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.
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.
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.
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.
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.
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.
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.
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.
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
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.
primarily attributable to the pro forma decrease in net premiums written, offset by the timing of premiums earned on business in force.
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.
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
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
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 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.
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.