-----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, ME09YyKyWOc+w/XjstMNMYNEqkIeZOykVHXItRhyHIiOkaa0BCKg0hOTrhJMefN/ Mjx2ttCLsMFTHQUBv09rQw== 0001047469-99-012527.txt : 19990402 0001047469-99-012527.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012527 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: 99579389 BUSINESS ADDRESS: STREET 1: 555 COLLEGE RD EAST CITY: PRINCETON STATE: NJ ZIP: 08543-5241 BUSINESS PHONE: 6092438819 10-K 1 FORM 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, 1998 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 Identification of incorporation or organization) 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 Quarterly New York Stock Exchange 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. /X/ 93.06% of the Company's voting stock is owned by Munich Reinsurance Company. At March 26, 1999, 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......................................................................................... 20 3. Legal Proceedings.................................................................................. 20 4. Submission of Matters to a Vote of Security Holders................................................ 20 PART II 5. Market for the Company's Common Equity and Related Stockholder Matters............................. 21 6. Selected Financial Information of the Company...................................................... 21 7. Management's Discussion and Analysis of the Company's Results of Operations and Financial Condition........................................................................... 22 8. Financial Statements and Supplementary Data........................................................ 34 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................................................. 34 PART III 10. Directors and Executive Officers of the Registrant................................................ 35 11. Executive Compensation............................................................................ 37 12. Security Ownership of Certain Beneficial Owners and Management.................................... 40 13. Certain Relationships and Related Transactions.................................................... 40 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................. 41
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 Re-Insurance") and American Alternative Insurance Corporation ("American Alternative"). 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. The Company is a 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 1997 net premiums written, according to BUSINESS INSURANCE. Following the acquisition of American Re Corporation (the "Company" or "American Re") by Munich Re in 1996, Munich Re and American Re completed, in 1997, the merger of Munich American Reinsurance Company ("MARC"), a 50% controlled subsidiary of Munich Re, into American Re-Insurance. At that time, Munich Re also contributed the insurance assets and liabilities of its United States Branch (the "U.S. Branch") to American Re-Insurance. These transactions are collectively referred to herein as the "Merger." 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-Insurance, MARC and the U.S. Branch for the period then ended, with 50% of MARC's net loss for the six-month period ended June 30, 1997, accounted for as minority interest. As a result, significant variances exist when comparing the results of operations for the years ended December 31, 1998 and 1997, with the same period in 1996. See "Management's Discussion and Analysis of the Company's Results of Operations and Financial Condition--Results of Operations--Year Ended December 31, 1997, Compared with Year Ended December 31, 1996". ITEM 1. BUSINESS THE COMPANY AND AMERICAN RE-INSURANCE American Re is the holding company for American Re-Insurance, a reinsurance company that primarily underwrites property and casualty reinsurance on a direct basis in the United States and international markets. American Re-Insurance was founded in 1917 as the first U.S.-owned reinsurance company. Based on statutory net premiums written of $2,276.2 million in 1998, American Re-Insurance ranked as the third largest property and casualty reinsurer in the United States, according to the Reinsurance Association of America. The Company had total assets of $13,554.0 million and stockholders' equity of $2,853.1 million at December 31, 1998. 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. 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 1 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. Excess of loss reinsurance is often written in layers, possibly involving multiple reinsurers. Excess of loss reinsurance allows the reinsurer to better control the relationship of the premium charged to the exposures assumed. The reinsurer taking on the risk just above the primary insurer's retention layer is said to write "working layer" or "low layer" excess of loss reinsurance. A loss that reaches just beyond the primary insurer's retention layer will create a loss for the lower layer reinsurer, but not for the reinsurers on higher layers. Losses incurred in low layer reinsurance tend to be more predictable than those in high layers due to a higher expected frequency of losses. MARKETING AND CUSTOMERS American Re's treaty and facultative products are marketed domestically to insurance companies by American Re-Insurance's Domestic Insurance Company Operations ("DICO") division and to the alternative market by Munich-American RiskPartners, Inc., a wholly-owned subsidiary of the Company ("RiskPartners"). Internationally, both types of products are marketed through American Re-Insurance's International Operations division. See"--International Operations." 2 Net written premium by operating unit by reinsurance type was as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 1998 1997 1996 -------------------- -------------------- -------------------- $ % $ % $ % --------- --------- --------- --------- --------- --------- ($ IN MILLIONS) DICO Treaty................................................. $ 1,044.1 43.4% $ 1,304.1 52.2% $ 847.8 44.6% Facultative............................................ 473.8 19.7 486.7 19.5 329.7 17.3 --------- --------- --------- --------- --------- --------- Total................................................ 1,517.9 63.1 1,790.8 71.7 1,177.5 61.9 RiskPartners Treaty................................................. 127.4 5.3 96.4 3.9 99.5 5.2 Facultative............................................ 309.1 12.8 177.4 7.1 182.8 9.6 --------- --------- --------- --------- --------- --------- Total................................................ 436.5 18.1 273.8 11.0 282.3 14.8 International Operations Treaty................................................. 417.3 17.3 405.5 16.2 411.4 21.6 Facultative............................................ 35.1 1.5 27.6 1.1 31.2 1.7 --------- --------- --------- --------- --------- --------- Total................................................ 452.4 18.8 433.1 17.3 442.6 23.3 Consolidated Treaty................................................. 1,588.8 66.0 1,806.0 72.3 1,358.7 71.4 Facultative............................................ 818.0 34.0 691.7 27.7 543.7 28.6 --------- --------- --------- --------- --------- --------- Grand Total.......................................... $ 2,406.8 100.0% $ 2,497.7 100.0% $ 1,902.4 100.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Treaty marketing to insurance company clients through DICO primarily focuses on small to medium sized regional property and casualty insurers. In addition, DICO's marketing strategy has been recently refocused, to include a variety of differing insurance concerns, which include: 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 in volume and scope. The Company's marketing efforts in the alternative market, which involves both reinsurance and insurance products, through RiskPartners 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. 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 business, American Re also has a primary insurance company, American Alternative, which primarily serves alternative market clients in addition to some DICO clients. (American Re-Insurance and American Alternative together are referred to herein as the "reinsurance/insurance subsidiaries.") International Operations markets both treaty and facultative reinsurance and alternative markets products outside the United States. International Operations maintains offices in fourteen major international cities: Beijing, Bogota, Brussels, Buenos Aires, Cairo, London, Melbourne, Mexico City, Montreal, Santiago, Singapore, Sydney, Tokyo and Toronto. 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. 3 The Company underwrites its business on a worldwide basis for many different clients and for many lines of property/casualty business. Its products provide a broad array of coverages. However, the amount of business written with respect to a particular customer is not the sole basis for determining the risk in the Company's exposure to such customer. Many factors such as net retentions, loss exposures and loss ratios as well as premium amounts must be evaluated to determine such exposure. Taking all of these factors into account, the net income of the Company is not materially dependent on a single customer, small group of customers, line of business or geographical area, and the Company believes the loss of any single customer would not have a material adverse effect on its financial condition or earnings. However, the Company's net earnings could be materially adversely affected, during any quarter or annual reporting period, by the incurrence of reinsured or insured losses under one or more treaties or contracts with a single customer or group of customers or in a line of business or geographical area, depending on individual and aggregate exposures assumed by the Company. (See also "--Risk Management and Retrocession Arrangements.") The Company's largest single client represented net premiums of $152.8 million or 6.3%, $68.0 million or 2.7%, and $128.4 million or 6.7% of total net premiums during the years ended December 31, 1998, 1997, and 1996, respectively. REINSURANCE/INSURANCE UNDERWRITING The Company's property and casualty reinsurance/insurance business includes the reinsurance/insurance of risks set forth in the following table by statutory annual statement line of business classifications for the years ended December 31, as indicated:
NET PREMIUMS WRITTEN ---------------------------------------------------------------- % OF % OF % OF LINE OF BUSINESS 1998 TOTAL 1997 TOTAL 1996 TOTAL - --------------------------------------------------------- --------- --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS) Fire..................................................... $ 162.7 6.8% $ 194.1 7.8% $ 161.3 8.5% Allied lines............................................. 38.8 1.6 35.2 1.4 29.0 1.5 Homeowners multi peril................................... 69.0 2.9 69.2 2.8 53.9 2.8 Commercial multi peril................................... 250.2 10.4 288.5 11.5 179.2 9.4 Ocean marine............................................. 54.2 2.2 86.5 3.4 65.5 3.4 Inland marine............................................ 28.0 1.2 46.6 1.9 23.1 1.2 Earthquake............................................... 19.5 0.8 25.8 1.0 26.8 1.4 Workers' compensation.................................... 364.7 15.2 367.6 14.7 411.1 21.6 Other liability(1)....................................... 506.7 21.0 407.2 16.3 384.7 20.2 Auto liability........................................... 533.3 22.2 586.7 23.5 367.8 19.3 Auto physical damage..................................... 160.0 6.6 144.3 5.8 48.9 2.6 Fidelity and surety...................................... 43.9 1.8 52.0 2.1 48.7 2.6 Other(2)................................................. 175.8 7.3 194.0 7.8 102.4 5.5 --------- --------- --------- --------- --------- --------- Line of business total................................... $ 2,406.8 100.0% $ 2,497.7 100.0% $ 1,902.4 100.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ (1) Includes premium amounts for classes of business such as construction and alteration liability, contractual liability, errors and omissions liability and umbrella liability, among others. (2) Includes premium amounts for lines of business such as, group and other accident and health, aircraft, glass, burglary and theft, boiler and machinery, credit, financial guaranty, international bulk class codes, and American Re-Insurance Company (Chile) S.A. The Company generally seeks to avoid assuming material exposures for asbestos, environmental and other difficult risks. When, in the opinion of management, such exposures may be material under a particular contract, the reinsurance/insurance subsidiaries either exclude the exposure, set a limit for the potential for losses, or gain assurance that the ceding company is following conservative and professional claims and underwriting practices. See "--Reserves for Unpaid Losses and Loss Adjustment Expenses." 4 The mix of reinsurance/insurance business based on statutory gross premiums written is set forth in the following table for the periods indicated:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 -------------------- -------------------- -------------------- -------------------- -------------------- (DOLLARS IN MILLIONS) Treaty Property Pro rata.......... $ 539.5 18.1% $ 658.6 21.5% $ 467.1 20.3% $ 419.4 20.9% $ 353.3 18.4% Excess............ 305.9 10.3 311.5 10.1 212.3 9.2 245.2 12.2 212.0 11.0 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Total........... 845.4 28.4 970.1 31.6 679.4 29.5 664.6 33.1 565.3 29.4 Treaty Casualty Pro rata.......... 606.5 20.3 686.3 22.4 583.2 25.3 374.5 18.6 410.8 21.4 Excess............ 446.6 15.0 452.3 14.7 311.3 13.5 320.2 16.0 360.9 18.8 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Total........... 1,053.1 35.3 1,138.6 37.1 894.5 38.8 694.7 34.6 771.7 40.2 Facultative Property Pro rata........... 90.2 3.0 71.5 2.3 73.0 3.2 59.1 3.0 56.0 2.9 Excess............. 209.6 7.0 200.9 6.5 107.6 4.7 88.8 4.4 63.2 3.3 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Total............ 299.8 10.0 272.4 8.8 180.6 7.9 147.9 7.4 119.2 6.2 Facultative Casualty Pro rata........... 7.6 0.3 34.3 1.1 2.5 0.1 0.2 0.0 0.6 0.0 Excess............. 775.9 26.0 655.5 21.4 546.6 23.7 499.2 24.9 466.3 24.2 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Total............ 783.5 26.3 689.8 22.5 549.1 23.8 499.4 24.9 466.9 24.2 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Grand Total...... $ 2,981.8 100.0% $ 3,070.9 100.0% $ 2,303.6 100.0% $ 2,006.6 100.0% $ 1,923.1 100.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
5 The following table sets forth certain information with respect to the treaty and facultative reinsurance written by American Re-Insurance for the periods indicated:
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS) Net premiums written: Treaty....................................................... $ 1,588.8 $ 1,806.0 $ 1,358.7 $ 1,128.2 $ 1,103.1 Facultative.................................................. 818.0 691.7 543.7 501.3 450.2 --------- --------- --------- --------- --------- Total net premiums written................................... $ 2,406.8 $ 2,497.7 $ 1,902.4 $ 1,629.5 $ 1,553.3 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net premiums earned: Treaty....................................................... $ 1,618.2 $ 1,782.6 $ 1,304.8 $ 1,075.6 $ 1,047.4 Facultative.................................................. 800.7 703.5 491.9 455.3 414.0 --------- --------- --------- --------- --------- Total net premiums earned.................................... $ 2,418.9 $ 2,486.1 $ 1,796.7 $ 1,530.9 $ 1,461.4 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Losses and LAE: Treaty....................................................... $ 1,197.0 $ 1,273.1 $ 909.4 $ 876.1 $ 761.6 Facultative.................................................. 485.4 443.2 258.4 464.1 249.4 --------- --------- --------- --------- --------- Total losses and LAE......................................... $ 1,682.4 $ 1,716.3 $ 1,167.8 $ 1,340.2 $ 1,011.0 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Underwriting expenses: Treaty....................................................... $ 511.4 $ 573.0 $ 377.9 $ 309.1 $ 298.3 Facultative.................................................. 305.0 265.4 155.6 143.3 141.0 --------- --------- --------- --------- --------- Total underwriting expenses.................................. $ 816.4 $ 838.4 $ 533.5 $ 452.4 $ 439.3 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Underwriting gains (losses): Treaty....................................................... $ (90.2) $ (63.5) $ 17.5 $ (109.6) $ (12.5) Facultative.................................................. 10.3 (5.1) 77.9 (152.1) 23.6 --------- --------- --------- --------- --------- Total underwriting gains (losses)............................ $ (79.9) $ (68.6) $ 95.4 $ (261.7) $ 11.1 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Loss and LAE ratios: Treaty....................................................... 74.0% 71.4% 69.7% 81.4% 72.7% Facultative.................................................. 60.6 63.0 52.5 101.9 60.3 Total loss and LAE ratios.................................... 69.6% 69.0% 65.0% 87.5% 69.2% Underwriting expense ratios: Treaty....................................................... 31.6% 32.1% 29.0% 28.7% 28.5% Facultative.................................................. 38.1 37.7 31.6 31.5 34.1 Total underwriting expense ratios............................ 33.7% 33.8% 29.7% 29.6% 30.0% Combined ratios: Treaty....................................................... 105.6% 103.6% 98.7% 110.1% 101.2% Facultative.................................................. 98.7 100.7 84.1 133.4 94.4 Total combined ratios........................................ 103.3% 102.9% 94.7% 117.1% 99.2% Statutory combined ratios: Treaty....................................................... 106.8% 106.3% 101.1% 115.7% 106.3% Facultative.................................................. 97.0 98.1 84.9 133.0 96.7 Total statutory combined ratios.............................. 103.7% 103.9% 96.6% 121.0% 103.8%
FACULTATIVE REINSURANCE. Under a facultative certificate, the primary insurer cedes and the reinsurer assumes part or all of the risks insured by the primary insurer under a single primary insurance policy. Facultative reinsurance, therefore, involves a review of each individual risk, with the reinsurer having the right to accept or reject each risk. Because facultative reinsurance usually involves the assumption of greater risks than treaty reinsurance and is sold in separate transactions, facultative reinsurance is typically priced for higher profit margins than treaty business. However, the reinsurer's losses may be higher for facultative business because the reinsurer may assume a higher potential liability and because the risks involved may be more volatile. In addition, underwriting expenses and, in particular, personnel costs, are higher on facultative business because each risk is individually underwritten and administered. 6 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. TREATY REINSURANCE. A treaty is a contractual arrangement between a primary insurer and a reinsurer under which the primary insurer must cede and the reinsurer must assume a specified portion of a type or category of risks. Accordingly, under its treaties, the Company assumes risks without having reviewed them individually, but rather, the review is on an overall portfolio basis. 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. INTERNATIONAL OPERATIONS The following table presents information with respect to the International Operations net premiums written by region for the periods indicated:
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- REGION 1998 TOTAL 1997 TOTAL 1996 TOTAL - --------------------------------------------------------------- --------- --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS) Australia...................................................... $ 34.4 7.6% $ 23.8 5.5% $ 30.4 6.9% Canada......................................................... 1.2 0.3 31.7 7.3 29.0 6.6 Europe......................................................... 93.9 20.7 88.4 20.4 108.5 24.5 Far East....................................................... 18.0 4.0 15.7 3.6 20.6 4.7 Latin America.................................................. 102.7 22.7 128.2 29.6 110.9 25.0 Middle East.................................................... 32.4 7.2 12.5 2.9 17.4 3.9 Southeast Asia................................................. 19.3 4.3 20.3 4.7 18.9 4.3 Ocean Marine/Other(1).......................................... 150.5 33.2 112.5 26.0 106.9 24.1 --------- --------- --------- --------- --------- --------- Region total................................................... $ 452.4 100.0% $ 433.1 100.0% $ 442.6 100.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------------ (1) Includes net premiums written from ocean marine, international home office and Princeton Eagle West Insurance Company, a Bermuda domiciled insurance subsidiary of the Company ("Princeton Eagle West") and corporate retrocessional charges. 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. 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 investment management, 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 $32.3 million, $41.2 million, and $46.7 million in 1998, 1997, and 1996, respectively. 7 INVESTMENTS Munich Re Capital Management ("MRCM"), an affiliated investment advisor, is primarily responsible for the management of the fixed income portion of the Company's portfolio. American Re Asset Management ("ARAM"), the Company's registered investment advisor, is responsible for the Company's equity investments, in addition to providing operational support and advisory services to the Company. The Company employs two other investment advisory firms that manage portions of the Company's investment portfolio, one of whom specializes in foreign currency-denominated investments. These firms were chosen for their extensive experience with portfolio management, and the particular requirements of American Re. 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:
1998 1997 -------------------- ---------------------- AMOUNT PERCENT AMOUNT PERCENT --------- --------- --------- ----------- Fixed maturities: U.S. Government and government agency bonds....................... $ 645.1 8.3% $ 1,150.6 15.0% Municipal bonds................................................... 2,637.0 33.8 1,763.8 23.0 Mortgage backed securities........................................ 1,218.6 15.6 1,023.5 13.3 Domestic corporate bonds.......................................... 1,585.9 20.3 1,889.3 24.6 Foreign bonds..................................................... 789.4 10.1 817.0 10.6 Redeemable preferred stock........................................ 77.3 1.0 71.4 1.0 Equity securities................................................... 545.2 7.0 293.3 3.8 Other investments................................................... 27.9 0.4 22.9 0.3 Cash and cash equivalents........................................... 274.9 3.5 641.6 8.4 --------- --------- --------- ----- Total fair value.................................................. $ 7,801.3 100.0% $ 7,673.4 100.0% --------- --------- --------- ----- --------- --------- --------- -----
The net increase 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 $6,876.0 million and $6,644.2 million of bonds carried at fair value as available for sale securities at December 31, 1998 and 1997 respectively. The following table reflects investment results for the three-year period indicated:
PRE-TAX NET AVERAGE INVESTMENT EFFECTIVE PRE-TAX REALIZED INVESTMENTS(1) INCOME(2) YIELD(3) NET CAPITAL GAINS -------------- ----------- ------------- ------------------- (DOLLARS IN MILLIONS) Year ended December 31, 1998.............................. $ 7,737.4 $ 417.5 5.4% $ 92.8 1997.............................. 7,340.4 427.5 5.8 87.7 1996.............................. 4,130.0 248.2 6.0 4.8
- ------------------------------ (1) Simple average of beginning-of-period and end-of-period financial statement investments and cash for applicable periods. (2) After investment expenses, excluding net realized capital gains (losses). (3) Net pre-tax investment income for the period divided by average investments for the same period. 8 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:
1998 1997 ---------------------- ---------------------- AMOUNT PERCENT AMOUNT PERCENT --------- ----------- --------- ----------- (DOLLARS IN MILLIONS) AAA............................................... $ 4,181.4 60.8% $ 3,815.7 57.4% AA................................................ 1,660.5 24.2 1,598.9 24.1 A................................................. 766.5 11.1 915.3 13.8 BBB............................................... 110.7 1.6 121.0 1.8 BB and below and not rated........................ 156.9 2.3 193.3 2.9 --------- ----- --------- ----- Total fair value................................ $ 6,876.0 100.0% $ 6,644.2 100.0% --------- ----- --------- ----- --------- ----- --------- -----
The following table indicates the composition of the Company's bond portfolio, on a fair value basis, by contractual maturity date at December 31:
1998 1997 ---------------------- ---------------------- AMOUNT PERCENT AMOUNT PERCENT --------- ----------- --------- ----------- (DOLLARS IN MILLIONS) One year or less.................................... $ 266.7 3.9% $ 433.0 6.5% Over one year through five years.................... 1,883.4 27.4 1,691.8 25.5 Over five years through ten years................... 2,645.2 38.5 2,275.7 34.3 Over ten years...................................... 862.1 12.5 1,220.2 18.3 Mortgage backed securities.......................... 1,218.6 17.7 1,023.5 15.4 --------- ----- --------- ----- Total fair value.................................. $ 6,876.0 100.0% $ 6,644.2 100.0% --------- ----- --------- ----- --------- ----- --------- -----
At December 31, 1998, American Re-Insurance held approximately $102.1 million of strategic investments, mostly in its client companies, in the form of senior debt, subordinated debt, and preferred or common securities. These client company investments allow American Re-Insurance an opportunity to integrate its various products and services, such as investment management and reinsurance brokerage, with the underwriting of reinsurance risks, adding value to these client relationships. While such investments are not a material part of the overall investment portfolio, American Re-Insurance will continue to engage in client company and other strategic investment opportunities on a selected basis. The Company continues to seek opportunities to enhance investment yield primarily through a high-quality, fixed maturity investment strategy, while adding common equities and various nontraditional investments. 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 5.09 and 4.25 years at December 31, 1998, and 1997, 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. 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 9 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 maintains incurred but not reported ("IBNR") loss reserves. Such reserves are established 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 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 1988 through 1998, and the subsequent changes in those reserves, presented on a combined basis for the Company, MARC, and the U.S. Branch. (See "Management's Discussion and Analysis of the Company's Results of Operation and Financial Condition--Results of Operations--Year Ended December 31, 1997, Compared with Year Ended December 31, 1996.") The following data is not accident year data, but a display of 1988 through 1998 year-end reserves and the subsequent changes in those reserves. For instance, the "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 1988 reserves have developed a $606 million deficiency through December 31, 1998. 10 CHANGES IN HISTORICAL RESERVES FOR UNPAID LOSSES AND LAE FOR THE LAST TEN YEARS--GAAP BASIS AS OF DECEMBER 31, 1998
DECEMBER 31, ------------------------------------------------------------------------------------------------- 1988 1989 1990 1991 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS) Net liability for unpaid losses and LAE............ $ 2,936 $ 3,025 $ 3,203 $ 3,267 $ 3,254 $ 3,573 $ 3,922 $ 4,501 $ 4,849 Paid (cumulative) as of: One year later.............. 821 634 811 864 739 889 1,076 1,124 1,295 Two years later............. 1,211 1,201 1,423 1,318 1,316 1,566 1,787 1,895 2,230 Three years later........... 1,604 1,700 1,755 1,667 1,791 2,058 2,303 2,517 Four years later............ 1,995 1,949 2,004 1,985 2,137 2,421 2,744 Five years later............ 2,179 2,131 2,243 2,252 2,414 2,748 Six years later............. 2,327 2,326 2,463 2,483 2,671 Seven years later........... 2,491 2,511 2,669 2,689 Eight years later........... 2,663 2,688 2,858 Nine years later............ 2,824 2,866 Ten years later............. 2,998 Net liability re-estimated as of: End of year................. $ 2,936 $ 3,025 $ 3,203 $ 3,267 $ 3,254 $ 3,573 $ 3,922 $ 4,501 $ 4,849 One year later.............. 3,012 3,073 3,258 3,194 3,317 3,640 4,369 4,512 4,920 Two years later............. 3,055 3,113 3,183 3,224 3,363 3,986 4,397 4,610 4,863 Three years later........... 3,107 3,048 3,216 3,244 3,666 4,017 4,347 4,555 Four years later............ 3,061 3,077 3,225 3,474 3,686 4,009 4,297 Five years later............ 3,086 3,087 3,472 3,493 3,705 3,986 Six years later............. 3,107 3,357 3,489 3,558 3,698 Seven years later........... 3,388 3,391 3,600 3,580 Eight years later........... 3,431 3,505 3,623 Nine years later............ 3,515 3,527 Ten years later............. 3,542 Deficiency.................. $ (606) $ (502) $ (420) $ (313) $ (444) $ (413) $ (375) $ (54) $ (14) 1997 1998 --------- --------- Net liability for unpaid losses and LAE............ $ 5,103 $ 5,065 Paid (cumulative) as of: One year later.............. 1,509 Two years later............. 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 One year later.............. 5,165 Two years later............. Three years later........... Four years later............ Five years later............ Six years later............. Seven years later........... Eight years later........... Nine years later............ Ten years later............. Deficiency.................. $ (62)
1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- Gross liability--end of year..................................... $ 6,080 $ 7,039 $ 7,178 $ 7,469 $ 7,334 Reinsurance recoverables on unpaid losses........................ 2,158 2,538 2,329 2,366 2,269 --------- --------- --------- --------- --------- Net liability--end of year....................................... 3,922 4,501 4,849 5,103 5,065 Gross re-estimated liability--latest............................. $ 6,363 $ 6,888 $ 7,134 $ 7,517 Re-estimated reinsurance recoverables on latest unpaid losses.... 2,066 2,333 2,271 2,352 --------- --------- --------- --------- Net re-estimated liability--latest............................... 4,297 4,555 4,863 5,165 Gross cumulative redundancy (deficiency)......................... $ (283) $ 151 $ 44 $ (48)
11 The reconciliation between statutory basis and GAAP basis reserves for each of the three years in the period ended December 31, 1998, is shown below: RECONCILIATION OF RESERVES FOR UNPAID LOSSES AND LAE FROM STATUTORY BASIS TO GAAP BASIS
DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- (DOLLARS IN MILLIONS) Statutory reserves.......................................................... $ 5,064.7 $ 5,196.1 $ 3,129.5 Adjustments to GAAP basis(1)................................................ 0.2 (93.3) (27.1) Reinsurance recoverables on unpaid losses................................... 2,269.2 2,366.5 1,775.1 ---------- ---------- ---------- Reserves on GAAP basis...................................................... 7,334.1 7,469.3 4,877.5 Merger-related adjustment................................................... -- -- 2,300.8 ---------- ---------- ---------- Reserves (restated)......................................................... $ 7,334.1 $ 7,469.3 $ 7,178.3 ---------- ---------- ---------- ---------- ---------- ----------
- ------------------------------ (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 Princeton Eagle West loss reserves. RECONCILIATION OF RESERVES FOR UNPAID LOSSES AND LAE (GAAP BASIS)
YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- (DOLLARS IN MILLIONS) Reserves at beginning of period............................................. $ 7,469.3 $ 7,178.3 $ 4,786.0 Reinsurance recoverables on unpaid losses................................... (2,366.5) (2,329.6) (1,941.4) ---------- ---------- ---------- Net reserves at beginning of period......................................... 5,102.8 4,848.7 2,844.6 Net incurred related to: Current period............................................................ 1,620.4 1,642.1 1,167.7 Prior periods............................................................. 62.0 74.2 0.1 ---------- ---------- ---------- Total net incurred.......................................................... 1,682.4 1,716.3 1,167.8 Net paid related to: Current period............................................................ 207.2 167.5 89.5 Prior periods............................................................. 1,513.1 1,294.7 820.5 ---------- ---------- ---------- Total net paid.............................................................. 1,720.3 1,462.2 910.0 ---------- ---------- ---------- Net reserves at end of period............................................... 5,064.9 5,102.8 3,102.4 Merger-related adjustment(1).............................................. -- -- 1,746.3 ---------- ---------- ---------- Net reserves at end of period............................................... 5,064.9 5,102.8 4,848.7 Reinsurance recoverables on unpaid losses................................... (2,269.2) (2,366.5) (1,775.1) Merger-related adjustment(1).............................................. -- -- (554.5) ---------- ---------- ---------- Reinsurance recoverables on unpaid losses................................... (2,269.2) (2,366.5) (2,329.6) ---------- ---------- ---------- Reserves at end of year..................................................... $ 7,334.1 $ 7,469.3 $ 7,178.3 ---------- ---------- ---------- ---------- ---------- ----------
- ------------------------------ (1) 1996 Balance Sheet data has been restated to reflect the July 1997 Merger. See "Management's Discussion and Analysis of the Company's Results of Operation and Financial Condition--Results of Operations--Year Ended December 31, 1997 Compared with Year Ended December 31, 1996." 12 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 asbestos, environmental and other latent liabilities ("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. 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. Travelers Property Casualty Corp. ("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, 1998, the reinsurance recoverable balance from Travelers was $266.1 million; thus there is $233.9 million of limit remaining to cover additional adverse loss development for losses incurred on or prior to December 31, 1991. The Company anticipates that any additional adverse loss development of losses incurred on or prior to December 31, 1991 would likely be related to Latent Liability Exposures, although the Cover is not limited to such types of losses. The Company had Latent Liability Exposure Loss Reserves, prior to cession to the Cover, at December 31, as follows:
1998 1997 -------------------- -------------------- GROSS NET GROSS NET --------- --------- --------- --------- (DOLLARS IN MILLIONS) Asbestos................................................................... $ 399.9 $ 258.5 $ 457.7 $ 297.1 Environmental-Related and Other Latent Liability........................... 237.3 150.1 327.9 218.6 --------- --------- --------- --------- Total...................................................................... $ 637.2 $ 408.6 $ 785.6 $ 515.7 --------- --------- --------- --------- --------- --------- --------- ---------
Latent Liability Exposure loss reserves at December 31, 1998 and 1997, 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. Notwithstanding current loss reserve levels and the remaining protection under the Cover, 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 general adverse loss retrocessional coverage for 1992 and prior years, which are not allocated to specific causative events. 13 THREE YEAR DEVELOPMENT ASBESTOS LIABILITIES
YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- (DOLLARS IN MILLIONS) Gross Basis: Beginning net reserve balance...................................................... $ 457.7 $ 499.8 $ 519.9 Incurred loss and LAE.............................................................. -- -- -- Loss and LAE paid.................................................................. 57.8 42.1 65.8 --------- --------- --------- Ending reserve balance............................................................. 399.9 457.7 454.1 Merger-related adjustment........................................................ -- -- 45.7 --------- --------- --------- Ending reserve balance............................................................. $ 399.9 $ 457.7 $ 499.8 --------- --------- --------- --------- --------- --------- Net Basis: Beginning net reserve balance...................................................... $ 297.1 $ 326.6 $ 328.5 Incurred loss and LAE.............................................................. -- -- -- Loss and LAE paid.................................................................. 38.6 29.5 37.2 --------- --------- --------- Ending reserve balance............................................................. 258.5 297.1 291.3 Merger-related adjustment........................................................ -- -- 35.3 --------- --------- --------- Ending reserve balance............................................................. $ 258.5 $ 297.1 $ 326.6 --------- --------- --------- --------- --------- ---------
ENVIRONMENTAL-RELATED AND OTHER LATENT LIABILITIES
YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- (DOLLARS IN MILLIONS) Gross Basis: Beginning net reserve balance...................................................... $ 327.9 $ 391.6 $ 427.2 Incurred loss and LAE.............................................................. -- -- -- Loss and LAE paid.................................................................. 90.6 63.7 91.2 --------- --------- --------- Ending reserve balance............................................................. 237.3 327.9 336.0 Merger-related adjustment........................................................ -- -- 55.6 --------- --------- --------- Ending reserve balance............................................................. $ 237.3 $ 327.9 $ 391.6 --------- --------- --------- --------- --------- --------- Net Basis: Beginning net reserve balance...................................................... $ 218.6 $ 273.9 $ 282.6 Incurred loss and LAE.............................................................. -- -- -- Loss and LAE paid.................................................................. 68.5 55.3 50.7 --------- --------- --------- Ending reserve balance............................................................. 150.1 218.6 231.9 Merger-related adjustment........................................................ -- -- 42.0 --------- --------- --------- Ending reserve balance............................................................. $ 150.1 $ 218.6 $ 273.9 --------- --------- --------- --------- --------- ---------
14 In managing its business, the Company actively monitors all of its accounts, both ongoing or terminated. As a part of this activity, attempts are made to reduce its administrative and legal costs by commuting (buying out) certain accounts. Since 1985, several major commutations have been negotiated, whereby certain reinsurance contracts were terminated and American Re-Insurance was discharged from all future liability in exchange for a payment of cash to the primary insurer. Existing liabilities associated with these contracts were consequently removed from American Re-Insurance's balance sheet. The potential ultimate losses which were removed as a result of commutations attributable to potential latent exposure liabilities cannot be determined and are not included in the above development table. The Company pursues opportunities to commute contracts with potential Latent Liability Exposures to the extent feasible. 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, 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. See also "--Reinsurance/Insurance Underwriting." 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 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, 1998 the Company maintained a reserve for uncollectible reinsurance and premiums and other receivables of $79.6 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 $10.0 million, on selected cases up to $25.0 million, with capacity to $50.0 million. For property business, the per risk limit accepted for treaty business is $10.0 million and on 15 selected cases up to $41.0 million and for facultative business is $10.0 million and on selected cases up to $166.0 million. After retrocessions, for casualty business, $10.0 million net is retained per treaty risk, but can expand to $15.0 million on a selected basis, and up to $6.5 million net per risk for facultative. After retrocessions, and prior to co-participation, if any, for its property business, $10.0 million net is generally retained per risk for treaty and up to $10.0 million net per risk for 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 business, losses resulting from non-perils, treaty and facultative agreements are covered in excess of $15.0 million each and every occurrence. For casualty business, treaty and facultative agreements are covered in excess of $10.0 million each and every occurrence. 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 $400.0 million of coverage, for a catastrophic event in excess of $100.0 million of retained losses. The $400.0 million of retrocessional coverage is reduced by two factors: (i) a reduction of $14.0 million, due to shortfalls in the placement of the retrocessional program; and (ii) co-participation of $0.3 million by the Company, which is customary in the industry. Thus, prior to any cession to accident year stop loss covers, the Company retains $114.3 million of the first $500 million of any single catastrophe loss as well as any loss above that amount. Upon payment of additional premiums, the coverage may be reinstated for additional events. 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, 1998, the reinsurance/insurance subsidiaries had in place retrocessional arrangements with approximately 785 retrocessionaires, and $2,343.1 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' retrocessional 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, 1998, a total of $550.5 million of accrued retrocessional recoverables on paid and unpaid losses (23.5% of total retrocessional recoverables) were attributable to National Indemnity Company (which had an A.M. Best rating of "A++ (Superior)" at December 31, 1998). 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/insurance subsidiaries' statutory surplus. 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 16 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 for primary insurers and reinsurers to transfer insurance risks directly to investors. EMPLOYEES At December 31, 1998, the Company and its subsidiaries employed a total of approximately 1,532 persons. None of these employees are represented by a labor union and the Company believes that its employee relations are good. No employees of the Company receive commissions or similar compensation based on volume. There are no minimum volume production requirements. 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 and American Alternative. 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. The rates and policy terms of primary insurance policies and agreements generally are closely regulated by state insurance departments. Unlike many primary insurance policies, the terms and conditions of reinsurance agreements generally are not subject to regulation by any governmental authority with respect to rates or policy terms. 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 is subject relate primarily to licensing requirements of reinsurers, the standards of solvency that must be met and maintained, 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. The Company's management believes that American Re-Insurance is in material compliance with all applicable laws and regulations pertaining to its business and operations. 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, the producer distribution system, the rate and policy form filing process, participation in residual markets, and claims handling procedures. 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. LICENSES. 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 17 reinsurer in Chile. In addition, American Re-Insurance and/or one or more of its affiliates is licensed or registered to transact non-insurance business in Argentina, Australia, Belgium, Bermuda, Bolivia, Canada, Chile, China, Columbia, Ecuador, Egypt, Japan, Mauritius, Mexico, New Zealand, Paraguay, Peru, Singapore, South Africa, the United Kingdom, Uruguay and Venezuela. American Alternative is licensed to transact insurance or reinsurance business in all fifty states and the District of Columbia. The Company's subsidiaries also maintain necessary licenses for their reinsurance intermediary and other operations. 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 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 Code. American Re-Insurance and American Alternative are prohibited from investing in securities issued by any corporation or enterprise the controlling interest of which is, or after such investment will be, held directly or indirectly by or for the benefit of their directors or officers. TRIENNIAL EXAMINATIONS. The Delaware Insurance Department conducts examinations of domiciled insurers and reinsurers every three years, and may do so at such other times as are deemed advisable by the Insurance Commissioner of Delaware. INSURANCE REGULATORY INFORMATION SYSTEM RATIOS. The National Association of Insurance Commissioners (the "NAIC") annually calculates 12 financial ratios to assist state insurance departments in monitoring the financial condition of insurance companies. Results are compared against a "usual range" of results for each ratio, established by the NAIC. Although American Re-Insurance has not received the official IRIS test results for 1998, American Re-Insurance believes that no 1998 test results are outside of the usual range of results for each test. In 1998, American Alternative had one ratio outside of the usual range: the change in net writings ratio exceeded the ceiling ratio value of 33%; the 1998 ratio result of 101% is attributable to expanded writings as the company continues to grow. RISK BASED CAPITAL. The NAIC has adopted a risk based capital standard for property and casualty insurance (and reinsurance) companies. American Re-Insurance included in its 1998 annual statement filing with the Insurance Department of the State of Delaware a risk based capital adjusted surplus to policyholders of $2,278.3 million, well in excess of the authorized control level risk based capital total of $671.3 million. American Alternative included in its 1998 annual statement filing with the Insurance Department of the State of Delaware an adjusted surplus to policyholders of $109.7 million, well in excess of the authorized control level risk based capital total of $5.8 million. 18 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 and American Alternative 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, 1998 the maximum amount available for the payment of dividends by American Re-Insurance during 1999 without prior approval of regulatory authorities will be $260.8 million. There can be no assurance that these dividend restrictions will not be amended in the future or, if amended, that they will not have a material adverse effect on the Company. 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. There can be no assurance that any of these laws or regulations will not be adopted in additional states or, if adopted, that they will not have a material adverse effect on the Company. 19 ITEM 2. PROPERTIES The Company owns approximately 424,000 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 18,545 square feet in Mexico City, Cairo, Santiago, Bogota and Buenos Aires. The Company also rents office space totaling approximately 355,000 square feet in Atlanta, Boston, Burlington (VT), Chicago, Columbus (OH), Dallas, Denver, Florham Park (NJ), Hartford, Honolulu, Kansas City (KS), Los Angeles, Minneapolis, New York, Philadelphia, San Francisco, Seattle, Woodland Hills (CA), Beijing, Bermuda, Brussels, London, Melbourne, Montreal, 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. In addition to claim-related litigation arising in the ordinary course of its reinsurance and insurance businesses, the Company is involved in non-claim litigation and adversarial proceedings incidental to its business principally related to insurance company insolvencies or liquidation proceedings. Based upon its familiarity with or review and analysis of such matters, the Company believes that none of the pending litigation matters, individually or in the aggregate, will have a material adverse effect on the consolidated financial statements of the Company. However, no assurance can be given as to the ultimate outcome of any such litigation matters. ITEM 4. SUBMISSION OF MATTERS TO A VOTE SECURITY HOLDERS None. 20 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 common equity securities. (b) 93.06% of the Company's Common Stock is owned by Munich Re and 6.94% is owned by Allianz Aktiengesellschaft ("Allianz"). (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--Dividends." ITEM 6. SELECTED FINANCIAL INFORMATION OF THE COMPANY
1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS) OPERATING DATA: Net premiums written.................................. $ 2,406.8 $ 2,497.7 $ 1,902.4 $ 1,629.5 $ 1,553.3 Net premiums earned................................... 2,418.9 2,486.1 1,796.7 1,530.9 1,461.4 Losses and LAE (2).................................... 1,682.4 1,716.3 1,167.8 1,340.2 1,011.0 Underwriting expenses................................. 816.4 838.4 533.5 452.4 439.3 Underwriting gain (loss).............................. (79.9) (68.6) 95.4 (261.7) 11.1 Net investment income................................. 417.5 427.5 248.2 222.6 188.7 Net realized capital gains (losses)................... 92.8 87.7 4.8 4.7 (0.2) Interest expense...................................... 42.2 42.8 54.1 60.7 60.0 Income (loss) before income taxes..................... 321.5 224.3 232.6 (159.5) 120.7 Income taxes (benefits)............................... 82.4 (3.4) 73.8 (76.6) 23.2 Income (loss) before minority interest, distributions on preferred securities of subsidiary trust, extraordinary loss.................................. 239.1 227.7 158.8 (82.9) 97.5 Minority interest..................................... -- 6.8 -- -- -- Distributions on preferred securities of subsidiary trust............................................... (13.1) (13.1) (13.1) (4.4) -- Income (loss) before extraordinary loss............... 226.0 221.4 145.7 (87.3) 97.5 Extraordinary loss, net of applicable income tax effect.............................................. -- -- (34.0) (0.3) -- Net income (loss) available to common shareholders.... 226.0 221.4 111.7 (87.6) 97.5 OTHER GAAP OPERATING DATA (3): Loss and LAE ratio.................................... 69.6% 69.0% 65.0% 87.5% 69.2% Underwriting expense ratio............................ 33.7 33.8 29.7 29.6 30.0 --------- --------- --------- --------- --------- Combined ratio........................................ 103.3% 102.8% 94.7% 117.1% 99.2% STATUTORY DATA (1) (4): Ratio of net premiums written to surplus.............. 0.87x 1.07x 1.21x 1.23x 1.26x Policyholders' surplus................................ $ 2,631.1 $ 2,323.4 $ 2,178.1 $ 1,892.8 $ 1,753.7 Loss and LAE ratio.................................... 68.2% 68.8% 67.5% 83.5% 75.2% Underwriting expense ratio............................ 35.5 35.1 31.0 32.1 32.6 --------- --------- --------- --------- --------- Combined ratio........................................ 103.7% 103.9% 98.5% 115.6% 107.8%
21
1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS) BALANCE SHEET DATA (1) (AT END OF PERIOD): Total investments and cash............................ $ 7,801.3 $ 7,673.4 $ 7,007.3 $ 3,957.5 $ 3,308.9 Total assets.......................................... 13,544.0 13,216.9 12,114.7 7,804.8 6,677.9 Loss and LAE reserves................................. 7,334.1 7,469.3 7,178.3 4,786.0 3,971.9 Senior bank debt...................................... 75.0 75.0 75.0 75.0 200.0 Senior notes.......................................... 498.5 498.5 498.4 -- -- Senior subordinated debt.............................. -- -- -- 450.0 450.0 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 -- Stockholders' equity.................................. $ 2,853.1 $ 2,586.4 $ 1,792.5 $ 847.1 $ 789.2
- ------------------------ (1) 1996 balance sheet data and statutory data for all years prior have been restated to reflect the July 1997 Merger. See "Management's Discussion and Analysis of the Company's Results of Operations and Financial Condition." (2) "LAE" means loss adjustment expenses. (3) 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." (4) 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, 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 DICO was partially offset by an increase in treaty premiums written by RiskPartners (formerly known as Am-Re Managers, Inc.), of 32.2% to $127.4 million for the year ended December 31, 1998, from $96.4 million for the same period in 1997, and by the Company's International Operations, of 2.9% to $417.3 million for the year ended December 31, 1998, from $405.5 million for the same period in 1997. 22 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 increase 27.2% to $35.1 million for the same period in 1997. The increases in 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% to $1,682.4 million for the year ended December 31, 1998, from $1,716.3 million in 1997. The Company attributes this decrease primarily 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 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 in 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 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 a $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 stocks 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. 23 Other income decreased 23.7% to $31.8 million for the year ended December 31, 1998, from $41.7 million in 1997. The decrease was primarily 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 the Merger, in the 1997 period. Income before income taxes, minority interest, distributions on preferred securities of subsidiary trust and extraordinary loss 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 allowance associated with the U.S. Branch's reserve discount 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"). Net income to common stockholders was $226.0 million for the year ended December 31, 1998 compared to net income of $221.4 million in 1997. YEAR ENDED DECEMBER 31, 1997, COMPARED WITH YEAR ENDED DECEMBER 31, 1996 On July 1, 1997, American Re and Munich Re completed the Merger. Prior to this transaction, MARC was owned 27.5% by Munich Re, 22.5% by the U.S. Branch, 40% by Allianz, and 10% by VICTORIA Versicherung AG ("VICTORIA"). This transaction was effected by exchanging 100% of the common shares of MARC for 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 additional shares of the Company. The exchange of MARC shares for American Re 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 (the remaining 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 exchange of the insurance assets and liabilities of the U.S. Branch for the Company's shares was also accounted for as an "as-if-pooling of interests" business combination between parties under common control. Common control for American Re, MARC and the U.S. Branch was considered effective at December 31, 1996. As such, the Company's December 31, 1996, balance sheet and related footnote disclosures as originally filed in its 1996 Form 10-K have been restated to reflect a 50% ownership by Munich Re of MARC, a 50% minority interest in the ownership of MARC by Allianz and VICTORIA, and a 100% ownership of the U.S. Branch. As common control was considered effective at December 31, 1996, the Company's consolidated statements of income and cash flows for the year ended December 31, 1996, have not been restated. 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 period then ended, with 50% of MARC's net loss for the six-month period ended June 30, 1997, accounted for as minority interest. As a result, significant variances exist when comparing the results of operations for the 24 year ended December 31, 1997, with the same period in 1996. Accordingly, selected financial results have been presented below on a pro forma basis for the year ended December 31, 1996, as if the merger transactions which took place in July 1997 had occurred on January 1, 1996. Pro forma adjustments to reflect such transactions have been applied to the respective historical income statements of the Company. The pro forma consolidated data does not purport to represent what the Company's financial position or results would have been had the Merger in fact occurred on the dates indicated above, or to project the Company's financial position or results of operations for any future dates or periods. The pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable in the circumstances. 25
ACTUAL PRO FORMA 1997 1996 VARIANCE --------- ----------- -------------------- Revenue: Premiums written...................................................... $ 2,497.7 $ 2,621.2 $ (123.5) (4.7)% Change in unearned premium reserve.................................... (11.6) (127.1 ) 115.5 (90.9) --------- ----------- --------- --------- Premiums earned..................................................... 2,486.1 2,494.1 (8.0) (0.3) Net investment income................................................. 427.5 392.2 35.3 9.0 Net realized capital gains............................................ 87.7 27.8 59.9 N/M Other income.......................................................... 41.7 47.9 (6.2) (12.9) --------- ----------- --------- --------- Total revenue....................................................... 3,043.0 2,962.0 81.0 2.7 --------- ----------- --------- --------- Losses and expenses: Losses and loss adjustment expenses................................... 1,716.3 1,675.1 41.2 2.5 Commission expense.................................................... 623.5 565.7 57.8 10.2 Operating expense..................................................... 214.9 182.4 32.5 17.8 Interest expense...................................................... 42.8 54.1 (11.3) (20.9) Other expense......................................................... 221.2 113.8 107.4 94.4 --------- ----------- --------- --------- Total losses and expenses........................................... 2,818.7 2,591.1 227.6 8.8 --------- ----------- --------- --------- Income before income taxes, minority interest, distributions on preferred securities of subsidiary trust and extraordinary loss... $ 224.3 $ 370.9 $ (146.6) (39.5)% --------- ----------- --------- --------- --------- ----------- --------- ---------
The Company's net premiums written increased 31.3% to $2,497.7 million for the year ended December 31, 1997, from $1,902.4 million in 1996. On a pro forma basis, 1996 net premiums written for the period were $2,621.2 million, resulting in a decrease of 4.7%. The pro forma decrease in net premiums written was attributable to a 15.7% decrease in facultative net premiums written to $691.7 million for the year ended December 31, 1997, from $820.7 million in 1996, offset slightly by a 0.3% increase in treaty net premiums written to $1,806.0 million for 1997 from $1,800.5 million in 1996. The decrease in facultative premiums was attributable to decreases of $107.0 million or 18.0% in DICO, $11.2 million or 5.9% in RiskPartners, and $10.8 million or 28.1% in the Company's International Operations. These decreases generally were the result of what the Company perceives to be deteriorating market conditions in the facultative market in the 1997 period, which include depressed reinsurance prices and premiums, lower renewal retention ratios on existing business, increased net retentions by primary companies, and new entrants into the facultative market. The increase in treaty net premiums written for the year ended December 31, 1997, from the same period in 1996 on a pro forma basis, was primarily attributable to an increase in DICO of $46.4 million or 3.7% offset by decreases in International Operations of $37.8 million or 8.5%, and RiskPartners of $3.1 million or 3.1%. The slight growth in treaty premiums also was attributable to what the Company perceives as deteriorating market conditions, which include decreased pricing on the primary insurance company level, primary companies increasing net retentions on excess of loss business as a result of surplus growth, and conversion of certain reinsurance programs from a pro rata to an excess of loss basis, which generally result in a reduction of reinsurance premiums. The decrease in International Operations' net premium written was primarily due to the assumption or renewal of certain aviation treaties by Munich Re in 1997 period, which were previously written through MARC and the U.S. Branch in the 1996 period, in addition to the effect of foreign exchange translations from other currencies into the strengthening U.S. dollar. The Company's net premiums earned increased 38.4% to $2,486.1 million for the year ended December 31, 1997, from $1,796.7 million in 1996. On a pro forma basis, 1996 net premiums earned were $2,494.1 million, resulting in a decrease of 0.3%. The pro forma decrease in premiums earned was 26 primarily attributable to the pro forma decrease in net premiums written, offset by the timing of premiums earned on business in force. Net losses and LAE incurred increased 47.0% and $1,716.3 million for the year ended December 31, 1997, from $1,167.8 million in 1996. On a pro forma basis, 1996 net losses and LAE incurred were $1,675.1 million, resulting in an increase of 2.5%. This increase was primarily attributable to an overall increase in the proportion of treaty net premiums earned in the 1997 period, which carries a higher overall loss ratio than facultative business. Underwriting expense, consisting of commission expense plus operating expense, increased 57.2% to $838.4 million for the year ended December 31, 1997, from $533.5 million in 1996. On a pro forma basis, underwriting expense for the 1996 period was $748.1 million, resulting in an increase of 12.1%. This increase included a 10.2% increase in commission expense to $623.5 million for the year ended December 31, 1997 from $565.7 million on a pro forma basis in 1996. This increase was due to a higher overall commission rate on treaty business during 1997 compared to 1996, especially on new business written, in addition to changes in the structure of the Company's retrocessional programs to include more excess of loss arrangements, which generally provide less offset to commission expense. Operating expenses increased 17.8% to $214.9 million for the year ended December 31, 1997 from $182.4 million on a pro forma basis for 1996. 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 $68.6 million for the year ended December 31, 1997, compared to an underwriting gain of $95.4 million in 1996. On a pro forma, the Company experienced an underwriting gain of $71.0 million in 1996. The Company's loss ratio increased to 69.0% for the year ended December 31, 1997 from 67.2% on a pro forma basis in 1996, while the underwriting expense ratio increased to 33.8% in 1997 from 30.0% on a pro forma basis in 1996. The combined ratio for the year ended December 31, 1997, increased to 102.8% from 97.2% on a pro forma basis in 1996. Net investment income increased 72.3% to $427.5 million for the year ended December 31, 1997, from $248.2 million in 1996. On a pro forma basis, net investment income was $392.2 million for the 1996 period, resulting in an increase of 9.0%. This increase was primarily attributable to an increase in the invested asset base in the 1997 period, as compared to the 1996 period. The Company's interest expense decreased by 20.9% to $42.8 million for the year ended December 31, 1997, from $54.1 million in 1996. This decrease was primarily attributable to the lower interest rate on the senior notes outstanding during the 1997 period, as compared to that of the senior subordinated debt outstanding during the 1996 period. In December 1996, the Company issued $500.0 million principal amount of 7.45% Senior Notes, and in-substance defeased its existing issue of 10 7/8% Senior Subordinated Debentures in the principal amount of $450.0 million, which were redeemed in September 1997. The Company realized net capital gains of $87.7 million for the year ended December 31, 1997, compared to net capital gains of $4.8 million in 1996. On a pro forma basis, the Company experienced net capital gains of $27.8 million in 1996. This increase was primarily due to net capital gains of $67.9 million realized on equity securities sold in 1997, as compared to net capital gains of $22.8 million realized for the same period of 1996, and net capital gains realized on bonds sold of $26.2 million as compared to net capital gains of $9.8 million realized in 1996. MARC and the U.S. Branch had combined realized capital losses of $5.0 million in futures contracts during the 1996 period. Other income decreased 12.5% to $41.7 million for the year ended December 31, 1997, from $47.5 million in 1996. The decrease in the 1997 period was attributable to a decrease in fee subsidiary revenue of $5.5 million. Other expenses increased substantially to $221.2 million for the year ended December 31, 1997 from $109.2 million in 1996. The increase in the 1997 period was primarily attributable to one-time charges incurred during the second quarter of 1997 of $38.2 million related to the write-down 27 of the value of data processing equipment, one-time severance and other personnel related charges of $72.8 million, and $13.3 million of other miscellaneous charges primarily due to the Merger, compared to $36.1 million of acquisition-related expenses incurred during 1996. In addition to these one-time charges, the Company also incurred an expense of $20.3 million related to the Company's long-term incentive compensation program established in the 1997 period; there was no similar program in effect in 1996. Income before income taxes, minority interest, distributions on preferred securities of subsidiary trust and extraordinary loss decreased slightly to $224.3 million for the year ended December 31, 1997, compared to $232.6 million in 1996. On a pro forma basis, this total was $370.9 million. Federal and foreign income tax benefits were $3.4 million for the year ended December 31, 1997, compared to tax expense of $73.8 million in 1996. The decrease in Federal and foreign taxes was primarily due to recognition of net operating losses by the U.S. Branch prior to the Merger, resulting in a tax benefit of $24.4 million, in addition to the reversal of a valuation allowance that reduced the deferred tax asset associated with the U.S. Branch's loss reserve discount. This reversal of the valuation allowance resulted in a tax benefit of $37.7 million; the valuation allowance was reversed as the Company believes that the recognition of the deferred tax asset is more likely than not, based on its consolidated tax position. The Company recognized an after-tax increase to income of $6.8 million representing the minority interest in the net loss of MARC for the six months ended June 30, 1997, prior to the Merger. The Company recognized an after-tax charge of $13.1 million for each of the years ended December 31, 1997 and 1996, 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"). In 1996, the Company recognized an extraordinary loss of $34.0 million after-tax, resulting from the in-substance defeasance of the senior subordinated debentures. This amount represents the write-off of the remaining unamortized financing fees from the subordinated debentures, interest payable through the redemption date of September 19, 1997, and a call premium of 4.75% of the redemption price. There was no comparable charge for the Company in 1997. Net income to common stockholders was $221.4 million for the year ended December 31, 1997, compared to net income of $111.7 million in 1996. FINANCIAL CONDITION The Company is a holding company, the principal subsidiary of which is American Re-Insurance. Based on statutory net premiums written of $2,276.2 million in 1998, American Re-Insurance ranked as the third largest property and casualty reinsurer in the U.S., according to Reinsurance Association of America statistics. The Company had total assets of $13,544.0 million and stockholders' equity of $2,853.1 million at December 31, 1998. Total consolidated assets increased by 2.5% to $13,544.0 million at December 1998, from $13,216.9 million at December 31, 1997. This increase was primarily due to an increase in premiums due and other receivables of $231.9 million and cash and investments of $127.9 million. The total financial statement value of investments and cash increased to $7,801.3 million at December 31, 1998, from $7,673.4 million at December 31, 1997, primarily due to cash flows from operating activities, and an increase in the fair value of investments held. The financial statement value of the investment portfolio at December 31, 1998, included a net increase from amortized cost to fair value of $244.5 million for debt and equity investments, compared to a net increase of $181.5 million at December 31, 1997. At December 31, 1998, the Company recognized a cumulative unrealized gain of $158.9 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 28 represents a net increase to stockholders' equity of $40.9 million from the cumulative unrealized gain on debt and equity securities of $118.0 million recognized at December 31, 1997. Total consolidated liabilities increased by 0.6% to $10,453.4 million at December 31, 1998, from $10,393.0 million at December 31, 1997. This increase was primarily due to increases in loss balances payable of $197.6 million, offset by decreases in loss and loss adjustment expense reserves of $135.2 million. Common stockholders' equity increased 10.3% to $2,853.1 million at December 31, 1998, from $2,586.4 million at December 31, 1997. This increase was primarily attributable to net income of $226.0 million for the year ended December 31, 1998, and recognized net market appreciation of $40.7 million in accumulated other comprehensive income, after applicable income tax effect. The Company's reinsurance/insurance subsidiaries' statutory surplus increased to $2,631.1 million at December 31, 1998, from $2,323.4 million at December 31, 1997. Operating leverage, as measured by such subsidiaries' premiums-to-surplus ratio, on an annualized basis was 0.87 to 1 and 1.07 to 1 at December 31, 1998, and December 31, 1997, respectively. LIQUIDITY AND CAPITAL RESOURCES As a holding company, 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 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 expected to total approximately $62.0 million in 1999. 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 1998 operating results, the maximum amount available for payment of dividends to the Company by American Re-Insurance in 1999 without approval of regulatory authorities is estimated to be $260.8 million. The Company's cash flow from operations may be influenced by a variety of 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 provided by operations for the Company were $202.7 million for 1998, $366.1 million for 1997, and $365.9 million in 1996. The decrease in the 1998 period is attributable to several factors, including the Company's lower level of premium writings in the soft insurance market, a higher level of paid losses from its book of proportional business, and payments related to catastrophe losses. Total cash proceeds in 1998 from sales of investments were $6,164.8 million compared to $4,268.5 million in 1997 and $1,203.5 million in 1996. Much of the increased activity in 1998 was due to the Company's investment strategy to continue to restructure the overall investment portfolio into tax-exempt securities and increase common equity holdings. Much of the increased activity in 1997 was due to the Merger, as the investment portfolio was significantly larger than prior years, in addition to a portfolio restructure, based on new investment managers' decisions and a redeployment into tax-exempt securities. Cash and cash equivalents were $274.9 million, $641.6 million, and $553.1 million, at December 31, 1998, 1997, and 1996, 29 respectively. Cash and short-term investments are maintained for liquidity purposes and represented 3.5%, 8.4% and 7.9%, 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, 1998, $75 million remained available under the bank credit agreement. CREDIT RATINGS In October 1998, 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 February 1999, Standard & Poor's Corporation ("S&P") affirmed American Re-Insurance's claims paying ability rating of "AAA," which is 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. In April 1998, Moody's Investors Service ("Moody's") affirmed American Re-Insurance's financial strength rating of "Aaa," which is 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 American Re-Insurance will continue to be rated "A++ (Superior)" by A.M. Best, "AAA" by S&P, or "Aaa" by Moody's. THE YEAR 2000 PROBLEM IMPACT OF THE YEAR 2000 PROBLEM. The "Year 2000 problem" refers to the potential failure of computer software and embedded computer chips to properly recognize the year 2000 and later dates, because such dates are represented only by the last two digits of the year and may be interpreted during computer operations as preceded by 19 rather than 20. The Company has been aware of the Year 2000 problem for several years and has assigned a team of dedicated in-house information technology staff, working with retained consultants and designated representatives from each of the Company's major business areas, to review all critical systems for their Year 2000 compliance and to correct all problems identified. THE COMPANY'S STATE OF READINESS. Some of the Company's Year 2000 problems have been eliminated in the ordinary course of ongoing upgrades to the Company's technology platforms. However, in order to address the remainder of the Company's Year 2000 non-compliant systems (e.g. certain mainframe systems, old software applications, and some facilities equipment), in 1997 management initiated a Year 2000 Compliance Program consisting of 5 phases: Phase 1--Planning, which consisted of defining the project scope, organizing a project team, developing a detailed project plan and obtaining management approval; Phase II--Inventory/Impact Analysis, which consisted of inventorying all of the Company's technology as well as non-technology-based systems and equipment containing embedded chips, determining whether there exists a potential Year 2000 problem, and analyzing the impact on the Company of such problem, and which resulted in the creation of a Year 2000 database including all products and services that need to be evaluated for Year 2000 compliance; Phase III--Renovation, which consists of repairing or replacing critical items that are not Year 2000 compliant; Phase IV--Vendor Compliance, pursuant to which, among other things, the Company is seeking representations from vendors that their products are 30 Year 2000 compliant or modifications to make such products Year 2000 compliant and has retained research consultants to independently verify vendors' Year 2000 compliance; and Phase V--Enterprise Wide Testing and Compliance Certification, which consists of performing a final integrated testing of the corrected business operations and underlying technical infrastructure in a controlled environment. The Company completed Phase I in January 1998 and Phase II in May 1998. The Company is currently in the final stages of Phases III, IV and V, which are expected to be completed by July 1999. RISKS ASSOCIATED WITH YEAR 2000 ISSUES. The major business risks of a Year 2000 failure facing the Company are (i) the inability of the Company to maintain critical business operations dependent on technology or the loss of facilities infrastructure such as telephone communications, with the potential for lost revenue and profits due to business disruptions, (ii) the direct costs associated with restoring operations after disruption, (iii) the loss of competitive market position due to a significant disruption of long duration, and (iv) potential legal liabilities of the Company to third parties who may claim dependence on, or to have been harmed by the failure of, the Company's systems and operations. After Phases III, IV and V are completed, the Company believes its systems will be no more likely to suffer disruptions from the Year 2000 problem than from any other type of hardware or software failures that can occur from time to time with many complex systems. The Company has backup systems for power, certain facilities infrastructure, and computer systems and has response procedures in place with vendors in the event of such "ordinary" failures. Unlike other businesses such as banking or computer based, transaction intensive retail operations, in the worst case scenario, the Company could briefly cease computer-related business operations without significant legal, regulatory, or financial impact. As a result, the Company has no additional contingency plan specific to potential Year 2000 failures after the renovation and compliance testing phases are completed. The Company will continue to monitor the progress of its Year 2000 compliance effort and will continue to review the adequacy of its response mechanisms for systems failures with respect to the Year 2000 problem. The Company is prepared to implement a Year 2000 specific contingency plan should any phase of this Year 2000 compliance effort fall materially behind schedule. In addition to the risks and costs associated with its internal systems and third party vendors, the Company continues to evaluate its underwriting risk arising from potential losses associated with Year 2000 failures. Due to a significant number of variables associated with the extent and severity of the Year 2000 problem, the Company's underwriting risk arising from potential Year 2000 losses cannot be quantified. These variables include actual pervasiveness and severity of Year 2000 system flaws, the amount of costs and expenses directly attributable to Year 2000 failures, the portion of such amount, if any, that constitutes insurable losses, and the extent of governmental intervention. Moreover, standard insurance and reinsurance contracts neither explicitly include nor explicitly exclude coverage for Year 2000 failures. As a result, some Year 2000 related losses may or may not be determined to be covered under standard insurance and reinsurance contracts, depending upon the specific contract language, the applicable case law, and the facts and circumstances of each loss. The Company is proactively seeking to minimize its potential Year 2000 underwriting exposures by (1) assisting clients in evaluation of their potential Year 2000 exposure, (2) performing an underwriting evaluation of each individual client's potential Year 2000 exposure, (3) structuring reinsurance and insurance contract language where possible to mitigate potential exposure; (4) recommending computer systems and technical support as appropriate, and (5) providing a combination of financial protection and risk management solutions. However, the Company cannot be certain that these steps will adequately minimize its Year 2000 underwriting exposures, and given the possible magnitude of the Year 2000 problem, the Company may incur a significant amount of Year 2000 related losses, including litigation expenses, and such losses may have a material adverse impact on the Company's business, operations or financial condition. The Company believes it is taking reasonable and appropriate measures in the course of its business operations and client relationships to avoid or mitigate such Year 2000 related liability exposure. COSTS ASSOCIATED WITH YEAR 2000 ISSUES. Year 2000 specific expenditures for 1998, not including in-house resources, were approximately $5.1 million. These expenses were paid out of working capital and 31 were in line with budgeted projections. The Company has budgeted $4.5 million in additional expenses in connection with the Company's Year 2000 compliance effort in 1999. It is anticipated that the total Year 2000 compliance expenditures will not have a material adverse effect on the Company's business, operations or financial condition. SAFE HARBOR DISCLOSURE The Company has made certain statements herein that may be deemed to be "forward-looking statements" that relate to, among other things, 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 Company's readiness to handle issues related to Year 2000 and risks related thereto. These statements are based upon a number of assumptions and estimates which are inherently subject to significant uncertainties and contingencies, many of which are beyond the control of the Company, and reflect future business decisions which 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 stockholders' equity, investments, capital plans, dividends, plans relating to products or services of American Re, and estimates concerning the effects of litigation or other disputes. Such statements may also include, but are not limited to, projections relating to the Company's ability to complete the various phases of its Year 2000 Compliance Plan in a timely manner; the ability of third party vendors and client companies to eliminate or minimize their Year 2000 exposures and the accuracy of their representations and warranties to the Company; the Company's ability to minimize any possible Year 2000 underwriting losses and the effects of Year 2000 reinsurance claims, litigation or other disputes, as well as assumptions for any of the foregoing and are generally expressed with words such as "believes," "estimates," "expects," "anticipates," "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. The major components of market risk affecting the Company are interest rates, foreign currency exchange rates and equity risk. The Company had both fixed and variable (primarily mortgage backed securities and collateralized mortgage obligations) income investments with a value of $6,953.3 million at December 31, 1998 that are subject to changes in value due to changes in market interest rates. The Company also has debt obligations outstanding, which are the 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 Belgian 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 substantially mitigated because the Company's losses incurred and loss reserves are generally denominated in the same currency as premiums and invested amounts. At December 31, 1998, the Company had no material currency rate exposure. In addition to interest rate and foreign exchange risk, the Company's common equity portfolio, aggregately $545.2 million at December 31, 1998, is subject to changes in value based on changes in equity prices. To hedge a portion of its exposure to movements in its equity prices, the Company entered into options contracts with a notional value of $18.5 million at December 31, 1998. A change in the fair value of the Company's equity portfolio would affect the calculation of the Company's other comprehensive income in its financial statements. 32 The Company has recently established American Re Capital Markets, Inc. to provide its clients with integrated solutions for mitigating risk in the financial markets. Currently, American Re Capital Markets is principally engaged in transactions in the weather derivative market, which exposes the Company to movement in weather related indexes. As of December 31, 1998, the Company was a party to 59 contracts with a notional value of $110.8 million. At December 31, 1998, the maximum payment amount of these contracts was $61.3 million, and the maximum receivable amount was $60.7 million. SENSITIVITY ANALYSIS OF MARKET RISK. 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 market interest rates. The following table presents the Company's projected change in fair value of the Company's financial instruments at December 31, 1998 based on the assumptions indicated. All market sensitive instruments reflected 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, 1998, with adjustments made to reflect the shift in the Treasury yield curve as appropriate.
FAIR VALUE OF TOTAL INVESTMENTS, PERCENTAGE EXCLUDING HYPOTHETICAL HYPOTHETICAL PERCENT CHANGE IN INTEREST RATES COMMON EQUITIES CHANGE CHANGE - -------------------------------------------------------------------- ---------------- ------------ ------------- (DOLLARS IN MILLIONS) 200 basis point rise................................................ $ 6,570.8 $ (685.3) (9.4)% 100 basis point rise................................................ 6,909.3 (346.8 ) (4.8 ) Base Scenario....................................................... 7,256.1 -- -- 100 basis point decline............................................. 7,612.3 356.2 4.9 200 basis point decline............................................. 7,991.8 735.7 10.1
FAIR VALUE OF SENIOR BANK PERCENTAGE DEBT, SENIOR HYPOTHETICAL HYPOTHETICAL PERCENT CHANGE IN INTEREST RATES NOTES AND QUIPS CHANGE CHANGE - -------------------------------------------------------------------- ---------------- ------------ ------------- (DOLLARS IN MILLIONS) 200 basis point rise................................................ $ 750.2 $ (139.5) (15.7)% 100 basis point rise................................................ 816.9 (72.8 ) (8.2 ) Base Scenario....................................................... 889.7 -- -- 100 basis point decline............................................. 973.7 84.0 9.4 200 basis point decline............................................. 1,075.0 185.3 20.8
The preceding tables indicate that at December 31, 1998, 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 prevailing market interest rates, the fair value of the Company's fixed maturity investments and debt instruments would be expected to increase. A change in fair value in the Company's fixed maturity investments would affect the calculation of the Company's other comprehensive income in its financial statements. A change in fair value in the Company's debt instruments would affect the Company's ability to redeem these instruments, especially the Senior Notes, which has a redemption feature that is based on the yield to maturity of the equivalent U.S. Treasury security, plus 15 basis points. 33 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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 34 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY DIRECTORS DR. JUR. CLAUS HELBIG, age 57, became a Director of the Company on November 25, 1996. Dr. Helbig has been a Member of the Board of Management of Munich Re since 1993. Dr. Helbig is also currently Vice Chairman of the Board of Directors of Allgemeine Kreditversicherung AG, Mainz, Germany and a Member of the Board of Directors of each of Deutsche Gesellschaft fuer Fondsverwaltung (DEGEF) Frankfurt, Germany (Deutsche Bank Group); and Karlsruher Rendite, Karlsruhe. From 1989 to 1992 Dr. Helbig was a member of the Board of Directors of each of Westdeutsche Landesbank (Austria) AG, Vienna, Austria; Westdeutsche Landesbank International S.A., Luxembourg; Banque Franco Allemande S.A., Paris, France; and a Member of the Board of Management of Suedwestdeutsche Landesbank. EDWARD J. NOONAN, age 40, became President, Chief Executive Officer and a Director of the Company and Chairman, President and Chief Executive Officer of American Re-Insurance on March 14, 1997. From February 5, 1997 to March 14, 1997, Mr. Noonan was Executive Vice President of the Company and American Re-Insurance. From September 1994 to March 14, 1997, Mr. Noonan was President of DICO. 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 1987 to April 1990, he was Vice President, Treaty Division of American Re-Insurance and from October 1983 through December 1987 he was a Vice President of American Re-Insurance. DR. JUR. HANS-JURGEN SCHINZLER, age 57, became a Director of the Company on November 25, 1996 and Chairman of the Company on March 14, 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 also Deputy Chairman of the Supervisory Board of Allianz Versicherungs-Aktiengesellschaft, Munich; a Member of the Supervisory Board of each of D.A.S., Munich; Degussa Aktiengesellschaft, Frankfurt; Dresdner Bank Aktiengesellschaft, Frankfurt; Hoechst Aktiengesellschaft, Frankfurt; and MAN Aktiengesellschaft, Munich. Dr. Schinzler is a Member of the Board of Directors of Allianz of America Inc., Delaware and Dresdner Securities (USA) Inc., New York. KARL WITTMANN, age 54, became a Director of the Company on December 31, 1998. Mr. Wittmann has been a Member of the Board of Management of Munich Re since January 1, 1998 responsible for Asia and Australasia, United Kingdom and Ireland and from January 1, 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; a Director of Munich Re Holding Co. (UK) Ltd., London; Munich Holdings of Australia Pty., Ltd., Sydney; Munich Management Pty. Ltd., Sydney; Munich Management Pte. Ltd., Singapore; Munich Reinsurance Company of Australasia Ltd., Sydney; Munichre Service Ltd., Hong Kong; International Insurance Society, Inc. (IIS), New York; Temple Insurance Company, Toronto; Munich Reinsurance Company of Canada, Toronto; Munich Life Management Corp. Ltd., Toronto; Munich American Reassurance Company, Atlanta; and Munich Canada Management Corp., Toronto. 35 EXECUTIVE OFFICERS In addition to Mr. Noonan, the executive officers of the Company are as follows: MAHMOUD M. ABDALLAH, age 50, became an Executive Vice President of the Company and American Re-Insurance on February 5, 1997. Mr. Abdallah has also been Chairman and CEO of AM-RE Global Services, Inc. since July 20, 1998. Additionally, Mr. Abdallah is President, International Operations for American Re-Insurance and AM-RE Brokers, which positions he assumed in September 1994. Mr. Abdallah has been a Director of American Re-Insurance since September 1992. From May 1989 to September 1994, he was Senior Vice President of American Re-Insurance. Prior to that, he was Vice President, responsible for International Operations from July 1987 to May 1989. Mr. Abdallah also serves on the Board of U.S. International Insurance Council (IIC). ALBERT J. BEER, age 48, is Executive Vice President of the Company and President of RiskPartners. Mr. Beer assumed the position of Executive Vice President on March 14, 1997 and became President of RiskPartners on December 5, 1997. Prior to that, Mr. Beer was President of DICO from March 14, 1997 to December 5, 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. Prior to that, Mr. Beer was with Tillinghast & Co. (professional actuaries) from November 1984 to April 1989, most recently as a principal. ROBERT K. BURGESS, age 50, is Executive Vice President, General Counsel and Secretary of the Company and American Re-Insurance. He became Executive Vice President on February 5, 1997, having served as Senior Vice President, General Counsel and Secretary of both companies from April 1, 1995. 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 from 1981 and an associate prior thereto. GREGORY T. DOYLE, age 38, became Executive Vice President of the Company and a Director, Executive Vice President and President of DICO on December 5, 1997. From February 5, 1997 to December 1997, Mr. Doyle was Senior Vice President of American Re-Insurance and Senior Vice President of DICO. From December 1994 to February 1997, Mr. Doyle was Eastern Region Vice President of American Re-Insurance. From March 26, 1990 to December 1994, he was Account Management Vice President. Mr. Doyle was Assistant Vice President of Account Management, New York since August 1, 1988. Prior to that, he was Director of Account Management. Mr. Doyle joined American Re-Insurance in December 1985 as a Production Assistant in the Treaty Production Department in New York. GEORGE T. O'SHAUGHNESSY, JR., age 43, has been Executive Vice President Chief Financial and Accounting Officer of American Re Corporation and American Re-Insurance since April 1998. Prior thereto he was Senior Vice President, Chief Financial and Accounting Officer and Controller of the Company from April 1, 1997. Mr. O'Shaughnessy became a Director of American Re-Insurance on December 5, 1997. Mr. O'Shaughnessy had been Vice President of American Re since April 1990. WOLFGANG ENGSHUBER, age 42, became Executive Vice President of the Company and Executive Vice President and a Director of American Re-Insurance on October 26, 1998, 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. 36 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, 1998, (the "named executive officers"), information concerning compensation earned in 1998, 1997, and 1996 by such persons for services with the Company and its subsidiaries.
LONG-TERM COMPENSATION ---------------------------- AWARDS ANNUAL COMPENSATION ----------- PAYOUTS -------------------------------------------------------- SECURITIES --------------- OTHER ANNUAL UNDERLYING LTIP NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS PAYOUTS - ------------------------------------ --------- ---------- ---------- --------------------- ----------- --------------- Edward J. Noonan.................... 1998 $ 575,000 $ 500,000 0 0 0 President and Chief 1997 475,000 500,000 0 0 0 Executive Officer 1996 295,000 375,000 0 0 0 Mahmoud M. Abdallah................. 1998 $ 430,000 $ 425,000 0 0 0 Executive Vice President 1997 400,000 425,000 0 0 0 1996 295,000 375,000 0 0 0 Albert J. Beer...................... 1998 $ 387,500 $ 400,000 0 0 0 Executive Vice President 1997 340,000 400,000 0 0 0 1996 270,000 375,000 0 0 0 Robert K. Burgess................... 1998 $ 430,000 $ 400,000 0 0 0 Executive Vice President, 1997 400,000 400,000 0 0 0 General Counsel and Secretary 1996 365,000 375,000 0 0 0 Gregory T. Doyle.................... 1998 $ 299,000 $ 300,000 0 0 0 Executive Vice President 1997 200,000 200,000 0 0 0 1996 171,000 120,000 0 0 0 ALL OTHER NAME AND PRINCIPAL POSITION COMPENSATION(2) - ------------------------------------ ---------------- Edward J. Noonan.................... $ 520,094 President and Chief 497,525 Executive Officer 9,274,065 Mahmoud M. Abdallah................. 411,588 Executive Vice President 391,696 9,274,731 Albert J. Beer...................... 124,894 Executive Vice President 117,444 1,924,199 Robert K. Burgess................... 246,908 Executive Vice President, 235,956 General Counsel and Secretary 4,119,633 Gregory T. Doyle.................... 119,739 Executive Vice President 109,024 1,878,604
- ------------------------------ (1) During each of the three years ended December 31, 1998, 1997 and 1996, 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 the Summary compensation 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 Deferred Compensation Plan as follows: Mr. Noonan, $485,224 in 1998, $461,702 in 1997 and $43,842 in 1996; Mr. Abdallah, $384,097 in 1998, $365,477 in 1997 and $34,704 in 1996; Mr. Beer, $99,763 in 1998, $94,927 in 1997 and $9,014 in 1996; Mr. Burgess, $219,441 in 1998, $208,803 in 1997 and $19,827 in 1996; Mr. Doyle, $99,982 in 1998, $95,135 in 1997 and $9,034 in 1996; (ii) employer contributions under the American Re-Insurance Company Savings Plan, a 401(k) plan, of $8,000 in 1998, $8,000 in 1997, and $7,500 in 1996, for Mr. Noonan; of $6,250 in 1998, $6,560 in 1997, and $7,500 in 1996, for Mr. Abdallah; of $8,000 in 1998, $8,023 in 1997 and $7,500 in 1996, for Mr. Beer; of $6,250 in 1998, $6,419 in 1997 and $7,500 in 1996, for Mr. Burgess; of $6,538 in 1998, $5,945 in 1997 and $7,500 in 1996 for Mr. Doyle; (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, 1998 of $20,884 in 1998, $22,285 in 1997 and $7,199 in 1996 for Mr. Noonan; of $15,788 in 1998, $14,291 in 1997, and $16,292 in 1996 for Mr. Abdallah; of $12,000 in 1998, $9,530 in 1997 and $6,250 in 1996 for Mr. Beer; of $15,763 in 1998, $14,563 in 1997 and $6,968 in 1996 for Mr. Burgess; of $8,750 in 1998, $4,299 in 1997 and $837 in 1996 for Mr. Doyle; (iv) employer contributions for group term life, accidental death and dismemberment and disability insurance of $5,986 in 1998, $5,538 in 1997 and $3,647 in 1996 for Mr. Noonan; of $5,453 in 1998, $5,368 in 1997 and $4,358 in 1996 for Mr. Abdallah; of $5,131 in 1998, $4,964 in 1997 and $4,183 in 1996 for Mr. Beer; of $5,454 in 1998, $6,171 in 1997 and $6,588 in 1996 for Mr. Burgess; of $4,469 in 1998, $3,645 in 1997 and $2,876 in 1996 for Mr. Doyle; and (v) amounts paid or elected to be deferred in 1996 pursuant to canceled options under the Company's two stock option plans which were terminated as a result of the change in control of the Company in 1996 as follows: Mr. Noonan, $9,211,877; Mr. Abdallah, $9,211,877; Mr. Beer, $1,897,252; Mr. Burgess, $4,078,750; and Mr. Doyle, $1,858,357. 37 LONG-TERM INCENTIVE PLAN The following table sets forth for the Chief Executive Officer of the Company, and the four named executive officers information concerning long term incentive compensation awards made in 1998 under the Company's Long-term Incentive Compensation Plan. LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE-BASED PLANS ------------------------------------------- (B) (C) NUMBER OF PERFORMANCE OR (D) (E) (F) (A) SHARES, UNITS OR OTHER PERIOD UNTIL THRESHOLD TARGET MAXIMUM NAME OTHER RIGHTS (#) MATURITIES OR PAYOUT ($ OR #) ($ OR #) ($ OR #) - ----------------------------------- ----------------- --------------------- --------------- ------------ ------------ Gregory T. Doyle................... 2000 0 $ 600,000 $ 1,200,000
Under the Company's Long-Term Incentive Plan, performance goals are selected by the Company's Executive Committee for which performance targets are chosen. The 1998 performance target for Mr. Doyle, as well as the 1997 performance target awards for Messrs. Noonan, Abdallah, Beer and Burgess, originally based upon a four-year performance cycle, 1997-2000, and reported in the Company's 10-K for the year ended December 31, 1997, were equally divided in amount by the Executive Committee in 1998 between two performance periods consisting of three fiscal years each, 1997--1999 and 1998-- 2000, with all amounts still subject to payment following the end of the four-year period. 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 under the applicable performance period. The performance goals selected by the Committee for both performance periods are Aggregate Operating Income and Return on Equity. COMPENSATION OF DIRECTORS Directors receive no additional compensation for their Board or Committee service. EMPLOYMENT AGREEMENTS In 1998, American Re-Insurance entered into 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 other bonus as may be paid, 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. Under the Agreements, American Re-Insurance has also agreed to pay a severance benefit to each 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 38 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. The Company has also entered into an Executive Severance and Non-Competition Agreement with Mr. Doyle pursuant to which he has agreed to serve initially in his position held at the time such agreement was entered into and thereafter in such positions as the Board of Directors of American Re-Insurance shall designate, on an "at-will" employment basis, and American Re-Insurance has agreed to pay a severance benefit if his employment with American Re-Insurance or an affiliate is terminated at any time on or before December 31, 2001, pursuant to an involuntary termination by the Company not for "Cause" or on a voluntary basis by the executive upon a "Constructive Discharge" (as such terms are defined in the agreement. Under the agreement, upon such termination, Mr. Doyle would be entitled to continuation of annual base salary for a period of two years. He would also be entitled to receive any amounts accrued to the date of termination under any long term compensation plan and all other benefits available under the Company's personnel policy manual as in effect as of the date of the agreement. For a period of two years after the date of termination, Mr. Doyle would be 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. 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 39 compensation columns of the Summary Compensation Table. The credited years of service on December 31, 1998 for the persons named in the Summary Compensation Table are as follows: Mr. Noonan, 14.2 years; Mr. Abdallah, 16 years; Mr. Beer, 6 years; Mr. Burgess, 3.6 years; and Mr. Doyle, 14.0 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, including incentive compensation awards, 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 in his retirement benefits 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 93.06% of the outstanding Common Stock of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 40 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. 41 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, 1999. 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.
NAME TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ CLAUS HELBIG - ------------------------------ Director March 30, 1999 Claus Helbig /s/ EDWARD J. NOONAN - ------------------------------ President, Chief Executive March 30, 1999 Edward J. Noonan Officer and Director /s/ HANS JURGEN SCHINZLER - ------------------------------ Chairman of the Board and March 30, 1999 Hans Jurgen Schinzler Director /s/ KARL WITTMANN - ------------------------------ Director March 30, 1999 Karl Wittmann
42 AMERICAN RE CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report......................................................... F-2 Independent Auditors' Report......................................................... F-3 Consolidated Balance Sheets--December 31, 1998 and 1997.............................. F-4 Consolidated Statements of Income--Years ended December 31, 1998, 1997, and 1996..... F-5 Consolidated Statements of Stockholders' Equity--Years ended December 31, 1998, 1997, and 1996............................................................................ F-6 Consolidated Statements of Cash Flows--Years ended December 31, 1998, 1997, and 1996................................................................................ F-7 Notes to Consolidated Financial Statements--December 31, 1998........................ F-8 INDEX TO SCHEDULES TO FINANCIAL STATEMENTS Summary of Investments Other Than Investments in Related Parties--December 31, 1998................................................................................ S-1 Condensed Financial Information of Registrant (Parent Company only): Condensed Balance Sheets--December 31, 1998 and 1997................................. S-2 Condensed Statements of Operations and Retained Earnings--Years ended December 31, 1998, 1997, and 1996................................................................ S-3 Condensed Statements of Cash Flows--Years ended December 31, 1998, 1997, and 1996.... S-4 Notes to Condensed Financial Information--December 31, 1998.......................... S-5 Supplemental Insurance Information--Years ended December 31, 1998, 1997, and 1996.... S-6 Reinsurance--Years ended December 31, 1998, 1997, and 1996........................... S-7 Supplemental Information (for Property-Casualty Insurance Underwriters)--Years ended December 31, 1998, 1997, and 1996................................................... S-8
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of American Re Corporation We have audited the accompanying consolidated balance sheets of American Re Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index as of December 31, 1998 and 1997 and for the years then ended. 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, 1998 and 1997, and the results of their operations and their cash flows for the years then ended, 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 Short Hills, New Jersey February 22, 1999 F-2 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of American Re Corporation We have audited the accompanying consolidated statements of income, stockholders' equity, and cash flows of American Re Corporation and subsidiaries (the "Company") for the year ended December 31, 1996. Our audit also included the financial statement schedules for the year ended December 31, 1996 as listed in the Index at Item 14. 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 financial statements and financial statement schedules based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of American Re Corporation and subsidiaries the year ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, such 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. Deloitte & Touche LLP Parsippany, New Jersey February 4, 1997 (March 14, 1997 as to Note 10, July 3, 1997 as to Note 1B) F-3 AMERICAN RE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ ASSETS Investments Fixed maturities Bonds available for sale, at fair value (amortized cost: December 31, 1998 and 1997--$6,688.6 and $6,481.4, respectively)..................................... $ 6,876.0 $ 6,644.2 Preferred stock available for sale, at fair value (amortized cost: December 31, 1998 and 1997--$76.7 and $70.8, respectively).................................. 77.3 71.4 Equity securities available for sale, at fair value (cost: December 31, 1998 and 1997--$488.7 and $275.2, respectively)........................................... 545.2 293.3 Other invested assets.............................................................. 27.9 22.9 Cash and cash equivalents............................................................ 274.9 641.6 ------------ ------------ Total investments and cash................................................... 7,801.3 7,673.4 Accrued investment income............................................................ 85.4 93.9 Premiums and other receivables....................................................... 1,315.5 1,083.6 Deferred policy acquisition costs.................................................... 357.7 356.7 Reinsurance recoverables on paid and unpaid losses................................... 2,343.1 2,449.0 Funds held by ceding companies....................................................... 408.9 383.0 Prepaid reinsurance premiums......................................................... 148.2 127.6 Deferred federal income taxes........................................................ 142.6 185.6 Other assets......................................................................... 941.3 864.1 ------------ ------------ Total assets................................................................. $ 13,544.0 $ 13,216.9 ------------ ------------ ------------ ------------ LIABILITIES Loss and loss adjustment expense reserves............................................ $ 7,334.1 $ 7,469.3 Unearned premium reserve............................................................. 1,280.5 1,269.9 ------------ ------------ Total insurance reserves..................................................... 8,614.6 8,739.2 Loss balances payable................................................................ 412.1 214.5 Funds held under reinsurance treaties................................................ 273.7 243.3 Senior bank debt..................................................................... 75.0 75.0 Senior notes......................................................................... 498.5 498.5 Other liabilities.................................................................... 579.5 622.5 ------------ ------------ Total liabilities............................................................ 10,453.4 10,393.0 Commitments and Contingent Liabilities (Note 14) Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding as all of its assets Junior Subordinated Debentures........................ 237.5 237.5 ------------ ------------ STOCKHOLDERS' EQUITY Common stock, par value: $0.01 per share; authorized: 1,000 shares; issued and outstanding: 149.49712 and 100 shares at December 31, 1998, and 1997, respectively....................................................................... -- -- Additional paid-in capital........................................................... 1,332.4 1,332.4 Retained earnings.................................................................... 1,397.6 1,171.6 Accumulated other comprehensive income............................................... 123.1 82.4 ------------ ------------ Total stockholders' equity................................................... 2,853.1 2,586.4 ------------ ------------ Total liabilities, Company-obligated mandatorily redeemable preferred securities of subsidiary trust, and stockholders' equity................... $ 13,544.0 $ 13,216.9 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. F-4 AMERICAN RE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- REVENUE Premiums written............................................................. $ 2,406.8 $ 2,497.7 $ 1,902.4 Change in unearned premium reserve........................................... 12.1 (11.6) (105.7) --------- --------- --------- Premiums earned............................................................ 2,418.9 2,486.1 1,796.7 Net investment income........................................................ 417.5 427.5 248.2 Net realized capital gains................................................... 92.8 87.7 4.8 Other income................................................................. 31.8 41.7 47.5 --------- --------- --------- Total revenue............................................................ 2,961.0 3,043.0 2,097.2 --------- --------- --------- LOSSES AND EXPENSES Losses and loss adjustment expenses.......................................... 1,682.4 1,716.3 1,167.8 Commission expense........................................................... 584.3 623.5 390.1 Operating expense............................................................ 232.1 214.9 143.4 Interest expense............................................................. 42.2 42.8 54.1 Other expenses............................................................... 98.5 221.2 109.2 --------- --------- --------- Total losses and expenses................................................ 2,639.5 2,818.7 1,864.6 --------- --------- --------- Income before income taxes, minority interest, distributions on preferred securities of subsidiary trust and extraordinary loss...................... 321.5 224.3 232.6 Federal and foreign income taxes............................................. 82.4 (3.4) 73.8 --------- --------- --------- Income before minority interest, distributions on preferred securities of subsidiary trust and extraordinary loss.................................... 239.1 227.7 158.8 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) --------- --------- --------- Income before extraordinary loss............................................. 226.0 221.4 145.7 Extraordinary loss, net of applicable income tax of $18.3.................... -- -- (34.0) --------- --------- --------- Net income to common stockholders........................................ $ 226.0 $ 221.4 $ 111.7 --------- --------- --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. F-5 AMERICAN RE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN MILLIONS)
ARC MARC MARC ADDITIONAL COMMON COMMON PREFERRED PAID IN RETAINED STOCK STOCK STOCK CAPITAL EARNINGS ----------- ----------- ----------- ----------- --------- Balance at January 1, 1996............................. $ 0.5 $ -- $ -- $ 710.5 $ 87.3 Comprehensive income: Net income........................................... 111.7 Net change in unrealized loss on foreign exchange.... Net change in unrealized appreciation of investments........................................ Fixed maturities................................... Equity securities.................................. Total comprehensive income............................. Dividend to common stockholders........................ (14.2) Merger-related capital restructure..................... (0.5) 0.5 Stock option and award settlement tax effect........... 69.5 Other, net............................................. 5.1 ----- ----- ----------- ----------- --------- Balance at December 31,1996............................ -- -- -- 785.6 184.8 Capital restatement resulting from Merger.............. -- 1.9 19.5 15.4 765.8 ----- ----- ----------- ----------- --------- Balance at December 31, 1996........................... -- 1.9 19.5 801.0 950.6 Comprehensive income: Net income........................................... 221.4 Net change in unrealized loss on foreign exchange.... Net change in unrealized appreciation of investments........................................ Fixed maturities................................... Equity securities.................................. Total comprehensive income............................. Shareholder dividends.................................. (0.4) Capital contribution................................... 85.0 Acquisition of MARC minority interest.................. 425.0 Merger-related capital restructure..................... (1.9) (19.5) 21.4 ----- ----- ----------- ----------- --------- Balance at December 31, 1997........................... -- -- -- 1,332.4 1,171.6 Comprehensive income: Net income........................................... 226.0 Net change in unrealized loss on foreign exchange.... Net change in unrealized appreciation of investments........................................ Fixed maturities................................... Equity securities.................................. Total comprehensive income............................. ----- ----- ----------- ----------- --------- Balance at December 31, 1998........................... $ -- $ -- $ -- $ 1,332.4 $ 1,397.6 ----- ----- ----------- ----------- --------- ----- ----- ----------- ----------- --------- ACCUMULATED OTHER COMPREHENSIVE INCOME TOTAL --------------- --------- Balance at January 1, 1996............................. $ 48.8 $ 847.1 Comprehensive income: Net income........................................... Net change in unrealized loss on foreign exchange.... (13.4) Net change in unrealized appreciation of investments........................................ Fixed maturities................................... (30.5) Equity securities.................................. (5.8) Total comprehensive income............................. 62.0 Dividend to common stockholders........................ (14.2) Merger-related capital restructure..................... -- Stock option and award settlement tax effect........... 69.5 Other, net............................................. 5.1 ------ --------- Balance at December 31,1996............................ (0.9) 969.5 Capital restatement resulting from Merger.............. 20.4 823.0 ------ --------- Balance at December 31, 1996........................... 19.5 1,792.5 Comprehensive income: Net income........................................... 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) Capital contribution................................... 85.0 Acquisition of MARC minority interest.................. 425.0 Merger-related capital restructure..................... -- ------ --------- Balance at December 31, 1997........................... 82.4 2,586.4 Comprehensive income: Net income........................................... 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........................... $ 123.1 $ 2,853.1 ------ --------- ------ ---------
See accompanying notes to consolidated financial statements. F-6 AMERICAN RE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................................. $ 226.0 $ 221.4 $ 111.7 Adjustments to reconcile net income to net cash provided by operating activities: Decrease in accrued investment income..................................................... 8.5 11.3 1.7 Increase in premiums and other receivables................................................ (231.9) (167.6) (131.2) Increase in deferred policy acquisition costs............................................. (1.0) (19.8) (24.4) Increase (decrease) in insurance reserves................................................. (124.6) 280.4 250.3 Increase (decrease) in current and deferred federal and foreign income tax assets and liabilities.............................................................................. (5.0) (57.5) 68.1 Change in other assets and liabilities.................................................... 371.9 96.4 54.8 Depreciation expense on property and equipment............................................ 7.2 8.4 8.5 Write-down of property and equipment...................................................... -- 38.2 -- Net realized capital gains................................................................ (92.8) (87.7) (4.8) Change in other, net...................................................................... 44.4 42.6 31.2 --------- --------- --------- Net cash provided by operating activities............................................... 202.7 366.1 365.9 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments held to maturity Maturities................................................................................ -- -- 75.0 Investments available for sale Purchases................................................................................. (7,130.2) (5,173.3) (1,981.1) Maturities................................................................................ 429.7 606.5 359.6 Sales..................................................................................... 6,164.7 4,266.6 1,202.7 Other investments Purchases................................................................................. (12.6) (3.0) (11.3) Sales..................................................................................... 0.1 1.9 0.8 Costs of additions to property and equipment................................................ (18.2) (23.1) (22.7) --------- --------- --------- Net cash used in investing activities................................................... (566.5) (324.4) (377.0) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowing of senior notes..................................................... -- -- 498.4 Defeasance of principal of senior subordinated debentures................................... -- -- (450.0) Dividend to common stockholders............................................................. -- (0.4) (14.2) Stock option and award proceeds received from parent........................................ -- -- 204.2 Stock option and award payments............................................................. -- -- (203.5) Merger-related expense payments............................................................. -- -- (34.1) Loan from parent company.................................................................... -- (35.9) 35.9 Capital contribution from parent company.................................................... -- 85.0 -- Other capital contribution sources, net..................................................... -- -- 5.2 --------- --------- --------- Net cash provided by financing activities............................................... -- 48.7 41.9 --------- --------- --------- Effect of exchange rate changes on cash and cash equivalents................................ (2.9) (1.9) (0.1) --------- --------- --------- Net increase (decrease) in cash and cash equivalents.................................... (366.7) 88.5 30.7 Cash and cash equivalents, beginning of period.............................................. 641.6 553.1 294.2 --------- --------- --------- Cash and cash equivalents, end of period.................................................... 274.9 641.6 324.9 Merger-related adjustment................................................................. -- -- 228.2 --------- --------- --------- Cash & cash equivalents, end of period...................................................... $ 274.9 $ 641.6 $ 553.1 --------- --------- --------- --------- --------- --------- SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid (refunded), net........................................................... $ (59.3) $ 29.3 $ (21.0) Interest paid and distributions on preferred securities subsidiary trust.................... $ 62.4 $ 63.0 $ 117.1
See accompanying notes to consolidated financial statements. F-7 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 1. THE COMPANY A. 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 in the alternative market through a primary insurance company, American Alternative Insurance Corporation ("American Alternative"). (American Re-Insurance and American Alternative together are the "reinsurance/insurance subsidiaries.") American Re conducts its business through 14 domestic and 14 international offices. B. ACQUISITION BY MUNICH RE The Company is a subsidiary of Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen ("Munich Re"), a company organized under the laws of Germany. On August 13, 1996, the Company entered into an Agreement and Plan of Merger with Munich Re and Puma Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Munich Re. Pursuant to the terms of the Merger Agreement, on November 25, 1996, following approval of the Merger by the Company's stockholders and applicable regulatory authorities, Puma Acquisition Corp. was merged with and into the Company, which became a wholly owned subsidiary of Munich Re (the "Acquisition"), and all of the outstanding shares of the Company's common stock, $.01 par value, were converted into the right to receive $65.00 per share in cash. In addition, the Merger Agreement canceled all outstanding Company stock options. Holders of the canceled Company stock options were entitled to receive a cash payment equal to the product of (i) the number of Company stock options outstanding at the merger date, and (ii) the excess of the Merger Consideration, over the cumulative exercise price total of the Company's stock options outstanding. In addition, certain holders of the Company's stock options were given the opportunity to defer the receipt of up to 100% of their option proceeds until 2001. Aggregate cash consideration paid by Munich Re was $3,278.3, including aggregate cash payment of canceled stock options of $124.2 and aggregate canceled stock option proceeds deferred of $79.9. The Company established a stockholders' equity benefit of $69.5, representing current and deferred tax benefits associated with the cancellation and settlement of the Company's stock options. In addition, the Company incurred a one-time charge to operating earnings of $36.1 ($35.1 on an after-tax basis), primarily consisting of financial advisory fees in connection with the Acquisition. On November 26, 1996, the Company's Common Stock was voluntarily delisted from the New York Stock Exchange. As a result of the Acquisition, the 47.3 million shares of Common Stock previously issued and outstanding, were converted to 100 common shares issued and outstanding. On July 1, 1997, American Re and Munich Re, completed the merger of Munich American Reinsurance Company ("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 F-8 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 1. THE COMPANY (CONTINUED) 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. In 1998, Munich Re acquired the shares of common stock owned by VICTORIA, bringing Munich Re's ownership interest to 93.06%. 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 exchange of the insurance assets and liabilities of the U.S. Branch for the Company's shares was also accounted for as an "as-if-pooling of interests" business combination between parties under common control. Common control for American Re, MARC and the U.S. Branch was considered effective at December 31, 1996. As such, the Company's December 31, 1996, balance sheet and related footnote disclosures, as originally filed in its 1996 Form 10-K, have been restated to reflect a 50% ownership of MARC, a 50% minority interest in the ownership of MARC by Allianz and VICTORIA, and a 100% ownership of the U.S. Branch. As common control was considered effective at December 31, 1996, the Company's consolidated statements of income and cash flows for the year ended December 31, 1996, have not been restated. 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-9 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 1. THE COMPANY (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 ----- ----- --------- ----- ----- ---------
For informational purposes, the pro forma condensed results of operations shown below are presented as if the Merger transactions which took place in July 1997 had occurred at January 1, 1996. Adjustments have been made to the 1997 amounts to exclude Merger-related expenses, minority interest, and reversal of the U.S. Branch deferred tax asset valuation allowance (see Note 6), and to the 1997 and 1996 amounts to include goodwill amortization.
YEAR ENDED DECEMBER 31, -------------------- 1997 1996 --------- --------- Revenue.............................................................. $ 3,043.0 $ 2,962.0 Income before income taxes, distributions on preferred securities of subsidiary trust and extraordinary loss............................ 348.1 370.9 Net income........................................................... $ 256.6 $ 234.6
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 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) 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 REPORTING COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Financial Accounting Standard No. 130 ("FAS No. 130"), "Reporting Comprehensive Income." FAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in financial statements. FAS 130 requires unrealized gains and losses on investments, unrealized foreign currency translation adjustments, and minimum pension liability adjustments, if any, to be included as components of other comprehensive income. Prior to the adoption of FAS 130 these amounts were reported as separate components in stockholders' equity. Prior years' financial statements have been reclassified to conform with the requirements of FAS 130. The components of other comprehensive income are shown net of tax in the Consolidated Statement of Stockholders' Equity. The adoption of this statement had no financial impact on the Company's net income or stockholders' equity. The components of accumulated other comprehensive income are as follows:
NET UNREALIZED NET UNREALIZED LOSS ON APPRECIATION OF FOREIGNS 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 ------ ------ --------- ------ ------ ---------
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 of 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, 1999. Currently, the Company does not expect the adoption of FAS No. 133 to have a material impact on its consolidated financial statements. F-11 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Currently, the Company does not expect the application of SOP No. 98-7 to have a material impact on its consolidated financial statements. 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 stockholders' 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 debt (see Note 8) have been deferred. Such costs are being amortized over the remainder of their respective lives, using the interest-rate method. As discussed in Note 10--"Senior Notes," the obligation of the Company's Senior Subordinated Debentures was extinguished through an in-substance defeasance in December 1996. Due to this early F-12 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) extinguishment, the Company recognized an extraordinary charge of $34.0, after applicable federal income tax effects of $18.3, representing the write-off of the remaining unamortized senior subordinated debt related financing fees of $14.1, interest payable through the redemption date of September 19, 1997 of $16.8, and a premium of 4.75% of the redemption price of $21.4. The amortization of deferred financing fees was $0.3, $1.9 and $1.9 for the years ended December 31, 1998, 1997, and 1996 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 $35.9 and $33.5 at December 31, 1998, and 1997, respectively. H. GOODWILL Goodwill represents the cost in excess of net assets acquired for the acquisitions of American Re-Insurance in 1992 and the minority interests in MARC in 1997. The goodwill, which is amortized over 40 years, was $258.3 and $265.3 at December 31, 1998 and 1997, respectively. The amortization of goodwill was $7.0, $4.7 and $2.4 for each of the years ended December 31, 1998, 1997, and 1996, respectively. The Company regularly evaluates the recoverability of goodwill and other acquired intangible assets. The carrying value of such assets would be reduced 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 $645.0 and $592.7 at December 31, 1998, and 1997, respectively. Management believes that the reserves for losses and LAE as of December 31, 1998 are adequate to cover the ultimate gross cost of losses and LAE incurred through December 31, 1998. 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-13 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 $2,269.2 and $2,366.5 at December 31, 1998, and 1997, 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, 1998, and 1997. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such F-14 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 15--"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' stockholders' equity. 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 1997 and 1996 financial statement presentations have been reclassified to conform with the 1998 presentation. F-15 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:
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 ----------- ----------- ----- --------- ----------- ----------- ----- ---------
1997 ------------------------------------------------ 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...................................... $ 1,125.1 $ 25.6 $ 0.1 $ 1,150.6 Obligations of states and political subdivisions................. 1,706.6 57.4 0.2 1,763.8 Corporate securities............................................. 2,652.6 57.4 3.7 2,706.3 Mortgage backed securities....................................... 997.1 28.5 2.1 1,023.5 ----------- ----------- ----- --------- Total bonds available for sale................................. 6,481.4 168.9 6.1 6,644.2 Preferred stock.................................................... 70.8 0.6 -- 71.4 ----------- ----------- ----- --------- Total fixed maturities......................................... $ 6,552.2 $ 169.5 $ 6.1 $ 6,715.6 ----------- ----------- ----- --------- ----------- ----------- ----- ---------
F-16 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 3. INVESTMENTS (CONTINUED) The amortized cost and fair value of fixed maturities at December 31, 1998, 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.
1998 --------------------------- AMORTIZED COST FAIR VALUE -------------- ----------- Due to mature: One year or less................................................. $ 265.0 $ 266.7 After one year through five years................................ 1,844.2 1,883.4 After five years through ten years............................... 2,627.6 2,702.5 After ten years.................................................. 833.6 882.1 Mortgage backed securities....................................... 1,194.9 1,218.6 -------------- ----------- Total fixed maturities......................................... $ 6,765.3 $ 6,953.3 -------------- ----------- -------------- -----------
Proceeds from sales of investments in fixed maturities available for sale and the related gains and losses realized on those sales were as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- Proceeds from sales........................................ $ 6,164.7 $ 4,266.6 $ 1,202.7 Gross gains realized....................................... 113.7 43.2 9.0 Gross losses realized...................................... 11.4 21.8 5.1
Net unrealized appreciation (depreciation) on investments included within accumulated other comprehensive income was as follows:
YEAR ENDED DECEMBER 31, -------------------- 1998 1997 --------- --------- Change in unrealized appreciation (depreciation) Fixed maturities......................................................... $ 24.3 $ 107.6 Equity securities........................................................ 38.6 (11.0) --------- --------- Subtotal............................................................... 62.9 96.6 Income tax effect.......................................................... 22.0 33.8 --------- --------- Net change in unrealized appreciation...................................... 40.9 62.8 Balance, beginning of year................................................. 118.0 55.2 --------- --------- Balance, end of year....................................................... $ 158.9 $ 118.0 --------- --------- --------- ---------
At December 31, 1998, and 1997, the Company's investments in bonds on a financial statement basis were $6,876.0 or 88.1% and $6,644.2 or 86.6%, respectively, of total investments and cash. The bond portfolio is diversified within various industry segments. F-17 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 3. INVESTMENTS (CONTINUED) Bond investment by market sector at December 31, were as follows:
1998 1997 ---------------------- ---------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ----------- --------- ----------- --------- U.S. government................................ $ 610.0 $ 645.1 $ 1,125.0 $ 1,150.6 Foreign government............................. 329.5 342.9 306.0 315.7 State and municipal............................ 2,561.1 2,636.9 1,706.6 1,763.8 Mortgage backed securities..................... 1,194.9 1,218.6 997.1 1,023.5 Financial...................................... 667.8 684.6 1,058.9 1,080.9 Utilities...................................... 117.2 119.2 273.7 278.7 Transportation/capital......................... 10.7 11.2 160.4 163.6 Health care.................................... 24.9 25.9 18.1 18.6 Natural resources.............................. 3.1 3.1 2.4 2.4 Other corporate securities..................... 1,169.4 1,188.5 833.2 846.4 ----------- --------- ----------- --------- Total...................................... $ 6,688.6 $ 6,876.0 $ 6,481.4 $ 6,644.2 ----------- --------- ----------- --------- ----------- --------- ----------- ---------
Sources of net investment income were as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- Fixed maturities................................................. $ 392.2 $ 407.7 $ 239.1 Short-term investments........................................... 22.0 21.9 9.6 Other............................................................ 28.9 16.3 13.8 --------- --------- --------- Gross investment income...................................... 443.1 445.9 262.5 Investment expenses.............................................. (25.6) (18.4) (14.3) --------- --------- --------- Net investment income........................................ $ 417.5 $ 427.5 $ 248.2 --------- --------- --------- --------- --------- ---------
Net realized capital investment gains (losses) were as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- Fixed maturities..................................................... $ 102.3 $ 21.4 $ 3.9 Equity securities.................................................... (3.8) 67.9 -- Other................................................................ (5.7) (1.6) 0.9 --------- --------- --- Net realized capital gains....................................... $ 92.8 $ 87.7 $ 4.8 --------- --------- --- --------- --------- ---
At December 31, 1998, and 1997, securities in the amount of $408.5 and $399.9 (par value), respectively, were on deposit with governmental authorities as required by law. F-18 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 4. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES The reconciliation of loss and loss adjustment expense reserves for the years ended December 31, 1998, 1997, and 1996 is shown below:
YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- Loss and LAE reserves at beginning of period................................ $ 7,469.3 $ 7,178.3 $ 4,786.0 Reinsurance recoverables on unpaid losses................................... (2,366.5) (2,329.6) (1,941.4) ---------- ---------- ---------- Net reserves at beginning of period......................................... 5,102.8 4,848.7 2,844.6 Net incurred related to: Current period............................................................ 1,620.4 1,642.1 1,167.7 Prior periods............................................................. 62.0 74.2 0.1 ---------- ---------- ---------- Total net incurred...................................................... 1,682.4 1,716.3 1,167.8 Net paid related to: Current period............................................................ 207.2 167.5 89.5 Prior periods............................................................. 1,513.1 1,294.7 820.5 ---------- ---------- ---------- Total net paid.......................................................... 1,720.3 1,462.2 910.0 ---------- ---------- ---------- Net reserves at end of period............................................... 5,064.9 5,102.8 3,102.4 Merger-related adjustment................................................. -- -- 1,746.3 ---------- ---------- ---------- Net reserves at end of period............................................... 5,064.9 5,102.8 4,848.7 Reinsurance recoverables on unpaid losses................................... (2,269.2) (2,366.5) (1,775.1) Merger-related adjustment................................................. -- -- (554.5) ---------- ---------- ---------- Reinsurance recoverables on unpaid losses................................... (2,269.2) (2,366.5) (2,329.6) ---------- ---------- ---------- Loss and LAE reserves at end of period...................................... $ 7,334.1 $ 7,469.3 $ 7,178.3 ---------- ---------- ---------- ---------- ---------- ----------
As a result of changes in estimates of insured events in prior years, the losses and LAE incurred (net of reinsurance recoveries of $252.1, $373.0 and $99.2 for the years ended December 31, 1998, 1997, and 1996, respectively) increased by $62.0 in 1998, $74.2 in 1997, and $0.1 in 1996. 5. 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 F-19 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 5. REINSURANCE (CONTINUED) 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 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, ------------------------------- 1998 1997 1996 --------- --------- --------- Premiums written Direct................................................... $ 208.6 $ 146.0 $ 71.2 Assumed.................................................. 2,908.9 2,935.1 2,262.0 Ceded.................................................... (710.7) (583.4) (430.8) --------- --------- --------- Net...................................................... 2,406.8 2,497.7 1,902.4 --------- --------- --------- --------- --------- --------- Premiums earned Direct................................................... 194.1 119.0 34.7 Assumed.................................................. 2,914.8 3,003.5 2,161.0 Ceded.................................................... (690.0) (636.4) (399.0) --------- --------- --------- Net...................................................... 2,418.9 2,486.1 1,796.7 --------- --------- --------- --------- --------- --------- Losses incurred Direct................................................... 136.4 56.9 (45.6) Assumed.................................................. 1,798.1 2,032.4 1,312.6 Ceded.................................................... (252.1) (373.0) (99.2) --------- --------- --------- Net...................................................... $ 1,682.4 $ 1,716.3 $ 1,167.8 --------- --------- --------- --------- --------- ---------
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 $79.6 and $81.0 at December 31, 1998 and 1997, 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, 1998), a subsidiary of Berkshire Hathaway, Inc., accounted for approximately 23.5% and 24.7% of the reinsurance recoverables on paid and unpaid losses at December 31, 1998, and 1997, respectively. Allianz A.G. Holdings (which had an A.M. Best rating of "A+" at December 31, 1998), accounted for approximately 9.2% and 12.0% of the reinsurance recoverables on paid and unpaid losses at December 31, 1998, and 1997, respectively. F-20 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 6. FEDERAL AND FOREIGN INCOME TAXES The net deferred tax asset recorded at December 31, 1998, and 1997, 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:
1998 1997 --------- --------- Loss reserves........................................................................ $ 323.6 $ 310.0 Unearned premiums.................................................................... 78.8 79.6 Alternative minimum tax ("AMT") credit carryforward.................................. 7.2 19.2 Other deferred tax assets............................................................ 54.7 80.4 --------- --------- Deferred tax asset................................................................. 464.3 489.2 Reinsurance recoverable on paid and unpaid losses.................................... 100.1 98.7 Deferred policy acquisition costs.................................................... 125.2 124.9 Investments.......................................................................... 73.8 60.0 Other deferred liabilities........................................................... 22.6 20.0 --------- --------- Deferred tax liability............................................................. 321.7 303.6 --------- --------- Net deferred tax asset............................................................. $ 142.6 $ 185.6 --------- --------- --------- ---------
At December 31, 1998, the Company believes it is more likely than not that the deferred tax asset is fully realizable, and therefore, no valuation allowance has been recorded. 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, however, could be reduced in the near term if estimates of future taxable income are reduced. F-21 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 6. FEDERAL AND FOREIGN INCOME TAXES (CONTINUED) Income tax expense (benefit) was as follows:
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) ----- ----------- --------- ----- ----------- ---------
YEAR ENDED DECEMBER 31, 1996 ----------------------------------- CURRENT DEFERRED TOTAL ----------- ----------- --------- Income--federal and foreign tax expense......................... $ 48.3 $ 23.8 $ 72.1 Federal tax expense (benefit) on net realized capital gains..... 3.3 (1.6) 1.7 ----- ----------- --------- Total federal and foreign tax expense......................... $ 51.6 $ 22.2 $ 73.8 ----- ----------- --------- ----- ----------- ---------
At December 31, 1996, the U.S. Branch had a valuation allowance to reflect the estimated amount of the deferred tax assets that may not be realized due to the expiration of net operating losses, tax credit carryforwards and loss reserve discounting. As part of the Redomestication of the U.S. Branch, the remaining net operating losses and the tax credit carryforwards remained with a successor Federal taxable entity to the U.S. Branch. As a result, the deferred tax assets for the net operating loss carryforwards and tax credit carryforwards, and the offsetting valuation allowances, are not included in the Company's deferred tax asset or liability calculation at December 31, 1997. However, the loss reserve discount deferred tax asset and corresponding valuation allowance were transferred to American Re as a part of the Redomestication. The valuation allowance associated with the discount on the loss reserves was reversed subsequent to the Redomestication, as the Company believes, based on its consolidated Federal tax position, that it is more likely than not that the deferred tax asset is fully realizable. This reversal resulted in a tax benefit of $37.7 million during the 1997 period. F-22 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 6. FEDERAL AND FOREIGN INCOME TAXES (CONTINUED) 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, ------------------------------- 1998 1997 1996 --------- --------- --------- Income before taxes.................................................................. $ 321.5 $ 224.3 $ 232.6 Income tax rate...................................................................... 35% 35% 35% --------- --------- --------- Tax expense at federal statutory income tax rate................................... 112.5 78.5 81.4 Tax effect of: Tax-exempt investment income....................................................... (31.0) (20.7) (19.9) Goodwill........................................................................... 2.5 1.6 0.8 Reversal of the valuation allowance associated with the loss reserve discount--U. S. Branch........................................................................ -- (37.7) -- Net operating loss utilization--U.S. Branch........................................ -- (24.4) -- Merger-related expenses, not deductible for federal income tax purposes............ -- -- 11.6 Other, net......................................................................... (1.6) (0.7) (0.1) --------- --------- --------- Federal and foreign income tax expense (benefit)................................. $ 82.4 $ (3.4) $ 73.8 --------- --------- --------- --------- --------- ---------
7. 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. F-23 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 7. BENEFIT PLANS (CONTINUED) 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, 1998 and 1997, and a statement of the funded status at December 31:
PENSION BENEFITS OTHER BENEFITS -------------------- -------------------- 1998 1997 1998 1997 --------- --------- --------- --------- RECONCILIATION OF BENEFIT OBLIGATION Obligation at January 1..................................................... $ 159.5 $ 127.0 $ 25.8 $ 19.6 Service cost.............................................................. 11.6 9.6 2.1 1.5 Interest cost............................................................. 10.8 9.5 1.7 1.4 Plan amendments........................................................... -- 0.9 -- -- Actuarial (gain) loss..................................................... 18.8 12.9 1.7 1.5 Acquisitions (divestitures)............................................... -- 3.0 -- 1.8 Benefit payments.......................................................... (6.5) (3.4) -- -- --------- --------- --------- --------- Obligation at December 31................................................... $ 194.2 $ 159.5 $ 31.3 $ 25.8 --------- --------- --------- --------- --------- --------- --------- --------- RECONCILIATION OF FAIR VALUE OF PLAN ASSETS Fair value of plan assets at January 1...................................... $ 109.1 $ 94.8 $ -- $ -- Actual return on plan assets.............................................. 12.0 16.3 -- -- Employer contributions.................................................... -- 1.4 0.4 0.4 Benefit payments.......................................................... (6.5) (3.4) (0.4) (0.4) Settlements............................................................... -- -- -- -- --------- --------- --------- --------- Fair value of plan assets at December 31.................................... $ 114.6 $ 109.1 $ -- $ -- --------- --------- --------- --------- --------- --------- --------- --------- FUNDED STATUS Funded status at December 31................................................ $ (79.5) $ (50.3) $ (31.3) $ (25.8) Unrecognized prior service cost............................................. 0.9 0.9 2.8 2.9 Unrecognized (gain) loss.................................................... 31.0 14.6 4.3 2.2 --------- --------- --------- --------- Net amount recognized in other liabilities.................................. $ (47.6) $ (34.8) $ (24.2) $ (20.7) --------- --------- --------- --------- --------- --------- --------- ---------
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 $8.8 and $10.7 at December 31, 1998 and 1997, 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 $31.3 and $25.8 at December 31, 1998 and 1997, respectively. F-24 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 7. BENEFIT PLANS (CONTINUED) Net periodic benefit cost for the years ended December 31, included the following components:
PENSION BENEFITS OTHER BENEFITS ------------------------------- -------------------- 1998 1997 1996 1998 1997 --------- --------- --------- --------- --------- Service cost......................................................... $ 11.6 $ 9.6 $ 7.1 $ 2.1 $ 1.5 Interest cost........................................................ 10.8 9.5 5.9 1.7 1.4 Expected return on plan assets....................................... (9.7) (8.6) (5.7) -- -- Amortization of prior service cost................................... 0.1 -- -- 0.2 0.1 Amortization of net (gain) loss...................................... 0.1 -- -- -- -- --------- --------- --- --- --- Net periodic benefit cost.......................................... $ 12.9 $ 10.5 7.3 $ 4.0 $ 3.0 --------- --------- --- --- --- --------- --------- --- --- --- 1996 --------- Service cost......................................................... $ 1.3 Interest cost........................................................ 1.2 Expected return on plan assets....................................... -- Amortization of prior service cost................................... -- Amortization of net (gain) loss...................................... -- --- Net periodic benefit cost.......................................... $ 2.5 --- ---
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 ------------------------------- ------------------------------- 1998 1997 1996 1998 1997 1996 --------- --------- --------- --------- --------- --------- Discount rate.................................................... 6.5% 7.0% 7.5% 6.5% 7.0% 7.5% Expected return on plan assets................................... 9.0% 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 1998. The rate was assumed to decrease gradually over 18 years, to a rate of 5% 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................. $ 1.0 $ (1.3) Effect on the health care component of the accumulated postretirement benefit obligation................................ $ 6.0 $ (7.6)
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 $5.0, $5.0, and $3.6 for the years ended December 31, 1998, 1997, and 1996, 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 F-25 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 7. BENEFIT PLANS (CONTINUED) Company. Charges to operations for such incentives were $21.6, $23.4 and $14.9 for the years ended December 31, 1998, 1997, and 1996, respectively. In 1998, American Re-Insurance entered into Employment Agreements (the "Agreements"), with certain senior executives pursuant to which each such executive has agreed to serve in his current position 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 bonus as may be paid, 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. Under the Agreements, American Re-Insurance has also agreed to pay a severance benefit to each executive if the executive's employment with American Re-Insurance or an affiliate is terminated during the term 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 American Re-Insurance'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, 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, 1998, and 1997, the Company's consolidated balance sheets reflected $126.5 and $79.9, respectively, of deferred option proceeds, which is reflected in other liabilities. 8. 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-26 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 8. 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, 1998 and 1997, $75.0 remained outstanding under the bank revolving credit agreement. In 1998, the Company guaranteed the repayment of principal, 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 its obligations under such derivatives contracts and for other general corporate purposes. At December 31, 1998 ARCM had no outstanding indebtedness under the agreement. 9. IN-SUBSTANCE DEFEASANCE On December 24, 1996, the Company defeased in-substance its existing issue of 10 7/8% Senior Subordinated Debentures due 2004 (the "Debentures"). On September 19, 1997, the Company redeemed all then outstanding Debentures ($450.0 in principal amount) at 104.75% of par, plus accrued interest to the date of redemption, in accordance with the terms of the indenture under which the Debentures were issued. As described in Note 2F--"Deferred Financing Fees", the Company recognized an extraordinary charge of $34.0, after applicable income tax of $18.3, resulting from the in-substance defeasance. As described in Note 10--"Senior Notes," funds for the redemption were raised through a private offering of $500.0 of the Company's 7.45% Senior Notes due 2026. The Company completed the offering of the Notes on December 24, 1996. The net proceeds of $494.1 raised from the offering of the Notes, in addition to $7.7 of funds from the working capital of the Company, were simultaneously deposited with the trustee under the indenture for the Debentures (the "Indenture"). These funds, plus accrued interest, were used to redeem the Debentures in full on September 19, 1997. 10. SENIOR NOTES As described in Note 9--"In-Substance Defeasance," in connection with the in-substance defeasance of the Debentures, the Company sold $500.0 aggregate principal amount of its Senior Notes due December 15, 2026 (the "Notes") on December 24, 1996. 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 F-27 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 10. SENIOR NOTES (CONTINUED) 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. 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, 1998, and 1997, were $2,631.1 and $2,323.4, respectively. Statutory net income for the years ended December 31, 1998, 1997, and 1996, on a combined basis was $319.9, $196.7 and $356.6, respectively. Dividends declared and paid by American Re-Insurance to the Company were $35.0, $105.0 and $70.0 in 1998, 1997, and 1996, respectively. F-28 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 12. CAPITAL AND SURPLUS AND STOCKHOLDER DIVIDEND RESTRICTIONS (CONTINUED) 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, 1998, American Re-Insurance could declare dividends of approximately $260.8 during 1999 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. 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. 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, 1986. The aggregate principal and interest amounts of these guarantees outstanding were $153.9 and $49.0 at December 31, 1998 and 1997, respectively. The aggregate principal and interest amount reflects the Company's extent of involvement in financial guarantees. There were no material concentrations of off-balance sheet financial instruments at December 31, 1998, and 1997. B. RELATED PARTY TRANSACTIONS In November 1996, the Company borrowed $35.9 from Munich Re for the payment of Acquisition-related expenses. In July 1997, the Company repaid this amount in full plus accrued interest. Munich Re and its affiliated companies participate on several of the Company's existing retrocessional programs. Total ceded premiums to Munich Re and its affiliated companies relating to such programs were approximately $174.4 and $97.0 for the years ended December 31, 1998 and 1997, respectively. Total insurance reserves outstanding with Munich Re and its affiliated companies were $256.7 and $236.3 at December 31, 1998 and 1997, respectively. Munich Re Capital Management, an affiliated registered investment advisor, is primarily responsible for the management of the fixed income portion of the Company's investment portfolio. 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 $20.3, $23.2, and $14.8, F-29 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) for the years ended December 31, 1998, 1997, and 1996. Future net minimum payments under noncancellable leases at December 31, 1998, were estimated to be as follows:
2004 AND 1999 2000 2001 2002 2003 THEREAFTER - --------- --------- --------- --------- --------- ------------- $18.7 $ 13.9 $ 11.6 $ 9.5 $ 6.7 $ 9.7 - --------- --------- --------- --- --- ---
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 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. The Company had Latent Liability Exposure loss reserves, before the application of any adverse loss coverage for 1992 and prior years, as follows at December 31:
1998 1997 -------------------- -------------------- GROSS NET GROSS NET --------- --------- --------- --------- Asbestos............................................... $ 399.9 $ 258.5 $ 457.7 $ 297.1 Environmental-Related and Other Latent Liability....... 237.3 150.1 327.9 218.6 --------- --------- --------- --------- Total.................................................. $ 637.2 $ 408.6 $ 785.6 $ 515.7 --------- --------- --------- --------- --------- --------- --------- ---------
Latent Liability Exposure loss reserves at December 31, 1998, and 1997, 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 non-claim litigation incidental to its business principally related to insurance company insolvencies or liquidation proceedings in the ordinary course of business. Also, in the ordinary course of business, the Company is sometimes involved in adversarial proceedings incidental to its insurance and reinsurance business. Based upon its familiarity with or review and analysis of such matters, the Company believes that none of the pending litigation matters will have a material adverse effect on the consolidated financial statements of the Company. However, no assurance can be given as to the ultimate outcome of any such litigation matters. F-30 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments at December 31, 1998, and 1997, were as follows:
1998 1997 -------------------- -------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE --------- --------- --------- --------- Assets: Bonds available for sale............................... $ 6,876.0 $ 6,876.0 $ 6,644.2 $ 6,644.2 Preferred stock........................................ 77.3 77.3 71.4 71.4 Equity securities...................................... 545.6 545.6 293.3 293.3 Other invested assets.................................. 27.9 27.9 22.9 22.9 --------- --------- --------- --------- Total investments.................................... 7,526.8 7,526.8 7,031.8 7,031.8 Cash and cash equivalents................................ 274.9 274.9 641.6 641.6 Liabilities: Senior bank debt....................................... 75.0 75.0 75.0 75.0 Senior Notes........................................... 498.5 568.6 498.5 539.0 QUIPS.................................................. 237.5 246.1 237.5 246.4
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. 16. 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 investment management, actuarial and financial analysis, due diligence consulting for mergers and acquisitions, and reinsurance and insurance F-31 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 16. SEGMENT REPORTING (CONTINUED) brokerage. The financial results of these subsidiaries have been aggregated along with holding company operations for presentation of segment results.
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------------------ TOTAL INTERNATIONAL INSURANCE FEE SUBS & DICO RISKPARTNERS OPERATIONS OPERATIONS HOLDING CO. 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 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) 16. SEGMENT REPORTING (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 ------------------------------------------------------------------------------ TOTAL INTERNATIONAL INSURANCE FEE SUBS & DICO RISKPARTNERS OPERATIONS OPERATIONS HOLDING CO. 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% --------- ------ ------ ----------- --------- ------ ------ -----------
F-33 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 16. SEGMENT REPORTING (CONTINUED)
YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------------------------------------ TOTAL INTERNATIONAL INSURANCE FEE SUBS & DICO RISKPARTNERS OPERATIONS OPERATIONS HOLDING CO. TOTAL --------- ------------- ------------- ----------- ------------- --------- REVENUES GROSS PREMIUMS WRITTEN........... $ 1,351.6 $ 422.8 $ 558.8 $ 2,333.2 -- $ 2,333.2 --------- ------ ------ ----------- ----- --------- NET PREMIUMS WRITTEN............. 1,177.4 283.7 441.3 1,902.4 -- 1,902.4 --------- ------ ------ ----------- ----- --------- PREMIUMS EARNED................ 1,091.9 290.4 414.4 1,796.7 -- 1,796.7 Net investment income............ -- -- -- 254.6 (6.4) 248.2 Net realized capital gains....... -- -- -- 5.3 (0.5) 4.8 Other income..................... -- -- -- 0.3 47.2 47.5 --------- ------ ------ ----------- ----- --------- Total revenue.................. 2,056.9 40.3 2,097.2 ----------- ----- --------- LOSSES AND EXPENSES LOSSES AND LAE................... 728.8 185.6 253.4 1,167.8 -- 1,167.8 UNDERWRITING EXPENSES............ 313.0 91.4 129.1 533.5 -- 533.5 Interest expense................. -- -- -- -- 54.1 54.1 Other expense.................... -- -- -- 9.6 99.6 109.2 --------- ------ ------ ----------- ----- --------- Total losses and expenses...... 1,710.9 153.7 1,864.6 ----------- ----- --------- Income before income taxes..... $ 232.6 --------- --------- UNDERWRITING GAIN.............. $ 50.1 $ 13.4 $ 31.9 $ 95.4 --------- ------ ------ ----------- --------- ------ ------ ----------- LOSS AND LAE RATIO............... 66.7% 63.9% 61.1% 65.0% UNDERWRITING EXPENSE RATIO....... 28.7 31.5 31.2 29.7 --------- ------ ------ ----------- COMBINED RATIO................... 95.4% 95.4% 92.3% 94.7% --------- ------ ------ ----------- --------- ------ ------ -----------
- ------------------------ 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. The Company assumed net premiums written from a primarily domestic client of $152.8 or 6.3%, $68.0 or 2.7%, and $128.4 or 6.7% of total net premiums during the years ended December 31, 1998, 1997, and 1996, respectively. F-34 AMERICAN RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) 17. UNAUDITED QUARTERLY FINANCIAL DATA Summarized quarterly financial data were as follows:
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 stockholders.............................. 82.9 64.2 32.6 46.3 Comprehensive income........................................... 73.1 67.3 72.4 53.9
1997 ------------------------------------------ FIRST SECOND THIRD FOURTH --------- --------- --------- --------- Operating Data Premiums written............................................... $ 840.6 $ 636.0 $ 550.0 $ 471.1 Premiums earned................................................ 654.3 679.8 552.8 599.2 Losses and LAE................................................. 449.9 469.4 398.4 398.6 Underwriting expenses.......................................... 210.9 213.7 198.2 215.6 Underwriting loss.............................................. (6.5) (3.2) (43.9) (15.0) Net investment income.......................................... 103.6 106.3 107.6 110.0 Interest expense............................................... 11.2 10.5 10.6 10.5 Net income to common stockholders.............................. 52.7 33.1 50.9 84.7 Comprehensive income........................................... $ (20.3) $ 88.1 $ 112.7 $ 103.8
F-35 SCHEDULE I AMERICAN RE CORPORATION SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1998 (DOLLARS IN MILLIONS)
AMOUNT AT WHICH SHOWN IN THE AMORTIZED FAIR BALANCE TYPE OF INVESTMENT COST VALUE SHEET - ---------------------------------------------------------------------------- ----------- --------- ------------ FIXED MATURITIES: Bonds available for sale: U.S. Government and government agencies................................. $ 610.0 $ 645.1 $ 645.1 States, municipalities and political subdivisions....................... 2,561.1 2,637.0 2,637.0 Mortgage backed securities.............................................. 1,194.9 1,218.6 1,218.6 Foreign governments..................................................... 329.5 342.9 342.9 Public utilities........................................................ 93.6 94.8 94.8 Corporate bonds......................................................... 1,899.5 1,937.6 1,937.6 ----------- --------- ------------ Total bonds available for sale........................................ 6,688.6 6,876.0 6,876.0 ----------- --------- ------------ Preferred securities.................................................... 76.7 77.3 77.3 ----------- --------- ------------ Total fixed maturities................................................ 6,765.3 6,953.3 6,953.3 ----------- --------- ------------ EQUITY SECURITIES: Common stock: Public utilities........................................................ 33.2 40.7 40.7 Banks, trust and insurance companies.................................... 70.7 74.4 74.4 Industrial and miscellaneous and all other.............................. 384.8 430.1 430.1 ----------- --------- ------------ Total equity securities............................................... 488.7 545.2 545.2 ----------- --------- ------------ Other investments....................................................... 27.9 27.9 27.9 ----------- --------- ------------ Total investments..................................................... $ 7,281.9 $ 7,526.4 $ 7,526.4 ----------- --------- ------------ ----------- --------- ------------
S-1 SCHEDULE II AMERICAN RE CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) CONDENSED BALANCE SHEET (DOLLARS IN MILLIONS)
DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ----------------- ASSETS Investment in subsidiaries............................................... $ 3,622.3 $ 3,337.8 Cash..................................................................... 27.5 6.0 Deferred financing fees.................................................. 26.0 26.8 Current federal income taxes recoverable................................. 25.6 57.3 Other assets............................................................. 154.2 113.2 -------- -------- Total assets........................................................... $ 3,855.6 $ 3,541.1 -------- -------- -------- -------- LIABILITIES Interest payable......................................................... $ 1.2 $ 0.9 Bank debt--term loan..................................................... 75.0 75.0 Senior notes............................................................. 498.5 498.5 Junior subordinated debt................................................. 244.8 244.8 Other liabilities........................................................ 183.0 135.5 -------- -------- Total liabilities...................................................... 1,002.5 954.7 -------- -------- STOCKHOLDERS' EQUITY Common stock............................................................. -- -- Additional paid in capital............................................... 1,332.4 1,332.4 Retained earnings........................................................ 1,397.6 1,171.6 Accumulated other comprehensive income................................... 123.1 82.4 -------- -------- Total stockholders' equity............................................. 2,853.1 2,586.4 -------- -------- Total liabilities and stockholders' equity............................. $ 3,855.6 $ 3,541.1 -------- -------- -------- --------
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, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- ----------------- REVENUE Net investment income................................. $ 1.4 $ 1.1 $ 1.0 Other income.......................................... 20.5 11.5 11.9 -------- -------- ------- Total............................................... 21.9 12.6 12.9 -------- -------- ------- EXPENSES Interest expense...................................... 63.0 63.6 74.9 Operating expenses.................................... 27.5 30.6 42.1 -------- -------- ------- Total expenses...................................... 90.5 94.2 117.0 -------- -------- ------- Operating loss before federal income taxes.......... (68.6) (81.6) (104.1) Federal income taxes.................................... (23.6) (27.1) (24.4) -------- -------- ------- Loss before equity in undistributed net income of subsidiaries...................................... (45.0) (54.5) (79.7) Equity in undistributed net income of subsidiaries...... 271.0 275.9 225.4 -------- -------- ------- Income before extraordinary loss.................... 226.0 221.4 145.7 Extraordinary loss, net of applicable income taxes of $18.3................................................. -- -- (34.0) -------- -------- ------- Net income to common stockholders................... 226.0 221.4 111.7 Retained earnings at beginning of period................ 1,171.6 950.6 87.3 -------- -------- ------- 1,397.6 1,172.0 199.0 Dividends to common stockholders...................... -- (0.4) (14.2) -------- -------- ------- Retained earnings at end of period...................... 1,397.6 1,171.6 184.8 Merger-related adjustment............................. -- -- 765.8 -------- -------- ------- Retained earnings (restated)............................ $ 1,397.6 $ 1,171.6 $ 950.6 -------- -------- ------- -------- -------- -------
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. 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income to common stockholders..................... $ 226.0 $ 221.4 $ 111.7 ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES: Equity in undistributed net income of subsidiaries.... (271.0) (275.9) (225.4) Interest payable (receivable)......................... 0.3 -- (13.5) Increase (decrease) in intercompany payables.......... (19.3) 15.1 10.0 Increase (decrease) in current and deferred federal income tax liability................................ 35.6 (56.4) (27.4) Increase (decrease) in other, net..................... 14.9 24.3 53.3 ------- ------- ------- Net cash used in operating activities............... (13.5) (71.5) (91.3) CASH FLOWS FROM FINANCING ACTIVITIES: Dividend received from subsidiary..................... 35.0 105.0 70.0 Proceeds from borrowing of senior notes............... -- -- 498.4 Defeasance of principal of senior subordinated debt... -- -- (450.0) Stock option and award proceeds from parent........... -- -- 204.2 Stock option and award payments....................... -- -- (203.5) Merger-related expense payments....................... -- -- (34.1) Loan from parent...................................... -- (35.9) 35.9 Investment in subsidiary.............................. -- (12.5) -- Dividends to common stockholders...................... -- (0.4) (14.2) Other capital contributions........................... -- -- 5.2 ------- ------- ------- Net cash provided by financing activities........... 35.0 56.2 111.9 ------- ------- ------- Net increase (decrease) in cash..................... 21.5 (15.3) 20.6 Cash and cash equivalents, beginning of period.......... 6.0 21.3 0.7 ------- ------- ------- Cash and cash equivalents, end of period................ $ 27.5 $ 6.0 $ 21.3 ------- ------- ------- ------- ------- ------- SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid (refunded), net..................... $ (59.3) $ 29.3 $ (21.0) Interest paid......................................... $ 63.0 $ 63.6 $ 117.7
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, 1998, 1997, and 1996, 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 BENEFITS, DEFERRED LOSSES, POLICY CLAIMS AND NET ACQUISITION LOSS UNEARNED EARNED INVESTMENT SEGMENT COSTS EXPENSES PREMIUMS PREMIUMS INCOME (1) - ------------------------------------------------------------- ----------- ---------- ---------- ---------- ---------- YEAR ENDED DECEMBER 31, 1998 DICO....................................................... $ 235.7 $ 3,636.4 $ 782.6 $ 1,573.3 -- RiskPartners............................................... 69.9 667.7 325.9 392.1 -- International Operations................................... 52.1 760.8 172.0 453.5 -- ----------- ---------- ---------- ---------- ---------- Total...................................................... $ 357.7 $ 5,064.9 $ 1,280.5 $ 2,418.9 -- ----------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- YEAR ENDED DECEMBER 31, 1997 DICO....................................................... $ 254.1 $ 3,762.1 $ 823.3 $ 1,782.4 -- RiskPartners............................................... 56.7 727.6 275.6 286.0 -- International Operations................................... 45.9 613.1 171.0 417.7 -- ----------- ---------- ---------- ---------- ---------- Total...................................................... $ 356.7 $ 5,102.8 $ 1,269.9 $ 2,486.1 -- ----------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- YEAR ENDED DECEMBER 31, 1996 DICO....................................................... 236.8 $ 3,659.2 $ 888.5 $ 1,091.9 -- RiskPartners............................................... 58.8 613.3 279.6 290.4 -- International Operations................................... 41.3 576.2 153.9 414.4 -- ----------- ---------- ---------- ---------- ---------- Total...................................................... $ 336.9 $ 4,848.7 $ 1,322.0 $ 1,796.7 -- ----------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- AMORTIZATION CLAIMS OF DEFERRED AND CLAIM POLICY ADJUSTMENT ACQUISITION UNDERWRITING PREMIUMS SEGMENT EXPENSE COSTS EXPENSES WRITTEN - ------------------------------------------------------------- ---------- ------------ ------------ ---------- YEAR ENDED DECEMBER 31, 1998 DICO....................................................... $ 1,073.8 $ 254.1 $ 561.3 $ 1,517.9 RiskPartners............................................... 273.2 56.7 132.6 436.5 International Operations................................... 335.4 45.9 122.5 452.4 ---------- ------ ------------ ---------- Total...................................................... $ 1,682.4 $ 356.7 $ 816.4 $ 2,406.8 ---------- ------ ------------ ---------- ---------- ------ ------------ ---------- YEAR ENDED DECEMBER 31, 1997 DICO....................................................... $ 1,250.6 $ 236.8 $ 585.5 $ 1,790.8 RiskPartners............................................... 194.2 58.8 108.2 273.8 International Operations................................... 271.5 41.3 144.7 433.1 ---------- ------ ------------ ---------- Total...................................................... $ 1,716.3 $ 336.9 $ 838.4 $ 2,497.7 ---------- ------ ------------ ---------- ---------- ------ ------------ ---------- YEAR ENDED DECEMBER 31, 1996 DICO....................................................... $ 728.8 $ 145.1 $ 313.0 $ 1,177.4 RiskPartners............................................... 185.6 56.0 91.4 283.7 International Operations................................... 253.4 34.1 129.1 441.3 ---------- ------ ------------ ---------- Total...................................................... $ 1,167.8 $ 235.2 $ 533.5 $ 1,902.4 ---------- ------ ------------ ---------- ---------- ------ ------------ ----------
- ------------------------ (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, 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% --------- ----------- ----------- --------- ----- --------- ----------- ----------- --------- ----- 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% --------- ----------- ----------- --------- ----- --------- ----------- ----------- --------- ----- YEAR ENDED DECEMBER 31, 1996: Life insurance in force....................................... $ -- $ -- $ -- $ -- --------- ----------- ----------- --------- --------- ----------- ----------- --------- PREMIUMS: Life insurance................................................ $ -- $ -- $ -- $ -- --% Accident and health insurance................................. -- -- -- -- -- Property-liability insurance.................................. 34.7 399.0 2,161.0 1,796.7 120.3 Title insurance............................................... -- -- -- -- -- --------- ----------- ----------- --------- ----- Total Premiums............................................ $ 34.7 $ 399.0 $ 2,161.0 $ 1,796.7 120.3% --------- ----------- ----------- --------- ----- --------- ----------- ----------- --------- -----
S-7 SCHEDULE VI AMERICAN RE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL INFORMATION (FOR PROPERTY-CASUALTY INSURANCE UNDERWRITERS) (DOLLARS IN MILLIONS)
CLAIMS AND CLAIM ADJUSTMENT EXPENSES RESERVES FOR DISCOUNT, INCURRED DEFERRED UNPAID CLAIMS IF ANY RELATEDTO: POLICY AND CLAIMS DEDUCTED NET --------- ACQUISITION ADJUSTMENT IN PREVIOUS UNEARNED EARNED INVESTMENT CURRENT AFFILIATION WITH REGISTRANT COSTS EXPENSES COLUMN PREMIUMS PREMIUMS INCOME YEAR - --------------------------------------- ----------- ------------- ----------- --------- --------- ----------- --------- 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 (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 (b)Unconsolidated property-casualty insurance entities................... ----------- ------------- ----------- --------- --------- ----------- --------- YEAR ENDED DECEMBER 31, 1996 (a) Consolidated property-casualty insurance entities................... $ 336.9 $ 7,178.3 Note (1) $ 1,322.0 $ 1,796.7 $ 248.2 $ 1,167.7 (b)Unconsolidated property-casualty insurance entities................... ----------- ------------- ----------- --------- --------- ----------- --------- AMORTIZATION OF DEFERRED PAID CLAIMS POLICY AND CLAIMS PRIOR ACQUISITION ADJUSTMENT PREMIUMS AFFILIATION WITH REGISTRANT YEAR COSTS EXPENSES WRITTEN - --------------------------------------- --------- ------------- ----------- ----------- YEAR ENDED DECEMBER 31, 1998 (a) Consolidated property-casualty insurance entities................... $ 62.0 $ 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................... $ 74.2 $ 336.9 $ 1,462.2 $ 2,497.7 (b)Unconsolidated property-casualty insurance entities................... --------- ------ ----------- ----------- YEAR ENDED DECEMBER 31, 1996 (a) Consolidated property-casualty insurance entities................... $ 0.1 $ 235.2 $ 910.0 $ 1,902.4 (b)Unconsolidated property-casualty insurance entities................... --------- ------ ----------- -----------
- ------------------------ (1) Workers' compensation reserves are discounted at 4.5%. The estimated amount of discount is $645.0, $592.7, and $505.5 as of December 31, 1998, 1997 and 1996, respectively. S-8 INDEX TO EXHIBITS
PAGE NUMBER IN EXHIBIT SEQUENTIAL NUMBERING NO. 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 May 1, 1997, by and among the Company. American Reinsurance, and Munich American Reinsurance Company. 3.1 Restated Certificate of Incorporation of the Company is incorporated by reference from the Company's Form S-I, 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 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 5-4, Registration No. 333-20663, Exhibit 4.4, as tiled with the Securities and Exchange Commission on January 29, 1997. 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 S3, Registration Statement No. 33-94558, Exhibit 4.2, as filed with the Securities and Exchange Commission on August 21, 1995.
PAGE NUMBER IN EXHIBIT SEQUENTIAL NUMBERING NO. DESCRIPTION SYSTEM - --------- -------------------------------------------------------------------------------- ----------------------- 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 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. 33-94553, Exhibit 4.6, as file with the Securities and Exchange Commission on August 22, 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. 30230 dated as of September 30, 1992 by and between American Re-lnsurance Company and The Aetna Casualty and Surety Company is incorporated by reference from the Company's Form 20-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, 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. 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.
PAGE NUMBER IN EXHIBIT SEQUENTIAL NUMBERING NO. DESCRIPTION SYSTEM - --------- -------------------------------------------------------------------------------- ----------------------- 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 5-8, Registration Statement No. 33-763 74, 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. 10.14 First Casualty Facultativc 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 104, 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. 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.
PAGE NUMBER IN EXHIBIT SEQUENTIAL NUMBERING NO. DESCRIPTION SYSTEM - --------- -------------------------------------------------------------------------------- ----------------------- 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. *21 Subsidiaries of the Company. *27 Financial Data Schedule.
- ------------------------ * filed herewith EX-10.16 2 EMPLOYMENT AGREEMENT Exhibit 10.16 ================================================================================ EMPLOYMENT AGREEMENT BY AND BETWEEN AMERICAN RE-INSURANCE COMPANY AND [FIRSTNAME] [MI] [LASTNAME] ================================================================================ EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of September 1, 1998 (the "Effective Date"), is by and between AMERICAN RE-INSURANCE COMPANY, a Delaware insurance company (the "Company"), and the executive identified on the signature page hereof (the "Executive"). RECITALS A. The Company desires to acknowledge the value of the Executive and assure itself of the services of Executive by engaging Executive to perform such services under the terms hereof; B. Executive desires to commit himself to serve the Company on the terms herein provided; C. Executive acknowledges that, while in the employ of the Company and/or any Affiliate thereof (as defined below), and in order for the Company and/or any Affiliate thereof to operate efficiently and profitably, Executive will be exposed to, and the Company must take reasonable steps to protect, ideas, methods, developments, strategies, business plans and financial and other information of the Company and/or any Affiliate thereof which are confidential and/or proprietary in nature and which are of significant value to other persons or entities that operate in the insurance and reinsurance industries. AGREEMENT NOW, THEREFORE, in consideration of the mutual agreements set forth herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Company and Executive hereby agree as follows: 1. Definitions. The following terms shall have the meanings set forth below: "Affiliate" shall mean a corporation or other entity that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with the corporation or other entity specified. "Annual Incentive Compensation Award" for any period shall be Executive's total award paid during such period under all Annual Incentive Compensation Plans. "Annual Incentive Compensation Plan" shall mean The American Re-Insurance Company Group Senior Executive Incentive Compensation Plan, The American Re-Insurance Company Group Executive Compensation Plan, any other similar annual bonus plan, and any successor to any of them. "Board" shall mean the Board of Directors of the Company. "Cause" shall mean that Executive shall have (i) been convicted of a felony. (ii) willfully failed to perform the duties of his position, (iii) stolen or embezzled 2 property, or (iv) committed an act of willful misconduct which is damaging or detrimental to the Company and/or any Affiliate thereof. "Competition" means directly or indirectly (i) soliciting reinsurance or retrocession business from any Customer, (ii) interfering with any contractual relationships between the Company and/or any Affiliate thereof, and any Customer, or (iii) otherwise engaging in, having an interest in, or managing any person, firm, corporation, partnership or business (whether as a director, officer, employee, agent, representative, partner, consultant or otherwise) that engages in any business which competes with any business of the Company or any Affiliate thereof. "Constructive Discharge" shall be deemed to have occurred if (i) the Company and/or any Affiliate thereof shall have (A) made a material adverse change to Executive's title as set forth on the signature page hereof or Executive's responsibilities, (B) failed to comply with its obligation set forth in the first sentence of Section 4 hereof, or (C) required, as a condition to continued employment with the Company and/or any Affiliate thereof, that Executive's principal work location be relocated to a location that is more than 75 miles from its location as of the Effective Date and (ii) Executive shall have within thirty days of such event asserted in writing to the Company and/or any Affiliate thereof that such event has occurred (and specifying same and the basis therefor) and that Executive is terminating employment with the Company and all Affiliates thereof by reason thereof; provided that the Company and/or such Affiliate thereof shall have fifteen days from receipt of such written notice from the Executive to cure the event(s) that constituted such Constructive Discharge prior to such termination becoming effective. 3 "Customer" shall mean, as of the date of Executive's termination of employment, any insurance or reinsurance company, insurance or reinsurance agent or broker, or other corporation, individual or consultant with which the Company and/or any Affiliate thereof is doing business. "Date of Termination" shall mean the date of Termination of Employment. "Final Year Employment Fraction" in the event of Executive's Termination of Employment shall mean the ratio of (i) the number of full calendar months for which Executive was employed hereunder in the final calendar year of Executive's employment, to (ii) 12. "LTIP" shall mean the American Re Corporation Long-Term Incentive Plan and any successor thereto. "Non-Competition Period" is defined in Section 7. "Re-employment" shall mean full-time employment for compensation by any person or entity but shall not include self-employment. "Release" shall mean a general release of the Company and its Affiliates from and against any and all claims which Executive has or may have against the Company and its Affiliates and each employee, officer, director or "controlling" person of the Company and/or its Affiliates arising out of or relating to Executive's employment by or termination of employment with the Company and/or any Affiliate thereof or otherwise, substantially in the form attached hereto. 4 "Severance Benefits" is defined in Section 5. "Severance Period" is defined in Section 5. "Solicitation" shall mean directly or indirectly, through any other person or entity, soliciting or otherwise inducing any person to leave the employ of the Company or any Affiliate thereof or otherwise interfering with the relationship between any such employee and the Company or any Affiliate thereof. "Termination of Employment" shall mean the time when the employer-employee relationship between Executive and the Company and/or an Affiliate thereof is terminated for any reason, with or without Cause. 2. Term. This Agreement shall govern Executive's employment by the Company and its Affiliates for the period commencing on the Effective Date and terminating on the fifth anniversary thereof. To the extent applicable, the provisions of Sections 5, 7, 8, 10, 11, 13, 14, 15, 16, 17, 18 and 19 shall continue to apply beyond such date in accordance with their terms. 3. Position. Executive hereby agrees to serve in the position set forth on the signature page hereof with the powers and duties customarily associated with such position at the Company. While in the employ of the Company and/or any Affiliate thereof, Executive shall devote his best efforts and his full business time and attention to the performance of the services customarily incident to such office and to such other services of an executive nature as may be reasonably requested by the Board and senior management. 5 4. Compensation and Benefits: Executive's cash compensation shall be determined by the Company from time to time, provided that the total of Executive's cash compensation for any calendar year from 1998 through and including 2002 shall not be less than the amount set forth on the signature page hereto as the "Guaranteed Amount." For purposes of the foregoing sentence, total cash compensation for any calendar year shall be the sum of the Executive's annual rate of base salary in effect as of April 15 of each such year and the Annual Incentive Compensation Award and/or any other bonus payment or award paid to Executive with respect to such year on or before March 31 of the following year. Executive shall be eligible to participate in the Annual Incentive Compensation Plans. So long as awards thereunder are generally granted to officers of the Company, Executive shall also be entitled to participate in the LTIP in accordance with the terms thereof. Executive shall also be entitled to participate in any and all other benefit plans generally available to officers of the Company. 5. Severance Benefits. In the event that Executive's employment hereunder is terminated by the Company not for Cause or by the Executive by reason of a Constructive Discharge, then, provided Executive executes a Release, for the period commencing on the Date of Termination and ending on the earlier of the second anniversary thereof or Executive's Re-employment (the "Severance Period") the Company shall pay or provide to Executive, and Executive shall be entitled to, the following benefits ("Severance Benefits"): (a) bi-weekly payments commencing on the two week anniversary of the commencement of the Severance Period with each such payment equal to the ratio of 6 (i) the sum of (A) the Executive's annual rate of base salary in effect on the Date of Termination and (B) the payment received on the last annual payment date prior to the Date of Termination under each Annual Incentive Compensation Plan in which Executive participates as of the Date of Termination, to (ii) 26; (b) following conclusion of each performance cycle of the LTIP in which falls the Executive's Date of Termination, a payment equal to the product of (i) the payment to which Executive would have been entitled under the LTIP had Executive remained employed for the entirety of such performance period (and satisfied any other conditions for receiving such award) and (ii) the fraction equal to (A) the number of full calendar months in such performance period in which Executive was employed by the Company and its Affiliates, divided by (B) the number of full calendar months in such performance period; and (c) to the extent permitted by law, the Severance Period shall be treated as a period of employment by the Company for purposes of any of the following benefit programs in which Executive was participating as of the date of Executive's Date of Termination: American Re-Insurance Company Employees' Pension Plan, American Re-Insurance Company Savings Plan, and the Company's medical, dental, life and accidental death and dismemberment insurance programs. To the extent that such treatment is not permitted by law, the Company shall provide Executive with equivalent benefits, in cash or in kind, outside the applicable plan or program. Upon such payment of cash and other benefits, the Company's obligations hereunder shall terminate. 7 6. No Right of Continued Employment; No Other Liability; Termination for Cause. Nothing in this Agreement shall confer upon Executive any right to continue in the employ of the Company and/or any Affiliate thereof or shall interfere with or restrict in any way the rights of the Company and/or any Affiliate thereof, which are hereby expressly reserved, to discharge Executive at any time for any reason whatsoever, with or without Cause. Executive hereby agrees that Executive's employment with the Company and/or any Affiliate thereof may be terminated, without liability, except as provided in this Agreement and without regard to (a) any general or specific policies (whether written or oral) of the Company and/or any Affiliate thereof relating to the employment or termination of its employees other than as set forth herein, or (b) any statements made to Executive (whether written or oral) pertaining to Executive's relationship with the Company and/or any Affiliate thereof. Executive further agrees that if Executive's employment with the Company and/or any Affiliate thereof is terminated for Cause, then neither the Company nor any of its Affiliates shall have any liability for, and Executive shall not be entitled to, any benefits payable with respect to the termination of Executive's employment with the Company and/or any Affiliate under the Company's Severance Pay Plan (or any successor thereto) or otherwise. 7. Non-Competition; Non-Solicitation. Executive will not engage in any activity constituting Competition for the period consisting of (a) the period of his employment hereunder, (b) any Severance Period and (c) in the event that Executive's employment hereunder is terminated by the Company for Cause or by the Executive other than by reason of a Constructive Discharge, for a period of six months following 8 the Date of Termination (the Non-Competition Period"). In addition, for the duration of the Non-Competition Period and one year thereafter, Executive shall not engage in any activity constituting Solicitation. 8. Covenant of Confidentiality. Executive agrees to keep confidential, and not to disclose to any third party, any ideas, methods, developments, strategies, business plans and financial and other information about the Company, its Affiliates and their employees or clients which is confidential information of the Company and/or any Affiliate thereof. Confidential information shall not include any information that becomes generally available to the public other than as a result of a disclosure, directly or indirectly, by Executive. 9. Certain Obligations. Upon termination of Executive's employment with the Company and/or any Affiliate thereof, Executive shall be deemed to have resigned from all offices and directorships then held with the Company and/or any Affiliate of the Company. 10. Assignment; Successors and Assigns. Executive agrees that he will not assign, sell, transfer, delegate or otherwise dispose of, whether voluntarily or involuntarily, any rights or obligations under this Agreement. Any purported assignment, transfer, or delegation in violation of this Section shall be null and void. Nothing in this Agreement shall prevent the merger or the consolidation of the Company and/or any Affiliate thereof with any other entity, or the sale by the Company and/or any Affiliate thereof of all or substantially all of its properties or assets, or the assignment by the Company and/or any Affiliate thereof of this Agreement and the performance of its 9 obligations hereunder to any successor in interest or any Affiliate. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective heirs, legal representatives, successors, and permitted assigns, and shall not benefit any person or entity other than those enumerated above. 11. Notices. Unless otherwise provided herein, any notice, request, instruction or other document to be given hereunder by any party to the other shall be in writing and delivered in person or by courier, or mailed by certified mail, postage prepaid, return receipt requested (such mailed notice to be effective on the date of such receipt), as follows: If to Executive, to the address set forth on the signature page hereof If to the Company: Secretary - American Re-Insurance Company 555 College Road East Princeton. NJ 08543 or to such other place and with such other copies as any party may designate as to itself by written notice to the other. 12. Entire Agreement. The terms and this Agreement are intended by the parties to be the final expression of their agreement with respect to the employment of Executive by the Company and/or any Affiliate thereof and may not be contradicted by evidence of any prior agreement (including, but not limited to, any Senior Executive or Executive Severance and Non-Competition Agreement), which such agreement or agreements are expressly superseded and terminated hereby. The parties further intend that this Agreement shall constitute the complete and exclusive statement of its terms and 10 that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal proceeding involving this Agreement. 13. Amendment; Waivers. This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by Executive and by a duly authorized representative of the Company, and approved by the Board. By an instrument in writing similarly executed, either party may waive compliance by the other party with any provision of this Agreement; provided, however, that such waiver shall not operate as a waiver of, or estoppel with respect to, any other or subsequent failure. No failure to exercise and no delay in exercising any right, remedy, or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, or power hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, or power provided herein or by law or in equity. 14. Limitation of Liability. No representative, stockholder, officer, director, Affiliate, employee or agent of the Company shall be liable for any debt, claim, demand, judgment, decree, liability or obligation of any kind, against or with respect to the Company arising out of action taken or omitted for or on behalf of the Company under or pursuant to this Agreement. 15. Withholding; Set-off. All amounts payable to Executive under this Agreement shall be subject to applicable withholding of income, wage and other taxes. Executive agrees that the Company and/or any Affiliate thereof shall have the right to set off against the Severance Benefits any amounts that Executive owes the Company and/or 11 any Affiliate thereof at the time of his/her termination of employment with the Company and/or any Affiliate thereof. 16. Severability; Enforcement. If any provision of this Agreement, or the application thereof to any person, place, or circumstance, shall be held by a court of competent jurisdiction to be invalid, unenforceable, or void, the remainder of this Agreement and such provisions as applied to other persons, places, and circumstances shall remain in full force and effect. In the event that the provisions of Section 7 shall be determined by any court of competent jurisdiction to be unenforceable by reason of its extending for too great a period of time or over too great a geographic area or by reason of its being too extensive in any other respect, it shall be deemed amended automatically (without execution of any documentation by the parties hereto) so that it may be interpreted to extend only over the maximum period of time for which it may be enforceable and/or over the maximum geographic area as to which it may be enforceable and/or to the maximum extent in all other respects as to which it may be enforceable, all as determined by such court in such action. 17. Discretion of Board. The Board, in its sole discretion, acting in good faith, shall determine all matters and questions relating to Termination of Employment, including, but not by way of limitation, whether a Termination of Employment was voluntary or involuntary or resulted from a Constructive Discharge or discharge for Cause, and all questions of whether particular leaves of absence constitute Termination of Employment. 12 18. Remedies. Executive acknowledges that a breach of this Agreement will cause irreparable damage to the Company, the exact amount of which will be difficult to ascertain, and that the remedies at law for any such breach will be inadequate. Accordingly, Executive agrees that, if Executive breaches this Agreement, the Company shall be entitled to specific performance and injunctive relief, without posting bond or other security, in addition to any other remedy which may be available at law or in equity. 19. Governing Law. This Agreement will be governed by and interpreted in accordance with the laws of the State of New Jersey, without reference to conflicts of law rules thereof. 20. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, and all such counterparts together shall constitute one and the same instrument. The parties have duly executed this Agreement as of the date first written above. AMERICAN RE-INSURANCE COMPANY EXECUTIVE By: --------------------------------- ------------------------------------ Signature Name: Dr. jur. Hans-Jurgen Schinzler Name: [FIRSTNAME] [MI] [LASTNAME] Title: Chairman of the Board of Directors American Re Corporation Title: Executive Vice President American Re-Insurance Company By: --------------------------------- Guaranteed Amount: $ [TOTAL COMPENSATION] Name: Edward J. Noonan Title: Chairman, President and Address: [STREET] Chief Executive Officer [CITY], [STATE] [ZIP] American Re-Insurance Company RELEASE AGREEMENT This Release (hereafter referred to as ("Release Agreement"), made this ________ day of ________, in the State of New Jersey, between: American Re-Insurance Company (A Delaware Corporation) with principal place of business at P. 0. Box 5241 555 College Road East Princeton, New Jersey 08543-5241 And ______________________________________ (hereinafter referred to as "Executive") (Address) ______________________________________ ______________________________________ ______________________________________ For good and valuable consideration, as set forth in the Employment Agreement dated September 1, 1998, by and between American Re-Insurance Company and ___________________________, Executive does hereby fully, finally, and forever release and discharge American Re-Insurance Company, its predecessors, successors, divisions, affiliates, representatives, officers, directors, shareholders, agents, employees, attorneys and assigns (collectively, the "Company"), of and from all claims, demands, actions, causes of action, suits, damages, losses, and expenses, of any and every nature whatsoever, whether known or not known, from the beginning of time to the date of this Release Agreement, including but not limited to all such claims arising out of or relating to the employment of Executive by American Re-Insurance Company and its affiliates, and including, but not limited to, any and all acts that have been or could have been alleged to have violated Executive's rights under Federal, State or local law, including but not limited to the following: Civil Rights Acts of 1866, 1871, 1964 and 1991; the Age Discrimination in Employment Act of 1967, as amended ("ADEA"); the Older Workers Benefit Protection Act; the Americans with Disabilities Act of 1990; the New Jersey Law Against Discrimination; the New Jersey Conscientious Employee Protection Act; the Employee Retirement Income Security Act ("ERISA"),State and Federal Family and Medical Leave Acts, and any contract of employment, express or implied; and any provision of any other law whatsoever, common or statutory, including but not limited to any law of the United States, New Jersey, or any other State or Government entity. For good and valuable consideration set forth herein, Executive acknowledges that he is voluntarily signing this Release Agreement and that by signing this Release Agreement he understands that he is releasing the Company from any claims that he might have prior to, following, or otherwise arising as a result of his separation from the Company, pursuant to the ADEA. Said waiver of ADEA rights applies only to claims that he has as of the date of this Release Agreement. This Release Agreement shall not in any way be construed as an admission by the Company of any acts of wrongdoing against the Executive or any other person or that the Executive has any claim, whatsoever, against the Company. The undersigned Executive acknowledges that he has been advised by American Re-Insurance Company to consult with an attorney of his choosing before executing this Release Agreement; that he has been given at least TWENTY-ONE (21) DAYS to consider whether or not to execute this Release Agreement; he further acknowledges that he has been advised that for a period of SEVEN (7) DAYS following execution of this Release Agreement, he may revoke it by notice delivered within the SEVEN (7) DAY period to Robert E. Humes, American Re-Insurance Company. American Re Plaza, 555 College Road East, P.O. Box 5241, Princeton, New Jersey 08543-5241, and that upon doing so this Release Agreement shall thereupon become null and void. If at the expiration of SEVEN (7) DAYS following execution of this Release Agreement. Executive has not revoked it, this Release Agreement and all of its terms shall become effective and binding on the parties hereto. Executive affirms that the terms stated in this Release Agreement and in the Employment Agreement dated September 1, 1998, by and between American Re-Insurance Company are the only consideration for his signing this Release Agreement and that no other premise or agreement of any kind has been made to or with him by any person or entity whomsoever to cause him to execute this instrument. Furthermore, Executive states that he fully understands the meaning and intent of this Release Agreement. IN WITNESS WHEREOF, the parties have executed this Release Agreement as of the date first written above. AMERICAN RE-INSURANCE COMPANY EXECUTIVE By: ----------------------------- ------------------------------------- Signature Name: Name: --------------------------- ------------------------------- Title: -------------------------- EX-21 3 SUBSIDIARIES OF THE COMPANY Exhibit 21
STATE/COUNTRY/DATE PRIMARY NAME OF INCORPORATION BUSINESS ACTIVITIES - ---- ---------------- ------------------- American Re Corporation1...................................... Delaware/1991 Holding Company American Re-Insurance Company................................. Delaware/1917 Reinsurance American Re Inversiones, S.A............................... Chile/1986 Holding Company 111 East 50th Street Corporation........................... New York/1979 Real Estate 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 AM-RE 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 AM-RE 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.2............... 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 Becher+Carlson Insurance Agency of Texas, Inc.3.......... Texas/1998 Insurance Agency Munich-American RiskPartners, Inc............................. Delaware/1988 Alternative Markets American Alternative Management, Inc....................... Delaware/1997 Alternative Markets Consulting Risk Management Products Canada, Inc.4..................... 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.5............................ England/1994 Insurance American Re Securities Corporation............................ Delaware/1998 Broker/Dealer The Princeton Excess and Surplus Lines Insurance Company.......................................... Delaware/1995 Surplus Lines Insurance
EX-27 4 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN RE CORPORATION'S REPORT ON FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1998 DEC-31-1998 6,953 0 0 545 0 0 7,526 275 2,343 358 13,544 7,334 1,281 412 0 574 238 0 0 2,853 13,544 2,419 418 93 32 1,682 816 141 322 82 239 0 0 0 226 0 0 5,103 1,620 62 207 1,513 5,065 (62) REPRESENTS COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING AS ALL OF ITS ASSESTS JUNIOR SUBORDINATED DEBENTURES.
-----END PRIVACY-ENHANCED MESSAGE-----