[GRAPHIC OMITTED]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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Commission file number 1-8026
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GENERAL RE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1026471
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Financial Centre, P.O. Box 10350
Stamford, Connecticut 06904-2350
- ------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, with area code (203) 328-5000
----------------
None
------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 31, 1997
- --------------------------------------- ------------------------------
Common Stock, $.50 par value 80,724,742 Shares
- --------------------------------------- -------------------------------
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GENERAL RE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Statements of Income
Three months ended March 31, 1997 and 1996 3
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 4
Consolidated Statements of Common Stockholders' Equity
Three months ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows
Three months ended March 31, 1997 and 1996 6
Notes to Consolidated Interim Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Statement Re: Computation of Per
Share Earnings 18
(b) Reports on Form 8-K 18
2
GENERAL RE CORPORATION
Consolidated Statements of Income
(in millions, except share data)
(Unaudited)
Three months ended
March 31,
1997 1996
---- ----
Premiums and other revenues
Net premiums written
Property/casualty $1,263 $1,210
Life/health 298 251
------- -------
Total net premiums written $1,561 $1,461
====== ======
Net premiums earned
Property/casualty $1,370 $1,294
Life/health 286 245
------- -------
Total net premiums earned 1,656 1,539
Investment income 318 285
Other revenues 87 68
Net realized gains on investments 11 50
------- -------
Total revenues 2,072 1,942
----- -----
Expenses
Claims and claim expenses 967 908
Life/health benefits 200 180
Acquisition costs 354 355
Other operating costs and expenses 206 147
Goodwill amortization 7 5
------- --------
Total expenses 1,734 1,595
----- -------
Income before income taxes and
minority interest 338 347
Income tax expense 81 87
------ -----
Income before minority interest 257 260
Minority interest 13 23
------ ------
Net income $244 $237
==== ====
Share data:
Net income per common share $2.97 $2.87
===== =====
Dividend per share to common stockholders $ .55 $ .51
===== =====
Average common shares outstanding 81,098,094 81,457,455
========== ==========
See notes to the consolidated interim financial statements.
3
GENERAL RE CORPORATION
Consolidated Balance Sheets
(in millions, except share data)
(Unaudited)
March 31, 1997 Dec. 31, 1996
-------------- -------------
ASSETS
Investments:
Fixed maturities:
Available-for-sale (cost: $16,114 in 1997;
$16,473 in 1996) ............................. $ 16,655 $ 17,168
Trading (cost: $2,844 in 1997; $2,994 in 1996) 2,739 2,967
Preferred equities, at fair value (cost: $1,000
in 1997; $771 in 1996) ........................... 1,007 789
Common equities, at fair value (cost: $1,965 in
1997; $1,941 in 1996) ............................ 3,787 3,675
Short-term investments, at amortized cost which
approximates fair value ......................... 1,386 1,267
Other invested assets .......................... 717 696
-------- --------
Total investments .......................... 26,291 26,562
Cash ............................................. 332 365
Accrued investment income ........................ 324 405
Accounts receivable .............................. 2,807 2,832
Funds held by reinsured companies ................ 490 474
Reinsurance recoverable .......................... 2,959 2,935
Deferred acquisition costs ....................... 446 457
Goodwill ......................................... 1,045 1,052
Trading account assets ........................... 3,390 4,085
Securities purchased under agreement to resell ... 476 --
Other assets ..................................... 1,045 994
-------- --------
Total assets ............................... $ 39,605 $ 40,161
======== ========
LIABILITIES
Claims and claim expenses ........................ $ 16,115 $ 15,977
Policy benefits for life/health contracts ........ 784 751
Unearned premiums ................................ 1,861 1,957
Other reinsurance balances ....................... 3,484 3,388
Notes payable and commercial paper ............... 738 430
Income taxes ..................................... 683 728
Securities sold under agreements to repurchase ... 2,541 1,985
Securities sold but not yet purchased ............ 578 869
Trading account liabilities ...................... 2,934 3,907
Other liabilities ................................ 1,368 1,675
Minority interest ................................ 1,152 1,166
-------- --------
Total liabilities ............................ 32,238 32,833
-------- --------
Cumulative convertible preferred stock (shares
issued: 1,708,765 in 1997 and 1,711,907 in 1996;
no par value) ................................... 146 146
Loan to employee savings and stock ownership plan (144) (144)
-------- --------
2 2
-------- --------
COMMON STOCKHOLDERS' EQUITY
Common stock (102,827,344 shares issued in 1997
and 1996; par value $.50) ........................ 51 51
Paid-in capital .................................. 1,060 1,041
Unrealized appreciation of investments, net of
deferred income taxes ............................ 1,572 1,625
Currency translation adjustments, net of deferred
income taxes .................................... (14) (53)
Retained earnings ................................ 6,905 6,708
Less common stock in treasury, at cost (shares
held: 22,102,602 in 1997
and 21,262,113 in 1996) ....................... (2,209) (2,046)
-------- --------
Total common stockholders' equity ........... 7,365 7,326
-------- --------
Total liabilities, cumulative convertible
preferred stock and common stockholders' equity . $ 39,605 $ 40,161
======== ========
See notes to the consolidated interim financial statements.
4
GENERAL RE CORPORATION
Consolidated Statements of Common Stockholders' Equity
(in millions)
(Unaudited)
Three months ended
March 31,
1997 1996
---- ----
Common stock:
Beginning of period ..................... $ 51 $ 51
Change for the period ................... -- --
------- -------
End of period ........................ 51 51
------- -------
Paid-in capital:
Beginning of period ..................... 1,041 635
Stock issued under stock option and other
incentive arrangements .................. 13 13
Other ................................... 6 2
------- -------
End of period ........................ 1,060 650
------- -------
Unrealized appreciation of investments,
net of deferred income taxes:
Beginning of period ..................... 1,625 1,468
Change for the period ................... (68) (80)
Deferred income taxes ................... 15 30
------- -------
End of period ........................ 1,572 1,418
------- -------
Currency translation adjustments,
net of deferred income taxes:
Beginning of period ..................... (53) (11)
Change for the period ................... 39 (12)
------- -------
End of period ........................ (14) (23)
------- -------
Retained earnings:
Beginning of period ..................... 6,708 5,986
Net income .............................. 244 237
Dividends paid on common stock .......... (44) (41)
Dividends paid on preferred stock, net of
income taxes ............................ (3) (3)
------- -------
End of period ........................ 6,905 6,179
------- -------
Common stock in treasury:
Beginning of period ..................... (2,046) (1,542)
Cost of shares acquired during period ... (167) (270)
Stock issued under stock option and other
incentive arrangements .................. 4 4
------- -------
End of period ........................ (2,209) (1,808)
------- -------
Total common stockholders' equity ....... $ 7,365 $ 6,467
======= =======
See notes to the consolidated interim financial statements.
5
GENERAL RE CORPORATION
Consolidated Statements of Cash Flows
(in millions)
(Unaudited)
Three months ended
March 31,
---------
1997 1996
---- ----
Cash flows from operating activities:
Net income ...................................... $ 244 $ 237
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in claim and claim expense liabilities 138 54
Change in policy benefits for life/health
contracts ................................... 33 77
Change in reinsurance recoverable ........... (24) (70)
Change in unearned premiums ................. (110) (79)
Amortization of acquisition costs ........... 354 355
Acquisition costs deferred .................. (343) (322)
Trading account activities
Change in trading account securities ... (80) (944)
Securities purchased under agreements
to resell .............................. (476) (44)
Securities sold under agreements to
repurchase ............................. 556 1,020
Change in other trading balances ....... (435) 21
Other changes in assets and liabilities ..... 105 298
Realized gains on investments ............... (11) (50)
------- -------
Net cash from (used in) operating
activities ......................... (49) 553
------- -------
Cash flows from investing activities:
Fixed maturities: available-for-sale
Purchases ................................... (1,709) (2,368)
Calls and maturities ........................ 116 278
Sales ....................................... 2,007 1,743
Preferred and common equities
Purchases ................................... (418) (265)
Sales ....................................... 126 195
Net (purchases) sales of short-term investments . (203) 104
Net purchases of other invested assets .......... (16) (5)
------- -------
Net cash used in investing
activities ......................... (97) (318)
------- -------
Cash flows from financing activities:
Commercial paper borrowing, net ................. 310 --
Change in contract deposits ..................... 1 117
Cash dividends paid to common stockholders ...... (44) (41)
Acquisition of treasury stock ................... (172) (263)
Other ........................................... 18 17
------- -------
Net cash from (used in) financing
activities ......................... 113 (170)
------- -------
Change in cash ....................................... (33) 65
Cash, beginning of period ............................ 365 258
------- -------
Cash, end of period .................................. $ 332 $ 323
======= =======
See notes to the consolidated interim financial statements.
6
GENERAL RE CORPORATION
----------------------
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. General - The interim financial statements of General Re Corporation and
its subsidiaries ("General Re") have been prepared on the basis of
generally accepted accounting principles and, in the opinion of management,
reflect all adjustments (consisting of normal, recurring accruals)
necessary for a fair presentation of results for such periods. The results
of operations for any interim period are not necessarily indicative of
results for the full year. These financial statements should be read in
conjunction with the financial statements and related notes in General Re's
1996 Annual Report filed on Form 10-K. Certain reclassifications have been
made to 1996 balances to conform to the 1997 presentation. The operating
results of General Re's international reinsurance operations are reported
on a quarter lag.
2. National Re - The comparable 1996 first quarter amounts do not include the
assets, liabilities, operating results and cash flows for National Re
Corporation, since it was acquired on October 3, 1996.
3. Cologne Re - The minority interest included in General Re's statements of
income and balance sheets relates to the economic interest of Cologne Re
not owned by GR-CK and the Class A shares of GR-CK, which are not owned by
General Re.
4. Income Taxes - General Re's effective income tax rate differs from current
statutory rates principally due to tax-exempt interest income and dividends
received deductions. General Re paid income taxes of $69 million and $31
million in the three months ended March 31, 1997 and 1996, respectively.
5. Reinsurance Ceded - General Re utilizes reinsurance to reduce its exposure
to large losses. The income statement amounts for premiums written,
premiums earned, claims and claim expenses incurred and life/health
benefits are reported net of reinsurance. Direct, assumed, ceded and net
amounts for the first quarter ended March 31, 1997 and 1996 were as follows
(in millions):
Property/Casualty Life/Health Claims and Life/Health
Written Earned Written Earned Claim Expenses Benefits
1997
Direct $123 $126 - - $104 -
Assumed 1,340 1,456 $352 $323 969 $221
Ceded (200) (212) (54) (37) (106) (21)
----- ----- ---- ---- ---- ----
Net $1,263 $1,370 $298 $286 $967 $200
====== ====== ==== ==== ==== ====
1996
Direct $111 $103 - - $65 -
Assumed 1,285 1,402 $289 $299 1,021 $240
Ceded (186) (211) (38) (54) (178) (60)
------ ------ ----- ----- ---- -----
Net $1,210 $1,294 $251 $245 $908 $180
====== ====== ==== ==== ==== ====
7
GENERAL RE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued)
6. Per Common Share Data - Income per common share is based on net income less
preferred dividends divided by the weighted average common shares
outstanding during the period. The weighted average common shares
outstanding were 81,098,094 and 81,457,455 for the first quarter ended
March 31, 1997 and 1996, respectively.
7. Litigation - On July 1, 1996, U.S. Aviation Underwriters, Inc. ("USAU"), a
subsidiary of General Re, and John V. Brennan, the former Chairman and
Chief Executive Officer of USAU, after a trial in the U.S. District Court
for the Eastern District of New York, were found guilty of mail fraud in
connection with the allocation of insurance claims between two companies,
arising out of the December 7, 1987 crash of a domestic United States
flight. General Re does not expect the amount of any liability to USAU to
be material to the financial position, results of operations or cash flows
of General Re.
8. New Accounting Standards - In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share. The Statement establishes a new standard for computing
and presenting earnings per share data. The Statement is effective for
financial statements issued for both interim and annual periods ending
after December 15, 1997. This Statement supersedes APB Opinion No. 15,
Earnings Per Share, and requires dual presentation of basic and diluted
earnings per share on the face of the income statement. Basic earnings per
share excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share include the effect
of all potentially dilutive securities. The Statement also requires a
reconciliation of the numerator and denominator of the basic earnings per
share to the numerator and denominator of the diluted earnings per share
computation in the notes to the financial statements. All prior period
earnings per share data presented must be restated.
General Re's primary earnings per share for the first quarter of 1997 were
the same as basic earnings per share calculated under the new Statement.
Fully diluted earnings per share are not currently presented because the
dilution effects are not material. If General Re had adopted the Statement
in the first quarter of 1997, diluted earnings per share would have been
$2.90 per share.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED
Net income for the first quarter of 1997 was $2.97 per share, compared with
$2.87 per share in 1996. Net income for the first quarter of 1997 included
after-tax realized gains of $.07 per share, compared with $.29 per share in the
first quarter of 1996. Income from operations, excluding after-tax realized
gains and losses, was $2.90 per share in the first quarter of 1997, an increase
of 12.4 percent from the $2.58 per share earned in the comparable period in
1996. These improved results in the first quarter of 1997 were primarily due to
increased earnings in the global life/health operations, financial services and
growth in North American property/casualty investment income.
Consolidated net premiums written for the first quarter of 1997 were $1,561
million, an increase of 6.8 percent from $1,461 million in 1996. North American
property/casualty premiums written of $795 million in the first quarter of 1997
increased 15.3 percent from $689 million in the comparable period in 1996. The
first quarter of 1997 includes $84 million of net premiums written by National
Re Corporation ("National Re"), which was acquired on October 3, 1996. The
international property/casualty subsidiaries' net premiums written of $468
million in the first quarter of 1997 decreased 10.2 percent from $521 million
for the same period in 1996. Net premiums written for the global life/health
segment were $298 million in the first quarter of 1997, an increase of 18.8
percent from the comparable amount in 1996.
Consolidated pretax investment income was $318 million in the first quarter of
1997, compared with $285 million in the same period of 1996. Investment income
for the North American property/casualty operations of $199 million in the first
quarter of 1997 increased by $30 million over the first quarter of 1996 due to
higher invested assets in existing operations and investment income from
National Re. Investment income for the international property/casualty
operations of $93 million in the first quarter of 1997 declined from $98 million
in the first quarter of 1996, principally due to currency and lower bond yields
in Germany. Investment income for the global life/health operations was $18
million in first quarter of 1997, compared to $14 million in the first quarter
of 1996. The financial services segment's investment income was $8 million and
$4 million in the first quarter of 1997 and 1996, respectively.
The consolidated effective tax rate was 24.1 percent for the first quarter of
1997, compared with 25.1 percent in the first quarter of 1996. The decrease in
the consolidated effective tax rate was the result of a decrease in the
proportion of General Re's pretax income earned by its international
subsidiaries in higher tax rate jurisdictions and lower realized gains.
Net cash flow from consolidated operations was negative $49 million in the first
quarter of 1997, compared to positive cash flow of $553 million in the same
period in 1996. Cash flows from operations for the North American
property/casualty operations of $117 million declined compared to $275 million
in the first quarter of 1996, principally due to commutations and higher paid
losses. The financial services operations had net cash outflows from operations
of $394 million in the first quarter of 1997, compared to positive cash flow of
$63 million in the first quarter of 1996. The cash outflow in the quarter was
due to the use of commercial paper to fund certain structured transactions. The
international property/casualty and global life/health operations had cash flow
from operating activities of $228 million for the first quarter of 1997,
compared with $215 million in 1996.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
In the first quarter of 1997, consolidated invested assets decreased by $271
million to $26,291 million. The decrease was due to a decline of $365 million in
the financial services segment and $161 million in the North American
property/casualty operations, partially offset by $255 million of growth in the
international property/casualty and global life/health operations invested
assets. The decrease in financial services invested assets primarily relates to
the hedging activities of General Re Financial Products Corporation ("GRFP").
The decrease in North American property/casualty invested assets was primarily
the result of repurchases of General Re's common stock, while the growth in the
international property/casualty and global life/health operations was due to
operating cash flow.
The consolidated gross liability for claims and claim expenses for
property/casualty operations was $16,115 million at March 31, 1997, an increase
of $138 million over the year-end 1996 liability. The asset for reinsurance
recoverable on unpaid claims was $2,584 million at March 31, 1997, compared to
$2,572 million at December 31, 1996. At March 31, 1997, the gross liability for
claims and claim expenses and the related asset for reinsurance recoverables
include $2,022 million and $623 million, respectively, for environmental and
latent injury claims. These amounts include provisions for both reported and
incurred but not reported claims.
Common stockholders' equity at March 31, 1997 was $7,365 million, an increase of
0.5 percent from the $7,326 million at December 31, 1996. The increase in common
stockholders' equity during the first quarter of 1997 was principally the result
of net income of $244 million, a decrease in unrealized foreign currency
translation losses of $39 million and the reissuance of common stock of $17
million, partially offset by common share repurchases of $167 million, a
decrease in after-tax unrealized investment gains of $53 million and common and
preferred stock dividends of $47 million. On a per share basis, common
stockholders' equity increased from $89.82 at December 31, 1996 to $91.23 at
March 31, 1997.
Dividends paid to common stockholders were $44 million and $41 million for the
first quarter of 1997 and 1996, respectively. On February 12, 1997, the Board of
Directors declared a regular quarterly dividend of $.55 per share on the common
stock of General Re. This represents an increase of 7.8 percent over the $.51
per share dividend paid in prior quarters during 1996 and the 21st consecutive
year in which General Re has increased its dividend. General Re repurchased
1,020,000 shares of common stock during the first quarter of 1997 for aggregate
consideration of $167 million, which equates to an average cost of $163.67 per
share. On April 9, 1997, General Re's Board of Directors approved a new
repurchase program for $500 million. In addition to specific repurchase
programs, General Re has standing authority to repurchase shares in anticipation
of share issuances under various compensation plans. Since the inception of the
repurchase program in 1987, General Re has repurchased 28,153,500 common shares
for total consideration of $2,500 million.
At March 31, 1997, General Re Corporation had $275 million of senior debt
outstanding, of which $150 million was issued by General Re Corporation and is
rated AAA by Standard & Poor's and Aa1 by Moody's, and $125 million was issued
by National Re and is rated AA by Standard and Poor's and Aa2 by Moody's.
General Re Corporation issues commercial paper to provide additional financial
flexibility for its operations. Commercial paper offered by General Re
Corporation has been rated A1+ by Standard & Poor's and Prime 1 by Moody's. At
March 31, 1997, $450 million of commercial paper was outstanding. General Re
Corporation has $1.2 billion
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
of available lines of credit which provide financial flexibility to support
General Re Corporation's commercial paper program. The credit lines consist of a
364-day facility of $400 million and a five-year credit facility of the
remaining $800 million. The credit agreements with the banks require General Re
to maintain a minimum consolidated tangible net worth, as defined, of $2.7
billion. All $1.2 billion of available lines of credit were unused at March 31,
1997.
Pretax income discussed in each of the segment sections that follow is before
minority interest deductions and goodwill amortization, both of which are deemed
corporate expenses that have not been allocated to the segments.
NORTH AMERICAN PROPERTY / CASUALTY
- ----------------------------------
(in millions) First Quarter
-------------
1997 1996
---- ----
Income before income taxes and realized gains $205 $181
Net premiums written 795 689
Net underwriting income 6 8
Combined ratio 99.2% 98.9%
Investment income $199 $169
Other income - 4
Operating cash flow 117 275
Pretax income for the North American property/casualty operations, excluding
realized gains/losses, increased 13.5 percent in the first quarter of 1997, as
compared to the same quarter of 1996. The 1997 results include the income from
National Re. The increase in pretax income was due to increased investment
income. In the first quarter of 1997, the combined ratio for the North American
property/casualty operations was 99.2 percent, compared with 98.9 percent for
the first quarter of 1996 and 99.1 percent for the full year 1996. The first
quarter was not significantly affected by catastrophes in either 1997 or 1996.
Net premiums written for the North American property/casualty operations were
$795 million in the first quarter of 1997, representing an increase of 15.3
percent over the first quarter of 1996. Excluding premiums from National Re, net
premiums written increased by 3.1 percent for the quarter. A major contributor
to the North American treaty growth continued to be increased business with
regional and specialty companies. At the same time, treaty business with large
national companies continued to decline. This trend toward writing more business
with regional and specialty companies has continued over recent years and is
enhanced by the National Re transaction. Casualty facultative individual risk
business increased approximately 10 percent primarily due to the inclusion of
National Re business, while individual risk property facultative business
declined slightly.
The wholesale nature of reinsurance transactions periodically results in
somewhat volatile premium trends between quarters and years. The addition or
loss of a large contract may significantly affect General Re's premium growth,
although large contracts generally have a smaller effect on earnings than on
premium
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
trends. General Re's treaty contracts usually include short-term cancellation
provisions. General Re's largest treaty has annualized premiums written of
approximately $250 million and contributed approximately one half of one percent
of General Re's 1996 net income.
For the General Star companies, which primarily write excess, surplus and
specialty insurance, net premiums written grew by 5.2 percent for the quarter.
For the Genesis operations, which provide direct excess insurance and
reinsurance to companies with self-insurance programs, net premiums written
increased by 1.8 percent for the first quarter compared to the same period in
1996. The slowed growth in Genesis premiums results principally from lower
growth in professional liability net premiums.
Pretax investment income for the North American property/casualty operations
increased 18.0 percent compared to the first quarter of 1996. On an after-tax
basis, net investment income increased 15.6 percent from $145 million to $167
million during the quarter. North American property/casualty after-tax
investment income grew due to an increase of $1.1 billion in the fixed income
portfolio and optimizing the fixed income portfolio's after-tax investment
income. National Re accounts for approximately $11 million of the $23 million
of growth in North American property/casualty after-tax investment income.
North American investment income of $199 million in the first quarter of 1997
declined slightly from $204 million in the fourth quarter of 1996. In general,
fourth quarter investment income benefits from higher common dividends than
other quarters. The overall annualized pretax yield on the North American
property/casualty invested asset portfolio was 5.4 percent in the first quarter
of 1997, compared with 5.2 percent in the same period in 1996. The annualized
pretax and after-tax yield in the first quarter of 1997 on the segment's fixed
maturity portfolio was 6.4 percent and 5.4 percent, respectively, compared with
6.8 percent and 5.8 percent in the same period in 1996.
The gross liability for claims and claim expenses for the North American
property/casualty operations was $10,727 million at March 31, 1997, a decrease
of $39 million, or 0.4 percent compared to the year-end 1996 liability. The
asset for reinsurance recoverable on unpaid claims was $1,978 million at March
31, 1997, compared to $2,025 million at December 31, 1996. The growth in the
segment's claim liability was reduced by the $51 million due to the commutation
of two assumed reinsurance transactions. At March 31, 1997, total assets of the
North American property/casualty operations were $19,435 million, compared with
$19,669 million at December 31, 1996.
During the first quarter of 1997, calls and maturities on grandfathered
tax-exempt bonds were approximately $21 million and preferred equity calls were
$45 million. The bonds had an average yield of approximately 7.4 percent and the
proceeds from the calls were reinvested at an average yield of approximately 5.6
percent. The preferred equities had an average yield of approximately 7.2
percent and the proceeds from the calls were reinvested at an average yield of
approximately 7.1 percent. Based on its current investment portfolio and the
current yield curve, General Re presently anticipates additional calls and
maturities through the end of 1997 of approximately $69 million of grandfathered
tax-exempt bonds and $155 million of preferred equities, both with
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
an average yield of approximately 7.7 percent. Reinvestment of these funds may
adversely affect average portfolio yields and investment income.
Cash flow from the North American operations for the first quarter compares
unfavorably with the first quarter of 1996, partially due to two commutations
which accounted for $51 million of the paid losses in the quarter. In addition,
during the first quarter of 1997, the North American operations had an increased
number of large claim payments, which were not concentrated in any particular
line of business or accident year. Due to the nature of General Re's reinsurance
operations, paid claims may be volatile from quarter to quarter.
INTERNATIONAL PROPERTY / CASUALTY
- ---------------------------------
(in millions) First Quarter
-------------
1997 1996
---- ----
Income before income taxes and realized gains $71 $83
Net premiums written 468 521
Net underwriting income (loss) (20) (11)
Combined ratio 103.5% 101.7%
Investment income $93 $98
Other income (loss) (2) (4)
Operating cash flow 228 215
Income before income taxes and realized gains of the international
property/casualty operations' decreased 14.2 percent for the first quarter of
1997, compared with the first quarter of 1996. For the first quarter of 1997,
income for the international property/casualty operations declined due to lower
underwriting and investment income.
The combined ratio in the international property/casualty operations was 103.5
percent in the first quarter, which compares unfavorably to the 102.1 percent
reported for the year 1996 and 101.7 percent for the first quarter of 1996. The
deterioration in underwriting was primarily due to two large individual property
losses.
International net premiums written were $468 million in the first quarter of
1997, compared with $521 million in the first quarter of 1996, a decline of 10.2
percent. Approximately half of this decrease was due to the strengthening of the
U.S. dollar, which lowered international premiums when translated into U.S.
dollars. The remaining decline was primarily attributable to the effect of
placing Cologne Re's U.S. broker market operations into runoff and lower
premiums in Cologne Re's Dublin operation.
Pretax investment income for the international property/casualty operations was
$93 million for the first quarter of 1997, compared with $98 million in the same
period of 1996. The decline in investment income was due to lower interest rates
in Germany over the past two years and the effect of currency translation into
the U.S. dollar. Since the end of 1994, the five-year German government bond has
declined from 7.25 percent to 4.80 percent
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
currently. Compared to the fourth quarter of 1996, investment income was lower
in the first quarter due to the seasonally higher common dividends in the fourth
quarter. The overall annualized pretax yield on the invested asset portfolio was
5.4 percent and 6.0 percent in the first quarter of 1997 and 1996, respectively.
At March 31, 1997, total assets of the international property/casualty and
global life/health operations were $12,662 million, compared with $12,454
million at December 31, 1996. The gross liability for claims and claim expenses
was $5,388 million at March 31, 1997 compared with $5,210 million at December
31, 1996. The asset for reinsurance recoverable on unpaid claims was $606
million at March 31, 1997, compared to $546 million at December 31, 1996. Growth
in these liabilities and assets was partly lowered due to the effect of the
stronger U.S. dollar, which appreciated 1.1 percent against the German mark
during the quarter.
GLOBAL LIFE / HEALTH
- --------------------
(in millions) First Quarter
-------------
1997 1996
---- ----
Income before income taxes and realized gains $28 $12
Net premiums written
Life 207 188
Health 91 63
----- ----
Total life/health net premiums written 298 251
Net underwriting income 10 1
Investment income 18 14
Other income (loss) 1 (3)
This segment includes the global life/health operations of Cologne Re. Pretax
income for the first quarter of $28 million increased 137.0 percent from the $12
million in the comparable quarter of 1996, principally due to improved mortality
experience in North America and an increase in investment income.
Life premiums written were $207 million for the first quarter of 1997, compared
with $188 million in the first quarter of 1996. Life reinsurance grew in several
markets, including the United States, Germany, France, Spain, the United Kingdom
and Australia. Excluding the effect of changes in currency exchange rates,
global life premiums increased approximately 18 percent. The increase in health
net premiums written was primarily due to a new block of individual health
business written in the United States.
The liability for policy benefits for life/health contracts was $784 million at
March 31, 1997, compared with $751 million at December 31, 1996. The asset for
reinsurance recoverable on unpaid losses was $261 million at March 31, 1997,
compared to $228 million at December 31, 1996. Cologne Re manages its invested
assets and total assets on an aggregate basis for the life/health and
property/casualty business and does not presently disaggregate these accounts by
segment. The total asset disclosure in the international property/casualty
segment includes the assets of the global life/health segment.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FINANCIAL SERVICES
- ---------------------
(in millions) First Quarter
-------------
1997 1996
---- ----
Income before income taxes and realized gains $30 $25
Total revenues (excluding realized gains) 82 63
Investment income 8 4
Financial services operations include General Re's derivative products,
investment management, insurance brokerage and management, reinsurance
brokerage, and real estate management operations.
In the first quarter of 1997, the financial services segment had total revenues
of $82 million, an increase of 29.8 percent from $63 million in the first
quarter of 1996. The growth in revenues in the first quarter was principally
attributable to GRFP. The growth in GRFP's revenues was primarily due to
revenues from swap transactions in Europe.
At March 31, 1997, total assets of the financial services operations were $7,508
million, compared with $8,038 million at December 31, 1996. GRFP's market
exposures arising from derivative products are managed through the purchase and
sale of government securities, futures and forward contracts or offsetting
derivatives transactions. The amount and nature of the financial services
segment's assets and liabilities are significantly affected by the risk
management strategies utilized by GRFP to reduce market, currency rate, and
interest rate risk. The purchase of government securities financed through
collateralized repurchase agreements and the sale of government securities,
whose proceeds are invested in reverse repurchase agreements, may cause
short-term fluctuations in GRFP's assets and liabilities. The use of these
transactions to offset GRFP's market exposures will increase or decrease the
amount of GRFP's trading account assets or liabilities. While these risk
management strategies may have a significant effect on the amount of assets and
liabilities, they generally do not have a material effect on General Re's
results from operations or common stockholders' equity.
During the first quarter of 1997, total invested assets of the financial
services operations decreased $365 million to $3,028 million. Securities
purchased under agreements to resell, which represent short-term liquid
investment of excess funds, increased $476 million in the first quarter of 1997.
Securities sold under agreements to repurchase, which are short-term borrowings
of funds, increased $556 million in the first quarter of 1997 to $2,541 million.
Securities sold, but not yet purchased, which decreased by $291 million during
1997, represent obligations of General Re to deliver the specified security at
the contracted price, thereby creating a liability to purchase the security in
the market at prevailing prices. Accordingly, General Re's ultimate obligation
to satisfy the sale of securities sold, but not yet purchased may exceed the
amount recognized in the balance sheet. General Re controls this risk and other
market risks associated with its derivative products operations through, among
other techniques, strict market position limits, marking the trading portfolio
to market on a daily basis, ongoing monitoring and analysis of its market
exposures, and periodically stress testing the portfolio.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
SAFE HARBOR DISCLOSURE
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "Act"), General Re sets forth below
cautionary statements identifying important factors that could cause General
Re's actual results to differ materially from those which might be projected,
forecasted, or estimated in General Re's forward-looking statements, as defined
in the Act, made by or on behalf of General Re in press releases, written
statements or documents filed with the Securities and Exchange Commission, or in
its communications and discussions with investors and analysts in the normal
course of business through meetings, phone calls and conference calls. Such
statements may include, but are not limited to, projections of premium revenue,
investment income, other revenue, losses, expenses, earnings (including earnings
per share), cash flows, plans for future operations, common stockholders'
equity, financing needs, capital plans, dividends, plans relating to products or
services of General Re, and estimates concerning the effects of litigation or
other disputes, as well as assumptions for any of the foregoing and are
generally expressed with words such as "believes," "estimates," "expects,"
"anticipates," "could have," "may have" and similar expressions.
Forward-looking statements are inherently subject to risks and uncertainties.
General Re cautions that factors which may cause General Re's results to differ
materially from such forward-looking statements include, but are not limited to,
the following:
1) Changes in the level of competition in the North American and
international reinsurance or primary insurance markets that adversely
affect the volume or profitability of General Re's property/casualty or
life/health businesses. These changes include, but are not limited to,
the intensification of price competition, the entry of new competitors,
existing competitors exiting the market, and the development of new
products by new and existing competitors;
2) Changes in the demand for reinsurance, including changes in ceding
companies' retentions, and changes in the demand for excess and
surplus lines insurance coverages in North America;
3) The ability of General Re to execute its growth strategies in its
property/casualty, life/health and financial services operations;
4) The ability of General Re to retain a significant portion of National
Re's book of business and realize certain synergies in connection with
its acquisition of National Re;
5) Catastrophe losses in General Re's North American or international
property/casualty businesses;
6) Adverse development on property/casualty claim and claim expense
liabilities related to business written in prior years, including, but
not limited to, evolving case law and its effect on environmental and
other latent injury claims, changing government regulations, newly
identified toxins, newly reported claims, new theories of liability, or
new insurance and reinsurance contract interpretations;
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
7) Changes in inflation that affect the profitability of General Re's
current property/casualty and life/health businesses or the adequacy of
its property/casualty claim and claim expense liabilities and
life/health policy benefit liabilities related to prior years'
business;
8) Changes in General Re's property/casualty and life/health businesses
retrocessional arrangements;
9) Lower than estimated retrocessional or reinsurance recoveries on
unpaid losses, including, but not limited to, losses due to a decline
in the creditworthiness of General Re's retrocessionaires or
reinsurers;
10) Increases in interest rates, which cause a reduction in the market
value of General Re's interest rate sensitive investments, including,
but not limited to, its fixed income investment portfolio, and its
common stockholders' equity;
11) Decreases in interest rates causing a reduction of income earned on new
cash flow from operations and the reinvestment of the proceeds from
sales, calls or maturities of existing investments;
12) Declines in the value of General Re's common equity investments;
13) Changes in mortality or morbidity levels that affect General Re's
life/health business;
14) Changes in the demand for financial services operations' products,
including derivatives offered by GRFP;
15) Credit losses on General Re's investment portfolio; credit and
market losses on GRFP's portfolio of derivatives and other
transactions;
16) Adverse results in litigation matters, including, but not limited to,
litigation related to environmental, asbestos and other potential mass
tort claims; and
17) Gains or losses related to foreign currency exchange rate fluctuations.
In addition to the factors outlined above that are directly related to General
Re's businesses, General Re is also subject to general business risks,
including, but not limited to, adverse state, federal or foreign legislation and
regulation, adverse publicity or news coverage, changes in general economic
factors, and the loss of key employees.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Statement Re: Computation of Per Share Earnings
Three Months Ended
March 31,
Earnings Per Share of Common Stock
(in millions, except share data) 1997 1996
- -------------------------------- ---- ----
Net income (applicable to common stock) (1) $241 $234
Average number of common shares outstanding 81,098,094 81,457,455
========== ==========
Net income per share (2) $2.97 $2.87
===== =====
(1) After deduction of preferred stock dividends of $3 million for the
quarter ended March 31, 1997 and 1996.
(2) Fully diluted earnings per share are not reported because the
effect of potentially dilutive securities are not material.
(b) Reports on Form 8-K
None
18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL RE CORPORATION
----------------------
(Registrant)
Date: May 8, 1997 JOSEPH P. BRANDON
----------- -----------------
Joseph P. Brandon
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: May 8, 1997 ELIZABETH A. MONRAD
----------- -------------------
Elizabeth A. Monrad
Vice President and Treasurer
(Principal Accounting Officer)
19