-----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, O0I3Kwfb9BzzKae5kcU0V+im9ojxDDaKFCWp4LWZvp1ZPgntWnBbiXb+iAkM4uQo DybfA9xuDcibXSIWUbiviQ== 0000912057-00-014954.txt : 20000331 0000912057-00-014954.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-014954 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN RE CORP CENTRAL INDEX KEY: 0000889217 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 133672116 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11688 FILM NUMBER: 586837 BUSINESS ADDRESS: STREET 1: 555 COLLEGE RD EAST CITY: PRINCETON STATE: NJ ZIP: 08543-5241 BUSINESS PHONE: 6092438819 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K --------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission File #1-11688 AMERICAN RE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-3672116 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
555 COLLEGE ROAD EAST PRINCETON, NEW JERSEY 08543 (609) 243-4200 (Address including zip code, and telephone number, including area code, of registrant's principle executive office) ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered AMERICAN RE CAPITAL--8.5% CUMULATIVE NEW YORK STOCK EXCHANGE QUARTERLY INCOME PREFERRED SECURITIES (AND THE GUARANTEE BY AMERICAN RE CORPORATION WITH RESPECT THERETO)
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 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. / / 100% of the Company's voting stock is owned by Munich Reinsurance Company. At March 20, 2000, the number of shares outstanding of the registrant's common stock was 149.49712. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMERICAN RE CORPORATION TABLE OF CONTENTS
ITEM PAGE - ---- -------- PART I 1. Business.............................................. 1 2. Properties............................................ 11 3. Legal Proceedings..................................... 11 4. Submission of Matters to a Vote of Security Holders... 12 PART II 5. Market for the Company's Common Equity and Related Stockholder Matters................................... 13 6. Selected Financial Information of the Company......... 13 7. Management's Discussion and Analysis of the Company's Results of Operations and Financial Condition......... 14 8. Financial Statements and Supplementary Data........... 23 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................... 27 PART III 10. Directors and Executive Officers of the Registrant.... 28 11. Executive Compensation................................ 31 12. Security Ownership of Certain Beneficial Owners and Management............................................ 34 13. Certain Relationships and Related Transactions........ 34 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................... 35
PART I Unless indicated otherwise, all financial data presented herein are derived from or based on the Company's consolidated financial statements prepared in accordance with generally accepted accounting principles ("GAAP"). Statutory data, where specifically identified as such, is presented on a combined basis for American Re-Insurance Company, American Alternative Insurance Corporation and The Princeton Excess and Surplus Lines Insurance Company. (These companies together are the "reinsurance/ insurance subsidiaries"). The statutory data are derived from statutory financial statements. Such statutory financial statements are prepared in accordance with statutory accounting principles, which differ from GAAP. ITEM 1. BUSINESS THE COMPANY AND AMERICAN RE-INSURANCE American Re Corporation (the "Company" or "American Re"), is the holding company for various reinsurance and insurance entities which provide treaty and facultative reinsurance, insurance and related services to insurance companies, other large businesses, government agencies, pools and other self-insurers in the United States and worldwide. The Company's principal subsidiary, American Re-Insurance Company, a Delaware insurance company founded in 1917, ("American Re-Insurance"), primarily underwrites property and casualty reinsurance on a direct basis in the United States and international markets. Based on statutory net premiums written of $2,821.3 million in 1999, American Re-Insurance ranked as the second largest property and casualty reinsurer in the United States, according to the Reinsurance Association of America. The Company had total assets of $14,278.8 million and stockholder's equity of $2,489.0 million at December 31, 1999. The Company and its subsidiaries employed approximately 1,600 persons as of December 31, 1999. The Company is a wholly-owned subsidiary of Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen ("Munich Re"), a company organized under the laws of Germany. Munich Re is the world's largest reinsurance company, based on 1998 net premiums written, according to BUSINESS INSURANCE. The Munich Re Group, including American Re, includes reinsurance subsidiaries, branches, service companies and liaison offices in more than 60 locations worldwide serving insurers in 150 countries. In August, 1999, as part of its strategy to serve alternative market needs, American Re signed a definitive agreement (the "Agreement") to acquire all of the outstanding shares of American Insurance Service, Inc. ("AIS"), the holding company that owns the United National Group of Companies ("UNG"). UNG includes United National Insurance Company, Diamond State Insurance Company, and Hallmark Insurance Company. UNG has admitted and non-admitted capabilities through these entities to write business in all states except Alaska, and holds an A+ (Superior) rating from the insurance industry-rating firm A.M. Best. At December 31, 1999, UNG had total assets of $1,301.2 million and shareholders' equity of $285.3 million. See "--Acquisition of American Insurance Service." OVERVIEW OF THE REINSURANCE INDUSTRY Reinsurance is a form of insurance in which a reinsurer indemnifies a primary insurer against part or all of the liability assumed by the primary insurer under one or more insurance policies. Reinsurance provides a primary insurer with several major benefits, including a reduction in net liability on individual risks, protection against catastrophic losses and assistance in maintaining acceptable financial ratios. Reinsurance also provides a primary insurer with additional underwriting capacity in that the primary insurer can accept larger risks and can expand the book of business it underwrites at a faster rate than would be possible while maintaining acceptable financial ratios without a corresponding increase in its capital and surplus position. 1 There are two basic types of reinsurance agreements: treaty contracts and facultative certificates. A treaty is an agreement between a primary insurer and a reinsurer under which the primary insurer is required to cede and the reinsurer is required to assume a specified portion of a type or category of risks insured by the primary insurer under designated types of policies issued during the term of the treaty contract. Under a facultative certificate, the primary insurer cedes and the reinsurer assumes all or part of the risks insured under a single primary insurance policy. A facultative certificate is separately negotiated for each risk or group of risks ceded. Facultative reinsurance is normally purchased by insurance companies for individual risks not covered by their reinsurance treaties, for limits in excess of those provided in their reinsurance treaties, and for unusual risks. Reinsurers indemnify primary insurers in treaties and facultative certificates on either a pro rata or excess of loss basis. In the case of pro rata reinsurance, the reinsurer, in return for a predetermined portion or share of the insurance premium charged by the primary insurer, indemnifies the primary insurer against a predetermined portion of the losses and loss adjustment expenses ("LAE") of the primary insurer under the covered primary policy or policies. In the case of excess of loss reinsurance, the reinsurer indemnifies the primary insurer against all or a specific portion of losses on underlying insurance policies in excess of a specified dollar amount, known as the "retention" or "attachment point," most often subject to a negotiated limit. Premiums payable to the reinsurer by the primary insurer for excess of loss coverage are not directly proportional to the premiums the primary insurer receives because the reinsurer does not assume a proportionate risk. BUSINESS OPERATIONS AND STRATEGY The Company's products include the full range of property and casualty coverages, including worker's compensation, auto liability and physical damage, surety, marine, construction, errors and omissions, accident and health, non-standard auto, homeowners and commercial multi peril. American Re markets domestically to insurance companies through Domestic Insurance Company Operations ("DICO"), to the alternative market through Munich-American RiskPartners, Inc. ("RiskPartners") and internationally, through International Operations. For financial information about Segments, see Note 17 to the consolidated financial statements, "Segment Reporting," included in this report. DOMESTIC INSURANCE COMPANY OPERATIONS The principal business of DICO is treaty and facultative reinsurance underwritten on a direct basis throughout the United States. The majority of DICO's business is written on a treaty basis. DICO markets treaty products to small to medium sized regional property and casualty insurers and to an increasing variety of differing insurance concerns, including large account specialists, national multiline insurers, personal lines companies, excess and specialty writers and professional line specialties. DICO's facultative business is marketed to both large primary insurers that comprise the largest segment of the commercial insurance market and small regional primary insurers whose commercial insurance risks are more limited to volume and scope. MUNICH AMERICAN RISKPARTNERS RiskPartners insurance and reinsurance marketing efforts in the alternative market focus on large commercial insurance buyers, such as major corporations and governmental entities, seeking alternatives to the primary insurance companies that traditionally service these insurance buyers. These large commercial enterprises, which retain or self-insure risks (through captives, risk retention groups or other means) as an alternative to procuring traditional insurance, are developing the same financial concerns and administrative characteristics as insurance companies as they retain increasing levels of risk. The majority of RiskPartners business is written on a facultative basis. RiskPartners works with insurance brokers, ultimate insureds and their captives or risk retention groups to provide specialized reinsurance/insurance coverages to fit their particular needs. To assist in its reinsurance marketing efforts, RiskPartners utilizes the services 2 of an affiliated primary insurance company, American Alternative Insurance Corporation ("American Alternative"), which primarily serves alternative market clients in addition to some DICO clients. INTERNATIONAL OPERATIONS International Operations markets both treaty and facultative reinsurance outside the United States. International Operations maintains offices in sixteen major international cities: Beijing, Bogota, Brussels, Buenos Aires, Cairo, London, Melbourne, Mexico City, Montreal, Moscow, Sao Paulo, Santiago, Singapore, Sydney, Tokyo and Toronto. In 1999, International Operations primarily wrote business in the form of reinsurance treaties. The geographic diversity of the international market for reinsurance requires decentralized operations. To maintain quality performance under these circumstances, International Operations has staffed its offices with experienced local personnel. The following table presents International Operations net premiums written by region for the periods indicated:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- REGION 1999 1998 1997 - ------ ------------------- ------------------- ------------------- (DOLLARS IN MILLIONS) Australia................... $ 45.3 8.9% $ 34.4 7.6% $ 23.8 5.5% Canada...................... 7.0 1.4 1.2 0.3 31.7 7.3 Europe...................... 161.3 31.5 93.9 20.7 88.4 20.4 Far East.................... 22.3 4.3 18.0 4.0 15.7 3.6 Latin America............... 113.3 22.1 102.7 22.7 128.2 29.6 Middle East................. 26.2 5.1 32.4 7.2 12.5 2.9 Southeast Asia.............. 29.0 5.7 19.3 4.3 20.3 4.7 Ocean Marine/Other(1)....... 107.4 21.0 150.5 33.2 112.5 26.0 ------ ----- ------ ----- ------ ----- Regions total............... $511.8 100.0% $452.4 100.0% $433.1 100.0% ====== ===== ====== ===== ====== =====
- ------------------------ (1) Includes net premiums written from ocean marine, international home office, and corporate retrocessional charges. FEE-BASED SERVICES In addition to its core reinsurance business, the Company, through various subsidiaries, offers a broad array of related services. These services include risk management, underwriting management, actuarial analysis, financial analysis, claims management, data processing, due diligence consulting for mergers and acquisitions, reinsurance and insurance brokerage, and captive and risk retention group management services. Such services have generated fees from clients of $29.3 million, $32.3 million, and $41.2 million in 1999, 1998, and 1997, respectively. UNDERWRITING The Company underwrites its business on a worldwide basis for many different clients and for many lines of property/casualty business. The Company provides a broad array of products and coverages, individually evaluated and tailored to meet each client's needs. Many factors are considered in evaluating the nature of the risk to the Company. These include the client's underlying exposures, its line of products, its underwriting controls, its pricing philosophy and its geographical territory of operation. The Company strives to manage its net income by monitoring and controlling its overall portfolio of business as to line of business and geographical spread of risk. Taking all of these factors into account, the Company is not materially dependent on a single customer, small group of customers, line of business or geographical area. 3 The Company believes the loss of any single customer would not have a material adverse effect on its financial condition or earnings. Through underwriting procedures, treaties are screened for compliance with general standards for ceding insurers and risks to be assumed and are then priced based on actuarial models the Company has developed. The actuarial models are tailored in each case to the risk exposures underlying the specific treaty and the loss experience for the risk covered thereunder. The Company determines whether to write or renew a particular treaty by considering many factors, including its past experience with the client, the types of risks to be covered, total exposure to risks underwritten by the client or to the type of risk to be assumed, and its evaluation of the client's financial strength, claims handling ability, and the overall underwriting capability. The Company's facultative risks are predominantly assumed on a "program" basis. Under this approach, which encompasses treaty concepts, pricing is agreed upon in advance for homogeneous risks and such risks are assumed without individual review, subject only to after-the-fact review and rejection as appropriate. Substantially the same underwriting and reserve procedures are utilized for domestic and international reinsurance operations, although local political, economic and other factors are considered in pricing models, reserving evaluations and underwriting decisions. Underwriting standards for International Operations are maintained through a series of written guidelines authorized by the senior management of International Operations. Similarly, local limitations on the commitment of resources granted to each international location are controlled by International Operations' senior management and reviewed at least annually. Underwriting opportunities that fall outside the established class and/or limit parameters are referred to home office underwriters for evaluation prior to commitment. CLAIMS Specific claims are reviewed and monitored by the Claims Division. The Claims Division is centralized in the home office. Claims are also handled regionally by various claims personnel in certain domestic and international offices, namely Chicago, Columbus, New York, and San Francisco (domestically) and Brussels, London, Santiago, Sydney, and Toronto (internationally). Claims administration includes reviewing initial loss reports, monitoring claims handling activities of clients, requesting additional information where appropriate, recommending proper reinsurance case reserves and approving payment of individual claims. In addition to reviewing claims and discussing claims issues with ceding companies, the Claims Division conducts periodic reviews of both specific claims and overall claims handling procedures at the offices of client companies. The Company relies upon its ability to monitor effectively the claims handling and claims reserving practices of ceding companies in order to establish the proper reinsurance premium for reinsurance agreements and to establish proper loss reserves. RISK MANAGEMENT AND RETROCESSION ARRANGEMENTS The Company purchases reinsurance to manage its own risk exposures. The insurance or indemnification of reinsurance is called a retrocession, and a reinsurer of a reinsurer is called a retrocessionaire. Reinsurance companies enter into retrocessional agreements for reasons similar to those that cause primary insurers to purchase reinsurance, namely to reduce net liability on individual risks, to protect against catastrophic losses, to stabilize their financial ratios and to obtain additional underwriting capacity. Generally, retrocessional agreements are contracts that are renewable on an annual basis, but that may be terminated by either party upon notice stated in the agreement. A retrocessionaire that does not renew a retrocession with a reinsurer is not discharged from existing liabilities to the reinsurer under the contract. A retrocession does not discharge a reinsurer from liability to its clients. The retrocessional coverages purchased by the Company include (i) routine coverage for its property and casualty business, (ii) property and casualty clash coverage for potential accumulation of liability in its 4 casualty business from treaties and facultative agreements covering losses arising from the same event or occurrence, (iii) catastrophe retrocessions for its property business, (iv) quota share treaties that enhance underwriting capacity, and (v) stop loss protection (excess of loss reinsurance that indemnifies the company against losses that exceed a specific retention). The Company records an uncollectible reserve when it believes that it is probable that it will not be able to collect a receivable from a retrocessionaire. At December 31, 1999 the Company maintained a reserve for uncollectible reinsurance and premiums and other receivables of $104.0 million. The Company adheres to specified limits on the amount of exposure to single risks that it will accept and purchases retrocessions to reduce its per risk exposure. Generally, for treaty and facultative casualty, the per-risk limit accepted is up to $50 million. For property business, the per-risk limit accepted for treaty business is up to $50 million and for facultative business up to $200 million. After retrocessions, and prior to co-participation, if any, for its property and casualty business, $25 million net is retained per risk for both treaty and facultative. The company will consider expanding both its maximum per risk acceptance, and its net retentions for both property and casualty business, on a selected basis, dependent upon a specific client's needs. Currently, the Company maintains retrocessional coverage for property and casualty clash events for treaty and facultative business, where treaty or facultative agreements are exposed to a loss from two or more products and/or reinsureds involved in a common occurrence. For property and casualty business, treaty and facultative agreements are covered in excess of $25 million each and every occurrence. The Company has in place a corporate quota share retrocessional program whereby the Company cedes 1.788% of all of its consolidated net premiums written to the quota share participants. In return, the Company receives commission offset as well as certain catastrophe reinsurance protection (described in the next paragraph). The Company purchases catastrophe retrocessions for both its treaty and facultative property business. Property catastrophe retrocessions cover the potential accumulation of all property exposures that may be involved in the same catastrophe, such as an earthquake or hurricane. Catastrophe retrocessions provide $400 million of coverage for a catastrophic event in excess of $100 million of retained losses. The $400 million of retrocessional coverage is reduced by two factors: (i) a reduction of $14.7 million, due to shortfalls in the placement of the retrocessional program; and (ii) co-participation of $.3 million by the Company, which is customary in the industry. Thus, if a $500 million domestic catastrophe loss was reported, the Company would retain $115.0 million of catastrophe losses (prior to recovery of $2 million from the quota share retrocessional program described above). Upon payment of additional premiums, the coverage may be reinstated for additional events. In November 1999, American Re Capital Markets, Inc., a subsidiary of the Company ("ARCM"), entered into certain index-based catastrophe related swaps ("Catastrophe Swaps") with Gold Eagle Capital Limited ("Gold Eagle"), a special purpose Bermuda company. Under the terms of the catastrophe swaps, ARCM may receive approximately $182 million of potential payments from Gold Eagle in the event of three types of certain catastrophic events: California earthquakes, Midwest earthquakes, or Eastern and Gulf Coast windstorms, all as specifically defined under the Catastrophe Swaps. See "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S RESULTS OF OPERATIONS AND FINANCIAL CONDITION--Market and Interest Rate Risk." Changing domestic and international reinsurance markets impact the retrocessional capacity available to all companies. The Company has successfully managed its exposure to changing retrocessional capacity levels in the past by diversifying its selection of retrocessionaires and expects to continue to minimize risks associated with fluctuation in the underwriting cycle. In accordance with the Company's underwriting guidelines, diversified retrocessional capacity is obtained through Munich Re and its affiliated companies, through existing trading relationships with retrocessional markets accessed on a direct basis or through the 5 Company's reinsurance intermediary, Am-Re Brokers, Inc., and through additional potential retrocessional markets. Historically, the Company believes that it has minimized the credit risk with respect to its retrocessions by monitoring its retrocessionaires, diversifying its retrocessions and collateralizing obligations from foreign retrocessionaires. Potential deterioration of the financial condition of retrocessional markets is carefully monitored and appropriate actions are taken to eliminate or minimize exposures. As of December 31, 1999, the reinsurance/insurance subsidiaries had in place retrocessional arrangements with approximately 846 retrocessionaires, and $3,034.9 million of accrued retrocessional recoverables on paid and unpaid losses and LAE (including IBNR). In structuring their retrocessional programs, the reinsurance/insurance subsidiaries have placements with certain retrocessionaires that result in sizable reinsurance recoverable obligations to the reinsurance/insurance subsidiaries. Certain select retrocessionaires participate in many of the reinsurance/insurance subsidiaries' retrocessionaire coverages including quota share, working layer excess of loss, catastrophe, and stop loss programs as well as specific cessions of assumed business. Cessions of significant amounts to a single retrocessionaire are contemplated only when excellent financial strength and/or the ability to collateralize obligations are clearly demonstrated. As of December 31, 1999, a total of $529.7 million of accrued retrocessional recoverables on a paid and unpaid losses (17.5% of total retrocessional recoverables) were attributable to National Indemnity Company (which had an A.M. Best rating of "A++ (Superior)" at December 31, 1999), $513.7 million (16.9% of total retrocessional recoverables) were attributable to Munich Re (which had an A.M. Best rating of "A++ (Superior)" at December 31, 1999), and $404.2 million (13.3% of total retrocessional recoverables) were attributable to Travelers Property Casualty Corp. ("Travelers") (which had an A.M. Best rating of "A+(Superior)" at December 31, 1999). Except as described above, recoverable amounts attributable to any one or related groups of retrocessionaires did not in the aggregate exceed 10% of the reinsurance recoverables on paid and unpaid losses. COMPETITION The property and casualty reinsurance business is highly competitive. Competition with respect to the types of reinsurance in which the Company is engaged is based on many factors, including the perceived overall financial strength of the reinsurer, ratings of the reinsurer, underwriting expertise, premiums charged, contract terms and conditions, services offered, speed of claims payment, reputation and experience. The Company competes in the United States and international reinsurance markets with independent reinsurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of primary insurance companies and underwriting syndicates from the United States and abroad, some of which have greater financial resources than the Company. The Company also competes with providers of alternative forms of risk transfer, such as investment banks which offer capital market mechanisms, such as the securitization of insurance and reinsurance risks, for primary insurers to transfer such risks directly to investors. REGULATORY MATTERS The Company is subject to regulation under the insurance statutes, including insurance holding company statutes, of various states, including Delaware, the domiciliary state of American Re-Insurance, American Alternative, and The Princeton Excess and Surplus Lines Insurance Company ("Princeton E & S"). GENERAL. U.S. domestic property and casualty insurers, including reinsurers, are subject to regulation by their states of domicile and by those states in which they are licensed. In general, the rates and policy terms of primary insurance policies and insurance company operations and practices with respect to policyholders are closely regulated by state insurance departments. By contrast, reinsurance agreements generally are not subject to regulation by any governmental authority with respect to rates or policy terms 6 although reinsurers are required to maintain certain financial condition in order to provide accredited reinsurance to authorized insurers in the states. As a practical matter, however, the rates charged by primary insurers do have an effect on the rates that can be charged by reinsurers. AMERICAN RE-INSURANCE. The regulation and supervision to which reinsurance companies are subject relate primarily to the standards of solvency that must be met and maintained (either through a process of becoming licensed or accredited in a state) and their financial condition generally, including regulations on the nature of and limitations on investments, restrictions on the size of risks which may be insured, deposits of securities for the benefit of ceding companies, methods of accounting, periodic examinations of the financial condition and affairs of reinsurers, the form and content of financial statements required to be filed with state insurance regulators, and reserves for unearned premiums, losses and other purposes. In general, such regulation is for the protection of the ceding companies and ultimately, their policyholders, rather than security holders. American Re's management believes that American Re-Insurance is in material compliance with all applicable laws and regulations pertaining to its business and operations. American Re-Insurance is licensed to transact insurance or reinsurance business in all fifty states, the District of Columbia, Puerto Rico, Canada (including the provinces of Ontario and Quebec), Australia, Singapore and the United Kingdom. American Re-Insurance Company (Chile) S.A. is a licensed reinsurer in Chile. In addition, American Re-Insurance and/or one or more of its subsidiaries or affiliates is licensed, registered to transact business or represented in Argentina, Australia, Belgium, Bermuda, Bolivia, Brazil, Canada, Chile, China, Colombia, Ecuador, Egypt, Japan, Mauritius, Mexico, New Zealand, Paraguay, Peru, Russia, Singapore, South Africa, the United Kingdom, Uruguay and Venezuela. AMERICAN ALTERNATIVE. In order to write primary insurance business primarily for the alternative market, American Alternative must comply with substantial regulatory requirements in each state where it does business. In addition to the rate and policy form requirements mentioned above, depending upon the nature of the primary business being written and the production sources for the business, these regulatory requirements include, but are not limited to, requirements with regard to licensing, coverages offered, claims processing operations, relations with producers, and mandatory participation in residual markets. This regulation is primarily designed for the protection of policyholders. The Company's management believes that American Alternative is in material compliance with all applicable laws and regulations pertaining to its business and operations. American Alternative is licensed to transact insurance or reinsurance business in all fifty states and the District of Columbia. PRINCETON E & S. Princeton E & S, a Delaware insurance company, was formed to provide insurance coverage on a non-admitted basis in the United States. Princeton E & S is licensed as an admitted insurer in its domicile state, Delaware, and to date has been authorized as eligible to write excess and surplus lines insurance in four states on a non-admitted basis. INVESTMENT LIMITATIONS. The Insurance Code of Delaware contains rules governing the types and amounts of investments that are permissible for the reinsurance/insurance subsidiaries. These rules are designed to ensure the safety and liquidity of the insurer's investment portfolio. In general, these rules only permit insurers to purchase investments that are interest bearing, interest accruing, entitled to dividends or otherwise income earning and not then in default in any respect, and the insurer must be entitled to receive for its exclusive account and benefit the interest or income accruing thereon. No security or investment is eligible for purchase at a price above its fair value or market value. In addition, these rules require investments to be diversified. Subject to the restrictions described above, insurers generally may only invest in certain types of investments, including certain U.S., state and municipal government obligations, secured and unsecured debt instruments and preferred and common stocks of solvent U.S. and certain foreign corporations (including insurers), limited partnership interests, insured savings accounts, collaterized mortgage obligations and real estate. In addition to specifically permitted types of investments, insurers generally may 7 make other loans or investments in an aggregate amount not exceeding a fixed percentage of their assets, provided that any such loan or investment is not expressly prohibited under the Insurance Codes. TRIENNIAL EXAMINATIONS. Insurance Departments usually conduct examinations of domiciled insurers and reinsurers every three years, and may do so at such other times as are deemed advisable by the Insurance Commissioners. The reinsurance/insurance subsidiaries are currently undergoing routine triennial examinations. RISK BASED CAPITAL. The NAIC has adopted a risk based capital standard for property and casualty insurance (and reinsurance) companies which measures the amount of capital appropriate for a property and casualty insurance company to support its overall business operations in light of its size and risk profile. American Re-Insurance's 1999 adjusted surplus to policyholders of $1,828.1 million is in excess of the authorized control level risk based capital total of $704.7 million. American Alternative's 1999 adjusted surplus to policyholders of $106.3 million is in excess of the authorized control level risk based capital total of $8.4 million. INSURANCE HOLDING COMPANY REGULATIONS. The insurance holding company laws and regulations vary from state to state, but generally require an insurance holding company to register with the state regulatory authorities and file certain reports that include current information concerning the capital structure, ownership, management, financial condition and general business operations of the insurance holding company and its subsidiary insurers which are licensed in the state. State holding company laws and regulations with respect to domestic insurers also require prior notice or regulatory approval of changes in control of an insurer or its holding company and of material inter-affiliate transactions within the holding company structure. See "DIVIDENDS." DIVIDENDS. Because the operations of the Company are conducted primarily through its reinsurance/ insurance subsidiaries, the Company is dependent upon dividends and tax allocation payments primarily from American Re-Insurance to meet its debt and other obligations and to pay dividends in the future if the Company's Board of Directors so determines. The payment of dividends to the Company by American Re-Insurance is subject to limitations imposed by the Delaware Insurance Code. Under the Delaware Insurance Code, no Delaware insurer may pay any (i) dividend or distribution without 10 days' prior notice to the Delaware Insurance Department or (ii) "extraordinary" dividend or distribution until (a) 30 days after the Delaware Insurance Commissioner has received notice of the declaration thereof and has not within such period disapproved such payment or (b) the Delaware Insurance Commissioner has approved such payment within the 30-day period. Under the Delaware Insurance Code, an "extraordinary" dividend for a property and casualty insurer is a dividend, the amount of which, when taken together with all other dividends made in the preceding twelve months, exceeds the greater of (i) 10% of an insurer's statutory surplus as of the end of the prior calendar year or (ii) the insurer's statutory net income, not including realized capital gains, for the prior calendar year. Under this definition, as of December 31, 1999 the maximum amount available for the payment of dividends by American Re-Insurance during 2000 without prior approval of regulatory authorities is $214.6 million. No prediction can be made as to whether any legislative proposals relating to dividend rules in Delaware will be made, whether any such legislative proposal will be adopted in the future, or the effect, if any, any such proposal would have on the Company or American Re-Insurance. LEGISLATIVE AND REGULATORY PROPOSALS. From time to time, various regulatory and legislative changes have been proposed in the insurance and reinsurance industry, which may have an effect on reinsurers. Some states have adopted, or are considering adopting laws, regulations and administrative practices which, among other things, may limit the ability of primary insurance companies to effect premium rate increases or to cancel or not renew existing policies. Additionally, a number of states are considering insurance company liquidation procedures that may significantly increase and accelerate the payment of reinsurance obligations, or otherwise alter contractual rights of reinsurers. The company is unable to 8 predict whether any of these laws or regulations would be adopted in additional states, the form in which any such laws and regulations would be adopted in additional states, or the effect, if any, these developments will have on the operations and financial condition of the Company or any of its subsidiaries. HOLOCAUST VICTIMS INSURANCE LAWS. Several states have enacted legislation pertaining to insurance policies that were issued in Europe to Holocaust victims during the period 1920 through 1945, and legislation on this subject matter is under consideration in other states. Insurance regulators in these states have taken actions or threatened to take actions to sanction insurance companies licensed in such states for alleged failure to comply with such laws. Most state insurance regulators have subscribed to a private, non-governmental, voluntary organization named the International Commission on Holocaust Era Insurance Claims ("Holocaust Commission") that is dedicated to identifying and resolving outstanding insurance claims from the Holocaust era for its members. Under some of the recently enacted state laws, an insurer's participation in the Holocaust Commission confers certain statutory benefits. CALIFORNIA. California has two Holocaust era insurance related statutes. The first purports to permit the suspension of an insurer's license if it or any of its affiliates has failed to pay any claim of Holocaust victims proven to be valid and unpaid. This statute also authorizes the Commissioner to include consideration of whether an insurer is participating in the Holocaust Commission in deciding whether to suspend the insurer's license. In July, 1999, the California Insurance Department ("CID") initiated an examination and hearing involving the Company's California licensed insurers and Munich Re in order to investigate whether these companies or affiliated companies in Europe had outstanding Holocaust era insurance claims. While the licensees named in the examination and hearing process either were not in existence or did not do business in Europe during the Holocaust era, and Munich Re, as a reinsurer, never issued any insurance policies, the CID sought information on Holocaust era insurance from European insurers in which Munich Re has an indirect investment interest. The hearing and examination are ongoing. The second California statute is the Holocaust Victim Insurance Relief Act of 1999 ("California Registry Law") designed to create a publicly accessible registry of Holocaust era policyholder information. The California Registry Law requires California licensed insurers to report Holocaust era policyholder information in their possession or in the possession of their "related companies," as that term is defined in the California Registry Law. The CID interprets this statute to require information even from companies that are not controlled by the licensed insurers or their parent companies. In March 2000, American Re-Insurance and the American Insurance Association, an insurance trade association many of whose members are California licensed insurers, initiated litigation in California challenging the validity of the California Registry Law on constitutional and other grounds. That litigation is pending. FLORIDA. Florida has enacted a statute ("Florida Holocaust Law") that seeks reports of information on Holocaust era insurance. The Florida Holocaust Law requires Florida licensed insurers to report certain information on insurance policies issued in Europe during the Holocaust era by such licensees and their affiliates. American Re-Insurance and American Alternative have no information to report because they did not issue insurance policies in Europe during the relevant time period. However, the companies have timely filed reports disclosing information voluntarily provided by European insurers in which Munich Re has an investment interest. The Florida Insurance Department has issued subpoenas to American Re-Insurance, American Alternative, and approximately 40 other insurance companies seeking policyholder information in connection with the Florida Holocaust Law. Recently, an unaffiliated company initiated litigation against the Florida Insurance Department challenging the validity of the subpoenas and the constitutionality of the Florida Holocaust Law. The Department has stayed any further action under the Florida Holocaust Law, and the litigation is pending. NEW YORK. New York has enacted a statute ("New York Holocaust Law") similar to the Florida Holocaust Law. American Re-Insurance and American Alternative timely filed reports responsive to the New York Holocaust Law disclosing information voluntarily provided by European insurers in which Munich Re has an investment interest. The New York Insurance Department subsequently requested 9 additional information in connection with Holocaust era insurance. American Re promptly forwarded these requests to the European insurers which responded directly to the Department. More recently, the Department has threatened to attempt to fine American Re up to $1,000 per day for alleged reporting violations unless Munich Re joins the Holocaust Commission, or agrees to pay alleged Holocaust claims involving companies that Munich Re does not control, or contributes to a humanitarian fund for the benefit of Holocaust survivors. No court or administrative proceedings have been commenced against American Re in New York to date. WASHINGTON. Washington has enacted a statute similar to the California Registry Law. American Re-Insurance and American Alternative have reported to the Washington Insurance Department that they have nothing to report under the statute. The Department has asserted that the companies' report is not in compliance with the law and has indicated that it may initiate enforcement action against American Re, although no action has been commenced to date. * * * * * American Re believes that it has fully complied with the requirements of these statutes. However, there can be no assurance that insurance regulators will not initiate administrative or other actions against American Re under these laws. American Re does not believe that the ultimate resolution of these matters will have a material adverse effect on the business, financial condition or results of operations of American Re and its subsidiaries taken as a whole. ACQUISITION OF AMERICAN INSURANCE SERVICE In August, 1999, as part of its strategy to serve alternative market needs, American Re signed an Agreement to acquire all of the outstanding shares of AIS, the holding company that owns UNG. UNG includes United National Insurance Company ("United National"), Diamond State Insurance Company, and Hallmark Insurance Company. UNG has admitted and non-admitted capabilities through these entities to write business in all states except Alaska, and holds an A+ (Superior) rating from the insurance industry-rating firm A.M. Best. At December 31, 1999, UNG had total assets of $1,301.2 million and had shareholders' equity of $285.3 million. The consideration to be paid to the shareholders of AIS ("Sellers") by American Re is $350.0 million in cash ("Purchase Price"), subject to certain adjustments not expected to increase the Purchase Price in excess of $5.0 million. Under the Agreement, the transaction is contingent upon AIS's redemption of certain shares currently owned by the Sellers (the "Redemption"), for a price of $150.0 million (the "Redemption Price"). The Redemption is expected to occur simultaneously with or immediately prior to American Re's purchase of the remaining outstanding shares from the Sellers. It is anticipated that the funds to effectuate the transaction will come from available funds held by American Re and from an existing bank credit facility. Two of the three insurance departments that must approve the transaction (Indiana and Wisconsin) have conducted hearings, completed their reviews and granted their approvals of the transaction. However, the Pennsylvania Insurance Department has subjected American Re to an excessive delay in reviewing the Company's application regarding United National, allegedly based on the fact that Munich Re has not joined the Holocaust Commission. As a result of this delay, on February 8, 2000, American Re filed suit in Pennsylvania Commonwealth Court against the Pennsylvania Insurance Department and the Pennsylvania Insurance Commissioner, seeking to compel the Department to complete its review of American Re's application to acquire United National. See "--Regulatory Matters-HOLOCAUST VICTIMS INSURANCE LAWS" and "Item 3. LEGAL PROCEEDINGS". 10 ITEM 2. PROPERTIES The Company owns approximately 413,541 square feet of space in four contiguous executive office properties in Princeton, New Jersey, on land owned by Princeton University and subject to long-term ground leases. The Company also owns properties for its foreign subsidiaries and representative offices totaling 20,305 square feet in Mexico City, Cairo, Santiago, Bogota and Buenos Aires. The Company also rents office space totaling approximately 344,872 square feet in Atlanta, Boston, Burlington (VT), Chicago, Columbus (OH), Dallas, Florham Park (NJ), Hartford, Honolulu, Kansas City (KS), Los Angeles, Minneapolis, New York, Philadelphia, San Francisco, Seattle, Woodland Hills (CA), Beijing, Bermuda, Brussels, Johannesburg, London, Melbourne, Montreal, Moscow, Sao Paulo, Singapore, Sydney, Tokyo, and Toronto. The Company believes that its office space is adequate for its current needs and will enter into new leases to meet future needs as such needs arise and as general market conditions permit. The Company has invested significant amounts in computer resources, including electronic data processing equipment and the development of proprietary software to support its business. As part of the Company's disaster control strategy, all key data is backed up regularly for off site storage. ITEM 3. LEGAL PROCEEDINGS. The Company is involved in claims related litigation, arbitrations and other adversarial proceedings in the ordinary course of business. The Company is also involved in non-claim litigation incidental to its business principally related to insurance company insolvencies or liquidation proceedings relating to companies with whom it does business. SUPERIOR NATIONAL INSURANCE GROUP, INC. V. AMERICAN RE-INSURANCE COMPANY, ET AL. On December 31, 1999, American Re-Insurance reached an agreement with Superior National Insurance Group, Inc. ("Superior National") to settle certain reinsurance disputes arising in connection with the sale of Business Insurance Group ("BIG") by Foundation Health Systems, Inc., to Superior National. As consideration for the execution of the settlement agreement, American Re-Insurance simultaneously entered into an Excess of Loss Retrocessional Reinsurance Agreement with Centre Reinsurance (US) Limited, pursuant to which Centre Re agreed to indemnify American Re-Insurance up to $40.0 million in excess of $135.0 million of aggregate ultimate net loss paid by American Re-Insurance under an Aggregate Excess of Loss Agreement with BIG. All pending litigations and arbitrations between the parties were terminated or dismissed with prejudice. AMERICAN RE-INSURANCE V. PENNSYLVANIA INSURANCE DEPARTMENT In connection with American Re's efforts to acquire all of the outstanding shares of AIS, the holding company that owns United National, Diamond State Insurance Company, and Hallmark Insurance Company, American Re is required to obtain the approval of three insurance departments which have regulatory authority over the transaction. Two of the three insurance departments that must approve the transaction (Indiana and Wisconsin) have conducted hearings, completed their reviews and granted their approvals of the transaction. However, the Pennsylvania Insurance Department has subjected American Re to an excessive delay in reviewing the application regarding United National, which is domiciled in Pennsylvania, allegedly based on the fact that Munich Re has not joined the Holocaust Commission. As a result of this delay, on February 8, 2000, American Re filed suit in Pennsylvania Commonwealth Court against the Pennsylvania Insurance Department and the Pennsylvania Insurance Commissioner, seeking to compel the Department to complete its review of American Re's application to acquire United National. At the present time, no assurance can be given as to the ability of American Re to prevail in the 11 litigation against the Department. Furthermore, even if American Re is successful in the litigation seeking to compel the Department to complete its review, there can be no assurance that such review would result in a timely approval of the transaction by the Department since, under the terms of the Agreement, the Sellers have had the right to terminate the Agreement since March 10, 2000 and they may elect to do so at any time. See "Item 1. BUSINESS"--Acquisition of American Insurance Service" and "Item 1. BUSINESS-- Regulatory Matters-HOLOCAUST VICTIMS INSURANCE LAWS". The Company does not believe that any of the pending legal proceedings will have a material adverse effect on the consolidated financial condition or results of operations of American Re and its subsidiaries. However, no assurance can be given as to the ultimate outcome of any such legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE SECURITY HOLDERS None. 12 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) There is no established public trading market for the Company's equity. (b) 100% of the Company's Common Stock is owned by Munich Re. (c) It is the Company's understanding that Munich Re intends to further strengthen the capital position of the Company by allowing net income to be retained; therefore, at this time no cash dividends on the Common Stock are anticipated. The dividend capacity of the reinsurance/insurance subsidiaries is discussed in Part I, Item 1. BUSINESS--Regulatory Matters-DIVIDENDS. ITEM 6. SELECTED FINANCIAL INFORMATION OF THE COMPANY Set forth below are five years of selected financial information derived from the audited consolidated financial statements and related notes of the Company. The statutory data have been derived from statutory financial statements. Such statutory financial statements are prepared in accordance with statutory accounting principles, which differ from GAAP. For additional information, see the Consolidated Financial Statements of the Company, and the related notes thereto included elsewhere in this report.
1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (DOLLARS IN MILLIONS) OPERATING DATA: Net premiums written....................... $2,905.7 $2,406.8 $2,497.7 $1,902.4 $1,629.5 Net premiums earned........................ 2,927.5 2,418.9 2,486.1 1,796.7 1,530.9 Losses and LAE (1)......................... 2,654.4 1,682.4 1,716.3 1,167.8 1,340.2 Underwriting expenses...................... 870.7 816.4 838.4 533.5 452.4 Underwriting gain (loss)................... (597.6) (79.9) (68.6) 95.4 (261.7) Net investment income...................... 415.1 417.5 427.5 248.2 222.6 Net realized capital gains................. 82.9 92.8 87.7 4.8 4.7 Interest expense........................... 41.9 42.2 42.8 54.1 60.7 Income (loss) before income taxes.......... (178.0) 321.5 224.3 232.6 (159.5) Income taxes (benefits).................... (90.1) 82.4 (3.4) 73.8 (76.6) Income (loss) before minority interest, distributions on preferred securities of subsidiary trust and extraordinary loss..................................... (87.9) 239.1 227.7 158.8 (82.9) Minority interest.......................... -- -- 6.8 -- -- Distributions on preferred securities of subsidiary trust......................... (13.1) (13.1) (13.1) (13.1) (4.4) Income (loss) before extraordinary loss.... (101.0) 226.0 221.4 145.7 (87.3) Extraordinary loss, net of applicable income tax effect........................ -- -- -- (34.0) (0.3) Net income (loss) available to common shareholders............................. (101.0) 226.0 221.4 111.7 (87.6) OTHER GAAP OPERATING DATA (2): Loss and LAE ratio......................... 90.7% 69.6% 69.0% 65.0% 87.5% Underwriting expense ratio................. 29.7 33.7 33.8 29.7 29.6 -------- -------- -------- -------- -------- Combined ratio............................. 120.4% 103.3% 102.8% 94.7% 117.1% STATUTORY DATA (3): Ratio of net premiums written to surplus... 1.31x 0.87x 1.07x 1.21x 1.23x Policyholders' surplus..................... $2,166.0 $2,631.1 $2,323.4 $2,178.1 $1,892.8 Loss and LAE ratio......................... 86.3% 68.2% 68.8% 67.5% 83.5% Underwriting expense ratio................. 28.9 35.5 35.1 31.0 32.1 -------- -------- -------- -------- -------- Combined ratio............................. 115.2% 103.7% 103.9% 98.5% 115.6%
13
1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (DOLLARS IN MILLIONS) BALANCE SHEET DATA (AT END OF PERIOD): Total investments and cash................. $7,439.9 $7,801.3 $7,673.4 $7,007.3 $3,957.5 Total assets............................... 14,278.8 13,544.0 13,216.9 12,114.7 7,804.8 Loss and LAE reserves...................... 8,369.0 7,334.1 7,469.3 7,178.3 4,786.0 Senior bank debt........................... 75.0 75.0 75.0 75.0 75.0 Senior notes............................... 498.5 498.5 498.5 498.4 -- Senior subordinated debt................... -- -- -- -- 450.0 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding as all its assets Junior Subordinated Debentures.................. 237.5 237.5 237.5 237.5 237.5 Stockholder's equity....................... $2,489.0 $2,853.1 $2,586.4 $1,792.5 $ 847.1
- ------------------------ (1) "LAE" means loss adjustment expenses. (2) GAAP loss and LAE ratio represents the sum of losses and LAE as a percentage of net premiums earned. GAAP underwriting expense ratio represents underwriting expenses as a percentage of net premiums earned. GAAP combined ratio represents the sum of the GAAP loss and LAE ratio and GAAP underwriting expense ratio. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S RESULTS OF OPERATIONS AND FINANCIAL CONDITION." (3) Represents statutory data for the applicable period. Ratio of net premiums written to surplus represents statutory net premiums written for the period over statutory policyholders' surplus at the end of such period. Statutory loss and LAE ratio represents the sum of statutory losses and LAE as a percentage of statutory net premiums earned. Statutory underwriting expense ratio represents statutory underwriting expenses as a percentage of statutory net premiums written. Statutory combined ratio represents the sum of the statutory loss and LAE ratio and the statutory underwriting expense ratio. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S RESULTS OF OPERATIONS AND FINANCIAL CONDITION." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1999, COMPARED WITH YEAR ENDED DECEMBER 31, 1998 The Company incurred a net loss to common stockholder of $101.0 million for the year ended December 31, 1999 compared to net income of $226.0 million in 1998. The Company's net premiums written increased 20.7% to $2,905.7 million for the year ended December 31, 1999, from $2,406.8 million in 1998. The Company experienced increases in both treaty and facultative net premiums written. Treaty net premium writings increased 22.9% to $1,952.4 million for the year ended December 31, 1999, from $1,588.8 million for the same period in 1998. This increase was primarily attributable to DICO, which increased treaty net written premiums 22.4% to $1,277.8 million for the year ended December 31, 1999, from $1,044.1 million for the same period in 1998, as a result of retrospective premium adjustments on several reinsurance contracts. The Company's two other major business segments, RiskPartners, the Company's alternative market operation, and International Operations, also had increased treaty net premium writings: RiskPartners increased treaty net written premiums 62.8% to $207.4 million for the year ended December 31, 1999, from $127.4 million for the same period in 1998, and International Operations increased treaty net written premiums 11.9% to $467.0 million for 1999, from $417.3 million for 1998. Facultative net premiums written increased 16.5% to $953.3 million for the year ended December 31, 1999, from $818.0 million for the same period in 1998. This increase was partially due to a change in the Company's facultative retrocessional program to retain more of this business. Net facultative premiums written changes included: (i) an 18.5% increase in DICO facultative net premiums written to $561.3 million for the year ended December 31, 1999, from $473.8 million for the same period in 1998; (ii) a 12.3% 14 increase in RiskPartners' facultative net premiums written to $347.2 million for 1999, from $309.1 million for 1998; and (iii) a 27.6% increase in International Operations' facultative net premiums written to $44.8 million for 1999, from $35.1 million for 1998. Included in the results described above were increased net premiums written resulting from changes in the Company's retrocessional programs and retrospective premium adjustments under several reinsurance contracts under which higher losses were also ceded to the Company. In addition, the Company's initiative with healthcare providers yielded $123.1 million of net premiums written for the year ended December 31, 1999, compared to $45.2 million for the same period in 1998. The Company's net premiums earned increased 21.0% to $2,927.5 million for the year ended December 31, 1999, from $2,418.9 million in 1998. The increase in premiums earned was primarily attributable to the increase in net premiums written. Net losses and LAE incurred increased 57.8% to $2,654.4 million for the year ended December 31, 1999, from $1,682.4 million in 1998. The 1999 period includes provisions for increased losses for the current and recent accident years to reflect adverse market conditions and a loss in connection with the settlement of a dispute concerning a finite reinsurance agreement. In addition, the Company incurred $122.5 million of catastrophe losses during the year ended December 31, 1999, compared to $65.5 million during the year ended December 31, 1998. During 1999, the Company undertook a study to reevaluate its reserves for asbestos, environmental-related and other latent liabilities ("latent liability exposures"). This was a result of the Company's assessment of its reported claims activity, which reflected continued emergence of newly reported claims in each of these areas and recent insurance industry efforts to accelerate the settlement of outstanding latent liability claims. As a result of this reevaluation, during the fourth quarter of 1999, the Company increased its gross incurred but not reported ("IBNR") loss reserves for latent liability exposures. This charge was partially offset by reserves in other accident years and by the utilization of the remaining limit under the Company's Adverse Loss Agreement with Travelers, covering losses for accident years 1991 and prior. See "Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--Reserves for Unpaid Losses and Loss Adjustment Expenses--ASBESTOS, ENVIRONMENTAL-RELATED AND OTHER LATENT LIABILITY CLAIMS". Underwriting expense, consisting of commission expense plus operating expense, increased 6.7% to $870.7 million for the year ended December 31, 1999, from $816.4 million in 1998. This increase included a 1.9% increase in commission expense to $595.3 million for the year ended December 31, 1999 from $584.3 million in 1998. Operating expenses increased 18.7% to $275.4 million for the year ended December 31, 1999 from $232.1 million for 1998. This increase is primarily due to a decrease in the capitalization of deferred acquisition costs and an increase in pension costs. The Company experienced an underwriting loss (net premiums earned minus losses and LAE incurred and underwriting expenses) of $597.6 million for the year ended December 31, 1999, compared to an underwriting loss of $79.9 million in 1998. The Company's loss ratio increased to 90.7% for the year ended December 31, 1999 from 69.6% in 1998, while the underwriting expense ratio decreased to 29.7% in 1998 from 33.7% in 1998. The combined ratio for the year ended December 31, 1999, increased to 120.4% from 103.3% in 1998. Pre-tax net investment income decreased slightly to $415.1 million for the year ended December 31, 1999, from $417.5 million in 1998. This decrease is the result of a decrease in the Company's invested asset base, offset in part by higher portfolio yields. The Company realized net capital gains of $82.9 million for the year ended December 31, 1999, compared to net capital gains of $92.8 million in 1998. The 1999 period included net capital gains of $87.9 million on the sale of common stock, offset by net capital losses of $3.8 million on the sale of bonds. The 1998 period included net capital gains of $103.0 million on the sale of bonds and $5.0 million on the 15 sale of common stock, offset by the $15.7 million write-down of common stock and other invested asset holdings, as the decline in fair value of these securities is considered to be other than temporary. Other income decreased 13.5% to $27.5 million for the year ended December 31, 1999, from $31.8 million in 1998. The decrease in the 1999 period was attributable to a decrease in fee subsidiary revenue of $3.0 million. Other expenses decreased 35.0% to $64.0 million for the year ended December 31, 1999 from $98.5 million in 1998. This decrease was primarily attributable to the reversal of an expense accrual related to the Company's long term incentive compensation program. The Company incurred a loss before income taxes, minority interest and distributions on preferred securities of subsidiary trust of $178.0 million for the year ended December 31, 1999, compared to income of $321.5 million in 1998. YEAR ENDED DECEMBER 31, 1998, COMPARED WITH YEAR ENDED DECEMBER 31, 1997 The Company's net premiums written decreased 3.6% to $2,406.8 million for the year ended December 31, 1998, from $2,497.7 million in 1997. The decrease in net premiums written was generally attributable to what the Company perceives to be depressed market conditions, increases in client retentions and the Company's declining to write business at prices it considered inadequate. As a result, the Company experienced a 12.0% decrease in treaty net premiums written to $1,588.8 million for the year ended December 31, 1998, from $1,806.0 million for the same period in 1997. The decrease in treaty premiums was primarily attributable to declines in traditional and finite risk treaty business written by DICO, which decreased 19.9% to $1,044.1 million for the year ended December 31, 1998, from $1,304.1 million for the same period in 1997. The decrease in DICO was primarily attributable to the non-renewal of and decreases in the amounts ceded to American Re-Insurance under several traditional and finite risk treaty programs, which were related in several instances to mergers of clients. In addition, the 1997 period included a rescission of a large retrocession which increased that period's net writings. The decrease in treaty premiums written by DICO was partially offset by a 32.2% increase in treaty premiums written by RiskPartners, to $127.4 million for the year ended December 31, 1998, from $96.4 million for the same period in 1997, and International Operations, which increased treaty premiums written 2.9% to $417.3 million for the year ended December 31, 1998, from $405.5 million for the same period in 1997. Facultative net premiums written increased 18.3% to $818.0 million for the year ended December 31, 1998, from $691.7 million for the same period in 1997. This increase is primarily attributable to increased program business from RiskPartners, which increased 74.2% to $309.1 million for the year ended December 31, 1998, from $177.4 million for the same period in 1997, and the Company's International Operations, which increased facultative net premiums written 27.2% to $35.1 million for the same period in 1997. The increases in facultative net premiums written by RiskPartners and International Operations were offset by a 2.7% decrease in facultative net premiums written by DICO, to $473.8 million for the year ended December 31, 1998, from $486.7 million for the same period in 1997. The Company's net premiums earned decreased 2.7% to $2,418.9 million for the year ended December 31, 1998, from $2,486.1 million in 1997. The decrease in premiums earned was primarily attributable to the decrease in net premiums written, partially offset by the timing of premiums earned on business in force. Net losses and LAE incurred decreased 2.0% and $1,682.4 million for the year ended December 31, 1998, from $1,716.3 million in 1997. The Company primarily attributes this decrease to the reduction in net premiums earned, partially offset by an increase in catastrophe losses in 1998. The Company incurred $65.5 million of catastrophe losses during the year ended December 31, 1998. There were no significant catastrophe losses in the 1997 period. Underwriting expense, consisting of commission expense plus operating expense, decreased 2.6% to $816.4 million for the year ended December 31, 1998, from $838.4 million in 1997. This decrease included 16 a 6.3% decrease in commission expense to $584.3 million for the year ended December 31, 1998 from $623.5 million in 1997. This decrease was partially due to the decrease in premiums earned during the year ended December 31, 1998, in addition to the non-renewal or decreases of several large domestic quota share treaties in the 1998 period with high commission ratios. Operating expenses increased 8.0% to $232.1 million for the year ended December 31, 1998 from $214.9 million for 1997. This increase is primarily the result of increased overhead costs, including expenditures for technological and process improvements. The Company experienced an underwriting loss (net premiums earned minus losses and LAE incurred and underwriting expenses) of $79.9 million for the year ended December 31, 1998, compared to an underwriting loss of $68.6 million in 1997. The Company's loss ratio increased to 69.6% for the year ended December 31, 1998 from 69.0% in 1997, while the underwriting expense ratio decreased to 33.7% in 1998 from 33.8% in 1997. The combined ratio for the year ended December 31, 1998, increased to 103.3% from 102.8% in 1997. Pre-tax net investment income decreased 2.3% to $417.5 million for the year ended December 31, 1998, from $427.5 million in 1997. This decrease was primarily attributable to repositioning the Company's investment portfolio into tax-exempt securities, in addition to overall lower interest rates in the 1998 period, as compared to the 1997 period. The Company's after-tax net investment income increased 1.4% to $305.3 million for the year ended December 31, 1998, from $301.2 million in 1997. The Company realized net capital gains of $92.8 million for the year ended December 31, 1998, compared to net capital gains of $87.7 million in 1997. This increase was primarily due to the Company's investment strategy, which included sales of taxable investments, as the Company repositioned its investment portfolio to include a larger portion of its overall investment portfolio to tax-exempt securities. The 1998 period included net capital gains of $103.0 million on the sale of bonds and $5.0 million on the sale of common stock, offset by the $15.7 million write-down of common stock and other invested asset holdings, as the decline in fair value of these securities is considered to be other than temporary. The 1997 period included capital gains of $67.9 million on the sale of common stock and $26.2 million on the sale of bonds. The net gains realized in the 1997 period were based on investment management and tax planning considerations. Other income decreased 23.7% to $31.8 million for the year ended December 31, 1998, from $41.7 million in 1997. The decrease in the 1997 period was attributable to a decrease in fee subsidiary revenue of $8.8 million. Other expenses decreased to $98.5 million for the year ended December 31, 1998 from $221.2 million in 1997. This decrease was primarily attributable to the inclusion of one-time charges of $124.3 million, primarily related to a merger in the 1997 period. Income before income taxes, minority interest, and distributions on preferred securities of subsidiary increased 43.3% to $321.5 million for the year ended December 31, 1998, compared to $224.3 million in 1997. Federal and foreign income tax expense was $82.4 million for the year ended December 31, 1998, compared to a tax benefit of $3.4 million in 1997. The increase in Federal and foreign taxes was primarily attributable to higher pre-tax income in the 1998 period, in addition to the recognition of $62.1 million of income tax benefits in 1997, representing net operating loss carry-forwards and the reversal of a deferred federal income tax asset valuation in the 1997 period, which reduced the corresponding federal income tax expense. The Company recognized an after-tax charge of $13.1 million for each of the years ended December 31, 1998 and 1997, representing the Company's minority interest in the earnings of American Re Capital, a single-purpose wholly-owned subsidiary trust. The charge is due to the distributions incurred by American Re Capital on the Cumulative Quarterly Income Preferred Securities ("QUIPS"). 17 Net income to common stockholder was $226.0 million for the year ended December 31, 1998 compared to net income of $221.4 million in 1997. FINANCIAL CONDITION The Company is a holding company, which includes its principal subsidiary, American Re-Insurance. Based on statutory net premiums written of $2,821.3 million in 1999, American Re-Insurance ranked as the second largest property and casualty reinsurer in the U.S., according to Reinsurance Association of America statistics. Total consolidated assets increased by 5.4% to $14,278.8 million at December 1999, from $13,544.0 million at December 31, 1998. This increase was primarily due to an increase in reinsurance recoverables on paid and unpaid losses of $691.8 million. Total consolidated liabilities increased by 10.5% to $11,552.3 million at December 31, 1999, from $10,453.4 million at December 31, 1998. This increase was primarily due to increases in loss and loss adjustment expense reserves of $1,034.9 million. Common stockholder's equity decreased 12.8% to $2,489.0 million at December 31, 1999, from $2,853.1 million at December 31, 1998. This decrease was primarily attributable to the net loss of $101.0 million for the year ended December 31, 1999, and recognized net market depreciation of $263.1 million in accumulated other comprehensive income, after applicable income tax effect. The Company's reinsurance/insurance subsidiaries' statutory surplus decreased to $2,166.0 million at December 31, 1999, from $2,631.1 million at December 31, 1998. Operating leverage, as measured by such subsidiaries' premiums-to-surplus ratio, on an annualized basis was 1.31 to 1 and 0.87 to 1 at December 31, 1999, and December 31, 1998, respectively. INVESTMENTS The total financial statement value of investments and cash decreased to $7,439.9 million at December 31, 1999, from $7,801.3 million at December 31, 1998, primarily due to decreases in cash flows from operating activities, and a decrease in the fair value of investments held. The financial statement value of the investment portfolio at December 31, 1999, included a net decrease from amortized cost to fair value of $161.2 million for debt and equity investments, compared to a net increase of $244.5 million at December 31, 1998. At December 31, 1999, the Company recognized a cumulative unrealized loss of $104.8 million due to the net adjustment to fair value on debt and equity investments, after applicable income tax effects, which was reflected as a separate component of accumulated other comprehensive income. This represents a net decrease to stockholder's equity of $263.7 million from the cumulative unrealized gain on debt and equity securities of $158.9 million recognized at December 31, 1998. 18 The Company follows a conservative investment strategy that emphasizes maintaining a high-quality investment portfolio and maximizing after-tax current income. The composition of the Company's investment portfolio, on a fair value basis, for the periods ending December 31, was as follows:
1999 1998 ------------------- ------------------- AMOUNT PERCENT AMOUNT PERCENT -------- -------- -------- -------- Fixed maturities: U.S. Government and government agency bonds............. $ 730.8 9.8% $ 645.1 8.3% Municipal bonds......................................... 2,070.3 27.8 2,637.0 33.8 Mortgage backed securities.............................. 1,106.8 14.9 1,218.6 15.6 Domestic corporate bonds................................ 1,637.8 22.0 1,585.9 20.3 Foreign bonds........................................... 769.5 10.4 789.4 10.1 Redeemable preferred stock.............................. 84.6 1.2 77.3 1.0 Equity securities......................................... 402.1 5.4 545.2 7.0 Other investments......................................... 40.5 0.5 27.9 0.4 Cash and cash equivalents................................. 597.5 8.0 274.9 3.5 -------- ----- -------- ----- Total fair value.................................... $7,439.9 100.0% $7,801.3 100.0% ======== ===== ======== =====
The net decrease in the financial statement value of investments and cash reflects underwriting results, reinvestment of investment income received, interest expense, income tax payments, and fair value adjustments on bonds and equity securities classified as available for sale. There were $6,315.2 million and $6,876.0 million of bonds carried at fair value as available for sale securities at December 31, 1999 and 1998 respectively. The following table indicates the composition of the Company's bond portfolio, on a fair value basis, by rating as assigned by Standard & Poor's at December 31:
1999 1998 ------------------- ------------------- AMOUNT PERCENT AMOUNT PERCENT -------- -------- -------- -------- (DOLLARS IN MILLIONS) AAA....................................... $3,912.8 62.0% $4,181.4 60.8% AA........................................ 1,324.8 21.0 1,660.5 24.2 A......................................... 712.7 11.3 766.5 11.1 BBB....................................... 210.4 3.3 110.7 1.6 BB and below and not rated................ 154.5 2.4 156.9 2.3 -------- ----- -------- ----- Total fair value.................... $6,315.2 100.0% $6,876.0 100.0% ======== ===== ======== =====
The Company continues to seek opportunities to enhance investment yield primarily through a conservative, fixed maturity investment strategy, while investigating various nontraditional investment opportunities. The Company also monitors investment and liability duration to ensure optimal investment performance. In addition, the Company continues to invest at a range of maturities to ensure a consistent maturity profile, thereby minimizing the need for security sales to raise liquidity levels. The modified duration of the Company's bond portfolio was estimated at 4.62 and 5.09 years at December 31, 1999, and 1998, respectively. The Company continually tracks the allocation of the bond portfolio invested in tax-advantaged securities based on tax planning considerations and their value relative to taxable investments. LIQUIDITY AND CAPITAL RESOURCES The Company's only material investment is the capital stock of American Re-Insurance. The Company is dependent on dividends and tax allocation payments, primarily from American Re-Insurance, to meet its short- and long-term liquidity requirements, including its debt service obligations. It is the 19 Company's understanding that it is Munich Re's intention to further strengthen the capital position of the Company by allowing net income to be retained; therefore, at this time, no cash dividends on the Company's common stock are anticipated. The Company is required to apply a portion of its operating cash flow to the servicing and repayment of its debt obligations. The payment of dividends to the Company by American Re-Insurance is subject to limitations imposed by the Delaware Insurance Code. Based upon these restrictions and 1999 operating results, the maximum amount available for payment of dividends to the Company by American Re-Insurance in 2000 without approval of regulatory authorities is $214.6 million. The Company's cash flow from operations may be influenced by a variety of other factors, including cyclical changes in the property and casualty reinsurance market, insurance regulatory initiatives, and changes in general economic conditions. Liquidity requirements are met on both a short- and long-term basis by funds provided by operations and from the maturity and sale of investments. Cash provided by operations primarily consists of premiums collected, investment income, and reinsurance recoverable balances collected, less paid claims, retrocession payments, underwriting and interest expenses, QUIPS distributions, and income tax payments. Cash flows used in operations for the Company were $38.5 million for 1999; cash flows provided by operations were $202.7 million for 1998, and $366.1 million for 1997. This decrease is primarily attributable to higher paid losses during the 1999 period. The decrease in the 1998 period is attributable to several factors, including the Company's lower level of premium writings in the soft market, a higher level of paid losses from its book of proportional business, and payments related to catastrophes. Total cash proceeds in 1999 from sales of investments were $3,321.3 million compared to $6,164.7 million in 1998 and $4,266.6 million in 1997. The decreased activity in 1999 was the result of an abnormally high level of activity during 1998. Much of the increased activity in 1998 was due to the Company's investment strategy to restructure the overall investment portfolio into tax-exempt securities and increase common equity holdings. Cash and cash equivalents were $597.5 million, $274.9 million, and $641.6 million, at December 31, 1999, 1998, and 1997, respectively. Cash and short-term investments are maintained for liquidity purposes and represented 8.0%, 3.5% and 8.4%, respectively, of total financial statement investments and cash on such dates. American Re has a $150 million unsecured bank credit agreement with Bank of America, N.A. At December 31, 1999, $75 million remained available under the bank credit agreement. CREDIT RATINGS In February, 2000, A.M. Best affirmed its rating of American Re-Insurance of "A++ (Superior)", the highest of A.M. Best's 15 qualitative ratings. "A++ (Superior)" is assigned by A.M. Best to those companies which, in its opinion, have demonstrated superior overall performance when compared to the standards established by A.M. Best and have demonstrated a very strong, ability to meet their policyholder and other contractual obligations over a long period of time. According to A.M. Best, the objectives of its rating system are to evaluate the factors affecting overall performance of an insurance or reinsurance company and to provide A.M. Best's opinion of the company's relative financial strength and ability to meet its obligation to policyholders currently and in the future. In March, 2000, Standard & Poor's Corporation ("S&P") affirmed American Re-Insurance's claims paying ability rating of "AAA." The "AAA" rating represents the highest of S&P's ratings. A rating of "AAA" is assigned by S&P to those companies which, in its opinion, have superior financial security on an absolute and relative basis and their capacity to meet policyholder obligations is overwhelming under a variety of economic and underwriting conditions. At the same time, S&P affirmed its "AA" counterparty credit and senior unsecured debt ratings of the Company. 20 In October, 1999, Moody's Investors Service ("Moody's") affirmed American Re-Insurance's financial strength rating of "Aaa." The "Aaa" rating represents the highest of Moody's 19 qualitative ratings. A rating of "Aaa" is assigned by Moody's to those companies which, in Moody's opinion, offer exceptional financial security. There can be no assurance that the Company or American Re-Insurance will continue to maintain the current ratings. SAFE HARBOR DISCLOSURE The Company has disclosed certain forward-looking statements concerning its operations, economic performance and financial condition, including, in particular the likelihood of the Company's success in developing and expanding its business and the risks related thereto. These statements are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond the control of the Company, and reflect future business decisions that are subject to change. Some of these assumptions inevitably will not materialize, and unanticipated events will occur which will affect the Company's results. Such statements may include, but are not limited to, projections of premium revenue, investment income, other revenue, losses, expenses, earnings, cash flows, plans for future operations, common stockholder's equity, investments, capital plans, dividends, plans relating to products or services of American Re, estimates concerning the effects of litigation or other disputes, adverse state or federal legislation or regulation, adverse publicity or news coverage or changes in general economic factors as well as the assumptions for any of the foregoing and are generally expressed with words, such as "believes," "estimates," "expects," "anticipates," "plans," "projects," "forecasts," "goals," "could have," "may have" and similar expressions. MARKET AND INTEREST RATE RISK The Company is subject to market risk arising from the potential change in the value of its various financial instruments. These changes may be due to fluctuations in interest and foreign exchange rate and equity prices. The major components of market risk affecting the Company are interest rate, foreign currency and equity risk. The Company has both fixed and variable (including mortgage backed securities and collateralized mortgage obligations) income investments with a value of $6,399.8 million at December 31, 1999 that are subject to changes in value due to market interest rates. The Company also has Senior Bank Debt of $75.0 million, Senior Notes of $498.5 million, and QUIPS of $237.5 million. The Senior Bank Debt is a variable rate loan, while the Senior Notes, and QUIPS are fixed rate instruments. The Company has exposure to movements in various currencies around the world, particularly the Belgium Franc and the Australian dollar. Changes in currency exchange rates primarily affect the international components of the Company's balance sheet, income statement, and statement of cash flows. This exposure is somewhat offset because the Company's reinsurance premiums and invested assets are partially offset by losses incurred and loss reserves, respectively, generally denominated in the same currency. At December 31, 1999, the Company had no material currency rate exposure. In addition to interest rate and foreign exchange risk, the Company's common equity portfolio of $402.1 million at December 31, 1999 is subject to changes in value based on changes in equity prices, predominately from the United States. To hedge a portion of its exposure to movements in its equity portfolio, the Company entered into options contracts with a notional value of $6.4 million at December 31, 1999. ARCM, a subsidiary of the Company, has been engaged primarily in the weather derivative business, which exposes the Company to losses or gains based on movements in temperature at certain U.S. weather stations. At December 31, 1999, ARCM had entered into 78 weather derivative contracts with a notional 21 value of $139.3 million. At December 31, 1999, the maximum payment amount of the contracts was $85.7 million, and the maximum receivable amount was $111.4 million. In November 1999, ARCM entered into certain index-based Catastrophe Swaps with Gold Eagle Capital Limited, a special purpose Bermuda company. Under the terms of the catastrophe swaps, ARCM may receive approximately $182 million of potential payments from Gold Eagle in the event of three types of certain catastrophic events: California earthquakes, Midwest earthquakes, or Eastern and Gulf Coast windstorms, all as specifically defined under the Catastrophe Swaps ("Catastrophes"). Payment amounts under the catastrophe swaps will be determined based upon an index of modeled insurance industry losses from Catastrophes as calculated by Risk Management Solutions, Inc. American Re Securities Corporation, a subsidiary of the Company, acted as placement agent for Gold Eagle in the placement of catastrophe related securities, called Modeled Index Linked Securities-SM- (ModILS-SM-), intended to collateralize any potential payments by Gold Eagle to ARCM under the catastrophe swaps. The Company adjusts the catastrophe swaps to fair value using a model pricing based upon interest rate spreads above comparable U.S. Treasury investments, applied to a notional value outstanding of $182.1 million. The fair value adjustment at December 31, 1999 was $0.6 million. SENSITIVITY ANALYSIS OF MARKET RISK AND DISCLOSURES ABOUT MODEL Interest rate sensitivity analysis is used to measure the Company's interest rate price risk by computing estimated changes in fair value of fixed and variable rate assets and liabilities in the event of a range of assumed changes in market interest rates. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 200 basis point increase or decrease in the mark interest rates. The following table presents the Company's projected change in fair value of the Company's financial instruments at December 31, 1999. All market sensitive instruments presented in this table are available for sale. The Company has no significant trading securities. The calculation of fair value is based on the net present value of estimated discounted cash flows expected over the life of the market rate sensitive instruments, using market prepayment assumptions and market rates of interest provided by independent broker quotations and other public sources as of December 31, 1999, with adjustments made to reflect the shift in the Treasury yield curve as appropriate.
FAIR VALUE OF TOTAL PERCENTAGE INVESTMENTS, EXCLUDING HYPOTHETICAL HYPOTHETICAL PERCENT CHANGE IN INTEREST RATES COMMON EQUITIES CHANGE CHANGE - -------------------------------- ---------------------- ------------ ------------ (DOLLARS IN MILLIONS) 200 basis point rise............................... $6,493.6 $(544.2) (7.7)% 100 basis point rise............................... 6,757.7 (280.1) (4.0) Base Scenario...................................... 7,037.8 -- -- 100 basis point decline............................ 7,330.2 292.4 4.2 200 basis point decline............................ 7,630.7 592.9 8.4
FAIR VALUE OF SENIOR PERCENTAGE BANK DEBT, SENIOR HYPOTHETICAL HYPOTHETICAL PERCENT CHANGE IN INTEREST RATES NOTES AND QUIPS CHANGE CHANGE - -------------------------------- -------------------- ------------ ------------ (DOLLARS IN MILLIONS) 200 basis point rise................................. $684.5 $(92.5) (11.9)% 100 basis point rise................................. 726.9 (50.1) (6.5) Base Scenario........................................ 777.0 -- -- 100 basis point decline.............................. 836.8 59.8 7.7 200 basis point decline.............................. 908.6 131.6 16.9
The preceding tables indicate that at December 31, 1999, in the event of a sudden and sustained increase in prevailing market interest rates, the fair value of the Company's investment and debt instruments would be expected to decrease, and that in the event of a sudden and sustained decrease in 22 prevailing market interest rates, the fair value of the Company's fixed maturity investments and debt instruments would be expected to increase. DISCLOSURES ABOUT LIMITATIONS OF SENSITIVITY ANALYSIS Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates and loan prepayments, and should not be relied on as indicative of future results. Certain shortcomings are inherent in the method of analysis presented in the computation of the fair value of fixed rate instruments. Actual values may differ from those projections presented should market conditions vary from assumptions used in the calculation of the fair value. In the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in the calculation of fair value. Finally, the desire of many borrowers to repay their fixed-rate mortgage loans may decrease in the event of interest rate increases. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the items included in Item 14(a) of this report. RESERVES FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES GENERAL. The reinsurance/insurance subsidiaries are required to maintain reserves to cover their estimated ultimate liability for losses and LAE with respect to reported and unreported claims incurred as of the end of each accounting period (net of estimated related salvage and subrogation claims). These reserves are estimates that involve actuarial and statistical projections of the expected cost of the ultimate settlement and administration of claims based on facts and circumstances then known, predictions of future events, estimates of future trends in claims severity and other variable factors. The inherent uncertainties of estimating loss reserves are exacerbated for reinsurers by the significant periods of time that often elapse between the occurrence of an insured loss, the reporting of the loss to the primary insurer and, ultimately, to the reinsurer, and the primary insurer's payment of that loss and subsequent indemnification by the reinsurer (the "tail"). As a consequence, actual losses and LAE paid may deviate, perhaps substantially, from estimates reflected in the reinsurance/insurance subsidiaries' reserves in their financial statements. If actual net losses and LAE paid exceed the reinsurance/insurance subsidiaries' net reserves; the Company's net income will be reduced in the year determined. When a claim is reported to a ceding company, its claims personnel establish a "case reserve" for the estimated amount of the ultimate payment. The estimate reflects the informed judgment of such personnel based on general insurance reserving practices and on the experience and knowledge of such personnel regarding the nature and value of the specific type of claim. The Company, in turn, typically establishes a case reserve when it receives notice of a claim from the ceding company. Such reserves are based on an independent evaluation by the Claims Division, taking into consideration coverage, liability, severity of injury or damage, jurisdiction, an assessment of the ceding company's ability to evaluate and handle the claim and the amount of reserves recommended by the ceding company. Case reserves are adjusted periodically by the Claims Division based on subsequent developments and audits of ceding companies. In accordance with industry practice, the Company establishes IBNR reserves to provide for future case reserves and loss payments on incurred claims that have not yet been reported to an insurer or reinsurer. In calculating its IBNR reserves, the reinsurance/insurance companies use generally accepted actuarial reserving techniques that take into account quantitative loss experience data, together, where appropriate, with qualitative factors. IBNR reserves are based on loss experience and are grouped both by class of business and by accident year. IBNR reserves are also adjusted to take into account certain factors such as changes in the volume of business written, reinsurance contract terms and conditions, the type of 23 business, claims processing and other variable factors that can be expected to affect the Company's liability for losses over time. CHANGES IN HISTORICAL RESERVES. The following table shows the year-end reserves from 1989 through 1999, and the subsequent changes in those reserves, presented on a combined basis for the reinsurance/ insurance subsidiaries. The following data is not accident year data, but a display of 1989 through 1999 year-end reserves and the subsequent changes in those reserves. For instance, the "Redundancy (Deficiency)" shown in the table for each year represents the aggregate amount by which original estimates of reserves at that year-end have changed in subsequent years. Accordingly, the cumulative deficiency for a year relates only to reserves at that year-end and such amounts are not additive. For example, the initial year-end 1989 reserves have developed a $561 million deficiency through December 31, 1999. CHANGES IN HISTORICAL RESERVES FOR UNPAID LOSSES AND LAE FOR THE LAST TEN YEARS--GAAP BASIS AS OF DECEMBER 31, 1999
DECEMBER 31, ------------------------------------------------------------------------------------- 1989 1990 1991 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN MILLIONS) Net liability for unpaid losses and LAE.... $3,025 $3,203 $3,267 $3,254 $3,573 $3,922 $4,501 $4,849 Paid (cumulative) as of: One year later............................. 634 811 864 739 889 1,076 1,124 1,295 Two years later............................ 1,201 1,423 1,318 1,316 1,566 1,787 1,895 2,230 Three years later.......................... 1,700 1,755 1,667 1,791 2,058 2,303 2,517 3,104 Four years later........................... 1,949 2,004 1,985 2,137 2,421 2,744 3,097 Five years later........................... 2,131 2,243 2,252 2,414 2,748 3,159 Six years later............................ 2,326 2,463 2,483 2,671 3,060 Seven years later.......................... 2,511 2,669 2,689 2,936 Eight years later.......................... 2,688 2,858 2,922 Nine years later........................... 2,866 3,079 Ten years later............................ 3,080 Net liability re-estimated as of: End of year................................ $3,025 $3,203 $3,267 $3,254 $3,573 $3,922 $4,501 $4,849 One year later............................. 3,073 3,258 3,194 3,317 3,640 4,369 4,512 4,920 Two years later............................ 3,113 3,183 3,224 3,363 3,986 4,397 4,610 4,863 Three years later.......................... 3,048 3,216 3,244 3,666 4,017 4,347 4,555 5,039 Four years later........................... 3,077 3,225 3,474 3,686 4,009 4,297 4,756 Five years later........................... 3,087 3,472 3,493 3,705 3,986 4,463 Six years later............................ 3,357 3,489 3,558 3,698 4,117 Seven years later.......................... 3,391 3,600 3,580 3,820 Eight years later.......................... 3,505 3,623 3,651 Nine years later........................... 3,527 3,699 Ten years later............................ 3,586 Redundancy (Deficiency).................... $ (561) $ (496) $ (384) $ (566) $ (544) $ (541) $ (255) $ (190) DECEMBER 31, ------------------------------ 1997 1998 1999 -------- -------- -------- (DOLLARS IN MILLIONS) Net liability for unpaid losses and LAE.... $5,103 $5,065 $5,480 Paid (cumulative) as of: One year later............................. 1,509 1,986 Two years later............................ 2,809 Three years later.......................... Four years later........................... Five years later........................... Six years later............................ Seven years later.......................... Eight years later.......................... Nine years later........................... Ten years later............................ Net liability re-estimated as of: End of year................................ $5,103 $5,065 $5,480 One year later............................. 5,165 5,635 Two years later............................ 5,533 Three years later.......................... Four years later........................... Five years later........................... Six years later............................ Seven years later.......................... Eight years later.......................... Nine years later........................... Ten years later............................ Redundancy (Deficiency).................... $ (430) $ (570)
1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- Gross liability--end of year....................... $7,039 $7,178 $7,469 $ 7,334 $8,369 Reinsurance recoverables on unpaid losses.......... 2,538 2,329 2,366 2,269 2,889 ------ ------ ------ ------- ------ Net liability--end of year......................... 4,501 4,849 5,103 5,065 5,480 Gross re-estimated liability--latest............... $7,495 $7,682 $8,238 $ 8,494 Re-estimated reinsurance recoverables on latest unpaid losses.................................... 2,739 2,643 2,705 2,859 ------ ------ ------ ------- Net re-estimated liability--latest................. 4,756 5,039 5,533 5,635 Gross cumulative redundancy (deficiency)........... $ (456) $ (504) $ (769) $(1,160)
24 The reconciliation between statutory basis and GAAP basis reserves for each of the three years in the period ended December 31, 1999, is shown below: RECONCILIATION OF RESERVES FOR UNPAID LOSSES AND LAE FROM STATUTORY BASIS TO GAAP BASIS
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (DOLLARS IN MILLIONS) Statutory reserves.......................................... $5,346.7 $5,064.7 $5,196.1 Adjustments to a GAAP basis(1).............................. 133.0 0.2 (93.3) Reinsurance recoverables on unpaid losses................... 2,889.3 2,269.2 2,366.5 -------- -------- -------- Reserves on a GAAP basis.................................... $8,369.0 $7,334.1 $7,469.3 ======== ======== ========
- ------------------------ (1) Consists primarily of the application of risk transfer and retroactive accounting rules of Financial Accounting Statement No. 113 ("FAS No. 113"), "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts", and the inclusion of loss reserves for Princeton Eagle West Insurance Company, a Bermuda Insurance Company. RECONCILIATION OF RESERVES FOR UNPAID LOSSES AND LAE (GAAP BASIS)
YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (DOLLARS IN MILLIONS) Reserves at beginning of period............................. $ 7,334.1 $ 7,469.3 $ 7,178.3 Reinsurance recoverable on unpaid losses.................... (2,269.2) (2,366.5) (2,329.6) --------- --------- --------- Net reserves at beginning of period......................... 5,064.9 5,102.8 4,848.7 Net incurred related to: Current period............................................ 2,084.0 1,620.4 1,642.1 Prior periods............................................. 570.4 62.0 74.2 --------- --------- --------- Total net incurred.......................................... 2,654.4 1,682.4 1,716.3 Net paid related to: Current period............................................ 253.6 207.2 167.5 Prior periods............................................. 1,986.0 1,513.1 1,294.7 --------- --------- --------- Total net paid.............................................. 2,239.6 1,720.3 1,462.2 --------- --------- --------- Net reserves at end of period............................... 5,479.7 5,064.9 5,102.8 Reinsurance recoverables on unpaid losses................... (2,889.3) (2,269.2) (2,366.5) --------- --------- --------- Reserves at end of year..................................... $ 8,369.0 $ 7,334.1 $ 7,469.3 ========= ========= =========
25 ASBESTOS, ENVIRONMENTAL-RELATED AND OTHER LATENT LIABILITY CLAIMS. Since the early 1980s, American Re-Insurance's underwriting results have been adversely affected by claims developing from latent liability exposures. During this period, reserves established by American Re-Insurance for latent liability exposures necessarily reflected the uncertainty inherent in estimating the ultimate future claim amounts arising from these types of exposures and the lack of credible actuarial methods to measure and quantify these exposures. American Re-Insurance's difficulty in accurately quantifying these exposures was attributable to the need for latent liability exposures to be first quantified by the insured party and then the primary insurer before the information was made available to the reinsurer. During 1999, the Company undertook a study to reevaluate its reserves for latent liability exposures. This was a result of the Company's assessment of its reported claims activity, which reflected continued emergence of newly reported claims in each of these areas and recent insurance industry efforts to accelerate the settlement of outstanding latent liability claims. Each of the Company's related exposures was evaluated individually to determine its expected ultimate liability for losses and LAE. As a result of this reevaluation, during the fourth quarter of 1999, the Company increased its IBNR loss reserves for such exposures. This charge was partially offset by favorable development on reserves in other accident years and by the utilization of the remaining limit under the Company's Adverse Loss Agreement with Travelers. Travelers provides indemnification in the form of an Adverse Loss Agreement (the "Cover") for adverse development of losses and allocated loss adjustment expenses of $500.0 million representing an 80% pro rata share (American Re-Insurance retains the remaining 20%) of up to $625.0 million of losses in excess of $2,700.0 million incurred on or prior to December 31, 1991. At December 31, 1999, the Company has utilized the full limit of the Cover. The Company had reserves for latent liability exposures, prior to cession to the Cover, at December 31, as follows:
1999 1998 ------------------- ------------------- GROSS NET GROSS NET -------- -------- -------- -------- (DOLLARS IN MILLIONS) Asbestos................................... $ 786.6 $470.9 $399.9 $258.5 Environmental-related and other latent liability................................ 646.2 466.7 237.3 150.1 -------- ------ ------ ------ Total...................................... $1,432.8 $937.6 $637.2 $408.6 ======== ====== ====== ======
Loss reserves for latent liability exposures at December 31, 1999 and 1998, represent best estimates drawn from a range of possible outcomes based upon currently known facts, projected forward for additional claimants using assumptions and methodologies considered reasonable. There can be no assurance that future losses resulting from these exposures will not materially adversely affect future earnings. The following table presents three calendar years of development of losses and LAE reserves associated with latent liability exposures, including case and IBNR reserves. The application of reinsurance recoveries to calculate net incurred and net paid losses, and the reinsurance recoverables on unpaid losses, are based on specific reinsurance contracts only, before the application of any adverse loss coverage for 1992 and prior years, which are not allocated to specific causative events. 26 THREE YEAR DEVELOPMENT ASBESTOS LIABILITIES
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (DOLLARS IN MILLIONS) Gross Basis: Beginning net reserve balance............................. $399.9 $457.7 $499.8 Incurred loss and LAE..................................... 483.9 -- -- Loss and LAE paid......................................... 97.2 57.8 42.1 ------ ------ ------ Ending reserve balance.................................... $786.6 $399.9 $457.7 ====== ====== ====== Net Basis: Beginning net reserve balance............................. $258.5 $297.1 $326.6 Incurred loss and LAE..................................... 277.9 -- -- Loss and LAE paid......................................... 65.5 38.6 29.5 ------ ------ ------ Ending reserve balance.................................... $470.9 $258.5 $297.1 ====== ====== ======
ENVIRONMENTAL-RELATED AND OTHER LATENT LIABILITIES
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (DOLLARS IN MILLIONS) Gross Basis: Beginning net reserve balance............................. $237.3 $327.9 $391.6 Incurred loss and LAE..................................... 538.4 -- -- Loss and LAE paid......................................... 129.5 90.6 63.7 ------ ------ ------ Ending reserve balance.................................... $646.2 $237.3 $327.9 ====== ====== ====== Net Basis: Beginning net reserve balance............................. $150.1 $218.6 $273.9 Incurred loss and LAE..................................... 411.9 -- -- Loss and LAE paid......................................... 95.3 68.5 55.3 ------ ------ ------ Ending reserve balance.................................... $466.7 $150.1 $218.6 ====== ====== ======
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 27 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY DIRECTORS DR. JUR. CLAUS HELBIG, age 58, became a Director of the Company in November 1996. Dr. Helbig has been a Member of the Board of Management of Munich Re since 1993. Dr. Helbig is a member of the Supervisory Board of Ingolstadt, Class KGa A, Harsewinkel, Deutsche Asset Management, Frankfurt, Karlsruher Rendite, Karlsruhe and various Munich Re affiliates. EDWARD J. NOONAN, age 41, became President, Chief Executive Officer and a Director of the Company and Chairman, President and Chief Executive Officer of American Re-Insurance in March 1997. From February 1997 to March 1997, Mr. Noonan was Executive Vice President of the Company and American Re-Insurance. From September 1994 to March 1997, Mr. Noonan was President, Domestic Insurance Company Operations of American Re-Insurance. Mr. Noonan has also been a Director of American Re-Insurance since September 1992. Mr. Noonan was a Senior Vice President of American Re-Insurance from July 1991 to February 1997. From April 1990 to July 1991, Mr. Noonan was Senior Vice President, Treaty Division. From May 1988 to April 1990, he was Vice President, Treaty Division of American Re-Insurance. DR. JUR. HANS-JURGEN SCHINZLER, age 58, became a Director of the Company in November 1996 and Chairman of the Company in March 1997. Dr. Schinzler has been Chairman of the Board of Management of Munich Re since 1993. From 1981 to 1993 Dr. Schinzler was a Member of the Board of Management of Munich Re. Dr. Schinzler currently holds positions on the Supervisory Boards of various subsidiaries within the Munich Re holding company system. Dr. Schinzler is the Chairman of the Supervisory Board of ERGO Versicherungsgruppe AG, Dusseldorf; MR Beteiligungen AG, Grafelfing; and MRE Beteilingungen AG Munich; Dr. Schinzler is also a Member of the Supervisory Board of each of Allianz Lebensversicherung--AG, Stuttgart; Aventis S.A., Schiltigheim; Dresdner Bank Aktiengesellschaft, Frankfurt; and MAN Aktiengesellschaft, Munich. Dr. Schinzler is a Member of the Board of Directors of Allianz of America Inc., Delaware and Kleinwort Benson North America Inc., New York. KARL WITTMAN, age 55, became a Director of the Company in December 1998. Mr. Wittmann has been a Member of the Board of Management of Munich Re since January 1998 responsible for Asia and Australasia, United Kingdom and Ireland and from January 1999 for North America. From 1985 to 1995 Mr. Wittmann was a Member of the Executive Management, Fire Treaty Underwriting, Munich Re. From 1995 to 1997 he was a Member of the Executive Management, Head of Operational Division Asia and Australasia, Munich Re. Mr. Wittmann is currently Chairman of Munichre General Services Ltd., London; Munichre Life Services Ltd., London; Munichre Services Ltd., London; The Great Lakes Reinsurance (UK) Plc., London; and is a Director of various Munich Re affiliates. EXECUTIVE OFFICERS In addition to Mr. Noonan, the executive officers of the Company are as follows: MAHMOUD M. ABDALLAH, age 51, became an Executive Vice President of the Company and American Re-Insurance in February 1997. Mr. Abdallah has been President, International Operations for American Re-Insurance since September 1994. Since July 1998 he has also been Chairman and CEO of the Munich American Global Services Group with responsibility for overseeing its member companies, Am-Re Brokers, Inc., ARB International, Ltd., Am-Re Consultants, Inc., and the Becher+Carlson Companies. In addition, the Information Technology Division of American Re-Insurance reports to Mr. Abdallah. Mr. Abdallah has been a Director of American Re-Insurance since September 1992. 28 ALBERT J. BEER, age 49, is Executive Vice President of the Company and President of Munich American RiskPartners, Inc. Mr. Beer assumed the position of Executive Vice President in March 1997 and became President of RiskPartners in December 1997. Mr. Beer was President of American Re-Insurance, Domestic Operations from March 1997 to December 1997. From December 1992 to March 1997, Mr. Beer was Senior Vice President--Branch Operations of American Re-Insurance. Mr. Beer has been a Director of American Re-Insurance since December 1992. From April 1989 to December 1992, he was Chief Actuary for Skandia America. ROBERT K. BURGESS, age 51, is Executive Vice President, General Counsel and Secretary of the Company and American Re-Insurance. He became Executive Vice President in February 1997. From April 1995 to February 1997, he was Senior Vice President, General Counsel and Secretary of both companies. Mr. Burgess has been a Director of American Re-Insurance since May 1995. Prior to April 1995, Mr. Burgess was a Partner in the law firm of Latham & Watkins. GREGORY T. DOYLE, age 39, became Executive Vice President of the Company and a Director, Executive Vice President and President of Domestic Insurance Company Operations of American Re-Insurance in December 1997. From February 1997 to December 1997, Mr. Doyle was Senior Vice President of American Re-Insurance and Senior Vice President of Domestic Insurance Company Operations. From December 1994 to February 1997, Mr. Doyle was Eastern Region Vice President of American Re-Insurance. From March 1990 to December 1994, he was Account Management Vice President. WOLFGANG ENGSHUBER, age 43, became Executive Vice President of the Company and a Director of American Re-Insurance in October 1998. He is responsible for American Re Financial Products and American Re Asset Management, Inc. Prior to that, Mr. Engshuber had been a Member of the Executive Board of Munich Reinsurance Company in Munich, Germany since October 1986. GEORGE T. O'SHAUGHNESSY, JR., age 44, is Executive Vice President and Chief Financial and Accounting Officer of the Company and American Re-Insurance. He assumed his current position in April 1998. From April 1997 to April 1998, Mr. O'Shaughnessy was Senior Vice President, Chief Financial and Accounting Officer of the Company and American Re-Insurance. Mr. O'Shaughnessy became a director of American Re-Insurance in December, 1997. From January 1995 to April 1997, Mr. O'Shaughnessy was Vice President and Controller of the Company and American Re-Insurance. EDWARD E. DUESS, age 48, is Senior Vice President and Chief Underwriting Officer for American Re-Insurance. He assumed his current position in July 1996. His primary functions include managing the Company's underwriting process on a world-wide basis. He is also responsible for overseeing American Re's Underwriting Management Services, Home Office Contracts, and Account Services departments. Mr. Duess has been with American Re for 24 years. Over that time, he has held a number of positions including Vice President and Chief Underwriting Officer for the Domestic Insurance Company Operations Division. ROBERT E. HUMES, age 56, is Senior Vice President--Human Resources Division of American Re-Insurance. He assumed his current position in September 1994. Mr. Humes was Vice President--Human Resources Division from July 1993 to September 1994. He was previously employed by Bristol-Myers Squibb Company as Senior Vice President of Corporate Resources and by its predecessor, Squibb Corporation, in management positions in Human Resources, most recently as Senior Vice President of Human Resources. JOHN W. RODGERS, age 48, became Senior Vice President-Claims of American Re in August 1999. Prior thereto, he held a number of management positions in the Claims Division, most recently as Vice President-Branch Claims Operations from March 1994 to August 1999. Mr. Rodgers has been with American Re from February 1989. Mr. Rodgers holds the CPCU, ARM and ARe designations, and is a member of the Chartered Property and Casualty Society. 29 PHILIP ROEPER, age 39, became Senior Vice President and Chief Information Officer of American Re-Insurance in January, 1999. Mr. Roeper joined American Re in September 1996 as the Vice President of Infrastructure and Operations. Prior to joining American Re-Insurance, he was employed by DHL Systems, Inc. in Burlingame, CA from August 1990 to September 1996, where he was most recently the Director of Global Network Services. THOMAS E. SMITH, age 47, became President of Am-Re University in August 1999. Am-Re University is the Company's initiative to create a learning organization. Mr. Smith was Senior Vice President-Claims of American Re from July 1996 to August 1999. Prior to joining American Re-Insurance, Mr. Smith was Vice President and Senior Claim Officer for the Commercial Division of the Farmers Insurance Group. Mr. Smith was with Farmers for over 20 years. Mr. Smith is both a Chartered Property & Casualty Underwriter and a Chartered Life Underwriter. DAVID SPIEGLER, age 39, became Senior Vice President & Chief Actuary of American Re-Insurance in February 2000. Prior thereto, he was the Chief Underwriting Officer of American Re Financial Products (from December 1998 to February 2000); Senior Vice President & Chief Pricing Actuary of American Re-Insurance (from April 1998 to December 1998); Vice President & Chief Pricing Actuary of American Re-Insurance (from July 1997 to April 1998); Vice President & Treaty Underwriting Manager in the Western Region of Domestic Insurance Company Operations of American Re-Insurance (from January 1996 to July 1997); and Vice President and Department Head of Domestic Insurance Company Operations' Actuarial Services Department (from July 1991 to January 1996). 30 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth for the Chief Executive Officer of the Company, and the four other executive officers of the Company who were the most highly compensated executive officers of the Company for the year ended December 31, 1999 (the "named executive officers"), information concerning compensation earned in 1999, 1998, and 1997 by such persons for services with the Company and its subsidiaries.
LONG-TERM COMPENSATION PAYOUTS --------------------------------------- ANNUAL COMPENSATION AWARDS ------------------------------------------------ SECURITIES PAYOUTS OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS LTIP COMPENSATION(2) - --------------------------- -------- -------- -------- --------------- ---------- -------- --------------- Edward J. Noonan........... 1999 $611,250 $ 0 0 0 0 $545,731 President and Chief 1998 575,000 500,000 0 0 0 520,094 Executive Officer 1997 475,000 500,000 0 0 0 497,525 Mahmoud M. Abdallah........ 1999 $451,250 $410,000 0 0 0 $431,798 Executive Vice President 1998 430,000 425,000 0 0 0 411,588 1997 400,000 425,000 0 0 0 391,696 Albert J. Beer............. 1999 $411,250 $225,000 0 0 0 $130,581 Executive Vice President 1998 387,500 400,000 0 0 0 124,894 1997 341,000 400,000 0 0 0 117,444 Robert K. Burgess.......... 1999 $451,250 $250,000 0 0 0 $258,754 Executive Vice President, 1998 430,000 400,000 0 0 0 246,908 General Counsel and 1997 400,000 400,000 0 0 0 235,956 Secretary Wolfgang Engshuber......... 1999 $321,250 $225,000 0 0 0 $ 21,175 Executive Vice President 1998 77,500 112,500 0 0 0 4,161
- ------------------------------ (1) During each of the three years ended December 31, 1999, 1998 and 1997, perquisites for each individual named in the Summary Compensation Table aggregated less than 10% of the total annual salary and bonus reported for such individual in such table, or $50,000, if lower. (2) Includes (i) accrued above market or preferential interest earned on deferred option proceeds under the Company's Senior Executive Special Deferred Compensation Plan as follows: Mr. Noonan, $509,943 in 1999, $485,224 in 1998, and $461,702 in 1997; Mr. Abdallah, $403,664 in 1999, $384,097 in 1998 and $365,477 in 1997; Mr. Beer, $104,845 in 1999, $99,763 in 1998, and $94,927 in 1997; and Mr. Burgess, $230,620 in 1999, $219,441 in 1998, and $208,803 in 1997; (ii) employer contributions under the American Re-Insurance Company Savings Plan, a 401(k) plan, of $8,000 in 1999, $8,000 in 1998, and $8,000 in 1997 for Mr. Noonan; of $6,250 in 1999, $6,250 in 1998, and $6,560 in 1997 for Mr. Abdallah; of $8,000 in 1999, $8,000 in 1998, and $8,023 in 1997 for Mr. Beer; of $8,615 in 1999, $6,250 in 1998, and $6,419 in 1997 for Mr. Burgess; of $6,215 in 1999, and $2,980 in 1998 for Mr. Engshuber; (iii) employer contributions under the American Re-Insurance Supplemental Savings Plan, a deferred compensation plan designed to supplement the 401(k) plan, of which 100% is vested as of December 31, 1999, of $21,596 in 1999, $20,884 in 1998, and $22,285 in 1997 for Mr. Noonan; of $16,038 in 1999, $15,788 in 1998, and $14,291 in 1997 for Mr. Abdallah; of $12,173 in 1999, $12,000 in 1998, and $9,530 in 1997 for Mr. Beer; of $13,673 in 1999, $15,763 in 1998, and $14,563 in 1997 for Mr. Burgess; of $10,000 in 1999 for Mr. Engshuber; and (iv) employer contributions for group term life, accidental death and dismemberment and disability insurance of $6,192 in 1999, $5,986 in 1998, and $5,538 in 1997 for Mr. Noonan; of $5,846 in 1999, $5,453 in 1998, and $5,368 in 1997 for Mr. Abdallah; of $5,563 in 1999, $5,131 in 1998, and $4,964 in 1997 for Mr. Beer; of $5,846 in 1999, $5,454 in 1998, and $6,171 in 1997 for Mr. Burgess; and $4,925 in 1999, and $1,181 in 1998 for Mr. Engshuber. 31 LONG TERM INCENTIVE PLAN The following table sets forth for the Chief Executive Officer of the Company, and the four named executive officers information concerning long term incentive compensation awards made in 1999 under the Company's Long-Term Incentive Plan.
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR - --------------------------------------------------------------------------------------------------------- ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE-BASED PLANS ----------------------------------- (A) (B) (C) (D) (E) (F) NUMBER OF PERFORMANCE OR SHARES, UNITS OR OTHER PERIOD UNTIL OTHER RIGHTS MATURITIES OR THRESHOLD TARGET MAXIMUM NAME (#) PAYOUT(1) ($ OR #) ($ OR #) ($ OR #) - ---------------------------- ---------------- ------------------ --------- ---------- ---------- Edward J. Noonan............ 2001 0 $1,200,000 $2,400,000 Mahmoud M. Abdallah......... 2001 0 $ 900,000 $1,800,000 Albert J. Beer.............. 2001 0 $ 900,000 $1,800,000 Robert K. Burgess........... 2001 0 $ 900,000 $1,800,000 Wolfgang Engshuber.......... 2001 0 $ 900,000 $1,800,000
- ------------------------------ (1) Under the Company's Long-Term Incentive Plan, performance goals are established by the Company's Executive Committee for which performance targets are chosen. These performance targets are applicable to a performance period consisting of three fiscal years, 1999-2001. The incentive amounts to be earned by each participant is 100% at risk and will vary from 0% to 200% of the individual target award based upon the achievement of the applicable performance targets within the performance period. The performance goals selected by the Committee for the performance period are Aggregate Operating Income and Return on Equity. MUNICH RE LONG-TERM INCENTIVE PLAN The following table sets forth sets forth for the Chief Executive Officer of the Company, and the four named executive officers information concerning stock appreciation rights awarded by Munich Re in 1999 under the Munich Re Long-Term Incentive Plan.
POTENTIAL REALIZABLE VALUE % OF TOTAL INDIVIDUAL GRANTS AT ASSUMED ANNUAL SAR'S ----------------------- RATES OF STOCK PRICE GRANTED TO APPRECIATION FOR TERM SAR'S EMPLOYEES IN EXERCISE EXPIRATION ------------------------------ NAME GRANTED(1) FISCAL YEAR(2) PRICE(3) DATE(4) 5% 10% - ---- ---------- -------------- ---------- ---------- ------------ ------------ Edward J. Noonan....................... 1,770 21.37% EUR 182.6 6/30/06 EUR 131,582 EUR 306,627 Mahmoud M. Abdallah.................... 1,310 15.82% EUR 182.6 6/30/06 EUR 97,385 EUR 226,944 Albert J. Beer......................... 1,200 14.49% EUR 182.6 6/30/06 EUR 89,208 EUR 207,888 Robert K. Burgess...................... 1,310 15.82% EUR 182.6 6/30/06 EUR 97,385 EUR 226,944 Wolfgang Engshuber..................... 940 11.35% EUR 182.6 6/30/06 EUR 69,880 EUR 162,846
- ------------------------------ (1) The Munich Re Long-Term Incentive Plan is a stock appreciation rights plan which provides to eligible participants in the Munich Re Group organization stock appreciation rights linked to the performance of Munich Re stock. Each right entitles the holder, after a two year vesting period, to draw in cash up to certain limits, the difference between the share price applicable at the time of the award and that at the time when the right is exercised. (2) Individual percentage totals represent the percentage of total SAR's granted to American Re employees. (3) The initial stock price is calculated from the average of the closing prices for Munich Re shares of stock in Frankfurt Xetra trading over the ten trading days prior to July 1, 1999. That amount was equivalent to EUR 182.6. The exchange rate into US dollars will be the rate applicable on the exercise date. (4) The stock appreciation rights may be exercised at any time after a two-year vesting period. Stock appreciation rights may only be exercised if the price of Munich Re shares has (i) increased by at least 20% compared to the initial share price and (ii) outperformed the DAX 30, an index of 30 publicly traded German corporations, for a specified period of time. 32 COMPENSATION OF DIRECTORS Directors receive no additional compensation for their Board or Committee service. EMPLOYMENT AGREEMENTS American Re-Insurance has Employment Agreements (the "Agreements"), with Messrs. Noonan, Abdallah, Beer, and Burgess pursuant to which each such executive has agreed to serve in his position indicated in the Summary Compensation Table for a period of five years and the Company agreed to provide certain compensation and severance benefits as provided therein. Under the Agreements, each executive's cash compensation, which consists of the executive's annual rate of base salary and the annual incentive compensation award or such other bonus payment, is determined by American Re-Insurance from time to time, but shall not be less than a minimum guaranteed amount equal to the executive's annual rate of pay in effect as of April 15, 1998 plus the bonus amount paid to such executive for the 1997 calendar year. To the extent the bonus amounts set forth in the Summary Compensation Table for any of such persons are less than they would have been entitled to under their Agreements for 1999, such executives voluntarily waived the contractual amount for 1999. Under the Agreements, American Re-Insurance has also agreed to pay a severance benefit to such executive if the executive's employment with American Re-Insurance or an affiliate is terminated during the term of the Agreement by the Company not for "Cause" or by the executive upon a "Constructive Discharge" (as such terms are defined in the Agreements). Upon either such termination, the executive would be entitled to receive, for a period commencing on the date of termination and ending on the earlier of the second anniversary thereof or the date of the executive's reemployment, severance benefits consisting of (i) continued salary and bonus (based on the salary in effect on the date of termination and the most recent bonus paid); (ii) amounts under the Company's Long Term Incentive Plan equal to the payments the executive would otherwise have been entitled to receive had the executive remained employed for the entire performance cycle, prorated based on the number of months the executive was employed during the performance period; and (iii) continued participation in all other benefit programs available from the Company as in effect as of the date of termination. During the employment period and any severance period and, in the event the executive is terminated by American Re-Insurance for Cause or by the executive other than by reason of Constructive Discharge, for an additional period of six months following the date of termination, the executive is subject to a covenant not to compete with American Re-Insurance or any affiliate thereof. RETIREMENT PLAN American Re-Insurance provides for its employees a noncontributory, defined benefits pension plan (the "American Re Pension Plan") and a nonqualified supplemental excess pension plan (the "Supplemental Pension Plan"). The table below shows the combined estimated maximum annual retirement benefits payable under both plans, at selected earnings levels and after selected periods of credited service to employees who retire at age 65. The benefits as presented do not take into account any reduction for joint and survivorship payments or any offset for Social Security benefits to be received by the employee. The table shows benefits computed as in a straight life annuity. 33 MAXIMUM RETIREMENT BENEFITS PAYABLE
YEARS OF SERVICE ---------------------------------------------------- REMUNERATION 15 20 25 30 35 - ------------ -------- -------- -------- -------- -------- $ 300,000................................. $ 78,750 $105,000 $131,250 $157,500 $183,750 400,000................................. 105,000 140,000 175,000 210,000 245,000 500,000................................. 131,250 175,000 218,750 262,500 306,250 600,000................................. 157,500 210,000 262,500 315,000 367,500 700,000................................. 183,750 245,000 306,250 367,500 428,750 800,000................................. 210,000 280,000 350,000 420,000 490,000 900,000................................. 236,250 315,000 393,750 472,500 551,250 1,000,000................................ 262,500 350,000 437,500 525,000 612,500 1,100,000................................ 288,750 385,000 481,250 577,500 673,750 1,200,000................................ 315,000 420,000 525,000 630,000 735,000
Compensation covered by the American Re-Insurance Pension Plan, together with the Supplemental Pension Plan for the named executive officers, corresponds with the compensation set forth in the annual compensation columns of the Summary Compensation Table. The credited years of service on December 31, 1999 for the persons named in the Summary Compensation Table are as follows: Mr. Noonan, 15.2 years; Mr. Abdallah, 17 years; Mr. Beer, 7 years; Mr. Burgess, 4.6 years; and Mr. Engshuber, 1.25 years. To be eligible to participate in the American Re-Insurance Pension Plan, an employee must have completed one year of service and attained age 21, or attained age 45. Retirement benefits are computed by multiplying the average of an employee's highest five years' base salary by 1.75% and multiplying by the number of years of covered service, not in excess of 35, with American Re-Insurance. Base Salary does not include overtime earnings, service awards and American Re Savings Plan match awards (supplemental and non-supplemental). Normal retirement age is 65. A participant is 100% vested after five years of service. The American Re-Insurance Pension Plan provides for reduced benefits upon early retirement prior to age 62. Early retirement is available to participants age 55 to 64 with at least ten years of service. Upon the death of a vested participant before retirement, the American Re-Insurance Pension Plan provides for a survivor annuity benefit to the participant's spouse of approximately 50% of the employee's accrued benefit at the time of death beginning on the date of the participant's earliest eligibility for retirement. The same benefits are payable to minor children if there is no surviving spouse. The Employee Retirement Income Security Act of 1974, as amended ("ERISA"), limits the maximum annual benefit that may be accrued under and paid from a tax-qualified plan. As a result, and as contemplated by ERISA, American Re-Insurance has established a supplemental plan to provide benefits (included in the foregoing table) which would exceed the ERISA limit. The Supplemental Pension Plan also is used to pay other pension benefits not otherwise payable under the American Re-Insurance Pension Plan, including benefits attributable to the Annual Incentive Compensation Plan, and covered compensation in excess of that permitted under the American Re-Insurance Pension Plan. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Munich Reinsurance Company owns 100% of the outstanding Common Stock of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents 1. The financial statements listed in the accompanying Index to Financial Statements are filed as part of this report. The Schedules to Financial Statements listed in the accompanying Index to Schedules to Financial Statements are filed as part of this report. 2. The accompanying Exhibit Index is hereby incorporated herein by this reference. The exhibits listed in the accompanying Index to Exhibit are filed or incorporated by reference as part of this report. (b) Reports on Form 8-K: None. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the Township of Plainsboro, State of New Jersey, on March 30, 2000. AMERICAN RE CORPORATION By: /S/ GEORGE T. O'SHAUGHNESSY, JR. ----------------------------------------- George T. O'Shaughnessy, Jr. EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL AND ACCOUNTING OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ CLAUS HELBIG Director ------------------------------------------- March 30, 2000 Claus Helbig /s/ EDWARD J. NOONAN President, Chief Executive ------------------------------------------- Officer and Director March 30, 2000 Edward J. Noonan /s/ HANS JURGEN SCHINZLER Chairman of the Board and ------------------------------------------- Director March 30, 2000 Hans Jurgen Schinzler /s/ KARL WITTMANN Director ------------------------------------------- March 30, 2000 Karl Wittmann
36 AMERICAN RE CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report................................ F-2 Consolidated Balance Sheets--December 31, 1999 and 1998..... F-3 Consolidated Statements of Income--Years ended December 31, 1999, 1998, and 1997...................................... F-4 Consolidated Statements of Stockholder's Equity--Years ended December 31, 1999, 1998, and 1997......................... F-5 Consolidated Statements of Cash Flows--Years ended December 31, 1999, 1998, and 1997.................................. F-6 Notes to Consolidated Financial Statements--December 31, 1999...................................................... F-7 INDEX TO SCHEDULES TO FINANCIAL STATEMENTS Summary of Investments Other Than Investments in Related Parties--December 31, 1999................................ S-1 Condensed Financial Information of Registrant (Parent Company only): Condensed Balance Sheets--December 31, 1999 and 1998...... S-2 Condensed Statements of Operations and Retained Earnings--Years ended December 31, 1999, 1998, and 1997.................................................... S-3 Condensed Statements of Cash Flows--Years ended December 31, 1999, 1998, and 1997................................ S-4 Notes to Condensed Financial Information--December 31, 1999.................................................... S-5 Supplemental Insurance Information--Years ended December 31, 1999, 1998, and 1997...................................... S-6 Reinsurance--Years ended December 31, 1999, 1998, and 1997...................................................... S-7 Supplemental Information (for Property-Casualty Insurance Underwriters)--Years ended December 31, 1999, 1998, and 1997...................................................... S-8
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of American Re Corporation We have audited the accompanying consolidated balance sheets of American Re Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholder's equity and cash flows for each of the years in the three-year period ended December 31, 1999. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement 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 financial position of American Re Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP New York, New York February 25, 2000 F-2 AMERICAN RE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ ASSETS Investments Fixed maturities Bonds available for sale, at fair value (amortized cost: December 31, 1999 and 1998--$6,511.6 and $6,688.6, respectively).......................................... $ 6,315.2 $ 6,876.0 Preferred stock available for sale, at fair value (amortized cost: December 31, 1999 and 1998--$84.4 and $76.7, respectively)................................... 84.6 77.3 Equity securities available for sale, at fair value (cost: December 31, 1999 and 1998--$367.1 and $488.7, respectively)........................................... 402.1 545.2 Other invested assets................................... 40.5 27.9 Cash and cash equivalents................................... 597.5 274.9 --------- --------- Total investments and cash............................ 7,439.9 7,801.3 Accrued investment income................................... 83.5 85.4 Premiums and other receivables.............................. 1,181.2 1,315.5 Deferred policy acquisition costs........................... 324.5 357.7 Reinsurance recoverables on paid and unpaid losses.......... 3,034.9 2,343.1 Funds held by ceding companies.............................. 609.7 408.9 Prepaid reinsurance premiums................................ 138.8 148.2 Deferred federal income taxes............................... 376.0 142.6 Other assets................................................ 1,090.3 941.3 --------- --------- Total assets.......................................... $14,278.8 $13,544.0 ========= ========= LIABILITIES Loss and loss adjustment expense reserves................... $ 8,369.0 $ 7,334.1 Unearned premium reserve.................................... 1,223.4 1,280.5 --------- --------- Total insurance reserves.............................. 9,592.4 8,614.6 Loss balances payable....................................... 421.3 412.1 Funds held under reinsurance treaties....................... 322.6 273.7 Senior bank debt............................................ 75.0 75.0 Senior notes................................................ 498.5 498.5 Other liabilities........................................... 642.5 579.5 --------- --------- Total liabilities..................................... 11,552.3 10,453.4 Commitments and contingent liabilities (Note 15) Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding as all of its assets Junior Subordinated Debentures..................... 237.5 237.5 --------- --------- STOCKHOLDER'S EQUITY Common stock, par value: $0.01 per share; authorized: 1,000 shares; issued and outstanding: 149.49712 shares at December 31, 1999, and 1998............................... -- -- Additional paid-in capital.................................. 1,332.4 1,332.4 Retained earnings........................................... 1,296.6 1,397.6 Accumulated other comprehensive income (loss)............... (140.0) 123.1 --------- --------- Total stockholder's equity............................ 2,489.0 2,853.1 --------- --------- Total liabilities, Company-obligated mandatorily redeemable preferred securities of subsidiary trust, and stockholder's equity............................. $14,278.8 $13,544.0 ========= =========
See accompanying notes to consolidated financial statements. F-3 AMERICAN RE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- REVENUE Premiums written.......................................... $2,905.7 $2,406.8 $2,497.7 Change in unearned premium reserve........................ 21.8 12.1 (11.6) -------- -------- -------- Premiums earned......................................... 2,927.5 2,418.9 2,486.1 Net investment income..................................... 415.1 417.5 427.5 Net realized capital gains................................ 82.9 92.8 87.7 Other income.............................................. 27.5 31.8 41.7 -------- -------- -------- Total revenue......................................... 3,453.0 2,961.0 3,043.0 -------- -------- -------- LOSSES AND EXPENSES Losses and loss adjustment expenses....................... 2,654.4 1,682.4 1,716.3 Commission expense........................................ 595.3 584.3 623.5 Operating expense......................................... 275.4 232.1 214.9 Interest expense.......................................... 41.9 42.2 42.8 Other expenses............................................ 64.0 98.5 221.2 -------- -------- -------- Total losses and expenses............................. 3,631.0 2,639.5 2,818.7 -------- -------- -------- Income (loss) before income taxes, minority interest and distributions on preferred securities of subsidiary trust................................................... (178.0) 321.5 224.3 Federal and foreign income taxes.......................... (90.1) 82.4 (3.4) -------- -------- -------- Income (loss) before minority interest and distributions on preferred securities of subsidiary trust............. (87.9) 239.1 227.7 Minority interest......................................... -- -- 6.8 Distributions on preferred securities of subsidiary trust, net of applicable income tax of $7.1.................... (13.1) (13.1) (13.1) -------- -------- -------- Net income (loss) to common stockholder............... $ (101.0) $ 226.0 $ 221.4 ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 AMERICAN RE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN MILLIONS)
ACCUMULATED ARC MARC MARC ADDITIONAL OTHER COMMON COMMON PREFERRED PAID IN RETAINED COMPREHENSIVE STOCK STOCK STOCK CAPITAL EARNINGS INCOME (LOSS) TOTAL -------- -------- --------- ---------- -------- -------------- -------- Balance at January 1, 1997............ $ -- $ 1.9 $19.5 $ 801.0 $ 950.6 $ 19.5 $1,792.5 Comprehensive income: Net income.......................... 221.4 Net change in unrealized loss on foreign exchange.................. 0.1 Net change in unrealized appreciation of investments Fixed maturities.................. 70.0 Equity securities................. (7.2) Total comprehensive income............ 284.3 Shareholder dividends................. (0.4) (0.4) Capital contribution.................. 85.0 85.0 Acquisition of MARC minority interest............................ 425.0 425.0 Merger-related capital restructure (Note 14)........................... (1.9) (19.5) 21.4 -- ------- ------ ----- -------- -------- ------- -------- Balance at December 31, 1997.......... -- -- -- 1,332.4 1,171.6 82.4 2,586.4 Comprehensive income: Net income.......................... 226.0 Net change in unrealized loss on foreign exchange.................. (0.2) Net change in unrealized appreciation of investments Fixed maturities.................. 15.8 Equity securities................. 25.1 Total comprehensive income............ 266.7 ------- ------ ----- -------- -------- ------- -------- Balance at December 31, 1998.......... -- -- -- 1,332.4 1,397.6 123.1 2,853.1 Comprehensive income (loss): Net loss............................ (101.0) Net change in unrealized loss on foreign exchange.................. 0.6 Net change in unrealized appreciation of investments Fixed maturities.................. (249.7) Equity securities................. (14.0) Total comprehensive loss.............. (364.1) ------- ------ ----- -------- -------- ------- -------- Balance at December 31, 1999.......... $ -- $ -- $ -- $1,332.4 $1,296.6 $(140.0) $2,489.0 ======= ====== ===== ======== ======== ======= ========
See accompanying notes to consolidated financial statements. F-5 AMERICAN RE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ (101.0) $ 226.0 $ 221.4 Adjustments to reconcile net income to net cash provided by operating activities: Decrease in accrued investment income................... 1.9 8.5 11.3 Decrease (increase) in premiums and other receivables... 134.3 (231.9) (167.6) Decrease (increase) in deferred policy acquisition costs.................................................. 33.2 (1.0) (19.8) Increase (decrease) in insurance reserves............... 977.8 (124.6) 280.4 Increase (decrease) in current and deferred federal and foreign income tax assets and liabilities.............. (154.8) (5.0) (57.5) Change in other assets and liabilities.................. (863.5) 371.9 96.4 Depreciation expense on property and equipment.......... 10.0 7.2 8.4 Write-down of property and equipment.................... -- -- 38.2 Net realized capital gains.............................. (82.9) (92.8) (87.7) Change in other, net.................................... 6.5 44.4 42.6 --------- --------- --------- Net cash provided by (used in) operating activities... (38.5) 202.7 366.1 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments available for sale Purchases............................................... (3,262.8) (7,130.2) (5,173.3) Maturities.............................................. 321.0 429.7 606.5 Sales................................................... 3,321.3 6,164.7 4,266.6 Other investments Purchases............................................... (23.0) (12.6) (3.0) Sales................................................... 16.0 0.1 1.9 Costs of additions to property and equipment.............. (10.7) (18.2) (23.1) --------- --------- --------- Net cash provided by (used in) investing activities... 361.8 (566.5) (324.4) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividend to common stockholders........................... -- -- (0.4) Loan from parent company.................................. -- -- (35.9) Capital contribution from parent company.................. -- -- 85.0 --------- --------- --------- Net cash provided by financing activities............. -- -- 48.7 --------- --------- --------- Effect of exchange rate changes on cash and cash equivalents............................................. (0.7) (2.9) (1.9) --------- --------- --------- Net increase (decrease) in cash and cash equivalents.......................................... 322.6 (366.7) 88.5 Cash and cash equivalents, beginning of period............ 274.9 641.6 553.1 --------- --------- --------- Cash & cash equivalents, end of period.................... 597.5 $ 274.9 $ 641.6 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid (refunded), net......................... $ (11.3) $ (59.3) $ 29.3 Interest paid and distributions on preferred securities of subsidiary trust........................................ $ 62.1 $ 62.4 $ 63.0
See accompanying notes to consolidated financial statements. F-6 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 1. NATURE OF OPERATIONS American Re Corporation (the "Company" or "American Re") primarily acts as the holding company for American Re-Insurance Company ("American Re-Insurance"). American Re-Insurance underwrites property and casualty reinsurance on a direct basis in both the domestic and international markets. To assist in its reinsurance business, American Re operates primarily in the alternative market through a primary insurance company, American Alternative Insurance Corporation ("American Alternative"). (American Re-Insurance, American Alternative and The Princeton Excess and Surplus Lines Insurance Company together are the "reinsurance/insurance subsidiaries.") American Re conducts its business through 14 domestic and 16 international offices. The Company is a wholly owned subsidiary of Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen ("Munich Re"), a company organized under the laws of Germany. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. BASIS OF PRESENTATION The Company's primary business is reinsuring property-casualty risks of domestic and foreign insurance organizations under excess of loss and pro rata reinsurance contracts. The Company and American Re-Insurance operate on a calendar year basis. The consolidated financial statements have been prepared on the basis of generally accepted accounting principles and include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated. 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 and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. B. APPLICATION OF NEW ACCOUNTING STANDARDS ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the FASB issued Financial Accounting Standard No. 133 ("FAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities." FAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. FAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Currently, the Company does not expect the adoption of FAS No. 133 to have a material impact on its consolidated financial statements. DEPOSIT ACCOUNTING In October 1998, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position No. 98-7 ("SOP No. 98-7"), "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." SOP No. 98-7 provides guidance on how to apply the deposit method of accounting when it is required for insurance and reinsurance contracts that do not transfer insurance risk. This SOP is effective for fiscal years beginning after June 15, 1999. The Company F-7 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) does not expect the application of SOP No. 98-7 to have a material impact on its consolidated financial statements. CODIFICATION OF STATUTORY ACCOUNTING PRINCIPLES In 1999, the National Association of Insurance Commissioners ("NAIC") adopted the Accounting Practices Manual, which includes Statements of Statutory Accounting Principles. The codification of Statutory Accounting Principles, which is effective January 1, 2001, prescribes statutory accounting practices which may differ from individual state "prescribed or permitted" practices. Where there is a difference, individual state "prescribed or permitted" practice will take precedence over codified statutory accounting practices. The Company is currently evaluating the financial statement impact, if any, which may result from the codification of Statutory Accounting Principles. C. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, money market instruments and other debt issues purchased with a maturity of ninety days or less when purchased. D. INVESTMENTS All debt and equity securities are classified as available for sale and reported at fair value, with unrealized gains and losses excluded from earnings and reflected in stockholder's equity as a component of other comprehensive income, net of related income taxes. Realized gains and losses on the sale or maturity of investments are determined on the basis of the specific identification method and are included in net income. Purchases and sales are recorded on a trade date basis. If a decline in fair value of an invested asset is considered to be other than temporary, or if the asset is deemed to be permanently impaired, the investment is reduced to its net realizable value and the reduction is accounted for as a realized investment loss. The cost for mortgage-backed securities is adjusted for unamortized premiums and discounts, which are amortized or accreted using the interest method over the estimated remaining term of the securities, adjusted for anticipated prepayments. E. DEFERRED POLICY ACQUISITION COSTS Deferred policy acquisition costs represent acquisition costs, primarily commissions and certain operating expenses. These costs were deferred and were limited to their estimated realizable value based on the related unearned premiums, anticipated claims and claims expenses and anticipated investment income. These costs are amortized ratably over the terms of the related contracts, which are generally a year in duration. F. DEFERRED FINANCING FEES Financing, underwriting, attorneys and accountants fees related to the issuance of the Senior Notes (see Note 10), the Cumulative Quarterly Income Preferred Securities (see Note 11), and the senior bank F-8 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) debt (see Note 9) have been deferred. Such costs are being amortized over the remainder of their respective lives, using the interest-rate method. The amortization of deferred financing fees was $0.3, $0.3 and $1.9 for the years ended December 31, 1999, 1998, and 1997, respectively. G. PROPERTY AND EQUIPMENT The Company uses straight-line depreciation for all of its depreciable assets, with the useful lives varying depending on the type of asset. Accumulated depreciation was $63.0 and $55.1 at December 31, 1999, and 1998, respectively. H. GOODWILL Goodwill represents the cost in excess of net assets required for the acquisitions of American Re-Insurance in 1992 and the minority interests in Munich American Reinsurance Company ("MARC") (See Note 14) in 1997. The goodwill, which is amortized over 40 years, was $251.3 and $258.3 at December 31, 1999 and 1998, respectively. The amortization of goodwill was $7.0, $7.0 and $4.7 for each of the years ended December 31, 1999, 1998, and 1997, respectively. The Company regularly evaluates the recoverability of goodwill and other acquired intangible assets. The carrying value of such assets would be reduced through a direct write-off if, in management's judgment, it was probable that projected future operating income, before amortization of goodwill, would not be sufficient on an undiscounted basis to recover the carrying value. I. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES The reserve for losses and loss adjustment expenses ("LAE") is based upon reports received from other insurers supplemented with the Company's own case reserve estimates provided by the Company's claims department. Loss and LAE reserves also include estimates of incurred but not reported losses based on past experience modified for current trends, and estimates of expenses for investigating and settling claims, reduced for anticipated salvage and subrogation. Generally, it is the Company's policy to discount all workers' compensation claims on reported and unreported losses to present value using an interest rate of 4.5%. Such discount resulted in a reduction in gross loss reserves of approximately $670.4 and $645.0 at December 31, 1999, and 1998, respectively. Management believes that the reserves for losses and LAE as of December 31, 1999 are adequate to cover the ultimate gross cost of losses and LAE incurred through December 31, 1999. The reserves are based on estimates of losses and LAE incurred and, therefore, the amount ultimately paid may be more or less than such estimates. The inherent uncertainties of estimating loss reserves are exacerbated for reinsurers by the significant periods of time that often elapse between the occurrence of an insured loss, the reporting of the loss to the primary insurer and, ultimately, to the reinsurer, and the primary insurer's payment of that loss and subsequent indemnification by the reinsurer. As a consequence, actual losses and LAE paid may deviate, perhaps substantially, from estimates reflected in the reinsurance/insurance companies' reserves in their financial statements. Any adjustments of these estimates or differences between estimates and amounts subsequently paid or collected are reflected in income as they occur. F-9 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) J. REINSURANCE RECOVERABLES ON UNPAID LOSSES Reinsurance recoverables on unpaid losses were $2,889.3 and $2,269.2 at December 31, 1999, and 1998, respectively. These recoverables were based upon the application of estimates of unpaid loss and LAE reserves in conjunction with terms specified under individual retrocessional contracts. The amounts ultimately collected may be more or less than such estimates. Any adjustments of these estimates or differences between estimates and amounts subsequently collected are reflected in income as they occur. K. INCOME TAXES The Company and its subsidiaries file a consolidated U.S. income tax return and separate foreign income tax returns as required. The Company uses the liability method of accounting for income taxes, whereby deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws. The Company is required to establish a "valuation allowance" for any portion of the deferred tax asset that management believes will not be realized. L. FOREIGN CURRENCY TRANSLATION Foreign currency revenue and expenses are translated at average exchange rates during the year. Assets and liabilities are translated at the rate of exchange in effect at the close of the respective year-end. Translation gains and losses are recorded in accumulated other comprehensive income, net of tax, while transaction gains and losses are included in other expenses. M. PREMIUMS AND UNEARNED PREMIUMS Premiums are recognized as revenue ratably over the terms of the contracts. Unearned premiums are computed using the monthly pro rata method on a gross of reinsurance premiums ceded basis for balance sheet purposes, and on a net of reinsurance premiums ceded basis for income statement purposes. On retrospectively rated contracts, estimated additional or return premiums are accrued. Assumed reinsurance and retrocessional contracts that do not both transfer significant insurance risk and result in the reasonable possibility that the Company or its retrocessionaires may realize a significant loss from the insurance risk assumed are required to be accounted for as deposits. These contract deposits are included in other assets and other liabilities in the Consolidated Balance Sheets and are accounted for as financing transactions with interest income or expense credited or charged to the contract deposits. N. FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the Company's estimates of fair value are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Furthermore, fair value estimates disclosed are based on pertinent information available to the Company at December 31, 1999, and 1998. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such F-10 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) amounts have not been comprehensively revalued for purposes of these financial statements since that date; therefore, current estimates of fair value may differ significantly from the amounts disclosed in the financial statements. The following methods and assumptions were used by the Company in estimating its fair value disclosures (as presented in Note 16--"Fair Value of Financial Instruments"): BONDS. Fair values for bonds were based on quoted market prices, where available. If quoted market prices were not available, fair values were based on quoted market prices of comparable instruments or were determined by dealers or a pricing service specializing in "matrix pricing" and modeling techniques. PREFERRED STOCK. The fair value of these instruments was based on quoted market price, where available. Where market values were unavailable, the Company used discounted cash flow models, using discount rates of securities of similar maturities and credit characteristics. EQUITY SECURITIES. The fair value of these securities was based on quoted market price, where available. Securities accounted for on the equity method represent the Company's ownership portion of respective securities' stockholder's equity. OTHER INVESTED ASSETS. Generally, the carrying amounts of these financial instruments were a reasonable estimate of their fair value. WEATHER DERIVATIVES. The value of weather derivatives is determined under an alternative approach model pricing. The determination of this value considers various factors, including: time value and volatility factors underlying the derivatives, including the degree day data received from the National Climatic Data Center used to calculate 10-year averages and 30-year volatility; price activity for equivalent or synthetic instruments in markets located in similar geographic locations; and counterparty credit quality. CASH AND CASH EQUIVALENTS. The carrying amounts of these financial instruments were a reasonable estimate of their fair value. SENIOR BANK DEBT. Given the fluctuating rate on the senior bank debt, the carrying amounts for these financial instruments were a reasonable estimate of their fair value. SENIOR NOTES. The fair value of this obligation was based on a quoted market price. CUMULATIVE QUARTERLY INCOME PREFERRED SECURITIES. The fair value of this obligation was based on a quoted market price. O. FINANCIAL STATEMENT PRESENTATION Certain 1998 and 1997 financial statement presentations have been reclassified to conform with the 1999 presentation. F-11 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 3. INVESTMENTS Investments in fixed maturities at December 31, were as follows:
1999 ---------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- -------- Bonds available for sale: U.S. Treasury securities and obligations of U.S. government agencies and corporations............. $ 754.1 $ 2.5 $ 25.8 $ 730.8 Obligations of states and political subdivisions... 2,123.1 10.1 62.9 2,070.3 Corporate securities............................... 2,484.7 4.6 82.0 2,407.3 Mortgage backed securities......................... 1,149.7 2.1 45.0 1,106.8 -------- ----- ------ -------- Total bonds available for sale................... 6,511.6 19.3 215.7 6,315.2 Preferred stock...................................... 84.4 0.2 -- 84.6 -------- ----- ------ -------- Total fixed maturities........................... $6,596.0 $19.5 $215.7 $6,399.8 ======== ===== ====== ========
1998 ---------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- -------- Bonds available for sale: U.S. Treasury securities and obligations of U.S. government agencies and corporations............. $ 610.0 $ 35.9 $ 0.8 $ 645.1 Obligations of states and political subdivisions... 2,561.1 77.1 1.2 2,637.0 Corporate securities............................... 2,322.6 60.1 7.4 2,375.3 Mortgage backed securities......................... 1,194.9 25.8 2.1 1,218.6 -------- ------ ----- -------- Total bonds available for sale................... 6,688.6 198.9 11.5 6,876.0 Preferred stock...................................... 76.7 0.6 -- 77.3 -------- ------ ----- -------- Total fixed maturities........................... $6,765.3 $199.5 $11.5 $6,953.3 ======== ====== ===== ========
The amortized cost and fair value of fixed maturities at December 31, 1999, are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be called or prepaid with or without call or prepayment penalties.
1999 --------------------------- AMORTIZED COST FAIR VALUE -------------- ---------- Due to mature: One year or less.......................................... $ 352.8 $ 352.6 After one year through five years......................... 2,138.6 2,108.7 After five years through ten years........................ 2,326.3 2,236.1 After ten years........................................... 628.6 595.6 Mortgage backed securities................................ 1,149.7 1,106.8 -------- -------- Total fixed maturities.................................. $6,596.0 $6,399.8 ======== ========
F-12 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 3. INVESTMENTS (CONTINUED) Proceeds from sales of investments available for sale and the related gains and losses realized on those sales were as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Proceeds from sales............................ $3,321.3 $6,164.7 $4,266.6 Gross gains realized........................... 154.0 156.8 121.8 Gross losses realized.......................... 71.1 64.0 34.1
Net unrealized appreciation (depreciation) on investments included within accumulated other comprehensive income was as follows:
YEAR ENDED DECEMBER 31, ------------------- 1999 1998 -------- -------- Change in unrealized appreciation (depreciation) Fixed maturities......................................... $(384.2) $ 24.3 Equity securities........................................ (21.5) 38.6 ------- ------ Subtotal............................................... (405.7) 62.9 Income tax effect.......................................... (142.0) 22.0 ------- ------ Net change in unrealized appreciation...................... (263.7) 40.9 Balance, beginning of year................................. 158.9 118.0 ------- ------ Balance, end of year....................................... $(104.8) $158.9 ======= ======
At December 31, 1999, and 1998, the Company's investments in bonds on a financial statement basis were $6,315.2 or 84.9% and $6,876.0 or 88.1%, respectively, of total investments and cash. The bond portfolio is diversified within various industry segments. Bond investment by market sector at December 31, were as follows:
1999 1998 -------------------- -------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- -------- --------- -------- U.S. government....................................... $ 754.1 $ 730.8 $ 610.0 $ 645.1 Foreign government.................................... 357.1 349.7 329.5 342.9 State and municipal................................... 2,123.1 2,070.3 2,561.1 2,636.9 Mortgage backed securities............................ 1,149.7 1,106.8 1,194.9 1,218.6 Financial............................................. 692.9 666.2 667.8 684.6 Utilities............................................. 117.4 112.1 117.2 119.2 Transportation/capital................................ 7.6 6.8 10.7 11.2 Health care........................................... 24.9 22.7 24.9 25.9 Natural resources..................................... 10.2 9.9 3.1 3.1 Other corporate securities............................ 1,274.6 1,239.9 1,169.4 1,188.5 -------- -------- -------- -------- Total............................................... $6,511.6 $6,315.2 $6,688.6 $6,876.0 ======== ======== ======== ========
F-13 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 3. INVESTMENTS (CONTINUED) Sources of net investment income were as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Fixed maturities.................................... $383.6 $392.2 $407.7 Short-term investments.............................. 16.8 22.0 21.9 Other............................................... 35.6 28.9 16.3 ------ ------ ------ Gross investment income......................... 436.0 443.1 445.9 Investment expenses................................. (20.9) (25.6) (18.4) ------ ------ ------ Net investment income........................... $415.1 $417.5 $427.5 ====== ====== ======
Net realized capital investment gains (losses) were as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Fixed maturities..................................... $ (3.8) $102.3 $21.4 Equity securities.................................... 87.9 (3.8) 67.9 Other................................................ (1.2) (5.7) (1.6) ------ ------ ----- Net capital gains................................ $ 82.9 $ 92.8 $87.7 ====== ====== =====
At December 31, 1999, and 1998, securities in the amount of $493.5 and $408.5 (par value), respectively, were on deposit with governmental authorities as required by law. 4. ACCUMULATED OTHER COMPREHENSIVE INCOME The components of accumulated other comprehensive income (loss) are as follows:
NET UNREALIZED APPRECIATION NET UNREALIZED (DEPRECIATION) LOSS ON FOREIGN OF INVESTMENTS EXCHANGE TOTAL -------------- --------------- -------- Balance at December 31, 1997.............. $ 118.0 $(35.6) $ 82.4 Period change........................... 155.7 (0.3) 155.4 Tax effect.......................... (54.5) 0.1 (54.4) Reclassification adjustment for gain/loss included in net income...... (92.8) -- (92.8) Tax effect.......................... 32.5 -- 32.5 ------- ------ ------- Balance at December 31, 1998.............. $ 158.9 $(35.8) $ 123.1 Period change........................... (322.8) 0.9 (321.9) Tax effect.......................... 113.0 (0.3) 112.7 Reclassification adjustment for gain/loss included in net income...... (82.9) -- (82.9) Tax effect.......................... 29.0 -- 29.0 ------- ------ ------- Balance at December 31, 1999.............. $(104.8) $(35.2) $(140.0) ======= ====== =======
F-14 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 5. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES The reconciliation of loss and loss adjustment expense reserves for the years ended December 31, 1999, 1998, and 1997 is shown below:
YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- Loss and LAE reserves at beginning of period..................................... $ 7,334.1 $ 7,469.3 $ 7,178.3 Reinsurance recoverables on unpaid losses.... (2,269.2) (2,366.5) (2,329.6) --------- --------- --------- Net reserves at beginning of period.......... 5,064.9 5,102.8 4,848.7 Net incurred related to: Current period............................. 2,084.0 1,620.4 1,642.1 Prior periods.............................. 570.4 62.0 74.2 --------- --------- --------- Total net incurred....................... 2,654.4 1,682.4 1,716.3 Net paid related to: Current period............................. 253.6 207.2 167.5 Prior periods.............................. 1,986.0 1,513.1 1,294.7 --------- --------- --------- Total net paid........................... 2,239.6 1,720.3 1,462.2 --------- --------- --------- Net reserves at end of period................ 5,479.7 5,064.9 5,102.8 Reinsurance recoverables on unpaid losses.... (2,889.3) (2,269.2) (2,366.5) --------- --------- --------- Loss and LAE reserves at end of period....... $ 8,369.0 $ 7,334.1 $ 7,469.3 ========= ========= =========
As a result of changes in estimates of insured events in prior years, the losses and LAE incurred (net of reinsurance recoveries of $1,024.2, $252.1 and $373.0 for the years ended December 31, 1999, 1998, and 1997, respectively) increased by $570.4 in 1999, $62.0 in 1998, and $74.2 in 1997. The increase during 1999 is primarily due to increased losses in recent accident years to reflect adverse market conditions, in addition to an increase in the Company's loss reserves associated with asbestos and environmental-related claims. (See Note 15). 6. REINSURANCE The Company purchases reinsurance (retrocessional agreements) for certain risks. Reinsurance companies enter into retrocessional agreements for reasons similar to those that cause primary insurers to purchase reinsurance, namely to reduce net liability on individual risks, to protect against catastrophic losses, to stabilize their financial ratios and to obtain additional underwriting capacity. The Company believes that it has minimized the credit risk with respect to its retrocessions by monitoring its retrocessionaires, diversifying its retrocessions and collateralizing obligations from foreign retrocessionaires. Potential deterioration of the financial condition of retrocessional markets is carefully monitored and appropriate actions are taken to eliminate or minimize exposures. As a general rule, the Company requires that unpaid losses and LAE (including IBNR) for certain admitted and non-admitted reinsurers (unregulated by United States insurance regulatory authorities) be collateralized by letters of credit, funds withheld or pledged trust agreements. In certain cases, the full limit ceded to non-admitted reinsurers is required to be collateralized regardless of actual claim activity. Actions such as drawdowns of letters of credit provided as collateral, cessation of relationships and commutations may be taken to reduce or eliminate exposure when necessary. Although reinsurance agreements contractually obligate the Company's reinsurers to reimburse it for the agreed-upon portion of its gross paid losses, they do not discharge the primary liability of the F-15 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 6. REINSURANCE (CONTINUED) Company. The income statement amounts for premiums written, premiums earned and losses and loss adjustment expenses are net of reinsurance. Direct, assumed, ceded and net amounts for these items are as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Premiums written Direct....................................... $ 277.6 $ 208.6 $ 146.0 Assumed...................................... 3,259.5 2,908.9 2,935.1 Ceded........................................ (631.4) (710.7) (583.4) -------- -------- -------- Net.......................................... 2,905.7 2,406.8 2,497.7 ======== ======== ======== Premiums earned Direct....................................... 263.5 194.1 119.0 Assumed...................................... 3,325.0 2,914.8 3,003.5 Ceded........................................ (661.0) (690.0) (636.4) -------- -------- -------- Net.......................................... 2,927.5 2,418.9 2,486.1 ======== ======== ======== Losses incurred Direct....................................... 266.4 136.4 56.9 Assumed...................................... 3,412.2 1,798.1 2,032.4 Ceded........................................ (1,024.2) (252.1) (373.0) -------- -------- -------- Net.......................................... $$2,654.4 $1,682.4 $1,716.3 ======== ======== ========
The Company maintains an allowance for doubtful accounts for amounts due from companies in receivership or believed to be in financial difficulty. The total allowance reflected in both reinsurance recoverables on paid and unpaid losses, and premiums and other receivables was $104.0 and $79.6 at December 31, 1999 and 1998, respectively. There can be no assurance future charges for uncollectible reinsurance will not materially adversely affect results of operations in any future period, although any such charges would not be expected to have a material adverse effect on the Company's liquidity or financial condition. National Indemnity Company (which had an A.M. Best rating of "A++" at December 31, 1999), a subsidiary of Berkshire Hathaway, Inc., accounted for approximately 17.5% and 23.5% of the reinsurance recoverables on paid and unpaid losses at December 31, 1999, and 1998, respectively. Munich Re (which had an A.M. Best rating of "A++" at December 31, 1999) accounted for approximately 16.9% and 9.6% of the reinsurance recoverables on paid and unpaid losses at December 31, 1999, and 1998, respectively. Travelers Property Casualty Corp. (which had an A.M. Best rating of "A+" at December 31, 1999), accounted for approximately 13.3% and 7.2% of the reinsurance recoverables on paid and unpaid losses at December 31, 1999, and 1998, respectively. F-16 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 7. FEDERAL AND FOREIGN INCOME TAXES The net deferred tax asset recorded at December 31, 1999, and 1998, represents the net temporary differences between the tax bases of assets and liabilities and their amounts for financial reporting. The components of the net deferred tax asset, based on a tax rate of 35% at December 31, were as follows:
1999 1998 -------- -------- Loss reserves............................................... $369.2 $323.6 Deferred compensation....................................... 85.5 54.7 Unearned premiums........................................... 77.2 78.8 Investment losses........................................... 59.7 -- Alternative minimum tax ("AMT") credit carryforward......... 55.5 7.2 Other deferred tax assets................................... 23.6 -- ------ ------ Deferred tax asset........................................ 670.7 464.3 ------ ------ Deferred policy acquisition costs........................... 113.7 125.2 Reinsurance recoverable on paid and unpaid losses........... 107.4 100.1 Investment gains............................................ -- 73.8 Other deferred liabilities.................................. 73.6 22.6 ------ ------ Deferred tax liability.................................... 294.7 321.7 ------ ------ Net deferred tax asset...................................... $376.0 $142.6 ====== ======
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. At December 31, 1999, the Company believes it is more likely than not that the deferred tax asset is fully realizable. Realization of the net deferred tax asset is dependent on generating sufficient taxable income in future periods. The amount of the deferred tax asset considered realizable could be reduced, however, if estimates of future taxable income are reduced. F-17 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 7. FEDERAL AND FOREIGN INCOME TAXES (CONTINUED) Income tax expense (benefit) was as follows:
YEAR ENDED DECEMBER 31, 1999 ------------------------------ CURRENT DEFERRED TOTAL -------- -------- -------- Income-federal and foreign tax expense (benefit)............ $ (24.7) $(94.4) $(119.1) Federal tax expense (benefit) on net realized capital gains..................................................... 29.9 (0.9) 29.0 ------- ------ ------- Total federal and foreign tax expense................... $ 5.2 $(95.3) $ (90.1) ======= ====== =======
YEAR ENDED DECEMBER 31, 1998 ------------------------------ CURRENT DEFERRED TOTAL -------- -------- -------- Income-federal and foreign tax expense...................... $ 23.0 $ 26.9 $ 49.9 Federal tax expense (benefit) on net realized capital gains..................................................... 40.6 (8.1) 32.5 ------- ------ ------- Total federal and foreign tax expense................... $ 63.6 $ 18.8 $ 82.4 ======= ====== =======
YEAR ENDED DECEMBER 31, 1997 ------------------------------ CURRENT DEFERRED TOTAL -------- -------- -------- Income-federal and foreign tax expense (benefit)............ $ 19.8 $(49.1) $ (29.3) Federal tax expense (benefit) on net realized capital gains..................................................... 32.6 (6.7) 25.9 ------- ------ ------- Total federal and foreign tax expense (benefit)......... $ 52.4 $(55.8) $ (3.4) ======= ====== =======
Reconciliations of the differences between income taxes computed at the federal statutory tax rate and consolidated provisions for income taxes were as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Income (loss) before taxes.................................. $(178.0) $321.5 $224.3 Income tax rate............................................. 35% 35% 35% ------- ------ ------ Tax expense at federal statutory income tax rate............ (62.3) 112.5 78.5 Tax effect of: Tax-exempt investment income................................ (32.6) (31.0) (20.7) Goodwill.................................................... 2.5 2.5 1.6 Reversal of the valuation allowance--U. S. Branch........... -- -- (37.7) Net operating loss utilization--U.S. Branch................. -- -- (24.4) Other, net.................................................. 2.3 (1.6) (0.7) ------- ------ ------ Federal and foreign income tax expense (benefit)............ $ (90.1) $ 82.4 $ (3.4) ======= ====== ======
As a result of the Redomestication (see Note 14), certain deferred tax assets of the U.S Branch associated with the operations of the Branch were transferred to the Company. These deferred tax assets had been reduced by a valuation allowance on the books of the U.S. Branch. The Company was not subject to a valuation allowance on these deferred tax assets after the transfer and was thus able to recognize a tax benefit of $62.1 in 1997. F-18 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 8. BENEFIT PLANS The Company has several qualified and nonqualified pension plans and other post retirement benefit plans for its employees. The Company has a non-contributory defined benefit pension plan covering substantially all of its employees. Benefits are based on years of service and the employee's final compensation. Accrued costs represent estimates based upon current information. Those estimates are subject to change due to changes in the underlying information supporting such estimates in the future. The Company's policy is to fund pension costs as required, subject to the amounts that are currently deductible for tax reporting purposes. Vested benefits are fully funded. The Company also provides post retirement health care benefits to individuals eligible to receive benefits under the Company's non-contributory defined benefit pension plan and who are covered under a Company medical insurance plan at retirement. The Company funds its obligation currently and no contributions are required by retirees. The following table provides a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the years ended December 31, 1999 and 1998, and a statement of the funded status at December 31:
PENSION BENEFITS OTHER BENEFITS ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- RECONCILIATION OF BENEFIT OBLIGATION Obligation at January 1..................................... $194.2 $159.5 $ 31.3 $ 25.8 Service cost.............................................. 14.9 11.6 2.8 2.1 Interest cost............................................. 12.7 10.8 2.1 1.7 Plan amendments........................................... -- -- (0.2) -- Actuarial (gain) loss..................................... (34.9) 18.8 (6.1) 1.7 Benefit payments.......................................... (5.7) (6.5) -- -- ------ ------ ------ ------ Obligation at December 31................................... $181.2 $194.2 $ 29.9 $ 31.3 ------ ------ ------ ------ RECONCILIATION OF FAIR VALUE OF PLAN ASSETS Fair value of plan assets at January 1...................... $114.6 $109.1 $ -- $ -- Actual return on plan assets.............................. 13.7 12.0 -- -- Employer contributions.................................... -- -- 0.5 0.4 Benefit payments.......................................... (5.6) (6.5) (0.5) (0.4) ------ ------ ------ ------ Fair value of plan assets at December 31.................... $122.7 $114.6 $ -- $ -- ------ ------ ------ ------ FUNDED STATUS Funded status at December 31................................ $(58.5) $(79.5) $(29.9) $(31.3) Unrecognized prior service cost............................. 0.8 0.9 2.4 2.8 Unrecognized (gain) loss.................................... (7.7) 31.0 (1.4) 4.3 ------ ------ ------ ------ Net amount recognized in other liabilities.................. $(65.4) $(47.6) $(28.9) $(24.2) ====== ====== ====== ======
The Company's nonqualified pension plan was the only pension plan with an accumulated benefit obligation in excess of plan assets. The plan's accumulated benefit obligation was $11.0 and $8.8 at December 31, 1999 and 1998, respectively. There are no plan assets in the nonqualified plan due to the nature of the plan. The Company's plans for post retirement benefits other than pensions also have no plan assets. The aggregate benefit obligation for those plans is $29.9 and $31.3 at December 31, 1999 and 1998, respectively. F-19 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 8. BENEFIT PLANS (CONTINUED) Net periodic benefit cost for the years ended December 31, included the following components:
PENSION BENEFITS OTHER BENEFITS ------------------------------ ------------------------------ 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- Service cost.............................................. $14.9 $11.6 $ 9.6 $2.8 $2.1 $1.5 Interest cost............................................. 12.7 10.8 9.5 2.1 1.7 1.4 Expected return on plan assets............................ (10.8) (9.7) (8.6) -- -- -- Amortization of prior service cost........................ 0.1 0.1 -- 0.2 0.2 0.1 Amortization of net loss.................................. 1.0 0.1 -- 0.1 -- -- ----- ----- ----- ---- ---- ---- Net periodic benefit cost............................... $17.9 $12.9 $10.5 $5.2 $4.0 $3.0 ===== ===== ===== ==== ==== ====
The prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10% of the greater of the benefit obligation and the market-related value of assets are amortized over the average remaining service period of active participants. The assumptions used in the measurement of the Company's benefit obligation are shown in the following table:
PENSION BENEFITS OTHER BENEFITS ------------------------------------ ------------------------------------ 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- Discount rate................................ 7.5% 6.5% 7.0% 7.5% 6.5% 7.0% Expected return on plan assets............... 9.5% 9.0% 9.0% N/A N/A N/A Rate of compensation expense................. 5.5% 5.5% 5.5% N/A N/A N/A
For measurement purposes, a 7.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually over 17 years, to a rate of 5.0% and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects:
1% INCREASE 1% DECREASE ----------- ----------- Effect on total of service and interest cost components of net periodic postretirement health care benefit cost...... $1.2 $(0.9) Effect on the health care component of the accumulated postretirement benefit obligation......................... $6.8 $(5.4)
Substantially all employees are eligible to participate in a savings plan under which designated contributions, which are invested in various investment programs, are matched, up to 5% of compensation, by the Company. The costs of the Company's matching contributions were $5.3, $5.0, and $5.0 for the years ended December 31, 1999, 1998, and 1997, respectively. Key employees are eligible for plans that provide compensation incentives based upon operating results and that reward specific individuals for performance and contribution to the success of the Company. Charges to operations for such incentives were $17.1, $21.6 and $23.4 for the years ended December 31, 1999, 1998, and 1997, respectively. American Re-Insurance has Employment Agreements (the "Agreements"), with Messrs. Noonan, Abdallah, Beer, and Burgess pursuant to which each such executive has agreed to serve in his position F-20 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 8. BENEFIT PLANS (CONTINUED) indicated in the Summary Compensation Table for a period of five years and the Company agreed to provide certain compensation and severance benefits as provided therein. Under the Agreements, each executive's cash compensation, which consists of the executive's annual rate of base salary and the annual incentive compensation award or such other bonus payment, is determined by American Re-Insurance from time to time, but shall not be less than a minimum guaranteed amount equal to the executive's annual rate of pay in effect as of April 15, 1998 plus the bonus amount paid to such executive for the 1997 calendar year. To the extent the bonus amounts set forth in the Summary Compensation Table for any of such persons are less than they would have been entitled to under their Agreements for 1999, such executives voluntarily waived the contractual amount for 1999. Under the Agreements, American Re-Insurance has also agreed to pay a severance benefit to such executive if the executive's employment with American Re-Insurance or an affiliate is terminated during the term of the Agreement by the Company not for "Cause" or by the executive upon a "Constructive Discharge" (as such terms are defined in the Agreements). Upon either such termination, the executive would be entitled to receive, for a period commencing on the date of termination and ending on the earlier of the second anniversary thereof or the date of the executive's reemployment, severance benefits consisting of (i) continued salary and bonus (based on the salary in effect on the date of termination and the most recent bonus paid); (ii) amounts under the Company's Long Term Incentive Plan equal to the payments the executive would otherwise have been entitled to receive had the executive remained employed for the entire performance cycle, prorated based on the number of months the executive was employed during the performance period; and (iii) continued participation in all other benefit programs available from the Company as in effect as of the date of termination. During the employment period and any severance period and, in the event the executive is terminated by American Re-Insurance for Cause or by the executive other than by reason of Constructive Discharge, for an additional period of six months following the date of termination, the executive is subject to a covenant not to compete with American Re-Insurance or any affiliate thereof. At the time of the acquisition by Munich Re, the Company established the Senior Executive Deferred Compensation Plan. Participants in the plan were provided the opportunity to defer, for five years, up to 100% of the option proceeds which they otherwise were eligible to receive from the cancellation of their options in accordance with the terms of the acquisition. Participants elected to defer an aggregate of $79.9 of option proceeds which the Company used to establish and fund a trust, the assets of which will be dedicated to the payment of such future obligations in the absence of insolvency by the Company. At the direction of the participants, the trust proceeds were invested by the Company in one or more of two index-related investment vehicles and a fixed rate investment vehicle. In addition thereto, participants are eligible to receive an additional return from the Company in the amount of 5% of the participant's original deferred principal provided certain conditions are met. At December 31, 1999, and 1998, the Company's consolidated balance sheets reflected $115.2 and $126.5, respectively, of deferred option proceeds, which is reflected in other liabilities. 9. SENIOR BANK DEBT In 1995, the Company borrowed $75.0 from Bank of America, N.A., in anticipation and as part of a new unsecured bank revolving credit agreement established on January 29, 1996, which allows the Company to borrow an aggregate amount up to $150.0. Outstanding amounts under the revolving credit F-21 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 9. SENIOR BANK DEBT (CONTINUED) agreement bear interest, at the election of the Company, currently at (i) the Bank of America Base Rate (that is a fluctuating rate equal to the greater of (x) Bank of America's announced rate of interest, identified as its "reference rate" or (y) the sum of the federal funds rate plus 0.5%), (ii) a Eurodollar reserve adjusted InterBank Offered Rate ("IBOR"), or (iii) a competitive bid rate as determined by the participating banks. Any amount not paid when due will bear interest at a rate of 2.00% in excess of the rate otherwise applicable. The revolving credit agreement has a term of five years and, except with respect to amounts outstanding under IBOR or bid loans, may be prepaid at any time at the option of the Company. The revolving credit agreement contains certain covenants relating to, among other things, restrictions on debt, liens, disposition of assets, consolidations, mergers, use of proceeds, changes in business and minimum statutory surplus. At December 31, 1999 and 1998, $75.0 remained outstanding under the bank revolving credit agreement. In 1998, the Company guaranteed the repayment of principle, interest and other fees and expenses under a Bank Credit Agreement between American Re Capital Markets, Inc., a wholly owned subsidiary of the Company ("ARCM") and Bank of America, N.A. The agreement currently permits ARCM to borrow funds or obtain letters of credit in an aggregate amount up to $50.0. ARCM shall use the proceeds of these loans and the letters of credit to cover losses incurred under weather-related and other derivatives contracts, to support certain of it obligations under such derivatives contracts and for other general corporate purposes. At December 31, 1999 ARCM had no outstanding indebtedness under the agreement. 10. SENIOR NOTES In December 1996, the Company sold $500.0 aggregate principal amount of its Senior Notes due December 15, 2026 (the "Notes"). The Notes bear interest at a rate of 7.45% annually, payable on June 15 and December 15 each year. The offering price of the notes was 99.687% of the aggregate principal amount, resulting in a yield to maturity of 7.476%. The Notes are redeemable in whole or in part, at the option of the Company at any time, at a redemption price equal to the greater of (i) 100% of the principal amount of such notes and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted, on a semiannual basis, at the rate per annum equal to the yield to maturity of the United States Treasury securities issue with comparable maturities to the remaining term of the Notes, plus 15 basis points, together with accrued interest to the date of redemption. The Indenture contains certain covenants, including, but not limited to, covenants imposing limitations on liens, and restrictions on mergers and sale of assets. The Notes were not registered under the Federal Securities Act of 1933 or registered or qualified under the securities laws of the various states. Pursuant to the terms of the Senior Notes, the Company agreed to make an offer to exchange the Notes for a new issue of debt securities of the Company which would be registered under the Securities Act of 1933, with terms substantially similar to the Notes (the "Exchange Offer"). The Exchange Offer was completed on March 14, 1997, with 100% of the holders of the $500.0 aggregate principal amount of the Notes accepting the Exchange Offer. F-22 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 11. CUMULATIVE QUARTERLY INCOME PREFERRED SECURITIES In 1995, American Re Capital, a Delaware business trust formed and wholly owned by the Company, completed the sale of 9,500,000 Cumulative Quarterly Income Preferred Securities ("QUIPS") ($237.5 aggregate principal amount), due in 2025. The net proceeds from the offering were used by American Re Capital to purchase a like amount of $244.8 principal amount of 8.5% Junior Subordinated Debentures of the Company. The $244.8 principal amount of 8.5% Junior Subordinated Debentures due September 30, 2025, represent all of the assets of the subsidiary trust. The Company used the proceeds from the sale of the Debentures to retire the Company's revolving bank credit facility with Chase Manhattan Bank, N.A. at the time of offering and to contribute $50.0 to the capital and surplus of American Re-Insurance Company. The remaining net proceeds from the sale were used for general corporate purposes. The Junior Subordinated Debentures and related income statement effects are eliminated in the Company's consolidated financial statements. The QUIPS accrue and pay distributions quarterly at a rate of 8.5% per annum of the stated liquidation value of $25 per preferred security. The Company has, through a guarantee agreement, a trust agreement, the Junior Subordinated Debentures and an expense agreement, taken together, fully and unconditionally guaranteed, on a subordinated basis, the Trust's obligation under the preferred securities to the extent that funds are available therefore, and as more fully set forth in such agreements. The QUIPS are mandatorily redeemable upon the maturity of the Junior Subordinated Debentures, on September 30, 2025 or upon earlier redemption as provided in the Indenture. The Company has the right to redeem the Junior Subordinated Debentures, in whole or in part, on or after September 30, 2000, at a redemption price of $25 per preferred security plus any accrued but unpaid interest to the redemption date. 12. CAPITAL AND SURPLUS AND STOCKHOLDER DIVIDEND RESTRICTIONS Statutory surplus for the reinsurance/insurance subsidiaries on a combined basis at December 31, 1999, and 1998, were $2,166.0 and $2,631.1, respectively. Statutory net income (loss) for the years ended December 31, 1999, 1998, and 1997, on a combined basis was $(183.3), $319.9 and $196.7, respectively. Dividends declared and paid by American Re-Insurance to the Company were $260.8, $35.0 and $105.0 in 1999, 1998, and 1997, respectively. The Company is dependent upon dividends received from its reinsurance/insurance subsidiaries to meet its debt and other obligations. Dividend payments by the reinsurance/insurance subsidiaries are restricted by the insurance laws of the State of Delaware. At December 31, 1999, American Re-Insurance could declare dividends of approximately $214.6 during 2000 without approval of the Commissioner of Insurance of the State of Delaware. 13. PERMITTED STATUTORY ACCOUNTING PRACTICES American Re-Insurance prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the Insurance Department of the State of Delaware. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners, as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all rules not so prescribed. F-23 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 13. PERMITTED STATUTORY ACCOUNTING PRACTICES (CONTINUED) American Re-Insurance received written approval from the Insurance Department of the State of Delaware to discount all workers' compensation reserves for losses at a rate of 4.5% for statutory accounting purposes. Delaware statutes allow discounting of certain types of reserves at various discount rates. 14. MERGER OF MARC AND THE U.S. BRANCH On July 1, 1997, American Re and Munich Re, completed the merger of MARC into American Re-Insurance. Prior to this transaction, MARC was owned 27.5% by Munich Re, 22.5% by Munich Re's U.S. Branch (the "U.S. Branch"), 40% by Allianz Aktiengesellschaft ("Allianz"), and 10% by VICTORIA Versicherung AG ("VICTORIA"). This transaction was effected by exchanging 100% of the common shares of MARC for 25.92804 newly issued shares of the Company. On July 2, 1997, the U.S. Branch exchanged its newly acquired shares of the Company with Munich Re for cash in the amount of $85.0 million. This amount approximated the statutory accounting value of the U.S. Branch's ownership in MARC at the time of the Merger. On July 3, 1997, Munich Re contributed the insurance-related assets and liabilities of the U.S. Branch to American Re-Insurance in exchange for 23.56908 additional shares of the Company ("the Redomestication"). As a result of these transactions (collectively, the "Merger"), the shares of common stock held by Allianz and VICTORIA represented minority interests in the Company's common stock equal to less than 9% on an aggregate basis. Munich Re has subsequently acquired the shares of common stock owned by VICTORIA and Allianz, bringing its ownership interest to 100.0%. The exchange of MARC shares for the Company shares by Allianz and VICTORIA (totaling 50% of MARC's ownership) was accounted for using the purchase method for business combinations. The exchange of MARC shares for the Company's shares by Munich Re and the U.S. Branch (totaling 50% of MARC's ownership) was accounted for as an "as-if-pooling of interests" business combination between parties under common control of the same parent company, Munich Re. The Company's consolidated statements of income and cash flows for the year ended December 31, 1997 represent the fully consolidated operations of American Re, MARC, and the U.S. Branch for the periods then ended, with 50% of MARC's net loss for the six-month period ended June 30, 1997 accounted for as minority interest in the net income of the Company. Revenue and net income for the separate entities for the six-month period ended June 30, 1997, prior to the Merger were as follows:
SIX-MONTH PERIOD ENDED JUNE 30, 1997 ------------- Revenue: American Re............................................... $1,094.1 MARC / U.S. Branch........................................ 517.0 -------- Total................................................... $1,611.1 ======== Net income: American Re............................................... $ 22.3 MARC / U.S. Branch........................................ 63.5 -------- Total................................................... $ 85.8 ========
F-24 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 14. MERGER OF MARC AND THE U.S. BRANCH (CONTINUED) The purchase of the 50% minority interest in the ownership of MARC was based upon a purchase price of $425.0, as agreed upon by all parties. The non-cash transaction was accounted for as follows: Purchase price: Consideration given as newly issued shares of American Re............................................... $425.0 Less: Book value of minority interest at July 1, 1997....... 240.2 ------ Excess of purchase price over net assets acquired........... $184.8 ======
The excess of the purchase price of the net assets acquired was allocated entirely to goodwill, which is included in the "Other assets" classification in the Consolidated Balance Sheets (see Note 2H). During 1997, the Company incurred one-time Merger-related charges, including the following:
MARC/U.S. AMERICAN RE BRANCH TOTAL ----------- --------- -------- Severance and other personnel related charges..................................... $ 8.9 $65.7 $ 74.6 Write-down of data processing equipment....... 22.7 15.5 38.2 Sale leaseback write-down..................... 13.3 -- 13.3 ----- ----- ------ $44.9 $81.2 $126.1 ===== ===== ======
15. COMMITMENTS AND CONTINGENT LIABILITIES A. DERIVATIVES AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS FINANCIAL GUARANTEES In 1998, the Company recommenced writing financial guarantee programs on a limited basis. In addition, the Company has principal and interest guarantees outstanding from programs written prior to December 31, 1996. The aggregate principal and interest amounts of these guarantees outstanding were $593.7 and $153.9 at December 31, 1999 and 1998, respectively. The aggregate principal and interest amount reflects the Company's extent of involvement in financial guarantees. DERIVATIVES American Re Capital Markets, Inc., a subsidiary of the Company ("ARCM"), has been engaged primarily in the weather derivative business, which exposes the Company to losses/gains based on movements in tempertaure at certain U.S. weather stations. At December 31, 1999, ARCM had entered into 78 such weather derivative contracts with a notional value of $139.3. At December 31, 1999, the maximum payment amount of such contracts was $85.7, and the maximum receivable amount was $111.4. In November 1999, ARCM entered into certain index-based catastrophe related swaps ("catastrophe swaps") with Gold Eagle Capital Limited, a special purpose Bermuda company ("Gold Eagle"). Under the terms of the catastrophe swaps, ARCM may receive approximately $182 of potential payments from Gold Eagle in the event of three types of certain catastrophic events: California earthquakes, Midwest earthquakes, or Eastern and Gulf Coast windstorms, all as specifically defined under the Catastrophe Swaps F-25 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) ("Catastrophes"). Payment amounts under the catastrophe swaps will be determined based upon an index of modeled insurance industry losses from Catastrophes as calculated by Risk Management Solutions, Inc. American Re Securities Corporation, a subsidiary of the Company, acted as placement agent for Gold Eagle in the placement of catastrophe related securities, called Modeled Index Linked Securities-SM- (ModILS-SM-), intended to collateralize any potential payments by Gold Eagle to ARCM under the catastrophe swaps. The Company adjusts the catastrophe swaps to fair value using a model pricing based upon interest rate spreads above comparable U.S. Treasury investments, applied to the notional value outstanding of $182.1. The fair value adjustment at December 31, 1999 was $0.6. B. RELATED PARTY TRANSACTIONS Gross premiums assumed from Munich Re and its affiliated companies were $48.4, $10.5, and nil for the years ended December 31, 1999, 1998, and 1997, respectively. Munich Re and its affiliated companies also participate on several of the Company's existing retrocessional programs. Total premiums ceded to Munich Re and its affiliated companies relating to such programs were approximately $159.2, $174.4 and $97.0 for the years ended December 31, 1999, 1998, and 1997, respectively. Total losses and LAE ceded to Munich Re and its affiliated companies were $252.8 and $(12.9) for the years ended December 31, 1999, and 1998, respectively. Total insurance reserves outstanding with Munich Re and its affiliated companies were $493.2 and $256.7 at December 31, 1999 and 1998, respectively. Munich Re Capital Management, an affiliated registered investment advisor, is responsible for the management of the fixed income portion of the Company's investment portfolio. Fees paid to Munich Re Capital Management were $2.6, $2.1, and $1.6 for the years ended December 31, 1999, 1998, and 1997, respectively. C. LEASES The Company has operating leases for certain of its furniture, fixtures, and computer equipment, and office space used by its branch office and subsidiary locations. Lease expense was $22.8, $20.3, and $23.2, for the years ended December 31, 1999, 1998, and 1997. Future net minimum payments under non-cancelable leases at December 31, 1999, were estimated to be as follows:
2005 and 2000 2001 2002 2003 2004 thereafter - --------------------- ---------- ---------- ---------- ---------- ---------- $19.3 $16.1 $14.0 $10.1 $3.4 $6.0 ---------- ---------- ---------- ---------- ---------- ----------
D. ASBESTOS, ENVIRONMENTAL-RELATED AND OTHER LATENT LIABILITY CLAIMS Since the early 1980s, American Re's underwriting results have been adversely affected by claims developing from asbestos, environmental-related and other latent liability coverage exposures ("latent liability exposures"). During this period, reserves established by American Re for latent liability exposures necessarily reflected the uncertainty inherent in estimating the ultimate future claim amounts arising from these types of exposures and the lack of credible actuarial methods to measure and quantify these F-26 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) exposures. The Company's difficulty in accurately quantifying these exposures was attributable to the need for latent liability exposures to be first quantified by the insured party and then the primary insurer before the information was made available to the reinsurer. During 1999, the Company undertook a study to reevaluate its reserves for latent liability exposures. This was a result of the Company's assessment of its reported claims activity, which reflected continued emergence of newly reported claims in each of these areas and recent insurance industry efforts to accelerate the settlement of outstanding latent liability claims. Each of the Company's related exposures was evaluated individually to determine its expected ultimate liability for losses and LAE. As a result of this reevaluation, during the fourth quarter of 1999, the Company increased its gross incurred but not reported ("IBNR") loss reserves for latent liability exposures. The Company had latent liability exposure loss reserves as follows at December 31:
1999 1998 ------------------- ------------------- GROSS NET GROSS NET -------- -------- -------- -------- Asbestos................................... $ 786.6 $470.9 $399.9 $258.5 Environmental-related and other latent liability................................ 646.2 466.7 237.3 150.1 -------- ------ ------ ------ Total.................................... $1,432.8 937.6 $637.2 $408.6 ======== ====== ====== ======
Loss reserves for latent liability exposures at December 31, 1999, and 1998, represent best estimates drawn from a range of possible outcomes based on currently known facts, projected forward using assumptions and methodologies considered reasonable. Notwithstanding these loss reserves, there can be no assurance that future losses resulting from these exposures will not materially adversely affect future earnings. E. LITIGATION The Company is involved in claims related litigation, arbitrations and other adversarial proceedings in the ordinary course of business. The Company is also involved in non-claim litigation incidental to its business principally related to insurance company insolvencies or liquidation proceedings relating to companies with whom it does business. The Company does not believe that any of the pending legal proceedings will have a material adverse effect on the consolidated financial condition or results of operations of American Re and its subsidiaries. However, no assurance can be given as to the ultimate outcome of any such legal proceedings. SUPERIOR NATIONAL INSURANCE GROUP, INC. V. AMERICAN RE-INSURANCE COMPANY, ET AL. On December 31, 1999, American Re-Insurance reached an agreement with Superior National Insurance Group, Inc. ("Superior National") to settle certain reinsurance disputes arising in connection with the sale of Business Insurance Group ("BIG") by Foundation Health Systems, Inc., to Superior National. As consideration for the execution of the settlement agreement, American Re-Insurance simultaneously entered into an Excess of Loss Retrocessional Reinsurance Agreement with Centre Reinsurance (US) Limited, pursuant to which Centre Re agreed to indemnify American Re-Insurance up to $40.0 in excess of $135.0 of aggregate ultimate net loss paid by American Re-Insurance under an F-27 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) Aggregate Excess of Loss Agreement with BIG. All pending litigations and arbitrations between the parties were terminated or dismissed with prejudice. AMERICAN RE-INSURANCE V. PENNSYLVANIA INSURANCE DEPARTMENT In connection with American Re's efforts to acquire all of the outstanding shares of AIS, the holding company that owns United National Insurance Company, Diamond State Insurance Company, and Hallmark Insurance Company, American Re is required to obtain the approval of three insurance departments which have regulatory authority over the transaction. Two of the three insurance departments that must approve the transaction (Indiana and Wisconsin) have conducted hearings, completed their reviews and granted their approvals of the transaction. However, the Pennsylvania Insurance Department has subjected American Re to an excessive delay in reviewing the application regarding United National, which is domiciled in Pennsylvania, obstensively based on the fact that Munich Re has not joined the Holocaust Commission. As a result of this delay, on February 8, 2000, American Re filed suit in Pennsylvania Commonwealth Court against the Pennsylvania Insurance Department and the Pennsylvania Insurance Commissioner, seeking to compel the Department to complete its review of American Re's application to acquire United National. At the present time, no assurance can be given as to the ability of American Re to prevail in the litigation against the Department. Furthermore, even if American Re is successful in the litigation seeking to compel the Department to complete its review, there can be no assurance that such review would result in a timely approval of the transaction by the Department since, under the terms of the Agreement, the Sellers have had the right to terminate the Agreement since March 10, 2000. HOLOCAUST VICTIMS INSURANCE LAWS Several states have enacted legislation pertaining to insurance policies that were issued in Europe to Holocaust victims during the period 1920 through 1945, and legislation on this subject matter is under consideration in other states. Insurance regulators in these states have taken actions or threatened to take actions to sanction insurance companies licensed in such states for alleged failure to comply with such laws. Most state insurance regulators have subscribed to a private, non-governmental, voluntary organization named the International Commission on Holocaust Era Insurance Claims ("Holocaust Commission") that is dedicated to identifying and resolving outstanding insurance claims from the Holocaust era for its members. Under some of the recently enacted state laws, an insurer's participation in the Holocaust Commission confers certain statutory benefits. CALIFORNIA. California has two Holocaust era insurance related statutes. The first purports to permit the suspension of an insurer's license if it or any of its affiliates has failed to pay any claim of Holocaust victims proven to be valid and unpaid. This statute also authorizes the Commissioner to include consideration of whether an insurer is participating in the Holocaust Commission in deciding whether to suspend the insurer's license. In July, 1999, the California Insurance Department ("CID") initiated an examination and hearing involving the Company's California licensed insurers and Munich Re in order to investigate whether these companies or affiliated companies in Europe had outstanding Holocaust era insurance claims. While the licensees named in the examination and hearing process either were not in existence or did not do business in Europe during the Holocaust era, and Munich Re, as a reinsurer, never issued any F-28 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) insurance policies, the CID sought information on Holocaust era insurance from European insurers in which Munich Re has an indirect investment interest. The hearing and examination are ongoing. The second California statute is the Holocaust Victim Insurance Relief Act of 1999 ("California Registry Law") designed to create a publicly accessible registry of Holocaust era policyholder information. The California Registry Law requires California licensed insurers to report Holocaust era policyholder information in their possession or in the possession of their "related companies," as that term is defined in the California Registry Law. The CID interprets this statute to require information even from companies that are not controlled by the licensed insurers or their parent companies. In March 2000, American Re-Insurance and the American Insurance Association, an insurance trade association many of whose members are California licensed insurers, initiated litigation in California challenging the validity of the California Registry Law on constitutional and other grounds. That litigation is pending. FLORIDA. Florida has enacted a statute ("Florida Holocaust Law") that seeks reports of information on Holocaust era insurance. The Florida Holocaust Law requires Florida licensed insurers to report certain information on insurance policies issued in Europe during the Holocaust era by such licensees and their affiliates. American Re-Insurance and American Alternative have no information to report because they did not issue insurance policies in Europe during the relevant time period. However, the companies have timely filed reports disclosing information voluntarily provided by European insurers in which Munich Re has an investment interest. The Florida Insurance Department has issued subpoenas to American Re-Insurance, American Alternative, and approximately 40 other insurance companies seeking policyholder information in connection with the Florida Holocaust Law. Recently, an unaffiliated company initiated litigation against the Florida Insurance Department challenging the validity of the subpoenas and the constitutionality of the Florida Holocaust Law. The Department has stayed any further action under the Florida Holocaust Law, and the litigation is pending. NEW YORK. New York has enacted a statute ("New York Holocaust Law") similar to the Florida Holocaust Law. American Re-Insurance and American Alternative timely filed reports responsive to the New York Holocaust Law disclosing information voluntarily provided by European insurers in which Munich Re has an investment interest. The New York Insurance Department subsequently requested additional information in connection with Holocaust era insurance. American Re promptly forwarded these requests to the European insurers which responded directly to the Department. More recently, the Department has threatened to fine American Re up to $1,000 per day for alleged reporting violations unless Munich Re joins the Holocaust Commission, or agrees to pay alleged Holocaust claims involving companies that Munich Re does not control, or contributes to a humanitarian fund for the benefit of Holocaust survivors. No court or administrative proceedings have been commenced against American Re in New York to date. WASHINGTON. Washington has enacted a statute similar to the California Registry Law. American Re-Insurance and American Alternative have reported to the Washington Insurance Department that they have nothing to report under the statute. The Department has asserted that the companies' report is not in compliance with the law and has indicated that it may initiate enforcement action against American Re, although no action has been commenced to date. * * * * * F-29 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) American Re believes that it has fully complied with the requirements of these statutes. However, there can be no assurance that insurance regulators will not initiate administrative or other actions against American Re under these laws. American Re does not believe that the ultimate resolution of these matters will have a material adverse effect on the business, financial condition or results of operations of American Re and its subsidiaries taken as a whole. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments at December 31, 1999, and 1998, were as follows:
1999 1998 ------------------- ------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- -------- -------- -------- Assets: Bonds available for sale............ $6,315.2 $6,315.2 $6,876.0 $6,876.0 Preferred stock..................... 84.6 84.6 77.3 77.3 Equity securities................... 402.1 402.1 545.6 545.6 Other invested assets............... 40.5 40.5 27.9 27.9 -------- -------- -------- -------- Total investments................. 6,842.4 6,842.4 7,526.8 7,526.8 Cash and cash equivalents........... 597.5 597.5 274.9 274.9 Liabilities: Senior bank debt.................... 75.0 75.0 75.0 75.0 Senior Notes........................ 498.5 474.0 498.5 568.6 QUIPS............................... 237.5 228.0 237.5 246.1
It is not practicable to estimate a fair value for the Company's financial guarantees, as there is no quoted market price for such contracts, and it is not possible to reliably estimate the timing and amount of all future cash flows due to the unique nature of each of these contracts. 17. SEGMENT REPORTING American Re's Domestic Insurance Company Operations ("DICO") serves U.S. insurance companies by providing them with customized, integrated treaty, facultative and finite risk reinsurance programs on a direct basis. American Re's alternative market strategic business unit, Munich-American RiskPartners ("RiskPartners") provides customized risk transfer, risk sharing, and risk management solutions to self-insured clients worldwide. International Operations ("International") provides treaty, facultative and finite risk reinsurance along with a range of other customized products and services to insurance companies and other entities worldwide. In addition to its core reinsurance business, American Re, through various subsidiaries, offers a broad array of related services including actuarial and financial analysis, due diligence consulting for mergers and acquisitions, and reinsurance and insurance brokerage. The financial results of these subsidiaries have been aggregated along with holding company operations for presentation of segment results. F-30 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 17. SEGMENT REPORTING (CONTINUED)
TOTAL REINSURANCE/ INSURANCE HOLDING CO. YEAR ENDED DECEMBER 31, 1999 DICO RISKPARTNERS INTERNATIONAL OPERATIONS & OTHER TOTAL - ---------------------------- -------- ------------ ------------- ------------ ----------- -------- REVENUES GROSS PREMIUMS WRITTEN........... $2,138.6 $810.7 $ 587.6 $3,536.9 $0.2 $3,537.1 -------- ------ ------- -------- --- -------- NET PREMIUMS WRITTEN............. 1,839.1 554.6 511.8 2,905.5 0.2 2,905.7 -------- ------ ------- -------- --- -------- PREMIUMS EARNED................ 1,828.3 582.0 517.0 2,927.3 0.2 2,927.5 Net investment income............ -- -- -- 400.7 14.4 415.1 Net realized capital gains....... -- -- -- 83.0 (0.1) 82.9 Other income..................... -- -- -- (1.8) 29.3 27.5 -------- ------ ------- -------- --- -------- Total revenue.................. 3,409.2 43.8 3,453.0 -------- --- -------- LOSSES AND EXPENSES LOSSES AND LAE................... 1,731.4 479.1 443.9 2,654.4 -- 2,654.4 UNDERWRITING EXPENSES............ 539.2 166.9 164.3 870.4 0.3 870.7 Interest expense................. -- -- -- -- 41.9 41.9 Other expense.................... -- -- -- 28.3 35.7 64.0 -------- ------ ------- -------- --- -------- Total losses and expenses...... 3,553.1 77.9 3,631.0 -------- --- -------- Income (loss) before income taxes........................ $ (178.0) ======== UNDERWRITING GAIN (LOSS)....... $ (442.3) $(64.0) $ (91.2) $ (597.5) ($0.1) $ (597.6) ======== ====== ======= ======== === ======== LOSS AND LAE RATIO............... 94.7% 82.3% 85.9% 90.7% N/M 90.7% UNDERWRITING EXPENSE RATIO....... 29.5 28.7 31.8 29.7 N/M 29.7 -------- ------ ------- -------- --- -------- COMBINED RATIO................... 124.2% 111.0% 117.7% 120.4% N/M 120.4% ======== ====== ======= ======== === ========
F-31 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 17. SEGMENT REPORTING (CONTINUED)
TOTAL REINSURANCE/ INSURANCE HOLDING CO. YEAR ENDED DECEMBER 31, 1998 DICO RISKPARTNERS INTERNATIONAL OPERATIONS & OTHER TOTAL - ---------------------------- -------- ------------ ------------- ------------ ----------- -------- REVENUES GROSS PREMIUMS WRITTEN........... $1,888.5 $670.1 $ 558.9 $3,117.5 -- $3,117.5 -------- ------ ------- -------- ------ -------- NET PREMIUMS WRITTEN............. 1,517.9 436.5 452.4 2,406.8 -- 2,406.8 -------- ------ ------- -------- ------ -------- PREMIUMS EARNED................ 1,573.3 392.1 453.5 2,418.9 -- 2,418.9 Net investment income............ -- -- -- 420.7 (3.2) 417.5 Net realized capital gains....... -- -- -- 92.8 -- 92.8 Other income..................... -- -- -- (0.5) 32.3 31.8 -------- ------ ------- -------- ------ -------- Total revenue.................. 2,931.9 29.1 2,961.0 -------- ------ -------- LOSSES AND EXPENSES LOSSES AND LAE................... 1,073.8 273.2 335.4 1,682.4 -- 1,682.4 UNDERWRITING EXPENSES............ 561.3 132.6 122.5 816.4 -- 816.4 Interest expense................. -- -- -- -- 42.2 42.2 Other expense.................... -- -- -- 18.7 79.8 98.5 -------- ------ ------- -------- ------ -------- Total losses and expenses...... 2,517.5 122.0 2,639.5 -------- ------ -------- Income before income taxes..... $ 321.5 ======== UNDERWRITING GAIN (LOSS)....... $ (61.8) $(13.7) $ (4.4) $ (79.9) ======== ====== ======= ======== LOSS AND LAE RATIO............... 68.2% 69.7% 74.0% 69.6% UNDERWRITING EXPENSE RATIO....... 35.7 33.8 27.0 33.7 -------- ------ ------- -------- COMBINED RATIO................... 103.9% 103.5% 101.0% 103.3% ======== ====== ======= ========
F-32 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 17. SEGMENT REPORTING (CONTINUED)
TOTAL REINSURANCE/ INSURANCE HOLDING CO. YEAR ENDED DECEMBER 31, 1997 DICO RISKPARTNERS INTERNATIONAL OPERATIONS & OTHER TOTAL - ---------------------------- -------- ------------ ------------- ------------ ----------- -------- REVENUES GROSS PREMIUMS WRITTEN........... $2,056.4 $471.1 $ 553.5 $3,081.0 -- $3,081.0 -------- ------ ------- -------- ------ -------- NET PREMIUMS WRITTEN............. 1,790.8 273.8 433.1 2,497.7 -- 2,497.7 -------- ------ ------- -------- ------ -------- PREMIUMS EARNED................ 1,782.4 286.0 417.7 2,486.1 -- 2,486.1 Net investment income............ -- -- -- 429.8 (2.3) 427.5 Net realized capital gains....... -- -- -- 87.7 -- 87.7 Other income..................... -- -- -- 1.0 40.7 41.7 -------- ------ ------- -------- ------ -------- Total revenue.................. 3,004.6 38.4 3,043.0 -------- ------ -------- LOSSES AND EXPENSES LOSSES AND LAE................... 1,250.6 194.2 271.5 1,716.3 -- 1,716.3 UNDERWRITING EXPENSES............ 585.5 108.2 144.7 838.4 -- 838.4 Interest expense................. -- -- -- -- 42.8 42.8 Other expense.................... -- -- -- 133.8 87.4 221.2 -------- ------ ------- -------- ------ -------- Total losses and expenses...... 2,688.5 130.2 2,818.7 -------- ------ -------- Income before income taxes..... $ 224.3 ======== UNDERWRITING GAIN (LOSS)....... $ (53.7) $(16.4) $ 1.5 $ (68.6) ======== ====== ======= ======== LOSS AND LAE RATIO............... 70.2% 67.9% 65.0% 69.0% UNDERWRITING EXPENSE RATIO....... 32.8 37.8 34.6 33.8 -------- ------ ------- -------- COMBINED RATIO................... 103.0% 105.7% 99.6% 102.8% ======== ====== ======= ========
- ------------------------ Elements of underwriting result are BOLD. The Company does not allocate certain items of revenues and expenses, nor are they included in the assessment of the segment results as reviewed by the Company's management. The assets and liabilities of the Company are generally not maintained on a segment or geographical basis. An allocation of such assets and liabilities is considered by the Company to be impracticable. F-33 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 18. UNAUDITED QUARTERLY FINANCIAL DATA Summarized quarterly financial data were as follows:
1999 ----------------------------------------- FIRST SECOND THIRD FOURTH -------- -------- -------- -------- OPERATING DATA Premiums written.......................................... $757.5 $667.2 $757.7 $ 723.3 Premiums earned........................................... 579.8 676.8 792.9 878.0 Losses and LAE............................................ 396.7 511.3 677.3 1,069.1 Underwriting expenses..................................... 210.1 214.0 209.8 236.8 Underwriting loss......................................... (27.0) (48.5) (94.2) (427.9) Net investment income..................................... 107.0 101.7 104.7 101.7 Interest expense.......................................... 10.5 10.0 10.8 10.6 Net income (loss) to common stockholder................... 57.0 45.7 4.4 (208.1) Comprehensive loss........................................ (20.7) (45.7) (52.2) (245.5)
1998 ----------------------------------------- FIRST SECOND THIRD FOURTH -------- -------- -------- -------- OPERATING DATA Premiums written.......................................... $682.3 $564.0 $557.6 $602.9 Premiums earned........................................... 592.9 576.1 581.8 668.1 Losses and LAE............................................ 395.4 394.9 441.4 450.7 Underwriting expenses..................................... 193.9 194.0 189.9 238.6 Underwriting loss......................................... 3.6 (12.8) (49.5) (21.3) Net investment income..................................... 110.6 105.5 103.3 98.1 Interest expense.......................................... 10.5 10.6 10.5 10.6 Net income to common stockholder.......................... 82.9 64.2 32.6 46.3 Comprehensive income...................................... 73.1 67.3 72.4 53.9
F-34 SCHEDULE I AMERICAN RE CORPORATION SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1999 (DOLLARS IN MILLIONS)
AMOUNT AT WHICH TYPE OF AMORTIZED FAIR SHOWN IN THE INVESTMENT COST VALUE BALANCE SHEET - -------------------------------------------------------- --------- -------- --------------- FIXED MATURITIES: Bonds available for sale: U.S. Government and government agencies............. $ 754.1 $ 730.8 $ 730.8 States, municipalities and political subdivisions... 2,123.1 2,070.3 2,070.3 Mortgage backed securities.......................... 1,149.7 1,106.7 1,106.7 Foreign governments................................. 357.1 349.7 349.7 Public utilities.................................... 117.4 112.1 112.1 Corporate bonds..................................... 2,010.2 1,945.6 1,945.6 -------- -------- -------- Total bonds available for sale.................... 6,511.6 6,315.2 6,315.2 -------- -------- -------- Preferred securities................................ 84.4 84.6 84.6 -------- -------- -------- Total fixed maturities............................ 6,596.0 6,399.8 6,399.8 -------- -------- -------- EQUITY SECURITIES: Common stock: Public utilities...................................... 2.8 2.5 2.5 Banks, trust and insurance companies................ 35.6 31.7 31.7 Industrial and miscellaneous and all other.......... 328.7 367.9 367.9 -------- -------- -------- Total equity securities........................... 367.1 402.1 402.1 -------- -------- -------- Other investments..................................... 40.5 40.5 40.5 -------- -------- -------- Total investments................................. $7,003.6 $6,842.4 $6,842.4 ======== ======== ========
S-1 SCHEDULE II AMERICAN RE CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) CONDENSED BALANCE SHEET (DOLLARS IN MILLIONS)
DECEMBER 31, 1999 DECEMBER 31, 1998 ----------------- ----------------- ASSETS Investment in subsidiaries................................ $3,004.5 $3,622.3 Bonds available for sale, at fair value (amortized cost: $116.8)................................................. 117.3 -- Cash...................................................... 121.4 27.5 Deferred financing fees................................... 25.3 26.0 Current federal income taxes recoverable.................. 55.2 25.6 Other assets.............................................. 111.8 154.2 -------- -------- Total assets............................................ $3,435.5 $3,855.6 ======== ======== LIABILITIES Interest payable.......................................... $ 0.9 $ 1.2 Bank debt--term loan...................................... 75.0 75.0 Senior notes.............................................. 498.5 498.5 Junior subordinated debt.................................. 244.8 244.8 Other liabilities......................................... 127.3 183.0 -------- -------- Total liabilities....................................... 946.5 1,002.5 -------- -------- STOCKHOLDER'S EQUITY Common stock.............................................. -- -- Additional paid in capital................................ 1,332.4 1,332.4 Retained earnings......................................... 1,296.6 1,397.6 Accumulated other comprehensive income (loss)............. (140.0) 123.1 -------- -------- Total stockholder's equity.............................. 2,489.0 2,853.1 -------- -------- Total liabilities and stockholder's equity.............. $3,435.5 $3,855.6 ======== ========
S-2 SCHEDULE II AMERICAN RE CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) CONDENSED STATEMENT OF OPERATIONS AND RETAINED EARNINGS (DOLLARS IN MILLIONS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1999 DECEMBER 31,1998 DECEMBER 31,1997 ----------------- ---------------- ---------------- REVENUE Net investment income....................... $ 8.6 $ 1.4 $ 1.1 Other income................................ 25.1 20.5 11.5 -------- -------- -------- Total..................................... 33.7 21.9 12.6 -------- -------- -------- EXPENSES Interest expense............................ 62.7 63.0 63.6 Operating expenses.......................... (25.9) 27.5 30.6 -------- -------- -------- Total expenses............................ 36.8 90.5 94.2 -------- -------- -------- Operating loss before federal income taxes................................... (3.1) (68.6) (81.6) Federal income taxes.......................... (0.7) (23.6) (27.1) -------- -------- -------- Loss before equity in undistributed net income of subsidiaries.................. (2.4) (45.0) (54.5) Equity in undistributed net income (loss) of subsidiaries................................ (98.6) 271.0 275.9 -------- -------- -------- Net income (loss) to common stockholder... (101.0) 226.0 221.4 Retained earnings at beginning of period...... 1,397.6 1,171.6 950.6 -------- -------- -------- 1,296.6 1,397.6 1,172.0 Dividends to common stockholder............. -- -- (0.4) -------- -------- -------- Retained earnings at end of period............ $1,296.6 $1,397.6 $1,171.6 ======== ======== ========
S-3 SCHEDULE II AMERICAN RE CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) CONDENSED STATEMENT OF CASH FLOWS (DOLLARS IN MILLIONS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31. 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) to common stockholder.... $(101.0) $226.0 $221.4 ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES: Equity in undistributed net income of subsidiaries............................. 98.6 (271.0) (275.9) Interest payable (receivable).............. (0.3) 0.3 -- Increase (decrease) in intercompany payables................................. (22.1) (19.3) 15.1 Increase (decrease) in current and deferred federal income tax liability............. 10.5 35.6 (56.4) Increase (decrease) in other, net.......... (34.8) 14.9 24.3 ------- ------ ------ Net cash used in operating activities........................... (49.1) (13.5) (71.5) CASH FLOWS FROM INVESTING ACTIVITIES: Investments available for sale Purchases................................ (158.8) -- -- Sales.................................... 41.0 -- -- ------- ------ ------ Net cash used in investing activities........................... (117.8) -- -- CASH FLOWS FROM FINANCING ACTIVITIES: Dividend received from subsidiary.......... 260.8 35.0 105.0 Loan from parent........................... -- -- (35.9) Investment in subsidiary................... -- -- (12.5) Dividends to common stockholder............ -- -- (0.4) ------- ------ ------ Net cash provided by financing activities........................... 260.8 35.0 56.2 ------- ------ ------ Net increase (decrease) in cash........ 93.9 21.5 (15.3) Cash and cash equivalents, beginning of period..................................... 27.5 6.0 21.3 ------- ------ ------ Cash and cash equivalents, end of period..... $ 121.4 $ 27.5 $ 6.0 ======= ====== ====== SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid (refunded), net.......... $ (11.3) $(59.3) $ 29.3 Interest paid.............................. $ 62.7 $ 63.0 $ 63.6
S-4 SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT AMERICAN RE CORPORATION (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL INFORMATION The condensed financial information of American Re Corporation for the years ended December 31, 1999, 1998, and 1997, should be read in conjunction with the consolidated financial statements of American Re Corporation and subsidiaries and the notes thereto. Investment in subsidiaries is accounted for using the equity method of accounting. S-5 SCHEDULE III AMERICAN RE CORPORATION SUPPLEMENTAL INSURANCE INFORMATION (DOLLARS IN MILLIONS)
NET DEFERRED BENEFITS, LOSSES, CLAIMS POLICY CLAIMS AND NET AND CLAIM ACQUISITION LOSS UNEARNED EARNED INVESTMENT ADJUSTMENT SEGMENT COSTS EXPENSES PREMIUMS PREMIUMS INCOME (1) EXPENSE - ------- ----------- ----------------- --------- --------- ---------- ---------- YEAR ENDED DECEMBER 31, 1999 DICO............................ $227.9 $3,853.4 $ 770.8 $1,828.3 -- $1,731.4 RiskPartners.................... 49.0 813.5 294.3 582.0 -- 479.1 International................... 47.6 807.4 157.6 517.0 -- 443.9 Other........................... -- 5.4 0.7 0.2 -- -- ------ -------- -------- -------- -------- Total........................... $324.5 $5,479.7 $1,223.4 $2,927.5 $2,654.4 ====== ======== ======== ======== ======== YEAR ENDED DECEMBER 31, 1998 DICO............................ $235.7 $3,636.4 $ 782.6 $1,573.3 -- $1,073.8 RiskPartners.................... 69.9 667.7 325.9 392.1 -- 273.2 International................... 52.1 760.8 172.0 453.5 -- 335.4 ------ -------- -------- -------- -------- Total........................... $357.7 $5,064.9 $1,280.5 $2,418.9 $1,682.4 ====== ======== ======== ======== ======== YEAR ENDED DECEMBER 31, 1997 DICO............................ $254.1 $3,762.1 $ 823.3 $1,782.4 -- $1,250.6 RiskPartners.................... 56.7 727.6 275.6 286.0 -- 194.2 International................... 45.9 613.1 171.0 417.7 -- 271.5 ------ -------- -------- -------- -------- Total........................... $356.7 $5,102.8 $1,269.9 $2,486.1 $1,716.3 ====== ======== ======== ======== ======== AMORTIZATION OF DEFERRED POLICY UNDERWRITING PREMIUMS SEGMENT ACQUISITION COSTS EXPENSES WRITTEN - ------- ----------------- ------------ --------- YEAR ENDED DECEMBER 31, 1999 DICO............................ $235.7 $539.2 $1,839.1 RiskPartners.................... 69.9 166.9 554.6 International................... 52.1 164.3 511.8 Other........................... -- 0.3 0.2 ------ ------ -------- Total........................... $357.7 $870.7 $2,905.7 ====== ====== ======== YEAR ENDED DECEMBER 31, 1998 DICO............................ $254.1 $561.3 $1,517.9 RiskPartners.................... 56.7 132.6 436.5 International................... 45.9 122.5 452.4 ------ ------ -------- Total........................... $356.7 $816.4 $2,406.8 ====== ====== ======== YEAR ENDED DECEMBER 31, 1997 DICO............................ $236.8 $585.5 $1,790.8 RiskPartners.................... 58.8 108.2 273.8 International................... 41.3 144.7 433.1 ------ ------ -------- Total........................... $336.9 $838.4 $2,497.7 ====== ====== ========
- ------------------------------ (1) The Company does not allocate net investment income by reportable segment, as it is not included in the assessment of the segment results as reviewed by the Company's management. S-6 SCHEDULE IV AMERICAN RE CORPORATION AND SUBSIDIARIES REINSURANCE (DOLLARS IN MILLIONS, EXCEPT PERCENTAGES)
CEDED TO ASSUMED PERCENTAGE GROSS OTHER FROM OTHER NET OF AMOUNT AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET -------- --------- ---------- -------- -------------- YEAR ENDED DECEMBER 31, 1999: Life insurance in force................. $ -- $ -- $ -- $ -- ====== ====== ======== ======== PREMIUMS: Life insurance.......................... $ -- $ -- $ -- $ -- --% Accident and health insurance........... -- -- -- -- -- Property-liability insurance............ 263.5 661.0 3,325.0 2,927.5 113.6 Title insurance......................... -- -- -- -- -- ------ ------ -------- -------- ----- Total Premiums........................ $263.5 $661.0 $3,325.0 $2,927.5 113.6% ====== ====== ======== ======== =====
CEDED TO ASSUMED PERCENTAGE GROSS OTHER FROM OTHER NET OF AMOUNT AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET -------- --------- ---------- -------- -------------- YEAR ENDED DECEMBER 31, 1998: Life insurance in force................. $ -- $ -- $ -- $ -- ====== ====== ======== ======== PREMIUMS: Life insurance.......................... $ -- $ -- $ -- $ -- --% Accident and health insurance........... -- -- -- -- -- Property-liability insurance............ 194.1 690.0 2,914.8 2,418.9 120.5 Title insurance......................... -- -- -- -- -- ------ ------ -------- -------- ----- Total Premiums...................... $194.1 $690.0 $2,914.8 $2,418.9 120.5% ====== ====== ======== ======== =====
CEDED TO ASSUMED PERCENTAGE GROSS OTHER FROM OTHER NET OF AMOUNT AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET -------- --------- ---------- -------- -------------- YEAR ENDED DECEMBER 31, 1997: Life insurance in force................. $ -- $ -- $ -- $ -- ====== ====== ======== ======== PREMIUMS: Life insurance.......................... $ -- $ -- $ -- $ -- --% Accident and health insurance........... -- -- -- -- -- Property-liability insurance............ 119.0 636.4 3,003.5 2,486.1 120.8 Title insurance......................... -- -- -- -- -- ------ ------ -------- -------- ----- Total Premiums...................... $119.0 $636.4 $3,003.5 $2,486.1 120.8% ====== ====== ======== ======== =====
S-7 SCHEDULE VI AMERICAN RE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL INFORMATION (FOR PROPERTY-CASUALTY INSURANCE UNDERWRITERS) (DOLLARS IN MILLIONS)
CLAIMS AND CLAIM ADJUSTMENT RESERVES FOR DISCOUNT, EXPENSES INCURRED DEFERRED UNPAID CLAIMS IF ANY RELATED TO: POLICY AND CLAIMS DEDUCTED NET ------------------- ACQUISITION ADJUSTMENT IN PREVIOUS UNEARNED EARNED INVESTMENT CURRENT PRIOR AFFILIATION WITH REGISTRANT COSTS EXPENSES COLUMN PREMIUMS PREMIUMS INCOME YEAR YEAR - --------------------------- ----------- ------------- ----------- -------- -------- ---------- -------- -------- YEAR ENDED DECEMBER 31, 1999 (a) Consolidated property-casualty insurance entities..................... $324.5 $8,369.0 Note (1 ) $1,223.4 $2,927.5 $415.1 $2,084.0 $570.4 (b) Unconsolidated property- casualty insurance entities..................... ------ -------- ------- -------- -------- ------ -------- ------ YEAR ENDED DECEMBER 31, 1998 (a) Consolidated property-casualty insurance entities..................... $357.7 $7,334.1 Note (1 ) $1,280.5 $2,418.9 $417.5 $1,620.4 $ 62.0 (b) Unconsolidated property- casualty insurance entities..................... ------ -------- ------- -------- -------- ------ -------- ------ YEAR ENDED DECEMBER 31, 1997 (a) Consolidated property-casualty insurance entities..................... $356.7 $7,469.3 Note (1 ) $1,269.9 $2,486.1 $427.5 $1,642.1 $ 74.2 (b) Unconsolidated property- casualty insurance entities..................... ------ -------- ------- -------- -------- ------ -------- ------ AMORTIZATION OF DEFERRED PAID CLAIMS POLICY AND CLAIMS ACQUISITION ADJUSTMENT PREMIUMS AFFILIATION WITH REGISTRANT COSTS EXPENSES WRITTEN - --------------------------- ------------ ----------- -------- YEAR ENDED DECEMBER 31, 1999 (a) Consolidated property-casualty insurance entities..................... 357.7 $2,239.6 2,905.7 (b) Unconsolidated property- casualty insurance entities..................... ------ -------- -------- YEAR ENDED DECEMBER 31, 1998 (a) Consolidated property-casualty insurance entities..................... $356.7 $1,720.3 $2,406.8 (b) Unconsolidated property- casualty insurance entities..................... ------ -------- -------- YEAR ENDED DECEMBER 31, 1997 (a) Consolidated property-casualty insurance entities..................... $336.9 $1,462.2 $2,497.7 (b) Unconsolidated property- casualty insurance entities..................... ------ -------- --------
- ------------------------ (1) Workers' compensation reserves are discounted at 4.5%. The estimated amount of discount is $670.4, $645.0, and $592.7 as of December 31, 1999, 1998, and 1997, respectively. S-8 INDEX TO EXHIBITS
PAGE NUMBER IN SEQUENTIAL NUMBERING EXHIBITS DESCRIPTION SYSTEM - --------------------- ------------------------------------------------------------ -------------------- 2.1 Agreement and Plan of Merger, dated as of August 13, 1996, by and among the Company, Munich Re and Puma Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Munich Re ("Sub"), is incorporated by reference from the Company's Form 8-K, Exhibit 2, as filed with the Securities and Exchange Commission on August 14, 1996. 2.2 Amendment dated as of October 23, 1996, to the Agreement and Plan of Merger, dated as of August 13, 1996, by and among the Company, Munich Re and Sub, is incorporated by reference from the Company Form 10-K, Exhibit 2.2, as filed with the Securities and Exchange Commission on March 27, 1997. 2.3 Agreement and Plan of Merger, dated as of July 1, 1997, by and among the Company, American Re-Insurance, and Munich American Reinsurance Company is incorporated by reference from the Company's Form 8-K as filed with the Securities and Exchange Commission on July 15, 1997. 3.1 Restated Certificate of Incorporation of the Company is incorporated by reference from the Company's Form S-1, Registration Statement No. 33-49110, Exhibit 3.1, as filed with the Securities and Exchange Commission on July 1, 1992. 3.2 Certificate of Amendment to the Restated Certificate of Incorporation of the Company is incorporated by reference from Amendment No. 2 to the Company's Form S-1, Registration Statement No. 33-54938, Exhibit 3.3, as filed with the Securities and Exchange Commission on January 25, 1993. 3.3 By-laws of the Company, adopted on November 25, 1996 are incorporated by reference from the Company's Form S-4, Registration No. 333-20663, Exhibit 3.2, as filed with the Securities and Exchange Commission on January 29, 1997. 4.1 Indenture, dated as of December 24, 1996, among the Company and State Street Bank and Trust Company, as Trustee, relating to the 7.45% Senior Notes, Due 2026 is incorporated by reference from the Company's Form S-4, Registration No. 333-20663, Exhibit 4.1, as filed with the Securities and Exchange Commission on January 29, 1997. 4.2 Registration Rights Agreement, dated as of December 24, 1996, among the Company, Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette, Merrill Lynch & Co., J.P. Morgan & Co., Morgan Stanley & Co. Incorporated, Solomon Brothers Inc., Smith Barney Inc. and UBS Securities is incorporated by reference from the Company's Form S-4, Registration No. 333-20663, Exhibit 4.4, as filed with the Securities and Exchange Commission on January 29, 1997.
PAGE NUMBER IN SEQUENTIAL NUMBERING EXHIBITS DESCRIPTION SYSTEM - --------------------- ------------------------------------------------------------ -------------------- 4.3 Form of Amended and Restated Trust Agreement between the Company and The Bank of New York, as Property Trustee, The Bank of New York (Delaware) as Delaware Trustee, and the Administrative Trustees named therein, relating to the 8 1/2% Cumulative Quarterly Preferred Securities due 2025 (including the form of Preferred Securities), is incorporated by reference from Amendment No. 1 to the Company's Form S-3, Registration Statement No. 33-94558, Exhibit 4.2, as filed with the Securities and Exchange Commission on August 21, 1995. 4.4 Form of Indenture between the Company and The Bank of New York, as Debenture Trustee, relating to the 8 1/2% Cumulative Quarterly Preferred Securities due 2025 (including the form of Junior Subordinated Debentures), is incorporated by reference from Amendment No. 1 to the Company's Form S-3, Registration Statement No. 33-94558, Exhibit 4.3, as filed with the Securities and Exchange Commission on August 21, 1995. 4.5 Form of Guarantee Agreement between the Company and The Bank of New York, as Guarantee Trustee, relating to the 8 1/2% Cumulative Quarterly Preferred Securities due 2025, is incorporated by reference from Amendment No. 1 to the Company's Form S-3, Registration Statement No. 33-94558, Exhibit 4.6, as file with the Securities and Exchange Commission on August 21, 1995. 10.1 Aggregate Excess of Loss Reinsurance Contract No. 2815-0010 dated as of April 6, 1992, between National Indemnity Company and American Re, as amended by Endorsement No. 1 thereto dated as of November 11, 1990 and Endorsement No. 2 thereto dated June 11, 1992 (together with letter of confirmation dated June 11, 1992 between such parties) is incorporated by reference from the Company's Form S-1, Registration Statement No. 33-49110, Exhibit 10.2, as filed with the Securities and Exchange Commission on July 1, 1992. 10.2 Aggregate Excess of Loss Reinsurance Agreement Contract No. 30280 dated as of September 30, 1992 by and between American Re-Insurance Company and The Aetna Casualty and Surety Company is incorporated by reference from the Company's Form 10-K, Exhibit 10.3, as filed with the Securities and Exchange Commission on March 31, 1993. 10.3+ American Re-Insurance Company Supplemental Employees Pension Plan for certain employees of American Re-Insurance Company effective January 1, 1985 and as amended and restated as of January 1, 1992 is incorporated by reference from Amendment No. 2 to the Company's Form S-1, Registration Statement No. 33-49110, Exhibit 10.4, as filed with the Securities and Exchange Commission on August 28, 1992. 10.4+ American Re-Insurance Company Incentive Compensation Plan for officers and other key employees as amended and in effect October 26, 1990 is incorporated by reference from Amendment No. 2 to the Company's Form S-1, Registration Statement No. 33-49110, Exhibit 10.5, as filed with the Securities and Exchange Commission on August 28, 1992.
PAGE NUMBER IN SEQUENTIAL NUMBERING EXHIBITS DESCRIPTION SYSTEM - --------------------- ------------------------------------------------------------ -------------------- 10.5+ American Re-Insurance Company Supplemental Incentive Savings Plan for certain employees of American Re-Insurance Company as adopted January 29, 1988 is incorporated by reference from Amendment No. 2 to the Company's Form S-1, Registration Statement No. 33-49110, Exhibit 10.8, as filed with the Securities and Exchange Commission on August 28, 1992. 10.6+ American Re-Insurance Company Savings Plan for certain employees of American Re-Insurance Company effective October 1, 1992 is incorporated by reference from the Company's Form S-1 Registration Statement, No. 33-54938, Exhibit 10.7, as filed with the Securities and Exchange Commission on November 24, 1992. 10.7 Multiple Line Domestic Quota Share Reinsurance Contract together with endorsements thereto (American Re reference #2815-9001) effective January 1, 1986 between American Re and National Indemnity Company is incorporated by reference from the Amendment No. 2 to the Company's Form S-1 Registration Statement No. 33-54938, Exhibit 10.27, as filed with the Securities Exchange Commission on January 25, 1993. 10.8+ Amended and Restated American Re-Insurance Company Group Incentive Compensation Plan for officers and other key employees; renamed the American Re-Insurance Company Group Senior Executive Compensation Plan, effective as of January 1, 1993, is incorporated by reference from the Company's Form 10-Q, Exhibit 10.89, as filed with the Securities and Exchange Commission on November 15, 1993. 10.9+ American Re-Insurance Company Group Executive Incentive Compensation Plan, effective as of January 1, 1993, is incorporated by reference from the Company's Form 10-Q Exhibit 10.9, as filed with the Securities and Exchange Commission on November 15, 1993. 10.10+ Amendment of the American Re-Insurance Company Savings Plan, dated November 18, 1993, is incorporated by referenced from the Company's form S-8, Registration Statement No. 33-76374, Exhibit 4.22, as filed with the Securities and Exchange Commission on March 11, 1994. 10.11+ Amendment of the American Re-Insurance Company Savings Plan dated March 9, 1994 is incorporated by reference from the Company's Form S-8, Registration Statement No. 33-76374, Exhibit 4.23, as filed with the Securities and Exchange Commission on March 11, 1994. 10.12+ American Re-Insurance Company Savings Plan as amended and restated effective as of January 1, 1994 is incorporated by reference from the Company's Form 10-K, Exhibit 10.36, as filed with the Securities and Exchange Commission on March 31, 1995. 10.13+ American Re-Insurance Company Employees Pension Plan as amended and restated effective as of January 1, 1994 is incorporated by reference from the Company's Form 10-K, Exhibit 10.37, as filed with the Securities and Exchange Commission on March 31, 1995.
PAGE NUMBER IN SEQUENTIAL NUMBERING EXHIBITS DESCRIPTION SYSTEM - --------------------- ------------------------------------------------------------ -------------------- 10.14 First Casualty Facultative Excess Reinsurance Agreement between American Re-Insurance and National Indemnity Company effective January 11, 1992 is incorporated by reference from the Company's Form 10-K, Exhibit 10.41, as filed with the Securities and Exchange Commission on March 31, 1995. 10.15 Credit Agreement dated as of January 29, 1996 among the Company, Bank of America National Trust and Savings Association, as Agent, and other Financial Institutions Party thereto is incorporated by reference from the Company's 10-K, Exhibit 10.42, as filed with the Securities and Exchange Commission on March 29, 1996. 10.16+ Form of Employment Agreement between the Company and certain executive officers of the Company is incorporated by reference from the Company's 10-K, Exhibit 10.16, as filed with the Securities and Exchange Commission on March 30, 1999. 10.17+ Senior Executive Deferred Compensation Plan is incorporated by reference from the Company's 10-K, Exhibit 10.20, as filed with the Securities and Exchange Commission on March 27, 1997. 10.19 Long Term Incentive Plan for Executive and Key Employees of the Company is incorporated by reference from the Company's 10-K, Exhibit 10.19, as filed with the Securities and Exchange Commission on March 30, 1998. 10.20+* Long Term Incentive Plan for Board Members and top Executives of Munich Re and its International Organization. 21* Subsidiaries of the Company. 27* Financial Data Schedule.
- ------------------------ * Filed herewith + Management contract or compensation plan or arrangement EX-10.20 2 EX-10.20 Exhibit 10.20 1 AIMS OF THE LONG-TERM INCENTIVE PLAN (LIP) The Munich Reinsurance Company (MR) wishes to take account of its shareholders' legitimate interest in maintaining and enhancing Munich Re's corporate success in the long term and has therefore decided to set up a long-term incentive plan. This additional compensation component is intended to reward Board members and top executives for their part in achieving this success, for which they carry major responsibility. The plan provides members with the possibility of participating in the price performance of Munich Re stock once a vesting period has elapsed and two thresholds have been exceeded. With this plan, the Munich Re aims to integrate the idea of shareholder value into the compensation system, thereby promoting harmonization of the interests of management and shareholders. At the same time, the plan results in increased emphasis on variable compensation and thus in greater identification by management with Munich Re's corporate goals and performance. Since long-term incentives are now common internationally as an element of compensation packages, Munich Re will also enhance its attractiveness to international executives. 2 DESIGN OF THE PLAN The Long-Term Incentive Plan is a "stock appreciation rights plan" which provides for stock appreciation rights linked to the performance of Munich Re shares. These rights will be issued free of charge to those taking part in the plan. Each stock appreciation right entitles the holder to draw in cash, up to a certain level, the difference between the MR share price at the time when the right is exercised and that applying at the start of the plan. However, in order to comply with the goal of increasing the company's value in the long term, exercise of the stock appreciation rights is possible only under the following conditions: 1. MR stock must outperform the DAX 30 at the end of a three-month period twice during the term of the plan (index threshold). 2. The MR share price at the time the stock appreciation rights are exercised must also have risen by at least 20 percent compared to the price at the start of the plan (price threshold). 3. The rights may be exercised only in fixed time windows and in accordance with the statutory regulations on insider trading. The Long-Term Incentive plan has an overall term of 7 years. The plan details are described in the following sections of this brochure. FIGURE 1: DESIGN OF THE LONG-TERM INCENTIVE PLAN* [captions] MR-Akienkurs MR stock price Sperrfrist Vesting period Kurssteigerung Price increase Maximum Maximum Kurshurde 20% 20% price threshold Jahr Year Planlaufzeit Plan term Assumed point in time at which the DAX 30 has been outperformed twice after 3 months in each case. -------------------------------------------------------------------- EXERCISE POSSIBLE? -------------------------------------------------------------------- ---------- --------------------------------------------------------- 1 Exercise not possible, as within the vesting period. 2 Exercise not possible, as index threshold not passed. 3 Exercise not possible, as price threshold not exceeded. 4 Exercise possible within the framework of the exercise conditions, as both exercise thresholds passed. ---------- --------------------------------------------------------- (Explanations to graph*) * For the full graph, please see page 03 of the German brochure (copy attached). 3 TERM The Long-Term Incentive Plan starts on 1st July 1999 and will end after a term of 7 years on 30th June 2006. 4 PARTICIPANTS Those taking part in the Long-Term Incentive Plan will be the Board Members of the Munich Reinsurance Company and the top executives of MR and its International Organization. Participation in the Long-Term Incentive Plan is subject to special conditions which supplement the contract of employment existing between a participant in the plan and the company concerned. 5 NUMBER OF STOCK APPRECIATION RIGHTS All participants in the plan will receive a personal written statement of the number of stock appreciation rights granted to them. The stock appreciation rights are personal and cannot be transferred except in the case of succession. 6 DETERMINATION OF INITIAL STOCK PRICE The price of MR stock at the start of the plan on 1st July 1999, i.e. the initial stock price, has been calculated from the average of the closing prices for MR shares in Frankfurt Xetra trading over the ten trading days before 1st July 1999. It currently amounts to EUR 182.6. Should during the term of the plan the price of MR stock be affected by a capital measure such that the assumptions of the plan are distorted, the initial stock price will be adjusted by the Munich Reinsurance Company, taking account of the original intentions of the plan. 7 DETERMINATION OF THE EXERCISE PRICE The decisive price when exercising stock appreciation rights is the closing price in Frankfurt Xetra trading. When rights are exercised while the stock exchange is open1, the closing price of that business day will be taken. The participant can set a selling limit in this case. When rights are exercised after closing but before opening of the stock exchange, the last closing price then applies. 1 The business hours of Frankfurt Xetra trading are currently 8:30 a.m. to 5:00 p.m. CET. 8 EXERCISE OF STOCK APPRECIATION RIGHTS Once the two-year vesting period has elapsed, exercise of the stock appreciation rights will be possible between 1st July 2001 and the end of the plan term on 30th June 2006, provided the following conditions are fulfilled: EXERCISE THRESHOLDS Stock appreciation rights may only be exercised if the price of MR shares has increased by at least 20 percent compared with the initial share price. In addition, during the term of the plan the DAX 30 must have been outperformed twice by MR shares at the end of a three-month period on the basis of the respective performance figures. These periods may not overlap. The participants will be informed as soon as this condition has been met. OBSERVANCE OF INSIDER REGULATIONS In order to avoid the possibility of advantages being obtained through special knowledge when stock appreciation rights are exercised, these rights may be exercised in the period stated only within precisely defined time windows and in compliance with the statutory regulations on insider trading. At the start of each plan year in the exercise period, the participants in the plan will be informed about the time windows in which the exercise of stock appreciation rights is possible. Observance of the exercise times does not, however, release the participants from the duty to comply with the national statutory regulations on insider trading as if the stock appreciation rights were stock options or shares. EXERCISE OF STOCK APPRECIATION RIGHTS IN TRANCHES Stock appreciation rights may be exercised as a whole or also in tranches of at least 100 rights. If after an exercise order fewer than 100 stock appreciation rights remain, these are also exercised for the participant in the plan. UNEXERCISED OPTION RIGHTS Stock appreciation rights which on the last trading day of the plan term have not been exercised by the participant shall be exercised for the participant, provided the prerequisites are met. 9 POSSIBLE PROFITS FROM THE LONG-TERM INCENTIVE PLAN The gross profit achieved from exercising stock appreciation rights is calculated from the difference between the exercise price and the initial MR share price. The gross profit is limited to an increase of 150 percent of the initial MR share price. In accordance with the exercise conditions, it is up to the plan participants to determine themselves when is the best time for them to exercise their rights. The net profit is the gross profit achieved in this way, less statutory deductions. If MR shares have not (a) outperformed the DAX 30 twice for three months by the end of the plan term and (b) achieved a price increase of 20 percent, the profit from the plan is then nil. SPECIMEN CALCULATION ----------------------------------------------------------------------- ASSUMPTIONS ----------------------------------------------------------------------- ----------------------------------------------------------------------- Exercise of 500 stock appreciation rights Initial price of MR share: EUR 182.6 Exercise price of MR share: EUR 232.6 ----------------------------------------------------------------------- ----------------------------------------------------------------------- CALCULATION OF GROSS PROFIT ----------------------------------------------------------------------- ----------------------------------------------------------------------- Gross profit =500 stock appreciation rights x (232/6-182.6) =EUR 25,000 (=DEM 48,896) ----------------------------------------------------------------------- 10 TAXATION AND PAYMENT OF PROFITS The profits from the Long-Term Incentive Plan are paid out by the company which has granted the stock appreciation rights to the plan participant. Payment is effected, less the statutory deductions, with the salary slip for the month following the exercise of the rights. The statutory deductions depend on the tax legislation in the particular county in which the plan participant is liable for tax. Responsibility for the proper taxation of the profits from the plan lies with the participant. The exchange rate will be the rate applying on the exercise date. 11 WHAT HAPPENS IN THE EVENT OF DISABILITY AND INCAPACITY? Participants who become disabled or incapacitated during the term of the plan will keep their stock appreciation rights. IN THE EVENT OF RETIREMENT? Participants who retire during the term of the plan will also deep their stock appreciation rights. If retirement occurs within one year of the start of the plan, however, the number of stock appreciation rights will be reduced pro rata temporis. IN THE EVENT OF DEATH? If a participant dies during the term of the plan, the stock appreciation rights will be exercised, subject to the exercise conditions, for the heir or heirs at the next possible time. IN THE EVENT OF A CHANGE OF JOB? Participant who change jobs within the Munich Re Group during the term of the plan will keep their stock appreciation rights. In all other cases in which a participant leaves the service of the company which granted the stock appreciation rights before the end of the plan term, the stock appreciation rights will be forfeited, and in the case of dismissal for exceptional reasons any profits from the stock appreciation rights will have to be repaid. 12 FUTURE INCENTIVE PLANS The decision as to whether LIPs will be set up in the years ahead and, if so, under what conditions, is open. Likewise, participation in this plan will not create any entitlement to participation in future plans. 13 NOTES ON ADMINISTRATION The Long-Term Incentive Plan will be administered by Dresdner Bank AG. The bank will keep track of the stock appreciation rights granted to each participant. After the plan starts, all participants will receive written notification of the number of stock appreciation rights, but at lease once every year during the exercise period, participants will be notified of the stock appreciation rights remaining. Requests from participants to exercise their stock appreciation rights must be made to the bank in writing. Participants will receive further information from the bank direct. Questions from participants may be directed to the persons at Munich Re responsible for personnel management. MUNICH REINSURANCE COMPANY CONDITIONS FOR THE 1999 LONG-TERM INCENTIVE PLAN* ART. 1 CONTRACTING PARTNERS Within the framework of the Long-Term Incentive Plan (hereinafter "LIP"), contractual relations shall exist only between the respective Plan participant and the company from which the participant has received the statement granting rights under the LIP. ART. 2 TERM OF THE LIP The LIP starts on 1st July 1999 and ends after a period of 7 years on 30th June 2006. ART. 3 OBJECT OF THE LIP The Munich Reinsurance Company (MR) is promoting the long-term increase in Munich Re's value, measured by the increase in the price of MR shares, by setting up a "stock appreciation rights plan". This plan involved giving stock appreciation rights, free of charge, to the persons responsible for achieving this corporate goal. By exercising stock appreciation rights, the participants in the plan have the possibility of participating in the Munich Reinsurance Company's success.. ART. 4 NUMBER OF STOCK APPRECIATION RIGHTS After the plan starts, all participants in the plan will be notified in writing of the number of stock appreciation rights granted to them. ART. 5 CONTENT OF STOCK APPRECIATION RIGHTS (1) Each stock appreciation right shall entitle its holder, when exercising the right under the conditions set out in Articles 7 to 11, to realize as (taxable) profit the difference between the price of MR shares at the time of exercise and their initial price established at the start of the plan, up to a maximum of 150 percent of the initial price. (2) The stock appreciation rights may only be exercised personally and are not transferable, except in the case of succession, in which case the arrangements set out in Art. 11(3) shall apply. ART. 6 INITIAL PRICE OF MUNICH RE SHARES (1) The price of MR stock at the start of the plan on 1st July 1999, i.e. the initial share price, shall be calculated from the average of closing prices for MR shares in Frankfurt * This translation of the German conditions is for information purposes only. The German conditions constitute the legal basis of the plan. Xetra trading over the ten trading days before 1st July 1999. It currently amounts to EUR 182.6. (2) In the case of capital measures, the initial share price shall be adjusted by the Munich Reinsurance Company, taking account of the original intentions of the plan. ART. 7 PREREQUISITES FOR THE EXERCISE OF STOCK APPRECIATION RIGHTS (1) Stock appreciation rights may be exercised after a two-year blocking period has elapsed and up to the last trading day before 1st July 2006. (2) It is a prerequisite for the exercise of stock appreciation rights that during the term of the plan the DAX 30 must have been outperformed twice by MR shares at the end of a three-month period on the basis of the respective performance figures. The periods may not overlap. The index is outperformed as soon as MR shares lie 0.01 points above the index. (3) Another prerequisite for the exercise of stock appreciation rights is that MR shares must show a price increase of at least 20 percent compared with their initial price. (4) In order to exclude the possibility of advantages being obtained through special knowledge when stock appreciation rights are exercised, the exercise of stock appreciation rights during the exercise period specified in (1) shall only be possible in precisely defined exercise windows and in accordance with the statutory regulations on insider trading: (a) The exercise of stock appreciation rights is basically prohibited 4 weeks prior to publication of the quarterly reports and 8 weeks prior to publication of the annual reports. At the start of each plan year in the exercise period, the participants in the plan will be informed about the time windows in which the exercise of stock appreciation rights is in principle possible. (b) Within the exercise windows, the participants in the plan shall be obliged to observe their country's relevant statutory regulations for the prevention of insider trading as if the stock appreciation rights were stock options or shares. ART. 8 EXERCISE OF STOCK APPRECIATION RIGHTS (1) At least 100 stock appreciation rights must be exercised per order. If after an exercise order fewer than 100 stock appreciation rights remain, these rights shall also be exercised for the plan participant by the bank administering the stock appreciation rights. (2) If a participant exercises the rights after closing (currently 5.00 p.m. CET) but before opening of the stock exchange (currently 8.30 a.m. CET), the closing price for MR shares in Frankfurt Xetra trading shall be taken as the basis for settlement (exercise price). Where exercise takes plan while the stock exchange is open, the closing price of that trading day shall apply. The participant can set a selling limit for the duration of that trading day. (3) Stock appreciation rights which on the last trading day of the plan term have not been exercised, although the prerequisites for this exist, shall be exercised on the participant's behalf. (4) Stock appreciation rights which on the last trading day of the plan term cannot be exercised owing to non-fulfillment of the prerequisites specified in Art. 8 shall lapse. ART. 9 PAYMENT OF THE PROFIT (1) Payment of the profit from the exercise of stock appreciation rights shall be effected by the company from which the plan participant received the statement granting rights under the LIP, in national currency, less the statutory deductions, with the next salary payment of the month following the time of exercise. (2) The exchange rate shall be the rate fixed by the European Central Bank on the Exercise date. ART. 10 TAXATION OF PROFITS Profits shall be taxed in accordance with the tax legislation in the particular country in which the plan participant is liable for tax. ART. 11 SPECIAL CASES (1) Participants who become disabled or incapacitated during the term of the plan shall keep their stock appreciation rights. (2) Participants who retire shall retain their stock appreciation rights. If retirement occurs within one year of the start of the plan, however, the number of stock appreciation rights shall be reduced pro rata temporis. (3) Where a participant dies, the stock appreciation rights shall be exercised, subject to the exercise conditions, on behalf of and for the account of the heirs on the next possible day after the date of death. (4) Plan participants who change jobs within the MR Group shall keep their stock appreciation rights vis-a-vis the company from which they received the statement granting rights under the LIP. (5) In all other cases in which participants leave the service of the company from which they received the statement granting rights under the LIP, the stock appreciation rights shall be forfeited. Where a participant leaves the company's service on account of dismissal for exceptional reasons, any profits received shall be repaid. (6) Should the company which granted the rights under the LIP be acquired by a third party not belonging to the MR Group, and the acquired company's membership of the MR Group be ended as a result, the stock appreciation rights shall be deemed to be exercised on the first trading day in Frankfurt am Main after the transfer to the acquirer became effective externally. Should at this point in time the exercise prerequisites in accordance with Art. 7 of these terms and conditions of business no longer exist, the stock appreciation rights shall lapse. ART. 12 FUTURE LIPS The Munich Reinsurance Company reserves the right to decide on whether to implement further LIPs and, if so, under what conditions. In no case may participation in this plan be deemed to create any right to participation in a future plan. ART. 13 ADMINISTRATION (1) The plan shall be administered by Dresdner Bank AG, which will operate an account for each plan participant in respect of the stock appreciation rights granted. (2) Participants shall give their orders to exercise stock appreciation rights to Dresdner Bank AG, using the "Exercise Order" form and stating the number desired. (3) After each exercise order, but at least once a year, plan participants will receive written notification of the stock appreciation rights remaining. ART. 14 GENERAL CLAUSE (1) Where claims arising from these provisions are made against the Munich Reinsurance Company, these shall be subject to German law. The place of jurisdiction for such claims shall be Munich. (2) Any claims arising out of the LIP between the company from which the plan participant received the statement granting rights under the LIP and the plan participant shall be subject to the law on which the contract of employment is based. (3) Should one or more of these provisions be invalid or no longer applicable, the parties to the contract shall, in agreement with the Munich Reinsurance Company, replace them to the necessary extent with other valid and applicable provisions coming as close as possible to the original purpose. The other provisions shall be unaffected thereby. EX-21 3 EX-21 EXHIBIT 21
STATE/COUNTRY/DATE PRIMARY NAME OF INCORPORATION BUSINESS ACTIVITIES - ---- ------------------ ---------------------------- American Re Corporation....................... Delaware/1991 Holding Company American Re-Insurance Company............... Delaware/1917 Reinsurance American Re Inversiones, S.A.............. Chile/1986 Holding Company American Alternative Insurance Corporation............................... Delaware/1923 Alternative Market Insurance American Re Asset Management, Inc........... Delaware/1995 Investment Management American Re Capital......................... Delaware/1995 Business Trust American Re Capital Markets, Inc............ Delaware/1998 Weather Derivatives Munich-American Global Services, Inc........ Delaware/1998 Holding Company AM-RE Consultants, Inc.................... Delaware/1994 Consulting Services AM-RE Brokers, Inc........................ Delaware/1978 Reinsurance Brokerage AM-RE Brokers (Bermuda), Ltd............ Bermuda/1997 Reinsurance Brokerage Princeton Eagle West (Holding) Inc........ Delaware/1995 Holding Company Princeton Eagle West Insurance Co. Ltd................................... Bermuda/1995 Rent-a-Captive Facility Princeton Eagle Holding (Bermuda) Ltd..... Bermuda/1994 Holding Company Princeton Eagle Insurance Company Ltd................................... Bermuda/1994 Rent-a-Captive Facility Munich-American Global Services (Munich) GmbH.................................... Germany/1979 Insurance Brokerage Becher + Carlson Risk Management Inc...... California/1983 Risk Management Becher + Carlson Insurance Services, Inc................................... California/1981 Insurance Agency Becher + Carlson Insurance Agency of Ohio.................................. Ohio/1994 Insurance Agency Becher + Carlson South Africa (Pty), Ltd................................... South Africa/1997 Risk Management Becher + Carlson Mauritius............ Mauritius/1997 Risk Management Becher + Carlson Management, Ltd........ Bermuda/1981 Captive Management Becher + Carlson Brokerage, Ltd....... Bermuda/1986 Brokerage Munich-American RiskPartners, Inc............. Delaware/1988 Alternative Markets Risk Management Products Canada, Inc........ Canada/1997 Risk Management AM-RE Managers (Bermuda) Ltd.................. Bermuda/1990 Underwriting Management AM-RE Services, Inc........................... Delaware/1980 Consulting Services American Re Holdings, Ltd..................... England/1988 Holding Company American Re Management, Ltd................... England/1988 Underwriting Management AM-RE Managers International, Ltd........... England/1988 Representative Office American Re Management (Vienna) GmbH........ Austria/1991 Representative Office ARB International, Ltd...................... England/1989 Lloyd's Brokerage Risk Management Partners, Ltd............... England/1994 Risk Management American Re Securities Corporation............ Delaware/1998 Broker/Dealer The Princeton Excess and Surplus Lines Insurance Company........................... Delaware/1995 Surplus Lines Insurance
EX-27.1 4 EXHIBIT 27.1
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN RE CORPORATION'S REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1999 DEC-31-1999 6,400 0 0 402 0 0 6,842 598 3,035 325 14,279 8,369 1,223 421 0 571 238 0 0 2,489 14,279 2,928 415 83 28 2,654 871 106 (178) (90) (88) 0 0 0 (101) 0 0 5,065 2,084 570 254 1,986 5,480 0 REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING AS ALL OF ITS ASSETS JUNIOR SUBORDINATED DEBENTURES.
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