-----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, CJ+OSr5YNmHcMQ3Sb+Fmh6HGpvJPpg5qwClrGd5I0ZqInrur2rWiXfujr+l2gX+U yVr7tJ7ziDqvtdhDnALQIA== 0000950130-97-001155.txt : 19970325 0000950130-97-001155.hdr.sgml : 19970325 ACCESSION NUMBER: 0000950130-97-001155 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970324 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08026 FILM NUMBER: 97561324 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-K405 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1- 8026 [LOGO] GENERAL RE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 06-1026471 (STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 695 EAST MAIN STREET STAMFORD, CONNECTICUT (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 06904-2351 (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 328-5000 SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $.50 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value on March 1, 1997 of the voting stock held by nonaffiliates of the registrant was $13,676 million. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT MARCH 1, 1997 ----- ---------------------------- Common Stock, $.50 par value 80,971,987 Certain information required by Items 10, 11 and 12 of Form 10-K is incorporated by reference into Part III hereof from the registrant's proxy statement which will be filed with the Securities and Exchange Commission within 120 days of the close of the registrant's fiscal year ended December 31, 1996. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- GENERAL RE CORPORATION TABLE OF CONTENTS PART I.
PAGE ---- ITEM 1. Business...................................................... 2 ITEM 2. Properties.................................................... 6 ITEM 3. Legal Proceedings............................................. 6 ITEM 4. Submission of Matters to a Vote of Security Holders........... 7 PART II. ITEM 5. Market for General Re Corporation's Common Equity and Related Stockholder Matters.......................................... 7 ITEM 6. Selected Financial Data: Eleven-Year Summary.................. 8 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 11 ITEM 8. Financial Statements and Supplementary Data................... 27 ITEM 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure......................................... 63 PART III. ITEM 10. Directors and Executive Officers of General Re Corporation.... 63 ITEM 11. Executive Compensation........................................ 64 ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................................... 64 ITEM 13. Certain Relationships and Related Transactions................ 64 PART IV. ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................................................... 65
1 PART I ITEM 1. BUSINESS GENERAL General Re Corporation was established in 1980 to serve as the holding company of General Reinsurance Corporation ("GRC," formed in 1921) and its affiliates. General Re Corporation and subsidiaries ("General Re") have global reinsurance and financial services operations in 62 cities in 30 countries on 6 continents and provide reinsurance coverage in approximately 150 countries. General Re operates four principal businesses: North American property/casualty reinsurance, international property/casualty reinsurance, life/health reinsurance and financial services. General Re's principal reinsurance operations are based in North America and Germany, with other major operations in Asia, Australia, Europe and South America. General Re's principal financial services operations are located in New York, London, Tokyo, Hong Kong, and Toronto. GRC is the largest North American professional property/casualty reinsurer, and General Re is among the three largest reinsurers in the world based on net premiums written and capital. General Re employed 3,737 persons at December 31, 1996, of which 2,525 employees were employed in North America and 1,212 employees in operations outside of North America. FINANCIAL HIGHLIGHTS The following table provides financial highlights of General Re and its business segments:
YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ---------- ---------- ---------- (IN MILLIONS, EXCEPT SHARE DATA) Total revenues North American property/casualty............ $ 3,887 $ 3,641 $ 3,155 International property/casualty............. 3,004 2,573 456 Life/health................................. 1,134 742 -- Financial services.......................... 271 254 226 ---------- ---------- ---------- Total...................................... $ 8,296 $ 7,210 $ 3,837 ========== ========== ========== Earnings per common share, excluding realized gains and losses............................ $ 10.79 $ 9.47 $ 7.43 Net income per common share.................. 11.00 9.92 7.97 Operating cash flow.......................... 1,678 1,774 1,086 Invested assets--insurance operations........ 23,168 21,016 17,237 Common stockholders' equity.................. 7,326 6,587 4,859
An eleven-year summary of additional significant financial information is presented on pages 8-10. Pretax earnings discussed in each of the segment sections in Item 1 exclude realized gains and are before minority interest deductions and goodwill amortization. REINSURANCE OPERATIONS Reinsurance is the business in which a reinsurer agrees to indemnify a "primary" or "ceding" insurer against all or part of the risks assumed by the primary insurer under a policy or policies it has issued. Among its benefits, reinsurance offers primary insurers the opportunity to increase underwriting capacity, write larger individual risks, reduce financial leverage, stabilize operating results, enter new markets with shared underwriting risk, protect against catastrophic losses and obtain consultative underwriting and risk management services. Treaty reinsurance refers to automatic reinsurance coverage for all or a portion of a specified class of risks ceded by the primary insurer, while for facultative reinsurance the reinsurer underwrites individual risks. Pro rata or proportional reinsurance describes all forms of reinsurance in which the reinsurer shares in a proportional part of the original losses and premiums of the business ceded by the primary company. Excess-of-loss or 2 nonproportional reinsurance refers to reinsurance which indemnifies the primary company for that portion of the loss that exceeds an agreed-upon amount or "retention." The reinsurance industry's overall profitability has historically been subject to cyclicality, principally due to the insurance industry's underwriting cycle, overall economic conditions, investment returns, industry capital levels and insured catastrophic events. The reinsurance industry, both domestically and globally, has recently experienced consolidation, as reinsurers seek to expand their markets, obtain critical mass in certain markets and further diversify their risks. In addition, there has been a shift in recent years in primary insurers' reinsurance purchases toward better capitalized and more creditworthy reinsurers. During 1996, the property/casualty pricing environment in both the primary insurance and reinsurance markets became increasingly competitive. There are virtually no barriers to entry to the reinsurance industry and competitors may be domestic or foreign, licensed or unlicensed. The number of General Re's competitors within the reinsurance industry is not known. Within the United States, the Reinsurance Association of America identified for 1995 approximately 80 property/casualty reinsurers writing predominantly unaffiliated business, with surplus exceeding $50 million or assumed reinsurance premiums exceeding $10 million. Reinsurers compete on the basis of reliability, financial strength and stability, ratings, underwriting consistency, service, business ethics, price, performance, capacity, terms and conditions. Purchasers of reinsurance are themselves insurers and, in some cases, reinsurers. NORTH AMERICAN PROPERTY/CASUALTY REINSURANCE General Re's North American property/casualty operations produced 47 percent of consolidated revenues in 1996 and 61 percent of pretax earnings. The principal business of these operations is treaty and facultative reinsurance underwritten on a direct basis throughout the United States and Canada. General Re writes predominately excess-of-loss reinsurance. Casualty reinsurance represented approximately 58 percent of General Re's North American property/casualty net premiums written in 1996 and property reinsurance business represented approximately 29 percent. General Re also writes excess and surplus lines insurance and provides direct excess insurance to companies with self-insured programs. These lines represented approximately 13 percent of the North American property/casualty net premiums written in 1996. On October 3, 1996, General Re Corporation acquired all of the outstanding shares of National Re Corporation and subsidiaries ("National Re"), a North American property/casualty reinsurance group, in exchange for 4,023,901 shares of General Re Corporation's common stock and $313 million in cash, including expenses, for a total cost of $900 million. National Re, through its wholly owned subsidiary, National Reinsurance Corporation ("NRC"), provides property and casualty reinsurance to insurers written on a direct basis. See Item 7, Management's Discussion and Analysis, and Note 3 to the consolidated financial statements, "Acquisitions and Reinsurance Ventures," for additional discussion of this transaction. U.S. property/casualty insurers and reinsurers are subject to regulation by their states of domicile and by those states in which they are licensed. General Re's principal U.S. subsidiary, GRC, is domiciled in Delaware and licensed in the District of Columbia and in all states but Hawaii, where it is an accredited reinsurer. General Re's two excess and surplus lines insurers, the General Star companies, are domiciled in Connecticut and Ohio. The Genesis companies, which are General Re's excess insurance writers for self-insured programs, are domiciled in Connecticut and North Dakota. General Re also writes excess insurance for self insurers through GRC. NRC is domiciled in the state of Delaware and licensed in all 50 states, the District of Columbia, Puerto Rico, Canada, and the United Kingdom. Fairfield Insurance Company, a subsidiary of NRC, is engaged in property and casualty insurance services, is domiciled in Connecticut, and is licensed in 42 states. In addition to solvency regulation, licensed primary insurers are typically subject to regulatory approval of insurance policy forms and the rates charged to policyholders; similar approvals are not typically required for either reinsurance contracts or the rates agreed to between ceding insurers and their reinsurers. The insurance regulators of every state participate in the National Association of Insurance Commissioners ("NAIC"). The NAIC adopts forms, instructions and accounting procedures for use by U.S. insurers, including reinsurers, in preparing and filing annual statutory financial statements. These forms, instructions and procedures are 3 collectively known as statutory accounting practices ("SAP"). Every state requires use of the NAIC annual statement form, although some states require or permit variations from the NAIC form and SAP. The NAIC is currently in the process of codifying SAP to bring greater uniformity to U.S. statutory insurance accounting practices throughout the United States. In addition to its activities relating to the annual statement and SAP, the NAIC develops model laws and regulations for use by its members. In 1989, the NAIC adopted its Financial Regulation Standards to guide state legislatures and state regulators in the development of effective insurer solvency regulation. These standards are viewed by the NAIC as minimum requirements for effective state regulatory oversight. In 1990, the NAIC adopted a formal accreditation program to encourage states to comply with its Financial Regulation Standards. Accredited states may refuse to accept financial examination reports of insurers issued by nonaccredited states; other sanctions may also be imposed by accredited states, including a refusal to license insurers domiciled in nonaccredited states. As of December 1996, 48 state insurance departments, including Delaware and the District of Columbia, have been accredited. The NAIC adopted risk-based capital requirements which apply to statutory annual statements of life insurers and property/casualty insurers (beginning in 1994). The NAIC also adopted a risk-based capital model law which supplanted the diverse minimum capital and surplus requirements with the risk- based capital requirement for those states adopting the model law. The formula and the model law have been made a part of the Financial Regulation Standards. The model law subjects an insurer failing its risk-based capital requirement to various levels of regulatory action. The model law has been adopted in Delaware, Connecticut and North Dakota. General Re's U.S. insurance subsidiaries have filed 1996 statutory annual statements which report risk- based capital well above the threshold for regulatory action. In 1995, the NAIC adopted a "defined standards" model law related to investments which has not yet been made a part of the Financial Regulation Standards. If ultimately enacted, the "defined standards" model law would change the amount and kind of permitted investments by insurers. The NAIC has considered a different model investment law during 1996 which is based on a "prudent person" standard. While it is uncertain whether either, or both, of these model laws will eventually be made a part of the Financial Regulation Standards, General Re does not currently anticipate that either of the model laws would have a significant effect on the investment management practices of its U.S. insurance subsidiaries. General Re Corporation uses dividends, primarily from GRC, to satisfy its liquidity needs. Ordinary dividends by GRC to General Re Corporation are not subject to any restriction, other than ten days' advance notice. Extraordinary dividends and other extraordinary distributions by GRC to General Re Corporation are subject to prior regulatory approval under the Delaware Insurance Holding Company System Registration Act. Under this Act, extraordinary dividends or other distributions are those which, together with others during the preceding twelve-month period, exceed the greater of 10 percent of an insurer's statutory surplus or 100 percent of net income, excluding realized capital gains, for the prior calendar year are generally considered extraordinary, requiring such approval. For additional discussion of regulatory matters, see the section on Financial Condition/Liabilities in Management's Discussion and Analysis (pages 21-23). INTERNATIONAL PROPERTY/CASUALTY REINSURANCE On December 28, 1994, General Re acquired a controlling interest in Kolnische Ruckversicherungs-Gesellschaft AG ("Cologne Re"). See the international property/casualty operating results section (page 14) of Management's Discussion and Analysis for more information on the transaction. General Re has consolidated Cologne Re in its financial statements and reflected the ownership of other stockholders as minority interests. In 1996, General Re's international property/casualty operations produced 36 percent of consolidated revenues and 27 percent of consolidated pretax earnings. In total, General Re operates its international reinsurance 4 business in 29 countries throughout the world. In 1996, the international property/casualty operations principally wrote business in the form of reinsurance treaties with a smaller amount composed of facultative reinsurance. Approximately 80 percent of international premiums in 1996 were written on a proportional basis and 20 percent were nonproportional or excess- of-loss. Property premiums written in 1996 were approximately 59 percent of total international property/casualty premiums and casualty premiums were approximately 41 percent. In general, regulation of the property/casualty reinsurance industry outside of the United States is subject to the differing laws and regulations of each country in which General Re has operations or writes premiums. Some jurisdictions, such as the United Kingdom, impose complex regulatory requirements on reinsurance companies, while other jurisdictions, such as Germany, impose fewer requirements. Local reinsurance business conducted by General Re's subsidiaries in some countries require licenses issued by governmental authorities. These licenses may be subject to modification or revocation dependent on such factors as amount and types of reserves and minimum capital and solvency tests. Jurisdictions may impose fines, censure and/or criminal sanctions for violation of regulatory requirements. LIFE/HEALTH REINSURANCE In 1996, General Re's life/health reinsurance operations produced 14 percent of consolidated revenues and 4 percent of consolidated pretax earnings. These operations include the North American and international life/health reinsurance operations of Cologne Re. Life/health net premiums written in 1996 were $1,075 million. Approximately 43 percent of General Re's life/health net premiums was written in Europe, another 42 percent was written in North America and the remaining 15 percent was written throughout the rest of the world. The life/health operations provide individual life, group life, group health, long-term care, individual health and finite risk reinsurance. Most of the life/health business is written on a proportional treaty basis, with smaller amounts written on a facultative basis. General Re's life/health business is marketed primarily on a direct basis with the exception of group health, which is marketed primarily through brokers. U.S. life insurers and reinsurers are subject to substantially similar regulatory requirements as those discussed in the North American property/casualty section above. Regulation of the life/health reinsurance industry outside of the United States is subject to the differing laws and regulations of each country in which General Re has operations or writes premiums. FINANCIAL SERVICES In 1996, General Re's financial services operations produced 3 percent of consolidated revenues and 8 percent of consolidated pretax earnings. General Re's financial services operations include derivative products, insurance brokerage and management, investment management, reinsurance brokerage and real estate management operations. General Re Financial Products Corporation ("GRFP"), a dealer in derivative products, offers a full line of interest rate, currency and equity swaps and options, as well as structured finance products through its offices or affiliates in New York, London, Tokyo, Hong Kong and Toronto. GRFP's client base consists principally of major corporations, insurance companies, financial institutions and sovereigns who use derivative products as part of their asset and liability risk management strategies. In 1996, General Re established three new companies affiliated with GRFP. These companies are General Re Investment Holdings Corporation and its wholly owned subsidiaries, General Re Corporate Finance, Inc. and General Re Funding Corporation. This group of companies specializes in structured credit investments and tax products. In 1995, General Re expanded its investment management services for insurance companies. In August 1995, General Re acquired all of the outstanding stock of New England Asset Management in exchange for stock of General Re. The resulting company, General Re-New England Asset Management, Inc. ("GR-NEAM"), provides investment management services primarily to insurance companies that seek General Re's expertise in managing insurance company investment portfolios. GR-NEAM has approximately 48 insurance company clients and approximately $10 billion of client assets under management or advisement at December 31, 1996. 5 The number of General Re's competitors in the financial services industry is not known. As a dealer in derivative products, GRFP competes predominantly on the basis of pricing, financial strength, risk management capabilities, service and product innovation. GRFP's principal competitors include investment and commercial banks, and other specialty companies dealing in derivatives. GR-NEAM's principal competitors include a limited number of other investment managers specializing in insurance company asset management. OTHER INFORMATION For additional information on General Re's businesses, see Item 7, Management's Discussion and Analysis, and Note 19 to the consolidated financial statements, "Information About General Re's Operations," included in this report. Also, reference is made to the caption, "Property/Casualty Insurance Claim Disclosures," on pages 28-31 of this report. ITEM 2. PROPERTIES The main offices of General Re are located in a six-story building in Stamford, Connecticut. This building, consisting of approximately 560,000 square feet of office space and a multiple-level parking garage, on approximately eight acres of land, was originally owned by Elm Street Corporation, a wholly owned financial services subsidiary of General Re. In November 1984, the land was leased and the improvements were sold to Stamford Investment Partners. Subsequently, the land and improvements were leased back by General Re. Under the terms of the lease, General Re has the option to purchase the improvements upon expiration of the 25-year lease or at an earlier date upon the occurrence of certain events. General Re has guaranteed the rental obligations of Elm Street Corporation in connection with this transaction. National Re leases approximately 107,500 square feet of office space in Stamford, Connecticut which was previously used as their principal offices. The lease is noncancellable and will expire in 2009. General Re has subleased this space until 2003 to a third party on approximately the same terms as the original lease. GRC Realty Corporation, also a wholly owned financial services subsidiary of General Re, has retained title to General Re's former home office site in Greenwich, Connecticut. This site consists of approximately four acres of land and an office building which has about 160,000 square feet of office space that is leased to nonaffiliates. The Greenwich site is subject to a mortgage expiring December 31, 1998, which had a remaining balance of $4 million at December 31, 1996. The principal operations of Cologne Re, the largest subsidiary in the international property/casualty segment, are based in an office building of approximately 130,000 square feet in Cologne, Germany. The North American life/health operations of Cologne Re are based in an office building in Stamford, Connecticut. Cologne Re owns both of these office buildings. In addition, General Re's North American property/casualty, financial services, and international life/health operations have branch and affiliate operations conducted from leased premises in various cities in the United States and foreign countries. At this time, General Re believes its facilities are suitable for its purpose and provide adequate capacity for General Re's present and anticipated needs. ITEM 3. LEGAL PROCEEDINGS General Re has been named as defendant in litigation arising from the ordinary course of conducting an insurance and reinsurance business. These lawsuits generally seek to establish liability under insurance or reinsurance contracts issued by the subsidiaries, and occasionally seek punitive or exemplary damages. General Re's reinsurance subsidiaries are also indirectly involved in coverage litigation. In those cases, plaintiffs seek coverage for their liabilities under insurance policies from insurance companies reinsured by General Re's reinsurance subsidiaries. In the judgment of management, none of these cases nor any other litigation, individually or collectively, is likely to result in judgments for amounts which, net of claim and claim expense liabilities previously established, would be material to the financial position, results of operations or cash flow of General Re. 6 On July 1, 1996, U.S. Aviation Underwriters, Inc. ("USAU"), a subsidiary of General Re, and John V. Brennan, the former Chairman and Chief Executive Officer of USAU, after a trial in the U.S. District Court for the Eastern District of New York, were found guilty of mail fraud in connection with the allocation of insurance claims between two companies, arising out of the December 7, 1987 crash of a domestic United States flight. General Re does not expect the amount of any liability to USAU to be material to the financial position, results of operations or cash flows of General Re. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR GENERAL RE CORPORATION'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) The common stock of General Re Corporation is traded on the New York Stock Exchange. The following table sets forth information as to the high and low closing prices of General Re Corporation's common stock on the New York Stock Exchange during 1996 and 1995.
1996 1995 --------------- --------------- HIGH LOW HIGH LOW ------- ------- ------- ------- First Quarter................................ $156.00 $142.38 $134.13 $122.88 Second Quarter............................... 153.25 139.13 137.63 125.50 Third Quarter................................ 154.50 140.83 152.13 129.88 Fourth Quarter............................... 169.38 142.50 157.88 142.88
(b) The number of registered holders of common stock at December 31, 1996 was 4,033. (c) The following table sets forth information as to the cash dividends paid by General Re Corporation on shares of its common stock during each of the past two years.
1996 1995 ---- ---- First Quarter................................................... $.51 $.49 Second Quarter.................................................. .51 .49 Third Quarter................................................... .51 .49 Fourth Quarter.................................................. .51 .49
It is the intention of General Re Corporation to declare quarterly dividends to the extent deemed appropriate by its Board of Directors. Dividends are paid principally from amounts received by General Re Corporation as dividends from GRC and the other operating subsidiaries. 7 ITEM 6. SELECTED FINANCIAL DATA: ELEVEN-YEAR SUMMARY
1996 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND RATIOS) CONSOLIDATED INFORMATION Total revenues......... $ 8,296 $ 7,210 $ 3,837 $ 3,560 $ 3,387 $ 3,207 Net premiums written... 6,661 6,102 3,001 2,524 2,349 2,249 After-tax income before accounting changes/2/,/3/........ 894 825 665 697 596 657 Per share............. 11.00 9.92 7.97 8.11 6.84 7.46 Net income............. 894 825 665 711 657 657 Per share............. 11.00 9.92 7.97 8.28 7.55 7.46 After-tax income, excluding realized gains/2/,/3/.......... 877 788 621 604 465 563 Per share............. 10.79 9.47 7.43 7.01 5.30 6.37 Investment income before tax............ 1,205 1,017 749 755 755 752 Investment income after tax................... 909 787 622 619 620 618 Investments............ 26,562 23,494 18,898 14,346 11,532 10,842 Total assets........... 40,161 34,263 28,116 19,419 14,700 12,416 Long-term debt......... 290 155 157 192 199 301 Common stockholders' equity................ 7,326 6,587 4,859 4,761 4,227 3,911 Return on equity/4/.... 12.6% 13.8% 12.9% 13.4% 11.4% 15.6% ----------------------------------------------------------- NORTH AMERICAN PROPERTY/CASUALTY OPERATIONS Net premiums written... $ 3,081 $ 2,964 $ 2,581 $ 2,275 $ 2,177 $ 2,122 Investment income before tax............ 727 711 686 705 703 703 Pretax income, excluding realized gains/2/,/5/.......... 741 716 599 644 489 647 Statutory surplus...... 5,326 4,607 3,770 3,836 3,452 3,363 Investments............ 14,879 13,481 11,177 11,601 10,477 10,003 Net claims and claim expense liabilities/6/........ 8,741 7,385 7,029 6,803 6,635 6,230 Loss ratio............. 69.0% 67.3% 71.4% 70.0% 78.8% 72.0% Expense ratio.......... 30.1% 32.3% 30.5% 31.1% 29.9% 29.3% Combined ratio......... 99.1% 99.6% 101.9% 101.1% 108.7% 101.3% ----------------------------------------------------------- INTERNATIONAL PROPERTY/CASUALTY OPERATIONS Net premiums written... $ 2,505 $ 2,429 $ 420 $ 249 $ 172 $ 127 Investment income before tax............ 394 247 52 43 47 44 Pretax income, excluding realized gains/2/,/5/.......... 320 200 46 25 24 30 Investments/7/......... 8,290 7,535 6,060 589 509 469 Net claims and claim expense liabilities/6/........ 4,664 4,352 3,289 253 202 164 Loss ratio............. 73.2% 77.0% 69.2% 75.1% 80.2% 75.8% Expense ratio.......... 28.9% 25.8% 29.4% 30.9% 32.8% 35.2% Combined ratio......... 102.1% 102.8% 98.6% 106.0% 113.0% 111.0% ----------------------------------------------------------- LIFE/HEALTH OPERATIONS Net premiums written... $ 1,075 $ 709 -- -- -- -- Investment income before tax............ 59 40 -- -- -- -- Pretax income, excluding realized gains/2/,/5/.......... 53 50 -- -- -- -- Net policy benefits for life/health contracts/6/.......... 523 379 $ 330 -- -- -- ----------------------------------------------------------- FINANCIAL SERVICES Revenues, excluding net realized gains........ $ 269 $ 250 $ 229 $ 211 $ 115 $ 100 Pretax income, excluding realized gains/2/,/5/.......... 100 100 85 58 10 1 ----------------------------------------------------------- COMMON STOCKHOLDERS' INFORMATION Average common shares outstanding........... 80.3 82.1 82.1 84.5 85.7 87.1 Dividend per common share................. $ 2.04 $ 1.96 $ 1.92 $ 1.88 $ 1.80 $ 1.68 Total common dividends............. 163 161 157 159 153 146 Cost of common share repurchases........... 735 35 207 134 179 59 Common stockholders' equity per share...... 89.82 80.22 59.35 56.92 49.89 45.14 Common share price:/8/High......... 169.38 157.88 128.50 132.75 123.13 101.88 Low.................... 139.13 122.88 102.50 105.38 78.63 84.88 Year end............... 157.75 155.00 123.50 107.00 115.75 101.88
See page 10 and notes to consolidated financial statements. 8
1990 1989 1988 1987 1986 CAGR/1/ -------- -------- -------- -------- -------- ---------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND RATIOS) CONSOLIDATED INFORMATION Total revenues......... $ 2,954 $ 2,742 $ 2,719 $ 3,115 $ 2,853 11.3% Net premiums written... 2,150 1,898 1,903 2,365 2,561 10.0 After-tax income before accounting changes/2/,/3/........ 614 599 513 469 321 10.8 Per share............. 6.89 6.52 5.39 4.62 3.14 13.4 Net income............. 6.14 599 480 511 329 10.5 Per share............. 6.89 6.52 5.04 5.04 3.22 13.1 After-tax income, excluding realized gains/2/,/3/.......... 566 559 518 458 298 11.4 Per share............. 6.35 6.08 5.44 4.52 2.92 14.0 Investment income before tax............ 706 673 570 506 413 11.3 Investment income after tax................... 581 558 494 435 345 10.2 Investments............ 9,510 8,799 7,866 6,969 5,978 16.1 Total assets........... 11,033 10,390 9,394 8,902 8,078 17.4 Long-term debt......... 302 263 114 115 115 9.7 Common stockholders' equity................ 3,270 3,084 2,695 2,563 2,413 11.7 Return on equity/4/.... 17.8% 19.3% 19.7% 18.4% 14.2% -- ----------------------------------------------------------- NORTH AMERICAN PROPERTY/CASUALTY OPERATIONS Net premiums written... $ 2,040 $ 1,789 $ 1,780 $ 2,251 $ 2,485 2.2% Investment income before tax............ 662 638 539 479 386 6.5 Pretax income, excluding realized gains/2/,/5/.......... 649 612 511 449 271 10.6 Statutory surplus...... 2,902 2,684 2,319 2,009 1,840 11.2 Investments............ 8,848 8,417 7,532 6,666 5,725 10.0 Net claims and claim expense liabilities/6/........ 5,816 5,535 5,218 4,739 4,024 8.1 Loss ratio............. 67.5% 69.7% 70.7% 74.5% 79.0% -- Expense ratio.......... 31.5% 28.3% 28.8% 24.7% 24.7% -- Combined ratio......... 99.0% 98.0% 99.5% 99.2% 103.7% -- ----------------------------------------------------------- INTERNATIONAL PROPERTY/CASUALTY OPERATIONS Net premiums written... $ 110 $ 109 $ 123 $ 114 $ 76 41.8% Investment income before tax............ 39 31 27 24 21 34.1 Pretax income, excluding realized gains/2/,/5/.......... 25 35 33 26 23 30.1 Investments/7/......... 442 342 299 279 221 43.7 Net claims and claim expense liabilities/6/........ 156 121 109 105 73 51.5 Loss ratio............. 71.5% 62.4% 64.4% 64.2% 61.0% -- Expense ratio.......... 37.5% 33.4% 31.3% 31.9% 31.5% -- Combined ratio......... 109.0% 95.8% 95.7% 96.1% 92.5% -- ----------------------------------------------------------- LIFE/HEALTH OPERATIONS Net premiums written... -- -- -- -- -- -- Investment income before tax............ -- -- -- -- -- -- Pretax income, excluding realized gains/2/,/5/.......... -- -- -- -- -- -- Net policy benefits for life/health contracts/6/.......... -- -- -- -- -- -- ----------------------------------------------------------- FINANCIAL SERVICES Revenues, excluding net realized gains........ $ 88 $ 90 $ 101 $ 106 $ 101 10.3% Pretax income, excluding realized gains/2/,/5/.......... 6 14 27 30 28 13.6 ----------------------------------------------------------- COMMON STOCKHOLDERS' INFORMATION Average common shares outstanding........... 88.0 91.3 95.3 101.4 102.0 -- Dividend per common share................. $ 1.52 $ 1.36 $ 1.20 $ 1.00 $ 0.88 8.8% Total common dividends............. 133 124 114 101 90 6.1 Cost of common share repurchases........... 236 206 268 274 -- -- Common stockholders' equity per share...... 37.50 34.28 29.04 26.20 23.47 14.4 Common share price:/8/High......... 93.00 95.75 59.25 68.38 68.88 9.4 Low.................... 69.00 55.00 45.88 48.75 49.44 10.9 Year end............... 93.00 87.13 55.25 55.88 55.50 11.0
See page 10 and notes to consolidated financial statements. 9 NOTES TO THE ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA Only continuing operations are presented. Balance sheet data are as of December 31st. The 1996 North American property/casualty operations include the balance sheet of National Re as of December 31, 1996 and income statement amounts since the October 3, 1996 acquisition. International property/casualty and life/health operations are reported on a one-quarter lag. The international property/casualty operations include Cologne Re for balance sheet amounts beginning at December 31, 1994 and income statement amounts beginning in 1995. Only nine months of Cologne Re's 1995 results are included in General Re's 1995 results due to the one-quarter reporting lag. Loss ratios, expense ratios and combined ratios shown in the table are computed in relation to net premiums earned (referred to as a "GAAP" combined ratio). (1) Represents compound annual growth rate. (2) Excludes cumulative effect of accounting changes. The balance sheet data in the table on pages 8 and 9 reflect the adoption of Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting For Certain Investments in Debt and Equity Securities in 1994 and the adoption of SFAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts in 1993, with reclassifications made for 1992. Adoption of SFAS No. 113 did not affect results from operations or common stockholders' equity. In 1993, General Re adopted the accounting prescribed by the Emerging Issues Task Force for multiple-year, retrospectively rated reinsurance contracts. The cumulative effect from prior years recorded in 1993 increased net income by $14 million or $.17 per share. In 1992, General Re adopted SFAS No. 109, Accounting for Income Taxes. The cumulative effect from prior years recorded in 1992 increased net income by $61 million or $.71 per share. (3) After deducting minority interest. (4) Return on equity is computed based on income from continuing operations excluding after-tax realized gains and cumulative effects of accounting changes divided by average common stockholders' equity at the beginning and end of the year. (5) Excludes amortization of goodwill. (6) Net of reinsurance. (7) Also includes investments for life/health operations. (8) The common share price information is based on General Re Corporation's daily closing price on the New York Stock Exchange. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSOLIDATED OPERATING RESULTS Comparison of 1996 with 1995 Net income of General Re Corporation and its subsidiaries ("General Re") was $894 million or $11.00 per share in 1996, an increase of 10.9 percent over the $9.92 per share earned in 1995. These results include after-tax realized gains of $.21 per share in 1996 and $.45 per share in 1995. The increase in 1996 earnings was primarily attributable to improved property/casualty underwriting results and growth in investment income in the North American and international property/casualty operations. Due to General Re's reporting of its international operations on a quarter lag, the 1996 results also benefited from a full year of results for Kolnische Ruckversicherungs-Gesellschaft AG ("Cologne Re") and the related joint-venture company, General Re-CKAG Reinsurance and Investment S.a r.l. ("GR-CK"), compared to only three quarters in 1995. In addition, North American property/casualty operations include the operating results of National Re Corporation and its subsidiaries ("National Re") since its acquisition by General Re Corporation on October 3, 1996. Consolidated net premiums written in 1996 were $6,661 million, an increase of $559 million or 9.2 percent, from $6,102 million in 1995. North American property/casualty premium volume was $3,081 million in 1996, compared with $2,964 million in 1995, an increase of 3.9 percent. North American property/casualty net premiums written in 1996 include approximately $89 million from National Re. Net premiums written in the international property/casualty reinsurance operations were $2,505 million in 1996, compared to $2,429 million in 1995. Net premiums written for the life/health segment, which consist of Cologne Re's North American and international life/health operations, were $1,075 million for 1996, as compared to $709 million in 1995. Consolidated investment income was $1,205 million in 1996, compared with $1,017 million in 1995. The consolidation of a full year of Cologne Re in 1996 accounts for approximately $90 million of the $188 million increase in consolidated investment income in 1996. Investment income for the North American property/casualty operations was $727 million in 1996, an increase of 2.3 percent over $711 million earned in 1995. The growth of pretax investment income in the North American operations was adversely affected by (1) the shift in assets from taxable to tax-advantaged securities over the last few years in response to General Re's tax planning strategies; (2) the maturity and calls of higher yielding fixed income securities; and (3) the use of North American cash flow from operations for common dividends and share repurchases. Investment income for the international property/casualty operations increased 59.5 percent to $394 million in 1996, compared with $247 million in 1995. The life/health operations earned investment income of $59 million in 1996, compared to $40 million in 1995. The financial services operations earned investment income of $25 million in 1996, compared with $19 million in 1995. Comparison of 1995 with 1994 Net income in 1995 was $825 million or $9.92 per share, an increase of 24.5 percent over $7.97 per share earned in 1994. These results include after-tax realized gains of $.45 per share in 1995 and $.54 per share in 1994. The improved results in 1995 were primarily attributable to increased underwriting profitability in the North American property/casualty operations, growth in after-tax investment income and increased income from General Re's international property/casualty operations. The 1995 results include three quarters of the year's results for Cologne Re and GR-CK, which are not reflected in the comparable 1994 amounts, since GR-CK was not formed until December 28, 1994. Consolidated net premiums written in 1995 were $6,102 million, an increase of $3,101 million or 103.3 percent from $3,001 million in 1994. North American property/casualty premium volume was $2,964 million in 1995, compared with $2,581 million in 1994, an increase of 14.9 percent. Net premiums written in the international property/casualty reinsurance operations were $2,429 million in 1995, compared to $420 million in 1994, with most of the growth attributable to the inclusion of Cologne Re's premiums during the year. In addition, the underwriting results of General Re's wholly owned European operations, which were predominantly reported on 11 a full underwriting-year lag in prior years, are now reported on a one-quarter lag, beginning in 1995. The international wholly owned subsidiaries' net premiums written increased by $263 million during 1995 due to this change in reporting, although net income was not materially affected by the change. Net premiums written for the life/health segment, which consist of Cologne Re's North American and international life/health operations, were $709 million for 1995. Consolidated net investment income was $1,017 million in 1995, compared with $749 million in 1994. The consolidation of Cologne Re accounts for approximately $193 million of the $268 million increase in consolidated investment income in 1995. Investment income for the North American property/casualty operations was $711 million in 1995, an increase of 3.7 percent over $686 million earned in 1994. The growth of pretax investment income in the North American operations was adversely affected by the shift in assets from taxable to tax-advantaged securities over the past few years in response to General Re's tax planning strategies, the maturity or call of higher yielding fixed income securities and the use of North American cash flow from operations for common dividends and stock repurchases. Investment income for the international property/casualty operations increased 375.4 percent to $247 million in 1995, compared with $52 million in 1994. Excluding the effect of Cologne Re, the international property/casualty operations investment income grew 24.2 percent in 1995. The life/health operations earned investment income of $40 million in 1995. The financial services operations earned investment income of $19 million in 1995, compared with $11 million in 1994. Pretax income discussed in each of the segment sections that follow is before minority interest deductions and goodwill amortization, both of which are deemed corporate expenses that have not been allocated to the segments. NORTH AMERICAN PROPERTY / CASUALTY OPERATING RESULTS
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- (IN MILLIONS) Income before taxes and realized gains............ $ 741 $ 716 $ 599 Net premiums written.............................. 3,081 2,964 2,581 Net underwriting income (loss).................... 27 13 (46) Combined ratio.................................... 99.1% 99.6% 101.9% Investment income................................. $ 727 $ 711 $ 686 Net other loss.................................... (13) (8) (40)
North American property/casualty pretax income in 1996, excluding realized gains, increased 3.5 percent over 1995. This growth in pretax income was primarily due to an improvement in the underwriting result of $14 million and an increase in investment income of $16 million, partly offset by an increase in net other loss of $5 million. The 1994 underwriting result was adversely affected by the earthquake in Northridge, California on January 17th. The growth in investment income of 2.3 percent in 1996 was due to an increase in the portfolio as a result of operating cash flows in 1995 and 1996. The increase in net other loss in 1996 was due to higher general corporate expenses which are charged to this segment and non-recurring fee income in 1995. The combined underwriting ratio is computed based on the relationship of losses and underwriting expenses to premiums earned. This ratio is General Re's principal indicator of underwriting performance, with less than 100.0 percent indicating an underwriting profit. In 1996, the combined ratio for the North American property/casualty segment was 99.1 percent, compared to 99.6 percent in 1995 and 101.9 percent in 1994. The 1996 and 1995 underwriting results were consistent with General Re's operating objective of achieving an underwriting profit. On October 3, 1996, General Re Corporation acquired all of the outstanding shares of National Re, a North American property/casualty reinsurance group, in exchange for 4,023,901 shares of General Re's common stock and $313 million in cash, including expenses, for a total cost of $900 million. National Re provides property and casualty reinsurance to insurers written on a direct basis. In 1996, National Re's full-year gross premiums written 12 were $364 million, of which approximately 70 percent was casualty business and 30 percent was property business. National Re's clients are predominantly small- to medium-sized, regional and specialty property/casualty insurers. Like General Re, National Re principally writes treaty and facultative reinsurance on an excess-of-loss basis. 1996 NET PREMIUMS WRITTEN [PIE CHART] Net premiums written in 1996 for the North American property/casualty GRC Treaty & Facultative 87.5% operations were $3,081 million, an increase of 3.9 percent from $2,964 General Star 8.3% million in 1995. The pie chart to the left depicts the relative share of Genesis 4.2% property/casualty premium by operating unit and the table below shows net premiums for the past three years by operating unit.
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 -------- -------- -------- (IN MILLIONS) General Reinsurance Corporation (treaty/facultative).............................. $ 2,696 $ 2,643 $ 2,288 General Star Companies (excess and surplus)........ 256 210 191 Genesis Companies (direct excess and alternative markets).......................................... 129 111 102 -------- -------- -------- Total............................................. $ 3,081 $ 2,964 $ 2,581 ======== ======== ========
General Reinsurance Corporation's ("GRC") treaty and facultative reinsurance premiums grew by 2.0 percent in 1996. Included in this figure is $89 million of net premiums written from National Re. GRC's premium growth was adversely affected by the nonrenewal of a large quota share treaty contract. Excluding the premiums associated with the nonrenewed contract and National Re, GRC's property/casualty premiums written increased 8.7 percent over the 1995 amounts. The underlying growth in GRC's premiums has slowed from growth in the prior few years due to the increasingly competitive primary insurance and reinsurance environments, increased retentions by certain large primary insurers, and the consolidation of companies in the primary insurance industry. In 1996, GRC's premium growth was primarily in the regional and specialty accounts, while individual risk facultative business was essentially flat. The wholesale nature of reinsurance transactions periodically results in somewhat volatile premium trends between quarters and years. The addition or loss of a large contract may significantly affect General Re's premium growth, although large contracts generally have a smaller effect on earnings than on premium trends. General Re's treaty contracts usually include short-term cancellation provisions. General Re's largest treaty was 7.7 percent of total North American net premiums written. For the General Star operations, which primarily write excess, surplus and specialty insurance, net premiums written grew 22.1 percent in 1996 due to increases in direct writings and retention levels. The facilities department within General Star grew by $12 million principally in the casualty errors and omissions line of business. The property department increased premium by $15 million primarily in fire and allied lines. The primary casualty department increased its net premiums by $9 million, while the net premiums of the excess casualty department increased by $11 million. General Star has produced a statutory underwriting profit for twelve consecutive years. The Genesis operations provide direct excess insurance and reinsurance to companies with self-insurance programs. Net premiums written for Genesis increased during the year by 15.9 percent over 1995 levels, principally due to growth in directors' and officers' coverage. Property premiums grew by $8 million due to increased emphasis on multiple line programs with existing accounts. 13 INTERNATIONAL PROPERTY / CASUALTY OPERATING RESULTS
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- (IN MILLIONS) Income before taxes and realized gains.............. $ 320 $ 200 $ 46 Net premiums written................................ 2,505 2,429 420 Net underwriting income (loss)...................... (53) (63) 6 Combined ratio...................................... 102.1% 102.8% 98.6% Investment income................................... $ 394 $ 247 $ 52 Net other income (loss)............................. (22) 16 (12)
Income before taxes and realized gains for the international property/casualty operations was $320 million in 1996, an increase of 59.2 percent from 1995. The segment's results are affected by the inclusion of a full year of Cologne Re's operating results in 1996 as compared to only three quarters in 1995 (see below for a description of the Cologne Re transaction). Excluding the additional quarter, the international property/casualty segments income before taxes would have grown 41.1 percent. [PIE CHART] International net premiums written were $2,505 million in 1996, compared with Germany 29.1% $2,429 million in 1995. The composition of international property/casualty US$ Foreign 17.2% premiums by currency presented in the chart to the left displays the Australia 5.4% geographic diversification of General Re's international business. The United Kingdom 10.5% category labelled "other" represents more than 100 currencies. France 6.1% Japan 4.4% Spain 3.1% Other 24.2% The reported growth in premiums was affected by a number of factors, including: a) the inclusion of a full year of Cologne Re's property/casualty premiums in 1996 compared to only three quarters in 1995; b) the effect of including current underwriting year estimates of the wholly owned European operations beginning in 1995; c) the effect of a stronger U.S. dollar which lowered international premiums when translated into U.S. dollars; and d) the placing of Cologne Re's U.S. property/casualty subsidiary into runoff. Adjusting for these factors, international property/casualty net premiums written decreased 2.9 percent in 1996. As in North America, international property/casualty insurance became more competitive in 1996, and as a result, General Re has been cautious about business expansion in this environment. Income before taxes and realized gains for the international property/casualty operations of $200 million in 1995 increased 334.4 percent over 1994 levels. The segment's results in 1995 were significantly affected by the inclusion of Cologne Re's results and, therefore, are not directly comparable to the results in 1994. On December 28, 1994, General Re and Colonia Konzern AG ("Colonia") formed a new company that acquired 75 percent of the ordinary shares and approximately 30 percent of the preference shares of Cologne Re, which collectively represents a 66.3 percent economic interest in Cologne Re. In exchange for its Cologne Re shares, Colonia, for itself and as trustee for Nordstern Allgemeine Versicherungs AG (collectively, "CKAG"), received 100 percent of the Class A shares of the new company, GR-CK. General Re initially contributed $884 million (DM 1,377 million) to GR-CK in exchange for 100 percent of the Class B shares of GR-CK. On December 30, 1994, GR-CK paid $302 million (DM 475 million) to General Re in exchange for notes in the principal amount of DM 475 million. The notes pay interest of 8.0 percent annually to GR-CK and are due on December 30, 2004. The intercompany notes have been eliminated in consolidation. The funds invested in GR-CK are subject to certain investment restrictions according to the joint-venture agreement. 14 The Class A shares have 49.9 percent of the votes of GR-CK and are entitled to an annual Class A dividend, which is based on a formula and is subject to a minimum of approximately DM 36 million, while the Class B shares have 50.1 percent of the votes of GR-CK and are entitled to the earnings of GR-CK in excess of the Class A dividend. General Re also receives an annual Class B cash dividend of 50.1 percent of GR-CK's distributable income, as defined in the joint-venture agreement. The dividends related to the 1995 calendar result, which were paid in 1996 with respect to the Class A and B shares were $27 million and $26 million, respectively. General Re has an option to purchase from January 1, 2002 to January 1, 2004 the Class A shares of GR-CK owned by CKAG at a formula price. The option has a minimum exercise price of DM 1,306 million and a maximum of DM 1,509 million, subject to certain warranty and other adjustments that may affect the exercise price. If General Re does not exercise its option to purchase the Class A shares of GR-CK from CKAG, CKAG has an option to purchase the Class B shares of GR-CK from General Re under a similar exercise price formula. 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 U.S. generally accepted accounting principles by 62.9 percent over the amount 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 to its ownership of Cologne Re through GR-CK, General Re purchased for its own account an additional 8.4 percent of the ordinary and preference shares of Cologne Re through December 31, 1996 for aggregate consideration of $85 million, which increased General Re's consolidated economic interest in Cologne Re to 74.7 percent at December 31, 1996. LIFE/HEALTH OPERATING RESULTS
YEARS ENDED DECEMBER 31, --------------------------- 1996 1995 1994 -------- -------- -------- (IN MILLIONS) Income before taxes and realized gains............... $ 53 $ 50 -- Net premiums written Life................................................ 812 542 -- Health.............................................. 263 167 -- Net underwriting income.............................. 2 10 -- Investment income.................................... 59 40 -- Net other income (loss).............................. (7) 0 --
The life/health operations include a full year of results in 1996 as compared to only three quarters of life/health operations in 1995, due to General Re's reporting of its international operations on a quarter lag. This segment includes the North American and international life/health operations of Cologne Re. During 1996, the life/health operations' income before taxes and realized gains increased by 6.4 percent. Excluding the effect of the quarter lag, life/health income would have declined 17.4 percent in 1996 due to lower underwriting margins. Net premiums written in 1996 were $1,075 million, an increase of 51.7 percent over 1995. Excluding the effect from the quarter lag, life/health premiums increased 16.4 percent in 1996. Approximately 43 percent of General Re's life/health net premiums was written in Europe, another 42 percent was written in North America and the remaining 15 percent was written throughout the rest of the world. The segment experienced strong premium growth in both North America and internationally. The North American operation's growth was primarily in the individual life, group life and individual health segments. The international operation's growth was spread throughout Europe, the United Kingdom and Australia. The 1996 underwriting income of $2 million decreased by $8 million from 1995 due to increased frequency in mortality experience and higher claims in the Medicare supplement and long-term care lines in the North American operations. Investment income increased by $19 million in 1996 as compared to 1995, in part due to the four quarters of investment income in 1996. 15 FINANCIAL SERVICES OPERATING RESULTS
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 -------- -------- -------- (IN MILLIONS) Income before taxes, minority interest and realized gains............................................. $ 100 $ 100 $ 85 Total revenues..................................... 269 250 229 Net investment income.............................. 25 19 11
The financial services operations include General Re's derivative products, insurance brokerage and management, investment management, reinsurance brokerage and real estate management operations. Pretax income for the financial services operations was $100 million in each of 1996 and 1995. The overall unchanged result was due to lower 1996 income in General Re's derivative products operations, General Re Financial Products Corporation and affiliates ("GRFP"), and from U.S. Aviation Underwriters, Inc., an aviation pool manager, partially offset by increased income from General Re Underwriting Services Limited, which provided underwriting services for Tempest Reinsurance Company Limited ("Tempest"), an affiliated Bermuda-based company specializing in excess property catastrophe reinsurance. This underwriting services agreement was terminated on July 1, 1996 when General Re sold its 20.7 percent interest in Tempest; this termination eliminated a major portion of General Re Underwriting Services Limited's operations. GRFP is a dealer in derivative products and offers a full line of interest rate, currency and equity swaps, options and other derivative products. GRFP's gross trading revenue was $144 million in 1996, compared to $142 million in 1995 and $135 million in 1994. The overall growth of GRFP's business in the U.S. derivatives market was slower than in international markets. GRFP closely monitors its derivatives operations and actively manages its open positions to control its exposures. GRFP hedges its exposure to market risk (which includes foreign exchange, interest rate, equity, swap spread, volatility, correlation, and yield curve risks) in connection with its dealer activities by purchasing or selling futures contracts, entering into forward foreign exchange contracts, purchasing or selling U.S. and foreign government securities or entering into offsetting derivative transactions. In August 1995, General Re acquired all of the outstanding stock of New England Asset Management in exchange for stock of General Re and combined it with General Re's own investment management subsidiary. The resulting company, General Re-New England Asset Management, Inc. ("GR-NEAM"), provides investment management services primarily for other insurance companies that seek General Re's expertise in managing insurance company investment portfolios. GR-NEAM has approximately 48 insurance company clients and approximately $10 billion of client assets under management or advisement at December 31, 1996. Pretax income for the financial services operations was $100 million in 1995, an increase of 18.1 percent from $85 million earned in 1994. The increase in 1995 income was principally due to increased profitability of GRFP. CONSOLIDATED FINANCIAL CONDITION Assets/Investments At December 31, 1996, total assets were $40,161 million, compared with $34,263 million at December 31, 1995. The $5,898 million growth in assets was attributable to an increase of $2,249 million in the total assets of the North American property/casualty operations, $1,022 million in the international reinsurance operations, and $2,627 million in the financial services segment. The growth in the assets of the North American property/casualty operations was primarily due to the inclusion of National Re's assets of $2,237 million. The increase in the assets of the international operations was due to the investment of operating cash flows offset by the decline of the German mark compared to the U.S. dollar which decreased assets by approximately $734 million. 16 General Re's invested assets increased from $23,494 million at December 31, 1995 to $26,562 million at December 31, 1996. The $3,068 million increase in invested assets was the result of an increase of $1,398 million in the North American property/casualty segment, an increase of $755 million in the international reinsurance operations and an increase of $915 million in the financial services operations. Unrealized appreciation after deferred income taxes on General Re's investment portfolio was $1,625 million and $1,468 million at December 31, 1996 and December 31, 1995, respectively. The increase was principally due to the appreciation of equities held in the North American and the international operations and appreciation of bonds held in the London and Australian operations, partially offset by a decline in the value of bonds held in the United States. NORTH AMERICAN PROPERTY/CASUALTY INVESTED ASSETS General Re's North American property/casualty investment portfolios are managed for both after-tax total return and after-tax current income. These investment objectives take into consideration the duration of the operation's liabilities and investment parameters requiring high credit quality across the portfolios. At December 31, 1996, total invested assets of the North American property/casualty operations were $14,879 million, a 10.4 percent increase over 1995 invested assets. The composition of the North American property/casualty invested assets as a percent of the total portfolio at December 31, 1996 is shown in the pie chart below. [PIE CHART] During 1996, there was a minimal amount of net new cash flow Preferred equities 5.6% allocated to the North American property/casualty portfolio, as Other 2.8% almost all available cash flow was used to purchase National Re, pay U.S. Government bonds 5.0% dividends to stockholders and repurchase General Re's common Foreign bonds 2.5% stock. Within the portfolio, General Re continued to shift assets from Mortgage-backed bonds 6.5% taxable to tax-advantaged securities as part of its tax planning Corporate bonds 6.3% strategies. In addition, this shift reflects management's belief that Municipal bonds 51.7% for much of the year, municipal securities were attractively priced Common equities 19.6% relative to their taxable equivalents. General Re anticipates that the investment of future cash flows will be weighted towards municipal securities. To minimize its exposure to shifts in interest rates, General Re balances within a range the duration (a present-value weighted measure of average life) of its property/casualty claim liabilities with the duration of fixed maturity investments in the investment portfolio. The table below shows the average maturity and effective duration of the North American taxable and tax-exempt portfolios in years:
DECEMBER 31, -------------- 1996 1995 1994 ---- ---- ---- AVERAGE MATURITY Taxable portfolio............................................... 6.8 9.4 7.7 Tax-exempt portfolio............................................ 11.7 10.9 9.1 EFFECTIVE DURATION Taxable portfolio............................................... 4.0 5.2 4.6 Tax-exempt portfolio............................................ 7.3 6.6 5.7
17 At December 31, 1996, the effective average maturity of the fixed-maturity portfolio was 10.3 years, compared to an estimated average life of 10.6 years for General Re's property/casualty claim liabilities. The duration of property/casualty assets was 5.1 years, compared with 4.5 years for the property/casualty claim liabilities. This compares with 1995 durations of 5.1 years and 4.9 years, respectively. The decrease in the duration of General Re's property/casualty claim liabilities at December 31, 1996 was principally due to the mix of premiums written. Included in fixed-maturity investments were mortgage-backed securities of $966 million (3.6 percent of consolidated invested assets) and other asset-backed securities of $53 million (0.2 percent of consolidated invested assets) at December 31, 1996. These securities have interest and principal repayment patterns that differ from typical fixed maturities. Mortgage-backed securities are generally issued by quasi-federal agencies or federally supported institutions and, to a lesser extent, by corporations. They can either be direct pass-throughs of cash flows from the underlying mortgages or can be a grouping of underlying mortgages into various principal repayment tranches, known as collateralized mortgage obligations ("CMOs"). The mortgage-backed securities portfolio comprises pass-through securities (49.9 percent) and CMOs (50.1 percent) based on December 31, 1996 market values. The CMO portfolio is composed of a range of security types but is primarily invested in sequential and planned amortization class securities. Other asset-backed securities are usually debt instruments which are collateralized by credit card or auto loan receivables whose interest and principal payments will vary with the underlying receivables. Most of the mortgage-backed and other asset-backed securities are publicly traded and market values were obtained from an external pricing service. At December 31, 1996, common equity investments in the North American portfolio totaled $2,925 million, representing 19.6 percent of the North American property/casualty investment portfolio. The North American equity portfolio is well diversified and primarily consists of holdings in companies with large market capitalizations which collectively have a calculated volatility approximating the Standard & Poor's 500 index. During 1996, General Re purchased futures contracts to hedge a portion of the common equity portfolio as a means to achieve target asset allocations within the North American portfolio. To the extent that General Re's portfolio held the same securities as the futures contracts, related gains and losses on the futures contracts were treated as basis adjustments to those securities held. Otherwise, gains and losses on the futures contracts were not deemed to qualify for such hedge accounting treatment. In 1996, realized gains included $72 million of losses from these futures contracts and $53 million of losses were recorded as basis adjustments for hedged equities. A small portion of the North American investment portfolio was dedicated to nontraditional, private investments. These alternative investments, included in the balance sheet caption, "Other invested assets," were $435 million (1.6 percent of consolidated invested assets) and $344 million (1.5 percent of consolidated invested assets) at December 31, 1996 and 1995, respectively. Most of these investments are interests in limited partnerships managed by outside professional managers. Over time, these investments are expected to provide a higher return than the overall North American property/casualty investment portfolio. This segment, however, also may entail a greater amount of risk both in terms of limited liquidity and greater uncertainty of returns compared to the rest of General Re's portfolio. General Re evaluates the fair value of these alternative investments on a quarterly basis by reviewing available financial information of the investee and performing other financial analyses in consultation with external advisors. Any changes in the fair value of limited partnerships are included in unrealized appreciation or depreciation in common stockholders' equity, unless a decline in fair value is considered other than temporary, resulting in a charge to income. 18 Credit Quality Tax-exempt Taxable Credit considerations are an important part of General Re's Nonrated .05 1.3 fixed-maturity investment strategy. The overall fixed- Below BBB .01 2.1 maturity portfolio continued to have an average credit rating BBB 2.1 3.8 of AA at December 31, 1996. The distribution of General Re's North A 22.1 17.0 American property/casualty fixed- maturity portfolio by credit AA 32.6 12.1 quality is presented in the chart on the left. AAA 42.6 63.7 Investment Returns The overall pretax yield on the North American property/casualty invested assets was 5.4 percent in 1996 and 5.9 percent in 1995. During 1996, the segment had approximately $494 million of calls and maturities on grandfathered tax-exempt bonds. These bonds had an average yield of approximately 7.9 percent and the proceeds from the calls were reinvested at an average yield of approximately 5.3 percent. Based on its current investment portfolio and the current yield curve, General Re presently anticipates additional calls and maturities through the end of 1997 of approximately $100 million of grandfathered tax-exempt bonds and $200 million of preferred equities, both with an average yield of approximately 7.6 percent. Reinvestment of these funds may adversely affect average portfolio yields and investment income. Pretax total return for North American investments was 7.1 percent in 1996, compared with a return of 18.9 percent in 1995 and (2.2) percent in 1994. Almost all investment sectors recorded lower returns in 1996 than in 1995, primarily due to higher interest rates in 1996 and a difficult comparison against the very favorable gains in U.S. equity markets during 1995. The total pretax returns on the North American investment portfolio by major asset class were as follows:
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- Short-term securities............................. 5.6% 6.0% 4.6% Taxable bonds..................................... 3.6 17.5 (3.0) Tax-exempt bonds.................................. 3.9 15.1 (2.4) Foreign bonds..................................... 9.5 13.7 4.1 Common equities................................... 22.6 37.9 (2.6) Foreign equities.................................. 18.5 9.2 12.7 Preferred equities................................ 9.1 17.6 (5.1)
The total after-tax return for the North American investment portfolio was 6.0 percent in 1996. 19 INTERNATIONAL INVESTED ASSETS General Re's international [PIE CHART] property/casualty and life/health reinsurance operations held invested Real estate/other 3.1% assets of $8,290 million at December 31, 1996, an increase of $755 million from Common equities 9.0% December 31, 1995. These portfolios include $6,545 million of Cologne Re's Short-term 9.4% investments, $1,255 million in wholly owned international operations' Government bonds 45.4% investments and $490 million of GR-CK investments. Most of the international Corporate & other bonds 33.1% invested assets are managed internally. The composition of the international investment portfolio by major asset class at December 31, 1996 is presented in the chart to the right. During 1996, the composition of the international investment portfolio did not change significantly, although there was a reduction in the level of short-term securities in favor of bonds. General Re's international investment portfolios are managed for both after- tax total return and after-tax investment income, taking into consideration the duration and currency structure of the operations' reinsurance liabilities. The investment objectives of each individual subsidiary company within the segment are determined by specific investment guidelines which consider the different legal and tax requirements in their respective jurisdictions. The fixed income portfolio of the [GRAPH] international operations consists of high credit quality securities. Substantially Nonrated 0.3% all bonds were investment grade; the average rating of the portfolio was above Below BBB 0.8% AA. The table to the left presents the credit ratings of fixed maturity BBB 1.3% securities held in the international investment portfolios. The common equity A 6.0% portfolio was well diversified with holdings principally from the major stock AA 34.2% markets in Europe, the United States and Japan. The real estate portfolio of $176 AAA 57.4% million was internationally diversified with principal holdings in Germany. The relatively high share of short-term investments in the portfolio is due to the need to hedge investment crediting provisions in certain deposit contracts. The portfolio is diversified by country of issuer and duration to match the currency and duration structure of the related reinsurance liabilities. 20 The currency structure of the international investment portfolio is globally diversified according to the currency structure of the underlying reinsurance business. General Re hedges its currency risk by seeking to match its assets and liabilities by currency. The composition of the international operation's invested assets by currency is presented in the chart below. The overall pretax yield on the [PIE CHART] international portfolio was 5.9 percent in 1996 and 5.5 percent Australian Dollar 7.6% during 1995. The international operations write a greater portion of Sterling 16.2% their business in property lines of business than General Re's North French Franc 3.5% American operations and, accordingly, invest in shorter duration securities Japanese Yen 1.6% as part of their program to match asset and liability durations. The Other 12.9% sharing of investment income under certain reinsurance agreements lowers German Mark 32.0 the international investment yield. US Dollar 26.2% LIABILITIES The gross liability for claims and claim expenses, which provides for estimated future payments arising from current and prior property/casualty reinsurance transactions, amounted to $15,977 million and $14,252 million at December 31, 1996 and 1995, respectively. Growth in the liability of $1,725 million during 1996 was due to $1,410 million in the North American property/casualty segment and $315 million in the international property/casualty segment. Growth in the North American property/casualty gross liability for claims and claim expenses is in part due to $1,037 million of liabilities assumed with the acquisition of National Re. In addition to the gross liability for property/casualty claim and claim expenses, General Re had a gross liability for policy benefits for life/health contracts of $751 million and $580 million at December 31, 1996 and 1995, respectively. The asset for reinsurance recoverable on paid and unpaid losses was $2,935 million at December 31, 1996, compared to $2,794 million at December 31, 1995. Growth of $141 million in the asset for reinsurance recoverable was due to $112 million associated with the North American property/casualty segment, $3 million for the international property/casualty operations and $26 million related to the life/health operations. Approximately $89 million of the increase in reinsurance recoverables was due to the acquisition of National Re. The gross liability and reinsurance recoverable for claims and claim expenses were based on General Re's analysis of reports and individual case estimates received from ceding companies. The liability and related recoverables, which include an amount estimated by General Re for claims and claim expenses incurred but not reported ("IBNR"), are evaluated continuously by management, annually by General Re's independent accountants in conjunction with their audit and periodically by independent consulting actuaries at the discretion of the Board of Directors. Any resulting adjustments are included in the current period's income. Consolidated net claims and claim expenses for 1995 and prior accident years experienced favorable development of $39 million in 1996. Net claims and claim expenses for 1995 and prior accident years for the North American operations experienced favorable development of $48 million in 1996. The net favorable loss development was due to favorable development on casualty lines of business, partially offset by losses related to environmental, asbestos and other mass tort claims. Net claims and claim expenses for 1995 and prior accident years for the international operations, after the effect of foreign exchange, had adverse development of $9 million in 1996. The net adverse loss development for the international operations was primarily related to strengthening of reserves for environmental, asbestos and other mass tort claims in runoff operations. Included in General Re's liability for claims and claim expenses are liabilities for environmental and latent injury damage claims. These claims are principally related to claims arising from remediation costs associated with 21 hazardous waste sites and bodily injury claims relating to asbestos products and environmental hazards. These amounts include provisions for both reported and IBNR claims. The table below presents the three-year development of the balance sheet liability for environmental and latent injury claims:
1996 1995 1994 ------ ------ ------ (IN MILLIONS) Gross liability, beginning of year........................ $1,756 $1,478 $1,332 Reinsurance recoverable................................... 498 382 444 ------ ------ ------ Liability, net of reinsurance, beginning of year.......... 1,258 1,096 888 Amount incurred during year.............................. 179 298 239 Less: amount paid during year............................ 108 136 100 Acquired companies (National Re in 1996; Cologne Re in 1994)................................................... 25 -- 69 ------ ------ ------ Liability, net of reinsurance, end of year................ 1,354 1,258 1,096 Reinsurance recoverable................................... 635 498 382 ------ ------ ------ Gross liability, end of year.............................. $1,989 $1,756 $1,478 ====== ====== ======
General Re continually estimates its liabilities and related reinsurance recoverable for environmental and latent injury claims and claim expenses. While most of its liabilities for such claims arise from exposures in North America, General Re has also provided for international environmental and latent injury exposures. Environmental and latent injury exposures do not lend themselves to traditional methods of loss development determination and therefore may be considered less reliable than reserves for standard lines of business (e.g., automobile). The estimate is composed of four parts: known claims, development on known claims, IBNR and direct excess coverage litigation expenses. General Re's estimate for IBNR is based on fitted curves of estimated future claim emergence; this estimate is less reliable than the estimated liability for reported claims. The effect of joint and several liability on the severity of claims and a provision for future claims inflation have been included in the loss development estimate. General Re has established a liability for litigation costs associated with coverage disputes arising out of direct excess insurance policies (rather than from reinsurance assumed). Certain subsidiaries were parties in 121 active direct excess coverage cases involving environmental and latent injury claims at December 31, 1996. Such coverage litigation expenses are estimated using an actuarial estimate of actionable items and their projected costs. General Re paid $7 million in such costs during 1996, and as of December 31, 1996, the liability for future litigation costs related to coverage disputes for environmental and latent injury claims was $132 million (included in the table above). As coverage disputes are tried and verdicts rendered, General Re expects that the settled case law will result in a downward trend in future direct excess litigation expenses. Because reinsurance contracts generally contain arbitration clauses which control disputes between the ceding company and the reinsurer, General Re does not expect the future costs associated with reinsurance disputes to be material. Comprehensive environmental laws have been enacted in many foreign countries, generally imposing sanctions in the form of cleanup costs, civil damage awards, fines and/or imprisonment. Changes in environmental regulations and environmental verdicts may affect future claim development. The liability for environmental and latent injury claims and claim expenses is management's best estimate of future claim and claim expense payments and recoveries which are expected to develop over the next several decades. General Re continues to monitor evolving case law and its effect on environmental and latent injury claims. Changing government regulations, newly identified toxins, newly reported claims, new theories of liability, new contract interpretations and other factors could significantly affect future claim development. While General Re has recorded its current best estimate of its liabilities for unpaid claims and claim expenses, it is reasonably possible that these estimated liabilities, net of estimated reinsurance recoveries, may increase in the future and that the increase may be material to General Re's results from operations, cash flows and financial position. It is not possible to estimate reliably the amount of additional net loss, or the range of net loss, that is reasonably possible. 22 General Re discounts certain liabilities associated with workers' compensation claims. Current statutory rules allow the discounting of "tabular reserves" as defined and allow discounting of nontabular reserves if permitted by the insurer's state of domicile. As of December 31, 1996, General Re recorded $1,662 million in claim liability discount, of which $970 million relates to tabular reserves and $692 million relates to nontabular reserves for medical costs associated with tabular reserve claims. The Delaware Insurance Department confirmed that General Re may discount both its tabular reserves and the medical expenses associated with such tabular reserves at 4.5 percent per year. Major catastrophe losses in recent years have had a significant effect on the insurance and reinsurance industry. General Re has exposure to windstorm, hail, earthquake and other catastrophic events, all of which are managed through several measures, including strong underwriting controls, occurrence caps on certain property treaties, modeling and monitoring its accumulations and imposing zonal limits. In addition, General Re uses its retrocessional programs to provide catastrophe protection. FINANCIAL SERVICES ASSETS AND LIABILITIES The asset and liability positions of the financial services operations fluctuate based on ongoing derivatives transactions and related risk management activities. The purchase of U.S. and foreign government securities (fixed maturities at fair value), which are primarily financed through collateralized repurchase agreements (securities sold under agreements to repurchase), and the "short" sale of U.S. and foreign government securities (securities sold but not yet purchased), whose proceeds are invested in reverse repurchase agreements (securities purchased under agreements to resell), contribute to the short-term fluctuations in the operations' total assets and liabilities, while generally not having any material effect on common stockholders' equity. During 1996, invested assets of these operations increased $915 million to $3,393 million. Securities purchased under agreements to resell (an asset) declined $66 million in 1996. Securities sold under agreements to repurchase (a liability) increased $722 million in 1996 to $1,985 million. Securities sold but not yet purchased represent obligations of General Re to deliver the specified security at the contracted price, thereby creating a liability to repurchase the security in the market at prevailing prices. Accordingly, General Re's ultimate obligation to satisfy the sale of securities sold but not yet purchased may exceed the amount recognized in the balance sheet. The liability for securities sold but not yet purchased increased $255 million in 1996 to $869 million at December 31, 1996. GRFP controls its market risk exposures through the use of cash instruments and derivative transactions. GRFP's components of market risk include foreign exchange, interest rate, equity, swap spread, volatility, correlation and yield curve risk. GRFP controls these risk exposures by taking offsetting positions in either cash instruments or other derivatives to reduce the overall exposure to loss due to movements in these variables. GRFP manages its exposures on a portfolio basis. Under this approach, GRFP monitors its market risk on a daily basis across all swap and option products by calculating the effect on operating results of potential changes in market variables over a one-week period, based on historical market volatility data and informed judgment. GRFP's 1996 aggregate weekly market risk limit across all trading books was $10 million. GRFP sets market risk limits for each type of risk based on a 95 percent probability that movements in market rates will not affect the results from operations in excess of the limit over a one-week period. Since inception, GRFP's largest consolidated weekly position change has been $5 million. In addition to these daily and weekly assessments of risk, GRFP prepares periodic stress tests to assess its exposure to extreme movements in various market risk factors. 23 The "value-at-risk" table below shows the aggregate risk management limit, as defined, and highest and lowest profits and losses recorded over one-week periods.
YEARS ENDED DECEMBER 31, --------------- 1996 1995 ------ ------ (IN MILLIONS) RISK LIMIT USAGE Average.................................................. $ 9 $ 8 PROFIT AND LOSS Highest.................................................. 4 4 Lowest................................................... (3) (4) Average.................................................. -- --
GRFP evaluates and records a fair-value adjustment against trading revenue to recognize counterparty credit exposure and future costs associated with administering each contract. The expected credit exposure for each trade is initially established on the trade date and is determined through the use of a proprietary credit exposure model that is based on historical default probabilities, market volatilities and, if applicable, the legal right of setoff. These exposures are continually monitored and adjusted due to changes in the credit quality of the counterparty, changes in interest and currency rates or changes in other factors affecting credit exposure. The fair value allowance for counterparty credit exposures and future administrative costs on existing contracts was $77 million and $67 million at December 31, 1996 and 1995, respectively. GRFP has not experienced any credit losses as a result of counterparty defaults. STOCKHOLDERS' EQUITY Common stockholders' equity at December 31, 1996 was $7,326 million, or $89.82 per share, an increase of 12.0 percent over $80.22 per share at December 31, 1995. The increase was primarily due to net income of $894 million, the reissuance of treasury stock for the acquisition of National Re of $587 million, after-tax unrealized appreciation of $157 million, less stock repurchases of $735 million and dividends paid of $174 million. Common stockholders' equity at December 31, 1995 increased 35.6 percent over the $4,859 million at year end 1994. 24 LIQUIDITY AND CAPITAL RESOURCES A summary of General Re's cash flow by business segment was as follows:
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- (IN MILLIONS) OPERATING ACTIVITIES: North American property/casualty.................. $ 930 $ 985 $ 968 International property/casualty and life/health... 740 740 215 Financial services................................ 8 49 (97) -------- -------- ------- Consolidated operating cash flow................... 1,678 1,774 1,086 -------- -------- ------- INVESTING ACTIVITIES: North American property/casualty.................. 93 (848) (16) International property/casualty and life/health... (826) (936) (189) Financial services................................ (13) 21 189 Cash used for acquisitions........................ (313) -- (582) Cash obtained in acquisitions..................... 3 -- 153 -------- -------- ------- Consolidated investing cash flow................... (1,056) (1,763) (445) -------- -------- ------- FINANCING ACTIVITIES: North American property/casualty.................. (733) (149) (350) International property/casualty................... 88 162 (22) Financial services................................ 130 (8) (87) -------- -------- ------- Consolidated financing cash flow................... (515) 5 (459) -------- -------- ------- Consolidated change in cash........................ $ 107 $ 16 $ 182 ======== ======== =======
General Re's cash flow from operations was $1,678 million in 1996, compared with $1,774 million in 1995, and $1,086 million in 1994. North American property/casualty financing cash flows include General Re's stock repurchases and dividends to stockholders. During 1996, General Re utilized $313 million in cash for the acquisition of National Re. As discussed earlier, General Re made a net cash investment in 1994 of $582 million in GR-CK, the holding company which owns approximately 66.3 percent of Cologne Re. The funds invested in GR-CK are subject to certain restrictions according to the joint- venture agreement. Dividends paid to General Re common and preferred stockholders were $174 million, $172 million and $168 million in 1996, 1995 and 1994, respectively. General Re used $735 million, $35 million and $207 million to repurchase 4,989,000 shares, 235,200 shares and 1,912,500 shares of its common stock in the years ended December 31, 1996, 1995 and 1994, respectively. Through December 31, 1996, General Re has purchased $2,333 million (27,133,500 shares) of its common stock since the inception of the repurchase program in 1987. On June 12, 1996, General Re's Board of Directors authorized $500 million of stock repurchases, in addition to the standing authority to repurchase shares in anticipation of shares to be issued under various compensation plans. The 1996 repurchase authorization had $226 million of remaining capacity as of December 31, 1996. On February 12, 1997, the Board of Directors declared a regular quarterly dividend of $.55 per share on the common stock of General Re. This represents an increase of 7.8 percent over the $.51 per share dividend paid in prior quarters during 1996 and the 21st consecutive year in which General Re has increased its dividend. CREDIT RATINGS At December 31, 1996, General Re Corporation had $275 million of senior debt outstanding of which $150 million was issued by General Re Corporation and is rated AAA by Standard & Poor's and Aa1 by Moody's, and $125 million was issued by National Re and is rated AA by Standard and Poor's and Aa2 by Moody's. General Re Corporation issues commercial paper to provide additional financial flexibility for its operations. Commercial paper offered by General Re Corporation has been rated A1+ by Standard & Poor's and Prime 1 by Moody's. At December 31, 1996, $140 million of commercial paper was outstanding. General Re Corporation 25 has $1.2 billion of available lines of credit which provide financial flexibility to support General Re Corporation's commercial paper program. The credit lines consist of a 364-day facility of $400 million and a five-year credit facility of the remaining $800 million. The credit agreements with the banks require General Re to maintain a minimum consolidated tangible net worth, as defined, of $2.7 billion. All $1.2 billion of available lines of credit were unused at December 31, 1996 and 1995. GRC and the General Star and Genesis insurers have a claims-paying ability rating of AAA by Standard & Poor's and are also rated A++ by A.M. Best Company, a leading insurance industry rating agency. GRC has a financial strength rating of Aaa by Moody's. Each of these ratings represents the highest category for the respective rating agency. Cologne Re has a claims- paying ability rating of AAA by Standard & Poor's and an A rating from A.M. Best Company. NEW ACCOUNTING STANDARDS See Note 2 to the consolidated financial statements on page 40 for a discussion of new accounting standards. SAFE HARBOR DISCLOSURE In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"), General Re sets forth below cautionary statements identifying important factors that could cause General Re's actual results to differ materially from those which might be projected, forecasted, or estimated in General Re's forward-looking statements, as defined in the Act, made by or on behalf of General Re in press releases, written statements or documents filed with the Securities and Exchange Commission, or in its communications and discussions with investors and analysts in the normal course of business through 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 stockholders' equity, financing needs, capital plans, dividends, plans relating to products or services of General Re, and estimates concerning the effects of litigation or other disputes, as well as assumptions for any of the foregoing and are generally expressed with words such as "believes," "estimates," "expects," "anticipates," "could have," "may have" and similar expressions. Forward-looking statements are inherently subject to risks and uncertainties. General Re cautions that factors which may cause General Re'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 North American and international reinsurance or primary insurance markets that adversely affect the volume or profitability of General Re'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 North America; 3) The ability of General Re to execute its growth strategies in its property/casualty, life/health and financial services operations; 4) The ability of General Re to retain a significant portion of National Re's book of business and realize certain synergies in connection with its acquisition of National Re; 5) Catastrophe losses in General Re's North American 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; 26 7) Changes in inflation that affect the profitability of General Re'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 General Re's property/casualty and life/health businesses retrocessional arrangements; 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 General Re's retrocessionaires or reinsurers; 10) Increases in interest rates, which cause a reduction in the market value of General Re's interest rate sensitive investments, including, but not limited to, its fixed income investment portfolio, and its common stockholders' 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 General Re's common equity investments; 13) Changes in mortality or morbidity levels that affect General Re's life/health business; 14) Changes in the demand for financial services operations' products, including derivatives offered by GRFP; 15) Credit losses on General Re'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 General Re's businesses, General Re 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA GENERAL RE CORPORATION INDEX TO RESERVE DISCLOSURES, FINANCIAL STATEMENTS AND SCHEDULES
PAGE ---- RESERVE DISCLOSURES Property/Casualty Insurance Claim Disclosures (Unaudited).................. 28 FINANCIAL STATEMENTS Report of Independent Accountants.......................................... 32 Consolidated Statements of Income.......................................... 33 Consolidated Balance Sheets................................................ 34 Consolidated Statements of Common Stockholders' Equity..................... 35 Consolidated Statements of Cash Flows...................................... 36 Notes to Consolidated Financial Statements................................. 37 FINANCIAL STATEMENT SCHEDULES I.Condensed Financial Information of General Re Corporation................ 67 V.Supplementary Insurance Information...................................... 70
Schedules other than those listed above have been omitted since they are either not required, not applicable or repeat information disclosed in the notes to financial statements. 27 PROPERTY/CASUALTY INSURANCE CLAIM DISCLOSURES The consolidated financial statements include estimated liabilities for unpaid claims and claim expenses of General Re's North American and international property/casualty reinsurance subsidiaries. The provision for reported but unpaid claims and claim expenses is based on client reports and individual case estimates, including anticipated salvage and subrogation recoverable. A provision is included for incurred but not reported ("IBNR") claims and claim expenses on the basis of past experience. Historic premium, claim and claim expense data are organized in actuarial formats, analyzed for credibility, and processed through actuarial formulae. Using actuarial judgment, forecasts of IBNR claims and claim expenses are determined and tested for validity. General Re strives for accuracy in its reserving structure and closely monitors its estimates against actual claims and claim expense emergence. The methods of making such estimates and for establishing the resulting liabilities are continually reviewed and updated. All adjustments to the reserve structure (which encompasses claims from up to 50 years ago) are included in current operating results. The actuary relied upon by management in forming the basis of its belief as to the reasonableness of claim and claim expense liabilities is Lee R. Steeneck, FCAS, MAAA, Vice President and Actuary of General Re Corporation. In addition to the ongoing review by management, these liabilities are subject to independent review on a regular basis. General Re's independent public accountants use actuaries during their annual financial statement audit to review both current balance sheet liabilities and income statement provisions. In addition, the Audit Committee of the Board of Directors has periodically engaged the services of an actuarial consulting firm to compare the claim liabilities established by management with the estimates of an independent consulting actuary. LOSS RESERVE TABLES Table 1 presents the development of net balance sheet liabilities for General Re's North American property/casualty operations from 1986 through 1996. Table 2 presents the development of the gross balance sheet liability for General Re's North American property/casualty operations from 1992 through 1996. The first data row shows the estimated net liability for unpaid claims and claim expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of claims and claim expenses, including IBNR, that are outstanding as of the balance sheet date. The upper "triangle" of data shows the reestimated amount of the previously recorded net liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims for individual years. The "cumulative (deficiency) redundancy" represents the aggregate change in the initial estimates from the original balance sheet date through December 31, 1996. Annual changes in the estimates are included in current operating results each year as the liabilities are reevaluated. The deficiencies shown in the tables represent cumulative differences between the original estimate and the current balance sheet liabilities and therefore they should not be summed. The lower "triangle" of data shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. General Re's liabilities for claims and claim expenses displayed in Tables 1 and 2 have been significantly affected by the emergence of environmental and latent injury claims. Starting in 1979, General Re considerably strengthened the liability for claims and claim expenses for latent injury (e.g., asbestos- related) and environmental (e.g., hazardous waste) claims. When originally written, these exposures, some dating back to the 1940s, were not known to cause bodily harm or property damage. Coverage, if any, was provided to policyholders on a very limited basis. Liberal interpretations of very carefully worded insurance policy contract language have, in retrospect, created unanticipated liabilities for the property/casualty insurance industry. Adjustments to General Re's liabilities have been made in each year's current operating results since 1979 to reflect the evolution of case law which has widened the nature and extent of insurance and reinsurance coverage 28 for these exposures. In recent years, reserve strengthening on environmental and mass tort claims has been offset by favorable development on reinsurance of liability business. Social and economic inflation have a leveraged effect on liabilities for claims and claim expenses. Implicit within the reserve structure is an increase in both the frequency and severity of claims between years. In recent years, some of General Re's clients have increased the amount of their retained risk, which partially offsets the effect of social and economic inflation. General Re purchases reinsurance, in both the North American and international markets, which provides protection from large property, liability or workers' compensation claims and allows General Re to offer greater capacity to clients for certain lines of business. General Re increased its capacity over time by retaining more risk and by purchasing additional reinsurance protection above its retentions. General Re believes it has selected financially sound reinsurers and anticipates receiving the full amounts recoverable, net of allowances provided for uncollectible reinsurance recoverables. Table 3 and Table 4 present the development of net and gross balance sheet liabilities for General Re's international property/casualty operations beginning in 1994. The accident-year information required to complete Table 3 and Table 4 for General Re's wholly owned international subsidiaries was not available in prior years. These liabilities, however, were not significant to the consolidated total liabilities in prior periods. Due to lags in receiving underwriting activity reports from ceding companies in Europe, there may be correlated development of both premium and claims in the international operations and fluctuations due to currency movement. The effect of currency movements on these liabilities has been separately reported in these two tables. In evaluating the information included in Tables 1-4, it should be noted that conditions and trends affecting the development of liabilities in the past may not occur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on these tables. Current actuarial studies indicate that liabilities for claims and claim expense as of December 31, 1996, net and gross of reinsurance, are adequate. General Re discounts certain North American workers' compensation loss reserves at an interest rate of 4.5 percent per annum, the same rate used for reporting to state regulatory authorities with respect to the same claim liabilities. These claims are characterized by periodic indemnity payments principally for wage loss and medical/rehabilitation expenses which are generally fixed or determinable, both in amount and duration. The amortization of the discount is included in current operating results as part of the development of prior years' liabilities. The effect of discounting reduced liabilities for claims and claim expenses, net of reinsurance, is shown in Table 5. 29 TABLE 1 ANALYSIS OF NORTH AMERICAN NET CLAIMS AND CLAIM EXPENSE DEVELOPMENT (IN MILLIONS)
YEAR ENDED DECEMBER 31, 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 ------------ ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ Net liability for unpaid claims and claim expenses............... $ 4,043 $ 4,738 $5,217 $5,549 $5,842 $6,230 $6,635 $6,803 $7,029 $7,385 $8,741 Net liability reestimated as of: 1 year later.......... 4,348 4,903 5,185 5,537 5,856 6,286 6,775 6,767 7,042 7,337 2 years later......... 4,691 4,927 5,247 5,481 5,778 6,352 6,850 6,845 6,868 3 years later......... 4,757 4,991 5,166 5,502 5,906 6,475 6,994 6,739 4 years later......... 4,874 4,983 5,236 5,683 6,091 6,638 6,935 5 years later......... 4,910 5,044 5,420 5,900 6,319 6,635 6 years later......... 5,022 5,284 5,642 6,173 6,326 7 years later......... 5,225 5,528 5,958 6,190 8 years later......... 5,467 5,855 5,979 9 years later......... 5,830 5,882 10 years later......... 5,876 Cumulative (deficiency) redundancy*........... $(1,833) $(1,144) $ (762) $ (641) $ (484) $ (405) $ (300) $ 64 $ 161 $ 48 XXX Cumulative amount of net liability paid through: 1 year later.......... $ 890 $ 747 $ 812 $ 927 $ 905 $1,044 $1,291 $1,207 $1,176 $1,253 2 years later......... 1,385 1,354 1,436 1,584 1,613 1,955 2,195 2,063 1,959 3 years later......... 1,877 1,846 1,903 2,115 2,332 2,570 2,850 2,617 4 years later......... 2,267 2,209 2,320 2,689 2,769 3,072 3,300 5 years later......... 2,565 2,546 2,814 3,025 3,184 3,437 6 years later......... 2,842 2,965 3,085 3,362 3,481 7 years later......... 3,207 3,203 3,375 3,618 8 years later......... 3,413 3,472 3,611 9 years later......... 3,659 3,695 10 years later......... 3,876
- -------- * The liability for workers' compensation tabular reserves for claims and claim expenses is discounted as discussed herein. Therefore, the liability reestimated for each year includes the effect of the discount and its amortization. TABLE 2 ANALYSIS OF NORTH AMERICAN GROSS CLAIMS AND CLAIM EXPENSE DEVELOPMENT (IN MILLIONS)
YEAR ENDED DECEMBER 31, 1992 1993 1994 1995 1996 ------------ ------ ------ ------ ------ ------- Gross liability for unpaid claims and claim expenses......................... $7,968 $8,122 $8,578 $9,356 $10,767 Gross liability reestimated as of: 1 year later........................... 8,087 8,180 8,865 9,326 2 years later.......................... 8,149 8,438 8,781 3 years later.......................... 8,570 8,502 4 years later.......................... 8,723 Cumulative (deficiency) redundancy...... $ (755) $ (380) $ (203) $ 30 xxx Cumulative amount of gross liability paid through: 1 year later........................... $1,620 $1,351 $1,502 $1,575 2 years later.......................... 2,641 2,419 2,416 3 years later.......................... 3,432 3,090 4 years later.......................... 3,964
30 TABLE 3 ANALYSIS OF INTERNATIONAL NET CLAIMS AND CLAIM EXPENSE DEVELOPMENT (IN MILLIONS)
YEAR ENDED DECEMBER 31, ---------------------- 1994 1995 1996 ------ ------ ------ Net liability for unpaid claims and claim expenses...... $3,289 $4,352 $4,664 Net liability reestimated as of: 1 year later........................................... 3,545 4,134 2 years later.......................................... 3,316 Cumulative (increase) decrease in net liability......... (27) 218 Less: (increase) decrease due to foreign exchange....... (57) 227 ------ ------ Cumulative (deficiency) redundancy...................... $ 30 $ (9) ------ ------ Cumulative amount of net liability paid through: 1 year later........................................... $ 408 $ 800 2 years later.......................................... 704
TABLE 4 ANALYSIS OF INTERNATIONAL GROSS CLAIMS AND CLAIM EXPENSE DEVELOPMENT (IN MILLIONS)
YEAR ENDED DECEMBER 31, ---------------------- 1994 1995 1996 ------ ------ ------ Gross liability for unpaid claims and claim expenses.... $3,580 $4,896 $5,210 Gross liability reestimated as of: 1 year later........................................... 3,858 4,667 2 years later.......................................... 3,625 Cumulative (increase) decrease in gross liability....... (45) 229 Less: (increase) decrease due to foreign exchange....... (62) 260 ------ ------ Cumulative (deficiency) redundancy...................... $ 17 $ (31) ------ ------ Cumulative amount of gross liability paid through: 1 year later........................................... $ 474 $ 842 2 years later.......................................... 760
TABLE 5 RECONCILIATION OF DISCOUNTING NET LIABILITY FOR CLAIMS AND CLAIM EXPENSES (IN MILLIONS)
1996 1995 1994 ------ ------ ------ Cumulative discount, beginning of the year.............. $1,406 $1,328 $1,319 Acquisition of National Re.............................. 150 -- -- Additional discount..................................... 162 131 64 Amortization of discount................................ (56) (53) (55) ------ ------ ------ Cumulative discount, end of the year.................... $1,662 $1,406 $1,328 ====== ====== ======
31 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of General Re Corporation Stamford, Connecticut We have audited the consolidated financial statements and schedules of General Re Corporation and subsidiaries listed in the index on page 27 of this Form 10-K. These financial statements and schedules are the responsibility of the corporation's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of General Re Corporation and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. New York, New York January 30, 1997 32 GENERAL RE CORPORATION CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN MILLIONS, EXCEPT SHARE DATA)
1996 1995 1994 ---------- ---------- ---------- PREMIUMS AND OTHER REVENUES Net premiums written Property/casualty......................... $ 5,586 $ 5,393 $ 3,001 Life/health............................... 1,075 709 -- ---------- ---------- ---------- Total net premiums written................. $ 6,661 $ 6,102 $ 3,001 ========== ========== ========== Net premiums earned Property/casualty......................... $ 5,618 $ 5,141 $ 2,788 Life/health............................... 1,060 696 -- ---------- ---------- ---------- Total net premiums earned.................. 6,678 5,837 2,788 Investment income.......................... 1,205 1,017 749 Other revenues............................. 309 292 234 Net realized gains on investments.......... 104 64 66 ---------- ---------- ---------- Total revenues......................... 8,296 7,210 3,837 ---------- ---------- ---------- EXPENSES Claims and claim expenses.................. 3,984 3,680 1,981 Life/health benefits....................... 789 505 -- Acquisition costs.......................... 1,478 1,345 614 Other operating costs and expenses......... 727 550 446 Goodwill amortization...................... 21 13 2 ---------- ---------- ---------- Total expenses......................... 6,999 6,093 3,043 ---------- ---------- ---------- Income before income taxes and minority interest.............................. 1,297 1,117 794 Income tax expense (benefit): Current................................... 327 288 152 Deferred.................................. (4) (41) (23) ---------- ---------- ---------- Income tax expense......................... 323 247 129 ---------- ---------- ---------- Income before minority interest........ 974 870 665 Minority interest.......................... 80 45 -- ---------- ---------- ---------- Net income............................. $ 894 $ 825 $ 665 ========== ========== ========== SHARE DATA: Net income per common share................ $ 11.00 $ 9.92 $ 7.97 ========== ========== ========== Dividends per share to common stockholders.............................. $ 2.04 $ 1.96 $ 1.92 Average common shares outstanding.......... 80,251,342 82,085,315 82,071,651
The accompanying notes are an integral part of these consolidated financial statements. 33 GENERAL RE CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (IN MILLIONS, EXCEPT SHARE DATA)
1996 1995 ------- ------- ASSETS INVESTMENTS: Fixed maturities: Available-for-sale (cost: $16,473 in 1996; $14,342 in 1995)..................................................... $17,168 $15,225 Trading (cost: $2,994 in 1996; $2,316 in 1995)............. 2,967 2,317 Preferred equities, at fair value (cost: $771 in 1996; $453 in 1995)................................................... 789 472 Common equities, at fair value (cost: $1,941 in 1996; $1,910 in 1995)................................................... 3,675 3,234 Short-term investments, at amortized cost which approximates fair value................................................. 1,267 1,449 Other invested assets....................................... 696 797 ------- ------- Total investments........................................... 26,562 23,494 Cash......................................................... 365 258 Accrued investment income.................................... 405 390 Accounts receivable.......................................... 2,832 2,368 Funds held by reinsured companies............................ 474 497 Reinsurance recoverable...................................... 2,935 2,794 Deferred acquisition costs................................... 457 434 Goodwill..................................................... 1,052 494 Trading account assets....................................... 4,085 2,434 Other assets................................................. 994 1,100 ------- ------- Total assets............................................. $40,161 $34,263 ======= ======= LIABILITIES Claims and claim expenses.................................... $15,977 $14,252 Policy benefits for life/health contracts.................... 751 580 Unearned premiums............................................ 1,957 1,913 Other reinsurance balances................................... 3,388 3,056 Notes payable and commercial paper........................... 430 155 Income taxes................................................. 728 634 Securities sold under agreements to repurchase............... 1,985 1,263 Securities sold but not yet purchased........................ 869 614 Trading account liabilities.................................. 3,907 2,627 Other liabilities............................................ 1,675 1,357 Minority interest............................................ 1,166 1,224 ------- ------- Total liabilities........................................ 32,833 27,675 ------- ------- Cumulative convertible preferred stock (shares issued 1,711,907 in 1996 and 1,724,037 in 1995; no par value)...... 146 147 Loan to employee savings and stock ownership plan............ (144) (146) ------- ------- 2 1 ------- ------- COMMON STOCKHOLDERS' EQUITY Common stock (102,827,344 shares issued in 1996 and 1995; par value $.50)................................................. 51 51 Paid-in capital.............................................. 1,041 635 Unrealized appreciation of investments, net of deferred income taxes................................................ 1,625 1,468 Currency translation adjustments, net of deferred income taxes....................................................... (53) (11) Retained earnings............................................ 6,708 5,986 Less common stock in treasury, at cost (shares held: 21,262,113 in 1996 and 20,714,069 in 1995).................. (2,046) (1,542) ------- ------- Total common stockholders' equity........................ 7,326 6,587 ------- ------- Total liabilities, cumulative convertible preferred stock and common stockholders' equity......................... $40,161 $34,263 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 34 GENERAL RE CORPORATION CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (IN MILLIONS)
1996 1995 1994 ------- ------- ------- COMMON STOCK: Beginning of year.................................. $ 51 $ 51 $ 51 Change for the year................................ -- -- -- ------- ------- ------- End of year....................................... 51 51 51 ------- ------- ------- PAID-IN CAPITAL: Beginning of year.................................. 635 604 596 Stock issued under stock option and other incentive arrangements...................................... 30 24 6 Stock issued for acquisition of National Re........ 369 -- -- Other.............................................. 7 7 2 ------- ------- ------- End of year....................................... 1,041 635 604 ------- ------- ------- UNREALIZED APPRECIATION OF INVESTMENTS, NET OF DEFERRED INCOME TAXES: Beginning of year.................................. 1,468 421 651 Cumulative effect of accounting change (FAS 115), net of deferred income taxes of $201 million...... -- -- 373 Change for the year................................ 242 1,641 (942) Deferred income taxes.............................. (85) (594) 339 ------- ------- ------- End of year....................................... 1,625 1,468 421 ------- ------- ------- CURRENCY TRANSLATION ADJUSTMENTS, NET OF DEFERRED INCOME TAXES: Beginning of year.................................. (11) (20) (42) Change for the year................................ (42) 9 22 ------- ------- ------- End of year....................................... (53) (11) (20) ------- ------- ------- RETAINED EARNINGS: Beginning of year.................................. 5,986 5,330 4,830 Net income......................................... 894 825 665 Dividends paid on common stock..................... (163) (161) (157) Dividends paid on preferred stock, net of income taxes............................................. (9) (8) (8) ------- ------- ------- End of year....................................... 6,708 5,986 5,330 ------- ------- ------- COMMON STOCK IN TREASURY: Beginning of year.................................. (1,542) (1,527) (1,325) Cost of shares acquired during year................ (735) (35) (207) Stock issued for acquisition of National Re........ 218 -- -- Issued under stock option and other incentive arrangements...................................... 13 20 5 ------- ------- ------- End of year....................................... (2,046) (1,542) (1,527) ------- ------- ------- Total common stockholders' equity............... $ 7,326 $ 6,587 $ 4,859 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 35 GENERAL RE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN MILLIONS)
1996 1995 1994 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income......................................... $ 894 $ 825 $ 665 Adjustments to reconcile net income to net cash provided by operating activities: Change in claim and claim expense liabilities..... 689 1,671 571 Change in policy benefits for life/health contracts........................................ 171 96 -- Change in reinsurance recoverable................. (49) (305) (220) Change in unearned premiums....................... 39 262 261 Amortization of acquisition costs................. 1,478 1,345 614 Acquisition costs deferred........................ (1,478) (1,455) (672) Trading account activities Change in trading account securities............. (660) (1,602) 1,232 Securities purchased under agreements to resell.. 66 747 (681) Securities sold under agreements to repurchase... 722 325 (628) Change in other trading balances................. (135) 586 26 Other changes in assets and liabilities........... 45 (657) (16) Realized gains on investments..................... (104) (64) (66) ------- ------- ------- Net cash from operating activities.............. 1,678 1,774 1,086 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Fixed maturities: available-for-sale Purchases......................................... (8,612) (5,837) (4,415) Calls and maturities.............................. 857 811 563 Sales............................................. 6,531 3,900 4,042 Equity securities Purchases......................................... (1,166) (900) (999) Sales............................................. 1,337 723 978 Net sales (purchases) of other invested assets..... 12 (101) (61) Net sales (purchases) of short-term investments.... 295 (359) (124) Cash used for acquisitions......................... (313) -- (582) Cash obtained in acquisitions...................... 3 -- 153 ------- ------- ------- Net cash used in investing activities........... (1,056) (1,763) (445) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of notes payable........................ (86) -- (21) Commercial paper borrowing (repayment), net........ 140 (31) (230) Change in contract deposits........................ 290 64 171 Cash dividends paid to stockholders:Common......... (163) (161) (157) Preferred.......................................... (11) (11) (11) Acquisition of treasury stock...................... (729) (30) (222) Other.............................................. 44 174 11 ------- ------- ------- Net cash (used in) from financing activities.... (515) 5 (459) ------- ------- ------- Change in cash...................................... 107 16 182 Cash, beginning of year............................. 258 242 60 ------- ------- ------- Cash, end of year................................... $ 365 $ 258 $ 242 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 36 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION General Re Corporation and subsidiaries ("General Re") have global reinsurance and financial services operations in 62 cities in 30 countries on 6 continents and provide reinsurance coverage in approximately 150 countries. General Re operates four principal businesses: North American property/casualty reinsurance, international property/casualty reinsurance, life/health reinsurance and financial services. General Re's principal reinsurance operations are based in North America and Germany, with other major operations in Asia, Australia, Europe and South America. General Re's financial services operations are located in New York, London, Tokyo, Hong Kong, and Toronto. GRC is the largest North American professional property/casualty reinsurer, and General Re is among the three largest reinsurers in the world based on net premiums written and capital. General Re's North American property/casualty operations produced revenues of $3,887 million, or 47 percent, of consolidated revenues in 1996. The principal business of these subsidiaries is treaty and facultative reinsurance underwritten on a direct basis throughout North America. General Re predominately writes excess-of-loss reinsurance across various lines of business. General Re's international property/casualty operations produced revenues of $3,004 million, or 36 percent, of consolidated revenues in 1996. With the consolidation of the results of Kolnische Ruckversicherungs-Gesellschaft AG ("Cologne Re") in 1995, international property/casualty premiums now account for a significantly greater portion of General Re's revenues. General Re's life/health reinsurance operations produced revenues of $1,134 million, or 14 percent, of the consolidated total in 1996. These operations include the North American and international life/health reinsurance operations of Cologne Re. General Re's financial services operations include derivative products, insurance brokerage and management, investment management, reinsurance brokerage and real estate management operations. Through General Re Financial Products Corporation and affiliates ("GRFP"), General Re offers a full line of interest rate, currency and equity swaps and options, as well as structured finance products. The financial services operations produced $271 million, or 3 percent, of General Re's 1996 revenues. ACCOUNTING POLICIES BASIS OF PRESENTATION: General Re's consolidated financial statements have been prepared on the basis of generally accepted accounting principles in the United States. The consolidated financial statements include General Re Corporation and its subsidiaries. All significant intercompany transactions have been eliminated. The North American property/casualty results include the results of National Re Corporation and its subsidiaries ("National Re") since the date of acquisition on October 3, 1996. International property/casualty and life/health subsidiaries report their results on a quarter lag. Certain other reclassifications have been made to 1995 and 1994 balances to conform to the 1996 presentation. INVESTMENTS: Fixed maturity securities that General Re may sell prior to maturity in response to changes in market interest rates, changes in liquidity needs, or other factors and equity securities are classified as available-for- sale and carried at fair value, with unrealized gains and losses, net of deferred income taxes, excluded from income and reported in a separate component of common stockholders' equity. Fixed maturity securities that are held for resale are classified as trading and carried at fair value, with unrealized gains and losses included in income. Realized gains or losses on sales of investments are primarily determined on the basis of identified cost and include adjustments to the net realizable value of investments for declines in value that are considered to be other 37 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) than temporary. Realized gains or losses include gains and losses arising from the translation into U.S. dollars of investments held by the North American operations and denominated in foreign currencies. General Re periodically uses derivatives to reduce the price risk associated with its investment portfolio. Derivatives used to manage these risks must be designated as a hedge at their inception and must remain a hedge throughout the hedge period. To the extent these derivatives are considered hedges, related gains or losses are treated as basis adjustments of the hedged securities. Investment income is recognized as earned and includes the accretion of bond discount and amortization of bond premium. Included in other invested assets are investments in reinsurance joint ventures, limited partnerships and real estate. Reinsurance ventures reported under the equity method are carried at initial cost with adjustment after acquisition for General Re's proportionate share of the venture's earnings. The amount of the adjustment is included in "Other revenues." Limited partnership investments are carried at estimated fair value. Real estate is valued at cost and depreciated over its estimated useful life. PROPERTY/CASUALTY OPERATIONS PREMIUMS EARNED: Premiums are recognized in income over the contract period in proportion to the amount of insurance or reinsurance provided. Unearned premium liabilities are established to cover the unexpired portion of premiums written. Such liabilities are computed by pro rata methods based on statistical data and reports received from ceding companies. In the absence of ceding company reports, premiums are estimated using historical information and management judgment. Premium adjustments on contracts and audit premiums are accrued on an estimated basis throughout the contract term. Premiums are reported net of retrocessions. ACQUISITION COSTS: Acquisition costs, consisting principally of commissions and brokerage expenses incurred at contract issuance, are deferred and amortized over the contract period in which the related premiums are earned, generally one year. Deferred acquisition costs are reviewed to determine that they do not exceed recoverable amounts, after considering investment income. CLAIMS AND CLAIM EXPENSES: The liability for claims and claim expenses is based on reports and individual case estimates received from ceding companies. The liability also includes incurred but not reported claims and claim expenses, which are actuarially estimated based on past experience and are reduced by anticipated salvage and subrogation recoverable. The methods of determining such estimates and establishing the related liabilities are regularly reviewed and updated, and any resulting adjustments are included in income currently. Reinsurance recoveries on unpaid claims and claim expenses, net of uncollectible amounts, are recognized as assets at the same time and in a manner consistent with General Re's method for establishing the related liability. Workers' compensation liabilities, after deduction of reinsurance recoverable for unpaid losses, were $1,490 million and $1,244 million at December 31, 1996 and 1995, respectively, after being discounted at an interest rate of 4.5 percent. LIFE/HEALTH OPERATIONS PREMIUMS EARNED: Premiums for life contracts are recognized in income when due. Premiums for health contracts are earned over the contract period in proportion to the amount of insurance or reinsurance provided. Unearned premium liabilities are established to cover the unexpired portion of health premiums written. Premiums are reported net of retrocessions. ACQUISITION COSTS: Acquisition costs, principally commissions that vary with and are primarily related to the acquisition of new business, are deferred and amortized with interest over the premium-paying period of traditional life and health insurance policies. 38 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) POLICY BENEFITS FOR LIFE/HEALTH CONTRACTS: The liability for policy benefits for life contracts has been computed based upon assumed investment yields and mortality and withdrawal rates anticipated at the later of either the acquisition of Cologne Re or at the date of contract issuance. These assumptions include a margin for adverse deviation and vary with the characteristics of the reinsurance contract's date of issuance, policy duration and country of risk. The interest rate assumptions used vary by country ranging principally from 3.0 percent to 7.0 percent. Appropriate provisions for profit-sharing commissions to ceding companies have been recorded. PRESENT VALUE OF FUTURE PROFITS: The present value of future profits ("PVP") is the actuarially determined present value of the projected profits from the continuation of in-force reinsurance on existing insurance policies on the date Cologne Re was acquired. The calculation of the estimated profits includes anticipated future premiums, death and benefit payments, reserve changes, profit sharing amounts, expenses and related investment income. PVP was determined using risk-adjusted discount rates ranging primarily from 10.0 percent through 16.0 percent. The interest rates selected for the valuation were determined based on the applicable interest rates in the country of risk and the risk inherent in the realization of the estimated future profits. PVP, which is included in "Other assets" on the balance sheet, was $112 million and $125 million at December 31, 1996 and 1995, respectively, and is being amortized over the duration of the related life business, approximately 20 years, based upon the assumed underlying profits of the business acquired using a 7.0 percent interest rate. FUNDS HELD BY REINSURED COMPANIES: Funds held by reinsured companies represent ceded premium retained by the ceding company for a period according to contractual terms. General Re generally earns investment income on these balances during the period funds are held. GOODWILL: General Re amortizes on a straight-line basis goodwill recorded in connection with its business combinations. Included in 1996 goodwill is approximately $595 million related to the acquisition of National Re. The 1995 goodwill amount is principally related to the Cologne Re joint venture. General Re's goodwill is amortized predominantly over 40 years. The amount of goodwill reported for the Cologne Re transaction fluctuates based on changes in the value of the German mark relative to the U.S. dollar during the period. DEFERRED INCOME TAXES: Deferred income taxes have been provided for all temporary differences between the bases of assets and liabilities used in the financial statements and General Re's United States and foreign tax returns. Deferred income taxes are also provided for unrealized appreciation (depreciation) of equity securities and certain fixed maturities, and for foreign currency translation gains or losses by a charge or credit directly to the applicable component of common stockholders' equity. FOREIGN CURRENCY TRANSLATION: Revenues and expenses denominated in foreign currencies are translated at the average rate of exchange during the period. Assets and liabilities are translated at the rate of exchange in effect at the close of the period. Gains or losses resulting from translating foreign currency financial statements are accumulated in a separate component of common stockholders' equity. General Re's international operations have exposures to the major currencies in Europe, principally the German mark and British pound. A deterioration in the value of these currencies could have an adverse effect on General Re's financial position and operating results. Gains or losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's functional currency) are included in net income. DEPOSITS: Reinsurance contracts that do not indemnify the ceding company against loss or liability are recorded as deposits and included in "Other reinsurance balances." These deposits are treated as financing transactions and are credited or charged with interest income or expense according to contract terms. 39 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) ALLOWANCE FOR DOUBTFUL ACCOUNTS: Allowances are provided for uncollectible reinsurance recoverables and other doubtful receivables. Write-offs of receivables reduce the allowance. At December 31, 1996 and 1995, the allowance was $126 million and $135 million, respectively. FINANCIAL SERVICES: GRFP's derivative contracts are carried at estimated fair value which is determined using financial models which incorporate current interest rates, currency rates, and security values. Securities owned, securities sold but not yet purchased and futures contracts are carried at fair value. Realized and unrealized gains or losses from selling or valuing securities and contractual commitments at fair value are included in "Other revenues." Included in trading account assets and liabilities are the unrealized gains and losses on interest rate and currency swaps, forward currency commitments and option products. These estimated unrealized gains and losses, which have been included in income, represent the fair value of estimated future cash flows for these transactions. Purchases of securities under agreements to resell and sales of securities under agreements to repurchase are accounted for as collateralized investing and financing transactions and are recorded at their contractual resale or repurchase amounts, plus accrued interest. ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. General Re's principal estimates include property/casualty claims and claim expenses, policy benefits for life/health contracts, estimated premium when General Re has not received ceding company reports and valuation of nonexchange traded financial instruments. General Re utilizes historical information, actuarial analyses, financial modeling and other analytical techniques to prepare these estimates. Actual results for all these items could differ from the estimates included in General Re's income statement, balance sheet and statement of cash flows. EARNINGS PER SHARE: Earnings per common share were based on earnings less preferred dividends, divided by the weighted average common shares outstanding during each year. Fully diluted earnings per share, assuming the conversion of all outstanding convertible preferred stock and the maximum dilutive effect of common stock equivalents, have not been presented because the effects are not material. 2. ACCOUNTING CHANGES In October 1995, the Financial Accounting Standards Board 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. 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. General Re elected to continue its current method of accounting for stock-based compensation and disclosed in Note 11 pro forma net income and earnings per share as if the Statement's fair-value based method of accounting were applied. Adoption of the Statement had no effect on General Re's results from operations, financial position or cash flows. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 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 the determination of 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. Adoption of the Statement had no material effect on the results from operations, financial position or cash flows of General Re. 40 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. ACQUISITIONS AND REINSURANCE VENTURES National Re On October 3, 1996, General Re acquired all of the outstanding shares of National Re, a North American property/casualty reinsurance group, in exchange for 4,023,901 shares of General Re Corporation's common stock and $313 million in cash, including expenses, for a total cost of $900 million. The acquisition of the shares of National Re has been accounted for as a purchase. The results of operations subsequent to the date of acquisition are included in General Re's consolidated operating results. At December 31, 1996, National Re's assets and liabilities at acquisition were included in General Re's consolidated balance sheet. Pro forma figures showing the effect of this acquisition on General Re's 1995 and 1996 net income and stockholders' equity have not been presented due to immateriality. Cologne Re On December 28, 1994, General Re and Colonia Konzern AG ("Colonia") formed a new company that acquired 75 percent of the ordinary shares and approximately 30 percent of the preference shares of Cologne Re, which collectively represents a 66.3 percent economic interest in Cologne Re. In exchange for its Cologne Re shares, Colonia, for itself and as trustee for Nordstern Allgemeine Versicherungs AG (collectively, "CKAG"), received 100 percent of the Class A shares of the new company, General Re-CKAG Reinsurance and Investment S.a r.1. ("GR-CK"). General Re initially contributed $884 million (DM 1,377 million) to GR-CK in exchange for 100 percent of the Class B shares of GR-CK. On December 30, 1994, GR-CK paid $302 million (DM 475 million) to General Re in exchange for notes in the principal amount of DM 475 million. The notes pay interest of 8.0 percent annually to GR-CK and are due on December 30, 2004. The intercompany notes have been eliminated in consolidation. The funds invested in GR-CK are subject to certain restrictions according to the joint venture agreement. The Class A shares have 49.9 percent of the votes of GR-CK and are entitled to an annual Class A dividend, which is based on a formula and is subject to a minimum of approximately DM 36 million, while the Class B shares have 50.1 percent of the votes of GR-CK and are entitled to the earnings of GR-CK in excess of the Class A dividend. General Re also receives an annual Class B cash dividend of 50.1 percent of GR-CK's distributable income, as defined in the joint-venture agreement. The dividends related to the 1995 calendar result, which were paid in 1996 with respect to the Class A and B shares were $27 million and $26 million, respectively. General Re has an option to purchase from January 1, 2002 to January 1, 2004 the Class A shares of GR-CK owned by the CKAG at a formula price. The option has a minimum exercise price of DM 1,306 million and a maximum of DM 1,509 million, subject to certain warranty and other adjustments that may affect the exercise price. If General Re does not exercise its option to purchase the Class A shares of GR-CK from CKAG, CKAG has an option to purchase the Class B shares of GR-CK from General Re under a similar exercise price formula. The acquisition of the shares of Cologne Re through GR-CK has been accounted for as a purchase. General Re has consolidated GR-CK and Cologne Re in its financial statements and recorded as minority interests the share of CKAG in GR-CK and of the other stockholders in Cologne Re. 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 U.S. generally accepted accounting principles by 62.9 percent over the amount 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 to its ownership in Cologne Re through GR-CK, General Re purchased for its own account an additional 8.4 percent of the ordinary and preference shares of Cologne Re through December 31, 1996 for aggregate consideration of $85 million, which increased General Re's 41 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) consolidated economic interest in Cologne Re to 74.7 percent. The purchases of additional Cologne Re shares are accounted for as a step acquisition. Under the step acquisition method of accounting, the fair value of assets and liabilities are recorded at each acquisition date with the excess of cost over fair value recorded as incremental goodwill. Tempest Reinsurance Company Limited In September 1993, General Re acted as sponsor in the formation of Tempest Reinsurance Company Limited ("Tempest"), a Bermuda-based reinsurance company specializing in excess property catastrophe reinsurance. On July 1, 1996, General Re sold its 20.7 percent interest in Tempest and its stock options, and terminated its underwriting services agreement with Tempest for $216 million in total consideration. 4. STATUTORY FINANCIAL INFORMATION General Re's North American reinsurance and insurance subsidiaries file financial statements prepared in accordance with statutory accounting practices prescribed or permitted by insurance regulators. Statutory accounting differs from generally accepted accounting principles in the reporting of certain reinsurance contracts, investments, subsidiaries, acquisition expenses, fixed assets, deferred income taxes and certain other items. Combined statutory surplus at December 31, 1996 and 1995 was $5,326 million and $4,607 million, respectively, and combined statutory net income for the years ended December 31, 1996, 1995 and 1994 was $777 million, $621 million and $511 million, respectively. General Re prepares statutory financial statements in accordance with accounting practices prescribed or permitted by their domiciliary state's insurance department. Prescribed accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed that have been permitted by the insurance department of the insurer's domiciliary state. As discussed in Note 1, General Re discounts certain workers' compensation liabilities at an annual rate of 4.5 percent. Included in the discount recognized for statutory purposes at December 31, 1996 was $692 million resulting from discounting permitted by the domiciliary insurance department. General Re's international subsidiaries prepare statutory financial statements based on local laws and regulations. Some jurisdictions, such as the United Kingdom, impose complex regulatory requirements on reinsurance companies, while other jurisdictions, such as Germany, impose fewer requirements. Local reinsurance business conducted by General Re in some countries require licenses issued by governmental authorities. These licenses may be subject to modification or revocation dependent on such factors as amount and types of reserves and minimum capital and solvency tests. Jurisdictions may impose fines, censure and/or criminal sanctions for violation of regulatory requirements. 42 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. INVESTMENTS The cost, fair value and gross unrealized appreciation and depreciation of short-term, fixed maturity, equity and other investments were as follows:
GROSS GROSS UNREALIZED UNREALIZED FAIR DECEMBER 31, 1996 COST/1/ APPRECIATION DEPRECIATION VALUE ----------------- ------- ------------ ------------ ------- (IN MILLIONS) SHORT-TERM INVESTMENTS............... $ 1,267 -- -- $ 1,267 FIXED MATURITIES -- AVAILABLE-FOR- SALE U.S. Government..................... 1,580 $ 45 $ 9 1,616 German federal and state governments........................ 868 56 -- 924 Tax-exempt.......................... 8,728 438 8 9,158 Corporate........................... 2,940 114 6 3,048 Mortgage-backed..................... 1,106 21 2 1,125 Asset-backed........................ 51 2 -- 53 Non-U.S............................. 1,200 46 2 1,244 ------- ------ ---- ------- Total fixed maturities -- available-for-sale................ 16,473 722 27 17,168 ------- ------ ---- ------- FIXED MATURITIES -- TRADING U.S. Government..................... 1,267 2 -- 1,269 Corporate........................... 35 -- -- 35 Non-U.S............................. 1,692 39 68 1,663 ------- ------ ---- ------- Total fixed maturities -- trading.. 2,994 41 68 2,967 ------- ------ ---- ------- PREFERRED EQUITIES................... 771 23 5 789 COMMON EQUITIES...................... 1,941 1,747 13 3,675 OTHER INVESTED ASSETS................ 612 104 20 696 ------- ------ ---- ------- Total............................ $24,058 $2,637 $133 $26,562 ======= ====== ==== ======= DECEMBER 31, 1995 ----------------- SHORT-TERM INVESTMENTS............... $ 1,449 -- -- $ 1,449 FIXED MATURITIES -- AVAILABLE-FOR- SALE U.S. Government..................... 1,354 $ 83 $ 3 1,434 German federal and state governments........................ 857 52 -- 909 Tax-exempt.......................... 6,665 521 2 7,184 Corporate........................... 2,790 137 5 2,922 Mortgage-backed..................... 598 28 -- 626 Asset-backed........................ 108 5 -- 113 Non U.S............................. 1,970 74 7 2,037 ------- ------ ---- ------- Total fixed maturities -- available-for-sale................ 14,342 900 17 15,225 ------- ------ ---- ------- FIXED MATURITIES -- TRADING U.S. Government..................... 730 8 -- 738 Non U.S............................. 1,586 35 42 1,579 ------- ------ ---- ------- Total fixed maturities -- trading.. 2,316 43 42 2,317 ------- ------ ---- ------- PREFERRED EQUITIES................... 453 22 3 472 COMMON EQUITIES...................... 1,910 1,339 15 3,234 OTHER INVESTED ASSETS................ 733 65 1 797 ------- ------ ---- ------- Total............................ $21,203 $2,369 $ 78 $23,494 ======= ====== ==== =======
- -------- /1/Cost is amortized cost for short-term investments and fixed maturities and original cost for equity securities and other invested assets. 43 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Gross gains of $148 million, $117 million and $57 million and gross losses of $93 million, $73 million and $120 million were realized on sales of available- for-sale fixed maturities in 1996, 1995 and 1994, respectively. The contractual maturities of fixed maturity investments--available-for-sale are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay certain obligations.
DECEMBER 31, 1996 ----------------- AMORTIZED FAIR COST VALUE --------- ------- (IN MILLIONS) Due in one year or less...................................... $ 834 $ 851 Due after one year through five years........................ 4,137 4,268 Due after five years through ten years....................... 5,363 5,612 Due after ten years.......................................... 4,982 5,259 Mortgage and asset-backed.................................... 1,157 1,178 ------- ------- Total........................................................ $16,473 $17,168 ======= =======
Realized gains or losses recognized in income for fixed maturities and equity securities were as follows:
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 -------- -------- -------- (IN MILLIONS) Fixed maturities.................................... $ 55 $ 44 $ (63) Equity securities................................... 49 20 129 -------- ------- -------- Total realized gains................................ $ 104 $ 64 $ 66 ======== ======= ========
Dividend, interest and other investment income was as follows:
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- (IN MILLIONS) Fixed maturities.................................... $ 1,041 $ 850 $ 648 Equity securities................................... 134 111 75 Short-term investments.............................. 52 62 35 Miscellaneous, net.................................. 24 26 8 -------- -------- ------ Total investment income............................ 1,251 1,049 766 Investment expenses................................. (46) (32) (17) -------- -------- ------ Investment income.................................. $ 1,205 $ 1,017 $ 749 ======== ======== ======
Securities with a market value of approximately $924 million at December 31, 1996 were on deposit with various state or governmental departments to comply with insurance laws. 44 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. CLAIMS AND CLAIM EXPENSES The table below provides a reconciliation of the beginning and ending claim and claim expense liability, net of reinsurance, for the years presented.
1996 1995 1994 ------- ------- ------- (IN MILLIONS) Balance at January 1................................ $14,252 $12,158 $ 8,452 Reinsurance recoverables on unpaid claims and claim expenses.......................................... (2,515) (1,840) (1,396) ------- ------- ------- Net balance at January 1............................ 11,737 10,318 7,056 Incurred claims and claim expenses related to: Current year....................................... 4,023 3,666 2,017 Prior years........................................ (39) 14 (36) ------- ------- ------- Total incurred claims and claim expenses............ 3,984 3,680 1,981 ------- ------- ------- Claim and claim expense payments related to: Current year....................................... 1,061 773 423 Prior years........................................ 2,052 1,584 1,206 ------- ------- ------- Total payments...................................... 3,113 2,357 1,629 ------- ------- ------- Effect of foreign exchange.......................... (150) 96 -- Net unpaid claims and claim expenses from acquisitions....................................... 947 -- 2,910 ------- ------- ------- Net balance at December 31.......................... 13,405 11,737 10,318 Reinsurance recoverables on unpaid claims and claim expenses.......................................... 2,572 2,515 1,840 ------- ------- ------- Balance at December 31.............................. $15,977 $14,252 $12,158 ======= ======= =======
Consolidated net claims and claim expenses for 1995 and prior accident years experienced favorable development of $39 million in 1996. Net claims and claim expenses for 1995 and prior accident years for the North American operations experienced favorable development of $48 million in 1996. The net favorable loss development was due to favorable development on casualty lines of business, partially offset by losses related to environmental, asbestos and other mass tort claims. Net claims and claim expenses for 1995 and prior accident years for the international operations, after the effect of foreign exchange, had adverse development of $9 million in 1996. The net adverse loss development for the international operations was primarily related to strengthening of reserves for environmental, asbestos and other mass tort claims in runoff operations. General Re continually estimates its liabilities and related reinsurance recoverable for environmental and latent injury claims and claim expenses. While most of its liabilities for such claims arise from exposures in North America, General Re has also provided for international environmental and latent injury exposures. Environmental and latent injury exposures do not lend themselves to traditional methods of loss development determination and therefore may be considered less reliable than reserves for standard lines of business (e.g., automobile). The estimate is composed of four parts: known claims, development on known claims, incurred but not reported ("IBNR") and direct excess coverage litigation expenses. General Re's estimate for IBNR is based on fitted curves of estimated future claim emergence; this estimate is less reliable than the estimated liability for reported claims. The effect of joint and several liability on the severity of claims and a provision for future claims inflation have been included in the loss development estimate. General Re has established a liability for litigation costs associated with coverage disputes arising out of direct excess insurance policies, rather than from reinsurance assumed. Direct excess coverage litigation expenses are estimated using a modified count and amount actuarial study. 45 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The gross liability for environmental and latent injury claims and claim expenses and the related reinsurance recoverable were $1,989 million and $635 million, respectively, at December 31, 1996. The liability for environmental and latent injury claims and claim expenses is management's best estimate of future claim and claim expense payments and recoveries which are expected to develop over the next several decades. General Re continues to monitor evolving case law and its effect on environmental and latent injury claims. Changing government regulations, newly identified toxins, newly reported claims, new theories of liability, new contract interpretations and other factors could significantly affect future claim development. While General Re has recorded its current best estimate of its liabilities for unpaid claims and claim expenses, it is reasonably possible that these estimated liabilities, net of estimated reinsurance recoveries, may increase in the future and that the increase may be material to General Re's results from operations, cash flows and financial position. It is not possible to estimate reliably the amount of additional net loss, or the range of net loss, that is reasonably possible. 7. FEDERAL, FOREIGN AND LOCAL INCOME TAXES Income tax expense (benefit) was as follows:
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------------- 1996 1995 1994 --------------------------- --------------------------- --------------------------- UNITED STATES FOREIGN TOTAL UNITED STATES FOREIGN TOTAL UNITED STATES FOREIGN TOTAL ------------- ------- ----- ------------- ------- ----- ------------- ------- ----- (IN MILLIONS) Current................. $179 $148 $327 $169 $119 $288 $ 99 $53 $152 Deferred................ (64) 60 (4) (90) 49 (41) (21) (2) (23) ---- ---- ---- ---- ---- ---- ---- --- ---- Total.................. $115 $208 $323 $ 79 $168 $247 $ 78 $51 $129 ==== ==== ==== ==== ==== ==== ==== === ====
Income taxes were established on a consolidated basis for all United States and international operations of General Re. No provisions have been made for U.S. income taxes relating to $146 million of cumulative undistributed income of wholly owned international subsidiaries as of December 31, 1996, which is considered permanently reinvested. Applicable U.S. income taxes have been recorded for Cologne Re's income since it distributes dividends to its shareholders on an annual basis. Income taxes paid were $219 million, $216 million and $138 million in 1996, 1995 and 1994, respectively. General Re's effective income tax rate is less than the U.S. statutory rate due to permanent differences between financial statement income and taxable income. An analysis of General Re's effective tax rate as a percentage of pretax income follows:
YEARS ENDED DECEMBER 31, --------------------------- 1996 1995 1994 -------- -------- -------- U.S. statutory tax rate............................ 35.0% 35.0% 35.0% Reduction in taxes resulting from: Tax-exempt bond interest.......................... (9.6) (10.3) (14.6) Dividends received deduction...................... (1.4) (1.5) (1.9) Foreign tax rate differential/credits............. 1.1 0.4 0.2 Miscellaneous..................................... (0.2) (1.5) (2.4) ------- -------- -------- Effective tax rate................................. 24.9% 22.1% 16.3% ======= ======== ========
46 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The components of the net deferred income tax liability were as follows:
DECEMBER 31, -------------- 1996 1995 ------- ------ (IN MILLIONS) DEFERRED INCOME TAX ASSETS: Claim and claim expense liabilities............................. $ 131 $ 69 Unearned premiums............................................... 82 77 Accruals not currently deductible............................... 78 57 U.S. temporary differences from foreign operations.............. 94 72 Other........................................................... 71 48 ------- ----- Total deferred tax assets...................................... 456 323 ------- ----- DEFERRED INCOME TAX LIABILITIES: Unrealized appreciation of investments.......................... 798 710 Deferred acquisition costs...................................... 86 61 Deferred charges................................................ 12 13 Discount on fixed maturity investments.......................... 32 40 Derivative financial instruments................................ 4 11 Other........................................................... 130 43 ------- ----- Total deferred tax liabilities................................. 1,062 878 ------- ----- Net deferred income tax liability................................ $ 606 $ 555 ======= =====
8. NOTES PAYABLE AND COMMERCIAL PAPER The carrying amounts of General Re's notes payable and commercial paper were as follows:
DECEMBER 31, ------------- 1996 1995 ------ ------ (IN MILLIONS) 9.00% Note due in 2009........................................... $ 150 $ 150 8.85% Note due in 2005........................................... 110 -- 7.50% Note due in 2005........................................... 26 -- 7.70% Mortgage payable through 1998.............................. 4 5 ------ ------ Total notes payable............................................. 290 155 Commercial paper................................................. 140 -- ------ ------ Total notes payable and commercial paper........................ $ 430 $ 155 ====== ======
The 9.00 percent note issued by General Re Corporation in conjunction with the Employee Savings and Stock Ownership Plan has a covenant requiring General Re not to encumber its common stock holding in GRC, the largest subsidiary of General Re. The 8.85 percent and 7.50 percent notes were issued by National Re on January 19, 1995 and July 31, 1995, respectively. These notes have a par value of $100 million and $25 million, respectively, and have been recorded on the balance sheet at their fair value at the acquisition date of National Re. The difference between their fair value and par value is recognized as an adjustment to interest expense over the life of the notes. The 7.70 percent mortgage payable is collateralized by General Re's prior home office. 47 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) General Re Corporation issues commercial paper for short-term funding needs. Information on the commercial paper program is as follows:
1996 1995 1994 ---- ---- ---- (IN MILLIONS) Year end balance.............................................. $140 -- $ 31 Average interest rate at year end............................. 5.30% -- 5.96% Average maturity at year end (in days)........................ 76.8 -- 29.8 Average outstanding balance during the year................... $226 $ 21 $209 Average interest rate for the year............................ 5.34% 5.78% 4.13%
General Re Corporation has $1.2 billion of available lines of credit which provide financial flexibility and support General Re Corporation's commercial paper program. The credit lines consist of a 364-day facility of $400 million and a five-year credit facility of the remaining $800 million. The credit agreements with the banks require General Re to maintain a minimum consolidated tangible net worth, as defined, of $2.7 billion. All $1.2 billion of available lines of credit were unused at December 31, 1996 and 1995. Interest expense and interest paid for all loans payable and commercial paper were as follows:
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- (IN MILLIONS) Interest expense.................................... $ 30 $ 15 $ 25 Interest paid....................................... 28 15 25
9. RETIREMENT PLANS General Re has noncontributory pension plans covering substantially all employees. Plans for U.S. employees provide pension benefits that are generally computed on the basis of the average earnings during the three consecutive years of highest earnings during the employee's service. General Re's funding policy is to contribute sufficient amounts to meet the minimum annual funding required by applicable regulations, plus such additional amounts as it may determine to be appropriate from time to time. Pension plan assets are principally invested in investment-grade fixed maturities and equities. Cologne Re provides unfunded pension benefits to its employees based on years of service and age at retirement. The components of pension expense related to both funded and unfunded plans were as follows:
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- (IN MILLIONS) Service cost for benefits earned during the year........................................... $ 17 $ 13 $ 10 Interest cost on projected benefit obligation... 19 16 12 Actual (return) loss on plan assets............. (22) (29) 4 Net amortization and deferral................... 11 22 (12) -------- -------- -------- Pension expense................................. $ 25 $ 22 $ 14 ======== ======== ========
The projected benefit obligation for U.S. employees was determined using an assumed discount rate of 7.50 percent in 1996, 7.00 percent in 1995 and 8.25 percent for 1994, and an assumed long-term compensation increase of 6.00 percent in 1996, 5.75 percent for 1995 and 6.00 percent for 1994. An assumed long-term rate of return on plan assets of 8.50 percent was used in determining pension expense in 1996, 1995 and 1994. The projected benefit obligation for most Cologne Re employees was determined using an assumed discount rate of 48 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7.00 percent in 1996 and 1995 and an assumed long-term compensation increase of 3.50 percent in 1996 and 1995. Through unfunded plans, General Re provides pension benefits for certain employees above amounts allowed under tax qualified plans. General Re also provides postretirement retainers through unfunded plans for members of the Board of Directors. The following table sets forth the plans' funded status and amount recognized in General Re's consolidated balance sheet:
DECEMBER 31, ------------------------------- 1996 1995 --------------- --------------- FUNDED UNFUNDED FUNDED UNFUNDED ------ -------- ------ -------- (IN MILLIONS) Accumulated benefit obligation: Vested....................................... $100 $ 72 $107 $ 62 Nonvested.................................... 16 10 13 10 ---- ----- ---- ----- Accumulated benefit obligation................ 116 82 120 72 Effect of projected salary increases.......... 64 42 60 34 ---- ----- ---- ----- Projected benefit obligation................. 180 124 180 106 Plan assets at fair value..................... 161 -- 143 -- ---- ----- ---- ----- Projected benefit obligation in excess of plan assets....................................... (19) (124) (37) (106) Unrecognized net (gain) loss.................. (20) 22 12 13 Unrecognized prior service cost............... (4) 6 (6) 6 Unrecognized net (asset) obligation at transition................................... (5) 1 (6) 5 ---- ----- ---- ----- Accrued pension liability.................... $(48) $ (95) $(37) $ (82) ==== ===== ==== =====
Substantially all of General Re's employees in the United States will become eligible for certain health care and group life insurance benefits upon retirement from General Re. General Re has funded the benefit cost of current retirees, with the retiree paying a portion of the costs. The retiree's portion of the costs varies depending upon the individual's length of service with General Re upon retirement. General Re funded $3 million for postretirement health care benefits for current retirees in both 1996 and 1995 and had an accrued liability of $30 million and $27 million, respectively, for current employees. 10. EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN General Re has a leveraged Employee Savings and Stock Ownership Plan ("ESSOP") in which substantially all U.S. employees may participate. This is a defined contribution plan which allows employees to make regular contributions that the ESSOP matches up to a maximum of 6 percent of the employee's salary. In 1989, the ESSOP borrowed $150 million from General Re at 9.25 percent, payable annually through 2014. The proceeds of this borrowing were used by the ESSOP to purchase 1,754,386 shares of 7.25 percent ($6.20 dividend per share) cumulative convertible preferred stock of General Re. All preferred stock outstanding is held by the ESSOP and is convertible into common stock, under certain conditions, on a one-to-one basis. The preferred stock is held by the ESSOP trustee as collateral for the loan from General Re. General Re makes contributions to the ESSOP which, together with the dividend on shares of the preferred stock, are sufficient to make loan interest and principal repayments back to General Re. As interest and principal are repaid, a portion of the preferred stock is released for allocation to participating employees. General Re recognizes compensation expense for the ESSOP based on the shares-allocated method. 49 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following summarizes ESSOP activity:
1996 1995 1994 ---------- ---------- ---------- (IN MILLIONS, EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31 Dividends paid on preferred stock: Allocated shares............................ $ 2 $ 2 $ 2 Unallocated shares.......................... 9 9 9 Compensation expense......................... 4 4 5 Contribution to ESSOP........................ 4 4 4 Interest income from ESSOP................... 14 14 14 ESSOP SHARE INFORMATION AT DECEMBER 31 Fair value per share......................... $ 159.50 $ 157.00 $ 125.60 Shares allocated to employees during the year........................................ 62,826 59,672 72,051 Committed to be released..................... 40 2,602 2,881
11. INCENTIVE PLANS General Re has a Long-Term Compensation Plan (the "Plan") which provides for the granting of incentive and nonqualified stock options to members of the Board of Directors and officers. The Plan provides that the exercise price of the options granted may not be less than the fair market value of General Re's common stock on the date the options are granted. The options are exercisable cumulatively, 20 percent each year commencing one year from the date of grant and expire ten years from the grant date. In certain circumstances, replacement options may be granted upon exercise of an original option, with the exercise price equal to the current market price and with a term extending to the expiration date of the original option. In celebration of its 75th Anniversary during 1996, General Re issued 75 option shares or stock appreciation rights ("SARs") to most of its employees. These options are exercisable cumulatively 33 percent each year commencing one year from March 21, 1996. As part of the acquisition of National Re, holders of National Re stock options had the opportunity to roll over their options into options to purchase General Re's common stock. These rollover options are fully vested and have exercise prices that maintain the holder's intrinsic value in the options held. The Plan also permits the granting of SARs in connection with options granted under the Plan. SARs permit the grantee to surrender an exercisable option for an amount equal to the excess of the market price of the common stock over the option price when the right is exercised. 50 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following summarizes the activity for options and SARs:
YEARS ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- STOCK OPTIONS Outstanding, beginning of year............... 3,647,929 3,107,851 2,501,412 Granted: ($140.13 to $168.25 per share)...... 1,092,738 944,987 814,532 Granted in National Re acquisition ($50.65 to $300.00 per share).......................... 262,269 -- -- Exercised ($55.25 to $151.31 per share)...... (341,765) (360,074) (171,093) Canceled..................................... (100,460) (43,635) (34,030) Voided due to SARs exercise.................. (1,300) (1,200) (2,970) --------- --------- --------- Outstanding, end of year..................... 4,559,411 3,647,929 3,107,851 ========= ========= ========= Options exercisable ($50.65 to $157.19 per share)...................................... 2,150,751 1,628,404 1,479,718 ========= ========= ========= Shares available for future options.......... 2,938,838 3,881,185 1,807,096 ========= ========= ========= STOCK APPRECIATION RIGHTS Outstanding, beginning of year............... 8,000 9,200 12,170 Granted...................................... 5,825 -- -- Exercised.................................... (1,300) (1,200) (2,970) --------- --------- --------- Outstanding, end of year..................... 12,525 8,000 9,200 ========= ========= =========
General Re has elected to continue accounting for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 for all of its compensatory plans. Accordingly, no compensation expense has been recognized for its nonqualified stock option plan. Had compensation expense for General Re's nonqualified stock option plan been recognized in accordance with FASB Statement No. 123, General Re's net income and earnings per share would have been $882 million, or $10.86 per share, in 1996 and $823 million, or $9.90 per share in 1995. The Plan also permits the granting of restricted stock awards as compensation to officers of General Re. Shares of restricted stock become outstanding upon grant, receive dividends and have voting rights identical to other outstanding shares of common stock. Restrictions lapse upon termination of the restriction period or upon death, disability or normal retirement. During 1996, 1995 and 1994, General Re made aggregate compensatory restricted stock awards of 96,153, 31,900 and 17,250 shares, respectively. The cost of restricted stock awards is based on the market value of the common stock at the date of grant and is recognized as expense over the restriction period. The Plan also provides for bonus awards to be made in cash, common stock, share units or restricted stock options ("RSOs"). RSOs restrictions lapse five years after the grant date and RSOs expire ten years after the grant date. RSOs are included in the table above. Share units are paid in shares of common stock at a designated future date in advance of the bonus award period. The expense of the Plan was $7 million in 1996, $4 million in 1995 and $2 million in 1994. 51 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. LEASES General Re leases office space and computer equipment under noncancelable leases expiring in various years through 2010. Several of the leases have renewal options with various terms and rental rate adjustments. Rental expense was $32 million in 1996, $31 million in 1995 and $32 million in 1994. At December 31, 1996, the future minimum annual rental commitments under noncancelable leases were as follows:
(IN MILLIONS) 1997........................... $ 34 1998........................... 33 1999........................... 28 2000........................... 27 2001........................... 25 Subsequent to 2001............. 137 ---- Total.......................... $284 ====
Future minimum rental payments above have not been reduced by $48 million of anticipated sublease rental income on noncancelable leases. 13. REINSURANCE Premiums, claims and claim expenses and life/health benefits are reported net of reinsurance in General Re's statements of income. Direct, assumed, ceded and net amounts for these items were as follows:
YEARS ENDED DECEMBER 31, --------------------------------------------------------------- PROPERTY/CASUALTY LIFE/HEALTH PREMIUMS PREMIUMS ------------------ --------------- CLAIMS AND LIFE/HEALTH WRITTEN EARNED WRITTEN EARNED CLAIM EXPENSES BENEFITS --------- -------- ------- ------ -------------- ----------- 1996 Direct.......... $ 525 $ 477 -- -- $ 382 -- Assumed......... 5,887 5,987 $1,180 $1,165 4,237 $ 915 Ceded........... (826) (846) (105) (105) (635) (126) -------- -------- ------ ------ ------ ----- Net............ $ 5,586 $ 5,618 $1,075 $1,060 $3,984 $ 789 ======== ======== ====== ====== ====== ===== 1995 Direct.......... $ 405 $ 364 -- -- $ 207 -- Assumed......... 6,091 5,900 $ 793 $ 780 4,372 $ 558 Ceded........... (1,103) (1,123) (84) (84) (899) (53) -------- -------- ------ ------ ------ ----- Net............ $ 5,393 $ 5,141 $ 709 $ 696 $3,680 $ 505 ======== ======== ====== ====== ====== ===== 1994 Direct.......... $ 438 $ 423 -- -- $ 290 -- Assumed......... 3,058 2,785 -- -- 2,118 -- Ceded........... (495) (420) -- -- (427) -- -------- -------- ------ ------ ------ ----- Net............ $ 3,001 $ 2,788 -- -- $1,981 -- ======== ======== ====== ====== ====== =====
General Re utilizes reinsurance to reduce its exposure to large claims. These agreements provide for recovery of a portion of certain claims and claim expenses from reinsurers. If the reinsurers are unable to meet their obligations under the agreements, General Re would be liable for such defaulted amounts. General Re holds partial collateral under these agreements and has never suffered a significant loss because of defaults. General Re utilizes various North American and international reinsurers as part of its retrocessional program. Prior to 52 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) being included in General Re's retrocessional program, reinsurers are reviewed for their anticipated long-term creditworthiness by General Re's Retrocessional Market Committee. At December 31, 1996, the largest reinsurance recoverable on unpaid claims and claim expenses from any single reinsurer was $382 million. The reinsurer is rated A++ by A.M. Best and has a Standard & Poor's claims-paying ability rating of AAA. As part of its retrocessional program, General Re placed a portion of its reinsurance with various Lloyd's of London syndicates. The syndicates act as managing agents for individual "Names" who bear the risks and rewards of the syndicates' underwriting results. Under Lloyd's current structure, Names have unlimited liability for potential claims. During 1996 Lloyd's finalized a plan of "Reconstruction and Renewal," which is intended to end litigation associated with losses from prior syndicate years, especially those years exposed to North American environmental and other mass tort exposures. The plan allows Names to reinsure their pre-1992 underwriting years to a newly formed corporate reinsurer "Equitas," which will reinsure and manage the runoff of these claims. The intent is to close out Names' potential exposures for these prior underwriting years. Names, however, still have potential exposure for these losses if Equitas is unable to meet its obligations. At December 31, 1996, General Re's reinsurance recoverables on paid and unpaid claims and claim expenses from all Lloyd's syndicates aggregated approximately $260 million. 14. DIVIDENDS General Re Corporation is the ultimate controlling entity in its insurance holding company system, which includes North American insurance companies that are subject to the insurance holding company acts of Delaware and various other states. General Re Corporation is dependent upon the ability of its operating subsidiaries to transfer funds in the form of loans, advances or dividends. The insurance holding company laws require the filing of annual reports by the insurance company members of the system and regulate transactions between the holding company and affiliated insurance companies to the extent that such transactions must be fair, reasonable and assure the adequacy of insurance companies' statutory surplus in relation to their liabilities and financial needs. The laws also subject extraordinary dividends and other extraordinary distributions to insurance company stockholders to regulatory approval. Under the insurance laws of the State of Delaware, GRC's state of domicile, dividends or distributions in a twelve-month period exceeding the greater of 10 percent of an insurance company's surplus or 100 percent of net income, excluding realized gains, for the previous calendar year are generally considered extraordinary and require such approval. During the fourth quarter of 1996, GRC paid a $940 million dividend to General Re Corporation in connection with the acquisition of National Re. Subsequently, General Re Corporation made a cash contribution to GRC of $210 million and contributed the common stock of National Re. As a result of the extraordinary dividend, any additional dividend payments by GRC to General Re Corporation prior to October 1, 1997 will be extraordinary and will require regulatory approval. The statutory standard for such approval requires that GRC's statutory surplus must be reasonable in relation to its outstanding liabilities and adequate relative to its financial needs following payment of the dividend. 15. GENERAL RE FINANCIAL PRODUCTS GENERAL GRFP's products include interest rate, currency and equity swaps and options, as well as structured finance products. These instruments are carried at their current estimates of fair value, which is a function of underlying interest rates, currency rates, security values, volatilities and the creditworthiness of counterparties. Future changes in these factors or a combination thereof may affect the fair value of these instruments with any resulting adjustment, including amounts in excess of those previously recognized in the financial statements, being included currently in the income statement. 53 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) TRADING REVENUES The results of GRFP's trading activities are summarized by profit centers in the following table. Trading revenues include any associated gains and losses on hedging instruments. Trading revenue is included in "Other revenues" in the income statement.
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 -------- -------- -------- (IN MILLIONS) Interest rate and foreign currency swaps............ $ 109 $ 110 $ 105 Interest rate and foreign currency options.......... 35 32 30 -------- -------- -------- Gross trading revenues.............................. $ 144 $ 142 $ 135 ======== ======== ========
NATURE AND TERMS GRFP is engaged as a dealer in various types of derivative instruments, which are described below: Interest rate, currency and equity swaps are agreements between two parties to exchange, at particular intervals, payment streams calculated on a specified notional amount. The parties to a currency swap typically exchange a principal amount in two currencies at inception of the contract, agreeing to re-exchange the currencies at a future date and agreed exchange rate. Interest rate, currency and equity options grant the purchaser the right, but not the obligation, to either purchase from or sell to the writer a specified financial instrument under agreed terms. Interest rate caps and floors require the writer to pay the purchaser at specified future dates the amount, if any, by which the option's underlying market interest rate exceeds the fixed cap or falls below the fixed floor rate, applied to a notional amount. Futures contracts are commitments to either purchase or sell a financial instrument at a future date for a specified price and are generally settled in cash. Forward-rate agreements are financial instruments that settle in cash at a specified future date based on the differential between agreed interest rates applied to a notional amount. Foreign exchange contracts generally involve the exchange of two currencies at agreed rates on a specified date; spot contracts usually require the exchange to occur within two business days of the contract date. A summary of notional amounts of derivative contracts at December 31, 1996 and 1995 is included in the table below. For these transactions, the notional amount represents the principal volume, which is referenced by the counterparties in computing payments to be exchanged, and are not indicative of GRFP's exposure to market or credit risk, future cash requirements or receipts from such transactions. Approximately 69 percent of the notional volume outstanding for derivative contracts at December 31, 1996 has a term of five years or less and approximately 94 percent of the contracts has a term of less than ten years.
DECEMBER 31, ----------------- 1996 1995 -------- -------- (IN MILLIONS) Interest rate and currency swap agreements................... $322,836 $260,200 Options written.............................................. 51,547 43,574 Options purchased............................................ 54,871 44,134 Financial futures contracts: Commitments to purchase..................................... 12,057 14,572 Commitments to sell......................................... 17,427 15,105 Forward rate agreements...................................... 9,565 15,700 Foreign exchange spot and forward contracts.................. 15,615 10,228
54 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FAIR VALUE OF TRADING INSTRUMENTS The table below discloses the net fair value or carrying amount at the reporting date for each class of derivative financial contract held or issued by GRFP for trading purposes, as well as the average fair value during the year, based on monthly observations. The net fair values reflect rights of setoff and qualifying master netting arrangements with various counterparties in accordance with Financial Accounting Standards Board Interpretation 39, Offsetting Amounts Related to Certain Contracts. Interest rate and foreign currency swaps shown in the table below include forward rate agreements and foreign exchange spot and forward contracts.
DECEMBER 31, --------------------------------------- 1996 1995 ------------------- ------------------ ASSET LIABILITY ASSET LIABILITY -------- --------- ------- --------- (IN MILLIONS) Interest rate and foreign currency swaps................................ $ 14,803 $ 14,815 $ 9,562 $ 9,833 Interest rate and foreign currency options.............................. 1,101 935 759 709 -------- -------- ------- ------- Gross fair value...................... 15,904 15,750 10,321 10,542 Adjustment for counterparty netting... (12,445) (12,445) (8,085) (8,085) -------- -------- ------- ------- Net fair value........................ 3,459 3,305 2,236 2,457 Security receivables/payables......... 626 602 198 170 -------- -------- ------- ------- Trading account assets/liabilities.... $ 4,085 $ 3,907 $ 2,434 $ 2,627 ======== ======== ======= ======= AVERAGE 1996 AVERAGE 1995 ------------------- ------------------ ASSET LIABILITY ASSET LIABILITY -------- --------- ------- --------- (IN MILLIONS) Interest rate and foreign currency swaps................................ $ 11,294 $ 11,618 $ 8,244 $ 8,680 Interest rate and foreign currency options.............................. 815 724 679 568 -------- -------- ------- ------- Gross fair value...................... 12,109 12,342 8,923 9,248 Adjustment for counterparty netting... (9,650) (9,650) (6,560) (6,560) -------- -------- ------- ------- Net fair value........................ 2,459 2,692 2,363 2,688 Security receivables/payables......... 197 213 191 152 -------- -------- ------- ------- Trading account assets/liabilities.... $ 2,656 $ 2,905 $ 2,554 $ 2,840 ======== ======== ======= =======
RISK MANAGEMENT Market Risk Market risk is the potential change in value of the portfolio caused by movements in foreign exchange, interest rate and equity markets. The level of market risk is influenced by factors such as volatility and market liquidity in which the financial instruments are traded. GRFP controls market risk exposures by taking offsetting positions in either cash instruments or other derivatives to reduce its overall exposure due to movements in these variables. For securities sold, but not yet purchased, GRFP may incur a loss if the market value of the security increases prior to the purchase of the instruments. GRFP manages its exposures on a portfolio basis. Under this approach, GRFP monitors its market risk on a daily basis across all swap and option products by calculating the effect on operating results of potential changes in market variables over a one week period. Based on historical market volatility data and informed judgment, GRFP sets market risk limits for each type of risk based on a 95 percent probability that movements in market rates will not affect the results from operations in excess of the limit over a one week holding period. GRFP also monitors its consolidated market risk across all trading books on a weekly basis and has established limits assuming simultaneous losses of two market risk components, each at the 95 55 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) percent confidence level. When a risk limit is exceeded, appropriate action is taken, dependent upon the amount and duration of the excess, to monitor, control, and reduce the excess within approved levels. The weekly market risk limit across all trading books was $10 million. Since inception, GRFP has not experienced a weekly position change in excess of the aggregate weekly market risk limit. In addition to these daily and weekly assessments of risk, GRFP prepares periodic stress tests to assess its exposure to movements in various market risk factors such as volatilities, shifts in yield curves, and foreign currency exchange rates. Credit Risk Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. GRFP evaluates and records a fair value adjustment against trading revenue to recognize counterparty credit exposure and future costs associated with administering each contract. The expected credit exposure for each trade is initially established on the trade date and is determined through the use of a proprietary credit exposure model that is based on historical default probabilities, market volatilities and, if applicable, the legal right of setoff. These exposures are continually monitored and the fair value adjustment is adjusted to reflect the changes in the credit quality of the counterparty, changes in interest and currency rates or changes in other factors affecting credit exposures. The fair value allowance for counterparty credit exposures and future administrative costs on existing contracts was $77 million at December 31, 1996. GRFP has not experienced any write-offs on such contracts. In the event counterparties are unable to fulfill their contractual obligations, future losses due to defaults may exceed amounts currently recognized in the balance sheet. Counterparties to the financial instruments are, in decreasing order of magnitude, foreign and domestic commercial banks, U.S. government-chartered organizations, sovereigns and corporations. GRFP evaluates the creditworthiness of its counterparties by performing formal internal credit analyses and by referring to ratings of widely-accepted credit rating services. Counterparty credit limits are determined based on this analysis and counterparty credit exposures are monitored in accordance with these limits. GRFP receives cash and/or investment grade securities from certain counterparties as collateral and, where appropriate, may purchase credit insurance or enter into other transactions to mitigate its credit exposure. GRFP also incorporates into contracts with certain counterparties provisions which allow the unwinding of these transactions in the event of a downgrade in credit rating or other indications of decline in creditworthiness of either the counterparty or GRFP. GRFP assesses credit risk by counterparty across all transactions with each respective counterparty. Assuming non-performance by all counterparties on all contracts potentially subject to a loss, the maximum potential loss, based on the cost of replacement, net of collateral held, at market rates prevailing at December 31, 1996, approximated $2,852 million. This value represents unrealized gains on financial instrument contracts in gain positions, net of any unrealized losses with these counterparties from offsetting positions. The maximum potential loss will increase or decrease during the life of the transaction as a function of contract terms and market conditions such as interest and currency rates. In the judgment of GRFP's management, the likelihood that all counterparties would default, resulting in a maximum potential loss, is remote. GRFP has not had any credit losses as a result of counterparty defaults. 56 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table presents GRFP's derivatives portfolio by counterparty credit quality and maturity at December 31, 1996. The amounts shown under gross exposure in the table are before consideration of netting arrangements and collateral held by GRFP. Net fair value shown on the table represents unrealized gains on financial instrument contracts in gain positions, net of any unrealized loss owed to these counterparties on offsetting positions. Net exposure shown on the table is net fair value less collateral held by GRFP.
GROSS AMOUNTS ----------------------------------------------------------- DUE AFTER FIVE NET DUE BEFORE YEARS THROUGH DUE AFTER FAIR NET FIVE YEARS TEN YEARS TEN YEARS TOTAL VALUE EXPOSURE ---------- -------------- --------- ------- ------ -------- (IN MILLIONS) Counterparty credit quality AAA.................... $1,140 $1,115 $ 795 $ 3,050 $ 379 $ 379 AA..................... 3,465 1,979 1,479 6,923 1,650 1,650 A...................... 2,583 1,842 584 5,009 1,084 674 BBB.................... 305 181 175 661 247 147 Below BBB.............. 172 88 1 261 99 2 ------ ------ ------ ------- ------ ------ Total................. $7,665 $5,205 $3,034 $15,904 $3,459 $2,852 ====== ====== ====== ======= ====== ======
In connection with certain purchases and sales of government securities, GRFP enters into collateralized repurchase and reverse repurchase agreements which may result in credit losses in the event the counterparty to the transaction is unable to fulfill its contractual obligations. All of these transactions are collateralized by U.S. and foreign government securities. In addition to interest amounts shown in Note 8, GRFP had $96 million, $90 million and $83 million of interest expense in 1996, 1995 and 1994, respectively, on related collateralized borrowings. GRFP's exposure to credit risks associated with the nonperformance of counterparties in fulfilling these contractual obligations can be directly affected by market fluctuations, which may affect the counterparties' ability to satisfy their obligations. It is GRFP's policy to take possession of securities purchased under agreements to resell. GRFP monitors the market value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral when appropriate. Counterparties to repurchase agreements and futures transactions are commercial banks and securities brokers and dealers. GRFP enters into exchange traded futures contracts for delayed delivery of foreign currencies or securities in which the seller/purchaser agrees to make/take delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise from the inability of the futures exchange to meet the terms of the contracts and from counterparties' inability to meet their margin requirements. Legal Risk Legal risk arises from the uncertainty of the enforceability, through legal or judicial processes, of the obligations of GRFP's counterparties, including contractual provisions intended to reduce credit exposure by providing for the offsetting or netting of mutual obligations. GRFP seeks to reduce legal risk by consulting with internal and external legal counsel (in relevant jurisdictions) to determine legality and enforceability of various transactions with different types of counterparties. Liquidity Risk GRFP is subject to liquidity risk in funding its portfolio of open transactions. Movements in underlying market variables affect both future cash flows intrinsic in the transactions, and collateral required to cover the value of open positions. Management believes GRFP has sufficient resources to cover its potential liquidity needs through its access to General Re's commercial paper program and lines of credit. 57 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The following are the estimated fair values of General Re's financial instruments:
DECEMBER 31, ----------------------------------- 1996 1995 ----------------- ----------------- STATEMENT FAIR STATEMENT FAIR VALUE VALUE VALUE VALUE --------- ------- --------- ------- (IN MILLIONS) FINANCIAL ASSETS Invested assets (see Note 5).............. $26,562 $26,562 $23,494 $23,494 Cash...................................... 365 365 258 258 Securities purchased under agreements to resell................................... -- -- 66 66 Mortgage receivable (included in other assets).................................. 84 116 86 123 Loan to ESSOP............................. 144 175 146 181 Contract deposit assets................... 198 198 193 193 Trading account assets.................... 4,085 4,085 2,434 2,434 FINANCIAL LIABILITIES 9.00% Note due in 2009.................... 150 172 150 186 8.85% Note due in 2005.................... 110 111 -- -- 7.50% Note due in 2005.................... 26 26 -- -- 7.70% Mortgage payable through 1998....... 4 4 5 5 Commercial paper.......................... 140 140 -- -- Securities sold under agreements to repurchase............................... 1,985 1,985 1,263 1,263 Securities sold but not yet purchased..... 869 869 614 614 Contract deposit liabilities.............. 1,962 1,962 1,668 1,668 Trading account liabilities............... 3,907 3,907 2,627 2,627
General Re uses various methods and assumptions in estimating the fair value of financial instruments. The following valuation methods and assumptions were utilized by General Re in estimating the fair value of financial instruments. Investments--Fair values for fixed maturities and equity securities were generally based on quoted market prices or dealer quotes. The fair value of investments in limited partnerships, which were included in other invested assets on the balance sheet, was determined by reviewing available financial information of the investee and by performing other financial analyses in consultation with external advisors. Fair values for investments in real estate were determined using discounted cash flow analyses for each property. Fair values for reinsurance ventures were based on General Re's proportionate share in the entity's stockholders' equity, since the cost of determining fair value exceeds the benefits derived. The carrying amounts for short-term investments approximate their fair values. Mortgage and loans receivable/payable--The fair value of General Re's mortgage and notes receivable/payable was estimated using discounted cash flow analyses, based on General Re's current incremental borrowing rates for similar types of arrangements. The fair value of General Re's debt was based on market price quotations. Contract deposit assets/liabilities--The fair value of contract deposit assets and liabilities approximates their carrying value. Securities purchased under agreements to resell, securities sold under agreements to repurchase--The carrying value for these financial instruments approximates their fair value. 58 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Trading account assets/liabilities--The fair value for trading account assets/liabilities was based on the use of valuation models that utilize, among other factors, current interest and foreign exchange rates and market volatility data. Securities sold but not yet purchased--The fair value for securities sold but not yet purchased was based on quoted market prices. 17. LEGAL PROCEEDINGS General Re has been named as defendant in litigation in the ordinary course of conducting its insurance business. These lawsuits generally seek to establish liability under insurance or reinsurance contracts issued by the subsidiaries, and occasionally seek punitive or exemplary damages. General Re's reinsurance subsidiaries are also indirectly involved in coverage litigation. In those cases, plaintiffs seek coverage for their liabilities under insurance policies from insurance companies reinsured by General Re's reinsurance subsidiaries. In the judgment of management, none of these cases, individually or collectively, is likely to result in judgments for amounts which, net of claim and claim expense liabilities previously established and applicable reinsurance, or any other litigation, would be material to the financial position, results of operations or cash flow of General Re. On July 1, 1996, U.S. Aviation Underwriters, Inc. ("USAU"), a subsidiary of General Re, and John V. Brennan, the former Chairman and Chief Executive Officer of USAU, after a trial in the U.S. District Court for the Eastern District of New York, were found guilty of mail fraud in connection with the allocation of insurance claims between two companies, arising out of the December 7, 1987 crash of a domestic United States flight. General Re does not expect the amount of any liability to USAU to be material to the financial position, results of operations or cash flows of General Re. 18. COMMON AND PREFERRED STOCK General Re has the authority to issue 250 million shares of $.50 par value common stock, of which 102 million have been issued. Common stock purchased in the open market is carried at cost and shown as a reduction to common stockholders' equity. When treasury shares are reissued, the treasury stock account is reduced for the cost of the common stock reissued on a first-in, first-out basis. No treasury stock of General Re is held by any subsidiary. The number of shares included in treasury stock were as follows:
YEARS ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 ---------- ---------- ---------- Balance, beginning of year.................... 20,714,069 20,955,202 19,195,866 Net purchases (reissuances)................... 548,044 (241,133) 1,759,336 ---------- ---------- ---------- Balance, end of year.......................... 21,262,113 20,714,069 20,955,202 ========== ========== ==========
General Re also has the authority to issue 20 million shares of preferred stock, of which 1,711,907 are issued and outstanding and held by the ESSOP, and 1 million (Series A Junior Participating Preferred) are reserved for the Stockholders' Rights Plan. Under the Stockholders' Rights Plan, one Right attaches to each outstanding share of common stock. In the event a person or group acquires or commences a tender or exchange offer for 20 percent or more of General Re's common stock, each Right entitles common stockholders to purchase Series A Junior Participating Stock, which is convertible to common stock having a value equal to two times the rights exercise price. 59 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 19. INFORMATION ABOUT GENERAL RE'S OPERATIONS General Re conducts its operations principally through the following business segments: the property/casualty reinsurance operations, which include both North American and international subsidiaries, life/health operations and financial services. The following is a summary of industry segment activity for 1996, 1995 and 1994:
1996 ------------------------------------------------------------- PROPERTY/CASUALTY LIFE/HEALTH FINANCIAL SERVICES CONSOLIDATED ----------------- ----------- ------------------ ------------ (IN MILLIONS) Net premiums written Property/casualty...... $5,586 -- -- $5,586 Life/health............ -- $1,075 -- 1,075 ------ ------ ----- ------ Total net premiums written.............. $5,586 $1,075 -- $6,661 ====== ====== ===== ====== Total revenues.......... $6,891 $1,134 $ 271 $8,296 Income before taxes, minority interest and realized gains......... 1,061 53 100 1,214 Income before taxes and minority interest...... 1,152 63 103 1,318 Total assets -- December 31........... 32,123 -- 8,038 40,161 1995 ------------------------------------------------------------- Net premiums written Property/casualty...... $5,393 -- -- $5,393 Life/health............ -- $ 709 -- 709 ------ ------ ----- ------ Total net premiums written.............. $5,393 $ 709 -- $6,102 ====== ====== ===== ====== Total revenues.......... $6,214 $ 742 $ 254 $7,210 Income before taxes, minority interest and realized gains......... 916 50 100 1,066 Income before taxes and minority interest...... 976 51 103 1,130 Total assets -- December 31........... 28,852 -- 5,411 34,263 1994 ------------------------------------------------------------- Net premiums written.... $3,001 -- -- $3,001 Total revenues.......... 3,611 -- $ 226 3,837 Income before taxes and realized gains......... 645 -- 85 730 Income before taxes..... 715 -- 81 796 Total assets -- December 31..................... 23,231 -- 4,885 28,116
60 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table is a summary of General Re's business by geographic area. Allocations to geographic area have been made on the basis of subsidiary location.
GEOGRAPHIC AREA ---------------------------------------- NORTH AMERICA INTERNATIONAL CONSOLIDATED ------------- ------------- ------------ (IN MILLIONS) 1996 Revenues............................. $ 4,593 $ 3,703 $ 8,296 Income before income taxes and minority interest................... 841 456 1,297 Identifiable assets at December 31... 29,041 11,120 40,161 1995 Revenues............................. $ 4,150 $ 3,060 $ 7,210 Income before income taxes and minority interest................... 783 334 1,117 Identifiable assets at December 31... 23,839 10,424 34,263 1994 Revenues............................. $ 3,317 $ 520 $ 3,837 Income before income taxes........... 663 131 794 Identifiable assets at December 31... 20,184 7,932 28,116
61 GENERAL RE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) 20. UNAUDITED QUARTERLY FINANCIAL DATA Summarized quarterly financial results and other data were as follows:
FIRST SECOND THIRD FOURTH --------- --------- --------- --------- (IN MILLIONS, EXCEPT PER SHARE DATA) 1996 Net premiums written Property/casualty...................... $ 1,210 $ 1,579 $ 1,390 $ 1,407 Life/health............................ 251 259 275 290 Net premiums earned Property/casualty...................... 1,294 1,424 1,378 1,522 Life/health............................ 245 254 276 285 Investment income....................... 285 288 302 330 Expenses................................ 1,595 1,754 1,744 1,906 Net income.............................. 237 224 184 249 Per common share: Net income............................. 2.87 2.80 2.31 3.00 Common dividends....................... .51 .51 .51 .51 FIRST SECOND THIRD FOURTH --------- --------- --------- --------- (IN MILLIONS, EXCEPT PER SHARE DATA) 1995 Net premiums written Property/casualty...................... $ 1,007 $ 1,589 $ 1,460 $ 1,337 Life/health............................ -- 220 235 254 Net premiums earned Property/casualty...................... 955 1,345 1,427 1,414 Life/health............................ -- 215 233 248 Investment income....................... 193 255 269 300 Expenses................................ 989 1,644 1,728 1,732 Net income.............................. 183 214 199 229 Per common share: Net income............................. 2.20 2.58 2.39 2.75 Common dividends....................... .49 .49 .49 .49
62 ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF GENERAL RE CORPORATION Reference is made to the captions "Board of Directors" and "Election of Directors" in the Proxy Statement. The Executive Officers of General Re as of March 1, 1997 are as follows:
NAME AGE POSITION ---- --- -------- Charles F. Barr......... 47 Vice President, General Counsel and Secretary of General Re Corporation since 1994; previously Vice President and Assistant General Counsel of General Reinsurance Corporation 1992-1994; Second Vice President and Assistant General Counsel of General Reinsurance Corporation 1990-1992. With General Re since 1989. Joseph P. Brandon....... 38 Vice President and Chief Financial Officer of General Re Corporation since 1991. With General Re since 1989. I. John Cholnoky........ 39 Vice President of General Re Corporation since 1996; Senior Vice President of General Reinsurance Corporation since 1993; previously Vice President of General Reinsurance Corporation 1992-1993; Second Vice President of General Reinsurance Corporation 1987-1992; Assistant Vice President of General Reinsurance Corporation 1985-1987. With General Re since 1981. Ronald E. Ferguson...... 55 Chairman and Chief Executive Officer of General Re Corporation since 1987. With General Re since 1969. Ernest C. Frohboese..... 56 Vice President, Investments of General Re Corporation since 1990 and Senior Vice President and Chief Investment Officer of General Reinsurance Corporation since 1990. With General Re since 1990. Christopher P. Garand... 49 Vice President, Enterprise Risk Manager of General Re Corporation since March 1995 and Senior Vice President of General Reinsurance Corporation since December 1994; previously Vice President and Manager, Financial Products and Services of General Reinsurance Corporation 1988-1994. With General Re since 1985. Hans Peter Gerhardt..... 42 Vice President of General Re Corporation since 1996; Senior Vice President of Cologne Re since 1993; Member of the Board of Executive Directors of Cologne Re since 1993. With General Re since 1994; joined Cologne Re in 1983. James E. Gustafson...... 50 President and Chief Operating Officer of General Re Corporation since March 1995 and Chairman and Chief Executive Officer of General Reinsurance Corporation since February 1995; previously Executive Vice President of General Reinsurance Corporation 1991-1995; Senior Vice President and Manager of Underwriting of General Reinsurance Corporation 1982-1991; President and Chief Executive Officer of General Re Services Corporation since 1987. With General Re since 1969.
63
NAME AGE POSITION ---- --- -------- Theron S. Hoffman....... 49 Vice President, Human Resources of General Re Corporation since March 1995 and Senior Vice President of General Re Services Corporation since 1990. With General Re since 1990. Tom N. Kellogg.......... 60 Executive Vice President of General Re Corporation since March 1995 and President and Chief Operating Officer of General Reinsurance Corporation since February 1995; previously Executive Vice President and Chief Marketing Officer of General Reinsurance Corporation 1991-1995. With General Re since 1968. Dr. Peter Lutke- 50 Executive Vice President of General Re Corporation Bornefeld............... since March 1995 and Chief Executive Officer of Cologne Re since 1993; Member of the Board of Directors of Cologne Re since 1990. With General Re since 1994; joined Cologne Re in 1979. Elizabeth A. Monrad..... 42 Vice President and Treasurer of General Re Corporation since March 1995; previously Corporate Controller of General Re Corporation 1992-1995; Senior Vice President and Treasurer of General Reinsurance Corporation since 1996. Previously a partner with Coopers & Lybrand, 1989-1992. With General Re since 1992. Franklin Montross, IV... 41 Vice President of General Re Corporation since 1996; Member, Vorstand of Cologne Re since 1995; Chief Underwriting Officer and Senior Vice President of General Reinsurance since 1992; previously, Vice President of General Reinsurance Corporation 1987-1991. With General Re since 1978. Stephen P. Raye......... 53 Vice President, Technology of General Re Corporation since March 1995 and Senior Vice President of General Re Services Corporation since 1993; Vice President Information Systems Division of General Re Services Corporation 1985-1993. With General Re since 1977. Lee R. Steeneck......... 49 Vice President and Actuary of General Re Corporation since March 1995 and Senior Vice President of General Reinsurance Corporation since 1996. With General Re since 1975. William E. Thiele....... 54 Vice President, Global Casualty of General Re Corporation since 1996. Previously, Chief Executive Officer and President of Swiss Re America Corporation 1993-1996; President, Chief Operating Officer and Director of Continental Insurance Companies 1990-1992; Executive Vice President of Continental Insurance Companies 1983-1990. With General Re 1968-1983, and since 1996.
The Chairman, President, Secretary and Treasurer are elected by the Board of Directors for one-year terms. Vice Presidents are appointed and serve at the discretion of the Board. Other officers may be appointed by and serve at the discretion of the Chief Executive Officer. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the caption, "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the caption, "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 64 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) FINANCIAL STATEMENTS SCHEDULES AND EXHIBITS 1. The Financial Statements, Reserve Disclosures (unaudited) and Financial Statement Schedules listed in Item 8 are filed as part of this Report. 2. Exhibits 3.1 The Restated Certificate of Incorporation of General Re Corporation, as amended, is incorporated by reference herein from General Re's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. .2 The By-Laws of General Re Corporation, as amended and restated. 4.1 Rights Agreement, dated as of September 11, 1991 between General Re Corporation and The Bank of New York, as Rights Agent, is incorporated by reference from General Re's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10.2 Form of Indemnity Agreement among General Re Corporation and directors and executive officers is incorporated by reference from General Re's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.(/1/) .3 The General Reinsurance Supplemental Benefit Equalization Plan, is incorporated by reference from General Re's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.(/1/) .4 The General Re Corporation Retirement Plan for Directors, is incorporated by reference from General Re's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.(/1/) .5 The General Re Corporation Deferred Compensation Plan for Directors, is incorporated by reference from General Re's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.(/1/) .6 Form of Severance Agreement among General Re Corporation and certain executive officers. .7 Employment Agreement between Cologne Re and Peter Lutke-Bornefeld. 11. Computation of Earnings Per Share. 21. Subsidiaries of the Registrant. 23. Consent of Independent Accountants. 24. Powers of Attorney of Directors. 27. Financial Data Schedule.
- -------- (/1/) Management contracts or compensatory plans filed pursuant to Item 14(c). (B) REPORTS ON FORM 8-K A report on Form 8-K dated October 3, 1996 reporting that General Re Corporation and National Re Corporation had consummated the merger. A report on Form 8-K dated November 6, 1996 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 General Re's results to differ materially from forward-looking statements made by General Re. 65 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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) By Elizabeth A. Monrad (Elizabeth A. Monrad, Vice President and Treasurer) Dated: March 10, 1997 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- Ronald E. Ferguson Chairman and Chief Executive February 25, 1997 (Ronald E. Ferguson) Officer and Director Joseph P. Brandon Vice President and Chief Financial Officer February 25, 1997 (Joseph P. Brandon) (Principal Financial Officer) Elizabeth A. Monrad Vice President and Treasurer February 25, 1997 (Elizabeth A. Monrad) (Principal Accounting Officer) *Lucy Wilson Benson Director February 25, 1997 (Lucy Wilson Benson) *Walter M. Cabot Director February 25, 1997 (Walter M. Cabot) *William C. Ferguson Director February 25, 1997 (William C. Ferguson) *Donald J. Kirk Director February 25, 1997 (Donald J. Kirk) *Kay Koplovitz Director February 25, 1997 (Kay Koplovitz) *Edward H. Malone Director February 25, 1997 (Edward H. Malone) *Andrew W. Mathieson Director February 25, 1997 (Andrew W. Mathieson) *Martin G. McGuinn Director February 25, 1997 (Martin G. McGuinn) *David E. McKinney Director February 25, 1997 (David E. McKinney) *Stephen A. Ross Director February 25, 1997 (Stephen A. Ross) *Walter F. Williams Director February 25, 1997 (Walter F. Williams)
- -------- *By either Charles F. Barr or Robert D. Graham pursuant to a power of attorney. 66 GENERAL RE CORPORATION SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF GENERAL RE CORPORATION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GENERAL RE CORPORATION CONDENSED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (PARENT COMPANY) (IN MILLIONS, EXCEPT SHARE DATA)
1996 1995 ------ ------ ASSETS Fixed maturities, available-for-sale.......................... $ 85 $ 212 Equity securities, at fair value.............................. -- 70 Short-term investments, at amortized cost which approximates fair value................................................... 159 21 Investment in subsidiaries, at equity......................... 7,361 6,559 Other invested assets......................................... 39 39 Other assets.................................................. 31 32 Due from subsidiaries......................................... 178 32 ------ ------ Total assets................................................ $7,853 $6,965 ====== ====== LIABILITIES Commercial paper.............................................. $ 140 -- Notes payable due 2009........................................ 150 $ 150 Income taxes.................................................. 135 125 Other liabilities............................................. 100 102 ------ ------ Total liabilities........................................... 525 377 ------ ------ Cumulative convertible preferred stock (shares issued: 1,711,907 in 1996 and 1,724,037 in 1995; no par value)......................... 146 147 Loan to employee savings and stock ownership plan............. (144) (146) ------ ------ 2 1 ------ ------ COMMON STOCKHOLDERS' EQUITY Common stock (102,827,344 shares issued in 1996 and 1995; par value $.50).................................................. 51 51 Paid-in capital............................................... 1,041 635 Unrealized appreciation of investments, net of deferred income taxes........................................................ 1,625 1,468 Currency translation adjustments, net of deferred income tax- es........................................................... (53) (11) Retained earnings............................................. 6,708 5,986 Less common stock in treasury, at cost (shares held: 21,262,113 in 1996 and 20,714,069 in 1995)...................................... (2,046) (1,542) ------ ------ Total common stockholders' equity........................... 7,326 6,587 ------ ------ Total liabilities, cumulative convertible preferred stock and common stockholders' equity................................ $7,853 $6,965 ====== ======
67 GENERAL RE CORPORATION CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (PARENT COMPANY) (IN MILLIONS)
1996 1995 1994 ------ ---- ---- REVENUES Distributions from subsidiaries Insurance subsidiaries................................. $1,038 $420 $441 Other subsidiaries..................................... 75 8 394 ------ ---- ---- Total distributions from subsidiaries................ 1,113 428 835 Investment income........................................ 9 11 26 Other revenues........................................... 15 22 37 Net realized gains (losses) on investments............... 1 (6) 6 ------ ---- ---- Total revenues....................................... 1,138 455 904 ------ ---- ---- EXPENSES Other operating costs and expenses....................... 36 29 29 Income tax expense (benefit)............................. (4) 4 (4) ------ ---- ---- Total expenses....................................... 32 33 25 ------ ---- ---- Income before equity income.......................... 1,106 422 879 ------ ---- ---- Equity in net income of subsidiaries less dividends received of $1,113 in 1996, $428 in 1995 and $835 in 1994............. (212) 403 (214) ------ ---- ---- Net income........................................... $ 894 $825 $665 ====== ==== ====
68 GENERAL RE CORPORATION CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (PARENT COMPANY) (IN MILLIONS)
1996 1995 1994 ---- ---- ----- CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $894 $825 $ 665 Equity in net income of subsidiaries less dividends re- ceived................................................... 212 (403) 214 Other..................................................... (107) 8 351 ---- ---- ----- Net cash from operating activities.................... 999 430 1,230 ---- ---- ----- CASH FLOWS FROM INVESTING ACTIVITIES Fixed maturities: Purchases............................................... (172) (344) (132) Sales................................................... 326 146 276 Maturities.............................................. -- 74 40 Equity securities: Purchases............................................... (60) -- -- Sales................................................... 111 -- 1 Other invested assets....................................... -- -- 105 Net sales (purchases) of short-term investments............. (138) 3 (20) Cash used in acquisitions................................... (313) -- (884) Capital contribution to subsidiaries........................ (28) (125) (6) ---- ---- ----- Net cash used in investing activities................. (274) (246) (620) ---- ---- ----- CASH FLOWS FROM FINANCING ACTIVITIES Commercial paper borrowing (repayment), net............... 140 (31) (230) Cash dividends paid to stockholders Common.................................................. (163) (161) (157) Preferred............................................... (11) (11) (11) Acquisition of treasury stock............................. (729) (30) (222) Other..................................................... 44 45 11 ---- ---- ----- Net cash used in financing activities................. (719) (188) (609) ---- ---- ----- Change in cash.............................................. (6) (4) 1 Cash, beginning of year..................................... -- 4 3 ---- ---- ----- Cash, end of year........................................... $ 6 $ -- $ 4 ==== ==== =====
69 GENERAL RE CORPORATION SCHEDULE V--SUPPLEMENTARY INSURANCE INFORMATION YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K - ------------------- ----------- -------- -------- ----------- -------- ---------- ---------- ------------ --------- -------- BENEFITS, GROSS POLICY CLAIMS, AMORTIZATION DEFERRED CLAIMS BENEFITS LOSSES OF DEFERRED YEAR POLICY AND FOR NET NET AND POLICY OTHER NET AND ACQUISITION CLAIM UNEARNED LIFE/HEALTH PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS SEGMENT COST EXPENSES PREMIUMS CONTRACTS REVENUE INCOME EXPENSES COSTS EXPENSES WRITTEN - ------------------- ----------- -------- -------- ----------- -------- ---------- ---------- ------------ --------- -------- 1996 Property/Casualty North America..... $232 $10,767 $1,151 -- $3,104 $ 727 $2,143 $ 682 $303 $3,081 International..... 158 5,210 639 -- 2,514 394 1,841 576 195 2,505 Life/health........ 67 -- 167 $751 1,060 59 789 220 60 1,075 ---- ------- ------ ---- ------ ------ ------ ------ ---- ------ Total........... $457 $15,977 $1,957 $751 $6,678 $1,180 $4,773 $1,478 $558 $6,661 ==== ======= ====== ==== ====== ====== ====== ====== ==== ====== 1995 Property/Casualty North America..... $226 $ 9,356 $1,115 -- $2,853 $ 711 $1,919 $ 706 $266 $2,964 International..... 183 4,896 667 -- 2,288 247 1,761 490 111 2,429 Life/health........ 25 -- 131 $580 696 40 505 149 36 709 ---- ------- ------ ---- ------ ------ ------ ------ ---- ------ Total........... $434 $14,252 $1,913 $580 $5,837 $ 998 $4,185 $1,345 $413 $6,102 ==== ======= ====== ==== ====== ====== ====== ====== ==== ====== 1994 Property/Casualty North America..... $204 $ 8,578 $1,008 -- $2,394 $ 686 $1,709 $ 535 $251 $2,581 International..... 120 3,580 494 -- 394 52 272 79 52 420 Life/health........ -- -- 140 $479 -- -- -- -- -- -- ---- ------- ------ ---- ------ ------ ------ ------ ---- ------ Total........... $324 $12,158 $1,642 $479 $2,788 $ 738 $1,981 $ 614 $303 $3,001 ==== ======= ====== ==== ====== ====== ====== ====== ==== ======
- ---- Note: The totals shown in the Schedule include only the property/casualty and life/health operations of General Re and may not correspond with consolidated amounts. 70 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGE ------- ----------- ------------ 10.6 Form of Severance Agreement among General Re Corporation and certain executive officers............. 72 .7 Employment Agreement between Kolnische Ruckversicherungs-Gesellschaft AG and Peter Lutke- Bornefeld.............................................. 80 11 Computation of Earnings Per Share...................... 91 21 Subsidiaries of General Re Corporation................. 93 23 Consent of Independent Accountants..................... 97 24 Powers of Attorney of Directors........................ 99 27 Financial Data Schedule................................ 101
71 EX-10.6 2 FORM OF SEVERANCE AGREEMENT EXHIBIT 10.6 FORM OF SEVERANCE AGREEMENT AMONG GENERAL RE CORPORATION AND CERTAIN EXECUTIVE OFFICERS 72 EXHIBIT 10.6 SEVERANCE AGREEMENT Agreement made this 15th day of May, 1996, between General Re Corporation (the "Company"), and (the "Executive"). WHEREAS, the Company desires to provide the Executive with severance pay under the circumstances and pursuant to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the Company and the Executive hereby agree as follows: 1. This Agreement shall be effective for the period beginning May 1, 1996 and expiring on January 16, 2007. 2. Definitions: For purposes of this Agreement, the terms set forth below shall have the meanings set forth below: (a) "Annual Compensation" means the Base Salary of the Employee plus the greater of: (i) fifty (50%) percent of the Employee's Base Salary or (ii) the Target Annual Incentive Bonus Award in effect for the calendar year, but excluding other special compensation or bonuses. (b) "Base Salary" means the regular annual basic salary paid by the Company for services performed by the Executive before any payroll deductions for taxes or any other purposes, plus any amounts reduced from such salary or wages and contributed on the Executive's behalf under the Employee Savings and Stock Ownership Plan ("ESOP") or any amounts contributed on behalf of such Executive under the Company's Cafeteria Plan for such period. Base salary shall not include overtime, 73 bonuses, commissions, fees, pension, severance pay or any other extraordinary compensation, nor Matching Contributions or ESOP Contributions under the ESOP or Company contributions to the Employee Retirement Plan of General Re Corporation and its Affiliates ("Retirement Plan") or any other deferred compensation or employee benefit plan or program of the Company. (c) "Change in Control" of the Company shall occur if: (i) any person, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, shall become the beneficial owner of shares of the Company with respect to which twenty (20%) percent or more of the total number of votes for the election of the Board of Directors of the Company may be cast; (ii) as a result of, or in connection with, any cash tender offer, exchange offer, merger or other business combination, sale of assets or contested election or combination of the foregoing, the persons who were prior to the institution thereof directors of the Company shall cease to constitute a majority of the Board of Directors of the Company; or (iii) stockholders of the Company shall approve an agreement pursuant to which the Company will cease to be an independent publicly-owned corporation or for a sale or other disposition of all or substantially all of the assets of the Company. (d) "Person" shall have the meaning given in Section 3(a)(9) of the Securities and Exchange Act of 1934 (as amended), as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (a) the Company or any of its subsidiaries, (b) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (c) an underwriter temporarily holding securities pursuant to an offering of such securities, or (d) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company. (e) "Target Annual Incentive Bonus Award" means the target formula amount of the Annual Incentive Bonus Award applicable for the calendar year an Employee pursuant to Section 6(c)(2)(A) of the General Re Corporation Long Term Incentive Plan. (f) "Termination for Cause" means any separation from service by the Executive from the Company which is effected by reason of fraud, deceit, or other gross misconduct by the Executive performed within the scope of the Executive's employment. 74 (g) "Termination for Good Reason" means any separation from service by the Executive because of (a) the involuntary assignment of the Executive to duties materially different from the Executive's position prior to such Change in Control; (b) a reduction of the Executive's salary which is greater than 10 percent of the Executive's salary at the annual rate in effect at the time of the Change in Control; or (c) the relocation of the Executive's regular assigned workplace by more than 50 additional miles from residence. 3. In the event that there is a Change in Control of the Company during the term of this Agreement, the Executive shall be entitled to a severance payment if the Executive's employment with the Company terminates (other than by reason of death, disability, retirement on or after Normal Retirement Date under the Retirement Plan of General Re Corporation and its Affiliates, Termination for Cause, or voluntary termination by the Executive except for Termination for Good Reason) during the term of this Agreement and within two years after the Change in Control. The amount of severance payment shall be an amount equal to the Executive's Annual Compensation multiplied by three (3). Notwithstanding anything contained herein to the contrary, the Executive's entitlement to severance pay pursuant to this Agreement shall be in lieu of, and not in addition to, any entitlement under the Company's Severance Pay Plan, and the Executives entitlement to severance pay pursuant to this Agreement shall be contingent upon the Executive delivering to the Company in a form acceptable to the Company a signed release of any and all claims that the Executive may have against the Company and any affiliated entities and their respective officers, directors, employees, agents and employee welfare benefit plans, relating in any way to the Executive's employment with the Company and any affiliated entities and to the termination of such employment. 4. In the event that any payments or benefits received or to be received by the Executive in connection with a Change in Control or termination of employment, whether pursuant to the terms of this Plan or any other plan, arrangement or agreement with the Company, any affiliated entity, or with any Person whose actions result in a Change in Control or with any Person affiliated with the Company or such Person, (all such payments and benefits, including the Severance Payments payable hereunder, being hereinafter called "Total Payments"), are subject (in whole or part) to the excise tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and deduction of any 75 federal, state and local income tax and Excise Tax on the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) any such total payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of Section 280G(b)(4)(B) of the Code, in excess of the "base amount" (as defined in Section 280G(b)(3) of the Code) allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the date of termination of the Executive's employment, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of a Change in Control or termination of the Executive's employment, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross- Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1174(b)(2)(b) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the Change of Control or termination of the Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable to the Executive with respect to such excess) at the time that the amount of such excess is finally determined. The Executive and the Company shall 76 each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for the Excise Tax with respect to the Total Payments. 5. Severance payments shall be made in a lump sum within two weeks (14 days) after the date of the Executive's termination. Notwithstanding the foregoing, at the Executive's written request, Severance Payments may be made at a later date or in an alternative method of payment period. 6. Notwithstanding anything in this Agreement to the contrary, the severance payment received under this Agreement shall be reduced by any payments earned after the Executive's termination of employment pursuant to employment, consulting and/or service agreements or arrangements between the Executive and the Company or any affiliated entity. 7. In the event that the Executive becomes entitled to receive a severance payment pursuant to the terms of this Agreement, the Executive will also be entitled, for a period of 36 months from the date of the Executive's termination, to participate in each medical, dental, vision, life and personal accident plan or benefit in which the Executive participated immediately prior to the Executive's termination of employment, upon the same terms available to active employees. If the terms of any benefit plan do not permit continued participation by the Executive, then the Company will make a lump sum payment to the Executive in an amount equal to the Company's cost to provide the benefit that the Executive would have been entitled to receive under this Agreement if the coverage under that plan immediately prior to the Executive's termination of employment had remained in effect. The benefit to be provided or payments to be made under this paragraph shall be reduced to the extent that the Executive receives benefits or payments for the same occurrence under another employer sponsored plan to which the Executive is entitled because of employment subsequent to the termination of employment with the Company. The benefit to be provided or payment to be made under this paragraph shall terminate in the event the Executive fails to make any required employee contributions, provided that such required contributions do not exceed the contribution amount required or an active employee participating in the benefit plan. 8. In the event of any dispute between the parties hereto arising out of or relating to this Agreement or the employment between the Company and the Executive, such dispute shall be settled by arbitration in Stamford, Connecticut in accordance with the commercial arbitration rules then obtaining of the American Arbitration Association, except that there shall be one arbitrator selected with respect to any 77 such arbitration proceeding. Judgment upon the award rendered may be entered in any court having jurisdiction thereof. 9. Any notice of other communication required or permitted under this Agreement shall be effective only if it is in writing and delivered personally or sent by registered or certified mail, postage prepaid, addressed as follows: If to the Company: Charles F. Barr Vice President and General Counsel General Reinsurance Corporation 695 East Main Street P.O. Box 10350 Stamford, CT 06904-2350 If to the Executive: or to such other address as either party may designate by notice to the other, and shall be deemed to have been given upon receipt. 10. Nothing contained herein shall be deemed to give the Executive the right to be retained in the employment of the Company or to limit the rights of the Company to discharge any Executive at any time. 11. This Agreement constitutes the entire agreement between the parties hereto with respect to the Executive's entitlement to severance pay from the Company, and supersedes and is in full substitution for any and all prior understandings or agreements with respect to the Executive's severance pay entitlement. The invalidity or unenforceability of any term or provision, or any clause, or portion thereof, of this Agreement, shall in no way impair or affect the validity or enforceability or any other provision of this Agreement which shall remain in full force and effect. 78 12. This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of either party hereto at any time to require the performance by the other party hereto of any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver be either party hereto of a breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. 13. This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by the Company (except to an affiliated entity) or by the Executive. 14. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut. 15. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. ------------------------------ GENERAL RE CORPORATION Dated: By: ------------------ --------------------------- 79 EX-10.7 3 EMPLOYMENT AGREEMENT EXHIBIT 10.7 EMPLOYMENT AGREEMENT BETWEEN KOELNISCHE RUECKVERSICHERUNGS-GESELLSCHAFT AG AND DR. PETER LUETKE-BORNEFELD 80 EXHIBIT 10.7 DIE KOELNISCHE RUECK. - -------------------------------------------------------------------------------- Seite 1 VORSTANDSVERTRAG zwischen der Koelnische Rueckversicherungs-Gesellschaft AG, Koeln - nachstehend "Gesellschaft" - und Herrn Dr. Peter Luetke-Bornefeld, Koeln (S) 1 AUFGABEN UND VERTRAGSDAUER Herr Dr. Luetke-Bornefeld ist seit 1. Januar 1990 Mitglied und seit 1. Januar 1993 Vorsitzender des Vorstands der Gesellschaft. Die letzte Bestellung erfolgte durch Beschluss des Aufsichtsrats vom 18. Januar 1994 fuer die Zeit vom 1. Januar 1995 bis 31. Dezember 1999. Dieser Vertrag gilt bis zum Ablauf der Amtszeit von Herrn Dr. Luetke-Bornefeld. Im Fall einer Wiederbestellung oder Verlaengerung der Amtszeit verlaengert er sich entsprechend. Eine Kuendigung ist beiderseits nur zum Ende einer Bestellungsperiode mit einer Frist von elf Monaten moeglich. Die Gesellschaft verpflichtet sich, Herrn Dr. Luetke-Bornefeld jeweils elf Monate vor Ablauf der Bestellungsperiode eine Mitteilung zu machen, falls sie den Vertrag nicht verlaengern will. Herr Dr. Luetke-Bornefeld fuehrt die Geschaefte der Gesellschaft nach Massgabe der Gesetze, der Satzung, der Geschaeftsordnung fuer den Vorstand, der Geschaeftsordnung fuer den Aufsichtsrat (soweit darin Pflichten des Vorstands und seiner Mitglieder geregelt sind) und dieses Vorstandsvertrages. Herrn Dr. Luetke-Bornefeld obliegen insbesondere die Aufgaben, die ihm nach dem jeweils gueltigen Geschaeftsverteilungsplan zugewiesen sind. 81 DIE KOELNISCHE RUECK. - -------------------------------------------------------------------------------- Seite 2 (S) 2 PFLICHTEN, NEBENTAETIGKEITEN Herr Dr. Luetke-Bornefeld hat seine gesamte Arbeitskraft der Gesellschaft zur Verfuegung zu stellen. Die Ausuebung von Taetigkeiten ausserhalb der General Re und Cologne Re Gruppe bedarf der Einwilligung des Aufsichtsrats. (S) 3 GEHALT Herr Dr. Luetke-Bornefeld erhaelt mit Wirkung vom 1. Januar 1996 folgende Verguetung: 3.1 Grundeinkommen Das jaehrliche Grundeinkommen betraegt DM 750.000,--. Dieses wird in 12 monatlichen Raten gezahlt. 3.2 Bonus Herr Dr. Luetke-Bornefeld erhaelt bei Erreichung der mit ihm vereinbarten Ziele einen Bonus, der grundsaetzlich komplett variabel ist. Die Hoehe dieses Bonus orientiert sich am Erfuellungsgrad der fuer seinen Verantwortungsbereich und fuer das Gesamtunternehmen (Koelnische Rueck) vereinbarten Ziele und seiner persoenlichen Performance. Darueberhinaus sollen besondere Markt- und Umweltbedingungen beruecksichtigt werden. Die als relevant geltenden Kriterien werden jeweils jaehrlich festgelegt. Den jeweiligen Zielerreichungsgrad wird der Vorsitzende des Aufsichtsrats, Ron Ferguson, festlegen. Da fuer das Jahr 1996 eine solche Festlegung nicht vorliegt, wird der Erfuellungsgrad von Ron Ferguson qualitativ festgestellt. Herr Dr. Luetke-Bornefeldt erhaelt die Moeglichkeit, einen Gesamtbonus von DM 650.000,-- zu erlangen. Hiervon sind DM 350.000,-- fuer die Jahre 1996 und 1997 garantiert. Das Grundeinkommen und der Bonusrahmen werden regelmaessig (mindestens alle 2 Jahre) entsprechend der Marktentwicklung ueberprueft und gegebenenfalls neu festgesetzt. 3.3 Stock Options Herr Dr. Luetke-Bornefeld nimmt am Stock Option Programm der General Re teil. 82 DIE KOELNISCHE RUECK. - -------------------------------------------------------------------------------- Seite 3 (S) 4 URLAUB Herrn Dr. Luetke-Bornefeld steht ein Jahresurlaub von fuenf Wochen zu. (S) 5 BETRIEBLICHE ALTERSVERSORGUNG Herr Dr. Luetke-Bornefeld erhaelt Leistungen der betrieblichen Altersversorgung nach Massgabe der Ruhegeldzusage fuer Vorstandsmitglieder der Koelnischen Rueck. Die Ruhegeldzusage ist Bestandteil dieses Dienstvertrages und wird Herrn Dr. Luetke-Bornefeld ausgehaendigt. Aufgrund der besonderen Aufgabe und Stellung im Vorstand wird (S) 4, Saetze 1-3, der Ruhegeldzusage fuer Herrn Dr. Luetke-Bornefeld verbessert und erhaelt folgende Fassung: Die Hoehe des Altersruhegeldes betraegt 50% des letzten jaehrlichen Grundeinkommens nach Massgabe dieses Dienstvertrages. Die massgebliche Bemessungsbasis (Grundeinkommen) ist auf das 7fache der im Jahr des Versorgungsfalles gueltigen Beitragsbemessungsgrenze in der gesetzlichen Rentenversicherung begrenzt. Wird der Dienstvertrag bei Ablauf nicht verlaengert, vorzeitig beendet oder aus wichtigem Grund beendet, bevor die Voraussetzungen fuer eine Ruhegeldzahlung gegeben sind, so richten sich unverfallbar erhalten bleibende Versorgungsansprueche nach dem Gesetz ueber die Verbesserung der betrieblichen Altersversorgung. Beginn der Betriebszugehoerigkeit im Sinne des Gesetzes ist fuer Herrn Dr. Luetke-Bornefeld der 1. Januar 1985. (S) 6 UEBERGANGSGELD Wird der Dienstvertrag zum Ablauf von der Gesellschaft nicht erneuert, ohne dass ein wichtiger Grund vorliegt, so steht Herrn Dr. Luetke-Bornefeld ein Anspruch auf Uebergangsgeld zu. Das Uebergangsgeld betraegt 50% des zuletzt gezahlten festen Jahresgehalts gemaess (S) 3.1 dieses Vertrages, gekuerzt um 1% des massgeblichen festen Jahresgehalts fuer jedes an der Vollendung des 65. Lebensjahres fehlende Lebensjahr. Es wird in monatlich nachtraeglich faelligen Teilen gezahlt. Der Anspruch auf Uebergangsgeld erlischt mit der Zahlung von Altersruhegeld bzw. von Witwen- und Waisengeld durch die Gesellschaft. Gleichzeitig entsteht ein Anspruch auf ein Altersruhegeld in gleicher Hoehe wie das Uebergangsgeld. Fuer das Altersruhegeld gelten die Regelungen der Ruhegeldzusage mit Ausnahme des (S) 4 ueber die Hoehe des Altersruhegeldes. 83 DIE KOELNISCHE RUECK. - -------------------------------------------------------------------------------- Seite 4 Herr Dr. Luetke-Bornefeld muss sich das aus einer anderen Taetigkeit erzielte Einkommen auf das zu zahlende Uebergangsgeld bis zu dessen Haelfte anrechnen lassen. Herr Dr. Luetke-Bornefeld ist verpflichtet, der Gesellschaft unaufgefordert jaehrlich die Hoehe der entsprechenden Einkuenfte zu belegen. (S) 7 ENTGELT-FORTZAHLUNG Stirbt Herr Dr. Luetke-Bornefeld waehrend der Dauer des Vorstandsvertrages, so haben seine Witwe und seine waisengeldberechtigten Kinder fuer den Sterbemonat und die drei folgenden Monate Anspruch auf Fortzahlung des monatlichen Grundeinkommens. Stirbt Herr Dr. Luetke-Bornefeld, waehrend er Uebergangs- oder Ruhegeld bezieht, so gilt diese Regelung entsprechend fuer diese Bezuege. (S) 8 DIENSTFAHRZEUG Die Gesellschaft stellt Herrn Dr. Luetke-Bornefeld im Rahmen dieses Vertrages einen seiner Position angemessenen PKW zur Verfuegung. Saemtliche Kosten, die durch die Benutzung des Fahrzeugs entstehen, traegt die Gesellschaft. Herr Dr. Luetke-Bornefeld darf den PKW auch privat nutzen. Die Einkommensteuer auf den Geldwertvorteil der Privatnutzung traegt er selbst. (S) 9 AUFWENDUNGSERSATZ UND NEBENLEISTUNGEN Herr Dr. Luetke-Bornefeld erhaelt Ersatz der im Gesellschaftsinteresse getaetigten Aufwendungen. Darueber hinaus schliesst die Gesellschaft fuer Herrn Dr. Luetke-Bornefeld Versicherungen ab, die insbesondere die mit der erforderlichen Reisetaetigkeit verbundenen Risiken abdecken. (S) 10 GEHEIMHALTUNG Herr Dr. Luetke-Bornefeld wird ueber vertrauliche Angaben und Geheimnisse der Gesellschaft, namentlich Betriebs- oder Geschaeftsgeheimnisse, die ihm durch seine Taetigkeit im Vorstand der Gesellschaft bekannt geworden sind, Stillschweigen bewahren. Diese Geheimhaltungspflicht besteht und bleibt auch nach dem Ausscheiden von Herrn Dr. Luetke-Bornefeld aus den Diensten der Gesellschaft bestehen. 84 DIE KOELNISCHE RUECK. - -------------------------------------------------------------------------------- Seite 5 (S) 11 RUCKGABE VON UNTERLAGEN UND GEGENSTAENDEN Herr Dr. Luetke-Bornefeld hat bei seinem Ausscheiden alle Unterlagen und Aufzeichnungen, die die Angelegenheiten der Gesellschaft betreffen, sowie hiervon gefertigte Durchschriften oder Kopien unaufgefordert an die Gesellschaft zurueckzugeben. Darueber hinaus sind auch alle anderen Gegenstaende, die im Eigentum der Gesellschaft stehen, an diese herauszugeben. An den genannten Unterlagen, Daten und Gegenstaenden steht Herrn Dr. Luetke-Bornefeld ein Zurueckbehaltungsrecht gegenueber der Gesellschaft nicht zu. (S) 12 SCHLUSSBESTIMMUNGEN Sollte eine Bestimmung dieses Vorstandsvertrags ganz oder teilweise unwirksam oder undurchfuehrbar sein oder werden oder sollte sich in dem Vorstandsvertrag eine Luecke herausstellen, so wird hierdurch die Gueltigkeit der uebrigen Bestimmungen des Vorstandsvertrags nicht beruehrt. Anstelle der unwirksamen oder undurchfuehrbaren Regelung oder zur Ausfuellung der Luecke werden die Gesellschaft und Herr Dr. Luetke-Bornefeld eine angemessene Regelung treffen, die, soweit rechtlich moeglich, dem am naechsten kommt, was die Gesellschaft und Herr Dr. Luetke-Bornefeld gewollt haben oder nach dem Sinn und Zweck des Vorstandsvertrags gewollt haben wuerden, falls sie diesen Punkt bedacht haetten. (S) 13 ABLOESUNG Dieser Vertrag ersetzt mit Wirkung 15.10.96 den Dienstvertrag vom 22.12.1989/12.1.1990 mit allen Nachtraegen und Ergaenzungen. Koeln, den 15.10.96 /s/ Ronald E. Ferguson /s/ Dr. Peter Luetke-Bornefeld - ------------------------------ ------------------------------ Vorsitzender des Aufsichtsrats Dr. Peter Luetke-Bornefeld 85 Stand: 1.10.1996 Anlage l -------- RUHEGELDZUSAGE FUER VORSTANDSMITGLIEDER DER KOELNISCHEN RUECK - -------------------------------------------------------------------------------- Die Koelnische Rueckversicherungs-Gesellschaft Aktiengesellschaft - im nachstehenden "Gesellschaft" genannt gewaehrt ihren Vorstandsmitgliedern sowie deren versorgungsberechtigten Angehoerigen Leistungen der betrieblichen Altersversorgung nach Massgabe der folgenden Bestimmungen. Sofern die jeweiligen Voraussetzungen erfuellt sind, besteht auf die Leistungen ein unmittelbarer Rechtsanspruch. (S) 1 LEISTUNGSARTEN Die Gesellschaft gewaehrt - Altersruhegeld - Ruhegeld wegen Dienstunfaehigkeit - Witwengeld - Waisengeld (S) 2 WARTEZEIT Das Vorstandsmitglied muss bei Eintritt des Versorgungsfalles eine ununterbrochene Dienstzeit von 5 Jahren zurueckgelegt haben. Als Dienstzeit gelten alle in der Gesellschaft zurueckgelegten Dienstjahre (auch vor der Bestellung zum Vorstand). (S) 3 ALTERSRUHEGELD Altersruhegeld wird gewaehrt, wenn das Vorstandsmitglied nach Vollendung des 65. Lebensjahres aus den Diensten der Gesellschaft ausscheidet. Eine vorzeitige Inanspruchnahme ist moeglich, sofern das Vorstandsmitglied im Zeitpunkt des Ausscheidens das 60. Lebensjahr vollendet hat. 86 (S) 4 HOEHE DES ALTERSRUHEGELDES Die Hoehe des Altersruhegeldes betraegt 50% des letzten jaehrlichen Grundeinkommens nach Massgabe des Dienstvertrages des Vorstandsmitgliedes. Dieser Prozentsatz gilt auch bei vorzeitiger Inanspruchnahme gemaess (S) 3, Satz 9. Das massgebliche Grundeinkommen als Bemessungsbasis ist auf das 4fache (Vierfache) der im Jahr des Versorgungsfalles gueltigen Beitragsbemessungsgrenze in der gesetzlichen Rentenversicherung begrenzt. Sollte diese Grenze nach wesentlich anderen Masstaeben festgelegt werden, als dies bei Erteilung dieser Ruhegeldzusage der Fall war, wird die Hoechstgrenze fuer das massgebliche Grundeinkommen gegebenenfalls neu definiert. (S) 5 RUHEGELD WEGEN DIENSTUNFAEHIGKEIT Ruhegeld wird gewaehrt, wenn das Vorstandsmitglied wegen dauernder Dienstunfaehigkeit aus den Diensten der Gesellschaft ausscheidet. Dauernde Dienstunfaehigkeit liegt vor, wenn das Vorstandsmitglied wegen Krankheit, Unfall oder aus einem sonstigen von ihm nicht zu vertretenden Grund nicht mehr in der Lage ist, seine Aufgaben zu erfuellen. Die dauernde Dienstunfaehigkeit ist auf Verlangen der Gesellschaft durch das Zeugnis eines von der Gesellschaft zu benennenden Arztes nachzuweisen. (S) 6 HOEHE DES RUHEGELDES WEGEN DIENSTUNFAEHIGKEIT Die Hoehe des Ruhegeldes wegen Dienstunfaehigkeit betraegt 40% des fuer das Altersruhegeld massgeblichen Grundeinkommens. Die Begrenzung des massgeblichen Grundeinkommens als Bemessungsbasis gemaess (S) 4 Satz 2 gilt entsprechend. Tritt die dauernde Dienstunfaehigkeit nach Vollendung des 55. Lebensjahres ein, erhoeht sich der Prozentsatz des Ruhegeldes um 1% fuer jedes weitere bis zum Eintritt des Versorgungsfalles vollendete Lebensjahr bis zum Hoechstanspruch von 50%. (S) 7 WITWENGELD l. Beim Ableben des Vorstandsmitglieds erhaelt die im Zeitpunkt der Erteilung dieser Ruhegeldzusage mit dem Vorstandsmitglied verheiratete Ehefrau Witwengeld. Voraussetzung ist, dass die Ehe bis zum Ableben des Vorstandsmitglieds bestanden hat. 87 2. Die Hoehe des Witwengeldes betraegt 60% der Leistung, die das Vorstandsmitglied zum Zeitpunkt seines Todes bezog oder haette beziehen koennen, wenn es zu diesem Zeitpunkt dauernd dienstunfaehig geworden waere. 3. Heiratet das Vorstandsmitglied nach einer Scheidung oder nach dem Tod der beguenstigten Ehefrau ein weiteres Mal, so wird die Gesellschaft auf Antrag des Vorstandsmitgliedes eine erneute Witwengeldzusage erteilen unter angemessener Beruecksichtigung der Altersdifferenz der Ehegatten sowie etwaiger Ansprueche der geschiedenen Ehefrau auf Unterhalt und/oder Versorgungsausgleich. (S) 8 WAISENGELD 1. Hinterlaesst das Vorstandsmitglied bei seinem Ableben eheliche oder diesen gleichgestellte Kinder, so erhalten diese ein Waisengeld bis zur Vollendung ihres 21. Lebensjahres, darueber hinaus bis zum Abschluss ihrer Schul- oder Berufsausbildung, laengstens jedoch bis zur Vollendung des 25. Lebensjahres. 2. Die Hoehe des Waisengeldes betraegt: fuer jede Halbwaise 10% fuer jede Vollwaise 20% der Leistung, die das Vorstandsmitglied zum Zeitpunkt seines Todes bezog oder haette beziehen koennen, wenn es zu diesem Zeitpunkt dauernd dienstunfaehig geworden waere. 3. Witwen- und Waisengeld werden insgesamt begrenzt auf den Betrag der Leistung, die das Vorstandsmitglied im Zeitpunkt seines Todes bezog oder bei dauernder Dienstunfaehigkeit haette beziehen koennen. (S) 9 ZAHLUNGSWEISE UND -DAUER l. Die Leistungen werden in monatlichen Teilbetraegen nachtraeglich gezahlt. Die erste Zahlung erfolgt fuer den Monat, der auf den Eintritt des Versorgungsfalls folgt. Der Beginn der Zahlungen wird hinausgeschoben, solange das Vorstandsmitglied oder seine Hinterbliebenen ueber den Zeitpunkt der Beendigung des Dienstverhaeltnisses hinaus laufende Aktivenbezuege erhalten. 88 Entsprechendes gilt, wenn nach Beendigung des Dienstverhaeltnisses ein Uebergangsgeld gezahlt wurde. 2. Die Leistungen werden - mit Ausnahme des Waisengeldes - lebenslaenglich gezahlt, es sei denn, die Voraussetzungen der Leistungen entfallen. Das Witwengeld endet vorzeitig, wenn die Witwe wieder heiratet. (S) 10 ABTRETUNGSVERBOT Ansprueche oder Anwartschaften auf Leistungen duerfen vom Versorgungsberechtigten weder verpfaendet noch abgetreten werden; dennoch erfolgte Abtretungen und Verpfaendungen sind der Gesellschaft gegenueber unwirksam. (S) 11 ANRECHNUNG Auf die Leistungen der Gesellschaft im Versorgungsfall werden die Betraege angerechnet, die das Vorstandsmitglied auf Basis unverfallbarer vertraglicher Versorgungsansprueche aus seiner frueheren Dienstzeit bei der Gesellschaft bei Beginn des Dienstvertrages erhaelt. Leistungen aus unverfallbar aufrechterhaltenen Anwartschaften anderer Arbeitgeber koennen auf die Leistungen der Gesellschaft im Versorgungsfall angerechnet werden, sofern eine Anrechnung mit dem Vorstandsmitglied bei Beginn des Dienstvertrages vereinbart wurde. (S) 12 ANPASSUNGSKLAUSEL Die laufenden Leistungen nach (S) 1 dieser Ruhegeldzusage werden wie folgt angepasst: Erhoeht oder ermaessigt sich der Preisindex fuer die Lebenshaltung von 4-Personen-Haushalten von Arbeitern und Angestellten mit mittlerem Einkommen. Basisjahr 1991, um mindestens 10% gegenueber dem Stand im Versorgungsfall bzw. seit der letzten Festsetzung, so wird die laufende Leistung ab dem Folgemonat im gleichen prozentualen Verhaeltnis erhoeht oder ermaessigt. 89 (S) 13 UNVERFALLBARKEIT Scheidet das Vorstandsmitglied vor Eintritt eines Versorgungsfalles aus den Diensten der Gesellschaft aus, so behaelt es seine Anwartschaft auf Leistungen, sofern zu diesem Zeitpunkt die gesetzlichen Voraussetzungen fuer die Unverfallbarkeit gemaess (S) 1 des Gesetzes zur Verbesserung der betrieblichen Altersversorgung vom 19.12.1974 (BetrAVG) erfuellt sind. Die Hoehe der unverfallbaren Anwartschaft richtet sich nach (S) 2 BetrAVG. Als Betriebszugehoerigkeit gelten alle in der Gesellschaft zurueckgelegten Dienstjahre (auch vor Bestellung zum Vorstand). (S) 14 SCHLUSSBESTIMMUNG 1. Diese Ruhegeldzusage ist Bestandteil des Dienstvertrages. Aenderungen und Ergaenzungen beduerfen der Schriftform. 2. Sollten einzelne Bestimmungen dieser Ruhegeldzusage unwirksam sein oder werden, so beruehrt dies nicht die Gueltigkeit der uebrigen Bestimmungen. Anstelle der unwirksamen Bestimmung oder zur Auffuellung eventueller Luecken des Vertrages soll eine angemessene Regelung treten, die dem am naechsten kommt, was die Parteien nach ihrer wirtschaftlichen Zwecksetzung gewollt haben. 3. Bestehende Ruhegeldzusagen werden mit Zustimmung des Vorstandsmitgliedes durch diese Bestimmungen abgeloest. Koeln, den 1.10.1996 Koelnische Rueckversicherungs-Gesellschaft AKTIENGESELLSCHAFT Der Aufsichtsrat 90 EX-11 4 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE 91 EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE ________________________________________________________________________________ ________________________________________________________________________________
YEARS ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- EARNINGS PER SHARE OF COMMON STOCK Net income applicable to common stock $883 $814 $654 (in millions)(a)....................... =========== =========== =========== Average number of common shares 80,251,342 82,085,315 82,071,651 outstanding(b)......................... =========== =========== =========== Net income per share.................... $11.00 $9.92 $7.97 =========== =========== =========== - ----------
(a) After deduction of preferred stock dividends of $11 million for the years ended December 31, 1996, 1995 and 1994. (b) Fully diluted earnings per share are not reported because the effect of potentially dilutive securities was not significant. 92 EX-21 5 SUBSIDIARIES OF GENERAL RE CORPORATION EXHIBIT 21 SUBSIDIARIES OF REGISTRANT 93 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT Significant subsidiaries of General Re Corporation at December 31, 1996 were as follows:
JURISDICTION INCORPORATED/ OF PERCENT ACQUIRED BY NAME NATURE OF BUSINESS INCORPORATION OWNED GROUP - ---------------------------------------- ---------------------- -------------- ------------ ------------- General Re Corporation Holding Company Delaware N/A 1980 General Reinsurance Corporation Reinsurer Delaware 100 1970 Elm Street Corporation Real Estate Delaware 100 1981 General Star Indemnity Company Insurer Connecticut 100 1967 General Star National Insurance Insurer Ohio 100 1864/1985 Company General Star Management Company Management Delaware 100 1979 Genesis Underwriting Management Management Delaware 100 1988 Company Genesis D&O Liability Insurance Agency Ohio 100 1988/1996 Program, Inc Broker Markets Agency, Inc. Agent Connecticut 100 1987 Genesis Insurance Company Insurer Connecticut 100 1976/1989 Genesis Indemnity Insurance Company Insurer North Dakota 100 1989 GRC Realty Corporation Real Estate Connecticut 100 1972 Gen Re Holdings, Inc. Holding Company Delaware 100 1981 Reinsurance Underwriting Services Manager UK 100 1966 Limited General Re Europe Limited Reinsurer UK 100 1981 General Re, Correduria de Intermediary Spain 100(1) 1987 Reaseguros, S.A. General and Cologne Re Management Management Australia 50(4) 1995 Limited General and Cologne Reinsurance Reinsurer Australia 100 1961 Australasia Limited Recoa Investments Pty. Limited Investment Company Australia 100 1967 General Re Compania de Reaseguros, Reinsurer Uruguay 100 1990 S.A. Mandataria General Re, S.A. Agent Argentina 100(1) 1990 Die Koelnische Rueck Compania de Reinsurer Argentina 100(1) 1991 Reaseguros, S.A. National Re Group Corporation Holding Company Delaware 100 1989/1996 National Reinsurance Corporation Reinsurer Delaware 100 1806/1996 Fairfield Insurance Company Insurer Connecticut 100 1991/1996 National Intermediaries, Inc. Intermediary New York 100 1976/1996 Global Resolution, Inc. Manager New Jersey 100 1995/1996 National Risk Services, Inc. Broker Connecticut 100 1995/1996 North Star Reinsurance Corporation Reinsurer Delaware 100 1956/1995 General Re-New England Asset Investment Adviser Delaware 100 1984/1995 Management, Inc. North Star Syndicate, Ltd. Insurance Syndicate Delaware 100 1979 United States Aviation Underwriters, Manager New York 100 1928/1982 Inc. USAU Reinsurance Limited Reinsurer Bermuda 100 1978 Canadian Aviation Insurance Managers Manager Montreal, Can. 100 1937 Ltd. Airsurance Limitee Manager Montreal, Can. 100 1982 General Re Services Corporation General Business Corp. Delaware 100 1979 General Re Financial Products Agent/Swap Dealer Delaware 100 1990 (Japan) Inc. Herbert Clough Inc. Intermediary New York 100 1926/1928 Genplus Managers, Inc. Manager Delaware 100 1984 Cresset Capital Limited Partnership Venture Capital NY Partnership 50(2) 1989 GRD Corporation General Business Corp. Delaware 100 1987 General Re-CKAG Reinsurance and Holding Company Luxembourg 50.1(7) 1994 Investment S.a r.1. Koelnische Reinsurer Germany 75(6) 1846/1994 Rueckversicherungs-Gesellschaft AG Cologne Holding Company of America Holding Company Connecticut 100 1992/1994 Cologne Re Managers Corporation Management Delaware 100 1995 Cologne Reinsurance Company of Reinsurer Connecticut 100 1975/1994 America Cologne Life Reinsurance Company Reinsurer Connecticut 100 1967/1994 Cologne Life Underwriting Management Connecticut 100 1996/1994 Management Company Health Reinsurance Management Partnership Massachusetts 51 (8) 1993/1994 Partnership John Hewitt and Associates Management Maine 92.63 (11) 1986/1995 Insurance Management Services, Management Connecticut 100 1996/1996 Corporation Idealife Insurance Company Insurer Connecticut 100 1981/1994 Europa Rueckversicherung AG Reinsurer Germany 75 (9) 1947/1994 Koelnische General Business Corp. Germany 100 1988/1994 Versicherungs-Beratungs-und Service GmbH The Cologne Reinsurance Company Ltd. Reinsurer UK 100 1983/1994 Cologne Reinsurance Company Ltd. Reinsurer Ireland 100 (1) 1990/1994 La Koelnische Italia Servizi Agent Italy 100 1989/1994 Riassicurativi SRL Koelnische Nordiska Aktiebolag Insurer Sweden 100 1980/1994 Cologne Reinsurance Finance Holdings Holding Company Netherlands 100 1976/1994 B.V.
94
JURISDICTION INCORPORATED/ OF PERCENT ACQUIRED BY NAME NATURE OF BUSINESS INCORPORATION OWNED GROUP - ---------------------------------------- ---------------------- ------------- ---------- ------------- Cologne Reinsurance Company Ltd. Reinsurer Bermuda 100 1980/1994 Cologne Reinsurance Ltd. Reinsurer Barbados 75(3) 1989/1994 La Koelnische Latina S.A. Agent Mexico 100(1) 1976/1994 Koelnische Rueck Wien Reinsurer Austria 70(5) 1869/1994 Cologne Reinsurance Company of Reinsurer South Africa 99 1966/1994 South Africa Ltd. General and Cologne Re Management Management Australia 50(4) 1995 Limited Cologne Life Reinsurance Company Reinsurer Australia 99 1983/1994 of Australia Ltd. Die Koelnische Rueck Riga GmbH Agent Latvia 100 1990/1994 La Koelnische Iberica S.A. Agent Spain 100 1981/1994 Koelnische Rueck Buenos Aires S.A. Agent Argentina 100 1992/1994 Cologne Life Reinsurance Company Limited Reinsurer UK 100 1996 Koelnische Gestion Immobiliere Real Estate France 100 1994 Cologne Re Consultants Consultants Hong Kong 100 1986/1994 Insiders GmbH General Business Corp. Germany 85 (10) 1993/1994 Koelnische Norden Reinsurer Denmark 100 1995 La Koelnische de Venezuela Reinsurer Venezuela 100 1988/1994 Universal Risk Partners Broker Luxembourg 100 1994 General Re London Limited General Business Corp. UK 100 1992/1994 GRD Global, Inc. Management Delaware 100 1995 General Re Financial Products Swap Dealer Delaware 100 1990 Corporation General Re Financial Products Agent Ontario 100 1993 (Canada) Limited General Re Financial Products Limited Agent UK 100 1990 General Re Financial Securities Swap Dealer UK 100 1992 Limited General Re Securities Corporation Broker-Dealer Delaware 100 1991 General Re Underwriting Services Underwriting Services Bermuda 100 1993 Limited General Re (Bermuda) Limited Reinsurer Bermuda 100 1993 GRD Corporation (continuation of direct subsidiaries) General Re Investment Holdings Holding Company Delaware 100 1996 Corporation General Re Funding Corporation General Business Corp. Delaware 100 1996 General Re Corporate Finance, Inc. General Business Corp. Delaware 100 1996 General Re Strategic Solutions, Inc. General Business Corp. Delaware 100 1995
__________ Legend: (1) Percentages include any director qualifying shares (2) Partnership Percentage (3) Cologne Reinsurance Company Ltd. (Bermuda) owns 75% and Cologne Life Reinsurance Company (Connecticut) owns 25% of Cologne Reinsurance Ltd. (Barbados) (4) General Reinsurance Corporation and Koelnische Rueckversicherungs- Gesellschaft AG each own 50% of General and Cologne Re Management Limited (5) Koelnische Rueckversicherungs-Gesellschaft AG owns 70% and non affiliates - Wiener Staedtische Allgemeine Versicherung Aktiengesellschaft and Versicherungsanstalt der oesterreichischen each own 15% (6) GRD Corporation owns an additional 7.8% Koelnische Rueckversicherungs- Gesellschaft AG directly (7) 50.1% controlling interest held by GRD Corporation and a 49.9% non- controlling minority interest held by Colonia Konzern, AG of Germany (37.8%) and Nordstern Allgemeine Versicherungs, AG of Germany (12.1%) (8) Cologne Life Underwriting Management Company owns 51% and Health Reinsurance Management, Inc. (a nonaffiliate) owns 49% of Health Reinsurance Management Partnership (9) Koelnische Rueckversicherungs-Gesellschaft AG owns 75% and non-affiliates - ProFin Beteiligungsgesellschaft GmbH owns 16%, Iron Trades Insurance Ltd. owns 8% and Mutuell Assurance Artisande de France owns 1% of Europa Rueckversicherung AG (10) Koelnische Rueckversicherungs-Gesellschaft AG owns 85% and two Managers own the remaining 15% of Insiders GmbH (11) Cologne Life Underwriting Management Company owns 92.63% and Robert Taylor owns 7.37% of John Hewitt and Associates (Indentation Shows Ownership) 95 EX-23 6 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS 96 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of General Re Corporation and Subsidiaries on Form S-8 (File Numbers 2-62106, 275489, 33-60867, 33-6483, 33-33102 and 333-13341) of our report, dated January 30, 1997, on our audits of the consolidated financial statements and financial statement schedules of General Re Corporation and Subsidiaries as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, which is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. New York, New York March 11, 1997 97 EX-24 7 POWERS OF ATTORNEY OF THE DIRECTORS EXHIBIT 24 POWER OF ATTORNEY 98 EXHIBIT 24 POWER OF ATTORNEY The Undersigned, a Director of General Re Corporation, a Delaware Corporation (the "Corporation"), Hereby Designates each of Charles F. Barr and Robert D. Graham as his attorney in fact to execute on his behalf, as a Director of General Re, General Re's Annual Report on Form 10-K under the Securities Exchange Act of 1934, as amended. ---------------------------------------- Original powers of attorney in this form signed by each of the following: LUCY WILSON BENSON WALTER M. CABOT WILLIAM C. FERGUSON DONALD J. KIRK KAY KOPLOVITZ EDWARD H. MALONE ANDREW W. MATHIESON MARTIN G. MCGUINN DAVID E. MCKINNEY STEPHEN A. ROSS WALTER F. WILLIAMS Dated as of February 25, 1997. 99 EX-27 8 FINANCIAL DATA SCHEDULE
7 12-MOS DEC-31-1996 DEC-31-1996 20135 0 0 4464 0 0 26562 365 135 457 40161 13405 1957 523 0 430 2 0 51 7275 40161 6678 1205 104 309 4773 1478 748 1297 323 894 0 0 0 894 11.00 0 11737 4023 (39) 1061 2052 13405 (39)
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