-----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, C696RWhBgutjM5bGTbD4j8em8ZidMX2gCGAwkjgkjXzigKGIr3pwCKwjcIPaNGms QBItM8hYLtY9HdA9Uw9H8A== 0000317745-96-000008.txt : 19961118 0000317745-96-000008.hdr.sgml : 19961118 ACCESSION NUMBER: 0000317745-96-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 96666672 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 November 14, 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 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, as of the latest practicable date. Class Outstanding at September 30, 1996 Common Stock, $.50 par value 78,323,425 Shares GENERAL RE CORPORATION INDEX PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements Consolidated Statements of Income Three and nine months ended September 30, 1996 and 1995 3 Consolidated Balance Sheets September 30, 1996 and December 31, 1995 4 Consolidated Statements of Common Stockholders' Equity Nine months ended September 30, 1996 and 1995 5 Consolidated Statements of Cash Flows Nine months ended September 30, 1996 and 1995 6 Notes to Consolidated Interim Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 11 - Statement Re: Computation of Per Share Earnings 18 (b) Reports on Form 8-K 19 2 GENERAL RE CORPORATION Consolidated Statements of Income (in millions, except per share data)
(Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 Premiums and other revenues Net premiums written Property/casualty $1,390 $1,460 $4,179 $4,055 Life/health 275 235 785 456 Total net premiums written $1,665 $1,695 $4,964 $4,511 Net premiums earned Property/casualty $1,378 $1,427 $4,096 $3,727 Life/health 276 233 775 448 Total net premiums earned 1,654 1,660 4,871 4,175 Net investment income 302 269 875 717 Other revenues 80 83 226 224 Net realized gains (losses) on investments (14) (8) 66 24 Total revenues 2,022 2,004 6,038 5,140 Expenses Claims and claim expenses 1,002 1,035 2,915 2,696 Life/health benefits 212 169 575 317 Acquisition costs 345 376 1,089 946 Other operating costs and expenses 185 148 514 402 Total expenses 1,744 1,728 5,093 4,361 Income before income taxes and minority interest 278 276 945 779 Income tax expense 75 67 236 161 Income before minority interest 203 209 709 618 Minority interest 19 10 64 22 NET INCOME $184 $199 $645 $596 Share Data Net income per common share $2.31 $2.39 $8.00 $7.17 Dividends per common share $0.51 $0.49 $1.53 $1.47 Average shares outstanding 78.4 82.2 79.7 82.0
See notes to the consolidated interim financial statements. 3 GENERAL RE CORPORATION Consolidated Balance Sheets (in millions, except share data)
(Unaudited) Assets Sept. 30, 1996 Dec. 31, 1995 Investments: Fixed maturities: Available-for-sale (cost: $15,175 in 1996; $14,342 in 1995) $15,690 $15,225 Trading (cost: $3,577 in 1996; $2,316 in 1995) 3,582 2,317 Preferred stocks, at fair value (cost: $424 in 1996; $453 in 1995) 429 472 Common stocks, at fair value (cost: $2,061 in 1996; $1,910 in 1995) 3,721 3,234 Short-term investments, at amortized cost which approximates fair value 1,632 1,449 Other invested assets 721 797 Total investments 25,775 23,494 Cash 373 258 Accrued investment income 391 390 Accounts receivable 2,562 2,368 Funds held by reinsured companies 447 497 Reinsurance recoverable 2,908 2,794 Deferred acquisition costs 439 434 Securities purchased under agreements to resell 15 66 Trading account assets 2,954 2,434 Other assets 1,479 1,528 Total assets $37,343 $34,263 Liabilities Claims and claim expenses $14,768 $14,252 Policy benefits for life/health contracts 737 580 Unearned premiums 2,002 1,913 Other reinsurance balances 3,040 3,056 Notes payable and commercial paper 304 155 Income taxes 683 634 Securities sold under agreements to repurchase 3,074 1,263 Securities sold but not yet purchased 258 614 Trading account liabilities 3,272 2,627 Other liabilities 1,560 1,357 Minority interest 1,155 1,224 Total liabilities 30,853 27,675 Cumulative convertible preferred stock (shares issued: 1,713,890 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 657 635 Unrealized appreciation of investments, net of deferred income taxes 1,464 1,468 Currency translation adjustments, net of deferred income taxes (63) (11) Retained earnings 6,503 5,986 Less common stock in treasury, at cost (shares held: 24,503,919 in 1996 and 20,714,069 in 1995) (2,123) (1,542) Total common stockholders' equity 6,489 6,587 Total liabilities, cumulative convertible preferred stock and common stockholders' equity $37,343 $34,263
See notes to the consolidated interim financial statements. 4 GENERAL RE CORPORATION Consolidated Statements of Common Stockholders' Equity (in millions)
(Unaudited) Nine Months Ended September 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 18 21 Other 4 5 End of period 657 630 Unrealized appreciation of investments, net of deferred income taxes: Beginning of period 1,468 421 Change for the period (17) 1,180 Applicable income taxes 13 (438) End of period 1,464 1,163 Currency translation adjustments, net of deferred income taxes: Beginning of period (11) (20) Change for the period (52) 12 End of period (63) (8) Retained earnings: Beginning of period 5,986 5,330 Net income 645 596 Dividends paid on common stock (121) (121) Dividends paid on preferred stock, net of income taxes (8) (8) Other 1 2 End of period 6,503 5,799 Common stock in treasury: Beginning of period (1,542) (1,527) Cost of shares acquired during period (590) - Issued under stock option and other incentive arrangements 9 20 End of period (2,123) (1,507) Total common stockholders' equity $6,489 $6,128
See notes to the consolidated interim financial statements. GENERAL RE CORPORATION Consolidated Statements of Cash Flows (in millions)
(Unaudited) Nine months ended September 30, 1996 1995 Cash flows from operating activities Net income $645 $596 Adjustments to reconcile net income to net cash provided by operating activities: Change in claim and claim expense liabilities 516 1,446 Change in policy benefits for life/health contracts 157 107 Change in reinsurance recoverable (114) (230) Change in unearned premiums 144 378 Amortization of acquisition costs 1,089 946 Acquisition costs deferred (1,066) (1,060) Trading account activities Change in trading account securities (1,796) (1,608) Securities purchased under agreements to resell 51 622 Securities sold under agreements to repurchase 1,811 415 Change in other trading balances 58 597 Other changes in assets and liabilities (81) (1,036) Net realized gains on investments (66) (24) Net cash from operating activities 1,348 1,149 Cash flows from investing activities Fixed maturities: available-for-sale Purchases (6,948) (4,644) Calls and maturities 657 473 Sales 5,128 3,377 Equity securities: Purchases (842) (626) Sales 812 559 Net purchases of short-term investments 112 (263) Net sales (purchases) of other invested assets 175 (120) Net cash used in investing activities (906) (1,244) Cash flows from financing activities Commercial paper (repayment) borrowing, net 150 (31) Change in contract deposits 213 105 Cash dividends paid to common stockholders (121) (121) Acquisition of treasury stock (596) - Other 27 140 Net cash used in financing activities (327) 93 Change in cash 115 (2) Cash, beginning of period 258 242 Cash, end of period $373 $240
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 two quarters 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 $174 million and $160 million in the nine months ended September 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 nine months ended September 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 $365 $325 - - $230 - Assumed 4,471 4,409 $873 $863 3,215 $651 Ceded (657) (638) (88) (88) (530) (76) Net $4,179 $4,096 $785 $775 $2,915 $575 1995 Direct $298 $263 - - $145 - Assumed 4,569 4,266 $508 $500 3,167 $370 Ceded (812) (802) (52) (52) (616) (53) Net $4,055 $3,727 $456 $448 $2,696 $317
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 September 30, 1996 and December 31, 1995, respectively. 7 GENERAL RE CORPORATION NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued) 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 78,423,243 and 79,706,910 for the three and nine months ended September 30, 1996, and 82,180,498 and 82,032,784 for the three and nine months ended September 30, 1995, respectively. 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 nine months of 1996. 8. Acquisitions and Dispositions - On July 1, 1996 the Corporation reached a definitive agreement to acquire all of the outstanding shares of National Re Corporation ("National Re"). At the closing on October 3, 1996, pursuant to the merger agreement, each shareholder of National Re common stock received, depending upon the shareholder's election, either $53 in cash or .37262 shares of the Corporation's common stock for each National Re share. Approximately 35 percent of National Re shareholders elected to receive cash, and the remaining 65 percent received shares of the Corporation's common stock. Upon closing of the transaction, the Corporation issued approximately 4,024,000 shares of common stock as a result of these elections and paid cash consideration of approximately $308 million. On July 1, 1996, ACE Limited finalized the acquisition of Tempest Reinsurance Company Limited ("Tempest"). The Corporation received $216 million in cash in exchange for its 20.7 percent interest in Tempest, its sponsor stock options, and early termination of its underwriting services agreement with Tempest. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated Income from operations, excluding after-tax realized gains and losses, was $2.73 per share in the third quarter of 1996, an increase of 12.3 percent from the $2.43 per share earned in the comparable period in 1995. Net income for the third quarter of 1996 included after-tax realized losses of $.42 per share, compared with a loss of $.04 per share in the third quarter of 1995. In the third quarter of 1996, the improved results, excluding after-tax realized gains and losses, were primarily due to an increase in United States property/casualty underwriting profits and growth in investment income in both the United States and international operations. For the first nine months of 1996, net income was $8.00 per share, compared with $7.17 per share for the same period in 1995. Included in net income were after-tax realized gains of $.04 per share in the first nine months of 1996, compared to $.22 per share in 1995. Due to the reporting of international operations on a quarter lag, the results for the first nine months of 1996 include nine months of income for Cologne Re and the related joint- venture company GR-CK, compared to only six months of income for the same period in 1995. Consolidated net premiums written for the third quarter of 1996 were $1,665 million, a decrease of 1.8 percent from $1,695 million in 1995. Consolidated net premiums written for the first nine months of 1996 were $4,964 million, compared with $4,511 million in 1995. United States property/casualty premiums written in the third quarter of both 1996 and 1995 was $824 million. Premium volume was adversely affected by the non- renewal of a large quota share treaty contract in 1996 and a competitive pricing environment. These effects were partially offset by a new quota share contract written during the quarter which represented approximately 6.0 percent of the United States net premiums written in the third quarter of 1996. Excluding the impact of the non-renewed contract, total United States property/casualty premiums grew 12.7 percent. The international property/casualty subsidiaries' net premiums written were $566 million in the third quarter of 1996, compared to $636 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 $275 million in the third quarter of 1996, an increase of $40 million from the comparable amount in 1995. This increase was primarily due to growth in the United States' individual life and group health portfolios and growth in France, Spain and Australia. Consolidated pretax net investment income was $302 million in the third quarter of 1996, compared with $269 million in 1995. Net investment income for the United States property/casualty operations of $183 million in the third quarter of 1996 increased by $4 million as compared to $179 million in the third quarter of 1995. Net investment income for the international property/casualty operations was $96 million in the third quarter of 1996, compared with $72 million in the third quarter of 1995. Net investment income for the life/health operations was $17 million in third quarter of 1996 as compared to $13 million in the third quarter of 1995. The financial services segment's net investment income was $6 million and $5 million in the third quarter of 1996 and 1995, respectively. For the nine months ended September 30, after-tax investment gains of $3 million and $18 million were realized in 1996 and 1995, respectively. For the third quarter of 1996, realized losses after-tax and minority interest on investments were $33 million, compared to a loss of $4 million in the third quarter of 1995. After-tax realized losses for the third quarter of 1996 included $12 million from S&P futures contracts that were used to hedge a portion of the common equity portfolio. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The consolidated effective tax rate was 26.9 percent for the third quarter of 1996, compared with 24.2 percent in the third quarter of 1995. The consolidated effective tax rate for the first nine months of 1996 was 24.9 percent, compared to 20.6 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 $1,348 million in the first nine months of 1996, compared to $1,149 million in the same period in 1995. Cash flows from operations for the United States property/casualty operations were $664 million and $850 million in the first nine months of 1996 and 1995, respectively. The financial services operations had net cash flows from operations of $103 million in the first nine months of 1996, compared to $10 million in the first nine months of 1995. The international property/casualty and life/health operations had cash flow from operating activities of $581 million for the first nine months of 1996, compared with $289 million in 1995. At September 30, 1996, total consolidated assets were $37,343 million, compared with $34,263 million at December 31, 1995. The growth in total assets was due to increases of $265 million in the United States property/casualty operations, $660 million in the international property/casualty and life/health operations and $2,155 million in the financial services segment. The increase in the United States property/casualty assets was primarily the result of operating cash flow, partially offset by the repurchases of the Corporation's common stock. The growth in the assets of the international property/casualty and life/health operations was also due to operating cash flow. The increase in the financial services assets primarily relates to the purchase of investment securities to hedge open swap positions. During the first nine months of 1996, total invested assets increased by $2,281 million to $25,775 million. The growth in invested assets was due to increases of $276 million in the United States property/casualty operations, $473 million in the international property/casualty and life/health operations and $1,532 million in the financial services segment. The consolidated gross liability for claims and claim expenses for property/casualty operations was $14,768 million at September 30, 1996, an increase of $516 million over the year-end 1995 liability. The asset for reinsurance recoverable on unpaid claims was $2,567 million at September 30, 1996, compared to $2,514 million at December 31, 1995. At September 30, 1996, the gross liability for claims and claim expenses and the related asset for reinsurance recoverables include $1,881 million and $601 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 September 30, 1996 was $6,489 million, a decrease of 1.5 percent from the $6,587 million at December 31, 1995. The change in common stockholders' equity during the first nine months of 1996 was principally the result of net income of $645 million offset by common share repurchases of $590 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) million, an increase in unrealized foreign currency translation losses of $52 million and common and preferred stock dividends of $129 million. On a per share basis, common stockholders' equity increased from $80.22 at December 31, 1995 to $82.85 at September 30, 1996. Dividends paid to common stockholders were $121 million for the first nine months of 1996 and 1995. The Corporation repurchased 290,100 and 4,045,400 shares of common stock during the third quarter and first nine months of 1996 for aggregate consideration of $43 million and $590 million, respectively. 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 26,189,900 common shares for total consideration of $2,189 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 September 30, 1996 an additional 80,523 ordinary and 73,796 preference shares of Cologne Re for aggregate consideration of $84 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 8.3 percent in Cologne Re, bringing the Corporation's total consolidated interest to 74.6 percent at September 30, 1996. The Corporation's financial statements include the additional percentage ownership in Cologne Re. At September 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. At September 30, 1996, $150 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 for five years and $400 million for 364 days. The lines of credit are extended by a group of 24 banks and 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 (in millions) Third Quarter Year-to-date 1996 1995 1996 1995 Income before income taxes and realized gains $188 $176 $546 $530 Net premiums written 824 824 2,203 2,213 Net underwriting gain (loss) 6 (4) 20 (3) Net investment income 183 179 523 534 Combined underwriting ratio 99.2% 99.1% 99.1% 99.1% Operating cash flow $314 $390 $664 $850 11 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/losses, increased 6.9 percent in the third quarter of 1996, as compared to the same quarter of 1995, and increased 3.0 percent for the first nine months of 1996. The $16 million increase in pretax income excluding realized gains/losses for the first nine months was due to the improved underwriting results on traditional treaty business. In the third quarter of 1996, the GAAP combined underwriting ratio for the United States property/casualty operations was 99.2 percent, compared with 100.5 percent for the third quarter of 1995. The GAAP combined ratio for the first nine months of 1996 was 99.1 percent, compared with 100.1 percent for the first nine months of 1995 and 99.6 percent for the full-year 1995. Net premiums written for the United States property/casualty operations were $824 million in the third quarter of 1996 and $2,203 million in the first nine months of 1996, representing a decline of 0.5 percent for the first nine months from the comparable 1995 amounts. Net premiums written were adversely affected by a large quota share treaty contract that was not renewed in 1996, partially offset by a new quota share contract written during the third quarter of 1996. Adjusting for the non-renewal of the treaty contract, United States property/casualty net premiums grew by 12.7 percent in the quarter and 7.7 percent for the first nine months of 1996. Net premiums written by General Reinsurance Corporation, excluding the non-renewal of the quota share contract and the new quota share contract, increased by 6.1 percent year-to-date. This increases reflects 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 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 37.6 percent and 23.4 percent for the quarter and year- to-date. For the Genesis operations, which provide direct excess insurance, net premiums written increased by 10.4 percent and 11.7 percent for the third quarter and first nine months of 1996, respectively, compared to the same period in 1995. Pretax investment income for the United States property/casualty operations increased 2.2 percent compared to the third quarter of 1995 but declined 1.9 percent year-to-date. On an after-tax basis, net investment income increased 4.7 percent from $148 million to $155 million during the quarter. The overall annualized pretax yield on the United States property/casualty invested asset portfolio was 5.5 percent in the first nine months of 1996, compared with 5.9 percent in the same period in 1995. The annualized pretax and after-tax yield in the first nine months of 1996 on the segment's fixed maturity portfolio was 6.6 percent and 5.7 percent, respectively, compared with 7.6 percent and 6.3 percent, in the same period in 1995. During the first nine months of 1996, the Corporation had approximately $368 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 5.2 percent. In addition, based on the Corporation's current investment portfolio and the current yield curve, the Corporation presently anticipates 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) additional calls and maturities during 1996 of approximately $136 million of grandfathered tax-exempt bonds with an average yield of approximately 7.9 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 $9,695 million at September 30, 1996, an increase of $339 million, or 3.6 percent, over the year-end 1995 liability. The asset for reinsurance recoverable on unpaid claims was $2,027 million at September 30, 1996, compared to $1,971 million at December 31, 1995. At September 30, 1996, total assets of the United States property/casualty operations were $17,685 million, compared with $17,420 million at December 31, 1995. International Property/Casualty (in millions) Third Quarter Year-to-date 1996 1995 1996 1995 Income before income taxes, minority interest and realized gains $73 $59 $232 $121 Net premiums written 566 636 1,976 1,842 Net underwriting loss (12) (10) (41) (34) Net investment income 96 72 291 144 Combined underwriting ratio 101.9% 101.8% 102.0% 101.7% Operating cash flow $185 $97 $581 $289 The international property/casualty operations' income before income taxes, minority interest and realized gains increased 24.1 percent for the third quarter of 1996, compared with the third quarter of 1995 and 91.7 percent for the first nine months of 1996 compared with the first nine months of 1995. For the third quarter of 1996, income for the international property/casualty operations increased as compared to 1995's third quarter due to increased investment income related to the growth in the segment's investment portfolio. This segment's year- to-date figures are not comparable to 1995, since 1995 amounts include only two quarters of Cologne Re's results due to the quarter reporting lag. International net premiums written were $566 million in the third quarter of 1996, compared with $636 million in the third quarter of 1995, a decline of 11.0 percent. A significant portion of this decrease, approximately 7 percent, can be attributed to foreign exchange effects. In addition, treaty volume in the international property/casualty segment, which is written mostly on a proportional basis, declined in the third quarter of 1996 as compared to 1995, reflecting an increasingly competitive environment in Europe. Pretax investment income for the international property/casualty operations was $96 million for the third quarter of 1996, compared with $72 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 nine 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) months of 1996 increased by $147 million. This growth is primarily due to the inclusion of nine months of investment income for Cologne Re and GR-CK in 1996 compared to only six months in 1995. The overall annualized pretax yield on the invested asset portfolio was 5.9 percent in the first nine months of 1996. At September 30, 1996, total assets of the international property/casualty and life/health operations were $12,092 million, compared with $11,432 million at December 31, 1995. The gross liability for claims and claim expenses was $5,072 million at September 30, 1996 compared with $4,896 million at December 31, 1995. The asset for reinsurance recoverable on unpaid claims was $540 million at September 30, 1996, compared to $544 million at December 31, 1995. Life/Health (in millions) Third Quarter Year-to-date 1996 1995 1996 1995 Income before income taxes, minority interest and realized gains $12 $16 $40 $31 Net premiums written 275 235 785 456 Net underwriting income (1) 5 5 6 Net investment income 17 13 44 26 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 two quarters of results due to the quarter reporting lag. Pretax income for the third quarter of $12 million, decreased 21.2 percent from the $16 million in the comparable quarter of 1995, principally due to a decline in underwriting results from a few large mortality losses, partially offset by an increase in investment income. Life/health premiums written were $275 million for the third quarter of 1996, compared with $235 million in the third quarter of 1995. The increase was due to growth in the United States' individual life and group health portfolios and growth in business written in France, Spain and Australia. The liability for policy benefits for life/health contracts was $737 million at September 30, 1996, compared with $580 million at December 31, 1995. The asset for reinsurance recoverable on unpaid losses was $231 million at September 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. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Financial Services (in millions) Third Quarter Year-to-date 1996 1995 1996 1995 Income before income taxes, minority interest and realized gains $24 $38 $74 $81 Total revenues (excluding realized gains) 60 74 185 188 Net investment income 6 5 17 14 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. In the third quarter of 1996, the financial services segment had total revenues of $60 million, down 18.1 percent from $74 million in the third quarter of 1995. For the first nine months, total revenues declined from $188 million in 1995 to $185 million in 1996, an decrease of 1.4 percent. The decline in revenue in the third quarter and first nine months was principally attributable to GRFP, which had lower trading revenues during the period. At September 30, 1996, total assets of the financial services operations were $7,566 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 nine months of 1996, total invested assets of the financial services operations increased $1,532 million to $4,010 million. Securities purchased under agreements to resell, which represent short-term liquid investment of excess funds, decreased $51 million in the first nine months of 1996 to $15 million. Securities sold under agreements to repurchase, which are short-term borrowings of funds, increased $1,811 million in the first nine months of 1996 to $3,074 million. Securities sold, but not yet purchased, which decreased by $356 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. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Safe Harbor Disclosure In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"), the Corporation sets forth below cautionary statements identifying important factors that could cause the Corporation's actual results to differ materially from those which might be projected, forecast, or estimated in the Corporation's forward-looking statements, as defined in the Act, made by or on behalf of the Corporation in press releases, written statements or documents filed with the Securities and Exchange Commission, or in its communications and discussions with shareholders and analysts in the normal course of business via meetings, phone calls and conference calls. Such statements may Include, but are not limited to, projections of premium revenue, investment income, other revenue, losses, expenses, earnings (including earnings per share), cash flows, plans for future operations, common shareholders' equity, financing needs, capital plans, dividends, plans relating to products or services of the Corporation, and estimates concerning the effects of litigation or other disputes, as well as assumptions for any of the foregoing. Forward-looking statements are inherently subject to risks and uncertainties. The Corporation cautions that factors which may cause the Corporation's results to differ materially from such forward-looking statements include, but are not limited to, the following: 1) Changes in the level of competition in the United States and international reinsurance or primary insurance markets that adversely impact the volume or profitability of the Corporation's property/casualty or life/health businesses. These changes include, but are not limited to, the intensification of price competition, the entry of new competitors, existing competitors exiting the market, and the development of new products by new and existing competitors; 2) Changes in the demand for reinsurance, including changes in ceding companies' retentions, and changes in the demand for excess and surplus lines insurance coverages in the United States; 3) The ability of the Corporation to execute its growth strategies in its property/casualty, life/health and financial services operations; 4) The ability of the Corporation to both retain a significant portion of National Reinsurance Corporation's book of business and realize certain synergies in connection with its acquisition of National Re Corporation; 5) Catastrophe losses in the Corporation's United States or International property/casualty businesses; 6) Adverse development on property/casualty claim and claim expense liabilities related to business written in prior years, including, but not limited to, evolving case law and its effect on environmental and other latent injury claims, changing government regulations, newly identified toxins, newly reported claims, new theories of liability, or new insurance and reinsurance contract interpretations; 7) Changes in inflation that affect the profitability of the Corporation's current property/casualty and life/health businesses or the adequacy of its property/casualty claim and claim expense liabilities and life/health policy benefit liabilities related to prior years' business; 8) Changes in the Corporation's property/casualty and life/health businesses' retrocessional arrangements; 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 9) Lower than estimated retrocessional or reinsurance recoveries on unpaid losses, including, but not limited to, losses due to a decline in the creditworthiness of the Corporation's retrocessionaires or reinsurers; 10) Increases in interest rates, which cause a reduction in the market value of the Corporation's interest rate sensitive investments, including, but not limited to, its fixed income investment portfolio, and its common shareholders' equity; 11) Decreases in interest rates causing a reduction of income earned on new cash flow from operations and the reinvestment of the proceeds from sales, calls or maturities of existing investments; 12) Declines in the value of the Corporation's common equity investments; 13) Changes in mortality or morbidity levels that affect the Corporation's life/health business; 14) Changes in the demand for the Corporation's financial services operations' products, including derivatives offered by General Re Financial Products ("GRFP"); 15) Credit losses on the Corporation's investment portfolio. Credit and market losses on GRFP's portfolio of derivatives and other transactions; 16) Adverse results in litigation matters, including, but not limited to, litigation related to environmental, asbestos and other potential mass tort claims; and 17) Gains or losses related to foreign currency exchange rate fluctuations. In addition to the factors outlined above that are directly related to the Corporation's businesses, the Corporation is also subject to general business risks, including, but not limited to, adverse state, federal or foreign legislation and regulation, adverse publicity or news coverage, changes in general economic factors, and the loss of key employees. 17 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 two companies, arising out of the 1987 crash of a domestic 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 of the convictions with the United States Circuit Court of Appeals. It is not possible to estimate the liability to the Corporation if the verdict is not overturned on appeal, but the effect of such an event 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) Exhibit 11 - Statement Re: Computation of Per Share Earnings Three Months Ended Nine Months Ended September 30, September 30, Earnings Per Share of Common Stock (in millions, except share data) 1996 1995 1996 1995 Net income (applicable to common stock) (1) $181 $196 $637 $588 Average number of common shares outstanding 78,423,243 82,180,498 79,706,910 82,032,784 Net income per share (2) $2.31 $2.39 $8.00 $7.17 (1) After deduction of preferred stock dividends of $3 million and $8 million for the three and nine months ended September 30, 1996 and 1995. (2) Fully diluted earnings per share are not reported because the effect of potentially dilutive securities was not significant. 18 OTHER INFORMATION (continued) (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. The report contains unaudited pro forma consolidated statements of income for the year ended December 31, 1995 and quarter ended March 31, 1996 and an unaudited pro forma consolidated balance sheet at March 31, 1996. A report on Form 8-K dated October 3, 1996 was also filed. The report filed by the Corporation announced the completion of the merger with National Re. A report on Form 8-K dated November 6, 1996 was filed in connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The report contains risk factors which may cause the Corporation's results to differ materially from the forward- looking statements made by the 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: November 14, 1996 JOSEPH P. BRANDON Joseph P. Brandon Vice President and Chief Financial Officer (Principal Financial Officer) Date: November 14, 1996 ELIZABETH A. MONRAD Elizabeth A. Monrad Vice President and Treasurer (Principal Accounting Officer) 19 EX-27 2
7 3-MOS DEC-31-1996 SEP-30-1996 19272 0 0 4150 0 0 25775 373 111 439 37343 12201 2002 506 0 304 1 0 51 6438 37343 1654 302 (14) 80 1214 345 185 278 75 203 0 0 0 184 2.31 0 0 0 0 0 0 0 0
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