The Company also rents office space totaling 254,136 square feet in Atlanta, Boston, Burlington (VT), Chicago, Columbus, Dallas, Denver, Florham Park (NJ), Hartford, Honolulu, Kansas City (KS), Los Angeles, Minneapolis, New York, Philadelphia, San Francisco, Woodland Hills (CA), Brussels, Beijing, Melbourne, Sydney, Bermuda, Montreal, Toronto, Tokyo, Singapore and London.
The Company has invested significant amounts in computer resources, including electronic data processing equipment and the development of proprietary software to support its business. The Company's mainframe computer system is linked by a network to its domestic and most international branch operations. The Company utilizes its proprietary and other software systems in its day-to-day operations to support its businesses. For facultative operations, the Company uses proprietary facultative risk clearance, risk processing, accounts receivable, PRO RATA loss, excess of loss and management information systems. On-line facilities are available for (a) maintaining retrocessional participant information for financial reporting purposes, (b) treasury and claims services and (c) managing and administering treaty reinsurance. As part of the Company's disaster control strategy, all key data is backed up regularly for off site storage.
Set forth below are five years of selected financial information. Financial information is presented for American Re-Insurance for the nine-month period ended September 30, 1992, and for the Company for the three months ended December 31, 1992, and each of the years ended December 31, 1993, 1994, 1995, and 1996. The information for the nine months ended September 30, 1992, was derived from the audited consolidated financial statements and related notes of American Re-Insurance. The information as of and for the three months ended December 31, 1992, and each of the years ended December 31, 1993, 1994, 1995, and 1996, was derived from the audited consolidated financial statements and related notes of the Company. The results of operations for any interim period are not necessarily indicative of results of operations for the full year. The statutory data have been derived from statutory financial statements. Such statutory financial statements are prepared in accordance with statutory accounting principles, which differ from GAAP. For additional information, see the Consolidated Financial Statements of the Company, and the related notes thereto included elsewhere in this report.
(1) Represents the sum of American Re-Insurance' s results for the nine months ended September 30, 1992, and the Company's results for the three months ended December 31, 1992. The combined sum has been presented for comparison of significant operating data.
The Company's net premiums written increased 16.7% to $1,902.4 million for the year ended December 31, 1996, from $1,629.5 million in 1995. Total treaty net premiums written increased 20.4% to $1,358.7 million for the year ended December 31, 1996, from $1,128.2 million in 1995, with increases in DICO's and International Operations' treaty net premiums written, partially offset by a decline in ARMI's treaty net premiums written. Facultative net premiums written increased 8.5% to $543.7 million for the year ended December 31, 1996, from $501.3 million in 1995, primarily due to both new accounts and the
The Company's net premiums earned increased 17.4% to $1,796.7 million for the year ended December 31, 1996, from $1,530.9 million in 1995. This increase in premiums earned was primarily due to the increase in premiums written for the year ended December 31, 1996, as well as the timing of premiums earned on business in force.
The Company realized net capital gains of $4.8 million for the year ended December 31, 1996, comprised of net capital gains of $3.9 million realized on bond sales and $0.9 million realized on the sale of other miscellaneous investments. The Company realized net capital gains of $4.7 million for the year
ended December 31, 1995, comprised of net capital gains of $4.3 million on bond sales and $0.4 million realized on the sale of other miscellaneous investments.
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 senior subordinated debentures, interest payable through the expected call date of September 19, 1997, and a call premium of 4.75% of the redemption price. See "Financial Condition." In 1995, the Company recognized an extraordinary, non-cash after-tax loss of $0.3 million, representing the write-off of capitalized financing fees from the revolving bank credit agreement after the obligation was paid in full.
The Company's net premiums earned increased 4.8% to $1,530.9 million for the year ended December 31, 1995, from $1,461.4 million in 1994. This increase in premiums earned was primarily due to the increase in premiums written for the year ended December 31, 1995, as well as the timing of premiums earned on business in force.
Net losses and loss adjustment expenses ("LAE") incurred increased 32.6% to $1,340.2 million for the year ended December 31, 1995, from $1,011.0 million in 1994. This increase was primarily due to a $347.4 million charge for loss reserve strengthening, primarily due to increases in reserves for net Latent Liability Exposures in 1995. See "Reserves for Unpaid Losses and Loss Adjustment Expenses". The year ended December 31, 1995, included $10.0 million of catastrophe losses for various Caribbean storms, compared to $66.1 million in catastrophe losses incurred in 1994 from the Northridge earthquake.
The Company experienced an underwriting loss (net premiums earned minus losses and LAE incurred and underwriting expenses) of $261.7 million for the year ended December 31, 1995, compared to an underwriting gain of $11.1 million in 1994. The change in the underwriting result was due to the charge for loss reserve strengthening recognized in 1995. On a GAAP basis, the Company's loss ratio increased to 87.5% for the year ended December 31, 1995 (inclusive of 20.4 points due to the charge for loss reserve strengthening and 0.6 points due to catastrophe losses), from 69.2% in 1994 (inclusive of 4.5 points from catastrophe losses), while the underwriting expense ratio decreased to 29.6% for the year ended December 31, 1995, from 30.0% in 1994. Primarily as a result of the charge for loss reserve strengthening, the GAAP combined ratio for the year ended December 31, 1995, increased to 117.1% from 99.2% in 1994.
Pre-tax net investment income increased 18.0% to $222.6 million for the year ended December 31, 1995, from $188.7 million in 1994. This increase was primarily due to the increase in invested assets, as well as a higher overall effective interest rate in the investment portfolio. The Company's after-tax net investment income increased by 14.2% to $166.8 million for the year ended December 31, 1995, from $146.0 million in 1994. The after-tax net investment income increase was less than the pre-tax net investment income increase due to the Company's decision to continue to increase the percentage of taxable fixed maturity investments in its portfolio, based on the relative attractiveness of investment yields on highly rated taxable instruments.
The Company is the holding company for American Re-Insurance, a reinsurance company that underwrites property and casualty reinsurance directly in the United States and international markets. Based on statutory net premiums written of $1,908.2 million in 1996, American Re-Insurance, ranked as the second largest property and casualty reinsurer in the U.S. The Company had total assets of $8,403.6 million and stockholders' equity of $969.5 million at December 31, 1996.
The Company is a wholly-owned subsidiary of Munich Re, a company organized under the laws of Germany. Munich Re is the world's largest reinsurance company, based on 1995 net premiums written, according to BUSINESS INSURANCE.
On August 13, 1996, the Company entered into the Merger Agreement 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 by the applicable regulatory authorities. Puma Acquisition Corp. was merged with and into the Company, which became a wholly owned subsidiary of Munich Re and all of the outstanding shares of the Company's Common Stock, were converted into the right to receive the Merger Consideration of $65.00 per share in cash. The aggregate consideration paid by Munich Re was $3,278.3 million. On November 26, 1996, the Company's Common Stock was voluntarily delisted from the New York Stock Exchange.
Total consolidated assets of the Company increased by 7.5% to $8,403.6 million at December 31, 1996, from $7,814.4 million at December 31, 1995. This increase was primarily attributable to increases in investments and cash of $345.1 million, and premiums due and other receivables of $131.2 million.
The total financial statement value of investments and cash increased to $4,302.5 million at December 31, 1996, from $3,957.5 million at December 31, 1995, due to cash flow from operating and financing activities, in addition to an increase in the fair value of investments held. The financial statement value of the investment portfolio at December 31, 1996, included a net increase from amortized cost to fair value of $53.4 million for debt and equity investments, compared to a net increase of $109.2 million at December 31, 1995. At December 31, 1996, the Company recognized a cumulative unrealized gain of $34.7 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 stockholder's equity. This represents a net decrease to stockholder' s equity of $36.3 million from the cumulative unrealized gain on debt and equity securities of $71.0 million recognized at December 31, 1995.
On December 24, 1996, the Company defeased in-substance its existing issue of 10-7/8% Senior Subordinated Debentures due 2004 (the "Debentures"). The Company plans to redeem all then outstanding Debentures (currently $450 million in principal amount) on or about September 19, 1997, 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.
In connection with the in-substance defeasance of the Debentures, the Company sold $500.0 million 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 net proceeds of $494.1 million from the offering of the Notes, in addition to $7.7 million of funds from the working capital of the Company, were simultaneously deposited with the trustee under the indenture for the Debentures (the "Indenture"). The net proceeds were invested in U.S. Government Obligations, as provided in the Indenture, which provide the trustee with funds sufficient to complete the redemption of the Debentures in September 1997 and to make all interest payments that will become due on the Debentures through the date of redemption.
The Notes are redeemable in whole or in part, at the option of the Company at any time, at a redemption price equal to the greater of (i) 100% of the principal amount of such Notes and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted, on a semiannual basis, at the rate per annum equal to the yield to maturity of the United States Treasury security issue of comparable maturity 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 made 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
On August 30, 1995, American Re Capital, a single-purpose Delaware business trust formed and wholly owned by the Company, completed the sale of $237.5 million of Cumulative Quarterly Income Preferred Securities ("the QUIPS"), due 2025. The net proceeds from the offering were used by American Re Capital to purchase a like amount of 8.5% Junior Subordinated Debentures of the Company. The $244.8 million 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., and to contribute $50.0 million to the capital and surplus of American Re-Insurance. 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 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.
Common stockholder' s equity increased 14.5% to $969.5 million at December 31, 1996, from $847.1 million at December 31, 1995. This increase was primarily attributable to net income of $111.7 million and a tax benefit of $69.5 million related to the settlement of the stock option and award plans at the Acquisition, offset by net market depreciation of $36.3 million on debt and equity securities, after applicable income tax effects, dividends to common stockholders of $14.2 million, and an increase in net unrealized loss on foreign exchange of $13.4 million.
On March 29, June 28, and September 30, 1996, the Company paid cash dividends of $0.08, $0.11, and $0.11, respectively, per share on all outstanding common shares. There were no dividends paid in the fourth quarter 1996.
As a normal course of business, the Company enters into foreign exchange forward contracts primarily as a hedge, for other than trading purposes, and such contracts are designed to offset certain foreign currency net asset positions. Foreign exchange forward contracts are agreements to exchange fixed amounts of two different currencies at a specified future date and at a specified price. Currency risk results mainly from fluctuations in translation rates and credit risk results from the possibility of non-performance
by counterparties, which could result in an unhedged position. At December 31, 1996, and 1995, the Company had $132.5 million and $140.8 million, respectively, in contracts to sell, and $49.5 million and $25.5 million, respectively, in contracts to buy various foreign currencies, primarily in Canadian and Australian dollars. The contract amounts of these instruments reflect the extent of the Company's involvement in this type of financial instrument and do not represent the Company's risk of loss. The Company recognized $4.0 million and $1.8 million as an unrealized loss on foreign exchange in stockholder' s equity due to foreign exchange forward contracts for the years ended December 31, 1996, and 1995, respectively. The estimated fair value of the foreign exchange forward contracts were $0.1 million and $0.7 million at December 31, 1996, and 1995, respectively.
The Company is required to apply a portion of its operating cash flow to the servicing and repayment of its debt obligations. The payment of dividends to the Company by American Re-Insurance is subject to limitations imposed by the Delaware Insurance Code. Based upon these restrictions and 1996 operating results, the maximum amount available for payment of dividends to the Company by American Re-Insurance in 1997 without approval of regulatory authorities is estimated to be $237.1 million.
The Company' s cash flow from operations may be influenced by a variety of other factors, including cyclical changes in the property and casualty reinsurance market, insurance regulatory initiatives, and changes in general economic conditions. Liquidity requirements are met on both a short- and long-term basis by funds provided by operations and from the maturity and the 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 $365.9 million for 1996, $325.7 million for 1995, and $429.8 million in 1994.