10-Q 1 a2049490z10-q.txt 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------ FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001, OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . FOR THE QUARTER ENDED MARCH 31, 2001 COMMISSION FILE NUMBER 1-11688 ------------------------ AMERICAN RE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-3672116 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 555 COLLEGE ROAD EAST 08543-5241 PRINCETON, NEW JERSEY (zip code) (Address of principal executive offices) Registrant's telephone number, including area code: (609) 243-4200 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / / INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK AS OF THE LATEST PRACTICABLE DATE. COMMON STOCK--$.01 PAR VALUE 149.49712 Description of Class Shares Outstanding as of May 14, 2001 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- AMERICAN RE CORPORATION INDEX TO FORM 10-Q

ii PART I. FINANCIAL INFORMATION AMERICAN RE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)

See accompanying notes to consolidated interim financial statements. 1 AMERICAN RE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN MILLIONS) (UNAUDITED)

See accompanying notes to consolidated interim financial statements. 2 AMERICAN RE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS) (UNAUDITED)

See accompanying notes to consolidated interim financial statements. 3 AMERICAN RE CORPORATION NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS MARCH 31, 2001 (DOLLARS IN MILLIONS) (UNAUDITED) 1. BASIS OF PRESENTATION American Re Corporation ("American Re" or the "Company") primarily acts as the holding company for American Re-Insurance Company ("American Re-Insurance"). American Re-Insurance underwrites property and casualty reinsurance in both the domestic and international markets. The Company is a wholly-owned subsidiary of Munich-American Holding Corporation, a Delaware holding company ("MAHC"), which in turn is wholly-owned by Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen ("Munich Re"), a company organized under the laws of Germany. The information for the interim periods ended March 31, 2001, and 2000, is unaudited. The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of results for such periods. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. Intercompany accounts and transactions have been eliminated. These financial statements should be read in conjunction with the financial statements and related notes in the Company's 2000 Form 10-K. 2. COMPREHENSIVE INCOME (LOSS) The Company experienced a comprehensive loss of $0.4 million for the three-month period ended March 31, 2001, compared to a comprehensive loss of $29.3 million for the same period in 2000. The components of accumulated other comprehensive income (loss) are as follows:

4 AMERICAN RE CORPORATION NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 (DOLLARS IN MILLIONS) (UNAUDITED) 3. REINSURANCE The Company reinsures certain risks to limit its exposure to catastrophes and large or unusually hazardous risks. Although reinsurance agreements contractually obligate the Company's reinsurers to reimburse it for the agreed-upon portion of its gross paid losses, they do not discharge the primary liability of the Company. The income statement amounts for premiums written, premiums earned and losses and loss adjustment expenses are net of reinsurance. Direct, assumed, ceded and net amounts for these items are as follows:

4. SEGMENT REPORTING American Re's Domestic Insurance Company Operations ("DICO") primarily deals directly with U.S. insurance companies, rather than through reinsurance intermediaries, by providing them with customized, integrated treaty, facultative and finite risk reinsurance programs on a direct basis. American Re's alternative market strategic business unit, Munich-American RiskPartners, Inc. ("RiskPartners") provides customized risk transfer, risk sharing, and risk management solutions to self-insured clients worldwide. International Operations ("International") provides treaty, facultative and finite risk reinsurance along with a range of other customized products and services to insurance companies and other entities worldwide. American Re HealthCare ("HealthCare") integrates risk transfer products and specialized services to help insurance companies and self-insureds predict, prevent, and manage catastrophic medical events. American Re Financial Products ("ARFP") provides clients with an array of highly customized financial risk management products and services, including 5 AMERICAN RE CORPORATION NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 (DOLLARS IN MILLIONS) (UNAUDITED) 4. SEGMENT REPORTING (CONTINUED) credit enhancement, entertainment finance, and enterprise risk management. Corporate Underwriting and Other includes certain corporate retrocessional programs and certain prior accident years' losses which are not allocated to the Company's business segments, in addition to the underwriting results of certain business segments that have been aggregated due to materiality. Segment information for the three months ended March 31, 2000, has been restated to reflect the underwriting results of Corporate Underwriting and Other. In addition to its core reinsurance business, American Re, through various subsidiaries, offers a broad array of related services including actuarial and financial analysis, due diligence consulting for mergers and acquisitions, rent-a-captive facilities, and reinsurance and insurance brokerage. The financial results of these subsidiaries have been aggregated along with holding company operations for presentation of segment results. 6 AMERICAN RE CORPORATION NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 (DOLLARS IN MILLIONS) (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2001

7 AMERICAN RE CORPORATION NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 (DOLLARS IN MILLIONS) (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2000

8 MANAGEMENTS' DISCUSSION AND ANALYSIS OF THE COMPANY'S RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS QUARTER ENDED MARCH 31, 2001, COMPARED WITH QUARTER ENDED MARCH 31, 2000 The Company's net premiums written increased 17.9% to $881.4 million for the quarter ended March 31, 2001, from $747.7 million for the same period in 2000. The increase in net premiums written is primarily due to increased prices in most lines of business and increased writings in facultative reinsurance, healthcare, and the Company's direct insurance operations. RiskPartners experienced a 76.6% increase in net premiums written to $198.2 million for the first quarter of 2001, from $112.2 million for the same period in 2000. This increase was primarily attributable to a $44.8 million increase in RiskPartners' direct business, a $22.4 million increase in its treaty business, and a $15.6 million increase in its facultative business. Treaty net premiums writings by HealthCare increased to $126.7 million for the first quarter of 2001, from $61.1 million for the same period in 2000. These increases were partially offset by a 7.9% decrease in DICO net premiums written to $376.8 million for the first quarter of 2001, from $408.9 million for the same period in 2000. This decrease was attributable to a $30.9 million decrease in DICO's finite risk business and a $26.3 million decrease in its treaty business, partially offset by a $21.0 million increase in its facultative writings. The Company's net premiums earned increased 14.3% to $857.9 million for the quarter ended March 31, 2001, from $750.5 million for the same period in 2000. The increase in premiums earned was primarily attributable to the increase in net premiums written, offset by the timing of premiums earned on business in force. Net losses and LAE incurred decreased 2.8% to $667.1 million for the quarter ended March 31, 2001, from $686.3 million for the same period in 2000. This decrease is primarily attributable to improved market conditions, resulting in lower loss ratios for the current accident year, in addition to lower losses from prior accident years. The Company incurred $24.0 million of catastrophe losses during the quarter ended March 31, 2001, compared to $47.1 million of catastrophe losses for the same period in 2000. Underwriting expense, consisting of commission expense plus operating expense, increased 7.9% to $278.3 million for the quarter ended March 31, 2001, from $257.9 million for the same period in 2000. This increase was due to a 6.3% increase in commission expense to $214.0 million for the first quarter of 2001 from $201.3 million for the same period in 2000. This increase was primarily attributable to the increase in premiums earned. Operating expenses increased 13.6% to $64.3 million for the first quarter of 2001 from $56.6 million for the first quarter of 2000. The Company experienced an underwriting loss (net premiums earned minus losses and LAE incurred and underwriting expenses) of $87.5 million for the quarter ended March 31, 2001, compared to an underwriting loss of $193.7 million for the same period in 2000. On a GAAP basis, the Company's loss ratio decreased to 77.8% for the first quarter of 2001 from 91.4% for the same period in 2000, while the underwriting expense ratio decreased to 32.4% for the first quarter of 2001 from 34.4% for the same period in 2000. As a result of these changes, the combined ratio for the quarter ended March 31, 2001, decreased to 110.2% from 125.8% for the same period in 2000. Pre-tax net investment income increased 14.0% to $122.3 million for the quarter ended March 31, 2001, from $107.3 million for the same period in 2000. The Company's after-tax net investment income increased 3.8% to $79.7 million for the quarter ended March 31, 2001, from $76.8 million for the same period in 2000. This increase is primarily due to an increase in the Company's investments, somewhat offset by a decrease in the investment portfolio's effective after-tax yield. 9 The Company realized net capital losses of $3.6 million for the quarter ended March 31, 2001, compared to net capital gains of $13.7 million for the same period in 2000. The 2001 period included capital losses of $8.5 million recognized on the sale of common equities and the write-down of $5.1 million of common equities, as the decline in the fair value of these securities was considered to be other than temporary, offset by capital gains of $10.0 million on the sale of bonds. The 2000 period included capital gains of $27.4 million recognized on the sale of common equities, offset by capital losses of $13.7 million on the sale of bonds. Other income decreased 6.3% to $9.0 million for the quarter ended March 31, 2001, from $9.6 million for the same period in 2000. This decrease was primarily attributable to a decrease in revenues from fee subsidiaries. Other expenses remained constant at $21.7 million for each of the quarters ended March 31, 2001 and 2000. Income before income taxes and distributions on preferred securities was $7.9 million for the quarter ended March 31, 2001, compared to a loss of $95.4 million for the same period in 2000. FINANCIAL CONDITION Total consolidated assets increased 1.7% to $15,196.1 million at March 31, 2001, from $14,942.8 million at December 31, 2000. Total consolidated liabilities increased 2.1% to $12,538.9 million at March 31, 2001, from $12,285.2 million at December 31, 2000. The total financial statement value of investments and cash increased 1.3% to $7,994.1 million at March 31, 2001, from $7,893.8 million at December 31, 2000, primarily due to cash flow from operations for the period, in addition to an increase in the fair value of investments held. The financial statement value of the investment portfolio at March 31, 2001, included a net decrease from amortized cost to fair value of $6.7 million for debt and equity investments, compared to a net decrease of $49.9 million at December 31, 2000. At March 31, 2001, the Company recognized a cumulative unrealized loss of $4.4 million due to the net adjustment to fair value on debt and equity investments, after applicable income tax effects, which was reflected in stockholder's equity as a component of accumulated other comprehensive income. This represents a net increase to stockholder's equity of $28.0 million from the cumulative unrealized loss on debt and equity securities of $32.4 million recognized at December 31, 2000. In 2000, American Re-Insurance entered into two securities lending agreements. The first, with State Street Bank and Trust Company involved predominately U.S. Treasury securities, which had a fair value of $359.9 and $218.5 at March 31, 2001 and December 31, 2000, respectively. Under the second agreement with Merrill Lynch, the securities on loan are comprised predominantly of tax-exempt municipal securities, which had a fair value of $916.0 and $904.4 at March 31, 2001 and December 31, 2000, respectively. Common stockholder's equity decreased slightly to $2,419.7 million at March 31, 2001, from $2,420.1 million at December 31, 2000. This decrease was attributable to the net income of $2.3 million offset by a $2.7 million decrease in accumulated other comprehensive income, net of tax. The Company's insurance/reinsurance subsidiaries' statutory surplus increased to $2,366.5 million at March 31, 2001, from $2,177.1 million at December 31, 2000. This increase is primarily the result of the cumulative effect of changes in accounting principles, resulting from the Codification of Statutory Accounting Principles. Operating leverage, as measured by such subsidiaries' premiums-to-surplus ratio, on an annualized basis was 1.40 to 1 and 1.46 to 1 at March 31, 2001, and December 31, 2000, respectively. 10 LIQUIDITY AND CAPITAL RESOURCES The Company is an insurance holding company whose only material investment is in the capital stock of American Re-Insurance. The Company is dependent on dividends and tax allocation payments, primarily from American Re-Insurance, to meet its short- and long-term liquidity requirements, including its debt service obligations. 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 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 (including payments made to commute or settle reinsurance arrangements), retrocession payments, underwriting and interest expenses, QUIPS distributions, and income tax payments. Cash flows provided by operations for the Company were $75.0 million for the three-month period ended March 31, 2001, down 15.0% from $88.3 million for the same period in 2000. Cash and cash equivalents were $539.7 million and $607.3 million at March 31, 2001, and December 31, 2000, respectively. Cash and short-term investments are maintained for liquidity purposes and represented 6.8% and 7.7%, respectively, of total financial statement investments and cash on such dates. MARKET AND INTEREST RATE RISK The Company is subject to market risk arising from the potential change in the value of its various financial instruments. These changes may be due to fluctuations in interest and foreign exchange rate and equity prices. The major components of market risk affecting the Company are interest rate, foreign currency and equity risk. The Company has both fixed and variable (including mortgage backed securities and collateralized mortgage obligations) income investments with a value of $6,883.8 million at March 31, 2001 that are subject to changes in value due to market interest rates. In addition to interest rate and foreign exchange risk, the Company's common equity portfolio of $556.7 million at March 31, 2001, is subject to changes in value based on changes in equity prices, predominantly in the United States. The Company also has a loan from Munich Re of $74.6 million, Senior Notes of $498.5 million, and QUIPS of $237.5 million. The Munich Re loan is a variable rate loan, while the Senior Notes, and QUIPS are fixed rate instruments. The Company has exposure to movements in various currencies around the world, particularly the Euro and the Australian dollar. Changes in currency exchange rates primarily affect the international components of the Company's balance sheet, income statement, and statement of cash flows. This exposure is somewhat offset because the Company's reinsurance premiums and invested assets are partially offset by losses incurred and loss reserves, respectively, generally denominated in the same currency. American Re Capital Markets, Inc. ("ARCM"), a subsidiary of the Company, is a party to certain index-based catastrophe-related swaps with Gold Eagle, a special purpose Bermuda company. Under the terms of the catastrophe swaps, ARCM may receive approximately $182.0 million of potential payments in the event of three types of certain catastrophic events: California earthquakes, Midwest earthquakes, or Eastern and Gulf Coast windstorms. The Company adjusts the catastrophe swaps to fair value using a model pricing based upon interest rate spreads above comparable U.S. Treasury investments, applied to a notional value outstanding of $182.1 million. 11 SAFE HARBOR DISCLOSURE The Company has disclosed certain forward-looking statements concerning 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 risks related thereto. These statements are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond the control of the Company, and reflect future business decisions that 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 stockholder's equity, investments, capital plans, dividends, plans relating to products or services of American Re, estimates concerning the effects of litigation or other disputes, adverse state or federal legislation or regulation, adverse publicity or news coverage or changes in general economic factors as well as the 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. 12 AMERICAN RE CORPORATION PART II. OTHER INFORMATION ITEMS 1 - 4 HAVE BEEN OMITTED AS THEY ARE EITHER INAPPLICABLE OR THE ANSWER IS NEGATIVE. ITEM 5. OTHER INFORMATION. HOLOCAUST VICTIMS INSURANCE LAWS. Several states (including California, Maryland, Minnesota, New York, and Washington) have enacted legislation pertaining to insurance policies that were issued in Europe to Holocaust victims during the period 1920 through 1945, and legislation on this subject matter is under consideration in other states (including New Jersey). Insurance regulators in some of these states have taken actions or threatened to take actions to sanction insurance companies licensed in such states for alleged failure to comply with such laws. Most state insurance regulators have subscribed to a private, non-governmental, voluntary organization named the International Commission on Holocaust Era Insurance Claims ("Holocaust Commission") that is dedicated to identifying and resolving outstanding insurance claims from the Holocaust era for its members. Under some of the recently enacted state laws, an insurer's participation in the Holocaust Commission confers certain statutory benefits. CALIFORNIA. California has two Holocaust era insurance related statutes. The first purports to permit the suspension of an insurer's license if it or any of its affiliates has failed to pay any claim of Holocaust victims proven to be valid and unpaid. This statute also authorizes the Commissioner to include consideration of whether an insurer is participating in the Holocaust Commission in deciding whether to suspend the insurer's license. In July, 1999, the California Insurance Department ("CID") initiated an examination and hearing involving the Company's California licensed insurers and Munich Re in order to investigate whether these companies or affiliated companies in Europe had outstanding Holocaust era insurance claims. While the licensees named in the examination and hearing process either were not in existence or did not do business in Europe during the Holocaust era, and Munich Re, as a reinsurer, never issued any insurance policies, the CID sought information on Holocaust era insurance from European insurers in which Munich Re has an indirect investment interest. While the hearing and examination are pending, there are no regulatory actions currently in progress against any of the Company's licensed insurers or Munich Re. The second California statute is the Holocaust Victim Insurance Relief Act of 1999 ("California Registry Law") designed to create a publicly accessible registry of Holocaust era policyholder information. The California Registry Law requires California licensed insurers to report Holocaust era policyholder information in their possession or in the possession of their "related companies," as that term is defined in the California Registry Law. The CID interprets this statute to require information even from companies that are not controlled by the licensed insurers or their parent companies. In March, 2000, American Re-Insurance and the American Insurance Association, an insurance trade association, many of whose members are California licensed insurers, initiated litigation in California challenging the validity of the California Registry Law on constitutional and other grounds. In June, 2000, the U.S. District Court for the Eastern District of California issued a preliminary injunction against the CID from enforcing the California Registry Law. Upon appeal by the CID of that decision, the United States Court of Appeals for the Ninth Circuit, in February, 2001, affirmed the preliminary injunction, but rejected the constitutional basis presented in support of the injunction and remanded the case to the District Court for consideration of the constitutional issue of due process as the basis for injunction. That litigation is pending. FLORIDA. Florida has enacted a statute ("Florida Holocaust Law") that seeks reports of information on Holocaust era insurance. The Florida Holocaust Law requires Florida licensed insurers to report certain information on insurance policies issued in Europe during the Holocaust era by such licensees and their affiliates. American Re-Insurance and AAIC have no information to report because 13 they did not issue insurance policies in Europe during the relevant time period. However, the companies have timely filed reports disclosing information voluntarily provided by European insurers in which Munich Re has an investment interest. The Florida Insurance Department has issued subpoenas to American Re-Insurance, AAIC, and approximately 40 other insurance companies seeking policyholder information in connection with the Florida Holocaust Law. In November 1999, an unaffiliated company initiated litigation against the Florida Insurance Department challenging the validity of the subpoenas and the constitutionality of the Florida Holocaust Law. In November 2000, the U.S. District Court for the Northern District of Florida held that Florida has no jurisdiction over the matters pertaining to Holocaust era insurance policies issued in Europe, and the Court enjoined Florida from enforcing the Florida Holocaust Law. Florida has appealed the District Court ruling. That appeal is pending. NEW YORK. New York has enacted a statute ("New York Holocaust Law") similar to the Florida Holocaust Law. American Re-Insurance and AAIC timely filed reports responsive to the New York Holocaust Law disclosing information voluntarily provided by European insurers in which Munich Re has an investment interest. The New York Insurance Department subsequently requested additional information in connection with Holocaust era insurance, and American Re promptly forwarded these requests to the European insurers which responded directly to the Department. Notwithstanding this, in 2000 the Department threatened to attempt to fine American Re up to $1,000 per day for alleged reporting violations unless Munich Re joins the Holocaust Commission, or agrees to pay alleged Holocaust claims involving companies that Munich Re does not control, or contributes to a humanitarian fund for the benefit of Holocaust survivors, and in April 2000, American Re-Insurance received a letter from the Department's Disciplinary Unit that disciplinary action against American Re-Insurance and/or its officers is being considered. However, no formal action has been taken by the Department to date. WASHINGTON. Washington has enacted a statute similar to the California Registry Law. American Re-Insurance and AAIC have reported to the Washington Insurance Department that they have nothing to report under the statute. The Department has asserted that the companies' report is not in compliance with the law and has indicated that it may initiate enforcement action against American Re, although no action has been commenced to date. * * * * * American Re believes that it has fully complied with the requirements of these statutes or in the alternative, that such statutes are unconstitutional. However, there can be no assurance that insurance regulators will not initiate administrative or other actions against American Re under these laws or that such statutes shall ultimately be found to be unconstitutional. American Re does not believe that the ultimate resolution of these matters will have a material adverse effect on the business, financial condition or results of operations of American Re and its subsidiaries taken as a whole. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None. 14 AMERICAN RE CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN RE CORPORATION (Registrant) /s/ GEORGE T. O'SHAUGHNESSY, JR. -------------------------------------------- GEORGE T. O'SHAUGHNESSY, JR. Executive Vice President and Chief Financial and Accounting Officer

Dated: May 14, 2001 15

AMERICAN RE CORP 10-Q