The Corporation and most of its domestic subsidiaries occupy approximately 75 percent of a six story building in Stamford, Connecticut. This building, consisting of approximately 560,000 square feet of office space and a multiple level parking garage, with approximately eight acres of land on which it is located, was originally owned by Elm Street Corporation, a wholly owned subsidiary of the Corporation. The Corporation has guaranteed the obligations of Elm Street Corporation in connection with this transaction. On November 12, 1984, the land was leased, the improvements were sold and the land and improvements were leased back by the Corporation. Under the terms of the lease, the Corporation has the option to purchase the improvements upon expiration of the 25 year lease or at an earlier date upon the occurrence of certain events.
Cologne Re's German operations are principally based in an office building of approximately 130,000 square feet in Cologne, Germany. The building has an estimated fair value of $40 million and is owned by Cologne Re. The United States operations of Cologne Re are based in an office building in Stamford, Connecticut which had an estimated fair value of $8 million at December 31, 1994.
At this time, the Corporation believes its facilities are suitable for its purposes, having adequate capacity for the Corporation's present and anticipated needs.
Only continuing operations are presented. Balance sheet data are as of December 31st.
(3) Return on equity is income from continuing operations excluding after-tax realized gains and cumulative effects of accounting changes divided by average common stockholders' equity at the beginning and end of the year.
Consolidated net premiums written in 1994 were $3,001 million, an increase of $477 million or 18.9 percent from $2,524 million in 1993. Domestic property/casualty premium volume was $2,581 million in 1994, compared with $2,275 million in 1993, an increase of 13.4 percent. Net premiums written in the international insurance operations were $420 million in 1994, an increase of 69.0 percent over 1993 volume.
Consolidated net investment income was $749 million in 1994, compared with $755 million in 1993. The level of investment income was adversely affected by the shift in assets from taxable to tax-advantaged securities in response to the Corporation's tax planning strategies, the use of the Corporation's cash flow from operations for stock repurchases, and an increase in lower yielding, short-term securities during the year to fund an investment in Cologne Re. The consolidated pretax investment yield on invested assets, excluding the invested assets of General Re Financial Products Corporation ("GRFP"), was 5.9 percent in 1994, compared with 6.5 percent in 1993. Net investment income for the domestic property/casualty operations was $686 million in 1994, a decrease of 2.7 percent over $705 million earned in 1993. Net investment income for the international property/casualty operations increased 20.9 percent to $52 million in 1994, compared with $43 million in 1993. The financial services operations had investment income of $11 million in 1994, compared with $7 million in 1993.
Consolidated net premiums written for 1993 of $2,524 million increased 7.5 percent over $2,349 million in 1992. Domestic property/casualty premium volume was $2,275 million in 1993, compared with $2,177 million in 1992, an increase of 4.5 percent. The international property/casualty operations net premiums written were $249 million in 1993, an increase of 44.5 percent from the comparable amount in 1992.
Domestic property/casualty income, excluding after-tax realized gains and the cumulative effect of accounting changes, decreased 3.2 percent from 1993's income, principally the result of catastrophe claims arising from the Northridge, California earthquake on January 17, 1994 and reduced investment income, due primarily to lower yields on the portfolio.
Net premiums written in 1994 for the domestic property/casualty operations of $2,581 million increased 13.4 percent from $2,275 million in 1993. Premium volume by operating unit expressed as a percentage of total domestic property/casualty premiums was as follows:
For the General Star companies, which write primary and excess specialty insurance on a licensed and surplus lines basis, premium volume grew 23.4 percent in 1994, due to both increased marketing activities and improved rates for coverage containing property exposures. General Star produced a statutory underwriting profit for the tenth consecutive year.
The Genesis companies provide direct excess insurance and excess reinsurance to self-insured programs. Underwriting results for the Genesis companies improved during 1994. Premiums increased during the year by 13.0 percent over 1993 levels due principally to growth in casualty premiums.
Net premiums written for the domestic property/casualty insurance segment of $2,275 million in 1993 increased 4.5 percent over $2,177 million in 1992. As discussed in Note 3 to the consolidated financial statements, North Star Reinsurance Corporation, a wholly owned subsidiary, was sold to Signet Star Holdings, Inc. in 1993. The disposal affects premium comparisons relative to prior years. During 1992, North Star contributed $157 million to the domestic property/casualty premium volume. During the first quarter of 1993, North Star had net premiums written of $41 million. After the first quarter of 1993, however, domestic property/casualty premiums exclude North Star. When North Star's premiums are excluded from the 1993 and 1992 results, domestic property/casualty premiums increased by 10.6% in 1993, as compared to 1992, due primarily to growth in treaty reinsurance, property facultative and General Star's business. North Star's premiums for 1993 and 1992 are included with GRC in the preceding table.
Net income for the international property/casualty operations of $14 million in 1993 decreased from $16 million in 1992. Included in these results were after-tax realized gains of $1 million in 1992. Income for the international property/casualty operations was adversely affected during 1993 by the strengthening of the U.S. dollar compared to foreign currencies and by nonrecurring charges related to the expansion of operations. The international property/casualty underwriting results, while still unprofitable, improved by $7 million over 1992 underwriting result, which was adversely affected by catastrophic events. International premiums written of $249 million in 1993 increased 44.5 percent over 1992 premium of $172 million.
On December 28, 1994, the Corporation and Colonia Konzern AG ("Colonia") formed a new company that acquired 75 percent of the common shares and approximately 30 percent of the preferred shares of Cologne Re, which collectively represent a 66.3 percent economic interest in Cologne Re. In exchange for its Cologne Re shares, Colonia, for itself and as trustee for Nordstern Allgemeine Versicherungs AG (collectively, the "CKAG Group"), received 100 percent of the Class A shares of the new company, General Re-CKAG Reinsurance and Investment S.A.R.L. ("GR-CK"). The Corporation initially contributed $884 million (DM 1,377 million) to GR-CK in exchange for 100 percent of the Class B shares of GR-CK. On December 30,
1994, GR-CK paid $302 million (DM 475 million) to a subsidiary of the Corporation in exchange for notes having a principal amount of DM 475 million. The notes pay interest of 8.0 percent annually to GR-CK and are due on December 30, 2004.
The Class A shares have 49.9 percent of the votes of GR-CK and are entitled to an annual Class A dividend, while the Class B shares have 50.1 percent of the votes of GR-CK and are entitled to the earnings of GR-CK in excess of the Class A dividend. The Corporation has an option after seven years to purchase the Class A shares of GR-CK owned by the CKAG Group at a formula price. The option has a minimum exercise price of DM 1,306 million and a maximum of DM 1,509 million, subject to certain warranty adjustments that may reduce the exercise price.
The financial services operations include the Corporation's derivative products, insurance brokerage and management, investment management, reinsurance brokerage and real estate management operations. Net income for the financial services operations was $52 million in 1994, an increase of 53.2 percent from $34 million earned in 1993. The increase in 1994 income was principally due to increased profitability of the Corporation's derivative products subsidiary, GRFP, and new revenues from General Re Underwriting Services Limited ("GRUS") and General Re Asset Management Corporation ("GRAM"). GRUS principally provides underwriting services for Tempest Reinsurance Company Limited, an affiliated Bermuda-based company specializing in excess property catastrophe reinsurance.
Income for the financial services operations of $34 million in 1993 increased significantly from $4 million earned in 1992. The increase in 1993 income was principally due to growth in GRFP, which was a startup operation in 1992. The Corporation's reinsurance brokerage operations also contributed to the improved results in 1993, in part due to the reinsurance brokerage operation's improved ability to place catastrophe reinsurance at higher prices.
The Corporation's invested assets increased from $14,346 million at December 31, 1993 to $18,898 million at December 31, 1994. Included in the December 31, 1994 balance sheet are GR-CK invested assets of $5,301 million. Excluding the impact of the Cologne Re transaction, invested assets decreased by $167 million as a result of a decrease of $494 million in the financial services operations, which was partially offset by an increase of $158 million in the domestic property/casualty segment and an increase of $169 million in the international property/casualty segment. The after-tax unrealized appreciation on the Corporation's total investment portfolio was $453 million and $1,137 million at December 31, 1994 and December 31, 1993, respectively. The decline was principally due to increased market interest rates and reduced equity values.
grouping of underlying mortgages into various principal repayment tranches ("CMO's"). The MBS portfolio is comprised of pass-through securities (56 percent) and CMO's (44 percent) based on December 31, 1994 market values. The CMO portfolio is comprised almost entirely of planned amortization class ("PAC's") securities which have experienced less volatility in repayment of principal than other types of CMO securities. ABS are usually collateralized by credit card or auto loan receivables which are packaged into debt instruments whose interest and principal payments will vary with the underlying receivable. Almost all of the MBS and ABS portfolios are publicly traded and market values were obtained from an external pricing service.
At December 31, 1994, investments in domestic equity securities totaled $2,367 million, representing 20.4 percent of the domestic portfolio and 48.7 percent of common stockholders' equity. The domestic equity portfolio is well diversified and primarily consists of companies with large capitalizations that, collectively, have a calculated volatility approximating the Standard & Poor's 500 index.
The ongoing financial integrity of the Corporation is dependent on reserve adequacy. The gross liability and reinsurance recoverable for claims and claim expenses were based on the Corporation's analysis of reports and individual case estimates received from ceding companies. The liability and related recoverables also include an amount estimated by the Corporation for claims and claim expenses incurred but not reported. The liability and recovery are evaluated continuously by management, annually by the Corporation's independent accountants in conjunction with their audit and periodically by independent consulting actuaries. Any resulting adjustments are included in income currently.
The liability for claims and claim expenses for 1993 and prior accident years, net of related reinsurance recoveries, decreased by $36 million in 1994. The decrease, which had a favorable effect on the Corporation's net income in 1994, was principally the result of the net impact of favorable loss development on casualty lines of business, partly offset by reserve strengthening for environmental and latent injury claims. The liability for prior accident years was increased by $140 million and $56 million during 1993 and 1992, respectively, adversely impacting net income in those years. The adverse income impact was the result of reserve strengthening principally for environmental and latent injury claims.
Included in the Corporation's liability for claims and claim expenses were liabilities for environmental and latent injury damage claims. These amounts include provisions for both reported and incurred but not reported (IBNR) claims. The table below presents the three-year development of the balance sheet liability for unpaid environmental and latent injury claims:
Ceding companies report information about environmental and latent injury claims based upon their individual and differing methodologies for characterizing claims. For example, some ceding companies report one claim for a policyholder with a number of exposure sites, whereas others report each exposure at each site as a separate claim. In addition, a substantial number of latent injury claims, which are often reported to the Corporation on a precautionary basis by ceding companies and insureds prior to reaching the reinsured layer, close without reinsurance payment. Due to these factors, the Corporation is unable to provide meaningful claim count information.
The Corporation discounts certain liabilities associated with workers' compensation claims. A new statutory accounting rule adopted in December 1993 by the NAIC, effective for calendar year 1994 and subsequent statutory annual statements, allows the discounting of "tabular reserves", as defined, and allows discounting of non-tabular reserves if permitted by the insurer's state of domicile. As of December 31, 1994, GRC recorded $1,328 million in discount on its loss reserves. Of that amount, $839 million relates to reserves eligible for the tabular reserve discount and $489 million relates to non-tabular reserves for medical costs associated with tabular reserve claims. The Delaware Insurance Department has confirmed that GRC may continue to discount both its tabular reserves and the medical expenses associated with such tabular reserves at 4.5% per year. Accordingly, the adoption of the statutory reserve discount rule during 1994 did not effect the Corporation's results from operations, cash flows and financial condition.
The asset and liability positions of the financial services operations fluctuate based on its dealer and related risk-management activities. GRFP manages its market risk through the purchase and sale of government
securities and futures contracts and by entering into offsetting derivative transactions. The purchase of government securities (fixed maturities at fair value), which are financed through collateralized repurchase agreements (securities sold under agreements to repurchase), and the sale of government securities (securities sold but not yet purchased), whose proceeds are invested in reverse repurchase agreements (securities purchased under agreements to resell), contribute to the short-term fluctuation in the operation's total assets and liabilities, while generally not having any material effect on common stockholders' equity. During 1994, invested assets of these operations decreased $494 million to $1,661 million. Securities purchased under agreements to resell (an asset) increased $680 million in 1994 to $813 million. Securities sold under agreements to repurchase (a liability) decreased $628 million in 1994 to $938 million. Securities sold but not yet purchased represent obligations of the Corporation to deliver the specified security at the contracted price, thereby creating a liability to repurchase the security in the market at prevailing prices. Accordingly, the Corporation's ultimate obligation to satisfy the sale of securities sold but not yet purchased may exceed the amount recognized in the balance sheet. The Corporation controls and manages this risk through the use of credit and market risk limits and reviews its market exposure on a daily basis. The liability for securities sold but not yet purchased increased $385 million in 1994 to $927 million at December 31, 1994.
Effective January 1, 1994, the Corporation adopted FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts. The Interpretation further clarifies the definition of a right of set-off. Effective December 31, 1994, the Corporation adopted FASB Interpretation No. 41, Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements. The Interpretation modified the accounting in FASB Interpretation No. 39 to permit offsetting in the balance sheet of payables and receivables for repurchase and reverse repurchase agreements when these agreements are with the same counterparty, have the same settlement date, are part of a master netting arrangement, and can be settled for cash on a net basis. The Corporation has reclassified amounts on the December 31, 1993 balance sheet to conform to the new Interpretations. The combined effect of adopting Interpretations Nos. 39 and 41 increased reported assets and liabilities by approximately $950 million at December 31, 1993 and $1,747 million at December 31, 1994. Adoption of these Interpretations had no impact on results from operations, cash flows or stockholders' equity.
The ratio of claim and claim expense reserves, net of reinsurance, to common stockholders' equity at December 31, 1994 was 2.1 to 1.0, and the ratio of net written premiums to common stockholders' equity was 0.6 to 1.0. These two ratios are conservative by insurance industry averages and indicate the capacity to assume additional reinsurance business.
A summary of the Corporation's cash flow by business segment was as follows:
Domestic and international operating cash flows grew in 1994 and 1993, reflecting growth in the business. Domestic property/casualty financing cash flows include the Corporation's stock repurchases and dividends to stockholders. As discussed earlier, the Corporation made a net cash investment in 1994 of $582 million in GR-CK, the holding company which owns approximately 66.3 percent of the economic interest of Cologne Re. The funds invested in GR-CK are not available for the Corporation's general business purposes, but are subject to certain restrictions according to the joint venture agreement. The Corporation's domestic cash flow should not be significantly affected by the joint venture structure as interest paid to GR-CK on the intercompany note will be funded by dividends received from GR-CK.
Dividends paid to common and preferred stockholders were $168 million, $170 million and $164 million in 1994, 1993 and 1992, respectively. The Corporation used $207 million, $134 million and $179 million to repurchase 1,912,500 shares, 1,213,600 shares and 2,138,100 shares of its common stock in the years ended December 31, 1994, 1993 and 1992, respectively. Through December 31, 1994, the Corporation has purchased $1,563 million (21,909,300 shares) of its common stock since the inception of the repurchase program in
GAAP TO SAP RECONCILIATION OF NET LIABILITY FOR CLAIMS AND CLAIM EXPENSES (IN MILLIONS)
The first data row shows the estimated net liability for unpaid claims and claim expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of claims and claim expenses, including IBNR, that are outstanding as of the balance sheet date.
The "Cumulative (Deficiency) Redundancy" represents the aggregate change in the initial estimates from the original date through December 31, 1994. Annual changes in the estimates are reflected in current operating results each year as the liabilities are reevaluated. The lower "triangle" of data shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year.
ANALYSIS OF NET UNPAID CLAIMS AND CLAIM EXPENSES DEVELOPMENT (IN MILLIONS)
Beginning in 1985, the Corporation strengthened its prices and continued to increase its reserves. Significant reserve strengthening on excess liability to qualified self insurers, written on both an excess of specific loss and aggregate basis, has been partially offset by favorable development on reinsurance of liability business written at the higher pricing levels.
In evaluating this information, it should be noted that conditions and trends affecting the development of liabilities in the past may not occur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on these tables. Current actuarial studies indicate that liabilities for claims and claim expense as of December 31, 1994, net and gross of reinsurance, are adequate.
We have audited the consolidated financial statements and schedules of General Re Corporation and subsidiaries listed in the index on page 21 of this Form 10-K. These financial statements and schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of General Re Corporation and subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND 1993 (IN MILLIONS, EXCEPT SHARE DATA)
The following are the significant accounting policies and practices of General Re Corporation and Subsidiaries (the "Corporation"):
On December 28, 1994, the Corporation and Colonia Konzern AG ("Colonia") formed a new company that acquired 75 percent of the common shares and approximately 30 percent of the preferred shares of Kolnische Ruckversicherungs-Gesellschaft AG ("Cologne Re"). As a result of its investment in GR-CK at the end of 1994 (see Note 3), the Corporation's operating results were not materially affected by the Cologne Re joint venture. Due to the ownership and control structure of GR-CK and Cologne Re, the Corporation has consolidated the balance sheet of the joint venture in its balance sheet at December 31, 1994.
Realized gains or losses on sales of investments are primarily determined on the basis of identified cost and include adjustments to the net realizable value of investments for declines in value that are considered to be other than temporary. Realized gains or losses include gains and losses arising from the translation into U.S. dollars of investments held by the domestic operations and denominated in foreign currencies. Investment income is recognized as earned and includes the amortization of bond discount and accretion of bond premium.
Included in other invested assets are investments in reinsurance ventures, limited partnerships and real estate. Reinsurance ventures accounted for under the equity method are carried at initial cost which is adjusted after acquisition for the Corporation's proportionate share of the venture's earnings. The amount of the adjustment is included in income. Limited partnerships are carried at estimated fair value with distributions of income recognized in investment income when received. Real estate is valued at cost and depreciated over its estimated useful life.
PREMIUMS EARNED: Premiums are recognized in income over the contract period in proportion to the amount of insurance or reinsurance provided. Unearned premium liabilities are established to cover the
FUTURE POLICY BENEFITS FOR LIFE AND HEALTH CONTRACTS: The liability for future policy benefits for life and health contracts has been computed based upon assumed investment yields and mortality and withdrawal rates anticipated at the time of the Corporation's investment in Cologne Re. These assumptions include a margin for adverse deviation and vary with the characteristics of the reinsurance contract's year of issue, policy duration, country of risk, and other appropriate factors. The interest rate assumptions used vary by country ranging from 3.0 percent to 7.0 percent. There was no participating life business; however, appropriate provisions for profit-sharing commission payments to ceding companies were made.
FUNDS HELD BY REINSURED COMPANIES: Funds held by reinsured companies represent ceded premium retained by the ceding company, for a period, according to contractual terms. The Corporation generally earns investment income on these balances during the period funds are held.
DEFERRED INCOME TAXES: Deferred income taxes have been provided for all temporary differences between the bases of assets and liabilities used in the financial statements and the Corporation's tax returns. Deferred income taxes are also provided for unrealized appreciation (depreciation) of equity securities and certain fixed maturities, and for foreign currency translation gains or losses by a charge (credit) directly to the applicable component of common stockholders' equity.
Effective January 1, 1994, the Corporation adopted FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts. The Interpretation further clarifies the definition of a right of set-off. Effective
Effective January 1, 1993, the Corporation adopted Statement of Financial Accounting Standards No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. The Statement specifies the accounting for reinsurance of insurance contracts and also applies to retrocessions of reinsurance contracts. Under the Statement, prepaid reinsurance premiums and reinsurance recoveries on unpaid claims and claim expenses are to be reported as assets, rather than as reductions in liabilities. The Statement also establishes the risk transfer requirements that a contract must satisfy in order to be accounted for as reinsurance and prescribes accounting and reporting standards for reinsurance contracts. Contracts that do not both transfer significant insurance risk and result in the reasonable possibility that the reinsurer (or retrocessionaire) may realize a significant loss from the insurance risk assumed are required to be accounted for as deposits. Adoption of the risk transfer components of the new Statement did not have a material impact on the Corporation's financial position or results from operations in 1993.
Effective January 1, 1992, the Corporation adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The Statement requires the use of the liability method of accounting for deferred income taxes. The cumulative effect of the change in accounting increased net income in 1992 by $61 million, or $.71 per common share.
The Class A shares have 49.9 percent of the votes of GR-CK and are entitled to an annual Class A dividend, which is based on a formula and is subject to a minimum of approximately DM 36 million, while the Class B shares have 50.1 percent of the votes of GR-CK and are entitled to the earnings of GR-CK in excess of the Class A dividend. The Corporation has an option after seven years to purchase the Class A shares of GR-CK owned by the CKAG Group at a formula price. The option has a minimum exercise price of DM 1,306 million ($842 million) and a maximum exercise price of DM 1,509 million ($973 million), subject to certain warranty adjustments that may reduce the exercise price.
In November 1993, SSH called the senior debt at par plus accrued interest. The convertible debt is convertible, at the Corporation's discretion, into common stock of SSH between June 30, 1995 and July 15, 1995. If the Corporation converts the debt to equity, it will own a 50 percent equity interest in SSH. The Corporation, through its wholly owned subsidiary, GRC, has retained the net claim and claim expense liability of North Star for all reinsurance contracts underwritten by North Star prior to January 1, 1993. These claim and claim expense liabilities are currently in runoff and did not have a material impact on the Corporation's results from operations or financial position during 1994.
In September 1993, the Corporation acted as sponsor in the formation of Tempest Reinsurance Company Limited ("Tempest"), a Bermuda-based reinsurance company specializing in excess property catastrophe reinsurance. The Corporation accounted for its 20.5 percent interest in Tempest of $112 million at December 31, 1994 under the equity method. The Corporation provides underwriting and investment management services for Tempest.
The Corporation's domestic reinsurance and insurance subsidiaries file financial statements prepared in accordance with statutory accounting practices prescribed or permitted by insurance regulators. Statutory accounting differs from generally accepted accounting principles in the reporting of certain reinsurance contracts, acquisition expenses, furniture and equipment, deferred income taxes and certain other items. Combined statutory surplus at December 31, 1994 and 1993 was $3,770 million and $3,836 million, respectively, and combined statutory net income for the years ended December 31, 1994, 1993 and 1992 was $511 million, $655 million and $547 million, respectively.
The Corporation's subsidiaries prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by their domiciliary state's insurance department. Prescribed accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed that have been permitted by the insurance department of the insurer's domiciliary state.
Investment income, which consists of interest and dividends from all fixed maturities, equity securities, short-term investments and from other sources, was as follows:
Securities with a par value of $549 million at December 31, 1994 were on deposit with various state or governmental departments to comply with insurance laws.
The Corporation's effective income tax rate is less than the U.S. statutory rate due to permanent differences between financial statement income and taxable income. An analysis of the Corporation's effective tax rate as a percentage of pretax income follows:
The Corporation has $1,000 million of available lines of credit from banks, all of which were unused at December 31, 1994. The credit agreement with the banks requires the Corporation to maintain a minimum consolidated tangible net worth, as defined, of $2,500 million. Interest expense and interest paid for all loans payable and commercial paper were as follows:
The Corporation and its subsidiaries have noncontributory pension plans covering substantially all employees. Pension expense for foreign employees was not material to the Corporation. Plans for United States employees provide pension benefits that are generally computed on the basis of the average earnings during the three consecutive years of highest earnings during the employee's service. The Corporation's funding policy is to contribute sufficient amounts to meet the minimum annual funding required by applicable regulations plus such additional amounts as it may determine to be appropriate from time to time for U.S. plans. Pension plan assets are principally invested in investment-grade fixed maturities and equities. Cologne Re provides pensions benefits to its employees based on years of service and age at retirement.
The components of pension expense related to both funded and unfunded plans for United States employees were as follows:
The projected benefit obligation for U.S. employees was determined using an assumed discount rate of 8.25% in 1994, 7.25% for 1993 and 8.0% for 1992, and an assumed long-term compensation increase of 6.0% in 1994,
5.5% for 1993 and 6.0% for 1992. An assumed long-term rate of return on plan assets of 8.5% was used in determining pension expense in 1994, 1993 and 1992. The projected benefit obligation for Cologne Re employees was determined using an assumed discount rate of 7.0 percent and an assumed long-term compensation increase of 3.5 percent.
The following table sets forth the plans' funded status and amount recognized in the Corporation's consolidated balance sheet:
Substantially all of the Corporation's employees in the United States become eligible for certain health care and group life insurance benefits upon retirement from the Corporation. Effective January 1, 1993, the Corporation adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. The Corporation has funded the benefit cost of current retirees, with the retiree paying a portion of the costs. The retiree's portion of the costs varies depending upon the individual's length of service with Corporation upon retirement. As of December 31, 1994 and 1993 the Corporation had funded $2 million for postretirement health care benefits for current retirees and had an accrued liability of $23 million and $20 million, respectively, for current employees.
The Corporation has a Long-term Compensation Plan (the "Plan") which provides for the granting of incentive and non-qualified stock options to Directors, key executives and managerial employees. The Plan provides that the exercise price of the options granted may not be less than the fair market value of the Corporation's common stock on the date the options are granted. The options are exercisable cumulatively, 20 percent each year, commencing one year from the date of grant and expire ten years from the grant date. In certain circumstances, replacement options may be granted upon exercise of an original option, with the exercise price equal to the current market price and with a term extending to the expiration date of the original option.
The Plan also permits the granting of stock appreciation rights (SARs) in connection with options granted under the Plan. SARs permit the grantee to surrender an exercisable option for an amount equal to the excess of the market price of the common stock over the option price when the right is exercised. No SARs have been granted since 1988.
Future minimum rental payments have not been reduced by $24 million of anticipated sub-lease rental income on non-cancelable leases.
Premiums written, premiums earned, and claims and claim expenses are reported net of reinsurance in the Corporation's statements of income. Direct, assumed, ceded and net amounts for these items were as follows:
The Corporation utilizes reinsurance to reduce its exposure to large claims. These agreements provide for recovery of a portion of certain claims and claim expenses from reinsurers. If the reinsurers are unable to meet their obligations under the agreements, the Corporation would be liable for such defaulted amounts. The Corporation holds partial collateral under these agreements.
The Corporation is the ultimate controlling entity in the General Re Group insurance holding company system, which includes domestic insurance companies that are subject to the insurance holding company acts of Delaware and various other states. The Corporation is dependent upon the ability of its operating subsidiaries for the transfer of funds in the form of loans, advances or dividends. The insurance holding company laws require the filing of annual reports by the insurance company members of the system and regulate transactions between the holding company and affiliated insurance companies to the extent that such transactions must be fair, reasonable and assure the adequacy of insurance companies' statutory surplus in relation to their liabilities and financial needs.
The laws also subject extraordinary dividends and other extraordinary distributions to insurance company stockholders to regulatory approval. Dividends or distributions in a twelve-month period exceeding the greater of 10 percent of an insurance company's surplus as of the prior year end or 100 percent of net income, excluding realized gains, for the previous calendar year are generally considered extraordinary and require such approval. Based on these restrictions, ordinary dividend payments by domestic insurance subsidiaries to the Corporation are limited to $420 million in 1995. Foreign and non-insurance subsidiaries generally are subject to fewer restrictions on the payment of dividends.
GRFP reduces exposure to market, currency rate and interest rate risk in connection with its dealer activities by purchasing or selling futures contracts, entering into forward contracts, purchasing or selling government securities, purchasing or selling exchange traded interest rate options, or entering into offsetting transactions. These hedging instruments are carried at fair value and contain elements of market and credit risk associated with the execution, settlement and financing of these instruments similar to the financial instruments described above.
GRFP is a dealer in various types of derivative instruments which are described below.
Forward rate agreements and futures contracts are commitments either to purchase or sell a financial instrument at a future date for a specified price and are generally settled in cash. Forward rate agreements settle in cash at a specified future date based on the differential between agreed interest rates applied to a notional amount.
GRFP is party to a variety of foreign exchange spot and forward contracts in its dealer and risk management activities. Foreign exchange contracts generally involve the exchange of two currencies at agreed rates; spot contracts usually require the exchange to occur within two business days of the contract date.
Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. In the event counterparties are unable to fulfill their contractual obligations, future losses due to defaults may exceed amounts currently recognized in the balance sheet. Counterparties to the financial instruments are, in decreasing order of magnitude, foreign and domestic commercial banks, U.S. government-chartered organizations, sovereigns and corporations. GRFP evaluates the creditworthiness of its counterparties by performing formal internal credit analyses and by referring to ratings of widely accepted credit rating services. Counterparty credit limits are determined based on this analysis and counterparty credit exposures are monitored in accordance with these limits. GRFP receives cash and/or investment grade securities from certain counterparties as collateral to mitigate its credit exposure. GRFP also incorporates into contracts with certain counterparties provisions which allow the unwinding of these transactions in the event of a downgrade in credit rating of either the counterparty or GRFP.
GRFP assesses credit risk by counterparty based on transactions with each respective counterparty. Assuming nonperformance by all counterparties on all contracts potentially subject to a loss, the maximum potential loss, based on the cost of replacement at market rates prevailing at December 31, 1994, approximated $1,869 million. This value is net of amounts offset pursuant to rights of setoff and qualifying master netting arrangements with various counterparties and is presented in accordance with Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts and FASB Interpretation No. 41, Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements. The Interpretation further clarifies the definition of a right of set-off. The maximum potential loss will increase or decrease during the life of the transaction as a function of maturity period, accounting values, and interest and currency rates. In the judgment of management, the likelihood that all counterparties would default, resulting in a maximum potential loss, is remote. GRFP has not experienced any counterparty defaults or write-offs on such contracts.
The following are the estimated fair values of the Corporation's financial instruments:
The Corporation uses various methods and assumptions in estimating the fair value of financial instruments. The following valuation methods and assumptions were utilized by the Corporation in estimating the fair value of financial instruments:
Cash and short-term investments -- The carrying amounts reported in the consolidated balance sheet approximate the fair values for these financial instruments.
Equity securities -- Fair values for equity securities were based on quoted market prices.
Securities sold but not yet purchased -- The fair value for securities sold but not yet purchased was based on quoted market prices.
On September 12, 1994, the Corporation's subsidiary, General Reinsurance Corporation, along with 31 other insurance companies and insurance industry organizations, reached a settlement of civil antitrust actions brought by 20 State Attorneys General and several private plaintiffs.
The settlement includes an already completed restructuring of the Insurance Services Office and the proposed funding by the defendants of a national public risk database and a public entity risk services institute to assist risk management efforts. The terms of the settlement, which provide for no admission of wrongdoing, illegality or payment of damages, will be subject to the approval of the United States District Court. The effect of the settlement was not material to the Corporation's results of operations, cash flows or financial condition.
The liability for claims and claims expenses for 1993 and prior accident years, net of related reinsurance recoveries, decreased by $36 million in 1994. The decrease is principally the result of favorable loss development on casualty lines of business partly offset by reserve strengthening for environmental, latent injury and associated litigation costs discussed above.
The Corporation has the authority to issue 250,000,000 shares of $.50 par value common stock, of which 102,827,344 have been issued. Common stock purchased in the open market is carried at cost and shown as a reduction to common stockholders' equity. When treasury shares are reissued, the treasury stock account is reduced for the cost of the common stock reissued on a first-in, first-out basis. No treasury stock of the Corporation is held by any subsidiary. The number of shares included in treasury stock were as follows:
The Corporation also has the authority to issue 20 million shares of preferred stock of which 1,734,717 are issued and outstanding and held by the ESSOP and 1 million (Series A Junior Participating Preferred) are reserved for the Shareholders' Rights Plan. Under the Shareholders' Rights Plan, one right attaches to each outstanding share of common stock. In the event a person or group acquires or commences a tender or exchange offer for 20% or more of the Corporation's common stock, each right entitles common stockholders to purchase Series A Junior Participating Stock, which is convertible to common stock having a value equal to two times the exercise price.
FINANCIAL SERVICES -- The Corporation's financial services operations engage in various financial services for affiliated and non-affiliated companies. Financial services include the Corporation's derivative products, insurance brokerage and management, reinsurance brokerage, investment management and real estate management operations.
Earnings per common share for each quarter are required to be computed independently and, due to purchases of treasury shares, will not equal the total year earnings per common share amounts.