsurance recoverable on unpaid claims was $2,053 million at June 30, 1996, compared to $1,971 million at December 31, 1995. At June 30, 1996, total assets of the United States property/casualty operations were $17,227 million, compared with $17,420 million at December 31, 1995. International Property/Casualty Second Quarter Year-to-date (in millions) 1996 1995 1996 1995 Income before income taxes and minority interest $105 $30 $220 $50 Pretax realized gains (losses) 33 (4) 69 (9) Income before income taxes, minority interest and realized gains $72 $34 $151 $59 Net premiums written $889 $885 $1,411 $1,206 Net underwriting loss (18) (38) (29) (23) Net investment income 97 61 196 72 Combined underwriting ratio 102.6% 104.5% 102.2% 101.6% Operating cash flow $181 $220 $396 $192 The international property/casualty operations' income before income taxes, minority interest and realized gains increased 111.8 percent for the second quarter of 1996, compared with the second quarter of 1995 and 155.9 percent for the first six months of 1996 compared with the first six months of 1995. For the second quarter of 1996, income for the international property/casualty operations increased as compared to 1995's second quarter due to improved underwriting results and increased investment income due to the growth in the segment's investment portfolio. This segment's year-to-date figures for 1995 include only one quarter of Cologne Re's results due to the quarter reporting lag. International net premiums written were $889 million in the second quarter of 1996, compared with $885 million in the second quarter of 1995. Within the international property/casualty segment, treaty volume, which is written mostly on a proportional basis, was essentially level with last year, reflecting an increasingly competitive environment in Europe, including Germany. Excess-of-loss property and casualty individual risk facultative business has experienced higher growth rates than proportional business in 1996. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Pretax investment income for the international property/casualty operations was $97 million for the second quarter of 1996, compared with $61 million in the same period of 1995. The increase in investment income is due to greater investment income from Cologne Re and GR-CK, as well as growth in the wholly owned subsidiaries' investment portfolio. The international property/casualty segment's net investment income for the first six months of 1996 increased by $124 million. This is primarily due to the inclusion of six months of investment income for Cologne Re and GR-CK in 1996 compared to only three months in 1995. The overall annualized pretax yield on the invested asset portfolio was 6.0 percent in the first six months of 1996, compared with 5.4 percent in the same period in 1995. At June 30, 1996, total assets of the international property/casualty operations were $13,790 million, compared with $13,115 million at December 31, 1995. The increase in total assets in 1996 was due to the continued growth of the international operations' underwriting portfolios and unrealized appreciation of the investment portfolios. The gross liability for claims and claim expenses was $5,089 million at June 30, 1996 compared with $4,896 million at December 31, 1995. The asset for reinsurance recoverable on unpaid claims was $531 million at June 30, 1996, compared to $544 million at December 31, 1995. Financial Services Second Quarter Year-to-date (in millions) 1996 1995 1996 1995 Income before income taxes and minority interest $24 $36 $52 $46 Pretax realized gains - 2 2 3 Income before income taxes, minority interest and realized gains $24 $34 $50 $43 Total revenues $62 $79 $127 $117 Net investment income 6 5 10 9 Financial services operations include the Corporation's derivative products, investment management, insurance brokerage and management, reinsurance brokerage, underwriting services and real estate management subsidiaries. In August 1995, the Corporation acquired all of the outstanding stock of New England Asset Management, which provides investment management services primarily for insurance companies. Through the combination of this and existing investment management operations, the Corporation has 51 insurance company clients and approximately $10 billion of client assets under management. In the second quarter of 1996, the financial services segment had total revenues of $62 million, down 21.5 percent from $79 million in the second quarter of 1995. For the first six months, total revenues increased from $117 million in 1995 to $127 million in 1996, an increase of 8.5 percent. The decline in revenue in the second quarter was principally attributable to GRFP, which had a difficult comparison with 1995's excellent second quarter. Pretax income of both GRFP and the other operations in the financial services segment also grew during the six month period. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) At June 30, 1996, total assets of the financial services operations were $6,797 million, compared with $5,411 million at December 31, 1995. GRFP's market exposures arising from derivative products are managed through the purchase and sale of government securities, futures and forward contracts or offsetting derivatives transactions. The amount and nature of the financial services segment's assets and liabilities are significantly affected by the risk management strategies utilized by GRFP to reduce market, currency rate, and interest rate risk. The purchase of government securities financed through collateralized repurchase agreements and the sale of government securities, whose proceeds are invested in reverse repurchase agreements, may cause short-term fluctuations in GRFP's assets and liabilities. The use of these transactions to offset GRFP's market exposures will increase or decrease the amount of GRFP's trading account assets or liabilities. While these risk management strategies may have a significant impact on the amount of assets and liabilities, they generally do not have a material effect on the Corporation's results from operations or common stockholders' equity. During the first six months of 1996, total invested assets of the financial services operations increased $1,026 million to $3,504 million. Securities purchased under agreements to resell, which represent short-term liquid investment of excess funds, increased $91 million in the first six months of 1996 to $157 million. Securities sold under agreements to repurchase, which are short-term borrowings of funds, increased $1,344 million in the first six months of 1996 to $2,607 million. Securities sold, but not yet purchased, which decreased by $46 million during 1996, represent obligations of the Corporation to deliver the specified security at the contracted price, thereby creating a liability to purchase the security in the market at prevailing prices. Accordingly, the Corporation's ultimate obligation to satisfy the sale of securities sold, but not yet purchased may exceed the amount recognized in the balance sheet. The Corporation controls this risk and other market risks associated with its derivative products operations through, among other techniques, strict market position limits, marking the trading portfolio to market on a daily basis, ongoing monitoring and analysis of its market exposures, and periodically stress testing the portfolio. Life/Health Second Quarter Year-to-date (in millions) 1996 1995 1996 1995 Income before income taxes and minority interest $16 $15 $30 $15 Pretax realized gains - - 2 - Income before income taxes, minority interest and realized gains $16 $15 $28 $15 Net premiums written $259 $220 $510 $220 Net underwriting income 4 1 6 1 Net investment income 13 13 27 13 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) This segment includes the United States and international life/health operations of Cologne Re. Similar to Cologne Re's property/casualty business, this segment's year-to-date figures for 1995 include only one quarter of results due to the quarter reporting lag. Pretax income for the second quarter of $16 million increased modestly from the $15 million in the comparable quarter of 1995, principally due to improved underwriting results and flat investment income. Life/health premiums written were $259 million for the second quarter of 1996, compared with $220 million in the second quarter of 1995. The increase was due to growth in the United States' individual life and group medical portfolios and growth in business written in France, Spain and Australia. The liability for policy benefits for life/health contracts was $2,378 million at June 30, 1996, compared with $2,263 million at December 31, 1995. The asset for reinsurance recoverable on unpaid losses was $228 million at June 30, 1996, compared to $201 million at December 31, 1995. Cologne Re manages its invested assets and total assets on an aggregate basis for the life/health and property/casualty business and does not presently disaggregate these accounts by segment. The invested asset and total asset disclosures in the international property/casualty segment include all of Cologne Re's invested assets. 1 PART II. OTHER INFORMATION Item 1. Legal Proceedings In May 1996, a criminal trial commenced against United States Aviation Underwriters, Inc. ("USAU"), a subsidiary of the Corporation, and John V. Brennan, former Chairman and Chief Executive Officer of USAU, in the United States District Court for the Eastern District of New York. The criminal indictment alleged mail fraud in connection with the allocation of insurance claims between USAir and Ogden-Allied Corporation, arising out of the 1987 crash of a domestic USAir flight. On July 1, 1996, Mr. Brennan and USAU were found guilty. The Corporation plans to file motions seeking to overturn the verdict and also plans to file an appeal with the United States Circuit Court of Appeals. It is not possible to estimate the liability to the Corporation if the verdict of guilty is not overturned on appeal, but the effect of such an event, net of existing provisions, is not expected to be material to the financial position, results of operations or cash flows of the Corporation. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit #11 - Statement re: computation of earnings per share (b) Reports on Form 8-K A report on form 8-K dated July 1, 1996 was filed regarding the Corporation's agreement to purchase all of the outstanding shares of National 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. GENERAL RE CORPORATION (Registrant) Date: August 13, 1996 JOSEPH P. BRANDON Joseph P. Brandon Vice President and Chief Financial Officer (Principal Financial Officer) Date: August 13, 1996 ELIZABETH A. MONRAD Elizabeth A. Monrad Vice President and Treasurer (Principal Accounting Officer) 18 GENERAL RE CORPORATION COMPUTATION of EARNINGS PER SHARE (in millions, except share data) Three Months Ended Six Months Ended June 30, June 30, Earnings Per Share of Common Stock 1996 1995 1996 1995 Net income (applicable to common stock) (a) $222 $212 $456 $392 Average number of common shares outstanding 79,254,137 81,996,173 80,355,796 81,957,703 Net income per share $2.80 $2.58 $5.67 $4.78 (a) After deduction of preferred stock dividends of $3 million and $5 million for the three and six months ended June 30, 1996 and 1995. (b) Fully diluted earnings per share are not reported because the effect of potentially dilutive securities was not significant. 19 EX-27 2
7 3-MOS DEC-31-1996 JUN-30-1996 18355 0 0 4035 0 0 24746 407 54 439 37813 12117 1993 2150 0 379 1 0 51 6246 37813 1678 288 30 78 1188 388 177 320 74 246 0 0 0 224 2.80 0 0 0 0 0 0 0 0
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