-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QqAa00rgrUjzvEuvTbNLJNBkZkGOonB4oMXXHbf2EuLgaclRHOXwRg/HNb6Ax1eo vFw+o6ZsqF7oNBzcNI8+9w== 0000912057-96-025886.txt : 19961115 0000912057-96-025886.hdr.sgml : 19961115 ACCESSION NUMBER: 0000912057-96-025886 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAC RE CORP CENTRAL INDEX KEY: 0000775542 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 133297840 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-47293 FILM NUMBER: 96660545 BUSINESS ADDRESS: STREET 1: PO BOX 2568 CITY: GREENWICH STATE: CT ZIP: 06836-2568 BUSINESS PHONE: 2036225200 MAIL ADDRESS: STREET 1: PO BOX 2568 CITY: GREENWICH STATE: CT ZIP: 06836-2568 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ______________ to _________________. Commission file number 0-13891. NAC RE CORP. (Exact name of registrant as specified in its charter) DELAWARE 13-3297840 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) ONE GREENWICH PLAZA, GREENWICH, CT 06836-2568 (Address of principal executive offices) (203) 622-5200 (Registrant's telephone number, including area code) Not Applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by a 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 ----- ------ There were 18,749,005 shares outstanding of the Registrant's Common Stock, $.10 par value, as of September 30, 1996. NAC RE CORP. AND SUBSIDIARIES TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. Independent Accountants' Review Report 3 Consolidated Balance Sheet - September 30, 1996 and December 31, 1995 4 Consolidated Statement of Income - Three Months and Nine Months Ended September 30, 1996 and 1995 5 Consolidated Statement of Stockholders' Equity - Nine Months Ended September 30, 1996 and 1995 6 Consolidated Statement of Cash Flows - Nine Months Ended September 30, 1996 and 1995 7 Notes to Consolidated Financial Statements 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-13 PART II. OTHER INFORMATION Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 Exhibit 11-1 16 Exhibit 11-2 17 Exhibit 15 18 INDEPENDENT ACCOUNTANT'S REVIEW REPORT Board of Directors and Shareholders NAC Re Corporation We have reviewed the accompanying consolidated balance sheet of NAC Re Corporation and subsidiaries as of September 30, 1996, and the related consolidated statement of income, for the three-month and nine-month periods ended September 30, 1996 and 1995 and the consolidated statements of stockholders' equity and cash flows for the nine-month periods ended September 30, 1996 and 1995. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquires of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted audited standards, the consolidated balance sheet of NAC Re Corporation as of December 31, 1995, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended (not presented herein) and in our report dated January 30, 1996, we expressed an unqualified opinion on those consolidated financial statements. New York, New York ERNST & YOUNG LLP October 22, 1996 -3- NAC RE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands) (UNAUDITED) SEPTEMBER 30, DECEMBER 31, 1996 1995 ---------- ----------- ASSETS Investments: Available for sale: Fixed maturities (amortized cost: 1996, $1,647,610; 1995, $1,551,848 ) $1,656,278 $1,593,543 Equity securities (cost: 1996, $134,400; 1995, $114,818) 152,419 127,257 Short-term investments 113,655 132,406 ---------- ----------- TOTAL INVESTMENTS 1,922,352 1,853,206 Cash 7,668 10,320 Accrued investment income 27,523 26,955 Premiums receivable 192,104 154,974 Reinsurance recoverable balances, net 303,624 257,136 Reinsurance recoverable on unearned premiums 20,643 28,111 Investment accounts receivable 8,011 43 Deferred policy acquisition costs 79,399 70,466 Excess of cost over net assets acquired 3,735 4,011 Deferred tax asset, net 42,343 27,688 Other assets 54,752 29,221 ----------- ----------- TOTAL ASSETS $2,662,154 $2,462,131 =========== =========== LIABILITIES Claims and claims expenses $1,443,686 $1,292,415 Unearned premiums 251,774 230,738 8% Notes due 1999 100,000 100,000 7.15% Notes due 2005 99,932 99,927 5.25% Convertible Subordinated Debentures due 2002 100,000 100,000 Investment accounts payable 45,330 50,580 Revolving credit agreement 12,924 17,762 Other liabilities 80,110 58,953 ----------- ----------- TOTAL LIABILITIES 2,133,756 1,950,375 ----------- ----------- STOCKHOLDERS' EQUITY Preferred stock, $1.00 par value: 1,000 shares authorized, none issued (Includes 90 shares of Series A Junior Participating Preferred Stock) - - Common stock, $.10 par value: 25,000 shares authorized (1996, 21,455; 1995, 21,341 issued) 2,145 2,134 Additional paid-in capital 248,708 246,356 Unrealized appreciation of investments, net of tax 17,347 35,187 Currency translation adjustments, net of tax 1,564 1,017 Retained earnings 319,678 269,660 Less treasury stock, at cost (1996, 2,706; 1995, 2,137 shares) (61,044) (42,598) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 528,398 511,756 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,662,154 $2,462,131 =========== =========== See Notes to Consolidated Financial Statements -4- NAC RE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share amounts) (UNAUDITED) ---------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 1996 1995 1996 1995 ---------- --------- ---------- ---------- PREMIUMS AND OTHER REVENUES Net premiums written $150,681 $145,466 $414,672 $382,689 Increase in unearned premiums (11,566) (12,122) (28,390) (24,313) ---------- --------- ---------- ---------- Premiums earned 139,115 133,344 386,282 358,376 Net investment income 26,140 22,270 77,499 66,907 Net investment gains 2,122 8,502 14,654 16,077 ---------- --------- ---------- ---------- Total revenues 167,377 164,116 478,435 441,360 OPERATING COSTS AND EXPENSES Claims and claims expenses 90,496 89,186 248,710 241,956 Commissions and brokerage 37,281 37,431 105,790 101,592 Acquisition and operating expenses 13,950 11,407 40,141 32,313 Interest expense 5,705 3,742 16,896 11,230 ---------- --------- ---------- ---------- Total operating costs and expenses 147,432 141,766 411,537 387,091 INCOME Operating income before income taxes 19,945 22,350 66,898 54,269 ---------- --------- ---------- ---------- Federal and foreign income taxes: Current 5,504 5,215 19,018 16,082 Deferred (1,597) (464) (5,344) (5,381) ---------- --------- ---------- ---------- Income tax expense (benefit) 3,907 4,751 13,674 10,701 -------- -------- ------- -------- Operating income/net income $16,038 $17,599 $53,224 $43,568 ========== ========= ========== ========== PER SHARE DATA Primary: Average shares outstanding 19,151 18,038 19,321 17,942 ========== ========= ========== ========== Operating income/net income $0.84 $0.98 $2.75 $2.43 ========== ========= ========== ========== Fully Diluted (assuming conversion of dilutive convertible securities): Average shares outstanding 21,171 20,059 21,380 20,023 ========== ========= ========== ========== Operating income/net income $0.80 $0.92 $2.61 $2.31 ========== ========= ========== ========== Cash dividends declared per share $0.06 $0.05 $0.17 $0.14 ========== ========= ========== ========== See Notes to Consolidated Financial Statements
-5- NAC RE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands) (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1996 1995 ----------- --------- COMMON STOCK Balance at beginning of year $2,134 $1,964 Issuance of shares 11 11 ----------- --------- Balance at end of period $2,145 $1,975 =========== ========= ADDITIONAL PAID-IN CAPITAL Balance at beginning of year $246,356 $194,231 Issuance of shares 2,352 2,614 ----------- --------- Balance at end of period $248,708 $196,845 =========== ========= UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS, NET OF TAX Balance at beginning of year $35,187 $(46,030) Unrealized (depreciation) appreciation (17,840) 65,768 ----------- --------- Balance at end of period $17,347 $19,738 =========== ========= CURRENCY TRANSLATION ADJUSTMENTS, NET OF TAX Balance at beginning of year $1,017 $1,059 Translation adjustments 547 1,224 ----------- --------- Balance at end of period $1,564 $2,283 =========== ========= RETAINED EARNINGS Balance at beginning of year $269,660 $210,255 Net income 53,224 43,568 Dividends (3,206) (2,460) ----------- --------- Balance at end of period $319,678 $251,363 =========== ========= TREASURY STOCK Balance at beginning of year $(42,598) $(42,394) Purchase of treasury shares (18,446) (160) ----------- --------- Balance at end of period $(61,044) $(42,554) =========== ========= TOTAL STOCKHOLDERS' EQUITY Balance at beginning of year $511,756 $319,085 Issuance of shares 2,363 2,625 Unrealized (depreciation) appreciation (17,840) 65,768 Translation adjustments 547 1,224 Net income 53,224 43,568 Dividends (3,206) (2,460) Purchase of treasury shares (18,446) (160) ----------- --------- Balance at end of period $528,398 $429,650 =========== ========= See Notes to Consolidated Financial Statements -6- NAC RE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1996 1995 ------------ ------------ OPERATING ACTIVITIES Net income $53,224 $43,568 Adjustments to reconcile net income to net cash provided by operating activities: Reserve for claims and claims expenses, net 118,489 111,201 Unearned premiums, net 28,394 24,433 Premiums receivable (36,982) (18,876) Accrued investment income (544) (2,149) Reinsurance balances, net (21,346) (980) Deferred policy acquisition costs (8,912) (7,223) Net investment gains (14,653) (16,085) Deferred tax asset, net (5,530) (5,362) Other liabilities 20,670 (8,333) Other items, net (10,220) (4,209) --------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 122,590 115,985 --------- -------- INVESTING ACTIVITIES Sales of fixed maturity investments 1,066,265 967,927 Maturities of fixed maturity investments 23,356 14,324 Purchases of fixed maturity investments (1,195,016) (1,117,400) Net sales of short-term investments 19,055 583 Sales of equity securities 68,480 75,106 Purchases of equity securities (79,414) (53,174) Purchases of furniture and equipment (3,594) (1,531) --------- -------- NET CASH USED BY INVESTING ACTIVITIES (100,868) (114,165) --------- -------- FINANCING ACTIVITIES Issuance of shares 2,037 2,469 Purchase of treasury shares (18,446) (160) Cash dividends paid to stockholders (3,039) (2,278) Borrowings under revolving credit agreement 8,162 - Repayments under revolving credit agreement (13,000) - --------- -------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (24,286) 31 --------- -------- Effects of exchange rate changes on cash (88) - --------- -------- (Decrease) increase in cash (2,652) 1,851 Cash - beginning of year 10,320 9,624 --------- -------- Cash - end of period $7,668 $11,475 ========= ======== See Notes to Consolidated Financial Statements -7- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL The accompanying consolidated financial statements have been prepared on the basis of generally accepted accounting principles and in the opinion of management, reflect all adjustments necessary (consisting of normal recurring accruals) for a fair presentation of results for such periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company's Annual Report to Shareholders. 2. PER SHARE DATA Primary earnings per share data are based on weighted average common shares and common share equivalents outstanding during the period. Fully diluted earnings per share data assumes conversion of dilutive convertible securities and the assumed exercise of all dilutive stock options. Weighted average common shares includes the effect of the Company's issuance of 1,530,000 shares of Common Stock through a public offering in November 1995. 3. RETROCESSION ACTIVITY The Company's balance sheet as of September 30, 1996 and December 31, 1995 reflects reinsurance recoverable balances as assets, the components of which are as follows (in thousands): REINSURANCE RECOVERABLE BALANCES, NET ------------------------------------------- September 30, 1996 December 31, 1995 ----------------------- ------------------ Paid Claims $13,567 $19,051 Unpaid Claims and Claims Expenses 370,982 338,746 Ceded Balances Payable (34,530) (56,792) Funds Held Liability (46,395) (43,869) ----------------------- ------------------ Net $303,624 $257,136 ======================= ================== The effect of retrocessional activity on premiums written, premiums earned and claims and claims expenses is as follows (in thousands): THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------ 1996 1995 1996 1995 -------- ------- -------- -------- Ceded premiums written $32,371 $41,171 $101,444 $120,982 Ceded premiums earned $35,348 $40,232 $108,912 $115,311 Ceded claims and claims expenses $25,101 $15,939 $70,932 $57,237 -8- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NAC Re Corporation ("NAC Re") is the holding company for NAC Reinsurance Corporation ("NAC") and its wholly owned insurance and reinsurance domestic and foreign subsidiaries. NAC Re and its subsidiaries are collectively referred to as the Company. RESULTS OF OPERATIONS Operating income, excluding investment gains, increased 21.2% to $14.6 million or $.76 per share for the quarter ended September 30, 1996, compared with $12.1 million or $.67 per share for the 1995 third quarter. Operating income, excluding investment gains, for the first nine months of 1996 increased 31.9% to $43.7 million or $2.26 per share, compared with $33.1 million or $1.85 per share for the comparable prior year period. Net income, including investment gains, for the 1996 third quarter totaled $16 million or $.84 per share, compared to $17.6 million or $.98 per share. Net income for the first nine months of 1996 totaled $53.2 million or $2.75 per share, an increase of 22.2% over the 1995 nine month period. Included in net income per share were investment gains, net of tax, of $.08 and $.49 for the 1996 third quarter and nine month period, respectively, compared with $.31 and $.58 for the same prior year periods. Net property catastrophe claim activity reported for the 1996 nine month period included $2.7 million which was principally related to the January 1996 winter storms. The 1995 nine month period included $5.0 million of net property catastrophe claim activity, including $2.8 million and $2.2 million from the domestic and international operations, respectively. PREMIUM REVENUES As shown in the table below, the Company's worldwide net premiums written for the 1996 third quarter and nine month period were $150.7 million and $414.7 million, respectively, an increase of 3.6% and 8.4% over the 1995 comparable periods.
(In millions) THREE MONTHS ENDED SEPTEMBER 30, --------------------------------------------------------------------------- DOMESTIC INTERNATIONAL TOTAL --------------------- -------------------- ----------------- 1996 1995 1996 1995 1996 1995 -------- -------- ------- ------- ------- ------- Net Premiums Written: Casualty $87.3 $87.0 $4.9 $4.9 $92.2 $91.9 Property 30.2 31.8 7.7 6.6 37.9 38.4 Specialty/Other 20.6 15.2 - - 20.6 15.2 -------- -------- ------- ------- ------- ------- Total $138.1 $134.0 $12.6 $11.5 $150.7 $145.5 ======== ======== ======= ======= ======= ======= (In millions) NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------------------------------------------- DOMESTIC INTERNATIONAL TOTAL --------------------- -------------------- ----------------- 1996 1995 1996 1995 1996 1995 -------- -------- ------- ------- ------- ------ Net Premiums Written: Casualty $239.8 $224.8 $16.2 $14.5 $256.0 $239.3 Property 91.7 84.5 24.1 19.6 115.8 104.1 Specialty/Other 42.9 39.3 - - 42.9 39.3 -------- -------- ------- ------- ------- ------ Total $374.4 $348.6 $40.3 $34.1 $414.7 $382.7 ======== ======== ======= ======= ======= ======
-9- Domestic net premiums written for the 1996 third quarter and nine month period reflected an increase of 3.0% and 7.4%, respectively, over the comparable prior year periods. Reduced ceded premium charges for the 1996 nine month period continue to favorably impact the net premium growth across all profit centers. This reduction in ceded premiums is principally due to a more cost effective retrocessional program and a moderate increase in the Company's retention levels. Casualty net premiums written for the 1996 third quarter and nine month period increased .4% and 6.7%, respectively over the comparable prior year period. Property net premiums written declined 5.2% from the 1995 third quarter and increased 8.4% from the 1995 nine month period. The casualty and property growth for the nine month period stems from increased opportunities from our existing facultative and treaty clients. Net premiums written from our specialty lines, which consist of fidelity/surety, aviation and ocean marine business, increased 35.6% and 9.3% over the 1995 third quarter and nine month period, respectively. NAC Reinsurance International Limited reported net premiums written of $12.6 million and $40.3 million for the 1996 third quarter and nine month period, respectively, an increase of 10.2% and 18.1%, respectively over the comparable 1995 periods. Casualty premiums were $4.9 million and $16.2 million for the 1996 third quarter and nine month period, respectively, compared to $4.9 million and $14.5 million for the same prior year periods. Property premiums for the 1996 third quarter and nine month period were $7.7 million and $24.1 million, respectively, compared to $6.6 million and $19.6 million for the 1995 prior year periods. Ceded premiums written recorded for retrocessional agreements for the 1996 third quarter and nine month period were $32.4 million and $101.4 million, respectively, compared to $41.2 million and $121.0 million over the comparable prior year periods. As mentioned above, reduced ceded premium charges were primarily due to more cost effective retrocessional programs coupled with a moderate increase in the Company's retention levels. In 1996, the Company increased its maximum retention on any one claim for non-catastrophe losses, principally for the casualty lines, in consideration of the Company's increased size and financial capacity. OPERATING COSTS AND EXPENSES Claims and claims expenses represent our most significant and uncertain cost. This expense is only an estimate at a given point in time of what the insurer or reinsurer expects to pay on claims, based upon facts and circumstances then known. We would generally expect to refine such an estimate in subsequent accounting periods by modest amounts with adjustments possible in either direction as additional information becomes known. One traditional means of measuring the underwriting performance of a property/casualty insurer is the statutory composite ratio. The composite ratio, based upon statutory accounting practices which differ from generally accepted accounting principles in several respects, reflects underwriting experience, but does not reflect income from investments. A composite ratio of under 100% indicates underwriting profitability while a composite ratio exceeding 100% indicates an underwriting loss. The following chart sets forth statutory composite ratios and the relevant components for the periods indicated for the Company's domestic reinsurance subsidiary. The consolidated statutory composite ratio combines the results of our international subsidiary on a U.S. statutory basis: THREE MONTHS NINE MONTHS YEAR ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, ------------------------------------------------ 1996 1995 1996 1995 1995 ------ ----- ----- ----- ----- Claims and Claims Expenses 65.2 % 66.3 % 63.9 % 66.3 % 65.1 % Commissions and Brokerage 27.2 29.3 28.3 29.4 29.7 Other Underwriting Expenses 8.3 6.9 8.9 7.7 8.3 ------ ----- ----- ----- ----- Domestic Statutory Composite Ratio 100.7 % 102.5 % 101.1 % 103.4 % 103.1 % ====== ===== ===== ===== ===== Consolidated Statutory Composite Ratio 101.2 % 102.8 % 101.7 % 104.2 % 103.7 % ====== ===== ===== ===== ===== -10- The domestic statutory composite ratio for the 1996 third quarter and nine month period was 100.7% and 101.1%, respectively, compared to 102.5% and 103.4% for the 1995 third quarter and nine month period, respectively. The nine month domestic statutory composite ratio included minimal net property catastrophe claim activity, increasing the nine month ratio by .8 percentage points. The 1995 nine month ratio and full year domestic composite ratios were increased by .8 percentage points and .9 percentage points, respectively, as a result of the 1995 net property catastrophe claim activity. The Company experienced net favorable claim development for the 1996 nine month period which was principally attributable to casualty business written since 1985. This favorable development in casualty reflects the strength of the pricing assumptions underlying the business written, particularly with respect to the consideration given to social and economic inflation. The pricing assumptions are utilized to establish the initial expected target loss ratio employed in the actuarial methodologies used to establish the reserves for claims and claims expenses. Such loss ratios are periodically adjusted to reflect actuarially computed comparisons of expected to actual claims and claims expense development, inflation and other considerations. Such favorable development was partly offset by unfavorable experience on business written prior to 1986. The pricing of the Company's reinsurance contracts contemplates many factors, including exposure to claims and the expenses of both the client company and broker. The Company's actuaries and underwriters evaluate the adequacy of premium revenue net of these expenses, thereby mitigating the effect of variations in these expenses to overall underwriting results. The Company's commission and brokerage ratio for the 1996 third quarter and nine months reflects a slight decrease compared to the 1995 third quarter and nine month period. This decrease is principally due to the effects of certain contractual provisions which adjust commission expense based upon claim experience, partially offset by increased commissions in pro rata contracts written in our specialty lines of business, which generally carry a higher commission rate. Other underwriting expenses for the 1996 third quarter and nine month period have increased as compared to the 1995 prior year periods, reflecting continued business expansion, investments in technology and the building of our facultative and international infrastructure. However, the Company will continue to seek measures to contain underwriting expenses that are not central to its underwriting activities, and to better utilize its resources. INVESTMENTS Cash and invested assets at September 30, 1996 and December 31, 1995 were approximately $1.9 billion and $1.8 billion, respectively, excluding net investment payables of $37.3 million and $50.5 million for the comparable prior year periods. Net investment income for the 1996 third quarter and nine months was $26.1 million and $77.5 million, respectively, increases of 17.4% and 15.8% over the 1995 comparable periods. The increases are primarily attributed to our growth in invested assets, including the net proceeds of approximately $147 million related to the Company's public debt and equity offerings in November 1995. The Company's pretax investment yields for both the 1996 third quarter and nine month period were 5.7%, compared to 6.0% for both comparable periods last year. The after-tax investment yield for the 1996 third quarter and nine month periods, was 4.4% and 4.5%, respectively, compared to 4.6% and 4.7% for the comparable prior year periods. Net investment gains, net of tax, for the 1996 third quarter and nine month period were $.08 per share and $.49 per share, respectively, compared to net investment gains of $.31 per share and $.58 per share for the 1995 third quarter and nine month period, respectively. Gains and losses on the sale of investments are recognized as a component of operating income, but the timing and recognition of such gains and losses are unpredictable and are not indicative of future operating results. The Company's investment strategy is focused principally on income predictability and asset value stability. This strategy results in an emphasis on high quality fixed maturity investments. Tactical shifts between taxable and tax-exempt bonds may occur in order to maximize after-tax investment returns. At September 30, 1996, our fixed maturity investments amounted to $1.7 billion, which approximates 86% of cash and invested assets; 97.3% of such investments are rated investment grade by Moody's Investor Services, Inc. or Standard & Poor's. -11- While uncertainties exist regarding interest rate and inflation variability, the Company attempts to minimize such risks and exposures by balancing the duration of its assets with the expected duration of its liabilities. Consistent with the payment profile of the Company's claim liabilities, as of September 30, 1996 the Company's investment portfolio had an average duration of 4.7 years. The balance of the Company's investment portfolio at September 30, 1996, consisting of cash, short-term investments and equity securities, amounted to $273.7 million. As of September 30, 1996, the Company held $152.4 million in equity securities which represented 23.5% of statutory surplus and 7.9% of cash and invested assets. LIQUIDITY AND CAPITAL RESOURCES NAC Re is a holding company and has no revenue producing operations of its own. Cash flow within NAC Re consists of investment income, operating and interest expenses, dividends to stockholders, rental income and dividends from NAC which are subject to statutory restrictions. In November 1995, the Company issued $100 million principal amount of its 7.15% Notes due November 15, 2005, and raised approximately $49 million on the issuance of 1.53 million shares of Common Stock. The Company contributed substantially all of the net proceeds from the Company's debt and equity offering to NAC in late 1995. The statutory surplus of NAC was $649.2 million at September 30, 1996. NAC ranks among the largest domestic reinsurers measured on this basis. Consolidated stockholders' equity at September 30, 1996 totaled $528.4 million or $28.18 per share compared to $511.8 million or $26.65 per share at December 31, 1995. As a result of changes in market interest rates, the unrealized appreciation of investments, net of tax, was $17.3 million at September 30, 1996 compared to $35.2 million at December 31, 1995, resulting in a decrease in stockholders' equity of $17.9 million or $.93 per share. Cash flow from operations was $122.6 million for the 1996 nine month period, compared to $116.0 million for the 1995 prior year period. In April 1996, the Company modified its existing $35 million revolving credit facility. The requirement for payment of outstanding balances beginning in September 1996 was replaced with a scheduled reduction of the credit facility beginning in July 1998 and ending July 2001. During the third quarter of 1996, the Company paid down $13 million of its outstanding borrowings. As a result, the outstanding borrowings at September 30, 1996 were $12.9 million, which were principally utilized to finance the Company's periodic repurchase of its Common Stock. NAC maintains a $15 million line of credit facility which is available for catastrophe claim payments or working capital purposes. There have been no borrowings under this facility. The Company declared a quarterly cash dividend of $.06 per share for the 1996 third quarter. The regular quarterly cash dividend was increased to $.06 per share from $.05 per share in June 1996. Since January 1, 1996, the Company has repurchased approximately 594,000 shares of common stock, bringing the total repurchases since January 1988 to 2,732,000 shares. Approximately 499,000 shares remain outstanding for repurchase under this program. REGULATORY INITIATIVES NAC Re and its domestic subsidiaries are subject to regulatory scrutiny under the insurance statutes and regulations of the jurisdictions in which they conduct business, including all states of the United States and Canada. NAC Re's international subsidiary is subject to the regulatory authority of the United Kingdom Department of Trade and Industry. These regulations vary from jurisdiction to jurisdiction, and are generally designed to protect ceding insurance companies and policyholders by ensuring each company's financial integrity and solvency in its business transactions and operations. Many of the insurance statutes and -12- regulations applicable to the Company may be categorized as reporting and disclosure standards which allow insurance regulators to closely monitor the Company's performance. Typical required reports include information concerning the Company's capital structure, ownership, financial strength and general business operations. In 1993, the National Association of Insurance Commissioners (the "NAIC") adopted a model risk-based capital act intended to provide an additional tool for regulators to evaluate the capital of property and casualty insurers and reinsurers with respect to the risks assumed by them and determine whether there is a perceived need for possible corrective action. The nature of any corrective action depends upon the extent of the calculated risk-based capital deficiency and ranges from requiring the company to submit a comprehensive plan to placing the insurer under regulatory control. While the model risk-based capital act applicable to property and casualty insurers and reinsurers has not yet been adopted in New York, NAC's domicile, it was enacted this year in California, NAC's commercial domicile. New York has issued a circular letter requiring the filing of risk-based capital reports by property and casualty insurers and reinsurers. In a related action, the NAIC adopted a proposal that requires property and casualty insurers and reinsurers to report the results of their risk-based capital calculations as part of the statutory annual statements filed with state regulatory authorities. Surplus (as calculated for statutory annual statement purposes) for each of the Company's domestic property and casualty insurance and reinsurance subsidiaries is well above the risk-based capital thresholds that would require either company or regulatory action. Various other regulatory and legislative initiatives have been discussed from time to time that could impact reinsurers. The thrust of regulatory efforts at all levels is to improve the solvency of reinsurers and create strong incentives for insurers to do business with well capitalized, prompt paying reinsurers operating under U.S. jurisdiction. These initiatives, and the overall focus on solvency, may intensify the restructuring of the reinsurance industry. While we cannot quantify the impact of these regulatory efforts on the Company's operations, we believe the Company is adequately positioned to compete in an environment of more stringent regulation. -13- PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION On October 31, 1996, the Company announced that Nicholas M. Brown, Jr., has been named President, Chief Operating Officer and a Director of NAC Re Corp., and President and Chief Executive Officer of its wholly-owned subsidiary, NAC Reinsurance Corporation. In addition, Ronald L. Bornhuetter, Chairman of the Board and Chief Executive Officer of NAC Re Corp., agreed to a three-year extension of his employment contract, which will run through June 2000. ITEM 6. EXHIBITS (a) Exhibit Index: EXHIBIT DESCRIPTION PAGE 11-1 Statement Re: Computation of Primary Per Share Earnings 16 11-2 Statement Re: Computation of Fully Diluted Per Share Earnings 17 15 Letter Re: Unaudited Interim Financial Information 18 (b) There were no reports filed on Form 8-K for the three months ended September 30, 1996. Omitted from this Part II are items which are inapplicable or to which the answer is negative for the period covered. -14- 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. NAC RE CORP. (Registrant) Date: November 12, 1996 JEROME T. FADDEN ------------------------ ------------------------------------- Jerome T. Fadden Vice President, Chief Financial Officer and Treasurer Date: November 12, 1996 RONALD L. BORNHUETTER ------------------------ ------------------------------------- Ronald L. Bornhuetter Chairman of the Board and Chief Executive Officer -15- EX-11.1 2 EXHIBIT 11.1
EXHIBIT 11-1 NAC RE CORP. AND SUBSIDIARIES COMPUTATION OF PRIMARY EARNINGS PER SHARE (Dollars in thousands, except per share amounts) PRIMARY EARNINGS PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENTS THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ----------------------- 1996 1995 1996 1995 ---------- ---------- ---------- ---------- Net income applicable to Common Stock $16,038 $17,599 $53,224 $43,568 ========== ========== ========== ========== Average number of common shares outstanding 18,750,668 17,591,170 18,957,387 17,554,752 Add: Assumed exercise of dilutive stock options (1) 400,078 447,314 363,768 387,350 ---------- ---------- ---------- ---------- Common stock and common stock equivalents outstanding 19,150,746 18,038,484 19,321,155 17,942,102 ========== ========== ========== ========== Net income per share assuming dilution of common stock equivalents $0.84 $0.98 $2.75 $2.43 ========== ========== ========== ==========
(1) Computed utilizing the average market price of the Common Stock for the period. NOTE: The Company's 5.25% convertible subordinated debentures due 2002 are not considered to be common stock equivalents in the calculation of primary earnings per share. -16- EX-11.2 3 EXHIBIT 11.2 EXHIBIT 11-2 NAC RE CORP. AND SUBSIDIARIES COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE (Dollars in thousands, except per share amounts) FULLY DILUTED EARNINGS PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENTS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ----------------------- 1996 1995 1996 1995 ---------- ---------- ---------- ---------- Net income applicable to Common Stock $16,038 $17,599 $53,224 $43,568 After-tax add back of convertible debenture interest and amortization 876 876 2,628 2,628 ---------- ---------- ---------- ---------- Adjusted net income $16,914 $18,475 $55,852 $46,196 ========== ========== ========== ========== Average number of common shares outstanding 18,750,668 17,591,170 18,957,387 17,554,752 ADD: Assumed exercise of dilutive stock options (1) 400,078 447,314 402,900 447,988 Assumed conversion of convertible debentures (2) 2,020,202 2,020,202 2,020,202 2,020,202 ---------- ---------- ---------- ---------- Common stock and common stock equivalents outstanding 21,170,948 20,058,686 21,380,489 20,022,942 ========== ========== ========== ========== Fully diluted earnings per share $0.80 $0.92 $2.61 $2.31 ========== ========== ========== ==========
(1) Computed utilizing the higher of ending or average market price of the Common Stock for the period. (2) Reflects the assumed conversion of the Company's 5.25% Convertible Subordinated Debentures due 2002. -17- EX-15 4 EXHIBIT 15 EXHIBIT 15 ACKNOWLEDGMENT LETTER To the Stockholders and Board of Directors NAC Re Corporation We are aware of the incorporation by reference in the Registration Statements (Form S-8 No. 33-25585 and Form S-8 No. 33-77494) pertaining to the NAC Re Corp. Employee Stock Purchase Plan, in the Registration Statement (Form S-8 No. 33-27745) pertaining to the NAC Re Corp. 1989 Stock Option Plan, in the Registration Statement (Form S-8 No. 7813) pertaining to the NAC Re Corp. 1985 and 1986 Stock Option Plans, in the Registration Statements (Form S-8 No. 33-22841 and Form S-8 No. 333-03935) pertaining to the NAC Re Corp. Employee Savings Plan, in the Registration Statement (Form S-8 No. 33-22841) pertaining to the NAC Re Corp. Director's Stock Option Plan, in the Registration Statement (Form S-8 No. 33-77492) pertaining to the NAC Re Corp. Director's Stock Option Plan, and in the Registration Statement (Form S-8 No. 33-77114) pertaining to the NAC Re Corp. 1993 Stock Option Plan of our report dated October 22, 1996, relating to the unaudited consolidated interim financial statements of NAC Re Corporation which is included in its Form 10-Q for the quarter ended September 30, 1996. Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part of the registration statement prepared or certified by accountants within the meaning of Sections 7 or 11 of the Securities Act of 1933. New York, New York ERNST & YOUNG LLP October 22, 1996 -18- EX-27 5 FINANCIAL DATA SCHEDULE EXHIBIT 27
7 NAC RE CORPORATION ARTICLE 7 OF REGULATION S-X INSURANCE COMPANIES NINE MONTH PERIOD ENDING SEPTEMBER 30, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 9-MOS DEC-31-1996 SEP-30-1996 1,656,278 0 0 152,419 0 0 1,922,352 7,668 13,567 79,399 2,662,154 1,443,686 251,774 5,819 0 299,932 0 0 2,145 526,253 2,662,154 386,282 77,499 14,654 0 248,710 145,931 16,896 66,898 13,674 53,224 0 0 0 53,224 2.75 2.61 0 0 0 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----