-----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, Ob+rzitfMpDr7a/Salq3O+bNOEJGuDnsS0GmdD5YvhJM734a2HxyR4fJzbjjY68G PES4AjolvIylfoCD4j195Q== 0000950112-96-000859.txt : 19960325 0000950112-96-000859.hdr.sgml : 19960325 ACCESSION NUMBER: 0000950112-96-000859 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960322 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: 033-47293 FILM NUMBER: 96537409 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 NAC REINSURANCE CORPORATION ================================================================================ - -------------------------------------------------------------------------------- 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 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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(G) OF THE ACT: TITLE OF CLASS -------------- Common Stock, $.10 par value 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 1, 1996 of the voting stock held by non-affiliates of the registrant was approximately $607 million. There were 19,203,552 shares outstanding of the Registrant's Common Stock, $.10 par value as of December 31, 1995. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the 1995 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, 1995 (Part III). - -------------------------------------------------------------------------------- ================================================================================ NAC RE CORP. AND SUBSIDIARIES TABLE OF CONTENTS
PAGE ITEM NUMBER - ----- ------ PART I 1. Business....................................................................... 1 2. Properties..................................................................... 13 3. Legal Proceedings.............................................................. 13 4. Submission of Matters to a Vote of Security Holders............................ 13 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters....... 14 6. Selected Financial Data........................................................ 14 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................... 14 8. Financial Statements and Supplementary Data.................................... 15 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.................................................................. 15 PART III 10. Directors and Executive Officers............................................... 15 11. Executive Compensation......................................................... 15 12. Security Ownership of Certain Beneficial Owners and Management................. 15 13. Certain Relationships and Related Transactions................................. 15 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............... 15
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, 1995, 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 $34.7 million or less than 4% of total net claims and claims expense reserves as of December 31, 1995. 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 50 states and is utilized to write primary insurance. In 1992, NAC formed and received regulatory authorization for a new 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 a limited amount of 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, 1995 with approximately $121 million, primarily writes non-U.S. international property and casualty treaty and property facultative reinsurance business. Ratings NAC, Greenwich, Indian Harbor and NAC Re International have "A" ("Excellent") ratings as determined by A.M. Best Rating Service, Property/Casualty 1995 Edition ("Best"), which is Best's 1 third highest rating. An "A" is assigned to companies which have achieved excellent overall performance when compared to established standards. Such companies are considered by Best to have demonstrated a 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 a "AA-" claims-paying rating from Standard & Poor's ("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. 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 company. NAC Re debt instruments have the following investment grade ratings from S&P and Moody's Investor Services ("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 should 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. 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 fidelity/surety and ocean marine). In consideration for reinsuring risks, the Company receives a share of the premiums written by the primary insurer. In many cases the Company reinsures part of its risk with other reinsurers and pays to such reinsurers a portion of the premiums that it receives from the primary insurer. Reinsurance provides primary insurers with three principal benefits: reducing net liability on individual risks, protecting against catastrophic losses and maintaining acceptable surplus ratios. Retrocessions provide reinsurers with similar benefits. Reinsurance, including retrocessions, does not legally discharge the reinsured from its liability with respect to its obligations. The Company 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. 2 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 offer 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 historical experience and total exposures. 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 81% of the Company's business. Facultative reinsurance is the reinsurance of individual risks; rather than agreeing 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 67% of the Company's business in 1995 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 over $1 million, 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 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 tied to 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 underwriting losses. 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 amount of premium that the primary insurer charges, which may be subject to state regulation, sets a limit on the Company's ability to negotiate the reinsurance premium. Generally, in the event the premium is considered inadequate, the Company will decline to write the business. The Company also writes a limited amount (approximately 6% of total net premiums written) of primary insurance business, principally through Greenwich. The principle lines of primary business written include aviation, inland marine, ocean marine and automobile. The business is written principally through participation in two underwriting pools, a managing general agency relationship, and through a general agency relationship. 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. 3 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 highly competitive, and since mid-1987 the level of reinsurance competition began to steadily increase, although not to the highly competitive levels which existed in 1984 and prior. The Company competes with numerous major 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. 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, absolute size, premiums charged, limits capacity, Best's ratings, 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 of NAC and its subsidiaries, S&P's "AA-" claims-paying rating of NAC and NAC Re International, 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 approved by a Security Committee comprised of certain officers of the Company. 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 is written on a direct basis. During 1995, three reinsurance brokers, AON Reinsurance Agency, Guy Carpenter and Company, Inc., and Bates Turner, Inc., generated 16%, 16% and 7%, respectively, of premiums assumed from client companies. These same reinsurance brokers generated 18%, 16%, and 9%, respectively, during 1994, and 19%, 16% and 13%, respectively, during 1993, of the Company's assumed premiums. One client company, Chubb Group, generated approximately 9%, 10% and 10%, of the Company's gross premiums written during 1995, 1994 and 1993, respectively. This business is generated primarily from the Company's domestic reinsurance operations. Gross premiums written from this client are expected to decline 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 its financial condition or results of operation due to the Company's competitive position in the marketplace and the continuing availability of other sources of business. 4 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 judgment as to rate adequacy, the primary insurer's experience, the primary insurer's financial status 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 The Claims Management Department activities include evaluating claims which may have potential exposure to the Company. This is accomplished through the application of claim evaluation standards designed to estimate the ultimate expected cost of the claim. Client and intermediary claim files are evaluated and relevant claim data is collected and periodically evaluated to confirm that adequate reserves are held for the ultimate exposure. Reinsurance coverage for claims with potential exposure to the Company is also identified and verified through the use of a uniform set of client claim reporting criteria. This includes conducting on-site claim reviews of ceding companies, and developing reports which analyze claim activity and the claims management procedures of client companies and intermediaries. 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 developments warrant a change. 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 higher reserve 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 risk involved, knowledge of the circumstances surrounding such claims, the severity of injury or damage, the potential for ultimate exposure, the Company's experience with the primary insurer on the line of business and the policy provisions relating to the type of claim. The Company periodically conducts audits 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 of what the insurer or reinsurer expects to pay on claims, based on facts and circumstances then known, and 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 loss 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 5 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. The Company regularly adjusts its reserves to reflect newly reported claims, inflation and other developments. 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. 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 cover the ultimate cost of investigating all claims, administering the claims payment process and defending lawsuits arising from claims based on actual experience and historical data such as the ratio of claims expenses to claims paid and on the basis of 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) 1995 1994 1993 ---------- ---------- -------- Domestic liability reported on a statutory basis, net of reinsurance............................................ $914,045 $795,569 $699,574 International liability, net of reinsurance.............. 42,414 15,587 -- Difference in discount rate applied to workers' compensation case reserves, net........................ (2,790) (2,723) (2,353) Reinsurance recoverable gross up......................... 338,746 277,737 211,840 ---------- ---------- -------- Consolidated liability reported on a GAAP basis, gross of reinsurance............................................ $1,292,415 $1,086,170 $909,061 ---------- ---------- -------- ---------- ---------- --------
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, 1995, 1994 and 1993. 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 1985 through 1995. 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 6 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 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 1995. In evaluating 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 1988, but incurred in 1985, will be included in the cumulative deficiency amount for years 1985, 1986 and 1987. 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 redundancies or deficiencies 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. DEVELOPMENT OF CLAIMS AND CLAIM EXPENSE RESERVES NET OF REINSURANCE RECOVERABLES (IN MILLIONS)
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- RESERVE FOR CLAIMS AND CLAIMS EXPENSES, NET OF REINSURANCE RECOVERABLES...... $54 $118 $201 $292* $388 $469 $529 $626 $697 $808 $954 RESERVE RE-ESTIMATED AS OF: One year later........................ 62 124 209* 293 384 460 494 602 653 788 Two years later....................... 72 138* 214 289 376 427 464 548 648 Three years later..................... 89* 150 214 281 350 407 423 549 Four years later...................... 101 155 213 258 336 379 424 Five years later...................... 110 160 199 253 321 392 Six years later....................... 117 159 203 245 331 Seven years later..................... 119 169 199 265 Eight years later..................... 129 171 226 Nine years later...................... 131 200 Ten years later....................... 160 CUMULATIVE REDUNDANCY (DEFICIENCY)..... (106) (82) (25) 27 57 77 105 77 49 20 PERCENTAGE........................... (196%) (69%) (12%) 19% 15% 16% 20% 12% 7% 2% CUMULATIVE AMOUNT OF LIABILITY PAID, NET OF REINSURANCE RECOVERABLES, PAID THROUGH: One year later........................ $11 $ 19 $ 23 $ 34 $ 60 $ 81 $ 65 $104 $119 $140 Two years later....................... 25 35 48 73 109 126 116 173 207 Three years later..................... 36 50 72 102 134 166 158 229 Four years later...................... 45 68 91 117 161 197 199 Five years later...................... 57 83 101 133 179 226 Six years later....................... 65 89 112 148 200 Seven years later..................... 68 96 125 163 Eight years later..................... 72 108 137 Nine years later...................... 81 119 Ten years later....................... 89
* 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 ---- ---- ------ ------ GROSS RESERVE FOR CLAIMS AND CLAIMS EXPENSES:................ $808 $909 $1,086 $1,292 Reserve re-estimated as of: One year later............................................. 798 873 1,097 Two years later............................................ 755 882 Three years later.......................................... 773 CUMULATIVE REDUNDANCY (DEFICIENCY)........................... 35 27 (11) PERCENTAGE................................................... 4% 3% (1%)
Retrocession Agreements Reinsurance companies enter into retrocession arrangements for the same reasons primary insurers seek reinsurance, namely, to increase aggregate premium capacity and to reduce and spread 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 similar losses involving more than one reinsured. The Company's retrocession agreements are all written on a treaty basis, but cover both its treaty and facultative business. The Company may occasionally purchase specific retrocessional protections on a limited basis for certain business that may be specifically excluded from its treaty 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 will be required to absorb the full amount of the loss associated with the reinsured risk if the retrocessionnaire is unable to or fails to meet its reinsurance obligations for any reason. A Security Committee comprised of certain officers of the Company is responsible for evaluating the financial condition of retrocessionnaires prior to the commencement of underwriting activities and at least annually thereafter. The security review process is administered in part by adhering to financial guidelines formulated to assess the retrocessionnaires' ability to satisfy future claim obligations. All retrocessionnaires are subject to ongoing evaluation to ensure that there have been no significant adverse changes in their financial condition. In the case of retrocessionnaires that either do not satisfy the Company's financial guidelines or are in liquidation or rehabilitation proceedings, 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, 1995, the Company had total reinsurance recoverables, exclusive of available offsets in the form of letters of credit, trust accounts and funds withheld, totaling $385.9 million, with 153 domestic and 86 foreign retrocessionnaires. Of that amount, approximately 37% or $142.9 million was due from a foreign retrocessionnaire, Hannover Ruckversicherungs AG (80%), and its affiliate, 8 Eisen Und Stahl Ruckversicherungs AG (20%) which are rated AA+ and AA-, respectively, by Standard & Poor's. Such amounts are fully collateralized by either 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, 1995. The Company re-evaluates its retrocessional requirements each year 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. The Company's retrocessional contracts generally apply only to traditional business. While gross lines and net retentions may vary by contract and by line of business, the following table summarizes the Company's maximum gross lines and net retentions on any one claim for the years indicated:
(IN THOUSANDS) INITIAL MAXIMUM CALENDAR YEAR GROSS LINE RETENTION RETENTION ------------- ---------- --------- --------- 1996 Casualty Treaty and Casualty Facultative................. $7,500(1) $ 2,000 $ 5,025 Property Treaty.......................................... $7,500 $ 2,000 $ 4,025 Property Facultative..................................... $ 75,000 $ 2,000 $ 3,650 1995 Property and Casualty Treaty and Casualty Facultative.... $7,500(1) $ 1,000 $ 3,925(2) Property Facultative..................................... $ 50,000 $ 1,000 $ 3,300 1994 Property and Casualty Treaty and Casualty Facultative.... $7,500 $ 1,000 $ 3,925 Property Facultative..................................... $ 50,000 $ 1,000 $ 3,925
- ------------ (1) The Company has additional reinsurance protection which provides $5.0 million of coverage per occurrence in excess of $7.5 million. This coverage, however, is limited to only two occurrences, and therefore the Company's maximum gross line is generally limited to $7.5 million. (2) In one client relationship for 1995, the Company has a maximum retention of $4.7 million. The Company increased its maximum retention on any one claim for non-catastrophe losses in 1996 in consideration of the Company's increased size and financial capacity, as well as the continued positive contribution of business written since 1986. In addition, the Company maintains catastrophe reinsurance programs for the purpose of limiting its exposure with respect to multiple claims arising from two or more risks in a single occurrence or event. In general, the coverage for the years indicated are as follows: 1996 Property--Property business is protected by a series of covers 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. For 1996, the Company expects to maintain $120 million of catastrophe protection, of which $30 million of coverage in excess of the first $60 million of coverage, is available only if industry-wide claims exceed certain minimum levels. The schedule displayed below identifies the 9 Company's net retention assuming gross claim activity subject to property catastrophe protection of $125 million (gross claims in excess of $125 million would not be subject to retrocessional recoveries):
(IN MILLIONS) COMPANY INITIAL COMPANY GROSS COMPANY CATASTROPHE NET INDUSTRY-WIDE CLAIMS CLAIMS RETENTION PROTECTION RETENTION -------------------- ------- --------- ----------- --------- (1) Less than $7.5 billion........................... $ 125 $ 5 $ 90 $35 (2) $7.5 billion to $9 billion....................... $ 125 $ 5 $ 100 $25 (3) $9 billion to $15 billion........................ $ 125 $ 5 $ 110 $15 (4) Greater than $15 billion......................... $ 125 $ 5 $ 120 $ 5
Should the Company's gross claims reach the levels outlined in the table and industry-wide claims not reach the thresholds identified in scenarios (2) through (4) above, the Company would not receive applicable claim payments from such catastrophe programs, as displayed in scenario (1) above. 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. 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. The 1996 retrocessional protection is subject to further negotiations. The Company believes that any changes that may be made will not materially alter the amount or nature of the retrocessional coverages. 1995 Property--Property business is protected by a series of covers 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. Workers' Compensation--100% of $145 million in excess of a $5 million retention for any one occurrence. Casualty Contingency Cover--100% of $15 million in excess of $5 million for any one occurrence. All layers were placed 100%, except for the second layer of protection, $5 million in excess of $7.5 million, which was placed 75% with the Company retaining the remaining 25% of the layer. 1994 Property--Property business is protected by a series of covers which provide protection for 100% of $60 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 $60 million of catastrophe protection, $24 million of coverage, in excess of the first $21 million of coverage, is available only if industry-wide claims exceed certain minimum levels. Workers' Compensation--100% of $120 million in excess of a $5 million retention for any one occurrence. 10 Casualty Contingency Cover--100% of $15 million in excess of $5 million for any one occurrence. All layers were placed 100%, except for the second layer of protection, $5 million in excess of $7.5 million, which was placed 75% with the Company retaining the remaining 25% of the layer. To the extent that the Company is reimbursed for claims under its catastrophe program, the contracts generally provide for the reinstatement of coverage for an additional premium in order to provide protection against a second, and in some lines of business, a third catastrophic event. Certain of the Company's retrocessional agreements also include provisions that adjust premium or commission payments based on the experience under the agreement. Premiums and commissions are recorded based on the expected ultimate experience of the agreements. Accordingly, contractual obligations for future payments or refunds of premiums or commissions based on claims experience have been recognized in the financial statements. 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. Independent investment advisors are utilized to manage the Company's investment portfolio within the guidelines established, and are required to report activities on a current 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. A summary of the Company's investment portfolio as of December 31, 1995 and 1994 is set forth below:
(IN THOUSANDS) DECEMBER 31, -------------------------------------------------- 1995 1994 ----------------------- ----------------------- CARRYING % OF CARRYING % OF VALUE PORTFOLIO VALUE PORTFOLIO ---------- --------- ---------- --------- Cash and short-term............................... $142,726 7.7% $145,200 10.3% ---------- --------- ---------- --------- Fixed maturities: U.S. Treasury................................... 119,430 6.4 54,693 3.9 Tax-exempt...................................... 742,807 39.9 403,077 28.5 Foreign Government.............................. 146,217 7.8 81,364 5.8 Corporate....................................... 348,341 18.7 328,804 23.2 Mortgage-backed................................. 174,812 9.4 219,087 15.4 Subordinated convertibles....................... 61,936 3.3 58,316 4.1 ---------- --------- ---------- --------- Subtotal........................................ 1,593,543 85.5 1,145,341 80.9 ---------- --------- ---------- --------- Equity securities................................. 127,257 6.8 123,986 8.8 ---------- --------- ---------- --------- Total....................................... $1,863,526 100.0% $1,414,527 100.0% ---------- --------- ---------- --------- ---------- --------- ---------- ---------
Guidelines established by the Committee restrict the portion of the portfolio that can be held in lower quality securities. Consistent with the Company's focus on asset quality, at December 31, 1995, 11 approximately 97% of the Company's fixed maturity investments were rated "investment grade" by Moody's or S&P. All of the Company's fixed maturity investments were paying interest as scheduled. 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, an industry sector or in a state. Such restrictions are addressed as a percentage of each portfolio segment (i.e., taxable securities, tax-exempt securities, or equity securities) and, with respect to NAC, as a percentage of consolidated statutory surplus. 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 6.6% of the Company's cash and invested assets at December 31, 1995. 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 little credit risk since they are either government or quasi-government agency-backed or "AAA" rated. 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 volatility of interest rates in the marketplace. Mortgage-backed securities in the Company's investment portfolio total $174.8 million at December 31, 1995, of which 46% are collateralized mortgage obligations (CMO's) which generally reduce the uncertainty concerning the maturity of a mortgage-backed security. 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. There were no outstanding foreign exchange contracts as of December 31, 1995 and 1994. While uncertainties exist regarding interest rates and inflation, the Company attempts to minimize such risks and exposure by balancing the duration of reinsurance liabilities with the duration of the assets in the investment portfolio. 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, 1995, the Company's fixed maturity investments which include mortgage-backed securities but 12 excludes convertible securities, had an expected average maturity of 7.1 years, as displayed in the table below:
(IN THOUSANDS) DECEMBER 31, 1995 ----------------------- EXPECTED MATURITY OF CARRYING % OF FIXED MATURITY INVESTMENTS VALUE PORTFOLIO -------------------------- ---------- --------- Less than 1 year....................................................... $32,224 2.0% 1-5 years.............................................................. 640,551 40.2 6-10 years............................................................. 717,150 45.0 11-15 years............................................................ 84,109 5.3 16-20 years............................................................ 17,185 1.1 More than 20 years..................................................... 40,388 2.5 ---------- --------- Subtotal............................................................... 1,531,607 96.1 Convertibles........................................................... 61,936 3.9 ---------- --------- Total............................................................ $1,593,543 100.0% ---------- --------- ---------- ---------
The balance of the Company's investment portfolio at December 31, 1995, consisting of cash, short-term investments and equity securities, amounted to $270 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 December 31, 1995, the Company held $127.3 million or 6.8% of cash and invested assets in equity securities, representing approximately 21% of statutory surplus. The Company does not hold any investments in real estate. Employees At December 31, 1995, the Company employed a total of 255 full-time employees, including 24 employees in the Company's U.K. operation. The Company's employees are not represented by a labor union and the Company believes that its employee relations are good. ITEM 2. PROPERTIES The Company leases its present corporate and administrative offices in a building located in Greenwich, Connecticut (the "Greenwich Lease"). The Company also has operating leases for office space at regional branch locations and its international subsidiary. See Note 6 of Notes to the Consolidated Financial Statements of NAC Re for a schedule on future minimum rentals related to the Company's operating leases. ITEM 3. LEGAL PROCEEDINGS NAC and Greenwich are parties to various lawsuits generally arising in the normal course of their business. The Company does not believe that the eventual outcome of any of the litigations to which NAC or Greenwich is a party will have a material effect on the Company's financial condition. NAC has been fully indemnified by The Continental Corporation for any losses incurred by Greenwich from events predating NAC's acquisition of Greenwich. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1995. 13 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Market Information The Common Stock ($.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, 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 THREE MONTHS ENDED ------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1994 1994 1994 1994 --------- -------- ------------- ------------ High........................... $ 32.00 $31.75 $ 29.75 $34.00 Low............................ $ 26.00 $24.00 $ 24.38 $24.25 Close.......................... $ 26.00 $29.50 $ 25.50 $33.50
Stockholders There were 313 holders of record of shares of Common Stock as of March 1, 1996, of which over 97% were held by Cede & Company as nominee for an unknown number of beneficial stockholders. Dividends The Company has declared its regular quarterly cash dividend of $.04 per share for March 1995 and each quarter of 1994. In June 1995, the Company increased its quarterly dividend to $.05 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 "Ten Year Financial Summary" on pages 36 through 37 of NAC Re's 1995 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 24 through 35 of NAC Re's 1995 Annual Report to Shareholders is incorporated herein by reference. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of NAC Re and its subsidiary companies, included on pages 38 through 64 of NAC Re's 1995 Annual Report to Shareholders, are incorporated herein by reference: - --Consolidated Balance Sheet at December 31, 1995 and 1994. - --Consolidated Statement of Income for the years ended December 31, 1995, 1994 and 1993. - --Consolidated Statement of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993. - --Consolidated Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993. - --Notes to Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not applicable. 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, 1995. 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. 15 Exhibits The exhibits listed on the Index to Exhibits set forth below are filed as part of this report. INDEX TO EXHIBITS 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.......
16 *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 by reference to Exhibit 10.17 to the 1994 10-K..................... (11) --Statement regarding computation of per share earnings............................. (12) --Statement regarding computation of ratios......................................... (13) --NAC Re's 1995 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 1995 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........................................................... (28) --Information from reports furnished to state insurance regulatory authorities [filed in paper format].........................................................
- ------------ * Executive Compensation Plans or Arrangements Reports on Form 8-K A report on Form 8-K, dated November 1, 1995, was filed with the Securities and Exchange Commission. The reported contained the Company's earnings release for the third quarter of 1995, dated October 19, 1995. Executive Compensation Plans or Arrangements Executive compensation plans or arrangements are indicated by an asterisk on the Index to Exhibits set forth above. 17 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/ JOHN N. ADIMARI ................................... JOHN N. ADIMARI ACTING CHIEF FINANCIAL OFFICER AND TREASURER Dated: March 22, 1996 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, President and Chief March 22, 1996 .................................... Executive Officer RONALD L. BORNHUETTER ROBERT A. BELFER* Director March 22, 1996 .................................... ROBERT A. BELFER JOHN P. BIRKELUND* Director March 22, 1996 .................................... JOHN P. BIRKELUND C. W. CARSON, JR.* Director March 22, 1996 .................................... C. W. CARSON, JR. TODD G. COLE* Director March 22, 1996 .................................... TODD G. COLE MICHAEL G. FITT* Director March 22, 1996 .................................... MICHAEL G. FITT DANIEL J. MCNAMARA* Director March 22, 1996 .................................... DANIEL J. MCNAMARA STEPHEN ROBERT* Director March 22, 1996 .................................... STEPHEN ROBERT WENDY J. STROTHMAN* Director March 22, 1996 .................................... WENDY J. STROTHMAN HERBERT S. WINOKUR, JR.* Director March 22, 1996 .................................... HERBERT S. WINOKUR, JR. /s/ JOHN N. ADIMARI Acting Chief Financial Officer and March 22, 1996 .................................... Treasurer JOHN N. ADIMARI
- ------------ * 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 GENERAL COUNSEL 18 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGES ------- NAC RE CORP. Report of Independent Auditors on Financial Statements and Schedules........ F-2 Consolidated Balance Sheet at December 31, 1995 and 1994.................... * Consolidated Statement of Income for the years ended December 31, 1995, 1994 and 1993.................................................................. * Consolidated Statement of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993................................................... * Consolidated Statement of Cash Flows for the years ended December 1995, 1994, and 1993............................................................ * Notes to Consolidated Financial Statements.................................. * SCHEDULES I Summary of Investments Other Than Investments in Related Parties at December 31, 1995.................................................................. S-1 III Condensed Financial Information of Registrant............................... S-2-S-4 V Supplementary Insurance Information for the years ended December 31, 1995, 1994, and 1993............................................................ S-5 VI Reinsurance for the years ended December 31, 1995, 1994 and 1993............ 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 1995 Annual Report to Shareholders. F-1 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, 1995 and 1994 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1995, 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. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for certain investments in debt and equity securities at December 31, 1993. New York, New York ERNST & YOUNG LLP JANUARY 30, 1996 F-2 SCHEDULE I NAC RE CORP. AND SUBSIDIARIES OTHER THAN INVESTMENTS IN RELATED PARTIES SUMMARY OF INVESTMENTS (IN THOUSANDS)
DECEMBER 31, 1995 ----------------------------------------- AMOUNT AT WHICH AMORTIZED MARKET SHOWN IN THE COST VALUE BALANCE SHEET ---------- ---------- ------------- Type of Investment: FIXED MATURITY SECURITIES United States Government............................. $116,958 $119,430 $119,430 Foreign governments.................................. 144,782 146,217 146,217 Mortgage-backed securities........................... 173,674 174,812 174,812 States, municipalities and political subdivisions.... 714,326 742,807 742,807 Corporate bonds...................................... 341,290 348,341 348,341 Subordinated convertibles............................ 60,818 61,936 61,936 ---------- ---------- ------------- Total Fixed Maturities........................... 1,551,848 1,593,543 1,593,543 EQUITY SECURITIES...................................... 114,818 127,257 127,257 CASH AND SHORT-TERM INVESTMENTS........................ 142,726 142,726 142,726 ---------- ---------- ------------- Total Investments................................ $1,809,392 $1,863,526 $ 1,863,526 ---------- ---------- ------------- ---------- ---------- -------------
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, -------------------- 1995 1994 -------- -------- ASSETS Fixed maturities....................................................... $34,088 $36,033 Short-term investments................................................. 14,930 7,645 Cash................................................................... 2,689 5,232 Accrued investment income.............................................. 290 317 Deferred expenses...................................................... 2,203 1,669 Federal income tax recoverable......................................... 3,197 1,105 Investment in wholly-owned subsidiaries................................ 775,100 485,014 Other assets........................................................... 4,084 3,810 -------- -------- Total assets..................................................... $836,581 $540,825 -------- -------- -------- -------- LIABILITIES 8% Notes due 1999...................................................... $100,000 $100,000 7.15% Notes due 2005................................................... 99,927 -- 5.25% Convertible Subordinated Debentures due 2002..................... 100,000 100,000 Revolving credit loan.................................................. 17,762 17,762 Interest payable....................................................... 1,358 603 Intercompany taxes payable............................................. 2,891 1,235 Dividend payable....................................................... 959 700 Accrued expenses and other liabilities................................. 1,928 1,440 -------- -------- Total liabilities................................................ 324,825 221,740 -------- -------- 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, 21,341; 1994, 19,639 issued)......... 2,134 1,964 Additional paid-in capital........................................... 246,356 194,231 Unrealized appreciation (depreciation) of investments, net of tax.... 35,187 (46,030) Currency translation adjustments, net of tax......................... 1,017 1,059 Retained earnings.................................................... 269,660 210,255 Less treasury stock, at cost (1995, 2,137 shares; 1994, 2,132 shares)............................................................ (42,598) (42,394) -------- -------- Total stockholders' equity....................................... 511,756 319,085 -------- -------- Total liabilities and stockholders' equity....................... $836,581 $540,825 -------- -------- -------- --------
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, ----------------------------- 1995 1994 1993 ------- ------- ------- INCOME Dividend declared from insurance subsidiary.................. $ 7,500 $15,000 $10,000 Net investment income........................................ 3,193 2,409 2,388 Net investment gains (losses)................................ 126 (138) -- Rental and other income...................................... 1,164 824 1,094 ------- ------- ------- 11,983 18,095 13,482 ------- ------- ------- EXPENSES Interest expense............................................. 15,610 14,416 13,545 Other operating costs and expenses........................... 2,104 1,776 2,100 ------- ------- ------- 17,714 16,192 15,645 ------- ------- ------- (Loss) income before intercompany tax allocation and equity in net income of wholly-owned subsidiaries less dividend declared................................................... (5,731) 1,903 (2,163) ------- ------- ------- Current intercompany tax credit................................ 4,711 4,557 5,063 Deferred tax benefit (expense)................................. 41 (9) (807) ------- ------- ------- Total tax credit, net.......................................... 4,752 4,548 4,256 ------- ------- ------- (Loss) income before equity in net income of wholly-owned subsidiaries less dividend declared.......................... (979) 6,451 2,093 Equity in net income of wholly-owned subsidiaries less dividend declared..................................................... 63,803 29,161 40,258 ------- ------- ------- Net income..................................................... $62,824 $35,612 $42,351 ------- ------- ------- ------- ------- -------
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, --------------------------------- 1995 1994 1993 --------- -------- -------- Operating activities: Net income.................................................. $ 62,824 $ 35,612 $ 42,351 Less equity in net income of subsidiaries, less cash dividend ($7,500 in 1995, $17,500 in 1994, $7,500 in 1993)................................................... 63,803 26,661 42,758 --------- -------- -------- (979) 8,951 (407) Adjustments to reconcile net income to net cash provided by operating activities...................................... 1,866 3,476 1,232 --------- -------- -------- Net cash provided by operating activities................... 887 12,427 825 --------- -------- -------- Investing activities: Sales of fixed maturity investments....................... 9,722 12,001 13,667 Maturities of fixed maturity investments.................. 4,700 3,720 5,180 Purchases of fixed maturity investments................... (10,527) (22,799) (26,749) Net (purchases) sales of short-term investments........... (7,285) (2,348) 12,333 Purchases of furniture and equipment...................... (1,290) (718) (676) Contribution to subsidiary................................ (146,556) -- -- --------- -------- -------- Net cash (used) provided by investing activities............ (151,236) (10,144) 3,755 --------- -------- -------- Financing activities: Issuance of shares........................................ 52,056 5,278 3,192 Net proceeds from issuance of 7.15% Notes................. 99,214 -- -- Net proceeds from issuance of 5.25% Debentures............ -- -- (146) Purchase of treasury shares............................... (204) (15,006) (7,542) Cash dividends paid to stockholders....................... (3,260) (2,827) (2,862) Borrowings under revolving credit agreement............... -- 13,857 3,905 --------- -------- -------- Net cash provided (used) by financing activities............ 147,806 1,302 (3,453) --------- -------- -------- (Decrease) increase in cash................................. (2,543) 3,585 1,127 Cash--beginning of year..................................... 5,232 1,647 520 --------- -------- -------- Cash--end of year........................................... $ 2,689 $ 5,232 $ 1,647 --------- -------- -------- --------- -------- --------
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 PREMIUMS COSTS EXPENSES PREMIUMS REVENUE INCOME EXPENSES COSTS EXPENSES WRITTEN ----------- ---------- -------- -------- ---------- ---------- ------------ --------- -------- DECEMBER 31, 1995 Domestic: Property/Casualty.. $68,158 $1,246,187 $216,213 $450,068 $80,875 $293,262 $132,049 $55,919 $471,917 Accident and Health........... -- 3,584 2,005 2,926 708 1,776 -- 489 4,131 ------- ---------- -------- -------- ------- -------- -------- ------- -------- Subtotal...... 68,158 1,249,771 218,218 452,994 81,583 295,038 132,049 56,408 476,048 International: Property/Casualty.. 2,308 43,277 12,520 38,791 7,725 31,110 7,014 6,044 45,441 Intercompany elimination...... -- (633) -- -- -- -- -- -- -- ------- ---------- -------- -------- ------- -------- -------- ------- -------- Total......... $70,466 $1,292,415 $230,738 $491,785 $89,308 $326,148 $139,063 $62,452 $521,489 ------- ---------- -------- -------- ------- -------- -------- ------- -------- ------- ---------- -------- -------- ------- -------- -------- ------- -------- DECEMBER 31, 1994 Domestic: Property/Casualty.. $59,030 $1,068,930 $188,436 $375,233 $75,661 $249,833 $114,540 $47,469 $411,750 Accident and Health........... -- 1,208 732 637 122 180 -- 76 662 ------- ---------- -------- -------- -------- -------- -------- ------- -------- Subtotal...... 59,030 1,070,138 189,168 375,870 75,783 250,013 114,540 47,545 412,412 International: Property/Casualty.. 923 16,032 6,045 19,861 4,721 15,740 3,052 5,210 25,789 ------- ---------- -------- -------- -------- -------- -------- ------- -------- Total......... $59,953 $1,086,170 $195,213 $395,731 $80,504 $265,753 $117,592 $52,755 $438,201 ------- ---------- -------- -------- -------- -------- -------- ------- -------- ------- ---------- -------- -------- -------- -------- -------- ------- -------- DECEMBER 31, 1993 Domestic: Property/Casualty.. $44,453 $907,968 $137,962 $305,950 $76,514 $213,882 $94,077 $44,623 $336,421 Accident and Health........... -- 1,093 679 429 118 (42) -- 69 520 ------- ---------- -------- -------- -------- -------- -------- ------- -------- Total......... $44,453 $909,061 $138,641 $306,379 $76,632 $213,840 $94,077 $44,692 $336,941 ------- ---------- -------- -------- -------- -------- -------- ------- -------- ------- ---------- -------- -------- -------- -------- -------- ------- --------
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, 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% ------- --------- ---------- -------- ----- ------- --------- ---------- -------- ----- DECEMBER 31, 1993 Premiums Written: Property/casualty..................... $15,647 $94,478 $415,252 $336,421 123% Accident and health................... 51 163 632 520 122% ------- --------- ---------- -------- ----- Total............................... $15,698 $94,641 $415,884 $336,941 123% ------- --------- ---------- -------- ----- ------- --------- ---------- -------- -----
S-6 SCHEDULE X NAC RE CORP. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS (IN THOUSANDS)
RESERVE CLAIMS AND CLAIMS FOR EXPENSES INCURRED AMORTIZATION DEFERRED UNPAID RELATED TO(2) OF DEFERRED AFFILIATION POLICY CLAIMS DISCOUNT NET ------------------ POLICY WITH ACQUISITION AND CLAIMS IF ANY, UNEARNED EARNED INVESTMENT CURRENT PRIOR ACQUISITION REGISTRANT COSTS EXPENSES DEDUCTED(1) PREMIUMS PREMIUMS INCOME YEAR YEARS COSTS ---------- ----------- ---------- ----------- -------- -------- ---------- -------- -------- ------------ CONSOLIDATED SUBSIDIARIES December 31, 1995... $70,466 $1,292,415 $18,340 $230,738 $491,785 $ 86,115 $345,783 ($19,635) $139,063 December 31, 1994... $59,953 $1,086,170 $17,084 $195,213 $395,731 $ 78,095 $309,294 ($43,541) $117,592 December 31, 1993... $44,453 $909,061 $14,834 $138,641 $306,379 $ 74,244 $237,491 ($23,651) $94,077 PAID CLAIMS AFFILIATION AND WITH CLAIMS PREMIUMS REGISTRANT EXPENSES WRITTEN ---------- -------- -------- CONSOLIDATED SUBSIDIARIES December 31, 1995... $180,386 $521,489 December 31, 1994... $154,651 $438,201 December 31, 1993... $142,709 $336,941
- ------------ (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 INDEX TO EXHIBITS
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..... *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 by reference to Exhibit 10.17 to the 1994 10-K................... (11) --Statement regarding computation of per share earnings........................... (12) --Statement regarding computation of ratios....................................... (13) --NAC Re's 1995 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 1995 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......................................................... (28) --Information from reports furnished to state insurance regulatory authorities [filed in paper format].......................................................
- ------------ * Executive Compensation Plans or Arrangements 2 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
YEAR ENDED DECEMBER 31, ----------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Net income applicable to common stock............... $62,824 $35,612 $42,351 ----------- ----------- ----------- ----------- ----------- ----------- Average number of common shares outstanding......... 17,708,733 17,603,372 17,895,253 Add: Assumed exercise of dilutive stock options (1)...... 385,729 291,335 524,404 ----------- ----------- ----------- Common stock and common stock equivalents outstanding....................................... 18,094,462 17,894,707 18,419,657 ----------- ----------- ----------- ----------- ----------- ----------- Net income per share assuming dilution of common stock equivalents................................. $3.47 $1.99 $2.30 ----------- ----------- ----------- ----------- ----------- -----------
- ------------ (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. 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
YEAR ENDED DECEMBER 31, -------------------------------------- 1995 1994 1993 ---------- ---------- ---------- Net income applicable to common stock.................. $62,824 $35,612 $42,351 After-tax add back of convertible debenture interest and amortization..................................... 3,504 3,504 3,504 ---------- ---------- ---------- Adjusted net income.................................... $66,328 $39,116 $45,855 ---------- ---------- ---------- ---------- ---------- ---------- Average number of common shares outstanding............ 17,708,733 17,603,372 17,895,253 Add: Assumed exercise of dilutive stock options(1).......... 424,524 429,897 530,004 Assumed conversion of convertible debentures(2)........ 2,020,202 2,020,202 2,020,202 ---------- ---------- ---------- Common stock and common stock equivalents outstanding.......................................... 20,153,459 20,053,471 20,445,459 ---------- ---------- ---------- ---------- ---------- ---------- Fully diluted earnings per share....................... $3.29 $1.95 $2.24 ---------- ---------- ---------- ---------- ---------- ----------
- ------------ (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 4 EXHIBIT 12 NAC RE CORP. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- --------- EARNINGS: Operating income before income taxes....... $ 78,821 $ 42,290 $ 49,497 $3,606 $41,718 -------- -------- -------- -------- --------- ADD BACK FIXED CHARGES: Interest expense........................... 15,381 14,196 13,324 4,538 3,547 Amortization of related debt expenses...... 267 258 258 68 63 Assumed interest component of rent expenses................................. 1,235 1,099 1,194 1,114 940 -------- -------- -------- -------- --------- Total fixed charges.................... 16,883 15,553 14,776 5,720 4,550 -------- -------- -------- -------- --------- Adjusted earnings.......................... $ 95,704 $ 57,843 $ 64,273 $9,326 $46,268 -------- -------- -------- -------- --------- -------- -------- -------- -------- --------- Ratio of earnings to fixed charges......... 5.7 to 1 3.7 to 1 4.3 to 1 1.6 to 1 10.2 to 1 -------- -------- -------- -------- --------- -------- -------- -------- -------- ---------
EX-13 5 Exhibit 13 - ------------------------------------------------------------------------------- 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 $45.9 million for 1995, $34.8 million for 1994 and $29.9 million for 1993. Operating results were impacted modestly in 1995 and 1994 and more significantly in 1993 by property catastrophe claims. After-tax charges for catastrophic events reduced operating earnings by $3.6 million for 1995, $3.3 million for 1994 and $12.3 million for 1993. Net income was $62.8 million for 1995, $35.6 million for 1994 and $42.4 million for 1993. On a per share basis, net income was $3.47, $1.99 and $2.30 for 1995, 1994 and 1993, respectively. Net income for 1995 includes after-tax realized investment gains of $17 million or $.94 per share compared to $.8 million or $.04 per share in 1994 and $12.4 million or $.67 per share in 1993. Premium Revenues The Company's steady growth in premium revenue, as indicated below, has been impacted by several different factors in recent years, including both external market influences and internal initiatives:
Gross Premiums Written Percent Change - --------------------------------------------------------------------------------------------------------------------------------- Dollars in Millions 1995 1994 1993 95/94 94/93 - --------------------------------------------------------------------------------------------------------------------------------- Domestic: Casualty $354.8 $293.4 $212.9 20.9% 37.8% Property 179.8 151.6 149.2 18.5 1.7 Specialty/other 92.3 100.2 69.5 (7.9) 44.3 - --------------------------------------------------------------------------------------------------------------------------------- Subtotal 626.9 545.2 431.6 15.0 26.3 ================================================================================================================================= International: Casualty 19.2 14.8 - 30.3 - Property 33.9 17.7 - 91.6 - - --------------------------------------------------------------------------------------------------------------------------------- Subtotal 53.1 32.5 - 63.7 - ================================================================================================================================= Intercompany transactions (2.1) (2.7) - - - - --------------------------------------------------------------------------------------------------------------------------------- Total $677.9 $575.0 $431.6 17.9% 33.2% ================================================================================================================================= Net Premiums Written Percent Change - --------------------------------------------------------------------------------------------------------------------------------- Dollars in Millions 1995 1994 1993 95/94 94/93 - --------------------------------------------------------------------------------------------------------------------------------- Domestic: Casualty $311.7 $250.1 $176.1 24.6% 42.0% Property 111.1 92.2 99.2 20.5 (7.1) Specialty/other 53.3 70.1 61.6 (24.1) 13.8 - --------------------------------------------------------------------------------------------------------------------------------- Subtotal 476.1 412.4 336.9 15.4 22.4 ================================================================================================================================= International: Casualty 18.7 14.5 - 29.0 - Property 26.7 11.3 - 136.7 - - --------------------------------------------------------------------------------------------------------------------------------- Subtotal 45.4 25.8 - 76.2 - ================================================================================================================================= Total $521.5 $438.2 $336.9 19.0% 30.1% =================================================================================================================================
24 - ------------------------------------------------------------------------------- Gross premiums written reflect total premiums written prior to the deduction for premiums ceded by the Company to its reinsurers as payment for its own retrocessional protection. The reinsurance marketplace remained competitive in 1995, particularly in the casualty area, in spite of some contrary indications during 1994. Rate pressure at the primary level and ample reinsurance capacity has appeared to preclude casualty reinsurance rate improvement. 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, with varying degrees of success, 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 size and financial strength of reinsurance partners. In addition, some primary companies appear to be increasing their retentions. 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, mergers among reinsurance companies and continued uncertainty in the Lloyd's market has dislodged business and created new opportunities for some reinsurers. In addition, continued globalization by U.S. insurers generated expanded opportunity in the international marketplace. The Company believes that while market conditions are becoming increasingly competitive in 1996, opportunities for profitable business growth are likely to continue. The Company's worldwide casualty gross premiums written increased 21.5% in 1995 compared to increases of 44.3% in 1994 and 7.2% in 1993. Domestic casualty gross premiums written increased 20.9% in 1995 and 37.8% in 1994. Casualty growth in 1995 came largely from increased participations from existing treaty clients, which more than offset increased retentions from one large account. Growth was also attributable to new relationships. Casualty growth in 1994 was attributed to several new treaty casualty 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 clients. Growth in 1995 and 1994 was also attributed to the Company's facultative business. Due to the maturing of the Company's facultative infrastructure, a continued focus on more complex lines of business and the successful marketing of facultative automatics, casualty facultative gross premiums written increased by 87.8% in 1995 and 80% in 1994, contributing $76.1 million and $40.5 million in gross premiums written, respectively. This is compared to a 29.4% increase in 1993. Although 1996 casualty premium will be impacted by increased retention levels by one large account, the Company does not believe that the reduction of business assumed from any one client will have a materially adverse effect on its 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. The number and unprecedented severity of claims related to property catastrophes, which the industry experienced subsequent to 1988, and particularly in 1992 and 1993, significantly impacted the cost and availability of property catastrophe protection in 1993. As a result, various insurance companies operating in both the primary and reinsurance markets closed or curtailed the reinsurance segment of their operation, due in part to the financial stress created by the double exposure to catastrophes. These factors limited catastrophe protection available in the marketplace and, as a result, companies were more 25 - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS limited in the amount of property protection they could offer resulting in a strengthening in terms and conditions for all property business during 1993. However, the influx of approximately $4 billion in new capital in the Bermuda market during 1993, dedicated primarily to providing catastrophe reinsurance protection, somewhat relieved the shortage of catastrophe protection in 1994. Nevertheless, property per risk pricing remained relatively firm in 1994 and 1995, although property catastrophe rates softened somewhat in 1995. The Company capitalized in each year on the general improvement in property market conditions, increasing premiums written while monitoring aggregate exposures and, as a result, worldwide property gross premiums written grew by 26.7% in 1995, 12.3% in 1994 and 6.3% in 1993. Domestic property gross premiums written increased 18.5% in 1995 and 1.7% in 1994. Excluding nontraditional premiums, domestic property gross premiums increased approximately 25% in both 1995 and 1994. As with casualty business, property facultative growth contributed to the overall premium gains, including the positive impact of facultative automatic programs, with property facultative gross premiums written increasing by 36.7% in 1995, 39.3% in 1994 and 105% in 1993. As expected, the Company's nontraditional treaty business has declined substantially and is no longer a meaningful component of premium revenues. Market conditions for nontraditional business began to erode in 1993, upon the introduction of new accounting standards that created higher thresholds for risk transfer and mitigated the benefits available to ceding companies attributable to certain nontraditional contracts. The Company's focus on certain specialty lines of business, particularly fidelity/surety, aviation and ocean marine business, has also resulted in growth opportunities. Fidelity/surety bond treaty gross premiums written were $33.3 million in 1995 compared to $33.5 million in 1994 and $31.8 million in 1993, which included approximately $7 million in non-recurring premiums derived from certain unearned premium portfolio transfers. The Company's 1995 bonding premiums were impacted by a weak overall construction environment and increased retentions by primary companies. Market conditions are expected to remain competitive during 1996. The Company's specialization in the aviation business began in mid-1992, with the underwriting of a large general aviation program, and expanded in 1994 as a result of 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 for the program, the treaty was not renewed effective July 1, 1994. The decline in aviation premium from this action was somewhat offset by premium from an increased participation in the aviation pool effective as of January 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 $10.9 million, $34.3 million and $22.5 million for 1995, 1994 and 1993, respectively. In addition to certain aviation business, the Company writes a limited amount of other primary insurance business, principally through its subsidiary, Greenwich Insurance Company. Primary insurance business is expected to be a source of growth in 1996, 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. 26 - ------------------------------------------------------------------------------- The Company's most significant investment to expand its business production in recent years has been the establishment of a fully licensed international property and casualty reinsurance subsidiary in London, England. Gross premiums written from this operation in 1995 and 1994 included $19.3 million and $14.8 million from casualty treaty business, respectively, and $33.9 million and $17.7 million from property treaty business, respectively, written principally in Europe, Japan and Australasia. In late 1995, the Company expanded its international operation to begin writing property facultative business. The Company expects its international business to continue to increase as the London operation begins to mature. Ceded premiums recorded for retrocession agreements were $156.4 million, $136.8 million and $94.7 million for the years ended December 31, 1995, 1994 and 1993. The principal cause for the increase in 1995 and 1994 ceded premiums was a result of 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 from expanded retrocessional protection obtained at marginally higher costs. The Company expects ceded premiums to decline in 1996 as a percentage of gross premiums written, principally due to a more favorable pricing environment for property catastrophe coverage. 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 what the insurer or reinsurer expects to pay on claims, based upon facts and circumstances then known. The Company would generally expect to refine such estimates in subsequent accounting periods by modest amounts with adjustments possible in either direction as additional information becomes 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 this type of coverage in certain volatile casualty lines of business, such as general liability, directors' and officers' liability and medical malpractice. Claim activity for these lines is characterized by protracted discovery and settlement periods, the ultimate cost of which can be influenced significantly by court rulings. Estimates of claims and claims expenses are based in part on a prediction of future events and 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. 27 - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS 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 years indicated 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): 1995 1994 1993 - -------------------------------------------------------------------------------- Domestic Composite Ratio: Claims and claims expenses 65.1% 66.6% 69.9% Commissions and brokerage 29.7 31.3 32.2 Other operating expenses 8.3 7.8 8.8 - -------------------------------------------------------------------------------- Total 103.1% 105.7% 110.9% - -------------------------------------------------------------------------------- Composite ratios for 15 largest reinsurers 113.1% 106.4% 106.5% ================================================================================ The Company's domestic composite ratio for 1995 reflects improvements in underwriting results after unsatisfactory underwriting results in 1994 and 1993 due to several factors. One factor was the severity and frequency of property catastrophes. Catastrophe costs increased the 1995 composite ratio by less than 1 percentage point, while property catastrophe claim activity arising from the Northridge earthquake increased the 1994 composite ratio by 1.3 percentage points. Property claim activity arising from several 1993 and 1992 catastrophic events increased the 1993 composite ratio by 6.2 percentage points. The extensive cost of 1992 catastrophes limited the availability and increased the cost of catastrophe retrocessional protection for 1993 requiring the Company to increase its net retention for catastrophe claims in 1993 to $10 million. Accordingly, such increased retention levels caused additional volatility in the results from property catastrophe claims in 1993. Aided by the influx of new capital in the catastrophe retrocessional market, the Company was able to reduce its exposure to a single event to $5 million for 1994 and 1995 at marginally higher costs each year. Due to softening in the property catastrophe market, for 1996 the Company expects lower costs for its catastrophe protection while continuing its single event exposure at $5 million and it expects to expand its coverage to $120 million of property catastrophe protection, up from $85 million in 1995, of which $30 million of coverage, in excess of the first $60 million of coverage, is available only if industry-wide claims exceed certain minimum levels. While the 1996 catastrophe protection provides somewhat more protection than the 1995 and 1994 coverage, and significantly more protection than in years prior to 1994, it is not enough protection for the Company to avail itself of all opportunities to write property reinsurance. 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 limits 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, or multiple catastrophic events could have a material adverse effect on the financial condition and results of operations of the Company. 28 - ------------------------------------------------------------------------------- In consideration of the Company's increased size and financial capacity, as well as the continued positive contribution of business written since 1986, the Company increased its maximum retention on any one claim for non-catastrophe losses for 1996 to $5 million, as compared to $3.9 million for 1995 and 1994, and $3 million for 1993. An additional factor impacting the 1994 and 1993 domestic composite ratios was disappointing returns from certain 1993 and 1992 underwriting year property and aviation treaties. The Company undertook underwriting and pricing actions to improve the results of such treaties. As previously noted, effective July 1, 1994, the general aviation program that generated adverse results was not renewed. The Company's casualty claim experience continues to develop satisfactorily. A growing area of focus in the reinsurance and insurance industries has been exposure to asbestos and environmental 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. The Company recorded claims and claims expenses incurred relating to asbestos and environmental claims of $7 million in 1995, $4.8 million in 1994, and $4.2 million in 1993, inclusive of paid claims of $4.8 million, $3.3 million, and $.8 million, respectively. The Company's claims and claims expense reserves for such exposures, net of reinsurance, as of December 31, 1995, 1994 and 1993 were $22 million, $19.8 million and $18.4 million, respectively. A reconciliation of the Company's gross and net liabilities for such exposures for the three years ending December 31, 1995 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. Total net claims and claims expenses for each year reflects favorable or unfavorable claim development from prior years for both traditional and nontraditional treaty business, as follows: (Favorable) Unfavorable Prior Year Claim Development - -------------------------------------------------------------------------------- Dollars in Millions 1995 1994 1993 - -------------------------------------------------------------------------------- Traditional business $ (18.7) $ (37.0) $ (9.3) Nontraditional business (.9) (6.5) (14.4) - -------------------------------------------------------------------------------- Total $ (19.6) $ (43.5) $ (23.7) ================================================================================ Percent to prior year net claims and claims expense reserves 2.4% 6.2% 3.8% ================================================================================ 29 - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS The net favorable claim development for traditional business written since 1986 continued to emerge during 1995, 1994 and 1993. The net favorable development on the Company's traditional business is impacted by several factors, some of which are interdependent. A principal reason for such development is the strength of the pricing assumptions underlying the business written, particularly with respect to social and economic inflation. The pricing assumptions are utilized to establish the initial expected target loss ratio employed in the actuarial methodologies used to establish the reserves for claims and claims expenses. Such loss ratios are periodically adjusted to reflect actuarially computed comparisons of expected to actual claims and claims expense development, inflation and other considerations. This favorable development offsets certain unfavorable development on business written prior to 1986, principally related to asbestos and environmental claims, and in 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, which is issued every two years by the RAA. Favorable and unfavorable claims experience for nontraditional treaty business is usually compensated for by adjustments in premiums from and commissions to client companies. Claims and claims expenses paid for the years ended 1995, 1994 and 1993 are as follows: ============================================================================== Dollars in Millions 1995 1994 1993 ============================================================================== Traditional business $ 162.5 $ 144.3 $ 115.3 Nontraditional business 17.9 10.4 27.4 ============================================================================== Total $ 180.4 $ 154.7 $ 142.7 ============================================================================== As the Company's casualty book of business continues to mature, claim payment activity is expected to increase. Claim payment activity includes net payments for property catastrophe claims of $5 million, $14.6 million and $32.1 million for traditional business for 1995, 1994 and 1993, respectively, and $5 million, $4.8 million and $3.9 million for nontraditional business for 1995, 1994 and 1993, respectively. Claims and claims expenses also include a charge for actual and potential non-recoveries from retrocessionnaires that either do not satisfy the Company's financial guidelines, or are in liquidation or rehabilitation proceedings. Such charges amounted to $1.4 million, $4 million and $1.1 million for 1995, 1994 and 1993, 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 .6 to 1 ratio of reinsurance recoverables (including IBNR) to statutory surplus, a measure of exposure that continues to receive attention from analysts of insurance companies and state regulators, is less than the average ratio for the top 15 property/casualty reinsurers reporting to the RAA of .9 to 1, based on the most recent available data. In addition, approximately 57% 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. 30 - ------------------------------------------------------------------------------- The 1995 and 1994 statutory composite ratios for the Company's international reinsurance subsidiary were 111.7% and 114.7%, respectively. The 1995 composite ratio includes approximately 3.3 percentage points due to property catastrophe claims principally related to a Caribbean hurricane. A principal cause for these relatively high composite ratios was the contribution of the operating expense ratios of 13% and 20.2%, respectively. The Company generally expects a higher expense ratio in the start-up years of the operation as the subsidiary establishes its operations and client relationships. The expense ratio of the international subsidiary is expected to normalize over time as it leverages its investment in infrastructure and marketing, 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 1995 compared to 1994 and 1993. 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 decline in the commissions and brokerage ratio in 1995 and 1994 was largely due to the expected reduction in nontraditional treaty business, as these contracts generally require experience refunds remitted in the form of commissions. This decrease was partially mitigated by an increase in pro rata contracts written in the Company's specialty lines of business, as these contracts generally carry a higher commission rate. Operating expenses increased in each year reflecting continued business expansion, investments in technology, a continued investment in facultative business and the opening of the international operation. Because of the expanded utilization of the Company's facultative infrastructure and other increases in premium volume without a corresponding growth in staff, the 1994 domestic operating expenses declined as a percentage of premium volume to 7.8% compared to 8.8% in 1993. The Company expanded staffing slightly in 1995 in order to accommodate continuing growth opportunities and began a significant technology initiative, resulting in a domestic statutory expense ratio of 8.3%. The Company plans to add additional staff in 1996, primarily in facultative branches. In addition, its technology initiative will generate additional expenditures in 1996 and possibly 1997. However, the Company will continue to seek measures to contain operating expenses that are not central to its underwriting activities, and to better utilize its resources. Accordingly, the Company expects to continue to write additional business over the next few years without a commensurate increase in operating expenses. Investments Cash and invested assets were $1.8 billion at December 31, 1995 and $1.4 billion at December 31, 1994, excluding net investment payables of $50.5 million and $42.4 million for 1995 and 1994, respectively. The increase in invested assets over 1994 includes approximately $146.6 million in net proceeds related to the Company's public debt and equity offerings in November 1995. Net investment income increased 10.9% in 1995 compared to 5.1% in 1994 and 16.8% in 1993. After-tax net investment income increased 14.7% in 1995 compared to 3.2% in 1994 and 14.1% in 1993. The increase in each year was the result of growth in invested assets due to the investment of cash flow from operations and in 1993, due to the investment of the net proceeds from the Company's 1992 debt offerings. The Company's pretax investment yield was 5.9% in 1995 compared to 6% in 1994 and 6.4% in 1993. On an after-tax basis, the investment yield was 4.6% in 1995, 4.5% in 1994 and 4.9% in 1993. 31 - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Investment yields during the past three years were characterized by a highly fluctuating interest rate environment. Interest rates declined through much of 1993, and then beginning in the first quarter of 1994, began an upward movement as the Federal funds rate was raised seven times, resulting in an increase in short-term interest rates of approximately 250 basis points. Investment yields began to decline during 1995, especially in the second half of the year, as the yield on a ten year Treasury bond declined over 200 basis points from 1994 levels. While the Company benefited in 1995 from the interest rate environment of 1994, the effect on investment yields was somewhat tempered given the Company's fixed maturity duration of approximately 5 years, the declining interest rate environment during 1995, as well as the portion of the Company's assets invested in equity securities. Also affecting the comparison of 1995 and 1994 pretax and after-tax investment yields was the Company's investment of available cash flow during 1995 in approximately $307 million of tax-exempt securities to take advantage of the higher after-tax yields for these securities. The Company expects continued growth in investment income during 1996 due to a higher invested asset base; however, such growth will be mitigated somewhat by lower available investment yields. Realized investment gains, net of tax, were $.94 per share for 1995, $.04 per share for 1994, and $.67 per share for 1993. Investment gains were realized in 1995 principally as a result of the allocation of a portion of the investment portfolio to tax-exempt securities. Gains and losses on the sale of investments are recognized as a component of operating income, but the timing and recognition of such gains and losses are unpredictable and are not indicative of future operating results. The Company's investment strategy is focused principally on income predictability and asset value stability. This strategy results in an emphasis on high quality, fixed maturity investments. Tactical shifts between taxable and tax-exempt bonds may occur in order to maximize after-tax investment returns. At the end of 1995, the Company's fixed maturity investments amounted to $1.6 billion, which approximates 86% of cash and invested assets, and substantially all such investments are rated investment grade by Moody's Investor Services, Inc. or Standard & Poor's. The decrease in interest rates during 1995 caused an increase in the market value of the Company's investment securities which resulted in a net unrealized appreciation of investments, net of tax, of $35.2 million or $1.83 per share at December 31, 1995. The unrealized appreciation was primarily attributable to the market value fluctuations in the Company's fixed income securities which are recorded at fair value, consistent with the accounting provisions of SFAS No. 115, which was adopted by the Company at December 31, 1993. 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 1995 the Company's investment portfolio had an average duration of 4.9 years. See Note 2 of the Notes to Consolidated Financial Statements for a detailed discussion of the fixed maturity investment portfolio. The balance of the Company's investment portfolio at December 31,1995, consisting of cash, short-term investments and equity securities, amounted to $270 million. As of December 31, 1995, the Company held $127 million or 6.8% of cash and invested assets in equity securities, representing 21% of statutory surplus. This is compared to $124 million or 8.8% of invested assets in equity securities at December 31, 1994, representing 30% of statutory surplus. 32 - ------------------------------------------------------------------------------- In late 1993, the Company established an international reinsurance operation in London, England (NAC Re International) with $75 million of capital, and increased stockholders' equity to $92 million and $121 million at the end of 1994 and 1995, respectively. 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, 1995, NAC Re International's investment portfolio, which was primarily invested in U.K. Government securities, had an average duration of 3.6 years, and a pretax investment yield of 7.3%. Income Taxes The Company's effective tax rate increased to 20.3% in 1995 as compared to 15.8% in 1994, due to the larger contribution of realized investment gains which are taxed at a marginal tax rate of 35%. Excluding investment gains, the Company's effective tax rate was 14.2%, up marginally as compared to 13.3% in 1994. This increase was principally due to improved underwriting results, offset somewhat by a lower effective tax rate on investment income due to the more significant contribution of tax-exempt income. The Company's effective tax rate marginally increased in 1994 over 1993 principally as a result of the tax rate increase in 1993 from 34% to 35%. The Company recorded a net tax benefit of approximately $.9 million in 1993 as a result of the revaluation of current tax liabilities and net deferred tax assets to reflect this tax rate increase. Accounting Pronouncement In October 1995, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123, "Accounting for Stock-Based Compensation." This Statement, if adopted, would require companies to recognize compensation expense for grants of stock, stock options and other equity instruments to employees based on their respective fair values at the date of grant. Companies that choose not to adopt the new rules will continue to apply the existing accounting rules contained in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." Companies that continue to apply the existing accounting rules contained in APB No. 25 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 Company intends to continue to account for its stock-based compensation under APB No. 25 and provide the pro forma disclosures required by FASB No. 123, beginning in 1996. See Note 8 of the Notes to Consolidated Financial Statements. 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. 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 principal amount of its 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 these transactions and borrowings described below, pretax interest expense was $15.6 million in 1995, $14.5 million in 1994 and $13.6 million in 1993. NAC Re maintains a revolving credit and term loan facility, under which it can borrow up to $35 million. Outstanding borrowings at each of December 31, 1995 and 1994 were $17.8 million, and were principally 33 - ------------------------------------------------------------------------------- MANACEMENT'S DISCUSSION AND ANALYSIS utilized to finance the Company's periodic repurchase of its Common Stock. There was minimal repurchase activity in 1995 and approximately 552,000 shares of NAC Re Common Stock were repurchased by the Company during 1994. As of December 31, 1995, approximately 500,000 shares were available for repurchase under the Company's repurchase program. Outstanding borrowings on the loan facility are payable quarterly over a three year period beginning in June 1996. NAC maintains a $15 million line of credit facility which is available for castrophe claim payments or working capital purposes. There have been no borrowings under this facility. Consolidated stockholders' equity totaled $511.8 million or $26.65 per share at December 31, 1995, compared to $319.1 million or $18.23 per share, at December 31, 1994. The increase in stockholders' equity for the year included $81.2 million, net of tax, or $4.64 per share, as a result of the unrealized appreciation of the Company's investment securities. The Company's regular quarterly dividend was increased to $.05 per share from $.04 per share in June 1995. It is anticipated that the cash dividend level will leave sufficient retained earnings to meet future financial needs. Statutory surplus of the reinsurance subsidiary was approximately $615 million and $407 million at the end of 1995 and 1994, respectively. The increase was primarily due to the contribution to NAC of the majority of the net proceeds from the Company's debt and equity offerings and from earnings growth. NAC ranks among the largest domestic reinsurers measured on this basis. The Company believes the increase in surplus will enhance 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 $438 million, including 1995 and 1994 cash flow of $174 million and $138 million, respectively. The cash flow for 1995 and 1994 increased primarily due to increased premium volume and increased net investment income. Cash flow is expected to continue to grow in 1996 as a result of anticipated growth in net premiums written and net investment income. 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 regulating each company's financial integrity and solvency in its business transactions and operations. Many of the insurance statutes and regulations applicable to the Company may be categorized as reporting and disclosure standards which allow insurance regulators to closely monitor the Company's performance. Typical required reports include information concerning the Company's capital structure, ownership, financial strength and general business operations. In 1993, the National Association of Insurance Commissioners (the "NAIC") adopted a model risk-based capital act intended to provide an additional tool for regulators to evaluate the capital of property and 34 - ------------------------------------------------------------------------------- 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 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, or California, NAC's commercial domicile, New York has issued a circular letter requiring the filing of risk-based capital reports and a bill is pending in California to adopt a risk-based capital act. In a related action, the NAIC adopted a proposal that requires property and casualty insurers and reinsurers to report the results of their risk-based capital calculations as part of the statutory annual statements filed with state regulatory authorities. Surplus (as calculated for statutory annual statement purposes) for each of the Company's domestic property and casualty insurance and reinsurance subsidiaries is well above the risk-based capital thresholds that would require either company or regulatory action. Other disclosure standards require prior regulatory agency 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 the Company's domiciliary Insurance Department as well as by other state Insurance Departments. Additionally, prior to the acquisition of 10% of the outstanding shares of Common Stock, stockholders may be required to file certain notices and reports with regulator 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 1994, the NAIC started analyzing and drafting new model laws entitled "Investments of Insurers Model Act and "Derivative Instruments Model Regulation." Although definitive action has not yet been taken by the NAIC, the Company's domestic subsidiaries may be subject to new 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. Late in 1995 the 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. 35 - ------------------------------------------------------------------------------- TEN YEAR FINANCIAL SUMMARY ============================================================================================================= In Thousands, except per share amounts 1995 1994 1993 1992(1) ============================================================================================================= Income Statement Data Gross premiums written $677,938 $575,037 $431,582 $366,292 Net premiums written 521,489 438,201 336,941 268,023 Premiums earned 491,785 395,731 306,379 250,533 Net investment income 89,308 80,504 76,632 65,590 Net investment gains (losses) 25,391 2,155 19,095 9,081 Total revenues 606,484 478,390 402,106 325,204 Operating costs and expenses 527,663 436,100 352,609 321,598 Operating income 62,824 35,612 42,351 10,386 Net income 62,824 35,612 42,351 22,443 Return on stockholders' equity (3) 19.7% 9.5% 13.7% 9.3% - ------------------------------------------------------------------------------------------------------------- Per Share Data (4) Primary: Average shares outstanding 18,094 17,895 18,420 18,313 Operating income $3.47 $1.99 $2.30 $.57 Net income 3.47 1.99 2.30 1.23 Fully diluted (assuming conversion of dilutive convertible securities): Average shares outstanding 20,153 20,053 20,445 18,536 Net income $3.29 $1.95 $2.24 $1.21 Cash dividends declared per share .19 .16 .16 .16 Stock prices: High 39.00 34.00 44.75 42.00 Low 28.25 24.00 28.00 21.75 Close 36.00 33.50 29.75 40.50 - ------------------------------------------------------------------------------------------------------------- Balance Sheet Data Total assets (5) (6) $2,462,131 $1,916,768 $1,778,868 $1,596,209 Cash and invested assets (5) 1,863,526 1,414,527 1,412,624 1,258,016 Claims and claims expense reserves, gross (6) 1,292,415 1,086,170 909,061 808,489 Net of reinsurance recoverable 953,669 808,433 697,221 626,090 Long-term debt 299,927 200,000 200,000 200,000 Unrealized appreciation (depreciation) of investments, net of tax: (5) Fixed maturities 27,102 (44,204) 30,865 2,402 Equity securities 8,085 (1,826) 6,521 3,786 Total reported 35,187 (46,030) 37,386 6,188 Stockholders' equity (5) 511,756 319,085 375,540 309,221 Stockholders' equity per share (4) (5) 26.65 18.23 21.13 17.35 - ------------------------------------------------------------------------------------------------------------- Domestic Statutory Data Statutory composite ratio 103.1% 105.7% 110.9% 126.9% Statutory surplus $615,433 $407,024 $406,163 $384,032 ============================================================================================================= (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. Stockholders' equity for the 1994 and 1995 computations include the effects of adopting SFAS No. 115.
36 - -------------------------------------------------------------------------------
============================================================================================================== 1991 1990 1989 1988(2) 1987 1986 CAGR* ============================================================================================================== $291,775 $261,099 $234,960 $206,761 $183,818 $131,717 20.0% 233,044 217,106 192,323 171,430 154,510 122,689 17.4 229,358 215,085 190,657 161,978 137,376 81,723 22.1 58,743 51,930 45,475 35,640 25,341 15,084 21.8 5,533 (1,121) 3,236 142 878 4,899 20.0 293,634 265,894 239,368 197,760 163,595 101,706 21.9 251,916 236,464 209,883 177,830 151,945 95,563 20.9 34,816 24,961 25,626 17,732 11,113 6,143 29.5 34,816 24,961 25,626 20,827 11,113 6,143 29.5 17.2% 13.4% 15.8% 14.0% 8.1% 7.5% -- - -------------------------------------------------------------------------------------------------------------- 15,813 15,898 15,865 15,796 16,304 11,836 -- $2.20 $1.57 $1.62 $1.12 $.68 $.52 23.5 2.20 1.57 1.62 1.31 .68 .52 23.5 18,393 18,358 18,414 18,257 16,304 11,836 -- $2.04 $1.50 $1.53 $1.29 $.68 $.52 22.8 .14 .13 .10 -- -- -- -- 31.50 25.83 27.33 14.11 14.33 18.67 -- 19.33 17.00 13.78 8.22 7.78 11.22 -- 31.50 22.00 23.83 14.11 7.89 11.67 -- - -------------------------------------------------------------------------------------------------------------- $1,106,573 $988,809 $869,810 $705,832 $591,474 $443,496 21.0 892,581 781,591 689,481 544,304 423,286 303,990 22.3 681,110 596,236 520,723 389,279 303,623 186,978 24.0 528,521 468,637 387,767 291,531 201,051 118,422 26.1 51,750 51,750 51,750 51,750 51,750 51,750 21.6 2,374 (2,588) -- -- -- -- -- 3,452 (2,958) (323) (158) -- -- -- 5,826 (5,546) (323) (158) -- -- -- 241,387 202,525 186,104 162,501 148,278 136,777 15.8 15.70 12.98 11.92 10.38 9.10 8.41 13.7 - -------------------------------------------------------------------------------------------------------------- 108.2% 108.2% 108.5% 106.8% 107.8% 109.9% -- $230,041 $197,391 $189,018 $174,217 $163,233 $152,466 16.8 ==============================================================================================================
(4) Stock price and per share figures have been restated to reflect the three-for-two stock splits effective in 1989 and 1991. (5) At December 31, 1993, the Company adopted SFAS No. 115. Retroactive application to prior periods is prohibited. See Note 1 of the Notes to Consolidated Financial Statements. (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. 37 - ------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET
In Thousands ================================================================================================================================= December 31, ------------------------------------------ 1995 1994 ================================================================================================================================= Assets Investments: Available for sale: Fixed maturities (amortized cost: 1995, $1,551,848; 1994, $1,189,545) $1,593,543 $1,145,341 Equity securities (cost: 1995, $114,818; 1994, $125,812) 127,257 123,986 Short-term investments 132,406 135,576 - --------------------------------------------------------------------------------------------------------------------------------- Total investments 1,853,206 1,404,903 - ---------------------------------------------------------------------------------------========================================== Cash 10,320 9,624 Accrued investment income 26,955 20,053 Premiums receivable 154,974 120,610 Reinsurance recoverable balances, net 257,136 205,797 Reinsurance recoverable on unearned premiums 28,111 22,115 Deferred policy acquisition costs 70,466 59,953 Excess of cost over net assets acquired 4,011 4,379 Deferred tax asset, net 27,688 44,341 Other assets 29,264 24,993 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $2,462,131 $1,916,768 - ---------------------------------------------------------------------------------------========================================== Liabilities Claims and claims expenses $1,292,415 $1,086,170 Unearned premiums 230,738 195,213 8% Notes due 1999 100,000 100,000 7.15% Notes due 2005 99,927 - 5.25% Convertible Subordinated Debentures due 2002 100,000 100,000 Investment accounts payable 50,580 42,442 Other liabilities 76,715 73,858 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,950,375 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, 21,341; 1994, 19,639 shares issued) 2,134 1,964 Additional paid-in capital 246,356 194,231 Unrealized appreciation (depreciation) of investments, net of tax 35,187 (46,030) Currency translation adjustments, net of tax 1,017 1,059 Retained earnings 269,660 210,255 Treasury stock, at cost (1995, 2,137; 1994, 2,132 shares) (42,598) (42,394) - --------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 511,756 319,085 - ---------------------------------------------------------------------------------------========================================== Total liabilities and stockholders' equity $2,462,131 $1,916,768 =================================================================================================================================
See Notes to Consolidated Financial Statements. 38 - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME In Thousands, except per share amounts ================================================================================ Year ended December 31, ----------------------------------- 1995 1994 1993 ================================================================================ Premiums and Other Revenues Net premiums written $521,489 $438,201 $336,941 Increase in unearned premiums (29,704) (42,470) (30,562) - -------------------------------------------------------------------------------- Premiums earned 491,785 395,731 306,379 - -------------------------------------------------------------------------------- Net investment income 89,308 80,504 76,632 Net investment gains 25,391 2,155 19,095 - -------------------------------------------------------------------------------- Total revenues 606,484 478,390 402,106 - ---------------------------------------------=================================== Operating Costs and Expenses Claims and claims expenses 326,148 265,753 213,840 Commissions and brokerage 139,063 117,592 94,077 Acquisition and operating expenses 46,804 38,301 31,110 Interest expense 15,648 14,454 13,582 - -------------------------------------------------------------------------------- Total operating costs and expenses 527,663 436,100 352,609 - ---------------------------------------------=================================== Income Operating income before income taxes 78,821 42,290 49,497 Federal and foreign income taxes: Current 18,779 10,885 12,202 Deferred (2,782) (4,207) (5,056) - -------------------------------------------------------------------------------- Income tax expense (benefit) 15,997 6,678 7,146 - -------------------------------------------------------------------------------- Operating income/net income $62,824 $35,612 $42,351 - ---------------------------------------------=================================== Per Share Data Primary: Average shares outstanding 18,094 17,895 18,420 Operating income/net income $3.47 $1.99 $2.30 - -------------------------------------------------------------------------------- Fully diluted (assuming conversion of dilutive convertible securities): Average shares outstanding 20,153 20,053 20,445 Operating income/net income $3.29 $1.95 $2.24 - -------------------------------------------------------------------------------- Cash dividends declared per share $.19 $.16 $.16 - -------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements. 39 - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY In Thousands ================================================================================ Year ended December 31, --------------------------------- 1995 1994 1993 ================================================================================ Common Stock Balance at beginning of year $1,964 $1,935 $1,914 Issuance of common stock 170 29 21 - -------------------------------------------------------------------------------- Balance at end of year 2,134 1,964 1,935 - -----------------------------------------------================================= Additional Paid-in Capital Balance at beginning of year 194,231 188,289 183,767 Issuance of common stock 52,125 5,942 4,522 - -------------------------------------------------------------------------------- Balance at end of year 246,356 194,231 188,289 - -----------------------------------------------================================= Unrealized Appreciation (Depreciation) of Investments, Net of Tax Balance at beginning of year (46,030) 37,386 6,188 Unrealized appreciation (depreciation) 81,217 (83,416) 2,844 Adjustment to ending balance for change in accounting method - - 28,354 - -------------------------------------------------------------------------------- Balance at end of year 35,187 (46,030) 37,386 - -----------------------------------------------================================= Currency Translation Adjustments, Net of Tax Balance at beginning of year 1,059 (2,141) (772) Translation adjustments (42) 3,200 (1,369) - -------------------------------------------------------------------------------- Balance at end of year 1,017 1,059 (2,141) - -----------------------------------------------================================= Retained Earnings Balance at beginning of year 210,255 177,459 137,970 Net income 62,824 35,612 42,351 Dividends (3,419) (2,816) (2,862) - -------------------------------------------------------------------------------- Balance at end of year 269,660 210,255 177,459 - -----------------------------------------------================================= Treasury Stock Balance at beginning of year (42,394) (27,388) (19,846) Purchase of treasury shares (204) (15,006) (7,542) - -------------------------------------------------------------------------------- Balance at end of year (42,598) (42,394) (27,388) - -----------------------------------------------================================= Total Stockholders' Equity Balance at beginning of year 319,085 375,540 309,221 Issuance of common stock 52,295 5,971 4,543 Unrealized appreciation (depreciation) 81,217 (83,416) 31,198 Translation adjustments (42) 3,200 (1,369) Net income 62,824 35,612 42,351 Dividends (3,419) (2,816) (2,862) Purchase of treasury shares (204) (15,006) (7,542) - -------------------------------------------------------------------------------- Balance at end of year $511,756 $319,085 $375,540 ================================================================================ See Notes to Consolidated Financial Statements. 40 - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS
In Thousands =============================================================================================== Year ended December 31, ------------------------------------------ 1995 1994 1993 =============================================================================================== Operating Activities Net income $62,824 $35,612 $42,351 Adjustments to reconcile net income to net cash provided by operating activities: Reserve for claims and claims expenses, net 145,404 111,072 71,131 Unearned premiums, net 29,584 42,533 30,562 Premiums receivable (34,415) (44,973) (4,627) Accrued investment income (6,916) (2,763) 624 Reinsurance balances, net 6,976 (2,963) 7,628 Deferred policy acquisition costs (10,523) (15,492) (14,435) Net investment gains (25,386) (2,120) (19,095) Deferred tax asset, net (2,781) (4,155) (5,056) Other liabilities 950 13,456 7,806 Other items, net 8,194 7,822 9,537 - ----------------------------------------------------------------------------------------------- Net Cash Provided By Operating Activities 173,911 138,029 126,426 - -----------------------------------------------------========================================== Investing Activities Sales of fixed maturity investments 1,479,415 690,286 769,217 Maturities of fixed maturity investments 31,099 37,300 33,269 Purchases of fixed maturity investments (1,849,492) (846,379) (871,972) Net sales of short-term investments 3,072 13,168 4,427 Sales of equity securities 101,918 41,706 24,048 Purchases of equity securities (84,910) (70,406) (76,697) Purchases of furniture and equipment (2,365) (2,994) (1,290) - ----------------------------------------------------------------------------------------------- Net Cash Used By Investing Activities (321,263) (137,319) (118,998) - -----------------------------------------------------========================================== Financing Activities Issuance of shares 52,056 5,278 3,192 Net proceeds from issuance of 7.15% Notes 99,214 -- -- Net proceeds from issuance of 5.25% Debentures -- -- (146) Purchase of treasury shares (204) (15,006) (7,542) Cash dividends paid to stockholders (3,260) (2,827) (2,862) Borrowings under revolving credit agreement -- 13,857 3,905 - ----------------------------------------------------------------------------------------------- Net Cash Provided (Used) By Financing Activities 147,806 1,302 (3,453) - -----------------------------------------------------========================================== Effects of exchange rate changes on cash 242 (18) (610) - -----------------------------------------------------========================================== Increase in cash 696 1,994 3,365 Cash at beginning of year 9,624 7,630 4,265 - ----------------------------------------------------------------------------------------------- Cash at end of year $10,320 $9,624 $7,630 ===============================================================================================
See Notes to Consolidated Financial Statements. 41 - ------------------------------------------------------------------------------- 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 in accordance with the provisions of SFAS No. 115 - "Accounting for Certain Investments in Debt and Equity Securities," which was adopted by the Company at December 31, 1993. The effect of adopting SFAS No. 115 at December 31, 1993 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. 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. 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. 42 - ------------------------------------------------------------------------------- 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 experience develops 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 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. 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 assumes conversion of dilutive convertible securities and the assumed 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 on the straight-line method. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization expense was approximately $2.2 million, $1.8 million and $1.3 million for the years ended December 31, 1995, 1994 and 1993, respectively. 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. 43 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 1995, 1994 and 1993. 2. Investment Information Investment Income The components of net investment income were as follows: In Thousands ================================================================================ Year ended December 31, ------------------------------------- 1995 1994 1993 ================================================================================ Fixed maturities $81,485 $74,861 $74,011 Equity securities 4,371 5,019 3,042 Cash and short-term investments 8,341 5,119 3,273 - -------------------------------------------------------------------------------- Gross investment income 94,197 84,999 80,326 Interest expense 685 900 885 Investment expenses 4,204 3,595 2,809 - -------------------------------------------------------------------------------- Net investment income $89,308 $80,504 $76,632 ================================================================================ Investment Gains (Losses) Realized and unrealized investment gains (losses) were as follows: In Thousands =============================================================================== Year ended December 31, ----------------------------------- Net realized investment gains (losses): 1995 1994 1993 ================================================================================ Fixed maturities $17,868 $(2,535) $16,119 Equity securities 7,523 4,690 2,976 - -------------------------------------------------------------------------------- Subtotal 25,391 2,155 19,095 Tax expense 8,422 1,353 6,683 - -------------------------------------------------------------------------------- Net realized investment gains, net of tax $16,969 $802 $12,412 - ---------------------------------------------=================================== Change in unrealized appreciation (depreciation) of investments: Fixed maturities $85,899 $(91,504) $40 Equity securities 14,265 (11,858) 4,295 - -------------------------------------------------------------------------------- Subtotal 100,164 (103,362) 4,335 Increase (decrease) in deferred income tax liability 18,947 (19,946) 1,491 - -------------------------------------------------------------------------------- 81,217 (83,416) 2,844 Effect of accounting change, net of tax (1) -- -- 28,354 - -------------------------------------------------------------------------------- Net change reflected in stockholders' equity $81,217 $(83,416) $31,198 ================================================================================ (1) The Company adopted SFAS No. 115 at December 31, 1993 (see Note 1). 44 - ------------------------------------------------------------------------------- The following tables reconcile amortized cost to the estimated fair values (which equals carrying value) of fixed maturity securities and equity securities. 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 ================================================================================ In Thousands ================================================================================ December 31, 1994 --------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ================================================================================ Available for Sale: U.S. Treasury $56,870 $160 $(2,337) $54,693 Tax-exempt 398,593 9,938 (5,454) 403,077 Foreign Government 87,301 -- (5,937) 81,364 Corporate 349,191 303 (20,690) 328,804 Mortgage-backed 235,100 1,022 (17,035) 219,087 Subordinated convertibles 62,490 865 (5,039) 58,316 - -------------------------------------------------------------------------------- Total fixed maturities 1,189,545 12,288 (56,492) 1,145,341 Equity securities 125,812 15,970 (17,796) 123,986 - -------------------------------------------------------------------------------- Total $1,315,357 $28,258 $(74,288) $1,269,327 ================================================================================ 45 - ------------------------------------------------------------------------------- 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, 1995 ---------------------------- Amortized Fair Cost Value ================================================================================ Available for Sale: Due in one year or less $30,658 $30,905 Due after one year through five years 309,478 337,798 Due after five years through ten years 762,644 758,479 Due after ten years 275,394 291,549 - -------------------------------------------------------------------------------- Subtotal 1,378,174 1,418,731 Mortgage-backed securities 173,674 174,812 - -------------------------------------------------------------------------------- Total $1,551,848 $1,593,543 ================================================================================ The weighted average contractual and expected maturities, based on fair value, of the fixed maturity investments excluding convertible securities, as of December 31, 1995 were 10.2 years and 7.1 years, respectively. Proceeds from the sales of fixed maturity securities during 1995, 1994 and 1993 were $1,479.4 million, $690.3 million and $769.2 million, respectively. Gross gains of $25.3 million, $7.7 million and $19.1 million were realized on those sales during 1995, 1994 and 1993, respectively. Gross losses of $7.4 million, $10.3 million and $2.4 million were realized during 1995, 1994 and 1993, respectively. Approximately 97% of all fixed maturity investments held at December 31, 1995 and 1994, were considered investment grade by Standard and Poor's or Moody's Investor Services, Inc. Securities on Deposit Securities with a face amount of $50.5 million at December 31, 1995, 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, 1995 is approximately $14.5 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 $1.4 million of the escrow balance will become available for use in 1996. 46 - ------------------------------------------------------------------------------- 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, ------------------------------------------ 1995 1994 1993 ========================================================================================================================== Reserves for claims and claims expenses, at beginning of year $1,086,170 $909,061 $808,489 Reinsurance recoverables, at beginning of year 277,737 211,840 182,399 - -------------------------------------------------------------------------------------------------------------------------- Reserves for claims and claims expenses, net of reinsurance recoverables, at beginning of year 808,433 697,221 626,090 - --------------------------------------------------------------------------------========================================== Provision for claims and claims expenses, net of reinsurance, occurring in the current year 345,783 309,294 237,491 - -------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in estimated claims and claims expenses, net of reinsurance, occurring in prior years: Traditional business (18,757) (37,076) (9,255) Nontraditional business (878) (6,465) (14,396) - -------------------------------------------------------------------------------------------------------------------------- Subtotal (19,635) (43,541) (23,651) - -------------------------------------------------------------------------------------------------------------------------- Total incurred claims and claims expenses, net of reinsurance 326,148 265,753 213,840 - --------------------------------------------------------------------------------========================================== Less payments for claims and claims expenses, net of reinsurance, occurring during: The current year 40,123 35,965 39,092 Prior years 140,263 118,686 103,617 - -------------------------------------------------------------------------------------------------------------------------- Total 180,386 154,651 142,709 - --------------------------------------------------------------------------------========================================== Effects of exchange rate changes on reserves (526) 110 - - -------------------------------------------------------------------------------------------------------------------------- Reserve for claims and claims expenses, net of reinsurance recoverables, at end of year 953,669 808,433 697,221 Reinsurance recoverables, at end of year 338,746 277,737 211,840 - -------------------------------------------------------------------------------------------------------------------------- Reserve for claims and claims expenses, at end of year $1,292,415 $1,086,170 $909,061 ==========================================================================================================================
Estimates of claims and claims expenses are based in part on a prediction of future events and 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. 47 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Claims and claims expenses reflect favorable claim development from prior years for both traditional business and nontraditional treaty business. The net favorable claim development for traditional business written since 1986 continued to emerge during 1993, 1994 and 1995. The net favorable development on the Company's traditional business is impacted by several factors, some of which are interdependent. A principal reason for such development is the strength of the pricing assumptions underlying the business written, particularly with respect to the consideration given to social and economic inflation. The pricing assumptions are utilized to establish the initial expected target loss ratio employed in the actuarial methodologies used to establish the reserves for claims and claims expenses. Such loss ratios are periodically adjusted to reflect actuarially computed comparisons of expected to actual claims and claims expense development, inflation and other considerations. This favorable development offsets certain unfavorable development for business written prior to 1986 principally related to asbestos and environmental claims, and in 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, which is issued every two years by the Reinsurance Association of America (RAA). Favorable and unfavorable claims experience for nontraditional treaty business is usually compensated for by adjustments in premiums from and commissions to client companies. Nontraditional business is no longer a meaningful component of claims and claims expense reserves as such business diminished upon the introduction of new accounting standards that created higher thresholds for risk transfer and mitigated the benefits available to ceding companies attributable to certain nontraditional contracts. The Company's incurred claims and claims expenses include a provision of $1.4 million, $4 million and $1.1 million in 1995, 1994 and 1993, respectively, for estimates of actual and potential non-recoveries from retrocessionnaires. Included in claims and claims expense reserves at December 31, 1995, 1994 and 1993, is a reserve for potential non-recoveries from retrocessionaires of $10.7 million, $10.5 million and $7.5 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, 1995, 1994 and 1993 were $29 million, $27.7 million and $24.2 million, respectively. The related discounted case reserves, net of reinsurance, were $10.6 million, $10.6 million and $9.3 million as of December 31, 1995, 1994 and 1993, respectively. Included in the claim payment activity are net payments for property catastrophe claims of approximately $10 million in 1995, $19 million in 1994 and $36 million in 1993. 48 - ------------------------------------------------------------------------------- Asbestos and Environmental Related Claims The Company's reserving process includes a continuing evaluation of the potential impact on claims liabilities from exposure to asbestos and environmental claims, including related loss adjustment expenses. Liabilities are established to cover both known and unasserted claims. 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, ------------------------------ 1995 1994 1993 ============================================================================================= Reserves for claims and claims expenses, net of reinsurance recoverables, at beginning of year $19,849 $18,379 $14,966 Provisions for claims and claims expenses, net of reinsurance 6,989 4,810 4,239 Less payments for claims and claims expenses, net of reinsurance 4,809 3,340 826 - --------------------------------------------------------------------------------------------- Reserve for claims and claims expenses, net of reinsurance recoverables, at end of year 22,029 19,849 18,379 Reinsurance recoverables, at end of year 35,135 34,141 31,341 - --------------------------------------------------------------------------------------------- Reserve for claims and claims expenses, gross of reinsurance recoverables, at end of year $57,164 $53,990 $49,720 =============================================================================================
Incurred but not reported claims and claims expense reserves (IBNR), net of reinsurance, included in the above table totaled $10.3 million in 1995, $9.4 million in 1994 and $8.8 million in 1993. Ceded liabilities reflect amounts expected to be recoverable from retrocessionaires, after reduction for potential uncollectible amounts. As of December 31, 1995 and 1994, the Company had approximately 800 open claim files for potential environmental exposures and 300 open claim files for potential asbestos exposures. Approximately 55% and 60% of the total open claim files for 1995 and 1994, 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 environmental and asbestos 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 available historical claim data as a reliable indication of future claim development; iii) an uncertain political climate which may impact, among other areas, the nature and amounts of costs for remediating waste sites; and iv) the potential of insurers and policyholders to reach agreements in order to avoid further significant 49 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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, ------------------------------------------------------------------------ 1995 1994 1993 ============================================================================================================ % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income - ------------------------------------------------------------------------------------------------------------ Income taxes computed on pretax operating income $27,587 35% $14,801 35% $17,324 35% Increase (reduction) in taxes resulting from: Tax-exempt investment income (10,150) (13) (7,308) (17) (8,124) (16) Dividend received deduction (822) (1) (713) (2) (380) (1) Impact of tax rate increase on deferred taxes -- -- -- -- (908) (2) Other, net (618) (1) (102) -- (766) (2) - ------------------------------------------------------------------------------------------------------------ Tax expense on operating income $15,997 20% $6,678 16% $7,146 14% ============================================================================================================
Significant components of the provision for income taxes attributable to operations were as follows: In Thousands ================================================================================ Year ended December 31, ------------------------------------------ 1995 1994 1993 ================================================================================ Current expense: Federal $17,809 $10,463 $11,838 Foreign 970 422 364 - -------------------------------------------------------------------------------- Total current expense 18,779 10,885 12,202 - --------------------------------------========================================== Deferred expense (benefit): Federal (3,245) (3,761) (5,056) Foreign 463 (446) -- - -------------------------------------------------------------------------------- Total deferred benefit (2,782) (4,207) (5,056) - --------------------------------------========================================== Total tax expense $15,997 $6,678 $7,146 ================================================================================ 50 - ------------------------------------------------------------------------------- The Company's current federal tax expense for the years 1995, 1994 and 1993 was based on regular taxable income. Taxes paid in the years 1995, 1994 and 1993 were $19 million, $10 million and $4.1 million, respectively. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1995 and 1994 were as follows: In Thousands ================================================================================ December 31, ------------------------- 1995 1994 ================================================================================ Deferred tax asset: Net claims reserve discount $52,556 $49,192 Net unearned premiums 13,307 11,693 Unrealized depreciation of investments - 16,111 Compensation liabilities 3,764 3,523 Other 2,951 3,088 - -------------------------------------------------------------------------------- Deferred tax asset, gross of valuation 72,578 83,607 Valuation allowance - (16,111) - -------------------------------------------------------------------------------- Deferred tax asset, net of valuation 72,578 67,496 - -------------------------------------------------------========================= Deferred tax liability: Deferred policy acquisition costs 23,855 20,660 Unrealized appreciation of investments 18,947 - Other 2,088 2,495 - -------------------------------------------------------------------------------- Deferred tax liability 44,890 23,155 - -------------------------------------------------------========================= Net deferred tax asset $27,688 $44,341 ================================================================================ A full valuation allowance was established in 1994 to reduce the deferred tax asset on the unrealized depreciation of investments recorded in stockholders' equity. The valuation allowance is not required in 1995 due to the increase in market values of the Company's fixed maturities and equity securities. Stockholders' equity at December 31, 1995 and 1994 reflects tax benefits of $3 million and $2.5 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. 51 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Retrocession Agreements The Company utilizes retrocession agreements principally to increase aggregate premium capacity, and to reduce and spread 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. The Company's maximum retention on any one claim for non-catastrophe losses for 1996 is $5 million, compared to $3.9 million for 1995, with the exception of one client relationship in 1995 in which the maximum retention on any one claim was $4.7 million. Such retention levels were $3.9 million and S3 million for 1994 and 1993, respectively. Further, the Company's retention level for property catastrophe claims in 1996 remained the same as 1995 and 1994 at $5 million per event compared to $10 million for 1993. For 1996, the Company expects to maintain $120 million of property catastrophe protection, of which $30 million of coverage, in excess of the first $60 million of coverage, 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, ---------------------------------------------------------------------------- 1995 1994 1993 1995 1994 1993 ======================================================================================= Direct $70,183 $46,005 $15,698 $58,475 $30,621 $14,003 Assumed 607,755 529,032 415,884 583,764 487,961 385,283 Ceded (156,449) (136,836) (94,641) (150,454) (122,851) (92,907) - --------------------------------------------------------------------------------------- Net $521,489 $438,201 $336,941 $491,785 $395,731 $306,379 =======================================================================================
The Company's direct and ceded premiums written increased in 1995 and 1994 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 $120.4 million, $105.6 million and $76.1 million for the years ended December 31, 1995, 1994 and 1993, respectively. 52 - ------------------------------------------------------------------------------- The Company's balance sheet as of December 31, 1995 and 1994 reflects reinsurance recoverables as assets, net of available offsets, as follows: In Thousands ================================================================================ December 31, ----------------------------- 1995 1994 ================================================================================ Reinsurance recoverable balances: Paid claims $19,051 $17,447 Unpaid claims and claims expenses 338,746 277,737 Ceded balances payable (56,792) (41,958) Funds held liability (43,869) (47,429) - -------------------------------------------------------------------------------- Reinsurance recoverable balances, net $257,136 $205,797 ================================================================================ Reinsurance recoverable on unearned premium $28,111 $22,115 ================================================================================ The Company is the beneficiary of letters of credit, trust accounts and funds withheld in the aggregate amount of $221 million at December 31, 1995, collateralizing reinsurance recoverables with respect to certain retrocessionnaires. At December 31, 1995, the Company had total reinsurance recoverables, exclusive of available offsets in the form of letters of credit, trust accounts and funds withheld, totaling $385.9 million, with 153 domestic and 86 foreign retrocessionnaires. Of that amount, approximately 37% or $142.9 million was due from a foreign retrocessionnaire, Hannover Ruckversicherungs AG (80%), and its affiliate, Eisen Und Stahl Ruckversicherungs AG (20%), which are rated AA+ and AA-, respectively, by Standard & Poor's. Such amounts are fully collateralized by either 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, 1995. 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, 1995: In Thousands =============================================================================== 1996 $3,468 1997 3,804 1998 3,813 1999 3,648 2000 3,490 2001 and thereafter 3,423 - ------------------------------------------------------------------------------- $21,646 =============================================================================== Rental expense, net of sublease rental income, was approximately $3.5 million for 1995 and $3.3 million for both 1994 and 1993. 53 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Service Agreement In 1994 and 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 $.8 million for 1995. The fair value of the notes, estimated based on quoted market prices, was approximately $102.7 million as of December 31, 1995. 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 1995, 1994 and 1993. The fair value of the Debentures, estimated based on quoted market prices, was approximately $98 million as of December 31, 1995. 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 million for 1995, 1994 and 1993. The fair value of the Notes, estimated based on quoted market prices, was approximately $105.7 million as of December 31, 1995. 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 $17.8 million were outstanding at December 31, 1995 and were principally used in connection with 1994 repurchases of the Company's common stock. Outstanding balances are payable quarterly over a three year period beginning June 1996. 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, 1995. Interest costs on borrowing facilities were approximately $1.4 million, $.9 million and $.1 million in 1995, 1994 and 1993, respectively. 54 - ------------------------------------------------------------------------------- Total interest expense paid in connection with the Company's long-term debt and financing arrangements was $14.6 million, $14.1 million and $13.1 million for the years ended December 31, 1995, 1994 and 1993, respectively. 8. Employee Benefits and Compensation Arrangements The Company accounts for stock compensation plans in accordance with 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. Stock Plans The Company maintains four stock option plans which provide for the granting of options to purchase shares of Common Stock to certain officers of the Company. Three such plans provide for the granting of SARs. Options and SARs have generally been granted with a six-year vesting schedule. Options granted under three of the plans generally expire 10 years from the date of grant. Outstanding SARs are converted by the Company to options prior to vesting. The Company maintains a stock option plan for non-employee directors that provides for automatic annual grants of options to eligible directors. Options expire 10 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:
Number of Options ======================================================================================================== Year ended December 31, --------------------------------------- 1995 1994 1993 ======================================================================================================== Outstanding, beginning of year ($6.27 to $40.38 per share) 1,548,071 1,540,546 1,430,203 Granted ($25.75 to $40.38 per share) 412,250 293,100 368,400 Exercised ($6.27 to $30.13 per share) (101,559) (156,643) (139,084) Cancelled ($13.61 to $36.25 per share) (84,395) (128,932) (118,973) - -------------------------------------------------------------------------------------------------------- Outstanding, end of year ($6.27 to $40.38 per share) 1,774,367 1,548,071 1,540,546 - -------------------------------------------------------------------===================================== Exercisable, end of year ($6.27 to $40.38 per share) 740,226 699,581 717,565 - -------------------------------------------------------------------------------------------------------- Available for grant, end of year 784,431 1,112,286 1,276,454 ========================================================================================================
The Company has a restricted stock plan, pursuant to which employees have been granted approximately 44,500, 52,400 and 37,500 shares of Common Stock during 1995, 1994 and 1993, respectively. Vesting for such shares occurs over a six-year period. The Company incurred compensation expense for the years ended December 31, 1995, 1994 and 1993 of approximately $613,000, $473,000 and $332,000, respectively, in connection with such plan. 55 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company has an Employee Stock Purchase Plan through which employees have the option, subject to certain limitations, to purchase Common Stock, at the end of each offering period at a discounted price. During each of the years ended December 31, 1995, 1994 and 1993, employees have purchased approximately 18,500, 22,000 and 20,900 shares of Common Stock, respectively, under this plan. Incentive Compensation Plans The Company maintains three 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 officers and the Performance Bonus Plan for non-officers provide for annual cash awards based on individual and corporate performance. Based on estimated performance levels, the Company expensed $6.4 million, $4.6 million and $3.6 million for the years ended December 31, 1995, 1994 and 1993, respectively, related to these plans. 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. 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 utilizing the entry age cost method and different actuarial assumptions than are 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. 56 - ------------------------------------------------------------------------------- The following tables set forth the amounts recognized in the Company's financial statements with respect to the qualified and non-qualified pension plans.
Dollars in Thousands ================================================================================================================== December 31, 1995 December 31, 1994 ---------------------------- ------------------------------ Non- Non- Qualified Qualified Qualified Qualified Plan Plan Total Plan Plan Total ================================================================================================================== Actuarial present value of benefit obligations: Accumulated benefit obligation: Vested $3,332 $1,263 $4,595 $2,081 $702 $2,783 Nonvested 830 62 892 542 15 557 - ------------------------------------------------------------------------------------------------------------------ Accumulated benefit obligation 4,162 1,325 5,487 2,623 717 3,340 Effect of projected salary increases 3,351 1,671 5,022 2,591 1,471 4,062 - ------------------------------------------------------------------------------------------------------------------ Projected benefit obligation 7,513 2,996 10,509 5,214 2,188 7,402 Plan assets at market value 5,169 - 5,169 3,655 - 3,655 - ------------------------------------------------------------------------------------------------------------------ Projected benefit obligation in excess of plan assets 2,344 2,996 5,340 1,559 2,188 3,747 Unrecognized net gain (loss) 175 (13) 162 536 316 852 Unrecognized net transition obligation (105) - (105) (115) - (115) Unrecognized net prior service costs (76) (267) (343) (79) (278) (357) - ------------------------------------------------------------------------------------------------------------------ Pension liability, end of year 2,338 2,716 5,054 1,901 2,226 4,127 Pension liability, beginning of year (1,901) (2,226) (4,127) (1,312) (1,772) (3,084) Company contributions 519 - 519 276 - 276 - ------------------------------------------------------------------------------------------------------------------ Net pension cost $956 $490 $1,446 $865 $454 $1,319 ==================================================================================================================
Dollars in Thousands ================================================================================================================== Year ended December 31, ------------------------------------------- 1995 1994 1993 ================================================================================================================== Net pension cost included the following components: Service costs - benefits earned during the year $1,111 $1,061 $1,066 Interest cost on projected benefit obligations 660 539 484 Net amortization and deferral 751 (264) (136) Actual return on plan assets (1,076) (17) (85) - ------------------------------------------------------------------------------------------------------------------ Net pension cost $1,446 $1,319 $1,329 ==================================================================================================================
The principal factors contributing to the increase in the accumulated and projected benefit obligations for 1995 is the decrease in the discount rate assumption in response to the decline in interest rates, and the use of revised mortality tables published by the Society of Actuaries during 1995. 57 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The discount rates used in determining the actuarial present value of benefit obligations were 7% and 8% for 1995 and 1994, respectively. The rate of increase for future compensation levels was 6% and 7% for 1995 and 1994, respectively. The assumed rate of return on plan assets was 8.5% for 1995, 1994 and 1993. Assets of the qualified plan are invested principally in equity securities and fixed maturities. Plan assets include approximately $517,000 and $481,000 of NAC Re Common Stock as of December 31, 1995 and 1994, respectively. 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 $1.6 million for 1995 and $1 million for both 1994 and 1993, 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 plan held approximately 123,000 and 127,600 shares of NAC Re Common Stock as of December 31, 1995 and 1994, 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 $375,000, $363,000 and $67,000 for the years ended December 31, 1995, 1994 and 1993, 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 50 million GBP, or approximately $75 million, and, subsequent to contributions by the Company in 1995 and 1994, its statutory surplus level was approximately 75.5 million GBP or $117.1 million at December 31, 1995. 58 - ------------------------------------------------------------------------------- The following is a summary of financial information related to the Company's domestic and international operations:
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.
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. 59 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In Thousands ===================================================================================================== Year ended December 31, 1993 ----------------------------------------------- Domestic International Total ===================================================================================================== Net premiums written $336,941 - $336,941 - ----------------------------------------------------------------------------------------------------- Premiums earned 306,379 - 306,379 Net investment income 76,229 $403 76,632 Realized gains (losses) 19,212 (117) 19,095 - ----------------------------------------------------------------------------------------------------- Total revenues 401,820 286 402,106 ===================================================================================================== Claims and claims expense 213,840 - 213,840 Commissions and brokerage 94,077 - 94,077 Other acquisition costs and expenses 31,004 106 31,110 Interest expense 13,582 - 13,582 - ----------------------------------------------------------------------------------------------------- Total expenses 352,503 106 352,609 ===================================================================================================== Pretax operating income (loss) 49,317 180 49,497 - ----------------------------------------------------------------------------------------------------- Net income (loss) $42,234 $117 $42,351 ===================================================================================================== Identifiable assets $1,716,811 $136,676 $1,778,868* ===================================================================================================== Statutory composite ratio 110.9% - 110.9% =====================================================================================================
* The total is net of intercompany transactions of $74.6 million. During 1995, three reinsurance brokers, AON Reinsurance Agency, Guy Carpenter and Company, Inc., and Bates Turner, Inc., generated 16%, 16% and 7%, respectively, of the Company's premiums assumed from client companies. These same reinsurance brokers generated 18%, 16%, and 9%, respectively, during 1994, and 19%, 16% and 13%, respectively, during 1993, of the Company's assumed premiums. One client company, Chubb Group, contributed approximately 9%, 10% and 10% of the Company's gross premiums written during 1995, 1994 and 1993, respectively. This business is generated primarily from the Company's domestic reinsurance operations. Gross premiums written from this client are expected to decline in 1996 as a result of an anticipated 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: 60 - -------------------------------------------------------------------------------
In Thousands ======================================================================================= Year ended December 31, --------------------------------------- Net Income: 1995 1994 1993 ======================================================================================= Domestic statutory net income $57,670 $27,312 $30,361 Domestic GAAP adjustments: Deferred acquisition costs 9,128 14,577 14,435 Deferred income taxes 3,204 3,770 5,828 Other, net (1,074) (370) (483) - --------------------------------------------------------------------------------------- Domestic GAAP net income 68,928 45,289 50,141 International operation 2,375 (1,128) 117 Parent company operations (8,479) (8,549) (7,907) - --------------------------------------------------------------------------------------- Consolidated GAAP net income $62,824 $35,612 $42,351 =======================================================================================
In Thousands ======================================================================================= December 31, -------------------------------------- Stockholders' Equity: 1995 1994 1993 ======================================================================================= Consolidated statutory surplus $615,433(1) $407,024 $406,163 Consolidated GAAP adjustments: Deferred acquisition costs 70,466 59,953 44,453 Deferred income tax asset, net 27,492 43,928 20,418 Excess of cost over net assets acquired 4,011 4,379 4,747 Unrealized appreciation (depreciation) 46,783 (40,321) 48,089 Unauthorized/authorized reinsurance charges 6,814 5,914 7,658 Other, net 4,101 4,137 2,099 - --------------------------------------------------------------------------------------- Investment in insurance subsidiaries, GAAP 775,100 485,014 533,627 Parent company: Other net assets 36,583 34,071 41,913 Long-term debt (299,927) (200,000) (200,000) - --------------------------------------------------------------------------------------- Consolidated stockholders' equity, GAAP $511,756 $319,085 $375,540 =======================================================================================
(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. 61 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, as such term is defined in the New York insurance law, which was $139.6 million at December 31, 1995. 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, 1995, is approximately $61.5 million. During 1995, 1994 and 1993, NAC declared dividends of $7.5 million, $15 million and $10 million, respectively, to NAC Re. In 1993, the National Association of Insurance Commissioners (the "NAIC") adopted a model risk-based capital act intended to provide an additional tool for regulators to evaluate the capital of property and casualty insurers and reinsurers with respect to the risks assumed by them and determine whether there is a perceived need for possible corrective action. The nature of the 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, or California, NAC's commercial domicile, New York has issued a circular letter requiring the filing of risk-based capital reports and a bill is pending in California to adopt a risk-based capital act. In a related action, the NAIC adopted a proposal that requires property and casualty insurers and reinsurers to report the results of their risk-based capital calculations as part of the statutory annual statements filed with state regulatory authorities. Surplus (as calculated for statutory annual statement purposes) for each of the Company's domestic property and casualty insurance and reinsurance subsidiaries is well above the risk-based capital thresholds that would require either company or regulatory action. 62 - ------------------------------------------------------------------------------- 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, ------------------- ----------------- ----------------- ------------------- 1995 1994 1995 1994 1995 1994 1995 1994 =================================================================================================================== Income Statement Data: Gross premiums written $174,267 $154,786 $186,637 $153,570 $166,144 $141,990 $150,890 $124,691 Net premiums written 138,800 119,479 145,466 121,234 126,702 105,469 110,521 92,019 Premiums earned 133,409 114,798 133,344 109,824 119,554 92,287 105,478 78,822 Net investment income 22,401 21,473 22,270 20,009 22,427 19,733 22,210 19,289 Investment gains (losses) 9,314 (878) 8,502 1,787 4,433 (2,992) 3,142 4,238 Operating costs and expenses 140,572 125,219 141,766 118,714 128,301 102,596 117,024 89,571 Operating income/net income 19,256 9,384 17,599 10,294 14,594 5,667 11,375 10,267 - ------------------------------------------------------------------------------------------------------------------- Per Share Data: Primary: Operating/net income $1.04 $.53 $.98 $.58 $.82 $.32 $.64 $.57 Fully diluted: Net income .98 .51 .92 .56 .78 .32 .62 .55 Stockholders' equity per share 26.65 18.23 24.39 19.30 23.10 19.74 20.90 20.00 Cash dividends declared per share .05 .04 .05 .04 .05 .04 .04 .04 - ------------------------------------------------------------------------------------------------------------------- Stock prices: High $38.38 $34.00 $39.00 $29.75 $35.25 $31.75 $34.00 $32.00 Low 31.63 24.25 30.63 24.38 28.50 24.00 28.25 26.00 Close 36.00 33.50 36.25 25.50 31.13 29.50 30.25 26.00 - -------------------------------------------------------------------------------------------------------------------
12. Capital Stock Changes in Common Stock outstanding were as follows:
Year ended December 31, - ------------------------------------------------------------------------------------ 1995 1994 1993 - ------------------------------------------------------------------------------------ Common Stock: Balance, beginning of year 19,638,865 19,348,739 19,140,171 Shares issued 1,702,188 290,126 208,568 - ------------------------------------------------------------------------------------ Balance, end of year 21,341,053 19,638,865 19,348,739 - --------------------------------------------======================================== Treasury Stock: Balance, beginning of year 2,131,633 1,579,375 1,322,667 Purchases 5,868 552,258 256,708 - ------------------------------------------------------------------------------------ Balance, end of year 2,137,501 2,131,633 1,579,375 - --------------------------------------------======================================== Total Common Stock outstanding 19,203,552 17,507,232 17,769,364 ====================================================================================
63 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2,631,000 shares of Common Stock. From its inception through the latest repurchase in 1995, approximately 2,137,000 shares were repurchased at a cost of approximately $42.6 million or an average price of $19.93 per share. As of December 31, 1995, approximately 500,000 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. 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, 1995, there were 19,203,552 Rights outstanding which, if exercised, would result in the issuance of approximately 85,300 shares of Series A Stock. 64 EX-23 6 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-25585) 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. 33-22841) 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. 33-34516) 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 of our report dated January 30, 1996, 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, 1995. ERNST & YOUNG LLP New York, New York March 19, 1996 EX-24 7 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari 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 1995 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 4, 1996 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari 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 1995 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 12, 1996 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari 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 1995 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 12, 1996 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari 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 1995 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 12, 1996 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari 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 1995 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 12, 1996 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari 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 1995 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 12, 1996 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari 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 1995 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 12, 1996 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari 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 1995 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 12, 1996 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari 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 1995 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 12, 1996 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari 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 1995 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 12, 1996 EX-27 8 EXHIBIT 27
7 1,000 12-MOS DEC-31-1995 DEC-31-1995 1,593,543 0 0 127,257 0 0 1,853,206 10,320 19,051 70,466 2,462,131 1,292,415 230,738 5,262 0 299,927 0 0 2,134 509,622 2,462,131 491,785 89,308 25,391 0 326,148 185,867 15,648 78,821 15,997 62,824 0 0 0 62,284 3.47 3.29 0 0 0 0 0 0 0
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