<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period _________ to _________.
Commission file number 0-13891.
NAC RE CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3297840
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
ONE GREENWICH PLAZA, GREENWICH, CT 06836-2568
(Address of principal executive offices)
(203) 622-5200
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
There were 18,373,575 shares outstanding of the Registrant's Common Stock,
$.10 par value, as of September 30, 1997.
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------ --------------------- -----------
<S> <C> <C>
Independent Accountants' Review Report........................ 3
Consolidated Balance Sheet -September 30, 1997 and
December 31, 1996............................................. 4
Consolidated Statement of Income--Three Months and Nine
Months Ended September 30, 1997 and 1996...................... 5
Consolidated Statement of Stockholders' Equity--Nine Months
Ended September 30, 1997 and 1996............................. 6
Consolidated Statement of Cash Flows -Nine Months Ended
September 30, 1997 and 1996................................... 7
Notes to Consolidated Financial Statements.................... 8-9
Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 10-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................... 16
Signatures.................................................... 17
</TABLE>
<PAGE>
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
Board of Directors and Shareholders
NAC Re Corporation
We have reviewed the accompanying consolidated balance sheet of NAC Re
Corporation and subsidiaries as of September 30, 1997, and the related
consolidated statements of income for the three month and nine month periods
ended September 30, 1997 and 1996 and the consolidated statements of
stockholders' equity and cash flows for the nine month periods ended September
30, 1997 and 1996. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquires of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of NAC Re Corporation as of December
31, 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for the year then ended (not presented herein) and in our
report dated February 4, 1997, we expressed an unqualified opinion on those
consolidated financial statements.
ERNST & YOUNG LLP
New York, New York
October 21, 1997
3
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Investments:
Available for sale:
Fixed maturities (amortized cost: 1997, $1,982,438; 1996, $1,681,190)............. $ 2,034,211 $1,703,537
Equity securities (cost: 1997, $120,530; 1996, $153,197).......................... 144,813 179,619
Short-term investments.............................................................. 128,714 81,893
------------- ------------
TOTAL INVESTMENTS............................................................... 2,307,738 1,965,049
Cash................................................................................ 13,370 18,853
Accrued investment income........................................................... 34,792 28,472
Premiums receivable................................................................. 229,612 200,036
Reinsurance recoverable balances, net............................................... 187,358 336,324
Reinsurance recoverable on unearned premiums........................................ 28,198 20,320
Investment accounts receivable...................................................... 6,764 411
Deferred policy acquisition costs................................................... 91,389 85,211
Excess of cost over net assets acquired............................................. 3,368 3,644
Deferred tax asset, net............................................................. 35,731 30,390
Other assets........................................................................ 48,399 56,921
------------- ------------
TOTAL ASSETS.................................................................... $ 2,986,719 $2,745,631
------------- ------------
------------- ------------
LIABILITIES
Claims and claims expenses.......................................................... $ 1,599,482 $1,513,345
Unearned premiums................................................................... 295,408 271,898
8% Notes due 1999 100,000 100,000
7.15% Notes due 2005 99,940 99,934
5.25% Convertible Subordinated Debentures due 2002 100,000 100,000
Investment accounts payable......................................................... 51,972 25,326
Revolving credit agreement.......................................................... 12,924 12,924
Other liabilities................................................................... 99,467 68,935
------------- ------------
TOTAL LIABILITIES............................................................... 2,359,193 2,192,362
------------- ------------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value:
1,000 shares authorized, none issued
(Includes 90 shares of Series A Junior Participating Preferred Stock)............. -- --
Common stock, $.10 par value:
25,000 shares authorized (1997, 21,685; 1996, 21,464 shares issued)............... 2,168 2,146
Additional paid-in capital.......................................................... 255,171 248,662
Unrealized appreciation of investments, net of tax.................................. 49,436 31,700
Currency translation adjustments, net of tax........................................ 3,559 8,377
Retained earnings................................................................... 401,110 335,868
Less treasury stock, at cost (1997, 3,312; 1996, 3,061 shares)...................... (83,918) (73,484)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY...................................................... 627,526 553,269
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 2,986,719 $2,745,631
------------- ------------
------------- ------------
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED)
----------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PREMIUMS AND OTHER REVENUES
Net premiums written........................................... $ 153,657 $ 150,681 $ 438,482 $ 414,672
Increase in unearned premiums.................................. (5,773) (11,566) (16,410) (28,390)
---------- ---------- ---------- ----------
Premiums earned................................................ 147,884 139,115 422,072 386,282
Net investment income.......................................... 31,917 26,140 90,797 77,499
Net investment gains........................................... 5,641 2,122 28,458 14,654
---------- ---------- ---------- ----------
Total revenues................................................. 185,442 167,377 541,327 478,435
OPERATING COSTS AND EXPENSES
Claims and claims expenses..................................... 97,304 90,496 278,388 248,710
Commissions and brokerage...................................... 40,200 37,281 111,362 105,790
Acquisition and operating expenses............................. 16,971 13,950 47,472 40,141
Interest expense............................................... 5,426 5,705 16,308 16,896
---------- ---------- ---------- ----------
Total operating costs and expenses............................. 159,901 147,432 453,530 411,537
INCOME
Operating income before income taxes............................. 25,541 19,945 87,797 66,898
---------- ---------- ---------- ----------
Federal and foreign income taxes:
Current...................................................... 7,628 5,504 30,939 19,018
Deferred..................................................... (2,757) (1,597) (12,248) (5,344)
---------- ---------- ---------- ----------
Income tax expense (benefit)................................... 4,871 3,907 18,691 13,674
---------- ---------- ---------- ----------
Operating income/net income...................................... $ 20,670 $ 16,038 $ 69,106 $ 53,224
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
PER SHARE DATA
Primary:
Average shares outstanding..................................... 18,894 19,151 18,788 19,321
Operating income/net income.................................... $ 1.09 $ 0.84 $ 3.68 $ 2.75
Fully Diluted (assuming conversion of dilutive convertible
securities):
Average shares outstanding................................... 20,957 21,171 20,985 21,380
Operating income/net income.................................. $ 1.03 $ 0.80 $ 3.42 $ 2.61
Cash dividends declared per share................................ $ 0.075 $ 0.06 $ 0.21 $ 0.17
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
COMMON STOCK
Balance at beginning of year............................................................ $ 2,146 $ 2,134
Issuance of shares...................................................................... 22 11
---------- ----------
Balance at end of period.............................................................. $ 2,168 $ 2,145
---------- ----------
---------- ----------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year............................................................ $ 248,662 $ 246,356
Issuance of shares...................................................................... 6,509 2,352
---------- ----------
Balance at end of period.............................................................. $ 255,171 $ 248,708
---------- ----------
---------- ----------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS, NET OF TAX
Balance at beginning of year............................................................ $ 31,700 $ 35,187
Unrealized appreciation (depreciation).................................................. 17,736 (17,840)
---------- ----------
Balance at end of period.............................................................. $ 49,436 $ 17,347
---------- ----------
---------- ----------
CURRENCY TRANSLATION ADJUSTMENTS, NET OF TAX
Balance at beginning of year............................................................ $ 8,377 $ 1,017
Translation adjustments................................................................. (4,818) 547
---------- ----------
Balance at end of period.............................................................. $ 3,559 $ 1,564
---------- ----------
---------- ----------
RETAINED EARNINGS
Balance at beginning of year............................................................ $ 335,868 $ 269,660
Net income.............................................................................. 69,106 53,224
Dividends............................................................................... (3,864) (3,206)
---------- ----------
Balance at end of period.............................................................. $ 401,110 $ 319,678
---------- ----------
---------- ----------
TREASURY STOCK
Balance at beginning of year............................................................ $ (73,484) $ (42,598)
Purchase of treasury shares, net of reissuance.......................................... (10,434) (18,446)
---------- ----------
Balance at end of period.............................................................. $ (83,918) $ (61,044)
---------- ----------
---------- ----------
TOTAL STOCKHOLDERS' EQUITY
Balance at beginning of year............................................................ $ 553,269 $ 511,756
Issuance of shares...................................................................... 6,531 2,363
Unrealized appreciation (depreciation).................................................. 17,736 (17,840)
Translation adjustments................................................................. (4,818) 547
Net income.............................................................................. 69,106 53,224
Dividends............................................................................... (3,864) (3,206)
Purchase of treasury shares, net of reissuance.......................................... (10,434) (18,446)
---------- ----------
Balance at end of period.............................................................. $ 627,526 $ 528,398
---------- ----------
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................................................ $ 69,106 $ 53,224
Adjustments to reconcile net income to net cash provided by operating activities:
Reserve for claims and claims expenses, net....................................... 286,492 118,489
Unearned premiums, net............................................................ 16,411 28,394
Premiums receivable............................................................... (30,619) (36,982)
Accrued investment income......................................................... (6,483) (544)
Reinsurance balances, net......................................................... (26,895) (21,346)
Deferred policy acquisition costs................................................. (6,324) (8,912)
Net investment gains.............................................................. (28,452) (14,653)
Deferred tax asset, net........................................................... (13,273) (5,530)
Other liabilities................................................................. 17,841 20,670
Other items, net.................................................................. 10,785 (10,220)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................................... 288,589 122,590
------------- -------------
INVESTING ACTIVITIES
Sales of fixed maturity investments............................................... 1,120,587 1,066,265
Maturities of fixed maturity investments.......................................... 20,148 23,356
Purchases of fixed maturity investments........................................... (1,428,210) (1,195,016)
Net (purchases) sales of short-term investments................................... (48,935) 19,055
Sales of equity securities........................................................ 125,146 68,480
Purchases of equity securities.................................................... (70,368) (79,414)
Purchases of furniture and equipment.............................................. (3,476) (3,594)
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES............................................... (285,108) (100,868)
------------- -------------
FINANCING ACTIVITIES
Issuance of shares................................................................ 5,232 2,037
Purchase of treasury shares, net of reissuance.................................... (10,434) (18,446)
Cash dividends paid to stockholders............................................... (3,590) (3,039)
Borrowings under revolving credit agreement....................................... -- 8,162
Repayments under revolving credit agreement....................................... -- (13,000)
------------- -------------
NET CASH USED BY FINANCING ACTIVITIES............................................... (8,792) (24,286)
------------- -------------
Effects of exchange rate changes on cash............................................ (172) (88)
------------- -------------
Decrease in cash.................................................................... (5,483) (2,652)
Cash--beginning of year............................................................. 18,853 10,320
------------- -------------
Cash--end of period................................................................. $ 13,370 $ 7,668
------------- -------------
------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying consolidated financial statements have been prepared on the
basis of generally accepted accounting principles and in the opinion of
management, reflect all adjustments necessary (consisting of normal recurring
accruals) for a fair presentation of results for such periods. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in the Company's
Annual Report to Shareholders.
2. PER SHARE DATA
Primary earnings per share data are based on weighted average common shares
and common share equivalents outstanding during the period. Fully diluted
earnings per share data assumes conversion of dilutive convertible securities
and the assumed exercise of all dilutive stock options.
3. RETROCESSION
The Company's balance sheet as of September 30, 1997 and December 31, 1996
reflects reinsurance recoverable balances as assets, the components of which are
stated in the table below. Effective January 1, 1997, the Company terminated two
retrocessional programs resulting in a total consideration of approximately $230
million, representing reinsurance recoverable balances for unpaid claims and
claims expenses.
<TABLE>
<CAPTION>
REINSURANCE RECOVERABLE BALANCES, NET
(IN THOUSANDS)
-------------------------------------
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Paid claims................................................................ $ 9,677 $ 15,457
Unpaid claims and claims expenses.......................................... 209,680 406,128
Ceded balances payable..................................................... (31,115) (38,205)
Funds held liability....................................................... (884) (47,056)
-------- --------
Net.................................................................... $ 187,358 $ 336,324
-------- --------
-------- --------
</TABLE>
The effect of retrocessional activity on premiums written, premiums earned
and claims expenses is as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Ceded premiums written............................................... $ 34,345 $ 32,371 $ 98,580 $ 101,444
Ceded premiums earned................................................ $ 32,007 $ 35,348 $ 90,700 $ 108,912
Ceded claims and claims expenses..................................... $ 21,695 $ 25,101 $ 57,961 $ 70,932
</TABLE>
8
<PAGE>
4. ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." Statement No. 130 requires
that a company classify items of other comprehensive income in a financial
statement and display the accumulated balance of other comprehensive income in
the equity section of a statement of financial position. Statement No. 131
requires disclosures about segments of a company and related information about
the different types of business activities and the different economic
environment in which it operates that differ from current practice. These
statements will be effective for periods beginning after December 15, 1997, with
earlier application permitted. The Company has not completed its analysis of all
matters associated with the implementation of these standards or determined the
period that they will be adopted. The effect of adopting these standards will
not be material to the Company's financial position.
In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share." This
Statement replaces the historical presentation of primary earnings per share
with the caption Basic earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income from operations by the weighted
average number of shares outstanding for the period. This Statement is effective
for financial statements issued for periods ending after December 15, 1997, with
early adoption prohibited. Upon adoption, all prior period EPS amounts will be
restated.
The Company's historical primary and fully diluted earnings per share
amounts as previously reported and the Basic and Diluted amounts required by
SFAS No. 128 are shown below. The Company's fully diluted earnings per share
data assumes the conversion of dilutive convertible securities and the
exercise of all dilutive stock options.
<TABLE>
<CAPTION>
NET INCOME
------------------------------------------------
AS REPORTED PRO FORMA
------------------------ ----------------------
FULLY
PRIMARY DILUTED BASIC DILUTED
PERIOD: EPS EPS EPS EPS
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
1997:
- -----
1st Qtr $ 1.06 $ 1.00 $ 1.08 $ 1.00
2nd Qtr $ 1.52 $ 1.41 $ 1.56 $ 1.42
3rd Qtr $ 1.09 $ 1.03 $ 1.13 $ 1.03
YTD $ 3.68 $ 3.42 $ 3.76 $ 3.45
1996:
- -----
1st Qtr $ 1.06 $ 1.00 $ 1.08 $ 1.00
2nd Qtr $ 0.85 $ 0.81 $ 0.87 $ 0.81
3rd Qtr $ 0.84 $ 0.80 $ 0.86 $ 0.80
YTD $ 2.75 $ 2.61 $ 2.81 $ 2.62
1996 Year $ 3.69 $ 3.51 $ 3.74 $ 3.51
1995 Year $ 3.47 $ 3.29 $ 3.55 $ 3.30
</TABLE>
9
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
NAC Re Corporation ("NAC Re") is the holding company for NAC Reinsurance
Corporation ("NAC") and its wholly owned insurance and reinsurance domestic and
foreign subsidiaries. NAC Re and its subsidiaries are collectively referred to
as the Company.
RESULTS OF OPERATIONS
For the quarter ended September 30, 1997, operating income, excluding
investment gains, was $17.0 million or $.90 per share, an increase of 18.4% from
the comparable 1996 results of $.76 per share. For the nine months of 1997,
operating income, excluding investment gains, was $50.4 million or $2.68 per
share, an increase of 18.6% from the comparable 1996 results of $2.26 per share.
Net income, including investment gains, for the 1997 third quarter totaled
$20.7 million or $1.09 per share, This is an increase of 29.8% over the $.84 per
share that was reported in the comparable quarter of 1996. Net income for the
first nine months of 1997 totaled $69.1 million or $3.68 per share, an increase
of 33.8% over the comparable 1996 results of $2.75 per share. Included in net
income per share were investment gains, net of tax, of $.19 and $1.00 for the
1997 third quarter and nine month period, respectively, compared with $.08 and
$.49 for the same prior year periods.
PREMIUM REVENUES
The Company's growth in premium revenue for its domestic and international
operations are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------
DOMESTIC INTERNATIONAL TOTAL
-------------------- -------------------- --------------------
1997 1996 1997 1996 1997 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Premiums Written:
Casualty..................................... $ 78.6 $ 87.3 $ 6.4 $ 4.9 $ 85.0 $ 92.2
Property..................................... 30.8 30.2 4.8 7.7 35.6 37.9
Specialty/Other.............................. 33.1 20.6 -- -- 33.1 20.6
--------- --------- --------- --------- --------- ---------
Total.......................................... $ 142.5 $ 138.1 $ 11.2 $ 12.6 $ 153.7 $ 150.7
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
(IN MILLIONS)
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------
DOMESTIC INTERNATIONAL TOTAL
-------------------- -------------------- --------------------
1997 1996 1997 1996 1997 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Premiums Written:
Casualty..................................... $ 235.1 $ 239.8 $ 20.5 $ 16.2 $ 255.6 $ 256.0
Property..................................... 88.7 91.7 18.3 24.1 107.0 115.8
Specialty/Other.............................. 75.9 42.9 -- -- 75.9 42.9
--------- --------- --------- --------- --------- ---------
Total.......................................... $ 399.7 $ 374.4 $ 38.8 $ 40.3 $ 438.5 $ 414.7
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
As shown in the table above, the Company's worldwide net premiums written
for the 1997 third quarter and nine month period were $153.7 million and $438.5
million, respectively, an increase of 2.0% and 5.7% over the comparable 1996
periods.
10
<PAGE>
Domestic net premiums written for the 1997 third quarter and nine month
period were $142.5 million and $399.7 million, respectively, an increase of 3.2%
and 6.8%, over the 1996 comparable periods. Casualty net premiums written for
the 1997 third quarter and nine month period reflected declines of 10.0% and
1.9% from the comparable 1996 periods. These declines were principally a result
of the continuing weak market conditions impacting our treaty business, which
were partially offset by growth in our facultative business.
The domestic property net premiums increased 2.0% over the 1996 third quarter
and declined 3.2% from the 1996 nine month period. The third quarter increase
is primarily attributable to a growth of about 15% in our facultative
business resulting from increases in our facultative automatic business.
Overall, the decline in property net premiums written for the nine month
period reflects the current market conditions. Net premiums written in the
specialty lines increased 61.3% to $33.1 million for the 1997 third quarter
and 76.8% to $75.9 million for the nine month period as a result of increased
opportunities.
Our international operation reported net premiums written of $11.2 million
and $38.8 million for the 1997 third quarter and nine month period,
respectively, compared to $12.6 million and $40.3 million for the 1996
comparable periods.
OPERATING COSTS AND EXPENSES
Claims and claims expenses represent the Company's most significant and
uncertain cost. This expense is only an estimate at a given point in time of
what the insurer or reinsurer expects to pay on the settlement of claims based
upon facts and circumstances then known. The Company would generally expect to
refine such an estimate in subsequent accounting periods by appropriate amounts
with adjustments possible in either direction as additional information becomes
known.
One traditional means of measuring the underwriting performance of a
property/casualty insurer is the statutory composite ratio. The composite ratio,
based upon statutory accounting practices which differ from generally accepted
accounting principles in several respects, reflects underwriting experience, but
does not reflect income from investments. A composite ratio under 100% indicates
underwriting profitability while a composite ratio exceeding 100% indicates an
underwriting loss.
The following chart sets forth statutory composite ratios and the relevant
components for the periods indicated for the Company's domestic operations. The
consolidated statutory composite ratio combines the results of the Company's
international operation on a U.S. statutory basis:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------- ---------------
1997 1996 1997 1996 1996
--------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Claims and Claims Expenses....................................... 65.6% 65.2% 65.8% 63.9% 63.7%
Commissions and Brokerage........................................ 27.9 27.2 27.3 28.3 28.3
Other Underwriting Expenses...................................... 9.5 8.3 9.7 8.9 9.1
--------- --------- --------- --------- ---------------
Domestic Statutory Composite Ratio............................... 103.0% 100.7% 102.8% 101.1% 101.1%
--------- --------- --------- --------- ---------------
--------- --------- --------- --------- ---------------
International Statutory Composite Ratio.......................... 111.2% 105.3% 110.1% 105.8% 105.6%
--------- --------- --------- --------- ---------------
--------- --------- --------- --------- ---------------
Consolidated Statutory Composite Ratio........................... 103.6% 101.2% 103.4% 101.7% 101.6%
--------- --------- --------- --------- ---------------
--------- --------- --------- --------- ---------------
</TABLE>
The Company's domestic statutory composite ratio for the 1997 third quarter
and nine month period was 103.0% and 102.8%, respectively, compared with 100.7%
and 101.1%, for the 1996 comparable periods. The third quarter and nine month
statutory composite ratio for our international operation was 111.2% and 110.1%,
respectively, compared to 105.3% and 105.8% for the same prior year periods. The
increase in the composite ratio is reflective of the current market conditions.
11
<PAGE>
The Company experienced net favorable claim development for the 1997 nine
month period which was principally attributable to casualty business written
since 1986. This favorable development in the casualty business reflects the
strength of the actuarial assumptions underlying the business written,
particularly with respect to social and economic inflation. These actuarial
assumptions are utilized to establish the expected loss ratio employed in the
actuarial methodologies used to establish the reserves for claims and claims
expenses. Such loss ratios are periodically adjusted to reflect actuarially
computed expected claims to actual claims and claims expense development,
inflation and other considerations. In addition, the favorable development
was partly offset by unfavorable experience on business written prior to
1986, principally related to asbestos and environmental claims.
The pricing of the Company's reinsurance contracts contemplates many
factors, including exposure to claims and the expenses of both the client
company and broker. The Company's actuaries and underwriters evaluate the
adequacy of premium revenue net of these expenses, thereby mitigating the effect
of variations in these expenses to overall underwriting results. The Company's
commission and brokerage ratio for the 1997 nine month period reflects a
decrease compared to the 1996 nine month period, principally due to a change in
the Company's mix of business, particularly from the specialty lines of business
coupled with the effects of certain contractual provisions which adjust
commission expense based upon claim experience.
The statutory underwriting expense ratios for the 1997 third quarter and
nine month period were 9.5% and 9.7%, respectively, compared to 1996 ratios of
8.3% and 8.9%. The increase in the underwriting expense ratios is reflective of
the continuing business expansion and investments in technology coupled with the
slower net premium growth.
INVESTMENTS
Cash and invested assets at September 30, 1997 and December 31, 1996 were
$2.3 billion and $2.0 billion, respectively, excluding net investment payables
of $45.2 million and $24.9 million for 1997 and 1996, respectively.
Net investment income for the 1997 third quarter and nine month period was
$31.9 million and $90.8 million, respectively, increases of 22.1% and 17.2%,
respectively, over the 1996 comparable periods. The increase in net investment
income is primarily attributable to the growth in invested assets, including the
contribution from the termination of two retrocessional programs effective at
the beginning of 1997. On an after-tax basis, the increase in net investment
income was more pronounced, reflecting the benefits of the Company's increased
allocation of available cash flow from operations to tax-exempt securities. Net
investment income, net of tax, for the 1997 third quarter was $1.35 per share an
increase of 27.4% over the 1996 comparable period of $1.06 per share. For the
nine months ended September 30, 1997, after-tax net investment income was $3.86
per share, an increase of 22.9% over the comparable 1996 period. The Company's
pretax investment yield was 5.9% for the 1997 third quarter, compared to 5.7%
for the 1996 third quarter. The after-tax investment yield for the 1997 third
quarter was 4.7%, compared to 4.4% for the comparable prior year period.
Net investment gains, net of tax for the 1997 third quarter were $3.7
million or $.19 per share, compared to net investment gains of $1.4 million or
$.08 per share for the 1996 third quarter. Net investment gains, net of tax, for
the 1997 nine months were $1.00 per share compared to $.49 per share for the
1996 comparable period. Gains and losses on the sale of investments are
recognized as a component of operating income, but the timing and recognition of
such gains and losses are unpredictable and are not indicative of future
operating results.
The Company follows an investment strategy that is focused principally on
income predictability and asset value stability. This strategy results in an
emphasis on high quality fixed maturity investments. Tactical shifts between
taxable and tax-exempt bonds may occur in order to maximize after-tax investment
returns. At September 30, 1997, our fixed maturity investments totaled over $2.0
billion, which approximates 88% of cash and invested assets, and 95.3% of such
investments are rated investment grade by Moody's Investor Services, Inc. or
Standard & Poor's.
12
<PAGE>
The balance of the Company's investment portfolio at September 30, 1997,
consisting of cash, short-term investments and equity securities, amounted to
$287 million. As of September 30, 1997, the Company held approximately $144.8
million or 6.2% of cash and invested assets in equity securities which
represented 21% of statutory surplus.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." Statement No. 130 requires
that a company classify items of other comprehensive income in a financial
statement and display the accumulated balance of other comprehensive income in
the equity section of a statement of financial position. Statement No. 131
requires disclosures about segments of a company and related information about
the different types of business activities and the different economic
environment in which it operates that differ from current practice. These
statements will be effective for periods beginning after December 15, 1997, with
earlier application permitted. The Company has not completed its analysis of all
matters associated with the implementation of these standards or determined the
timing of adoption. The effect of adopting these standards will not be material
to the Company's financial position.
In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share." This
Statement replaces the historical presentation of primary earnings per share
with the caption Basic earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income from operations by the weighted
average number of shares outstanding for the period. This Statement is effective
for financial statements issued for periods ending after December 15, 1997, with
early adoption prohibited. Upon adoption, all prior period EPS amounts will be
restated.
The Company's historical primary and fully diluted earnings per share
amounts for operating income, excluding investment gains and net income and the
Basic and Diluted amounts required by SFAS No. 128 are shown below. The
Company's fully diluted earnings per share data assumes the conversion of
dilutive convertible securities and the exercise of all dilutive stock options.
The Company's Diluted EPS amounts as reported under Statement 128 are not
expected to differ materially from previously reported fully diluted EPS.
PRIMARY VS. Basic EPS:
<TABLE>
<CAPTION>
WEIGHTED AVG.
OPERATING INCOME(1) NET INCOME SHARES (000'S)
------------------------ ------------------------ ----------------------
AS PRO AS PRO AS PRO
PERIOD REPORTED FORMA REPORTED FORMA REPORTED FORMA
- ------ ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
1995: $ 2.53 $ 2.59 $ 3.47 $ 3.55 18,094 17,709
- -----
1996:
- -----
- -1st Qtr .73 .75 1.06 1.08 19,562 19,211
- -2nd Qtr .76 .78 .85 .87 19,253 18,913
- -3rd Qtr .76 .78 .84 .86 19,151 18,751
- -4th Qtr .75 .76 .92 .93 18,800 18,549
Full Year 3.03 3.07 3.69 3.74 19,095 18,855
1997:
- -----
- -1st Qtr .88 .89 1.06 1.08 18,692 18,432
- -2nd Qtr .90 .92 1.52 1.56 18,778 18,376
- -3rd Qtr .90 .93 1.09 1.13 18,894 18,372
Year-to-date 2.68 2.74 3.68 3.76 18,788 18,393
</TABLE>
- ------------------------
(1) Excludes net realized investment gains, net of tax.
13
<PAGE>
FULLY DILUTED VS. DILUTED EPS:
<TABLE>
WEIGHTED AVG.
OPERATING INCOME(1) NET INCOME SHARES (000'S)
------------------------ ------------------------ ----------------------
AS PRO AS PRO AS PRO
PERIOD REPORTED FORMA REPORTED FORMA REPORTED FORMA
- ------ ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
1995: $ 2.45 $ 2.45 $ 3.29 $ 3.30 20,153 20,115
- -----
1996:
- -----
- -1st Qtr .71 .71 1.00 1.00 21,582 21,582
- -2nd Qtr .73 .73 .81 .81 21,287 21,273
- -3rd Qtr .73 .73 .80 .80 21,171 21,171
- -4th Qtr .72 .72 .87 .87 20,820 20,820
Full Year 2.90 2.90 3.51 3.51 21,117 21,115
1997:
- -----
- -1st Qtr .83 .83 1.00 1.00 20,712 20,712
- -2nd Qtr .85 .86 1.41 1.42 20,933 20,798
- -3rd Qtr .85 .85 1.03 1.03 20,957 20,914
Year-to-date 2.52 2.55 3.42 3.45 20,985 20,808
</TABLE>
(1) Excludes net realized investment gains, net of tax.
LIQUIDITY AND CAPITAL RESOURCES
NAC Re is a holding company and has no revenue producing operations of its
own. Cash flow within NAC Re consists of investment income, operating and
interest expenses, dividends to stockholders, rental income, dividends and tax
reimbursements from NAC, which are subject to statutory restrictions.
The statutory surplus of the reinsurance subsidiary, NAC Reinsurance
Corporation was $691.0 million at September 30, 1997 which ranks NAC among the
largest domestic reinsurers measured on this basis.
Total assets were approximately $3.0 billion at September 30, 1997.
Stockholders' equity reached $627.5 million or $34.15 per share at September 30,
1997 compared to $553.3 or $30.06 per share at December 31, 1996. The unrealized
appreciation of investments, net of tax, was $49.4 million at September 30,
1997, compared to an unrealized appreciation of investments, net of tax, of
$31.7 million at December 31, 1996.
Cash flow from operations for the 1997 nine month period reached $288.6
million compared to $122.6 million for the prior year period. This increase was
principally due to a receipt of approximately $180 million related to the
termination of two retrocessional programs effective at the beginning of 1997,
partly offset by increases in paid claim activities from various lines of
business.
NAC Re maintains a revolving credit facility under which it can borrow up to
$35 million. Outstanding borrowings as of September 30, 1997 were $12.9 million
and were principally used to finance the Company's periodic repurchase of Common
Stock.
NAC maintains a $15 million line of credit facility which is available for
general corporate purposes including catastrophe claim payments. There have been
no borrowings under this facility.
From January 1 to September 30, 1997 the Company has repurchased
approximately 257,000 shares of common stock at an average cost of $41.09 per
share. From the inception of the Company's stock repurchase program,
approximately 3,338,000 shares have been repurchased at an average cost of
$25.32 per share. Approximately 744,000 shares remain authorized for repurchase
under the program.
The Company declared a quarterly cash dividend of $.075 per share for the
1997 third quarter. The regular quarterly cash dividend was increased to $.075
per share from $.06 per share in June 1997.
14
<PAGE>
REGULATORY INITIATIVES
NAC Re and its domestic subsidiaries are subject to regulatory oversight
under the insurance statutes and regulations of the jurisdictions in which they
conduct business, including all states of the United States and Canada. NAC Re's
international subsidiary is subject to the regulatory authority of the United
Kingdom Department of Trade and Industry. The international subsidiary's
Australian branch office is also subject to the Australian Insurance and
Supervisory Commission's solvency and regulatory authority. These regulations
vary from jurisdiction to jurisdiction, and are generally designed to protect
ceding insurance companies and policyholders by ensuring each company's
financial integrity and solvency in its business transactions and operations.
Many of the insurance statutes and regulations applicable to the Company relate
to reporting and disclosure standards which allow insurance regulators to
closely monitor the Company's performance. Typical required reports include
information concerning the Company's capital structure, ownership, financial
strength and general business operations.
In 1993, the National Association of Insurance Commissioners (the "NAIC")
adopted a model risk-based capital act intended to provide an additional tool
for regulators to evaluate the capital of property and casualty insurers and
reinsurers with respect to the risks assumed by them and determine whether there
is a perceived need for possible corrective action. The nature of the corrective
action depends upon the extent of the calculated risk-based capital deficiency
and ranges from requiring the company to submit a comprehensive plan to placing
the insurer under regulatory control. While the model risk-based capital act has
not yet been adopted in New York, NAC's domicile, New York has issued a circular
letter requiring the filing of risk-based capital reports by property and
casualty insurers and reinsurers. The NAIC also adopted a proposal that requires
property and casualty insurers and reinsurers to report the results of their
risk-based capital calculations as part of the statutory annual statements filed
with state regulatory authorities. Surplus (as calculated for statutory annual
statement purposes) for each of the Company's domestic subsidiaries is well
above the risk-based capital thresholds that would require either company or
regulatory action.
Various other regulatory and legislative initiatives have been discussed
from time to time that could impact reinsurers. Generally, the thrust of
regulatory efforts has been to improve the solvency of reinsurers and create
strong incentives for insurers to do business with well capitalized, prompt
paying reinsurers operating under U.S. jurisdiction. While we cannot quantify
the impact of these regulatory efforts on the Company's operations, we believe
the Company is adequately positioned to compete in an environment of more
stringent regulation.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995
Except for the historical information contained herein, the matters
discussed in this Form 10-Q are forward-looking statements. These
forward-looking statements involve risks and uncertainties that could render
them materially different, including, but not limited to the effect of general
economic conditions and conditions specific to the reinsurance and investment
markets, pricing competition, the amount of underwriting capacity from
time-to-time in the market, actual versus estimated claims experience, the
effects of regulatory and legal developments and rating agencies and policies.
The Company assumes no obligation to update any forward-looking statements or
other information contained in this report.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibit Index:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------ ---------
<C> <S> <C>
11-1 Statement Re: Computation of Primary Per Share Earnings 18
11-2 Statement Re: Computation of Fully Diluted Per Share Earnings 19
15 Letter Re: Unaudited Interim Financial Information 20
27 Financial Data Schedule 21-22
</TABLE>
- ------------------------
(b) There were no reports filed on Form 8-K for the quarter ended September 30,
1997.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Nac Re Corp.
(Registrant)
Date: November 12, 1997 /S/ NICHOLAS M. BROWN, JR.
------------------------------ --------------------------------------
NICHOLAS M. BROWN, JR.
President and Chief Operating Officer
Date: November 12, 1997 /S/ JEROME T. FADDEN
------------------------------ --------------------------------------
JEROME T. FADDEN
Vice President, Chief Financial Officer
and Treasurer
17
<PAGE>
EXHIBIT 11-1
NAC RE CORP. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRIMARY EARNINGS PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- --------------------------
1997 1996 1997 1996
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net income applicable to Common Stock.................. $ 20,670 $ 16,038 $ 69,106 $ 53,224
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Average number of common shares outstanding............ 18,371,712 18,750,668 18,392,846 18,957,387
Add:
Assumed exercise of dilutive stock options (1)....... 522,534 400,078 394,792 363,768
------------- ------------- ------------ ------------
Common stock and common stock equivalents
outstanding.......................................... 18,894,246 19,150,746 18,787,638 19,321,155
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Net income per share assuming dilution of common stock
equivalents.......................................... $ 1.09 $ 0.84 $ 3.68 $ 2.75
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
- ------------------------
(1) Computed utilizing the average market price of the Common Stock for the
period.
NOTE: The Company's 5.25% convertible subordinated debentures due 2002 are
not considered to be common stock equivalents in the calculation of primary
earnings per share.
18
<PAGE>
EXHIBIT 11-2
NAC RE CORP. AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FULLY DILUTED EARNINGS PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income applicable to
Common Stock............. $20,670 $ 16,038 $ 69,106 $ 53,224
After-tax add back of
convertible debenture
interest and
amortization............. 876 876 2,628 2,628
------------ ------------ ------------ ------------
Adjusted net income........ $21,546 $ 16,914 $ 71,734 $ 55,852
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Average number of common
shares outstanding....... 18,371,712 18,750,668 18,392,846 18,957,387
Add:
Assumed exercise of
dilutive stock options
(1)...................... 565,347 400,078 572,007 402,900
Assumed conversion of
convertible debentures
(2)...................... 2,020,202 2,020,202 2,020,202 2,020,202
------------ ------------ ------------ ------------
Common stock and common
stock equivalents
outstanding.............. 20,957,261 21,170,948 20,985,055 21,380,489
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Fully diluted earnings per
share.................... $1.03 $0.80 $3.42 $2.61
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</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.
19
<PAGE>
EXHIBIT 15
ACKNOWLEDGMENT LETTER
To the Stockholders and Board of Directors
NAC Re Corporation
We are aware of the incorporation by reference in the Registration Statements
(Form S-8 No. 33-25585, Form S-8 No. 33-77494 and Form S-8 No. 333-33873)
pertaining to the NAC Re Corp. Employee Stock Purchase Plan, in the
Registration Statement (Form S-8 No. 33-27745) pertaining to the NAC Re Corp.
1989 Stock Option Plan, in the Registration Statement (Form S-8 No. 7813)
pertaining to the NAC Re Corp. 1985 and 1986 Stock Option Plans, in the
Registration Statements (Form S-8 No. 33-22841 and Form S-8 No. 333-03935)
pertaining to the NAC Re Corp. Employee Savings Plan, in the Registration
Statement (Form S-8 No. 33-34516) pertaining to the NAC Re Corp. Director's
Stock Option Plan, in the Registration Statement (Form S-8 No. 33-77492)
pertaining to the NAC Re Corp. Director's Stock Option Plan, and in the
Registration Statement (Form S-8 No. 33-77114) pertaining to the NAC Re Corp.
1993 Stock Option Plan, in the Registration Statement (Form S-8 No.
333-33875) pertaining to the NAC Re Corp. 1997 Incentive and Capital
Accumulation Plan, of our report dated October 21, 1997, relating to the
unaudited consolidated interim financial statements of NAC Re Corporation
that is included in its Form 10-Q for the quarter ended September 30, 1997.
ERNST & YOUNG LLP
New York, New York
October 21, 1997
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-31-1996
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 2,034,211
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 144,813
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,307,738
<CASH> 13,370
<RECOVER-REINSURE> 9,677
<DEFERRED-ACQUISITION> 91,389
<TOTAL-ASSETS> 2,986,719
<POLICY-LOSSES> 1,599,482
<UNEARNED-PREMIUMS> 295,408
<POLICY-OTHER> 23,124
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 299,940
0
0
<COMMON> 2,168
<OTHER-SE> 625,358
<TOTAL-LIABILITY-AND-EQUITY> 2,986,719
422,072
<INVESTMENT-INCOME> 90,797
<INVESTMENT-GAINS> 28,458
<OTHER-INCOME> 0
<BENEFITS> 278,388
<UNDERWRITING-AMORTIZATION> 158,834
<UNDERWRITING-OTHER> 16,308
<INCOME-PRETAX> 87,797
<INCOME-TAX> 18,691
<INCOME-CONTINUING> 69,106
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,106
<EPS-PRIMARY> 3.68
<EPS-DILUTED> 3.42
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
