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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 June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period to .
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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 18,753,981 shares outstanding of the Registrant's Common Stock,
$.10 par value, as of June 30, 1996.
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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 -
June 30, 1996 and December 31, 1995 4
Consolidated Statement of Income -
Three Months and Six Months Ended June 30, 1996 and 1995 5
Consolidated Statement of Stockholders' Equity -
Six Months Ended June 30, 1996 and 1995 6
Consolidated Statement of Cash Flows -
Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders 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 June 30, 1996, and the related consolidated
statement of income, for the three-month and six-month periods ended June 30,
1996 and 1995 and the consolidated statements of stockholders' equity and cash
flows for the six-month periods ended June 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
July 23, 1996
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<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
June 30, December 31,
1996 1995
----------- -----------
ASSETS
Investments:
Available for sale:
Fixed maturities (amortized cost:
1996, $1,606,137; 1995, $1,551,848 ) $ 1,605,320 $ 1,593,543
Equity securities (cost: 1996, $122,043:
1995, $114,818) 138,548 127,257
Short-term investments 113,547 132,406
----------- -----------
TOTAL INVESTMENTS 1,857,415 1,853,206
Cash 15,306 10,320
Accrued investment income 27,258 26,955
Premiums receivable 190,694 154,974
Reinsurance recoverable balances, net 286,968 257,136
Reinsurance recoverable on unearned premiums 23,620 28,111
Deferred policy acquisition costs 75,856 70,466
Excess of cost over net assets acquired 3,828 4,011
Deferred tax asset, net 44,992 27,688
Other assets 47,856 29,264
----------- -----------
TOTAL ASSETS $ 2,573,793 $ 2,462,131
=========== ===========
LIABILITIES
Claims and claims expenses $ 1,382,739 $ 1,292,415
Unearned premiums 242,978 230,738
8% Notes due 1999 100,000 100,000
7.15% Notes due 2005 99,930 99,927
5.25% Convertible Subordinated
Debentures due 2002 100,000 100,000
Investment accounts payable 37,261 50,580
Revolving credit agreement 25,924 17,762
Other liabilities 79,415 58,953
----------- -----------
TOTAL LIABILITIES 2,068,247 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 (shares issued:
1996, 21,423; 1995, 21,341) 2,142 2,134
Additional paid-in capital 248,181 246,356
Unrealized appreciation of investments,
net of tax 9,920 35,187
Currency translation adjustments, net of tax 321 1,017
Retained earnings 304,764 269,660
Treasury stock, at cost (1996, 2,669;
1995, 2,137 shares) (59,782) (42,598)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 505,546 511,756
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,573,793 $ 2,462,131
=========== ===========
See Notes to Consolidated Financial Statements
- 4 -
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PREMIUMS AND OTHER REVENUES
Net premiums written $ 140,852 $ 126,702 $ 263,991 $ 237,223
Increase in unearned premiums (10,506) (7,148) (16,824) (12,191)
--------- --------- --------- ---------
Premiums earned 130,346 119,554 247,167 225,032
Net investment income 25,616 22,427 51,359 44,637
Net investment gains 2,715 4,433 12,532 7,575
--------- --------- --------- ---------
Total revenues 158,677 146,414 311,058 277,244
OPERATING COSTS AND EXPENSES
Claims and claims expenses 84,525 79,167 158,214 152,770
Commissions and brokerage 34,990 34,584 68,509 64,161
Acquisition and operating expenses 13,541 10,613 26,191 20,906
Interest expense 5,620 3,937 11,191 7,488
--------- --------- --------- ---------
Total operating costs and expenses 138,676 128,301 264,105 245,325
INCOME
Operating income before income taxes 20,001 18,113 46,953 31,919
--------- --------- --------- ---------
Federal and foreign income taxes:
Current 4,794 6,276 13,514 10,867
Deferred (1,207) (2,757) (3,747) (4,917)
--------- --------- --------- ---------
Income tax expense (benefit) 3,587 3,519 9,767 5,950
--------- --------- --------- ---------
Operating income/net income $ 16,414 $ 14,594 $ 37,186 $ 25,969
========= ========= ========= =========
PER SHARE DATA
Primary:
Average shares outstanding 19,253 17,889 19,408 17,894
========= ========= ========= =========
Operating income/net income $ 0.85 $ 0.82 $ 1.92 $ 1.45
========= ========= ========= =========
Fully Diluted (assuming conversion of
dilutive convertible securities):
Average shares outstanding 21,287 19,910 21,437 19,914
========= ========= ========= =========
Operating income/net income $ 0.81 $ 0.78 $ 1.82 $ 1.39
========= ========= ========= =========
Cash dividends declared per share $ 0.06 $ 0.05 $ 0.11 $ 0.09
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
Six months ended June 30,
-------------------------
1996 1995
--------- ----------
COMMON STOCK
Balance at beginning of year $ 2,134 $ 1,964
Issuance of shares 8 6
--------- ---------
Balance at end of period $ 2,142 $ 1,970
========= =========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year $ 246,356 $ 194,231
Issuance of shares 1,825 1,597
--------- ---------
Balance at end of period $ 248,181 $ 195,828
========= =========
UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENTS, NET OF TAX
Balance at beginning of year $ 35,187 $ (46,030)
Unrealized (depreciation) appreciation (25,267) 59,628
--------- ---------
Balance at end of period $ 9,920 $ 13,598
========= =========
CURRENCY TRANSLATION ADJUSTMENTS, NET OF TAX
Balance at beginning of year $ 1,017 $ 1,059
Translation adjustments (696) 1,157
--------- ---------
Balance at end of period $ 321 $ 2,216
========= =========
RETAINED EARNINGS
Balance at beginning of year $ 269,660 $ 210,255
Net income 37,186 25,969
Dividends (2,082) (1,578)
--------- ---------
Balance at end of period $ 304,764 $ 234,646
========= =========
TREASURY STOCK
Balance at beginning of year $ (42,598) $ (42,394)
Purchase of treasury shares (17,184) (82)
--------- ---------
Balance at end of period $ (59,782) $ (42,476)
========= =========
TOTAL STOCKHOLDERS' EQUITY
Balance at beginning of year $ 511,756 $ 319,085
Issuance of shares 1,833 1,603
Unrealized (depreciation) appreciation (25,267) 59,628
Translation adjustments (696) 1,157
Net income 37,186 25,969
Dividends (2,082) (1,578)
Purchase of treasury shares (17,184) (82)
--------- ---------
Balance at end of period $ 505,546 $ 405,782
========= =========
See Notes to Consolidated Financial Statements
- 6 -
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended June 30,
-------------------------
1996 1995
---------- -----------
OPERATING ACTIVITIES
Net income $ 37,186 $ 25,969
Adjustments to reconcile net income to net cash
provided by operating activities:
Reserve for claims and claims expenses, net 71,772 59,159
Unearned premiums, net 16,824 12,033
Premiums receivable (35,784) (10,171)
Accrued investment income (329) (3,017)
Reinsurance balances, net (9,336) 4,411
Deferred policy acquisition costs (5,408) (3,345)
Net investment gains (12,532) (7,569)
Deferred tax asset, net (3,747) (4,929)
Other liabilities 13,821 (11,990)
Other items, net (5,019) (7,405)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 67,448 53,146
--------- ---------
INVESTING ACTIVITIES
Sales of fixed maturity investments 780,979 609,666
Maturities of fixed maturity investments 18,732 11,713
Purchases of fixed maturity investments (869,343) (658,378)
Net sales (purchases) of short-term investments 18,807 (29,996)
Sales of equity securities 52,170 55,879
Purchases of equity securities (51,997) (40,119)
Purchases of furniture and equipment (2,407) (1,011)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (53,059) (52,246)
--------- ---------
FINANCING ACTIVITIES
Issuance of shares 1,603 1,599
Purchase of treasury shares (17,184) (82)
Cash dividends paid to stockholders (1,916) (1,401)
Borrowings under revolving credit agreement 8,162 --
--------- ---------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (9,335) 116
--------- ---------
Effects of exchange rate changes on cash (68) --
--------- ---------
Increase in cash 4,986 1,016
Cash - beginning of year 10,320 9,624
--------- ---------
Cash - end of period $ 15,306 $ 10,640
========= =========
See Notes to Consolidated Financial Statements
- 7 -
<PAGE>
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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 June 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
------------------------------------------------
June 30, 1996 December 31, 1995
----------------- -------------------
Paid Claims $18,952 $19,051
Unpaid Claims and
Claims Expenses 357,520 338,746
Ceded Balances Payable (43,490) (56,792)
Funds Held Liability (46,014) (43,869)
----------------- -------------------
Net $286,968 $257,136
================= ===================
The effect of retrocessional activity on premiums written, premiums earned
and claims and claims expenses is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- -------------------------------
1996 1995 1996 1995
---------- --------- -------------- ------------
<S> <C> <C> <C> <C>
Ceded premiums written $31,866 $39,442 $69,073 $79,811
Ceded premiums earned $35,204 $37,379 $73,564 $75,079
Ceded claims and claims expenses $25,324 $15,904 $45,831 $41,298
</TABLE>
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<PAGE>
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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 25.4% to $14.7 million
or $.76 per share for the quarter ended June 30, 1996, compared with $11.7
million or $.65 per share for the 1995 second quarter. Operating income,
excluding investment gains, for the first six months of 1996 increased 38% to
$29 million or $1.50 per share, compared with $21 million or $1.18 per share for
the comparable prior year period.
Net income, including investment gains, for the 1996 second quarter totaled
$16.4 million or $.85 per share, an increase of 12.5% over the comparable prior
year period. Net income for the first six months of 1996 totaled $37.2 million
or $1.92 per share, an increase of 43.2% over the 1995 six month period.
Included in net income per share were investment gains, net of tax, of $.09 and
$.42 for the 1996 second quarter and six month period, respectively, compared
with $.17 and $.27 for the same prior year periods.
Net property catastrophe claim activity for the 1996 six month period was
minimal. It included $2.1 million for domestic claim activity from the January
1996 winter storms. The 1995 six month period included $5.2 million of net
property catastrophe claim activity, of which $3.2 million and $2.0 million were
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 second quarter and six month period were $140.9 million and $264
million, respectively, an increase of 11.2% and 11.3% over the 1995 comparable
periods.
<TABLE>
<CAPTION>
(In millions)
Three months ended June 30,
----------------------------------------------------------
Domestic International Total
---------------------- -------------- -----------------
1996 1995 1996 1995 1996 1995
---------- --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Premiums Written:
Casualty $ 83.3 $ 73.7 $ 6.1 $ 4.7 $ 89.4 $ 78.4
Property 32.4 28.8 8.0 6.5 40.4 35.3
Specialty/Other 11.1 13.0 - - 11.1 13.0
------ ------ ----- ----- ------ ------
Total $126.8 $115.5 $14.1 $11.2 $140.9 $126.7
====== ====== ===== ===== ====== ======
<CAPTION>
(In millions)
Six months ended June 30,
----------------------------------------------------------
Domestic International Total
---------------------- -------------- -----------------
1996 1995 1996 1995 1996 1995
---------- --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Premiums Written:
Casualty $152.4 $137.7 $11.3 $ 9.6 $163.7 $147.3
Property 61.5 52.7 16.4 13.1 77.9 65.8
Specialty/Other 22.4 24.1 - - 22.4 24.1
------ ------ ----- ----- ------ ------
Total $236.3 $214.5 $27.7 $22.7 $264.0 $237.2
====== ====== ===== ===== ====== ======
</TABLE>
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<PAGE>
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Domestic net premiums written for the 1996 second quarter and six month period
reflected an increase of 9.7% and 10.1%, respectively, over the comparable 1995
prior year periods. Reduced ceded premium charges continue to favorably impact
the net premium growth across all profit centers, due primarily to a more cost
effective retrocessional program and a moderate increase in the Company's
retention levels. Casualty net premiums increased 13.1% and 10.7% for the 1996
second quarter and six month period, respectively. Casualty growth for the
second quarter and six months is primarily attributed to new business and
increased participations with existing treaty client relationships. Property net
premiums written increased 12.2% and 16.7% for the 1996 second quarter and six
month period, respectively. Contributing to the property growth were business
opportunities from new clients coupled with new business and increased
opportunities from existing treaty and facultative client relationships. Net
premiums written for our specialty lines, which consist of fidelity/surety,
aviation and ocean marine business, declined 15% and 7.3% for the 1996 second
quarter and six month period, respectively, primarily due to reduced aviation
premiums.
NAC Reinsurance International Limited reported net premiums written of $14.1
million and $27.7 million for the 1996 second quarter and six month period,
respectively, increases of 26% and 22%, respectively over the comparable 1995
periods. Casualty premiums were $6.1 million and $11.3 million for the 1996
second quarter and six month period, respectively, an increase of 31.3% and
17.7% over the 1995 comparable prior year periods. Property premiums for the
1996 second quarter and six month period were $8 million and $16.4 million,
respectively, an increase of 22.2% and 25.2% over the 1995 prior year periods.
In July 1996, the Company announced the opening of its fully licensed branch
office in Sydney, Australia. The Company expects its international business to
increase as the London operation achieves greater market penetration.
Ceded premiums written recorded for retrocessional agreements for the 1996
second quarter and six month period were $31.9 million and $69.1 million,
respectively, compared to $39.4 million and $79.8 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.
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<PAGE>
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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:
<TABLE>
<CAPTION>
Three months ended Six months ended Year ended
June 30, June 30, December 31,
----------------- ----------------- ------------
1996 1995 1996 1995 1995
------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Claims and Claims Expenses 64.1 % 65.5 % 63.2 % 66.3 % 65.1 %
Commissions and Brokerage 28.2 29.7 28.9 29.4 29.7
Other Underwriting Expenses 8.9 7.8 9.2 8.2 8.3
------- ------- ------- ------- -------
Domestic Statutory Composite Ratio 101.2 % 103.0 % 101.3 % 103.9 % 103.1 %
------- ------- ------- ------- -------
Consolidated Statutory Composite Ratio 101.6 % 103.2 % 101.8 % 105.1 % 103.7 %
======= ======= ======= ======= =======
</TABLE>
The domestic statutory composite ratio for the 1996 second quarter and six month
period was 101.2% and 101.3%, respectively, compared to 103.0% and 103.9% for
the 1995 second quarter and six month period, respectively. The six month
domestic statutory composite ratio included minimal net property catastrophe
claim activity, increasing the six month ratio by .9 percentage points. The 1995
six month ratio and full year domestic composite ratios were increased by 1.5
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 six 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 second quarter and six months
reflects a slight decrease compared to the 1995 second quarter and six month
periods. 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 second quarter and six 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 June 30, 1996 and December 31, 1995 were
approximately $1.8 billion, excluding net investment payables of $37.3 million
and $50.5 million for 1996 and 1995, respectively.
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<PAGE>
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Net investment income for the 1996 second quarter and six months was $25.6
million and $51.4 million, respectively, increases of 14.2% and 15.1% over the
1995 comparable periods. The increase is 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 the 1996 second quarter and six month
period were 5.7% and 5.8%, respectively, compared to 6.2% for both comparable
periods last year. The after-tax investment yield for both the 1996 second
quarter and six month periods, was 4.5%, compared to 4.8% for the comparable
prior year periods.
Net investment gains, net of tax, for the 1996 second quarter and six month
period were $.09 per share and $.42 per share, respectively, compared to net
investment gains of $.17 per share and $.27 per share for the 1995 second
quarter and six 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
June 30, 1996, our fixed maturity investments amounted to $1.6 billion, which
approximates 86% of cash and invested assets; 97.4% of such investments are
rated investment grade by Moody's Investor Services, Inc. or Standard & Poor's.
While uncertainties exist regarding interest rate and inflation variability, the
Company attempts to minimize such risks and exposures by balancing the duration
of its assets with the expected duration of its liabilities. Consistent with the
payment profile of the Company's claim liabilities, as of June 30, 1996 the
Company's investment portfolio had an average duration of 4.7 years.
The balance of the Company's investment portfolio at June 30, 1996, consisting
of cash, short-term investments and equity securities, amounted to $267.4
million. As of June 30, 1996, the Company held $138.5 million in equity
securities which represented 21.5% of statutory surplus and 7.4% 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 the reinsurance subsidiary, NAC was $643.4 million at
June 30, 1996 which ranks among the largest domestic reinsurers measured on this
basis.
Consolidated stockholders' equity at June 30, 1996 totaled $505.5 million or
$26.96 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 $9.9 million at June 30, 1996
compared to an unrealized appreciation of investments of $35.2 million at
December 31, 1995, resulting in a decrease in stockholders' equity of $25.3
million or $1.32 per share.
Cash flow from operations was $67.4 million for the 1996 six month period,
compared to $53.1 million for the 1995 prior year period. This increase in cash
flow was principally due to increases in investment income and lower paid claims
as compared to the 1995 six month period.
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<PAGE>
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In April 1996, the Company modified its existing $35 million revolving credit
facility. The requirement for payment of outstanding balances beginning in June
1996 was replaced with a scheduled reduction of the credit facility beginning in
July 1998 and ending July 2001. Outstanding borrowings at June 30, 1996 were
$25.9 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.
On June 12, 1996, the Board of Directors of NAC Re Corp. approved a 20% increase
in the regular quarterly cash dividend to $.06 per share and an increase in the
Company's stock repurchase program by an additional 600,000 shares. During the
first six months of 1996, the Company has repurchased approximately 532,000
shares of common stock, bringing the total repurchases since January 1988 to
2,669,000 shares. Approximately 562,000 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 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 the corrective
action depends upon the extent of the calculated risk-based capital deficiency
and ranges from requiring the company to submit a comprehensive plan to placing
the insurer under regulatory control. While the model risk-based capital act has
not yet been adopted in New York, NAC's domicile or California, NAC's commercial
domicile, New York has issued a circular letter requiring the filing of
risk-based capital reports and a bill is pending in California to adopt a
risk-based capital act. In a related action, the NAIC adopted a proposal that
requires property and casualty insurers and reinsurers to report the results of
their risk-based capital calculations as part of the statutory annual statements
filed with state regulatory authorities. Surplus (as calculated for statutory
annual statement purposes) for each of the Company's domestic property and
casualty insurance and reinsurance subsidiaries is well above the risk-based
capital thresholds that would require either company or regulatory action.
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 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 10, 1996. At such
meeting Robert A. Belfer, Wendy J. Strothman and Herbert S. Winokur, Jr. were
each reelected as a director for a term expiring in 1999 by an affirmative vote
of 17,575,826 shares with 91,312 shares withheld.
An amendment to the NAC Re Corp. Partners' Restricted Stock Plan was adopted to
increase the number of shares available for grant under such plan from 162,500
to 262,500. The amendment was adopted by the following vote:
For Against Abstain
--- ------- -------
15,908,546 1,493,589 265,003
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 June
30, 1996.
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: August 13, 1996 /s/ JEROME T. FADDEN
-------------------------- -------------------------------------
Jerome T. Fadden
Vice President,
Chief Financial Officer and Treasurer
Date: August 13, 1996 /s/ 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 Six months ended
June 30, June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income applicable to Common Stock $ 16,414 $ 14,594 $ 37,186 $ 25,969
=========== =========== =========== ===========
Average number of common shares outstanding 18,913,257 17,547,507 19,061,882 17,536,242
Add:
Assumed exercise of dilutive stock options (1) 339,861 341,891 345,618 357,378
----------- ----------- ----------- -----------
Common stock and common stock equivalents outstanding 19,253,118 17,889,398 19,407,500 17,893,620
=========== =========== =========== ===========
Net income per share assuming dilution of common stock
equivalents $ .85 $ .82 $ 1.92 $ 1.45
=========== =========== =========== ===========
</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 -
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
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income applicable to Common Stock $ 16,414 $ 14,594 $ 37,186 $ 25,969
After-tax add back of convertible debenture interest
and amortization 876 876 1,752 1,752
----------- ----------- ----------- -----------
Adjusted net income $ 17,290 $ 15,470 $ 38,938 $ 27,721
=========== =========== =========== ===========
Average number of common shares outstanding 18,913,257 17,547,507 19,061,882 17,536,242
Add:
Assumed exercise of dilutive stock options (1) 353,314 341,891 354,976 357,378
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
21,286,773 19,909,600 21,437,060 19,913,822
=========== =========== =========== ===========
Fully diluted earnings per share $ 0.81 $ 0.78 $ 1.82 $ 1.39
=========== =========== =========== ===========
</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 -
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 July 23, 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 June 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
July 23, 1996
- 18 -
<TABLE> <S> <C>
<ARTICLE>7
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 1,605,320
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 138,548
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,857,415
<CASH> 15,306
<RECOVER-REINSURE> 18,952
<DEFERRED-ACQUISITION> 75,856
<TOTAL-ASSETS> 2,573,793
<POLICY-LOSSES> 1,382,739
<UNEARNED-PREMIUMS> 242,978
<POLICY-OTHER> 11,903
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 299,930
0
0
<COMMON> 2,142
<OTHER-SE> 503,404
<TOTAL-LIABILITY-AND-EQUITY> 2,573,793
247,167
<INVESTMENT-INCOME> 51,359
<INVESTMENT-GAINS> 12,532
<OTHER-INCOME> 0
<BENEFITS> 158,214
<UNDERWRITING-AMORTIZATION> 94,700
<UNDERWRITING-OTHER> 11,191
<INCOME-PRETAX> 46,953
<INCOME-TAX> 9,767
<INCOME-CONTINUING> 37,186
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,186
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 1.82
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
