-----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, F/1BY00HtIh6J23rRGST0YUjn9TkaMyqNsGX0BFbldjORsvITBXBeu4pY3mWaSbl XJ6dIZbFD2cg71MVdWxOxg== 0000950112-95-002951.txt : 19951121 0000950112-95-002951.hdr.sgml : 19951121 ACCESSION NUMBER: 0000950112-95-002951 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAC RE CORP CENTRAL INDEX KEY: 0000775542 STANDARD INDUSTRIAL CLASSIFICATION: 6331 IRS NUMBER: 133297840 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-47293 FILM NUMBER: 95590660 BUSINESS ADDRESS: STREET 1: PO BOX 2568 CITY: GREENWICH STATE: CT ZIP: 06836-2568 BUSINESS PHONE: 2036225200 MAIL ADDRESS: STREET 1: PO BOX 2568 CITY: GREENWICH STATE: CT ZIP: 06836-2568 10-Q 1 NAC RE CORP. ================================================================================ - - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period to . --------------- --------------- Commission file number 0-13891. NAC Re Corp. (Exact name of registrant as specified in its charter) Delaware 13-3297840 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Greenwich Plaza, Greenwich, CT 06836-2568 (Address of principal executive offices) (203) 622-5200 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- There were 17,616,887 shares outstanding of the Registrant's Common Stock, $.10 par value, as of September 30, 1995. - - -------------------------------------------------------------------------------- ================================================================================ NAC RE CORP. AND SUBSIDIARIES TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. - - ---- -- --------- ----------- ------- Independent Accountants' Review Report 3 Consolidated Balance Sheet - September 30, 1995 and December 31, 1994 4 Consolidated Statement of Income - Three months and nine months ended September 30, 1995 and 1994 5 Consolidated Statement of Stockholders' Equity - Nine months ended September 30, 1995 and 1994 6 Consolidated Statement of Cash Flows - Nine months ended September 30, 1995 and 1994 7 Notes to Consolidated Financial Statements 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-13 PART II. OTHER INFORMATION - - ------- ----------------- Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 Exhibit 11-1 16 Exhibit 11-2 17 Exhibit 15 18 INDEPENDENT ACCOUNTANT'S REVIEW REPORT Board of Directors and Shareholders NAC Re Corporation We have reviewed the accompanying consolidated balance sheet of NAC Re Corporation and subsidiaries as of September 30, 1995, and the related consolidated statement of income, for the three and nine months periods ended September 30, 1995 and 1994 and the consolidated statements of stockholders' equity and cash flows for the nine-month periods ended September 30, 1995 and 1994. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquires of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted audited standards, the consolidated balance sheet of NAC Re Corporation as of December 31, 1994, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended (not presented herein) and in our report dated January 31, 1995, we expressed an unqualified opinion on those consolidated financial statements. ERNST & YOUNG LLP New York, New York October 19, 1995 - 3 - NAC RE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands) (Unaudited) September 30, December 31, 1995 1994 ------------- ------------- ASSETS Investments: Available for sale: Fixed maturities (amortized cost: 1995, $1,333,546 $1,145,341 Equity securities (cost: 1995, $105,263: 1994, $125,812) 117,834 123,986 Short-term investments 135,728 135,576 ------------ ----------- TOTAL INVESTMENTS 1,587,108 1,404,903 Cash 11,475 9,624 Accrued investment income 22,244 20,053 Premiums receivable 138,007 120,610 Reinsurance recoverable balances, net 223,671 205,797 Reinsurance recoverable on unearned premiums 27,785 22,115 Investment accounts receivable 32,706 - Deferred policy acquisition costs 67,162 59,953 Excess of cost over net assets acquired 4,104 4,379 Deferred tax asset, net 37,600 44,341 Other assets 37,162 24,993 ------------ ----------- TOTAL ASSETS $2,189,024 $1,916,768 ============ =========== LIABILITIES Claims and claims expenses $1,214,226 $1,086,170 Unearned premiums 225,258 195,213 8% Notes due 1999 100,000 100,000 5.25% Convertible Subordinated Debentures due 2002 100,000 100,000 Investment accounts payable 51,487 42,442 Other liabilities 68,403 73,858 ------------ ----------- TOTAL LIABILITIES 1,759,374 1,597,683 ============ =========== 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 (1995, 19,753; 1994, 19,639 issued) 1,975 1,964 Additional paid-in capital 196,845 194,231 Unrealized appreciation (depreciation) of investments, net of tax 19,738 (46,030) Currency translation adjustments, net of tax 2,283 1,059 Retained earnings 251,363 210,255 Less treasury stock, at cost (1995, 2,136; 1994, 2,132 shares) (42,554) (42,394) ------------ ----------- TOTAL STOCKHOLDERS' EQUITY 429,650 319,085 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,189,024 $1,916,768 ============ =========== -4- NAC RE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share amounts)
(Unaudited) ----------------------------------------------------------- Three months ended Nine months ended September 30, September 30, ------------------------- ------------------------- 1995 1994 1995 1994 -------- -------- -------- -------- Premiums and Other Revenues Net premiums written $145,466 $121,234 $382,689 $318,722 Increase in unearned premiums (12,122) (11,410) (24,313) (37,789) -------- -------- -------- -------- Premiums earned 133,344 109,824 358,376 280,933 Net investment income 22,270 20,009 66,907 59,031 Net investment gains 8,502 1,787 16,077 3,033 -------- -------- -------- -------- Total revenues 164,116 131,620 441,360 342,997 Operating Costs and Expenses Claims and claims expenses 89,186 72,694 241,956 187,255 Commissions and brokerage 37,431 32,787 101,592 84,729 Acquisition and operating expenses 11,407 9,607 32,313 28,182 Interest expense 3,742 3,626 11,230 10,715 -------- -------- -------- -------- Total operating costs and expenses 141,766 118,714 387,091 310,881 Income Operating income before income taxes 22,350 12,906 54,269 32,116 -------- -------- -------- -------- Federal and foreign income taxes: Current 5,215 3,719 16,082 9,421 Deferred (464) (1,107) (5,381) (3,533) -------- -------- -------- -------- Income tax expense (benefit) 4,751 2,612 10,701 5,888 -------- -------- -------- -------- Operating income/net income $17,599 $10,294 $43,568 $26,228 ======== ======== ======== ======== Per Share Data Primary: Average shares outstanding 18,038 17,824 17,942 17,938 ======== ======== ======== ======== Operating income/net income $0.98 $0.58 $2.43 $1.46 ======== ======== ======== ======== Fully Diluted (assuming conversion of dilutive convertible securities): Average shares outstanding 20,059 19,844 20,023 19,970 ======== ======== ======== ======== Operating income/net income $0.92 $0.56 $2.31 $1.44 ======== ======== ======== ======== Cash dividends declared per share $0.05 $0.04 $0.14 $0.12 ======== ======== ======== ========
See Notes to Consolidated Financial Statements -5- NAC RE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands) (Unaudited) Nine months ended September 30, ---------------------------------- 1995 1994 ------------- ----------- COMMON STOCK Balance at beginning of year $1,964 $1,935 Issuance of shares 11 26 -------- -------- Balance at end of period $1,975 $1,961 ======== ======== ADDITIONAL PAID-IN CAPITAL Balance at beginning of year $194,231 $188,289 Issuance of shares 2,614 5,365 -------- -------- Balance at end of period $196,845 $193,654 ======== ======== UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS, NET OF TAX Balance at beginning of year $(46,030) $37,386 Unrealized appreciation (depreciation) 65,768 (56,302) -------- -------- Balance at end of period $19,738 $(18,916) ======== ======== CURRENCY TRANSLATION ADJUSTMENTS, NET OF TAX Balance at beginning of year $1,059 $(2,141) Translation adjustments 1,224 2,843 -------- -------- Balance at end of period $2,283 $702 ======== ======== RETAINED EARNINGS Balance at beginning of year $210,255 $177,459 Net income 43,568 26,228 Dividends (2,460) (2,116) -------- -------- Balance at end of period $251,363 $201,571 ======== ======== TREASURY STOCK Balance at beginning of year $(42,394) $(27,388) Purchase of treasury shares (160) (12,526) -------- -------- Balance at end of period $(42,554) $(39,914) ======== ======== TOTAL STOCKHOLDERS' EQUITY Balance at beginning of year $319,085 $375,540 Issuance of shares 2,625 5,391 Unrealized appreciation (depreciation) 65,768 (56,302) Translation adjustments 1,224 2,843 Net income 43,568 26,228 Dividends (2,460) (2,116) Purchase of treasury shares (160) (12,526) -------- -------- Balance at end of period $429,650 $339,058 ======== ======== See Notes to Consolidated Financial Statements -6- NAC RE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
(Unaudited) Nine months ended September 30, ---------------------------------- 1995 1994 ------------- ----------- OPERATING ACTIVITIES Net income $43,568 $26,228 Adjustments to reconcile net income to net cash provided by operating activities: Reserve for claims and claims expenses, net 111,201 74,122 Unearned premiums, net 24,433 37,743 Premiums receivable (18,876) (34,529) Accrued investment income (2,149) (405) Reinsurance balances, net (980) (874) Deferred policy acquisition costs (7,223) (13,117) Net investment gains (16,085) (3,053) Deferred tax asset, net (5,362) (3,492) Other liabilities (8,333) 7,488 Other items, net (4,209) 3,095 ---------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 115,985 93,206 ---------- ----------- INVESTING ACTIVITIES Sales of fixed maturity investments 967,927 474,255 Maturities of fixed maturity investments 14,324 26,919 Purchases of fixed maturity investments (1,117,400) (601,239) Net sales of short-term investments 583 42,605 Sales of equity securities 75,106 26,094 Purchases of equity securities (53,174) (58,385) Purchases of furniture and equipment (1,531) (2,419) ---------- ----------- NET CASH USED BY INVESTING ACTIVITIES (114,165) (92,170) ---------- ----------- FINANCING ACTIVITIES Issuance of shares 2,469 4,673 Purchase of treasury shares (160) (11,119) Cash dividends paid to stockholders (2,278) (2,122) Borrowings under revolving credit agreement - 9,979 ---------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 31 1,411 ---------- ----------- Increase in cash 1,851 2,447 Cash - beginning of year 9,624 7,630 ---------- ----------- Cash - end of period $11,475 $10,077 ========== ===========
See Notes to Consolidated Financial Statements -7- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. General The accompanying consolidated financial statements have been prepared on the basis of generally accepted accounting principles and in the opinion of management, reflect all adjustments necessary (consisting of normal recurring accruals) for a fair presentation of results for such periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company's Annual Report to Shareholders. 2. Per Share Data Primary earnings per share data are based on weighted average common shares and common share equivalents outstanding during the period. Fully diluted earnings per share data assumes conversion of dilutive convertible securities and the assumed exercise of all dilutive stock options. 3. Retrocession The Company's balance sheet as of September 30, 1995 and December 31, 1994 reflect reinsurance recoverable balances as assets, the components of which are as follows (in thousands): Reinsurance Recoverable Balances, Net ------------------------------------- September 30, December 31, 1995 1994 ------------- ------------ Paid Claims $11,749 $17,447 Unpaid Claims and Claims Expenses 294,839 277,737 Ceded Balances Payable (36,485) (41,958) Funds Held Liability (46,432) (47,429) ------------- ---------- Net $223,671 $205,797 ============= ========== The effect of retrocessional activity on premiums written, premiums earned and claims expenses is as follows (in thousands): Three months ended Nine months ended September 30, September 30, -------------------- ------------------- 1995 1994 1995 1994 -------------------- ------------------- Ceded premiums written $41,171 $32,336 $120,982 $101,529 Ceded premiums earned $40,232 $29,135 $115,311 $87,759 Ceded claims and claims expenses $15,939 $38,374 $57,237 $83,121 -8- Management's Discussion and Analysis of Financial Condition and Results of Operations NAC Re Corporation ("NAC Re") is the holding company for NAC Reinsurance Corporation ("NAC") and its wholly owned insurance and reinsurance domestic and foreign subsidiaries. NAC Re and its subsidiaries are collectively referred to as the Company. Results of Operations - - --------------------- Operating income, excluding investment gains, totaled $12.1 million or $.67 per share for the third quarter ended September 30, 1995, compared with $9.1 million or $.51 per share for the 1994 third quarter. Operating income, excluding investment gains, for the nine months ended September 30, 1995 totaled $33.1 million or $1.85 per share compared with $25.0 million or $1.39 per share for the same prior year period. Operating earnings per share for the first nine months of 1995 were reduced by $.18 as a result of property catastrophe claims related to the earthquake in Kobe, Japan and Hurricane Marilyn. Net claim activity of approximately $1.2 million in the 1995 third quarter related to Hurricane Marilyn was offset by favorable claim development from the Kobe earthquake. The 1994 nine month operating earnings per share was reduced by $.18 resulting from the 1994 California earthquake. Net income for the 1995 third quarter and nine month period was $.98 and $2.43 per share, respectively, compared to $.58 and $1.46 per share for the same prior year periods. Net investment gains, net of tax, for the 1995 third quarter were $5.5 million or $.31 per share compared to net investment gains of $1.2 million or $.07 per share for the 1994 third quarter. Net investment gains, net of tax, for the 1995 nine month period were $10.5 million or $.58 per share compared to net investment gains of $1.3 million or $.07 cents per share for the comparable prior year period. Premium Revenues The Company's steady growth in premium revenue, as indicated below, has been impacted by several different factors, including both external market influences and internal initiatives: (In millions) Three months ended September 30, ---------------------------------------------- Domestic International Total --------------- ------------- -------------- 1995 1994 1995 1994 1995 1994 ------ ------ ------ ------ ------ ----- Net Premiums Written: Casualty $87.0 $72.3 $4.9 $2.9 $91.9 $75.2 Property 31.8 25.0 6.6 2.4 38.4 27.4 Specialty/Other 15.2 18.6 - - 15.2 18.6 ------ ------ ----- ----- ------ ------ Total $134.0 $115.9 $11.5 $5.3 $145.5 $121.2 ====== ====== ===== ===== ====== ====== (In millions) Nine months ended September 30, ---------------------------------------------- Domestic International Total --------------- ------------- -------------- 1995 1994 1995 1994 1995 1994 ------ ------ ------ ------ ------ ----- Net Premiums Written: Casualty $224.8 $177.9 $14.5 $9.8 $239.3 $187.7 Property 84.5 65.6 19.6 6.9 104.1 72.5 Specialty/Other 39.3 58.5 - - 39.3 58.5 ------ ------ ------ ------ ------ ------ Total $348.6 $302.0 $34.1 $16.7 $382.7 $318.7 ====== ====== ====== ====== ====== ====== Worldwide net premiums written for the 1995 third quarter and nine months were $145.5 million and $382.7 million, respectively, an increase of approximately 20% over the 1994 comparable prior year periods. -9- The Company's domestic net premiums written increased 15.6% to $134 million for the 1995 third quarter, compared to the 1994 third quarter. Domestic net premiums written for the nine month period increased 15.4% to $348.6 million, compared to the 1994 nine month period. These increases reflect continued growth in substantially all traditional risk business profit centers. Casualty net premiums written increased 20.2% and 26.3% for the third quarter and nine month periods, respectively. Property net premiums written increased 27.3% and 28.6% for the third quarter and nine month periods, respectively. The casualty and property growth can be attributed to contributions from new accounts and existing client relationships in both our treaty and facultative business. Specialty net premiums written, which consist of aviation, fidelity/surety and ocean marine business, decreased 18.4% and 32.8% for the third quarter and nine month periods, respectively. This decline is primarily attributable to the nonrenewal of a large aviation account effective July 1994 which was partly offset by premium from an increased participation in a premier aviation underwriting pool, effective January 1995. Excluding the impact of this cancelled aviation account, the specialty net premiums written for the 1995 third quarter and nine month periods would have reflected an increase of approximately 9% and 8%, respectively. NAC Reinsurance International Limited, which became fully operational in 1994, reported net premiums written of $11.5 million and $34.1 million for the 1995 third quarter and nine month period, respectively, compared to $5.3 million and $16.7 million for the 1994 third quarter and nine month period, respectively. Casualty net premiums written increased 71.2% and 48.1% for the third quarter and nine month periods, respectively. Property net premiums written increased 171.7% and 186.2% for the third quarter and nine month periods, respectively. The growth in 1995 net premiums written reflects contributions from treaties written during 1994 and new business opportunities generated during the 1995 renewal seasons. Ceded premiums written recorded for retrocessional agreements for the 1995 third quarter and nine month period were $41.2 million and $121 million, increases of 27.3% and 19.2% over the comparable prior year periods, respectively. The principal cause for the increase in ceded premiums was a result of the Company's increased share of the reinsurance protection purchased for the "common account" of all participating companies in the aviation pool and to a lesser extent from expanded retrocessional protection obtained at marginally higher costs. As a percentage of gross premiums written, ceded premiums written were approximately 22% and 24% for the 1995 third quarter and nine month period, respectively, compared to 21% and 24% for the same prior year periods. Operating Costs and Expenses Claims and claims expenses represent our most significant and uncertain costs. This expense is only an estimate at a given point in time of what the insurer or reinsurer expects to pay on claims, based upon facts and circumstances then known. We would generally expect to refine such an estimate in subsequent accounting periods by modest amounts with adjustments possible in either direction as additional information becomes known. One traditional means of measuring the underwriting performance of a property/casualty insurer is the statutory composite ratio. The composite ratio, based upon statutory accounting practices which differ from generally accepted accounting principles in several respects, reflects underwriting experience, but does not reflect income from investments. A composite ratio of under 100% indicates underwriting profitability while a composite ratio exceeding 100% indicates an underwriting loss. The following chart sets forth statutory composite ratios and the relevant components for the periods indicated for the Company's domestic reinsurance subsidiary. The consolidated statutory composite ratio combines the results of our international subsidiary on a U.S. statutory basis: -10-
Three months ended Nine months ended Year ended September 30, September 30, December 31, ----------------------- ----------------------- -------------- 1995 1994 1995 1994 1994 ----------- --------- ----------- --------- -------------- Claims and Claims Expenses 66.3 % 65.7 % 66.3 % 66.5 % 66.6 % Commissions and Brokerage 29.3 31.5 29.4 31.7 31.3 Other Underwriting Expenses 6.9 6.9 7.7 7.8 7.8 ------ ------ ------ ------ ------ Domestic Statutory Composite Ratio 102.5 % 104.1 % 103.4 % 106.0 % 105.7 % ====== ====== ====== ====== ====== Consolidated Statutory Composite Ratio 102.8 % 104.5 % 104.2 % 106.0 % 106.1 % ====== ====== ====== ====== ======
The domestic statutory composite ratio for the 1995 third quarter and nine month period was 102.5% and 103.4%, respectively, compared to 104.1% and 106.0% for the 1994 third quarter and nine month periods, respectively. The 1995 nine month domestic statutory composite ratio included 0.8 percentage points resulting from the 1995 Kobe earthquake. The nine month statutory composite ratio of our international subsidiary, NAC Reinsurance International Limited, was 114.7%, which included 8.0 percentage points as a result of the Kobe earthquake and Hurricane Marilyn. The 1994 nine month domestic statutory composite ratio was increased by 1.9 percentage points resulting from the 1994 California earthquake. Based upon actuarial comparisons of expected versus actual claim development, the Company experienced net favorable claim development for the 1995 nine month period which was principally attributable to our casualty business written since 1985. This favorable development in casualty reflects the strength of the pricing assumptions underlying the business written, particularly with respect to the consideration given to social and economic inflation. This favorable development was partially offset by unfavorable experience in our aviation business. The unfavorable experience in our aviation business was principally from claims related to the 1993 underwriting year which was generated from a large account which was not renewed effective July 1994. In addition, the favorable development was partly offset by unfavorable experience on business written prior to 1985, principally related to asbestos and environmental claims. The pricing of the Company's reinsurance contracts contemplates many factors, including exposure to claims and the expenses of both the client company and broker. The Company's actuaries and underwriters evaluate the adequacy of premium revenue net of these expenses, thereby mitigating the effect of variations in these expenses to overall underwriting results. The Company's commission and brokerage ratio for the 1995 third quarter and nine month periods, reflects a slight decrease compared to the 1994 prior year periods reflecting the reduction in our nontraditional treaty business which generally produces higher commission and brokerage expenses. This decrease is partly offset by the increased commissions in pro rata contracts written in our specialty lines of business, which generally carry a higher commission rate. Underwriting expenses for the 1995 third quarter and nine months have increased as compared to the 1994 prior year periods, reflecting continued business expansion, investments in technology and the building of our facultative and international infrastructure. While underwriting expenses have increased, the 1995 domestic composite ratios have been relatively equal compared to prior year periods. The Company has continued to seek measures to reduce underwriting expenses that are not central to its underwriting activities, and to better utilize its resources. Investments Cash and invested assets at September 30, 1995 and December 31, 1994 were $1.6 billion and $1.4 billion, respectively, excluding net investment payables of $18.8 million and $42.4 million for 1995 and 1994, respectively. Net investment income for the 1995 third quarter and nine months was $22.3 million and $66.9 million, increases of 11.3% and 13.3% over the 1994 comparable periods, respectively. The increase is primarily attributed to our growth in invested assets. The Company's pretax investment yield was 6% for both the 1995 third quarter and nine month periods, compared to 6% and 5.9% for the 1994 third quarter and nine month periods, respectively. On an after-tax basis, net investment income grew 15.8% and 16.8% over the 1994 third quarter and nine month periods, respectively, reflecting the benefits of the -11- Company's increased allocation of available cash flow to tax-exempt securities. The after-tax investment yield for the 1995 third quarter and nine month period was 4.6% and 4.7%, respectively, compared to 4.5% for both the 1994 third quarter and nine month periods. Net investment gains, net of tax for the 1995 third quarter were $5.5 million or $.31 per share, compared to net investment gains of $1.2 million or $.07 per share for the 1994 third quarter. Net investment gains, net of tax, for the 1995 nine month period were $10.5 million or $.58 per share compared to net investment gains of $1.3 million or $.07 per share for the same prior year period. 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. At September 30, 1995, our fixed maturity investments amounted to $1.3 billion, which approximates 83% of cash and invested assets, and 96% of such investments are rated investment grade by Moody's Investor Services, Inc. or Standard & Poor's. 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. The Company has increased its investments in tax-exempt securities to $658 million or 49% of total fixed maturity investments at September 30, 1995 compared to $403.1 million or 35.2% of total fixed maturities at December 31, 1994. While uncertainties exist regarding interest rate and inflation variability, the Company attempts to minimize such risks and exposures by balancing the duration of its assets with the expected duration of its liabilities. Consistent with the payment profile of the Company's claim liabilities, as of September 30, 1995 the Company's fixed maturity investments, excluding convertible securities, had an expected average maturity of 7 years. The balance of the Company's investment portfolio at September 30, 1995, consisting of cash, short-term investments and equity securities, amounted to $265 million. The Company's equity investment strategy is designed to build a quality equity portfolio by specifically investing a portion of cash flow from operations in equity securities. As of September 30, 1995, the Company held $117.8 million or 7.4% of cash and invested assets in equity securities which represented 26% of statutory surplus. Liquidity and Capital Resources NAC Re is a holding company and has no revenue producing operations of its own. Cash flow within NAC Re consists of investment income, operating and interest expenses, dividends to stockholders, rental income and dividends from NAC Reinsurance Corporation which are subject to statutory restrictions. Consolidated stockholders' equity at September 30, 1995 totaled $429.7 million or $24.39 per share compared to $319.1 million or $18.23 per share at December 31, 1994. The unrealized appreciation of investments, net of tax, was $19.7 million at September 30, 1995 compared to an unrealized depreciation of investments of $46 million at December 31, 1994, resulting in an increase in book value of $65.8 million or $3.76 per share. Statutory surplus of the reinsurance subsidiary was $452.8 million at September 30, 1995. NAC Reinsurance ranks among the largest domestic reinsurers measured on this basis. Our marketing activities suggest that the minimum surplus standards for casualty reinsurance have continued to increase, particularly in light of the emphasis in the market place on financial security. The Company believes the minimum surplus required for a lead casualty reinsurer is over $250 million, and expects that minimum to rise to $500 million in the near future. This perception is subjective and not based upon any regulatory initiatives or imposed standards. The likely impact of such a requirement in the marketplace on our operating results cannot be quantified. However, it is not expected to materially affect the Company's ability to attract new business or retain it's existing client base. Cash flow from operations was $116 million for the 1995 nine month period, compared to $93.2 million for the 1994 prior year period. This increase in cash flow was principally due to increases in premium receipts which were partially offset by higher paid claim activity. -12- NAC Re maintains a revolving credit and term loan facility which was increased to $35 million in December 1994. Outstanding borrowings at September 30, 1995 were approximately $17.8 million and are payable beginning June 1996 in twelve quarterly equal payments. The primary purpose for borrowings under this facility has been to finance the Company's periodic repurchase of its common stock. At September 30, 1995, a total of 2.1 million shares of the Company's common stock have been repurchased since the stock repurchase program's inception. As of September 30, 1995, approximately 495,000 shares remain authorized for repurchase under the repurchase program. The Company declared a quarterly cash dividend of $.05 per share for the 1995 third quarter. The regular quarterly cash dividend was increased to $.05 per share in June 1995. On October 10, 1995, the Company filed a registration statement with the Securities and Exchange Commission relating to the proposed issuance of $100 million aggregate principal amount of its Notes and approximately 1.5 million shares of its Common Stock. The Company anticipates that substantially all of the net proceeds to the Company from the sale of the Common Stock and from the offering of the Notes will be contributed to NAC to increase its statutory capital base and will be invested in accordance with the Company's investment guidelines for all of its invested assets. On October 20, 1995, NAC entered into an agreement with Western Atlantic Reinsurance Corporation ("Western Atlantic"), pursuant to which NAC acquired the right to renew Western Atlantic's book of property and casualty treaty reinsurance business on a prospective basis. Western Atlantic's current business approximates $170 million in annual gross in-force premium. Western Atlantic is a subsidiary of Swiss Reinsurance America Corporation. Regulatory Initiatives NAC Re and its domestic subsidiaries are subject to regulatory scrutiny under the insurance statutes and regulations of the jurisdictions in which they conduct business, including all states of the United States and Canada. NAC Re's international subsidiary is subject to the regulatory authority of the United Kingdom Department of Trade and Industry. These regulations vary from jurisdiction to jurisdiction and are generally designed to protect ceding insurance companies and policyholders by ensuring each company's financial integrity and solvency in its business transactions and operations. A majority of the insurance statutes and regulations applicable to the Company has been categorized as reporting and disclosure standards which allow insurance regulators to closely monitor the Company's performance. Typical required reports include information concerning the Company's capital structure, ownership, financial strength and general business operations. In 1993, the National Association of Insurance Commissioners (the "NAIC") adopted a model risk-based capital act intended to provide a tool for regulators to evaluate the capital of property and casualty insurers and reinsurers with respect to the risks assumed by them and determine whether there is a perceived need for possible corrective action. The nature of the corrective action depends upon the extent of the calculated risk=based capital deficiency and ranges from requiring the respective company to submit a comprehensive plan to placing the insurer under regulatory control. The risk=based capital requirements have not been adopted by New York, NAC's domicile, or California, NAC's commercial domicile. In a related action, the NAIC adopted a proposal that requires property and casualty insurers and reinsurers to report the results of their risk=based capital calculations as part of the 1994 and subsequent statutory annual statements filed with state regulatory authorities. Surplus (as calculated for statutory annual statement purposes) for each of the Company's domestic property and casualty insurance and reinsurance subsidiaries is well above the risk=based capital thresholds that would require either company or regulatory action. Various other regulatory and legislative initiatives have been discussed from time to time that could impact reinsurers. The thrust of regulatory efforts at all levels is to improve the solvency of reinsurers and create strong incentives for insurers to do business with well capitalized, prompt paying reinsurers operating under U.S. jurisdiction. These initiatives, and the overall focus on solvency, may intensify the restructuring of the reinsurance industry. While we cannot quantify the impact of these regulatory efforts on the Company's operations, we believe the Company is adequately positioned to compete in an environment of more stringent regulation. -13- PART II. OTHER INFORMATION Item 6. Exhibits - - ------------------ (a) Exhibit Index: Exhibit Description Page - - -------- ---------------------------------------------------- ---- 11-1 Statement Re: Computation of Primary Per Share Earnings 16 11-2 Statement Re: Computation of Fully Diluted Per Share Earnings 17 15 Letter Re: Unaudited Interim Financial Information 18 (b) There were no reports filed on Form 8-K for the three months ended September 30, 1995. Omitted from this Part II are items which are inapplicable or to which the answer is negative for the period covered. - 14 - SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NAC Re CORP. ------------ (Registrant) Date: November 10, 1995 John N. Adimari ------------------------- ------------------------- John N. Adimari Acting Chief Financial Officer and Treasurer Date: November 10, 1995 Ronald L. Bornhuetter ------------------------- ------------------------- Ronald L. Bornhuetter Chairman of the Board, President and Chief Executive Officer -15- EX-11.1 2 EXHIBIT 11-1 NAC RE CORP. AND SUBSIDIARIES COMPUTATION OF PRIMARY EARNINGS PER SHARE (Dollars in thousands, except per share amounts) Primary Earnings Per Share of Common Stock and Common Stock Equivalents - - -----------------------------------------------------------------------
Three months ended Nine months ended September 30, September 30, --------------------------- ------------------------ 1995 1994 1995 1994 ------------ ------------ ---------- ---------- Net income applicable to Common Stock $17,599 $10,294 $43,568 $26,228 ========== ========== ========== ========== Average number of common shares outstanding 17,591,170 17,588,889 17,554,752 17,641,293 Add: Assumed exercise of dilutive stock options (1) 447,314 234,725 387,350 296,914 ---------- ---------- ---------- --------- Common stock and common stock equivalents outstanding 18,038,484 17,823,614 17,942,102 17,938,207 ========== ========== ========== ========== Net income per share assuming dilution of common stock equivalents $0.98 $0.58 $2.43 $1.46 ========== ========== ========== ==========
(1) Computed utilizing the average market price of the Common Stock for the period. NOTE: The Company's 5.25% convertible subordinated debentures due 2002 are not considered to be common stock equivalents in the calculation of primary earnings per share. - 16 - EX-11.2 3
EXHIBIT 11-2 NAC RE CORP. AND SUBSIDIARIES COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE (Dollars in thousands, except per share amounts) Fully Diluted Earnings Per Share of Common Stock and Common Stock Equivalents - - ----------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, --------------------------- ---------------------------- 1995 1994 1995 1994 ------------ ----------- ----------- ----------- Net income applicable to Common Stock $17,599 $10,294 $43,568 $26,228 After-tax add back of convertible debenture interest and amortization 876 876 2,628 2,628 ---------- ---------- ---------- ---------- Adjusted net income $18,475 $11,170 $46,196 $28,856 ========== ========== ======= ========== Average number of common shares outstanding 17,591,170 17,588,889 17,554,752 17,641,293 Add: Assumed exercise of dilutive stock options (1) 447,314 234,725 447,988 308,091 Assumed conversion of convertible debentures (2) 2,020,202 2,020,202 2,020,202 2,020,202 ---------- ---------- ---------- ---------- Common stock and common stock equivalents outstanding 20,058,686 19,843,816 20,022,942 19,969,586 Fully diluted earnings per share $0.92 $0.56 $2.31 $1.44 ========== ========== ======= ========== (1) Computed utilizing the higher of ending or average market price of the Common Stock for the period. (2) Reflects the assumed conversion of the Company's 5.25% Convertible Subordinated Debentures due 2002. - 17 -
EX-15 4 EXHIBIT 15 Acknowledgment Letter To the Stockholders and Board of Directors NAC Re Corporation We are aware of the incorporation by reference in the Registration Statement (Form S-8 No. 33-5585) 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 Statement (Form S-8 No. 33-2284) pertaining to the NAC Re Corp. Employee Savings Plan, in the Registration Statement (Form S-8 No. 33-2841) 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, in the Registration Statement (Form S-8 No. 33-77494) pertaining to the NAC Re Corp. Employee Stock Purchase Plan, and in the Registration Statement (Form S-8 No. 33-77114) pertaining to the NAC Re Corp. 1993 Stock Option Plan our report dated October 19, 1995, relating to the unaudited consolidated interim financial statements of NAC Re Corporation which is included in its Form 10-Q for the quarter ended September 30, 1995. Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part of the registration statement prepared or certified by accountants within the meaning of Sections 7 or 11 of the Securities Act of 1933. ERNST & YOUNG LLP New York, New York October 19, 1995 - 18 - EX-27 5
7 NAC Re Corporation Article 7 of Regulation S-X Insurance Companies Nine Month Period Ending September 30, 1995 (Dollars in thousands, except per share amounts) 1,000 9-MOS SEP-30-1995 SEP-30-1995 1,333,566 0 0 117,834 0 0 1,587,108 11,475 11,749 67,162 2,189,024 1,214,226 225,258 6,415 0 200,000 1,975 0 0 427,675 2,189,024 358,376 66,907 16,077 0 241,956 133,905 11,230 54,269 10,701 43,568 0 0 0 43,568 2.43 2.31 0 0 0 0 0 0 0
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