-----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, D9NHpg2I5S6KeItmHXjOKvpj4ZXLOA+Y/8ZVEUTXtjOxgHaY5m1+4O+YpV4nXW2c hjkPzBGxYbcJWjfzbWPcog== 0000912057-97-010260.txt : 19970327 0000912057-97-010260.hdr.sgml : 19970327 ACCESSION NUMBER: 0000912057-97-010260 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13720 FILM NUMBER: 97563983 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-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ----------------- FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________________ 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 (I.R.S. Employer Identification No.) incorporation or organization)
ONE GREENWICH PLAZA, GREENWICH, CT 06836-2568 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 622-5200 ------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, par value $.10 per share New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None (TITLE OF CLASS) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value on March 3, 1997 of the voting stock held by non-affiliates of the registrant was approximately $642 million. There were 18,463,493 shares outstanding of the Registrant's Common Stock, $.10 par value as of March 3, 1997. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the 1996 Annual Report to Shareholders, as indicated herein (Parts I and II). (2) Proxy Statement involving the election of directors and other matters which the registrant intends to file with the Commission within 120 days after December 31, 1996 (Part III). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NAC RE CORP. AND SUBSIDIARIES TABLE OF CONTENTS
PAGE ITEM NUMBER - ----------- ------------- PART I 1. Business......................................................................................... 1 2. Properties....................................................................................... 14 3. Legal Proceedings................................................................................ 14 4. Submission of Matters to a Vote of Security Holders.............................................. 14 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters......................... 15 6. Selected Financial Data.......................................................................... 15 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 15 8. Financial Statements and Supplementary Data...................................................... 16 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............ 16 PART III 10. Directors and Executive Officers................................................................. 16 11. Executive Compensation........................................................................... 16 12. Security Ownership of Certain Beneficial Owners and Management................................... 16 13. Certain Relationships and Related Transactions................................................... 16 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................. 16
PART I ITEM 1. BUSINESS HISTORY NAC Re Corp. ("NAC Re") is a Delaware corporation that was organized on June 27, 1985 for the purpose of holding all the outstanding shares of common stock of NAC Reinsurance Corporation ("NAC"), a property and casualty reinsurance operation. Based on industry data published by the Reinsurance Association of America ("RAA") as of December 31, 1996, NAC is the 9th largest reinsurance company in the United States, ranked by statutory surplus. NAC is the parent company of three subsidiaries: Greenwich Insurance Company, Indian Harbor Insurance Company and NAC Re International Holdings Limited. NAC Re and its subsidiaries are collectively referred to as the Company. NAC was incorporated in New York in 1929 and from 1939 until April 30, 1984, NAC was a wholly-owned subsidiary of CIT Financial Corporation ("CIT"). On April 30, 1984, CIT transferred ownership of NAC to RCA Corporation ("RCA"), the then parent corporation of CIT. On May 24, 1984, Kramer Capital Corporation ("KCC"), through Grey Eagle Enterprises, Inc., a Delaware corporation owned 95% by KCC and 5% by the former President and Chief Operating Officer of NAC, acquired NAC from RCA. After completion of a public offering in October 1985, KCC controlled approximately 51% of the Common Stock of NAC Re. On January 8, 1987, following the approval of their respective stockholders, KCC was merged into NAC Re. As a result of the merger, NAC Re became 100% publicly owned. NAC is licensed to write reinsurance in all 50 states, the District of Columbia, Puerto Rico and all provinces of Canada. Prior to 1977, NAC wrote both primary insurance and reinsurance business for a variety of risks. Because of substantial losses incurred from such business, NAC discontinued writing any significant new insurance or reinsurance and was operated as a run-off company from 1977 to 1981. NAC's reserves, net of reinsurance recoverables, for business written prior to 1977, which includes aircraft and marine risks, general liability, medical, accountant's and attorney's malpractice, other professional risks and foreign risks, are approximately $37.1 million or less than 4% of total net claims and claims expense reserves as of December 31, 1996. Since 1982, NAC has been writing property and casualty reinsurance primarily on an excess of loss treaty basis. In 1990, NAC acquired Greenwich Insurance Company ("Greenwich"), formerly Harbor Insurance Company, from The Continental Corporation. All liabilities incurred before the acquisition date, including insurance obligations under expired as well as in-force business, remained with the previous owner and its affiliates. Greenwich is licensed in all 50 states and is utilized to write primary insurance. In 1992, NAC received regulatory authorization for a newly formed insurance subsidiary, Indian Harbor Insurance Company ("Indian Harbor"). As a surplus lines carrier, Indian Harbor is licensed in only its state of domicile, North Dakota, and expects to write primary business on a nonadmitted basis in selected states. In December 1993, NAC, through NAC Re International Holdings Limited, formed and received U.S. and U.K. regulatory authorization for a new reinsurance subsidiary, NAC Reinsurance International Limited ("NAC Re International"), based in London, England. NAC Re International, capitalized as of December 31, 1996 with approximately $135.1 million, primarily writes non-U.S. international property and casualty treaty and facultative reinsurance business. GENERAL The Company, through NAC and its subsidiaries, is principally engaged in providing treaty and facultative reinsurance to primary insurers of casualty risks (principally general liability, professional liability, automobile and workers' compensation) and commercial and personal property risks (including 1 fidelity/surety and ocean marine). In consideration for reinsuring risks, the Company receives premiums from the primary insurer. In many cases, the Company reinsures part of its risk with other reinsurers and pays a premium to such reinsurers. Reinsurance provides primary insurers with three principal benefits: reducing net exposure on individual risks, protecting against catastrophic losses and maintaining acceptable capital ratios. Retrocessions provide reinsurers with similar benefits. Reinsurance, including retrocessions, does not legally discharge the reinsured from its liability with respect to its obligations to the policyholder. The Company generally writes property and casualty treaty business through reinsurance brokers, facultative business on a direct basis (directly with the primary company), and fidelity/surety and ocean marine through reinsurance brokers and on a direct basis. Treaty reinsurance is a contractual arrangement that provides for the automatic reinsuring by the Company of a specified type or category of risks underwritten by the primary insurer. Typically, the primary insurer is required to cede the agreed type or category of risks to the Company and the Company is obligated to accept a specified portion of such risks. The Company determines whether to write particular treaties based on many factors, including the reinsured's risk management and underwriting practices. In treaty reinsurance, the reinsurer need not separately evaluate each of the individual risks assumed and, within prescribed parameters, is generally dependent on the underwriting decisions made by the primary insurer. Such dependence subjects the reinsurer to the risk that the primary insurer has not adequately determined the risk to be reinsured and, accordingly, the premium ceded to the reinsurer in connection therewith may not adequately compensate the reinsurer for the risk assumed. Treaty reinsurance, including fidelity/surety business, constitutes approximately 79% of the Company's business. Facultative reinsurance is the reinsurance of individual risks; rather than an agreement to reinsure all or a portion of a class of risks, the reinsurer separately rates and underwrites each risk. A portion of the Company's facultative business is written on an "automatic" basis. Automatic facultative agreements provide coverage on a blanket basis for risks which would otherwise be reinsured on an individual basis. Eligible risks must be underwritten by the cedant in accordance with agreement guidelines, which are generally more restrictive than typical treaty arrangements. Traditionally, risks covered by facultative reinsurance are those excluded from coverage by treaty reinsurance. Approximately 61% of the Company's business in 1996 was written on an excess of loss basis, under which the Company indemnifies an insurer for a portion of the losses on insurance policies in excess of a specified loss amount, generally $1 million or more, and up to an amount per loss specified in the contract. The balance of the Company's business is written on either a pro rata basis under which the Company assumes from the primary insurer a percentage of loss specified in the treaty of each risk in the reinsured class or on a primary insurance basis as discussed below. Premiums that the primary insurer pays to the reinsurer for excess of loss coverage are not directly proportional to the premiums that the primary insurer receives because the reinsurer does not assume a proportionate risk. In most instances, the reinsurer does not pay commissions to the primary insurer in connection with excess of loss reinsurance. In pro rata reinsurance, premiums that the primary insurer pays to the reinsurer are proportional to the premiums that the primary insurer receives and the reinsurer generally pays the primary insurer a ceding commission. Generally, the ceding commission is based on the primary insurer's cost of obtaining the business being reinsured, such as commission, local taxes, settlement costs and miscellaneous administrative expenses. The amount of premium received by the reinsurer for reinsuring risks on a pro rata basis is generally based on the primary insurer's initial underwriting assumptions. Thus, if the primary insurer does not accurately estimate the ultimate losses to be incurred on the risks insured, the reinsurer may also incur an underwriting loss. Excess of loss reinsurance allows the flexibility to negotiate a premium based on the reinsurer's own estimate of the actual amount of losses to be incurred. However, as a practical matter, the 2 rates charged by primary insurers and the policy terms of primary insurance agreements may affect the rates charged and the policy terms associated with reinsurance agreements. The Company also writes primary insurance business, which approximates 6% of total net premiums written, principally through Greenwich. The principle lines of primary business written include automobile, aviation, multiple peril and inland marine. The business is written principally through participation in underwriting pools and contractual relationships with managing general agents and general agents. The Company evaluates each business relationship based upon the underwriting experience and operational expertise of each distribution channel selected, and performs an analysis to evaluate financial security. The Company periodically performs underwriting, claims and operational audits of each pool and agency relationship. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the Company's premium revenues. COMPETITION The reinsurance business has been increasingly competitive since mid-1987, although not to the highly competitive levels which existed in 1984 and prior. The Company competes with numerous international and domestic reinsurance companies. These competitors, several of which have far greater financial and other resources, include independent reinsurance companies and subsidiaries or affiliates of established worldwide insurance companies. They also include the reinsurance departments of some primary insurance companies and underwriting syndicates in Lloyds. Competition in the types of reinsurance business in which the Company is engaged is based on many factors. These factors include perceived overall financial strength, size, premiums charged, limits capacity, A.M. Best's ("Best's") ratings (see Ratings discussion), services offered, underwriting expertise and quality of claims management. The number of jurisdictions in which a reinsurer is licensed to do business is also a factor. The Company believes that Best's "A+" rating and S&P's "AA-" rating of NAC and its subsidiaries, its nationwide licensing, its reputation for prompt claims payment and a high level of client service, together with its limits capacity and surplus size, put it in a favorable position to compete for new reinsurance opportunities and retain its existing client base. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of current market conditions. REGULATION See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 10 of the Notes to the Consolidated Financial Statements of NAC Re for a discussion of the regulatory issues that impact the Company. MARKETING The Company obtains substantially all of its treaty business through reinsurance brokers. The Company evaluates the financial condition of its reinsurance brokers on a regular basis. The Company generally pays brokers from 1% to 2.5% of premiums ceded on pro rata business, 5% on "working layer" excess of loss reinsurance (i.e., reinsurance attaching within the first $1 million of coverage), and 10% on "non-working layer" excess of loss reinsurance (i.e., reinsurance attaching at or above the $1 million layer). The reinsurance broker typically represents the primary insurer in negotiating and purchasing reinsurance. The Company's facultative reinsurance generally is written on a direct basis, with the exception of automatic agreements which may be written through reinsurance brokers. See Note 9 of the Notes to the Consolidated Financial Statements of NAC Re for a discussion of the Company's major clients. 3 UNDERWRITING Underwriting opportunities presented to the Company are evaluated based upon a number of factors, including the type and layer of risk to be assumed, actuarial evaluation of premium adequacy, the primary insurer's underwriting and claims experience, the primary insurer's financial condition and Best's rating, the Company's exposure and experience with the primary insurer and the line of business to be underwritten. The Company will also perform on-site underwriting reviews of the primary insurers where deemed necessary to determine the quality of a current or prospective client's underwriting operation. CLAIMS Claims are managed by the Company's professional claims staff whose responsibilities include reviewing initial loss reports and coverage issues, monitoring claims handling activities of ceding companies, establishing and adjusting proper case reserves and approving payment of claims. In addition to claims assessment, processing and payment, the claims staff selectively conducts comprehensive claims audits of both specific claims and overall claims procedures at the offices of selected ceding companies. RESERVES The Company establishes reserves to provide for the ultimate settlement and administration of claims for losses, including both claims that have been reported to the Company and claims for losses that have occurred but have not been reported to the Company. The Company establishes reserves for reported claims when it first receives notice of the claim and changes the reserve as necessary. It is the Company's policy not to establish a reserve less than the reserve established by the primary insurer; in many cases, the Company sets up a reserve higher than the reserve established by the ceding company based on its evaluation of the claim. In the case of excess of loss reinsurance, reserves are established on a case by case basis by evaluating several factors. These factors include the type of claim involved, the circumstances surrounding such claim, the severity of injury or damage, the potential for ultimate exposure, the Company's experience with the primary insurer and the policy provisions relating to the type of claim. The Company regularly adjusts its reserves to reflect newly reported claims, inflation and other developments. The Company periodically conducts claims audits of its ceding companies to determine if the amount recommended by the primary insurer is insufficient and should be increased. Reserves for incurred but not reported (IBNR) claims are established on the basis of actuarial analysis of statistical loss information, which is utilized to project ultimate claims. Actuarial review of the Company's reserves is conducted quarterly by actuaries employed by the Company. Claims reserves are only estimates at a given point in time, based on facts and circumstances then known, of the amount the insurer or reinsurer expects to pay on claims. It is possible that the ultimate liability may exceed or be less than such estimates. The estimates are not precise inasmuch as, among other things, they are based on predictions of future events and estimates of future trends in claim severity and frequency and other variable factors. As additional facts become known during the claim settlement period, it often becomes necessary to refine and adjust the estimates of liability on a claim and, even then, the ultimate liability may exceed or be less than the revised estimates. The estimation of reserves for reinsurers, particularly those that have experienced recent substantial growth in premium revenues, such as the Company, is inherently more difficult than the reserve estimations of primary companies or reinsurers with a fairly stable volume of business and loss history. The reserving process is intended to provide implicit recognition of the impact of inflation and other factors affecting claim payments by taking into account changes in historical payment patterns and perceived probable trends (note additional consideration for workers' compensation case reserves as described below). There is generally no precise method, however, for subsequently evaluating the adequacy of the consideration given to inflation or to any other specific factor, because the eventual deficiency or redundancy of reserves is affected by many factors, some of which are interdependent. 4 The Company's reserving process includes periodic evaluation of the potential impact on claim liabilities from exposure to asbestos and environmental claims, including related loss adjustment expenses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 of the Notes to the Consolidated Financial Statements of NAC Re for a discussion of asbestos and environmental claims. The Company establishes claims expense reserves to provide for the ultimate cost of investigating all claims, administering the claims payment process and defending lawsuits arising from claims. Such claims expense reserves represent estimates based on actual experience and historical data such as the ratio of claims expenses to claims paid and other currently available information. Claims expense reserves comprise "allocated expenses" (those directly attributable to the specific risk being covered) and "unallocated expenses" (those expenses not directly attributable to a given risk, such as overhead, administrative expenses and salary). Except for certain workers' compensation case reserves, the Company does not discount its reserves in an attempt to present-value the claims or claims expenses. The Company utilizes tabular reserving for certain workers' compensation case reserves that are considered fixed and determinable, and discounts such reserves using a 7% interest rate for financial statements prepared in accordance with generally accepted accounting principles (GAAP) and a 5% interest rate for statutory accounting purposes. Tabular reserving methodology results in applying uniform and consistent criteria for establishing expected future indemnity and medical payments (including an explicit factor for inflation) and the use of mortality tables to determine expected payment periods. A reconciliation of the difference between the reserves for claims and claims expenses determined in accordance with GAAP and those recorded for statutory reporting purposes is as follows:
(IN THOUSANDS) 1996 1995 1994 ------------ ------------ ------------ Domestic liability reported on a statutory basis, net of reinsurance.... $ 1,036,227 $ 914,045 $ 795,569 International liability, net of reinsurance............................. 74,530 42,414 15,587 Difference in discount rate applied to workers' compensation case reserves, net......................................................... (3,540) (2,790) (2,723) Reinsurance recoverable................................................. 406,128 338,746 277,737 ------------ ------------ ------------ Consolidated liability reported on a GAAP basis, gross of reinsurance... $ 1,513,345 $ 1,292,415 $ 1,086,170 ------------ ------------ ------------ ------------ ------------ ------------
Note 3 of the Notes to the Consolidated Financial Statements of NAC Re provides a table which analyzes paid and unpaid claims and claims expenses and a reconciliation of beginning and ending reserve balances for the years ended December 31, 1996, 1995 and 1994. Included in such analysis is a discussion of certain factors which impact both current and prior year claims activity. The following table on page 7 represents the development of GAAP balance sheet reserves for 1986 through 1996. The top line of the table shows the reserves, net of reinsurance recoverables, at the balance sheet date for each of the indicated years. This represents the estimated amounts of net claims and claims expenses arising in all prior years that are unpaid at the balance sheet date, including claims that had been incurred but not yet reported. The reserve for claims and claims expenses for 1988 and subsequent years is net of the 7% discount related to workers' compensation tabular reserves. The upper portion of the table shows the re-estimated amount of the previously recorded reserve based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The re-estimated reserve for each year reflects the 7% discount related to workers' compensation tabular reserves. The "Cumulative Redundancy (Deficiency)" represents the aggregate change in the estimates over all prior years. The lower portion of the table shows the 5 cumulative amounts paid as of successive years with respect to that reserve liability. The table on page 8 represents the claim development of the gross balance sheet reserves for years 1992 through 1996. With respect to the information in the table below, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of the deficiency related to claims settled in 1989, but incurred in 1986, will be included in the cumulative deficiency amount for years 1986, 1987 and 1988. This table does not present accident or policy year development data. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future reserve development based on these tables. For further discussion of reserve and retrocessional activity see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 3 and 5 of the Notes to the Consolidated Financial Statements of NAC Re. 6 DEVELOPMENT OF CLAIMS AND CLAIMS EXPENSE RESERVES NET OF REINSURANCE RECOVERABLES (IN MILLIONS)
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------ RESERVE FOR CLAIMS AND CLAIMS EXPENSES, NET OF REINSURANCE RECOVERABLES.............................................. $118 $201 $292* $388 $469 $529 $626 $697 $808 $954 $1,107 RESERVE RE-ESTIMATED AS OF: One year later............................................ 124 209* 293 384 460 494 602 653 788 921 Two years later........................................... 138* 214 289 376 427 464 548 648 755 Three years later......................................... 150 214 281 350 407 423 549 630 Four years later.......................................... 155 213 258 336 379 424 531 Five years later.......................................... 160 199 253 321 392 417 Six years later........................................... 159 203 245 331 391 Seven years later......................................... 169 199 265 336 Eight years later......................................... 171 226 273 Nine years later.......................................... 200 234 Ten years later........................................... 208 CUMULATIVE REDUNDANCY (DEFICIENCY).......................... (90) (33) 19 52 78 112 95 67 53 33 PERCENTAGE.................................................. (76%) (16%) 7% 13% 17% 21% 15% 10% 7% 3% CUMULATIVE AMOUNT OF LIABILITY PAID, NET OF REINSURANCE RECOVERABLES, PAID THROUGH: One year later............................................ $ 19 $ 23 $ 34 $ 60 $ 81 $ 65 $104 $119 $140 $146 Two years later........................................... 35 48 73 109 126 116 173 207 233 Three years later......................................... 50 72 102 134 166 158 229 258 Four years later.......................................... 68 91 117 161 197 199 261 Five years later.......................................... 83 101 133 179 226 220 Six years later........................................... 89 112 148 200 244 Seven years later......................................... 96 125 163 213 Eight years later......................................... 108 137 174 Nine years later.......................................... 119 148 Ten years later........................................... 130
- ------------------------ * The reserve for claims and claims expense, net of reinsurance recoverables for 1988 and subsequent years is net of the 7% discount related to certain workers' compensation case reserves. The re-estimated reserve for each year includes the discount effect. 7 DEVELOPMENT OF CLAIMS AND CLAIMS EXPENSE RESERVES GROSS OF REINSURANCE RECOVERABLES (IN MILLIONS)
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- GROSS RESERVE FOR CLAIMS AND CLAIMS EXPENSES:........................ $ 808 $ 909 $ 1,086 $ 1,292 $ 1,513 Reserve re-estimated as of: One year later..................................................... 798 873 1,097 1,280 Two years later.................................................... 755 882 1,093 Three years later.................................................. 773 888 Four years later................................................... 774 CUMULATIVE REDUNDANCY (DEFICIENCY)................................... 34 21 (7) 12 PERCENTAGE........................................................... 4% 2% (1%) 1%
RETROCESSION AGREEMENTS Reinsurance companies enter into retrocession arrangements to increase aggregate premium capacity and to reduce the risk of loss on reinsurance underwritten. Historically, the Company has obtained reinsurance for itself primarily through excess of loss reinsurance agreements. The Company has also obtained reinsurance protection against liability on a single event arising from several different treaty obligations, and reinsurance protection against liability arising from related losses involving more than one reinsured or contract. The Company's retrocession agreements are generally structured on a treaty basis, and cover both its treaty and facultative business. The Company has occasionally purchased specific retrocessional protections for certain business that may be specifically excluded from its retrocessional agreements. The Company retrocedes its risks to other reinsurers both through reinsurance brokers and on a direct basis. The retrocession of risks underwritten by the Company does not legally discharge the Company from liability for any part of the risk reinsured. The Company would be required to absorb the full amount of the loss associated with the reinsured risk if the retrocessionnaire were unable to or failed to meet its reinsurance obligations for any reason. The Company evaluates the financial condition of retrocessionnaires prior to the commencement of underwriting activities and at least annually thereafter. The Company utilizes financial guidelines to assess the retrocessionnaires' ability to satisfy future claim obligations. The Company's retrocessionnaires are subject to periodic evaluation to ensure that there have been no significant adverse changes in their financial condition. In the case of retrocessionnaires that are unable to meet their obligation under the retrocessional agreement or do not satisfy the Company's financial guidelines, a reserve for actual and potential non-recovery is established, which includes a provision for paid and unpaid claims and claims expenses, inclusive of IBNR claims. The reserve for non-recoveries is continually reviewed and updated to reflect current activity and developments. The Company evaluates its exposure to reinsurance recoveries after considering the extent to which it has collateralized the retrocessionnaires' balances by letters of credit, trust accounts or funds withheld. At December 31, 1996, the Company had reinsurance recoverables, exclusive of available offsets, in the form of letters of credit, trust accounts and funds withheld, totaling $441.9 million, with approximately 178 domestic and 116 foreign retrocessionnaires. Of that amount, approximately 41% or $180 million was due from one retrocessionnaire, Hannover Ruckversicherungs AG (80%), and its affiliate, E&S Ruckversicherungs AG (20%), both of which are rated "AA+" by Standard & Poor's. Such amounts are fully collateralized by either ceded balances payable, funds withheld or letters of credit. No other amounts 8 recoverable from a single entity or group of entities exceeded 10% of stockholders' equity as of December 31, 1996. The Company re-evaluates its retrocessional requirements in relation to many factors, including its surplus capacity, gross line capacity (amount of risk of loss assumed on any one contract) and changing market conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the Company's ceded premium charges. The following discussion outlines the Company's maximum gross lines and net retentions for the years indicated. 1997 The following table summarizes the Company's expected maximum gross lines, initial and maximum retentions on any one claim for 1997:
(IN MILLIONS) GROSS INITIAL MAXIMUM LINE RETENTION RETENTION --------- ---------- ------------- Casualty Treaty and Casualty Facultative Automatics............................. $ 7.5(1) $ 5.0 $ 5.0 Casualty Facultative (2)........................................................ $ 7.5 $ 3.0 $ 3.0 Property Treaty................................................................. $ 7.5(1) $ 3.0 $ 3.9 Property Facultative............................................................ $ 100.0 $ 3.0 $ 3.0 Surety.......................................................................... $ 20.0 $ 2.0 $ 4.0
- ------------------------ (1) The Company has reinsurance protection which provides additional per risk or per occurrence protection in excess of its $7.5 million gross line. (2) Individual risk only. The Company's 1997 reinsurance program for multiple claims arising from two or more risks in a single occurrence or event is indicated below: PROPERTY--Property business is protected by a series of retrocessional agreements which provide protection for 100% of $115 million in excess of $5 million on a first and second event. Certain of the Company's retrocessional protection are available only if industry-wide claims exceed certain minimum levels. For 1997, the Company expects to obtain $115 million of catastrophe protection, of which $25 million of protection in excess of the first $55 million of protection, is available only if industry-wide claims exceed certain minimum levels. The table displayed below identifies the Company's net retention assuming gross claim activity subject to property catastrophe protection of $115 million. The Company has in place aggregate excess of loss protections that could provide additional recoveries.
(IN MILLIONS) COMPANY INITIAL COMPANY INDUSTRY-WIDE GROSS COMPANY CATASTROPHE MAXIMUM CLAIMS CLAIMS RETENTION PROTECTION RETENTION - ------------------------------------------------------------------- ----------- ------------- ------------- ------------- (1) Less than $7.5 billion......................................... $ 120 $ 5 $ 90 $ 30 (2) $7.5 billion to $10 billion.................................... $ 120 $ 5 $ 100 $ 20 (3) $10 billion to $14.9 billion................................... $ 120 $ 5 $ 110 $ 10 (4) Greater than $14.9 billion..................................... $ 120 $ 5 $ 115 $ 5
The Company believes that industry-wide claims of the magnitude identified in the above table would be necessary in order for the Company's gross claims to reach the levels for claims to be recoverable from such contracts. Therefore, the Company believes that industry-wide claims would impact its clients in a manner that generally conforms to the retrocessional coverages in place. 9 WORKERS' COMPENSATION--100% of $195 million in excess of a $5 million retention for any one occurrence. CASUALTY CONTINGENCY COVER--100% of $25 million in excess of $5 million for any one occurrence. In recognition of the Company's enhanced surplus position and financial capacity, as well as the continued positive contribution of business written since 1986, the Company has reached agreements to terminate two retrocessional programs effective January 1, 1997. As a result, the Company expects to receive total consideration of approximately $220 million representing reinsurance recoverable balances for unpaid claims and claims expenses. The termination of these programs will result in an increase in net retention levels for the years 1996 and prior. Particularly as the casualty book of business matures, the increase in net retentions for these years may result in increased volatility in future years to the extent the actual frequency and severity of claims differs from management's current estimates. The Company believes its exposure to such volatility is within acceptable levels. Refer to the following tables and discussion for the impact of the termination on the Company's 1996 and 1995 retrocessional programs. 1996 The following table summarizes the Company's maximum gross lines, initial and maximum retention on any one claim for 1996:
(IN MILLIONS) INITIAL RETENTION MAXIMUM RETENTION -------------------------------- ------------------------------ GROSS BEFORE AFTER BEFORE LINE TERMINATION TERMINATION TERMINATION AFTER --------- --------------- --------------- --------------- ------------- Casualty Treaty and Casualty Facultative........... $ 7.5 $ 2.0 $ 7.5 $ 5.0 $ 7.5 Property Treaty.................................... $ 7.5 $ 2.0 $ 7.5 $ 4.0 $ 7.5 Property Facultative............................... $ 75.0 $ 2.0 $ 5.0 $ 3.7 $ 5.0 Surety............................................. $ 20.0 $ 2.0 $ 7.5 $ 4.0 $ 12.5
The Company's 1996 reinsurance program for multiple claims arising from two or more risks in a single occurrence or event is indicated below: PROPERTY--Property business is protected by a series of reinsurance agreements which provide protection for 100% of $120 million in excess of $5 million on a first and second event. Certain of the Company's retrocessional protection is available only if industry-wide claims exceed certain minimum levels. Within the Company's $120 million of catastrophe protection, $30 million of coverage, in excess of the first $60 million of coverage, is available only if industry-wide claims exceed certain minimum levels. As a result of the termination of the retrocessional programs, the protection has been reduced by $10 million, increasing the Company's initial and maximum retentions to $10 million and $15 million, respectively. This coverage was not subject to an industry-wide claims minimum. The Company is unaware of any property catastrophe claim in excess of $5 million that would initiate this coverage. WORKERS' COMPENSATION--100% of $195 million in excess of a $5 million retention for any one occurrence. This protection was not affected by the termination of the retrocessional programs. CASUALTY CONTINGENCY COVER--100% of $25 million in excess of $5 million for any one occurrence. As a result of the termination of the retrocessional programs, the protection has been reduced by $10.8 million, increasing the Company's initial and maximum retentions to $7.5 million and $15.8 million, respectively. However, the maximum retention could exceed these retention levels should the net loss from any one insured or reinsured exceed the casualty contingency agreements' maximum net retention warranty. The maximum net retention warranty for 1996 was $5 million for treaty and facultative automatics and $3.7 million for individual risk facultative certificates. 10 1995 The following table summarizes the Company's maximum gross lines, initial and maximum retentions on any one claim for 1995:
(IN MILLIONS) INITIAL RETENTION MAXIMUM RETENTION -------------------------------- ------------------------------ GROSS BEFORE AFTER BEFORE AFTER LINE TERMINATION TERMINATION TERMINATION TERMINATION ------------- --------------- --------------- --------------- ------------- Property/Casualty Treaty and Casualty Facultative................................. $ 7.5 $ 1.0 $ 7.5 $ 3.9 $ 7.5 Property Facultative.......................... $ 50.0 $ 1.0 $ 5.0 $ 3.3 $ 7.0 Surety........................................ $ 20.0 $ 2.0 $ 7.5 $ 3.9 $ 13.0
The Company's 1995 reinsurance program for multiple claims arising from two or more risks in a single occurrence or event is indicated below: PROPERTY--Property business is protected by a series of reinsurance agreements which provide protection for 100% of $85 million in excess of $5 million on a first and second event. Certain of the Company's retrocessional protection is available only if industry-wide claims exceed certain minimum levels. Within the Company's $85 million of catastrophe protection, $20 million of coverage, in excess of the first $45 million of coverage, is available only if industry-wide claims exceed certain minimum levels. As a result of the termination of the retrocessional programs, the protection has been reduced by $20 million, increasing the Company's initial and maximum retentions to $10 million and $25 million, respectively. This coverage was not subject to an industry-wide claims minimum. The Company is unaware of any property catastrophe claim in excess of $5 million that would initiate this coverage. WORKERS' COMPENSATION--100% of $145 million in excess of a $5 million retention for any one occurrence. This protection was not affected by the termination of the retrocessional programs. CASUALTY CONTINGENCY COVER--100% of $15 million in excess of $5 million for any one occurrence. As a result of the termination of the retrocessional programs, the protection has been reduced by $11.3 million, increasing the Company's initial and maximum retentions to $7.5 million and $16.3 million, respectively. However, the maximum retention could exceed these retention levels should the net loss from any one insured or reinsured exceed the casualty contingency agreements' maximum net retention warranty. The maximum net retention warranty for 1995 was $3.3 million INVESTMENTS The Finance and Investment Committee (the "Committee") of NAC Re's Board of Directors is responsible for establishing investment policy and guidelines and for overseeing their execution. The Company utilizes independent investment advisors to manage its investment portfolio within the established guidelines. These advisors are required to report investment transaction activities and portfolio results on a periodic basis and to meet periodically to review and discuss portfolio structure, security selection and performance results with the Committee. The investment strategy, established by the Committee and management, focuses on capital preservation and income predictability. Accordingly, the Company emphasizes investment grade fixed maturity securities. For statutory accounting purposes, investment grade securities are recorded at amortized cost and, therefore, statutory surplus is not impacted by fluctuations in their market value. For GAAP reporting purposes, all of the Company's fixed maturities and equity securities are categorized as available for sale and are recorded at their fair value. Periodic changes in fair value are recorded directly in the Company's stockholders' equity, net of applicable deferred taxes. 11 A summary of the Company's investment portfolio as of December 31, 1996 and 1995 is set forth below:
(IN THOUSANDS) DECEMBER 31, ---------------------------------------------------- 1996 1995 ------------------------- ------------------------- CARRYING % OF CARRYING % OF VALUE PORTFOLIO VALUE PORTFOLIO ------------ ----------- ------------ ----------- Cash and short-term.............................................. $ 100,746 5.1% $ 142,726 7.7% ------------ ----- ------------ ----- Fixed maturities: U.S. Treasury.................................................. 70,608 3.6 119,430 6.4 Tax-exempt..................................................... 848,390 42.8 742,807 39.9 Foreign Government............................................. 161,988 8.1 146,217 7.8 Corporate...................................................... 376,826 19.0 348,341 18.7 Mortgage-backed................................................ 189,748 9.6 174,812 9.4 Subordinated convertibles...................................... 55,977 2.8 61,936 3.3 ------------ ----- ------------ ----- Subtotal....................................................... 1,703,537 85.9 1,593,543 85.5 ------------ ----- ------------ ----- Equity securities................................................ 179,619 9.0 127,257 6.8 ------------ ----- ------------ ----- Total.......................................................... $ 1,983,902 100.0% $ 1,863,526 100.0% ------------ ----- ------------ ----- ------------ ----- ------------ -----
Guidelines established by the Committee restrict the portion of the portfolio that can be held in lower rated or non-investment grade securities. Consistent with the Company's focus on asset quality, at December 31, 1996, approximately 98% of the Company's fixed maturity investments were considered "investment grade" by Moody's Investor Services, Inc. ("Moody's") or Standard and Poor's ("S&P"). The guidelines also address portfolio diversification by establishing certain restrictions regarding the portion of the investment portfolio that can be invested in a particular security, issuer, an industry sector or, in the case of tax-exempt securities, in a state or municipality. Such restrictions do not apply to investments in direct or indirect obligations of the U.S. Government (i.e., US Treasury and GNMA Securities), which comprised 3.7% of the Company's cash and invested assets at December 31, 1996. The portfolio guidelines generally prohibit investment in derivative products (i.e., products which include features such as futures, forwards, swaps, options and other investments with similar characteristics), without prior approval and written authorization by the Committee. Such authorization would be provided only after evaluating a written plan submitted by the advisor which documents the strategy, the objective, a description of the size and nature of each transaction, the expected return, the costs/benefits, and the possible risk factors. Except as discussed below, the Company does not purchase, own or employ the use of derivative investment products. The portfolio guidelines permit the purchase of certain securities which derive their values or their contractually required cash flows from other securities, such as mortgage-backed securities, where the underlying collateral is a pool of residential or commercial real estate mortgages. These securities are generally considered to have high credit quality since they are either government or quasi-government agency-backed or are equivalent to a "AAA" rating. The risks associated with mortgage-backed securities are interest rate risk (as with all fixed-rate securities) and prepayment risk or extension risk which may result in a decline in the expected return and/or value of the security. Prepayment or extension of principal payments occur and can be exacerbated depending upon the level of interest rates in the marketplace. Mortgage-backed securities in the Company's investment portfolio total $189.7 million at December 31, 1996, of which 83.6% are collateralized mortgage obligations (CMO's) which generally reduce the uncertainty concerning the maturity of a mortgage-backed security. 12 The guidelines also permit NAC Re International to purchase foreign exchange contracts for the sole purpose of hedging the subsidiary's exposure to a particular currency. As of December 31, 1996, NAC Re International held such a hedge due to the establishment of a fully operational branch office located in Australia. The Company does not expect this hedge to have a material impact on the consolidated results. While uncertainties exist regarding interest rates and inflation, the Company attempts to minimize such risks and exposure by balancing the duration of the assets in the investment portfolio with the duration of reinsurance liabilities. Consistent with the payment profile of the Company's claim reserve liabilities, and based upon the expected maturity of fixed maturity investments as of December 31, 1996, the Company's fixed maturity investments which include mortgage-backed securities but excludes convertible securities, had an expected average maturity of 6.6 years, as displayed in the table below:
(IN THOUSANDS) DECEMBER 31, 1996 ------------------------------- EXPECTED MATURITY OF FIXED MATURITY INVESTMENTS CARRYING VALUE % OF PORTFOLIO - --------------------------------------------------------------- -------------- --------------- Less than 1 year............................................... $ 34,263 2.0% 1-5 years...................................................... 751,795 44.1 6-10 years..................................................... 704,348 41.4 11-15 years.................................................... 92,606 5.4 16-20 years.................................................... 19,961 1.2 More than 20 years............................................. 44,587 2.6 -------------- ----- Subtotal....................................................... 1,647,560 96.7 Convertibles................................................... 55,977 3.3 -------------- ----- Total...................................................... $ 1,703,537 100.0% -------------- ----- -------------- -----
The balance of the Company's investment portfolio at December 31, 1996, consisting of cash, short-term investments and equity securities, amounted to $280.4 million. The Company's equity investment strategy is designed to build a quality equity portfolio. As of December 31, 1996, the Company held $179.6 million or 9% of cash and invested assets in equity securities, representing 27% of statutory surplus. The Company does not hold any direct investments in real estate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion of the Company's investing activities and results. RATINGS NAC, Greenwich, Indian Harbor and NAC Re International, comprising the NAC Re group of companies, have been assigned an "A+" (Superior) rating as determined by A.M. Best Company, and published in A.M. Best Rating Service, Property/Casualty Edition. An "A+", which is Best's second highest rating, is assigned to companies which have demonstrated superior overall performance when compared to established standards. Such companies are considered by Best to have demonstrated a very strong ability to meet their obligations to policyholders over a long period of time. NAC and its domestic subsidiaries, as well as NAC Re International, have been assigned a "AA-" claims-paying rating from S&P, which is S&P's fourth highest rating. A "AA-" is assigned to insurers that offer excellent financial security. The Company's capacity to meet policyholder obligations is considered strong under a variety of economic and underwriting conditions. NAC Re International is supported by a Net Worth Maintenance Agreement with NAC pursuant to which NAC has agreed to provide certain specified financial support to NAC Re International in meeting its regulatory standards and liquidity needs, subject to regulatory requirements on NAC. 13 Both the Best rating and S&P claims-paying rating are based upon factors of concern to policyholders and should not be considered an indication of the degree or lack of risk involved in an equity investment in an insurance or reinsurance company. NAC Re debt instruments have the following investment grade ratings from S&P and Moody's:
S&P MOODY'S --------- ----------- $100 Million 8% Senior Notes due 1999......................................................... A- Baa2 $100 Million 7.15% Senior Notes due 2005...................................................... A- Baa2 $100 Million 5.25% Convertible Subordinated Debentures due 2002............................... BBB+ Baa3
Debt ratings are a current assessment of the credit-worthiness of an obligor with respect to a specific obligation. A company with a debt rating of "A-" is considered by S&P to have a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt rated in higher rated categories. A company with a debt rating of "BBB+" by S&P and "Baa2" and "Baa3" by Moody's is considered to have adequate capacity to pay interest and repay principal but capacity to meet long-term obligations is susceptible to adverse economic conditions or changing circumstances. All of the above-mentioned ratings are continually monitored and readjusted by each of the rating agencies. While the Company believes that it will maintain and could possibly improve its ratings over time, there is no assurance that it will continue to receive these favorable ratings in the future. EMPLOYEES At December 31, 1996, the Company had 296 full-time employees, including 37 employees relating to the Company's U.K. operation. The Company's employees are not represented by a labor union and the Company believes that its employee relations are good. ITEM 2. PROPERTIES The Company leases its present corporate and administrative offices in a building located in Greenwich, Connecticut. The Company also has operating leases for office space at regional branch locations and its international subsidiary. See Note 6 of Notes to the Consolidated Financial Statements of NAC Re for a schedule on future minimum rentals related to the Company's operating leases. ITEM 3. LEGAL PROCEEDINGS NAC and Greenwich are parties to various lawsuits generally arising in the normal course of their business. The Company does not believe that the eventual outcome of any of the litigations to which NAC or Greenwich is a party will have a material effect on the Company's financial condition. NAC has been fully indemnified by The Continental Corporation for any losses incurred by Greenwich from events occurring prior to NAC's acquisition of Greenwich. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1996. 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Common Stock ($.10 par value) of NAC Re is traded on the New York Stock Exchange (NYSE) under the symbol NRC. Prior to May 1, 1995, it was traded on the NASDAQ Stock Market (NASDAQ) under the symbol NREC. For the periods presented below, the high and low sales price and close prices of the Common Stock as reported by the NYSE or, as appropriate, NASDAQ on its national market reporting system, were as follows:
THREE MONTHS ENDED ------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1996 1996 1996 1996 ----------- ----------- ------------- ------------- High.................................................. $ 36.25 $ 33.88 $ 40.63 $ 37.63 Low................................................... $ 31.75 $ 28.50 $ 30.25 $ 32.63 Close................................................. $ 32.63 $ 33.50 $ 36.00 $ 33.88
THREE MONTHS ENDED ------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1995 1995 1995 1995 ----------- ----------- ------------- ------------- High.................................................. $ 34.00 $ 35.25 $ 39.00 $ 38.38 Low................................................... $ 28.25 $ 28.50 $ 30.63 $ 31.63 Close................................................. $ 30.25 $ 31.13 $ 36.25 $ 36.00
STOCKHOLDERS There were 379 holders of record of shares of Common Stock as of March 3, 1997, of which 97% were held by Cede & Company as nominee for an unknown number of beneficial stockholders. DIVIDENDS The Company declared a quarterly cash dividend of $.04 per share for March 1995 and increased this to $.05 per share for June 1995 through March 1996. In June 1996, the Company increased its quarterly dividend to $.06 per share. The Company considers increasing the dividend on its Common Stock from time to time. There is presently no intention to decrease the cash dividend in the foreseeable future. Future dividends will be dependent upon, among other factors, the earnings of the Company, its financial condition, its capital requirements, general business conditions and the ability of NAC to pay dividends to NAC Re. For a description of restrictions on NAC's ability to pay dividends, reference is made to Note 10 of Notes to the Consolidated Financial Statements of NAC Re. ITEM 6. SELECTED FINANCIAL DATA The selected financial data included in the "Eleven Year Financial Summary" on pages 30 through 31 of NAC Re's 1996 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 20 through 29 of NAC Re's 1996 Annual Report to Shareholders is incorporated herein by reference. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of NAC Re and its subsidiary companies, included on pages 32 through 60 of NAC Re's 1996 Annual Report to Shareholders, are incorporated herein by reference: --Consolidated Balance Sheet at December 31, 1996 and 1995. --Consolidated Statement of Income for the years ended December 31, 1996, 1995 and 1994. -- Consolidated Statement of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994. --Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994. --Notes to Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Incorporated by reference to the caption "Directors and Executive Officers" in the definitive proxy statement involving the election of directors and other matters (the "Proxy Statement") which NAC Re intends to file with the Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than 120 days after December 31, 1996. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to the caption "Compensation of Directors and Executive Officers" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the captions "Certain Relationships and Related Transactions" and "Compensation Committee Interlocks and Insider Participation" in the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS AND SCHEDULES The Financial Statements and schedules listed in the accompanying Index to Financial Statements and Schedules on page F-1 are filed as part of this report. 16 EXHIBITS The exhibits listed on the Index to Exhibits set forth below are filed as part of this report.
EXHIBIT NO. - ------------- (3) -- Articles of incorporation and bylaws: 3.1 -- Restated Certificate of Incorporation of NAC Re incorporated herein by reference to Exhibit 3.1 to the Annual Report on Form 10-K of NAC Re for the year ended December 31, 1990 3.2 -- Bylaws of NAC Re as amended through June 9, 1988 incorporated herein by reference to Exhibit 3.2 to the Annual Report on Form 10-K of NAC Re for the year ended December 31, 1988 (the "1988 10-K") (4) -- Instruments defining rights of security holders, including indentures: 4.1 -- Rights Agreement dated as of June 9, 1988 by and between NAC Re Corporation and American Stock Transfer and Trust Company (the "Rights Agreement") incorporated herein by reference to Exhibit A to the Current Report on Form 8-K filed June 24, 1988 4.2 -- First Amendment to the Rights Agreement dated as of March 28, 1990 incorporated herein by reference to Exhibit A to the Current Report on Form 8-K filed April 2, 1990 4.3 -- Second Amendment to the Rights Agreement dated as of September 13, 1990 incorporated herein by reference to Exhibit 4.3 to the Current Report on Form 8-K filed September 21, 1990 (10) -- Material contracts: 10.1 -- Lease of NAC Re's corporate and administrative offices in Greenwich, CT incorporated herein by reference to Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December 31, 1985 10.2 -- Form of Sublease between NAC Re and NAC incorporated herein by reference to Exhibit 10.16 to the Joint Proxy Statement/Prospectus on Form S-4 (No. 33-8836) of NAC Re and KCC *10.3 -- Amended 1985 Stock Option Plan of NAC Re incorporated herein by reference to Exhibit 10.6 to the Registration Statement on Form S-1 (No.2-99952) *10.4 -- 1986 Incentive and Non-qualified Stock Option Plan of NAC Re incorporated herein by reference to Exhibit 10.12 to the Registration Statement on Form S-1 (No. 33-5198) *10.5 -- NAC Re Corp. 1989 Stock Option Plan incorporated herein by reference to Exhibit 4.2 to the Registration Statement on Form S-8 (No. 33-27745) *10.6 -- NAC Re Corp. 1993 Stock Option Plan incorporated herein by reference to Exhibit A to the definitive Proxy Statement filed with the Securities and Exchange Commission on March 26, 1993 ("1993 Proxy Statement") *10.7 -- Amended and Restated NAC Re Corp. Directors' Stock Option Plan incorporated herein by reference to Exhibit B to the 1993 Proxy Statement *10.8 -- Amended and Restated NAC Re Corp. Benefits Equalization Plan incorporated herein by reference to Exhibit 10.8 to the Annual Report on Form 10-K for the year ended December 31, 1993 (the "1993 10-K") *10.9 -- Amended and Restated NAC Re Corp. Excess Benefit Savings Plan incorporated herein by reference to Exhibit 10.9 to the 1993 10-K *10.10 -- Form of Severance Contract between NAC Re Corp. and the executive officers of NAC Re incorporated herein by reference to Exhibit 10.23 to the 1988 10-K
17
EXHIBIT NO. - ------------- *10.11 -- NAC Re Corp. Amended and Restated Annual Incentive Plan incorporated herein by reference to Exhibit 10.17 to the Annual Report on Form 10-K of NAC Re for the year ended December 31, 1991 (the "1991 10-K") *10.12 -- NAC Re Corp. Long-term Incentive Plan incorporated herein by reference to Exhibit 10.12 to the Annual Report on Form 10-K of NAC Re for the year ended December 31, 1994 (the "1994 10-K") *10.13 -- Employment contract with Ronald L. Bornhuetter dated as of March 4, 1992 incorporated herein by reference to Exhibit 10.19 to the 1991 10-K *10.14 -- Trust Agreement, dated as of July 1, 1989, between NAC Re and Marine Midland Bank, N.A. relating to supplemental pension benefits for Ronald L. Bornhuetter incorporated herein by reference to Exhibit 10.22 to the Annual Report on Form 10-K of NAC Re for the year ended December 31, 1989 (the "1989 10-K") *10.15 -- NAC Re Corp. Directors' Deferred Compensation Agreement incorporated herein by reference to Exhibit 10.20 to the 1989 10-K *10.16 -- Consulting Agreement with Michael G. Fitt effective as of March 1, 1995 incorporated herein by reference to the 1994 10-K *10.17 -- Employment contract with Ronald L. Bornhuetter dated as of October 30, 1996 *10.18 -- Employment contract with Nicholas M. Brown, Jr., dated as of October 30, 1996 *10.19 -- Form of Employment contract with Executive Vice Presidents dated as of October 30, 1996 (11) -- Statement regarding computation of per share earnings (12) -- Statement regarding computation of ratios (13) -- NAC Re's 1996 Annual Report to Shareholders only those portions thereof which are expressly incorporated by reference in NAC Re's Annual Report on Form 10-K for 1996, are "filed" as part of this Annual Report on Form 10-K (21) -- Subsidiaries of the registrant incorporated herein by reference to Exhibit 21 to the 1993 10-K (23) -- Consents of experts and counsel (24) -- Powers of attorney (27) -- Financial Data Schedule
- ------------------------ * Executive Compensation Plans or Arrangements REPORTS ON FORM 8-K There were no reports on Form 8-K filed with the Securities and Exchange Commission during the fourth quarter of 1996. EXECUTIVE COMPENSATION PLANS OR ARRANGEMENTS Executive compensation plans or arrangements are indicated by an asterisk on the Index to Exhibits set forth above. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities 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) By /s/ JEROME T. FADDEN ----------------------------------------- Jerome T. Fadden VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER Dated: March 25, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- RONALD L. BORNHUETTER* Director, Chairman and - ------------------------------ Chief Executive Officer March 25, 1997 RONALD L. BORNHUETTER NICHOLAS M. BROWN, JR.* Director, President and - ------------------------------ Chief Operating Officer March 25, 1997 NICHOLAS M. BROWN, JR. ROBERT A. BELFER* Director - ------------------------------ March 25, 1997 ROBERT A. BELFER JOHN P. BIRKELUND* Director - ------------------------------ March 25, 1997 JOHN P. BIRKELUND C. W. CARSON, JR.* Director - ------------------------------ March 25, 1997 C. W. CARSON, JR. TODD G. COLE* Director - ------------------------------ March 25, 1997 TODD G. COLE MICHAEL G. FITT* Director - ------------------------------ March 25, 1997 MICHAEL G. FITT DANIEL J. MCNAMARA* Director - ------------------------------ March 25, 1997 DANIEL J. MCNAMARA STEPHEN ROBERT* Director - ------------------------------ March 25, 1997 STEPHEN ROBERT WENDY J. STROTHMAN* Director - ------------------------------ March 25, 1997 WENDY J. STROTHMAN HERBERT S. WINOKUR, JR.* Director - ------------------------------ March 25, 1997 HERBERT S. WINOKUR, JR. /s/ JEROME T. FADDEN Vice President, Chief - ------------------------------ Financial Officer and March 25, 1997 JEROME T. FADDEN Treasurer - ------------------------ * By MARTHA G. BANNERMAN, his or her attorney-in-fact and agent, pursuant to a power of attorney, a copy of which has been filed with the Securities and Exchange Commission as Exhibit 24 hereto. By: /s/ MARTHA G. BANNERMAN ----------------------------------------- Martha G. Bannerman VICE PRESIDENT AND GENENERAL COUNSEL
19 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
NAC RE CORP. PAGES Report of Independent Auditors on Financial Statements and Schedules............................ F-2 Consolidated Balance Sheet at December 31, 1996 and 1995........................................ * Consolidated Statement of Income for the years ended December 31, 1996, 1995 and 1994................................................................................. * Consolidated Statement of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994.......................................................................................... * Consolidated Statement of Cash Flows for the years ended December 1996, 1995 and 1994........... * Notes to Consolidated Financial Statements...................................................... * SCHEDULES I Summary of Investments Other Than Investments in Related Parties at December 31, 1996........... S-1 III Condensed Financial Information of Registrant................................................... S-2 - S-4 V Supplementary Insurance Information for the years ended December 31, 1996, 1995 and 1994........ S-5 VI Reinsurance for the years ended December 31, 1996, 1995 and 1994................................ S-6 X Supplementary Information Concerning Property-Casualty Insurance Operations..................... S-7 Schedules other than those listed above are omitted for the reason that they are not applicable.
- ------------------------ * Incorporated by reference to NAC Re's 1996 Annual Report to Shareholders. F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of NAC RE CORPORATION: We have audited the consolidated balance sheet of NAC Re Corporation and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NAC Re Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects, the information set forth therein. ERNST & YOUNG LLP New York, New York February 4, 1997 F-2 SCHEDULE I NAC RE CORP. AND SUBSIDIARIES OTHER THAN INVESTMENTS IN RELATED PARTIES SUMMARY OF INVESTMENTS (IN THOUSANDS)
DECEMBER 31, 1996 ----------------------------------------- AMOUNT AT WHICH AMORTIZED MARKET SHOWN IN THE COST VALUE BALANCE SHEET ------------ ------------ ------------- Type of Investment: FIXED MATURITY SECURITIES United States Government............................................. $ 71,354 $ 70,608 $ 70,608 Foreign governments.................................................. 160,490 161,988 161,988 Mortgage-backed securities........................................... 191,467 189,748 189,748 States, municipalities and political subdivisions.................... 828,501 848,390 848,390 Corporate bonds...................................................... 377,294 376,826 376,826 Subordinated convertibles............................................ 52,084 55,977 55,977 ------------ ------------ ------------- Total Fixed Maturities........................................... 1,681,190 1,703,537 1,703,537 EQUITY SECURITIES...................................................... 153,197 179,619 179,619 CASH AND SHORT-TERM INVESTMENTS........................................ 100,746 100,746 100,746 ------------ ------------ ------------- Total Investments................................................ $ 1,935,133 $ 1,983,902 $ 1,983,902 ------------ ------------ ------------- ------------ ------------ -------------
S-1 SCHEDULE III NAC RE CORP. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT NAC RE CORP. BALANCE SHEET (PARENT COMPANY) (IN THOUSANDS)
DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- ASSETS Fixed maturities.......................................................................... $ 30,066 $ 34,088 Short-term investments.................................................................... 5,377 14,930 Cash...................................................................................... 266 2,689 Accrued investment income................................................................. 444 290 Deferred expenses......................................................................... 1,865 2,203 Federal income tax recoverable............................................................ 940 3,197 Investment in wholly-owned subsidiaries................................................... 825,283 775,100 Fixed assets.............................................................................. 7,569 3,578 Other assets.............................................................................. 1,035 506 ---------- ---------- Total assets........................................................................ $ 872,955 $ 836,581 ---------- ---------- ---------- ---------- LIABILITIES 8% Notes due 1999......................................................................... $ 100,000 $ 100,000 7.15% Notes due 2005...................................................................... 99,934 99,927 5.25% Convertible Subordinated Debentures due 2002........................................ 100,000 100,000 Revolving credit loan..................................................................... 12,924 17,762 Interest payable.......................................................................... 1,537 1,358 Intercompany taxes payable................................................................ -- 2,891 Dividend payable.......................................................................... 1,104 959 Accrued expenses and other liabilities.................................................... 4,187 1,928 ---------- ---------- Total liabilities................................................................... 319,686 324,825 ---------- ---------- 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, 21,464; 1995, 21,341 issued)................................................................................. 2,146 2,134 Additional paid-in capital................................................................ 248,662 246,356 Unrealized appreciation of investments, net of tax........................................ 31,700 35,187 Currency translation adjustments, net of tax.............................................. 8,377 1,017 Retained earnings......................................................................... 335,868 269,660 Less treasury stock, at cost (1996, 3,061 shares; 1995, 2,137 shares)..................... (73,484) (42,598) ---------- ---------- Total stockholders' equity.......................................................... 553,269 511,756 ---------- ---------- Total liabilities and stockholders' equity.......................................... $ 872,955 $ 836,581 ---------- ---------- ---------- ----------
S-2 SCHEDULE III NAC RE CORP. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED) NAC RE CORP. STATEMENT OF INCOME (PARENT COMPANY) (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- INCOME Dividend declared from insurance subsidiary.................................... $ 38,000 $ 7,500 $ 15,000 Net investment income.......................................................... 2,815 3,193 2,409 Net investment gains (losses).................................................. 87 126 (138) Rental and other income........................................................ 1,559 1,164 824 --------- --------- --------- 42,461 11,983 18,095 --------- --------- --------- EXPENSES Interest expense............................................................... 22,284 15,610 14,416 Other operating costs and expenses............................................. 2,672 2,104 1,776 --------- --------- --------- 24,956 17,714 16,192 --------- --------- --------- Income (loss) before intercompany tax allocation and equity in net income of wholly-owned subsidiaries less dividend declared............................... 17,505 (5,731) 1,903 --------- --------- --------- Current intercompany tax credit.................................................. 6,778 4,711 4,557 Deferred tax benefit (expense)................................................... 424 41 (9) --------- --------- --------- Total tax credit, net............................................................ 7,202 4,752 4,548 --------- --------- --------- Income (loss) before equity in net income of wholly-owned subsidiaries less dividend declared.............................................................. 24,707 (979) 6,451 Equity in net income of wholly-owned subsidiaries less dividend declared......... 45,813 63,803 29,161 --------- --------- --------- Net income....................................................................... $ 70,520 $ 62,824 $ 35,612 --------- --------- --------- --------- --------- ---------
S-3 SCHEDULE III NAC RE CORP. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED) NAC RE CORP. STATEMENT OF CASH FLOWS (PARENT COMPANY) (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 ---------- ----------- ---------- Operating activities: Net income................................................................. $ 70,520 $ 62,824 $ 35,612 Less equity in net income of subsidiaries, less cash dividend ($38,000 in 1996, $7,500 in 1995, $17,500 in 1994)................................... 45,814 63,803 26,661 ---------- ----------- ---------- 24,706 (979) 8,951 Adjustments to reconcile net income to net cash provided by operating activities................................................................. 2,483 1,866 3,476 ---------- ----------- ---------- Net cash provided by operating activities.................................... 27,189 887 12,427 ---------- ----------- ---------- Investing activities: Sales of fixed maturity investments........................................ 8,844 9,722 12,001 Maturities of fixed maturity investments................................... 7,000 4,700 3,720 Purchases of fixed maturity investments.................................... (12,425) (10,527) (22,799) Net sales (purchases) of short-term investments............................ 9,553 (7,285) (2,348) Purchases of furniture and equipment....................................... (4,648) (1,290) (718) Contribution to subsidiary................................................. -- (146,556) -- ---------- ----------- ---------- Net cash provided (used) by investing activities............................. 8,324 (151,236) (10,144) ---------- ----------- ---------- Financing activities: Issuance of shares......................................................... 1,951 52,056 5,278 Net proceeds from issuance of 7.15% Notes.................................. -- 99,214 -- Purchase of treasury shares, net of reissuance............................. (30,886) (204) (15,006) Cash dividends paid to stockholders........................................ (4,163) (3,260) (2,827) Borrowings under revolving credit agreement................................ 8,162 -- 13,857 Repayments under revolving credit agreement................................ (13,000) -- -- ---------- ----------- ---------- Net cash (used) provided by financing activities............................. (37,936) 147,806 1,302 (Decrease) increase in cash.................................................. (2,423) (2,543) 3,585 Cash--beginning of year...................................................... 2,689 5,232 1,647 ---------- ----------- ---------- Cash--end of year............................................................ $ 266 $ 2,689 $ 5,232 ---------- ----------- ---------- ---------- ----------- ----------
S-4 SCHEDULE V NAC RE CORP. AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION (IN THOUSANDS)
FUTURE POLICY BENEFITS, BENEFITS, LOSSES, CLAIMS, AMORTIZATION DEFERRED CLAIMS LOSSES OF DEFERRED POLICY AND NET AND POLICY OTHER ACQUISITION CLAIMS UNEARNED PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING COSTS EXPENSES PREMIUMS REVENUE INCOME EXPENSES COSTS EXPENSES ----------- --------- ----------- ----------- ----------- ----------- ------------ ----------- DECEMBER 31, 1996 Domestic: Property/Casualty.... $ 82,369 $1,434,429 $ 255,514 $ 474,025 $ 93,062 $ 303,485 $ 133,423 $ 71,231 Accident and Health............. -- 2,746 775 1,987 144 (950) -- 110 ----------- --------- ----------- ----------- ----------- ----------- ------------ ----------- Subtotal......... 82,369 1,437,193 256,289 476,012 93,206 302,535 133,423 71,341 International: Property/Casualty.... 2,842 80,531 15,609 50,330 11,124 36,418 9,901 7,587 Intercompany elimination.......... -- (4,379) -- -- -- -- -- -- ----------- --------- ----------- ----------- ----------- ----------- ------------ ----------- Total............ $ 85,211 $1,513,345 $ 271,898 $ 526,342 $ 104,330 $ 338,953 $ 143,324 $ 78,928 ----------- --------- ----------- ----------- ----------- ----------- ------------ ----------- ----------- --------- ----------- ----------- ----------- ----------- ------------ ----------- DECEMBER 31, 1995 Domestic: Property/Casualty.... $ 68,158 $1,246,187 $ 216,213 $ 450,068 $ 80,875 $ 293,262 $ 132,049 $ 55,919 Accident and Health............. -- 3,584 2,005 2,926 708 1,776 -- 489 ----------- --------- ----------- ----------- ----------- ----------- ------------ ----------- Subtotal......... 68,158 1,249,771 218,218 452,994 81,583 295,038 132,049 56,408 International: Property/Casualty.... 2,308 43,277 12,520 38,791 7,725 31,110 7,014 6,044 Intercompany elimination.......... -- (633) -- -- -- -- -- -- ----------- --------- ----------- ----------- ----------- ----------- ------------ ----------- Total............ $ 70,466 $1,292,415 $ 230,738 $ 491,785 $ 89,308 $ 326,148 $ 139,063 $ 62,452 ----------- --------- ----------- ----------- ----------- ----------- ------------ ----------- ----------- --------- ----------- ----------- ----------- ----------- ------------ ----------- DECEMBER 31, 1994 Domestic: Property/Casualty.... $ 59,030 $1,068,930 $ 188,436 $ 375,233 $ 75,661 $ 249,833 $ 114,540 $ 47,469 Accident and Health............. -- 1,208 732 637 122 180 -- 76 ----------- --------- ----------- ----------- ----------- ----------- ------------ ----------- Subtotal......... 59,030 1,070,138 189,168 375,870 75,783 250,013 114,540 47,545 International: Property/Casualty.... 923 16,032 6,045 19,861 4,721 15,740 3,052 5,210 ----------- --------- ----------- ----------- ----------- ----------- ------------ ----------- Total............ $ 59,953 $1,086,170 $ 195,213 $ 395,731 $ 80,504 $ 265,753 $ 117,592 $ 52,755 ----------- --------- ----------- ----------- ----------- ----------- ------------ ----------- ----------- --------- ----------- ----------- ----------- ----------- ------------ ----------- PREMIUMS WRITTEN ----------- DECEMBER 31, 1996 Domestic: Property/Casualty.... $ 521,072 Accident and Health............. 804 ----------- Subtotal......... 521,876 International: Property/Casualty.... 52,128 Intercompany elimination.......... -- ----------- Total............ $ 574,004 ----------- ----------- DECEMBER 31, 1995 Domestic: Property/Casualty.... $ 471,917 Accident and Health............. 4,131 ----------- Subtotal......... 476,048 International: Property/Casualty.... 45,441 Intercompany elimination.......... -- ----------- Total............ $ 521,489 ----------- ----------- DECEMBER 31, 1994 Domestic: Property/Casualty.... $ 411,750 Accident and Health............. 662 ----------- Subtotal......... 412,412 International: Property/Casualty.... 25,789 ----------- Total............ $ 438,201 ----------- -----------
S-5 SCHEDULE VI NAC RE CORP. AND SUBSIDIARIES REINSURANCE (IN THOUSANDS)
PERCENTAGE CEDED ASSUMED OF AMOUNT GROSS TO OTHER FROM OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET --------- ---------- ----------- ---------- ------------- DECEMBER 31, 1996 Premiums Written: Property/casualty................................... $ 72,749 $ 139,928 $ 640,379 $ 573,200 112% Accident and health................................. 61 148 891 804 111 --------- ---------- ----------- ---------- --- Total........................................... $ 72,810 $ 140,076 $ 641,270 $ 574,004 112% --------- ---------- ----------- ---------- --- --------- ---------- ----------- ---------- --- DECEMBER 31, 1995 Premiums Written: Property/casualty................................... $ 70,138 $ 155,777 $ 602,997 $ 517,358 117% Accident and health................................. 45 672 4,758 4,131 115 --------- ---------- ----------- ---------- --- Total........................................... $ 70,183 $ 156,449 $ 607,755 $ 521,489 117% --------- ---------- ----------- ---------- --- --------- ---------- ----------- ---------- --- DECEMBER 31, 1994 Premiums Written: Property/casualty................................... $ 45,926 $ 136,648 $ 528,261 $ 437,539 121% Accident and health................................. 79 188 771 662 116 --------- ---------- ----------- ---------- --- Total........................................... $ 46,005 $ 136,836 $ 529,032 $ 438,201 121% --------- ---------- ----------- ---------- --- --------- ---------- ----------- ---------- ---
S-6 SCHEDULE X NAC RE CORP. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS (IN THOUSANDS)
DEFERRED RESERVE FOR POLICY UNPAID CLAIMS DISCOUNT NET ACQUISITION AND CLAIMS IF ANY, UNEARNED EARNED INVESTMENT AFFILIATION WITH REGISTRANT COSTS EXPENSES DEDUCTED(1) PREMIUMS PREMIUMS INCOME - -------------------------------------- ----------- -------------- ----------- ---------- ---------- ---------- CONSOLIDATED SUBSIDIARIES December 31, 1996..................... $ 85,211 $ 1,513,345 $ 20,766 $ 271,898 $ 526,342 $ 101,515 December 31, 1995..................... $ 70,466 $ 1,292,415 $ 18,340 $ 230,738 $ 491,785 $ 86,115 December 31, 1994..................... $ 59,953 $ 1,086,170 $ 17,084 $ 195,213 $ 395,731 $ 78,095 CLAIMS AND CLAIMS EXPENSES INCURRED AMORTIZATION RELATED TO (2) OF DEFERRED -------------- POLICY PAID CLAIMS CURRENT PRIOR ACQUISITION AND CLAIMS PREMIUMS AFFILIATION WITH REGISTRANT YEAR YEARS COSTS EXPENSES WRITTEN - ---------------------------------------- ---------- ------------ ----------- ---------- CONSOLIDATED SUBSIDIARIES December 31, 1996.....................$372,294 ($ 33,341) $ 143,324 $ 190,424 $ 574,004 December 31, 1995.....................$345,783 ($ 19,635) $ 139,063 $ 180,386 $ 521,489 December 31, 1994.....................$309,294 ($ 43,541) $ 117,592 $ 154,651 $ 438,201
- ------------------------ (1) Relates to certain workers' compensation case reserves which are discounted for statutory accounting purposes utilizing a 5% interest rate, and a 7% interest rate for GAAP. (2) Amounts are net of discount related to certain workers' compensation case reserves. S-7 EX-10.17 2 EX-10.17 EMPLOYMENT AGREEMENT THIS AGREEMENT by and among NAC RE CORPORATION ("NAC Re"), a Delaware business corporation, NAC REINSURANCE CORPORATION ("NAC"), a New York insurance corporation, and RONALD L. BORNHUETTER (the "Executive"), dated as of the 30th day of October, 1996. W I T N E S S E T H WHEREAS, NAC Re and NAC presently employ the Executive pursuant to an Employment Agreement dated as of March 4, 1992; and WHEREAS, NAC Re and NAC wish to continue to employ the Executive for the period provided in this Agreement, and the Executive is willing to continue to serve in the employ of NAC Re and NAC and of any direct or indirect subsidiary of NAC Re (collectively, the "Companies") on the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties agree as follows: 1. EMPLOYMENT. NAC Re and NAC hereby agree to continue to employ the Executive, and the Executive hereby agrees to continue his employment with NAC Re and NAC, on the terms and subject to the conditions set forth herein. 2. TERM OF EMPLOYMENT. The term of the Executive's employment under this Agreement (the "Employment Period") shall commence on July 1, 1997, and end on July 1, 2000, unless earlier terminated in accordance with Section 7 below. 3. DUTIES AND RESPONSIBILITIES. (a) TITLES AND RESPONSIBILITIES. During the Employment Period, the Executive shall serve as Chairman of the Board of Directors of NAC Re. He shall also serve as Chief Executive Officer of NAC Re until December 1999 or such earlier date as the Executive and the Board of Directors of NAC Re (the "Board") shall mutually determine. The Executive shall report and be responsible only to the Board. The Executive shall also be a member of the Finance and Investment Committee (or other committee with supervisory authority over the investment portfolios) of NAC Re and NAC and a member of the Executive Committee of NAC Re. The Executive shall serve as an EX officio member of all other committees of NAC Re and NAC with management responsibilities, except the Audit Committee and Compensation Committee. (b) OTHER OFFICES. NAC Re agrees that the Executive shall be nominated for election to the Board at each meeting of its stockholders at which the class of directors to which the Executive is assigned is to be elected, so long as the Executive shall be employed by NAC Re under the terms of this Agreement. Notwithstanding the foregoing, it shall not be considered a breach of this Agreement if the Executive is not nominated or elected, or is removed, as a director of either NAC Re or NAC (and a member of any NAC Re or NAC board committee) as a result of a determination by the Insurance Department of the State of New York (or by any other insurance department having jurisdiction over NAC Re, NAC or any subsidiary or affiliate of either of them) after a hearing or investigation by such authority at which or during which the Executive and his counsel were given a reasonable opportunity to be heard, that the Executive be removed or disqualified from acting as a director of NAC Re and/or NAC. If NAC Re shall so request, the Executive shall become and shall, during such portion of the Employment Period as NAC Re shall request, act as a director and/or senior executive officer of any of its subsidiaries or affiliates without any additional compensation. (c) PLACE OF PERFORMANCE. During the Employment Period, the Executive's office shall be located in the principal executive offices of NAC Re and NAC, which shall be in southern Connecticut or the New York metropolitan area. NAC Re and NAC shall provide the Executive with an office, an executive secretary reasonably acceptable to him, and other support reasonably appropriate to his duties. (d) BUSINESS TIME. During the Employment Period, the Executive agrees to devote his full business time during normal business hours to the business and affairs of the Companies and to use his best efforts to perform faithfully, diligently and competently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent serving on corporate, civic or charitable boards or committees only if and to the extent not substantially interfering with the performance of such responsibilities, (ii) periods of vacation, disability and sick leave to which he is entitled, and (iii) reasonable activities having a charitable, educational or other public interest purpose. 4. COMPENSATION. (a) BASE SALARY. During the Employment Period, the Executive shall receive a minimum annual base salary ("Base Salary") equal to his base salary in effect immediately prior to the Employment Period, payable in accordance with the customary payroll policy as in effect from time to time for senior executives of NAC Re and NAC. NAC Re and NAC shall review the Executive's Base Salary no less frequently than annually commencing no later than March 1998, for possible increases of such Base Salary in relationship to the goals and performance of the Companies and prevailing competitive conditions. (b) AIP AND LIP BONUS. During the Employment Period, the Executive shall participate in the NAC Re Corp. Amended and Restated Annual Incentive Plan ("AIP") and NAC Re Corp. Long-Term Incentive Plan ("LIP") (or any successor plans thereto) and shall be entitled to a minimum target percentage bonus opportunity equal to 45% of Base Salary under the AIP and 60% of Base Salary under the LIP (or any successor plans thereto) in each performance year. (c) SUPPLEMENTAL PENSION. The Executive and his spouse shall be entitled to supplemental pension in accordance with the provisions of Section 5 below. - 2 - (d) VACATION. During the Employment Period, the Executive shall be entitled to no less than five weeks paid vacation per year. (e) LIFE INSURANCE. During the Employment Period, NAC Re and NAC shall cause to be maintained for the benefit of the Executive life insurance coverage initially having an aggregate death value of not less than $1,000,000 including any coverage provided under any group program instituted by the Companies as to which the Executive may be required to contribute part of the cost. Not less than $600,000 of such insurance shall be provided at NAC Re's and NAC's expense. After the Employment Period, NAC Re and NAC shall cause to be maintained at their expense for the remainder of the Executive's life and for the benefit of the Executive life insurance coverage having an aggregate death value of not less than $100,000. The Executive shall be the owner of and have the right to designate or change the beneficiary or beneficiaries of the insurance described in this Section 4(e), and such insurance shall be provided in a form whereby the Executive may create an irrevocable trust as the owner of such insurance. (f) FRINGE BENEFITS. In addition to any other benefits provided to the Executive, NAC Re and NAC shall provide or reimburse the Executive for the following: (i) a luxury automobile and all related insurance, operating and maintenance expenses; (ii) all reasonable club dues for clubs and other similar organizations which are important to the conduct of the business of the Companies and which he uses for business purposes; (iii) reasonable consultations with financial and tax advisors or counselors; and (iv) legal expenses in connection with the negotiation of this Agreement. (g) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all business-related expenses incurred by the Executive in accordance with the policies and procedures of NAC Re and NAC as applicable to senior executives of NAC Re and NAC. (h) OTHER EXECUTIVE BENEFITS. Without limiting the foregoing provisions of this Section 4, during the Employment Period the Executive shall be entitled to participate in or be covered under all compensation, pension, and welfare and fringe benefit plans, programs and policies of the Companies applicable to senior executives of the Companies. - 3 - 5. SUPPLEMENTAL PENSION. (a) RETIREMENT PRIOR TO A CHANGE IN CONTROL. Upon the Executive's Retirement (as defined in Section 5(f) below) prior to a Change in Control (as defined in Section 6(c) below), NAC Re and NAC agree to pay to the Executive an annual supplemental retirement pension, payable monthly commencing on the first day of the second month after separation, equal to: (i) 53% of the Executive's Average Annual Compensation (as defined in Section 5(f) below) -less- (ii) The amount of any annual benefit for which the Executive is eligible under the NAC Re Corporation Retirement Plan, the NAC Re Corporation Benefits Equalization Plan, and the General Re Corporation Employee Retirement Plan, assuming the Executive elected receipt of such benefit at the time of his Retirement hereunder and elected a life annuity payment form. (b) RETIREMENT AFTER A CHANGE IN CONTROL. In the event of the Executive's Retirement on or after a Change in Control, and in lieu of the supplemental retirement pension payments provided for in Section 5(a) above, NAC Re and NAC agree to pay to the Executive an annual supplemental retirement pension, payable monthly commencing on the first day of the second month after separation, equal to: (i) 53% of the Executive's Average Annual Compensation -less- (ii) The amount of any annual benefit for which the Executive is eligible under the NAC Re Corporation Retirement Plan, the NAC Re Corporation Benefits Equalization Plan, and the General Re Corporation Employee Retirement Plan, assuming the Executive elected receipt of such benefit at the time of his Retirement hereunder and elected a life annuity payment form -subject to- (iii) A minimum annual benefit of $100,000 payable without offset for benefits payable from the NAC Re Corporation Retirement Plan, the NAC Re Corporation Benefits Equalization Plan, and the General Re Corporation Employee Retirement Plan. - 4 - (c) SUPPLEMENTAL DISABILITY PENSION. In the event of the Executive's separation from employment on account of Disability (as defined in Section 7(a) below), and in lieu of the supplemental retirement pension payments provided for in the foregoing provisions of this Section 5, NAC Re and NAC agree to pay the Executive an annual supplemental disability pension benefit, payable monthly commencing on the first day of the second month after the date of his termination of his employment on account of Disability, equal to: (i) 53% of the Executive's Average Annual Compensation -less- (ii) Any long-term disability benefits payable from the NAC Re Corporation Health and Welfare Plan -less- (iii) The amount of any annual benefit for which the Executive is eligible under the NAC Re Corporation Retirement Plan, the NAC Re Corporation Benefits Equalization Plan, and the General Re Corporation Employee Retirement Plan. In determining benefits under this Section 5(c), if benefits are payable under the NAC Re Corporation Health and Welfare Plan, benefits under the NAC Re Corporation Retirement Plan, the NAC Re Corporation Benefits Equalization Plan, and the General Re Corporation Employee Retirement Plan shall be assumed to commence at age 65, and no offset shall be taken until that time. If benefits are not payable under the NAC Re Corporation Health and Welfare Plan, benefits under the NAC Re Corporation Retirement Plan, the NAC Re Corporation Benefits Equalization Plan and the General Re Corporation Employee Retirement Plan shall be assumed to commence as of the Executive's termination of employment or, if not then payable, the first date payable. (d) FORM AND MANNER OF PAYMENT. The benefit calculated under the foregoing provisions of this Section 5 shall be payable to the Executive for his lifetime and, following his death, 50% of such amount shall continue to be paid to his surviving spouse for her lifetime commencing on the first day of the month immediately after the date of the Executive's death. In lieu of payments over the lifetimes of the Executive and his spouse, the Executive may elect to receive the actuarial equivalent value of such payments in a cash lump sum. Such election shall be made by written notice to NAC Re not later than 15 days prior to commencement of payments hereunder. Such value shall be determined using accepted actuarial principles and assumptions: for mortality, the UP 1984 Mortality Table, and for interest, the applicable interest rate, as in effect for the month preceding the payment date, used by the Pension Benefit Guaranty Corporation to value immediate annuities in connection with the termination of a single-employer plan under the Employee Retirement Income Security Act of 1974, as amended. - 5 - (e) PRERETIREMENT DEATH BENEFIT. In the event of the Executive's termination of employment on account of his death, NAC Re and NAC agree to pay to the Executive's surviving spouse (unless she fails to survive him for at least five days, in which case payment shall be made to the Executive's estate) a death benefit equal to 100% of the cash lump sum payment the Executive would have been entitled to receive pursuant to Section 5(a) or 5(b) above, as the case may be, had the Executive's Retirement occurred on the day before his death and the Executive had immediately elected a cash lump sum payment in accordance with Section 5(d). Such death benefit shall be payable in a cash lump sum as soon as possible after the Executive's death. (f) DEFINITIONS. For purposes of the foregoing, (i) "Retirement" means any separation from employment except due to death or Disability, and (ii) "Average Annual Compensation" means (A) the highest average of the Executive's Base Salary for any 36 calendar month period preceding his separation from employment, times (B) the sum of 1.00 plus the Executive's target AIP bonus percentage at the time of his termination of employment (the sum of which shall in no event be less than 1.45). (g) FUNDING OF SUPPLEMENTAL PENSION OBLIGATION. Payment of the supplemental pension benefits payable under this Section 5 shall be provided through a so-called "Rabbi Trust" established by the Companies for the benefit of the Executive, which the Companies and the Executive agree to amend to conform to this Agreement. The Companies agree to maintain assets of the trust at a level at least equal to the lump sum value (determined in accordance with Section 5(d)) of the Executive's supplemental pension benefits, assuming Retirement were to occur on the first day of the calendar year. In the event of the Executive's Disability, the Rabbi Trust shall be augmented to a level sufficient at any time to fund the payment of Disability benefits plus the present value of the lump sum payment which the Executive could elect. If the Executive has not elected a lump sum, the Companies agree to maintain the assets of the trust at a level at least equal to the lump sum value (determined in accordance with section 5(d)) of the future payments. To the extent the assets held in the trust exceed the foregoing lump sum value plus the amount, if any, required to be contributed to the trust pursuant to Section 8(c)(iii) below, the excess amount shall be returned to the Companies in proportion to their respective contribution or shall remain in the trust for the contingency of future increases in the lump sum value, as elected by the Companies. 6. OPTIONS. (a) OPTION EXERCISE ACCELERATION. Upon termination of the Executive's employment by NAC Re or NAC without Cause or due to death, Disability, Retirement, or by the Executive for Good Reason (as defined in Section 7(d) below), or upon the occurrence of a Change in Control, all outstanding stock options to purchase NAC Re common stock held by the Executive for at least six months (the "Stock Options") shall become immediately exercisable in full and shall remain exercisable for one year thereafter, or for such longer period provided pursuant to the terms of the option grants (but not beyond the respective maximum terms of such options), after which, if not exercised, they will be automatically forfeited. - 6 - (b) CASH-OUT OF OPTIONS. In the event that as a result of a Change in Control NAC Re common stock ceases to be traded on a national securities exchange, each of the Executive's Stock Options shall automatically be converted into the right to receive, no later than five days after the NAC Re common stock ceases to be so traded, a cash amount equal to the difference between the exercise price of each such Stock Option and the Market Value (as defined below), multiplied by the number of shares of NAC Re common stock with respect to which the Stock Option is exercisable. For purposes of this Section 6(b), Market Value means (i) in the event the Change in Control is the result of a tender offer or exchange offer, the cash and fair market value of any security or property paid for each share of NAC Re common stock in such tender offer or exchange offer, and (ii) in all other cases, the highest sale price of NAC Re common stock on the national securities exchange on which such stock is traded during the 90-day period preceding the Change in Control. (c) CHANGE IN CONTROL. For purposes of this Agreement, a "Change in Control" shall mean a change in control of NAC Re of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not NAC Re is then subject to such reporting requirement; provided that, without limitation, such a Change in Control shall be deemed to have occurred if (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as determined for purposes of Regulation 13D-G under the Exchange Act as currently in effect), directly or indirectly, of securities of NAC Re representing 30% or more of the combined voting power of NAC Re's then outstanding securities; (ii) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director, whose election to the Board or nomination for election to the Board by NAC Re's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; (iii) the stockholders of NAC Re approve a merger or consolidation of NAC Re with any other corporation, other than a merger or consolidation which would result in the holders of the voting securities of NAC Re outstanding immediately prior thereto holding immediately thereafter securities representing more than 80% of the combined voting power of the voting securities of NAC Re or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the stockholders of NAC Re approve a plan of complete liquidation of NAC Re or an agreement for the sale or disposition by NAC Re of all or substantially all of NAC Re's assets. 7. TERMINATION. (a) DEATH OR DISABILITY. The Executive's employment pursuant to this Agreement shall terminate automatically upon the Executive's death. NAC Re and NAC may terminate the Executive's employment pursuant to this Agreement, after having established the Executive's Disability, by giving to the Executive notice of their intention in accordance with Section 7(e). For purposes of this Agreement, "Disability" means any physical or mental - 7 - condition which is likely to render the Executive incapable of performing his duties under this Agreement on a full-time basis for the entire ensuing six-month period or any physical or mental condition which in fact renders the Executive incapable of performing his duties under the Agreement on a full-time basis for a period of six consecutive months. Any question as to the existence of the Executive's incapacity upon which the Executive and NAC Re or NAC cannot agree shall be determined by a qualified independent physician selected by the Companies and approved by the Executive (or, if the Executive is unable to grant such approval, by any adult member of the Executive's immediate family or his legal representative), said approval not to be unreasonably withheld. The determination of such physician made in writing to NAC Re and NAC and to the Executive shall be final and conclusive for all purposes of this Agreement. (b) VOLUNTARY TERMINATION. Notwithstanding anything in this Agreement to the contrary, the Executive may voluntarily terminate his employment. In the event of any termination pursuant to this Section 7(b), the Executive shall have no further obligation to NAC Re or NAC under this Agreement, except as provided in Section 11. NAC Re's and NAC's obligations to the Executive in the event he voluntarily terminates are described in Section 8 below. (c) CAUSE. NAC Re and NAC may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means: (i) the conviction of the Executive of a felony under state or federal law, or the equivalent under foreign law, unless in any such case the Executive performed such act in good faith and in a manner NAC Re or NAC reasonably believed to be in or not opposed to the best interests of NAC Re or NAC; (ii) the material breach by the Executive of the provisions of this Agreement, in which event NAC Re will give the Executive written notice specifying such breach and permitting the Executive to cure such breach within 30 days of receipt of such notice; or (iii) a determination or request by the Insurance Department of the State of New York (or other insurance department have jurisdiction), after a hearing by such authority at which or during which the Executive and his counsel were given a reasonable opportunity to be heard, that the Executive should be removed or disqualified from acting as an officer of NAC Re and/or NAC. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to the Executive and opportunity for the Executive, together with the Executive's counsel, to be heard - 8 - before the Board), finding that in the good faith opinion of the Board the Executive was guilty of conduct set forth above in this Section 7(c) and specifying the particulars thereof in detail. (d) GOOD REASON. The Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means (i) a material reduction in the nature or scope of the Executive's authority, duties, powers or functions as exist immediately prior to the commencement of the Employment Period, except as contemplated herein; (ii) the assignment to the Executive of any duties which are not commensurate with or at least as prestigious as the Executive's duties and responsibilities as contemplated by this Agreement; (iii) a material breach by NAC Re or NAC of any of the provisions of this Agreement; or (iv) following a Change in Control, a voluntary termination for any reason upon six months written notice to NAC Re. (e) NOTICE OF TERMINATION. Any termination by NAC Re or NAC for Cause or Disability or by the Executive for Good Reason shall be communicated by a written notice (a "Notice of Termination") to the other party hereto given in accordance with Section 14(c). A "Notice of Termination" shall set forth in reasonable detail the events giving rise to such termination. (f) DATE OF TERMINATION. For purposes of this Agreement, the term "Date of Termination" means (i) in the case of termination for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of his duties during such 30-day period); (ii) in the case of termination for Cause, a date specified in the Notice of Termination (which shall not be less than 30 days nor more than 60 days from the date such Notice of Termination is given); (iii) in the case of any other termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be; and (iv) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. Notwithstanding the foregoing, if within 30 days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the grounds for termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been taken); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, NAC Re and NAC shall continue to pay the Executive his full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Base Salary, AIP and LIP bonus awards, other incentive compensation, and any other welfare and fringe benefits describe in Section 4), until the dispute is finally resolved in accordance with this Section 7(f). 8. OBLIGATIONS OF NAC RE AND NAC UPON TERMINATION. - 9 - (a) DEATH, DISABILITY, CAUSE AND VOLUNTARY TERMINATION. If the Executive's employment is terminated by NAC Re or NAC during the Employment Period by reason of the Executive's death, Disability or for Cause, or is voluntarily terminated by the Executive (other than on account of Good Reason), NAC Re and NAC shall have no further obligation to the Executive or the Executive's legal representatives under this Agreement other than (i) those obligations earned for Base Salary and payments under the AIP and LIP that have accrued at the Date of Termination (the "Accrued Obligations") and (ii) those obligations expressly provided under any of the plans referred to in Section 4(h) or pursuant to Sections 4(e), 5 and 6 (the "Benefit Rights"). The Accrued Obligations shall be paid to the Executive or the Executive's estate, as the case may be, in a lump sum in cash within 15 days of the Date of Termination. (b) PRIOR TO CHANGE IN CONTROL, TERMINATION BY NAC RE OR NAC OTHER THAN FOR CAUSE OR DISABILITY AND TERMINATION BY THE EXECUTIVE FOR GOOD REASON. (i) LUMP SUM PAYMENTS. If during the Employment Period and prior to a Change in Control, NAC Re or NAC terminates the Executive's employment other than for Cause or Disability, or the Executive terminates his employment for Good Reason, NAC Re and NAC shall pay to the Executive in a lump sum in cash within 15 days after the Date of Termination the sum of the following amounts: (A) the Accrued Obligations and (B) an amount equal to (1) the Executive's Base Salary plus the AIP and LIP target bonus opportunities (which shall in no event be less than 105% of Base Salary) for the year which includes the Date of Termination multiplied by (2) the unexpired term of the Employment Period. For purposes of this Section 8(b)(i), the unexpired term of the Employment Period shall be expressed in whole years and any fractional period thereof calculated on a 365-day basis. (ii) DISCHARGE OF NAC RE'S AND NAC'S OBLIGATIONS. NAC Re and NAC shall have no further obligations to the Executive in respect of any termination described in this Section 8(b), other than for the Benefit Rights. (c) FOLLOWING CHANGE IN CONTROL, TERMINATION BY NAC RE OR NAC OTHER THAN FOR CAUSE OR DISABILITY AND TERMINATION BY THE EXECUTIVE FOR GOOD REASON. (i) LUMP SUM PAYMENTS. If during the Employment Period and following a Change in Control, NAC Re or NAC terminates the Executive's employment other than for Cause or Disability, or the Executive terminates his employment for Good Reason, NAC Re and NAC shall pay to the Executive in a lump sum in cash within 15 days after the Date of Termination the sum of (A) the Accrued Obligations and (B) the amount described in Section 8(b)(i)(B) above, provided, however, that the sum of the amounts payable under the foregoing Section 8(c)(i)(B) shall in no event be less than 2.99 times the sum of the amounts described in clause (1) of Section 8(b)(i)(B). - 10 - (ii) BENEFITS. Upon any termination described in Section 8(c)(i), the Executive shall be entitled to the amount described in Section (8)(b)(ii). In addition, NAC Re and NAC shall provide or cause to be provided to the Executive for a period of 36 months following such termination continued life, medical and dental insurance benefits at least equal to those which the Executive was receiving or entitled to receive immediately prior to the termination of employment described in Section 8(c)(i). (iii) FUNDING RABBI TRUST. Upon a Change in Control, NAC Re and NAC shall contribute to the Rabbi Trust referred to in Section 5(g) an amount in cash equal to the payments that would be made pursuant to this Section 8(c) in the event the Executive terminated his employment for Good Reason immediately following such Change in Control. (iv) DISCHARGE OF NAC RE'S AND NAC'S OBLIGATIONS. NAC Re and NAC shall have no further obligations to the Executive in respect of any termination described in this Section 8(c), other than for the Benefit Rights. 9. GROSS-UP PAYMENT. In the event that any payments (the "Severance Payments") provided for in this Agreement (including, but not limited to, the rights provided under Section 6 and Section 8) are subject to the tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any successor provision, NAC Re and NAC shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Severance Payments and any federal, state and local income taxes and Excise Tax (including interest and penalties) upon the payment provided for by this Section 9, shall be equal to the Severance Payments. The determination whether any payments made pursuant to this Agreement are subject to the Excise Tax shall be based on the opinion of tax counsel selected by the Executive and reasonably acceptable to NAC Re. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal, state and local income taxes at the highest marginal rate of income taxation applicable to any individual residing in the jurisdiction in which the Executive resides in the calendar year in which the Gross-Up Payment is to be made. In the event that the Excise Tax is subsequently determined to be less than the amount initially determined hereunder, the Executive shall promptly repay to NAC Re and NAC the portion of the Gross-Up Payment attributable to such reduction. In the event that the Excise Tax is subsequently determined to exceed the amount initially determined hereunder, NAC Re and NAC shall promptly make an additional Gross-Up Payment in respect of such excess. - 11 - 10. NO MITIGATION; NO OFFSET. In no event shall the Executive be obligated to seek other employment by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. Any amounts that may be earned by the Executive other than from NAC Re and NAC shall not reduce NAC Re's and NAC's obligation to make any payments hereunder. The amounts payable by NAC Re and NAC hereunder shall not be subject to any right of set-off that NAC Re and NAC may assert against the Executive. 11. NONCOMPETITION. In the case of the Executive's termination of employment pursuant to Section 7(b) without Good Reason, the Executive shall not, until July 1, 2000, (a) engage anywhere within the geographical areas in which the Companies have conducted their business operations as of the date hereof or at any time prior to the Date of Termination, directly or indirectly, alone or as a shareholder, principal, agent, partner, officer, director, employee or consultant of any other organization, in the business of insurance, reinsurance or any other activity conducted by the Companies (the "Designated Industry") in competition with the Companies; (b) divert to any competitor of the Companies in the Designated Industry any customer of the Companies; or (c) solicit or encourage any officer, employee or consultant of the Companies to leave their employ for employment by or with any competitor of the Companies in the Designated Industry; provided, however, that the Executive may invest in stock, bonds, or other securities of any similar business in the Designated Industry (but without otherwise participating in such Designated Industry) if (i) such stock, bonds, or other securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Exchange Act; and (ii) his investment does not exceed, in the case of any class of the capital stock of any one issuer, one percent (1%) of the issued and outstanding shares, or, in the case of other securities, one percent (1%) of the aggregate principal amount thereof issued and outstanding. If at any time the provisions of this Section 11 shall be determined to be invalid or unenforceable, by reason of being vague or unreasonable as to area, duration or scope of activity, this Section 11 shall be considered divisible and shall become and be immediately amended to only such area, duration and scope of activity as shall be determined to be reasonable and enforceable by the court or other body having jurisdiction over the matter; and the Executive agrees that this Section 11 as so amended shall be valid and binding as though any invalid or unenforceable provision had not been included herein. Nothing in this Section 11 shall prevent or restrict the Executive from engaging in any business or industry other than the Designated Industry in any capacity. 12. INDEMNIFICATION. NAC Re and NAC shall indemnify and hold harmless the Executive, his heirs and personal representatives to the fullest extent permitted by applicable law, as now or hereafter in effect, with respect to any acts, omissions or events that occurred while the Executive is or was an employee of NAC Re and NAC or serves or served NAC Re and NAC or any other corporation or other enterprise of any kind in any capacity at the request of NAC Re, NAC or any affiliate of NAC Re or NAC (an "Enterprise"). Without limiting the generality of the foregoing, NAC Re and NAC shall promptly pay, or reimburse the Executive for, (a) all of the Executive's reasonable expenses, including attorneys' fees and court costs, actually and reasonably incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal thereof, to which the Executive may be a party by reason of any - 12 - action taken or failure to act under or in connection with his service for NAC Re, NAC or an Enterprise, and (b) all amounts required to be paid in settlement of or in satisfaction of a judgment in connection with any such action, suit or proceeding; provided, however, that NAC Re and NAC shall not be required to indemnify or hold harmless the Executive, his heirs or personal representatives in any manner whatsoever in the event and to the extent there is a final and nonappealable judgment by a court of competent jurisdiction that the liability incurred by the Executive resulted from his gross negligence, fraud or willful malfeasance. 13. SUCCESSORS. (a) This Agreement is personal to the Executive and, without the prior written consent of NAC Re and NAC, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon NAC Re, NAC and their successors. NAC Re and NAC shall require any successor to all or substantially all of the business and/or assets of NAC Re and NAC, whether direct or indirect, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement. 14. MISCELLANEOUS. (a) APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of New York, applied without reference to principles of conflict of laws. (b) AMENDMENTS. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (c) NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered or mailed to the other party by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Ronald L. Bornhuetter 29 Old Stone Bridge Road Cos Cob, Connecticut 06807 If to NAC Re or NAC: - 13 - NAC Re Corporation One Greenwich Plaza Greenwich, Connecticut 06836-2568 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only when actually received by the addressee. (d) SEVERABILITY. The invalidity or uneforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) WAIVER. Waiver by any party hereto of any breach or default by any other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. (f) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein, and no other agreement, verbal or otherwise, shall be binding as between the parties unless it is in writing and signed by the party against whom enforcement is sought. Upon commencement of the Employment Period, all prior and contemporaneous agreements and understandings between the parties with respect to the subject matter of this Agreement are superseded by this Agreement. (g) CAPTIONS. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. (h) CONSENT TO JURISDICTION. Each of the parties to this Agreement hereby submits to the exclusive jurisdiction of the courts of the State of New York and the Federal courts of the United States of America located in such state solely in respect of the interpretation and enforcement of the provisions of this Agreement, and hereby waives, and agrees not to assert, as a defense in any action, suit or proceeding for the interpretation and enforcement of this Agreement, that it is not subject thereto; that such action, suit or proceeding may not be brought or is not maintainable in said courts; that this Agreement may not be enforced in or by said courts; that its property is exempt or immune from execution; that the suit, action or proceeding is brought in an inconvenient forum; or that the venue of the suit, action or proceeding is improper. Each of the parties agrees that service of process in any such action, suit or proceeding shall be deemed in every respect effective service of process upon it if given in the manner set forth in Section 14(c). (i) LEGAL FEES. The Executive shall be entitled to reimbursement by NAC Re and NAC for all legal fees and expenses reasonably incurred by him in connection with this Agreement (including all such fees and expenses, if any, incurred in contesting or disputing the nature of any termination or in seeking to obtain or enforce any right or benefit provided by - 14 - this Agreement). Such payments, which shall be made on an ongoing basis, rather than at the conclusion of a dispute, shall be made within five days after the Executive submits an invoice or other reasonably appropriate documentation relating thereto to NAC Re or NAC; provided, however, that the Executive hereby agrees to return to NAC Re and NAC any such amounts paid to him with respect to a position taken by the Executive in a contest or dispute, which position is finally determined to be frivolous, either by mutual written agreement of the parties, by a binding arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been taken). IN WITNESS WHEREOF, the Executive has hereunto set his hand and each of NAC Re and NAC have caused this Agreement to be executed in its name on its behalf all as of the day and year first above written. NAC RE CORPORATION By /s/Herbert S. Winokur, Jr. ----------------------------------- Herbert S. Winokur, Jr. Chairman, Compensation Committee NAC REINSURANCE CORPORATION By /s/ Martha G. Bannerman ----------------------------------- Martha G. Bannerman Executive Vice President, General Counsel and Secretary EXECUTIVE /s/ Ronald L. Bornhuetter -------------------------------------- Ronald L. Bornhuetter -15 - EX-10.18 3 EX-10.18 Exhibit 10.18 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT is made as of the 30th day of October, 1996 by NAC Re Corp., a Delaware corporation having its principal office in Greenwich, Connecticut, NAC Reinsurance Corporation, a New York corporation having its principal office in Greenwich, Connecticut (NAC Re Corp. and NAC Reinsurance Corporation being hereinafter sometimes collectively referred to as "Employer"), and Nicholas M. Brown, Jr., a resident of Minnetonka, Minnesota ("Executive"). W I T N E S S E T H WHEREAS, Executive is expected to make major contributions to the business of Employer; WHEREAS, Employer recognizes that Executive is capable of assuming the position of Chief Executive Officer of NAC Reinsurance Corporation; WHEREAS, Employer desires to ensure the continuity of its management and to establish an orderly transition procedure with respect to the positions of Chairman and Chief Executive Officer of NAC Re Corp.; and WHEREAS, Executive is willing to make his services available to Employer and to carry out the duties of Executive's positions and offices, subject to the terms and conditions set forth below. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, Employer and Executive, intending to be legally bound, do hereby agree as follows: 1. CERTAIN DEFINED TERMS. In addition to terms defined elsewhere herein, the following terms shall have the following meanings when used in this Agreement with initial capital letters: (a) "Annual Incentive Plan" shall mean the Annual Incentive Plan of the Employer. (b) "Board" shall mean the Board of Directors of NAC Re Corp. (c) "Cause" shall mean Executive's willful breach of duty in the course of his employment or Executive's habitual neglect of his employment duties in a manner that materially impacts the business or reputation of Employer unless such breach or neglect is of a nature that reasonably can be corrected and is fully corrected within sixty (60) days following written notice to Executive in respect thereof. For purposes of this Section 1(c), no act, or failure to act, on -2- Executive's part shall be deemed "willful" unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that his action or omission was in the best interest of Employer. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Executive was guilty of conduct set forth above in this Section 1(c) and specifying the particulars thereof in detail. (d) "Change in Control" shall mean a change in control of NAC Re Corp. of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not NAC Re Corp. is then subject to such reporting requirements; provided that, without limitation, such a Change in Control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as determined for purpose of Regulation 13D-G under the Exchange Act as currently in effect), directly or indirectly, of securities of NAC Re Corp. representing thirty percent (30%) or more of the combined voting power of the then outstanding securities of NAC Re Corp.; or (ii) during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director, whose election to the Board or nomination for election to the Board by the stockholders of NAC Re Corp. was approved by a vote of at least two-thirds (2/3) of the directors then still in office either who were directors at the beginning of such period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; or (iii) the stockholders of NAC Re Corp. approve a merger or consolidation of NAC Re Corp. with any other corporation, other than a merger or consolidation which would result in the holders of the voting securities of NAC Re Corp. outstanding immediately prior thereto holding immediately thereafter securities representing more than eighty percent (80%) of the combined voting power of the voting securities of NAC Re Corp. or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the stockholders of NAC Re Corp. approve a plan of complete liquidation of NAC Re Corp. or an agreement for the sale or disposition by NAC Re Corp. of all or substantially all the assets of NAC Re Corp. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended. (f) "Common Stock" shall mean the common stock, ten cents (10CENTS) par value, of NAC Re Corp. -3- (g) "Compensation" shall mean the sum of (i) Executive's annual base salary pursuant to Section 5(a) hereof and (ii) Executive's annual bonus at target pursuant to Section 5(c) hereof. (h) "Compensation Committee" shall mean the Compensation Committee of the Board. (i) "Disability" shall mean permanent and total disability as such term is defined under Section 22(e)(3) of the Code. Any question as to the existence of Disability upon which Executive and Employer cannot agree shall be determined by a qualified independent physician selected by Executive (or, if Executive is unable to make such selection, such selection shall be made by any adult member of Executive's immediate family or Executive's legal representative), and approved by Employer, said approval not to be unreasonably withheld. The determination of such physician made in writing to Employer and to Executive shall be final and conclusive for all purposes of this Agreement. (j) "Effective Date" shall mean November 11, 1996. (k) "Final Average Compensation" shall mean Executive's highest average annual Compensation earned during any consecutive thirty-six (36) complete months (or lesser actual period of receiving Compensation) during the period of sixty (60) complete months (or lesser actual period of receiving Compensation) immediately preceding Executive's termination of employment with Employer. (l) "Good Reason" shall mean the occurrence, without Executive's express written consent, of any of the following circumstances unless, in the case of paragraphs (i), (vi), (vii), or (viii), such circumstances are fully corrected within sixty (60) days following Executive's written notice to Employer in respect thereof: (i) the assignment to Executive of any duties inconsistent with his offices and status as of the Effective Date (or any offices and status to which Executive has been promoted at the time), or a substantial diminution in the nature or status of Executive's responsibilities; (ii) the failure of Executive to be appointed, on the schedules set forth in Sections 2 and 3 hereof, Chief Executive Officer of NAC Re Corp. or Chairman of the Board; (iii) a reduction in Executive's annual base salary as in effect on the Effective Date, on March 1, 1997 or as the same may be increased from time to time; -4- (iv) in the event of a Change in Control, any circumstances in which Executive is not Chief Executive Officer of a publicly traded, independent reinsurance company; (v) the relocation of the office in which Executive is located on the Effective Date to a location more than forty-five (45) miles therefrom; (vi) a material reduction in the aggregate benefits and compensation provided to Executive under Employer's employee pension and welfare benefit plans and incentive compensation, stock option and stock ownership plans; (vii) the failure of Employer to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 11 hereof; or (viii) any purported termination of Executive's employment by Employer for Cause for which Executive is not given notice of such termination in accordance with Section 1(c) hereof; for purposes of this Agreement, no such purported termination shall be effective. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. In the event of a termination of Executive's employment by Executive for Good Reason, Executive shall provide Employer not less than sixty (60) days' notice of such termination. Such notice shall indicate that such termination is for Good Reason and shall set forth in reasonable detail the facts and circumstances claimed to provide the basis for Executive's termination for Good Reason. If within sixty (60) days following the date on which such notice of termination is given, Employer notifies Executive that a dispute exists concerning the grounds for termination, the date of termination for determining the timing of any obligation under this Agreement shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties or by arbitration pursuant to Section 15 hereof; provided, further, that the date of termination shall be extended by a dispute only if such notice of dispute is given in good faith and Employer pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, Employer will continue to pay Executive his full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, annual base salary) and continue Executive as a participant in all other incentive compensation, benefit and insurance plans in which Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Section 1(1), unless resolution of such dispute is unreasonably delayed by Executive. Amounts paid under this Section 1(1) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. -5- (m) "Grant Date" shall mean the date on which the Board or the Compensation Committee approves the grant of a non-qualified option to purchase Common Stock (or a stock appreciation right) or the award of restricted Common Stock to Executive. (n) "Long-Term Incentive Plan" shall mean the Long-Term Incentive Plan. (o) "Term" shall mean the term provided in Section 4 hereof. 2. EMPLOYMENT; DUTIES; MANAGEMENT SUCCESSION. Commencing on the Effective Date, Executive shall be employed as President and Chief Operating Officer of NAC Re Corp. and as President and Chief Executive Officer of NAC Reinsurance Corporation, and Executive agrees to carry out and perform all the duties and responsibilities that are normally performed and pertinent to these positions and that may be communicated to him from time to time by the Chief Executive Officer of NAC Re Corp. or by the Board. Between the Effective Date and December 1999, Executive shall work in cooperation with the Chief Executive Officer of NAC Re Corp. to effect the orderly transition of responsibility as Chief Executive Officer of NAC Re Corp. to Executive, as shall be determined by mutual agreement; provided, however, that nothing contained in this Agreement shall confer upon Executive any right to be appointed Chief Executive Officer of NAC Re Corp., to be retained as President and Chief Operating Officer of NAC Re Corp. or as President and Chief Executive Officer of NAC Reinsurance Corporation, or to be retained as an employee of Employer in any other capacity. 3. DIRECTORSHIPS. As soon as practicable following the Effective Date, Executive shall be appointed to the Boards of Directors of NAC Reinsurance Corporation, Greenwich Insurance Company, and Indian Harbor Insurance Company. As soon as practicable following the Effective Date, Executive shall also be appointed to the Board, subject to re-election to such position on the Board by vote of the shareholders of NAC Re Corp. Not later than July 2000, Executive shall be considered for election as Chairman of the Board. 4. TERM. The term of this Agreement shall commence on the Effective Date and shall continue through December 31, 2001, unless terminated earlier pursuant to Section 7 hereof. 5. COMPENSATION AND BENEFITS DURING THE TERM. (a) BASE SALARY: Executive's annual base salary shall be FOUR HUNDRED SEVENTY-FIVE THOUSAND DOLLARS ($475,000.00), shall be FIVE HUNDRED THOUSAND DOLLARS ($500,000.00) effective March 1, 1997, and shall be reviewed annually commencing March 1998 in conjunction with normal salary administration. Any increases will be based on Executive's achievement of goals, performance of Employer and prevailing competitive -6- conditions. Upon any appointment of Executive as Chief Executive Officer of NAC Re Corp., Executive's annual base salary shall be increased based upon prevailing competitive conditions. (b) SIGN-ON BONUS: On January 15, 1997, Executive shall be paid TWO HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($225,000.00) in cash and shall be issued five thousand (5,000) shares of Common Stock upon payment of their par value. (c) ANNUAL BONUS OPPORTUNITY: During the Term, Executive shall participate in the Annual Incentive Plan at a target of 45% (0-90% opportunity) of annual base salary earned during the year. The first opportunity for a bonus under the Annual Incentive Plan shall be in March 1998, based on 1997 performance in accordance with the terms of the Annual Incentive Plan and the determination of the Compensation Committee. (d) LONG-TERM BONUS OPPORTUNITY: During the Term, Executive shall participate in the Long-Term Incentive Plan at a target of 55% (0-110% opportunity) of average annual base salary earned during the applicable performance period; provided, however, that for any performance period in which Executive has not received annual base salary during the entire period, annual base salary during any partial year shall be annualized, and provided, further, that the target shall be 60% (0-120% opportunity) of annual base salary upon any appointment of Executive as Chief Executive Officer of NAC Re Corp. The first opportunity for a bonus under the Long-Term Incentive Plan shall be in March 1998, based on 1995-1997 performance in accordance with the terms of the Long-Term Incentive Plan. (e) INITIAL STOCK OPTION GRANT: (i) On or prior to the Effective Date, Executive shall be granted stock appreciation rights, which will automatically convert into non-qualified options on the second anniversary of the Effective Date, ("SARs") with respect to one hundred thousand (100,000) shares of Common Stock, twenty percent (20%) of which shall vest on each of the five (5) anniversaries of the Grant Date, provided that Executive is employed by Employer on those dates. The exercise price of the foregoing SARs shall be the fair market value of a share of Common Stock on the Grant Date. (ii) On or prior to the Effective Date, Executive shall also be granted SARs with respect to fifty thousand (50,000) shares of Common Stock, which will vest on the sixth anniversary of the Grant Date; provided, however, that fifty percent (50%) shall vest on the date, if earlier, on which there has occurred an increase of twelve percent (12%) or more in the price of a share of Common Stock from such price on the Grant Date, and fifty percent (50%) shall vest on the date, if earlier, on which there has occurred an increase of twenty-five (25%) or more in the price of a share of Common Stock from such price on the Grant Date; provided, -7- however, that Executive is employed by Employer on such dates and provided, further, that such vesting in no case shall occur prior to six (6) months following the Grant Date. The exercise price of the foregoing SARs shall be the fair market value of a share of Common Stock on the Grant Date. (iii) Options or SARs granted pursuant to this Agreement shall be subject to the terms and conditions of the Company's stock option plans and shall expire, unless exercised, ten (10) years following the Grant Date. Vested SARs may not be exercised while Executive is employed by Employer prior to conversion of SARs to non-qualified options. (f) ANNUAL STOCK OPTION GRANT: Executive shall be given the opportunity to be granted additional options or SARs with respect to shares of Common Stock with an underlying market value at the time of grant of 100-125% of Executive's annual base salary at the time of grant in accordance with and commencing upon Employer's next regular grant of options following the Effective Date; provided, however, that nothing contained in this Section 5(f) shall confer upon Executive any right to such additional options or SARs. (g) RESTRICTED STOCK GRANT: On or prior to the Effective Date, Executive shall be granted fifteen thousand (15,000) shares of restricted Common Stock, one-third (1/3) of which shall vest on the date on which there has occurred an increase of fifteen percent (15%) or more in the price of a share of Common Stock from the price on the Grant Date, one-third (1/3) of which shall vest on the date on which there has occurred an increase of thirty percent (30%) or more in the price of a share of Common Stock from the price on the Grant Date, and one-third (1/3) of which shall vest on the date on which there has occurred an increase of forty-five percent (45%) or more in the price of a share of Common Stock from the price on the Grant Date; provided, however, that Executive is employed by Employer on such dates and provided, further, that such vesting in no case shall occur prior to six (6) months following the Grant Date. On or prior to the Effective Date, Executive also shall be granted five thousand (5,000) shares of restricted Common Stock, twenty percent (20%) of which shall vest on each of the five (5) anniversaries of the Grant Date; provided, however, that Executive is employed by Employer on such dates. (h) RETIREMENT BENEFIT: (i) If Executive retires from employment with Employer on or after attaining age fifty-five (55), Executive shall be paid a lifetime annual retirement benefit, commencing within thirty (30) days following the date of such retirement, equal to fifty percent (50%) of Executive's Final Average Compensation, reduced by benefits from any defined benefit pension plans maintained by Employer and any defined benefit pension plans maintained by any previous employers. Any retirement benefit that is payable prior to age sixty (60) shall be reduced by five percent (5%) per year to reflect its expected period of payment. The benefit will be paid to -8- Executive for his lifetime and, upon his death, fifty percent (50%) of his benefit will be paid to his surviving spouse, if any, for her lifetime. (ii) If Executive terminates employment with Employer prior to attaining age fifty-five (55), Employer shall provide Executive with a benefit equal to that which he would have received under the NAC Re Corp. Benefits Equalization Plan had four (4) years been added to his actual service with Employer, such benefit being reduced by his actual benefit under the NAC Re Corp. Benefits Equalization Plan and the NAC Re Corp. Retirement Plan. In the event of Executive's death prior to attaining age fifty-five (55), a benefit shall be paid to the Executive's surviving spouse, if any, as provided under the terms of the NAC Re Corp. Benefits Equalization Plan and the NAC Re Corp. Retirement Plan, with credit for the four (4) additional years of service as contemplated in the preceding sentence. (iii) No benefit shall be payable pursuant to this Section 5(h) if Executive's employment is terminated for Cause, if Executive terminates employment prior to attaining age fifty-five (55) without Good Reason, or if Executive shall violate any of the provisions of Section 8 hereof. (iv) The administration and interpretation of the benefit payable pursuant to this Section 5(h) shall be determined by the independent actuary of the Employer, whose interpretations and decisions shall be final and binding on all persons. (i) RELOCATION: Employer shall relocate Executive to the Greenwich, Connecticut area in accordance with the relocation policy attached hereto. In addition, Employer shall pay to Executive a mortgage subsidy of two percent (2%), for a term not to exceed five (5) years, on a home mortgage loan of up to seven hundred fifty thousand dollars ($750,000). Employer shall pay to Executive, with respect to any payments in connection with relocation that are subject to federal, state or local taxation, an additional amount so that Executive shall incur no such taxes with respect to such payments. (j) PENSION AND WELFARE BENEFIT PROGRAMS: Executive shall be entitled to participate, on a basis and to the extent consistent with Executive's senior executive position, in any employee pension or welfare benefit plan, employee stock purchase plan and other so-called fringe benefit programs from time to time in effect for the benefit of employees of Employer generally and/or for any group of employees of which Executive is a member, provided that Executive meets the eligibility requirements of any such plan or program. -9- (k) OTHER EXECUTIVE BENEFITS: During the Term, Employer shall (i) provide Executive with an automobile of a make and model commensurate with Executive's position and shall pay all costs of insurance, maintenance and operation for such automobile; (ii) provide Executive with reasonable financial planning and tax services; and (iii) reimburse Executive for reasonable club dues and initiation fees at a club of Executive's choice which is important to the conduct of the business of Employer and which is used for business purposes. 6. OTHER ACTIVITIES. During the Term, Executive is expected to devote to Employer's business his full business time and attention so as to assure full and efficient performance of Executive's duties hereunder. During the Term, Executive shall not, without Employer's prior written consent, engage or participate, directly or indirectly, in any other business as a sole proprietor, partner, employee, officer, shareholder, trustee, advisor or consultant, or accept appointment or election as a director or in any other fiduciary or honorary capacity in any other business, venture or project; provided, however, that nothing in this Agreement shall preclude Executive from devoting nonbusiness time and efforts to charitable, social and civic matters to the extent that such activities do not interfere with Executive's performance of his duties under this Agreement and provided, further, however, that Executive shall not be precluded from making investments as described in the proviso to the first sentence of Section 8(a) hereof. 7. TERMINATION. Executive's employment under this Agreement may be terminated by Employer at any time without prior notice, subject to the requirement of prior notice if such termination is for Cause. Executive's employment under this Agreement may be terminated by Executive upon not less than three (3) months' prior notice, other than in the case of termination on account of Executive's unforeseen health problems, Disability or Good Reason. If Executive's employment under this Agreement is terminated, the following provisions shall apply: (a) TERMINATION OF EMPLOYMENT BY EMPLOYER FOR A REASON OTHER THAN CAUSE OR BY EXECUTIVE FOR GOOD REASON: If, before the end of the Term, Employer terminates Executive's employment for a reason other than Cause, or if Executive terminates employment on account of Good Reason, Employer shall pay to Executive, within thirty (30) days following the date of such termination, a lump sum amount equal to three (3) times the sum of (i) Executive's then annual base salary plus (ii) the amounts that would be paid to Executive under the Annual Incentive Plan and the Long-Term Incentive Plan at Executive's targets for the year or performance period, as the case may be, during which such termination occurs. (b) TERMINATION OF EMPLOYMENT BY EMPLOYER FOR CAUSE, BY EXECUTIVE OTHER THAN FOR GOOD REASON OR ON ACCOUNT OF DEATH OR DISABILITY: If Executive's employment is terminated by Employer for Cause, by Executive other than for Good Reason, or on account of Executive's death or Disability, Executive, or his estate in the case of his death, shall receive from Employer -10- within thirty (30) days following the date of termination a lump sum amount equal to Executive's annual base salary which is accrued but unpaid as of the date of termination. (c) TERMINATION OF EMPLOYMENT AFTER A CHANGE IN CONTROL BY EMPLOYER OTHER THAN FOR CAUSE OR BY EXECUTIVE FOR GOOD REASON: If, after a Change in Control, Executive's employment is terminated by Employer other than for Cause or by Executive for Good Reason, Employer shall pay to Executive, within thirty (30) days following such termination, a lump sum amount equal to the sum of (i) Executive's annual base salary which is accrued but unpaid as of the date of termination plus (ii) the portions, if any, of amounts under the Annual Incentive Plan and Long-Term Incentive Plan that were earned by Executive but unpaid as of the date of termination plus (iii) 2.99 times the sum of (A) Executive's then annual base salary plus (B) the amounts that would be paid to Executive under the Annual Incentive Plan and the Long-Term Incentive Plan at Executive's targets (as such targets were in effect prior to the Change in Control) for the year or performance period, as the case may be, during which such termination occurs, and Executive shall vest in all issued but unvested restricted Common Stock and granted but unvested options to acquire Common Stock then held by Executive. If an excise tax under Section 4999 of the Code or any comparable tax that is in excess of ordinary federal income taxes, as may be in effect from time to time, is imposed on amounts paid to Executive hereunder, then Executive shall be reimbursed by Employer in an amount equal to such excise tax and any further tax due on amounts reimbursed hereunder within five (5) days after Executive's submission to Employer of a notice of Executive's payment thereof. (d) NON-EXCLUSIVITY OF RIGHTS: Nothing in this Agreement shall prevent or limit Executive's present or future participation in any benefit, bonus, incentive, or other plan or program provided by Employer for which Executive may qualify, nor shall this Agreement limit or otherwise affect rights that Executive may have under any stock option or other agreements with Employer. Amounts or benefits that are vested or that Executive is otherwise entitled to receive under any plan or program of Employer at, or subsequent to, the date of termination of Executive's employment shall be payable in accordance with such plan or program; provided, however, that any compensation and benefits received by Executive pursuant to this Agreement shall be in lieu of (but, if necessary to give effect to this provision, shall be reduced by) any and all compensation and benefits that Executive is entitled to receive or may become entitled to receive under any reduction in force or severance pay plan, program or practice that Employer now has in effect or may hereafter put into effect and shall be applied toward satisfying any severance pay and benefits required under federal or state law to be paid or provided to Executive. -11- 8. NON-COMPETITION; CONFIDENTIAL INFORMATION. (a) Executive agrees that, during the Term, and if Executive's employment is terminated by Executive other than for Good Reason, for a period of eighteen (18) months following the date of termination of this Agreement, Executive shall not (i) engage anywhere within the geographical areas in which NAC Re Corp. and its subsidiaries (for purposes of this Section 8, the "NAC Re Group") have conducted their business operations as of the Effective Date or at any time prior to the date of termination of Executive's employment, directly or indirectly, alone or as a shareholder, principal, agent, partner, officer, director, employee or consultant of any other organization, in the business conducted by the NAC Re Group as a material component of its operations including, without limitation, insurance or reinsurance (the "Designated Industry") in direct competition with the NAC Re Group; provided, however, that it is acknowledged and agreed that this Section 8(a)(i) does not prohibit Executive from engaging in the insurance business where the Executive is only incidentally engaged in any activity which is a material component of the operations of the NAC Re Group; (ii) divert to any competitor of the NAC Re Group in the Designated Industry any customer of the NAC Re Group; or (iii) solicit or encourage any officer, employee or consultant of the NAC Re Group to leave their employ for employment by or with any competitor of the NAC Re Group in the Designated Industry; provided, however, that Executive may invest in stocks, bonds, or other securities of any similar business in the Designated Industry (but without otherwise participating in such Designated Industry) if (A) such stocks, bonds, or other securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Exchange Act; and (B) his investment does not exceed, in the case of any class of the capital stock of any one issuer, one percent (1%) of the issued and outstanding shares, or, in the case of other securities, one percent (1%) of the aggregate principal amount thereof issued and outstanding. If at any time the provisions of this Section 8 shall be determined to be invalid or unenforceable, by reason of being vague or unreasonable as to area, duration or scope of activity, this Section 8 shall be considered divisible and shall become and be immediately amended to only such area, duration and scope of activity as shall be determined to be reasonable and enforceable by the court or other body having jurisdiction over the matter; and Executive agrees that this Section 8, as so amended, shall be valid and binding as though any invalid or unenforceable provision had not been included herein. Nothing in this Section 8 shall prevent or restrict Executive from engaging in any business or industry other than the Designated Industry in any capacity. (b) Executive shall not at any time after the date of termination of employment reveal to anyone other than authorized representatives of the NAC Re Group, or use for Executive's own benefit, any trade secrets, customer information or other information that has been designated as confidential by the NAC Re Group or is understood by Executive to be confidential without the written authorization of the Board in each instance, unless such information is or becomes available -12- to the public or is otherwise public knowledge or in the public domain for reasons other than Executive's acts or omissions. (c) If Executive breaches any of the obligations under this Section 8, Employer shall have no further compensation or benefit obligations pursuant to this Agreement or pursuant to the Annual Incentive Plan or the Long-Term Incentive Plan but shall remain obligated for compensation and benefits for periods prior to such breach as provided in any other plans, policies or practices then applicable to Executive in accordance with the terms thereof. Executive hereby acknowledges that Employer's remedies at law for any breach of Executive's obligations under this Section 8 would be inadequate, and Executive and Employer agree that, in addition to any other remedies provided for herein or otherwise available at law, temporary and permanent injunctive relief may be granted in any proceeding which may be properly brought by Employer to enforce the provisions of this Section 8 without the necessity of proof of actual damages. 9. NO MITIGATION OBLIGATION; NO SET-OFF OR COUNTERCLAIMS: In no event shall Executive be obligated to seek other employment by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement. Any amounts that may be earned by Executive other than from Employer shall not reduce Employer's obligation to make any payments hereunder. The amounts payable by Employer hereunder shall not be subject to any right of set-off that Employer may assert against Executive. 10. TAXES. Employer may withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as Employer is required to withhold pursuant to any law, regulation or ruling. Executive shall bear all expense of, except as otherwise contemplated herein, and be solely responsible for, all federal, state, local or foreign taxes due with respect to any payment received hereunder. 11. SUCCESSORS AND BINDING AGREEMENT. (a) Employer will require any successor, whether direct or indirect, by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of Employer, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that Employer is required to perform it. Failure of Employer to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from Employer in the same amount and on the same terms as Executive would be entitled hereunder if Executive had terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date on which Executive's employment with Employer was terminated. As used in this Agreement, -13- "Employer" shall include any successor to Employer's business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive dies while any amount is still payable hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there is no such designee, to Executive's estate. 12. NOTICES. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, provided that all notices to Employer shall be directed to the attention of the Office of the General Counsel of NAC Re Corp., or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt: Employer: NAC Re Corp. Office of the General Counsel One Greenwich Plaza P.O. Box 2568 Greenwich, CT 06386-2568 Executive: Nicholas M. Brown, Jr., 5600 Bristol Lane Minnetonka, Minnesota 55343 13. GOVERNING LAW. The validity, interpretation, construction, and performance of this Agreement shall be governed by and construed in accordance with the substantive laws of the State of New York, without giving effect to the principles of conflict of laws of such State, to the extent not preempted by applicable federal law. -14- 14. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 15. ARBITRATION. Any dispute arising out of or in any way relating to this Agreement or Executive's employment with Employer, including, without limitation, any claims Executive may assert under the Age Discrimination in Employment Act of 1967, as amended, shall be resolved by arbitration in Connecticut through the Stamford, Connecticut office of the American Arbitration Association in accordance with the Model Employment Arbitration Procedures of the American Arbitration Association except to the extent such provisions are modified as hereinafter provided. The arbitration proceeding shall be conducted by three (3) arbitrators. Executive and Employer shall each designate one (1) arbitrator, each of whom shall be an attorney admitted to practice in one or more states who has ten (10) or more years of experience in employment matters, and the arbitrators so selected shall thereafter designate a third arbitrator (who shall be a member of the National Academy of Arbitrators) by mutual agreement. The arbitrators shall have no authority to modify any provision of this Agreement or to award a remedy for a dispute involving this Agreement other than a benefit specifically provided under or by virtue of this Agreement. The decision of the arbitrators shall be final and binding on Employer and Executive. Employer and Executive shall each pay their own legal fees associated with arbitration proceedings hereunder, but the fees of the arbitrators and any other costs associated with such arbitration proceedings shall be shared equally. 16. MERGER. This Agreement expresses in full the understanding of Employer and Executive, and all promises, representations, understandings, arrangements and prior agreements with regard to Executive's employment by Employer are merged herein. 17. WAIVER. Failure by either party hereto to insist upon strict adherence to any one or more of the covenants or terms contained herein, on one or more occasions, shall not be construed to be a waiver nor deprive such party of the right to require strict compliance with the same thereafter. 18. AMENDMENTS. No amendments hereto, or waivers or releases of obligations or liabilities hereunder, shall be effective unless agreed to in writing by all parties hereto. 19. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be executed effective as of the date first written above. NAC Re Corp. By:/S/RONALD L. BORNHUETTER -------------------------------------- Its Chairman and Chief Executive Officer NAC Reinsurance Corporation By:/S/RONALD L. BORNHUETTER -------------------------------------- Its Chairman and Chief Executive Officer /S/NICHOLAS M. BROWN, JR. ----------------------------------------- Nicholas M. Brown, Jr. EX-10.19 4 EX-10.19 Exhibit 10.19 FORM OF EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT is made as of the 31st day of October, 1996 by NAC Re Corp., a Delaware corporation having its principal office in Greenwich, Connecticut, NAC Reinsurance Corporation, a New York corporation having its principal office in Greenwich, Connecticut (NAC Re Corp. and NAC Reinsurance Corporation being hereinafter sometimes collectively referred to as "Employer"), and _______________, a resident of ____________________, _______________ ("Executive"). W I T N E S S E T H WHEREAS, Executive has been and continues to be employed by Employer in a management capacity; WHEREAS, Executive is expected to continue to make major contributions to the business of Employer; WHEREAS, Employer desires to reinforce and encourage the continued attention and dedication of members of Employer's management, including Executive, to its responsibilities on behalf of Employer; and WHEREAS, Executive is willing to make his services available to Employer and to carry out the duties of Executive's position and office, subject to the terms and conditions set forth below. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, Employer and Executive, intending to be legally bound, do hereby agree as follows: 1. CERTAIN DEFINED TERMS. In addition to terms defined elsewhere herein, the following terms shall have the following meanings when used in this Agreement with initial capital letters: (a) "Board" shall mean the Board of Directors of NAC Re Corp. (b) "Cause" shall mean Executive's willful breach of duty in the course of his employment or Executive's habitual neglect of his employment duties in a manner that materially impacts the business or reputation of Employer unless such breach or neglect is of a nature that reasonably can be corrected and is fully corrected within sixty (60) days following written notice to Executive in respect thereof. For purposes of this Section 1(b), no act, or failure to act, on Executive's part shall be deemed "willful" unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that his action or omission was in the best interest of Employer. Notwithstanding the foregoing, Executive shall not be deemed to have -2- been terminated for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Executive was guilty of conduct set forth above in this Section 1(b) and specifying the particulars thereof in detail. (c) "Change in Control Agreement" shall mean the letter agreement between NAC Re Corp. and Executive dated ______________. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended. (e) "Common Stock" shall mean the common stock, ten cents (10 ) par value, of NAC Re Corp. (f) "Compensation Committee" shall mean the Compensation Committee of the Board. (g) "Disability" shall mean permanent and total disability as such term is defined under Section 22(e)(3) of the Code. Any question as to the existence of Disability upon which Executive and Employer cannot agree shall be determined by a qualified independent physician selected by Executive (or, if Executive is unable to make such selection, such selection shall be made by any adult member of Executive's immediate family or Executive's legal representative), and approved by Employer, said approval not to be unreasonably withheld. The determination of such physician made in writing to Employer and to Executive shall be final and conclusive for all purposes of this Agreement. (h) "Effective Date" shall mean October 30, 1996. (i) "Good Reason" shall mean the occurrence, without Executive's express written consent, of any of the following circumstances unless, in the case of paragraphs (i), (iv), (v), (vi) and (vii), such circumstances are fully corrected within sixty (60) days following Executive's written notice to Employer in respect thereof: (i) the assignment to Executive of any duties inconsistent with his offices and status as of the Effective Date (or any offices and status to which Executive has been promoted at the time), or a substantial diminution in the nature or status of Executive's responsibilities; (ii) a reduction by Employer in Executive's annual base salary as in effect on the Effective Date or as the same may be increased from time to time; (iii) the relocation of the office in which Executive is located on the Effective Date to a location more than forty-five (45) miles therefrom; -3- (iv) a material reduction in the aggregate benefits and compensation provided to Executive under Employer's employee pension and welfare benefit plans and incentive compensation, stock option and stock ownership plans; (v) the failure of Employer to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 10 hereof; (vi) any purported termination of Executive's employment by Employer for Cause for which Executive is not given notice of such termination in accordance with Section 1(b) hereof; for purposes of this Agreement, no such purported termination shall be effective; or (vii) failure by Employer to honor its obligations to indemnify Executive as established by the corporate bylaws or by the applicable provisions of law. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. In the event of a termination of Executive's employment by Executive for Good Reason, Executive shall provide Employer not less than sixty (60) days' notice of such termination. Such notice shall indicate that such termination is for Good Reason and shall set forth in reasonable detail the facts and circumstances claimed to provide the basis for Executive's termination for Good Reason. If, within sixty (60) days following the date on which such notice of termination is given, Employer notifies Executive that a dispute exists concerning the grounds for termination, the date of termination for determining the timing of any obligation under this Agreement shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties or by arbitration pursuant to Section 14 hereof; provided, further, that the date of termination shall be extended by a dispute only if such notice of dispute is given in good faith and Employer pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, Employer will continue to pay Executive his full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, annual base salary) and continue Executive as a participant in all other incentive compensation, benefit and insurance plans in which Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Section 1(i), unless resolution of such dispute is unreasonably delayed by Executive. Amounts paid under this Section 1(i) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. (j) "Term" shall mean the term provided in Section 3 hereof. 2. EMPLOYMENT; DUTIES. Commencing on the Effective Date, Executive shall be employed as Executive Vice President of NAC Reinsurance Corporation, and Executive agrees to carry out and perform all the duties and responsibilities that are pertinent to such position or that may be communicated to Executive from time to time by a duly authorized officer of Employer, or by the Board; provided, however, that nothing contained in this Agreement shall -4- confer upon Executive any right to be retained as Executive Vice President of NAC Reinsurance Corporation or to be retained as an employee of Employer in any other capacity. 3. TERM. The term of this Agreement shall commence on the Effective Date and shall continue through October 30, 1999, unless terminated earlier pursuant to Section 6 hereof; provided, however, that this Agreement shall terminate upon the occurrence of a "Change in Control," as such term is defined in the Change in Control Agreement. 4. COMPENSATION AND BENEFITS DURING THE TERM. (a) BASE SALARY: Executive's annual base salary as in effect on the Effective Date shall continue to be Executive's annual base salary following the Effective Date, subject to review annually in conjunction with normal salary administration. Any increases will be based on Executive's achievement of goals, performance of Employer and prevailing competitive conditions. (b) INCENTIVE PLANS; STOCK OPTIONS; BENEFIT PLANS: During the Term, Executive shall continue to be provided the opportunity to participate in any incentive plans, to be granted options to acquire shares of Common Stock, and to participate, on a basis and to the extent consistent with Executive's senior executive position, in any employee pension or welfare benefit plan, employee stock purchase plan and other so-called fringe benefit programs from time to time in effect for the benefit of employees of Employer generally and/or for any group of employees of which Executive is a member, provided that Executive meets the eligibility requirements of any such plan or program. 5. OTHER ACTIVITIES. During the Term, Executive shall devote to Employer's business his full business time and attention so as to assure full and efficient performance of Executive's duties hereunder. During the Term, Executive shall not, without Employer's prior written consent, engage or participate, directly or indirectly, as a sole proprietor, partner, employee, officer, shareholder, trustee, advisor or consultant, or accept appointment or election as a director or in any other fiduciary or honorary capacity in any other business, venture or project in the Designated Industry, as such term is defined in Section 7(a) hereof; provided, however, that nothing in this Agreement shall preclude Executive from devoting nonbusiness time and efforts to charitable, social and civic matters to the extent that such activities do not interfere with Executive's performance of his duties under this Agreement or from engaging in any investment or business pursuits on nonbusiness time outside of the Designated Industry, as such term is defined in Section 7(a) hereof. 6. TERMINATION. Executive's employment under this Agreement may be terminated by Employer at any time without prior notice, subject to the requirement of prior notice if such termination is for Cause. Executive's employment under this Agreement may be terminated by Executive upon not less than thirty (30) days' prior notice, other than in the case of termination on account of Executive's unforeseen health problems, Disability or Good Reason. If Executive's employment under this Agreement is terminated, the following provisions shall apply: -5- (a) TERMINATION OF EMPLOYMENT BY EMPLOYER FOR A REASON OTHER THAN CAUSE OR BY EXECUTIVE FOR GOOD REASON: If, before the end of the Term, Employer terminates Executive's employment for a reason other than Cause, or if Executive terminates employment on account of Good Reason, Employer shall pay to Executive, within thirty (30) days following the date of such termination, a lump sum amount equal to the sum of (i) Executive's annual base salary which is accrued but unpaid as of the date of termination plus (ii) the portions, if any, of amounts under the Annual Incentive Plan of Employer and the Long-Term Incentive Plan of Employer that were earned by Executive but unpaid as of the date of termination plus (iii) the greater of (A) two (2) times the sum of Executive's then annual base salary plus the amounts that would be paid to Executive under the Annual Incentive Plan of Employer and the Long-Term Incentive Plan of Employer at Executive's targets (as such targets were in effect at the time of termination) for the year or performance periods, as the case may be, during which such termination occurs or (B) the number of years and partial years (expressed in twelfths) remaining in the Term on the date of termination times the sum of Executive's then annual base salary plus the amounts that would be paid to Executive under the Annual Incentive Plan of Employer and the Long-Term Incentive Plan of Employer at Executive's targets (as such targets were in effect at the time of termination) for the year or performance period, as the case may be, during which such termination occurs; in addition, Executive shall vest in all issued but unvested restricted Common Stock and granted but unvested options to acquire Common Stock then held by Executive. (b) TERMINATION OF EMPLOYMENT BY EMPLOYER FOR CAUSE, BY EXECUTIVE OTHER THAN FOR GOOD REASON OR ON ACCOUNT OF DEATH OR DISABILITY: If Executive's employment is terminated by Employer for Cause, by Executive other than for Good Reason, or on account of Executive's death or Disability, Executive, or his estate in the case of his death, shall receive from Employer within thirty (30) days following the date of termination a lump sum amount equal to Executive's annual base salary which is accrued but unpaid as of the date of termination. (c) NON-EXCLUSIVITY OF RIGHTS: Nothing in this Agreement shall prevent or limit Executive's present or future participation in any benefit, bonus, incentive, or other plan or program provided by Employer for which Executive may qualify, nor shall this Agreement limit or otherwise affect rights that Executive may have under any stock option or other agreements, including the Change in Control Agreement, with Employer. Amounts or benefits that are vested or that Executive is otherwise entitled to receive under any plan or program of Employer at, or subsequent to, the date of termination of Executive's employment shall be payable in accordance with such plan or program; provided, however, that any compensation and benefits received by Executive pursuant to this Agreement shall be in lieu of (but, if necessary to give effect to this provision, shall be reduced by) any and all compensation and benefits that Executive is entitled to receive or may become entitled to receive under any reduction in force or severance pay plan, program or practice that Employer now has in effect or may hereafter put into effect and shall be applied toward satisfying any severance pay and benefits required under federal or state law to be paid or provided to Executive. 7. NON-COMPETITION; CONFIDENTIAL INFORMATION. -6- (a) Executive agrees that, if Executive's employment is terminated by Executive other than for Good Reason, for a period of twelve (12) months following the date of termination of this Agreement, Executive shall not (i) divert to any competitor of NAC Re Corp. and its subsidiaries (for purposes of this Section 7, the "NAC Re Group") in the business conducted by the NAC Re Group as a material component of its operations including, without limitation, insurance or reinsurance (the "Designated Industry") any customer as of the date of termination of the NAC Re Group; or (ii) solicit or encourage any officer, employee or consultant of the NAC Re Group to leave their employ for employment by or with any competitor of the NAC Re Group in the Designated Industry. If at any time the provisions of this Section 7 shall be determined to be invalid or unenforceable, by reason of being vague or unreasonable as to area, duration or scope of activity, this Section 7 shall be considered divisible and shall become and be immediately amended to only such area, duration and scope of activity as shall be determined to be reasonable and enforceable by the court or other body having jurisdiction over the matter; and Executive agrees that this Section 7, as so amended, shall be valid and binding as though any invalid or unenforceable provision had not been included herein. (b) Executive shall not at any time after the date of termination of employment reveal to anyone other than authorized representatives of the NAC Re Group, or use for Executive's own benefit, any trade secrets, customer information or other information that has been designated as confidential by the NAC Re Group or is understood by Executive to be confidential without the written authorization of the Board in each instance, unless such information is or becomes available to the public or is otherwise public knowledge or in the public domain for reasons other than Executive's acts or omissions. (c) If Executive materially breaches any of the obligations under this Section 7, Employer shall have no further compensation or benefit obligations pursuant to this Agreement or pursuant to the Annual Incentive Plan of Employer or the Long-Term Incentive Plan of Employer but shall remain obligated for compensation and benefits for periods prior to such breach as provided in any other plans, policies or practices then applicable to Executive in accordance with the terms thereof. Executive hereby acknowledges that Employer's remedies at law for any breach of Executive's obligations under this Section 7 would be inadequate, and Executive and Employer agree that, in addition to any other remedies provided for herein or otherwise available at law, temporary and permanent injunctive relief may be granted in any proceeding which may be properly brought by Employer to enforce the provisions of this Section 7 without the necessity of proof of actual damages. 8. NO MITIGATION OBLIGATION; NO SET-OFF OR COUNTERCLAIMS: In no event shall Executive be obligated to seek other employment by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement. Any amounts that may be earned by Executive other than from Employer shall not reduce Employer's obligation to make any payments hereunder. The amounts payable by Employer hereunder shall not be subject to any right of set-off that Employer may assert against Executive. 9. TAXES. Employer may withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as Employer is required to withhold pursuant to any law, -7- regulation or ruling. Executive shall bear all expense of, and be solely responsible for, all federal, state, local or foreign taxes due with respect to any payment received hereunder. 10. SUCCESSORS AND BINDING AGREEMENT. (a) Employer will require any successor, whether direct or indirect, by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of Employer, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that Employer is required to perform it. Failure of Employer to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from Employer in the same amount and on the same terms as Executive would be entitled hereunder if Executive had terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date on which Executive's employment with Employer was terminated. As used in this Agreement, "Employer" shall include any successor to Employer's business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive dies while any amount is still payable hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there is no such designee, to Executive's estate. 11. NOTICES. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, provided that all notices to Employer shall be directed to the attention of the Office of the General Counsel of NAC Re Corp., or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt: Employer: NAC Re Corp. Attn: General Counsel One Greenwich Plaza P.O. Box 2568 Greenwich, CT 06386-2568 Executive: ___________________________________ -8- ___________________________________ ___________________________________ 12. GOVERNING LAW. The validity, interpretation, construction, and performance of this Agreement shall be governed by and construed in accordance with the substantive laws of the State of New York, without giving effect to the principles of conflict of laws of such State, to the extent not preempted by applicable federal law. 13. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. ARBITRATION. Any dispute arising out of or in any way relating to this Agreement or Executive's employment with Employer, including, without limitation, any claims Executive may assert under the Age Discrimination in Employment Act of 1967, as amended (the "ADEA"), shall be resolved by arbitration in Connecticut through the Stamford, Connecticut office of the American Arbitration Association in accordance with the Model Employment Arbitration Procedures of the American Arbitration Association except to the extent such provisions are modified as hereinafter provided. The arbitration proceeding shall be conducted by three (3) arbitrators. Executive and Employer shall each designate one (1) arbitrator, each of whom shall be an attorney admitted to practice in one or more states who has ten (10) or more years of experience in employment matters, and the arbitrators so selected shall thereafter designate a third arbitrator (who shall be a member of the National Academy of Arbitrators) by mutual agreement. The arbitrators shall have no authority to modify any provision of this Agreement or to award a remedy for a dispute involving this Agreement other than a benefit specifically provided under or by virtue of this Agreement; provided, however, that with respect to a dispute covered by the ADEA, the arbitrators shall have the authority to provide all remedies available under such statute. The decision of the arbitrators shall be final and binding on Employer and Executive. Employer and Executive shall each pay their own legal fees associated with arbitration proceedings hereunder, but the fees of the arbitrators and any other costs associated with such arbitration proceedings shall be shared equally; provided, however, that the arbitrators shall be authorized to award all such legal fees, arbitration fees and costs to a prevailing party. 15. MERGER. With the exception of the Change in Control Agreement, this Agreement expresses in full the understanding of Employer and Executive, and all promises, representations, understandings, arrangements and prior agreements with regard to Executive's employment by Employer are merged herein. 16. WAIVER. Failure by either party hereto to insist upon strict adherence to any one or more of the covenants or terms contained herein, on one or more occasions, shall not be construed to be a waiver nor deprive such party of the right to require strict compliance with the same thereafter. -9- 17. AMENDMENTS. No amendments hereto, or waivers or releases of obligations or liabilities hereunder, shall be effective unless agreed to in writing by all parties hereto. 18. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be executed effective as of the date first written above. NAC Re Corp. By:_____________________________ Its Chairman NAC Reinsurance Corporation By:_____________________________ Its Chairman ________________________________ ________________________________ EX-11 5 EX-11 EXHIBIT 11-1 NAC RE CORP. AND SUBSIDIARIES COMPUTATION OF PRIMARY EARNINGS PER SHARE (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) PRIMARY EARNINGS PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENTS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 ------------- ------------ ------------ Net income applicable to common stock................................. $70,520 $62,824 $35,612 ------------- ------------ ------------ ------------- ------------ ------------ Average number of common shares outstanding........................... 18,854,789 17,708,733 17,603,372 Add: Assumed exercise of dilutive stock options (1)........................ 239,925 385,729 291,335 ------------- ------------ ------------ Common stock and common stock equivalents outstanding................. 19,094,714 18,094,462 17,894,707 ------------- ------------ ------------ ------------- ------------ ------------ Net income per share assuming dilution of common stock equivalents.... $3.69 $3.47 $1.99 ------------- ------------ ------------ ------------- ------------ ------------
- ------------------------ (1) Computed utilizing the average market price of the common stock for the period. NOTE: The 5.25% Convertible Subordinated Debentures due 2002 are not considered to be common stock equivalents in the calculation of primary earnings per share. EXHIBIT 11-2 NAC RE CORP. AND SUBSIDIARIES COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) FULLY DILUTED EARNINGS PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENTS
YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Net income applicable to common stock................................... $70,520 $62,824 $35,612 After-tax add back of convertible debenture interest and amortization... 3,504 3,504 3,504 ------------ ------------ ------------ Adjusted net income..................................................... $74,024 $66,328 $39,116 ------------ ------------ ------------ ------------ ------------ ------------ Average number of common shares outstanding............................. 18,854,789 17,708,733 17,603,372 Add: Assumed exercise of dilutive stock options(1)........................... 242,125 424,524 429,897 Assumed conversion of convertible debentures(2)......................... 2,020,202 2,020,202 2,020,202 ------------ ------------ ------------ Common stock and common stock equivalents outstanding................... 21,117,116 20,153,459 20,053,471 ------------ ------------ ------------ ------------ ------------ ------------ Fully diluted earnings per share........................................ $3.51 $3.29 $1.95 ------------ ------------ ------------ ------------ ------------ ------------
- ------------------------ (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. EX-12 6 EX-12 EXHIBIT 12 NAC RE CORP. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1996 1995 1994 1993 1992 ---------- --------- --------- --------- --------- Earnings: Operating income before income taxes............................ $89,036 $78,821 $42,290 $49,497 $3,606 ---------- --------- --------- --------- --------- Add back fixed charges: Interest expense................................................ 21,976 15,381 14,196 13,324 4,538 Amortization of related debt expenses........................... 346 267 258 258 68 Assumed interest component of rent expenses..................... 1,311 1,235 1,099 1,194 1,114 ---------- --------- --------- --------- --------- Total fixed charges........................................... 23,633 16,883 15,553 14,776 5,720 ---------- --------- --------- --------- --------- Adjusted earnings............................................... $112,669 $95,704 $57,843 $64,273 $9,326 ---------- --------- --------- --------- --------- ---------- --------- --------- --------- --------- Ratio of earnings to fixed charges.............................. 4.8 to 1 5.7 to 1 3.7 to 1 4.3 to 1 1.6 to 1 ---------- --------- --------- --------- --------- ---------- --------- --------- --------- ---------
EX-13 7 EXHIBIT 13 Exhibit 13 FINANCIAL HIGHLIGHTS ================================================================================ In Thousands, except per share amounts 1996 1995 % change ================================================================================ Year ended December 31, Net premiums written $574,004 $521,489 10.1% Total revenues 650,241 606,484 7.2 Domestic statutory composite ratio 101.1% 103.1% - Consolidated statutory composite ratio 101.6% 103.7% - Operating income (1) 57,812 45,855 26.1 Per primary share 3.03 2.53 19.8 Per fully diluted share 2.90 2.45 18.4 Net income 70,520 62,824 12.3 Per primary share 3.69 3.47 6.3 Per fully diluted share 3.51 3.29 6.7 Return on stockholders' equity (2) 13.8% 19.7% - - -------------------------------------------------------------------------------- At December 31, Total assets $2,745,631 $2,462,131 11.5% Claims reserves 1,513,345 1,292,415 17.1 Long-term debt 299,934 299,927 - Stockholders' equity 553,269 511,756 8.1 Per primary share 30.06 26.65 12.8 Per fully diluted share 31.95 28.78 11.0 Statutory surplus 663,867 615,433 7.9 ================================================================================ (1) Excludes net realized investment gains, net of tax. (2) Based on net income divided by stockholders' equity as reported at the beginning of the year. Table of Contents ====================================================== Financial Highlights 1 ------------------------------------------------------ Summary of Growth 2 ------------------------------------------------------ Letter to Our Shareholders 3 ------------------------------------------------------ Introducing Nicholas M. Brown, Jr. 9 ------------------------------------------------------ Executive Dialogue 10 ------------------------------------------------------ Financial Review * Financial Reporting Responsibility 16 * Report of Independent Actuaries 18 * Report of Independent Auditors 19 * Management's Discussion and Analysis 20 * Eleven Year Financial Summary 30 * Consolidated Financial Statements 32 ------------------------------------------------------ General Information 61 ====================================================== SUMMARY OF GROWTH PERFORMANCE SINCE INCEPTION
In Millions, except per share amounts =================================================================================================================== Income Statement Data Balance Sheet Data ------------------------------------------------------------ -------------------------------------- Net Net Net Return on Premiums Stockholders' premiums investment income (loss) stockholders' per Total equity Statutory written income per share(1) equity(2)(6) employee(3) assets(4)(6) per share(1)(6) surplus ========================================================================================= ======================== Sept. 1985 - - - - - $141.2 $5.40 $26.3 Year Ended: 1985 $26.6 $8.3 $(.19) (4.7)% - 222.7 6.94 74.0 1986 122.7 15.1 .52 7.5 $3.3 443.5 8.41 152.5 1987 154.5 25.3 .68 8.1 2.1 591.5 9.10 163.2 1988 171.4 35.6 1.31 14.0 1.6 705.8 10.38 174.2 1989 192.3 45.5 1.62 15.8 1.7 869.8 11.92 189.0 1990 217.1 51.9 1.57 13.4 1.8 988.8 12.98 197.4 1991 233.0 58.7 2.20 17.2 1.7 1,016.6 15.70 230.0 1992 268.0 65.6 1.23(5) 9.3 2.0 1,596.2 17.35 384.0 1993 336.9 76.6 2.30 13.7 2.2 1,778.9 21.13 406.2 1994 438.2 80.5 1.99 9.5 2.6 1,916.8 18.23 407.0 1995 521.5 89.3 3.47 19.7 2.9 2,462.1 26.65 615.4 1996 574.0 104.3 3.69 13.8 2.8 2,745.6 30.06 663.9 ===================================================================================================================
(1) Per share figures have been restated to reflect the three-for-two stock splits effective in 1989 and 1991. (2) Based on net income divided by stockholders' equity as reported at the beginning of each year. (3) Based on domestic gross premiums written divided by number of domestic employees at the beginning of the year. (4) Prior years reclassified to reflect the adoption of SFAS No. 113 in 1993. (5) In January 1992, the Company's $51.8 million 6.25% Convertible Debentures were converted into 2.4 million shares. (6) The Company adopted SFAS No. 115 at December 31, 1993. As such, all of the Company's fixed maturities and equity securities were classified as "available for sale" and recorded at their fair value. Retroactive application to prior periods is prohibited. 2 LETTER TO OUR SHAREHOLDERS We are pleased to report strong financial and strategic performance in 1996. We achieved our objectives in a competitive and rapidly changing marketplace. Underwriting conditions continued to be difficult in the reinsurance and insurance markets, as capacity remained plentiful, causing some of our competitors to relax their standards to gain market share. Further, the reinsurance landscape changed in 1996 with significant mergers, sales of operations and the entrance of new players in the facultative market. Our seasoned franchise and the fruition of investments made over the last ten years helped NAC Re to flourish despite these demanding conditions. Operating Results Our most gratifying financial achievement for 1996 was a 26% increase in earnings. Operating income, excluding investment gains, reached nearly $58 million, compared with approximately $46 million in 1995. On a primary per share basis, earnings were $3.03, compared with $2.53 per share for 1995. With investment gains of nearly $13 million net of tax or $.66 per share, net income for 1996 rose to more than $70 million or $3.69 per share. While gross premium growth in 1996 was up approximately 5.3% worldwide, net premium growth was strong, up just over 10% from 1995 to $574 million, with contributions from all profit centers. Domestic net premiums written increased 9.6%, well above the average 5% growth achieved by the other domestic property/casualty companies reporting to the Reinsurance Association of America (RAA). Our international operation also had a net premium gain, up more than 14% for the year. Both domestically and internationally, net premium growth was favorably impacted by reductions in ceded premium, principally due to a more cost effective retrocessional program. This helped to offset a $45 million decline in premium from one large client, which resulted from a substantial increase in its retentions. The Company's statutory composite ratio continued to improve in 1996, at 101.1% for domestic operations, compared with 103.1% for 1995 and 101.6% on a consolidated basis, compared to 103.7% last year. This measure of underwriting results has steadily improved in recent years and now outperforms the industry; we expect the top 15 property/casualty companies reporting to the RAA to show an average statutory composite ratio of 103.8%. Stockholders' equity rose to $30.06 per share at the end of 1996, compared with $26.65 per share a year earlier. However, fluctuations in the unrealized appreciation of investments can make stockholders' equity an inconsistent indicator of performance. For example, in 1996, changes in market interest rates resulted in a decline in unrealized appreciation of approximately $.18 per share, which in turn was more than offset by increases in net income. Return on beginning stockholders' equity was 11.3% based on operating income excluding realized gains, and 13.8% based on net income. Profitable Growth When market conditions are competitive, premium growth must be managed cautiously. Our growth strategy emphasizes the quality of the business we write, not the quantity of the premium produced. This requires our underwriters to be discriminating in the clients they seek to reinsure and restrained in the pricing and other terms and conditions they propose. We must also be diligent and consistent in 3 - -------------------------------------------------------------------------------- LETTER TO OUR SHAREHOLDERS enhancing the value we provide to our clients in order to maintain relationships and build new ones. Our success has been strongly influenced by our ability to respond to the needs of our clients without compromising our underwriting quality. Underwriting Quality We are extremely pleased with the sources of our growth in 1996 and the persistence of our staff in adhering to our underwriting standards. We are particularly proud of our high quality client roster, and note that the majority of our domestic treaty and facultative automatic business is derived from our 30 largest clients. This concentration of premium from a relatively small number of cedants has been a consistent and positive characteristic of our book of business. However, we have derived considerable growth from smaller clients as well. In addition, the sources of our revenue are now more balanced, reducing the potential impact of changes in buying habits of any one client. The contribution to our premium base from our 10 largest clients has declined, with no one client responsible for as much as 5% of our business in 1996. Among our top 30 clients, 20 clients each generate from 1% to 3% of our premium, double the number contributing in that range just two years ago. Our marketing effort aggressively seeks to expand business opportunities from clients we know best. Approximately 75% of new business written in 1996 came from existing clients. This success reflects the value derived from long-term client relationships, our reputation for independence and stability, and our proactive efforts to capitalize on changes in the marketplace. Increased opportunities made it easier for us to remain selective while continuing to grow in virtually all lines of business. We have also sought to selectively build our client base, developing new relationships from which large accounts may blossom over time, providing additional diversity and profitability. Approximately 28% of our treaty and facultative automatic growth was generated by new clients in 1996. In addition, we developed many new facultative individual risk clients. We also gain balance and diversity through continued globalization. The commitment we have to a global strategy was fortified in 1996 when the NAC Re Board of Directors convened in London. Board members met many important clients from around the world, and reviewed the progress of our international operation, which currently contributes approximately 10% to our revenue base. Maintaining a selective roster of clients and generating new business opportunities are only two facets of the underwriting quality equation. Without discipline in underwriting analysis, long-term success is sacrificed for short term gains. The discipline we apply to risk evaluation extends equally to new opportunities or renewal business, and without regard to whether the source is a new or a long-term client. The underwriting analysis process at NAC Re is a careful, collaborative effort involving teams of actuaries, claims professionals, attorneys, accountants and underwriting service staff. Their assistance in risk assessment, pricing, and the evaluation of contract terms helps ensure that the underwriting process addresses all facets of risk and exposure. The same rigorous standards for risk evaluation are applied regardless of the size of the opportunity. We strive to take lead positions or co-lead positions in most business we write, and have succeeded in 4 - -------------------------------------------------------------------------------- maintaining that position with the majority of our contracts in 1996. However, even where our participation on an account is expected to be relatively small, we do not rely on the underwriting of other reinsurers. We devote the same degree of diligence as we would for a lead position. As a result of our disciplined underwriting process, we evaluate considerably more business than we ultimately write, particularly in the facultative individual risk area. This is illustrated by our "success ratio," which is the measure of business actually written in relation to the business submitted to us for review. For example, our success ratio for 1996 for facultative individual risk business ranged from 20% to 30%, which was comparable to 1995 levels. This is a further indication of our discipline and resolve in the face of difficult market conditions. Numerous other techniques contribute to our underwriting success. For example, our underwriters have become specialists in particular lines of business and in specific types of risks or perils. Specialization is beneficial as it improves the quality of our underwriting and provides a valued resource to our clients. We also maintain underwriting integrity through an internal underwriting audit process. Teams of underwriters are assembled from treaty departments, facultative offices and our international operation to audit the underwriting efforts of different profit centers and branch locations. We have expanded this effort by utilizing internal financial audit staff and external independent auditors to assess our underwriting process in various locations. This additional oversight helps to validate the integrity of our underwriting process and ensure compliance with internal underwriting controls. We expect our underwriting process and our tools for profitability analysis to be greatly improved in 1997 with the implementation of the underwriting and claims components of "Destiny," our powerful new comprehensive information system. A cross-discipline team of professionals, in partnership with our technology experts and premier outside consultants, has harnessed the latest technology in the design of a system that will enable our staff to increase the precision and efficiency of their risk and exposure analysis. We believe shared, instantaneous access to information will result in even better underwriting decisions and enhanced client service. Customer Intimacy Our profitable growth strategy clearly relies not only on the care with which we underwrite business, but also the degree to which we can attract and retain business. Our success in developing and maintaining relationships depends upon providing a level of stability, innovation and service that will differentiate us in a competitive market. We characterize this undertaking as our customer intimacy strategy. Stability may be measured by the duration of a reinsurer's existence and the degree of its independence, both of which are indicators of long-term commitment to the business, and both of which are, more and more, distinguishing factors for NAC Re. Size is also viewed as a gauge of stability -- as long as it is supported by a quality balance sheet. NAC Re's significant surplus size facilitates access to high-grade cedants, who are increasingly selective when choosing a reinsurer. Statutory surplus at NAC Reinsurance has grown to approximately $665 million, an increase of nearly $50 million in 1996. 5 - -------------------------------------------------------------------------------- LETTER TO OUR SHAREHOLDERS Similarly, NAC Reinsurance International has gained access to the global marketplace due, in part, to the dedication of approximately $140 million in capital to that operation. The A.M. Best rating of "A+" (Superior) shared by all members of the NAC Re group is a clear signal of financial strength and stability, which also facilitates increasing acceptance of our international operation throughout the world. We are also extremely pleased with innovations in the products we offer and the solutions we developed for our clients that distinguished NAC Re in 1996 and paved the way for future growth. For example, we marketed a new property reinsurance product that should assist our clients in simplifying proportional transactions. In several instances, we were successful in cross-marketing treaty and facultative solutions, working closely with our broker partners to meet our clients' needs creatively and completely. Our focus on continuous improvement in service can best be illustrated by several domestic and global initiatives in 1996 to achieve greater proximity to our clients. We moved our Greenwich branch office to New York City, better utilizing our existing resources by locating in the midst of a large client population. Additionally, the maturity of some existing facultative branches and the level of business being generated allowed us to open new offices in Philadelphia and Los Angeles. We launched a full operation in Sydney, which will provide the proximity from which to develop the growing business in Australia and New Zealand. Finally, by maximizing our technology resources, we were able to initiate small, low-cost satellite locations in Dallas, Indianapolis and Madrid. This will allow us to better service our clients and explore new territories, without significant additional investment in infrastructure. Financial Integrity In the risk assumption business, a sound balance sheet and financial integrity depend upon important interdependent factors for long-term success. These include consideration for the aggregation of risk, the maintenance of a sound retrocessional strategy, careful claims reserving, and effective asset management. Naturally, disciplined underwriting provides the critical first step in ensuring financial integrity. While the assessment of risk in each transaction is essential, the process would be incomplete and financial integrity potentially compromised without careful management of the aggregation of risk. We accomplished this through a variety of means, including sophisticated modeling, particularly with respect to property exposures, where large or catastrophic events could impact multiple contracts and products. In 1996, a cross-functional team developed our expertise in aggregation analysis, establishing internally a service that had previously been outsourced. This quantitative modeling proficiency will also facilitate prospective analysis to target new underwriting opportunities more proactively. The quantification of risk also provides the basis for structuring an effective retrocessional program. Ensuring adequate protection while maintaining acceptable margins of profitability is a critical exercise for a strong financial position. At each milestone in surplus growth, we have reevaluated our risk appetite and our tolerance to potential volatility in earnings. In 1996, we were able to expand our overall retrocessional protection, significantly reduce our costs and only moderately increase our retention levels. We will continue to devote resources and attention to the refinement and deployment of our retrocessional strategy. Changes in our retrocessional program in 1997 should enhance our overall profitability. 6 - -------------------------------------------------------------------------------- Ensuring that the balance sheet adequately reflects our ability to make good on our "promise to pay" is essential for the integrity of our financial position. While we consider our claims reserving techniques to be among the best in the industry, we continue to strive for greater certainty through the use of additional improved analytical tools. For example, in 1996 we supplemented our principal actuarial models with new reserving software that tests our methodology with multiple additional models. Our reserving also relies on our claims review process combined with actuarial analysis, and in 1996 we expanded the number of claim audits to more than 100 in order to keep pace with our increasingly diverse book of business. For an outside view, throughout our history the Audit Committee of our Board of Directors has engaged an independent actuarial consulting firm to perform an annual analysis of our reserve adequacy. The independent actuarial opinion can be found on page 18 of this Annual Report. The preservation of a strong balance sheet requires careful investing. Cash and invested assets reached nearly $2 billion in 1996, generating more than $100 million in pretax net investment income, up from $89 million in 1995. Our portfolio continues to be largely composed of fixed maturity securities, 98% of which are investment grade. Through the use of several external investment managers, including separate managers for our portfolio in the United Kingdom, we are able to tap into the expertise and research capabilities of premier asset management firms. Shareholder Return Improvement in shareholder return is our top priority. We were disappointed that our strong financial performance and superior franchise value were not adequately recognized by Wall Street during 1996. Nonetheless, we are encouraged by the generally upward movement in our stock price in the first two months of this year. In addition, we believe the recent upgrade in our A.M. Best Rating to "A+" (Superior) serves to confirm our view of our financial strength. We remain committed to building shareholder value and delivering strong financial results, generated by continued profitable growth. In addition, we will continue to explore and execute capital management strategies to enhance shareholder value. In 1996 we repurchased nearly one million shares of NAC Re Common Stock, and we anticipate that our repurchase authorization will be expanded this year. Further, we plan to redesign aspects of our compensation program to even more closely align management's interest with those of our shareholders. And finally, we plan to more aggressively communicate our accomplishments and business strategy to the investor community. We believe that these actions, executed by a strong management team committed to delivering superior results, will increase the likelihood of the returns that our shareholders deserve. Preparation for the Future While we have continued to build for the future by seeking profitable growth and enhancing the integrity of our balance sheet, our most important long-term investment in 1996 was made in our people. We expanded our worldwide underwriting force by more than 15% in 1996. The individuals who joined our talented staff bring many years of experience in the reinsurance and insurance business, and, together with growing strength in supporting departments, will help forge the new relationships, develop the new products and stimulate the innovative thinking required to generate growth for years to come. 7 - -------------------------------------------------------------------------------- LETTER TO OUR SHAREHOLDERS We also broadened our skills and experience in financial management, expanding the scope of our Finance Division and attracting new professionals with diverse backgrounds and impressive credentials. With this additional leadership, we believe our management depth throughout the organization is unparalleled for a company of our size. Finally, and perhaps most significantly, we began to secure our future by selecting a highly-regarded, experienced and energetic leader to serve as the President and Chief Operating Officer of NAC Re Corp. and Chief Executive Officer of NAC Reinsurance Corporation. Nick Brown joined us in late 1996 with more than 20 years of experience and accomplishments at two insurance industry leaders. His broad perspective and ability to understand our business from our clients' vantage point have already made important contributions to our efforts. I look forward to working with Nick and our executive team as we lead the Company and its outstanding people in seeking growth and prosperity for our shareholders in the years to come. /S/ Ronald L. Bornhuetter Ronald L. Bornhuetter Chairman and Chief Executive Officer March 1997 8 - -------------------------------------------------------------------------------- INTRODUCING NICHOLAS M. BROWN, JR. In late 1996 Nicholas M. Brown, Jr. became NAC Re's new President and Chief Operating Officer, reporting directly to Chairman and Chief Executive Officer Ronald L. Bornhuetter. A seasoned insurance executive, Nick joined NAC Re from the St. Paul Companies, where, as Executive Vice President and Chief Operating Officer of St. Paul Fire and Marine Insurance Company, a $3.5 billion premium operation, he was responsible for all U.S. underwriting business. Nick had previously been President of St. Paul Specialty, a division of specialized commercial operations, including medical liability, construction, surety and technology. Nick's industry experience spans more than 20 years, with 17 of those in various positions at Aetna Life and Casualty Companies. Beginning his career as an actuarial trainee, Nick moved through the ranks, holding a variety of senior positions covering almost all aspects of the property/casualty business. A Delaware native, Nick has a B.A. summa cum laude in mathematics from the University of Delaware and an M.A. in economics and finance from Trinity College. He is a fellow of the Casualty Actuarial Society, and has, in his career, served on a variety of industry and not-for-profit boards and associations. Commenting on his appointment at NAC Re, Nick said, "I am pleased and proud to have been selected to join NAC Re at what I view as a time of great challenge and opportunity. Our industry is in the midst of dramatic change, and thanks to diligent past management by Ron and the NAC Re Board, this Company is extremely well-positioned to thrive in the years to come. I look forward to contributing to our future, while helping the Company grow in the global marketplace carefully, intelligently and profitably." 9 - -------------------------------------------------------------------------------- EXECUTIVE DIALOGUE Ronald L. Bornhuetter, NAC Re's Chairman and CEO, and Nicholas M. Brown, Jr., NAC Re's new President and COO, discuss the state of the market and NAC Re's opportunities for profitable growth. Ron and Nick take a close look at the reasons for NAC Re's success and talk about leading the Company beyond its year 2000 goals and into the next millennium. Current insurance and reinsurance market conditions Ron Bornhuetter: During the past year competition and consolidation defined the reinsurance marketplace. Domestic reinsurance premium growth slowed to 3.7% in the first nine months, only slightly ahead of the primary market. Despite severe price pressures, reported industry composite ratios and earnings improved over a strong 1995 year. While many of the larger reinsurers enjoyed better than average results, NAC Re significantly outperformed industry averages with nearly double the premium growth, a lower combined ratio, and record earnings. Rapid industry consolidation distinguished the reinsurance sector in 1996, with five significant reinsurers leaving the industry in one year through mergers and other transactions. We anticipate additional departures as the flight to quality creates a clearer distinction between strong, independent reinsurers and the rest of the pack. With each departure comes potential clients seeking more stable partners and appropriate diversity among their approved reinsurers. Insurers respond to consolidation by upgrading their reinsurer lists. NAC Re leverages industry changes by attracting top notch people and seeking new business. Nick Brown: Primary insurers face competitive pricing conditions and consolidation challenges similar to those for reinsurers. Loss costs in 1996 outgrew premium gains, with analysts predicting more of the same in 1997. Reinsurers can be somewhat insulated by writing most business on an excess of loss basis, so loss experience is not as correlated to their clients' results. Typically, reinsurers suffer more from severity issues than the frequency of events, such as the number of smaller catastrophes that plagued primary insurers in 1996. Premier insurers are managing these market pressures by tempering growth targets and controlling expenses. Nearly all carriers are squeezing more productivity out of their resources. Many companies are also carving out specialized niches, where barriers to entry are high and premium dollars are comparatively stable. These developments have major implications for reinsurers as they affect the structure and stability of reinsurance programs, and the amount of reinsurance purchased. Selecting reinsurers Ron Bornhuetter: Fundamental shifts in reinsurance purchases are underway in response to changes in the insurance and reinsurance industry. Many large and midsize insurers are raising their retentions or deductibles, shrinking their traditional treaty programs while opting for more selective and less costly use of facultative protections. In contrast, specialty and other insurers new to their markets are securing more comprehensive reinsurance protection from unexpected loss activity. The ongoing consolidation among reinsurers adds another element of uncertainty for insurers, causing many to seek more stable reinsurers in their restructured programs. Reinsurers having the strengths of financial security, global treaty and facultative capabilities, large limits capacity, superior underwriting skills, and a value-added approach will thrive in this changing, competitive market. We also increasingly see the reinsurance buyer factoring 10 - -------------------------------------------------------------------------------- the independence of its reinsurer into the buying decision. These are the reinsurers that will attract the best business and meet the needs of insurers and their intermediaries searching for a few, good long-term partners. Nick Brown: Only a handful of reinsurers demonstrate the financial strength and varied capabilities Ron identified, and they alone benefit from this environment of consolidation and competition. Reinsurers must have $500 million or more in surplus, as well as proven capacity and reliability, to clear the first bar set by most insurers. Primary insurers are looking for substantially more from their reinsurers -- they need a reinsurer's expertise and value-added service to help them profit in these difficult times. That something extra can be crucial insights on policy forms, rapid quote turnarounds and claim payments, actuarial expertise, or electronic submissions. Any service that helps the insurer compete more effectively and efficiently has value. The reinsurer that delivers this value will differentiate itself from other reinsurers in the top tier. Ron Bornhuetter: What Nick just described is our client intimacy strategy and why it has worked. The outcome of the strategy may be a new property product structured for a core client, technical underwriting assistance on an emerging casualty coverage, or a host of other services. The point is knowing the needs of each client, one at a time, and then tailoring our product and service to meet those needs. We are committed to working with our intermediary partners to deliver the best product and service to each client, and we believe that client intimacy is key to differentiation and success. Nick Brown: A client intimate strategy will continue to make NAC Re a reinsurer of choice. When reassessing their reinsurance needs, insurers look to their most valuable partners first. The reinsurer who can bring solutions and security to the table will grow with the client and share in its success. Executing our long-term strategy Ron Bornhuetter: In 1996 we made tremendous strides toward four strategic goals: profitable growth, global expansion, prudent risk management and customer intimacy. Focusing on profitable growth, we achieved greater depth and breadth in our select client base, while maintaining our underwriting standards. NAC Re underwriters developed more core relationships with intermediaries and ceding companies, bolstering our foundation for future growth. Intensified marketing efforts helped extend our client reach to more regional and specialty carriers. By offering our brokers and clients easy access to our entire range of reinsurance products and services, including our international and niche insurance resources, we find new ways to grow with them and strengthen relationships. Typical of our innovative solutions for clients is a new strategic alliance in the ocean marine business. Ocean marine is a highly specialized market in which NAC Re stands out for its underwriting expertise. Our creative underwriters found a way to partner with another reinsurer to give clients more NAC Re support while satisfying their accumulation concerns. Such innovative thinking should lead to many more years of profitable premium growth. Nick Brown: It is precisely that innovative spirit that attracted me to NAC Re, along with its success and drive. I am impressed to see NAC 11 - -------------------------------------------------------------------------------- EXECUTIVE DIALOGUE Re having grown from a startup to a major reinsurer with an impressive market presence, diversified lines of business, a seasoned facultative network, and expanding locations throughout the world. I had an opportunity to join NAC Re at a key point in its history: while committed to consistent execution of a long-term strategy to ensure further growth and expansion, we are in a position to enjoy the harvest of our strategic investments of the past. Profitable growth through diversification Ron Bornhuetter: NAC Re's diversification strategy in which we seek to gain market share by serving more needs of our current clients and consistently add new clients, has worked well in the international marketplace. NAC Re International attained 15% premium growth in 1996, generated from new clients and from U.S. clients abroad. In 1996, we began writing facultative business from our London base. We also launched operations in Australia and Spain. Our cedants are now spread from the United Kingdom to Australasia to South America, wherever growing markets need reinsurance. Our international underwriters share the view that their worldwide marketplace is as competitive as Nick and I see in the U.S., but I am bullish on profitable growth. Our strategy of taking large shares and influencing contract terms has started to pay off in the global arena as effectively as it has domestically. The professional underwriting and service trademark of NAC Re has helped us withstand competitive pressures. Casualty expertise, another NAC Re hallmark, serves us well as foreign liability systems perceptibly evolve along U.S. lines to create exposures that are new to some clients, but all too familiar to us. Nick Brown: More international insurers and reinsurers seem to be reaching the same conclusion as their U.S. counterparts: profitable growth will come by finding the right niches among hundreds of opportunities, or by taking another company's niche or market share. Our international and domestic success has come from building rather than buying business. On the domestic front, several facultative automatics represent successful entries into new business lines. The worldwide insurance market offers nearly $800 billion in property and casualty premium, less than half of that amount residing in the U.S. A single niche can amount to significant and profitable growth. A niche market strategy has worked well for the Greenwich Insurance Company and Indian Harbor Insurance Company, two domestic NAC Re Group members operating in a handful of specialty markets not generally served by our core reinsurance clients. When needed, we step in to provide primary capacity for a core reinsurance client. Future growth will remain similarly focused and specialized, complementing NAC Re's broader strategy. Finding superior, profitable opportunities in a competitive market Ron Bornhuetter: Before I discuss future growth opportunities for NAC Re, I would like to emphasize the word "profitable." Our underwriters do not have written premium targets. In fact, we nonrenewed or walked away from several sizable accounts due to unacceptable price and terms. We will continue to rely on underwriting and claim audits, actuarial pricing analysis, security review, and the other disciplines that helped us become the successful reinsurer we are today. Our tools are more refined, but the fundamentals remain unchanged. Our unwavering discipline may cost us growth, but not profit or opportunities. More 12 - -------------------------------------------------------------------------------- joint marketing efforts with our intermediaries will draw desirable business away from direct reinsurers and generate more opportunities for us to work together. Strategic affiliations providing entry into targeted specialty lines of business, like a new alternative risk program, will enhance treaty growth. NAC Re's facultative foundation now includes underwriters in our newest locations -- Philadelphia, Los Angeles, Dallas and Indianapolis, all producing more business because of that local presence. In 1996, our facultative forces generated a 24% increase in individual risk and automatic premium, confirming our belief that proximity to clients is a key component in profitable growth. Nick Brown: Linking our people with our intermediaries and clients is a vital part of our plan for success. Increased electronic client connections bring us closer to our broker partners and ceding companies, and make it easier to transact business, improving the productivity of all parties to the reinsurance transaction. Deploying our specialist teams and a new research database to deliver value-added expertise to more clients will further differentiate us from competitors. Maximizing cross-selling efforts, so that each underwriter can promote the full array of NAC Re products and capabilities, is furthered by ongoing training and new marketing brochures. All of these initiatives, coupled with technology leadership, puts our entire organization in front of our intermediaries and clients. Building the NAC Re franchise effectively and efficiently Nick Brown: Coming from the primary market where productivity increasingly impacts operational decisions, I was pleased to see NAC Re's heavy emphasis on leveraging our existing resources for growth. Some new facultative offices consist of an underwriter and a laptop linked to the Company's systems and information databases. The new research database housing all of our legal, claims and underwriting research provides NAC Re employees with instant access to answers, eliminating duplicate activities and multiplying the benefits of completed efforts. Ron Bornhuetter: The best example of merging savings with better results is our Destiny system. Many insurers and reinsurers have contracted out the development of new systems and paid huge bills - some are still waiting to see results. In contrast, our technology unit teamed up with business users from around the Company to build the advanced system we all wanted, and they succeeded. Implementation begins in 1997, a year after the first phase began, at a fraction of the cost of outsourcing and with far greater productivity. In addition, electronic data interchange initiatives will enhance productivity gains throughout our organization. Delivering shareholder value Ron Bornhuetter: Nick and I have talked about success in our reinsurance market and delivering value to our clients, but as I mention in the Letter to Shareholders, increasing shareholder value is our paramount concern. In 1996, stock price performance by both NAC Re and the reinsurance sector did not keep pace with the booming insurance and stock market, despite, in the case of NAC Re, strongest earnings ever. Our number one priority is to raise NAC Re above its industry group and reward our shareholders for their long-term commitment to us. We will continue to execute a successful business strategy and build an outstanding franchise that should deliver attractive returns. 13 - -------------------------------------------------------------------------------- EXECUTIVE DIALOGUE We will also employ the capital management tools necessary to achieve our long-term goals. Our new financial management leadership channels a wealth of investment banking and sophisticated corporate transactional experience to the task. The alternatives at our disposal are varied, but I emphasize that capital management strategies will be balanced with our continued adherence to a pristine balance sheet and the reinsurance fundamentals that ultimately generate future returns. Nick Brown: Attention to those fundamentals is crucial to both the strength and consistency of our earnings. Maintaining per occurrence limits on catastrophe covers is one example. During 1996 and early 1997, our underwriters reduced exposed limits on casualty facultative business and refined our retrocessional program to lower cost while improving protection. By better guarding against unwanted surprises, we stay on our course toward greater profitability and improved shareholder returns. Progress toward our year 2000 goals and beyond Ron Bornhuetter: By staying the course, we have achieved success on all four strategic objectives and made our greatest strides in profitability, certainly our most important measure of progress. It is not easy, but the people and tools - -- the NAC Re franchise -- are all in place to make it happen. Nick Brown: I look forward to working with Ron to continue NAC Re's industry leadership in all four targeted areas -- profitable growth, international expansion, prudent risk management and customer intimacy. Our strategy is sound; the tools for execution are here. I will help keep our focus on these goals and our priorities in appropriate order. Ron Bornhuetter: Critical to our success are our talented and loyal employees and their motivation and innovative spirit. The collective underwriting, actuarial, claims, contract, legal and financial expertise that is our hallmark, improves our clients' profitability and strengthens the bonds that make core relationships. With this expertise and a flexible and cutting-edge information system, we have a combination of skills and tools that are unsurpassed. It is all here, and our shareholders, members of our Board, clients, intermediaries, and employees will enjoy the fruits of these efforts for years to come. NAC Re [Logo] Corporation 14 - -------------------------------------------------------------------------------- FINANCIAL REVIEW ----------------------------------- * Financial Reporting Responsibility ----------------------------------- * Report of Independent Actuaries ----------------------------------- * Report of Independent Auditors ----------------------------------- * Management's Discussion and Analysis ----------------------------------- * Eleven Year Financial Summary ----------------------------------- * Consolidated Financial Statements ----------------------------------- 15 - -------------------------------------------------------------------------------- FINANCIAL REPORTING RESPONSIBILITY Management Letter The management of NAC Re has primary responsibility for the integrity and accuracy of the financial information presented in this Annual Report and for making certain that such information presents fairly the financial position and operating results of the Company. The financial statements included in this Annual Report have been prepared in conformity with generally accepted accounting principles, and all financial information presented within this Report is consistent with these financial statements. The accounting systems and internal controls of the Company are designed to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the Company's financial records are reliable for preparing financial statements and maintaining accountability for assets, and that the assets of the Company are safeguarded against losses from unauthorized use or disposition. Management believes that the Company's system of internal control is adequate to accomplish these objectives. Ernst & Young LLP, independent certified public accountants, have audited the financial statements of the Company, and their report is included on page 19. The independent auditors have full access to each member of the Company's management in conducting their audit. Management believes that all representations made to Ernst & Young LLP during the audit were valid and appropriate. The Audit Committee has engaged the services of Tillinghast - Towers Perrin, a leading actuarial consulting firm, to provide an independent opinion as to whether the Company's reserves for claims and claims expenses and assets for reinsurance recoverable on those reserves are fairly stated and represent a reasonable estimate of the Company's ultimate claims reserves and related assets. The Tillinghast report is included on page 18. The Audit Committee of the Board of Directors, composed of directors who are neither officers nor employees of the Company, oversees management's discharge of its financial reporting responsibilities. The activities of the Audit Committee are discussed in the Audit Committee Chairman's letter. Ronald L. Bornhuetter Jerome T. Fadden Thomas A. Weidman Chief Executive Officer Chief Financial Officer Chief Actuarial Officer 16 - -------------------------------------------------------------------------------- Audit Committee Chairman's Letter In 1996 the Audit Committee of the Board of Directors was composed of five independent directors: C. W. Carson, Jr., Chairman; Todd G. Cole; Michael G. Fitt; Daniel J. McNamara; and Wendy J. Strothman. The Committee held four meetings during 1996. The Audit Committee oversees management's discharge of its financial reporting responsibilities and the system of internal controls established by management. In fulfilling its responsibility, the Committee recommended to the Board of Directors the selection of the Company's independent certified public accountants, Ernst & Young LLP. The Audit Committee also engaged the services of independent actuarial consultants, Tillinghast - Towers Perrin. The independent auditors are engaged for the purpose of auditing the Company's year end financial statements and providing timely interim review reports on the quarterly financial statements. The Audit Committee met with the Company's internal auditors and representatives of the independent auditors to review the overall scope and specific plans for their respective audits. In addition, the Company's internal auditors and independent auditors had free access to the Audit Committee throughout the year and had the opportunity, without management present, to discuss the results of their examinations, their evaluations of the Company's internal controls, and the overall quality of the Company's financial reporting. The Committee also reviewed the report of the independent actuarial consultants which states that the Company's reserves for claims and claims expenses and assets for reinsurance recoverable on those reserves are fairly stated and represent a reasonable estimate of the Company's ultimate claims reserves and related assets. The independent actuarial consultants met with the Committee, without management present, to discuss the results of their examination and had, at all times, free access to the Audit Committee. The Committee also reviewed the consolidated financial statements of the Company prior to their distribution to the shareholders. C. W. Carson, Jr. Chairman, Audit Committee 17 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACTUARIES To the Board of Directors of NAC Re Corporation: We have examined the liability for claims and claims expenses of $1,513,345,000 and the asset for reinsurance recoverable on unpaid claims and claims expenses of $406,128,000 recorded in the December 31, 1996 consolidated balance sheet of NAC Re Corporation and subsidiaries (the "Company"). Our examination included a review of assumptions and methods used by the Company and performance of independent projections of the Company's claims and claims expenses and the reinsurance recoverable on unpaid claims and claims expenses using internal and external data and such other procedures as we consider necessary in the circumstances. In making our examination, we relied upon the accuracy and completeness of all loss data and other related information prepared by the Company. The Company uses tabular reserving for workers' compensation case losses that are considered fixed and determinable, and discounts such reserves at a 7% annual rate of return. The amount of discount estimated for December 31, 1996 case reserves are $22,694,000 gross of reinsurance recoverable and $20,765,000 net of reinsurance recoverable. In estimating future loss emergence, we have assumed that historical loss emergence patterns and judgments made are predictive of future developments. Due to the inherent limitations of data and the uncertainty associated with statistical estimates for property and casualty reinsurance, it is possible that the actual payments of unpaid claims and claims expenses could prove to be materially different from the estimated amount contained in the financial statements. Our estimates make no provision for the extraordinary future emergence of new classes of losses, types of loss not sufficiently represented in the Company's historical data base, or losses which are not yet quantifiable. We also have assumed that all reinsurance is valid and collectible, and have not anticipated any contingent liabilities or diminution of asset value that may exist in the event that any of the reinsuring companies might be unable to meet their obligations to the Company under existing reinsurance agreements. With the exception of reinsurance recoverable on unpaid claims and claims expenses, we have not examined the Company's assets and have formed no opinion as to the validity or value of the assets. We have presumed that all reserves are backed by valid assets, which have suitably scheduled maturities and/or liquidity to meet cash flow requirements. In our opinion, the amounts recorded in the consolidated balance sheet as estimated reserves for claims and claims expenses and the assets for reinsurance recoverable on unpaid claims and claims expenses: * are computed in accordance with commonly accepted actuarial methods and are fairly stated in accordance with sound actuarial principles; * are based upon actuarial assumptions which are relevant to policy provisions; and * make a reasonable provision in the aggregate for all unpaid claims and claims expense obligations. Boston, Massachusetts Tillinghast - Towers Perrin February 14, 1997 18 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of NAC Re Corporation: We have audited the consolidated balance sheet of NAC Re Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996 (presented on pages 32 to 60 herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of NAC Re Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. New York, New York Ernst & Young LLP February 4, 1997 19 - -------------------------------------------------------------------------------- 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 The Company's operating income, excluding realized investment gains, was $57.8 million for 1996, $45.9 million for 1995 and $34.8 million for 1994. On a per share basis, operating income, excluding realized investment gains, was $3.03, $2.53, and $1.95 for 1996, 1995 and 1994, respectively. Net income was $70.5 million for 1996, $62.8 million for 1995 and $35.6 million for 1994. On a per share basis, net income was $3.69, $3.47 and $1.99 for 1996, 1995 and 1994, respectively. Net income for 1996 includes after-tax realized investment gains of $12.7 million or $.66 per share compared to $17.0 million or $.94 per share in 1995 and $.8 million or $.04 per share in 1994. Premium Revenues The Company's premium revenue growth for its domestic and international operations are as follows: Gross Premiums Written Percent Change ================================================================================ Dollars in Millions 1996 1995 1994 96/95 95/94 ================================================================================ Domestic: Casualty $ 364.1 $ 354.8 $ 293.4 2.6% 20.9% Property 189.2 179.8 151.6 5.2 18.5 Specialty/other 102.1 92.3 100.2 10.7 (7.9) - -------------------------------------------------------------------------------- Subtotal 655.4 626.9 545.2 4.6 15.0 ================================================================================ International: Casualty 22.8 19.2 14.8 18.1 30.3 Property 38.9 33.9 17.7 14.7 91.6 - -------------------------------------------------------------------------------- Subtotal 61.7 53.1 32.5 15.9 63.7 ================================================================================ Intercompany transactions: Casualty (.7) (.6) (.8) -- -- Property (2.3) (1.5) (1.9) -- -- - -------------------------------------------------------------------------------- Total $ 714.1 $ 677.9 $ 575.0 5.3% 17.9% ================================================================================ Net Premiums Written Percent Change ================================================================================ Dollars in Millions 1996 1995 1994 96/95 95/94 ================================================================================ Domestic: Casualty $ 328.9 $ 311.7 $ 250.1 5.5% 24.6% Property 121.1 111.1 92.2 9.0 20.5 Specialty/other 71.9 53.3 70.1 35.0 (24.1) - -------------------------------------------------------------------------------- Subtotal 521.9 476.1 412.4 9.6 15.4 ================================================================================ International: Casualty 22.1 18.7 14.5 18.4 29.0 Property 30.0 26.7 11.3 12.1 136.7 - -------------------------------------------------------------------------------- Subtotal 52.1 45.4 25.8 14.7 76.2 ================================================================================ Total $ 574.0 $ 521.5 $ 438.2 10.1% 19.0% ================================================================================ 20 - -------------------------------------------------------------------------------- The property/casualty reinsurance marketplace remained competitive in 1996. Rate pressure at the primary level and ample reinsurance capacity precluded reinsurance rate improvements. In addition, larger primary companies increased their retentions. This, in turn, may have pressured certain small to mid-sized reinsurers to reduce prices in a fight for survival. Other reinsurers responded by seeking merger opportunities or by raising capital in order to expand surplus levels and remain attractive to increasingly selective reinsurance purchasers. Mergers by primary companies have resulted, in certain instances, in much larger companies, which has helped to exacerbate the need for increased size and financial strength of reinsurance partners. The dynamics of the marketplace have not only intensified competition but also generated opportunities for growth. For example, the curtailment by some companies of reinsurance operations and mergers among reinsurance companies has dislodged business and created new opportunities for some reinsurers. In addition, continued globalization by U.S. insurers and lingering uncertainty about Lloyd's has generated expanded opportunity in the international marketplace. The Company believes that while market conditions will continue to be competitive in 1997 in all lines of business, opportunities for selective profitable business growth are likely to continue. Worldwide casualty gross premiums written in 1996 totaled $386.2 million, an increase of 3.4% compared to increases of 21.5% in 1995 and 44.3% in 1994. Domestic casualty gross premiums written increased 2.6% in 1996, 20.9% in 1995 and 37.8% in 1994. Growth in casualty business slowed in 1996 due principally to the prolonged soft market conditions and the increased retentions of certain clients, including one large account. Excluding the impact of this large account, casualty gross premiums would have increased approximately 14% over 1995. Casualty growth in 1996 was attributed to increased opportunities from existing facultative and treaty clients, which more than offset increased retention levels. Casualty growth in 1995 came largely from increased participations from existing treaty clients. Casualty growth in 1994 was attributed to several new treaty programs written during the latter half of 1993, increases in participations from existing clients and, to a certain extent, increases in the amount of underlying premium written by ceding company clients. Casualty facultative gross premiums written increased 2.7% to $78.2 million in 1996 compared to $76.1 million in 1995 and $40.5 million in 1994. Worldwide property gross premiums written were $225.8 million in 1996, compared to $212.2 million in 1995 and $167.4 million in 1994. Domestic gross premiums written increased 5.2% in 1996, 18.5% in 1995 and 1.7% in 1994 as a result of the competitive market conditions and increased retentions at the primary level. Property facultative growth contributed to the overall premium gains, including the positive impact of facultative automatic programs, and expansion into international facultative markets, with property facultative gross premiums written increasing by 33.9% in 1996, 36.7% in 1995, and 39.3% in 1994. The Company's focus on certain specialty lines of business, particularly fidelity/surety, aviation and ocean marine business, has resulted in several growth opportunities. Fidelity/surety bond treaty gross premiums were $45.9 million in 1996, $33.3 million in 1995 and $33.5 million in 1994. The growth in 1996 was primarily attributable to a significant new surety treaty. The 1996 and 1995 fidelity/surety premiums continue to be impacted by the weak market conditions and increased retentions by primary companies. The Company's specialization in aviation began in 1992, with the underwriting of a large general aviation program, and expanded in 1994 with a participation in a premier aviation underwriting pool. Due to adverse claim development in the general aviation program, and unsuccessful efforts to adequately correct the pricing, the treaty was not renewed effective July 1, 1994. The decline in premium was somewhat 21 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS offset by premium from an increased participation in the aviation pool in 1995. The Company's aviation business is managed and evaluated on a net basis to most effectively monitor exposures after the "common account" reinsurance protection the Company receives, as discussed below. Net premiums written from aviation business totaled $8.3 million, $10.9 million and $34.3 million for 1996, 1995 and 1994, respectively. In addition to aviation business, the Company writes a limited amount of other primary insurance business, principally through its subsidiary, Greenwich Insurance Company. Primary insurance is expected to be a source of growth in 1997, and currently represents approximately 6% of total net premiums written. Expansion in this area will be focused on highly specialized moderate duration casualty programs that are not competitive with business written by the Company's insurance company clients. The Company expanded its specialty lines to ocean marine business in 1994. Ocean marine gross premiums written totaled $12.7 million in 1996 compared to $6.3 million in 1995. The Company's most significant effort to expand its business production in recent years has been the establishment of a fully licensed reinsurance subsidiary in London, England. Although the international marketplace is extremely competitive, the Company's international operation continues to report steady growth. Gross premiums written were $61.6 million, $53.2 million and $32.5 million for the years 1996, 1995 and 1994, respectively. The Company expects its international business to continue to increase as its international operation expands and matures. Currently no single client generates more than 5% of premium volume. The Company does not believe that the reduction of business assumed from any one client will have a materially adverse effect on its future financial condition or results of operations due to the Company's competitive position in the marketplace and the continuing availability of other sources of business. Ceded premiums recorded for retrocession agreements were $140.1 million, $156.4 million and $136.8 million in 1996, 1995 and 1994, respectively. The Company continually evaluates its retrocessional programs based on market conditions, pricing and its own risk tolerance. Ceded premiums were reduced in 1996 as a result of the soft retrocessional market, coupled with the Company's favorable claim experience and moderate increases in the Company's retention levels. The principal factor increasing ceded premiums in 1995 was the Company's share of the reinsurance protection purchased for the "common account" of all participating companies in the aviation pool and to a lesser extent, the expanded retrocessional protection obtained at marginally higher costs. The Company expects ceded premiums as a percentage of gross premiums written to decline further in 1997, principally due to a favorable pricing environment and through the restructuring of its retrocessional program. Operating Costs and Expenses Claims and claims expenses represent the Company's most significant and uncertain costs. This expense is only an estimate at a given point in time of the amount the insurer or reinsurer expects to pay on the settlement of claims. The Company would generally expect to refine such estimates in subsequent accounting periods based upon facts and circumstances then known. The fact that the Company's exposure to claims generally begins after its clients absorb the first $1 million in claims contributes to the uncertainty of its claims estimates. With this excess coverage, claims occur less frequently than coverages which attach within the first $1 million of claims, thereby providing less credible historical claim experience from which to estimate ultimate claim costs. Further, the Company writes coverage in certain volatile casualty lines of business, such as general liability, directors' and 22 - -------------------------------------------------------------------------------- officers' liability and medical malpractice. Claim activity for these lines is characterized by protracted litigation, the ultimate cost of which can be influenced significantly by future court rulings. Estimates of claims and claims expenses are based in part on a prediction of future events, estimates of future trends in claim severity and frequency and other variable factors. The Company's ability to predict future trends based upon its own historical claim experience is inherently difficult because of its substantial growth in premiums since 1985. Therefore, the Company has supplemented its historical claim experience to a certain extent with claim experience derived from external sources, such as reinsurance industry data, for purposes of evaluating future trends and providing an estimate of ultimate claim costs. As the Company's book of business continues to mature, its own historical claim experience achieves greater credibility and enhances its ability to evaluate future trends. Accordingly, the Company believes its reserving process improves as additional claims experience emerges and could be expected to result in more refined estimates of claims and claims expenses over time. 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 for the Company's domestic reinsurance subsidiary. It also provides an average of actual or estimated composite ratios for the fifteen largest property/casualty reinsurers, ranked by statutory surplus, based on data reported by the Reinsurance Association of America (RAA): 1996 1995 1994 ================================================================================ Domestic Composite Ratio: Claims and claims expenses 63.7% 65.1% 66.6% Commissions and brokerage 28.3 29.7 31.3 Other operating expenses 9.1 8.3 7.8 - -------------------------------------------------------------------------------- Total 101.1% 103.1% 105.7% - -------------------------------------------------------------------------------- Composite ratios for 15 largest reinsurers 103.8% 113.1% 106.4% ================================================================================ The Company's domestic composite ratio for 1996 reflects significant improvements in underwriting results compared to 1995 and 1994. Each year's ratio reflects the net favorable claim development from prior years, as discussed below. Aided by a favorable catastrophe retrocessional market, the Company expects to maintain its exposure to a single event to $5 million for 1997 at a lower cost than 1996 and 1995. For 1997, the Company expects to obtain $115 million of property catastrophe protection, of which $25 million of coverage, in excess of the first $55 million of coverage, is available only if industry-wide claims exceed certain minimum levels. The Company evaluates its potential accumulated aggregate catastrophe exposure on both a gross claim basis and net of available reinsurance protection to determine whether its exposure to claims is within acceptable levels, and evaluates the catastrophe protection it offers to its clients accordingly. Although the Company has attempted to limit its exposure to acceptable levels, an extremely large catastrophic event, 23 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS or multiple catastrophic events could have a material adverse effect on the financial condition and results of operations of the Company. The Company's maximum retention on any one claim for non-catastrophe losses for 1997 and 1996 is $5.0 million, compared to $3.9 million in 1995. In recognition of the Company's enhanced surplus position and financial capacity, and the continued positive contribution of business written since 1986, the Company has reached agreements to terminate two retrocessional programs effective January 1, 1997. As a result, the Company expects to receive a total consideration of approximately $220 million, representing reinsurance recoverable balances for unpaid claims and claims expenses, with total cash and invested assets increasing by approximately $170 million. The termination of these programs will result in an increase in retention levels for the years 1996 and prior. Particularly as the casualty book of business matures, the increase in net retentions for these years may result in increased volatility in future years to the extent the actual frequency and severity of claims differs from management's current estimates. The Company believes its exposure to such volatility is within acceptable levels. See Note 5 of the Notes to Consolidated Financial Statements for the impact on 1996 and 1995 retention levels. An important area of focus in the reinsurance and insurance industries is exposure to asbestos and environmental claims. The Company's reserving process includes a periodic evaluation of the potential impact on claim liabilities from exposure to asbestos and environmental claims, including related loss adjustment expenses. The Company recorded claims and claims expenses incurred relating to asbestos and environmental claims of $10.7 million in 1996, $7.0 million in 1995 and $4.8 million in 1994, inclusive of paid claims of $4.2 million, $4.8 million, and $3.3 million, respectively. The Company's claims and claims expense reserves for such exposures, net of reinsurance, as of December 31, 1996, 1995 and 1994 were $28.5 million, $22.0 million and $19.8 million, respectively. A reconciliation of the Company's gross and net liabilities for such exposures for the three years ending December 31, 1996 and a discussion of open claim files are set forth in Note 3 of the Notes to Consolidated Financial Statements. The Company believes it has made a reasonable provision for its asbestos and environmental exposures and is unaware of any specific issues which would materially affect its claims and claims expense estimate. The estimation of claims and claims expense liabilities for asbestos and environmental exposures is subject to a much greater uncertainty than would normally be associated with the establishment of liabilities for other exposures due to several factors, including: i) uncertain legal interpretation and application of insurance and reinsurance coverage and liability; ii) the lack of reliability of available historical claim data as an indicator of future claim development; iii) an uncertain political climate which may impact, among other areas, the nature and amount of costs for remediating waste sites; and iv) the potential of insurers and policyholders to reach agreements in order to avoid further significant legal costs. Due to the potential significance of these uncertainties, the Company believes that no meaningful range of claims and claims expense liabilities beyond recorded reserves can be established. As these uncertainties are resolved, additional reserve provisions, which could be material in amount, may be necessary. The Company's total net claims and claims expenses for each year reflects favorable claim development from prior years of $33.3 million in 1996, $19.6 million in 1995 and $43.5 million in 1994. The net favorable claim development for business written since 1986 continued to emerge during 1996, 1995 and 1994. This favorable development is impacted by several factors, some of which are interdependent. A principal factor is the strength of the actuarial assumptions underlying the business written, particularly 24 - -------------------------------------------------------------------------------- with respect to social and economic inflation. These actuarial assumptions are utilized to establish the expected 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 comparisons of actuarially computed expected claims to actual claims and claims expense development, inflation and other considerations. This favorable development has offset certain unfavorable development on business written prior to 1986, principally related to asbestos and environmental claims, and in 1996 and 1995, includes the Company's evaluation of the lengthening of loss emergence patterns for certain lines of business included in the most recent Historical Loss Development Study issued by the RAA. Claim payment activity increased to $190.4 million in 1996, compared to $180.4 million in 1995 and $154.7 million in 1994, reflecting in part, the Company's maturing casualty book of business. Claims and claims expenses also include a charge for actual and potential non-recoveries from retrocessionnaires that are unable to meet their obligation under the retrocession agreement or do not satisfy the Company's financial guidelines. Such charges amounted to $1.2 million, $1.4 million and $4.0 million for 1996, 1995 and 1994, respectively, and reflect a provision for paid and unpaid claims, inclusive of incurred but not reported (IBNR) claims. Substantially all such charges relate to reinsurance purchased prior to 1986. The Company's .7 to 1 ratio of reinsurance recoverables (including IBNR and unearned premiums) to statutory surplus (a measure of exposure that continues to receive attention from research analysts and state regulators) is equal to the average ratio for the top 15 property/casualty reinsurers reporting to the RAA, based on the most recent available data. In addition, approximately 62% of the Company's reinsurance recoverables are collateralized by letters of credit, trust accounts or funds withheld, which further reduces the Company's exposure to uncollectible balances. The Company is unaware of any specific, unusual and significant circumstances affecting claim reserve estimates, except to the extent disclosed. The 1996 statutory composite ratio for the Company's international reinsurance subsidiary was 105.6% compared to 111.7% in 1995 and 114.7% in 1994. A principal cause of these relatively high composite ratios was the contribution of the operating expense ratios of 13.7%, 13.0% and 20.2% for the years ended December 31, 1996, 1995 and 1994, respectively. The Company generally expects a higher expense ratio in the start-up years an operation. The expense ratio of the international subsidiary is expected to decline over time as it leverages its investment in infrastructure and marketing, broadens client relationships and generates increases in premium revenues. The pricing of the Company's reinsurance contracts contemplates many factors, including exposure to claims and the expenses of the client and the broker. Commissions and brokerage expenses as a percentage of premium revenues declined moderately in 1996 compared to 1995 and 1994. This decrease is principally due to the effects of certain contractual provisions which adjust commission expense based upon claims experience, partially mitigated by increases in pro rata contracts written in the Company's specialty lines of business, as these contracts generally carry a higher commission rate. 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. Operating expenses increased in 1996, 1995 and 1994, reflecting continued business expansion, investments in technology, a continued investment in facultative business and the start-up costs of the international operation. In addition, the Company expanded staffing in 1996 and 1995 in order to 25 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS accommodate continuing growth opportunities. The Company continues to seek measures to contain operating expenses that are not central to its underwriting activities, and to better utilize its resources. Investments Cash and invested assets were $2.0 billion at December 31, 1996 and $1.8 billion at December 31, 1995, excluding net investment payables of $24.9 million and $50.5 million for 1996 and 1995, respectively. Net investment income increased 16.8% in 1996 compared to 10.9% in 1995 and 5.1% in 1994. The increase in 1996 is principally attributable to the growth in invested assets, including the investment proceeds of approximately $147 million from the Company's public debt and equity offerings in November 1995. The Company's pretax investment yield was 5.7% in 1996, 5.9% in 1995 and 6.0% in 1994. On an after-tax basis, the investment yield was 4.4% in 1996, 4.6% in 1995 and 4.5% in 1994. Realized investment gains, net of tax, were $.66 per share for 1996, $.94 per share for 1995, and $.04 per share for 1994. 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. While the Company continued to be impacted in 1996 from the declining interest rate environment in 1995, the effect on investment yields was somewhat tempered given the Company's fixed maturity duration of approximately 5 years. Also affecting the comparison of 1996 and 1995 pretax and after-tax investment yields was the Company's investment of available cash flow during 1996 of approximately $117 million into tax-exempt securities to take advantage of the higher after-tax yields for these securities. The Company expects continued growth in investment income during 1997 due to a higher invested asset base, including the expected cash consideration resulting from the termination of two retrocessional programs in 1997. See Note 5 to the Notes to Consolidated Financial Statements. 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 the end of 1996, the Company's fixed maturity investments amounted to $1.7 billion, which approximates 86% of cash and invested assets, and approximately 98% of such investments are rated investment grade by Moody's Investor Services, Inc. or Standard & Poor's. Changes in market interest rates during 1996 resulted in a slight decrease in the market value of the Company's investment securities compared to 1995. Net unrealized appreciation of investments, net of tax, was $31.7 million at December 31, 1996 compared to $35.2 million at December 31, 1995. The unrealized appreciation was primarily attributable to the market value fluctuations in the Company's fixed income and equity securities, which are recorded at their fair values. 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 duration of its liabilities. Consistent with the payment profile of the Company's claims liabilities, as of the end of 1996 the Company's investment portfolio had an average duration of 4.8 years. See Note 2 of the Notes to Consolidated Financial Statements for a detailed discussion of the fixed maturity investment portfolio. 26 - -------------------------------------------------------------------------------- The balance of the Company's investment portfolio at December 31, 1996, consisting of cash, short-term investments and equity securities, amounted to $280.4 million. As of December 31, 1996, the Company held $179.6 million or 9.1% of cash and invested assets in equity securities, representing 27% of statutory surplus. This is compared to $127.0 million or 6.8% of invested assets in equity securities at December 31, 1995, representing 21% of statutory surplus. Since the initial capitalization of the Company's international reinsurance operation (NAC Re International), with $75 million in 1993 and subsequent contributions in 1994 and 1995, the stockholders' equity of NAC Re International has grown to $138.5 million as of December 31, 1996. This capital, a component of the invested assets described above, is being invested in accordance with the Company's overall investment strategy. At December 31, 1996, NAC Re International's investment portfolio, which was primarily invested in U.K. Government securities, had an average duration of 4.2 years, a pretax investment yield of 6.4% and an after-tax investment yield of 4.3%. Income Taxes The Company's effective tax rate increased to 20.8% in 1996 compared to 20.3% in 1995 and 15.8% in 1994. Excluding investment gains, the Company's 1996 effective tax rate was 16.8% compared to 14.2% in 1995. This increase was principally due to improved underwriting results and a slightly higher effective tax rate on investment income. The Company's effective tax rate increased in 1995 over 1994 principally due to of the larger contribution of investment gains, taxed at a marginal rate of 35%. 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, dividends and tax reimbursements from NAC. These dividends are subject to statutory restrictions as described in Note 10 of the Notes to Consolidated Financial Statements. In late 1995, the Company issued $100 million of 7.15% Notes due November 15, 2005, and raised approximately $49 million on the issuance of 1,530,000 shares of Common Stock. In addition, the Company raised $200 million in 1992 through the issuance of $100 million of 5.25% Convertible Subordinated Debentures due December 2002 and $100 million of 8% Notes due June 1999. As a result of the transactions and borrowings described below, pretax interest expense was $22.3 million in 1996, $15.6 million in 1995 and $14.5 million in 1994. NAC Re maintains a revolving credit facility, under which it can borrow up to $35 million. Outstanding borrowings as of December 31, 1996 and 1995 were $12.9 million and $17.8 million, respectively, and were principally used to finance the Company's periodic repurchase of its Common Stock. In April 1996, the Company modified its credit facility. The requirement for payment of outstanding balances beginning in June 1996 was replaced with a scheduled reduction of the credit facility beginning in July 1998 and ending July 2001. 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. During 1996, the Company repurchased approximately 943,000 shares of NAC Re Common Stock under its stock repurchase program. As of December 31, 1996, approximately 150,000 shares remain authorized for repurchase and the Company anticipates that the repurchase authorization will be expanded in the first quarter of 1997. 27 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS The Company's regular quarterly dividend was increased in June 1996 to $.06 per share from $.05 per share. It is anticipated that the cash dividend level will leave sufficient retained earnings to meet the Company's future financial needs. Consolidated stockholders' equity totaled $553.3 million or $30.06 per share at December 31, 1996, compared to $511.8 million or $26.65 per share, at December 31, 1995. Statutory surplus of the reinsurance subsidiary was approximately $664 million and $615 million at the end of 1996 and 1995, respectively. NAC ranks among the largest domestic reinsurers measured on this basis. The Company believes its surplus level enhances its ability to attract new business and retain its existing client base. The Company's insurance operations create liquidity in that premiums are received substantially in advance of the time claims are paid. Over the most recent three years, cash flow provided by operating activities totaled over $478 million, including 1996 cash flow of $166 million. The cash flow for 1996 declined from 1995 primarily due to an increase in paid claims coupled with the timing of settlement of certain reinsurance balances. The Company expects its 1997 cash flow from operations to benefit from a nonrecurring receipt of approximately $170 million related to the termination of certain retrocessional agreements, described above. Regulatory Initiatives NAC Re and its domestic subsidiaries are subject to regulatory oversight 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. The international subsidiary's Australian branch office is also subject to the Australian Insurance and Supervisory Commission's solvency and regulatory authority. 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 regulations applicable to the Company relate to 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 adequacy of property and casualty insurers and reinsurers with respect to the risks assumed by them and to 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 has not yet been adopted in New York, NAC's domicile, it was enacted in California in 1996, 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. The NAIC also 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. 28 - -------------------------------------------------------------------------------- Surplus (as calculated for statutory annual statement purposes) for each of the Company's domestic 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. Generally, the thrust of regulatory efforts 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 accelerate 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. Other disclosure standards require regulatory approval of changes in control of an insurer and of transactions between affiliates and subsidiaries. The Company is also subject to periodic financial and market conduct examinations conducted by various state Insurance Departments. Additionally, certain state regulators require that prior to the acquisition of 10% of the outstanding shares of Common Stock of the Company, stockholders may be required to file certain notices and reports with regulatory agencies. State insurance legislators and regulators and the NAIC are expected to continue to fine-tune existing insurance laws and regulations, with a continued emphasis on insurance company solvency. In 1996, the NAIC adopted new model laws entitled "Investments of Insurers Model Act (Defined Limits)" and "Derivative Instruments Model Regulation." Although no state has adopted these model laws, the Company's domestic subsidiaries may be subject to additional investment regulation in the future. Any new investment regulation is expected to have minimal, if any, effect on the Company as its investment portfolios are currently subject to the extensive statutory requirements of New York and California. The federal Superfund program's taxing authority expired at the end of 1995. While it is expected to be reenacted, it is not possible to predict when or in what form given the current difficult federal environment and the varied proposals. See Note 3 of the Notes to the Consolidated Financial Statements. Congress enacted the Private Securities Litigation Reform Act of 1995. While one of the objects of the Act may have been to reduce litigation costs, it is unlikely to have that effect in the near term; the exact meaning of the various provisions is likely to be litigated for some time to come. Product liability and tort reform continue to appear on the Congress' agenda. It is not possible to predict whether there will be any change in product liability or tort reform or what the content or scope of any such change might be, and, accordingly, it is not possible to assess the impact on the Company's operations. To the extent that reform, if any, reduces litigation costs, it would be a favorable development for the Company. The Consolidated Financial Statements and related notes that follow should be read in concert with this discussion and are integral to it. 29 - -------------------------------------------------------------------------------- ELEVEN YEAR FINANCIAL SUMMARY
============================================================================================================================ In Thousands, except per share amounts 1996 1995 1994 1993 1992(1) 1991 ============================================================================================================================ Income Statement Data Gross premiums written $714,080 $677,938 $575,037 $431,582 $366,292 $291,775 Net premiums written 574,004 521,489 438,201 336,941 268,023 233,044 Premiums earned 526,342 491,785 395,731 306,379 250,533 229,358 Net investment income 104,330 89,308 80,504 76,632 65,590 58,743 Net investment gains (losses) 19,569 25,391 2,155 19,095 9,081 5,533 Total revenues 650,241 606,484 478,390 402,106 325,204 293,634 Operating costs and expenses 561,205 527,663 436,100 352,609 321,598 251,916 Operating income 70,520 62,824 35,612 42,351 10,386 34,816 Net income 70,520 62,824 35,612 42,351 22,443 34,816 Return on stockholders' equity (3) (5) 13.8% 19.7% 9.5% 13.7% 9.3% 17.2% - ---------------------------------------------------------------------------------------------------------------------------- Per Share Data (4) Primary: Average shares outstanding 19,095 18,094 17,895 18,420 18,313 15,813 Operating income $3.69 $3.47 $1.99 $2.30 $.57 $2.20 Net income 3.69 3.47 1.99 2.30 1.23 2.20 Fully diluted (assuming conversion of dilutive convertible securities): Average shares outstanding 21,117 20,153 20,053 20,445 18,536 18,393 Net income $3.51 $3.29 $1.95 $2.24 $1.21 $2.04 Cash dividends declared per share .23 .19 .16 .16 .16 .14 Stock prices: High 40.63 39.00 34.00 44.75 42.00 31.50 Low 28.50 28.25 24.00 28.00 21.75 19.33 Close 33.88 36.00 33.50 29.75 40.50 31.50 - ---------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data Total assets (5) (6) $2,745,631 $2,462,131 $1,916,768 $1,778,868 $1,596,209 $1,106,573 Cash and invested assets (5) 1,983,902 1,863,526 1,414,527 1,412,624 1,258,016 892,581 Claims and claims expense reserves, gross (6) 1,513,345 1,292,415 1,086,170 909,061 808,489 681,110 Net of reinsurance recoverable 1,107,217 953,669 808,433 697,221 626,090 528,521 Long-term debt 299,934 299,927 200,000 200,000 200,000 51,750 Unrealized appreciation (depreciation) of investments, net of tax: (5) Fixed maturities 14,526 27,102 (44,204) 30,865 2,402 2,374 Equity securities 17,174 8,085 (1,826) 6,521 3,786 3,452 Total reported 31,700 35,187 (46,030) 37,386 6,188 5,826 Stockholders' equity (5) 553,269 511,756 319,085 375,540 309,221 241,387 Stockholders' equity per share (4) (5) 30.06 26.65 18.23 21.13 17.35 15.70 - ---------------------------------------------------------------------------------------------------------------------------- Domestic Statutory Data Statutory composite ratio 101.1% 103.1% 105.7% 110.9% 126.9% 108.2% Statutory surplus $663,867 $615,433 $407,024 $406,163 $384,032 $230,041 ============================================================================================================================ ============================================================================================================================ In Thousands, except per share amounts 1990 1989 1988(2) 1987 1986 CAGR* ============================================================================================================================ Income Statement Data Gross premiums written $261,099 $234,960 $206,761 $183,818 $131,717 18.4% Net premiums written 217,106 192,323 171,430 154,510 122,689 16.7 Premiums earned 215,085 190,657 161,978 137,376 81,723 20.5 Net investment income 51,930 45,475 35,640 25,341 15,084 21.3 Net investment gains (losses) (1,121) 3,236 142 878 4,899 14.9 Total revenues 265,894 239,368 197,760 163,595 101,706 20.4 Operating costs and expenses 236,464 209,883 177,830 151,945 95,563 19.4 Operating income 24,961 25,626 17,732 11,113 6,143 27.6 Net income 24,961 25,626 20,827 11,113 6,143 27.6 Return on stockholders' equity (3) (5) 13.4% 15.8% 14.0% 8.1% 7.5% - - ---------------------------------------------------------------------------------------------------------------------------- Per Share Data (4) Primary: Average shares outstanding 15,898 15,865 15,796 16,304 11,836 - Operating income $1.57 $1.62 $1.12 $.68 $.52 21.6 Net income 1.57 1.62 1.31 .68 .52 21.6 Fully diluted (assuming conversion of dilutive convertible securities): Average shares outstanding 18,358 18,414 18,257 16,304 11,836 - Net income $1.50 $1.53 $1.29 $.68 $.52 21.0 Cash dividends declared per share .13 .10 - - - - Stock prices: High 25.83 27.33 14.11 14.33 18.67 - Low 17.00 13.78 8.22 7.78 11.22 - Close 22.00 23.83 14.11 7.89 11.67 - - ---------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data Total assets (5) (6) $988,809 $869,810 $705,832 $591,474 $443,496 20.0 Cash and invested assets (5) 781,591 689,481 544,304 423,286 303,990 20.6 Claims and claims expense reserves, gross (6) 596,236 520,723 389,279 303,623 186,978 23.3 Net of reinsurance recoverable 468,637 387,767 291,531 201,051 118,422 25.0 Long-term debt 51,750 51,750 51,750 51,750 51,750 19.2 Unrealized appreciation (depreciation) of investments, net of tax: (5) Fixed maturities (2,588) - - - - - Equity securities (2,958) (323) (158) - - - Total reported (5,546) (323) (158) - - - Stockholders' equity (5) 202,525 186,104 162,501 148,278 136,777 15.0 Stockholders' equity per share (4) (5) 12.98 11.92 10.38 9.10 8.41 13.6 - ---------------------------------------------------------------------------------------------------------------------------- Domestic Statutory Data Statutory composite ratio 108.2% 108.5% 106.8% 107.8% 109.9% - Statutory surplus $197,391 $189,018 $174,217 $163,233 $152,466 15.8 ============================================================================================================================
(1) In 1992, the Company adopted SFAS No. 109, "Accounting for Income Taxes." The cumulative effect from prior years increased net income by $12.1 million or $.66 per share. (2) In 1988, the Company adopted the practice of discounting workers' compensation tabular case reserves. The cumulative effect from prior years increased net income by $1.9 million or $.12 per share. In addition, 1988 income tax expense included a charge for the utilization of an operating loss carry forward. The tax benefit of $1.2 million, or $.07 per share, resulting from such utilization was recorded as an extraordinary item. (3) Based on net income divided by stockholders' equity as reported at the beginning of each year. (4) Stock price and per share figures have been restated to reflect the three-for-two stock splits effective in 1989 and 1991. (5) The Company adopted SFAS No. 115 at December 31, 1993. As such, all of the Company's fixed maturities and equity securities were classified as "available for sale" and recorded at their fair values. The effect of adopting SFAS No. 115 was to record in stockholders' equity unrealized appreciation, net of deferred income taxes of $28.4 million, related to fixed maturities that were previously recorded at amortized cost. Retroactive application to prior periods is prohibited. (6) Reclassified to reflect the adoption of SFAS No. 113 in 1993, which requires reinsurance recoverables on claims and claims expenses (including IBNR) and unearned premiums to be reported as assets. * Compound annual growth rate. 30 & 31 - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET In Thousands ================================================================================ December 31, -------------------------- 1996 1995 ================================================================================ Assets Investments: Available for sale: Fixed maturities (amortized cost: 1996, $1,681,190; 1995, $1,551,848) $ 1,703,537 $1,593,543 Equity securities (cost: 1996, $153,197; 1995, $114,818) 179,619 127,257 Short-term investments 81,893 132,406 - -------------------------------------------------------------------------------- Total investments 1,965,049 1,853,206 - -------------------------------------------------------------------------------- Cash 18,853 10,320 Accrued investment income 28,472 26,955 Premiums receivable 200,036 154,974 Reinsurance recoverable balances, net 336,324 257,136 Reinsurance recoverable on unearned premiums 20,320 28,111 Deferred policy acquisition costs 85,211 70,466 Excess of cost over net assets acquired 3,644 4,011 Deferred tax asset, net 30,390 27,688 Other assets 57,332 29,264 - -------------------------------------------------------------------------------- Total assets $ 2,745,631 $2,462,131 - -------------------------------------------------------------------------------- Liabilities Claims and claims expenses $ 1,513,345 $1,292,415 Unearned premiums 271,898 230,738 8% Notes due 1999 100,000 100,000 7.15% Notes due 2005 99,934 99,927 5.25% Convertible Subordinated Debentures due 2002 100,000 100,000 Investment accounts payable 25,326 50,580 Revolving credit agreement 12,924 17,762 Other liabilities 68,935 58,953 - -------------------------------------------------------------------------------- Total liabilities 2,192,362 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, 21,464; 1995, 21,341 shares issued) 2,146 2,134 Additional paid-in capital 248,662 246,356 Unrealized appreciation of investments, net of tax 31,700 35,187 Currency translation adjustments, net of tax 8,377 1,017 Retained earnings 335,868 269,660 Treasury stock, at cost (1996, 3,061; 1995, 2,137 shares) (73,484) (42,598) - -------------------------------------------------------------------------------- Total stockholders' equity 553,269 511,576 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 2,745,631 $2,462,131 ================================================================================ See Notes to Consolidated Financial Statements. 32 ================================================================================ CONSOLIDATED STATEMENT OF INCOME In Thousands, except per share amounts ================================================================================ Year ended December 31, ---------------------------------- 1996 1995 1994 ================================================================================ Premiums and Other Revenues Net premiums written $ 574,004 $ 521,489 $ 438,201 Increase in unearned premiums (47,662) (29,704) (42,470) - -------------------------------------------------------------------------------- Premiums earned 526,342 491,785 395,731 - -------------------------------------------------------------------------------- Net investment income 104,330 89,308 80,504 Net investment gains 19,569 25,391 2,155 - -------------------------------------------------------------------------------- Total revenues 650,241 606,484 478,390 - -------------------------------------------------------------------------------- Operating Costs and Expenses Claims and claims expenses 338,953 326,148 265,753 Commissions and brokerage 143,324 139,063 117,592 Acquisition and operating expenses 56,606 46,804 38,301 Interest expense 22,322 15,648 14,454 - -------------------------------------------------------------------------------- Total operating costs and expenses 561,205 527,663 436,100 - -------------------------------------------------------------------------------- Income Operating income before income taxes 89,036 78,821 42,290 Federal and foreign income taxes: Current 23,310 18,779 10,885 Deferred (4,794) (2,782) (4,207) - -------------------------------------------------------------------------------- Income tax expense (benefit) 18,516 15,997 6,678 - -------------------------------------------------------------------------------- Operating income/net income $ 70,520 $ 62,824 $ 35,612 - -------------------------------------------------------------------------------- Per Share Data Primary: Average shares outstanding 19,095 18,094 17,895 Operating income/net income $ 3.69 $ 3.47 $ 1.99 - -------------------------------------------------------------------------------- Fully diluted (assuming conversion of dilutive convertible securities): Average shares outstanding 21,117 20,153 20,053 Operating income/net income $ 3.51 $ 3.29 $ 1.95 - -------------------------------------------------------------------------------- Cash dividends declared per share $ .23 $ .19 $ .16 - -------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements. 33 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
In Thousands ====================================================================================== Year ended December 31, 1996 1995 1994 ====================================================================================== Common Stock Balance at beginning of year $ 2,134 $ 1,964 $ 1,935 Issuance of shares 12 170 29 - -------------------------------------------------------------------------------------- Balance at end of year 2,146 2,134 1,964 - -------------------------------------------------------------------------------------- Additional Paid-in Capital Balance at beginning of year 246,356 194,231 188,289 Issuance of shares 2,306 52,125 5,942 - -------------------------------------------------------------------------------------- Balance at end of year 248,662 246,356 194,231 - -------------------------------------------------------------------------------------- Unrealized Appreciation (Depreciation) of Investments, Net of Tax Balance at beginning of year 35,187 (46,030) 37,386 Unrealized (depreciation) appreciation (3,487) 81,217 (83,416) - -------------------------------------------------------------------------------------- Balance at end of year 31,700 35,187 (46,030) - -------------------------------------------------------------------------------------- Currency Translation Adjustments, Net of Tax Balance at beginning of year 1,017 1,059 (2,141) Translation adjustments 7,360 (42) 3,200 - -------------------------------------------------------------------------------------- Balance at end of year 8,377 1,017 1,059 - -------------------------------------------------------------------------------------- Retained Earnings Balance at beginning of year 269,660 210,255 177,459 Net income 70,520 62,824 35,612 Dividends (4,312) (3,419) (2,816) - -------------------------------------------------------------------------------------- Balance at end of year 335,868 269,660 210,255 - -------------------------------------------------------------------------------------- Treasury Stock Balance at beginning of year (42,598) (42,394) (27,388) Purchase of treasury shares, net of reissuance (30,886) (204) (15,006) - -------------------------------------------------------------------------------------- Balance at end of year (73,484) (42,598) (42,394) - -------------------------------------------------------------------------------------- Total Stockholders' Equity Balance at beginning of year 511,756 319,085 375,540 Issuance of shares 2,318 52,295 5,971 Unrealized (depreciation) appreciation (3,487) 81,217 (83,416) Translation adjustments 7,360 (42) 3,200 Net income 70,520 62,824 35,612 Dividends (4,312) (3,419) (2,816) Purchase of treasury shares, net of reissuance (30,886) (204) (15,006) - -------------------------------------------------------------------------------------- Balance at end of year $ 553,269 $ 511,756 $ 319,085 - --------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 34 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS
In Thousands ========================================================================================= Year ended December 31, -------------------------------------- 1996 1995 1994 ========================================================================================= Operating Activities Net income $ 70,520 $ 62,824 $ 35,612 Adjustments to reconcile net income to net cash provided by operating activities: Reserve for claims and claims expenses, net 147,927 145,404 111,072 Unearned premiums, net 47,703 29,584 42,533 Premiums receivable (43,512) (34,415) (44,973) Accrued investment income (1,266) (6,916) (2,763) Reinsurance balances, net (18,063) 6,976 (2,963) Deferred policy acquisition costs (14,518) (10,523) (15,492) Net investment gains (19,577) (25,386) (2,120) Deferred tax asset, net (4,980) (2,781) (4,155) Other liabilities 6,447 950 13,456 Other items, net (4,564) 8,194 7,822 - ----------------------------------------------------------------------------------------- Net Cash Provided By Operating Activities 166,117 173,911 138,029 - ----------------------------------------------------------------------------------------- Investing Activities Sales of fixed maturity investments 1,336,125 1,479,415 690,286 Maturities of fixed maturity investments 31,094 31,099 37,300 Purchases of fixed maturity investments (1,508,258) (1,849,492) (846,379) Net sales of short-term investments 53,646 3,072 13,168 Sales of equity securities 79,569 101,918 41,706 Purchases of equity securities (104,917) (84,910) (70,406) Purchases of furniture and equipment (6,775) (2,365) (2,994) - ----------------------------------------------------------------------------------------- Net Cash Used By Investing Activities (119,516) (321,263) (137,319) - ----------------------------------------------------------------------------------------- Financing Activities Issuance of shares 1,951 52,056 5,278 Net proceeds from issuance of 7.15% Notes -- 99,214 -- Purchase of treasury shares, net of reissuance (30,886) (204) (15,006) Cash dividends paid to stockholders (4,163) (3,260) (2,827) Borrowings under revolving credit agreement 8,162 -- 13,857 Repayments under revolving credit agreement (13,000) -- -- - ----------------------------------------------------------------------------------------- Net Cash (Used) Provided By Financing Activities (37,936) 147,806 1,302 - ----------------------------------------------------------------------------------------- Effects of exchange rate changes on cash (132) 242 (18) - ----------------------------------------------------------------------------------------- Increase in cash 8,533 696 1,994 Cash - beginning of year 10,320 9,624 7,630 - ----------------------------------------------------------------------------------------- Cash - end of year $ 18,853 $ 10,320 $ 9,624 =========================================================================================
See Notes to Consolidated Financial Statements 35 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements have been prepared on the basis of generally accepted accounting principles (GAAP) and include the accounts of NAC Re Corp. (NAC Re) and its insurance and reinsurance subsidiaries: NAC Reinsurance Corporation (NAC), Greenwich Insurance Company, Indian Harbor Insurance Company and NAC Re International Holdings Limited and its subsidiaries. NAC Re and its subsidiaries are collectively referred to herein as the Company. All intercompany transactions and balances have been eliminated in consolidation. The preparation of the financial statements in conformity with GAAP requires the use of estimates and assumptions that affect amounts reported in the financial statements and the accompanying notes. Actual results could differ from such estimates. Premium Revenues and Related Expenses Property/casualty premiums are recognized as income over the terms of the related reinsurance contracts and policies. Unearned premium reserves represent the portion of premiums written that relate to the unexpired terms of contracts and policies in force. Such reserves are computed by pro rata methods based on statistical data or reports received from ceding companies. Certain of the Company's assumed and retrocession agreements include provisions that adjust premium payments based upon the experience under the contracts. Premiums are recorded based upon the expected ultimate experience under the agreements. Acquisition costs, consisting principally of commissions and brokerage expenses incurred at the time a contract or policy is issued, are deferred and amortized over the period in which the related premiums are earned. Deferred policy acquisition costs are limited to their estimated realizable value based on the related unearned premiums and take into account anticipated claims and claims expenses, based on historical and current experience, and anticipated investment income. Investments Fixed maturities, which include bonds, notes, and redeemable preferred stocks and equity securities, including common and non-redeemable preferred stocks, have been categorized as "available for sale" and recorded at their fair value. The fair value of fixed maturities and equity securities is estimated using quoted market prices or dealer quotes. Short-term investments, which have an original maturity of one year or less, are carried at cost, which approximates fair value. The Company categorizes all of its fixed maturities and equity securities as available for sale in order to provide the Company the flexibility to respond to various factors, including changes in market conditions and tax planning considerations. Unrealized appreciation or depreciation of the securities available for sale, net of applicable deferred income taxes, is excluded from income, and recorded as a separate component of stockholders' equity. 36 - -------------------------------------------------------------------------------- Realized investment gains or losses on the sale or maturity of investments are determined by the specific identification method. Net investment income, consisting of dividends and interest, net of investment expenses, is recognized when earned. The amortization of premium and accretion of discount for fixed maturities is computed utilizing the interest method. The effective yield utilized in the interest method is adjusted when sufficient information exists to estimate the probability and timing of prepayments. Claims and Claims Expenses The reserves for claims and claims expenses are based on reports and individual case estimates received from ceding companies. An amount is included for claims and claims expenses incurred but not reported on the basis of past experience of the Company and the reinsurance industry. These estimates are reviewed regularly and, as claims develop and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are reflected in results of operations in the period in which they become known and are accounted for as changes in estimates. Reserves are generally recorded without consideration of potential salvage or subrogation recoveries which are estimated to be immaterial; such recoveries, when realized, are reflected as a reduction of claims incurred. Certain workers' compensation case reserves are considered fixed and determinable and are subject to tabular reserving. Such tabular reserves are discounted using an interest rate of 7%. Income Taxes The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is established for any portion of a deferred tax asset that management believes will not be realized. Stock Plans The Company accounts for stock compensation plans in accordance with Accounting Principals Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense for stock option grants and stock appreciation rights (SARs) is recognized to the extent that the fair value of the stock exceeds the exercise price of the option at the measurement date. Per Share Data Primary earnings per share data are based on the weighted average common shares and common share equivalents outstanding during the period. Fully diluted earnings per share data assume conversion of dilutive convertible securities and the exercise of all dilutive stock options. Furniture, Equipment and Leasehold Improvements The costs of furniture and equipment are charged against income over their estimated service lives. Leasehold improvements are amortized over the remaining terms of the office leases. Depreciation and amortization are computed using the straight-line method. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization expense was approximately $4.4 million, $2.2 million and $1.8 million for the years ended December 31, 1996, 1995 and 1994, respectively. 37 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Foreign Exchange The assets and liabilities of foreign operations are translated at the rate of exchange in effect at the balance sheet date. Revenues and expenses of foreign operations are translated at the average exchange rates during the year. The effect of the translation adjustments for foreign operations is recorded as a cumulative translation adjustment in a separate component of stockholders' equity, net of applicable deferred income taxes. Foreign currency transaction gains and losses are included in net income and are not material. Cost in Excess of Net Assets Acquired The excess of cost over net assets acquired is amortized on a straight-line basis over a period of twenty years. Amortization charged to operating expenses was approximately $368,000 for each of the years ended December 31, 1996, 1995 and 1994. 2. Investment Information Investment Income The components of net investment income were as follows: In Thousands ================================================================================ Year ended December 31, ---------------------------------- 1996 1995 1994 ================================================================================ Fixed maturities $ 97,048 $81,485 $74,861 Equity securities 5,228 4,371 5,019 Cash and short-term investments 7,271 8,341 5,119 - -------------------------------------------------------------------------------- Gross investment income 109,547 94,197 84,999 Interest expense 472 685 900 Investment expenses 4,745 4,204 3,595 - -------------------------------------------------------------------------------- Net investment income $104,330 $89,308 $80,504 ================================================================================ Investment Gains (Losses) Realized and unrealized investment gains (losses) were as follows: In Thousands ================================================================================ Year ended December 31, ------------------------------- Net realized investment gains (losses): 1996 1995 1994 ================================================================================ Fixed maturities $ 7,243 $ 17,868 $ (2,535) Equity securities 12,326 7,523 4,690 - -------------------------------------------------------------------------------- Subtotal 19,569 25,391 2,155 Tax expense 6,861 8,422 1,353 - -------------------------------------------------------------------------------- Net realized investment gains, net of tax $ 12,708 $ 16,969 $ 802 - -------------------------------------------------------------------------------- Change in unrealized (depreciation) appreciation of investments: Fixed maturities $(19,348) $ 85,899 $ (91,504) Equity securities 13,983 14,265 (11,858) - -------------------------------------------------------------------------------- Subtotal (5,365) 100,164 (103,362) (Decrease) increase in deferred income tax liability (1,878) 18,947 (19,946) - -------------------------------------------------------------------------------- Net change reflected in stockholders' equity $ (3,487) $ 81,217 $ (83,416) ================================================================================ 38 - -------------------------------------------------------------------------------- The following tables reconcile amortized cost to the estimated fair value (which equals carrying value) of fixed maturity securities and equity securities. In Thousands ================================================================================ December 31, 1996 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ================================================================================ Available for Sale: U.S. Treasury $ 71,354 $ 431 $ (1,177) $ 70,608 Tax-exempt 828,501 21,853 (1,964) 848,390 Foreign Government 160,490 2,452 (954) 161,988 Corporate 377,294 4,456 (4,924) 376,826 Mortgage-backed 191,467 734 (2,453) 189,748 Subordinated convertibles 52,084 5,030 (1,137) 55,977 - -------------------------------------------------------------------------------- Total fixed maturities 1,681,190 34,956 (12,609) 1,703,537 Equity securities 153,197 29,918 (3,496) 179,619 - -------------------------------------------------------------------------------- Total $1,834,387 $64,874 $(16,105) $1,883,156 ================================================================================ In Thousands ================================================================================ December 31, 1995 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ================================================================================ Available for Sale: U.S. Treasury $ 116,958 $ 3,040 $ (568) $ 119,430 Tax-exempt 714,326 28,947 (466) 742,807 Foreign Government 144,782 2,091 (656) 146,217 Corporate 341,290 9,352 (2,301) 348,341 Mortgage-backed 173,674 2,023 (885) 174,812 Subordinated convertibles 60,818 4,007 (2,889) 61,936 - -------------------------------------------------------------------------------- Total fixed maturities 1,551,848 49,460 (7,765) 1,593,543 Equity securities 114,818 19,123 (6,684) 127,257 - -------------------------------------------------------------------------------- Total $1,666,666 $68,583 $(14,449) $1,720,800 ================================================================================ 39 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Contractual maturities of fixed maturity securities are shown below. Expected maturities, which are best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties In Thousands ================================================================================ December 31, 1996 ----------------------------- Amortized Fair Cost Value ================================================================================ Available for Sale: Due in one year or less $ 28,074 $ 27,651 Due after one year through five years 328,554 331,626 Due after five years through ten years 789,284 803,914 Due after ten years 343,811 350,598 - -------------------------------------------------------------------------------- Subtotal 1,489,723 1,513,789 Mortage-backed securities 191,467 189,748 - -------------------------------------------------------------------------------- Total $1,681,190 $1,703,537 ================================================================================ The weighted average contractual and expected maturities, based on fair value, of the fixed maturity investments excluding convertible securities, as of December 31, 1996 were 9.9 years and 6.6 years, respectively. Proceeds from the sales of fixed maturity securities during 1996, 1995 and 1994 were $1,336.1 million, $1,479.4 million and $690.3 million, respectively. Gross gains of $16.3 million, $25.3 million and $7.7 million were realized on those sales during 1996, 1995 and 1994, respectively. Gross losses of $9.1 million, $7.4 million and $10.3 million were realized during 1996, 1995 and 1994, respectively. Approximately 98% of all fixed maturity investments held at December 31, 1996 were considered investment grade by Standard and Poor's or Moody's Investor Services, Inc. Securities on Deposit Securities with a face amount of $58.9 million at December 31, 1996, were on deposit with various state or governmental insurance departments in order to comply with insurance laws. Assets Held in Escrow Included in NAC Re's cash and invested assets at December 31, 1996 is approximately $20.3 million of assets held in a "holding company" escrow account arising from a tax allocation agreement between NAC Re and its domestic subsidiaries. The agreement provides that each subsidiary must remit to NAC Re its tax liability based upon its separate return. The excess of the taxes paid by the subsidiaries to NAC Re over the consolidated group's tax liability are restricted for current operating use, but may become available for unrestricted use three years following the filing of the consolidated tax return that generated the asset. Approximately $4.3 million of the escrow balance will become available for use in 1997. 40 - -------------------------------------------------------------------------------- 3. Claims and Claims Expenses The following table represents an analysis of paid and unpaid claims and claims expenses and a reconciliation of beginning and ending reserve balances for the years indicated.
In Thousands ============================================================================================================= Year ended December 31, 1996 1995 1994 ============================================================================================================= Reserves for claims and claims expenses, at beginning of year $1,292,415 $1,086,170 $909,061 Reinsurance recoverables, at beginning of year 338,746 277,737 211,840 - ------------------------------------------------------------------------------------------------------------- Reserves for claims and claims expenses, net of reinsurance recoverables, at beginning of year 953,669 808,433 697,221 - ------------------------------------------------------------------------------------------------------------- Provision for claims and claims expenses, net of reinsurance, occurring in the current year 372,294 345,783 309,294 Decrease in estimated claims and claims expenses, net of reinsurance, occurring in prior years (33,341) (19,635) (43,541) - ------------------------------------------------------------------------------------------------------------- Total incurred claims and claims expenses, net of reinsurance 338,953 326,148 265,753 - ------------------------------------------------------------------------------------------------------------- Less payments for claims and claims expenses, net of reinsurance, occurring during: The current year 44,025 40,123 35,965 Prior years 146,399 140,263 118,686 - ------------------------------------------------------------------------------------------------------------- Total 190,424 180,386 154,651 - ------------------------------------------------------------------------------------------------------------- Effects of exchange rate changes on reserves 5,019 (526) 110 - ------------------------------------------------------------------------------------------------------------- Reserves for claims and claims expenses, net of reinsurance recoverables, at end of year 1,107,217 953,669 808,433 Reinsurance recoverables, at end of year 406,128 338,746 277,737 - ------------------------------------------------------------------------------------------------------------- Reserves for claims and claims expenses, at end of year $1,513,345 $1,292,415 $1,086,170 =============================================================================================================
Estimates of claims and claims expenses are based in part on a prediction of future events, estimates of future trends in claim severity and frequency and other variable factors. The Company's ability to predict future trends based upon its own historical claim experience is inherently difficult because of its substantial growth in premiums since 1985. Therefore, the Company has supplemented its historical claim experience to a certain extent with claim experience derived from external sources, such as reinsurance industry data, for purposes of evaluating future trends and providing an estimate of ultimate claim costs. As the Company's book of business continues to mature, its own historical claim experience achieves greater credibility and enhances its ability to evaluate future trends. Accordingly, the Company believes its reserving process improves as additional claims experience emerges and could be expected to result in more refined estimates of claims and claims expenses over time. 41 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Claims and claims expenses reflect favorable claim development from prior years. The net favorable claim development for business written since 1986 continued to emerge during 1996, 1995 and 1994. This favorable development is impacted by several factors, some of which are interdependent. A principal factor is the strength of the actuarial assumptions underlying the business written, particularly with respect to the consideration given to social and economic inflation. These actuarial assumptions are utilized to establish the expected 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 comparisons of actuarially computed expected to actual claims and claims expense development, inflation and other considerations. This favorable development has offset certain unfavorable development for business written prior to 1986, principally related to asbestos and environmental claims, and in 1996 and 1995, includes the Company's evaluation of the lengthening of loss emergence patterns for certain lines of business included in the most recent Historical Loss Development Study issued by the Reinsurance Association of America (RAA). The Company's incurred claims and claims expenses include a provision of $1.2 million, $1.4 million and $4 million in 1996, 1995 and 1994, respectively, for estimates of actual and potential non-recoveries from retrocessionnaires. Included in claims and claims expense reserves at December 31, 1996, 1995 and 1994 is a reserve for potential non-recoveries from retrocessionnaires of $12.7 million, $10.7 million and $10.5 million, respectively. Such charges for non-recoveries relate principally to retrocessional contracts for business written prior to 1986. See Note 5 - Retrocession Agreements. Except for certain workers' compensation case reserves, the Company does not discount its claims and claims expense reserves. The Company utilizes tabular reserving for workers' compensation case reserves that are considered fixed and determinable and discounts such reserves using an interest rate of 7% for financial statements prepared in accordance with GAAP and a 5% interest rate for statutory accounting purposes. Tabular reserving methology results in applying a uniform and consistent criteria for establishing expected future indemnity and medical payments (including an explicit factor for inflation) and the use of mortality tables to determine expected payment periods. Tabular reserves, net of reinsurance, reflected in the GAAP financial statements for the years ending December 31, 1996, 1995 and 1994 were $35.8 million, $29 million and $27.7 million, respectively. The related discounted case reserves, net of reinsurance, were $15 million as of December 31, 1996 and $10.6 million as of December 31, 1995 and 1994. Asbestos and Environmental Related Claims The Company's reserving process includes a continuing evaluation of the potential impact on claim liabilities from exposure to asbestos and environmental claims, including related loss adjustment expenses. Liabilities are established to cover both known and unasserted claims. 42 - -------------------------------------------------------------------------------- A reconciliation of the beginning and ending reserves related to asbestos and environmental exposure claims for the years indicated is as follows:
In Thousands ============================================================================================================= Year ended December 31, ------------------------------------ 1996 1995 1994 ============================================================================================================= Reserves for claims and claims expenses, net of reinsurance recoverables, at beginning of year $22,029 $19,849 $18,379 Provisions for claims and claims expenses, net of reinsurance 10,683 6,989 4,810 Less payments for claims and claims expenses, net of reinsurance 4,212 4,809 3,340 - ------------------------------------------------------------------------------------------------------------- Reserves for claims and claims expenses, net of reinsurance recoverables, at end of year 28,500 22,029 19,849 Reinsurance recoverables, at end of year 32,584 35,135 34,141 - ------------------------------------------------------------------------------------------------------------- Reserves for claims and claims expenses, gross of reinsurance recoverables, at year end $61,084 $57,164 $53,990 =============================================================================================================
Incurred but not reported claims and claims expense reserves (IBNR), net of reinsurance, included in the above table totaled $13.4 million in 1996, $10.3 million in 1995 and $9.4 million in 1994. Ceded liabilities reflect amounts expected to be recoverable from retrocessionnaires, after reduction for potential uncollectible amounts. As of December 31, 1996 and 1995, the Company had approximately 300 open claim files for potential asbestos exposures and 800 open claim files for potential environmental exposures. Approximately 53% and 55% of the total open claim files for 1996 and 1995, respectively, are due to precautionary claim notices. Precautionary claim notices are submitted by the ceding company in order to preserve their right to receive coverage under the reinsurance contract. Such notices do not contain an incurred loss amount to the Company. The Company actively evaluates potential exposure to asbestos and environmental claims and records claims and claims expense reserves as appropriate. The Company believes it has made a reasonable provision for its asbestos and environmental exposures and is unaware of any specific issues which would materially affect its claims and claims expense estimate. The estimation of claims and claims expense liabilities for asbestos and environmental exposures is subject to a much greater uncertainty than would normally be associated with the establishment of liabilities for other exposures due to several factors, including: i) uncertain legal interpretation and application of insurance and reinsurance coverage and liability; ii) the lack of reliability of available historical claim data as an indicator of future claim development; iii) an uncertain political climate which may impact, among other areas, the nature and amount of costs for remediating waste sites; and iv) the potential of insurers and policyholders to reach agreements in order to avoid further significant legal costs. Due to the potential significance of these uncertainties, the Company believes that no meaningful range of claims and claims expense liabilities beyond recorded reserves can be established. As these uncertainties are resolved, additional reserve provisions, which could be material in amount, may be necessary. 43 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Income Taxes The provision for federal income taxes has been determined on the basis of a consolidated tax return consisting of NAC Re and its subsidiaries. The income tax provision in the consolidated statement of income gives effect to permanent differences between financial and taxable income. Due to the contribution of tax-exempt income and other factors as noted below, the Company's effective income tax rate is less than the statutory rate on operating income. An analysis of the Company's effective tax rate is as follows:
In Thousands ========================================================================================================= Year ended December 31, ------------------------------------------------------------------- 1996 1995 1994 ========================================================================================================= % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income ========================================================================================================= Income taxes computed on pretax operating income $ 31,163 35% $ 27,587 35% $ 14,801 35% Increase (reduction) in taxes resulting from: Tax-exempt investment income (12,272) (14) (10,150) (13) (7,308) (17) Dividend received deduction (895) (1) (822) (1) (713) (2) Other, net 520 1 (618) (1) (102) -- - --------------------------------------------------------------------------------------------------------- Tax expense on operating income $ 18,516 21% $ 15,997 20% $ 6,678 16% =========================================================================================================
Significant components of the provision for income taxes attributable to operations were as follows: In Thousands ================================================================================ Year ended December 31, --------------------------------------- 1996 1995 1994 ================================================================================ Current expense: Federal $ 19,879 $ 17,809 $ 10,463 Foreign 3,431 970 422 - -------------------------------------------------------------------------------- Total current expense 23,310 18,779 10,885 - -------------------------------------------------------------------------------- Deferred expense (benefit): Federal (4,845) (3,245) (3,761) Foreign 51 463 (446) - -------------------------------------------------------------------------------- Total deferred benefit (4,794) (2,782) (4,207) - -------------------------------------------------------------------------------- Total tax expense $ 18,516 $ 15,997 $ 6,678 ================================================================================ 44 - -------------------------------------------------------------------------------- The Company's current federal tax expense for the years 1996, 1995 and 1994 was based on regular taxable income. Taxes paid in the years 1996, 1995 and 1994 were $17 million, $19 million and $10 million, respectively. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1996 and 1995 were as follows: In Thousands ================================================================================ December 31, ------------------------- 1996 1995 ================================================================================ Deferred tax asset: Net claims reserve discount $62,629 $52,556 Net unearned premiums 17,524 13,307 Compensation liabilities 4,756 3,764 Other 2,129 2,951 - -------------------------------------------------------------------------------- Deferred tax asset 87,038 72,578 - -------------------------------------------------------------------------------- Deferred tax liability: Deferred policy acquisition costs 29,766 23,855 Unrealized appreciation of investments 17,068 18,947 Currency translation adjustments 4,511 548 Foreign subsidiary income 3,615 116 Other 1,688 1,424 - -------------------------------------------------------------------------------- Deferred tax liability 56,648 44,890 - -------------------------------------------------------------------------------- Net deferred tax asset $30,390 $27,688 - -------------------------------------------------------------------------------- Stockholders' equity at December 31, 1996 and 1995 reflects tax benefits of $3.1 million and $3 million, respectively, related to compensation expense deductions for stock options exercised. As a result of the merger of its previously existing parent into NAC Re in January 1987, $12 million of tax loss carryforwards are currently available for use to offset future taxable income of NAC Re under the separate return limitation year rules, with the following expiration dates: $1.8 million expiring in 1998, $6.2 million expiring in 1999, $3.9 million expiring in 2000 and $.1 million expiring in 2001. A deferred tax asset was not recorded for these loss carryforwards, as the Company does not expect to utilize these losses in future years. 5. Retrocession Agreements The Company utilizes retrocession agreements principally to increase aggregate premium capacity and to reduce the risk of loss on reinsurance underwritten. In addition, the Company maintains catastrophe reinsurance programs for the purpose of limiting its exposure with respect to multiple claims arising from a single occurrence or event. The Company's retrocession agreements provide for recovery of a portion of claims and claims expenses from retrocessionnaires. Reinsurance recoverables are recorded as assets, predicated on the retrocessionnaires' ability to meet their obligations under the retrocession agreements. If the retrocessionnaires are unable to satisfy their obligation under the agreements, the Company would be liable for such defaulted amounts. 45 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's maximum retention on any one claim for non-catastrophe property/casualty losses for 1997 and 1996 is $5 million, compared to $3.9 million for 1995. The Company's maximum retention for surety losses for 1997 and 1996 is $4 million per principal, compared to $3.9 million per principal for 1995. Further, the Company's retention level for property catastrophe claims in 1997 remains the same as 1996 and 1995 at $5 million per event. For 1997, the Company expects to obtain $115 million of property catastrophe protection, of which $25 million of protection, in excess of the first $55 million of protection, is available only if industry-wide claims exceed certain minimum levels. The effect of retrocessional activity on premiums written and earned is set forth below: In Thousands ================================================================================ Premiums Written Premiums Earned --------------------------------- ----------------------------------- Year ended December 31, Year ended December 31, --------------------------------- ----------------------------------- 1996 1995 1994 1996 1995 1994 ================================================================================ Direct $ 72,810 $ 70,183 $ 46,005 $ 65,667 $ 58,475 $ 30,621 Assumed 641,270 607,755 529,032 608,542 583,764 487,961 Ceded (140,076) (156,449) (136,836) (147,867) (150,454) (122,851) - -------------------------------------------------------------------------------- Net $ 574,004 $ 521,489 $ 438,201 $ 526,342 $ 491,785 $ 395,731 ================================================================================ The Company's direct and ceded premiums written increased in 1994, 1995, and 1996 principally due to an agreement with a premier aviation underwriting pool which also provides reinsurance protection for the common account of all the direct writer participants. The Company recorded ceded claims and claims expenses incurred of $123.2 million, $120.4 million and $105.6 million for the years ended December 31, 1996, 1995 and 1994, respectively. The Company's balance sheet as of December 31, 1996 and 1995 reflects reinsurance recoverables as assets, net of available offsets, as follows: In Thousands ================================================================================ December 31, ------------------------ 1996 1995 ================================================================================ Reinsurance recoverable balances: Paid claims $ 15,457 $ 19,051 Unpaid claims and claims expenses 406,128 338,746 Ceded balances payable (38,205) (56,792) Funds held liability (47,056) (43,869) - -------------------------------------------------------------------------------- Reinsurance recoverable balances, net $ 336,324 $ 257,136 ================================================================================ Reinsurance recoverable on unearned premiums $ 20,320 $ 28,111 ================================================================================ 46 - -------------------------------------------------------------------------------- The Company is the beneficiary of letters of credit, trust accounts and funds withheld in the aggregate amount of $272 million at December 31, 1996, collateralizing reinsurance recoverables with respect to certain retrocessionnaires. At December 31, 1996, the Company had reinsurance recoverables, exclusive of available offsets in the form of letters of credit, trust accounts and funds withheld, totaling $441.9 million, with approximately 178 domestic and 116 foreign retrocessionnaires. Of that amount, approximately 41% or $180 million was due from one retrocessionnaire, Hannover Ruckversicherungs AG (80%), and its affiliate, E&S Ruckversicherungs AG (20%), both of which are rated AA+ by Standard & Poor's. Such amounts are fully collateralized by either ceded balances payable, funds withheld or letters of credit. No other amounts recoverable from a single entity or group of entities exceeded 10% of stockholders' equity as of December 31, 1996. In recognition of the Company's enhanced surplus position and financial capacity, and the continued positive contribution of business written since 1986, the Company has reached agreements to terminate two retrocessional programs effective January 1, 1997. As a result, the Company expects to receive total consideration of approximately $220 million, representing reinsurance recoverable balances for unpaid claims and claims expenses. Also as a result of the termination, the Company's maximum retention on any one claim for non-catastrophe property/casualty losses for 1996 and 1995 will increase to $7.5 million. The Company's maximum retention for surety losses for 1996 and 1995 will increase to $12.5 million and $13 million per principal, respectively. In addition, the Company's retention levels for property catastrophe claims relating to 1996 and 1995 will increase to $15 million and $25 million, respectively per event. 6. Lease and Service Agreements Operating Lease Agreement The Company leases office space under noncancellable, and in most instances renewable, operating leases expiring at various dates through 2003. The following is a schedule of future minimum rental payments, exclusive of escalation clauses and rental income, as of December 31, 1996: Year In Thousands ================================================================================ 1997 $3,986 1998 3,995 1999 3,830 2000 3,672 2001 and thereafter 3,693 - -------------------------------------------------------------------------------- Total $19,176 ================================================================================ Rental expense, net of sublease rental income, was approximately $3.9 million for 1996, $3.5 million for 1995 and $3.3 million for 1994. 47 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Service Agreement In 1995, the Company had consulting agreements with two investment banking firms with which two Directors of the Company are associated, for a fee of $100,000 per firm. The Company has retained the services of these firms from time to time since 1991. In addition, these firms acted as co-managing underwriters in connection with the Company's 1995 Common Stock offering and co-lead underwriters in connection with its concurrent debt offering and were paid total underwriting commissions of $3 million related to such offerings. See Notes 7 and 12. 7. Long-term Debt and Financing Arrangements The Company's $100 million of 7.15% Senior Notes due November 15, 2005, were issued in November 1995 through a public offering at a price of $99.9 million. The expenses incurred in the offering of approximately $.8 million were deferred and are being amortized over the life of the Notes. Interest and amortization costs were $7.2 million and $.8 million for 1996 and 1995, respectively. The fair value of the Notes, estimated based on quoted market prices, was approximately $99.7 million as of December 31, 1996. The Company contributed the net proceeds of $99.1 million to NAC in 1995. The Company's $100 million of 5.25% Convertible Subordinated Debentures due December 15, 2002, were issued in December 1992 through a private offering. The Debentures are callable as of January 15, 1996 and are convertible into approximately 2 million shares of the Company's Common Stock at a conversion price of $49.50 per share. The expenses incurred in the offering of approximately $1.4 million were deferred and are being amortized over the life of the Debentures. Interest and amortization costs were $5.4 million for 1996, 1995 and 1994. The fair value of the Debentures, estimated based on quoted market prices, was approximately $96.5 million as of December 31, 1996. The Company contributed $85 million of the net proceeds of the offering to NAC in 1992. The Company's $100 million of 8% Senior Notes due June 15, 1999 were issued in June 1992 through a public offering. The expenses incurred in the offering of approximately $.8 million were deferred and are being amortized over the life of the Notes. Interest and amortization costs were $8.1 milion for 1996, 1995 and 1994. The fair value of the Notes, estimated based on quoted market prices, was approximately $103.6 million as of December 31, 1996. The Company contributed $80 million of the net proceeds of the offering to NAC in 1992. NAC Re has a revolving credit agreement and term loan bank facility under which it can borrow up to $35 million. A commitment fee of 3/8 of 1% per year is paid on the unused credit line. Borrowings of $12.9 million were outstanding at December 31, 1996 and were principally used in connection with repurchases of the Company's Common Stock. The Company modified its existing revolving credit facility in April 1996. The requirement for payment of outstanding balances beginning in June 1996 was replaced with a scheduled reduction of the credit facility beginning in July 1998 and ending July 2001. NAC has a $15 million line of credit which is available for catastrophe claim payments or working capital purposes. A commitment fee of 1/4 of 1% per year is paid on the unused credit line. There were no outstanding borrowings on this facility at December 31, 1996. Interest costs on borrowing facilities were approximately $1.6 million, $1.4 million and $.9 million in 1996, 1995 and 1994, respectively. 48 - -------------------------------------------------------------------------------- Total interest expense paid in connection with the Company's long-term debt and financing arrangements was $22 million, $14.6 million and $14.1 million for the years ended December 31, 1996, 1995 and 1994, respectively. 8. Employee Benefits and Compensation Arrangements Stock Plans The Company accounts for stock compensation plans in accordance with Accounting Principals Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense for stock option grants and stock appreciation rights (SARs) is recognized to the extent that the fair value of the stock exceeds the exercise price of the option at the measurement date. The Company maintains stock option plans which provide for the granting of options and SARs to purchase shares of Common Stock to certain officers of the Company. Under such plans, the Company had the authority to grant up to 2,375,000 options at December 31, 1996. Options and SARs have generally been granted with a five or six year vesting schedule. The majority of the options expire ten years from the date of grant; the remainder of the options have no expiration. Outstanding SARs are generally converted by the Company to options prior to vesting. The Company also maintains a stock option plan for non-employee directors that provides for automatic annual grants of options to eligible directors. Under such plan, the Company had the authority to grant up to 375,000 options at December 31, 1996. Options expire ten years from the date of grant and are fully exercisable six months after their grant date. Information concerning stock options (including SARs) for all of the Company's stock option plans is as follows:
Year ended December 31, ===================================================================================================== 1996 1995 1994 ---------------------------------------------------------------- Average Average Average Options Exercise Options Exercise Options Exercise (000's) Price (000's) Price (000's) Price ===================================================================================================== Outstanding, beginning of year 1,772 $28.27 1,548 $25.11 1,541 $24.40 Granted 713 35.93 412 38.02 293 26.49 Exercised (33) 19.79 (102) 17.97 (157) 15.59 Cancelled (72) 33.73 (86) 30.24 (129) 31.39 - ----------------------------------------------------------------------------------------------------- Outstanding, end of year 2,380 $30.51 1,772 $28.27 1,548 $25.11 - ----------------------------------------------------------------------------------------------------- Exercisable, end of year 931 $23.59 738 $21.66 700 $19.62 - ----------------------------------------------------------------------------------------------------- Available for grant, end of year 139 -- 784 -- 1,112 -- =====================================================================================================
49 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about the Company's stock options (including SARs) for options outstanding as of December 31, 1996: Options Outstanding Options Exercisable ================================================================================ Average Number of Remaining Number of Range of Options Average Contractual Options Average Exercise Prices (000's) Price Life (Years) (000's) Price ================================================================================ $11.22 - $18.83 342 $15.06 5.3 342 $15.06 $21.83 - $29.63 528 $24.96 7.3 330 $24.08 $30.13 - $40.38 1,510 $35.95 9.5 259 $34.21 - -------------------------------------------------------------------------------- $11.22 - $40.38 2,380 $30.51 8.4 931 $23.59 ================================================================================ The Company has an Employee Stock Purchase Plan through which all employees have the option, subject to certain limitations, to purchase NAC Re's Common Stock, at the end of each offering period at a discounted price. The discounted price is based on 85% of the lesser of the stock's market price at the beginning of the period and the market price at the end of the period. During the 1996, 1995 and 1994 plan years, employees have purchased approximately 28,400, 21,200 and 18,500 shares of Common Stock. The Company's stock purchase plan qualifies as a non-compensatory plan under APB 25. The Company has a restricted stock plan, pursuant to which employees have been granted approximately 57,600, 44,500 and 52,400 shares of Common Stock during 1996, 1995 and 1994, respectively. Vesting for such shares occurs over a six-year period. In 1996, the Company also granted 20,000 shares of restricted stock to an executive in connection with his employment contract. Vesting for the majority of these shares is based upon future appreciation of NAC Re's Common Stock while the remainder of the shares vest over a five year period. The Company incurred compensation expense, under APB 25, for the years ended December 31, 1996, 1995 and 1994 of approximately $974,000, $613,000 and $473,000, respectively, in connection with such stock grants. Supplemental and Pro Forma Disclosures In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." This Statement, if adopted, requires companies to recognize compensation expense for grants of stock, stock options and other equity instruments to employees based on their respective fair values on the date of grant. Companies that choose not to adopt the new rules will continue to apply the existing accounting rules contained in APB No. 25, but are required to disclose the pro forma effects of net income and earnings per share, as if the fair value based method of accounting had been applied. The following pro forma information regarding net income and earnings per share required by Statement No. 123 has been determined as if the Company had accounted for its employee stock plans under the fair value method described in that Statement. The fair value of options and other awards granted under 50 - -------------------------------------------------------------------------------- the Company's stock-based compensation plans was estimated on the date of grant using a Black-Scholes option valuation model. The Black-Scholes option model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected dividend yield, the expected life of the options, the expected stock price volatility and the risk-free interest rate. The weighted average dividend yield for stock option grants during 1996 and 1995 was .7% and .6%, respectively. The weighted average expected life for both 1996 and 1995 was 7.5 years. The weighted average volatility and risk-free interest rate for both 1996 and 1995 were 28% and 6.3%, respectively. The weighted average grant date fair values for options granted during 1996 and 1995 were $15.32 per share and $16.24 per share, respectively. The assumptions for the stock purchase plan for both 1996 and 1995 were as follows: dividend yield of .7%; expected life of 1 year, volatility of 28% and risk-free interest rate of 5.3%. The grant date fair values for the stock purchase plan shares during 1996 and 1995 were $8.75 per share and $8.69 per share, respectively. For purposes of pro forma disclosures, the estimated fair value of each option is amortized to expense over the option's vesting period and does not include grants prior to January 1, 1995. As such, the pro forma net income and earnings per share are not indicative of future years. The Company's pro forma information is as follows: In Thousands, except per share amounts ================================================================================ Year ended December 31, ---------------------------------------------------- 1996 1995 --------------------- ------------------------ Reported Pro Forma Reported Pro Forma ================================================================================ Net income $70,520 $69,111 $62,824 $62,322 Earnings per share: Primary $3.69 $3.62 $3.47 $3.44 Fully diluted $3.51 $3.44 $3.29 $3.27 ================================================================================ Incentive Compensation Plans The Company maintains two incentive compensation plans. The Long-term Incentive Plan provides for cash awards to eligible officers based on achievement of certain corporate goals over a three-year performance cycle. The Annual Incentive Plan for all employees (which was amended in 1996 to incorporate a previously separate plan for non-officers) provides for annual cash awards based on individual and corporate performance. Based on estimated performance levels, the Company expensed $8.5 million, $6.4 million and $4.6 million for the years ended December 31, 1996, 1995 and 1994, respectively, related to these plans. 51 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Severance Program The Company has severance agreements with officers and a severance program for non-officers to provide for severance payments and continuation of benefits in the event of employment termination resulting from a change in control. The extent of the severance payments and when they are triggered vary depending upon the position of the employee and, in the case of non-officers, the length of tenure of the employee. Employment Contracts The Company has employment contracts with certain officers, the terms of which expire at various times through December 31, 2001. Such agreements provide for minimum salary levels, incentive bonuses payable in accordance with bonus plans and, in two contracts, supplemental retirement benefits. Retirement Plans The Company maintains a qualified non-contributory defined benefit pension plan covering substantially all U.S. employees. Pension benefits generally vest after five years of service. Benefits are based on years of service and compensation, as defined in the plan, during the highest consecutive three years of the employee's last ten years of employment. The Company's policy is to make annual contributions to the plan that are deductible for federal income tax purposes and that meet the minimum funding standards required by law. This contribution level is determined by utilizing the entry age cost method and different actuarial assumptions than those used for pension expense purposes. The Company also maintains a non-qualified unfunded supplemental defined benefit plan designed to compensate individuals to the extent their benefits under the Company's qualified plan are curtailed due to Internal Revenue Code limitations. 52 - -------------------------------------------------------------------------------- The following tables set forth the amounts recognized in the Company's financial statements with respect to the qualified and non-qualified pension plans.
In Thousands ===================================================================================================================== December 31, 1996 December 31, 1995 ------------------------------------------------------------------ Non- Non- Qualified Qualified Qualified Qualified Plan Plan Total Plan Plan Total - --------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation: Vested $ 3,676 $ 1,422 $ 5,098 $ 3,332 $ 1,263 $ 4,595 Nonvested 769 141 910 830 62 892 - --------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation 4,445 1,563 6,008 4,162 1,325 5,487 Effect of projected salary increases 3,174 1,330 4,504 3,351 1,671 5,022 - --------------------------------------------------------------------------------------------------------------------- Projected benefit obligation 7,619 2,893 10,512 7,513 2,996 10,509 Plan assets at market value 6,461 -- 6,461 5,169 -- 5,169 - --------------------------------------------------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets 1,158 2,893 4,051 2,344 2,996 5,340 Unrecognized net gain (loss) 1,866 608 2,474 175 (13) 162 Unrecognized net transition obligation (96) -- (96) (105) -- (105) Unrecognized net prior service costs (72) (255) (327) (76) (267) (343) - --------------------------------------------------------------------------------------------------------------------- Pension liability, end of year 2,856 3,246 6,102 2,338 2,716 5,054 Pension liability, beginning of year (2,338) (2,716) (5,054) (1,901) (2,226) (4,127) Company contributions 557 -- 557 519 -- 519 - --------------------------------------------------------------------------------------------------------------------- Net pension cost $ 1,075 $ 530 $ 1,605 $ 956 $ 490 $ 1,446 =====================================================================================================================
In Thousands ================================================================================ Year ended December 31, ---------------------------- 1996 1995 1994 ================================================================================ Net pension cost included the following components: Service costs - benefits earned during the year $ 1,247 $ 1,111 $ 1,061 Interest cost on projected benefit obligations 741 660 539 Net amortization and deferral (807) 751 (264) Actual return on plan assets 424 (1,076) (17) - -------------------------------------------------------------------------------- Net pension cost $ 1,605 $ 1,446 $ 1,319 ================================================================================ The discount rates used in determining the actuarial present value of benefit obligations were 7.25% and 7% for 1996 and 1995, respectively. The rate of increase for future compensation levels was 6% for 1996 and 1995. The assumed rate of return on plan assets was 8.5% for 1996, 1995 and 1994. Assets of the qualified plan are invested principally in equity securities and fixed maturities. Plan assets include approximately $486,000 and $517,000 of NAC Re Common Stock as of December 31, 1996 and 1995, respectively. 53 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company maintains a qualified contributory defined contribution plan for substantially all U.S. employees. Under this plan, the Company makes a matching contribution equal to 50% of each participant's eligible elective contributions, which may be up to 6% of the participant's compensation. The Company may make an additional annual discretionary matching contribution. The Company also maintains a non-qualified unfunded supplemental defined contribution plan designed to compensate individuals to the extent the Company's contributions under the qualified plan are curtailed due to Internal Revenue Code limitations. The Company expensed $2 million for 1996, $1.6 million for 1995 and $1 million for 1994, related to these plans. Contributions to the qualified plan are invested, at the election of the participant, in several funds, including a NAC Re Common Stock fund. The fund held approximately 137,000 and 123,000 shares of NAC Re Common Stock as of December 31, 1996 and 1995, respectively. The Company maintains a qualified non-contributory defined contribution plan covering substantially all U.K. employees. Contributions under this plan are determined on the basis of salary, age and position within the organization. The Company also maintains an unfunded supplemental defined contribution plan designed to compensate individuals to the extent their benefits under the qualified plan are curtailed due to U.K. Inland Revenue limitations. The Company incurred expenses of $436,000, $375,000 and $363,000 for the years ended December 31, 1996, 1995 and 1994, respectively, related to these plans. 9. Domestic and International Financial Information The Company's principle business segment, for both its domestic and international operations, is the reinsurance of property and casualty lines of business, including general liability, automobile liability, aviation, fidelity/surety and commercial and personal property. The Company's domestic operation includes business written in the United States and Canada. International property and casualty reinsurance is conducted through a wholly-owned subsidiary, NAC Re International Holdings Limited, which established a fully licensed property and casualty reinsurance subsidiary, NAC Reinsurance International Limited, located in London, England in December 1993. The subsidiary was initially capitalized with (pounds)50 million, or approximately $75 million, and, subsequent to contributions by the Company in 1995 and 1994, its statutory surplus level was approximately (pounds)79.6 million or $135.1 million at December 31, 1996. 54 - -------------------------------------------------------------------------------- The following is a summary of financial information related to the Company's domestic and international operations: In Thousands ================================================================================ Year ended December 31, 1996 ------------------------------------ Domestic International Total ================================================================================ Net premiums written $ 521,876 $ 52,128 $ 574,004 - -------------------------------------------------------------------------------- Premiums earned 476,012 50,330 526,342 Net investment income 93,206 11,124 104,330 Realized gains (losses) 19,603 (34) 19,569 - -------------------------------------------------------------------------------- Total revenues 588,821 61,420 650,241 ================================================================================ Claims and claims expense 302,535 36,418 338,953 Commissions and brokerage 133,423 9,901 143,324 Other acquisition costs and expenses 49,019 7,587 56,606 Interest expense 22,322 -- 22,322 - -------------------------------------------------------------------------------- Total expenses 507,299 53,906 561,205 ================================================================================ Pretax operating income 81,522 7,514 89,036 - -------------------------------------------------------------------------------- Net income $ 65,566 $ 4,954 $ 70,520 ================================================================================ Identifiable assets $2,640,727 $ 252,043 $2,745,631* ================================================================================ Statutory composite ratio 101.1% 105.6% 101.6% ================================================================================ * The total is net of intercompany transactions of $147.1 million. In Thousands ================================================================================ Year ended December 31, 1995 ------------------------------------ Domestic International Total ================================================================================ Net premiums written $ 476,048 $ 45,441 $ 521,489 - -------------------------------------------------------------------------------- Premiums earned 452,994 38,791 491,785 Net investment income 81,583 7,725 89,308 Realized gains 24,063 1,328 25,391 - -------------------------------------------------------------------------------- Total revenues 558,640 47,844 606,484 ================================================================================ Claims and claims expense 295,038 31,110 326,148 Commissions and brokerage 132,049 7,014 139,063 Other acquisition costs and expenses 40,760 6,044 46,804 Interest expense 15,648 -- 15,648 - -------------------------------------------------------------------------------- Total expenses 483,495 44,168 527,663 ================================================================================ Pretax operating income 75,145 3,676 78,821 - -------------------------------------------------------------------------------- Net income $ 60,449 $ 2,375 $ 62,824 ================================================================================ Identifiable assets $2,405,051 $180,060 $2,462,131* ================================================================================ Statutory composite ratio 103.1% 111.7% 103.7% ================================================================================ * The total is net of intercompany transactions of $123 million. 55 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In Thousands ================================================================================ Year ended December 31, 1994 ------------------------------------ Domestic International Total ================================================================================ Net premiums written $ 412,412 $ 25,789 $ 438,201 - -------------------------------------------------------------------------------- Premiums earned 375,870 19,861 395,731 Net investment income 75,783 4,721 80,504 Realized gains (losses) 4,209 (2,054) 2,155 - -------------------------------------------------------------------------------- Total revenues 455,862 22,528 478,390 ================================================================================ Claims and claims expense 250,013 15,740 265,753 Commissions and brokerage 114,540 3,052 117,592 Other acquisition costs and expenses 33,091 5,210 38,301 Interest expense 14,454 -- 14,454 - -------------------------------------------------------------------------------- Total expenses 412,098 24,002 436,100 ================================================================================ Pretax operating income (loss) 43,764 (1,474) 42,290 - -------------------------------------------------------------------------------- Net income (loss) $ 36,740 $ (1,128) $ 35,612 ================================================================================ Identifiable assets $1,893,596 $ 115,300 $1,916,768* ================================================================================ Statutory composite ratio 105.7% 114.7% 106.1% ================================================================================ * The total is net of intercompany transactions of $92.1 million. During 1996, two reinsurance brokers, AON Reinsurance Agency and Guy Carpenter and Company, Inc., generated 23% and 13%, respectively, of the Company's premiums assumed from client companies. These same reinsurance brokers generated 16% and 16%, respectively, during 1995, and 18% and 16%, respectively, during 1994, of the Company's assumed premiums. One client company, Chubb Group, contributed approximately 2%, 9% and 10% of the Company's gross premiums written during 1996, 1995 and 1994, respectively. This business is generated primarily from the Company's domestic reinsurance operations. Gross premiums written from this client declined in 1996 as a result of an increase in its retention levels. The Company does not believe that the reduction of business assumed from any one client or broker will have a materially adverse effect on the Company due to its competitive position in the marketplace and the continuing availability of other sources of business. 10. Statutory Financial Information Consolidated statutory net income and surplus of NAC, as reported to the insurance regulatory authorities, differs in certain respects from the amounts as prepared in accordance with generally accepted accounting principles (GAAP). The following schedules identify the significant reconciling differences: 56 - --------------------------------------------------------------------------------
In Thousands ==================================================================================== Year ended December 31, ------------------------------------ Net Income: 1996 1995 1994 ==================================================================================== Domestic statutory net income $ 59,827 $ 57,670 $ 27,312 Domestic GAAP adjustments: Deferred acquisition costs 14,211 9,128 14,577 Deferred income taxes 4,421 3,204 3,770 Other, net 401 (1,074) (370) - ------------------------------------------------------------------------------------ Domestic GAAP net income 78,860 68,928 45,289 International operation 4,954 2,375 (1,128) Parent company operations (13,294) (8,479) (8,549) - ------------------------------------------------------------------------------------ Consolidated GAAP net income $ 70,520 $ 62,824 $ 35,612 ====================================================================================
In Thousands ==================================================================================== December 31, ------------------------------------ Stockholders' Equity: 1996 1995 1994 ==================================================================================== Consolidated statutory surplus $ 663,867 $ 615,433(1) $ 407,024 Consolidated GAAP adjustments: Deferred acquisition costs 85,211 70,466 59,953 Deferred income tax asset, net 29,599 27,492 43,928 Excess of cost over net assets acquired 3,644 4,011 4,379 Unrealized appreciation (depreciation) 25,537 46,783 (40,321) Unauthorized/authorized reinsurance charges 12,730 6,814 5,914 Other, net 4,695 4,101 4,137 - ------------------------------------------------------------------------------------ Investment in insurance subsidiaries, GAAP 825,283 775,100 485,014 Parent company: Other net assets 27,920 36,583 34,071 Long-term debt (299,934) (299,927) (200,000) - ------------------------------------------------------------------------------------ Consolidated stockholders' equity, GAAP $ 553,269 $ 511,756 $ 319,085 ====================================================================================
(1) The Company contributed approximately $146.6 million to the statutory surplus of NAC from the proceeds of the public debt and equity offerings in November 1995. See Notes 7 and 12. Under the holding company structure, NAC Re is dependent upon the ability of its principal operating subsidiary, NAC, for the transfer of funds in the form of rental receipts, tax reimbursements and cash dividends. Such transactions, including the payment of cash dividends, are subject to restrictions imposed by New York insurance law. Generally, NAC may pay cash dividends only out of its statutory earned surplus which was $155.9 million at December 31, 1996. However, the maximum amount of dividends that may be paid in any twelve-month period without the prior approval of the New York Insurance Department is the lesser of net investment income or 10% of statutory surplus as such terms are defined in the New York insurance law. The maximum amount of cash dividends that NAC could pay without such regulatory approval, based on 10% of statutory surplus as of December 31, 1996, is approximately $66.4 million. During 1996, 1995 and 1994, NAC declared dividends of $38 million, $7.5 million and $15 million, respectively, to NAC Re. 57 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 adequacy of property and casualty insurers and reinsurers with respect to the risks assumed by them and to 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 has not yet been adopted in New York, NAC's domicile, it was enacted in California in 1996, 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. The NAIC also 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 subsidiaries is well above the risk-based capital thresholds that would require either company or regulatory action. 11. Quarterly Financial Information (Unaudited) The following is a summary of quarterly financial data, in thousands, except per share data and stock prices:
Three months ended ============================================================================================================== December 31, September 30, June 30, March 31, ------------------- ------------------ ------------------ ------------------ 1996 1995 1996 1995 1996 1995 1996 1995 ============================================================================================================== Income Statement Data: Gross premiums written $197,964 $174,267 $183,052 $186,637 $172,718 $166,144 $160,346 $150,890 Net premiums written 159,332 138,800 150,681 145,466 140,852 126,702 123,139 110,521 Premiums earned 140,060 133,409 139,115 133,344 130,346 119,554 116,821 105,478 Net investment income 26,831 22,401 26,140 22,270 25,616 22,427 25,743 22,210 Investment gains (losses) 4,915 9,314 2,122 8,502 2,715 4,433 9,817 3,142 Operating costs and expenses 149,668 140,572 147,432 141,766 138,676 128,301 125,429 117,024 Operating income/net income 17,296 19,256 16,038 17,599 16,414 14,594 20,772 11,375 - -------------------------------------------------------------------------------------------------------------- Per Share Data: Primary: Operating/net income $.92 $1.04 $.84 $.98 $.85 $.82 $1.06 $.64 Fully diluted: Net income .87 .98 .80 .92 .81 .78 1.00 .62 Stockholders' equity per share 30.06 26.65 28.18 24.39 26.96 23.10 26.54 20.90 Cash dividends declared per share .06 .05 .06 .05 .06 .05 .05 .04 - -------------------------------------------------------------------------------------------------------------- Stock prices: High $37.63 $38.38 $40.63 $39.00 $33.88 $35.25 $36.25 $34.00 Low 32.63 31.63 30.25 30.63 28.50 28.50 31.75 28.25 Close 33.88 36.00 36.00 36.25 33.50 31.13 32.63 30.25 - --------------------------------------------------------------------------------------------------------------
58 - -------------------------------------------------------------------------------- 12. Capital Stock Changes in Common Stock outstanding were as follows: Year ended December 31, ================================================================================ 1996 1995 1994 ================================================================================ Common Stock: Balance, beginning of year 21,341,053 19,638,865 19,348,739 Shares issued 122,929 1,702,188 290,126 - -------------------------------------------------------------------------------- Balance, end of year 21,463,982 21,341,053 19,638,865 - -------------------------------------------------------------------------------- Treasury Stock: Balance, beginning of year 2,137,501 2,131,633 1,579,375 Purchases 943,042 5,868 552,258 Shares reissued (20,000) - - - -------------------------------------------------------------------------------- Balance, end of year 3,060,543 2,137,501 2,131,633 - -------------------------------------------------------------------------------- Total Common Stock outstanding 18,403,439 19,203,552 17,507,232 ================================================================================ Equity Offering The Company issued 1,530,000 shares of Common Stock through a secondary public offering in November 1995. Approximately $47.5 million of the net proceeds was contributed to the statutory surplus of NAC. Stock Repurchase The Company maintains a stock repurchase program pursuant to which the Board of Directors has authorized the repurchase of approximately 3,231,000 shares of Common Stock. Since January 1, 1996, the Company repurchased approximately 943,000 shares of Common Stock, at an average cost of $33.23 per share. From its inception through December 31, 1996, approximately 3,081,000 shares were repurchased at a cost of approximately $73.9 million or an average price of $24.00 per share. As of December 31, 1996, approximately 150,000 shares remain authorized for repurchase under the program. Rights Plan In June 1988, the Company declared a dividend of one Preferred Stock Purchase Right (a "Right") for each outstanding share of NAC Re Common Stock. Pursuant to the related Rights Plan, as amended in 1990, the Rights will become exercisable only in the event, with certain exceptions, a person or group becomes the beneficial owner of 15% or more of NAC Re voting stock. The Rights Plan provides, however, that the Rights will not become exercisable due to the beneficial ownership by The Equitable Life Assurance Society of the United States and its affiliates of up to 28.5% of such stock. Each Right currently entitles the holder to purchase from the Company, for a price of $37.78 (the "Exercise Price"), 1/225 of a share of Series A Junior Participating Preferred Stock (the "Series A Stock") or that number of shares of Series A Stock having a market value equal to two times the Exercise Price. 59 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In addition, upon the occurrence of certain events, holders of the Rights will be entitled to purchase the shares of Series A Stock or shares in an acquiring entity, whichever is applicable, having a market value of two times the Exercise Price. NAC Re will generally be entitled to redeem the Rights at $.0222 per Right following a public announcement that a person or group has become the beneficial owner of 15% of the NAC Re voting stock. The Rights will expire on June 21, 1998. At December 31, 1996, there were 18,403,439 Rights outstanding which, if exercised, would result in the issuance of approximately 81,800 shares of Series A Stock. 60 - -------------------------------------------------------------------------------- GENERAL INFORMATION ------------------------- * Corporate Information ------------------------- * Reinsurance Terms ------------------------- 61 - -------------------------------------------------------------------------------- CORPORATE INFORMATION NAC Re Corporation NAC Re Corporation was established in 1985 and is the parent company of NAC Reinsurance Corporation. DIRECTORS Robert A. Belfer Private Investor John P. Birkelund Chairman, Dillon, Read & Co., Inc. Ronald L. Bornhuetter Chairman of the Board and Chief Executive Officer, NAC Re Corporation Nicholas M. Brown, Jr. President and Chief Operating Officer, NAC Re Corporation C.W. Carson, Jr. Independent Financial Consultant; Vice Chairman, retired, Chemical Bank and Chemical Banking Corporation Todd G. Cole Chief Executive Officer, retired, CIT Financial Corporation Michael G. Fitt Chairman and Chief Executive Officer, retired, Employers Reinsurance Corporation Daniel J. McNamara Of Counsel, former Chairman, Insurance Group Practice, Hughes, Hubbard & Reed LLP Stephen Robert Chairman and Chief Executive Officer, Oppenheimer & Co., Inc. Wendy J. Strothman Executive Vice President and Publisher, Houghton Mifflin Company Herbert S. Winokur, Jr. President, Winokur & Associates, Inc. OFFICERS Martha G. Bannerman Vice President and General Counsel Jerome T. Fadden Vice President, Chief Financial Officer and Treasurer Celia R. Brown Secretary COMMITTEES OF THE BOARD Audit C.W. Carson, Jr.* Todd G. Cole Michael G. Fitt Daniel J. McNamara Wendy J. Strothman Compensation John P. Birkelund C.W. Carson, Jr. Daniel J. McNamara Stephen Robert Wendy J. Strothman Herbert S. Winokur, Jr.* Executive Robert A. Belfer John P. Birkelund Ronald L. Bornhuetter* Daniel J. McNamara Stephen Robert Herbert S. Winokur, Jr. Finance and Investment Robert A. Belfer Ronald L. Bornhuetter* Nicholas M. Brown, Jr. C.W. Carson, Jr. Todd G. Cole Michael G. Fitt Daniel J. McNamara Herbert S. Winokur, Jr. Nominating Robert A. Belfer John P. Birkelund Ronald L. Bornhuetter Stephen Robert* * Committee Chairperson 62 - -------------------------------------------------------------------------------- CORPORATE INFORMATION NAC REINSURANCE CORPORATION NAC Reinsurance Corporation offers treaty and facultative reinsurance protection to property and casualty insurers. It has an "A+" (Superior) rating from A.M. Best and is licensed to write reinsurance throughout the United States and Canada. Ronald L. Bornhuetter Chairman of the Board Nicholas M. Brown, Jr. President and Chief Executive Officer Martha G. Bannerman Executive Vice President, General Counsel and Secretary Jerome T. Fadden Executive Vice President, Chief Financial Officer and Treasurer Stanley J. Kott Executive Vice President C. Fred Madsen Executive Vice President George F. Stoffel Senior Vice President, Casualty Clash Brian M. Boornazian Vice President, Property Celia R. Brown Vice President, Human Resources Christopher F. Buse Vice President, Casualty Treaty Gregory A. Douglas Vice President, Casualty Facultative John C. Hodge Vice President, Information Systems Richard H. Miller Vice President and Controller Thomas W. Muller Vice President, Property Field Operations Mindy Pollack Vice President, Claims Management Laura A. Shanahan Vice President, Surety/Fidelity Thomas A. Weidman Vice President and Chief Actuarial Officer GREENWICH INSURANCE COMPANY/INDIAN HARBOR INSURANCE COMPANY Greenwich Insurance Company, a primary insurance company licensed to write insurance throughout the United States, writes a limited number of specialized products with an emphasis on domestic casualty products. Indian Harbor Insurance Company, an excess and surplus lines carrier licensed in North Dakota writes a limited amount of primary business on a non-admitted basis in selected states. Both companies are subsidiaries of NAC Reinsurance Corporation and share its "A+" (Superior) A.M. Best rating. John A. Murad President and Chief Executive Officer John N. Adimari Vice President, Operations C. William Cole Vice President and Chief Underwriter NAC REINSURANCE INTERNATIONAL LIMITED NAC Reinsurance International Limited, a subsidiary of NAC Reinsurance Corporation, is an international reinsurer licensed in the United Kingdom that writes property and casualty reinsurance throughout the world. It has an "A+" (Superior) rating from A.M. Best. Charles J. Catt Manager Director Martha G. Bannerman Director Ronald L. Bornhuetter Chairman Nicholas M. Brown, Jr. Director David J. Clark Director and Chief Underwriter, Property Michael G. Fitt Director John W. Hume Finance Director John Lock Director Jeffrey R. Slocombe Director David J. Watson Director and Chief Underwriter, Casualty 63 - -------------------------------------------------------------------------------- REINSURANCE TERMS Automatic Facultative Agreements provide coverage on a blanket basis for risks which would otherwise be reinsured on an individual basis. Eligible risks must be underwritten by the insurer in accordance with agreement guidelines, which are generally more restrictive than typical treaty arrangements. Capacity is the ability to assume risk, generally measured by the ratio of net premiums written to statutory surplus, and by the ratio of claims reserves to statutory surplus. Clash Agreements protect insurers from an accumulation of liability claims from a single event. Excess of Loss Reinsurance obligates the reinsurer to indemnify the insurer only for claims in excess of an agreed amount, up to a maximum limit specified in the agreement. Excess of loss reinsurance may be written on a treaty or on a facultative basis. Facultative Reinsurance is the reinsurance of individual risks, each offered at the option of the primary company, and accepted at the option of the reinsurer. Incurred But Not Reported Losses (IBNR) represent the liability for losses which have already occurred, but which have not yet been reported to the reinsurer. The monetary amount reserved for such liabilities is necessarily an estimate based on the insurer's and reinsurer's judgment and experience. Limits Capacity is the maximum amount the reinsurer may be obligated to pay as a result of any one risk or occurrence. Property Catastrophe Agreements protect insurers from an accumulation of property claims arising out of a single event or occurrence. Pro Rata Reinsurance (also known as quota share and surplus share) obligates the reinsurer to share losses with the insurer in the same proportion it shares premiums. With quota share reinsurance the percentage is fixed; with surplus share reinsurance the percentage is variable. Reinsurance is the assumption by a reinsurer of all or part of a risk or risks originally undertaken by another insurer. The principal functions of reinsurance are: * to enable insurers to write coverages involving larger policy limits than they could otherwise write; * to protect insurers against the accumulation of individual claims arising out of catastrophic occurrences; * to reduce the financial burden attending the rapid growth of premium income; and * in general, to reduce an insurer's net exposure to claims activity to amounts considered appropriate to its financial resources. Retrocessions are a reinsurance company's own reinsurance, and a retrocessionnaire is a company which provides such reinsurance. Composite or Combined Ratio provides an overall indication of underwriting profitability. The ratio is the sum of: the ratio of commissions and other underwriting expenses to premiums written, and the ratio of claims and claims expenses to premiums earned. A statutory composite ratio over 100% indicates that for each dollar of premium received more than one dollar is expected to be paid. Statutory Surplus is the excess of total admitted assets over total liabilities, determined according to statutory accounting practices. Treaty Reinsurance is an agreement between a reinsurer and an insurance company, often called the "primary" company, which provides for the reinsurance of an entire class of risks. 64 EX-23 8 EX-23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to 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. 33-34516) 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 February 4, 1997, with respect to the consolidated financial statements and schedules of NAC Re Corporation and subsidiaries included and/or incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP New York, New York March 24, 1997 EX-24 9 EX-24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Ronald L. Bornhuetter, Martha G. Bannerman, and Celia R. Brown and each and any one of them, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to sign the name of the undersigned in the Report of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereto set his hand. /s/Nicholas M. Brown, Jr. ----------------------------------- Nicholas M. Brown, Jr. Director Dated: March 11, 1997 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Nicholas M. Brown, Jr., Martha G. Bannerman, and Celia R. Brown and each and any one of them, her true and lawful attorney-in-fact and agent, for her and in her name, place and stead, to sign the name of the undersigned in the Report of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereto set her hand. /s/Wendy J. Strothman ----------------------------------- Wendy J. Strothman Director Dated: March 11, 1997 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Nicholas M. Brown, Jr. Martha G. Bannerman and Celia R. Brown and each and any one of them, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to sign the name of the undersigned in the Report of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereto set his hand. /s/Robert A. Belfer ----------------------------------- Robert A. Belfer Director Dated: March 11, 1997 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Nicholas M. Brown, Jr., Martha G. Bannerman, and Celia R. Brown and each and any one of them, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to sign the name of the undersigned in the Report of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereto set his hand. /s/Michael G. Fitt ----------------------------------- Michael G. Fitt Director Dated: March 11, 1997 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Nicholas M. Brown, Jr., Martha G. Bannerman and Celia R. Brown and each and any one of them, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to sign the name of the undersigned in the Report of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereto set his hand. /s/Ronald L. Bornhuetter ----------------------------------- Ronald L. Bornhuetter Director Dated: March 11, 1997 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Nicholas M. Brown, Jr., Martha G. Bannerman and Celia R. Brown and each and any one of them, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to sign the name of the undersigned in the Report of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereto set his hand. /s/ John P. Birkelund ----------------------------------- John P. Birkelund Director Dated: March 11, 1997 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Nicholas M. Brown, Jr., Martha G. Bannerman and Celia R. Brown and each and any one of them, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to sign the name of the undersigned in the Report of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereto set his hand. /s/C. W. Carson, Jr. ----------------------------------- C. W. Carson, Jr. Director Dated: March 11, 1997 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Nicholas M. Brown, Jr., Martha G. Bannerman and Celia R. Brown and each and any one of them, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to sign the name of the undersigned in the Report of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereto set his hand. /s/Todd G. Cole ----------------------------------- Todd G. Cole Director Dated: March 11, 1997 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Nicholas M. Brown, Jr., Martha G. Bannerman and Celia R. Brown and each and any one of them, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to sign the name of the undersigned in the Report of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereto set his hand. /s/Daniel J. McNamara ----------------------------------- Daniel J. McNamara Director Dated: March 11, 1997 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Nicholas M. Brown, Jr., Martha G. Bannerman and Celia R. Brown and each and any one of them, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to sign the name of the undersigned in the Report of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereto set his hand. /s/Stephen Robert ----------------------------------- Stephen Robert Director Dated: March 11, 1997 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Nicholas M. Brown, Jr., Martha G. Bannerman and Celia R. Brown and each and any one of them, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to sign the name of the undersigned in the Report of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereto set his hand. /s/Herbert S. Winokur, Jr. ----------------------------------- Herbert S. Winokur, Jr. Director Dated: March 11, 1997 EX-27 10 EX-27
7 12-MOS DEC-31-1996 DEC-31-1996 1,703,537 0 0 179,619 0 0 1,965,049 18,853 15,457 85,211 2,745,631 1,513,345 271,898 8,271 0 299,934 0 0 2,146 551,123 2,745,631 526,342 104,330 19,569 0 338,953 199,930 22,322 89,036 18,516 70,520 0 0 0 70,520 3.69 3.51 0 0 0 0 0 0 0
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