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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ____________________ TO _____________________
COMMISSION FILE NUMBER 0-13891
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NAC RE CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE><CAPTION>
DELAWARE 13-3297840
<S> <C>
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
ONE GREENWICH PLAZA, GREENWICH, CT 06836-2568
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 622-5200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF CLASS
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Common Stock, $.10 par value
Indicate by 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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value on March 1, 1996 of the voting stock held by
non-affiliates of the registrant was approximately $607 million.
There were 19,203,552 shares outstanding of the Registrant's Common Stock,
$.10 par value as of December 31, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the 1995 Annual Report to Shareholders, as indicated herein
(Parts I and II).
(2) Proxy Statement involving the election of directors and other matters which
the registrant intends to file with the Commission within 120 days after
December 31, 1995 (Part III).
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<PAGE>
NAC RE CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE><CAPTION>
PAGE
ITEM NUMBER
- ----- ------
<S> <C> <C>
PART I
1. Business....................................................................... 1
2. Properties..................................................................... 13
3. Legal Proceedings.............................................................. 13
4. Submission of Matters to a Vote of Security Holders............................ 13
PART II
5. Market for the Registrant's Common Stock and Related Stockholder Matters....... 14
6. Selected Financial Data........................................................ 14
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 14
8. Financial Statements and Supplementary Data.................................... 15
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures.................................................................. 15
PART III
10. Directors and Executive Officers............................................... 15
11. Executive Compensation......................................................... 15
12. Security Ownership of Certain Beneficial Owners and Management................. 15
13. Certain Relationships and Related Transactions................................. 15
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............... 15
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
History
NAC Re Corp. ("NAC Re") is a Delaware corporation that was organized on June
27, 1985 for the purpose of holding all the outstanding shares of common stock
of NAC Reinsurance Corporation ("NAC"), a property and casualty reinsurance
operation. Based on industry data published by the Reinsurance Association of
America ("RAA") as of December 31, 1995, NAC is the 9th largest reinsurance
company in the United States, ranked by statutory surplus. NAC is the parent
company of three subsidiaries: Greenwich Insurance Company, Indian Harbor
Insurance Company and NAC Re International Holdings Limited. NAC Re and its
subsidiaries are collectively referred to as the Company.
NAC was incorporated in New York in 1929 and from 1939 until April 30, 1984,
NAC was a wholly- owned subsidiary of CIT Financial Corporation ("CIT"). On
April 30, 1984, CIT transferred ownership of NAC to RCA Corporation ("RCA"), the
then parent corporation of CIT. On May 24, 1984, Kramer Capital Corporation
("KCC"), through Grey Eagle Enterprises, Inc., a Delaware corporation owned 95%
by KCC and 5% by the former President and Chief Operating Officer of NAC,
acquired NAC from RCA. After completion of a public offering in October 1985,
KCC controlled approximately 51% of the Common Stock of NAC Re. On January 8,
1987, following the approval of their respective stockholders, KCC was merged
into NAC Re. As a result of the merger, NAC Re became 100% publicly owned.
NAC is licensed to write reinsurance in all 50 states, the District of
Columbia, Puerto Rico and all provinces of Canada. Prior to 1977, NAC wrote both
primary insurance and reinsurance business for a variety of risks. Because of
substantial losses incurred from such business, NAC discontinued writing any
significant new insurance or reinsurance and was operated as a run-off company
from 1977 to 1981. NAC's reserves, net of reinsurance recoverables, for business
written prior to 1977, which includes aircraft and marine risks, general
liability, medical, accountant's and attorney's malpractice, other professional
risks and foreign risks, are approximately $34.7 million or less than 4% of
total net claims and claims expense reserves as of December 31, 1995. Since
1982, NAC has been writing property and casualty reinsurance primarily on an
excess of loss treaty basis.
In 1990, NAC acquired Greenwich Insurance Company ("Greenwich"), formerly
Harbor Insurance Company, from The Continental Corporation. All liabilities
incurred before the acquisition date, including insurance obligations under
expired as well as in-force business, remained with the previous owner and its
affiliates. Greenwich is licensed in 50 states and is utilized to write primary
insurance.
In 1992, NAC formed and received regulatory authorization for a new
insurance subsidiary, Indian Harbor Insurance Company ("Indian Harbor"). As a
surplus lines carrier, Indian Harbor is licensed in only its state of domicile,
North Dakota, and expects to write a limited amount of primary business on a
nonadmitted basis in selected states.
In December 1993, NAC, through NAC Re International Holdings Limited, formed
and received U.S. and U.K. regulatory authorization for a new reinsurance
subsidiary, NAC Reinsurance International Limited ("NAC Re International"),
based in London, England. NAC Re International, capitalized as of December 31,
1995 with approximately $121 million, primarily writes non-U.S. international
property and casualty treaty and property facultative reinsurance business.
Ratings
NAC, Greenwich, Indian Harbor and NAC Re International have "A"
("Excellent") ratings as determined by A.M. Best Rating Service,
Property/Casualty 1995 Edition ("Best"), which is Best's
1
<PAGE>
third highest rating. An "A" is assigned to companies which have achieved
excellent overall performance when compared to established standards. Such
companies are considered by Best to have demonstrated a strong ability to meet
their obligations to policyholders over a long period of time.
NAC and its domestic subsidiaries, as well as NAC Re International, have a
"AA-" claims-paying rating from Standard & Poor's ("S&P"), which is S&P's fourth
highest rating. A "AA-" is assigned to insurers that offer excellent financial
security. The Company's capacity to meet policyholder obligations is considered
strong under a variety of economic and underwriting conditions. NAC Re
International is supported by a Net Worth Maintenance Agreement with NAC
pursuant to which NAC has agreed to provide certain specified financial support
to NAC Re International in meeting its regulatory standards and liquidity needs,
subject to regulatory requirements on NAC.
Both the Best rating and S&P claims-paying rating are based upon factors of
concern to policyholders and should not be considered an indication of the
degree or lack of risk involved in an equity investment in an insurance company.
NAC Re debt instruments have the following investment grade ratings from S&P
and Moody's Investor Services ("Moody's"):
<TABLE><CAPTION>
S&P MOODY'S
--- -------
<S> <C> <C>
$100 Million 8% Senior Notes due 1999....................................... A- Baa2
$100 Million 7.15% Senior Notes due 2005.................................... A- Baa2
$100 Million 5.25% Convertible Subordinated Debentures due 2002............. BBB+ Baa3
</TABLE>
Debt ratings are a current assessment of the credit-worthiness of an obligor
with respect to a specific obligation. A company with a debt rating of "A-" is
considered by S&P to have a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher rated
categories. A company with a debt rating of "BBB+" by S&P and "Baa2" and "Baa3"
by Moody's is considered to have adequate capacity to pay interest and repay
principal but capacity to meet long-term obligations is susceptible to adverse
economic conditions or changing circumstances.
All of the above-mentioned ratings are continually monitored and readjusted
by each of the rating agencies. While the Company believes that it should
maintain and could possibly improve its ratings over time, there is no assurance
that it will continue to receive these favorable ratings in the future.
General
The Company, through NAC and its subsidiaries, is principally engaged in
providing treaty and facultative reinsurance to primary insurers of casualty
risks (principally general liability, professional liability, automobile and
workers' compensation) and commercial and personal property risks (including
fidelity/surety and ocean marine). In consideration for reinsuring risks, the
Company receives a share of the premiums written by the primary insurer. In many
cases the Company reinsures part of its risk with other reinsurers and pays to
such reinsurers a portion of the premiums that it receives from the primary
insurer.
Reinsurance provides primary insurers with three principal benefits:
reducing net liability on individual risks, protecting against catastrophic
losses and maintaining acceptable surplus ratios. Retrocessions provide
reinsurers with similar benefits. Reinsurance, including retrocessions, does not
legally discharge the reinsured from its liability with respect to its
obligations.
The Company writes property and casualty treaty business through reinsurance
brokers, facultative business on a direct basis (directly with the primary
company), and fidelity/surety and ocean marine through reinsurance brokers and
on a direct basis.
2
<PAGE>
Treaty reinsurance is a contractual arrangement that provides for the
automatic reinsuring by the Company of a specified type or category of risks
underwritten by the primary insurer. Typically, the primary insurer is required
to offer the agreed type or category of risks to the Company and the Company is
obligated to accept a specified portion of such risks. The Company determines
whether to write particular treaties based on many factors, including the
reinsured's historical experience and total exposures. In treaty reinsurance,
the reinsurer need not separately evaluate each of the individual risks assumed
and, within prescribed parameters, is generally dependent on the underwriting
decisions made by the primary insurer. Such dependence subjects the reinsurer to
the risk that the primary insurer has not adequately determined the risk to be
reinsured and, accordingly, the premium ceded to the reinsurer in connection
therewith may not adequately compensate the reinsurer for the risk assumed.
Treaty reinsurance, including fidelity/surety business, constitutes
approximately 81% of the Company's business.
Facultative reinsurance is the reinsurance of individual risks; rather than
agreeing to reinsure all or a portion of a class of risks, the reinsurer
separately rates and underwrites each risk. A portion of the Company's
facultative business is written on an "automatic" basis. Automatic facultative
agreements provide coverage on a blanket basis for risks which would otherwise
be reinsured on an individual basis. Eligible risks must be underwritten by the
cedant in accordance with agreement guidelines, which are generally more
restrictive than typical treaty arrangements. Traditionally, risks covered by
facultative reinsurance are those excluded from coverage by treaty reinsurance.
Approximately 67% of the Company's business in 1995 was written on an excess
of loss basis, under which the Company indemnifies an insurer for a portion of
the losses on insurance policies in excess of a specified loss amount, generally
over $1 million, and up to an amount per loss specified in the contract. The
balance of the Company's business is written on either a pro rata basis under
which the Company assumes from the primary insurer a percentage specified in the
treaty of each risk in the reinsured class or on a primary insurance basis as
discussed below.
Premiums that the primary insurer pays to the reinsurer for excess of loss
coverage are not directly proportional to the premiums that the primary insurer
receives because the reinsurer does not assume a proportionate risk. In most
instances, the reinsurer does not pay commissions to the primary insurer in
connection with excess of loss reinsurance. In pro rata reinsurance, premiums
that the primary insurer pays to the reinsurer are proportional to the premiums
that the primary insurer receives and the reinsurer generally pays the primary
insurer a ceding commission. Generally, the ceding commission is based on the
primary insurer's cost of obtaining the business being reinsured, such as
commission, local taxes, settlement costs and miscellaneous administrative
expenses.
The amount of premium received by the reinsurer for reinsuring risks on a
pro rata basis is generally tied to the primary insurer's initial underwriting
assumptions. Thus, if the primary insurer does not accurately estimate the
ultimate losses to be incurred on the risks insured, the reinsurer may also
incur underwriting losses. Excess of loss reinsurance allows the flexibility to
negotiate a premium based on the reinsurer's own estimate of the actual amount
of losses to be incurred. However, as a practical matter, the amount of premium
that the primary insurer charges, which may be subject to state regulation, sets
a limit on the Company's ability to negotiate the reinsurance premium.
Generally, in the event the premium is considered inadequate, the Company will
decline to write the business.
The Company also writes a limited amount (approximately 6% of total net
premiums written) of primary insurance business, principally through Greenwich.
The principle lines of primary business written include aviation, inland marine,
ocean marine and automobile. The business is written principally through
participation in two underwriting pools, a managing general agency relationship,
and through a general agency relationship. The Company evaluates each business
relationship based upon the underwriting experience and operational expertise of
each distribution channel selected, and performs an analysis to evaluate
financial security. The Company periodically performs underwriting, claims and
operational audits of each pool and agency relationship.
3
<PAGE>
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for a discussion of the Company's premium revenues.
Competition
The reinsurance business has been highly competitive, and since mid-1987 the
level of reinsurance competition began to steadily increase, although not to the
highly competitive levels which existed in 1984 and prior. The Company competes
with numerous major international and domestic reinsurance companies. These
competitors, several of which have far greater financial and other resources,
include independent reinsurance companies and subsidiaries or affiliates of
established worldwide insurance companies. They also include the reinsurance
departments of some primary insurance companies and underwriting syndicates.
Competition in the types of reinsurance business in which the Company is
engaged is based on many factors. These factors include perceived overall
financial strength, absolute size, premiums charged, limits capacity, Best's
ratings, services offered, underwriting expertise and quality of claims
management. The number of jurisdictions in which a reinsurer is licensed to do
business is also a factor. The Company believes that Best's "A" rating of NAC
and its subsidiaries, S&P's "AA-" claims-paying rating of NAC and NAC Re
International, its nationwide licensing, its reputation for prompt claims
payment and a high level of client service, together with its limits capacity
and surplus size, put it in a favorable position to compete for new reinsurance
opportunities and retain its existing client base.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for a discussion of current market conditions.
Regulation
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 10 of the Notes to the Consolidated Financial Statements
of NAC Re for a discussion of the regulatory issues that impact the Company.
Marketing
The Company obtains substantially all of its treaty business through
reinsurance brokers approved by a Security Committee comprised of certain
officers of the Company. The Company generally pays brokers from 1% to 2.5% of
premiums ceded on pro rata business, 5% on "working layer" excess of loss
reinsurance (i.e., reinsurance attaching within the first $1 million of
coverage), and 10% on "non-working layer" excess of loss reinsurance (i.e.,
reinsurance attaching at or above the $1 million layer). The reinsurance broker
typically represents the primary insurer in negotiating and purchasing
reinsurance. The Company's facultative reinsurance is written on a direct basis.
During 1995, three reinsurance brokers, AON Reinsurance Agency, Guy
Carpenter and Company, Inc., and Bates Turner, Inc., generated 16%, 16% and 7%,
respectively, of premiums assumed from client companies. These same reinsurance
brokers generated 18%, 16%, and 9%, respectively, during 1994, and 19%, 16% and
13%, respectively, during 1993, of the Company's assumed premiums. One client
company, Chubb Group, generated approximately 9%, 10% and 10%, of the Company's
gross premiums written during 1995, 1994 and 1993, respectively. This business
is generated primarily from the Company's domestic reinsurance operations. Gross
premiums written from this client are expected to decline in 1996 as a result of
an increase in its retention levels. The Company does not believe that the
reduction of business assumed from any one client or broker will have a
materially adverse effect on its financial condition or results of operation due
to the Company's competitive position in the marketplace and the continuing
availability of other sources of business.
4
<PAGE>
Underwriting
Underwriting opportunities presented to the Company are evaluated based upon
a number of factors, including the type and layer of risk to be assumed,
actuarial judgment as to rate adequacy, the primary insurer's experience, the
primary insurer's financial status and Best's rating, the Company's exposure and
experience with the primary insurer and the line of business to be underwritten.
The Company will also perform on-site underwriting reviews of the primary
insurers where deemed necessary to determine the quality of a current or
prospective client's underwriting operation.
Claims
The Claims Management Department activities include evaluating claims which
may have potential exposure to the Company. This is accomplished through the
application of claim evaluation standards designed to estimate the ultimate
expected cost of the claim. Client and intermediary claim files are evaluated
and relevant claim data is collected and periodically evaluated to confirm that
adequate reserves are held for the ultimate exposure.
Reinsurance coverage for claims with potential exposure to the Company is
also identified and verified through the use of a uniform set of client claim
reporting criteria. This includes conducting on-site claim reviews of ceding
companies, and developing reports which analyze claim activity and the claims
management procedures of client companies and intermediaries.
Reserves
The Company establishes reserves to provide for the ultimate settlement and
administration of claims for losses, including both claims that have been
reported to the Company and claims for losses that have occurred but have not
been reported to the Company.
The Company establishes reserves for reported claims when it first receives
notice of the claim and changes the reserve as developments warrant a change. It
is the Company's policy not to establish a reserve less than the reserve
established by the primary insurer; in many cases, the Company sets up a higher
reserve based on its evaluation of the claim. In the case of excess of loss
reinsurance, reserves are established on a case by case basis by evaluating
several factors. These factors include the type of risk involved, knowledge of
the circumstances surrounding such claims, the severity of injury or damage, the
potential for ultimate exposure, the Company's experience with the primary
insurer on the line of business and the policy provisions relating to the type
of claim. The Company periodically conducts audits to determine if the amount
recommended by the primary insurer is insufficient and should be increased.
Reserves for incurred but not reported (IBNR) claims are established on the
basis of actuarial analysis of statistical loss information, which is utilized
to project ultimate claims. Actuarial review of the Company's reserves is
conducted quarterly by actuaries employed by the Company.
Claims reserves are only estimates at a given point in time of what the
insurer or reinsurer expects to pay on claims, based on facts and circumstances
then known, and it is possible that the ultimate liability may exceed or be less
than such estimates. The estimates are not precise inasmuch as, among other
things, they are based on predictions of future events and estimates of future
trends in claim severity and frequency and other variable factors. As additional
facts become known during the loss settlement period, it often becomes necessary
to refine and adjust the estimates of liability on a claim and even then the
ultimate liability may exceed or be less than the revised estimates. The
estimation of reserves for reinsurers, particularly those that have experienced
recent substantial growth in premium revenues, such as the Company, is
inherently more difficult than the reserve estimations of primary companies or
reinsurers with a fairly stable volume of business and loss history.
The reserving process is intended to provide implicit recognition of the
impact of inflation and other factors affecting claim payments by taking into
account changes in historical payment patterns and perceived probable trends
(note additional consideration for workers' compensation case reserves as
5
<PAGE>
described below). There is generally no precise method, however, for
subsequently evaluating the adequacy of the consideration given to inflation or
to any other specific factor, because the eventual deficiency or redundancy of
reserves is affected by many factors, some of which are interdependent. The
Company regularly adjusts its reserves to reflect newly reported claims,
inflation and other developments.
The Company's reserving process includes a continuing evaluation of the
potential impact on claim liabilities from exposure to asbestos and
environmental claims, including related loss adjustment expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 3 of the Notes to the Consolidated Financial Statements of
NAC Re for a discussion of asbestos and environmental claims.
The Company establishes claims expense reserves to cover the ultimate cost
of investigating all claims, administering the claims payment process and
defending lawsuits arising from claims based on actual experience and historical
data such as the ratio of claims expenses to claims paid and on the basis of
other currently available information. Claims expense reserves comprise
"allocated expenses" (those directly attributable to the specific risk being
covered) and "unallocated expenses" (those expenses not directly attributable to
a given risk, such as overhead, administrative expenses and salary).
Except for certain workers' compensation case reserves, the Company does not
discount its reserves in an attempt to present-value the claims or claims
expenses.
The Company utilizes tabular reserving for certain workers' compensation
case reserves that are considered fixed and determinable, and discounts such
reserves using a 7% interest rate for financial statements prepared in
accordance with generally accepted accounting principles (GAAP) and a 5%
interest rate for statutory accounting purposes. Tabular reserving methodology
results in applying uniform and consistent criteria for establishing expected
future indemnity and medical payments (including an explicit factor for
inflation) and the use of mortality tables to determine expected payment
periods.
A reconciliation of the difference between the reserves for claims and
claims expenses determined in accordance with GAAP and those recorded for
statutory reporting purposes is as follows:
<TABLE><CAPTION>
(IN THOUSANDS)
1995 1994 1993
---------- ---------- --------
<S> <C> <C> <C>
Domestic liability reported on a statutory basis, net of
reinsurance............................................ $914,045 $795,569 $699,574
International liability, net of reinsurance.............. 42,414 15,587 --
Difference in discount rate applied to workers'
compensation case reserves, net........................ (2,790) (2,723) (2,353)
Reinsurance recoverable gross up......................... 338,746 277,737 211,840
---------- ---------- --------
Consolidated liability reported on a GAAP basis, gross of
reinsurance............................................ $1,292,415 $1,086,170 $909,061
---------- ---------- --------
---------- ---------- --------
</TABLE>
Note 3 of the Notes to the Consolidated Financial Statements of NAC Re
provides a table which analyzes paid and unpaid claims and claims expenses and a
reconciliation of beginning and ending reserve balances for the years ended
December 31, 1995, 1994 and 1993. Included in such analysis is a discussion of
certain factors which impact both current and prior year claims activity.
The following table on page 7 represents the development of GAAP balance
sheet reserves for 1985 through 1995. The top line of the table shows the
reserves, net of reinsurance recoverables, at the balance sheet date for each of
the indicated years. This represents the estimated amounts of net claims and
claims expenses arising in all prior years that are unpaid at the balance sheet
date, including claims that had been incurred but not yet reported. The reserve
for claims and claims expenses for 1988 and subsequent years is net of the 7%
discount related to workers' compensation tabular reserves. The upper
6
<PAGE>
portion of the table shows the re-estimated amount of the previously recorded
reserve based on experience as of the end of each succeeding year. The estimate
changes as more information becomes known about the frequency and severity of
claims for individual years. The re-estimated reserve for each year reflects the
7% discount related to workers' compensation tabular reserves. The "Cumulative
Redundancy (Deficiency)" represents the aggregate change in the estimates over
all prior years. The lower portion of the table shows the cumulative amounts
paid as of successive years with respect to that reserve liability. The table on
page 8 represents the claim development of the gross balance sheet reserves for
years 1992 through 1995.
In evaluating the information in the table below, it should be noted that
each amount includes the effects of all changes in amounts for prior periods.
For example, the amount of the deficiency related to claims settled in 1988, but
incurred in 1985, will be included in the cumulative deficiency amount for years
1985, 1986 and 1987. This table does not present accident or policy year
development data. Conditions and trends that have affected development of the
liability in the past may not necessarily occur in the future. Accordingly, it
may not be appropriate to extrapolate future redundancies or deficiencies based
on these tables. For further discussion of reserve and retrocessional activity
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 3 and 5 of the Notes to the Consolidated Financial
Statements of NAC Re.
DEVELOPMENT OF CLAIMS AND CLAIM EXPENSE RESERVES
NET OF REINSURANCE RECOVERABLES
(IN MILLIONS)
<TABLE><CAPTION>
YEAR ENDED DECEMBER 31,
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1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RESERVE FOR CLAIMS AND CLAIMS EXPENSES,
NET OF REINSURANCE RECOVERABLES...... $54 $118 $201 $292* $388 $469 $529 $626 $697 $808 $954
RESERVE RE-ESTIMATED AS OF:
One year later........................ 62 124 209* 293 384 460 494 602 653 788
Two years later....................... 72 138* 214 289 376 427 464 548 648
Three years later..................... 89* 150 214 281 350 407 423 549
Four years later...................... 101 155 213 258 336 379 424
Five years later...................... 110 160 199 253 321 392
Six years later....................... 117 159 203 245 331
Seven years later..................... 119 169 199 265
Eight years later..................... 129 171 226
Nine years later...................... 131 200
Ten years later....................... 160
CUMULATIVE REDUNDANCY (DEFICIENCY)..... (106) (82) (25) 27 57 77 105 77 49 20
PERCENTAGE........................... (196%) (69%) (12%) 19% 15% 16% 20% 12% 7% 2%
CUMULATIVE AMOUNT OF LIABILITY PAID,
NET OF REINSURANCE RECOVERABLES, PAID
THROUGH:
One year later........................ $11 $ 19 $ 23 $ 34 $ 60 $ 81 $ 65 $104 $119 $140
Two years later....................... 25 35 48 73 109 126 116 173 207
Three years later..................... 36 50 72 102 134 166 158 229
Four years later...................... 45 68 91 117 161 197 199
Five years later...................... 57 83 101 133 179 226
Six years later....................... 65 89 112 148 200
Seven years later..................... 68 96 125 163
Eight years later..................... 72 108 137
Nine years later...................... 81 119
Ten years later....................... 89
</TABLE>
* The reserve for claims and claims expense, net of reinsurance recoverables
for 1988 and subsequent years, is net of the 7% discount related to
certain workers' compensation case reserves. The re-estimated reserve
for each year includes the discount effect.
7
<PAGE>
DEVELOPMENT OF CLAIMS AND CLAIMS EXPENSE RESERVES
GROSS OF REINSURANCE RECOVERABLES
(IN MILLIONS)
<TABLE><CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1992 1993 1994 1995
---- ---- ------ ------
<S> <C> <C> <C> <C>
GROSS RESERVE FOR CLAIMS AND CLAIMS EXPENSES:................ $808 $909 $1,086 $1,292
Reserve re-estimated as of:
One year later............................................. 798 873 1,097
Two years later............................................ 755 882
Three years later.......................................... 773
CUMULATIVE REDUNDANCY (DEFICIENCY)........................... 35 27 (11)
PERCENTAGE................................................... 4% 3% (1%)
</TABLE>
Retrocession Agreements
Reinsurance companies enter into retrocession arrangements for the same
reasons primary insurers seek reinsurance, namely, to increase aggregate premium
capacity and to reduce and spread the risk of loss on reinsurance underwritten.
Historically, the Company has obtained reinsurance for itself primarily through
excess of loss reinsurance agreements. The Company has also obtained reinsurance
protection against liability on a single event arising from several different
treaty obligations, and reinsurance protection against liability arising from
similar losses involving more than one reinsured. The Company's retrocession
agreements are all written on a treaty basis, but cover both its treaty and
facultative business. The Company may occasionally purchase specific
retrocessional protections on a limited basis for certain business that may be
specifically excluded from its treaty retrocessional agreements.
The Company retrocedes its risks to other reinsurers both through
reinsurance brokers and on a direct basis. The retrocession of risks
underwritten by the Company does not legally discharge the Company from
liability for any part of the risk reinsured. The Company will be required to
absorb the full amount of the loss associated with the reinsured risk if the
retrocessionnaire is unable to or fails to meet its reinsurance obligations for
any reason. A Security Committee comprised of certain officers of the Company is
responsible for evaluating the financial condition of retrocessionnaires prior
to the commencement of underwriting activities and at least annually thereafter.
The security review process is administered in part by adhering to financial
guidelines formulated to assess the retrocessionnaires' ability to satisfy
future claim obligations. All retrocessionnaires are subject to ongoing
evaluation to ensure that there have been no significant adverse changes in
their financial condition.
In the case of retrocessionnaires that either do not satisfy the Company's
financial guidelines or are in liquidation or rehabilitation proceedings, a
reserve for actual and potential non-recovery is established, which includes a
provision for paid and unpaid claims and claims expenses, inclusive of IBNR
claims. The reserve for non-recoveries is continually reviewed and updated to
reflect current activity and developments. The Company evaluates its exposure to
reinsurance recoveries after considering the extent to which it has
collateralized the retrocessionnaires' balances by letters of credit, trust
accounts or funds withheld.
At December 31, 1995, the Company had total reinsurance recoverables,
exclusive of available offsets in the form of letters of credit, trust accounts
and funds withheld, totaling $385.9 million, with 153 domestic and 86 foreign
retrocessionnaires. Of that amount, approximately 37% or $142.9 million was due
from a foreign retrocessionnaire, Hannover Ruckversicherungs AG (80%), and its
affiliate,
8
<PAGE>
Eisen Und Stahl Ruckversicherungs AG (20%) which are rated AA+ and AA-,
respectively, by Standard & Poor's. Such amounts are fully collateralized by
either funds withheld or letters of credit. No other amounts recoverable from a
single entity or group of entities exceeded 10% of stockholders' equity as of
December 31, 1995.
The Company re-evaluates its retrocessional requirements each year in
relation to many factors, including its surplus capacity, gross line capacity
(amount of risk of loss assumed on any one contract) and changing market
conditions. The Company's retrocessional contracts generally apply only to
traditional business.
While gross lines and net retentions may vary by contract and by line of
business, the following table summarizes the Company's maximum gross lines and
net retentions on any one claim for the years indicated:
<TABLE><CAPTION>
(IN THOUSANDS)
INITIAL MAXIMUM
CALENDAR YEAR GROSS LINE RETENTION RETENTION
------------- ---------- --------- ---------
<S> <C> <C> <C>
1996
Casualty Treaty and Casualty Facultative................. $7,500(1) $ 2,000 $ 5,025
Property Treaty.......................................... $7,500 $ 2,000 $ 4,025
Property Facultative..................................... $ 75,000 $ 2,000 $ 3,650
1995
Property and Casualty Treaty and Casualty Facultative.... $7,500(1) $ 1,000 $ 3,925(2)
Property Facultative..................................... $ 50,000 $ 1,000 $ 3,300
1994
Property and Casualty Treaty and Casualty Facultative.... $7,500 $ 1,000 $ 3,925
Property Facultative..................................... $ 50,000 $ 1,000 $ 3,925
</TABLE>
- ------------
(1) The Company has additional reinsurance protection which provides $5.0
million of coverage per occurrence in excess of $7.5 million. This coverage,
however, is limited to only two occurrences, and therefore the Company's
maximum gross line is generally limited to $7.5 million.
(2) In one client relationship for 1995, the Company has a maximum retention of
$4.7 million.
The Company increased its maximum retention on any one claim for
non-catastrophe losses in 1996 in consideration of the Company's increased size
and financial capacity, as well as the continued positive contribution of
business written since 1986.
In addition, the Company maintains catastrophe reinsurance programs for the
purpose of limiting its exposure with respect to multiple claims arising from
two or more risks in a single occurrence or event. In general, the coverage for
the years indicated are as follows:
1996
Property--Property business is protected by a series of covers which provide
protection for 100% of $120 million in excess of $5 million on a first and
second event.
Certain of the Company's retrocessional protection is available only if
industry-wide claims exceed certain minimum levels. For 1996, the Company
expects to maintain $120 million of catastrophe protection, of which $30 million
of coverage in excess of the first $60 million of coverage, is available only if
industry-wide claims exceed certain minimum levels. The schedule displayed below
identifies the
9
<PAGE>
Company's net retention assuming gross claim activity subject to property
catastrophe protection of $125 million (gross claims in excess of $125 million
would not be subject to retrocessional recoveries):
<TABLE><CAPTION>
(IN MILLIONS)
COMPANY INITIAL COMPANY
GROSS COMPANY CATASTROPHE NET
INDUSTRY-WIDE CLAIMS CLAIMS RETENTION PROTECTION RETENTION
-------------------- ------- --------- ----------- ---------
<S> <C> <C> <C> <C>
(1) Less than $7.5 billion........................... $ 125 $ 5 $ 90 $35
(2) $7.5 billion to $9 billion....................... $ 125 $ 5 $ 100 $25
(3) $9 billion to $15 billion........................ $ 125 $ 5 $ 110 $15
(4) Greater than $15 billion......................... $ 125 $ 5 $ 120 $ 5
</TABLE>
Should the Company's gross claims reach the levels outlined in the table and
industry-wide claims not reach the thresholds identified in scenarios (2)
through (4) above, the Company would not receive applicable claim payments from
such catastrophe programs, as displayed in scenario (1) above. The Company
believes that industry-wide claims of the magnitude identified in the above
table would be necessary in order for the Company's gross claims to reach the
levels for claims to be recoverable from such contracts. Therefore, the Company
believes that industry-wide claims would impact its clients in a manner that
generally conforms to the retrocessional coverages in place.
Workers' Compensation--100% of $195 million in excess of a $5 million
retention for any one occurrence.
Casualty Contingency Cover--100% of $25 million in excess of $5 million for
any one occurrence.
The 1996 retrocessional protection is subject to further negotiations. The
Company believes that any changes that may be made will not materially alter the
amount or nature of the retrocessional coverages.
1995
Property--Property business is protected by a series of covers which provide
protection for 100% of $85 million in excess of $5 million on a first and second
event. Certain of the Company's retrocessional protection is available only if
industry-wide claims exceed certain minimum levels. Within the Company's $85
million of catastrophe protection, $20 million of coverage, in excess of the
first $45 million of coverage, is available only if industry-wide claims exceed
certain minimum levels.
Workers' Compensation--100% of $145 million in excess of a $5 million
retention for any one occurrence.
Casualty Contingency Cover--100% of $15 million in excess of $5 million for
any one occurrence. All layers were placed 100%, except for the second layer of
protection, $5 million in excess of $7.5 million, which was placed 75% with the
Company retaining the remaining 25% of the layer.
1994
Property--Property business is protected by a series of covers which provide
protection for 100% of $60 million in excess of $5 million on a first and second
event. Certain of the Company's retrocessional protection is available only if
industry-wide claims exceed certain minimum levels. Within the Company's $60
million of catastrophe protection, $24 million of coverage, in excess of the
first $21 million of coverage, is available only if industry-wide claims exceed
certain minimum levels.
Workers' Compensation--100% of $120 million in excess of a $5 million
retention for any one occurrence.
10
<PAGE>
Casualty Contingency Cover--100% of $15 million in excess of $5 million for
any one occurrence. All layers were placed 100%, except for the second layer of
protection, $5 million in excess of $7.5 million, which was placed 75% with the
Company retaining the remaining 25% of the layer.
To the extent that the Company is reimbursed for claims under its
catastrophe program, the contracts generally provide for the reinstatement of
coverage for an additional premium in order to provide protection against a
second, and in some lines of business, a third catastrophic event.
Certain of the Company's retrocessional agreements also include provisions
that adjust premium or commission payments based on the experience under the
agreement. Premiums and commissions are recorded based on the expected ultimate
experience of the agreements. Accordingly, contractual obligations for future
payments or refunds of premiums or commissions based on claims experience have
been recognized in the financial statements.
Investments
The Finance and Investment Committee (the "Committee") of NAC Re's Board of
Directors is responsible for establishing investment policy and guidelines and
for overseeing their execution. Independent investment advisors are utilized to
manage the Company's investment portfolio within the guidelines established, and
are required to report activities on a current basis and to meet periodically to
review and discuss portfolio structure, security selection and performance
results with the Committee.
The investment strategy, established by the Committee and management,
focuses on capital preservation and income predictability. Accordingly, the
Company emphasizes investment grade fixed maturity securities. For statutory
accounting purposes, investment grade securities are recorded at amortized cost
and; therefore, statutory surplus is not impacted by fluctuations in their
market value. For GAAP reporting purposes, all of the Company's fixed maturities
and equity securities are categorized as available for sale and are recorded at
their fair value. Periodic changes in fair value are recorded directly in the
Company's stockholders' equity, net of applicable deferred taxes.
A summary of the Company's investment portfolio as of December 31, 1995 and
1994 is set forth below:
<TABLE><CAPTION>
(IN THOUSANDS)
DECEMBER 31,
--------------------------------------------------
1995 1994
----------------------- -----------------------
CARRYING % OF CARRYING % OF
VALUE PORTFOLIO VALUE PORTFOLIO
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Cash and short-term............................... $142,726 7.7% $145,200 10.3%
---------- --------- ---------- ---------
Fixed maturities:
U.S. Treasury................................... 119,430 6.4 54,693 3.9
Tax-exempt...................................... 742,807 39.9 403,077 28.5
Foreign Government.............................. 146,217 7.8 81,364 5.8
Corporate....................................... 348,341 18.7 328,804 23.2
Mortgage-backed................................. 174,812 9.4 219,087 15.4
Subordinated convertibles....................... 61,936 3.3 58,316 4.1
---------- --------- ---------- ---------
Subtotal........................................ 1,593,543 85.5 1,145,341 80.9
---------- --------- ---------- ---------
Equity securities................................. 127,257 6.8 123,986 8.8
---------- --------- ---------- ---------
Total....................................... $1,863,526 100.0% $1,414,527 100.0%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
Guidelines established by the Committee restrict the portion of the
portfolio that can be held in lower quality securities. Consistent with the
Company's focus on asset quality, at December 31, 1995,
11
<PAGE>
approximately 97% of the Company's fixed maturity investments were rated
"investment grade" by Moody's or S&P. All of the Company's fixed maturity
investments were paying interest as scheduled.
The guidelines also address portfolio diversification by establishing
certain restrictions regarding the portion of the investment portfolio that can
be invested in a particular security, an industry sector or in a state. Such
restrictions are addressed as a percentage of each portfolio segment (i.e.,
taxable securities, tax-exempt securities, or equity securities) and, with
respect to NAC, as a percentage of consolidated statutory surplus. Such
restrictions do not apply to investments in direct or indirect obligations of
the U.S. Government (i.e., US Treasury and GNMA Securities), which comprised
6.6% of the Company's cash and invested assets at December 31, 1995.
The portfolio guidelines generally prohibit investment in derivative
products (i.e., products which include features such as futures, forwards,
swaps, options and other investments with similar characteristics), without
prior approval and written authorization by the Committee. Such authorization
would be provided only after evaluating a written plan submitted by the advisor
which documents the strategy, the objective, a description of the size and
nature of each transaction, the expected return, the costs/benefits, and the
possible risk factors. Except as discussed below, the Company does not purchase,
own or employ the use of derivative investment products.
The portfolio guidelines permit the purchase of certain securities which
derive their values or their contractually required cash flows from other
securities, such as mortgage-backed securities, where the underlying collateral
is a pool of residential or commercial real estate mortgages. These securities
are generally considered to have little credit risk since they are either
government or quasi-government agency-backed or "AAA" rated. The risks
associated with mortgage-backed securities are interest rate risk (as with all
fixed-rate securities) and prepayment risk or extension risk which may result in
a decline in the expected return and/or value of the security. Prepayment or
extension of principal payments occur and can be exacerbated depending upon the
volatility of interest rates in the marketplace. Mortgage-backed securities in
the Company's investment portfolio total $174.8 million at December 31, 1995, of
which 46% are collateralized mortgage obligations (CMO's) which generally reduce
the uncertainty concerning the maturity of a mortgage-backed security.
The guidelines also permit NAC Re International to purchase foreign exchange
contracts for the sole purpose of hedging the subsidiary's exposure to a
particular currency. There were no outstanding foreign exchange contracts as of
December 31, 1995 and 1994.
While uncertainties exist regarding interest rates and inflation, the
Company attempts to minimize such risks and exposure by balancing the duration
of reinsurance liabilities with the duration of the assets in the investment
portfolio. Consistent with the payment profile of the Company's claim reserve
liabilities, and based upon the expected maturity of fixed maturity investments
as of December 31, 1995, the Company's fixed maturity investments which include
mortgage-backed securities but
12
<PAGE>
excludes convertible securities, had an expected average maturity of 7.1 years,
as displayed in the table below:
<TABLE><CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1995
-----------------------
EXPECTED MATURITY OF CARRYING % OF
FIXED MATURITY INVESTMENTS VALUE PORTFOLIO
-------------------------- ---------- ---------
<S> <C> <C>
Less than 1 year....................................................... $32,224 2.0%
1-5 years.............................................................. 640,551 40.2
6-10 years............................................................. 717,150 45.0
11-15 years............................................................ 84,109 5.3
16-20 years............................................................ 17,185 1.1
More than 20 years..................................................... 40,388 2.5
---------- ---------
Subtotal............................................................... 1,531,607 96.1
Convertibles........................................................... 61,936 3.9
---------- ---------
Total............................................................ $1,593,543 100.0%
---------- ---------
---------- ---------
</TABLE>
The balance of the Company's investment portfolio at December 31, 1995,
consisting of cash, short-term investments and equity securities, amounted to
$270 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 December 31, 1995, the Company held
$127.3 million or 6.8% of cash and invested assets in equity securities,
representing approximately 21% of statutory surplus. The Company does not hold
any investments in real estate.
Employees
At December 31, 1995, the Company employed a total of 255 full-time
employees, including 24 employees in the Company's U.K. operation. The Company's
employees are not represented by a labor union and the Company believes that its
employee relations are good.
ITEM 2. PROPERTIES
The Company leases its present corporate and administrative offices in a
building located in Greenwich, Connecticut (the "Greenwich Lease"). The Company
also has operating leases for office space at regional branch locations and its
international subsidiary. See Note 6 of Notes to the Consolidated Financial
Statements of NAC Re for a schedule on future minimum rentals related to the
Company's operating leases.
ITEM 3. LEGAL PROCEEDINGS
NAC and Greenwich are parties to various lawsuits generally arising in the
normal course of their business. The Company does not believe that the eventual
outcome of any of the litigations to which NAC or Greenwich is a party will have
a material effect on the Company's financial condition. NAC has been fully
indemnified by The Continental Corporation for any losses incurred by Greenwich
from events predating NAC's acquisition of Greenwich.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1995.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
The Common Stock ($.10 par value) of NAC Re is traded on the New York Stock
Exchange (NYSE) under the symbol NRC. Prior to May 1, 1995, it was traded on the
NASDAQ Stock Market (NASDAQ) under the symbol NREC. For the periods presented
below, the high and low sales price and close prices of the Common Stock as
reported by the NYSE or, as appropriate, NASDAQ on its national market reporting
system, were as follows:
<TABLE><CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
High........................... $ 34.00 $35.25 $ 39.00 $38.38
Low............................ $ 28.25 $28.50 $ 30.63 $31.63
Close.......................... $ 30.25 $31.13 $ 36.25 $36.00
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
High........................... $ 32.00 $31.75 $ 29.75 $34.00
Low............................ $ 26.00 $24.00 $ 24.38 $24.25
Close.......................... $ 26.00 $29.50 $ 25.50 $33.50
</TABLE>
Stockholders
There were 313 holders of record of shares of Common Stock as of March 1,
1996, of which over 97% were held by Cede & Company as nominee for an unknown
number of beneficial stockholders.
Dividends
The Company has declared its regular quarterly cash dividend of $.04 per
share for March 1995 and each quarter of 1994. In June 1995, the Company
increased its quarterly dividend to $.05 per share. The Company considers
increasing the dividend on its Common Stock from time to time. There is
presently no intention to decrease the cash dividend in the foreseeable future.
Future dividends will be dependent upon, among other factors, the earnings of
the Company, its financial condition, its capital requirements, general business
conditions and the ability of NAC to pay dividends to NAC Re.
For a description of restrictions on NAC's ability to pay dividends,
reference is made to Note 10 of Notes to the Consolidated Financial Statements
of NAC Re.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data included in the "Ten Year Financial Summary" on
pages 36 through 37 of NAC Re's 1995 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 24 through 35 of NAC Re's 1995 Annual Report to Shareholders
is incorporated herein by reference.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of NAC Re and its subsidiary
companies, included on pages 38 through 64 of NAC Re's 1995 Annual Report to
Shareholders, are incorporated herein by reference:
- --Consolidated Balance Sheet at December 31, 1995 and 1994.
- --Consolidated Statement of Income for the years ended December 31, 1995, 1994
and 1993.
- --Consolidated Statement of Stockholders' Equity for the years ended December
31, 1995, 1994 and 1993.
- --Consolidated Statement of Cash Flows for the years ended December 31, 1995,
1994 and 1993.
- --Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Incorporated by reference to the caption "Directors and Executive Officers"
in the definitive proxy statement involving the election of directors and other
matters (the "Proxy Statement") which NAC Re intends to file with the Commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later
than 120 days after December 31, 1995.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the caption "Compensation of Directors and
Executive Officers" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the captions "Certain Relationships and Related
Transactions" and "Compensation Committee Interlocks and Insider Participation"
in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements and Schedules
The Financial Statements and schedules listed in the accompanying Index to
Financial Statements and Schedules on page F-1 are filed as part of this report.
15
<PAGE>
Exhibits
The exhibits listed on the Index to Exhibits set forth below are filed as
part of this report.
INDEX TO EXHIBITS
<TABLE>
EXHIBIT NO.
- ------------
<S> <C> <C>
(3) --Articles of incorporation and bylaws:
3.1 --Restated Certificate of Incorporation of NAC Re incorporated herein by reference
to Exhibit 3.1 to the Annual Report on Form 10-K of NAC Re for the year ended
December 31, 1990...............................................................
3.2 --Bylaws of NAC Re as amended through June 9, 1988 incorporated herein by
reference to Exhibit 3.2 to the Annual Report on Form 10-K of NAC Re for the
year ended December 31, 1988 (the "1988 10-K")..................................
(4) --Instruments defining rights of security holders, including indentures:
4.1 --Rights Agreement dated as of June 9, 1988 by and between NAC Re Corporation and
American Stock Transfer and Trust Company (the "Rights Agreement") incorporated
herein by reference to Exhibit A to the Current Report on Form 8-K filed June 24,
1988............................................................................
4.2 --First Amendment to the Rights Agreement dated as of March 28, 1990 incorporated
herein by reference to Exhibit A to the Current Report on Form 8-K filed April 2,
1990............................................................................
4.3 --Second Amendment to the Rights Agreement dated as of September 13, 1990
incorporated herein by reference to Exhibit 4.3 to the Current Report on Form
8-K filed September 21, 1990....................................................
(10) --Material contracts:
10.1 --Lease of NAC Re's corporate and administrative offices in Greenwich, CT
incorporated herein by reference to Exhibit 10.11 to the Annual Report on Form
10-K for the year ended December 31, 1985.......................................
10.2 --Form of Sublease between NAC Re and NAC incorporated herein by reference to
Exhibit 10.16 to the Joint Proxy Statement/Prospectus on Form S-4 (No. 33-8836)
of NAC Re and KCC...............................................................
*10.3 --Amended 1985 Stock Option Plan of NAC Re incorporated herein by reference to
Exhibit 10.6 to the Registration Statement on Form S-1 (No. 2-99952)............
*10.4 --1986 Incentive and Non-qualified Stock Option Plan of NAC Re incorporated herein
by reference to Exhibit 10.12 to the Registration Statement on Form S-1 (No.
33-5198)........................................................................
*10.5 --NAC Re Corp. 1989 Stock Option Plan incorporated herein by reference to Exhibit
4.2 to the Registration Statement on Form S-8 (No. 33-27745)....................
*10.6 --NAC Re Corp. 1993 Stock Option Plan incorporated herein by reference to Exhibit
A to the definitive Proxy Statement filed with the Securities and Exchange
Commission on March 26, 1993 ("1993 Proxy Statement")...........................
*10.7 --Amended and Restated NAC Re Corp. Directors' Stock Option Plan incorporated
herein by reference to Exhibit B to the 1993 Proxy Statement....................
*10.8 --Amended and Restated NAC Re Corp. Benefits Equalization Plan incorporated herein
by reference to Exhibit 10.8 to the Annual Report on Form 10-K for the year
ended December 31, 1993 (the "1993 10-K").......................................
*10.9 --Amended and Restated NAC Re Corp. Excess Benefit Savings Plan incorporated
herein by reference to Exhibit 10.9 to the 1993 10-K............................
*10.10--Form of Severance Contract between NAC Re Corp. and the executive officers of
NAC Re incorporated herein by reference to Exhibit 10.23 to the 1988 10-K.......
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C>
*10.11--NAC Re Corp. Amended and Restated Annual Incentive Plan incorporated herein by
reference to Exhibit 10.17 to the Annual Report on Form 10-K of NAC Re for the
year ended December 31, 1991 (the "1991 10-K")..................................
*10.12--NAC Re Corp. Long-term Incentive Plan incorporated herein by reference to
Exhibit 10.12 to the Annual Report on Form 10-K of NAC Re for the year ended
December 31, 1994 (the "1994 10-K").............................................
*10.13--Employment contract with Ronald L. Bornhuetter dated as of March 4, 1992
incorporated herein by reference to Exhibit 10.19 to the 1991 10-K..............
*10.14--Trust Agreement, dated as of July 1, 1989, between NAC Re and Marine Midland
Bank, N.A. relating to supplemental pension benefits for Ronald L. Bornhuetter
incorporated herein by reference to Exhibit 10.22 to the Annual Report on Form
10-K of NAC Re for the year ended December 31, 1989 (the "1989 10-K")...........
*10.15--NAC Re Corp. Directors' Deferred Compensation Agreement incorporated herein by
reference to Exhibit 10.20 to the 1989 10-K.....................................
*10.16--Consulting Agreement with Michael G. Fitt effective as of March 1, 1995
incorporated by reference to Exhibit 10.17 to the 1994 10-K.....................
(11) --Statement regarding computation of per share earnings.............................
(12) --Statement regarding computation of ratios.........................................
(13) --NAC Re's 1995 Annual Report to Shareholders; only those portions thereof which
are expressly incorporated by reference in NAC Re's Annual Report on Form 10-K
for 1995 are "filed" as part of this Annual Report on Form 10-K................
(21) --Subsidiaries of the registrant incorporated herein by reference to Exhibit 21 to
the 1993 10-K...................................................................
(23) --Consents of experts and counsel...................................................
(24) --Powers of attorney................................................................
(27) --Financial Data Schedule...........................................................
(28) --Information from reports furnished to state insurance regulatory authorities
[filed in paper format].........................................................
</TABLE>
- ------------
* Executive Compensation Plans or Arrangements
Reports on Form 8-K
A report on Form 8-K, dated November 1, 1995, was filed with the Securities
and Exchange Commission. The reported contained the Company's earnings release
for the third quarter of 1995, dated October 19, 1995.
Executive Compensation Plans or Arrangements
Executive compensation plans or arrangements are indicated by an asterisk on
the Index to Exhibits set forth above.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities 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)
By /s/ JOHN N. ADIMARI
...................................
JOHN N. ADIMARI
ACTING CHIEF FINANCIAL OFFICER AND
TREASURER
Dated: March 22, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE><CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
RONALD L. BORNHUETTER* Director, President and Chief March 22, 1996
.................................... Executive Officer
RONALD L. BORNHUETTER
ROBERT A. BELFER* Director March 22, 1996
....................................
ROBERT A. BELFER
JOHN P. BIRKELUND* Director March 22, 1996
....................................
JOHN P. BIRKELUND
C. W. CARSON, JR.* Director March 22, 1996
....................................
C. W. CARSON, JR.
TODD G. COLE* Director March 22, 1996
....................................
TODD G. COLE
MICHAEL G. FITT* Director March 22, 1996
....................................
MICHAEL G. FITT
DANIEL J. MCNAMARA* Director March 22, 1996
....................................
DANIEL J. MCNAMARA
STEPHEN ROBERT* Director March 22, 1996
....................................
STEPHEN ROBERT
WENDY J. STROTHMAN* Director March 22, 1996
....................................
WENDY J. STROTHMAN
HERBERT S. WINOKUR, JR.* Director March 22, 1996
....................................
HERBERT S. WINOKUR, JR.
/s/ JOHN N. ADIMARI Acting Chief Financial Officer and March 22, 1996
.................................... Treasurer
JOHN N. ADIMARI
</TABLE>
- ------------
* By MARTHA G. BANNERMAN, his or her attorney-in-fact and agent, pursuant to a
power of attorney, a copy of which has been filed with the Securities and
Exchange Commission as Exhibit 24 hereto.
By /s/ MARTHA G. BANNERMAN
...................................
MARTHA G. BANNERMAN
VICE PRESIDENT AND GENERAL COUNSEL
18
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE><CAPTION>
PAGES
-------
<C> <S> <C>
NAC RE CORP.
Report of Independent Auditors on Financial Statements and Schedules........ F-2
Consolidated Balance Sheet at December 31, 1995 and 1994.................... *
Consolidated Statement of Income for the years ended December 31, 1995, 1994
and 1993.................................................................. *
Consolidated Statement of Stockholders' Equity for the years ended December
31, 1995, 1994 and 1993................................................... *
Consolidated Statement of Cash Flows for the years ended December 1995,
1994, and 1993............................................................ *
Notes to Consolidated Financial Statements.................................. *
SCHEDULES
I Summary of Investments Other Than Investments in Related Parties at December
31, 1995.................................................................. S-1
III Condensed Financial Information of Registrant............................... S-2-S-4
V Supplementary Insurance Information for the years ended December 31, 1995,
1994, and 1993............................................................ S-5
VI Reinsurance for the years ended December 31, 1995, 1994 and 1993............ S-6
X Supplementary Information Concerning Property-Casualty Insurance
Operations................................................................ S-7
Schedules other than those listed above are omitted for the reason that they are
not applicable.
</TABLE>
- ------------
* Incorporated by reference to NAC Re's 1995 Annual Report to Shareholders.
F-1
<PAGE>
To the Board of Directors and Shareholders of
NAC RE CORPORATION:
We have audited the consolidated balance sheet of NAC Re Corporation and
subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. Our audits also included the
financial statement schedules listed in the Index at Item 14. These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NAC Re Corporation and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects, the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for certain investments in debt and equity
securities at December 31, 1993.
New York, New York ERNST & YOUNG LLP
JANUARY 30, 1996
F-2
<PAGE>
SCHEDULE I
NAC RE CORP. AND SUBSIDIARIES
OTHER THAN INVESTMENTS IN RELATED PARTIES
SUMMARY OF INVESTMENTS
(IN THOUSANDS)
<TABLE><CAPTION>
DECEMBER 31, 1995
-----------------------------------------
AMOUNT AT
WHICH
AMORTIZED MARKET SHOWN IN THE
COST VALUE BALANCE SHEET
---------- ---------- -------------
<S> <C> <C> <C>
Type of Investment:
FIXED MATURITY SECURITIES
United States Government............................. $116,958 $119,430 $119,430
Foreign governments.................................. 144,782 146,217 146,217
Mortgage-backed securities........................... 173,674 174,812 174,812
States, municipalities and political subdivisions.... 714,326 742,807 742,807
Corporate bonds...................................... 341,290 348,341 348,341
Subordinated convertibles............................ 60,818 61,936 61,936
---------- ---------- -------------
Total Fixed Maturities........................... 1,551,848 1,593,543 1,593,543
EQUITY SECURITIES...................................... 114,818 127,257 127,257
CASH AND SHORT-TERM INVESTMENTS........................ 142,726 142,726 142,726
---------- ---------- -------------
Total Investments................................ $1,809,392 $1,863,526 $ 1,863,526
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
S-1
<PAGE>
SCHEDULE III
NAC RE CORP. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NAC RE CORP.
BALANCE SHEET
(PARENT COMPANY)
(IN THOUSANDS)
<TABLE><CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Fixed maturities....................................................... $34,088 $36,033
Short-term investments................................................. 14,930 7,645
Cash................................................................... 2,689 5,232
Accrued investment income.............................................. 290 317
Deferred expenses...................................................... 2,203 1,669
Federal income tax recoverable......................................... 3,197 1,105
Investment in wholly-owned subsidiaries................................ 775,100 485,014
Other assets........................................................... 4,084 3,810
-------- --------
Total assets..................................................... $836,581 $540,825
-------- --------
-------- --------
LIABILITIES
8% Notes due 1999...................................................... $100,000 $100,000
7.15% Notes due 2005................................................... 99,927 --
5.25% Convertible Subordinated Debentures due 2002..................... 100,000 100,000
Revolving credit loan.................................................. 17,762 17,762
Interest payable....................................................... 1,358 603
Intercompany taxes payable............................................. 2,891 1,235
Dividend payable....................................................... 959 700
Accrued expenses and other liabilities................................. 1,928 1,440
-------- --------
Total liabilities................................................ 324,825 221,740
-------- --------
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, 21,341; 1994, 19,639 issued)......... 2,134 1,964
Additional paid-in capital........................................... 246,356 194,231
Unrealized appreciation (depreciation) of investments, net of tax.... 35,187 (46,030)
Currency translation adjustments, net of tax......................... 1,017 1,059
Retained earnings.................................................... 269,660 210,255
Less treasury stock, at cost (1995, 2,137 shares; 1994, 2,132
shares)............................................................ (42,598) (42,394)
-------- --------
Total stockholders' equity....................................... 511,756 319,085
-------- --------
Total liabilities and stockholders' equity....................... $836,581 $540,825
-------- --------
-------- --------
</TABLE>
S-2
<PAGE>
SCHEDULE III
NAC RE CORP. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
NAC RE CORP.
STATEMENT OF INCOME
(PARENT COMPANY)
(IN THOUSANDS)
<TABLE><CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
INCOME
Dividend declared from insurance subsidiary.................. $ 7,500 $15,000 $10,000
Net investment income........................................ 3,193 2,409 2,388
Net investment gains (losses)................................ 126 (138) --
Rental and other income...................................... 1,164 824 1,094
------- ------- -------
11,983 18,095 13,482
------- ------- -------
EXPENSES
Interest expense............................................. 15,610 14,416 13,545
Other operating costs and expenses........................... 2,104 1,776 2,100
------- ------- -------
17,714 16,192 15,645
------- ------- -------
(Loss) income before intercompany tax allocation and equity in
net income of wholly-owned subsidiaries less dividend
declared................................................... (5,731) 1,903 (2,163)
------- ------- -------
Current intercompany tax credit................................ 4,711 4,557 5,063
Deferred tax benefit (expense)................................. 41 (9) (807)
------- ------- -------
Total tax credit, net.......................................... 4,752 4,548 4,256
------- ------- -------
(Loss) income before equity in net income of wholly-owned
subsidiaries less dividend declared.......................... (979) 6,451 2,093
Equity in net income of wholly-owned subsidiaries less dividend
declared..................................................... 63,803 29,161 40,258
------- ------- -------
Net income..................................................... $62,824 $35,612 $42,351
------- ------- -------
------- ------- -------
</TABLE>
S-3
<PAGE>
SCHEDULE III
NAC RE CORP. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
NAC RE CORP.
STATEMENT OF CASH FLOWS
(PARENT COMPANY)
(IN THOUSANDS)
<TABLE><CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income.................................................. $ 62,824 $ 35,612 $ 42,351
Less equity in net income of subsidiaries, less cash
dividend ($7,500 in 1995, $17,500 in 1994, $7,500 in
1993)................................................... 63,803 26,661 42,758
--------- -------- --------
(979) 8,951 (407)
Adjustments to reconcile net income to net cash provided by
operating activities...................................... 1,866 3,476 1,232
--------- -------- --------
Net cash provided by operating activities................... 887 12,427 825
--------- -------- --------
Investing activities:
Sales of fixed maturity investments....................... 9,722 12,001 13,667
Maturities of fixed maturity investments.................. 4,700 3,720 5,180
Purchases of fixed maturity investments................... (10,527) (22,799) (26,749)
Net (purchases) sales of short-term investments........... (7,285) (2,348) 12,333
Purchases of furniture and equipment...................... (1,290) (718) (676)
Contribution to subsidiary................................ (146,556) -- --
--------- -------- --------
Net cash (used) provided by investing activities............ (151,236) (10,144) 3,755
--------- -------- --------
Financing activities:
Issuance of shares........................................ 52,056 5,278 3,192
Net proceeds from issuance of 7.15% Notes................. 99,214 -- --
Net proceeds from issuance of 5.25% Debentures............ -- -- (146)
Purchase of treasury shares............................... (204) (15,006) (7,542)
Cash dividends paid to stockholders....................... (3,260) (2,827) (2,862)
Borrowings under revolving credit agreement............... -- 13,857 3,905
--------- -------- --------
Net cash provided (used) by financing activities............ 147,806 1,302 (3,453)
--------- -------- --------
(Decrease) increase in cash................................. (2,543) 3,585 1,127
Cash--beginning of year..................................... 5,232 1,647 520
--------- -------- --------
Cash--end of year........................................... $ 2,689 $ 5,232 $ 1,647
--------- -------- --------
--------- -------- --------
</TABLE>
S-4
<PAGE>
SCHEDULE V
NAC RE CORP. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE><CAPTION>
FUTURE
POLICY
BENEFITS, BENEFITS,
LOSSES, CLAIMS, AMORTIZATION
DEFERRED CLAIMS LOSSES OF DEFERRED
POLICY AND NET AND POLICY OTHER
ACQUISITION CLAIMS UNEARNED PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS
COSTS EXPENSES PREMIUMS REVENUE INCOME EXPENSES COSTS EXPENSES WRITTEN
----------- ---------- -------- -------- ---------- ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1995
Domestic:
Property/Casualty.. $68,158 $1,246,187 $216,213 $450,068 $80,875 $293,262 $132,049 $55,919 $471,917
Accident and
Health........... -- 3,584 2,005 2,926 708 1,776 -- 489 4,131
------- ---------- -------- -------- ------- -------- -------- ------- --------
Subtotal...... 68,158 1,249,771 218,218 452,994 81,583 295,038 132,049 56,408 476,048
International:
Property/Casualty.. 2,308 43,277 12,520 38,791 7,725 31,110 7,014 6,044 45,441
Intercompany
elimination...... -- (633) -- -- -- -- -- -- --
------- ---------- -------- -------- ------- -------- -------- ------- --------
Total......... $70,466 $1,292,415 $230,738 $491,785 $89,308 $326,148 $139,063 $62,452 $521,489
------- ---------- -------- -------- ------- -------- -------- ------- --------
------- ---------- -------- -------- ------- -------- -------- ------- --------
DECEMBER 31, 1994
Domestic:
Property/Casualty.. $59,030 $1,068,930 $188,436 $375,233 $75,661 $249,833 $114,540 $47,469 $411,750
Accident and
Health........... -- 1,208 732 637 122 180 -- 76 662
------- ---------- -------- -------- -------- -------- -------- ------- --------
Subtotal...... 59,030 1,070,138 189,168 375,870 75,783 250,013 114,540 47,545 412,412
International:
Property/Casualty.. 923 16,032 6,045 19,861 4,721 15,740 3,052 5,210 25,789
------- ---------- -------- -------- -------- -------- -------- ------- --------
Total......... $59,953 $1,086,170 $195,213 $395,731 $80,504 $265,753 $117,592 $52,755 $438,201
------- ---------- -------- -------- -------- -------- -------- ------- --------
------- ---------- -------- -------- -------- -------- -------- ------- --------
DECEMBER 31, 1993
Domestic:
Property/Casualty.. $44,453 $907,968 $137,962 $305,950 $76,514 $213,882 $94,077 $44,623 $336,421
Accident and
Health........... -- 1,093 679 429 118 (42) -- 69 520
------- ---------- -------- -------- -------- -------- -------- ------- --------
Total......... $44,453 $909,061 $138,641 $306,379 $76,632 $213,840 $94,077 $44,692 $336,941
------- ---------- -------- -------- -------- -------- -------- ------- --------
------- ---------- -------- -------- -------- -------- -------- ------- --------
</TABLE>
S-5
<PAGE>
SCHEDULE VI
NAC RE CORP. AND SUBSIDIARIES
REINSURANCE
(IN THOUSANDS)
<TABLE><CAPTION>
PERCENTAGE
CEDED ASSUMED OF AMOUNT
GROSS TO OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1995
Premiums Written:
Property/casualty..................... $70,138 $155,777 $602,997 $517,358 117%
Accident and health................... 45 672 4,758 4,131 115%
------- --------- ---------- -------- -----
Total............................... $70,183 $156,449 $607,755 $521,489 117%
------- --------- ---------- -------- -----
------- --------- ---------- -------- -----
DECEMBER 31, 1994
Premiums Written:
Property/casualty..................... $45,926 $136,648 $528,261 $437,539 121%
Accident and health................... 79 188 771 662 116%
------- --------- ---------- -------- -----
Total............................... $46,005 $136,836 $529,032 $438,201 121%
------- --------- ---------- -------- -----
------- --------- ---------- -------- -----
DECEMBER 31, 1993
Premiums Written:
Property/casualty..................... $15,647 $94,478 $415,252 $336,421 123%
Accident and health................... 51 163 632 520 122%
------- --------- ---------- -------- -----
Total............................... $15,698 $94,641 $415,884 $336,941 123%
------- --------- ---------- -------- -----
------- --------- ---------- -------- -----
</TABLE>
S-6
<PAGE>
SCHEDULE X
NAC RE CORP. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
(IN THOUSANDS)
<TABLE><CAPTION>
RESERVE CLAIMS AND CLAIMS
FOR EXPENSES INCURRED AMORTIZATION
DEFERRED UNPAID RELATED TO(2) OF DEFERRED
AFFILIATION POLICY CLAIMS DISCOUNT NET ------------------ POLICY
WITH ACQUISITION AND CLAIMS IF ANY, UNEARNED EARNED INVESTMENT CURRENT PRIOR ACQUISITION
REGISTRANT COSTS EXPENSES DEDUCTED(1) PREMIUMS PREMIUMS INCOME YEAR YEARS COSTS
---------- ----------- ---------- ----------- -------- -------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
SUBSIDIARIES
December 31, 1995... $70,466 $1,292,415 $18,340 $230,738 $491,785 $ 86,115 $345,783 ($19,635) $139,063
December 31, 1994... $59,953 $1,086,170 $17,084 $195,213 $395,731 $ 78,095 $309,294 ($43,541) $117,592
December 31, 1993... $44,453 $909,061 $14,834 $138,641 $306,379 $ 74,244 $237,491 ($23,651) $94,077
<CAPTION>
PAID
CLAIMS
AFFILIATION AND
WITH CLAIMS PREMIUMS
REGISTRANT EXPENSES WRITTEN
---------- -------- --------
<S> <C> <C>
CONSOLIDATED
SUBSIDIARIES
December 31, 1995... $180,386 $521,489
December 31, 1994... $154,651 $438,201
December 31, 1993... $142,709 $336,941
</TABLE>
- ------------
(1) Relates to certain workers' compensation case reserves which are discounted
for statutory accounting purposes utilizing a 5% interest rate, and a 7%
interest rate for GAAP.
(2) Amounts are net of discount related to certain workers' compensation case
reserves.
S-7
<PAGE>
INDEX TO EXHIBITS
<TABLE><CAPTION>
EXHIBIT NO.
- ------------
<S> <C> <C>
(3) --Articles of incorporation and bylaws:
3.1 --Restated Certificate of Incorporation of NAC Re incorporated herein by reference
to Exhibit 3.1 to the Annual Report on Form 10-K of NAC Re for the year ended
December 31, 1990.............................................................
3.2 --Bylaws of NAC Re as amended through June 9, 1988 incorporated herein by
reference to Exhibit 3.2 to the Annual Report on Form 10-K of NAC Re for the
year ended December 31, 1988 (the "1988 10-K")................................
(4) --Instruments defining rights of security holders, including indentures:
4.1 --Rights Agreement dated as of June 9, 1988 by and between NAC Re Corporation and
American Stock Transfer and Trust Company (the "Rights Agreement") incorporated
herein by reference to Exhibit A to the Current Report on Form 8-K filed June 24,
1988..........................................................................
4.2 --First Amendment to the Rights Agreement dated as of March 28, 1990 incorporated
herein by reference to Exhibit A to the Current Report on Form 8-K filed April 2,
1990..........................................................................
4.3 --Second Amendment to the Rights Agreement dated as of September 13, 1990
incorporated herein by reference to Exhibit 4.3 to the Current Report on Form
8-K filed September 21, 1990..................................................
(10) --Material contracts:
10.1 --Lease of NAC Re's corporate and administrative offices in Greenwich, CT
incorporated herein by reference to Exhibit 10.11 to the Annual Report on Form
10-K for the year ended December 31, 1985.....................................
10.2 --Form of Sublease between NAC Re and NAC incorporated herein by reference to
Exhibit 10.16 to the Joint Proxy Statement/Prospectus on Form S-4 (No. 33-8836)
of NAC Re and KCC.............................................................
*10.3 --Amended 1985 Stock Option Plan of NAC Re incorporated herein by reference to
Exhibit 10.6 to the Registration Statement on Form S-1 (No. 2-99952)............
*10.4 --1986 Incentive and Non-qualified Stock Option Plan of NAC Re incorporated herein
by reference to Exhibit 10.12 to the Registration Statement on Form S-1 (No.
33-5198)......................................................................
*10.5 --NAC Re Corp. 1989 Stock Option Plan incorporated herein by reference to Exhibit
4.2 to the Registration Statement on Form S-8 (No. 33-27745)..................
*10.6 --NAC Re Corp. 1993 Stock Option Plan incorporated herein by reference to Exhibit
A to the definitive Proxy Statement filed with the Securities and Exchange
Commission on March 26, 1993 ("1993 Proxy Statement").........................
*10.7 --Amended and Restated NAC Re Corp. Directors' Stock Option Plan incorporated
herein by reference to Exhibit B to the 1993 Proxy Statement..................
*10.8 --Amended and Restated NAC Re Corp. Benefits Equalization Plan incorporated herein
by reference to Exhibit 10.8 to the Annual Report on Form 10-K for the year
ended December 31, 1993 (the "1993 10-K").....................................
*10.9 --Amended and Restated NAC Re Corp. Excess Benefit Savings Plan incorporated
herein by reference to Exhibit 10.9 to the 1993 10-K..........................
*10.10--Form of Severance Contract between NAC Re Corp. and the executive officers of
NAC Re incorporated herein by reference to Exhibit 10.23 to the 1988 10-K.....
*10.11--NAC Re Corp. Amended and Restated Annual Incentive Plan incorporated herein by
reference to Exhibit 10.17 to the Annual Report on Form 10-K of NAC Re for the
year ended December 31, 1991 (the "1991 10-K")................................
*10.12--NAC Re Corp. Long-term Incentive Plan incorporated herein by reference to
Exhibit 10.12 to the Annual Report on Form 10-K of NAC Re for the year ended
December 31, 1994 (the "1994 10-K")...........................................
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
*10.13--Employment contract with Ronald L. Bornhuetter dated as of March 4, 1992
incorporated herein by reference to Exhibit 10.19 to the 1991 10-K............
*10.14--Trust Agreement, dated as of July 1, 1989, between NAC Re and Marine Midland
Bank, N.A. relating to supplemental pension benefits for Ronald L. Bornhuetter
incorporated herein by reference to Exhibit 10.22 to the Annual Report on Form
10-K of NAC Re for the year ended December 31, 1989 (the "1989 10-K").........
*10.15--NAC Re Corp. Directors' Deferred Compensation Agreement incorporated herein by
reference to Exhibit 10.20 to the 1989 10-K...................................
*10.16--Consulting Agreement with Michael G. Fitt effective as of March 1, 1995
incorporated by reference to Exhibit 10.17 to the 1994 10-K...................
(11) --Statement regarding computation of per share earnings...........................
(12) --Statement regarding computation of ratios.......................................
(13) --NAC Re's 1995 Annual Report to Shareholders; only those portions thereof which
are expressly incorporated by reference in NAC Re's Annual Report on Form 10-K
for 1995 are "filed" as part of this Annual Report on Form 10-K..............
(21) --Subsidiaries of the registrant incorporated herein by reference to Exhibit 21 to
the 1993 10-K.................................................................
(23) --Consents of experts and counsel.................................................
(24) --Powers of attorney..............................................................
(27) --Financial Data Schedule.........................................................
(28) --Information from reports furnished to state insurance regulatory authorities
[filed in paper format].......................................................
</TABLE>
- ------------
* Executive Compensation Plans or Arrangements
2
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>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net income applicable to common stock............... $62,824 $35,612 $42,351
----------- ----------- -----------
----------- ----------- -----------
Average number of common shares outstanding......... 17,708,733 17,603,372 17,895,253
Add:
Assumed exercise of dilutive stock options (1)...... 385,729 291,335 524,404
----------- ----------- -----------
Common stock and common stock equivalents
outstanding....................................... 18,094,462 17,894,707 18,419,657
----------- ----------- -----------
----------- ----------- -----------
Net income per share assuming dilution of common
stock equivalents................................. $3.47 $1.99 $2.30
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------
(1) Computed utilizing the average market price of the common stock for the
period.
NOTE: The 5.25% Convertible Subordinated Debentures due 2002 are not considered
to be common stock equivalents in the calculation of primary earnings per
share.
EXHIBIT 11-2
NAC RE CORP. AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FULLY DILUTED EARNINGS PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENTS
<TABLE><CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net income applicable to common stock.................. $62,824 $35,612 $42,351
After-tax add back of convertible debenture interest
and amortization..................................... 3,504 3,504 3,504
---------- ---------- ----------
Adjusted net income.................................... $66,328 $39,116 $45,855
---------- ---------- ----------
---------- ---------- ----------
Average number of common shares outstanding............ 17,708,733 17,603,372 17,895,253
Add:
Assumed exercise of dilutive stock options(1).......... 424,524 429,897 530,004
Assumed conversion of convertible debentures(2)........ 2,020,202 2,020,202 2,020,202
---------- ---------- ----------
Common stock and common stock equivalents
outstanding.......................................... 20,153,459 20,053,471 20,445,459
---------- ---------- ----------
---------- ---------- ----------
Fully diluted earnings per share....................... $3.29 $1.95 $2.24
---------- ---------- ----------
---------- ---------- ----------
</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.
EXHIBIT 12
NAC RE CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE><CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Operating income before income taxes....... $ 78,821 $ 42,290 $ 49,497 $3,606 $41,718
-------- -------- -------- -------- ---------
ADD BACK FIXED CHARGES:
Interest expense........................... 15,381 14,196 13,324 4,538 3,547
Amortization of related debt expenses...... 267 258 258 68 63
Assumed interest component of rent
expenses................................. 1,235 1,099 1,194 1,114 940
-------- -------- -------- -------- ---------
Total fixed charges.................... 16,883 15,553 14,776 5,720 4,550
-------- -------- -------- -------- ---------
Adjusted earnings.......................... $ 95,704 $ 57,843 $ 64,273 $9,326 $46,268
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Ratio of earnings to fixed charges......... 5.7 to 1 3.7 to 1 4.3 to 1 1.6 to 1 10.2 to 1
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
</TABLE>
Exhibit 13
- -------------------------------------------------------------------------------
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
The Company's operating income, excluding realized investment gains, was
$45.9 million for 1995, $34.8 million for 1994 and $29.9 million for 1993.
Operating results were impacted modestly in 1995 and 1994 and more significantly
in 1993 by property catastrophe claims. After-tax charges for catastrophic
events reduced operating earnings by $3.6 million for 1995, $3.3 million for
1994 and $12.3 million for 1993.
Net income was $62.8 million for 1995, $35.6 million for 1994 and $42.4 million
for 1993. On a per share basis, net income was $3.47, $1.99 and $2.30 for 1995,
1994 and 1993, respectively. Net income for 1995 includes after-tax realized
investment gains of $17 million or $.94 per share compared to $.8 million or
$.04 per share in 1994 and $12.4 million or $.67 per share in 1993.
Premium Revenues
The Company's steady growth in premium revenue, as indicated below, has been
impacted by several different factors in recent years, including both external
market influences and internal initiatives:
<TABLE>
<CAPTION>
Gross Premiums Written Percent Change
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in Millions 1995 1994 1993 95/94 94/93
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic:
Casualty $354.8 $293.4 $212.9 20.9% 37.8%
Property 179.8 151.6 149.2 18.5 1.7
Specialty/other 92.3 100.2 69.5 (7.9) 44.3
- ---------------------------------------------------------------------------------------------------------------------------------
Subtotal 626.9 545.2 431.6 15.0 26.3
=================================================================================================================================
International:
Casualty 19.2 14.8 - 30.3 -
Property 33.9 17.7 - 91.6 -
- ---------------------------------------------------------------------------------------------------------------------------------
Subtotal 53.1 32.5 - 63.7 -
=================================================================================================================================
Intercompany transactions (2.1) (2.7) - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Total $677.9 $575.0 $431.6 17.9% 33.2%
=================================================================================================================================
<CAPTION>
Net Premiums Written Percent Change
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in Millions 1995 1994 1993 95/94 94/93
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic:
Casualty $311.7 $250.1 $176.1 24.6% 42.0%
Property 111.1 92.2 99.2 20.5 (7.1)
Specialty/other 53.3 70.1 61.6 (24.1) 13.8
- ---------------------------------------------------------------------------------------------------------------------------------
Subtotal 476.1 412.4 336.9 15.4 22.4
=================================================================================================================================
International:
Casualty 18.7 14.5 - 29.0 -
Property 26.7 11.3 - 136.7 -
- ---------------------------------------------------------------------------------------------------------------------------------
Subtotal 45.4 25.8 - 76.2 -
=================================================================================================================================
Total $521.5 $438.2 $336.9 19.0% 30.1%
=================================================================================================================================
</TABLE>
24
<PAGE>
- -------------------------------------------------------------------------------
Gross premiums written reflect total premiums written prior to the deduction for
premiums ceded by the Company to its reinsurers as payment for its own
retrocessional protection.
The reinsurance marketplace remained competitive in 1995, particularly in the
casualty area, in spite of some contrary indications during 1994. Rate pressure
at the primary level and ample reinsurance capacity has appeared to preclude
casualty reinsurance rate improvement. This, in turn, may have pressured certain
small to mid-sized reinsurers to reduce prices in a fight for survival. Other
reinsurers responded by seeking merger opportunities or by raising capital, with
varying degrees of success, in order to expand surplus levels and remain
attractive to increasingly selective reinsurance purchasers. Mergers by primary
companies have resulted, in certain instances, in much larger companies, which
has helped to exacerbate the need for size and financial strength of reinsurance
partners. In addition, some primary companies appear to be increasing their
retentions.
The dynamics of the marketplace have not only intensified competition but also
generated opportunities for growth. For example, the curtailment by some
companies of reinsurance operations, mergers among reinsurance companies and
continued uncertainty in the Lloyd's market has dislodged business and created
new opportunities for some reinsurers. In addition, continued globalization by
U.S. insurers generated expanded opportunity in the international marketplace.
The Company believes that while market conditions are becoming increasingly
competitive in 1996, opportunities for profitable business growth are likely to
continue.
The Company's worldwide casualty gross premiums written increased 21.5% in 1995
compared to increases of 44.3% in 1994 and 7.2% in 1993. Domestic casualty gross
premiums written increased 20.9% in 1995 and 37.8% in 1994. Casualty growth in
1995 came largely from increased participations from existing treaty clients,
which more than offset increased retentions from one large account. Growth was
also attributable to new relationships. Casualty growth in 1994 was attributed
to several new treaty casualty programs written during the latter half of 1993,
increases in participations from existing clients and, to a certain extent,
increases in the amount of underlying premium written by clients. Growth in 1995
and 1994 was also attributed to the Company's facultative business. Due to the
maturing of the Company's facultative infrastructure, a continued focus on more
complex lines of business and the successful marketing of facultative
automatics, casualty facultative gross premiums written increased by 87.8% in
1995 and 80% in 1994, contributing $76.1 million and $40.5 million in gross
premiums written, respectively. This is compared to a 29.4% increase in 1993.
Although 1996 casualty premium will be impacted by increased retention levels by
one large account, the Company does not believe that the reduction of business
assumed from any one client will have a materially adverse effect on its
financial condition or results of operations due to the Company's competitive
position in the marketplace and the continuing availability of other sources of
business.
The number and unprecedented severity of claims related to property
catastrophes, which the industry experienced subsequent to 1988, and
particularly in 1992 and 1993, significantly impacted the cost and availability
of property catastrophe protection in 1993. As a result, various insurance
companies operating in both the primary and reinsurance markets closed or
curtailed the reinsurance segment of their operation, due in part to the
financial stress created by the double exposure to catastrophes. These factors
limited catastrophe protection available in the marketplace and, as a result,
companies were more
25
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
limited in the amount of property protection they could offer resulting in a
strengthening in terms and conditions for all property business during 1993.
However, the influx of approximately $4 billion in new capital in the Bermuda
market during 1993, dedicated primarily to providing catastrophe reinsurance
protection, somewhat relieved the shortage of catastrophe protection in 1994.
Nevertheless, property per risk pricing remained relatively firm in 1994 and
1995, although property catastrophe rates softened somewhat in 1995.
The Company capitalized in each year on the general improvement in property
market conditions, increasing premiums written while monitoring aggregate
exposures and, as a result, worldwide property gross premiums written grew by
26.7% in 1995, 12.3% in 1994 and 6.3% in 1993. Domestic property gross premiums
written increased 18.5% in 1995 and 1.7% in 1994. Excluding nontraditional
premiums, domestic property gross premiums increased approximately 25% in both
1995 and 1994. As with casualty business, property facultative growth
contributed to the overall premium gains, including the positive impact of
facultative automatic programs, with property facultative gross premiums written
increasing by 36.7% in 1995, 39.3% in 1994 and 105% in 1993. As expected, the
Company's nontraditional treaty business has declined substantially and is no
longer a meaningful component of premium revenues. Market conditions for
nontraditional business began to erode in 1993, upon the introduction of new
accounting standards that created higher thresholds for risk transfer and
mitigated the benefits available to ceding companies attributable to certain
nontraditional contracts.
The Company's focus on certain specialty lines of business, particularly
fidelity/surety, aviation and ocean marine business, has also resulted in growth
opportunities. Fidelity/surety bond treaty gross premiums written were $33.3
million in 1995 compared to $33.5 million in 1994 and $31.8 million in 1993,
which included approximately $7 million in non-recurring premiums derived from
certain unearned premium portfolio transfers. The Company's 1995 bonding
premiums were impacted by a weak overall construction environment and increased
retentions by primary companies. Market conditions are expected to remain
competitive during 1996.
The Company's specialization in the aviation business began in mid-1992, with
the underwriting of a large general aviation program, and expanded in 1994 as a
result of a participation in a premier aviation underwriting pool. Due to
adverse claim development in the general aviation program, and unsuccessful
efforts to adequately correct the pricing for the program, the treaty was not
renewed effective July 1, 1994. The decline in aviation premium from this action
was somewhat offset by premium from an increased participation in the aviation
pool effective as of January 1995. The Company's aviation business is managed
and evaluated on a net basis to most effectively monitor exposures after the
"common account" reinsurance protection the Company receives, as discussed
below. Net premiums written from aviation business totaled $10.9 million, $34.3
million and $22.5 million for 1995, 1994 and 1993, respectively. In addition to
certain aviation business, the Company writes a limited amount of other primary
insurance business, principally through its subsidiary, Greenwich Insurance
Company. Primary insurance business is expected to be a source of growth in
1996, and currently represents approximately 6% of total net premiums written.
Expansion in this area will be focused on highly specialized moderate duration
casualty programs that are not competitive with business written by the
Company's insurance company clients.
26
<PAGE>
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The Company's most significant investment to expand its business production in
recent years has been the establishment of a fully licensed international
property and casualty reinsurance subsidiary in London, England. Gross premiums
written from this operation in 1995 and 1994 included $19.3 million and $14.8
million from casualty treaty business, respectively, and $33.9 million and $17.7
million from property treaty business, respectively, written principally in
Europe, Japan and Australasia. In late 1995, the Company expanded its
international operation to begin writing property facultative business. The
Company expects its international business to continue to increase as the London
operation begins to mature.
Ceded premiums recorded for retrocession agreements were $156.4 million, $136.8
million and $94.7 million for the years ended December 31, 1995, 1994 and 1993.
The principal cause for the increase in 1995 and 1994 ceded premiums was a
result of the Company's 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. The Company expects ceded premiums to decline in 1996 as a
percentage of gross premiums written, principally due to a more favorable
pricing environment for property catastrophe coverage.
Operating Costs and Expenses
Claims and claims expenses represent the Company's 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. The Company would generally expect to refine such
estimates in subsequent accounting periods by modest amounts with adjustments
possible in either direction as additional information becomes known.
The fact that the Company's exposure to claims generally begins after its
clients absorb the first $1 million in claims contributes to the uncertainty of
its claims estimates. With this excess coverage, claims occur less frequently
than coverages which attach within the first $1 million of claims, thereby
providing less credible historical claim experience from which to estimate
ultimate claim costs. Further, the Company writes this type of coverage in
certain volatile casualty lines of business, such as general liability,
directors' and officers' liability and medical malpractice. Claim activity for
these lines is characterized by protracted discovery and settlement periods, the
ultimate cost of which can be influenced significantly by court rulings.
Estimates of claims and claims expenses are based in part on a prediction of
future events and estimates of future trends in claim severity and frequency and
other variable factors. The Company's ability to predict future trends based
upon its own historical claim experience is inherently difficult because of its
substantial growth in premiums since 1985. Therefore, the Company has
supplemented its historical claim experience to a certain extent with claim
experience derived from external sources, such as reinsurance industry data, for
purposes of evaluating future trends and providing an estimate of ultimate claim
costs. As the Company's book of business continues to mature, its own historical
claim experience achieves greater credibility and enhances its ability to
evaluate future trends. Accordingly, the Company believes its reserving process
improves as additional claims experience emerges and could be expected to result
in more refined estimates of claims and claims expenses over time.
27
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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 for the years
indicated for the Company's domestic reinsurance subsidiary. It also provides an
average of actual or estimated composite ratios for the fifteen largest
property/casualty reinsurers, ranked by statutory surplus, based on data
reported by the Reinsurance Association of America (RAA):
1995 1994 1993
- --------------------------------------------------------------------------------
Domestic Composite Ratio:
Claims and claims expenses 65.1% 66.6% 69.9%
Commissions and brokerage 29.7 31.3 32.2
Other operating expenses 8.3 7.8 8.8
- --------------------------------------------------------------------------------
Total 103.1% 105.7% 110.9%
- --------------------------------------------------------------------------------
Composite ratios for 15 largest reinsurers 113.1% 106.4% 106.5%
================================================================================
The Company's domestic composite ratio for 1995 reflects improvements in
underwriting results after unsatisfactory underwriting results in 1994 and 1993
due to several factors. One factor was the severity and frequency of property
catastrophes. Catastrophe costs increased the 1995 composite ratio by less than
1 percentage point, while property catastrophe claim activity arising from the
Northridge earthquake increased the 1994 composite ratio by 1.3 percentage
points. Property claim activity arising from several 1993 and 1992 catastrophic
events increased the 1993 composite ratio by 6.2 percentage points. The
extensive cost of 1992 catastrophes limited the availability and increased the
cost of catastrophe retrocessional protection for 1993 requiring the Company to
increase its net retention for catastrophe claims in 1993 to $10 million.
Accordingly, such increased retention levels caused additional volatility in the
results from property catastrophe claims in 1993.
Aided by the influx of new capital in the catastrophe retrocessional market, the
Company was able to reduce its exposure to a single event to $5 million for 1994
and 1995 at marginally higher costs each year. Due to softening in the property
catastrophe market, for 1996 the Company expects lower costs for its catastrophe
protection while continuing its single event exposure at $5 million and it
expects to expand its coverage to $120 million of property catastrophe
protection, up from $85 million in 1995, of which $30 million of coverage, in
excess of the first $60 million of coverage, is available only if industry-wide
claims exceed certain minimum levels. While the 1996 catastrophe protection
provides somewhat more protection than the 1995 and 1994 coverage, and
significantly more protection than in years prior to 1994, it is not enough
protection for the Company to avail itself of all opportunities to write
property reinsurance. The Company evaluates its potential accumulated aggregate
catastrophe exposure on both a gross claim basis and net of available
reinsurance protection to determine whether its exposure to claims is within
acceptable levels, and limits the catastrophe protection it offers to its
clients accordingly. Although the Company has attempted to limit its exposure to
acceptable levels, an extremely large catastrophic event, or multiple
catastrophic events could have a material adverse effect on the financial
condition and results of operations of the Company.
28
<PAGE>
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In consideration of the Company's increased size and financial capacity, as well
as the continued positive contribution of business written since 1986, the
Company increased its maximum retention on any one claim for non-catastrophe
losses for 1996 to $5 million, as compared to $3.9 million for 1995 and 1994,
and $3 million for 1993.
An additional factor impacting the 1994 and 1993 domestic composite ratios was
disappointing returns from certain 1993 and 1992 underwriting year property and
aviation treaties. The Company undertook underwriting and pricing actions to
improve the results of such treaties. As previously noted, effective July 1,
1994, the general aviation program that generated adverse results was not
renewed. The Company's casualty claim experience continues to develop
satisfactorily.
A growing area of focus in the reinsurance and insurance industries has been
exposure to asbestos and environmental claims. The Company's reserving process
includes a continuing evaluation of the potential impact on claim liabilities
from exposure to asbestos and environmental claims, including related loss
adjustment expenses. The Company recorded claims and claims expenses incurred
relating to asbestos and environmental claims of $7 million in 1995, $4.8
million in 1994, and $4.2 million in 1993, inclusive of paid claims of $4.8
million, $3.3 million, and $.8 million, respectively. The Company's claims and
claims expense reserves for such exposures, net of reinsurance, as of December
31, 1995, 1994 and 1993 were $22 million, $19.8 million and $18.4 million,
respectively. A reconciliation of the Company's gross and net liabilities for
such exposures for the three years ending December 31, 1995 and a discussion of
open claim files are set forth in Note 3 of the Notes to Consolidated Financial
Statements.
The Company believes it has made a reasonable provision for its asbestos and
environmental exposures and is unaware of any specific issues which would
materially affect its claims and claims expense estimate. The estimation of
claims and claims expense liabilities for asbestos and environmental exposures
is subject to a much greater uncertainty than would normally be associated with
the establishment of liabilities for other exposures due to several factors,
including: i) uncertain legal interpretation and application of insurance and
reinsurance coverage and liability; ii) the lack of reliability of available
historical claim data as an indicator of future claim development; iii) an
uncertain political climate which may impact, among other areas, the nature and
amount of costs for remediating waste sites and iv) the potential of insurers
and policyholders to reach agreements in order to avoid further significant
legal costs. Due to the potential significance of these uncertainties, the
Company believes that no meaningful range of claims and claims expense
liabilities beyond recorded reserves can be established. As these uncertainties
are resolved, additional reserve provisions, which could be material in amount,
may be necessary.
Total net claims and claims expenses for each year reflects favorable or
unfavorable claim development from prior years for both traditional and
nontraditional treaty business, as follows:
(Favorable) Unfavorable
Prior Year Claim Development
- --------------------------------------------------------------------------------
Dollars in Millions 1995 1994 1993
- --------------------------------------------------------------------------------
Traditional business $ (18.7) $ (37.0) $ (9.3)
Nontraditional business (.9) (6.5) (14.4)
- --------------------------------------------------------------------------------
Total $ (19.6) $ (43.5) $ (23.7)
================================================================================
Percent to prior year net claims
and claims expense reserves 2.4% 6.2% 3.8%
================================================================================
29
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
The net favorable claim development for traditional business written since 1986
continued to emerge during 1995, 1994 and 1993. The net favorable development on
the Company's traditional business is impacted by several factors, some of which
are interdependent. A principal reason for such development is the strength of
the pricing assumptions underlying the business written, particularly with
respect 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. This favorable development offsets certain
unfavorable development on business written prior to 1986, principally related
to asbestos and environmental claims, and in 1995, includes the Company's
evaluation of the lengthening of loss emergence patterns for certain lines of
business included in the most recent Historical Loss Development Study, which is
issued every two years by the RAA. Favorable and unfavorable claims experience
for nontraditional treaty business is usually compensated for by adjustments in
premiums from and commissions to client companies.
Claims and claims expenses paid for the years ended 1995, 1994 and 1993 are as
follows:
==============================================================================
Dollars in Millions 1995 1994 1993
==============================================================================
Traditional business $ 162.5 $ 144.3 $ 115.3
Nontraditional business 17.9 10.4 27.4
==============================================================================
Total $ 180.4 $ 154.7 $ 142.7
==============================================================================
As the Company's casualty book of business continues to mature, claim payment
activity is expected to increase. Claim payment activity includes net payments
for property catastrophe claims of $5 million, $14.6 million and $32.1 million
for traditional business for 1995, 1994 and 1993, respectively, and $5 million,
$4.8 million and $3.9 million for nontraditional business for 1995, 1994 and
1993, respectively.
Claims and claims expenses also include a charge for actual and potential
non-recoveries from retrocessionnaires that either do not satisfy the Company's
financial guidelines, or are in liquidation or rehabilitation proceedings. Such
charges amounted to $1.4 million, $4 million and $1.1 million for 1995, 1994 and
1993, respectively, and reflect a provision for paid and unpaid claims,
inclusive of incurred but not reported (IBNR) claims. Substantially all such
charges relate to reinsurance purchased prior to 1986. The Company's .6 to 1
ratio of reinsurance recoverables (including IBNR) to statutory surplus, a
measure of exposure that continues to receive attention from analysts of
insurance companies and state regulators, is less than the average ratio for the
top 15 property/casualty reinsurers reporting to the RAA of .9 to 1, based on
the most recent available data. In addition, approximately 57% of the Company's
reinsurance recoverables are collateralized by letters of credit, trust accounts
or funds withheld, which further reduces the Company's exposure to uncollectible
balances.
The Company is unaware of any specific, unusual and significant circumstances
affecting claim reserve estimates, except to the extent disclosed.
30
<PAGE>
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The 1995 and 1994 statutory composite ratios for the Company's international
reinsurance subsidiary were 111.7% and 114.7%, respectively. The 1995 composite
ratio includes approximately 3.3 percentage points due to property catastrophe
claims principally related to a Caribbean hurricane. A principal cause for these
relatively high composite ratios was the contribution of the operating expense
ratios of 13% and 20.2%, respectively. The Company generally expects a higher
expense ratio in the start-up years of the operation as the subsidiary
establishes its operations and client relationships. The expense ratio of the
international subsidiary is expected to normalize over time as it leverages its
investment in infrastructure and marketing, and generates increases in premium
revenues.
The pricing of the Company's reinsurance contracts contemplates many factors,
including exposure to claims and the expenses of the client and the broker.
Commissions and brokerage expenses as a percentage of premium revenues declined
moderately in 1995 compared to 1994 and 1993. 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 decline in the commissions and brokerage ratio in 1995
and 1994 was largely due to the expected reduction in nontraditional treaty
business, as these contracts generally require experience refunds remitted in
the form of commissions. This decrease was partially mitigated by an increase in
pro rata contracts written in the Company's specialty lines of business, as
these contracts generally carry a higher commission rate.
Operating expenses increased in each year reflecting continued business
expansion, investments in technology, a continued investment in facultative
business and the opening of the international operation. Because of the expanded
utilization of the Company's facultative infrastructure and other increases in
premium volume without a corresponding growth in staff, the 1994 domestic
operating expenses declined as a percentage of premium volume to 7.8% compared
to 8.8% in 1993. The Company expanded staffing slightly in 1995 in order to
accommodate continuing growth opportunities and began a significant technology
initiative, resulting in a domestic statutory expense ratio of 8.3%. The Company
plans to add additional staff in 1996, primarily in facultative branches. In
addition, its technology initiative will generate additional expenditures in
1996 and possibly 1997. However, the Company will continue to seek measures to
contain operating expenses that are not central to its underwriting activities,
and to better utilize its resources. Accordingly, the Company expects to
continue to write additional business over the next few years without a
commensurate increase in operating expenses.
Investments
Cash and invested assets were $1.8 billion at December 31, 1995 and $1.4 billion
at December 31, 1994, excluding net investment payables of $50.5 million and
$42.4 million for 1995 and 1994, respectively. The increase in invested assets
over 1994 includes approximately $146.6 million in net proceeds related to the
Company's public debt and equity offerings in November 1995.
Net investment income increased 10.9% in 1995 compared to 5.1% in 1994 and 16.8%
in 1993. After-tax net investment income increased 14.7% in 1995 compared to
3.2% in 1994 and 14.1% in 1993. The increase in each year was the result of
growth in invested assets due to the investment of cash flow from operations and
in 1993, due to the investment of the net proceeds from the Company's 1992 debt
offerings. The Company's pretax investment yield was 5.9% in 1995 compared to 6%
in 1994 and 6.4% in 1993. On an after-tax basis, the investment yield was 4.6%
in 1995, 4.5% in 1994 and 4.9% in 1993.
31
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Investment yields during the past three years were characterized by a highly
fluctuating interest rate environment. Interest rates declined through much of
1993, and then beginning in the first quarter of 1994, began an upward movement
as the Federal funds rate was raised seven times, resulting in an increase in
short-term interest rates of approximately 250 basis points. Investment yields
began to decline during 1995, especially in the second half of the year, as the
yield on a ten year Treasury bond declined over 200 basis points from 1994
levels.
While the Company benefited in 1995 from the interest rate environment of 1994,
the effect on investment yields was somewhat tempered given the Company's fixed
maturity duration of approximately 5 years, the declining interest rate
environment during 1995, as well as the portion of the Company's assets invested
in equity securities. Also affecting the comparison of 1995 and 1994 pretax and
after-tax investment yields was the Company's investment of available cash flow
during 1995 in approximately $307 million of tax-exempt securities to take
advantage of the higher after-tax yields for these securities. The Company
expects continued growth in investment income during 1996 due to a higher
invested asset base; however, such growth will be mitigated somewhat by lower
available investment yields.
Realized investment gains, net of tax, were $.94 per share for 1995, $.04 per
share for 1994, and $.67 per share for 1993. Investment gains were realized in
1995 principally as a result of the allocation of a portion of the investment
portfolio to tax-exempt securities. 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
the end of 1995, the Company's fixed maturity investments amounted to $1.6
billion, which approximates 86% of cash and invested assets, and substantially
all such investments are rated investment grade by Moody's Investor Services,
Inc. or Standard & Poor's.
The decrease in interest rates during 1995 caused an increase in the market
value of the Company's investment securities which resulted in a net unrealized
appreciation of investments, net of tax, of $35.2 million or $1.83 per share at
December 31, 1995. The unrealized appreciation was primarily attributable to the
market value fluctuations in the Company's fixed income securities which are
recorded at fair value, consistent with the accounting provisions of SFAS No.
115, which was adopted by the Company at December 31, 1993.
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 duration of its liabilities. Consistent with the
payment profile of the Company's claims liabilities, as of the end of 1995 the
Company's investment portfolio had an average duration of 4.9 years. See Note 2
of the Notes to Consolidated Financial Statements for a detailed discussion of
the fixed maturity investment portfolio.
The balance of the Company's investment portfolio at December 31,1995,
consisting of cash, short-term investments and equity securities, amounted to
$270 million. As of December 31, 1995, the Company held $127 million or 6.8% of
cash and invested assets in equity securities, representing 21% of statutory
surplus. This is compared to $124 million or 8.8% of invested assets in equity
securities at December 31, 1994, representing 30% of statutory surplus.
32
<PAGE>
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In late 1993, the Company established an international reinsurance operation in
London, England (NAC Re International) with $75 million of capital, and
increased stockholders' equity to $92 million and $121 million at the end of
1994 and 1995, respectively. This capital, a component of the invested assets
described above, is being invested in accordance with the Company's overall
investment strategy. At December 31, 1995, NAC Re International's investment
portfolio, which was primarily invested in U.K. Government securities, had an
average duration of 3.6 years, and a pretax investment yield of 7.3%.
Income Taxes
The Company's effective tax rate increased to 20.3% in 1995 as compared to 15.8%
in 1994, due to the larger contribution of realized investment gains which are
taxed at a marginal tax rate of 35%. Excluding investment gains, the Company's
effective tax rate was 14.2%, up marginally as compared to 13.3% in 1994. This
increase was principally due to improved underwriting results, offset somewhat
by a lower effective tax rate on investment income due to the more significant
contribution of tax-exempt income. The Company's effective tax rate marginally
increased in 1994 over 1993 principally as a result of the tax rate increase in
1993 from 34% to 35%. The Company recorded a net tax benefit of approximately
$.9 million in 1993 as a result of the revaluation of current tax liabilities
and net deferred tax assets to reflect this tax rate increase.
Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123, "Accounting for Stock-Based Compensation." This Statement, if
adopted, would require companies to recognize compensation expense for grants of
stock, stock options and other equity instruments to employees based on their
respective fair values at the date of grant. Companies that choose not to adopt
the new rules will continue to apply the existing accounting rules contained in
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees." Companies that continue to apply the existing accounting rules
contained in APB No. 25 are required to disclose the pro forma effects of net
income and earnings per share, as if the fair value based method of accounting
had been applied. The Company intends to continue to account for its stock-based
compensation under APB No. 25 and provide the pro forma disclosures required by
FASB No. 123, beginning in 1996. See Note 8 of the Notes to Consolidated
Financial Statements.
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. These
dividends are subject to statutory restrictions as described in Note 10 of the
Notes to Consolidated Financial Statements.
In late 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 1,530,000 shares of Common Stock. In addition, the Company raised
$200 million in 1992 through the issuance of $100 million of 5.25% Convertible
Subordinated Debentures due December 2002 and $100 million of 8% Notes due June
1999. As a result of these transactions and borrowings described below, pretax
interest expense was $15.6 million in 1995, $14.5 million in 1994 and $13.6
million in 1993.
NAC Re maintains a revolving credit and term loan facility, under which it can
borrow up to $35 million. Outstanding borrowings at each of December 31, 1995
and 1994 were $17.8 million, and were principally
33
<PAGE>
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MANACEMENT'S DISCUSSION AND ANALYSIS
utilized to finance the Company's periodic repurchase of its Common Stock. There
was minimal repurchase activity in 1995 and approximately 552,000 shares of NAC
Re Common Stock were repurchased by the Company during 1994. As of December 31,
1995, approximately 500,000 shares were available for repurchase under the
Company's repurchase program. Outstanding borrowings on the loan facility are
payable quarterly over a three year period beginning in June 1996.
NAC maintains a $15 million line of credit facility which is available for
castrophe claim payments or working capital purposes. There have been no
borrowings under this facility.
Consolidated stockholders' equity totaled $511.8 million or $26.65 per share at
December 31, 1995, compared to $319.1 million or $18.23 per share, at December
31, 1994. The increase in stockholders' equity for the year included $81.2
million, net of tax, or $4.64 per share, as a result of the unrealized
appreciation of the Company's investment securities.
The Company's regular quarterly dividend was increased to $.05 per share from
$.04 per share in June 1995. It is anticipated that the cash dividend level will
leave sufficient retained earnings to meet future financial needs.
Statutory surplus of the reinsurance subsidiary was approximately $615 million
and $407 million at the end of 1995 and 1994, respectively. The increase was
primarily due to the contribution to NAC of the majority of the net proceeds
from the Company's debt and equity offerings and from earnings growth. NAC ranks
among the largest domestic reinsurers measured on this basis. The Company
believes the increase in surplus will enhance its ability to attract new
business and retain its existing client base.
The Company's insurance operations create liquidity in that premiums are
received substantially in advance of the time claims are paid. Over the most
recent three years, cash flow provided by operating activities totaled over $438
million, including 1995 and 1994 cash flow of $174 million and $138 million,
respectively. The cash flow for 1995 and 1994 increased primarily due to
increased premium volume and increased net investment income. Cash flow is
expected to continue to grow in 1996 as a result of anticipated growth in net
premiums written and net investment income.
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 regulating 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
34
<PAGE>
- -------------------------------------------------------------------------------
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.
Other disclosure standards require prior regulatory agency approval of changes
in control of an insurer and of transactions between affiliates and
subsidiaries. The Company is also subject to periodic financial and market
conduct examinations conducted by the Company's domiciliary Insurance Department
as well as by other state Insurance Departments. Additionally, prior to the
acquisition of 10% of the outstanding shares of Common Stock, stockholders may
be required to file certain notices and reports with regulator agencies.
State insurance legislators and regulators and the NAIC are expected to continue
to fine-tune existing insurance laws and regulations, with a continued emphasis
on insurance company solvency. In 1994, the NAIC started analyzing and drafting
new model laws entitled "Investments of Insurers Model Act and "Derivative
Instruments Model Regulation." Although definitive action has not yet been taken
by the NAIC, the Company's domestic subsidiaries may be subject to new
investment regulation in the future. Any new investment regulation is expected
to have minimal, if any, effect on the Company as its investment portfolios are
currently subject to the extensive statutory requirements of New York and
California.
The federal Superfund program's taxing authority expired at the end of 1995.
While it is expected to be reenacted, it is not possible to predict when or in
what form given the current difficult federal environment and the varied
proposals. See Note 3 of the Notes to the Consolidated Financial Statements.
Late in 1995 the Congress enacted the Private Securities Litigation Reform Act
of 1995. While one of the objects of the Act may have been to reduce litigation
costs, it is unlikely to have that effect in the near term; the exact meaning of
the various provisions is likely to be litigated for some time to come. Product
liability and tort reform continue to appear on the Congress' agenda. It is not
possible to predict whether there will be any change in product liability or
tort reform or what the content or scope of any such change might be, and,
accordingly, it is not possible to assess the impact on the Company's
operations. To the extent that reform, if any, reduces litigation costs, it
would be a favorable development for the Company.
The Consolidated Financial Statements and related notes that follow should be
read in concert with this discussion and are integral to it.
35
<PAGE>
- -------------------------------------------------------------------------------
TEN YEAR FINANCIAL SUMMARY
<TABLE>
=============================================================================================================
In Thousands, except per share amounts 1995 1994 1993 1992(1)
=============================================================================================================
<S> <C> <C> <C> <C>
Income Statement Data
Gross premiums written $677,938 $575,037 $431,582 $366,292
Net premiums written 521,489 438,201 336,941 268,023
Premiums earned 491,785 395,731 306,379 250,533
Net investment income 89,308 80,504 76,632 65,590
Net investment gains (losses) 25,391 2,155 19,095 9,081
Total revenues 606,484 478,390 402,106 325,204
Operating costs and expenses 527,663 436,100 352,609 321,598
Operating income 62,824 35,612 42,351 10,386
Net income 62,824 35,612 42,351 22,443
Return on stockholders' equity (3) 19.7% 9.5% 13.7% 9.3%
- -------------------------------------------------------------------------------------------------------------
Per Share Data (4)
Primary:
Average shares outstanding 18,094 17,895 18,420 18,313
Operating income $3.47 $1.99 $2.30 $.57
Net income 3.47 1.99 2.30 1.23
Fully diluted (assuming conversion of dilutive
convertible securities):
Average shares outstanding 20,153 20,053 20,445 18,536
Net income $3.29 $1.95 $2.24 $1.21
Cash dividends declared per share .19 .16 .16 .16
Stock prices:
High 39.00 34.00 44.75 42.00
Low 28.25 24.00 28.00 21.75
Close 36.00 33.50 29.75 40.50
- -------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Total assets (5) (6) $2,462,131 $1,916,768 $1,778,868 $1,596,209
Cash and invested assets (5) 1,863,526 1,414,527 1,412,624 1,258,016
Claims and claims expense reserves, gross (6) 1,292,415 1,086,170 909,061 808,489
Net of reinsurance recoverable 953,669 808,433 697,221 626,090
Long-term debt 299,927 200,000 200,000 200,000
Unrealized appreciation (depreciation)
of investments, net of tax: (5)
Fixed maturities 27,102 (44,204) 30,865 2,402
Equity securities 8,085 (1,826) 6,521 3,786
Total reported 35,187 (46,030) 37,386 6,188
Stockholders' equity (5) 511,756 319,085 375,540 309,221
Stockholders' equity per share (4) (5) 26.65 18.23 21.13 17.35
- -------------------------------------------------------------------------------------------------------------
Domestic Statutory Data
Statutory composite ratio 103.1% 105.7% 110.9% 126.9%
Statutory surplus $615,433 $407,024 $406,163 $384,032
=============================================================================================================
(1) In 1992, the Company adopted SFAS No. 109, "Accounting for Income Taxes."
The cumulative effect from prior years increased net income by $12.1
million or $.66 per share.
(2) In 1988, the Company adopted the practice of discounting workers'
compensation tabular case reserves. The cumulative effect from prior
years increased net income by $1.9 million or $.12 per share. In addition,
1988 income tax expense included a charge for the utilization of an
operating loss carry forward. The tax benefit of $1.2 million, or $.07 per
share, resulting from such utilization was recorded as an extraordinary
item.
(3) Based on net income divided by stockholders' equity as reported at the
beginning of each year. Stockholders' equity for the 1994 and 1995
computations include the effects of adopting SFAS No. 115.
</TABLE>
36
<PAGE>
- -------------------------------------------------------------------------------
<TABLE><CAPTION>
==============================================================================================================
1991 1990 1989 1988(2) 1987 1986 CAGR*
==============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
$291,775 $261,099 $234,960 $206,761 $183,818 $131,717 20.0%
233,044 217,106 192,323 171,430 154,510 122,689 17.4
229,358 215,085 190,657 161,978 137,376 81,723 22.1
58,743 51,930 45,475 35,640 25,341 15,084 21.8
5,533 (1,121) 3,236 142 878 4,899 20.0
293,634 265,894 239,368 197,760 163,595 101,706 21.9
251,916 236,464 209,883 177,830 151,945 95,563 20.9
34,816 24,961 25,626 17,732 11,113 6,143 29.5
34,816 24,961 25,626 20,827 11,113 6,143 29.5
17.2% 13.4% 15.8% 14.0% 8.1% 7.5% --
- --------------------------------------------------------------------------------------------------------------
15,813 15,898 15,865 15,796 16,304 11,836 --
$2.20 $1.57 $1.62 $1.12 $.68 $.52 23.5
2.20 1.57 1.62 1.31 .68 .52 23.5
18,393 18,358 18,414 18,257 16,304 11,836 --
$2.04 $1.50 $1.53 $1.29 $.68 $.52 22.8
.14 .13 .10 -- -- -- --
31.50 25.83 27.33 14.11 14.33 18.67 --
19.33 17.00 13.78 8.22 7.78 11.22 --
31.50 22.00 23.83 14.11 7.89 11.67 --
- --------------------------------------------------------------------------------------------------------------
$1,106,573 $988,809 $869,810 $705,832 $591,474 $443,496 21.0
892,581 781,591 689,481 544,304 423,286 303,990 22.3
681,110 596,236 520,723 389,279 303,623 186,978 24.0
528,521 468,637 387,767 291,531 201,051 118,422 26.1
51,750 51,750 51,750 51,750 51,750 51,750 21.6
2,374 (2,588) -- -- -- -- --
3,452 (2,958) (323) (158) -- -- --
5,826 (5,546) (323) (158) -- -- --
241,387 202,525 186,104 162,501 148,278 136,777 15.8
15.70 12.98 11.92 10.38 9.10 8.41 13.7
- --------------------------------------------------------------------------------------------------------------
108.2% 108.2% 108.5% 106.8% 107.8% 109.9% --
$230,041 $197,391 $189,018 $174,217 $163,233 $152,466 16.8
==============================================================================================================
</TABLE>
(4) Stock price and per share figures have been restated to reflect the
three-for-two stock splits effective in 1989 and 1991.
(5) At December 31, 1993, the Company adopted SFAS No. 115. Retroactive
application to prior periods is prohibited. See Note 1 of the Notes to
Consolidated Financial Statements.
(6) Reclassified to reflect the adoption of SFAS No. 113 in 1993, which
requires reinsurance recoverables on claims and claims expenses
(including IBNR) and unearned premiums to be reported as assets.
* Compound annual growth rate.
37
<PAGE>
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
In Thousands
=================================================================================================================================
December 31,
------------------------------------------
1995 1994
=================================================================================================================================
<S> <C> <C>
Assets
Investments:
Available for sale:
Fixed maturities (amortized cost: 1995, $1,551,848; 1994, $1,189,545) $1,593,543 $1,145,341
Equity securities (cost: 1995, $114,818; 1994, $125,812) 127,257 123,986
Short-term investments 132,406 135,576
- ---------------------------------------------------------------------------------------------------------------------------------
Total investments 1,853,206 1,404,903
- ---------------------------------------------------------------------------------------==========================================
Cash 10,320 9,624
Accrued investment income 26,955 20,053
Premiums receivable 154,974 120,610
Reinsurance recoverable balances, net 257,136 205,797
Reinsurance recoverable on unearned premiums 28,111 22,115
Deferred policy acquisition costs 70,466 59,953
Excess of cost over net assets acquired 4,011 4,379
Deferred tax asset, net 27,688 44,341
Other assets 29,264 24,993
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $2,462,131 $1,916,768
- ---------------------------------------------------------------------------------------==========================================
Liabilities
Claims and claims expenses $1,292,415 $1,086,170
Unearned premiums 230,738 195,213
8% Notes due 1999 100,000 100,000
7.15% Notes due 2005 99,927 -
5.25% Convertible Subordinated Debentures due 2002 100,000 100,000
Investment accounts payable 50,580 42,442
Other liabilities 76,715 73,858
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,950,375 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, 21,341; 1994, 19,639 shares issued) 2,134 1,964
Additional paid-in capital 246,356 194,231
Unrealized appreciation (depreciation) of investments, net of tax 35,187 (46,030)
Currency translation adjustments, net of tax 1,017 1,059
Retained earnings 269,660 210,255
Treasury stock, at cost (1995, 2,137; 1994, 2,132 shares) (42,598) (42,394)
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 511,756 319,085
- ---------------------------------------------------------------------------------------==========================================
Total liabilities and stockholders' equity $2,462,131 $1,916,768
=================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
38
<PAGE>
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
In Thousands, except per share amounts
================================================================================
Year ended December 31,
-----------------------------------
1995 1994 1993
================================================================================
Premiums and Other Revenues
Net premiums written $521,489 $438,201 $336,941
Increase in unearned premiums (29,704) (42,470) (30,562)
- --------------------------------------------------------------------------------
Premiums earned 491,785 395,731 306,379
- --------------------------------------------------------------------------------
Net investment income 89,308 80,504 76,632
Net investment gains 25,391 2,155 19,095
- --------------------------------------------------------------------------------
Total revenues 606,484 478,390 402,106
- ---------------------------------------------===================================
Operating Costs and Expenses
Claims and claims expenses 326,148 265,753 213,840
Commissions and brokerage 139,063 117,592 94,077
Acquisition and operating expenses 46,804 38,301 31,110
Interest expense 15,648 14,454 13,582
- --------------------------------------------------------------------------------
Total operating costs and expenses 527,663 436,100 352,609
- ---------------------------------------------===================================
Income
Operating income before income taxes 78,821 42,290 49,497
Federal and foreign income taxes:
Current 18,779 10,885 12,202
Deferred (2,782) (4,207) (5,056)
- --------------------------------------------------------------------------------
Income tax expense (benefit) 15,997 6,678 7,146
- --------------------------------------------------------------------------------
Operating income/net income $62,824 $35,612 $42,351
- ---------------------------------------------===================================
Per Share Data
Primary:
Average shares outstanding 18,094 17,895 18,420
Operating income/net income $3.47 $1.99 $2.30
- --------------------------------------------------------------------------------
Fully diluted (assuming conversion
of dilutive convertible securities):
Average shares outstanding 20,153 20,053 20,445
Operating income/net income $3.29 $1.95 $2.24
- --------------------------------------------------------------------------------
Cash dividends declared per share $.19 $.16 $.16
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
39
<PAGE>
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
In Thousands
================================================================================
Year ended December 31,
---------------------------------
1995 1994 1993
================================================================================
Common Stock
Balance at beginning of year $1,964 $1,935 $1,914
Issuance of common stock 170 29 21
- --------------------------------------------------------------------------------
Balance at end of year 2,134 1,964 1,935
- -----------------------------------------------=================================
Additional Paid-in Capital
Balance at beginning of year 194,231 188,289 183,767
Issuance of common stock 52,125 5,942 4,522
- --------------------------------------------------------------------------------
Balance at end of year 246,356 194,231 188,289
- -----------------------------------------------=================================
Unrealized Appreciation (Depreciation) of
Investments, Net of Tax
Balance at beginning of year (46,030) 37,386 6,188
Unrealized appreciation (depreciation) 81,217 (83,416) 2,844
Adjustment to ending balance for change
in accounting method - - 28,354
- --------------------------------------------------------------------------------
Balance at end of year 35,187 (46,030) 37,386
- -----------------------------------------------=================================
Currency Translation Adjustments, Net of Tax
Balance at beginning of year 1,059 (2,141) (772)
Translation adjustments (42) 3,200 (1,369)
- --------------------------------------------------------------------------------
Balance at end of year 1,017 1,059 (2,141)
- -----------------------------------------------=================================
Retained Earnings
Balance at beginning of year 210,255 177,459 137,970
Net income 62,824 35,612 42,351
Dividends (3,419) (2,816) (2,862)
- --------------------------------------------------------------------------------
Balance at end of year 269,660 210,255 177,459
- -----------------------------------------------=================================
Treasury Stock
Balance at beginning of year (42,394) (27,388) (19,846)
Purchase of treasury shares (204) (15,006) (7,542)
- --------------------------------------------------------------------------------
Balance at end of year (42,598) (42,394) (27,388)
- -----------------------------------------------=================================
Total Stockholders' Equity
Balance at beginning of year 319,085 375,540 309,221
Issuance of common stock 52,295 5,971 4,543
Unrealized appreciation (depreciation) 81,217 (83,416) 31,198
Translation adjustments (42) 3,200 (1,369)
Net income 62,824 35,612 42,351
Dividends (3,419) (2,816) (2,862)
Purchase of treasury shares (204) (15,006) (7,542)
- --------------------------------------------------------------------------------
Balance at end of year $511,756 $319,085 $375,540
================================================================================
See Notes to Consolidated Financial Statements.
40
<PAGE>
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE><CAPTION>
In Thousands
===============================================================================================
Year ended December 31,
------------------------------------------
1995 1994 1993
===============================================================================================
<S> <C> <C> <C>
Operating Activities
Net income $62,824 $35,612 $42,351
Adjustments to reconcile net income to net cash
provided by operating activities:
Reserve for claims and claims expenses, net 145,404 111,072 71,131
Unearned premiums, net 29,584 42,533 30,562
Premiums receivable (34,415) (44,973) (4,627)
Accrued investment income (6,916) (2,763) 624
Reinsurance balances, net 6,976 (2,963) 7,628
Deferred policy acquisition costs (10,523) (15,492) (14,435)
Net investment gains (25,386) (2,120) (19,095)
Deferred tax asset, net (2,781) (4,155) (5,056)
Other liabilities 950 13,456 7,806
Other items, net 8,194 7,822 9,537
- -----------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 173,911 138,029 126,426
- -----------------------------------------------------==========================================
Investing Activities
Sales of fixed maturity investments 1,479,415 690,286 769,217
Maturities of fixed maturity investments 31,099 37,300 33,269
Purchases of fixed maturity investments (1,849,492) (846,379) (871,972)
Net sales of short-term investments 3,072 13,168 4,427
Sales of equity securities 101,918 41,706 24,048
Purchases of equity securities (84,910) (70,406) (76,697)
Purchases of furniture and equipment (2,365) (2,994) (1,290)
- -----------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (321,263) (137,319) (118,998)
- -----------------------------------------------------==========================================
Financing Activities
Issuance of shares 52,056 5,278 3,192
Net proceeds from issuance of 7.15% Notes 99,214 -- --
Net proceeds from issuance of 5.25% Debentures -- -- (146)
Purchase of treasury shares (204) (15,006) (7,542)
Cash dividends paid to stockholders (3,260) (2,827) (2,862)
Borrowings under revolving credit agreement -- 13,857 3,905
- -----------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Financing Activities 147,806 1,302 (3,453)
- -----------------------------------------------------==========================================
Effects of exchange rate changes on cash 242 (18) (610)
- -----------------------------------------------------==========================================
Increase in cash 696 1,994 3,365
Cash at beginning of year 9,624 7,630 4,265
- -----------------------------------------------------------------------------------------------
Cash at end of year $10,320 $9,624 $7,630
===============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
41
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles (GAAP) and include the accounts of NAC
Re Corp. (NAC Re) and its insurance and reinsurance subsidiaries: NAC
Reinsurance Corporation (NAC), Greenwich Insurance Company, Indian Harbor
Insurance Company and NAC Re International Holdings Limited and its
subsidiaries. NAC Re and its subsidiaries are collectively referred to herein as
the Company. All intercompany transactions and balances have been eliminated in
consolidation.
The preparation of the financial statements in conformity with GAAP requires the
use of estimates and assumptions that affect amounts reported in the financial
statements and the accompanying notes. Actual results could differ from such
estimates.
Premium Revenues and Related Expenses
Property/casualty premiums are recognized as income over the terms of the
related reinsurance contracts and policies. Unearned premium reserves represent
the portion of premiums written that relate to the unexpired terms of contracts
and policies in force. Such reserves are computed by pro rata methods based on
statistical data or reports received from ceding companies. Certain of the
Company's assumed and retrocession agreements include provisions that adjust
premium payments based upon the experience under the contracts. Premiums are
recorded based upon the expected ultimate experience under the agreements.
Acquisition costs, consisting principally of commissions and brokerage expenses
incurred at the time a contract or policy is issued, are deferred and amortized
over the period in which the related premiums are earned. Deferred policy
acquisition costs are limited to their estimated realizable value based on the
related unearned premiums and take into account anticipated claims and claims
expenses, based on historical and current experience, and anticipated investment
income.
Investments
Fixed maturities, which include bonds, notes, and redeemable preferred stocks
and equity securities, including common and non-redeemable preferred stocks,
have been categorized as "available for sale" and recorded at their fair value
in accordance with the provisions of SFAS No. 115 - "Accounting for Certain
Investments in Debt and Equity Securities," which was adopted by the Company at
December 31, 1993. The effect of adopting SFAS No. 115 at December 31, 1993 was
to record in stockholders' equity unrealized appreciation, net of deferred
income taxes, of $28.4 million, related to fixed maturities that were previously
recorded at amortized cost.
The Company categorizes all of its fixed maturities and equity securities as
available for sale in order to provide the Company the flexibility to respond to
various factors, including changes in market conditions and tax planning
considerations. Unrealized appreciation or depreciation of the securities
available for sale, net of applicable deferred income taxes, is excluded from
income, and recorded as a separate component of stockholders' equity. The fair
value of fixed maturities and equity securities is estimated using quoted market
prices or dealer quotes. Short-term investments, which have an original maturity
of one year or less, are carried at cost, which approximates fair value.
42
<PAGE>
- -------------------------------------------------------------------------------
Realized investment gains or losses on the sale or maturity of investments are
determined by the specific identification method. Net investment income,
consisting of dividends and interest, net of investment expenses, is recognized
when earned. The amortization of premium and accretion of discount for fixed
maturities is computed utilizing the interest method. The effective yield
utilized in the interest method is adjusted when sufficient information exists
to estimate the probability and timing of prepayments.
Claims and Claims Expenses
The reserves for claims and claims expenses are based on reports and individual
case estimates received from ceding companies. An amount is included for claims
and claims expenses incurred but not reported on the basis of past experience of
the Company and the reinsurance industry. These estimates are reviewed regularly
and, as experience develops and new information becomes known, the reserves are
adjusted as necessary. Such adjustments, if any, are reflected in results of
operations in the period in which they become known and are accounted for as
changes in estimates. Reserves are recorded without consideration of potential
salvage or subrogation recoveries which are estimated to be immaterial; such
recoveries, when realized, are reflected as a reduction of claims incurred.
Certain workers' compensation case reserves are considered fixed and
determinable and are subject to tabular reserving. Such tabular reserves are
discounted using an interest rate of 7%.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under
the liability method, deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A
valuation allowance is established for any portion of a deferred tax asset that
management believes will not be realized.
Per Share Data
Primary earnings per share data are based on the 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.
Furniture, Equipment and Leasehold Improvements
The costs of furniture and equipment are charged against income over their
estimated service lives. Leasehold improvements are amortized over the remaining
terms of the office leases. Depreciation and amortization are computed on the
straight-line method. Maintenance and repairs are charged to expense as
incurred. Depreciation and amortization expense was approximately $2.2 million,
$1.8 million and $1.3 million for the years ended December 31, 1995, 1994 and
1993, respectively.
Foreign Exchange
The assets and liabilities of foreign operations are translated at the rate of
exchange in effect at the balance sheet date. Revenues and expenses of foreign
operations are translated at the average exchange rates during the year. The
effect of the translation adjustments for foreign operations is recorded as a
cumulative translation adjustment in a separate component of stockholders'
equity, net of applicable deferred income taxes. Foreign currency transaction
gains and losses are included in net income and are not material.
43
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cost in Excess of Net Assets Acquired
The excess of cost over net assets acquired is amortized on a straight-line
basis over a period of twenty years. Amortization charged to operating expenses
was approximately $368,000 for each of the years ended December 31, 1995, 1994
and 1993.
2. Investment Information
Investment Income
The components of net investment income were as follows:
In Thousands
================================================================================
Year ended December 31,
-------------------------------------
1995 1994 1993
================================================================================
Fixed maturities $81,485 $74,861 $74,011
Equity securities 4,371 5,019 3,042
Cash and short-term investments 8,341 5,119 3,273
- --------------------------------------------------------------------------------
Gross investment income 94,197 84,999 80,326
Interest expense 685 900 885
Investment expenses 4,204 3,595 2,809
- --------------------------------------------------------------------------------
Net investment income $89,308 $80,504 $76,632
================================================================================
Investment Gains (Losses)
Realized and unrealized investment gains (losses) were as follows:
In Thousands
===============================================================================
Year ended December 31,
-----------------------------------
Net realized investment gains (losses): 1995 1994 1993
================================================================================
Fixed maturities $17,868 $(2,535) $16,119
Equity securities 7,523 4,690 2,976
- --------------------------------------------------------------------------------
Subtotal 25,391 2,155 19,095
Tax expense 8,422 1,353 6,683
- --------------------------------------------------------------------------------
Net realized investment gains, net of tax $16,969 $802 $12,412
- ---------------------------------------------===================================
Change in unrealized appreciation
(depreciation) of investments:
Fixed maturities $85,899 $(91,504) $40
Equity securities 14,265 (11,858) 4,295
- --------------------------------------------------------------------------------
Subtotal 100,164 (103,362) 4,335
Increase (decrease) in deferred income
tax liability 18,947 (19,946) 1,491
- --------------------------------------------------------------------------------
81,217 (83,416) 2,844
Effect of accounting change, net of tax (1) -- -- 28,354
- --------------------------------------------------------------------------------
Net change reflected in stockholders'
equity $81,217 $(83,416) $31,198
================================================================================
(1) The Company adopted SFAS No. 115 at December 31, 1993 (see Note 1).
44
<PAGE>
- -------------------------------------------------------------------------------
The following tables reconcile amortized cost to the estimated fair values
(which equals carrying value) of fixed maturity securities and equity
securities.
In Thousands
================================================================================
December 31, 1995
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
================================================================================
Available for Sale:
U.S. Treasury $116,958 $3,040 $(568) $119,430
Tax-exempt 714,326 28,947 (466) 742,807
Foreign Government 144,782 2,091 (656) 146,217
Corporate 341,290 9,352 (2,301) 348,341
Mortgage-backed 173,674 2,023 (885) 174,812
Subordinated convertibles 60,818 4,007 (2,889) 61,936
- --------------------------------------------------------------------------------
Total fixed maturities 1,551,848 49,460 (7,765) 1,593,543
Equity securities 114,818 19,123 (6,684) 127,257
- --------------------------------------------------------------------------------
Total $1,666,666 $68,583 $(14,449) $1,720,800
================================================================================
In Thousands
================================================================================
December 31, 1994
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
================================================================================
Available for Sale:
U.S. Treasury $56,870 $160 $(2,337) $54,693
Tax-exempt 398,593 9,938 (5,454) 403,077
Foreign Government 87,301 -- (5,937) 81,364
Corporate 349,191 303 (20,690) 328,804
Mortgage-backed 235,100 1,022 (17,035) 219,087
Subordinated convertibles 62,490 865 (5,039) 58,316
- --------------------------------------------------------------------------------
Total fixed maturities 1,189,545 12,288 (56,492) 1,145,341
Equity securities 125,812 15,970 (17,796) 123,986
- --------------------------------------------------------------------------------
Total $1,315,357 $28,258 $(74,288) $1,269,327
================================================================================
45
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contractual maturities of fixed maturity securities are shown below. Expected
maturities, which are best estimates, will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
In Thousands
================================================================================
December 31, 1995
----------------------------
Amortized Fair
Cost Value
================================================================================
Available for Sale:
Due in one year or less $30,658 $30,905
Due after one year through five years 309,478 337,798
Due after five years through ten years 762,644 758,479
Due after ten years 275,394 291,549
- --------------------------------------------------------------------------------
Subtotal 1,378,174 1,418,731
Mortgage-backed securities 173,674 174,812
- --------------------------------------------------------------------------------
Total $1,551,848 $1,593,543
================================================================================
The weighted average contractual and expected maturities, based on fair value,
of the fixed maturity investments excluding convertible securities, as of
December 31, 1995 were 10.2 years and 7.1 years, respectively.
Proceeds from the sales of fixed maturity securities during 1995, 1994 and 1993
were $1,479.4 million, $690.3 million and $769.2 million, respectively. Gross
gains of $25.3 million, $7.7 million and $19.1 million were realized on those
sales during 1995, 1994 and 1993, respectively. Gross losses of $7.4 million,
$10.3 million and $2.4 million were realized during 1995, 1994 and 1993,
respectively.
Approximately 97% of all fixed maturity investments held at December 31, 1995
and 1994, were considered investment grade by Standard and Poor's or Moody's
Investor Services, Inc.
Securities on Deposit
Securities with a face amount of $50.5 million at December 31, 1995, were on
deposit with various state or governmental insurance departments in order to
comply with insurance laws.
Assets Held in Escrow
Included in NAC Re's cash and invested assets at December 31, 1995 is
approximately $14.5 million of assets held in a "holding company" escrow
account arising from a tax allocation agreement between NAC Re and its domestic
subsidiaries. The agreement provides that each subsidiary must remit to NAC Re
its tax liability based upon its separate return. The excess of the taxes paid
by the subsidiaries to NAC Re over the consolidated group's tax liability are
restricted for current operating use, but may become available for unrestricted
use three years following the filing of the consolidated tax return that
generated the asset. Approximately $1.4 million of the escrow balance will
become available for use in 1996.
46
<PAGE>
- -------------------------------------------------------------------------------
3. Claims and Claims Expenses
The following table represents an analysis of paid and unpaid claims and claims
expenses and a reconciliation of beginning and ending reserve balances for the
years indicated.
<TABLE><CAPTION>
In Thousands
==========================================================================================================================
Year ended December 31,
------------------------------------------
1995 1994 1993
==========================================================================================================================
<S> <C> <C> <C>
Reserves for claims and claims expenses, at beginning of year $1,086,170 $909,061 $808,489
Reinsurance recoverables, at beginning of year 277,737 211,840 182,399
- --------------------------------------------------------------------------------------------------------------------------
Reserves for claims and claims expenses, net of reinsurance
recoverables, at beginning of year 808,433 697,221 626,090
- --------------------------------------------------------------------------------==========================================
Provision for claims and claims expenses, net of reinsurance,
occurring in the current year 345,783 309,294 237,491
- --------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in estimated claims and claims expenses,
net of reinsurance, occurring in prior years:
Traditional business (18,757) (37,076) (9,255)
Nontraditional business (878) (6,465) (14,396)
- --------------------------------------------------------------------------------------------------------------------------
Subtotal (19,635) (43,541) (23,651)
- --------------------------------------------------------------------------------------------------------------------------
Total incurred claims and claims expenses, net of reinsurance 326,148 265,753 213,840
- --------------------------------------------------------------------------------==========================================
Less payments for claims and claims expenses, net of reinsurance, occurring
during:
The current year 40,123 35,965 39,092
Prior years 140,263 118,686 103,617
- --------------------------------------------------------------------------------------------------------------------------
Total 180,386 154,651 142,709
- --------------------------------------------------------------------------------==========================================
Effects of exchange rate changes on reserves (526) 110 -
- --------------------------------------------------------------------------------------------------------------------------
Reserve for claims and claims expenses, net of reinsurance
recoverables, at end of year 953,669 808,433 697,221
Reinsurance recoverables, at end of year 338,746 277,737 211,840
- --------------------------------------------------------------------------------------------------------------------------
Reserve for claims and claims expenses, at end of year $1,292,415 $1,086,170 $909,061
==========================================================================================================================
</TABLE>
Estimates of claims and claims expenses are based in part on a prediction of
future events and estimates of future trends in claim severity and frequency and
other variable factors. The Company's ability to predict future trends based
upon its own historical claim experience is inherently difficult because of its
substantial growth in premiums since 1985. Therefore, the Company has
supplemented its historical claim experience to a certain extent with claim
experience derived from external sources, such as reinsurance industry data, for
purposes of evaluating future trends and providing an estimate of ultimate claim
costs. As the Company's book of business continues to mature, its own historical
claim experience achieves greater credibility and enhances its ability to
evaluate future trends. Accordingly, the Company believes its reserving process
improves as additional claims experience emerges and could be expected to result
in more refined estimates of claims and claims expenses over time.
47
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Claims and claims expenses reflect favorable claim development from prior years
for both traditional business and nontraditional treaty business. The net
favorable claim development for traditional business written since 1986
continued to emerge during 1993, 1994 and 1995. The net favorable development on
the Company's traditional business is impacted by several factors, some of which
are interdependent. A principal reason for such development is 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. This favorable
development offsets certain unfavorable development for business written prior
to 1986 principally related to asbestos and environmental claims, and in 1995,
includes the Company's evaluation of the lengthening of loss emergence patterns
for certain lines of business included in the most recent Historical Loss
Development Study, which is issued every two years by the Reinsurance
Association of America (RAA). Favorable and unfavorable claims experience for
nontraditional treaty business is usually compensated for by adjustments in
premiums from and commissions to client companies. Nontraditional business is no
longer a meaningful component of claims and claims expense reserves as such
business diminished upon the introduction of new accounting standards that
created higher thresholds for risk transfer and mitigated the benefits available
to ceding companies attributable to certain nontraditional contracts.
The Company's incurred claims and claims expenses include a provision of $1.4
million, $4 million and $1.1 million in 1995, 1994 and 1993, respectively, for
estimates of actual and potential non-recoveries from retrocessionnaires.
Included in claims and claims expense reserves at December 31, 1995, 1994 and
1993, is a reserve for potential non-recoveries from retrocessionaires of $10.7
million, $10.5 million and $7.5 million, respectively. Such charges for
non-recoveries relate principally to retrocessional contracts for business
written prior to 1986. See Note 5 - Retrocession Agreements.
Except for certain workers' compensation case reserves, the Company does not
discount its claims and claims expense reserves. The Company utilizes tabular
reserving for workers' compensation case reserves that are considered fixed and
determinable and discounts such reserves using an interest rate of 7% for
financial statements prepared in accordance with GAAP and a 5% interest rate for
statutory accounting purposes. Tabular reserving methology results in applying a
uniform and consistent criteria for establishing expected future indemnity and
medical payments (including an explicit factor for inflation) and the use of
mortality tables to determine expected payment periods.
Tabular reserves, net of reinsurance, reflected in the GAAP financial statements
for the years ending December 31, 1995, 1994 and 1993 were $29 million, $27.7
million and $24.2 million, respectively. The related discounted case reserves,
net of reinsurance, were $10.6 million, $10.6 million and $9.3 million as of
December 31, 1995, 1994 and 1993, respectively.
Included in the claim payment activity are net payments for property catastrophe
claims of approximately $10 million in 1995, $19 million in 1994 and $36 million
in 1993.
48
<PAGE>
- -------------------------------------------------------------------------------
Asbestos and Environmental Related Claims
The Company's reserving process includes a continuing evaluation of the
potential impact on claims liabilities from exposure to asbestos and
environmental claims, including related loss adjustment expenses.
Liabilities are established to cover both known and unasserted claims.
A reconciliation of the beginning and ending reserves related to asbestos and
environmental exposure claims for the years indicated is as follows:
<TABLE><CAPTION>
In Thousands
=============================================================================================
Year ended December 31,
------------------------------
1995 1994 1993
=============================================================================================
<S> <C> <C> <C>
Reserves for claims and claims expenses, net of reinsurance
recoverables, at beginning of year $19,849 $18,379 $14,966
Provisions for claims and claims expenses, net of reinsurance 6,989 4,810 4,239
Less payments for claims and claims expenses,
net of reinsurance 4,809 3,340 826
- ---------------------------------------------------------------------------------------------
Reserve for claims and claims expenses, net of reinsurance
recoverables, at end of year 22,029 19,849 18,379
Reinsurance recoverables, at end of year 35,135 34,141 31,341
- ---------------------------------------------------------------------------------------------
Reserve for claims and claims expenses, gross of reinsurance
recoverables, at end of year $57,164 $53,990 $49,720
=============================================================================================
</TABLE>
Incurred but not reported claims and claims expense reserves (IBNR), net of
reinsurance, included in the above table totaled $10.3 million in 1995, $9.4
million in 1994 and $8.8 million in 1993. Ceded liabilities reflect amounts
expected to be recoverable from retrocessionaires, after reduction for potential
uncollectible amounts.
As of December 31, 1995 and 1994, the Company had approximately 800 open claim
files for potential environmental exposures and 300 open claim files for
potential asbestos exposures. Approximately 55% and 60% of the total open claim
files for 1995 and 1994, respectively, are due to precautionary claim notices.
Precautionary claim notices are submitted by the ceding company in order to
preserve their right to receive coverage under the reinsurance contract. Such
notices do not contain an incurred loss amount to the Company. The Company
actively evaluates potential exposure to environmental and asbestos claims and
records claims and claims expense reserves as appropriate.
The Company believes it has made a reasonable provision for its asbestos and
environmental exposures and is unaware of any specific issues which would
materially affect its claims and claims expense estimate. The estimation of
claims and claims expense liabilities for asbestos and environmental exposures
is subject to a much greater uncertainty than would normally be associated with
the establishment of liabilities for other exposures due to several factors,
including i) uncertain legal interpretation and application of insurance and
reinsurance coverage and liability; ii) the lack of available historical claim
data as a reliable indication of future claim development; iii) an uncertain
political climate which may impact, among other areas, the nature and amounts of
costs for remediating waste sites; and iv) the potential of insurers and
policyholders to reach agreements in order to avoid further significant
49
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
legal costs. Due to the potential significance of these uncertainties, the
Company believes that no meaningful range of claims and claims expense
liabilities beyond recorded reserves can be established. As these uncertainties
are resolved, additional reserve provisions, which could be material in amount,
may be necessary.
4. Income Taxes
The provision for federal income taxes has been determined on the basis of a
consolidated tax return consisting of NAC Re and its subsidiaries.
The income tax provision in the consolidated statement of income gives effect to
permanent differences between financial and taxable income. Due to the
contribution of tax-exempt income and other factors as noted below, the
Company's effective income tax rate is less than the statutory rate on operating
income. An analysis of the Company's effective tax rate is as follows:
<TABLE><CAPTION>
In Thousands
============================================================================================================
Year ended December 31,
------------------------------------------------------------------------
1995 1994 1993
============================================================================================================
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income taxes computed on pretax
operating income $27,587 35% $14,801 35% $17,324 35%
Increase (reduction) in taxes
resulting from:
Tax-exempt investment income (10,150) (13) (7,308) (17) (8,124) (16)
Dividend received deduction (822) (1) (713) (2) (380) (1)
Impact of tax rate increase on
deferred taxes -- -- -- -- (908) (2)
Other, net (618) (1) (102) -- (766) (2)
- ------------------------------------------------------------------------------------------------------------
Tax expense on
operating income $15,997 20% $6,678 16% $7,146 14%
============================================================================================================
</TABLE>
Significant components of the provision for income taxes attributable to
operations were as follows:
In Thousands
================================================================================
Year ended December 31,
------------------------------------------
1995 1994 1993
================================================================================
Current expense:
Federal $17,809 $10,463 $11,838
Foreign 970 422 364
- --------------------------------------------------------------------------------
Total current expense 18,779 10,885 12,202
- --------------------------------------==========================================
Deferred expense (benefit):
Federal (3,245) (3,761) (5,056)
Foreign 463 (446) --
- --------------------------------------------------------------------------------
Total deferred benefit (2,782) (4,207) (5,056)
- --------------------------------------==========================================
Total tax expense $15,997 $6,678 $7,146
================================================================================
50
<PAGE>
- -------------------------------------------------------------------------------
The Company's current federal tax expense for the years 1995, 1994 and 1993 was
based on regular taxable income. Taxes paid in the years 1995, 1994 and 1993
were $19 million, $10 million and $4.1 million, respectively.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1995 and 1994 were as follows:
In Thousands
================================================================================
December 31,
-------------------------
1995 1994
================================================================================
Deferred tax asset:
Net claims reserve discount $52,556 $49,192
Net unearned premiums 13,307 11,693
Unrealized depreciation of investments - 16,111
Compensation liabilities 3,764 3,523
Other 2,951 3,088
- --------------------------------------------------------------------------------
Deferred tax asset, gross of valuation 72,578 83,607
Valuation allowance - (16,111)
- --------------------------------------------------------------------------------
Deferred tax asset, net of valuation 72,578 67,496
- -------------------------------------------------------=========================
Deferred tax liability:
Deferred policy acquisition costs 23,855 20,660
Unrealized appreciation of investments 18,947 -
Other 2,088 2,495
- --------------------------------------------------------------------------------
Deferred tax liability 44,890 23,155
- -------------------------------------------------------=========================
Net deferred tax asset $27,688 $44,341
================================================================================
A full valuation allowance was established in 1994 to reduce the deferred tax
asset on the unrealized depreciation of investments recorded in stockholders'
equity. The valuation allowance is not required in 1995 due to the increase in
market values of the Company's fixed maturities and equity securities.
Stockholders' equity at December 31, 1995 and 1994 reflects tax benefits of $3
million and $2.5 million, respectively, related to compensation expense
deductions for stock options exercised.
As a result of the merger of its previously existing parent into NAC Re in
January 1987, $12 million of tax loss carryforwards are currently available for
use to offset future taxable income of NAC Re under the separate return
limitation year rules, with the following expiration dates: $1.8 million
expiring in 1998, $6.2 million expiring in 1999, $3.9 million expiring in 2000
and $.1 million expiring in 2001. A deferred tax asset was not recorded for
these loss carryforwards, as the Company does not expect to utilize these losses
in future years.
51
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Retrocession Agreements
The Company utilizes retrocession agreements principally to increase aggregate
premium capacity, and to reduce and spread the risk of loss on reinsurance
underwritten. In addition, the Company maintains catastrophe reinsurance
programs for the purpose of limiting its exposure with respect to multiple
claims arising from a single occurrence or event. The Company's retrocession
agreements provide for recovery of a portion of claims and claims expenses from
retrocessionnaires. Reinsurance recoverables are recorded as assets, predicated
on the retrocessionnaires' ability to meet their obligations under the
retrocession agreements. If the retrocessionnaires are unable to satisfy their
obligation under the agreements, the Company would be liable for such defaulted
amounts.
The Company's maximum retention on any one claim for non-catastrophe losses for
1996 is $5 million, compared to $3.9 million for 1995, with the exception of one
client relationship in 1995 in which the maximum retention on any one claim was
$4.7 million. Such retention levels were $3.9 million and S3 million for 1994
and 1993, respectively. Further, the Company's retention level for property
catastrophe claims in 1996 remained the same as 1995 and 1994 at $5 million per
event compared to $10 million for 1993. For 1996, the Company expects to
maintain $120 million of property catastrophe protection, of which $30 million
of coverage, in excess of the first $60 million of coverage, is available only
if industry-wide claims exceed certain minimum levels.
The effect of retrocessional activity on premiums written and earned is set
forth below:
<TABLE><CAPTION>
In Thousands
=======================================================================================
Premiums Written Premiums Earned
----------------------------------------------------------------------------
Year ended December 31, Year ended December 31,
----------------------------------------------------------------------------
1995 1994 1993 1995 1994 1993
=======================================================================================
<S> <C> <C> <C> <C> <C> <C>
Direct $70,183 $46,005 $15,698 $58,475 $30,621 $14,003
Assumed 607,755 529,032 415,884 583,764 487,961 385,283
Ceded (156,449) (136,836) (94,641) (150,454) (122,851) (92,907)
- ---------------------------------------------------------------------------------------
Net $521,489 $438,201 $336,941 $491,785 $395,731 $306,379
=======================================================================================
</TABLE>
The Company's direct and ceded premiums written increased in 1995 and 1994
principally due to an agreement with a premier aviation underwriting pool which
also provides reinsurance protection for the common account of all the direct
writer participants.
The Company recorded ceded claims and claims expenses incurred of
$120.4 million, $105.6 million and $76.1 million for the years ended
December 31, 1995, 1994 and 1993, respectively.
52
<PAGE>
- -------------------------------------------------------------------------------
The Company's balance sheet as of December 31, 1995 and 1994 reflects
reinsurance recoverables as assets, net of available offsets, as follows:
In Thousands
================================================================================
December 31,
-----------------------------
1995 1994
================================================================================
Reinsurance recoverable balances:
Paid claims $19,051 $17,447
Unpaid claims and claims expenses 338,746 277,737
Ceded balances payable (56,792) (41,958)
Funds held liability (43,869) (47,429)
- --------------------------------------------------------------------------------
Reinsurance recoverable balances, net $257,136 $205,797
================================================================================
Reinsurance recoverable on unearned premium $28,111 $22,115
================================================================================
The Company is the beneficiary of letters of credit, trust accounts and funds
withheld in the aggregate amount of $221 million at December 31, 1995,
collateralizing reinsurance recoverables with respect to certain
retrocessionnaires.
At December 31, 1995, the Company had total reinsurance recoverables, exclusive
of available offsets in the form of letters of credit, trust accounts and funds
withheld, totaling $385.9 million, with 153 domestic and 86 foreign
retrocessionnaires. Of that amount, approximately 37% or $142.9 million was due
from a foreign retrocessionnaire, Hannover Ruckversicherungs AG (80%), and its
affiliate, Eisen Und Stahl Ruckversicherungs AG (20%), which are rated AA+ and
AA-, respectively, by Standard & Poor's. Such amounts are fully collateralized
by either funds withheld or letters of credit. No other amounts recoverable from
a single entity or group of entities exceeded 10% of stockholders' equity as of
December 31, 1995.
6. Lease and Service Agreements
Operating Lease Agreement
The Company leases office space under noncancellable, and in most instances
renewable, operating leases expiring at various dates through 2003. The
following is a schedule of future minimum rental payments, exclusive of
escalation clauses and rental income, as of December 31, 1995:
In Thousands
===============================================================================
1996 $3,468
1997 3,804
1998 3,813
1999 3,648
2000 3,490
2001 and thereafter 3,423
- -------------------------------------------------------------------------------
$21,646
===============================================================================
Rental expense, net of sublease rental income, was approximately $3.5 million
for 1995 and $3.3 million for both 1994 and 1993.
53
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Service Agreement
In 1994 and 1995, the Company had consulting agreements with two investment
banking firms with which two Directors of the Company are associated for a fee
of $100,000 per firm. The Company has retained the services of these firms from
time to time since 1991. In addition, these firms acted as co-managing
underwriters in connection with the Company's 1995 common stock offering and
co-lead underwriters in connection with its concurrent debt offering and were
paid total underwriting commissions of $3 million related to such offerings.
See Notes 7 and 12.
7. Long-term Debt and Financing Arrangements
The Company's $100 million of 7.15% Senior Notes due November 15, 2005, were
issued in November 1995 through a public offering at a price of $99.9 million.
The expenses incurred in the offering of approximately $.8 million were deferred
and are being amortized over the life of the Notes. Interest and amortization
costs were $.8 million for 1995. The fair value of the notes, estimated based on
quoted market prices, was approximately $102.7 million as of December 31, 1995.
The Company contributed the net proceeds of $99.1 million to NAC in 1995.
The Company's $100 million of 5.25% Convertible Subordinated Debentures due
December 15, 2002, were issued in December 1992 through a private offering. The
Debentures are callable as of January 15, 1996 and are convertible into
approximately 2 million shares of the Company's Common Stock at a conversion
price of $49.50 per share. The expenses incurred in the offering of
approximately $1.4 million were deferred and are being amortized over the life
of the Debentures. Interest and amortization costs were $5.4 million for 1995,
1994 and 1993. The fair value of the Debentures, estimated based on quoted
market prices, was approximately $98 million as of December 31, 1995. The
Company contributed $85 million of the net proceeds of the offering to NAC in
1992.
The Company's $100 million of 8% Senior Notes due June 15, 1999 were issued in
June 1992 through a public offering. The expenses incurred in the offering of
approximately $.8 million were deferred and are being amortized over the life of
the Notes. Interest and amortization costs were $8.1 million for 1995, 1994 and
1993. The fair value of the Notes, estimated based on quoted market prices, was
approximately $105.7 million as of December 31, 1995. The Company contributed
$80 million of the net proceeds of the offering to NAC in 1992.
NAC Re has a revolving credit agreement and term loan bank facility under which
it can borrow up to $35 million. A commitment fee of 3/8 of 1% per year is paid
on the unused credit line. Borrowings of $17.8 million were outstanding at
December 31, 1995 and were principally used in connection with 1994 repurchases
of the Company's common stock. Outstanding balances are payable quarterly over a
three year period beginning June 1996. NAC has a $15 million line of credit
which is available for catastrophe claim payments or working capital purposes. A
commitment fee of 1/4 of 1% per year is paid on the unused credit line. There
were no outstanding borrowings on this facility at December 31, 1995. Interest
costs on borrowing facilities were approximately $1.4 million, $.9 million and
$.1 million in 1995, 1994 and 1993, respectively.
54
<PAGE>
- -------------------------------------------------------------------------------
Total interest expense paid in connection with the Company's long-term debt and
financing arrangements was $14.6 million, $14.1 million and $13.1 million for
the years ended December 31, 1995, 1994 and 1993, respectively.
8. Employee Benefits and Compensation Arrangements
The Company accounts for stock compensation plans in accordance with APB Opinion
No 25, "Accounting for Stock Issued to Employees." Accordingly, compensation
expense for stock option grants and stock appreciation rights (SARs) is
recognized to the extent that the fair value of the stock exceeds the exercise
price of the option at the measurement date.
Stock Plans
The Company maintains four stock option plans which provide for the granting of
options to purchase shares of Common Stock to certain officers of the Company.
Three such plans provide for the granting of SARs. Options and SARs have
generally been granted with a six-year vesting schedule. Options granted under
three of the plans generally expire 10 years from the date of grant. Outstanding
SARs are converted by the Company to options prior to vesting.
The Company maintains a stock option plan for non-employee directors that
provides for automatic annual grants of options to eligible directors. Options
expire 10 years from the date of grant and are fully exercisable six months
after their grant date.
Information concerning stock options (including SARs) for all of the Company's
stock option plans is as follows:
<TABLE><CAPTION>
Number of Options
========================================================================================================
Year ended December 31,
---------------------------------------
1995 1994 1993
========================================================================================================
<S> <C> <C> <C>
Outstanding, beginning of year ($6.27 to $40.38 per share) 1,548,071 1,540,546 1,430,203
Granted ($25.75 to $40.38 per share) 412,250 293,100 368,400
Exercised ($6.27 to $30.13 per share) (101,559) (156,643) (139,084)
Cancelled ($13.61 to $36.25 per share) (84,395) (128,932) (118,973)
- --------------------------------------------------------------------------------------------------------
Outstanding, end of year ($6.27 to $40.38 per share) 1,774,367 1,548,071 1,540,546
- -------------------------------------------------------------------=====================================
Exercisable, end of year ($6.27 to $40.38 per share) 740,226 699,581 717,565
- --------------------------------------------------------------------------------------------------------
Available for grant, end of year 784,431 1,112,286 1,276,454
========================================================================================================
</TABLE>
The Company has a restricted stock plan, pursuant to which employees have been
granted approximately 44,500, 52,400 and 37,500 shares of Common Stock during
1995, 1994 and 1993, respectively. Vesting for such shares occurs over a
six-year period. The Company incurred compensation expense for the years ended
December 31, 1995, 1994 and 1993 of approximately $613,000, $473,000 and
$332,000, respectively, in connection with such plan.
55
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has an Employee Stock Purchase Plan through which employees have the
option, subject to certain limitations, to purchase Common Stock, at the end of
each offering period at a discounted price. During each of the years ended
December 31, 1995, 1994 and 1993, employees have purchased approximately 18,500,
22,000 and 20,900 shares of Common Stock, respectively, under this plan.
Incentive Compensation Plans
The Company maintains three incentive compensation plans. The Long-term
Incentive Plan provides for cash awards to eligible officers based on
achievement of certain corporate goals over a three-year performance cycle. The
Annual Incentive Plan for officers and the Performance Bonus Plan for
non-officers provide for annual cash awards based on individual and corporate
performance. Based on estimated performance levels, the Company expensed $6.4
million, $4.6 million and $3.6 million for the years ended December 31, 1995,
1994 and 1993, respectively, related to these plans.
Severance Program
The Company has severance agreements with officers and a severance program for
non-officers to provide for severance payments and continuation of benefits in
the event of employment termination resulting from a change in control. The
extent of the severance payments and when they are triggered vary depending upon
the position of the employee and, in the case of non-officers, the length of
tenure of the employee.
Retirement Plans
The Company maintains a qualified non-contributory defined benefit pension plan
covering substantially all U.S. employees. Pension benefits generally vest after
five years of service. Benefits are based on years of service and compensation,
as defined in the plan, during the highest consecutive three years of the
employee's last ten years of employment.
The Company's policy is to make annual contributions to the plan that are
deductible for federal income tax purposes and that meet the minimum funding
standards required by law utilizing the entry age cost method and different
actuarial assumptions than are used for pension expense purposes.
The Company also maintains a non-qualified unfunded supplemental defined benefit
plan designed to compensate individuals to the extent their benefits under the
Company's qualified plan are curtailed due to Internal Revenue Code limitations.
56
<PAGE>
- -------------------------------------------------------------------------------
The following tables set forth the amounts recognized in the Company's financial
statements with respect to the qualified and non-qualified pension plans.
<TABLE><CAPTION>
Dollars in Thousands
==================================================================================================================
December 31, 1995 December 31, 1994
---------------------------- ------------------------------
Non- Non-
Qualified Qualified Qualified Qualified
Plan Plan Total Plan Plan Total
==================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested $3,332 $1,263 $4,595 $2,081 $702 $2,783
Nonvested 830 62 892 542 15 557
- ------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 4,162 1,325 5,487 2,623 717 3,340
Effect of projected salary increases 3,351 1,671 5,022 2,591 1,471 4,062
- ------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 7,513 2,996 10,509 5,214 2,188 7,402
Plan assets at market value 5,169 - 5,169 3,655 - 3,655
- ------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess
of plan assets 2,344 2,996 5,340 1,559 2,188 3,747
Unrecognized net gain (loss) 175 (13) 162 536 316 852
Unrecognized net transition obligation (105) - (105) (115) - (115)
Unrecognized net prior service costs (76) (267) (343) (79) (278) (357)
- ------------------------------------------------------------------------------------------------------------------
Pension liability, end of year 2,338 2,716 5,054 1,901 2,226 4,127
Pension liability, beginning of year (1,901) (2,226) (4,127) (1,312) (1,772) (3,084)
Company contributions 519 - 519 276 - 276
- ------------------------------------------------------------------------------------------------------------------
Net pension cost $956 $490 $1,446 $865 $454 $1,319
==================================================================================================================
</TABLE>
<TABLE><CAPTION>
Dollars in Thousands
==================================================================================================================
Year ended December 31,
-------------------------------------------
1995 1994 1993
==================================================================================================================
<S> <C> <C> <C>
Net pension cost included the following components:
Service costs - benefits earned during the year $1,111 $1,061 $1,066
Interest cost on projected benefit obligations 660 539 484
Net amortization and deferral 751 (264) (136)
Actual return on plan assets (1,076) (17) (85)
- ------------------------------------------------------------------------------------------------------------------
Net pension cost $1,446 $1,319 $1,329
==================================================================================================================
</TABLE>
The principal factors contributing to the increase in the accumulated and
projected benefit obligations for 1995 is the decrease in the discount rate
assumption in response to the decline in interest rates, and the use of revised
mortality tables published by the Society of Actuaries during 1995.
57
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The discount rates used in determining the actuarial present value of benefit
obligations were 7% and 8% for 1995 and 1994, respectively. The rate of increase
for future compensation levels was 6% and 7% for 1995 and 1994, respectively.
The assumed rate of return on plan assets was 8.5% for 1995, 1994 and 1993.
Assets of the qualified plan are invested principally in equity securities and
fixed maturities. Plan assets include approximately $517,000 and $481,000 of NAC
Re Common Stock as of December 31, 1995 and 1994, respectively.
The Company maintains a qualified contributory defined contribution plan for
substantially all U.S. employees. Under this plan, the Company makes a matching
contribution equal to 50% of each participant's eligible elective contributions,
which may be up to 6% of the participant's compensation. The Company may make an
additional annual discretionary matching contribution. The Company also
maintains a non-qualified unfunded supplemental defined contribution plan
designed to compensate individuals to the extent the Company's contributions
under the qualified plan are curtailed due to Internal Revenue Code limitations.
The Company expensed $1.6 million for 1995 and $1 million for both 1994 and
1993, related to these plans. Contributions to the qualified plan are invested,
at the election of the participant, in several funds, including a NAC Re Common
Stock fund. The plan held approximately 123,000 and 127,600 shares of NAC Re
Common Stock as of December 31, 1995 and 1994, respectively.
The Company maintains a qualified non-contributory defined contribution plan
covering substantially all U.K. employees. Contributions under this plan are
determined on the basis of salary, age and position within the organization. The
Company also maintains an unfunded supplemental defined contribution plan
designed to compensate individuals to the extent their benefits under the
qualified plan are curtailed due to U.K. Inland Revenue limitations. The Company
incurred expenses of $375,000, $363,000 and $67,000 for the years ended December
31, 1995, 1994 and 1993, respectively, related to these plans.
9. Domestic and International Financial Information
The Company's principle business segment, for both its domestic and
international operations, is the reinsurance of property and casualty lines of
business, including general liability, automobile liability, aviation,
fidelity/surety and commercial and personal property. The Company's domestic
operation includes business written in the United States and Canada.
International property and casualty reinsurance is conducted through a
wholly-owned subsidiary, NAC Re International Holdings Limited, which
established a fully licensed property and casualty reinsurance subsidiary, NAC
Reinsurance International Limited, located in London, England in December 1993.
The subsidiary was initially capitalized with 50 million GBP, or
approximately $75 million, and, subsequent to contributions by the Company
in 1995 and 1994, its statutory surplus level was approximately 75.5 million
GBP or $117.1 million at December 31, 1995.
58
<PAGE>
- -------------------------------------------------------------------------------
The following is a summary of financial information related to the Company's
domestic and international operations:
<TABLE><CAPTION>
In Thousands
========================================================================================================
Year ended December 31, 1995
-----------------------------------------------------
Domestic International Total
========================================================================================================
<S> <C> <C> <C>
Net premiums written $476,048 $45,441 $521,489
- --------------------------------------------------------------------------------------------------------
Premiums earned 452,994 38,791 491,785
Net investment income 81,583 7,725 89,308
Realized gains 24,063 1,328 25,391
- --------------------------------------------------------------------------------------------------------
Total revenues 558,640 47,844 606,484
========================================================================================================
Claims and claims expense 295,038 31,110 326,148
Commissions and brokerage 132,049 7,014 139,063
Other acquisition costs and expenses 40,760 6,044 46,804
Interest expense 15,648 - 15,648
- --------------------------------------------------------------------------------------------------------
Total expenses 483,495 44,168 527,663
========================================================================================================
Pretax operating income 75,145 3,676 78,821
- --------------------------------------------------------------------------------------------------------
Net income $60,449 $2,375 $62,824
========================================================================================================
Identifiable assets $2,405,051 $180,060 $2,462,131*
========================================================================================================
Statutory composite ratio 103.1% 111.7% 103.7%
========================================================================================================
</TABLE>
* The total is net of intercompany transactions of $123 million.
<TABLE><CAPTION>
In Thousands
========================================================================================================
Year ended December 31, 1994
------------------------------------------------------
Domestic International Total
========================================================================================================
<S> <C> <C> <C>
Net premiums written $412,412 $25,789 $438,201
- --------------------------------------------------------------------------------------------------------
Premiums earned 375,870 19,861 395,731
Net investment income 75,783 4,721 80,504
Realized gains (losses) 4,209 (2,054) 2,155
- --------------------------------------------------------------------------------------------------------
Total revenues 455,862 22,528 478,390
========================================================================================================
Claims and claims expense 250,013 15,740 265,753
Commissions and brokerage 114,540 3,052 117,592
Other acquisition costs and expenses 33,091 5,210 38,301
Interest expense 14,454 - 14,454
- --------------------------------------------------------------------------------------------------------
Total expenses 412,098 24,002 436,100
========================================================================================================
Pretax operating income (loss) 43,764 (1,474) 42,290
- --------------------------------------------------------------------------------------------------------
Net income (loss) $36,740 $(1,128) $35,612
========================================================================================================
Identifiable assets $1,893,596 $115,300 $1,916,768*
========================================================================================================
Statutory composite ratio 105.7% 114.7% 106.1%
========================================================================================================
</TABLE>
* The total is net of intercompany transactions of $92.1 million.
59
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE><CAPTION>
In Thousands
=====================================================================================================
Year ended December 31, 1993
-----------------------------------------------
Domestic International Total
=====================================================================================================
<S> <C> <C> <C>
Net premiums written $336,941 - $336,941
- -----------------------------------------------------------------------------------------------------
Premiums earned 306,379 - 306,379
Net investment income 76,229 $403 76,632
Realized gains (losses) 19,212 (117) 19,095
- -----------------------------------------------------------------------------------------------------
Total revenues 401,820 286 402,106
=====================================================================================================
Claims and claims expense 213,840 - 213,840
Commissions and brokerage 94,077 - 94,077
Other acquisition costs and expenses 31,004 106 31,110
Interest expense 13,582 - 13,582
- -----------------------------------------------------------------------------------------------------
Total expenses 352,503 106 352,609
=====================================================================================================
Pretax operating income (loss) 49,317 180 49,497
- -----------------------------------------------------------------------------------------------------
Net income (loss) $42,234 $117 $42,351
=====================================================================================================
Identifiable assets $1,716,811 $136,676 $1,778,868*
=====================================================================================================
Statutory composite ratio 110.9% - 110.9%
=====================================================================================================
</TABLE>
* The total is net of intercompany transactions of $74.6 million.
During 1995, three reinsurance brokers, AON Reinsurance Agency, Guy Carpenter
and Company, Inc., and Bates Turner, Inc., generated 16%, 16% and 7%,
respectively, of the Company's premiums assumed from client companies. These
same reinsurance brokers generated 18%, 16%, and 9%, respectively, during 1994,
and 19%, 16% and 13%, respectively, during 1993, of the Company's assumed
premiums. One client company, Chubb Group, contributed approximately 9%, 10% and
10% of the Company's gross premiums written during 1995, 1994 and 1993,
respectively. This business is generated primarily from the Company's domestic
reinsurance operations. Gross premiums written from this client are expected to
decline in 1996 as a result of an anticipated increase in its retention levels.
The Company does not believe that the reduction of business assumed from any one
client or broker will have a materially adverse effect on the Company due to its
competitive position in the marketplace and the continuing availability of other
sources of business.
10. Statutory Financial Information
Consolidated statutory net income and surplus of NAC, as reported to the
insurance regulatory authorities, differs in certain respects from the amounts
as prepared in accordance with generally accepted accounting principles (GAAP).
The following schedules identify the significant reconciling differences:
60
<PAGE>
- -------------------------------------------------------------------------------
<TABLE><CAPTION>
In Thousands
=======================================================================================
Year ended December 31,
---------------------------------------
Net Income: 1995 1994 1993
=======================================================================================
<S> <C> <C> <C>
Domestic statutory net income $57,670 $27,312 $30,361
Domestic GAAP adjustments:
Deferred acquisition costs 9,128 14,577 14,435
Deferred income taxes 3,204 3,770 5,828
Other, net (1,074) (370) (483)
- ---------------------------------------------------------------------------------------
Domestic GAAP net income 68,928 45,289 50,141
International operation 2,375 (1,128) 117
Parent company operations (8,479) (8,549) (7,907)
- ---------------------------------------------------------------------------------------
Consolidated GAAP net income $62,824 $35,612 $42,351
=======================================================================================
</TABLE>
<TABLE><CAPTION>
In Thousands
=======================================================================================
December 31,
--------------------------------------
Stockholders' Equity: 1995 1994 1993
=======================================================================================
<S> <C> <C> <C>
Consolidated statutory surplus $615,433(1) $407,024 $406,163
Consolidated GAAP adjustments:
Deferred acquisition costs 70,466 59,953 44,453
Deferred income tax asset, net 27,492 43,928 20,418
Excess of cost over net assets acquired 4,011 4,379 4,747
Unrealized appreciation (depreciation) 46,783 (40,321) 48,089
Unauthorized/authorized reinsurance charges 6,814 5,914 7,658
Other, net 4,101 4,137 2,099
- ---------------------------------------------------------------------------------------
Investment in insurance subsidiaries, GAAP 775,100 485,014 533,627
Parent company:
Other net assets 36,583 34,071 41,913
Long-term debt (299,927) (200,000) (200,000)
- ---------------------------------------------------------------------------------------
Consolidated stockholders' equity, GAAP $511,756 $319,085 $375,540
=======================================================================================
</TABLE>
(1) The Company contributed approximately $146.6 million to the statutory
surplus of NAC, from the proceeds of the public debt and equity offerings
in November 1995. See Notes 7 and 12.
61
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the holding company structure, NAC Re is dependent upon the ability of its
principal operating subsidiary, NAC, for the transfer of funds in the form of
rental receipts, tax reimbursements and cash dividends. Such transactions,
including the payment of cash dividends, are subject to restrictions imposed by
New York insurance law. Generally, NAC may pay cash dividends only out of its
statutory earned surplus, as such term is defined in the New York insurance law,
which was $139.6 million at December 31, 1995. However, the maximum amount of
dividends that may be paid in any twelve-month period without the prior approval
of the New York Insurance Department is the lesser of net investment income or
10% of statutory surplus, as such terms are defined in the New York insurance
law. The maximum amount of cash dividends that NAC could pay without such
regulatory approval, based on 10% of statutory surplus as of December 31, 1995,
is approximately $61.5 million. During 1995, 1994 and 1993, NAC declared
dividends of $7.5 million, $15 million and $10 million, respectively, to NAC Re.
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.
62
<PAGE>
- -------------------------------------------------------------------------------
11. Quarterly Financial Information (Unaudited)
The following is a summary of quarterly financial data, in thousands except per
share data and stock prices:
<TABLE><CAPTION>
Three months ended
===================================================================================================================
December 31, September 30, June 30, March 31,
------------------- ----------------- ----------------- -------------------
1995 1994 1995 1994 1995 1994 1995 1994
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Gross premiums written $174,267 $154,786 $186,637 $153,570 $166,144 $141,990 $150,890 $124,691
Net premiums written 138,800 119,479 145,466 121,234 126,702 105,469 110,521 92,019
Premiums earned 133,409 114,798 133,344 109,824 119,554 92,287 105,478 78,822
Net investment income 22,401 21,473 22,270 20,009 22,427 19,733 22,210 19,289
Investment gains (losses) 9,314 (878) 8,502 1,787 4,433 (2,992) 3,142 4,238
Operating costs and expenses 140,572 125,219 141,766 118,714 128,301 102,596 117,024 89,571
Operating income/net income 19,256 9,384 17,599 10,294 14,594 5,667 11,375 10,267
- -------------------------------------------------------------------------------------------------------------------
Per Share Data:
Primary:
Operating/net income $1.04 $.53 $.98 $.58 $.82 $.32 $.64 $.57
Fully diluted:
Net income .98 .51 .92 .56 .78 .32 .62 .55
Stockholders' equity per share 26.65 18.23 24.39 19.30 23.10 19.74 20.90 20.00
Cash dividends declared per share .05 .04 .05 .04 .05 .04 .04 .04
- -------------------------------------------------------------------------------------------------------------------
Stock prices:
High $38.38 $34.00 $39.00 $29.75 $35.25 $31.75 $34.00 $32.00
Low 31.63 24.25 30.63 24.38 28.50 24.00 28.25 26.00
Close 36.00 33.50 36.25 25.50 31.13 29.50 30.25 26.00
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
12. Capital Stock
Changes in Common Stock outstanding were as follows:
<TABLE><CAPTION>
Year ended December 31,
- ------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock:
Balance, beginning of year 19,638,865 19,348,739 19,140,171
Shares issued 1,702,188 290,126 208,568
- ------------------------------------------------------------------------------------
Balance, end of year 21,341,053 19,638,865 19,348,739
- --------------------------------------------========================================
Treasury Stock:
Balance, beginning of year 2,131,633 1,579,375 1,322,667
Purchases 5,868 552,258 256,708
- ------------------------------------------------------------------------------------
Balance, end of year 2,137,501 2,131,633 1,579,375
- --------------------------------------------========================================
Total Common Stock outstanding 19,203,552 17,507,232 17,769,364
====================================================================================
</TABLE>
63
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Offering
The Company issued 1,530,000 shares of Common Stock through a secondary public
offering in November 1995. Approximately $47.5 million of the net proceeds was
contributed to the statutory surplus of NAC.
Stock Repurchase
The Company maintains a stock repurchase program pursuant to which the Board of
Directors has authorized the repurchase of approximately 2,631,000 shares of
Common Stock. From its inception through the latest repurchase in 1995,
approximately 2,137,000 shares were repurchased at a cost of approximately $42.6
million or an average price of $19.93 per share. As of December 31, 1995,
approximately 500,000 shares remain authorized for repurchase under the program.
Rights Plan
In June 1988, the Company declared a dividend of one Preferred Stock Purchase
Right (a "Right") for each outstanding share of NAC Re Common Stock. Pursuant to
the related Rights Plan, as amended in 1990, the Rights will become exercisable
only in the event, with certain exceptions, a person or group becomes the
beneficial owner of 15% or more of NAC Re voting stock. The Rights Plan
provides, however, that the Rights will not become exercisable due to the
beneficial ownership by The Equitable Life Assurance Society of the United
States and its affiliates of up to 28.5% of such stock. Each Right currently
entitles the holder to purchase from the Company, for a price of $37.78 (the
"Exercise Price" ), 1/225 of a share of Series A Junior Participating Preferred
Stock (the "Series A Stock") or that number of shares of Series A Stock having a
market value equal to two times the Exercise Price.
In addition, upon the occurrence of certain events, holders of the Rights will
be entitled to purchase the shares of Series A Stock or shares in an acquiring
entity, whichever is applicable, having a market value of two times the Exercise
Price.
NAC Re will generally be entitled to redeem the Rights at $.0222 per Right
following a public announcement that a person or group has become the beneficial
owner of 15% of the NAC Re voting stock. The Rights will expire on June 21,
1998.
At December 31, 1995, there were 19,203,552 Rights outstanding which, if
exercised, would result in the issuance of approximately 85,300 shares of Series
A Stock.
64
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-25585) 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. 33-22841) 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. 33-34516) 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 of our report dated January 30, 1996, with respect
to the consolidated financial statements and schedules of NAC Re Corporation
and subsidiaries included and/or incorporated by reference in the Annual Report
(Form 10-K, for the year ended December 31, 1995.
ERNST & YOUNG LLP
New York, New York
March 19, 1996
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari and each
and any one of them, her true and lawful attorney-in-fact and agent, for her and
in her name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1995 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as she might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set her hand.
/s/WENDY J. STROTHMAN
------------------------------
Wendy J. Strothman
Director
Dated: March 4, 1996
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1995 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/ROBERT A. BELFER
------------------------------
Robert A. Belfer
Director
Dated: March 12, 1996
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1995 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/MICHAEL G. FITT
------------------------------
Michael G. Fitt
Director
Dated: March 12, 1996
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1995 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any one of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/RONALD L. BORNHUETTER
------------------------------
Ronald L. Bornhuetter
Director
Dated: March 12, 1996
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1995 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any one of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/JOHN P. BIRKELUND
------------------------------
John P. Birkelund
Director
Dated: March 12, 1996
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1995 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any one of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/C. W. CARSON, JR.
------------------------------
C. W. Carson, Jr.
Director
Dated: March 12, 1996
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1995 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any one of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/TODD G. COLE
------------------------------
Todd G. Cole
Director
Dated: March 12, 1996
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1995 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any one of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/DANIEL J. McNAMARA
------------------------------
Daniel J. McNamara
Director
Dated: March 12, 1996
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1995 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any one of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/STEPHEN ROBERT
------------------------------
Stephen Robert
Director
Dated: March 12, 1996
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Martha G. Bannerman, Celia R. Brown and John N. Adimari and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1995 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any one of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/HERBERT S. WINOKUR, JR.
------------------------------
Herbert S. Winokur, Jr.
Director
Dated: March 12, 1996
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