-----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, GsDCjxtl/wH9ToSXSzTJKn/OyD3lxwLX+F1KzIrnHrJeTYrP2ev+FbMZiH60Nplj fexBhShaMjU93mBf/PJoow== 0001005477-97-001466.txt : 19970520 0001005477-97-001466.hdr.sgml : 19970520 ACCESSION NUMBER: 0001005477-97-001466 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAC RE CORP CENTRAL INDEX KEY: 0000775542 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 133297840 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13720 FILM NUMBER: 97607026 BUSINESS ADDRESS: STREET 1: PO BOX 2568 CITY: GREENWICH STATE: CT ZIP: 06836-2568 BUSINESS PHONE: 2036225200 MAIL ADDRESS: STREET 1: PO BOX 2568 CITY: GREENWICH STATE: CT ZIP: 06836-2568 10-Q 1 FORM 10-Q ================================================================================ - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ______________ to ______________. Commission file number 0-13891. NAC Re Corp. (Exact name of registrant as specified in its charter) Delaware 13-3297840 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Greenwich Plaza, Greenwich, CT 06836-2568 (Address of principal executive offices) (203) 622-5200 (Registrant's telephone number, including area code) Not Applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| There were 18,390,483 shares outstanding of the Registrant's Common Stock, $.10 par value, as of March 31, 1997. - -------------------------------------------------------------------------------- ================================================================================ NAC RE CORP. AND SUBSIDIARIES TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. Independent Accountants' Review Report 3 Consolidated Balance Sheet - March 31, 1997 and December 31, 1996 4 Consolidated Statement of Income - Three Months Ended March 31, 1997 and 1996 5 Consolidated Statement of Stockholders' Equity - Three Months Ended March 31, 1997 and 1996 6 Consolidated Statement of Cash Flows - Three Months Ended March 31, 1997 and 1996 7 Notes to Consolidated Financial Statements 8-9 Management's Discussion and Analysis of Financial Condition and Results of Operations 10-14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 Exhibit 11-1 17 Exhibit 11-2 18 Exhibit 15 19 Exhibit 27 20-21 INDEPENDENT ACCOUNTANT'S REVIEW REPORT Board of Directors and Shareholders NAC Re Corporation We have reviewed the accompanying consolidated balance sheet of NAC Re Corporation and subsidiaries as of March 31, 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the three months ended March 31, 1997 and 1996. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquires of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted audited standards, the consolidated balance sheet of NAC Re Corporation as of December 31, 1996, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended (not presented herein) and in our report dated February 4, 1997, we expressed an unqualified opinion on those consolidated financial statements. New York, New York ERNST & YOUNG LLP April 22, 1997 - 3 - NAC RE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands) (Unaudited) March 31, December 31, 1997 1996 ----------- ------------ ASSETS Investments: Available for sale: Fixed maturities (amortized cost: 1997, $1,764,682; 1996, $1,681,190) $ 1,764,015 $ 1,703,537 Equity securities (cost: 1997, $158,535; 1996, $153,197) 183,889 179,619 Short-term investments 191,140 81,893 ----------- ----------- TOTAL INVESTMENTS 2,139,044 1,965,049 Cash 30,535 18,853 Accrued investment income 29,062 28,472 Premiums receivable 207,185 200,036 Reinsurance recoverable balances, net 172,679 336,324 Reinsurance recoverable on unearned premiums 22,765 20,320 Deferred policy acquisition costs 87,150 85,211 Excess of cost over net assets acquired 3,552 3,644 Deferred tax asset, net 46,656 30,390 Other assets 69,856 57,332 ----------- ----------- TOTAL ASSETS $ 2,808,484 $ 2,745,631 =========== =========== LIABILITIES Claims and claims expenses $ 1,537,772 $ 1,513,345 Unearned premiums 277,838 271,898 8% Notes due 1999 100,000 100,000 7.15% Notes due 2005 99,936 99,934 5.25% Convertible Subordinated Debentures due 2002 100,000 100,000 Investment accounts payable 41,996 25,326 Revolving credit agreement 12,924 12,924 Other liabilities 87,018 68,935 ----------- ----------- TOTAL LIABILITIES 2,257,484 2,192,362 ----------- ----------- 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 (1997, 21,548; 1996, 21,464 shares issued) 2,155 2,146 Additional paid-in capital 250,553 248,662 Unrealized appreciation of investments, net of tax 16,047 31,700 Currency translation adjustments, net of tax 4,900 8,377 Retained earnings 354,613 335,868 Less treasury stock, at cost (1997, 3,158; 1996, 3,061 shares) (77,268) (73,484) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 551,000 553,269 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,808,484 $ 2,745,631 =========== =========== See Notes to Consolidated Financial Statements - 4 - NAC RE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share amounts) (Unaudited) Three months ended March 31, --------------------- 1997 1996 --------- -------- PREMIUMS AND OTHER REVENUES Net premiums written $136,171 $123,139 Increase in unearned premiums (4,061) (6,318) --------- -------- Premiums earned 132,110 116,821 Net investment income 28,572 25,743 Net investment gains 5,133 9,817 --------- -------- Total revenues 165,815 152,381 OPERATING COSTS AND EXPENSES Claims and claims expenses 87,531 73,689 Commissions and brokerage 32,886 33,519 Acquisition and operating expenses 15,177 12,650 Interest expense 5,474 5,571 --------- -------- Total operating costs and expenses 141,068 125,429 INCOME Operating income before income taxes 24,747 26,952 --------- -------- Federal and foreign income taxes: Current 10,857 8,720 Deferred (5,964) (2,540) --------- -------- Income tax expense (benefit) 4,893 6,180 --------- -------- Operating income/net income $19,854 $20,772 ========= ======== PER SHARE DATA Primary: Average shares outstanding 18,692 19,562 Operating income/net income $1.06 $1.06 Fully Diluted (assuming conversion of dilutive convertible securities): Average shares outstanding 20,712 21,582 Operating income/net income $1.00 $1.00 See Notes to Consolidated Financial Statements - 5 - NAC RE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands) (Unaudited) Three months ended March 31, ----------------------- 1997 1996 --------- -------- COMMON STOCK Balance at beginning of year $2,146 $2,134 Issuance of shares 9 5 --------- -------- Balance at end of period $2,155 $2,139 ========= ======== ADDITIONAL PAID-IN CAPITAL Balance at beginning of year $248,662 $246,356 Issuance of shares 1,891 1,198 --------- -------- Balance at end of period $250,553 $247,554 ========= ======== UNREALIZED APPRECIATION OF INVESTMENTS, NET OF TAX Balance at beginning of year $31,700 $35,187 Unrealized depreciation (15,653) (19,878) --------- -------- Balance at end of period $16,047 $15,309 ========= ======== CURRENCY TRANSLATION ADJUSTMENTS, NET OF TAX Balance at beginning of year $8,377 $1,017 Translation adjustments (3,477) (1,492) --------- -------- Balance at end of period $4,900 $(475) ========= ======== RETAINED EARNINGS Balance at beginning of year $335,868 $269,660 Net income 19,854 20,772 Dividends (1,109) (957) --------- -------- Balance at end of period $354,613 $289,475 ========= ======== TREASURY STOCK Balance at beginning of year $ (73,484) $(42,598) Purchase of treasury shares, net of reissuance (3,784) (2,805) --------- -------- Balance at end of period $ (77,268) $(45,403) ========= ======== TOTAL STOCKHOLDERS' EQUITY Balance at beginning of year $553,269 $511,756 Issuance of shares 1,900 1,203 Unrealized depreciation (15,653) (19,878) Translation adjustments (3,477) (1,492) Net income 19,854 20,772 Dividends (1,109) (957) Purchase of treasury shares, net of reissuance (3,784) (2,805) --------- -------- Balance at end of period $551,000 $508,599 ========= ======== See Notes to Consolidated Financial Statements - 6 - NAC RE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (Unaudited) Three months ended March 31, ------------------------ 1997 1996 --------- --------- OPERATING ACTIVITIES Net income $19,854 $20,772 Adjustments to reconcile net income to net cash provided by operating activities: Reserve for claims and claims expenses, net 241,349 30,029 Unearned premiums, net 4,058 6,318 Premiums receivable (7,884) (13,566) Accrued investment income (696) 734 Reinsurance balances, net (44,290) (2,648) Deferred policy acquisition costs (2,041) (1,879) Net investment gains (5,133) (9,817) Deferred tax asset, net (5,964) (2,540) Other liabilities 11,745 7,815 Other items, net (10,459) (10,154) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 200,539 25,064 --------- --------- INVESTING ACTIVITIES Sales of fixed maturity investments 386,972 501,443 Maturities of fixed maturity investments 7,629 5,391 Purchases of fixed maturity investments (467,650) (526,508) Net purchases of short-term investments (110,841) (1,778) Sales of equity securities 22,236 31,822 Purchases of equity securities (24,019) (21,420) Purchases of furniture and equipment (1,040) (1,124) --------- --------- NET CASH USED BY INVESTING ACTIVITIES (186,713) (12,174) --------- --------- FINANCING ACTIVITIES Issuance of shares 1,671 1,000 Purchase of treasury shares, net of reissuance (2,840) (2,805) Cash dividends paid to stockholders (1,104) (959) --------- --------- NET CASH USED BY FINANCING ACTIVITIES (2,273) (2,764) --------- --------- Effects of exchange rate changes on cash 129 - --------- --------- Increase in cash 11,682 10,126 Cash - beginning of year 18,853 10,320 --------- --------- Cash - end of period $30,535 $20,446 ========= ========= See Notes to Consolidated Financial Statements - 7 - - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. General The accompanying consolidated financial statements have been prepared on the basis of generally accepted accounting principles and in the opinion of management, reflect all adjustments necessary (consisting of normal recurring accruals) for a fair presentation of results for such periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company's Annual Report to Shareholders. 2. Per Share Data Primary earnings per share data are based on weighted average common shares and common share equivalents outstanding during the period. Fully diluted earnings per share data assumes conversion of dilutive convertible securities and the assumed exercise of all dilutive stock options. 3. Retrocession The Company's balance sheet as of March 31, 1997 and December 31, 1996 reflects reinsurance recoverable balances as assets, the components of which are stated in the table below. In the beginning of 1997, the Company terminated two retrocessional programs resulting in a total consideration of approximately $230 million, representing reinsurance recoverable balances for unpaid claims and claims expenses, with total cash consideration of approximately $180 million. Reinsurance Recoverable Balances, Net ------------------------------------- March 31, 1997 December 31, 1996 -------------- ----------------- Paid Claims $10,407 $15,457 Unpaid Claims and Claims Expenses 192,005 406,128 Ceded Balances Payable (28,856) (38,205) Funds Held Liability (877) (47,056) -------- -------- Net $172,679 $336,324 ======== ======== The effect of retrocessional activity on premiums written, premiums earned and claims expenses is as follows (in thousands): Three months ended March 31, ------------------ 1997 1996 ------------------ Ceded premiums written $32,371 $37,207 Ceded premiums earned $29,926 $38,360 Ceded claims and claims expenses $18,763 $20,507 - -------------------------------------------------------------------------------- -8- - -------------------------------------------------------------------------------- 4. Accounting Pronouncement In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per Share." This Statement replaces the historical presentation of primary earnings per share with the caption Basic earnings per share. Basic earnings per share excludes dilution and is computed by dividing income from operations by the weighted average number of shares outstanding for the period. This Statement is effective for financial statements issued for periods ending after December 15, 1997, with early adoption prohibited. Upon adoption, all prior period EPS amounts will be restated. The Company's historical primary and fully diluted earnings per share amounts as previously reported and the Basic and Diluted amounts required by SFAS No. 128 are shown below. The Company's fully diluted earnings per share data assumes the conversion of dilutive convertible securities and the exercise of all dilutive stock options. Net Income --------------------------- Primary Basic EPS As Reported Pro Forma ------------ ----------- Full Year: 1995 $3.47 $3.55 1996 $3.69 $3.74 1st Qtr: 1996 $1.06 $1.08 1997 $1.06 $1.08 Net Income --------------------------- Fully Diluted Diluted EPS As Reported Pro Forma ------------ ----------- Full Year: 1995 $3.29 $3.30 1996 $3.51 $3.51 1st Qtr: 1996 $1.00 $1.00 1997 $1.00 $1.00 - -------------------------------------------------------------------------------- -9- - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations NAC Re Corporation ("NAC Re") is the holding company for NAC Reinsurance Corporation ("NAC") and its wholly owned insurance and reinsurance domestic and foreign subsidiaries. NAC Re and its subsidiaries are collectively referred to as the Company. Results of Operations Operating earnings, excluding investment gains, of $16.4 million, increased 14.3% over the 1996 first quarter. On a per share basis, operating earnings, excluding investment gains, were $.88, an increase of 20.5% over the comparable 1996 period. Net income, including investment gains, was $19.9 million or $1.06 per share for the 1997 first quarter compared to $20.8 million or $1.06 per share for the 1996 first quarter. Premium Revenues The Company's growth in premium revenue for its domestic and international operations are as follows: (In millions) Three months ended March 31, ------------------------------------------------- Domestic International Total ----------------- ------------- ------------ 1997 1996 1997 1996 1997 1996 ------ ------ ---- ----- ------ ------ Net Premiums Written: Casualty $75.7 $69.1 $7.1 $5.2 $82.8 $74.3 Property 27.3 29.1 6.8 8.4 34.1 37.5 Specialty/Other 19.3 11.3 - - 19.3 11.3 ------ ------ ----- ----- ------ ------ Total $122.3 $109.5 $13.9 $13.6 $136.2 $123.1 ====== ====== ===== ===== ====== ====== As shown in the table above, the Company's worldwide net premiums written for the 1997 first quarter were $136.2 million, an increase of 10.6% over the comparable 1996 period. Domestic net premiums written for the 1997 first quarter of $122.3 million reflected an increase of 11.6% over the comparable 1996 period. Although market conditions continue to be extremely competitive, domestic casualty net premiums written grew 9.5% over the comparable prior year period, primarily as a result of increased opportunities in the Company's facultative business. Property net premiums written for the 1997 first quarter declined 6.2% as a result of the continuing competitive pressures. Net premiums written from the specialty lines totaled $19.2 million, an increase of 69.9% over the 1996 first quarter, principally due to increased opportunities and participations from existing clients. Net premiums written across all lines of business continues to be favorably impacted by reduced ceded premium charges. The reduction in ceded premiums is due, in part, to the favorable claims results experienced within the Company's retrocessional programs, coupled with the changing retrocessional market conditions and a restructuring of the Company's retrocessional programs. The Company's international operation, NAC Reinsurance International Limited, reported net premiums written of $13.9 million for the 1997 first quarter, compared to $13.6 million for the 1996 first quarter. The minimal increase in net premiums reflects an increase of $1.9 million or 36.8% in casualty net premiums written, partly offset by a decrease of $1.6 million or 18.8% in property net premiums, due to competitive international market conditions. - -------------------------------------------------------------------------------- -10- - -------------------------------------------------------------------------------- Operating Costs and Expenses Claims and claims expenses represent the Company's most significant and uncertain cost. This expense is only an estimate at a given point in time of what the insurer or reinsurer expects to pay on the settlement of claims based upon facts and circumstances then known. The Company would generally expect to refine such an estimate in subsequent accounting periods by modest amounts with adjustments possible in either direction as additional information becomes known. One traditional means of measuring the underwriting performance of a property/casualty insurer is the statutory composite ratio. The composite ratio, based upon statutory accounting practices which differ from generally accepted accounting principles in several respects, reflects underwriting experience, but does not reflect income from investments. A composite ratio under 100% indicates underwriting profitability while a composite ratio exceeding 100% indicates an underwriting loss. The following chart sets forth statutory composite ratios and the relevant components for the periods indicated for the Company's domestic reinsurance subsidiary. The consolidated statutory composite ratio combines the results of the Company's international subsidiary on a U.S. statutory basis: Three months ended Year ended March 31, December 31, ------------------ ------------ 1997 1996 1996 ---- ---- ---- Claims and Claims Expenses 65.8% 62.2% 63.7 Commissions and Brokerage 26.1 29.6 28.3 Other Underwriting Expenses 10.2 9.7 9.1 ----- ----- ----- Domestic Statutory Composite Ratio 102.1% 101.5% 101.1 ===== ===== ===== Consolidated Statutory Composite Ratio 102.8% 101.9% 101.6 ===== ===== ===== The Company's domestic statutory composite ratio for the 1997 first quarter was 102.1% compared with 101.5% for the 1996 first quarter ratio. The slight increase in the composite ratio is reflective of the competitive market conditions. The Company experienced net favorable claim development for the 1997 three month period which was principally attributable to casualty business written since 1986. This favorable development in the casualty business reflects the strength of the actuarial assumptions underlying the business written, particularly with respect to social and economic inflation. These actuarial assumptions are utilized to establish the expected loss ratio employed in the actuarial methodologies used to establish the reserves for claims and claims expenses. Such loss ratios are periodically adjusted to reflect actuarially computed expected claims to actual claims and claims expense development, inflation and other considerations. Such favorable development was partly offset by unfavorable experience in our property business. The unfavorable experience in our property business was principally from claims related to the 1995 underwriting year. In addition, the favorable development was partly offset by unfavorable experience on business written prior to 1985, principally related to asbestos and environmental claims. The pricing of the Company's reinsurance contracts contemplates many factors, including exposure to claims and the expenses of both the client company and broker. The Company's actuaries and underwriters evaluate the adequacy of premium revenue net of these expenses, thereby mitigating the effect of variations in these expenses to overall underwriting results. The Company's commission and brokerage ratio for the 1997 first quarter reflects a decrease compared to the 1996 first quarter, principally due to a change in the mix of business, particularly from the specialty lines of business. Other underwriting expenses for the 1997 first quarter have increased as compared to the 1996 prior year period, reflecting continued business expansion, investments in technology and the building of our facultative and international infrastructure. - -------------------------------------------------------------------------------- -11- - -------------------------------------------------------------------------------- Investments Cash and invested assets at March 31, 1997 and December 31, 1996 were $2.1 billion and $2.0 billion, respectively, excluding net investment payables of $41.5 million and $24.9 million for 1997 and 1996, respectively. Net investment income for the 1997 first quarter was $28.6 million, an increase of 11.0% over the 1996 comparable period. The increase in net investment income is primarily attributable to the growth in invested assets, including the contribution from the termination of two retrocessional programs effective at the beginning of 1997. On an after-tax basis, the increase in net investment income was more pronounced, reflecting the benefits of the Company's increased allocation of available cash flow from operations to tax-exempt securities. Net investment income, net of tax, for the 1997 first quarter was $1.21 per share compared to $1.03 per share for the same period last year. The Company's pretax investment yield was 5.6% for the 1997 first quarter, compared to 5.8% for the 1996 first quarter. The after-tax investment yield for the 1997 first quarter was 4.4%, compared to 4.6% for the comparable prior year period. Net investment gains, net of tax for the 1997 first quarter were $3.5 million or $.18 per share, compared to net investment gains of $6.4 million or $.33 per share for the 1996 first quarter. 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 March 31, 1997, our fixed maturity investments amounted to $1.8 billion, which approximates 81% of cash and invested assets, and 96% of such investments are rated investment grade by Moody's Investor Services, Inc. or Standard & Poor's. While uncertainties exist regarding interest rate and inflation variability, the Company attempts to minimize such risks and exposures by balancing the duration of its assets with the expected duration of its liabilities. Consistent with the payment profile of the Company's claim liabilities, as of March 31, 1997 the Company's investment portfolio had an average duration of 4.8 years. The balance of the Company's investment portfolio at March 31, 1997, consisting of cash, short-term investments and equity securities, amounted to $405.6 million. As of March 31, 1997, the Company held approximately $184 million or 8.5% of cash and invested assets in equity securities which represented 28% of statutory surplus. Accounting Pronouncement In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per Share." This Statement replaces the historical presentation of primary earnings per share with the caption Basic earnings per share. Basic earnings per share excludes dilution and is computed by dividing income from operations by the weighted average number of shares outstanding for the period. This Statement is effective for financial statements issued for periods ending after December 15, 1997, with early adoption prohibited. Upon adoption, all prior period EPS amounts will be restated. The Company's historical primary and fully diluted earnings per share amounts for operating income, excluding investment gains and net income and the Basic and Diluted amounts required by SFAS No. 128 are shown below. The Company's fully diluted earnings per share data assumes the conversion of dilutive convertible securities and the exercise of all dilutive stock options. The Company's Diluted EPS amounts as reported under Statement 128 are not expected to differ materially from previously reported fully diluted EPS, as reflected below . - -------------------------------------------------------------------------------- -12- - --------------------------------------------------------------------------------
Operating Income(1) Net Income Weighted Avg. Shares ------------------- ---------- -------------------- Primary Basic Primary Basic Primary Basic Period As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma - ------ ----------- --------- ----------- --------- ----------- --------- Full Year 1995 $2.53 $2.59 $3.47 $3.55 18,094,462 17,708,733 - -------------- 1996: - - 1st Qtr .73 .75 1.06 1.08 19,561,870 19,210,507 - - 2nd Qtr .76 .78 .85 .87 19,253,118 18,913,257 - - 3rd Qtr .76 .78 .84 .86 19,150,746 18,750,668 - - 4th Qtr .75 .76 .92 .93 18,799,565 18,549,225 Full Year 3.03 3.07 3.69 3.74 19,094,714 18,854,789 1997: - - 1st Qtr .88 .89 1.06 1.08 18,691,650 18,431,878 Operating Income(1) Net Income Weighted Avg. Shares ------------------- ---------- -------------------- Primary Basic Primary Basic Primary Basic Period As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma - ------ ----------- --------- ----------- --------- ----------- --------- Full Year 1995 $2.45 $2.45 $3.29 $3.30 20,153,459 20,114,664 - -------------- 1996: - - 1st Qtr .71 .71 1.00 1.00 21,582,072 21,582,072 - - 2nd Qtr .73 .73 .81 .81 21,286,773 21,273,320 - - 3rd Qtr .73 .73 .80 .80 21,170,948 21,170,948 - - 4th Qtr .72 .72 .87 .87 20,819,767 20,819,767 Full Year 2.90 2.90 3.51 3.51 21,117,116 21,114,916 1997: - - 1st Qtr .83 .83 1.00 1.00 20,711,852 20,711,852
(1) Excludes net realized investment gains, net of tax. Liquidity and Capital Resources NAC Re is a holding company and has no revenue producing operations of its own. Cash flow within NAC Re consists of investment income, operating and interest expenses, dividends to stockholders, rental income, dividends and tax reimbursements from NAC, which are subject to statutory restrictions. The statutory surplus of the reinsurance subsidiary, NAC Reinsurance Corporation was $666.6 million at March 31, 1997 which ranks among the largest domestic reinsurers measured on this basis. Total assets exceeded $2.8 billion at March 31, 1997. Stockholders' equity reached $551.0 million or $29.96 per share at March 31, 1997 compared to $553.3 or $30.06 per share at December 31, 1996. The unrealized appreciation of investments, net of tax, decreased $15.7 million or $.85 in stockholder's equity per share from December 31, 1996, reflecting the overall increase in market interest rates and the Company's realization of certain investment gains during the 1997 first quarter. Cash flow from operations for the 1997 first quarter, which included approximately $180 million from the termination of two retrocessional programs effective at the beginning of 1997, reached $200.5 million compared to $25.1 million for the prior year period. NAC Re maintains a revolving credit facility under which it can borrow up to $35 million. Outstanding borrowings as of March 31, 1997 were $12.9 million and were principally used to finance the Company's periodic repurchase of Common Stock. NAC maintains a $15 million line of credit facility which is available for catastrophe claim payments or working capital purposes. There have been no borrowings under this facility. - -------------------------------------------------------------------------------- -13- - -------------------------------------------------------------------------------- In March 1997, the Board of Directors of NAC Re Corp. approved the expansion of shares remaining under the Company's stock repurchase program to one million shares. Since January 1, 1997, the Company has repurchased approximately 124,000 shares of common stock at an average cost of $37.67 per share. From the inception of the program, approximately 3,204,000 shares have been repurchased at an average cost of $24.53 per share. Approximately 878,000 shares remain authorized for repurchase under the program. Regulatory Initiatives NAC Re and its domestic subsidiaries are subject to regulatory oversight under the insurance statutes and regulations of the jurisdictions in which they conduct business, including all states of the United States and Canada. NAC Re's international subsidiary is subject to the regulatory authority of the United Kingdom Department of Trade and Industry. The international subsidiary's Australian branch office is also subject to the Australian Insurance and Supervisory Commission's solvency and regulatory authority. These regulations vary from jurisdiction to jurisdiction, and are generally designed to protect ceding insurance companies and policyholders by ensuring each company's financial integrity and solvency in its business transactions and operations. Many of the insurance statutes and regulations applicable to the Company relate to reporting and disclosure standards which allow insurance regulators to closely monitor the Company's performance. Typical required reports include information concerning the Company's capital structure, ownership, financial strength and general business operations. In 1993, the National Association of Insurance Commissioners (the "NAIC") adopted a model risk-based capital act intended to provide an additional tool for regulators to evaluate the capital 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, it was enacted in California in 1996, NAC's commercial domicile. New York has issued a circular letter requiring the filing of risk-based capital reports by property and casualty insurers and reinsurers. The NAIC also adopted a proposal that requires property and casualty insurers and reinsurers to report the results of their risk-based capital calculations as part of the statutory annual statements filed with state regulatory authorities. Surplus (as calculated for statutory annual statement purposes) for each of the Company's domestic subsidiaries is well above the risk-based capital thresholds that would require either company or regulatory action. Various other regulatory and legislative initiatives have been discussed from time to time that could impact reinsurers. Generally, the thrust of regulatory efforts has been to improve the solvency of reinsurers and create strong incentives for insurers to do business with well capitalized, prompt paying reinsurers operating under U.S. jurisdiction. While we cannot quantify the impact of these regulatory efforts on the Company's operations, we believe the Company is adequately positioned to compete in an environment of more stringent regulation. - -------------------------------------------------------------------------------- -14- PART II. OTHER INFORMATION Item 6. Exhibits (a) Exhibit Index: Exhibit Description Page - -------------------------------------------------------------------------------- 11-1 Statement Re: Computation of Primary Per Share Earnings 16 11-2 Statement Re: Computation of Fully Diluted Per Share Earnings 17 15 Letter Re: Unaudited Interim Financial Information 18 27 Financial Data Schedule 19 (b) There were no reports filed on Form 8-K for the three months ended March 31, 1997. Omitted from this Part II are items which are inapplicable or to which the answer is negative for the period covered. - 15 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NAC Re CORP. (Registrant) Date: May 12, 1997 Jerome T. Fadden --------------------------- Jerome T. Fadden Vice President, Chief Financial Officer and Treasurer Date: May 12, 1997 Nicholas M. Brown, Jr. --------------------------- Nicholas M. Brown, Jr. President and Chief Operating Officer - 16 - EX-11.1 2 COMPUTATION OF PRIMARY EARNINGS PER SHARE EXHIBIT 11-1 NAC RE CORP. AND SUBSIDIARIES COMPUTATION OF PRIMARY EARNINGS PER SHARE (Dollars in thousands, except per share amounts) Primary Earnings Per Share of Common Stock and Common Stock Equivalents Three months ended March 31, ------------------------ 1997 1996 ----------- ----------- Net income applicable to Common Stock $ 19,854 $ 20,772 =========== =========== Average number of common shares outstanding 18,431,878 19,210,507 Add: Assumed exercise of dilutive stock options(1) 259,772 351,363 ----------- ----------- Common stock and common stock equivalents outstanding 18,691,650 19,561,870 =========== =========== Net income per share assuming dilution of common stock equivalents $ 1.06 $ 1.06 =========== =========== (1) Computed utilizing the average market price of the Common Stock for the period. NOTE: The Company's 5.25% convertible subordinated debentures due 2002 are not considered to be common stock equivalents in the calculation of primary earnings per share. - 17 - EX-11.2 3 COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE EXHIBIT 11-2 NAC RE CORP. AND SUBSIDIARIES COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE (Dollars in thousands, except per share amounts) Fully Diluted Earnings Per Share of Common Stock and Common Stock Equivalents Three months ended March 31, ----------------------- 1997 1996 ---------- ---------- Net income applicable to Common Stock $ 19,854 $ 20,772 After-tax add back of convertible debenture interest and amortization 876 876 ---------- ---------- Adjusted net income $ 20,730 $ 21,648 ========== ========== Average number of common shares outstanding 18,431,878 19,210,507 Add: Assumed exercise of dilutive stock options(1) 259,772 351,363 Assumed conversion of convertible debentures(2) 2,020,202 2,020,202 ---------- ---------- Common stock and common stock equivalents outstanding 20,711,852 21,852,072 ========== ========== Fully diluted earnings per share $1.00 $1.00 ========== ========== (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. - 18 - EX-15 4 LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION EXHIBIT 15 Acknowledgment Letter To the Stockholders and Board of Directors NAC Re Corporation We are aware of the incorporation by reference in the Registration Statements (Form S-8 No. 33-25585 and Form S-8 No. 33-77494) pertaining to the NAC Re Corp. Employee Stock Purchase Plan, in the Registration Statement (Form S-8 No. 33-27745) pertaining to the NAC Re Corp. 1989 Stock Option Plan, in the Registration Statement (Form S-8 No. 7813) pertaining to the NAC Re Corp. 1985 and 1986 Stock Option Plans, in the Registration Statements (Form S-8 No. 33-22841 and Form S-8 No. 333-03935) pertaining to the NAC Re Corp. Employee Savings Plan, in the Registration Statement (Form S-8 No. 33-34516) pertaining to the NAC Re Corp. Director's Stock Option Plan, in the Registration Statement (Form S-8 No. 33-77492) pertaining to the NAC Re Corp. Director's Stock Option Plan, and in the Registration Statement (Form S-8 No. 33-77114) pertaining to the NAC Re Corp. 1993 Stock Option Plan of our report dated April 22, 1997, relating to the unaudited consolidated interim financial statements of NAC Re Corporation which is included in its Form 10-Q for the quarter ended March 31, 1997. Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part of the registration statement prepared or certified by accountants within the meaning of Sections 7 or 11 of the Securities Act of 1933. ERNST & YOUNG LLP New York, New York April 22, 1997 - 19 - EX-27 5 FDS OF NAC RE CORPORATION
7 EXHIBIT 27 NAC Re Corporation Article 7 of Regulation S-X Insurance Companies Three Month Period Ending March 31, 1997 (Dollars in thousands, except per share amounts) 3-MOS MAR-31-1997 JAN-01-1997 DEC-31-1997 1,764,015 0 0 183,889 0 0 2,139,044 30,535 10,407 87,150 2,808,484 1,537,772 277,838 14,051 0 299,936 0 0 2,155 548,845 2,808,484 132,110 28,572 5,133 0 87,531 48,063 5,474 24,747 4,893 19,854 0 0 0 19,854 1.06 1.00 0 0 0 0 0 0 0
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