Pretax yields on the North American property/casualty bond portfolios were as follows:
The liability for environmental and latent injury claims and claim expenses is management's best estimate of future claim and claim expense payments and recoveries which are expected to develop over the next several decades. General Re continuously monitors evolving case law and its effect on environmental and latent injury claims. Changing government regulations, newly identified toxins, newly reported claims, new theories of liability, new contract interpretations and other factors could significantly affect future claim development. While General Re has recorded its current best estimate of its liabilities for unpaid claims and claim expenses, it is reasonably possible that these estimated liabilities, net of estimated reinsurance recoveries, may increase in the future and that the increase may be material to General Re's results from operations, cash flows and financial position. It is not possible to estimate reliably the amount of additional net loss, or the range of net loss, that is reasonably possible.
General Re has a project under way to modify its internal mainframe, server and personal computer hardware and software applications that may be affected by the Year 2000 change. In addition, General Re is reviewing the related initiatives of its principal vendors and other important third-party relationships. Both internal and external resources have been engaged to modify General Re's computer systems for Year 2000 compliance. Included in consolidated operating results was approximately $6 million and $1 million for the cost of these procedures in 1997 and 1996, respectively. An additional $13 million is the anticipated cost to complete the modifications.
Table 3 and Table 4 present the development of net and gross balance sheet liabilities for General Re's international property/casualty operations beginning in 1994. Although the accident-year information required to complete Table 3 and Table 4 for General Re's wholly owned international subsidiaries was not available in prior years, these liabilities were not significant for these periods. Due to lags in receiving underwriting activity reports from ceding companies in Europe, there may be correlated development of both premiums and claims in the international operations and fluctuations due to currency movements. The effect of currency movements on these liabilities has been separately reported in these two tables.
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (IN MILLIONS, EXCEPT SHARE DATA)
General Re's financial services operations include derivative products, insurance brokerage and management, investment management, reinsurance brokerage and real estate management operations. Through General Re Financial Products Corporation and its affiliates ("GRFP"), General Re offers a full line of interest rate, currency credit and equity swaps and options, as well as structured finance products. The financial services operations produced $301 million, or 4 percent, of General Re's 1997 revenues.
FUNDS HELD BY REINSURED COMPANIES: Funds held by reinsured companies represent ceded premiums retained by the ceding company for a period according to contractual terms. General Re generally earns investment income on these balances during the period funds are held.
of direct excess insurance policies, rather than from reinsurance assumed. Direct excess coverage litigation expenses are estimated using a modified count and amount actuarial study.
Premiums, claims and claim expenses and life/health benefits are reported net of reinsurance in General Re's statements of income. Direct, assumed, ceded and net amounts for these items were as follows:
The fair value of options granted during 1997, 1996 and 1995 were $58 million, $48 million and $39 million, respectively. The fair value of the options granted was determined using the binomial option-pricing model using the following assumptions:
GRFP assesses credit risk by counterparty across all transactions with each respective counterparty. Assuming non-performance by all counterparties on all contracts potentially subject to a loss, the maximum potential loss, based on the cost of replacement, net of collateral held, at market rates prevailing at December 31, 1997, approximated $3,075 million. This value represents unrealized gains on financial instrument contracts in gain positions, net of any unrealized losses with these counterparties from offsetting positions. The maximum potential loss will increase or decrease during the life of the transaction as a function of contract terms and market conditions such as interest and currency rates. In the judgment of management, the likelihood that all counterparties would default, resulting in a maximum potential loss, is remote. Since inception, GRFP has not had any credit losses.