-----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, ACCupaZlNlHnf0GdpqryinVSoGU0ncdmRmOeYc0HtRfj70deqJ6KqF/C6zLFcMo9 /PgvD/MMB0hTpTjr0e58OA== 0001005477-97-002030.txt : 19970814 0001005477-97-002030.hdr.sgml : 19970814 ACCESSION NUMBER: 0001005477-97-002030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAC RE CORP CENTRAL INDEX KEY: 0000775542 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 133297840 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13720 FILM NUMBER: 97658718 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 June 30, 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 18,396,722 shares outstanding of the Registrant's Common Stock, $.10 par value, as of June 30, 1997. - -------------------------------------------------------------------------------- ================================================================================ NAC RE CORP. AND SUBSIDIARIES TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. Independent Accountants' Review Report 3 Consolidated Balance Sheet - June 30, 1997 and December 31, 1996 4 Consolidated Statement of Income - Three Months and Six Months Ended June 30, 1997 and 1996 5 Consolidated Statement of Stockholders' Equity - Six Months Ended June 30, 1997 and 1996 6 Consolidated Statement of Cash Flows - Six Months Ended June 30, 1997 and 1996 7 Notes to Consolidated Financial Statements 8-9 Management's Discussion and Analysis of Financial Condition and Results of Operations 10-15 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 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 June 30, 1997, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 1997 and 1996 and the consolidated statements of stockholders' equity and cash flows for the six-month periods ended June 30, 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 July 22, 1997 - 3 - NAC RE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands)
(Unaudited) June 30, December 31, 1997 1996 ----------- ----------- ASSETS Investments: Available for sale: Fixed maturities (amortized cost: 1997, $1,943,612; 1996, $1,681,190) $1,968,826 $1,703,537 Equity securities (cost: 1997, $113,317; 1996, $153,197) 136,158 179,619 Short-term investments 88,476 81,893 ---------- ---------- TOTAL INVESTMENTS 2,193,460 1,965,049 Cash 18,581 18,853 Accrued investment income 33,640 28,472 Premiums receivable 232,848 200,036 Reinsurance recoverable balances, net 178,236 336,324 Reinsurance recoverable on unearned premiums 25,862 20,320 Investment accounts receivable 5,164 411 Deferred policy acquisition costs 89,228 85,211 Excess of cost over net assets acquired 3,460 3,644 Deferred tax asset, net 41,407 30,390 Other assets 64,303 56,921 ---------- ---------- TOTAL ASSETS $2,886,189 $2,745,631 ========== ========== LIABILITIES Claims and claims expenses $1,567,771 $1,513,345 Unearned premiums 287,748 271,898 8% Notes due 1999 100,000 100,000 7.15% Notes due 2005 99,938 99,934 5.25% Convertible Subordinated Debentures due 2002 100,000 100,000 Investment accounts payable 31,256 25,326 Revolving credit agreement 12,924 12,924 Other liabilities 92,369 68,935 ---------- ---------- TOTAL LIABILITIES 2,292,006 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, 21,608; 1996, 21,464 shares issued) 2,161 2,146 Additional paid-in capital 252,091 248,662 Unrealized appreciation of investments, net of tax 31,236 31,700 Currency translation adjustments, net of tax 6,191 8,377 Retained earnings 381,818 335,868 Less treasury stock, at cost (1997, 3,211; 1996, 3,061 shares) (79,314) (73,484) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 594,183 553,269 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,886,189 $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 Six months ended June 30, June 30, -------------------- ------------------- 1997 1996 1997 1996 -------- -------- -------- -------- PREMIUMS AND OTHER REVENUES Net premiums written $148,654 $140,852 $284,825 $263,991 Increase in unearned premiums (6,576) (10,506) (10,637) (16,824) -------- -------- -------- -------- Premiums earned 142,078 130,346 274,188 247,167 Net investment income 30,308 25,616 58,880 51,359 Net investment gains 17,684 2,715 22,817 12,532 -------- -------- -------- -------- Total revenues 190,070 158,677 355,885 311,058 OPERATING COSTS AND EXPENSES Claims and claims expenses 93,553 84,525 181,084 158,214 Commissions and brokerage 38,276 34,990 71,162 68,509 Acquisition and operating expenses 15,324 13,541 30,501 26,191 Interest expense 5,408 5,620 10,882 11,191 -------- -------- -------- -------- Total operating costs and expenses 152,561 138,676 293,629 264,105 INCOME Operating income before income taxes 37,509 20,001 62,256 46,953 -------- -------- -------- -------- Federal and foreign income taxes: Current 12,454 4,794 23,311 13,514 Deferred (3,527) (1,207) (9,491) (3,747) -------- -------- -------- -------- Income tax expense (benefit) 8,927 3,587 13,820 9,767 -------- -------- -------- -------- Operating income/net income $ 28,582 $ 16,414 $ 48,436 $ 37,186 ======== ======== ======== ======== PER SHARE DATA Primary: Average shares outstanding 18,778 19,253 18,735 19,408 Operating income/net income $ 1.52 $ 0.85 $ 2.59 $ 1.92 Fully Diluted (assuming conversion of dilutive convertible securities): Average shares outstanding 20,933 21,287 20,964 21,437 Operating income/net income $ 1.41 $ 0.81 $ 2.39 $ 1.82 Cash dividend declared per share $ 0.075 $ 0.06 $ 0.135 $ 0.11
See Notes to Consolidated Financial Statements - 5 - NAC RE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands) (Unaudited) Six months ended June 30, -------------------- 1997 1996 -------- -------- COMMON STOCK Balance at beginning of year $ 2,146 $ 2,134 Issuance of shares 15 8 -------- -------- Balance at end of period $ 2,161 $ 2,142 ======== ======== ADDITIONAL PAID-IN CAPITAL Balance at beginning of year $248,662 $246,356 Issuance of shares 3,429 1,825 -------- -------- Balance at end of period $252,091 $248,181 ======== ======== UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS, NET OF TAX Balance at beginning of year $ 31,700 $ 35,187 Unrealized depreciation (464) (25,267) -------- -------- Balance at end of period $ 31,236 $ 9,920 ======== ======== CURRENCY TRANSLATION ADJUSTMENTS, NET OF TAX Balance at beginning of year $ 8,377 $ 1,017 Translation adjustments (2,186) (696) -------- -------- Balance at end of period $ 6,191 $ 321 ======== ======== RETAINED EARNINGS Balance at beginning of year $335,868 $269,660 Net income 48,436 37,186 Dividends (2,486) (2,082) -------- -------- Balance at end of period $381,818 $304,764 ======== ======== TREASURY STOCK Balance at beginning of year $(73,484) $(42,598) Purchase of treasury shares, net of reissuance (5,830) (17,184) -------- -------- Balance at end of period $(79,314) $(59,782) ======== ======== TOTAL STOCKHOLDERS' EQUITY Balance at beginning of year $553,269 $511,756 Issuance of shares 3,444 1,833 Unrealized depreciation (464) (25,267) Translation adjustments (2,186) (696) Net income 48,436 37,186 Dividends (2,486) (2,082) Purchase of treasury shares, net of reissuance (5,830) (17,184) -------- -------- Balance at end of period $594,183 $505,546 ======== ======== See Notes to Consolidated Financial Statements - 6 - NAC RE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (Unaudited) Six months ended June 30, ----------------------- 1997 1996 ----------- --------- OPERATING ACTIVITIES Net income $ 48,436 $ 37,186 Adjustments to reconcile net income to net cash provided by operating activities: Reserve for claims and claims expenses, net 264,132 71,772 Unearned premiums, net 10,637 16,824 Premiums receivable (33,178) (35,784) Accrued investment income (5,229) (329) Reinsurance balances, net (40,982) (9,336) Deferred policy acquisition costs (4,076) (5,408) Net investment gains (22,817) (12,532) Deferred tax asset, net (9,589) (3,747) Other liabilities 12,245 13,821 Other items, net 1,027 (5,019) ----------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 220,606 67,448 ----------- --------- INVESTING ACTIVITIES Sales of fixed maturity investments 756,696 780,979 Maturities of fixed maturity investments 15,564 18,732 Purchases of fixed maturity investments (1,036,467) (869,343) Net (purchases) sales of short-term investments (7,633) 18,807 Sales of equity securities 110,219 52,170 Purchases of equity securities (51,266) (51,997) Purchases of furniture and equipment (2,663) (2,407) ----------- --------- NET CASH USED BY INVESTING ACTIVITIES (215,550) (53,059) ----------- --------- FINANCING ACTIVITIES Issuance of shares 2,755 1,603 Purchase of treasury shares, net of reissuance (5,830) (17,184) Cash dividends paid to stockholders (2,213) (1,916) Borrowings under revolving credit agreement -- 8,162 ----------- --------- NET CASH USED BY FINANCING ACTIVITIES (5,288) (9,335) ----------- --------- Effects of exchange rate changes on cash (40) (68) ----------- --------- (Decrease) increase in cash (272) 4,986 Cash - beginning of year 18,853 10,320 ----------- --------- Cash - end of period $ 18,581 $ 15,306 =========== ========= 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 June 30, 1997 and December 31, 1996 reflects reinsurance recoverable balances as assets, the components of which are stated in the table below. Effective January 1, 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. Reinsurance Recoverable Balances, Net (In thousands) ------------------------------------- June 30, 1997 December 31, 1996 --------------- ----------------- Paid Claims $13,183 $15,457 Unpaid Claims and Claims Expenses 198,046 406,128 Ceded Balances Payable (32,088) (38,205) Funds Held Liability (905) (47,056) ----------- ----------- Net $178,236 $336,324 =========== =========== The effect of retrocessional activity on premiums written, premiums earned and claims expenses is as follows (in thousands): Three months ended Six months ended June 30, June 30, ------------------ ------------------ 1997 1996 1997 1996 ------------------ ------- ------- Ceded premiums written $31,864 $31,866 $64,235 $69,073 Ceded premiums earned $28,767 $35,204 $58,693 $73,564 Ceded claims and claims expenses $19,794 $25,324 $38,557 $45,831 - -------------------------------------------------------------------------------- - 8 - - -------------------------------------------------------------------------------- 4. Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." Statement No. 130 requires that a company classify items of other comprehensive income in a financial statement and display the accumulated balance of other comprehensive income in the equity section of a statement of financial position. Statement No. 131 requires disclosures about segments of a company and related information about the different types of business activities and the different economic environment in which it operates that differ from current practice. These statements will be effective for periods beginning after December 15, 1997, with earlier application permitted. The Company has not completed its analysis of all matters associated with the implementation of these standards or determined the period that they will be adopted. The effect of adopting these standards will not be material to the Company's financial position. In February 1997, the FASB 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 ---------------------------------------------------- As Reported Pro Forma ----------------------- ------------------------ Period: Primary Diluted Primary Diluted EPS EPS EPS EPS --------- --------- ---------- ---------- 1997: 1st Qtr $1.06 $1.00 $1.08 $1.00 2nd Qtr $1.52 $1.41 $1.56 $1.42 YTD $2.59 $2.39 $2.63 $2.42 1996: 1st Qtr $1.06 $1.00 $1.08 $1.00 2nd Qtr $0.85 $0.81 $0.87 $0.81 YTD $1.92 $1.82 $1.95 $1.82 1996 Year $3.69 $3.51 $3.74 $3.51 1995 Year $3.47 $3.29 $3.55 $3.30 - -------------------------------------------------------------------------------- - 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 For the quarter ended June 30, 1997, operating income, excluding investment gains, was $16.9 million or $.90 per share an increase of 18.4% from the comparable 1996 results of $.76 per share. For the six months of 1997, operating income, excluding investment gains, was $33.4 million or $1.78 per share, an increase of 18.7% from the comparable 1996 results of $1.50 per share. Net income, including investment gains, for the 1997 second quarter totaled $28.6 million or $1.52 per share, This is an increase of 78.8% over the $.85 per share that was reported in the comparable quarter of 1996. Net income for the first six months of 1997 totaled $48.4 million or $2.59 per share, an increase of 30.3% over the comparable 1996 results of $1.92 per share. Included in net income per share were investment gains, net of tax, of $.62 and $.81 for the 1997 second quarter and six month period, respectively, compared with $.09 and $.42 for the same prior year periods. Premium Revenues The Company's growth in premium revenue for its domestic and international operations are as follows: (In millions) Three months ended June 30, -------------------------------------------------- Domestic International Total ---------------- -------------- ---------------- 1997 1996 1997 1996 1997 1996 ------- ------- ------ ------ ------- ------- Net Premiums Written: Casualty $80.8 $83.3 $7.0 $6.1 $87.8 $89.4 Property 30.6 32.4 6.7 8.0 37.3 40.4 Specialty/Other 23.5 11.1 - - 23.5 11.1 ------- ------- ------ ------ ------- ------- Total $134.9 $126.8 $13.7 $14.1 $148.6 $140.9 ======= ======= ====== ====== ======= ======= (In millions) Six months ended June 30, -------------------------------------------------- Domestic International Total ---------------- -------------- --------------- 1997 1996 1997 1996 1997 1996 ------- ------- ------ ------ ------- ------- Net Premiums Written: Casualty $156.5 $152.4 $14.1 $11.3 $170.6 $163.7 Property 57.9 61.5 13.5 16.4 71.4 77.9 Specialty/Other 42.8 22.4 - - 42.8 22.4 ------- ------- ------ ------ ------- ------- Total $257.2 $236.3 $27.6 $27.7 $284.8 $264.0 ======= ======= ====== ====== ======= ======= As shown in the table above, the Company's worldwide net premiums written for the 1997 second quarter and six month period were $148.6 million and $284.8 million, respectively, an increase of 5.5% and 7.9% over the comparable 1996 periods. During the second quarter, NAC Re experienced slowing premium growth in both our domestic and international operations, primarily as a result of the continuing competitive market conditions. - -------------------------------------------------------------------------------- - 10 - - -------------------------------------------------------------------------------- Domestic net premiums written for the 1997 second quarter and six month period were $134.9 million and $257.2 million respectively, an increase of 6.5% and 8.8% over the comparable 1996 periods. Domestic casualty net premiums written for the 1997 second quarter declined 3.0% over the comparable prior year period, primarily as a result of the competitive market conditions impacting our treaty business, which was only partially offset by growth in our facultative business. Property net premiums written for the 1997 second quarter declined 5.5% as a result of the continuing competitive pressures. Net premiums written from the specialty lines totaled $23.5 million, an increase of 112.8% over the 1996 second quarter, principally due to increased opportunities. 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 $13.7 million and $27.6 million for the 1997 second quarter and six month period, respectively, compared to $14.1 million and $27.7 million for the 1996 comparable periods. The slight decrease in net premiums for the 1997 second quarter and six month period is primarily attributable to a decrease of $2.9 million or 17.6% in property net premiums written due to highly competitive international market conditions. This decline was partially offset by increases in casualty net premiums. 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 Six months ended Year ended June 30, June 30, December 31, ------------------ ---------------- ------------ 1997 1996 1997 1996 1996 ------ ------ ------ ------ ------ Claims and Claims Expenses 66.0% 64.1% 65.9% 63.2% 63.7% Commissions and Brokerage 27.7 28.2 26.9 28.9 28.3 Other Underwriting Expenses 9.6 8.9 9.9 9.2 9.1 ----- ------ ----- ----- ----- Domestic Statutory Composite Ratio 103.3% 101.2% 102.7% 101.3% 101.1% ===== ===== ===== ===== ===== International Statutory Composite Ratio 110.1% 105.6% 109.7% 106.1% 105.6% ===== ===== ===== ===== ===== Consolidated Statutory Composite Ratio 103.9% 101.6% 103.4% 101.8% 101.6% ===== ===== ===== ===== =====
The Company's domestic statutory composite ratio for the 1997 second quarter and six month period was 103.3% an 102.7%, respectively, compared with 101.2% and 101.3%, for the 1996 comparable periods. The second quarter and six month statutory composite ratio for our international operation was 110.1% and 109.7%, respectively, compared to 105.6% and 106.1% for the same prior year periods. The slight increase in the composite ratio is reflective of the overall highly competitive market conditions. - -------------------------------------------------------------------------------- - 11 - - -------------------------------------------------------------------------------- The Company experienced net favorable claim development for the 1997 six 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 and 1996 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 second quarter and six month period reflects a decrease compared to the 1996 second quarter and six month period, principally due to a change in the Company's mix of business, particularly from the specialty lines of business. Other underwriting expenses for the 1997 second quarter and six month period have increased compared to the 1996 prior year periods, reflecting continued business expansion, investments in technology and the building of our facultative and international infrastructure. Investments Cash and invested assets at June 30, 1997 and December 31, 1996 were $2.2 billion and $2.0 billion, respectively, excluding net investment payables of $26.1 million and $24.9 million for 1997 and 1996, respectively. Net investment income for the 1997 second quarter and six month period was $30.3 million and $58.9 million, respectively, increases of 18.3% and 14.6%, respectively, over the 1996 comparable periods. 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 second quarter was $1.30 per share an increase of 23.8% over the 1996 comparable period of $1.05 per share. For the six months ended June 30, 1997, after-tax net investment income was $2.50 per share, an increase of 20.2% over the comparable 1996 period. The Company's pretax investment yield was 5.8% for the 1997 second quarter, compared to 5.7% for the 1996 second quarter. The after-tax investment yield for the 1997 second quarter was 4.7%, compared to 4.5% for the comparable prior year period. Net investment gains, net of tax for the 1997 second quarter were $11.6 million or $.62 per share, compared to net investment gains of $1.7 million or $.09 per share for the 1996 second quarter. Net investment gains, net of tax, for the 1997 six months were $.81 per share compared to $.42 per share for the 1996 comparable period. Gains and losses on the sale of investments are recognized as a component of operating income, but the timing and recognition of such gains and losses are unpredictable and are not indicative of future operating results. 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 June 30, 1997, our fixed maturity investments amounted to $2.0 billion, which approximates 89% of cash and invested assets, and 98.4% of such investments are rated investment grade by Moody's Investor Services, Inc. or Standard & Poor's. - -------------------------------------------------------------------------------- - 12 - - -------------------------------------------------------------------------------- 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 June 30, 1997 the Company's investment portfolio had an average duration of 5.5 years. The balance of the Company's investment portfolio at June 30, 1997, consisting of cash, short-term investments and equity securities, amounted to $2.2 million. As of June 30, 1997, the Company held approximately $136.2 million or 6.2% of cash and invested assets in equity securities which represented 20% of statutory surplus. Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." Statement No. 130 requires that a company classify items of other comprehensive income in a financial statement and display the accumulated balance of other comprehensive income in the equity section of a statement of financial position. Statement No. 131 requires disclosures about segments of a company and related information about the different types of business activities and the different economic environment in which it operates that differ from current practice. These statements will be effective for periods beginning after December 15, 1997, with earlier application permitted. The Company has not completed its analysis of all matters associated with the implementation of these standards or determined the timing of adoption. The effect of adopting these standards will not be material to the Company's financial position. In February 1997, the FASB 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. Primary vs. Basic EPS:
Operating Income(1) Net Income Weighted Avg. Shares -------------------- --------------------- ------------------------ As Pro As Pro As Pro Period Reported Forma Reported Forma Reported Forma ------ --------- ------- --------- -------- ---------- ---------- 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 - 2nd Qtr .90 .92 1.52 1.56 18,777,674 18,375,609 Year-to-date 1.78 1.81 2.59 2.63 18,734,511 18,403,588
- -------------------------------------------------------------------------------- - 13 - - -------------------------------------------------------------------------------- Fully Diluted vs. Diluted EPS:
Operating Income(1) Net Income Weighted Avg. Shares -------------------- ------------------- ----------------------- As Pro As Pro As Pro Period Reported Forma Reported Forma Reported Forma ------ --------- ------- -------- ------- ---------- ---------- 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 - 2nd Qtr .85 .86 1.41 1.42 20,932,675 20,797,876 Year-to-date 1.67 1.69 2.39 2.42 20,964,197 20,754,713
(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 $684.9 million at June 30, 1997 which ranks among the largest domestic reinsurers measured on this basis. Total assets were approximately $2.9 billion at June 30, 1997. Stockholders' equity reached $594.2 million or $32.30 per share at June 30, 1997 compared to $553.3 or $30.06 per share at December 31, 1996. The unrealized appreciation of investments, net of tax, was $31.2 million at June 30, 1997, compared to an unrealized appreciation of investments, net of tax, of $31.7 million at December 31, 1996. Cash flow from operations for the 1997 six month period, which included approximately $180 million from the termination of two retrocessional programs effective at the beginning of 1997, reached $220.6 million compared to $67.4 million for the prior year period. The increase in cash flow for the 1997 six month period was partially offset by increases in paid claim activities from various lines of business. NAC Re maintains a revolving credit facility under which it can borrow up to $35 million. Outstanding borrowings as of June 30, 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. During 1997 the Company has repurchased approximately 156,000 shares of common stock at an average cost of $38.14 per share. From the inception of the Company's stock repurchase program, approximately 3,236,000 shares have been repurchased at an average cost of $24.68 per share. Approximately 846,000 shares remain authorized for repurchase under the program. On June 11, 1997, the Board of Directors approved a 25% increase in the Company's quarterly dividend and declared a regular quarterly cash dividend of $.075 per share, which was payable on July 9, 1997 to holders of record on June 25, 1997. - -------------------------------------------------------------------------------- - 14 - - -------------------------------------------------------------------------------- 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, 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. - -------------------------------------------------------------------------------- - 15 - PART II. OTHER INFORMATION Item 4. Submissions of Matters to a Vote of Security Holders The Company's Annual Meeting of Stockholders was held on May 9, 1997. At such meeting Ronald L. Bornhuetter, Todd G. Cole and Daniel J. McNamara were each reelected as a director for a term expiring in 2000. Mr. Bornhuetter was reelected by an affirmative vote of 15,339,980 shares with 639,874 shares withheld, Mr. Cole was reelected by an affirmative vote of 15,575,598 shares with 404,256 shares withheld, and Mr. McNamara was reelected by an affirmative vote of 15,335,529 shares with 644,331 shares withheld. The proposal to adopt the 1997 NAC Re Corp. Incentive and Capital Accumulation Plan, which provides for the grant of options and restricted stock to employees, was adopted by the following vote: For Against Abstain Broker Non-Vote --- ------- ------- --------------- 8,574,360 6,374,993 30,718 999,783 The proposal to amend the NAC Re Corp. Employee Stock Purchase Plan was adopted to increase the number of shares available under such plan from 237,500 to 337,500, and to extend the expiration date of the plan from February 1, 1998 to January 16, 2003. The proposal to amend the plan was adopted by the following vote: For Against Abstain Broker Non-Vote --- ------- ------- --------------- 14,616,818 296,806 28,235 1,037,995 Item 6. Exhibits (a) Exhibit Index: Exhibit Description Page - ------- ----------- ---- 11-1 Statement Re: Computation of Primary Per Share Earnings 18 11-2 Statement Re: Computation of Fully Diluted Per Share Earnings 19 15 Letter Re: Unaudited Interim Financial Information 20 27 Financial Data Schedule 21-22 (b) There were no reports filed on Form 8-K for the quarter ended June 30, 1997. Omitted from this Part II are items which are inapplicable or to which the answer is negative for the period covered. - 16 - 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: August 12, 1997 JEROME T. FADDEN ---------------------- ----------------------------------------- Jerome T. Fadden Vice President, Chief Financial Officer and Treasurer Date: August 12, 1997 NICHOLAS M. BROWN, JR. ---------------------- ----------------------------------------- Nicholas M. Brown, Jr. President and Chief Operating Officer - 17 - EX-11.1 2 COMPUTATION OF PRIMARY EARNINGS 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 Six months ended June 30, June 30, ------------------------- ------------------------ 1997 1996 1997 1996 ------------ ----------- ----------- ----------- Net income applicable to Common Stock $ 28,582 $ 16,414 $ 48,436 $ 37,186 =========== =========== =========== =========== Average number of common shares outstanding 18,375,609 18,913,257 18,403,588 19,061,882 Add: Assumed exercise of dilutive stock options (1) 402,065 339,861 330,923 345,618 ----------- ----------- ----------- ----------- Common stock and common stock equivalents outstanding 18,777,674 19,253,118 18,734,511 19,407,500 =========== =========== =========== =========== Net income per share assuming dilution of common stock equivalents $ 1.52 $ 0.85 $ 2.59 $ 1.92 =========== =========== =========== ===========
(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. EX-11.2 3 COMPUTATION OF FULLY DILUTED EARNINGS 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 Six months ended June 30, June 30, ------------------------ ------------------------ 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Net income applicable to Common Stock $ 28,582 $ 16,414 $ 48,436 $ 37,186 After-tax add back of convertible debenture interest and amortization 876 876 1,752 1,752 ----------- ----------- ----------- ----------- Adjusted net income $ 29,458 $ 17,290 $ 50,188 $ 38,938 =========== =========== =========== =========== Average number of common shares outstanding 18,375,609 18,913,257 18,403,588 19,061,882 Add: Assumed exercise of dilutive stock options (1) 536,864 353,314 540,407 354,976 Assumed conversion of convertible debentures (2) 2,020,202 2,020,202 2,020,202 2,020,202 ----------- ----------- ----------- ----------- Common stock and common stock equivalents outstanding 20,932,675 21,286,773 20,964,197 21,437,060 =========== =========== =========== =========== Fully diluted earnings per share $ 1.41 $ 0.81 $ 2.39 $ 1.82 =========== =========== =========== ===========
(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-15 4 ACKNOWLEDGEMENT LETTER 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 July 22, 1997, relating to the unaudited consolidated interim financial statements of NAC Re Corporation that is included in its Form 10-Q for the quarter ended June 30, 1997. ERNST & YOUNG LLP New York, New York July 22, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
7 1000 6-MOS DEC-31-1997 JUN-30-1997 $1,968,826 0 0 136,158 0 0 2,193,460 18,581 13,183 89,228 2,886,189 1,567,771 287,748 19,470 0 299,938 0 0 2,161 592,022 2,886,189 274,188 58,880 22,817 0 181,084 101,663 10,882 62,256 13,820 48,436 0 0 0 48,436 2.59 2.39 0 0 0 0 0 0 0
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