<PAGE>
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, 1996
[ ] 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 18,749,005 shares outstanding of the Registrant's Common Stock,
$.10 par value, as of September 30, 1996.
<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, 1996 and December 31, 1995 4
Consolidated Statement of Income - Three Months and
Nine Months Ended September 30, 1996 and 1995 5
Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 30, 1996 and 1995 6
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 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 5. Other Information 14
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, 1996, and the related
consolidated statement of income, for the three-month and nine-month periods
ended September 30, 1996 and 1995 and the consolidated statements of
stockholders' equity and cash flows for the nine-month periods ended September
30, 1996 and 1995. 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, 1995, 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 30, 1996, we expressed an unqualified opinion on those
consolidated financial statements.
New York, New York ERNST & YOUNG LLP
October 22, 1996
-3-
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1996 1995
---------- -----------
ASSETS
Investments:
Available for sale:
Fixed maturities (amortized cost: 1996,
$1,647,610; 1995, $1,551,848 ) $1,656,278 $1,593,543
Equity securities (cost: 1996, $134,400;
1995, $114,818) 152,419 127,257
Short-term investments 113,655 132,406
---------- -----------
TOTAL INVESTMENTS 1,922,352 1,853,206
Cash 7,668 10,320
Accrued investment income 27,523 26,955
Premiums receivable 192,104 154,974
Reinsurance recoverable balances, net 303,624 257,136
Reinsurance recoverable on unearned premiums 20,643 28,111
Investment accounts receivable 8,011 43
Deferred policy acquisition costs 79,399 70,466
Excess of cost over net assets acquired 3,735 4,011
Deferred tax asset, net 42,343 27,688
Other assets 54,752 29,221
----------- -----------
TOTAL ASSETS $2,662,154 $2,462,131
=========== ===========
LIABILITIES
Claims and claims expenses $1,443,686 $1,292,415
Unearned premiums 251,774 230,738
8% Notes due 1999 100,000 100,000
7.15% Notes due 2005 99,932 99,927
5.25% Convertible Subordinated Debentures due 2002 100,000 100,000
Investment accounts payable 45,330 50,580
Revolving credit agreement 12,924 17,762
Other liabilities 80,110 58,953
----------- -----------
TOTAL LIABILITIES 2,133,756 1,950,375
----------- -----------
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 (1996, 21,455;
1995, 21,341 issued) 2,145 2,134
Additional paid-in capital 248,708 246,356
Unrealized appreciation of investments, net of tax 17,347 35,187
Currency translation adjustments, net of tax 1,564 1,017
Retained earnings 319,678 269,660
Less treasury stock, at cost (1996, 2,706; 1995,
2,137 shares) (61,044) (42,598)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 528,398 511,756
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,662,154 $2,462,131
=========== ===========
See Notes to Consolidated Financial Statements
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<PAGE>
<TABLE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(UNAUDITED)
----------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
PREMIUMS AND OTHER REVENUES
Net premiums written $150,681 $145,466 $414,672 $382,689
Increase in unearned premiums (11,566) (12,122) (28,390) (24,313)
---------- --------- ---------- ----------
Premiums earned 139,115 133,344 386,282 358,376
Net investment income 26,140 22,270 77,499 66,907
Net investment gains 2,122 8,502 14,654 16,077
---------- --------- ---------- ----------
Total revenues 167,377 164,116 478,435 441,360
OPERATING COSTS AND EXPENSES
Claims and claims expenses 90,496 89,186 248,710 241,956
Commissions and brokerage 37,281 37,431 105,790 101,592
Acquisition and operating expenses 13,950 11,407 40,141 32,313
Interest expense 5,705 3,742 16,896 11,230
---------- --------- ---------- ----------
Total operating costs and expenses 147,432 141,766 411,537 387,091
INCOME
Operating income before income taxes 19,945 22,350 66,898 54,269
---------- --------- ---------- ----------
Federal and foreign income taxes:
Current 5,504 5,215 19,018 16,082
Deferred (1,597) (464) (5,344) (5,381)
---------- --------- ---------- ----------
Income tax expense (benefit) 3,907 4,751 13,674 10,701
-------- -------- ------- --------
Operating income/net income $16,038 $17,599 $53,224 $43,568
========== ========= ========== ==========
PER SHARE DATA
Primary:
Average shares outstanding 19,151 18,038 19,321 17,942
========== ========= ========== ==========
Operating income/net income $0.84 $0.98 $2.75 $2.43
========== ========= ========== ==========
Fully Diluted (assuming conversion of
dilutive convertible securities):
Average shares outstanding 21,171 20,059 21,380 20,023
========== ========= ========== ==========
Operating income/net income $0.80 $0.92 $2.61 $2.31
========== ========= ========== ==========
Cash dividends declared per share $0.06 $0.05 $0.17 $0.14
========== ========= ========== ==========
See Notes to Consolidated Financial Statements
</TABLE>
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<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
----------- ---------
COMMON STOCK
Balance at beginning of year $2,134 $1,964
Issuance of shares 11 11
----------- ---------
Balance at end of period $2,145 $1,975
=========== =========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year $246,356 $194,231
Issuance of shares 2,352 2,614
----------- ---------
Balance at end of period $248,708 $196,845
=========== =========
UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENTS, NET OF TAX
Balance at beginning of year $35,187 $(46,030)
Unrealized (depreciation) appreciation (17,840) 65,768
----------- ---------
Balance at end of period $17,347 $19,738
=========== =========
CURRENCY TRANSLATION ADJUSTMENTS, NET OF TAX
Balance at beginning of year $1,017 $1,059
Translation adjustments 547 1,224
----------- ---------
Balance at end of period $1,564 $2,283
=========== =========
RETAINED EARNINGS
Balance at beginning of year $269,660 $210,255
Net income 53,224 43,568
Dividends (3,206) (2,460)
----------- ---------
Balance at end of period $319,678 $251,363
=========== =========
TREASURY STOCK
Balance at beginning of year $(42,598) $(42,394)
Purchase of treasury shares (18,446) (160)
----------- ---------
Balance at end of period $(61,044) $(42,554)
=========== =========
TOTAL STOCKHOLDERS' EQUITY
Balance at beginning of year $511,756 $319,085
Issuance of shares 2,363 2,625
Unrealized (depreciation) appreciation (17,840) 65,768
Translation adjustments 547 1,224
Net income 53,224 43,568
Dividends (3,206) (2,460)
Purchase of treasury shares (18,446) (160)
----------- ---------
Balance at end of period $528,398 $429,650
=========== =========
See Notes to Consolidated Financial Statements
-6-
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
------------ ------------
OPERATING ACTIVITIES
Net income $53,224 $43,568
Adjustments to reconcile net income to net cash
provided by operating activities:
Reserve for claims and claims expenses, net 118,489 111,201
Unearned premiums, net 28,394 24,433
Premiums receivable (36,982) (18,876)
Accrued investment income (544) (2,149)
Reinsurance balances, net (21,346) (980)
Deferred policy acquisition costs (8,912) (7,223)
Net investment gains (14,653) (16,085)
Deferred tax asset, net (5,530) (5,362)
Other liabilities 20,670 (8,333)
Other items, net (10,220) (4,209)
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 122,590 115,985
--------- --------
INVESTING ACTIVITIES
Sales of fixed maturity investments 1,066,265 967,927
Maturities of fixed maturity investments 23,356 14,324
Purchases of fixed maturity investments (1,195,016) (1,117,400)
Net sales of short-term investments 19,055 583
Sales of equity securities 68,480 75,106
Purchases of equity securities (79,414) (53,174)
Purchases of furniture and equipment (3,594) (1,531)
--------- --------
NET CASH USED BY INVESTING ACTIVITIES (100,868) (114,165)
--------- --------
FINANCING ACTIVITIES
Issuance of shares 2,037 2,469
Purchase of treasury shares (18,446) (160)
Cash dividends paid to stockholders (3,039) (2,278)
Borrowings under revolving credit agreement 8,162 -
Repayments under revolving credit agreement (13,000) -
--------- --------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (24,286) 31
--------- --------
Effects of exchange rate changes on cash (88) -
--------- --------
(Decrease) increase in cash (2,652) 1,851
Cash - beginning of year 10,320 9,624
--------- --------
Cash - end of period $7,668 $11,475
========= ========
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.
Weighted average common shares includes the effect of the Company's
issuance of 1,530,000 shares of Common Stock through a public offering in
November 1995.
3. RETROCESSION ACTIVITY
The Company's balance sheet as of September 30, 1996 and December 31, 1995
reflects reinsurance recoverable balances as assets, the components of
which are as follows (in thousands):
REINSURANCE RECOVERABLE BALANCES, NET
-------------------------------------------
September 30, 1996 December 31, 1995
----------------------- ------------------
Paid Claims $13,567 $19,051
Unpaid Claims and Claims Expenses 370,982 338,746
Ceded Balances Payable (34,530) (56,792)
Funds Held Liability (46,395) (43,869)
----------------------- ------------------
Net $303,624 $257,136
======================= ==================
The effect of retrocessional activity on premiums written, premiums earned
and claims and claims expenses is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1996 1995 1996 1995
-------- ------- -------- --------
Ceded premiums written $32,371 $41,171 $101,444 $120,982
Ceded premiums earned $35,348 $40,232 $108,912 $115,311
Ceded claims and claims expenses $25,101 $15,939 $70,932 $57,237
-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, increased 21.2% to $14.6 million
or $.76 per share for the quarter ended September 30, 1996, compared with $12.1
million or $.67 per share for the 1995 third quarter. Operating income,
excluding investment gains, for the first nine months of 1996 increased 31.9% to
$43.7 million or $2.26 per share, compared with $33.1 million or $1.85 per share
for the comparable prior year period.
Net income, including investment gains, for the 1996 third quarter totaled $16
million or $.84 per share, compared to $17.6 million or $.98 per share. Net
income for the first nine months of 1996 totaled $53.2 million or $2.75 per
share, an increase of 22.2% over the 1995 nine month period. Included in net
income per share were investment gains, net of tax, of $.08 and $.49 for the
1996 third quarter and nine month period, respectively, compared with $.31 and
$.58 for the same prior year periods.
Net property catastrophe claim activity reported for the 1996 nine month period
included $2.7 million which was principally related to the January 1996 winter
storms. The 1995 nine month period included $5.0 million of net property
catastrophe claim activity, including $2.8 million and $2.2 million from the
domestic and international operations, respectively.
PREMIUM REVENUES
As shown in the table below, the Company's worldwide net premiums written for
the 1996 third quarter and nine month period were $150.7 million and $414.7
million, respectively, an increase of 3.6% and 8.4% over the 1995 comparable
periods.
<TABLE><CAPTION>
(In millions)
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
DOMESTIC INTERNATIONAL TOTAL
--------------------- -------------------- -----------------
1996 1995 1996 1995 1996 1995
-------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Premiums Written:
Casualty $87.3 $87.0 $4.9 $4.9 $92.2 $91.9
Property 30.2 31.8 7.7 6.6 37.9 38.4
Specialty/Other 20.6 15.2 - - 20.6 15.2
-------- -------- ------- ------- ------- -------
Total $138.1 $134.0 $12.6 $11.5 $150.7 $145.5
======== ======== ======= ======= ======= =======
<CAPTION>
(In millions)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
DOMESTIC INTERNATIONAL TOTAL
--------------------- -------------------- -----------------
1996 1995 1996 1995 1996 1995
-------- -------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Premiums Written:
Casualty $239.8 $224.8 $16.2 $14.5 $256.0 $239.3
Property 91.7 84.5 24.1 19.6 115.8 104.1
Specialty/Other 42.9 39.3 - - 42.9 39.3
-------- -------- ------- ------- ------- ------
Total $374.4 $348.6 $40.3 $34.1 $414.7 $382.7
======== ======== ======= ======= ======= ======
</TABLE>
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<PAGE>
Domestic net premiums written for the 1996 third quarter and nine month period
reflected an increase of 3.0% and 7.4%, respectively, over the comparable prior
year periods. Reduced ceded premium charges for the 1996 nine month period
continue to favorably impact the net premium growth across all profit centers.
This reduction in ceded premiums is principally due to a more cost effective
retrocessional program and a moderate increase in the Company's retention
levels. Casualty net premiums written for the 1996 third quarter and nine month
period increased .4% and 6.7%, respectively over the comparable prior year
period. Property net premiums written declined 5.2% from the 1995 third quarter
and increased 8.4% from the 1995 nine month period. The casualty and property
growth for the nine month period stems from increased opportunities from our
existing facultative and treaty clients. Net premiums written from our
specialty lines, which consist of fidelity/surety, aviation and ocean marine
business, increased 35.6% and 9.3% over the 1995 third quarter and nine month
period, respectively.
NAC Reinsurance International Limited reported net premiums written of $12.6
million and $40.3 million for the 1996 third quarter and nine month period,
respectively, an increase of 10.2% and 18.1%, respectively over the comparable
1995 periods. Casualty premiums were $4.9 million and $16.2 million for the
1996 third quarter and nine month period, respectively, compared to $4.9 million
and $14.5 million for the same prior year periods. Property premiums for the
1996 third quarter and nine month period were $7.7 million and $24.1 million,
respectively, compared to $6.6 million and $19.6 million for the 1995 prior year
periods.
Ceded premiums written recorded for retrocessional agreements for the 1996 third
quarter and nine month period were $32.4 million and $101.4 million,
respectively, compared to $41.2 million and $121.0 million over the comparable
prior year periods. As mentioned above, reduced ceded premium charges were
primarily due to more cost effective retrocessional programs coupled with a
moderate increase in the Company's retention levels. In 1996, the Company
increased its maximum retention on any one claim for non-catastrophe losses,
principally for the casualty lines, in consideration of the Company's increased
size and financial capacity.
OPERATING COSTS AND EXPENSES
Claims and claims expenses represent our 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 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:
THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------------------------------------------
1996 1995 1996 1995 1995
------ ----- ----- ----- -----
Claims and Claims Expenses 65.2 % 66.3 % 63.9 % 66.3 % 65.1 %
Commissions and Brokerage 27.2 29.3 28.3 29.4 29.7
Other Underwriting Expenses 8.3 6.9 8.9 7.7 8.3
------ ----- ----- ----- -----
Domestic Statutory Composite
Ratio 100.7 % 102.5 % 101.1 % 103.4 % 103.1 %
====== ===== ===== ===== =====
Consolidated Statutory
Composite Ratio 101.2 % 102.8 % 101.7 % 104.2 % 103.7 %
====== ===== ===== ===== =====
-10-
<PAGE>
The domestic statutory composite ratio for the 1996 third quarter and nine month
period was 100.7% and 101.1%, respectively, compared to 102.5% and 103.4% for
the 1995 third quarter and nine month period, respectively. The nine month
domestic statutory composite ratio included minimal net property catastrophe
claim activity, increasing the nine month ratio by .8 percentage points. The
1995 nine month ratio and full year domestic composite ratios were increased by
.8 percentage points and .9 percentage points, respectively, as a result of the
1995 net property catastrophe claim activity.
The Company experienced net favorable claim development for the 1996 nine month
period which was principally attributable to 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. The pricing
assumptions are utilized to establish the initial expected target loss ratio
employed in the actuarial methodologies used to establish the reserves for
claims and claims expenses. Such loss ratios are periodically adjusted to
reflect actuarially computed comparisons of expected to actual claims and claims
expense development, inflation and other considerations. Such favorable
development was partly offset by unfavorable experience on business written
prior to 1986.
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 1996 third quarter and nine months
reflects a slight decrease compared to the 1995 third quarter and nine month
period. This decrease is principally due to the effects of certain contractual
provisions which adjust commission expense based upon claim experience,
partially offset by increased commissions in pro rata contracts written in our
specialty lines of business, which generally carry a higher commission rate.
Other underwriting expenses for the 1996 third quarter and nine month period
have increased as compared to the 1995 prior year periods, reflecting continued
business expansion, investments in technology and the building of our
facultative and international infrastructure. However, the Company will
continue to seek measures to contain underwriting expenses that are not central
to its underwriting activities, and to better utilize its resources.
INVESTMENTS
Cash and invested assets at September 30, 1996 and December 31, 1995 were
approximately $1.9 billion and $1.8 billion, respectively, excluding net
investment payables of $37.3 million and $50.5 million for the comparable prior
year periods.
Net investment income for the 1996 third quarter and nine months was $26.1
million and $77.5 million, respectively, increases of 17.4% and 15.8% over the
1995 comparable periods. The increases are primarily attributed to our growth
in invested assets, including the net proceeds of approximately $147 million
related to the Company's public debt and equity offerings in November 1995. The
Company's pretax investment yields for both the 1996 third quarter and nine
month period were 5.7%, compared to 6.0% for both comparable periods last year.
The after-tax investment yield for the 1996 third quarter and nine month
periods, was 4.4% and 4.5%, respectively, compared to 4.6% and 4.7% for the
comparable prior year periods.
Net investment gains, net of tax, for the 1996 third quarter and nine month
period were $.08 per share and $.49 per share, respectively, compared to net
investment gains of $.31 per share and $.58 per share for the 1995 third quarter
and nine month period, respectively. 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 September 30, 1996, our fixed maturity investments amounted to $1.7 billion,
which approximates 86% of cash and invested assets; 97.3% of such investments
are rated investment grade by Moody's Investor Services, Inc. or Standard &
Poor's.
-11-
<PAGE>
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, 1996
the Company's investment portfolio had an average duration of 4.7 years.
The balance of the Company's investment portfolio at September 30, 1996,
consisting of cash, short-term investments and equity securities, amounted to
$273.7 million. As of September 30, 1996, the Company held $152.4 million in
equity securities which represented 23.5% of statutory surplus and 7.9% of cash
and invested assets.
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 which
are subject to statutory restrictions.
In November 1995, the Company issued $100 million principal amount of its 7.15%
Notes due November 15, 2005, and raised approximately $49 million on the
issuance of 1.53 million shares of Common Stock. The Company contributed
substantially all of the net proceeds from the Company's debt and equity
offering to NAC in late 1995.
The statutory surplus of NAC was $649.2 million at September 30, 1996. NAC
ranks among the largest domestic reinsurers measured on this basis.
Consolidated stockholders' equity at September 30, 1996 totaled $528.4 million
or $28.18 per share compared to $511.8 million or $26.65 per share at December
31, 1995. As a result of changes in market interest rates, the unrealized
appreciation of investments, net of tax, was $17.3 million at September 30, 1996
compared to $35.2 million at December 31, 1995, resulting in a decrease in
stockholders' equity of $17.9 million or $.93 per share.
Cash flow from operations was $122.6 million for the 1996 nine month period,
compared to $116.0 million for the 1995 prior year period.
In April 1996, the Company modified its existing $35 million revolving credit
facility. The requirement for payment of outstanding balances beginning in
September 1996 was replaced with a scheduled reduction of the credit facility
beginning in July 1998 and ending July 2001. During the third quarter of 1996,
the Company paid down $13 million of its outstanding borrowings. As a result,
the outstanding borrowings at September 30, 1996 were $12.9 million, which were
principally utilized to finance the Company's periodic repurchase of its 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.
The Company declared a quarterly cash dividend of $.06 per share for the 1996
third quarter. The regular quarterly cash dividend was increased to $.06 per
share from $.05 per share in June 1996.
Since January 1, 1996, the Company has repurchased approximately 594,000 shares
of common stock, bringing the total repurchases since January 1988 to 2,732,000
shares. Approximately 499,000 shares remain outstanding for repurchase under
this program.
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. Many of the
insurance statutes and
-12-
<PAGE>
regulations applicable to the Company may be categorized as reporting and
disclosure standards which allow insurance regulators to closely monitor the
Company's performance. Typical required reports include information concerning
the Company's capital structure, ownership, financial strength and general
business operations.
In 1993, the National Association of Insurance Commissioners (the "NAIC")
adopted a model risk-based capital act intended to provide an additional tool
for regulators to evaluate the capital of property and 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 any
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 applicable to property and casualty insurers and reinsurers has not
yet been adopted in New York, NAC's domicile, it was enacted this year in
California, 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. In a related action, the NAIC adopted a proposal that
requires property and casualty insurers and reinsurers to report the results of
their risk-based capital calculations as part of the statutory annual statements
filed with state regulatory authorities. Surplus (as calculated for statutory
annual statement purposes) for each of the Company's domestic property and
casualty insurance and reinsurance subsidiaries is well above the risk-based
capital thresholds that would require either company or regulatory action.
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.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On October 31, 1996, the Company announced that Nicholas M. Brown, Jr., has been
named President, Chief Operating Officer and a Director of NAC Re Corp., and
President and Chief Executive Officer of its wholly-owned subsidiary, NAC
Reinsurance Corporation. In addition, Ronald L. Bornhuetter, Chairman of the
Board and Chief Executive Officer of NAC Re Corp., agreed to a three-year
extension of his employment contract, which will run through June 2000.
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, 1996.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
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<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 12, 1996 JEROME T. FADDEN
------------------------ -------------------------------------
Jerome T. Fadden
Vice President,
Chief Financial Officer and Treasurer
Date: November 12, 1996 RONALD L. BORNHUETTER
------------------------ -------------------------------------
Ronald L. Bornhuetter
Chairman of the Board
and Chief Executive Officer
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11-1
NAC RE CORP. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER SHARE
(Dollars in thousands, except per share amounts)
PRIMARY EARNINGS PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENTS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income applicable to Common Stock $16,038 $17,599 $53,224 $43,568
========== ========== ========== ==========
Average number of common shares outstanding 18,750,668 17,591,170 18,957,387 17,554,752
Add:
Assumed exercise of dilutive stock options (1) 400,078 447,314 363,768 387,350
---------- ---------- ---------- ----------
Common stock and common stock equivalents outstanding 19,150,746 18,038,484 19,321,155 17,942,102
========== ========== ========== ==========
Net income per share assuming dilution of common stock
equivalents $0.84 $0.98 $2.75 $2.43
========== ========== ========== ==========
</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-
<PAGE>
<TABLE>
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
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income applicable to Common Stock $16,038 $17,599 $53,224 $43,568
After-tax add back of convertible debenture interest
and amortization 876 876 2,628 2,628
---------- ---------- ---------- ----------
Adjusted net income $16,914 $18,475 $55,852 $46,196
========== ========== ========== ==========
Average number of common shares outstanding 18,750,668 17,591,170 18,957,387 17,554,752
ADD:
Assumed exercise of dilutive stock options (1) 400,078 447,314 402,900 447,988
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 21,170,948 20,058,686 21,380,489 20,022,942
========== ========== ========== ==========
Fully diluted earnings per share $0.80 $0.92 $2.61 $2.31
========== ========== ========== ==========
</TABLE>
(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-
<PAGE>
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. 33-22841) 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 October 22, 1996,
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, 1996.
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.
New York, New York ERNST & YOUNG LLP
October 22, 1996
-18-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
NAC RE CORPORATION
ARTICLE 7 OF REGULATION S-X
INSURANCE COMPANIES
NINE MONTH PERIOD ENDING SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 1,656,278
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 152,419
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,922,352
<CASH> 7,668
<RECOVER-REINSURE> 13,567
<DEFERRED-ACQUISITION> 79,399
<TOTAL-ASSETS> 2,662,154
<POLICY-LOSSES> 1,443,686
<UNEARNED-PREMIUMS> 251,774
<POLICY-OTHER> 5,819
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 299,932
0
0
<COMMON> 2,145
<OTHER-SE> 526,253
<TOTAL-LIABILITY-AND-EQUITY> 2,662,154
386,282
<INVESTMENT-INCOME> 77,499
<INVESTMENT-GAINS> 14,654
<OTHER-INCOME> 0
<BENEFITS> 248,710
<UNDERWRITING-AMORTIZATION> 145,931
<UNDERWRITING-OTHER> 16,896
<INCOME-PRETAX> 66,898
<INCOME-TAX> 13,674
<INCOME-CONTINUING> 53,224
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,224
<EPS-PRIMARY> 2.75
<EPS-DILUTED> 2.61
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
