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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period to .
--------------- ---------------
Commission file number 0-13891.
NAC Re Corp.
(Exact name of registrant as specified in its charter)
Delaware 13-3297840
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Greenwich Plaza, Greenwich, CT 06836-2568
(Address of principal executive offices)
(203) 622-5200
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by a check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
There were 17,616,887 shares outstanding of the Registrant's
Common Stock, $.10 par value, as of September 30, 1995.
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<PAGE>
NAC RE CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
- - ---- -- --------- ----------- -------
Independent Accountants' Review Report 3
Consolidated Balance Sheet -
September 30, 1995 and December 31, 1994 4
Consolidated Statement of Income -
Three months and nine months ended September 30,
1995 and 1994 5
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 1995 and 1994 6
Consolidated Statement of Cash Flows -
Nine months ended September 30, 1995 and 1994 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis
of Financial Condition and Results of Operations 9-13
PART II. OTHER INFORMATION
- - ------- -----------------
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit 11-1 16
Exhibit 11-2 17
Exhibit 15 18
<PAGE>
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
Board of Directors and Shareholders
NAC Re Corporation
We have reviewed the accompanying consolidated balance sheet of NAC Re
Corporation and subsidiaries as of September 30, 1995, and the related
consolidated statement of income, for the three and nine months periods
ended September 30, 1995 and 1994 and the consolidated statements of
stockholders' equity and cash flows for the nine-month periods ended
September 30, 1995 and 1994. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data, and making inquires of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, which will be performed for the full year with the objective of
expressing an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted audited
standards, the consolidated balance sheet of NAC Re Corporation as of
December 31, 1994, and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended (not presented
herein) and in our report dated January 31, 1995, we expressed an
unqualified opinion on those consolidated financial statements.
ERNST & YOUNG LLP
New York, New York
October 19, 1995
- 3 -
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
September 30, December 31,
1995 1994
------------- -------------
ASSETS
Investments:
Available for sale:
Fixed maturities (amortized cost: 1995, $1,333,546 $1,145,341
Equity securities (cost: 1995, $105,263:
1994, $125,812) 117,834 123,986
Short-term investments 135,728 135,576
------------ -----------
TOTAL INVESTMENTS 1,587,108 1,404,903
Cash 11,475 9,624
Accrued investment income 22,244 20,053
Premiums receivable 138,007 120,610
Reinsurance recoverable balances, net 223,671 205,797
Reinsurance recoverable on unearned premiums 27,785 22,115
Investment accounts receivable 32,706 -
Deferred policy acquisition costs 67,162 59,953
Excess of cost over net assets acquired 4,104 4,379
Deferred tax asset, net 37,600 44,341
Other assets 37,162 24,993
------------ -----------
TOTAL ASSETS $2,189,024 $1,916,768
============ ===========
LIABILITIES
Claims and claims expenses $1,214,226 $1,086,170
Unearned premiums 225,258 195,213
8% Notes due 1999 100,000 100,000
5.25% Convertible Subordinated Debentures due
2002 100,000 100,000
Investment accounts payable 51,487 42,442
Other liabilities 68,403 73,858
------------ -----------
TOTAL LIABILITIES 1,759,374 1,597,683
============ ===========
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value:
1,000 shares authorized, none issued
(Includes 90 shares of Series A Junior
Participating Preferred Stock) - -
Common stock, $.10 par value:
25,000 shares authorized (1995,
19,753; 1994, 19,639 issued) 1,975 1,964
Additional paid-in capital 196,845 194,231
Unrealized appreciation (depreciation) of
investments, net of tax 19,738 (46,030)
Currency translation adjustments, net of tax 2,283 1,059
Retained earnings 251,363 210,255
Less treasury stock, at cost (1995, 2,136;
1994, 2,132 shares) (42,554) (42,394)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 429,650 319,085
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $2,189,024 $1,916,768
============ ===========
-4-
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
<TABLE><CAPTION>
(Unaudited)
-----------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Premiums and Other Revenues
Net premiums written $145,466 $121,234 $382,689 $318,722
Increase in unearned premiums (12,122) (11,410) (24,313) (37,789)
-------- -------- -------- --------
Premiums earned 133,344 109,824 358,376 280,933
Net investment income 22,270 20,009 66,907 59,031
Net investment gains 8,502 1,787 16,077 3,033
-------- -------- -------- --------
Total revenues 164,116 131,620 441,360 342,997
Operating Costs and Expenses
Claims and claims expenses 89,186 72,694 241,956 187,255
Commissions and brokerage 37,431 32,787 101,592 84,729
Acquisition and operating expenses 11,407 9,607 32,313 28,182
Interest expense 3,742 3,626 11,230 10,715
-------- -------- -------- --------
Total operating costs and expenses 141,766 118,714 387,091 310,881
Income
Operating income before income taxes 22,350 12,906 54,269 32,116
-------- -------- -------- --------
Federal and foreign income taxes:
Current 5,215 3,719 16,082 9,421
Deferred (464) (1,107) (5,381) (3,533)
-------- -------- -------- --------
Income tax expense (benefit) 4,751 2,612 10,701 5,888
-------- -------- -------- --------
Operating income/net income $17,599 $10,294 $43,568 $26,228
======== ======== ======== ========
Per Share Data
Primary:
Average shares outstanding 18,038 17,824 17,942 17,938
======== ======== ======== ========
Operating income/net income $0.98 $0.58 $2.43 $1.46
======== ======== ======== ========
Fully Diluted (assuming conversion of
dilutive convertible securities):
Average shares outstanding 20,059 19,844 20,023 19,970
======== ======== ======== ========
Operating income/net income $0.92 $0.56 $2.31 $1.44
======== ======== ======== ========
Cash dividends declared per share $0.05 $0.04 $0.14 $0.12
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
-5-
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
Nine months ended September 30,
----------------------------------
1995 1994
------------- -----------
COMMON STOCK
Balance at beginning of year $1,964 $1,935
Issuance of shares 11 26
-------- --------
Balance at end of period $1,975 $1,961
======== ========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year $194,231 $188,289
Issuance of shares 2,614 5,365
-------- --------
Balance at end of period $196,845 $193,654
======== ========
UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENTS, NET OF TAX
Balance at beginning of year $(46,030) $37,386
Unrealized appreciation (depreciation) 65,768 (56,302)
-------- --------
Balance at end of period $19,738 $(18,916)
======== ========
CURRENCY TRANSLATION ADJUSTMENTS, NET OF TAX
Balance at beginning of year $1,059 $(2,141)
Translation adjustments 1,224 2,843
-------- --------
Balance at end of period $2,283 $702
======== ========
RETAINED EARNINGS
Balance at beginning of year $210,255 $177,459
Net income 43,568 26,228
Dividends (2,460) (2,116)
-------- --------
Balance at end of period $251,363 $201,571
======== ========
TREASURY STOCK
Balance at beginning of year $(42,394) $(27,388)
Purchase of treasury shares (160) (12,526)
-------- --------
Balance at end of period $(42,554) $(39,914)
======== ========
TOTAL STOCKHOLDERS' EQUITY
Balance at beginning of year $319,085 $375,540
Issuance of shares 2,625 5,391
Unrealized appreciation (depreciation) 65,768 (56,302)
Translation adjustments 1,224 2,843
Net income 43,568 26,228
Dividends (2,460) (2,116)
Purchase of treasury shares (160) (12,526)
-------- --------
Balance at end of period $429,650 $339,058
======== ========
See Notes to Consolidated Financial Statements
-6-
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE><CAPTION>
(Unaudited)
Nine months ended September 30,
----------------------------------
1995 1994
------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $43,568 $26,228
Adjustments to reconcile net income to net cash
provided by operating activities:
Reserve for claims and claims expenses, net 111,201 74,122
Unearned premiums, net 24,433 37,743
Premiums receivable (18,876) (34,529)
Accrued investment income (2,149) (405)
Reinsurance balances, net (980) (874)
Deferred policy acquisition costs (7,223) (13,117)
Net investment gains (16,085) (3,053)
Deferred tax asset, net (5,362) (3,492)
Other liabilities (8,333) 7,488
Other items, net (4,209) 3,095
---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 115,985 93,206
---------- -----------
INVESTING ACTIVITIES
Sales of fixed maturity investments 967,927 474,255
Maturities of fixed maturity investments 14,324 26,919
Purchases of fixed maturity investments (1,117,400) (601,239)
Net sales of short-term investments 583 42,605
Sales of equity securities 75,106 26,094
Purchases of equity securities (53,174) (58,385)
Purchases of furniture and equipment (1,531) (2,419)
---------- -----------
NET CASH USED BY INVESTING ACTIVITIES (114,165) (92,170)
---------- -----------
FINANCING ACTIVITIES
Issuance of shares 2,469 4,673
Purchase of treasury shares (160) (11,119)
Cash dividends paid to stockholders (2,278) (2,122)
Borrowings under revolving credit agreement - 9,979
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 31 1,411
---------- -----------
Increase in cash 1,851 2,447
Cash - beginning of year 9,624 7,630
---------- -----------
Cash - end of period $11,475 $10,077
========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-7-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying consolidated financial statements have been prepared on
the basis of generally accepted accounting principles and in the opinion
of management, reflect all adjustments necessary (consisting of normal
recurring accruals) for a fair presentation of results for such
periods.
These consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes contained
in the Company's Annual Report to Shareholders.
2. Per Share Data
Primary earnings per share data are based on weighted average common
shares and common share equivalents outstanding during the period.
Fully diluted earnings per share data assumes conversion of dilutive
convertible securities and the assumed exercise of all dilutive stock
options.
3. Retrocession
The Company's balance sheet as of September 30, 1995 and December 31,
1994 reflect reinsurance recoverable balances as assets, the components
of which are as follows (in thousands):
Reinsurance Recoverable Balances, Net
-------------------------------------
September 30, December 31,
1995 1994
------------- ------------
Paid Claims $11,749 $17,447
Unpaid Claims and Claims Expenses 294,839 277,737
Ceded Balances Payable (36,485) (41,958)
Funds Held Liability (46,432) (47,429)
------------- ----------
Net $223,671 $205,797
============= ==========
The effect of retrocessional activity on premiums written, premiums earned and
claims expenses is as follows (in thousands):
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
1995 1994 1995 1994
-------------------- -------------------
Ceded premiums written $41,171 $32,336 $120,982 $101,529
Ceded premiums earned $40,232 $29,135 $115,311 $87,759
Ceded claims and claims expenses $15,939 $38,374 $57,237 $83,121
-8-
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
NAC Re Corporation ("NAC Re") is the holding company for NAC Reinsurance
Corporation ("NAC") and its wholly owned insurance and reinsurance domestic and
foreign subsidiaries. NAC Re and its subsidiaries are collectively referred to
as the Company.
Results of Operations
- - ---------------------
Operating income, excluding investment gains, totaled $12.1 million or $.67 per
share for the third quarter ended September 30, 1995, compared with $9.1 million
or $.51 per share for the 1994 third quarter. Operating income, excluding
investment gains, for the nine months ended September 30, 1995 totaled $33.1
million or $1.85 per share compared with $25.0 million or $1.39 per share for
the same prior year period. Operating earnings per share for the first nine
months of 1995 were reduced by $.18 as a result of property catastrophe claims
related to the earthquake in Kobe, Japan and Hurricane Marilyn. Net claim
activity of approximately $1.2 million in the 1995 third quarter related to
Hurricane Marilyn was offset by favorable claim development from the Kobe
earthquake. The 1994 nine month operating earnings per share was reduced by
$.18 resulting from the 1994 California earthquake.
Net income for the 1995 third quarter and nine month period was $.98 and $2.43
per share, respectively, compared to $.58 and $1.46 per share for the same prior
year periods. Net investment gains, net of tax, for the 1995 third quarter were
$5.5 million or $.31 per share compared to net investment gains of $1.2 million
or $.07 per share for the 1994 third quarter. Net investment gains, net of tax,
for the 1995 nine month period were $10.5 million or $.58 per share compared to
net investment gains of $1.3 million or $.07 cents per share for the comparable
prior year period.
Premium Revenues
The Company's steady growth in premium revenue, as indicated below, has been
impacted by several different factors, including both external market influences
and internal initiatives:
(In millions)
Three months ended September 30,
----------------------------------------------
Domestic International Total
--------------- ------------- --------------
1995 1994 1995 1994 1995 1994
------ ------ ------ ------ ------ -----
Net Premiums Written:
Casualty $87.0 $72.3 $4.9 $2.9 $91.9 $75.2
Property 31.8 25.0 6.6 2.4 38.4 27.4
Specialty/Other 15.2 18.6 - - 15.2 18.6
------ ------ ----- ----- ------ ------
Total $134.0 $115.9 $11.5 $5.3 $145.5 $121.2
====== ====== ===== ===== ====== ======
(In millions)
Nine months ended September 30,
----------------------------------------------
Domestic International Total
--------------- ------------- --------------
1995 1994 1995 1994 1995 1994
------ ------ ------ ------ ------ -----
Net Premiums Written:
Casualty $224.8 $177.9 $14.5 $9.8 $239.3 $187.7
Property 84.5 65.6 19.6 6.9 104.1 72.5
Specialty/Other 39.3 58.5 - - 39.3 58.5
------ ------ ------ ------ ------ ------
Total $348.6 $302.0 $34.1 $16.7 $382.7 $318.7
====== ====== ====== ====== ====== ======
Worldwide net premiums written for the 1995 third quarter and nine months were
$145.5 million and $382.7 million, respectively, an increase of approximately
20% over the 1994 comparable prior year periods.
-9-
<PAGE>
The Company's domestic net premiums written increased 15.6% to $134 million
for the 1995 third quarter, compared to the 1994 third quarter. Domestic
net premiums written for the nine month period increased 15.4% to $348.6
million, compared to the 1994 nine month period. These increases reflect
continued growth in substantially all traditional risk business profit
centers. Casualty net premiums written increased 20.2% and 26.3% for the
third quarter and nine month periods, respectively. Property net premiums
written increased 27.3% and 28.6% for the third quarter and nine month
periods, respectively. The casualty and property growth can be attributed
to contributions from new accounts and existing client relationships in
both our treaty and facultative business.
Specialty net premiums written, which consist of aviation, fidelity/surety
and ocean marine business, decreased 18.4% and 32.8% for the third quarter
and nine month periods, respectively. This decline is primarily
attributable to the nonrenewal of a large aviation account effective July
1994 which was partly offset by premium from an increased participation in
a premier aviation underwriting pool, effective January 1995. Excluding
the impact of this cancelled aviation account, the specialty net premiums
written for the 1995 third quarter and nine month periods would have
reflected an increase of approximately 9% and 8%, respectively.
NAC Reinsurance International Limited, which became fully operational in
1994, reported net premiums written of $11.5 million and $34.1 million for
the 1995 third quarter and nine month period, respectively, compared to
$5.3 million and $16.7 million for the 1994 third quarter and nine month
period, respectively. Casualty net premiums written increased 71.2% and
48.1% for the third quarter and nine month periods, respectively. Property
net premiums written increased 171.7% and 186.2% for the third quarter and
nine month periods, respectively. The growth in 1995 net premiums written
reflects contributions from treaties written during 1994 and new business
opportunities generated during the 1995 renewal seasons.
Ceded premiums written recorded for retrocessional agreements for the 1995
third quarter and nine month period were $41.2 million and $121 million,
increases of 27.3% and 19.2% over the comparable prior year periods,
respectively. The principal cause for the increase in ceded premiums was a
result of the Company's increased share of the reinsurance protection
purchased for the "common account" of all participating companies in the
aviation pool and to a lesser extent from expanded retrocessional
protection obtained at marginally higher costs. As a percentage of gross
premiums written, ceded premiums written were approximately 22% and 24% for
the 1995 third quarter and nine month period, respectively, compared to 21%
and 24% for the same prior year periods.
Operating Costs and Expenses
Claims and claims expenses represent our most significant and uncertain
costs. This expense is only an estimate at a given point in time of what
the insurer or reinsurer expects to pay on claims, based upon facts and
circumstances then known. We would generally expect to refine such an
estimate in subsequent accounting periods by modest amounts with
adjustments possible in either direction as additional information becomes
known.
One traditional means of measuring the underwriting performance of a
property/casualty insurer is the statutory composite ratio. The composite
ratio, based upon statutory accounting practices which differ from
generally accepted accounting principles in several respects, reflects
underwriting experience, but does not reflect income from investments. A
composite ratio of under 100% indicates underwriting profitability while a
composite ratio exceeding 100% indicates an underwriting loss.
The following chart sets forth statutory composite ratios and the relevant
components for the periods indicated for the Company's domestic reinsurance
subsidiary. The consolidated statutory composite ratio combines the
results of our international subsidiary on a U.S. statutory basis:
-10-
<PAGE>
<TABLE><CAPTION>
Three months ended Nine months ended Year ended
September 30, September 30, December 31,
----------------------- ----------------------- --------------
1995 1994 1995 1994 1994
----------- --------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C>
Claims and Claims Expenses 66.3 % 65.7 % 66.3 % 66.5 % 66.6 %
Commissions and Brokerage 29.3 31.5 29.4 31.7 31.3
Other Underwriting Expenses 6.9 6.9 7.7 7.8 7.8
------ ------ ------ ------ ------
Domestic Statutory Composite Ratio 102.5 % 104.1 % 103.4 % 106.0 % 105.7 %
====== ====== ====== ====== ======
Consolidated Statutory Composite
Ratio 102.8 % 104.5 % 104.2 % 106.0 % 106.1 %
====== ====== ====== ====== ======
</TABLE>
The domestic statutory composite ratio for the 1995 third quarter and nine
month period was 102.5% and 103.4%, respectively, compared to 104.1% and
106.0% for the 1994 third quarter and nine month periods, respectively.
The 1995 nine month domestic statutory composite ratio included 0.8
percentage points resulting from the 1995 Kobe earthquake. The nine month
statutory composite ratio of our international subsidiary, NAC Reinsurance
International Limited, was 114.7%, which included 8.0 percentage points as
a result of the Kobe earthquake and Hurricane Marilyn. The 1994 nine month
domestic statutory composite ratio was increased by 1.9 percentage points
resulting from the 1994 California earthquake.
Based upon actuarial comparisons of expected versus actual claim
development, the Company experienced net favorable claim development for
the 1995 nine month period which was principally attributable to our
casualty business written since 1985. This favorable development in
casualty reflects the strength of the pricing assumptions underlying the
business written, particularly with respect to the consideration given to
social and economic inflation. This favorable development was partially
offset by unfavorable experience in our aviation business. The unfavorable
experience in our aviation business was principally from claims related to
the 1993 underwriting year which was generated from a large account which
was not renewed effective July 1994. In addition, the favorable
development was partly offset by unfavorable experience on business written
prior to 1985, principally related to asbestos and environmental claims.
The pricing of the Company's reinsurance contracts contemplates many
factors, including exposure to claims and the expenses of both the client
company and broker. The Company's actuaries and underwriters evaluate the
adequacy of premium revenue net of these expenses, thereby mitigating the
effect of variations in these expenses to overall underwriting results.
The Company's commission and brokerage ratio for the 1995 third quarter and
nine month periods, reflects a slight decrease compared to the 1994 prior
year periods reflecting the reduction in our nontraditional treaty business
which generally produces higher commission and brokerage expenses. This
decrease is partly offset by the increased commissions in pro rata
contracts written in our specialty lines of business, which generally carry
a higher commission rate.
Underwriting expenses for the 1995 third quarter and nine months have
increased as compared to the 1994 prior year periods, reflecting continued
business expansion, investments in technology and the building of our
facultative and international infrastructure. While underwriting expenses
have increased, the 1995 domestic composite ratios have been relatively
equal compared to prior year periods. The Company has continued to seek
measures to reduce underwriting expenses that are not central to its
underwriting activities, and to better utilize its resources.
Investments
Cash and invested assets at September 30, 1995 and December 31, 1994 were
$1.6 billion and $1.4 billion, respectively, excluding net investment
payables of $18.8 million and $42.4 million for 1995 and 1994,
respectively.
Net investment income for the 1995 third quarter and nine months was $22.3
million and $66.9 million, increases of 11.3% and 13.3% over the 1994
comparable periods, respectively. The increase is primarily attributed to
our growth in invested assets. The Company's pretax investment yield was
6% for both the 1995 third quarter and nine month periods, compared to 6%
and 5.9% for the 1994 third quarter and nine month periods, respectively.
On an after-tax basis, net investment income grew 15.8% and 16.8% over the
1994 third quarter and nine month periods, respectively, reflecting the
benefits of the
-11-
<PAGE>
Company's increased allocation of available cash flow to tax-exempt
securities. The after-tax investment yield for the 1995 third quarter and
nine month period was 4.6% and 4.7%, respectively, compared to 4.5% for
both the 1994 third quarter and nine month periods.
Net investment gains, net of tax for the 1995 third quarter were $5.5
million or $.31 per share, compared to net investment gains of $1.2 million
or $.07 per share for the 1994 third quarter. Net investment gains, net of
tax, for the 1995 nine month period were $10.5 million or $.58 per share
compared to net investment gains of $1.3 million or $.07 per share for the
same prior year period. Gains and losses on the sale of investments are
recognized as a component of operating income, but the timing and
recognition of such gains and losses are unpredictable and are not
indicative of future operating results.
At September 30, 1995, our fixed maturity investments amounted to $1.3
billion, which approximates 83% of cash and invested assets, and 96% of
such investments are rated investment grade by Moody's Investor Services,
Inc. or Standard & Poor's.
The Company's investment strategy is focused principally on income
predictability and asset value stability. This strategy results in an
emphasis on high quality fixed maturity investments. Tactical shifts
between taxable and tax-exempt bonds may occur in order to maximize
after-tax investment returns. The Company has increased its investments in
tax-exempt securities to $658 million or 49% of total fixed maturity
investments at September 30, 1995 compared to $403.1 million or 35.2% of
total fixed maturities at December 31, 1994.
While uncertainties exist regarding interest rate and inflation
variability, the Company attempts to minimize such risks and exposures by
balancing the duration of its assets with the expected duration of its
liabilities. Consistent with the payment profile of the Company's claim
liabilities, as of September 30, 1995 the Company's fixed maturity
investments, excluding convertible securities, had an expected average
maturity of 7 years.
The balance of the Company's investment portfolio at September 30, 1995,
consisting of cash, short-term investments and equity securities, amounted
to $265 million. The Company's equity investment strategy is designed to
build a quality equity portfolio by specifically investing a portion of
cash flow from operations in equity securities. As of September 30, 1995,
the Company held $117.8 million or 7.4% of cash and invested assets in
equity securities which represented 26% of statutory surplus.
Liquidity and Capital Resources
NAC Re is a holding company and has no revenue producing operations of its
own. Cash flow within NAC Re consists of investment income, operating and
interest expenses, dividends to stockholders, rental income and dividends
from NAC Reinsurance Corporation which are subject to statutory
restrictions.
Consolidated stockholders' equity at September 30, 1995 totaled $429.7
million or $24.39 per share compared to $319.1 million or $18.23 per share
at December 31, 1994. The unrealized appreciation of investments, net of
tax, was $19.7 million at September 30, 1995 compared to an unrealized
depreciation of investments of $46 million at December 31, 1994, resulting
in an increase in book value of $65.8 million or $3.76 per share.
Statutory surplus of the reinsurance subsidiary was $452.8 million at
September 30, 1995. NAC Reinsurance ranks among the largest domestic
reinsurers measured on this basis. Our marketing activities suggest that
the minimum surplus standards for casualty reinsurance have continued to
increase, particularly in light of the emphasis in the market place on
financial security. The Company believes the minimum surplus required for
a lead casualty reinsurer is over $250 million, and expects that minimum to
rise to $500 million in the near future. This perception is subjective and
not based upon any regulatory initiatives or imposed standards. The likely
impact of such a requirement in the marketplace on our operating results
cannot be quantified. However, it is not expected to materially affect the
Company's ability to attract new business or retain it's existing client
base.
Cash flow from operations was $116 million for the 1995 nine month period,
compared to $93.2 million for the 1994 prior year period. This increase in
cash flow was principally due to increases in premium receipts which were
partially offset by higher paid claim activity.
-12-
<PAGE>
NAC Re maintains a revolving credit and term loan facility which was
increased to $35 million in December 1994. Outstanding borrowings at
September 30, 1995 were approximately $17.8 million and are payable
beginning June 1996 in twelve quarterly equal payments. The primary
purpose for borrowings under this facility has been to finance the
Company's periodic repurchase of its common stock. At September 30, 1995,
a total of 2.1 million shares of the Company's common stock have been
repurchased since the stock repurchase program's inception. As of
September 30, 1995, approximately 495,000 shares remain authorized for
repurchase under the repurchase program.
The Company declared a quarterly cash dividend of $.05 per share for the
1995 third quarter. The regular quarterly cash dividend was increased to
$.05 per share in June 1995.
On October 10, 1995, the Company filed a registration statement with the
Securities and Exchange Commission relating to the proposed issuance of
$100 million aggregate principal amount of its Notes and approximately 1.5
million shares of its Common Stock. The Company anticipates that
substantially all of the net proceeds to the Company from the sale of the
Common Stock and from the offering of the Notes will be contributed to NAC
to increase its statutory capital base and will be invested in accordance
with the Company's investment guidelines for all of its invested assets.
On October 20, 1995, NAC entered into an agreement with Western Atlantic
Reinsurance Corporation ("Western Atlantic"), pursuant to which NAC
acquired the right to renew Western Atlantic's book of property and
casualty treaty reinsurance business on a prospective basis. Western
Atlantic's current business approximates $170 million in annual gross
in-force premium. Western Atlantic is a subsidiary of Swiss Reinsurance
America Corporation.
Regulatory Initiatives
NAC Re and its domestic subsidiaries are subject to regulatory scrutiny
under the insurance statutes and regulations of the jurisdictions in which
they conduct business, including all states of the United States and
Canada. NAC Re's international subsidiary is subject to the regulatory
authority of the United Kingdom Department of Trade and Industry. These
regulations vary from jurisdiction to jurisdiction and are generally
designed to protect ceding insurance companies and policyholders by
ensuring each company's financial integrity and solvency in its business
transactions and operations. A majority of the insurance statutes and
regulations applicable to the Company has been categorized as reporting and
disclosure standards which allow insurance regulators to closely monitor
the Company's performance. Typical required reports include information
concerning the Company's capital structure, ownership, financial strength
and general business operations.
In 1993, the National Association of Insurance Commissioners (the "NAIC")
adopted a model risk-based capital act intended to provide a tool for
regulators to evaluate the capital of property and casualty insurers and
reinsurers with respect to the risks assumed by them and determine whether
there is a perceived need for possible corrective action. The nature of
the corrective action depends upon the extent of the calculated risk=based
capital deficiency and ranges from requiring the respective company to
submit a comprehensive plan to placing the insurer under regulatory
control. The risk=based capital requirements have not been adopted by New
York, NAC's domicile, or California, NAC's commercial domicile. In a
related action, the NAIC adopted a proposal that requires property and
casualty insurers and reinsurers to report the results of their risk=based
capital calculations as part of the 1994 and subsequent statutory annual
statements filed with state regulatory authorities. Surplus (as calculated
for statutory annual statement purposes) for each of the Company's domestic
property and casualty insurance and reinsurance subsidiaries is well above
the risk=based capital thresholds that would require either company or
regulatory action.
Various other regulatory and legislative initiatives have been discussed
from time to time that could impact reinsurers. The thrust of regulatory
efforts at all levels is to improve the solvency of reinsurers and create
strong incentives for insurers to do business with well capitalized, prompt
paying reinsurers operating under U.S. jurisdiction. These initiatives,
and the overall focus on solvency, may intensify the restructuring of the
reinsurance industry. While we cannot quantify the impact of these
regulatory efforts on the Company's operations, we believe the Company is
adequately positioned to compete in an environment of more stringent
regulation.
-13-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits
- - ------------------
(a) Exhibit Index:
Exhibit Description Page
- - -------- ---------------------------------------------------- ----
11-1 Statement Re: Computation of Primary Per Share Earnings 16
11-2 Statement Re: Computation of Fully Diluted Per Share
Earnings 17
15 Letter Re: Unaudited Interim Financial
Information 18
(b) There were no reports filed on Form 8-K for the three months ended
September 30, 1995.
Omitted from this Part II are items which are inapplicable or to which
the answer is negative for the period covered.
- 14 -
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NAC Re CORP.
------------
(Registrant)
Date: November 10, 1995 John N. Adimari
------------------------- -------------------------
John N. Adimari
Acting Chief Financial
Officer and Treasurer
Date: November 10, 1995 Ronald L. Bornhuetter
------------------------- -------------------------
Ronald L. Bornhuetter
Chairman of the Board,
President and Chief
Executive Officer
-15-
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
- - -----------------------------------------------------------------------
<TABLE><CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ------------------------
1995 1994 1995 1994
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Net income applicable to Common Stock $17,599 $10,294 $43,568 $26,228
========== ========== ========== ==========
Average number of common shares outstanding 17,591,170 17,588,889 17,554,752 17,641,293
Add:
Assumed exercise of dilutive stock options (1) 447,314 234,725 387,350 296,914
---------- ---------- ---------- ---------
Common stock and common stock equivalents outstanding 18,038,484 17,823,614 17,942,102 17,938,207
========== ========== ========== ==========
Net income per share assuming dilution of common stock
equivalents $0.98 $0.58 $2.43 $1.46
========== ========== ========== ==========
</TABLE>
(1) Computed utilizing the average market price of the Common
Stock for the period.
NOTE: The Company's 5.25% convertible subordinated debentures due 2002 are
not considered to be common stock equivalents in the calculation
of primary earnings per share.
- 16 -
<TABLE><CAPTION>
EXHIBIT 11-2
NAC RE CORP. AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
(Dollars in thousands, except per share amounts)
Fully Diluted Earnings Per Share of Common Stock and Common Stock Equivalents
- - -----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
--------------------------- ----------------------------
1995 1994 1995 1994
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income applicable to Common Stock $17,599 $10,294 $43,568 $26,228
After-tax add back of convertible debenture interest and
amortization 876 876 2,628 2,628
---------- ---------- ---------- ----------
Adjusted net income $18,475 $11,170 $46,196 $28,856
========== ========== ======= ==========
Average number of common shares outstanding 17,591,170 17,588,889 17,554,752 17,641,293
Add:
Assumed exercise of dilutive stock options (1) 447,314 234,725 447,988 308,091
Assumed conversion of convertible debentures (2) 2,020,202 2,020,202 2,020,202 2,020,202
---------- ---------- ---------- ----------
Common stock and common stock equivalents outstanding 20,058,686 19,843,816 20,022,942 19,969,586
Fully diluted earnings per share $0.92 $0.56 $2.31 $1.44
========== ========== ======= ==========
(1) Computed utilizing the higher of ending or average market price
of the Common Stock for the period.
(2) Reflects the assumed conversion of the Company's 5.25%
Convertible Subordinated Debentures due 2002.
- 17 -
</TABLE>
EXHIBIT 15
Acknowledgment Letter
To the Stockholders and Board of Directors
NAC Re Corporation
We are aware of the incorporation by reference in the Registration
Statement (Form S-8 No. 33-5585) pertaining to the NAC Re Corp. Employee
Stock Purchase Plan, in the Registration Statement (Form S-8 No. 33-27745)
pertaining to the NAC Re Corp. 1989 Stock Option Plan, in the Registration
Statement (Form S-8 No. 7813) pertaining to the NAC Re Corp. 1985 and 1986
Stock Option Plans, in the Registration Statement (Form S-8 No. 33-2284)
pertaining to the NAC Re Corp. Employee Savings Plan, in the Registration
Statement (Form S-8 No. 33-2841) pertaining to the NAC Re Corp. Director's
Stock Option Plan, in the Registration Statement (Form S-8 No. 33-77492)
pertaining to the NAC Re Corp. Director's Stock Option Plan, in the
Registration Statement (Form S-8 No. 33-77494) pertaining to the NAC Re
Corp. Employee Stock Purchase Plan, and in the Registration Statement (Form
S-8 No. 33-77114) pertaining to the NAC Re Corp. 1993 Stock Option Plan our
report dated October 19, 1995, relating to the unaudited consolidated
interim financial statements of NAC Re Corporation which is included in its
Form 10-Q for the quarter ended September 30, 1995.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a
part of the registration statement prepared or certified by accountants
within the meaning of Sections 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG LLP
New York, New York
October 19, 1995
- 18 -
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
NAC Re Corporation
Article 7 of Regulation S-X
Insurance Companies
Nine Month Period Ending September 30, 1995
(Dollars in thousands, except per share amounts)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 1,333,566
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 117,834
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,587,108
<CASH> 11,475
<RECOVER-REINSURE> 11,749
<DEFERRED-ACQUISITION> 67,162
<TOTAL-ASSETS> 2,189,024
<POLICY-LOSSES> 1,214,226
<UNEARNED-PREMIUMS> 225,258
<POLICY-OTHER> 6,415
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 200,000
<COMMON> 1,975
0
0
<OTHER-SE> 427,675
<TOTAL-LIABILITY-AND-EQUITY> 2,189,024
358,376
<INVESTMENT-INCOME> 66,907
<INVESTMENT-GAINS> 16,077
<OTHER-INCOME> 0
<BENEFITS> 241,956
<UNDERWRITING-AMORTIZATION> 133,905
<UNDERWRITING-OTHER> 11,230
<INCOME-PRETAX> 54,269
<INCOME-TAX> 10,701
<INCOME-CONTINUING> 43,568
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,568
<EPS-PRIMARY> 2.43
<EPS-DILUTED> 2.31
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
