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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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)
Delaware 13-3297840
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Greenwich Plaza, Greenwich, CT 06836-2568
(Address of principal executive offices)
(203) 622-5200
(Registrant's telephone number, including area code)
Not Applicable
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(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 18,390,483 shares outstanding of the Registrant's Common Stock,
$.10 par value, as of March 31, 1997.
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<PAGE>
NAC RE CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Independent Accountants' Review Report 3
Consolidated Balance Sheet -
March 31, 1997 and December 31, 1996 4
Consolidated Statement of Income -
Three Months Ended March 31, 1997 and 1996 5
Consolidated Statement of Stockholders' Equity -
Three Months Ended March 31, 1997 and 1996 6
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1997 and 1996 7
Notes to Consolidated Financial Statements 8-9
Management's Discussion and Analysis
of Financial Condition and Results of Operations 10-14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit 11-1 17
Exhibit 11-2 18
Exhibit 15 19
Exhibit 27 20-21
<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 March 31, 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for the three months
ended March 31, 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 audited
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.
New York, New York ERNST & YOUNG LLP
April 22, 1997
- 3 -
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
March 31, December 31,
1997 1996
----------- ------------
ASSETS
Investments:
Available for sale:
Fixed maturities (amortized cost:
1997, $1,764,682; 1996, $1,681,190) $ 1,764,015 $ 1,703,537
Equity securities
(cost: 1997, $158,535; 1996, $153,197) 183,889 179,619
Short-term investments 191,140 81,893
----------- -----------
TOTAL INVESTMENTS 2,139,044 1,965,049
Cash 30,535 18,853
Accrued investment income 29,062 28,472
Premiums receivable 207,185 200,036
Reinsurance recoverable balances, net 172,679 336,324
Reinsurance recoverable on unearned premiums 22,765 20,320
Deferred policy acquisition costs 87,150 85,211
Excess of cost over net assets acquired 3,552 3,644
Deferred tax asset, net 46,656 30,390
Other assets 69,856 57,332
----------- -----------
TOTAL ASSETS $ 2,808,484 $ 2,745,631
=========== ===========
LIABILITIES
Claims and claims expenses $ 1,537,772 $ 1,513,345
Unearned premiums 277,838 271,898
8% Notes due 1999 100,000 100,000
7.15% Notes due 2005 99,936 99,934
5.25% Convertible Subordinated
Debentures due 2002 100,000 100,000
Investment accounts payable 41,996 25,326
Revolving credit agreement 12,924 12,924
Other liabilities 87,018 68,935
----------- -----------
TOTAL LIABILITIES 2,257,484 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, 21,548; 1996, 21,464 shares issued) 2,155 2,146
Additional paid-in capital 250,553 248,662
Unrealized appreciation of investments, net of tax 16,047 31,700
Currency translation adjustments, net of tax 4,900 8,377
Retained earnings 354,613 335,868
Less treasury stock, at cost
(1997, 3,158; 1996, 3,061 shares) (77,268) (73,484)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 551,000 553,269
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,808,484 $ 2,745,631
=========== ===========
See Notes to Consolidated Financial Statements
- 4 -
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three months ended
March 31,
---------------------
1997 1996
--------- --------
PREMIUMS AND OTHER REVENUES
Net premiums written $136,171 $123,139
Increase in unearned premiums (4,061) (6,318)
--------- --------
Premiums earned 132,110 116,821
Net investment income 28,572 25,743
Net investment gains 5,133 9,817
--------- --------
Total revenues 165,815 152,381
OPERATING COSTS AND EXPENSES
Claims and claims expenses 87,531 73,689
Commissions and brokerage 32,886 33,519
Acquisition and operating expenses 15,177 12,650
Interest expense 5,474 5,571
--------- --------
Total operating costs and expenses 141,068 125,429
INCOME
Operating income before income taxes 24,747 26,952
--------- --------
Federal and foreign income taxes:
Current 10,857 8,720
Deferred (5,964) (2,540)
--------- --------
Income tax expense (benefit) 4,893 6,180
--------- --------
Operating income/net income $19,854 $20,772
========= ========
PER SHARE DATA
Primary:
Average shares outstanding 18,692 19,562
Operating income/net income $1.06 $1.06
Fully Diluted (assuming conversion of dilutive
convertible securities):
Average shares outstanding 20,712 21,582
Operating income/net income $1.00 $1.00
See Notes to Consolidated Financial Statements
- 5 -
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
Three months ended
March 31,
-----------------------
1997 1996
--------- --------
COMMON STOCK
Balance at beginning of year $2,146 $2,134
Issuance of shares 9 5
--------- --------
Balance at end of period $2,155 $2,139
========= ========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year $248,662 $246,356
Issuance of shares 1,891 1,198
--------- --------
Balance at end of period $250,553 $247,554
========= ========
UNREALIZED APPRECIATION OF INVESTMENTS, NET OF TAX
Balance at beginning of year $31,700 $35,187
Unrealized depreciation (15,653) (19,878)
--------- --------
Balance at end of period $16,047 $15,309
========= ========
CURRENCY TRANSLATION ADJUSTMENTS, NET OF TAX
Balance at beginning of year $8,377 $1,017
Translation adjustments (3,477) (1,492)
--------- --------
Balance at end of period $4,900 $(475)
========= ========
RETAINED EARNINGS
Balance at beginning of year $335,868 $269,660
Net income 19,854 20,772
Dividends (1,109) (957)
--------- --------
Balance at end of period $354,613 $289,475
========= ========
TREASURY STOCK
Balance at beginning of year $ (73,484) $(42,598)
Purchase of treasury shares, net of reissuance (3,784) (2,805)
--------- --------
Balance at end of period $ (77,268) $(45,403)
========= ========
TOTAL STOCKHOLDERS' EQUITY
Balance at beginning of year $553,269 $511,756
Issuance of shares 1,900 1,203
Unrealized depreciation (15,653) (19,878)
Translation adjustments (3,477) (1,492)
Net income 19,854 20,772
Dividends (1,109) (957)
Purchase of treasury shares, net of reissuance (3,784) (2,805)
--------- --------
Balance at end of period $551,000 $508,599
========= ========
See Notes to Consolidated Financial Statements
- 6 -
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended
March 31,
------------------------
1997 1996
--------- ---------
OPERATING ACTIVITIES
Net income $19,854 $20,772
Adjustments to reconcile net income
to net cash provided by operating
activities:
Reserve for claims and claims
expenses, net 241,349 30,029
Unearned premiums, net 4,058 6,318
Premiums receivable (7,884) (13,566)
Accrued investment income (696) 734
Reinsurance balances, net (44,290) (2,648)
Deferred policy acquisition costs (2,041) (1,879)
Net investment gains (5,133) (9,817)
Deferred tax asset, net (5,964) (2,540)
Other liabilities 11,745 7,815
Other items, net (10,459) (10,154)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 200,539 25,064
--------- ---------
INVESTING ACTIVITIES
Sales of fixed maturity investments 386,972 501,443
Maturities of fixed maturity investments 7,629 5,391
Purchases of fixed maturity investments (467,650) (526,508)
Net purchases of short-term investments (110,841) (1,778)
Sales of equity securities 22,236 31,822
Purchases of equity securities (24,019) (21,420)
Purchases of furniture and equipment (1,040) (1,124)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (186,713) (12,174)
--------- ---------
FINANCING ACTIVITIES
Issuance of shares 1,671 1,000
Purchase of treasury shares, net of
reissuance (2,840) (2,805)
Cash dividends paid to stockholders (1,104) (959)
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (2,273) (2,764)
--------- ---------
Effects of exchange rate changes on cash 129 -
--------- ---------
Increase in cash 11,682 10,126
Cash - beginning of year 18,853 10,320
--------- ---------
Cash - end of period $30,535 $20,446
========= =========
See Notes to Consolidated Financial Statements
- 7 -
<PAGE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying consolidated financial statements have been prepared on
the basis of generally accepted accounting principles and in the opinion
of management, reflect all adjustments necessary (consisting of normal
recurring accruals) for a fair presentation of results for such periods.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes contained in the
Company's Annual Report to Shareholders.
2. Per Share Data
Primary earnings per share data are based on weighted average common
shares and common share equivalents outstanding during the period. Fully
diluted earnings per share data assumes conversion of dilutive convertible
securities and the assumed exercise of all dilutive stock options.
3. Retrocession
The Company's balance sheet as of March 31, 1997 and December 31, 1996
reflects reinsurance recoverable balances as assets, the components of
which are stated in the table below. In the beginning of 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, with total cash
consideration of approximately $180 million.
Reinsurance Recoverable Balances, Net
-------------------------------------
March 31, 1997 December 31, 1996
-------------- -----------------
Paid Claims $10,407 $15,457
Unpaid Claims and Claims Expenses 192,005 406,128
Ceded Balances Payable (28,856) (38,205)
Funds Held Liability (877) (47,056)
-------- --------
Net $172,679 $336,324
======== ========
The effect of retrocessional activity on premiums written, premiums earned
and claims expenses is as follows (in thousands):
Three months ended
March 31,
------------------
1997 1996
------------------
Ceded premiums written $32,371 $37,207
Ceded premiums earned $29,926 $38,360
Ceded claims and claims expenses $18,763 $20,507
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-8-
<PAGE>
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4. Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board 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.
Net Income
---------------------------
Primary Basic EPS
As Reported Pro Forma
------------ -----------
Full Year:
1995 $3.47 $3.55
1996 $3.69 $3.74
1st Qtr:
1996 $1.06 $1.08
1997 $1.06 $1.08
Net Income
---------------------------
Fully Diluted Diluted EPS
As Reported Pro Forma
------------ -----------
Full Year:
1995 $3.29 $3.30
1996 $3.51 $3.51
1st Qtr:
1996 $1.00 $1.00
1997 $1.00 $1.00
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<PAGE>
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
NAC Re Corporation ("NAC Re") is the holding company for NAC Reinsurance
Corporation ("NAC") and its wholly owned insurance and reinsurance domestic and
foreign subsidiaries. NAC Re and its subsidiaries are collectively referred to
as the Company.
Results of Operations
Operating earnings, excluding investment gains, of $16.4 million, increased
14.3% over the 1996 first quarter. On a per share basis, operating earnings,
excluding investment gains, were $.88, an increase of 20.5% over the comparable
1996 period. Net income, including investment gains, was $19.9 million or $1.06
per share for the 1997 first quarter compared to $20.8 million or $1.06 per
share for the 1996 first quarter.
Premium Revenues
The Company's growth in premium revenue for its domestic and international
operations are as follows:
(In millions)
Three months ended March 31,
-------------------------------------------------
Domestic International Total
----------------- ------------- ------------
1997 1996 1997 1996 1997 1996
------ ------ ---- ----- ------ ------
Net Premiums Written:
Casualty $75.7 $69.1 $7.1 $5.2 $82.8 $74.3
Property 27.3 29.1 6.8 8.4 34.1 37.5
Specialty/Other 19.3 11.3 - - 19.3 11.3
------ ------ ----- ----- ------ ------
Total $122.3 $109.5 $13.9 $13.6 $136.2 $123.1
====== ====== ===== ===== ====== ======
As shown in the table above, the Company's worldwide net premiums written for
the 1997 first quarter were $136.2 million, an increase of 10.6% over the
comparable 1996 period. Domestic net premiums written for the 1997 first quarter
of $122.3 million reflected an increase of 11.6% over the comparable 1996
period.
Although market conditions continue to be extremely competitive, domestic
casualty net premiums written grew 9.5% over the comparable prior year period,
primarily as a result of increased opportunities in the Company's facultative
business. Property net premiums written for the 1997 first quarter declined 6.2%
as a result of the continuing competitive pressures. Net premiums written from
the specialty lines totaled $19.2 million, an increase of 69.9% over the 1996
first quarter, principally due to increased opportunities and participations
from existing clients.
Net premiums written across all lines of business continues to be favorably
impacted by reduced ceded premium charges. The reduction in ceded premiums is
due, in part, to the favorable claims results experienced within the Company's
retrocessional programs, coupled with the changing retrocessional market
conditions and a restructuring of the Company's retrocessional programs.
The Company's international operation, NAC Reinsurance International Limited,
reported net premiums written of $13.9 million for the 1997 first quarter,
compared to $13.6 million for the 1996 first quarter. The minimal increase in
net premiums reflects an increase of $1.9 million or 36.8% in casualty net
premiums written, partly offset by a decrease of $1.6 million or 18.8% in
property net premiums, due to competitive international market conditions.
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-10-
<PAGE>
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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 modest amounts with
adjustments possible in either direction as additional information becomes
known.
One traditional means of measuring the underwriting performance of a
property/casualty insurer is the statutory composite ratio. The composite ratio,
based upon statutory accounting practices which differ from generally accepted
accounting principles in several respects, reflects underwriting experience, but
does not reflect income from investments. A composite ratio under 100% indicates
underwriting profitability while a composite ratio exceeding 100% indicates an
underwriting loss.
The following chart sets forth statutory composite ratios and the relevant
components for the periods indicated for the Company's domestic reinsurance
subsidiary. The consolidated statutory composite ratio combines the results of
the Company's international subsidiary on a U.S. statutory basis:
Three months ended Year ended
March 31, December 31,
------------------ ------------
1997 1996 1996
---- ---- ----
Claims and Claims Expenses 65.8% 62.2% 63.7
Commissions and Brokerage 26.1 29.6 28.3
Other Underwriting Expenses 10.2 9.7 9.1
----- ----- -----
Domestic Statutory Composite Ratio 102.1% 101.5% 101.1
===== ===== =====
Consolidated Statutory Composite Ratio 102.8% 101.9% 101.6
===== ===== =====
The Company's domestic statutory composite ratio for the 1997 first quarter was
102.1% compared with 101.5% for the 1996 first quarter ratio. The slight
increase in the composite ratio is reflective of the competitive market
conditions.
The Company experienced net favorable claim development for the 1997 three 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. Such favorable development was partly offset by
unfavorable experience in our property business. The unfavorable experience in
our property business was principally from claims related to the 1995
underwriting year. In addition, the favorable development was partly offset by
unfavorable experience on business written prior to 1985, principally related to
asbestos and environmental claims.
The pricing of the Company's reinsurance contracts contemplates many factors,
including exposure to claims and the expenses of both the client company and
broker. The Company's actuaries and underwriters evaluate the adequacy of
premium revenue net of these expenses, thereby mitigating the effect of
variations in these expenses to overall underwriting results. The Company's
commission and brokerage ratio for the 1997 first quarter reflects a decrease
compared to the 1996 first quarter, principally due to a change in the mix of
business, particularly from the specialty lines of business.
Other underwriting expenses for the 1997 first quarter have increased as
compared to the 1996 prior year period, reflecting continued business expansion,
investments in technology and the building of our facultative and international
infrastructure.
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-11-
<PAGE>
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Investments
Cash and invested assets at March 31, 1997 and December 31, 1996 were $2.1
billion and $2.0 billion, respectively, excluding net investment payables of
$41.5 million and $24.9 million for 1997 and 1996, respectively.
Net investment income for the 1997 first quarter was $28.6 million, an increase
of 11.0% over the 1996 comparable period. 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 first quarter was $1.21 per share
compared to $1.03 per share for the same period last year. The Company's pretax
investment yield was 5.6% for the 1997 first quarter, compared to 5.8% for the
1996 first quarter. The after-tax investment yield for the 1997 first quarter
was 4.4%, compared to 4.6% for the comparable prior year period.
Net investment gains, net of tax for the 1997 first quarter were $3.5 million or
$.18 per share, compared to net investment gains of $6.4 million or $.33 per
share for the 1996 first quarter. 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
March 31, 1997, our fixed maturity investments amounted to $1.8 billion, which
approximates 81% of cash and invested assets, and 96% of such investments are
rated investment grade by Moody's Investor Services, Inc. or Standard & Poor's.
While uncertainties exist regarding interest rate and inflation variability, the
Company attempts to minimize such risks and exposures by balancing the duration
of its assets with the expected duration of its liabilities. Consistent with the
payment profile of the Company's claim liabilities, as of March 31, 1997 the
Company's investment portfolio had an average duration of 4.8 years.
The balance of the Company's investment portfolio at March 31, 1997, consisting
of cash, short-term investments and equity securities, amounted to $405.6
million. As of March 31, 1997, the Company held approximately $184 million or
8.5% of cash and invested assets in equity securities which represented 28% of
statutory surplus.
Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board 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, as reflected
below .
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<PAGE>
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<TABLE>
<CAPTION>
Operating Income(1) Net Income Weighted Avg. Shares
------------------- ---------- --------------------
Primary Basic Primary Basic Primary Basic
Period As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
- ------ ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Full Year 1995 $2.53 $2.59 $3.47 $3.55 18,094,462 17,708,733
- --------------
1996:
- - 1st Qtr .73 .75 1.06 1.08 19,561,870 19,210,507
- - 2nd Qtr .76 .78 .85 .87 19,253,118 18,913,257
- - 3rd Qtr .76 .78 .84 .86 19,150,746 18,750,668
- - 4th Qtr .75 .76 .92 .93 18,799,565 18,549,225
Full Year 3.03 3.07 3.69 3.74 19,094,714 18,854,789
1997:
- - 1st Qtr .88 .89 1.06 1.08 18,691,650 18,431,878
<CAPTION>
Operating Income(1) Net Income Weighted Avg. Shares
------------------- ---------- --------------------
Primary Basic Primary Basic Primary Basic
Period As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
- ------ ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Full Year 1995 $2.45 $2.45 $3.29 $3.30 20,153,459 20,114,664
- --------------
1996:
- - 1st Qtr .71 .71 1.00 1.00 21,582,072 21,582,072
- - 2nd Qtr .73 .73 .81 .81 21,286,773 21,273,320
- - 3rd Qtr .73 .73 .80 .80 21,170,948 21,170,948
- - 4th Qtr .72 .72 .87 .87 20,819,767 20,819,767
Full Year 2.90 2.90 3.51 3.51 21,117,116 21,114,916
1997:
- - 1st Qtr .83 .83 1.00 1.00 20,711,852 20,711,852
</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 $666.6 million at March 31, 1997 which ranks among the largest domestic
reinsurers measured on this basis.
Total assets exceeded $2.8 billion at March 31, 1997. Stockholders' equity
reached $551.0 million or $29.96 per share at March 31, 1997 compared to $553.3
or $30.06 per share at December 31, 1996. The unrealized appreciation of
investments, net of tax, decreased $15.7 million or $.85 in stockholder's equity
per share from December 31, 1996, reflecting the overall increase in market
interest rates and the Company's realization of certain investment gains during
the 1997 first quarter.
Cash flow from operations for the 1997 first quarter, which included
approximately $180 million from the termination of two retrocessional programs
effective at the beginning of 1997, reached $200.5 million compared to $25.1
million for the prior year period.
NAC Re maintains a revolving credit facility under which it can borrow up to $35
million. Outstanding borrowings as of March 31, 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
catastrophe claim payments or working capital purposes. There have been no
borrowings under this facility.
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<PAGE>
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In March 1997, the Board of Directors of NAC Re Corp. approved the expansion of
shares remaining under the Company's stock repurchase program to one million
shares. Since January 1, 1997, the Company has repurchased approximately 124,000
shares of common stock at an average cost of $37.67 per share. From the
inception of the program, approximately 3,204,000 shares have been repurchased
at an average cost of $24.53 per share. Approximately 878,000 shares remain
authorized for repurchase under the program.
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, it was enacted in California
in 1996, NAC's commercial domicile. New York has issued a circular letter
requiring the filing of risk-based capital reports by property and casualty
insurers and reinsurers. 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.
- --------------------------------------------------------------------------------
-14-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits
(a) Exhibit Index:
Exhibit Description Page
- --------------------------------------------------------------------------------
11-1 Statement Re: Computation of Primary Per Share Earnings 16
11-2 Statement Re: Computation of Fully Diluted Per Share Earnings 17
15 Letter Re: Unaudited Interim Financial Information 18
27 Financial Data Schedule 19
(b) There were no reports filed on Form 8-K for the three months ended March
31, 1997.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
- 15 -
<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: May 12, 1997 Jerome T. Fadden
---------------------------
Jerome T. Fadden
Vice President, Chief Financial Officer
and Treasurer
Date: May 12, 1997 Nicholas M. Brown, Jr.
---------------------------
Nicholas M. Brown, Jr.
President and Chief Operating Officer
- 16 -
EXHIBIT 11-1
NAC RE CORP. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER SHARE
(Dollars in thousands, except per share amounts)
Primary Earnings Per Share of Common Stock and Common Stock Equivalents
Three months ended
March 31,
------------------------
1997 1996
----------- -----------
Net income applicable to Common Stock $ 19,854 $ 20,772
=========== ===========
Average number of common shares outstanding 18,431,878 19,210,507
Add:
Assumed exercise of dilutive stock options(1) 259,772 351,363
----------- -----------
Common stock and common stock equivalents
outstanding 18,691,650 19,561,870
=========== ===========
Net income per share assuming dilution of
common stock equivalents $ 1.06 $ 1.06
=========== ===========
(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.
- 17 -
EXHIBIT 11-2
NAC RE CORP. AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
(Dollars in thousands, except per share amounts)
Fully Diluted Earnings Per Share of Common Stock and Common Stock Equivalents
Three months ended
March 31,
-----------------------
1997 1996
---------- ----------
Net income applicable to Common Stock $ 19,854 $ 20,772
After-tax add back of convertible debenture
interest and amortization 876 876
---------- ----------
Adjusted net income $ 20,730 $ 21,648
========== ==========
Average number of common shares outstanding 18,431,878 19,210,507
Add:
Assumed exercise of dilutive stock options(1) 259,772 351,363
Assumed conversion of convertible debentures(2) 2,020,202 2,020,202
---------- ----------
Common stock and common stock equivalents
outstanding 20,711,852 21,852,072
========== ==========
Fully diluted earnings per share $1.00 $1.00
========== ==========
(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.
- 18 -
EXHIBIT 15
Acknowledgment Letter
To the Stockholders and Board of Directors
NAC Re Corporation
We are aware of the incorporation by reference in the Registration Statements
(Form S-8 No. 33-25585 and Form S-8 No. 33-77494) pertaining to the NAC Re Corp.
Employee Stock Purchase Plan, in the Registration Statement (Form S-8 No.
33-27745) pertaining to the NAC Re Corp. 1989 Stock Option Plan, in the
Registration Statement (Form S-8 No. 7813) pertaining to the NAC Re Corp. 1985
and 1986 Stock Option Plans, in the Registration Statements (Form S-8 No.
33-22841 and Form S-8 No. 333-03935) pertaining to the NAC Re Corp. Employee
Savings Plan, in the Registration Statement (Form S-8 No. 33-34516) 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 of our report dated April 22, 1997,
relating to the unaudited consolidated interim financial statements of NAC Re
Corporation which is included in its Form 10-Q for the quarter ended March 31,
1997.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part
of the registration statement prepared or certified by accountants within the
meaning of Sections 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG LLP
New York, New York
April 22, 1997
- 19 -
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
EXHIBIT 27
NAC Re Corporation
Article 7 of Regulation S-X
Insurance Companies
Three Month Period Ending March 31, 1997
(Dollars in thousands, except per share amounts)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 1,764,015
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 183,889
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,139,044
<CASH> 30,535
<RECOVER-REINSURE> 10,407
<DEFERRED-ACQUISITION> 87,150
<TOTAL-ASSETS> 2,808,484
<POLICY-LOSSES> 1,537,772
<UNEARNED-PREMIUMS> 277,838
<POLICY-OTHER> 14,051
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 299,936
0
0
<COMMON> 2,155
<OTHER-SE> 548,845
<TOTAL-LIABILITY-AND-EQUITY> 2,808,484
132,110
<INVESTMENT-INCOME> 28,572
<INVESTMENT-GAINS> 5,133
<OTHER-INCOME> 0
<BENEFITS> 87,531
<UNDERWRITING-AMORTIZATION> 48,063
<UNDERWRITING-OTHER> 5,474
<INCOME-PRETAX> 24,747
<INCOME-TAX> 4,893
<INCOME-CONTINUING> 19,854
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,854
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.00
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
