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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________________ TO
________________________
COMMISSION FILE NUMBER 0-13891
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NAC RE CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 13-3297840
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
ONE GREENWICH PLAZA, GREENWICH, CT 06836-2568
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 622-5200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, par value $.10 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value on March 3, 1997 of the voting stock held by
non-affiliates of the registrant was approximately $642 million.
There were 18,463,493 shares outstanding of the Registrant's Common Stock,
$.10 par value as of March 3, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the 1996 Annual Report to Shareholders, as indicated herein
(Parts I and II).
(2) Proxy Statement involving the election of directors and other matters which
the registrant intends to file with the Commission within 120 days after
December 31, 1996 (Part III).
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NAC RE CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ITEM NUMBER
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<C> <S> <C>
PART I
1. Business......................................................................................... 1
2. Properties....................................................................................... 14
3. Legal Proceedings................................................................................ 14
4. Submission of Matters to a Vote of Security Holders.............................................. 14
PART II
5. Market for the Registrant's Common Stock and Related Stockholder Matters......................... 15
6. Selected Financial Data.......................................................................... 15
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 15
8. Financial Statements and Supplementary Data...................................................... 16
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............ 16
PART III
10. Directors and Executive Officers................................................................. 16
11. Executive Compensation........................................................................... 16
12. Security Ownership of Certain Beneficial Owners and Management................................... 16
13. Certain Relationships and Related Transactions................................................... 16
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................. 16
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
HISTORY
NAC Re Corp. ("NAC Re") is a Delaware corporation that was organized on June
27, 1985 for the purpose of holding all the outstanding shares of common stock
of NAC Reinsurance Corporation ("NAC"), a property and casualty reinsurance
operation. Based on industry data published by the Reinsurance Association of
America ("RAA") as of December 31, 1996, NAC is the 9th largest reinsurance
company in the United States, ranked by statutory surplus. NAC is the parent
company of three subsidiaries: Greenwich Insurance Company, Indian Harbor
Insurance Company and NAC Re International Holdings Limited. NAC Re and its
subsidiaries are collectively referred to as the Company.
NAC was incorporated in New York in 1929 and from 1939 until April 30, 1984,
NAC was a wholly-owned subsidiary of CIT Financial Corporation ("CIT"). On April
30, 1984, CIT transferred ownership of NAC to RCA Corporation ("RCA"), the then
parent corporation of CIT. On May 24, 1984, Kramer Capital Corporation ("KCC"),
through Grey Eagle Enterprises, Inc., a Delaware corporation owned 95% by KCC
and 5% by the former President and Chief Operating Officer of NAC, acquired NAC
from RCA. After completion of a public offering in October 1985, KCC controlled
approximately 51% of the Common Stock of NAC Re. On January 8, 1987, following
the approval of their respective stockholders, KCC was merged into NAC Re. As a
result of the merger, NAC Re became 100% publicly owned.
NAC is licensed to write reinsurance in all 50 states, the District of
Columbia, Puerto Rico and all provinces of Canada. Prior to 1977, NAC wrote both
primary insurance and reinsurance business for a variety of risks. Because of
substantial losses incurred from such business, NAC discontinued writing any
significant new insurance or reinsurance and was operated as a run-off company
from 1977 to 1981. NAC's reserves, net of reinsurance recoverables, for business
written prior to 1977, which includes aircraft and marine risks, general
liability, medical, accountant's and attorney's malpractice, other professional
risks and foreign risks, are approximately $37.1 million or less than 4% of
total net claims and claims expense reserves as of December 31, 1996. Since
1982, NAC has been writing property and casualty reinsurance primarily on an
excess of loss treaty basis.
In 1990, NAC acquired Greenwich Insurance Company ("Greenwich"), formerly
Harbor Insurance Company, from The Continental Corporation. All liabilities
incurred before the acquisition date, including insurance obligations under
expired as well as in-force business, remained with the previous owner and its
affiliates. Greenwich is licensed in all 50 states and is utilized to write
primary insurance.
In 1992, NAC received regulatory authorization for a newly formed insurance
subsidiary, Indian Harbor Insurance Company ("Indian Harbor"). As a surplus
lines carrier, Indian Harbor is licensed in only its state of domicile, North
Dakota, and expects to write primary business on a nonadmitted basis in selected
states.
In December 1993, NAC, through NAC Re International Holdings Limited, formed
and received U.S. and U.K. regulatory authorization for a new reinsurance
subsidiary, NAC Reinsurance International Limited ("NAC Re International"),
based in London, England. NAC Re International, capitalized as of December 31,
1996 with approximately $135.1 million, primarily writes non-U.S. international
property and casualty treaty and facultative reinsurance business.
GENERAL
The Company, through NAC and its subsidiaries, is principally engaged in
providing treaty and facultative reinsurance to primary insurers of casualty
risks (principally general liability, professional liability, automobile and
workers' compensation) and commercial and personal property risks (including
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fidelity/surety and ocean marine). In consideration for reinsuring risks, the
Company receives premiums from the primary insurer. In many cases, the Company
reinsures part of its risk with other reinsurers and pays a premium to such
reinsurers.
Reinsurance provides primary insurers with three principal benefits:
reducing net exposure on individual risks, protecting against catastrophic
losses and maintaining acceptable capital ratios. Retrocessions provide
reinsurers with similar benefits. Reinsurance, including retrocessions, does not
legally discharge the reinsured from its liability with respect to its
obligations to the policyholder.
The Company generally writes property and casualty treaty business through
reinsurance brokers, facultative business on a direct basis (directly with the
primary company), and fidelity/surety and ocean marine through reinsurance
brokers and on a direct basis.
Treaty reinsurance is a contractual arrangement that provides for the
automatic reinsuring by the Company of a specified type or category of risks
underwritten by the primary insurer. Typically, the primary insurer is required
to cede the agreed type or category of risks to the Company and the Company is
obligated to accept a specified portion of such risks. The Company determines
whether to write particular treaties based on many factors, including the
reinsured's risk management and underwriting practices. In treaty reinsurance,
the reinsurer need not separately evaluate each of the individual risks assumed
and, within prescribed parameters, is generally dependent on the underwriting
decisions made by the primary insurer. Such dependence subjects the reinsurer to
the risk that the primary insurer has not adequately determined the risk to be
reinsured and, accordingly, the premium ceded to the reinsurer in connection
therewith may not adequately compensate the reinsurer for the risk assumed.
Treaty reinsurance, including fidelity/surety business, constitutes
approximately 79% of the Company's business.
Facultative reinsurance is the reinsurance of individual risks; rather than
an agreement to reinsure all or a portion of a class of risks, the reinsurer
separately rates and underwrites each risk. A portion of the Company's
facultative business is written on an "automatic" basis. Automatic facultative
agreements provide coverage on a blanket basis for risks which would otherwise
be reinsured on an individual basis. Eligible risks must be underwritten by the
cedant in accordance with agreement guidelines, which are generally more
restrictive than typical treaty arrangements. Traditionally, risks covered by
facultative reinsurance are those excluded from coverage by treaty reinsurance.
Approximately 61% of the Company's business in 1996 was written on an excess
of loss basis, under which the Company indemnifies an insurer for a portion of
the losses on insurance policies in excess of a specified loss amount, generally
$1 million or more, and up to an amount per loss specified in the contract. The
balance of the Company's business is written on either a pro rata basis under
which the Company assumes from the primary insurer a percentage of loss
specified in the treaty of each risk in the reinsured class or on a primary
insurance basis as discussed below.
Premiums that the primary insurer pays to the reinsurer for excess of loss
coverage are not directly proportional to the premiums that the primary insurer
receives because the reinsurer does not assume a proportionate risk. In most
instances, the reinsurer does not pay commissions to the primary insurer in
connection with excess of loss reinsurance. In pro rata reinsurance, premiums
that the primary insurer pays to the reinsurer are proportional to the premiums
that the primary insurer receives and the reinsurer generally pays the primary
insurer a ceding commission. Generally, the ceding commission is based on the
primary insurer's cost of obtaining the business being reinsured, such as
commission, local taxes, settlement costs and miscellaneous administrative
expenses.
The amount of premium received by the reinsurer for reinsuring risks on a
pro rata basis is generally based on the primary insurer's initial underwriting
assumptions. Thus, if the primary insurer does not accurately estimate the
ultimate losses to be incurred on the risks insured, the reinsurer may also
incur an underwriting loss. Excess of loss reinsurance allows the flexibility to
negotiate a premium based on the reinsurer's own estimate of the actual amount
of losses to be incurred. However, as a practical matter, the
2
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rates charged by primary insurers and the policy terms of primary insurance
agreements may affect the rates charged and the policy terms associated with
reinsurance agreements.
The Company also writes primary insurance business, which approximates 6% of
total net premiums written, principally through Greenwich. The principle lines
of primary business written include automobile, aviation, multiple peril and
inland marine. The business is written principally through participation in
underwriting pools and contractual relationships with managing general agents
and general agents. The Company evaluates each business relationship based upon
the underwriting experience and operational expertise of each distribution
channel selected, and performs an analysis to evaluate financial security. The
Company periodically performs underwriting, claims and operational audits of
each pool and agency relationship.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for a discussion of the Company's premium revenues.
COMPETITION
The reinsurance business has been increasingly competitive since mid-1987,
although not to the highly competitive levels which existed in 1984 and prior.
The Company competes with numerous international and domestic reinsurance
companies. These competitors, several of which have far greater financial and
other resources, include independent reinsurance companies and subsidiaries or
affiliates of established worldwide insurance companies. They also include the
reinsurance departments of some primary insurance companies and underwriting
syndicates in Lloyds.
Competition in the types of reinsurance business in which the Company is
engaged is based on many factors. These factors include perceived overall
financial strength, size, premiums charged, limits capacity, A.M. Best's
("Best's") ratings (see Ratings discussion), services offered, underwriting
expertise and quality of claims management. The number of jurisdictions in which
a reinsurer is licensed to do business is also a factor. The Company believes
that Best's "A+" rating and S&P's "AA-" rating of NAC and its subsidiaries, its
nationwide licensing, its reputation for prompt claims payment and a high level
of client service, together with its limits capacity and surplus size, put it in
a favorable position to compete for new reinsurance opportunities and retain its
existing client base.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for a discussion of current market conditions.
REGULATION
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 10 of the Notes to the Consolidated Financial Statements
of NAC Re for a discussion of the regulatory issues that impact the Company.
MARKETING
The Company obtains substantially all of its treaty business through
reinsurance brokers. The Company evaluates the financial condition of its
reinsurance brokers on a regular basis. The Company generally pays brokers from
1% to 2.5% of premiums ceded on pro rata business, 5% on "working layer" excess
of loss reinsurance (i.e., reinsurance attaching within the first $1 million of
coverage), and 10% on "non-working layer" excess of loss reinsurance (i.e.,
reinsurance attaching at or above the $1 million layer). The reinsurance broker
typically represents the primary insurer in negotiating and purchasing
reinsurance. The Company's facultative reinsurance generally is written on a
direct basis, with the exception of automatic agreements which may be written
through reinsurance brokers.
See Note 9 of the Notes to the Consolidated Financial Statements of NAC Re
for a discussion of the Company's major clients.
3
<PAGE>
UNDERWRITING
Underwriting opportunities presented to the Company are evaluated based upon
a number of factors, including the type and layer of risk to be assumed,
actuarial evaluation of premium adequacy, the primary insurer's underwriting and
claims experience, the primary insurer's financial condition and Best's rating,
the Company's exposure and experience with the primary insurer and the line of
business to be underwritten. The Company will also perform on-site underwriting
reviews of the primary insurers where deemed necessary to determine the quality
of a current or prospective client's underwriting operation.
CLAIMS
Claims are managed by the Company's professional claims staff whose
responsibilities include reviewing initial loss reports and coverage issues,
monitoring claims handling activities of ceding companies, establishing and
adjusting proper case reserves and approving payment of claims. In addition to
claims assessment, processing and payment, the claims staff selectively conducts
comprehensive claims audits of both specific claims and overall claims
procedures at the offices of selected ceding companies.
RESERVES
The Company establishes reserves to provide for the ultimate settlement and
administration of claims for losses, including both claims that have been
reported to the Company and claims for losses that have occurred but have not
been reported to the Company.
The Company establishes reserves for reported claims when it first receives
notice of the claim and changes the reserve as necessary. It is the Company's
policy not to establish a reserve less than the reserve established by the
primary insurer; in many cases, the Company sets up a reserve higher than the
reserve established by the ceding company based on its evaluation of the claim.
In the case of excess of loss reinsurance, reserves are established on a case by
case basis by evaluating several factors. These factors include the type of
claim involved, the circumstances surrounding such claim, the severity of injury
or damage, the potential for ultimate exposure, the Company's experience with
the primary insurer and the policy provisions relating to the type of claim. The
Company regularly adjusts its reserves to reflect newly reported claims,
inflation and other developments. The Company periodically conducts claims
audits of its ceding companies to determine if the amount recommended by the
primary insurer is insufficient and should be increased. Reserves for incurred
but not reported (IBNR) claims are established on the basis of actuarial
analysis of statistical loss information, which is utilized to project ultimate
claims. Actuarial review of the Company's reserves is conducted quarterly by
actuaries employed by the Company.
Claims reserves are only estimates at a given point in time, based on facts
and circumstances then known, of the amount the insurer or reinsurer expects to
pay on claims. It is possible that the ultimate liability may exceed or be less
than such estimates. The estimates are not precise inasmuch as, among other
things, they are based on predictions of future events and estimates of future
trends in claim severity and frequency and other variable factors. As additional
facts become known during the claim settlement period, it often becomes
necessary to refine and adjust the estimates of liability on a claim and, even
then, the ultimate liability may exceed or be less than the revised estimates.
The estimation of reserves for reinsurers, particularly those that have
experienced recent substantial growth in premium revenues, such as the Company,
is inherently more difficult than the reserve estimations of primary companies
or reinsurers with a fairly stable volume of business and loss history.
The reserving process is intended to provide implicit recognition of the
impact of inflation and other factors affecting claim payments by taking into
account changes in historical payment patterns and perceived probable trends
(note additional consideration for workers' compensation case reserves as
described below). There is generally no precise method, however, for
subsequently evaluating the adequacy of the consideration given to inflation or
to any other specific factor, because the eventual deficiency or redundancy of
reserves is affected by many factors, some of which are interdependent.
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The Company's reserving process includes periodic evaluation of the
potential impact on claim liabilities from exposure to asbestos and
environmental claims, including related loss adjustment expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 3 of the Notes to the Consolidated Financial Statements of
NAC Re for a discussion of asbestos and environmental claims.
The Company establishes claims expense reserves to provide for the ultimate
cost of investigating all claims, administering the claims payment process and
defending lawsuits arising from claims. Such claims expense reserves represent
estimates based on actual experience and historical data such as the ratio of
claims expenses to claims paid and other currently available information. Claims
expense reserves comprise "allocated expenses" (those directly attributable to
the specific risk being covered) and "unallocated expenses" (those expenses not
directly attributable to a given risk, such as overhead, administrative expenses
and salary).
Except for certain workers' compensation case reserves, the Company does not
discount its reserves in an attempt to present-value the claims or claims
expenses. The Company utilizes tabular reserving for certain workers'
compensation case reserves that are considered fixed and determinable, and
discounts such reserves using a 7% interest rate for financial statements
prepared in accordance with generally accepted accounting principles (GAAP) and
a 5% interest rate for statutory accounting purposes. Tabular reserving
methodology results in applying uniform and consistent criteria for establishing
expected future indemnity and medical payments (including an explicit factor for
inflation) and the use of mortality tables to determine expected payment
periods.
A reconciliation of the difference between the reserves for claims and
claims expenses determined in accordance with GAAP and those recorded for
statutory reporting purposes is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
1996 1995 1994
------------ ------------ ------------
Domestic liability reported on a statutory basis, net of reinsurance.... $ 1,036,227 $ 914,045 $ 795,569
International liability, net of reinsurance............................. 74,530 42,414 15,587
Difference in discount rate applied to workers' compensation case
reserves, net......................................................... (3,540) (2,790) (2,723)
Reinsurance recoverable................................................. 406,128 338,746 277,737
------------ ------------ ------------
Consolidated liability reported on a GAAP basis, gross of reinsurance... $ 1,513,345 $ 1,292,415 $ 1,086,170
------------ ------------ ------------
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</TABLE>
Note 3 of the Notes to the Consolidated Financial Statements of NAC Re
provides a table which analyzes paid and unpaid claims and claims expenses and a
reconciliation of beginning and ending reserve balances for the years ended
December 31, 1996, 1995 and 1994. Included in such analysis is a discussion of
certain factors which impact both current and prior year claims activity.
The following table on page 7 represents the development of GAAP balance
sheet reserves for 1986 through 1996. The top line of the table shows the
reserves, net of reinsurance recoverables, at the balance sheet date for each of
the indicated years. This represents the estimated amounts of net claims and
claims expenses arising in all prior years that are unpaid at the balance sheet
date, including claims that had been incurred but not yet reported. The reserve
for claims and claims expenses for 1988 and subsequent years is net of the 7%
discount related to workers' compensation tabular reserves. The upper portion of
the table shows the re-estimated amount of the previously recorded reserve based
on experience as of the end of each succeeding year. The estimate changes as
more information becomes known about the frequency and severity of claims for
individual years. The re-estimated reserve for each year reflects the 7%
discount related to workers' compensation tabular reserves. The "Cumulative
Redundancy (Deficiency)" represents the aggregate change in the estimates over
all prior years. The lower portion of the table shows the
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cumulative amounts paid as of successive years with respect to that reserve
liability. The table on page 8 represents the claim development of the gross
balance sheet reserves for years 1992 through 1996.
With respect to the information in the table below, it should be noted that
each amount includes the effects of all changes in amounts for prior periods.
For example, the amount of the deficiency related to claims settled in 1989, but
incurred in 1986, will be included in the cumulative deficiency amount for years
1986, 1987 and 1988. This table does not present accident or policy year
development data. Conditions and trends that have affected development of the
liability in the past may not necessarily occur in the future. Accordingly, it
may not be appropriate to extrapolate future reserve development based on these
tables. For further discussion of reserve and retrocessional activity see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 3 and 5 of the Notes to the Consolidated Financial
Statements of NAC Re.
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DEVELOPMENT OF CLAIMS AND CLAIMS EXPENSE RESERVES
NET OF REINSURANCE RECOVERABLES
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------
RESERVE FOR CLAIMS AND CLAIMS EXPENSES, NET OF REINSURANCE
RECOVERABLES.............................................. $118 $201 $292* $388 $469 $529 $626 $697 $808 $954 $1,107
RESERVE RE-ESTIMATED AS OF:
One year later............................................ 124 209* 293 384 460 494 602 653 788 921
Two years later........................................... 138* 214 289 376 427 464 548 648 755
Three years later......................................... 150 214 281 350 407 423 549 630
Four years later.......................................... 155 213 258 336 379 424 531
Five years later.......................................... 160 199 253 321 392 417
Six years later........................................... 159 203 245 331 391
Seven years later......................................... 169 199 265 336
Eight years later......................................... 171 226 273
Nine years later.......................................... 200 234
Ten years later........................................... 208
CUMULATIVE REDUNDANCY (DEFICIENCY).......................... (90) (33) 19 52 78 112 95 67 53 33
PERCENTAGE.................................................. (76%) (16%) 7% 13% 17% 21% 15% 10% 7% 3%
CUMULATIVE AMOUNT OF LIABILITY PAID, NET OF REINSURANCE
RECOVERABLES, PAID THROUGH:
One year later............................................ $ 19 $ 23 $ 34 $ 60 $ 81 $ 65 $104 $119 $140 $146
Two years later........................................... 35 48 73 109 126 116 173 207 233
Three years later......................................... 50 72 102 134 166 158 229 258
Four years later.......................................... 68 91 117 161 197 199 261
Five years later.......................................... 83 101 133 179 226 220
Six years later........................................... 89 112 148 200 244
Seven years later......................................... 96 125 163 213
Eight years later......................................... 108 137 174
Nine years later.......................................... 119 148
Ten years later........................................... 130
</TABLE>
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* The reserve for claims and claims expense, net of reinsurance recoverables
for 1988 and subsequent years is net of the 7% discount related to certain
workers' compensation case reserves. The re-estimated reserve for each year
includes the discount effect.
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DEVELOPMENT OF CLAIMS AND CLAIMS EXPENSE RESERVES
GROSS OF REINSURANCE RECOVERABLES
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
GROSS RESERVE FOR CLAIMS AND CLAIMS EXPENSES:........................ $ 808 $ 909 $ 1,086 $ 1,292 $ 1,513
Reserve re-estimated as of:
One year later..................................................... 798 873 1,097 1,280
Two years later.................................................... 755 882 1,093
Three years later.................................................. 773 888
Four years later................................................... 774
CUMULATIVE REDUNDANCY (DEFICIENCY)................................... 34 21 (7) 12
PERCENTAGE........................................................... 4% 2% (1%) 1%
</TABLE>
RETROCESSION AGREEMENTS
Reinsurance companies enter into retrocession arrangements to increase
aggregate premium capacity and to reduce the risk of loss on reinsurance
underwritten. Historically, the Company has obtained reinsurance for itself
primarily through excess of loss reinsurance agreements. The Company has also
obtained reinsurance protection against liability on a single event arising from
several different treaty obligations, and reinsurance protection against
liability arising from related losses involving more than one reinsured or
contract. The Company's retrocession agreements are generally structured on a
treaty basis, and cover both its treaty and facultative business. The Company
has occasionally purchased specific retrocessional protections for certain
business that may be specifically excluded from its retrocessional agreements.
The Company retrocedes its risks to other reinsurers both through
reinsurance brokers and on a direct basis. The retrocession of risks
underwritten by the Company does not legally discharge the Company from
liability for any part of the risk reinsured. The Company would be required to
absorb the full amount of the loss associated with the reinsured risk if the
retrocessionnaire were unable to or failed to meet its reinsurance obligations
for any reason. The Company evaluates the financial condition of
retrocessionnaires prior to the commencement of underwriting activities and at
least annually thereafter. The Company utilizes financial guidelines to assess
the retrocessionnaires' ability to satisfy future claim obligations. The
Company's retrocessionnaires are subject to periodic evaluation to ensure that
there have been no significant adverse changes in their financial condition.
In the case of retrocessionnaires that are unable to meet their obligation
under the retrocessional agreement or do not satisfy the Company's financial
guidelines, a reserve for actual and potential non-recovery is established,
which includes a provision for paid and unpaid claims and claims expenses,
inclusive of IBNR claims. The reserve for non-recoveries is continually reviewed
and updated to reflect current activity and developments. The Company evaluates
its exposure to reinsurance recoveries after considering the extent to which it
has collateralized the retrocessionnaires' balances by letters of credit, trust
accounts or funds withheld.
At December 31, 1996, the Company had reinsurance recoverables, exclusive of
available offsets, in the form of letters of credit, trust accounts and funds
withheld, totaling $441.9 million, with approximately 178 domestic and 116
foreign retrocessionnaires. Of that amount, approximately 41% or $180 million
was due from one retrocessionnaire, Hannover Ruckversicherungs AG (80%), and its
affiliate, E&S Ruckversicherungs AG (20%), both of which are rated "AA+" by
Standard & Poor's. Such amounts are fully collateralized by either ceded
balances payable, funds withheld or letters of credit. No other amounts
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recoverable from a single entity or group of entities exceeded 10% of
stockholders' equity as of December 31, 1996.
The Company re-evaluates its retrocessional requirements in relation to many
factors, including its surplus capacity, gross line capacity (amount of risk of
loss assumed on any one contract) and changing market conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of the Company's ceded premium charges.
The following discussion outlines the Company's maximum gross lines and net
retentions for the years indicated.
1997
The following table summarizes the Company's expected maximum gross lines,
initial and maximum retentions on any one claim for 1997:
<TABLE>
<CAPTION>
(IN MILLIONS)
GROSS INITIAL MAXIMUM
LINE RETENTION RETENTION
--------- ---------- -------------
<S> <C> <C> <C>
Casualty Treaty and Casualty Facultative Automatics............................. $ 7.5(1) $ 5.0 $ 5.0
Casualty Facultative (2)........................................................ $ 7.5 $ 3.0 $ 3.0
Property Treaty................................................................. $ 7.5(1) $ 3.0 $ 3.9
Property Facultative............................................................ $ 100.0 $ 3.0 $ 3.0
Surety.......................................................................... $ 20.0 $ 2.0 $ 4.0
</TABLE>
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(1) The Company has reinsurance protection which provides additional per risk or
per occurrence protection in excess of its $7.5 million gross line.
(2) Individual risk only.
The Company's 1997 reinsurance program for multiple claims arising from two
or more risks in a single occurrence or event is indicated below:
PROPERTY--Property business is protected by a series of retrocessional
agreements which provide protection for 100% of $115 million in excess of $5
million on a first and second event.
Certain of the Company's retrocessional protection are available only if
industry-wide claims exceed certain minimum levels. For 1997, the Company
expects to obtain $115 million of catastrophe protection, of which $25 million
of protection in excess of the first $55 million of protection, is available
only if industry-wide claims exceed certain minimum levels. The table displayed
below identifies the Company's net retention assuming gross claim activity
subject to property catastrophe protection of $115 million. The Company has in
place aggregate excess of loss protections that could provide additional
recoveries.
<TABLE>
<CAPTION>
(IN MILLIONS)
COMPANY INITIAL COMPANY
INDUSTRY-WIDE GROSS COMPANY CATASTROPHE MAXIMUM
CLAIMS CLAIMS RETENTION PROTECTION RETENTION
- ------------------------------------------------------------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(1) Less than $7.5 billion......................................... $ 120 $ 5 $ 90 $ 30
(2) $7.5 billion to $10 billion.................................... $ 120 $ 5 $ 100 $ 20
(3) $10 billion to $14.9 billion................................... $ 120 $ 5 $ 110 $ 10
(4) Greater than $14.9 billion..................................... $ 120 $ 5 $ 115 $ 5
</TABLE>
The Company believes that industry-wide claims of the magnitude identified
in the above table would be necessary in order for the Company's gross claims to
reach the levels for claims to be recoverable from such contracts. Therefore,
the Company believes that industry-wide claims would impact its clients in a
manner that generally conforms to the retrocessional coverages in place.
9
<PAGE>
WORKERS' COMPENSATION--100% of $195 million in excess of a $5 million
retention for any one occurrence.
CASUALTY CONTINGENCY COVER--100% of $25 million in excess of $5 million for
any one occurrence.
In recognition of the Company's enhanced surplus position and financial
capacity, as well as the continued positive contribution of business written
since 1986, the Company has reached agreements to terminate two retrocessional
programs effective January 1, 1997. As a result, the Company expects to receive
total consideration of approximately $220 million representing reinsurance
recoverable balances for unpaid claims and claims expenses. The termination of
these programs will result in an increase in net retention levels for the years
1996 and prior. Particularly as the casualty book of business matures, the
increase in net retentions for these years may result in increased volatility in
future years to the extent the actual frequency and severity of claims differs
from management's current estimates. The Company believes its exposure to such
volatility is within acceptable levels. Refer to the following tables and
discussion for the impact of the termination on the Company's 1996 and 1995
retrocessional programs.
1996
The following table summarizes the Company's maximum gross lines, initial
and maximum retention on any one claim for 1996:
<TABLE>
<CAPTION>
(IN MILLIONS)
INITIAL RETENTION MAXIMUM RETENTION
-------------------------------- ------------------------------
GROSS BEFORE AFTER BEFORE
LINE TERMINATION TERMINATION TERMINATION AFTER
--------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Casualty Treaty and Casualty Facultative........... $ 7.5 $ 2.0 $ 7.5 $ 5.0 $ 7.5
Property Treaty.................................... $ 7.5 $ 2.0 $ 7.5 $ 4.0 $ 7.5
Property Facultative............................... $ 75.0 $ 2.0 $ 5.0 $ 3.7 $ 5.0
Surety............................................. $ 20.0 $ 2.0 $ 7.5 $ 4.0 $ 12.5
</TABLE>
The Company's 1996 reinsurance program for multiple claims arising from two
or more risks in a single occurrence or event is indicated below:
PROPERTY--Property business is protected by a series of reinsurance
agreements which provide protection for 100% of $120 million in excess of $5
million on a first and second event. Certain of the Company's retrocessional
protection is available only if industry-wide claims exceed certain minimum
levels. Within the Company's $120 million of catastrophe protection, $30 million
of coverage, in excess of the first $60 million of coverage, is available only
if industry-wide claims exceed certain minimum levels. As a result of the
termination of the retrocessional programs, the protection has been reduced by
$10 million, increasing the Company's initial and maximum retentions to $10
million and $15 million, respectively. This coverage was not subject to an
industry-wide claims minimum. The Company is unaware of any property catastrophe
claim in excess of $5 million that would initiate this coverage.
WORKERS' COMPENSATION--100% of $195 million in excess of a $5 million
retention for any one occurrence. This protection was not affected by the
termination of the retrocessional programs.
CASUALTY CONTINGENCY COVER--100% of $25 million in excess of $5 million for
any one occurrence. As a result of the termination of the retrocessional
programs, the protection has been reduced by $10.8 million, increasing the
Company's initial and maximum retentions to $7.5 million and $15.8 million,
respectively. However, the maximum retention could exceed these retention levels
should the net loss from any one insured or reinsured exceed the casualty
contingency agreements' maximum net retention warranty. The maximum net
retention warranty for 1996 was $5 million for treaty and facultative automatics
and $3.7 million for individual risk facultative certificates.
10
<PAGE>
1995
The following table summarizes the Company's maximum gross lines, initial
and maximum retentions on any one claim for 1995:
<TABLE>
<CAPTION>
(IN MILLIONS)
INITIAL RETENTION MAXIMUM RETENTION
-------------------------------- ------------------------------
GROSS BEFORE AFTER BEFORE AFTER
LINE TERMINATION TERMINATION TERMINATION TERMINATION
------------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Property/Casualty Treaty and Casualty
Facultative................................. $ 7.5 $ 1.0 $ 7.5 $ 3.9 $ 7.5
Property Facultative.......................... $ 50.0 $ 1.0 $ 5.0 $ 3.3 $ 7.0
Surety........................................ $ 20.0 $ 2.0 $ 7.5 $ 3.9 $ 13.0
</TABLE>
The Company's 1995 reinsurance program for multiple claims arising from two
or more risks in a single occurrence or event is indicated below:
PROPERTY--Property business is protected by a series of reinsurance
agreements which provide protection for 100% of $85 million in excess of $5
million on a first and second event. Certain of the Company's retrocessional
protection is available only if industry-wide claims exceed certain minimum
levels. Within the Company's $85 million of catastrophe protection, $20 million
of coverage, in excess of the first $45 million of coverage, is available only
if industry-wide claims exceed certain minimum levels. As a result of the
termination of the retrocessional programs, the protection has been reduced by
$20 million, increasing the Company's initial and maximum retentions to $10
million and $25 million, respectively. This coverage was not subject to an
industry-wide claims minimum. The Company is unaware of any property catastrophe
claim in excess of $5 million that would initiate this coverage.
WORKERS' COMPENSATION--100% of $145 million in excess of a $5 million
retention for any one occurrence. This protection was not affected by the
termination of the retrocessional programs.
CASUALTY CONTINGENCY COVER--100% of $15 million in excess of $5 million for
any one occurrence. As a result of the termination of the retrocessional
programs, the protection has been reduced by $11.3 million, increasing the
Company's initial and maximum retentions to $7.5 million and $16.3 million,
respectively. However, the maximum retention could exceed these retention levels
should the net loss from any one insured or reinsured exceed the casualty
contingency agreements' maximum net retention warranty. The maximum net
retention warranty for 1995 was $3.3 million
INVESTMENTS
The Finance and Investment Committee (the "Committee") of NAC Re's Board of
Directors is responsible for establishing investment policy and guidelines and
for overseeing their execution. The Company utilizes independent investment
advisors to manage its investment portfolio within the established guidelines.
These advisors are required to report investment transaction activities and
portfolio results on a periodic basis and to meet periodically to review and
discuss portfolio structure, security selection and performance results with the
Committee.
The investment strategy, established by the Committee and management,
focuses on capital preservation and income predictability. Accordingly, the
Company emphasizes investment grade fixed maturity securities. For statutory
accounting purposes, investment grade securities are recorded at amortized cost
and, therefore, statutory surplus is not impacted by fluctuations in their
market value. For GAAP reporting purposes, all of the Company's fixed maturities
and equity securities are categorized as available for sale and are recorded at
their fair value. Periodic changes in fair value are recorded directly in the
Company's stockholders' equity, net of applicable deferred taxes.
11
<PAGE>
A summary of the Company's investment portfolio as of December 31, 1996 and
1995 is set forth below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31,
----------------------------------------------------
1996 1995
------------------------- -------------------------
CARRYING % OF CARRYING % OF
VALUE PORTFOLIO VALUE PORTFOLIO
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Cash and short-term.............................................. $ 100,746 5.1% $ 142,726 7.7%
------------ ----- ------------ -----
Fixed maturities:
U.S. Treasury.................................................. 70,608 3.6 119,430 6.4
Tax-exempt..................................................... 848,390 42.8 742,807 39.9
Foreign Government............................................. 161,988 8.1 146,217 7.8
Corporate...................................................... 376,826 19.0 348,341 18.7
Mortgage-backed................................................ 189,748 9.6 174,812 9.4
Subordinated convertibles...................................... 55,977 2.8 61,936 3.3
------------ ----- ------------ -----
Subtotal....................................................... 1,703,537 85.9 1,593,543 85.5
------------ ----- ------------ -----
Equity securities................................................ 179,619 9.0 127,257 6.8
------------ ----- ------------ -----
Total.......................................................... $ 1,983,902 100.0% $ 1,863,526 100.0%
------------ ----- ------------ -----
------------ ----- ------------ -----
</TABLE>
Guidelines established by the Committee restrict the portion of the
portfolio that can be held in lower rated or non-investment grade securities.
Consistent with the Company's focus on asset quality, at December 31, 1996,
approximately 98% of the Company's fixed maturity investments were considered
"investment grade" by Moody's Investor Services, Inc. ("Moody's") or Standard
and Poor's ("S&P").
The guidelines also address portfolio diversification by establishing
certain restrictions regarding the portion of the investment portfolio that can
be invested in a particular security, issuer, an industry sector or, in the case
of tax-exempt securities, in a state or municipality. Such restrictions do not
apply to investments in direct or indirect obligations of the U.S. Government
(i.e., US Treasury and GNMA Securities), which comprised 3.7% of the Company's
cash and invested assets at December 31, 1996.
The portfolio guidelines generally prohibit investment in derivative
products (i.e., products which include features such as futures, forwards,
swaps, options and other investments with similar characteristics), without
prior approval and written authorization by the Committee. Such authorization
would be provided only after evaluating a written plan submitted by the advisor
which documents the strategy, the objective, a description of the size and
nature of each transaction, the expected return, the costs/benefits, and the
possible risk factors. Except as discussed below, the Company does not purchase,
own or employ the use of derivative investment products.
The portfolio guidelines permit the purchase of certain securities which
derive their values or their contractually required cash flows from other
securities, such as mortgage-backed securities, where the underlying collateral
is a pool of residential or commercial real estate mortgages. These securities
are generally considered to have high credit quality since they are either
government or quasi-government agency-backed or are equivalent to a "AAA"
rating. The risks associated with mortgage-backed securities are interest rate
risk (as with all fixed-rate securities) and prepayment risk or extension risk
which may result in a decline in the expected return and/or value of the
security. Prepayment or extension of principal payments occur and can be
exacerbated depending upon the level of interest rates in the marketplace.
Mortgage-backed securities in the Company's investment portfolio total $189.7
million at December 31, 1996, of which 83.6% are collateralized mortgage
obligations (CMO's) which generally reduce the uncertainty concerning the
maturity of a mortgage-backed security.
12
<PAGE>
The guidelines also permit NAC Re International to purchase foreign exchange
contracts for the sole purpose of hedging the subsidiary's exposure to a
particular currency. As of December 31, 1996, NAC Re International held such a
hedge due to the establishment of a fully operational branch office located in
Australia. The Company does not expect this hedge to have a material impact on
the consolidated results.
While uncertainties exist regarding interest rates and inflation, the
Company attempts to minimize such risks and exposure by balancing the duration
of the assets in the investment portfolio with the duration of reinsurance
liabilities. Consistent with the payment profile of the Company's claim reserve
liabilities, and based upon the expected maturity of fixed maturity investments
as of December 31, 1996, the Company's fixed maturity investments which include
mortgage-backed securities but excludes convertible securities, had an expected
average maturity of 6.6 years, as displayed in the table below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1996
-------------------------------
<S> <C> <C>
EXPECTED MATURITY OF FIXED MATURITY INVESTMENTS CARRYING VALUE % OF PORTFOLIO
- --------------------------------------------------------------- -------------- ---------------
Less than 1 year............................................... $ 34,263 2.0%
1-5 years...................................................... 751,795 44.1
6-10 years..................................................... 704,348 41.4
11-15 years.................................................... 92,606 5.4
16-20 years.................................................... 19,961 1.2
More than 20 years............................................. 44,587 2.6
-------------- -----
Subtotal....................................................... 1,647,560 96.7
Convertibles................................................... 55,977 3.3
-------------- -----
Total...................................................... $ 1,703,537 100.0%
-------------- -----
-------------- -----
</TABLE>
The balance of the Company's investment portfolio at December 31, 1996,
consisting of cash, short-term investments and equity securities, amounted to
$280.4 million. The Company's equity investment strategy is designed to build a
quality equity portfolio. As of December 31, 1996, the Company held $179.6
million or 9% of cash and invested assets in equity securities, representing 27%
of statutory surplus. The Company does not hold any direct investments in real
estate. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for further discussion of the Company's investing
activities and results.
RATINGS
NAC, Greenwich, Indian Harbor and NAC Re International, comprising the NAC
Re group of companies, have been assigned an "A+" (Superior) rating as
determined by A.M. Best Company, and published in A.M. Best Rating Service,
Property/Casualty Edition. An "A+", which is Best's second highest rating, is
assigned to companies which have demonstrated superior overall performance when
compared to established standards. Such companies are considered by Best to have
demonstrated a very strong ability to meet their obligations to policyholders
over a long period of time.
NAC and its domestic subsidiaries, as well as NAC Re International, have
been assigned a "AA-" claims-paying rating from S&P, which is S&P's fourth
highest rating. A "AA-" is assigned to insurers that offer excellent financial
security. The Company's capacity to meet policyholder obligations is considered
strong under a variety of economic and underwriting conditions. NAC Re
International is supported by a Net Worth Maintenance Agreement with NAC
pursuant to which NAC has agreed to provide certain specified financial support
to NAC Re International in meeting its regulatory standards and liquidity needs,
subject to regulatory requirements on NAC.
13
<PAGE>
Both the Best rating and S&P claims-paying rating are based upon factors of
concern to policyholders and should not be considered an indication of the
degree or lack of risk involved in an equity investment in an insurance or
reinsurance company.
NAC Re debt instruments have the following investment grade ratings from S&P
and Moody's:
<TABLE>
<CAPTION>
S&P MOODY'S
--------- -----------
<S> <C> <C>
$100 Million 8% Senior Notes due 1999......................................................... A- Baa2
$100 Million 7.15% Senior Notes due 2005...................................................... A- Baa2
$100 Million 5.25% Convertible Subordinated Debentures due 2002............................... BBB+ Baa3
</TABLE>
Debt ratings are a current assessment of the credit-worthiness of an obligor
with respect to a specific obligation. A company with a debt rating of "A-" is
considered by S&P to have a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher rated
categories. A company with a debt rating of "BBB+" by S&P and "Baa2" and "Baa3"
by Moody's is considered to have adequate capacity to pay interest and repay
principal but capacity to meet long-term obligations is susceptible to adverse
economic conditions or changing circumstances.
All of the above-mentioned ratings are continually monitored and readjusted
by each of the rating agencies. While the Company believes that it will maintain
and could possibly improve its ratings over time, there is no assurance that it
will continue to receive these favorable ratings in the future.
EMPLOYEES
At December 31, 1996, the Company had 296 full-time employees, including 37
employees relating to the Company's U.K. operation. The Company's employees are
not represented by a labor union and the Company believes that its employee
relations are good.
ITEM 2. PROPERTIES
The Company leases its present corporate and administrative offices in a
building located in Greenwich, Connecticut. The Company also has operating
leases for office space at regional branch locations and its international
subsidiary. See Note 6 of Notes to the Consolidated Financial Statements of NAC
Re for a schedule on future minimum rentals related to the Company's operating
leases.
ITEM 3. LEGAL PROCEEDINGS
NAC and Greenwich are parties to various lawsuits generally arising in the
normal course of their business. The Company does not believe that the eventual
outcome of any of the litigations to which NAC or Greenwich is a party will have
a material effect on the Company's financial condition. NAC has been fully
indemnified by The Continental Corporation for any losses incurred by Greenwich
from events occurring prior to NAC's acquisition of Greenwich.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1996.
14
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Stock ($.10 par value) of NAC Re is traded on the New York Stock
Exchange (NYSE) under the symbol NRC. Prior to May 1, 1995, it was traded on the
NASDAQ Stock Market (NASDAQ) under the symbol NREC. For the periods presented
below, the high and low sales price and close prices of the Common Stock as
reported by the NYSE or, as appropriate, NASDAQ on its national market reporting
system, were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
<S> <C> <C> <C> <C>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
----------- ----------- ------------- -------------
High.................................................. $ 36.25 $ 33.88 $ 40.63 $ 37.63
Low................................................... $ 31.75 $ 28.50 $ 30.25 $ 32.63
Close................................................. $ 32.63 $ 33.50 $ 36.00 $ 33.88
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
<S> <C> <C> <C> <C>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
----------- ----------- ------------- -------------
High.................................................. $ 34.00 $ 35.25 $ 39.00 $ 38.38
Low................................................... $ 28.25 $ 28.50 $ 30.63 $ 31.63
Close................................................. $ 30.25 $ 31.13 $ 36.25 $ 36.00
</TABLE>
STOCKHOLDERS
There were 379 holders of record of shares of Common Stock as of March 3,
1997, of which 97% were held by Cede & Company as nominee for an unknown number
of beneficial stockholders.
DIVIDENDS
The Company declared a quarterly cash dividend of $.04 per share for March
1995 and increased this to $.05 per share for June 1995 through March 1996. In
June 1996, the Company increased its quarterly dividend to $.06 per share. The
Company considers increasing the dividend on its Common Stock from time to time.
There is presently no intention to decrease the cash dividend in the foreseeable
future. Future dividends will be dependent upon, among other factors, the
earnings of the Company, its financial condition, its capital requirements,
general business conditions and the ability of NAC to pay dividends to NAC Re.
For a description of restrictions on NAC's ability to pay dividends,
reference is made to Note 10 of Notes to the Consolidated Financial Statements
of NAC Re.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data included in the "Eleven Year Financial Summary"
on pages 30 through 31 of NAC Re's 1996 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 20 through 29 of NAC Re's 1996 Annual Report to Shareholders
is incorporated herein by reference.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of NAC Re and its subsidiary
companies, included on pages 32 through 60 of NAC Re's 1996 Annual Report to
Shareholders, are incorporated herein by reference:
--Consolidated Balance Sheet at December 31, 1996 and 1995.
--Consolidated Statement of Income for the years ended December 31, 1996,
1995 and 1994.
-- Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994.
--Consolidated Statement of Cash Flows for the years ended December 31,
1996, 1995 and 1994.
--Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Incorporated by reference to the caption "Directors and Executive Officers"
in the definitive proxy statement involving the election of directors and other
matters (the "Proxy Statement") which NAC Re intends to file with the Commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later
than 120 days after December 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the caption "Compensation of Directors and
Executive Officers" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the captions "Certain Relationships and Related
Transactions" and "Compensation Committee Interlocks and Insider Participation"
in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The Financial Statements and schedules listed in the accompanying Index to
Financial Statements and Schedules on page F-1 are filed as part of this report.
16
<PAGE>
EXHIBITS
The exhibits listed on the Index to Exhibits set forth below are filed as
part of this report.
<TABLE>
<CAPTION>
EXHIBIT NO.
- -------------
<C> <C> <S>
(3) -- Articles of incorporation and bylaws:
3.1 -- Restated Certificate of Incorporation of NAC Re incorporated herein by reference to Exhibit
3.1 to the Annual Report on Form 10-K of NAC Re for the year ended December 31, 1990
3.2 -- Bylaws of NAC Re as amended through June 9, 1988 incorporated herein by reference to Exhibit
3.2 to the Annual Report on Form 10-K of NAC Re for the year ended December 31, 1988 (the
"1988 10-K")
(4) -- Instruments defining rights of security holders, including indentures:
4.1 -- Rights Agreement dated as of June 9, 1988 by and between NAC Re Corporation and American
Stock Transfer and Trust Company (the "Rights Agreement") incorporated herein by reference to
Exhibit A to the Current Report on Form 8-K filed June 24, 1988
4.2 -- First Amendment to the Rights Agreement dated as of March 28, 1990 incorporated herein by
reference to Exhibit A to the Current Report on Form 8-K filed April 2, 1990
4.3 -- Second Amendment to the Rights Agreement dated as of September 13, 1990 incorporated herein
by reference to Exhibit 4.3 to the Current Report on Form 8-K filed September 21, 1990
(10) -- Material contracts:
10.1 -- Lease of NAC Re's corporate and administrative offices in Greenwich, CT incorporated herein
by reference to Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December
31, 1985
10.2 -- Form of Sublease between NAC Re and NAC incorporated herein by reference to Exhibit 10.16 to
the Joint Proxy Statement/Prospectus on Form S-4 (No. 33-8836) of NAC Re and KCC
*10.3 -- Amended 1985 Stock Option Plan of NAC Re incorporated herein by reference to Exhibit 10.6 to
the Registration Statement on Form S-1 (No.2-99952)
*10.4 -- 1986 Incentive and Non-qualified Stock Option Plan of NAC Re incorporated herein by reference
to Exhibit 10.12 to the Registration Statement on Form S-1 (No. 33-5198)
*10.5 -- NAC Re Corp. 1989 Stock Option Plan incorporated herein by reference to Exhibit 4.2 to the
Registration Statement on Form S-8 (No. 33-27745)
*10.6 -- NAC Re Corp. 1993 Stock Option Plan incorporated herein by reference to Exhibit A to the
definitive Proxy Statement filed with the Securities and Exchange Commission on March 26,
1993 ("1993 Proxy Statement")
*10.7 -- Amended and Restated NAC Re Corp. Directors' Stock Option Plan incorporated herein by
reference to Exhibit B to the 1993 Proxy Statement
*10.8 -- Amended and Restated NAC Re Corp. Benefits Equalization Plan incorporated herein by reference
to Exhibit 10.8 to the Annual Report on Form 10-K for the year ended December 31, 1993 (the
"1993 10-K")
*10.9 -- Amended and Restated NAC Re Corp. Excess Benefit Savings Plan incorporated herein by
reference to Exhibit 10.9 to the 1993 10-K
*10.10 -- Form of Severance Contract between NAC Re Corp. and the executive officers of NAC Re
incorporated herein by reference to Exhibit 10.23 to the 1988 10-K
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
- -------------
<C> <C> <S>
*10.11 -- NAC Re Corp. Amended and Restated Annual Incentive Plan incorporated herein by reference to
Exhibit 10.17 to the Annual Report on Form 10-K of NAC Re for the year ended December 31,
1991 (the "1991 10-K")
*10.12 -- NAC Re Corp. Long-term Incentive Plan incorporated herein by reference to Exhibit 10.12 to
the Annual Report on Form 10-K of NAC Re for the year ended December 31, 1994 (the "1994
10-K")
*10.13 -- Employment contract with Ronald L. Bornhuetter dated as of March 4, 1992 incorporated herein
by reference to Exhibit 10.19 to the 1991 10-K
*10.14 -- Trust Agreement, dated as of July 1, 1989, between NAC Re and Marine Midland Bank, N.A.
relating to supplemental pension benefits for Ronald L. Bornhuetter incorporated herein by
reference to Exhibit 10.22 to the Annual Report on Form 10-K of NAC Re for the year ended
December 31, 1989 (the "1989 10-K")
*10.15 -- NAC Re Corp. Directors' Deferred Compensation Agreement incorporated herein by reference to
Exhibit 10.20 to the 1989 10-K
*10.16 -- Consulting Agreement with Michael G. Fitt effective as of March 1, 1995 incorporated herein
by reference to the 1994 10-K
*10.17 -- Employment contract with Ronald L. Bornhuetter dated as of October 30, 1996
*10.18 -- Employment contract with Nicholas M. Brown, Jr., dated as of October 30, 1996
*10.19 -- Form of Employment contract with Executive Vice Presidents dated as of October 30, 1996
(11) -- Statement regarding computation of per share earnings
(12) -- Statement regarding computation of ratios
(13) -- NAC Re's 1996 Annual Report to Shareholders only those portions thereof which are expressly
incorporated by reference in NAC Re's Annual Report on Form 10-K for 1996, are "filed" as
part of this Annual Report on Form 10-K
(21) -- Subsidiaries of the registrant incorporated herein by reference to Exhibit 21 to the 1993
10-K
(23) -- Consents of experts and counsel
(24) -- Powers of attorney
(27) -- Financial Data Schedule
</TABLE>
- ------------------------
* Executive Compensation Plans or Arrangements
REPORTS ON FORM 8-K
There were no reports on Form 8-K filed with the Securities and Exchange
Commission during the fourth quarter of 1996.
EXECUTIVE COMPENSATION PLANS OR ARRANGEMENTS
Executive compensation plans or arrangements are indicated by an asterisk on
the Index to Exhibits set forth above.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NAC RE CORP.
(Registrant)
By /s/ JEROME T. FADDEN
-----------------------------------------
Jerome T. Fadden
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND TREASURER
Dated: March 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
RONALD L. BORNHUETTER* Director, Chairman and
- ------------------------------ Chief Executive Officer March 25, 1997
RONALD L. BORNHUETTER
NICHOLAS M. BROWN, JR.* Director, President and
- ------------------------------ Chief Operating Officer March 25, 1997
NICHOLAS M. BROWN, JR.
ROBERT A. BELFER* Director
- ------------------------------ March 25, 1997
ROBERT A. BELFER
JOHN P. BIRKELUND* Director
- ------------------------------ March 25, 1997
JOHN P. BIRKELUND
C. W. CARSON, JR.* Director
- ------------------------------ March 25, 1997
C. W. CARSON, JR.
TODD G. COLE* Director
- ------------------------------ March 25, 1997
TODD G. COLE
MICHAEL G. FITT* Director
- ------------------------------ March 25, 1997
MICHAEL G. FITT
DANIEL J. MCNAMARA* Director
- ------------------------------ March 25, 1997
DANIEL J. MCNAMARA
STEPHEN ROBERT* Director
- ------------------------------ March 25, 1997
STEPHEN ROBERT
WENDY J. STROTHMAN* Director
- ------------------------------ March 25, 1997
WENDY J. STROTHMAN
HERBERT S. WINOKUR, JR.* Director
- ------------------------------ March 25, 1997
HERBERT S. WINOKUR, JR.
/s/ JEROME T. FADDEN Vice President, Chief
- ------------------------------ Financial Officer and March 25, 1997
JEROME T. FADDEN Treasurer
- ------------------------
* By MARTHA G. BANNERMAN, his or her attorney-in-fact and agent, pursuant to a
power of attorney, a copy of which has been filed with the Securities and
Exchange Commission as Exhibit 24 hereto.
<TABLE>
<C> <S> <C>
By: /s/ MARTHA G. BANNERMAN
-----------------------------------------
Martha G. Bannerman
VICE PRESIDENT AND GENENERAL COUNSEL
</TABLE>
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
NAC RE CORP. PAGES
<S> <C> <C>
Report of Independent Auditors on Financial Statements and Schedules............................ F-2
Consolidated Balance Sheet at December 31, 1996 and 1995........................................ *
Consolidated Statement of Income for the years ended December 31, 1996,
1995 and 1994................................................................................. *
Consolidated Statement of Stockholders' Equity for the years ended December 31, 1996, 1995 and
1994.......................................................................................... *
Consolidated Statement of Cash Flows for the years ended December 1996, 1995 and 1994........... *
Notes to Consolidated Financial Statements...................................................... *
SCHEDULES
I Summary of Investments Other Than Investments in Related Parties at December 31, 1996........... S-1
III Condensed Financial Information of Registrant................................................... S-2 - S-4
V Supplementary Insurance Information for the years ended December 31, 1996, 1995 and 1994........ S-5
VI Reinsurance for the years ended December 31, 1996, 1995 and 1994................................ S-6
X Supplementary Information Concerning Property-Casualty Insurance Operations..................... S-7
Schedules other than those listed above are omitted for the reason that they are not applicable.
</TABLE>
- ------------------------
* Incorporated by reference to NAC Re's 1996 Annual Report to Shareholders.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
NAC RE CORPORATION:
We have audited the consolidated balance sheet of NAC Re Corporation and
subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. Our audits also included the
financial statement schedules listed in the Index at Item 14. These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NAC Re Corporation and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects, the
information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 4, 1997
F-2
<PAGE>
SCHEDULE I
NAC RE CORP. AND SUBSIDIARIES
OTHER THAN INVESTMENTS IN RELATED PARTIES
SUMMARY OF INVESTMENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------
<S> <C> <C> <C>
AMOUNT AT
WHICH
AMORTIZED MARKET SHOWN IN THE
COST VALUE BALANCE SHEET
------------ ------------ -------------
Type of Investment:
FIXED MATURITY SECURITIES
United States Government............................................. $ 71,354 $ 70,608 $ 70,608
Foreign governments.................................................. 160,490 161,988 161,988
Mortgage-backed securities........................................... 191,467 189,748 189,748
States, municipalities and political subdivisions.................... 828,501 848,390 848,390
Corporate bonds...................................................... 377,294 376,826 376,826
Subordinated convertibles............................................ 52,084 55,977 55,977
------------ ------------ -------------
Total Fixed Maturities........................................... 1,681,190 1,703,537 1,703,537
EQUITY SECURITIES...................................................... 153,197 179,619 179,619
CASH AND SHORT-TERM INVESTMENTS........................................ 100,746 100,746 100,746
------------ ------------ -------------
Total Investments................................................ $ 1,935,133 $ 1,983,902 $ 1,983,902
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
S-1
<PAGE>
SCHEDULE III
NAC RE CORP. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NAC RE CORP.
BALANCE SHEET
(PARENT COMPANY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Fixed maturities.......................................................................... $ 30,066 $ 34,088
Short-term investments.................................................................... 5,377 14,930
Cash...................................................................................... 266 2,689
Accrued investment income................................................................. 444 290
Deferred expenses......................................................................... 1,865 2,203
Federal income tax recoverable............................................................ 940 3,197
Investment in wholly-owned subsidiaries................................................... 825,283 775,100
Fixed assets.............................................................................. 7,569 3,578
Other assets.............................................................................. 1,035 506
---------- ----------
Total assets........................................................................ $ 872,955 $ 836,581
---------- ----------
---------- ----------
LIABILITIES
8% Notes due 1999......................................................................... $ 100,000 $ 100,000
7.15% Notes due 2005...................................................................... 99,934 99,927
5.25% Convertible Subordinated Debentures due 2002........................................ 100,000 100,000
Revolving credit loan..................................................................... 12,924 17,762
Interest payable.......................................................................... 1,537 1,358
Intercompany taxes payable................................................................ -- 2,891
Dividend payable.......................................................................... 1,104 959
Accrued expenses and other liabilities.................................................... 4,187 1,928
---------- ----------
Total liabilities................................................................... 319,686 324,825
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value: 1,000 shares authorized, none issued (includes 90 shares
of Series A Junior Participating Preferred Stock)....................................... -- --
Common stock, $.10 par value: 25,000 shares authorized (1996, 21,464; 1995, 21,341
issued)................................................................................. 2,146 2,134
Additional paid-in capital................................................................ 248,662 246,356
Unrealized appreciation of investments, net of tax........................................ 31,700 35,187
Currency translation adjustments, net of tax.............................................. 8,377 1,017
Retained earnings......................................................................... 335,868 269,660
Less treasury stock, at cost (1996, 3,061 shares; 1995, 2,137 shares)..................... (73,484) (42,598)
---------- ----------
Total stockholders' equity.......................................................... 553,269 511,756
---------- ----------
Total liabilities and stockholders' equity.......................................... $ 872,955 $ 836,581
---------- ----------
---------- ----------
</TABLE>
S-2
<PAGE>
SCHEDULE III
NAC RE CORP. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
NAC RE CORP.
STATEMENT OF INCOME
(PARENT COMPANY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
INCOME
Dividend declared from insurance subsidiary.................................... $ 38,000 $ 7,500 $ 15,000
Net investment income.......................................................... 2,815 3,193 2,409
Net investment gains (losses).................................................. 87 126 (138)
Rental and other income........................................................ 1,559 1,164 824
--------- --------- ---------
42,461 11,983 18,095
--------- --------- ---------
EXPENSES
Interest expense............................................................... 22,284 15,610 14,416
Other operating costs and expenses............................................. 2,672 2,104 1,776
--------- --------- ---------
24,956 17,714 16,192
--------- --------- ---------
Income (loss) before intercompany tax allocation and equity in net income of
wholly-owned subsidiaries less dividend declared............................... 17,505 (5,731) 1,903
--------- --------- ---------
Current intercompany tax credit.................................................. 6,778 4,711 4,557
Deferred tax benefit (expense)................................................... 424 41 (9)
--------- --------- ---------
Total tax credit, net............................................................ 7,202 4,752 4,548
--------- --------- ---------
Income (loss) before equity in net income of wholly-owned subsidiaries less
dividend declared.............................................................. 24,707 (979) 6,451
Equity in net income of wholly-owned subsidiaries less dividend declared......... 45,813 63,803 29,161
--------- --------- ---------
Net income....................................................................... $ 70,520 $ 62,824 $ 35,612
--------- --------- ---------
--------- --------- ---------
</TABLE>
S-3
<PAGE>
SCHEDULE III
NAC RE CORP. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
NAC RE CORP.
STATEMENT OF CASH FLOWS
(PARENT COMPANY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ----------- ----------
Operating activities:
Net income................................................................. $ 70,520 $ 62,824 $ 35,612
Less equity in net income of subsidiaries, less cash dividend ($38,000 in
1996, $7,500 in 1995, $17,500 in 1994)................................... 45,814 63,803 26,661
---------- ----------- ----------
24,706 (979) 8,951
Adjustments to reconcile net income to net cash provided by operating
activities................................................................. 2,483 1,866 3,476
---------- ----------- ----------
Net cash provided by operating activities.................................... 27,189 887 12,427
---------- ----------- ----------
Investing activities:
Sales of fixed maturity investments........................................ 8,844 9,722 12,001
Maturities of fixed maturity investments................................... 7,000 4,700 3,720
Purchases of fixed maturity investments.................................... (12,425) (10,527) (22,799)
Net sales (purchases) of short-term investments............................ 9,553 (7,285) (2,348)
Purchases of furniture and equipment....................................... (4,648) (1,290) (718)
Contribution to subsidiary................................................. -- (146,556) --
---------- ----------- ----------
Net cash provided (used) by investing activities............................. 8,324 (151,236) (10,144)
---------- ----------- ----------
Financing activities:
Issuance of shares......................................................... 1,951 52,056 5,278
Net proceeds from issuance of 7.15% Notes.................................. -- 99,214 --
Purchase of treasury shares, net of reissuance............................. (30,886) (204) (15,006)
Cash dividends paid to stockholders........................................ (4,163) (3,260) (2,827)
Borrowings under revolving credit agreement................................ 8,162 -- 13,857
Repayments under revolving credit agreement................................ (13,000) -- --
---------- ----------- ----------
Net cash (used) provided by financing activities............................. (37,936) 147,806 1,302
(Decrease) increase in cash.................................................. (2,423) (2,543) 3,585
Cash--beginning of year...................................................... 2,689 5,232 1,647
---------- ----------- ----------
Cash--end of year............................................................ $ 266 $ 2,689 $ 5,232
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
S-4
<PAGE>
SCHEDULE V
NAC RE CORP. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
FUTURE
POLICY
BENEFITS, BENEFITS,
LOSSES, CLAIMS, AMORTIZATION
DEFERRED CLAIMS LOSSES OF DEFERRED
POLICY AND NET AND POLICY OTHER
ACQUISITION CLAIMS UNEARNED PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING
COSTS EXPENSES PREMIUMS REVENUE INCOME EXPENSES COSTS EXPENSES
----------- --------- ----------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
Domestic:
Property/Casualty.... $ 82,369 $1,434,429 $ 255,514 $ 474,025 $ 93,062 $ 303,485 $ 133,423 $ 71,231
Accident and
Health............. -- 2,746 775 1,987 144 (950) -- 110
----------- --------- ----------- ----------- ----------- ----------- ------------ -----------
Subtotal......... 82,369 1,437,193 256,289 476,012 93,206 302,535 133,423 71,341
International:
Property/Casualty.... 2,842 80,531 15,609 50,330 11,124 36,418 9,901 7,587
Intercompany
elimination.......... -- (4,379) -- -- -- -- -- --
----------- --------- ----------- ----------- ----------- ----------- ------------ -----------
Total............ $ 85,211 $1,513,345 $ 271,898 $ 526,342 $ 104,330 $ 338,953 $ 143,324 $ 78,928
----------- --------- ----------- ----------- ----------- ----------- ------------ -----------
----------- --------- ----------- ----------- ----------- ----------- ------------ -----------
DECEMBER 31, 1995
Domestic:
Property/Casualty.... $ 68,158 $1,246,187 $ 216,213 $ 450,068 $ 80,875 $ 293,262 $ 132,049 $ 55,919
Accident and
Health............. -- 3,584 2,005 2,926 708 1,776 -- 489
----------- --------- ----------- ----------- ----------- ----------- ------------ -----------
Subtotal......... 68,158 1,249,771 218,218 452,994 81,583 295,038 132,049 56,408
International:
Property/Casualty.... 2,308 43,277 12,520 38,791 7,725 31,110 7,014 6,044
Intercompany
elimination.......... -- (633) -- -- -- -- -- --
----------- --------- ----------- ----------- ----------- ----------- ------------ -----------
Total............ $ 70,466 $1,292,415 $ 230,738 $ 491,785 $ 89,308 $ 326,148 $ 139,063 $ 62,452
----------- --------- ----------- ----------- ----------- ----------- ------------ -----------
----------- --------- ----------- ----------- ----------- ----------- ------------ -----------
DECEMBER 31, 1994
Domestic:
Property/Casualty.... $ 59,030 $1,068,930 $ 188,436 $ 375,233 $ 75,661 $ 249,833 $ 114,540 $ 47,469
Accident and
Health............. -- 1,208 732 637 122 180 -- 76
----------- --------- ----------- ----------- ----------- ----------- ------------ -----------
Subtotal......... 59,030 1,070,138 189,168 375,870 75,783 250,013 114,540 47,545
International:
Property/Casualty.... 923 16,032 6,045 19,861 4,721 15,740 3,052 5,210
----------- --------- ----------- ----------- ----------- ----------- ------------ -----------
Total............ $ 59,953 $1,086,170 $ 195,213 $ 395,731 $ 80,504 $ 265,753 $ 117,592 $ 52,755
----------- --------- ----------- ----------- ----------- ----------- ------------ -----------
----------- --------- ----------- ----------- ----------- ----------- ------------ -----------
<CAPTION>
PREMIUMS
WRITTEN
-----------
<S> <C>
DECEMBER 31, 1996
Domestic:
Property/Casualty.... $ 521,072
Accident and
Health............. 804
-----------
Subtotal......... 521,876
International:
Property/Casualty.... 52,128
Intercompany
elimination.......... --
-----------
Total............ $ 574,004
-----------
-----------
DECEMBER 31, 1995
Domestic:
Property/Casualty.... $ 471,917
Accident and
Health............. 4,131
-----------
Subtotal......... 476,048
International:
Property/Casualty.... 45,441
Intercompany
elimination.......... --
-----------
Total............ $ 521,489
-----------
-----------
DECEMBER 31, 1994
Domestic:
Property/Casualty.... $ 411,750
Accident and
Health............. 662
-----------
Subtotal......... 412,412
International:
Property/Casualty.... 25,789
-----------
Total............ $ 438,201
-----------
-----------
</TABLE>
S-5
<PAGE>
SCHEDULE VI
NAC RE CORP. AND SUBSIDIARIES
REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE
CEDED ASSUMED OF AMOUNT
GROSS TO OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
--------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
Premiums Written:
Property/casualty................................... $ 72,749 $ 139,928 $ 640,379 $ 573,200 112%
Accident and health................................. 61 148 891 804 111
--------- ---------- ----------- ---------- ---
Total........................................... $ 72,810 $ 140,076 $ 641,270 $ 574,004 112%
--------- ---------- ----------- ---------- ---
--------- ---------- ----------- ---------- ---
DECEMBER 31, 1995
Premiums Written:
Property/casualty................................... $ 70,138 $ 155,777 $ 602,997 $ 517,358 117%
Accident and health................................. 45 672 4,758 4,131 115
--------- ---------- ----------- ---------- ---
Total........................................... $ 70,183 $ 156,449 $ 607,755 $ 521,489 117%
--------- ---------- ----------- ---------- ---
--------- ---------- ----------- ---------- ---
DECEMBER 31, 1994
Premiums Written:
Property/casualty................................... $ 45,926 $ 136,648 $ 528,261 $ 437,539 121%
Accident and health................................. 79 188 771 662 116
--------- ---------- ----------- ---------- ---
Total........................................... $ 46,005 $ 136,836 $ 529,032 $ 438,201 121%
--------- ---------- ----------- ---------- ---
--------- ---------- ----------- ---------- ---
</TABLE>
S-6
<PAGE>
SCHEDULE X
NAC RE CORP. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEFERRED RESERVE FOR
POLICY UNPAID CLAIMS DISCOUNT NET
ACQUISITION AND CLAIMS IF ANY, UNEARNED EARNED INVESTMENT
AFFILIATION WITH REGISTRANT COSTS EXPENSES DEDUCTED(1) PREMIUMS PREMIUMS INCOME
- -------------------------------------- ----------- -------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUBSIDIARIES
December 31, 1996..................... $ 85,211 $ 1,513,345 $ 20,766 $ 271,898 $ 526,342 $ 101,515
December 31, 1995..................... $ 70,466 $ 1,292,415 $ 18,340 $ 230,738 $ 491,785 $ 86,115
December 31, 1994..................... $ 59,953 $ 1,086,170 $ 17,084 $ 195,213 $ 395,731 $ 78,095
<CAPTION>
CLAIMS AND
CLAIMS
EXPENSES
INCURRED AMORTIZATION
RELATED TO (2) OF DEFERRED
-------------- POLICY PAID CLAIMS
CURRENT PRIOR ACQUISITION AND CLAIMS PREMIUMS
AFFILIATION WITH REGISTRANT YEAR YEARS COSTS EXPENSES WRITTEN
- ---------------------------------------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
CONSOLIDATED SUBSIDIARIES
December 31, 1996.....................$372,294 ($ 33,341) $ 143,324 $ 190,424 $ 574,004
December 31, 1995.....................$345,783 ($ 19,635) $ 139,063 $ 180,386 $ 521,489
December 31, 1994.....................$309,294 ($ 43,541) $ 117,592 $ 154,651 $ 438,201
</TABLE>
- ------------------------
(1) Relates to certain workers' compensation case reserves which are discounted
for statutory accounting purposes utilizing a 5% interest rate, and a 7%
interest rate for GAAP.
(2) Amounts are net of discount related to certain workers' compensation case
reserves.
S-7
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT by and among NAC RE CORPORATION ("NAC Re"), a Delaware
business corporation, NAC REINSURANCE CORPORATION ("NAC"), a New York insurance
corporation, and RONALD L. BORNHUETTER (the "Executive"), dated as of the 30th
day of October, 1996.
W I T N E S S E T H
WHEREAS, NAC Re and NAC presently employ the Executive pursuant to an
Employment Agreement dated as of March 4, 1992; and
WHEREAS, NAC Re and NAC wish to continue to employ the Executive for
the period provided in this Agreement, and the Executive is willing to continue
to serve in the employ of NAC Re and NAC and of any direct or indirect
subsidiary of NAC Re (collectively, the "Companies") on the terms and subject to
the conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants herein contained, the parties agree as follows:
1. EMPLOYMENT. NAC Re and NAC hereby agree to continue to employ
the Executive, and the Executive hereby agrees to continue his employment with
NAC Re and NAC, on the terms and subject to the conditions set forth herein.
2. TERM OF EMPLOYMENT. The term of the Executive's employment
under this Agreement (the "Employment Period") shall commence on July 1, 1997,
and end on July 1, 2000, unless earlier terminated in accordance with Section 7
below.
3. DUTIES AND RESPONSIBILITIES.
(a) TITLES AND RESPONSIBILITIES. During the Employment
Period, the Executive shall serve as Chairman of the Board of Directors of NAC
Re. He shall also serve as Chief Executive Officer of NAC Re until December
1999 or such earlier date as the Executive and the Board of Directors of NAC Re
(the "Board") shall mutually determine. The Executive shall report and be
responsible only to the Board. The Executive shall also be a member of the
Finance and Investment Committee (or other committee with supervisory authority
over the investment portfolios) of NAC Re and NAC and a member of the Executive
Committee of NAC Re. The Executive shall serve as an EX officio member of all
other committees of NAC Re and NAC with management responsibilities, except the
Audit Committee and Compensation Committee.
(b) OTHER OFFICES. NAC Re agrees that the Executive shall
be nominated for election to the Board at each meeting of its stockholders at
which the class of directors to which the Executive is assigned is to be
elected, so long as the Executive shall be employed by NAC Re under the terms of
this Agreement. Notwithstanding the foregoing, it
<PAGE>
shall not be considered a breach of this Agreement if the Executive is not
nominated or elected, or is removed, as a director of either NAC Re or NAC (and
a member of any NAC Re or NAC board committee) as a result of a determination by
the Insurance Department of the State of New York (or by any other insurance
department having jurisdiction over NAC Re, NAC or any subsidiary or affiliate
of either of them) after a hearing or investigation by such authority at which
or during which the Executive and his counsel were given a reasonable
opportunity to be heard, that the Executive be removed or disqualified from
acting as a director of NAC Re and/or NAC. If NAC Re shall so request, the
Executive shall become and shall, during such portion of the Employment Period
as NAC Re shall request, act as a director and/or senior executive officer of
any of its subsidiaries or affiliates without any additional compensation.
(c) PLACE OF PERFORMANCE. During the Employment Period, the
Executive's office shall be located in the principal executive offices of NAC Re
and NAC, which shall be in southern Connecticut or the New York metropolitan
area. NAC Re and NAC shall provide the Executive with an office, an executive
secretary reasonably acceptable to him, and other support reasonably appropriate
to his duties.
(d) BUSINESS TIME. During the Employment Period, the
Executive agrees to devote his full business time during normal business hours
to the business and affairs of the Companies and to use his best efforts to
perform faithfully, diligently and competently the responsibilities assigned to
him hereunder, to the extent necessary to discharge such responsibilities,
except for (i) time spent serving on corporate, civic or charitable boards or
committees only if and to the extent not substantially interfering with the
performance of such responsibilities, (ii) periods of vacation, disability and
sick leave to which he is entitled, and (iii) reasonable activities having a
charitable, educational or other public interest purpose.
4. COMPENSATION.
(a) BASE SALARY. During the Employment Period, the
Executive shall receive a minimum annual base salary ("Base Salary") equal to
his base salary in effect immediately prior to the Employment Period, payable in
accordance with the customary payroll policy as in effect from time to time for
senior executives of NAC Re and NAC. NAC Re and NAC shall review the
Executive's Base Salary no less frequently than annually commencing no later
than March 1998, for possible increases of such Base Salary in relationship to
the goals and performance of the Companies and prevailing competitive
conditions.
(b) AIP AND LIP BONUS. During the Employment Period, the
Executive shall participate in the NAC Re Corp. Amended and Restated Annual
Incentive Plan ("AIP") and NAC Re Corp. Long-Term Incentive Plan ("LIP") (or any
successor plans thereto) and shall be entitled to a minimum target percentage
bonus opportunity equal to 45% of Base Salary under the AIP and 60% of Base
Salary under the LIP (or any successor plans thereto) in each performance year.
(c) SUPPLEMENTAL PENSION. The Executive and his spouse
shall be entitled to supplemental pension in accordance with the provisions of
Section 5 below.
- 2 -
<PAGE>
(d) VACATION. During the Employment Period, the Executive
shall be entitled to no less than five weeks paid vacation per year.
(e) LIFE INSURANCE. During the Employment Period, NAC Re
and NAC shall cause to be maintained for the benefit of the Executive life
insurance coverage initially having an aggregate death value of not less than
$1,000,000 including any coverage provided under any group program instituted by
the Companies as to which the Executive may be required to contribute part of
the cost. Not less than $600,000 of such insurance shall be provided at NAC
Re's and NAC's expense. After the Employment Period, NAC Re and NAC shall cause
to be maintained at their expense for the remainder of the Executive's life and
for the benefit of the Executive life insurance coverage having an aggregate
death value of not less than $100,000. The Executive shall be the owner of and
have the right to designate or change the beneficiary or beneficiaries of the
insurance described in this Section 4(e), and such insurance shall be provided
in a form whereby the Executive may create an irrevocable trust as the owner of
such insurance.
(f) FRINGE BENEFITS. In addition to any other benefits
provided to the Executive, NAC Re and NAC shall provide or reimburse the
Executive for the following:
(i) a luxury automobile and all related insurance, operating
and maintenance expenses;
(ii) all reasonable club dues for clubs and other similar
organizations which are important to the conduct of the
business of the Companies and which he uses for business
purposes;
(iii) reasonable consultations with financial and tax advisors
or counselors; and
(iv) legal expenses in connection with the negotiation of
this Agreement.
(g) EXPENSES. During the Employment Period, the Executive
shall be entitled to receive prompt reimbursement for all business-related
expenses incurred by the Executive in accordance with the policies and
procedures of NAC Re and NAC as applicable to senior executives of NAC Re and
NAC.
(h) OTHER EXECUTIVE BENEFITS. Without limiting the
foregoing provisions of this Section 4, during the Employment Period the
Executive shall be entitled to participate in or be covered under all
compensation, pension, and welfare and fringe benefit plans, programs and
policies of the Companies applicable to senior executives of the Companies.
- 3 -
<PAGE>
5. SUPPLEMENTAL PENSION.
(a) RETIREMENT PRIOR TO A CHANGE IN CONTROL. Upon the
Executive's Retirement (as defined in Section 5(f) below) prior to a Change in
Control (as defined in Section 6(c) below), NAC Re and NAC agree to pay to the
Executive an annual supplemental retirement pension, payable monthly commencing
on the first day of the second month after separation, equal to:
(i) 53% of the Executive's Average Annual Compensation (as
defined in Section 5(f) below)
-less-
(ii) The amount of any annual benefit for which the Executive
is eligible under the NAC Re Corporation Retirement
Plan, the NAC Re Corporation Benefits Equalization Plan,
and the General Re Corporation Employee Retirement Plan,
assuming the Executive elected receipt of such benefit
at the time of his Retirement hereunder and elected a
life annuity payment form.
(b) RETIREMENT AFTER A CHANGE IN CONTROL. In the event of
the Executive's Retirement on or after a Change in Control, and in lieu of the
supplemental retirement pension payments provided for in Section 5(a) above, NAC
Re and NAC agree to pay to the Executive an annual supplemental retirement
pension, payable monthly commencing on the first day of the second month after
separation, equal to:
(i) 53% of the Executive's Average Annual Compensation
-less-
(ii) The amount of any annual benefit for which the Executive
is eligible under the NAC Re Corporation Retirement
Plan, the NAC Re Corporation Benefits Equalization Plan,
and the General Re Corporation Employee Retirement Plan,
assuming the Executive elected receipt of such benefit
at the time of his Retirement hereunder and elected a
life annuity payment form
-subject to-
(iii) A minimum annual benefit of $100,000 payable without
offset for benefits payable from the NAC Re Corporation
Retirement Plan, the NAC Re Corporation Benefits
Equalization Plan, and the General Re Corporation
Employee Retirement Plan.
- 4 -
<PAGE>
(c) SUPPLEMENTAL DISABILITY PENSION. In the event of the
Executive's separation from employment on account of Disability (as defined in
Section 7(a) below), and in lieu of the supplemental retirement pension payments
provided for in the foregoing provisions of this Section 5, NAC Re and NAC agree
to pay the Executive an annual supplemental disability pension benefit, payable
monthly commencing on the first day of the second month after the date of his
termination of his employment on account of Disability, equal to:
(i) 53% of the Executive's Average Annual Compensation
-less-
(ii) Any long-term disability benefits payable from the NAC
Re Corporation Health and Welfare Plan
-less-
(iii) The amount of any annual benefit for which the Executive
is eligible under the NAC Re Corporation Retirement
Plan, the NAC Re Corporation Benefits Equalization Plan,
and the General Re Corporation Employee Retirement Plan.
In determining benefits under this Section 5(c), if benefits are payable under
the NAC Re Corporation Health and Welfare Plan, benefits under the NAC Re
Corporation Retirement Plan, the NAC Re Corporation Benefits Equalization Plan,
and the General Re Corporation Employee Retirement Plan shall be assumed to
commence at age 65, and no offset shall be taken until that time. If benefits
are not payable under the NAC Re Corporation Health and Welfare Plan, benefits
under the NAC Re Corporation Retirement Plan, the NAC Re Corporation Benefits
Equalization Plan and the General Re Corporation Employee Retirement Plan shall
be assumed to commence as of the Executive's termination of employment or, if
not then payable, the first date payable.
(d) FORM AND MANNER OF PAYMENT. The benefit calculated
under the foregoing provisions of this Section 5 shall be payable to the
Executive for his lifetime and, following his death, 50% of such amount shall
continue to be paid to his surviving spouse for her lifetime commencing on the
first day of the month immediately after the date of the Executive's death. In
lieu of payments over the lifetimes of the Executive and his spouse, the
Executive may elect to receive the actuarial equivalent value of such payments
in a cash lump sum. Such election shall be made by written notice to NAC Re not
later than 15 days prior to commencement of payments hereunder. Such value
shall be determined using accepted actuarial principles and assumptions: for
mortality, the UP 1984 Mortality Table, and for interest, the applicable
interest rate, as in effect for the month preceding the payment date, used by
the Pension Benefit Guaranty Corporation to value immediate annuities in
connection with the termination of a single-employer plan under the Employee
Retirement Income Security Act of 1974, as amended.
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<PAGE>
(e) PRERETIREMENT DEATH BENEFIT. In the event of the
Executive's termination of employment on account of his death, NAC Re and NAC
agree to pay to the Executive's surviving spouse (unless she fails to survive
him for at least five days, in which case payment shall be made to the
Executive's estate) a death benefit equal to 100% of the cash lump sum payment
the Executive would have been entitled to receive pursuant to Section 5(a) or
5(b) above, as the case may be, had the Executive's Retirement occurred on the
day before his death and the Executive had immediately elected a cash lump sum
payment in accordance with Section 5(d). Such death benefit shall be payable in
a cash lump sum as soon as possible after the Executive's death.
(f) DEFINITIONS. For purposes of the foregoing, (i)
"Retirement" means any separation from employment except due to death or
Disability, and (ii) "Average Annual Compensation" means (A) the highest average
of the Executive's Base Salary for any 36 calendar month period preceding his
separation from employment, times (B) the sum of 1.00 plus the Executive's
target AIP bonus percentage at the time of his termination of employment (the
sum of which shall in no event be less than 1.45).
(g) FUNDING OF SUPPLEMENTAL PENSION OBLIGATION. Payment of
the supplemental pension benefits payable under this Section 5 shall be provided
through a so-called "Rabbi Trust" established by the Companies for the benefit
of the Executive, which the Companies and the Executive agree to amend to
conform to this Agreement. The Companies agree to maintain assets of the trust
at a level at least equal to the lump sum value (determined in accordance with
Section 5(d)) of the Executive's supplemental pension benefits, assuming
Retirement were to occur on the first day of the calendar year. In the event of
the Executive's Disability, the Rabbi Trust shall be augmented to a level
sufficient at any time to fund the payment of Disability benefits plus the
present value of the lump sum payment which the Executive could elect. If the
Executive has not elected a lump sum, the Companies agree to maintain the assets
of the trust at a level at least equal to the lump sum value (determined in
accordance with section 5(d)) of the future payments. To the extent the assets
held in the trust exceed the foregoing lump sum value plus the amount, if any,
required to be contributed to the trust pursuant to Section 8(c)(iii) below, the
excess amount shall be returned to the Companies in proportion to their
respective contribution or shall remain in the trust for the contingency of
future increases in the lump sum value, as elected by the Companies.
6. OPTIONS.
(a) OPTION EXERCISE ACCELERATION. Upon termination of the
Executive's employment by NAC Re or NAC without Cause or due to death,
Disability, Retirement, or by the Executive for Good Reason (as defined in
Section 7(d) below), or upon the occurrence of a Change in Control, all
outstanding stock options to purchase NAC Re common stock held by the Executive
for at least six months (the "Stock Options") shall become immediately
exercisable in full and shall remain exercisable for one year thereafter, or for
such longer period provided pursuant to the terms of the option grants (but not
beyond the respective maximum terms of such options), after which, if not
exercised, they will be automatically forfeited.
- 6 -
<PAGE>
(b) CASH-OUT OF OPTIONS. In the event that as a result of a
Change in Control NAC Re common stock ceases to be traded on a national
securities exchange, each of the Executive's Stock Options shall automatically
be converted into the right to receive, no later than five days after the NAC Re
common stock ceases to be so traded, a cash amount equal to the difference
between the exercise price of each such Stock Option and the Market Value (as
defined below), multiplied by the number of shares of NAC Re common stock with
respect to which the Stock Option is exercisable. For purposes of this Section
6(b), Market Value means (i) in the event the Change in Control is the result of
a tender offer or exchange offer, the cash and fair market value of any security
or property paid for each share of NAC Re common stock in such tender offer or
exchange offer, and (ii) in all other cases, the highest sale price of NAC Re
common stock on the national securities exchange on which such stock is traded
during the 90-day period preceding the Change in Control.
(c) CHANGE IN CONTROL. For purposes of this Agreement, a
"Change in Control" shall mean a change in control of NAC Re of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), whether or not NAC Re is then subject to such reporting
requirement; provided that, without limitation, such a Change in Control shall
be deemed to have occurred if (i) any "person" (as such term is used in Section
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
determined for purposes of Regulation 13D-G under the Exchange Act as currently
in effect), directly or indirectly, of securities of NAC Re representing 30% or
more of the combined voting power of NAC Re's then outstanding securities; (ii)
during any period of two consecutive years (not including any period prior to
the execution of this Agreement), individuals who at the beginning of such
period constitute the Board and any new director, whose election to the Board or
nomination for election to the Board by NAC Re's stockholders was approved by a
vote of at least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority of the Board; (iii) the stockholders of NAC Re approve a
merger or consolidation of NAC Re with any other corporation, other than a
merger or consolidation which would result in the holders of the voting
securities of NAC Re outstanding immediately prior thereto holding immediately
thereafter securities representing more than 80% of the combined voting power of
the voting securities of NAC Re or such surviving entity outstanding immediately
after such merger or consolidation; or (iv) the stockholders of NAC Re approve a
plan of complete liquidation of NAC Re or an agreement for the sale or
disposition by NAC Re of all or substantially all of NAC Re's assets.
7. TERMINATION.
(a) DEATH OR DISABILITY. The Executive's employment pursuant
to this Agreement shall terminate automatically upon the Executive's death. NAC
Re and NAC may terminate the Executive's employment pursuant to this Agreement,
after having established the Executive's Disability, by giving to the Executive
notice of their intention in accordance with Section 7(e). For purposes of this
Agreement, "Disability" means any physical or mental
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<PAGE>
condition which is likely to render the Executive incapable of performing his
duties under this Agreement on a full-time basis for the entire ensuing
six-month period or any physical or mental condition which in fact renders the
Executive incapable of performing his duties under the Agreement on a full-time
basis for a period of six consecutive months. Any question as to the existence
of the Executive's incapacity upon which the Executive and NAC Re or NAC cannot
agree shall be determined by a qualified independent physician selected by the
Companies and approved by the Executive (or, if the Executive is unable to grant
such approval, by any adult member of the Executive's immediate family or his
legal representative), said approval not to be unreasonably withheld. The
determination of such physician made in writing to NAC Re and NAC and to the
Executive shall be final and conclusive for all purposes of this Agreement.
(b) VOLUNTARY TERMINATION. Notwithstanding anything in this
Agreement to the contrary, the Executive may voluntarily terminate his
employment. In the event of any termination pursuant to this Section 7(b), the
Executive shall have no further obligation to NAC Re or NAC under this
Agreement, except as provided in Section 11. NAC Re's and NAC's obligations to
the Executive in the event he voluntarily terminates are described in Section 8
below.
(c) CAUSE. NAC Re and NAC may terminate the Executive's
employment for Cause. For purposes of this Agreement, "Cause" means:
(i) the conviction of the Executive of a felony under state
or federal law, or the equivalent under foreign law,
unless in any such case the Executive performed such act
in good faith and in a manner NAC Re or NAC reasonably
believed to be in or not opposed to the best interests
of NAC Re or NAC;
(ii) the material breach by the Executive of the provisions
of this Agreement, in which event NAC Re will give the
Executive written notice specifying such breach and
permitting the Executive to cure such breach within 30
days of receipt of such notice; or
(iii) a determination or request by the Insurance Department
of the State of New York (or other insurance department
have jurisdiction), after a hearing by such authority at
which or during which the Executive and his counsel were
given a reasonable opportunity to be heard, that the
Executive should be removed or disqualified from acting
as an officer of NAC Re and/or NAC.
Notwithstanding the foregoing, the Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-quarters (3/4) of the entire membership of the Board at a meeting of the
Board called and held for such purpose (after reasonable notice to the Executive
and opportunity for the Executive, together with the Executive's counsel, to be
heard
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<PAGE>
before the Board), finding that in the good faith opinion of the Board the
Executive was guilty of conduct set forth above in this Section 7(c) and
specifying the particulars thereof in detail.
(d) GOOD REASON. The Executive may terminate his employment
for Good Reason. For purposes of this Agreement, "Good Reason" means (i) a
material reduction in the nature or scope of the Executive's authority, duties,
powers or functions as exist immediately prior to the commencement of the
Employment Period, except as contemplated herein; (ii) the assignment to the
Executive of any duties which are not commensurate with or at least as
prestigious as the Executive's duties and responsibilities as contemplated by
this Agreement; (iii) a material breach by NAC Re or NAC of any of the
provisions of this Agreement; or (iv) following a Change in Control, a voluntary
termination for any reason upon six months written notice to NAC Re.
(e) NOTICE OF TERMINATION. Any termination by NAC Re or NAC
for Cause or Disability or by the Executive for Good Reason shall be
communicated by a written notice (a "Notice of Termination") to the other party
hereto given in accordance with Section 14(c). A "Notice of Termination" shall
set forth in reasonable detail the events giving rise to such termination.
(f) DATE OF TERMINATION. For purposes of this Agreement,
the term "Date of Termination" means (i) in the case of termination for
Disability, 30 days after Notice of Termination is given (provided that the
Executive shall not have returned to the full-time performance of his duties
during such 30-day period); (ii) in the case of termination for Cause, a date
specified in the Notice of Termination (which shall not be less than 30 days nor
more than 60 days from the date such Notice of Termination is given); (iii) in
the case of any other termination for which a Notice of Termination is required,
the date of receipt of such Notice of Termination or, if later, the date
specified therein, as the case may be; and (iv) in all other cases, the actual
date on which the Executive's employment terminates during the Employment
Period. Notwithstanding the foregoing, if within 30 days after any Notice of
Termination is given the party receiving such Notice of Termination notifies the
other party that a dispute exists concerning the grounds for termination, the
Date of Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties, by a binding
arbitration award or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or the time for appeal therefrom
having expired and no appeal having been taken); provided further that the Date
of Termination shall be extended by a notice of dispute only if such notice is
given in good faith and the party giving such notice pursues the resolution of
such dispute with reasonable diligence. Notwithstanding the pendency of any
such dispute, NAC Re and NAC shall continue to pay the Executive his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to, Base Salary, AIP and LIP bonus awards, other
incentive compensation, and any other welfare and fringe benefits describe in
Section 4), until the dispute is finally resolved in accordance with this
Section 7(f).
8. OBLIGATIONS OF NAC RE AND NAC UPON TERMINATION.
- 9 -
<PAGE>
(a) DEATH, DISABILITY, CAUSE AND VOLUNTARY TERMINATION. If
the Executive's employment is terminated by NAC Re or NAC during the Employment
Period by reason of the Executive's death, Disability or for Cause, or is
voluntarily terminated by the Executive (other than on account of Good Reason),
NAC Re and NAC shall have no further obligation to the Executive or the
Executive's legal representatives under this Agreement other than (i) those
obligations earned for Base Salary and payments under the AIP and LIP that have
accrued at the Date of Termination (the "Accrued Obligations") and (ii) those
obligations expressly provided under any of the plans referred to in Section
4(h) or pursuant to Sections 4(e), 5 and 6 (the "Benefit Rights"). The Accrued
Obligations shall be paid to the Executive or the Executive's estate, as the
case may be, in a lump sum in cash within 15 days of the Date of Termination.
(b) PRIOR TO CHANGE IN CONTROL, TERMINATION BY NAC RE OR NAC
OTHER THAN FOR CAUSE OR DISABILITY AND TERMINATION BY THE EXECUTIVE FOR GOOD
REASON.
(i) LUMP SUM PAYMENTS. If during the Employment Period and
prior to a Change in Control, NAC Re or NAC terminates
the Executive's employment other than for Cause or
Disability, or the Executive terminates his employment
for Good Reason, NAC Re and NAC shall pay to the
Executive in a lump sum in cash within 15 days after the
Date of Termination the sum of the following amounts:
(A) the Accrued Obligations and (B) an amount equal to
(1) the Executive's Base Salary plus the AIP and LIP
target bonus opportunities (which shall in no event be
less than 105% of Base Salary) for the year which
includes the Date of Termination multiplied by (2) the
unexpired term of the Employment Period. For purposes
of this Section 8(b)(i), the unexpired term of the
Employment Period shall be expressed in whole years and
any fractional period thereof calculated on a 365-day
basis.
(ii) DISCHARGE OF NAC RE'S AND NAC'S OBLIGATIONS. NAC Re and
NAC shall have no further obligations to the Executive
in respect of any termination described in this Section
8(b), other than for the Benefit Rights.
(c) FOLLOWING CHANGE IN CONTROL, TERMINATION BY NAC RE OR
NAC OTHER THAN FOR CAUSE OR DISABILITY AND TERMINATION BY THE EXECUTIVE FOR GOOD
REASON.
(i) LUMP SUM PAYMENTS. If during the Employment Period and
following a Change in Control, NAC Re or NAC terminates
the Executive's employment other than for Cause or
Disability, or the Executive terminates his employment
for Good Reason, NAC Re and NAC shall pay to the
Executive in a lump sum in cash within 15 days after the
Date of Termination the sum of (A) the Accrued
Obligations and (B) the amount described in Section
8(b)(i)(B) above, provided, however, that the sum of the
amounts payable under the foregoing Section 8(c)(i)(B)
shall in no event be less than 2.99 times the sum of the
amounts described in clause (1) of Section 8(b)(i)(B).
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<PAGE>
(ii) BENEFITS. Upon any termination described in Section
8(c)(i), the Executive shall be entitled to the amount
described in Section (8)(b)(ii). In addition, NAC Re
and NAC shall provide or cause to be provided to the
Executive for a period of 36 months following such
termination continued life, medical and dental insurance
benefits at least equal to those which the Executive was
receiving or entitled to receive immediately prior to
the termination of employment described in Section
8(c)(i).
(iii) FUNDING RABBI TRUST. Upon a Change in Control, NAC Re
and NAC shall contribute to the Rabbi Trust referred to
in Section 5(g) an amount in cash equal to the payments
that would be made pursuant to this Section 8(c) in the
event the Executive terminated his employment for Good
Reason immediately following such Change in Control.
(iv) DISCHARGE OF NAC RE'S AND NAC'S OBLIGATIONS. NAC Re and
NAC shall have no further obligations to the Executive
in respect of any termination described in this Section
8(c), other than for the Benefit Rights.
9. GROSS-UP PAYMENT. In the event that any payments (the
"Severance Payments") provided for in this Agreement (including, but not limited
to, the rights provided under Section 6 and Section 8) are subject to the tax
(the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986,
as amended, or any successor provision, NAC Re and NAC shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of any Excise Tax on the Severance
Payments and any federal, state and local income taxes and Excise Tax (including
interest and penalties) upon the payment provided for by this Section 9, shall
be equal to the Severance Payments. The determination whether any payments made
pursuant to this Agreement are subject to the Excise Tax shall be based on the
opinion of tax counsel selected by the Executive and reasonably acceptable to
NAC Re. For purposes of determining the amount of the Gross-Up Payment, the
Executive shall be deemed to pay federal, state and local income taxes at the
highest marginal rate of income taxation applicable to any individual residing
in the jurisdiction in which the Executive resides in the calendar year in which
the Gross-Up Payment is to be made. In the event that the Excise Tax is
subsequently determined to be less than the amount initially determined
hereunder, the Executive shall promptly repay to NAC Re and NAC the portion of
the Gross-Up Payment attributable to such reduction. In the event that the
Excise Tax is subsequently determined to exceed the amount initially determined
hereunder, NAC Re and NAC shall promptly make an additional Gross-Up Payment in
respect of such excess.
- 11 -
<PAGE>
10. NO MITIGATION; NO OFFSET. In no event shall the Executive be
obligated to seek other employment by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement. Any amounts
that may be earned by the Executive other than from NAC Re and NAC shall not
reduce NAC Re's and NAC's obligation to make any payments hereunder. The
amounts payable by NAC Re and NAC hereunder shall not be subject to any right of
set-off that NAC Re and NAC may assert against the Executive.
11. NONCOMPETITION. In the case of the Executive's termination of
employment pursuant to Section 7(b) without Good Reason, the Executive shall
not, until July 1, 2000, (a) engage anywhere within the geographical areas in
which the Companies have conducted their business operations as of the date
hereof or at any time prior to the Date of Termination, directly or indirectly,
alone or as a shareholder, principal, agent, partner, officer, director,
employee or consultant of any other organization, in the business of insurance,
reinsurance or any other activity conducted by the Companies (the "Designated
Industry") in competition with the Companies; (b) divert to any competitor of
the Companies in the Designated Industry any customer of the Companies; or (c)
solicit or encourage any officer, employee or consultant of the Companies to
leave their employ for employment by or with any competitor of the Companies in
the Designated Industry; provided, however, that the Executive may invest in
stock, bonds, or other securities of any similar business in the Designated
Industry (but without otherwise participating in such Designated Industry) if
(i) such stock, bonds, or other securities are listed on any national or
regional securities exchange or have been registered under Section 12(g) of the
Exchange Act; and (ii) his investment does not exceed, in the case of any class
of the capital stock of any one issuer, one percent (1%) of the issued and
outstanding shares, or, in the case of other securities, one percent (1%) of the
aggregate principal amount thereof issued and outstanding. If at any time the
provisions of this Section 11 shall be determined to be invalid or
unenforceable, by reason of being vague or unreasonable as to area, duration or
scope of activity, this Section 11 shall be considered divisible and shall
become and be immediately amended to only such area, duration and scope of
activity as shall be determined to be reasonable and enforceable by the court or
other body having jurisdiction over the matter; and the Executive agrees that
this Section 11 as so amended shall be valid and binding as though any invalid
or unenforceable provision had not been included herein. Nothing in this
Section 11 shall prevent or restrict the Executive from engaging in any business
or industry other than the Designated Industry in any capacity.
12. INDEMNIFICATION. NAC Re and NAC shall indemnify and hold
harmless the Executive, his heirs and personal representatives to the fullest
extent permitted by applicable law, as now or hereafter in effect, with respect
to any acts, omissions or events that occurred while the Executive is or was an
employee of NAC Re and NAC or serves or served NAC Re and NAC or any other
corporation or other enterprise of any kind in any capacity at the request of
NAC Re, NAC or any affiliate of NAC Re or NAC (an "Enterprise"). Without
limiting the generality of the foregoing, NAC Re and NAC shall promptly pay, or
reimburse the Executive for, (a) all of the Executive's reasonable expenses,
including attorneys' fees and court costs, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal thereof, to which the Executive may be a party by reason of any
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<PAGE>
action taken or failure to act under or in connection with his service for NAC
Re, NAC or an Enterprise, and (b) all amounts required to be paid in settlement
of or in satisfaction of a judgment in connection with any such action, suit or
proceeding; provided, however, that NAC Re and NAC shall not be required to
indemnify or hold harmless the Executive, his heirs or personal representatives
in any manner whatsoever in the event and to the extent there is a final and
nonappealable judgment by a court of competent jurisdiction that the liability
incurred by the Executive resulted from his gross negligence, fraud or willful
malfeasance.
13. SUCCESSORS.
(a) This Agreement is personal to the Executive and, without
the prior written consent of NAC Re and NAC, shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon NAC Re, NAC and their successors. NAC Re and NAC shall require any
successor to all or substantially all of the business and/or assets of NAC Re
and NAC, whether direct or indirect, by an agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement.
14. MISCELLANEOUS.
(a) APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of New York, applied without reference to
principles of conflict of laws.
(b) AMENDMENTS. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(c) NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given when delivered
or mailed to the other party by registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Executive:
Ronald L. Bornhuetter
29 Old Stone Bridge Road
Cos Cob, Connecticut 06807
If to NAC Re or NAC:
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NAC Re Corporation
One Greenwich Plaza
Greenwich, Connecticut 06836-2568
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith, except that notice of change of address shall be
effective only when actually received by the addressee.
(d) SEVERABILITY. The invalidity or uneforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
(e) WAIVER. Waiver by any party hereto of any breach or
default by any other party of any of the terms of this Agreement shall not
operate as a waiver of any other breach or default, whether similar to or
different from the breach or default waived.
(f) ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties hereto with respect to the matters referred to
herein, and no other agreement, verbal or otherwise, shall be binding as between
the parties unless it is in writing and signed by the party against whom
enforcement is sought. Upon commencement of the Employment Period, all prior
and contemporaneous agreements and understandings between the parties with
respect to the subject matter of this Agreement are superseded by this
Agreement.
(g) CAPTIONS. The captions of this Agreement are not part
of the provisions hereof and shall have no force or effect.
(h) CONSENT TO JURISDICTION. Each of the parties to this
Agreement hereby submits to the exclusive jurisdiction of the courts of the
State of New York and the Federal courts of the United States of America located
in such state solely in respect of the interpretation and enforcement of the
provisions of this Agreement, and hereby waives, and agrees not to assert, as a
defense in any action, suit or proceeding for the interpretation and enforcement
of this Agreement, that it is not subject thereto; that such action, suit or
proceeding may not be brought or is not maintainable in said courts; that this
Agreement may not be enforced in or by said courts; that its property is exempt
or immune from execution; that the suit, action or proceeding is brought in an
inconvenient forum; or that the venue of the suit, action or proceeding is
improper. Each of the parties agrees that service of process in any such
action, suit or proceeding shall be deemed in every respect effective service of
process upon it if given in the manner set forth in Section 14(c).
(i) LEGAL FEES. The Executive shall be entitled to
reimbursement by NAC Re and NAC for all legal fees and expenses reasonably
incurred by him in connection with this Agreement (including all such fees and
expenses, if any, incurred in contesting or disputing the nature of any
termination or in seeking to obtain or enforce any right or benefit provided by
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<PAGE>
this Agreement). Such payments, which shall be made on an ongoing basis, rather
than at the conclusion of a dispute, shall be made within five days after the
Executive submits an invoice or other reasonably appropriate documentation
relating thereto to NAC Re or NAC; provided, however, that the Executive hereby
agrees to return to NAC Re and NAC any such amounts paid to him with respect to
a position taken by the Executive in a contest or dispute, which position is
finally determined to be frivolous, either by mutual written agreement of the
parties, by a binding arbitration award or by a final judgment, order or decree
of a court of competent jurisdiction (which is not appealable or the time for
appeal therefrom having expired and no appeal having been taken).
IN WITNESS WHEREOF, the Executive has hereunto set his hand and each
of NAC Re and NAC have caused this Agreement to be executed in its name on its
behalf all as of the day and year first above written.
NAC RE CORPORATION
By /s/Herbert S. Winokur, Jr.
-----------------------------------
Herbert S. Winokur, Jr.
Chairman, Compensation Committee
NAC REINSURANCE CORPORATION
By /s/ Martha G. Bannerman
-----------------------------------
Martha G. Bannerman
Executive Vice President, General
Counsel and Secretary
EXECUTIVE
/s/ Ronald L. Bornhuetter
--------------------------------------
Ronald L. Bornhuetter
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Exhibit 10.18
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made as of the 30th day of October, 1996 by
NAC Re Corp., a Delaware corporation having its principal office in Greenwich,
Connecticut, NAC Reinsurance Corporation, a New York corporation having its
principal office in Greenwich, Connecticut (NAC Re Corp. and NAC Reinsurance
Corporation being hereinafter sometimes collectively referred to as "Employer"),
and Nicholas M. Brown, Jr., a resident of Minnetonka, Minnesota ("Executive").
W I T N E S S E T H
WHEREAS, Executive is expected to make major contributions to the business
of Employer;
WHEREAS, Employer recognizes that Executive is capable of assuming the
position of Chief Executive Officer of NAC Reinsurance Corporation;
WHEREAS, Employer desires to ensure the continuity of its management and to
establish an orderly transition procedure with respect to the positions of
Chairman and Chief Executive Officer of NAC Re Corp.; and
WHEREAS, Executive is willing to make his services available to Employer
and to carry out the duties of Executive's positions and offices, subject to the
terms and conditions set forth below.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, Employer and Executive, intending to be legally
bound, do hereby agree as follows:
1. CERTAIN DEFINED TERMS. In addition to terms defined elsewhere herein,
the following terms shall have the following meanings when used in this
Agreement with initial capital letters:
(a) "Annual Incentive Plan" shall mean the Annual Incentive Plan of
the Employer.
(b) "Board" shall mean the Board of Directors of NAC Re Corp.
(c) "Cause" shall mean Executive's willful breach of duty in the
course of his employment or Executive's habitual neglect of his employment
duties in a manner that materially impacts the business or reputation of
Employer unless such breach or neglect is of a nature that reasonably can be
corrected and is fully corrected within sixty (60) days following written notice
to Executive in respect thereof. For purposes of this Section 1(c), no act, or
failure to act, on
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Executive's part shall be deemed "willful" unless done, or omitted to be done,
by Executive not in good faith and without reasonable belief that his action or
omission was in the best interest of Employer. Notwithstanding the foregoing,
Executive shall not be deemed to have been terminated for Cause unless and until
there shall have been delivered to Executive a copy of a resolution duly adopted
by the affirmative vote of not less than three-quarters (3/4) of the entire
membership of the Board at a meeting of the Board called and held for such
purpose (after reasonable notice to Executive and an opportunity for Executive,
together with Executive's counsel, to be heard before the Board), finding that,
in the good faith opinion of the Board, Executive was guilty of conduct set
forth above in this Section 1(c) and specifying the particulars thereof in
detail.
(d) "Change in Control" shall mean a change in control of NAC Re
Corp. of a nature that would be required to be reported in response to Item 6(e)
of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), whether or not NAC Re Corp. is then
subject to such reporting requirements; provided that, without limitation, such
a Change in Control shall be deemed to have occurred if (i) any "person" (as
such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as determined for purpose of Regulation 13D-G under the
Exchange Act as currently in effect), directly or indirectly, of securities of
NAC Re Corp. representing thirty percent (30%) or more of the combined voting
power of the then outstanding securities of NAC Re Corp.; or (ii) during any
period of two (2) consecutive years (not including any period prior to the
execution of this Agreement), individuals who at the beginning of such period
constitute the Board and any new director, whose election to the Board or
nomination for election to the Board by the stockholders of NAC Re Corp. was
approved by a vote of at least two-thirds (2/3) of the directors then still in
office either who were directors at the beginning of such period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority of the Board; or (iii) the stockholders of NAC
Re Corp. approve a merger or consolidation of NAC Re Corp. with any other
corporation, other than a merger or consolidation which would result in the
holders of the voting securities of NAC Re Corp. outstanding immediately prior
thereto holding immediately thereafter securities representing more than eighty
percent (80%) of the combined voting power of the voting securities of NAC Re
Corp. or such surviving entity outstanding immediately after such merger or
consolidation; or (iv) the stockholders of NAC Re Corp. approve a plan of
complete liquidation of NAC Re Corp. or an agreement for the sale or disposition
by NAC Re Corp. of all or substantially all the assets of NAC Re Corp.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(f) "Common Stock" shall mean the common stock, ten cents (10CENTS)
par value, of NAC Re Corp.
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(g) "Compensation" shall mean the sum of (i) Executive's annual base
salary pursuant to Section 5(a) hereof and (ii) Executive's annual bonus at
target pursuant to Section 5(c) hereof.
(h) "Compensation Committee" shall mean the Compensation Committee of
the Board.
(i) "Disability" shall mean permanent and total disability as such
term is defined under Section 22(e)(3) of the Code. Any question as to the
existence of Disability upon which Executive and Employer cannot agree shall be
determined by a qualified independent physician selected by Executive (or, if
Executive is unable to make such selection, such selection shall be made by any
adult member of Executive's immediate family or Executive's legal
representative), and approved by Employer, said approval not to be unreasonably
withheld. The determination of such physician made in writing to Employer and
to Executive shall be final and conclusive for all purposes of this Agreement.
(j) "Effective Date" shall mean November 11, 1996.
(k) "Final Average Compensation" shall mean Executive's highest
average annual Compensation earned during any consecutive thirty-six (36)
complete months (or lesser actual period of receiving Compensation) during the
period of sixty (60) complete months (or lesser actual period of receiving
Compensation) immediately preceding Executive's termination of employment with
Employer.
(l) "Good Reason" shall mean the occurrence, without Executive's
express written consent, of any of the following circumstances unless, in the
case of paragraphs (i), (vi), (vii), or (viii), such circumstances are fully
corrected within sixty (60) days following Executive's written notice to
Employer in respect thereof:
(i) the assignment to Executive of any duties inconsistent
with his offices and status as of the Effective Date (or any offices and
status to which Executive has been promoted at the time), or a substantial
diminution in the nature or status of Executive's responsibilities;
(ii) the failure of Executive to be appointed, on the
schedules set forth in Sections 2 and 3 hereof, Chief Executive Officer of
NAC Re Corp. or Chairman of the Board;
(iii) a reduction in Executive's annual base salary as in
effect on the Effective Date, on March 1, 1997 or as the same may be
increased from time to time;
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(iv) in the event of a Change in Control, any circumstances
in which Executive is not Chief Executive Officer of a publicly traded,
independent reinsurance company;
(v) the relocation of the office in which Executive is
located on the Effective Date to a location more than forty-five (45) miles
therefrom;
(vi) a material reduction in the aggregate benefits and
compensation provided to Executive under Employer's employee pension and
welfare benefit plans and incentive compensation, stock option and stock
ownership plans;
(vii) the failure of Employer to obtain a satisfactory
agreement from any successor to assume and agree to perform this Agreement,
as contemplated in Section 11 hereof; or
(viii) any purported termination of Executive's employment by
Employer for Cause for which Executive is not given notice of such
termination in accordance with Section 1(c) hereof; for purposes of this
Agreement, no such purported termination shall be effective.
Executive's continued employment shall not constitute consent to, or a waiver
of rights with respect to, any circumstance constituting Good Reason
hereunder. In the event of a termination of Executive's employment by
Executive for Good Reason, Executive shall provide Employer not less than
sixty (60) days' notice of such termination. Such notice shall indicate that
such termination is for Good Reason and shall set forth in reasonable detail
the facts and circumstances claimed to provide the basis for Executive's
termination for Good Reason. If within sixty (60) days following the date on
which such notice of termination is given, Employer notifies Executive that a
dispute exists concerning the grounds for termination, the date of
termination for determining the timing of any obligation under this Agreement
shall be the date on which the dispute is finally determined, either by
mutual written agreement of the parties or by arbitration pursuant to Section
15 hereof; provided, further, that the date of termination shall be extended
by a dispute only if such notice of dispute is given in good faith and
Employer pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, Employer will continue to
pay Executive his full compensation in effect when the notice giving rise to
the dispute was given (including, but not limited to, annual base salary) and
continue Executive as a participant in all other incentive compensation,
benefit and insurance plans in which Executive was participating when the
notice giving rise to the dispute was given, until the dispute is finally
resolved in accordance with this Section 1(1), unless resolution of such
dispute is unreasonably delayed by Executive. Amounts paid under this
Section 1(1) are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
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(m) "Grant Date" shall mean the date on which the Board or the
Compensation Committee approves the grant of a non-qualified option to
purchase Common Stock (or a stock appreciation right) or the award of
restricted Common Stock to Executive.
(n) "Long-Term Incentive Plan" shall mean the Long-Term Incentive
Plan.
(o) "Term" shall mean the term provided in Section 4 hereof.
2. EMPLOYMENT; DUTIES; MANAGEMENT SUCCESSION. Commencing on the
Effective Date, Executive shall be employed as President and Chief Operating
Officer of NAC Re Corp. and as President and Chief Executive Officer of NAC
Reinsurance Corporation, and Executive agrees to carry out and perform all
the duties and responsibilities that are normally performed and pertinent to
these positions and that may be communicated to him from time to time by the
Chief Executive Officer of NAC Re Corp. or by the Board. Between the
Effective Date and December 1999, Executive shall work in cooperation with
the Chief Executive Officer of NAC Re Corp. to effect the orderly transition
of responsibility as Chief Executive Officer of NAC Re Corp. to Executive, as
shall be determined by mutual agreement; provided, however, that nothing
contained in this Agreement shall confer upon Executive any right to be
appointed Chief Executive Officer of NAC Re Corp., to be retained as
President and Chief Operating Officer of NAC Re Corp. or as President and
Chief Executive Officer of NAC Reinsurance Corporation, or to be retained as
an employee of Employer in any other capacity.
3. DIRECTORSHIPS. As soon as practicable following the Effective
Date, Executive shall be appointed to the Boards of Directors of NAC
Reinsurance Corporation, Greenwich Insurance Company, and Indian Harbor
Insurance Company. As soon as practicable following the Effective Date,
Executive shall also be appointed to the Board, subject to re-election to
such position on the Board by vote of the shareholders of NAC Re Corp. Not
later than July 2000, Executive shall be considered for election as Chairman
of the Board.
4. TERM. The term of this Agreement shall commence on the Effective
Date and shall continue through December 31, 2001, unless terminated earlier
pursuant to Section 7 hereof.
5. COMPENSATION AND BENEFITS DURING THE TERM.
(a) BASE SALARY: Executive's annual base salary shall be FOUR
HUNDRED SEVENTY-FIVE THOUSAND DOLLARS ($475,000.00), shall be FIVE HUNDRED
THOUSAND DOLLARS ($500,000.00) effective March 1, 1997, and shall be reviewed
annually commencing March 1998 in conjunction with normal salary
administration. Any increases will be based on Executive's achievement of
goals, performance of Employer and prevailing competitive
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conditions. Upon any appointment of Executive as Chief Executive Officer of
NAC Re Corp., Executive's annual base salary shall be increased based upon
prevailing competitive conditions.
(b) SIGN-ON BONUS: On January 15, 1997, Executive shall be paid
TWO HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($225,000.00) in cash and shall be
issued five thousand (5,000) shares of Common Stock upon payment of their par
value.
(c) ANNUAL BONUS OPPORTUNITY: During the Term, Executive shall
participate in the Annual Incentive Plan at a target of 45% (0-90%
opportunity) of annual base salary earned during the year. The first
opportunity for a bonus under the Annual Incentive Plan shall be in March
1998, based on 1997 performance in accordance with the terms of the Annual
Incentive Plan and the determination of the Compensation Committee.
(d) LONG-TERM BONUS OPPORTUNITY: During the Term, Executive shall
participate in the Long-Term Incentive Plan at a target of 55% (0-110%
opportunity) of average annual base salary earned during the applicable
performance period; provided, however, that for any performance period in
which Executive has not received annual base salary during the entire period,
annual base salary during any partial year shall be annualized, and provided,
further, that the target shall be 60% (0-120% opportunity) of annual base
salary upon any appointment of Executive as Chief Executive Officer of NAC Re
Corp. The first opportunity for a bonus under the Long-Term Incentive Plan
shall be in March 1998, based on 1995-1997 performance in accordance with the
terms of the Long-Term Incentive Plan.
(e) INITIAL STOCK OPTION GRANT:
(i) On or prior to the Effective Date, Executive shall be
granted stock appreciation rights, which will automatically convert into
non-qualified options on the second anniversary of the Effective Date,
("SARs") with respect to one hundred thousand (100,000) shares of Common
Stock, twenty percent (20%) of which shall vest on each of the five (5)
anniversaries of the Grant Date, provided that Executive is employed by
Employer on those dates. The exercise price of the foregoing SARs shall be
the fair market value of a share of Common Stock on the Grant Date.
(ii) On or prior to the Effective Date, Executive shall also
be granted SARs with respect to fifty thousand (50,000) shares of Common
Stock, which will vest on the sixth anniversary of the Grant Date; provided,
however, that fifty percent (50%) shall vest on the date, if earlier, on
which there has occurred an increase of twelve percent (12%) or more in the
price of a share of Common Stock from such price on the Grant Date, and fifty
percent (50%) shall vest on the date, if earlier, on which there has
occurred an increase of twenty-five (25%) or more in the price of
a share of Common Stock from such price on the Grant Date; provided,
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however, that Executive is employed by Employer on such dates and provided,
further, that such vesting in no case shall occur prior to six (6) months
following the Grant Date. The exercise price of the foregoing SARs shall be
the fair market value of a share of Common Stock on the Grant Date.
(iii) Options or SARs granted pursuant to this Agreement
shall be subject to the terms and conditions of the Company's stock option
plans and shall expire, unless exercised, ten (10) years following the Grant
Date. Vested SARs may not be exercised while Executive is employed by
Employer prior to conversion of SARs to non-qualified options.
(f) ANNUAL STOCK OPTION GRANT: Executive shall be given the
opportunity to be granted additional options or SARs with respect to shares
of Common Stock with an underlying market value at the time of grant of
100-125% of Executive's annual base salary at the time of grant in accordance
with and commencing upon Employer's next regular grant of options following
the Effective Date; provided, however, that nothing contained in this Section
5(f) shall confer upon Executive any right to such additional options or SARs.
(g) RESTRICTED STOCK GRANT: On or prior to the Effective Date,
Executive shall be granted fifteen thousand (15,000) shares of restricted
Common Stock, one-third (1/3) of which shall vest on the date on which there
has occurred an increase of fifteen percent (15%) or more in the price of a
share of Common Stock from the price on the Grant Date, one-third (1/3) of
which shall vest on the date on which there has occurred an increase of
thirty percent (30%) or more in the price of a share of Common Stock from the
price on the Grant Date, and one-third (1/3) of which shall vest on the date
on which there has occurred an increase of forty-five percent (45%) or more
in the price of a share of Common Stock from the price on the Grant Date;
provided, however, that Executive is employed by Employer on such dates and
provided, further, that such vesting in no case shall occur prior to six (6)
months following the Grant Date. On or prior to the Effective Date, Executive
also shall be granted five thousand (5,000) shares of restricted Common
Stock, twenty percent (20%) of which shall vest on each of the five (5)
anniversaries of the Grant Date; provided, however, that Executive is
employed by Employer on such dates.
(h) RETIREMENT BENEFIT:
(i) If Executive retires from employment with Employer on
or after attaining age fifty-five (55), Executive shall be paid a lifetime
annual retirement benefit, commencing within thirty (30) days following the
date of such retirement, equal to fifty percent (50%) of Executive's Final
Average Compensation, reduced by benefits from any defined benefit pension
plans maintained by Employer and any defined benefit pension plans maintained
by any previous employers. Any retirement benefit that is payable prior to
age sixty (60) shall be reduced by five percent (5%) per year to reflect its
expected period of payment. The benefit will be paid to
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Executive for his lifetime and, upon his death, fifty percent (50%) of his
benefit will be paid to his surviving spouse, if any, for her lifetime.
(ii) If Executive terminates employment with Employer prior
to attaining age fifty-five (55), Employer shall provide Executive with a
benefit equal to that which he would have received under the NAC Re Corp.
Benefits Equalization Plan had four (4) years been added to his actual
service with Employer, such benefit being reduced by his actual benefit under
the NAC Re Corp. Benefits Equalization Plan and the NAC Re Corp. Retirement
Plan. In the event of Executive's death prior to attaining age fifty-five
(55), a benefit shall be paid to the Executive's surviving spouse, if any, as
provided under the terms of the NAC Re Corp. Benefits Equalization Plan and
the NAC Re Corp. Retirement Plan, with credit for the four (4) additional
years of service as contemplated in the preceding sentence.
(iii) No benefit shall be payable pursuant to this Section
5(h) if Executive's employment is terminated for Cause, if Executive
terminates employment prior to attaining age fifty-five (55) without Good
Reason, or if Executive shall violate any of the provisions of Section 8
hereof.
(iv) The administration and interpretation of the benefit
payable pursuant to this Section 5(h) shall be determined by the independent
actuary of the Employer, whose interpretations and decisions shall be final
and binding on all persons.
(i) RELOCATION: Employer shall relocate Executive to the
Greenwich, Connecticut area in accordance with the relocation policy attached
hereto. In addition, Employer shall pay to Executive a mortgage subsidy of
two percent (2%), for a term not to exceed five (5) years, on a home mortgage
loan of up to seven hundred fifty thousand dollars ($750,000). Employer
shall pay to Executive, with respect to any payments in connection with
relocation that are subject to federal, state or local taxation, an
additional amount so that Executive shall incur no such taxes with respect to
such payments.
(j) PENSION AND WELFARE BENEFIT PROGRAMS: Executive shall be
entitled to participate, on a basis and to the extent consistent with
Executive's senior executive position, in any employee pension or welfare
benefit plan, employee stock purchase plan and other so-called fringe benefit
programs from time to time in effect for the benefit of employees of Employer
generally and/or for any group of employees of which Executive is a member,
provided that Executive meets the eligibility requirements of any such plan
or program.
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(k) OTHER EXECUTIVE BENEFITS: During the Term, Employer shall (i)
provide Executive with an automobile of a make and model commensurate with
Executive's position and shall pay all costs of insurance, maintenance and
operation for such automobile; (ii) provide Executive with reasonable
financial planning and tax services; and (iii) reimburse Executive for
reasonable club dues and initiation fees at a club of Executive's choice
which is important to the conduct of the business of Employer and which is
used for business purposes.
6. OTHER ACTIVITIES. During the Term, Executive is expected to devote
to Employer's business his full business time and attention so as to assure
full and efficient performance of Executive's duties hereunder. During the
Term, Executive shall not, without Employer's prior written consent, engage
or participate, directly or indirectly, in any other business as a sole
proprietor, partner, employee, officer, shareholder, trustee, advisor or
consultant, or accept appointment or election as a director or in any other
fiduciary or honorary capacity in any other business, venture or project;
provided, however, that nothing in this Agreement shall preclude Executive
from devoting nonbusiness time and efforts to charitable, social and civic
matters to the extent that such activities do not interfere with Executive's
performance of his duties under this Agreement and provided, further,
however, that Executive shall not be precluded from making investments as
described in the proviso to the first sentence of Section 8(a) hereof.
7. TERMINATION. Executive's employment under this Agreement may be
terminated by Employer at any time without prior notice, subject to the
requirement of prior notice if such termination is for Cause. Executive's
employment under this Agreement may be terminated by Executive upon not less
than three (3) months' prior notice, other than in the case of termination on
account of Executive's unforeseen health problems, Disability or Good Reason.
If Executive's employment under this Agreement is terminated, the following
provisions shall apply:
(a) TERMINATION OF EMPLOYMENT BY EMPLOYER FOR A REASON OTHER THAN
CAUSE OR BY EXECUTIVE FOR GOOD REASON: If, before the end of the Term,
Employer terminates Executive's employment for a reason other than Cause, or
if Executive terminates employment on account of Good Reason, Employer shall
pay to Executive, within thirty (30) days following the date of such
termination, a lump sum amount equal to three (3) times the sum of (i)
Executive's then annual base salary plus (ii) the amounts that would be paid
to Executive under the Annual Incentive Plan and the Long-Term Incentive Plan
at Executive's targets for the year or performance period, as the case may
be, during which such termination occurs.
(b) TERMINATION OF EMPLOYMENT BY EMPLOYER FOR CAUSE, BY EXECUTIVE
OTHER THAN FOR GOOD REASON OR ON ACCOUNT OF DEATH OR DISABILITY: If
Executive's employment is terminated by Employer for Cause, by Executive
other than for Good Reason, or on account of Executive's death or Disability,
Executive, or his estate in the case of his death, shall receive from
Employer
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within thirty (30) days following the date of termination a lump sum amount
equal to Executive's annual base salary which is accrued but unpaid as of the
date of termination.
(c) TERMINATION OF EMPLOYMENT AFTER A CHANGE IN CONTROL BY
EMPLOYER OTHER THAN FOR CAUSE OR BY EXECUTIVE FOR GOOD REASON: If, after a
Change in Control, Executive's employment is terminated by Employer other
than for Cause or by Executive for Good Reason, Employer shall pay to
Executive, within thirty (30) days following such termination, a lump sum
amount equal to the sum of (i) Executive's annual base salary which is
accrued but unpaid as of the date of termination plus (ii) the portions, if
any, of amounts under the Annual Incentive Plan and Long-Term Incentive Plan
that were earned by Executive but unpaid as of the date of termination plus
(iii) 2.99 times the sum of (A) Executive's then annual base salary plus (B)
the amounts that would be paid to Executive under the Annual Incentive Plan
and the Long-Term Incentive Plan at Executive's targets (as such targets were
in effect prior to the Change in Control) for the year or performance period,
as the case may be, during which such termination occurs, and Executive shall
vest in all issued but unvested restricted Common Stock and granted but
unvested options to acquire Common Stock then held by Executive. If an
excise tax under Section 4999 of the Code or any comparable tax that is in
excess of ordinary federal income taxes, as may be in effect from time to
time, is imposed on amounts paid to Executive hereunder, then Executive shall
be reimbursed by Employer in an amount equal to such excise tax and any
further tax due on amounts reimbursed hereunder within five (5) days after
Executive's submission to Employer of a notice of Executive's payment thereof.
(d) NON-EXCLUSIVITY OF RIGHTS: Nothing in this Agreement shall
prevent or limit Executive's present or future participation in any benefit,
bonus, incentive, or other plan or program provided by Employer for which
Executive may qualify, nor shall this Agreement limit or otherwise affect
rights that Executive may have under any stock option or other agreements
with Employer. Amounts or benefits that are vested or that Executive is
otherwise entitled to receive under any plan or program of Employer at, or
subsequent to, the date of termination of Executive's employment shall be
payable in accordance with such plan or program; provided, however, that any
compensation and benefits received by Executive pursuant to this Agreement
shall be in lieu of (but, if necessary to give effect to this provision,
shall be reduced by) any and all compensation and benefits that Executive is
entitled to receive or may become entitled to receive under any reduction in
force or severance pay plan, program or practice that Employer now has in
effect or may hereafter put into effect and shall be applied toward
satisfying any severance pay and benefits required under federal or state law
to be paid or provided to Executive.
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8. NON-COMPETITION; CONFIDENTIAL INFORMATION.
(a) Executive agrees that, during the Term, and if Executive's
employment is terminated by Executive other than for Good Reason, for a
period of eighteen (18) months following the date of termination of this
Agreement, Executive shall not (i) engage anywhere within the geographical
areas in which NAC Re Corp. and its subsidiaries (for purposes of this
Section 8, the "NAC Re Group") have conducted their business operations as of
the Effective Date or at any time prior to the date of termination of
Executive's employment, directly or indirectly, alone or as a shareholder,
principal, agent, partner, officer, director, employee or consultant of any
other organization, in the business conducted by the NAC Re Group as a
material component of its operations including, without limitation, insurance
or reinsurance (the "Designated Industry") in direct competition with the
NAC Re Group; provided, however, that it is acknowledged and agreed that this
Section 8(a)(i) does not prohibit Executive from engaging in the insurance
business where the Executive is only incidentally engaged in any activity
which is a material component of the operations of the NAC Re Group; (ii)
divert to any competitor of the NAC Re Group in the Designated Industry any
customer of the NAC Re Group; or (iii) solicit or encourage any officer,
employee or consultant of the NAC Re Group to leave their employ for
employment by or with any competitor of the NAC Re Group in the Designated
Industry; provided, however, that Executive may invest in stocks, bonds, or
other securities of any similar business in the Designated Industry (but
without otherwise participating in such Designated Industry) if (A) such
stocks, bonds, or other securities are listed on any national or regional
securities exchange or have been registered under Section 12(g) of the
Exchange Act; and (B) his investment does not exceed, in the case of any
class of the capital stock of any one issuer, one percent (1%) of the issued
and outstanding shares, or, in the case of other securities, one percent (1%)
of the aggregate principal amount thereof issued and outstanding. If at any
time the provisions of this Section 8 shall be determined to be invalid or
unenforceable, by reason of being vague or unreasonable as to area, duration
or scope of activity, this Section 8 shall be considered divisible and shall
become and be immediately amended to only such area, duration and scope of
activity as shall be determined to be reasonable and enforceable by the court
or other body having jurisdiction over the matter; and Executive agrees that
this Section 8, as so amended, shall be valid and binding as though any
invalid or unenforceable provision had not been included herein. Nothing in
this Section 8 shall prevent or restrict Executive from engaging in any
business or industry other than the Designated Industry in any capacity.
(b) Executive shall not at any time after the date of termination
of employment reveal to anyone other than authorized representatives of the
NAC Re Group, or use for Executive's own benefit, any trade secrets, customer
information or other information that has been designated as confidential by
the NAC Re Group or is understood by Executive to be confidential without the
written authorization of the Board in each instance, unless such information
is or becomes available
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to the public or is otherwise public knowledge or in the public domain for
reasons other than Executive's acts or omissions.
(c) If Executive breaches any of the obligations under this
Section 8, Employer shall have no further compensation or benefit obligations
pursuant to this Agreement or pursuant to the Annual Incentive Plan or the
Long-Term Incentive Plan but shall remain obligated for compensation and
benefits for periods prior to such breach as provided in any other plans,
policies or practices then applicable to Executive in accordance with the
terms thereof. Executive hereby acknowledges that Employer's remedies at law
for any breach of Executive's obligations under this Section 8 would be
inadequate, and Executive and Employer agree that, in addition to any other
remedies provided for herein or otherwise available at law, temporary and
permanent injunctive relief may be granted in any proceeding which may be
properly brought by Employer to enforce the provisions of this Section 8
without the necessity of proof of actual damages.
9. NO MITIGATION OBLIGATION; NO SET-OFF OR COUNTERCLAIMS: In no event
shall Executive be obligated to seek other employment by way of mitigation of
the amounts payable to Executive under any of the provisions of this
Agreement. Any amounts that may be earned by Executive other than from
Employer shall not reduce Employer's obligation to make any payments
hereunder. The amounts payable by Employer hereunder shall not be subject to
any right of set-off that Employer may assert against Executive.
10. TAXES. Employer may withhold from any amounts payable under this
Agreement all federal, state, city, or other taxes as Employer is required to
withhold pursuant to any law, regulation or ruling. Executive shall bear all
expense of, except as otherwise contemplated herein, and be solely
responsible for, all federal, state, local or foreign taxes due with respect
to any payment received hereunder.
11. SUCCESSORS AND BINDING AGREEMENT.
(a) Employer will require any successor, whether direct or
indirect, by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of Employer, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that Employer is required to perform it. Failure of Employer to
obtain such assumption and agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle Executive to
compensation from Employer in the same amount and on the same terms as
Executive would be entitled hereunder if Executive had terminated his
employment for Good Reason following a Change in Control, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the date on which Executive's employment
with Employer was terminated. As used in this Agreement,
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"Employer" shall include any successor to Employer's business and/or assets
as aforesaid which assumes and agrees to perform this Agreement by operation
of law, or otherwise.
(b) This Agreement shall inure to the benefit of, and be
enforceable by, Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive dies while any amount is still payable hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms
of this Agreement to Executive's devisee, legatee or other designee or, if
there is no such designee, to Executive's estate.
12. NOTICES. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below, provided that all notices to Employer
shall be directed to the attention of the Office of the General Counsel of
NAC Re Corp., or to such other address as either party may have furnished to
the other in writing in accordance herewith, except that notice of change of
address shall be effective only upon receipt:
Employer:
NAC Re Corp.
Office of the General Counsel
One Greenwich Plaza
P.O. Box 2568
Greenwich, CT 06386-2568
Executive:
Nicholas M. Brown, Jr.,
5600 Bristol Lane
Minnetonka, Minnesota 55343
13. GOVERNING LAW. The validity, interpretation, construction, and
performance of this Agreement shall be governed by and construed in
accordance with the substantive laws of the State of New York, without giving
effect to the principles of conflict of laws of such State, to the extent not
preempted by applicable federal law.
<PAGE>
-14-
14. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
15. ARBITRATION. Any dispute arising out of or in any way relating to
this Agreement or Executive's employment with Employer, including, without
limitation, any claims Executive may assert under the Age Discrimination in
Employment Act of 1967, as amended, shall be resolved by arbitration in
Connecticut through the Stamford, Connecticut office of the American
Arbitration Association in accordance with the Model Employment Arbitration
Procedures of the American Arbitration Association except to the extent such
provisions are modified as hereinafter provided. The arbitration proceeding
shall be conducted by three (3) arbitrators. Executive and Employer shall
each designate one (1) arbitrator, each of whom shall be an attorney admitted
to practice in one or more states who has ten (10) or more years of
experience in employment matters, and the arbitrators so selected shall
thereafter designate a third arbitrator (who shall be a member of the
National Academy of Arbitrators) by mutual agreement. The arbitrators shall
have no authority to modify any provision of this Agreement or to award a
remedy for a dispute involving this Agreement other than a benefit
specifically provided under or by virtue of this Agreement. The decision of
the arbitrators shall be final and binding on Employer and Executive.
Employer and Executive shall each pay their own legal fees associated with
arbitration proceedings hereunder, but the fees of the arbitrators and any
other costs associated with such arbitration proceedings shall be shared
equally.
16. MERGER. This Agreement expresses in full the understanding of
Employer and Executive, and all promises, representations, understandings,
arrangements and prior agreements with regard to Executive's employment by
Employer are merged herein.
17. WAIVER. Failure by either party hereto to insist upon strict
adherence to any one or more of the covenants or terms contained herein, on
one or more occasions, shall not be construed to be a waiver nor deprive such
party of the right to require strict compliance with the same thereafter.
18. AMENDMENTS. No amendments hereto, or waivers or releases of
obligations or liabilities hereunder, shall be effective unless agreed to in
writing by all parties hereto.
19. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be executed effective as of the date first written above.
NAC Re Corp.
By:/S/RONALD L. BORNHUETTER
--------------------------------------
Its Chairman and Chief
Executive Officer
NAC Reinsurance Corporation
By:/S/RONALD L. BORNHUETTER
--------------------------------------
Its Chairman and Chief
Executive Officer
/S/NICHOLAS M. BROWN, JR.
-----------------------------------------
Nicholas M. Brown, Jr.
<PAGE>
Exhibit 10.19
FORM OF EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made as of the 31st day of October, 1996 by
NAC Re Corp., a Delaware corporation having its principal office in Greenwich,
Connecticut, NAC Reinsurance Corporation, a New York corporation having its
principal office in Greenwich, Connecticut (NAC Re Corp. and NAC Reinsurance
Corporation being hereinafter sometimes collectively referred to as "Employer"),
and _______________, a resident of ____________________, _______________
("Executive").
W I T N E S S E T H
WHEREAS, Executive has been and continues to be employed by Employer in
a management capacity;
WHEREAS, Executive is expected to continue to make major contributions
to the business of Employer;
WHEREAS, Employer desires to reinforce and encourage the continued
attention and dedication of members of Employer's management, including
Executive, to its responsibilities on behalf of Employer; and
WHEREAS, Executive is willing to make his services available to Employer
and to carry out the duties of Executive's position and office, subject to
the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, Employer and Executive, intending
to be legally bound, do hereby agree as follows:
1. CERTAIN DEFINED TERMS. In addition to terms defined elsewhere
herein, the following terms shall have the following meanings when used in
this Agreement with initial capital letters:
(a) "Board" shall mean the Board of Directors of NAC Re Corp.
(b) "Cause" shall mean Executive's willful breach of duty in the
course of his employment or Executive's habitual neglect of his employment
duties in a manner that materially impacts the business or reputation of
Employer unless such breach or neglect is of a nature that reasonably can be
corrected and is fully corrected within sixty (60) days following written
notice to Executive in respect thereof. For purposes of this Section 1(b),
no act, or failure to act, on Executive's part shall be deemed "willful"
unless done, or omitted to be done, by Executive not in good faith and
without reasonable belief that his action or omission was in the best
interest of Employer. Notwithstanding the foregoing, Executive shall not be
deemed to have
<PAGE>
-2-
been terminated for Cause unless and until there shall have been delivered to
Executive a copy of a resolution duly adopted by the affirmative vote of not
less than three-quarters (3/4) of the entire membership of the Board at a
meeting of the Board called and held for such purpose (after reasonable
notice to Executive and an opportunity for Executive, together with
Executive's counsel, to be heard before the Board), finding that, in the good
faith opinion of the Board, Executive was guilty of conduct set forth above
in this Section 1(b) and specifying the particulars thereof in detail.
(c) "Change in Control Agreement" shall mean the letter agreement
between NAC Re Corp. and Executive dated ______________.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) "Common Stock" shall mean the common stock, ten cents (10 )
par value, of NAC Re Corp.
(f) "Compensation Committee" shall mean the Compensation Committee
of the Board.
(g) "Disability" shall mean permanent and total disability as such
term is defined under Section 22(e)(3) of the Code. Any question as to the
existence of Disability upon which Executive and Employer cannot agree shall
be determined by a qualified independent physician selected by Executive (or,
if Executive is unable to make such selection, such selection shall be made
by any adult member of Executive's immediate family or Executive's legal
representative), and approved by Employer, said approval not to be
unreasonably withheld. The determination of such physician made in writing
to Employer and to Executive shall be final and conclusive for all purposes
of this Agreement.
(h) "Effective Date" shall mean October 30, 1996.
(i) "Good Reason" shall mean the occurrence, without Executive's
express written consent, of any of the following circumstances unless, in the
case of paragraphs (i), (iv), (v), (vi) and (vii), such circumstances are
fully corrected within sixty (60) days following Executive's written notice
to Employer in respect thereof:
(i) the assignment to Executive of any duties inconsistent
with his offices and status as of the Effective Date (or any offices and
status to which Executive has been promoted at the time), or a substantial
diminution in the nature or status of Executive's responsibilities;
(ii) a reduction by Employer in Executive's annual base salary
as in effect on the Effective Date or as the same may be increased from time
to time;
(iii) the relocation of the office in which Executive is
located on the Effective Date to a location more than forty-five (45) miles
therefrom;
<PAGE>
-3-
(iv) a material reduction in the aggregate benefits and
compensation provided to Executive under Employer's employee pension and
welfare benefit plans and incentive compensation, stock option and stock
ownership plans;
(v) the failure of Employer to obtain a satisfactory
agreement from any successor to assume and agree to perform this Agreement,
as contemplated in Section 10 hereof;
(vi) any purported termination of Executive's employment by
Employer for Cause for which Executive is not given notice of such
termination in accordance with Section 1(b) hereof; for purposes of this
Agreement, no such purported termination shall be effective; or
(vii) failure by Employer to honor its obligations to
indemnify Executive as established by the corporate bylaws or by the
applicable provisions of law.
Executive's continued employment shall not constitute consent to, or a waiver
of rights with respect to, any circumstance constituting Good Reason
hereunder. In the event of a termination of Executive's employment by
Executive for Good Reason, Executive shall provide Employer not less than
sixty (60) days' notice of such termination. Such notice shall indicate that
such termination is for Good Reason and shall set forth in reasonable detail
the facts and circumstances claimed to provide the basis for Executive's
termination for Good Reason. If, within sixty (60) days following the date
on which such notice of termination is given, Employer notifies Executive
that a dispute exists concerning the grounds for termination, the date of
termination for determining the timing of any obligation under this Agreement
shall be the date on which the dispute is finally determined, either by
mutual written agreement of the parties or by arbitration pursuant to Section
14 hereof; provided, further, that the date of termination shall be extended
by a dispute only if such notice of dispute is given in good faith and
Employer pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, Employer will continue to
pay Executive his full compensation in effect when the notice giving rise to
the dispute was given (including, but not limited to, annual base salary) and
continue Executive as a participant in all other incentive compensation,
benefit and insurance plans in which Executive was participating when the
notice giving rise to the dispute was given, until the dispute is finally
resolved in accordance with this Section 1(i), unless resolution of such
dispute is unreasonably delayed by Executive. Amounts paid under this
Section 1(i) are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
(j) "Term" shall mean the term provided in Section 3 hereof.
2. EMPLOYMENT; DUTIES. Commencing on the Effective Date, Executive
shall be employed as Executive Vice President of NAC Reinsurance Corporation,
and Executive agrees to carry out and perform all the duties and
responsibilities that are pertinent to such position or that may be
communicated to Executive from time to time by a duly authorized officer of
Employer, or by the Board; provided, however, that nothing contained in this
Agreement shall
<PAGE>
-4-
confer upon Executive any right to be retained as Executive Vice President of
NAC Reinsurance Corporation or to be retained as an employee of Employer in
any other capacity.
3. TERM. The term of this Agreement shall commence on the Effective
Date and shall continue through October 30, 1999, unless terminated earlier
pursuant to Section 6 hereof; provided, however, that this Agreement shall
terminate upon the occurrence of a "Change in Control," as such term is
defined in the Change in Control Agreement.
4. COMPENSATION AND BENEFITS DURING THE TERM.
(a) BASE SALARY: Executive's annual base salary as in effect on
the Effective Date shall continue to be Executive's annual base salary
following the Effective Date, subject to review annually in conjunction with
normal salary administration. Any increases will be based on Executive's
achievement of goals, performance of Employer and prevailing competitive
conditions.
(b) INCENTIVE PLANS; STOCK OPTIONS; BENEFIT PLANS: During the
Term, Executive shall continue to be provided the opportunity to participate
in any incentive plans, to be granted options to acquire shares of Common
Stock, and to participate, on a basis and to the extent consistent with
Executive's senior executive position, in any employee pension or welfare
benefit plan, employee stock purchase plan and other so-called fringe benefit
programs from time to time in effect for the benefit of employees of Employer
generally and/or for any group of employees of which Executive is a member,
provided that Executive meets the eligibility requirements of any such plan
or program.
5. OTHER ACTIVITIES. During the Term, Executive shall devote to
Employer's business his full business time and attention so as to assure full
and efficient performance of Executive's duties hereunder. During the Term,
Executive shall not, without Employer's prior written consent, engage or
participate, directly or indirectly, as a sole proprietor, partner, employee,
officer, shareholder, trustee, advisor or consultant, or accept appointment
or election as a director or in any other fiduciary or honorary capacity in
any other business, venture or project in the Designated Industry, as such
term is defined in Section 7(a) hereof; provided, however, that nothing in
this Agreement shall preclude Executive from devoting nonbusiness time and
efforts to charitable, social and civic matters to the extent that such
activities do not interfere with Executive's performance of his duties under
this Agreement or from engaging in any investment or business pursuits on
nonbusiness time outside of the Designated Industry, as such term is defined
in Section 7(a) hereof.
6. TERMINATION. Executive's employment under this Agreement may be
terminated by Employer at any time without prior notice, subject to the
requirement of prior notice if such termination is for Cause. Executive's
employment under this Agreement may be terminated by Executive upon not less
than thirty (30) days' prior notice, other than in the case of termination on
account of Executive's unforeseen health problems, Disability or Good Reason.
If Executive's employment under this Agreement is terminated, the following
provisions shall apply:
<PAGE>
-5-
(a) TERMINATION OF EMPLOYMENT BY EMPLOYER FOR A REASON OTHER THAN
CAUSE OR BY EXECUTIVE FOR GOOD REASON: If, before the end of the Term,
Employer terminates Executive's employment for a reason other than Cause, or
if Executive terminates employment on account of Good Reason, Employer shall
pay to Executive, within thirty (30) days following the date of such
termination, a lump sum amount equal to the sum of (i) Executive's annual
base salary which is accrued but unpaid as of the date of termination plus
(ii) the portions, if any, of amounts under the Annual Incentive Plan of
Employer and the Long-Term Incentive Plan of Employer that were earned by
Executive but unpaid as of the date of termination plus (iii) the greater of
(A) two (2) times the sum of Executive's then annual base salary plus the
amounts that would be paid to Executive under the Annual Incentive Plan of
Employer and the Long-Term Incentive Plan of Employer at Executive's targets
(as such targets were in effect at the time of termination) for the year or
performance periods, as the case may be, during which such termination occurs
or (B) the number of years and partial years (expressed in twelfths)
remaining in the Term on the date of termination times the sum of Executive's
then annual base salary plus the amounts that would be paid to Executive
under the Annual Incentive Plan of Employer and the Long-Term Incentive Plan
of Employer at Executive's targets (as such targets were in effect at the
time of termination) for the year or performance period, as the case may be,
during which such termination occurs; in addition, Executive shall vest in
all issued but unvested restricted Common Stock and granted but unvested
options to acquire Common Stock then held by Executive.
(b) TERMINATION OF EMPLOYMENT BY EMPLOYER FOR CAUSE, BY EXECUTIVE
OTHER THAN FOR GOOD REASON OR ON ACCOUNT OF DEATH OR DISABILITY: If
Executive's employment is terminated by Employer for Cause, by Executive
other than for Good Reason, or on account of Executive's death or Disability,
Executive, or his estate in the case of his death, shall receive from
Employer within thirty (30) days following the date of termination a lump sum
amount equal to Executive's annual base salary which is accrued but unpaid as
of the date of termination.
(c) NON-EXCLUSIVITY OF RIGHTS: Nothing in this Agreement shall
prevent or limit Executive's present or future participation in any benefit,
bonus, incentive, or other plan or program provided by Employer for which
Executive may qualify, nor shall this Agreement limit or otherwise affect
rights that Executive may have under any stock option or other agreements,
including the Change in Control Agreement, with Employer. Amounts or
benefits that are vested or that Executive is otherwise entitled to receive
under any plan or program of Employer at, or subsequent to, the date of
termination of Executive's employment shall be payable in accordance with
such plan or program; provided, however, that any compensation and benefits
received by Executive pursuant to this Agreement shall be in lieu of (but, if
necessary to give effect to this provision, shall be reduced by) any and all
compensation and benefits that Executive is entitled to receive or may become
entitled to receive under any reduction in force or severance pay plan,
program or practice that Employer now has in effect or may hereafter put into
effect and shall be applied toward satisfying any severance pay and benefits
required under federal or state law to be paid or provided to Executive.
7. NON-COMPETITION; CONFIDENTIAL INFORMATION.
<PAGE>
-6-
(a) Executive agrees that, if Executive's employment is terminated
by Executive other than for Good Reason, for a period of twelve (12) months
following the date of termination of this Agreement, Executive shall not (i)
divert to any competitor of NAC Re Corp. and its subsidiaries (for purposes
of this Section 7, the "NAC Re Group") in the business conducted by the NAC
Re Group as a material component of its operations including, without
limitation, insurance or reinsurance (the "Designated Industry") any customer
as of the date of termination of the NAC Re Group; or (ii) solicit or
encourage any officer, employee or consultant of the NAC Re Group to leave
their employ for employment by or with any competitor of the NAC Re Group in
the Designated Industry. If at any time the provisions of this Section 7
shall be determined to be invalid or unenforceable, by reason of being vague
or unreasonable as to area, duration or scope of activity, this Section 7
shall be considered divisible and shall become and be immediately amended to
only such area, duration and scope of activity as shall be determined to be
reasonable and enforceable by the court or other body having jurisdiction
over the matter; and Executive agrees that this Section 7, as so amended,
shall be valid and binding as though any invalid or unenforceable provision
had not been included herein.
(b) Executive shall not at any time after the date of termination
of employment reveal to anyone other than authorized representatives of the
NAC Re Group, or use for Executive's own benefit, any trade secrets, customer
information or other information that has been designated as confidential by
the NAC Re Group or is understood by Executive to be confidential without the
written authorization of the Board in each instance, unless such information
is or becomes available to the public or is otherwise public knowledge or in
the public domain for reasons other than Executive's acts or omissions.
(c) If Executive materially breaches any of the obligations under
this Section 7, Employer shall have no further compensation or benefit
obligations pursuant to this Agreement or pursuant to the Annual Incentive
Plan of Employer or the Long-Term Incentive Plan of Employer but shall remain
obligated for compensation and benefits for periods prior to such breach as
provided in any other plans, policies or practices then applicable to
Executive in accordance with the terms thereof. Executive hereby
acknowledges that Employer's remedies at law for any breach of Executive's
obligations under this Section 7 would be inadequate, and Executive and
Employer agree that, in addition to any other remedies provided for herein or
otherwise available at law, temporary and permanent injunctive relief may be
granted in any proceeding which may be properly brought by Employer to
enforce the provisions of this Section 7 without the necessity of proof of
actual damages.
8. NO MITIGATION OBLIGATION; NO SET-OFF OR COUNTERCLAIMS: In no event
shall Executive be obligated to seek other employment by way of mitigation of
the amounts payable to Executive under any of the provisions of this
Agreement. Any amounts that may be earned by Executive other than from
Employer shall not reduce Employer's obligation to make any payments
hereunder. The amounts payable by Employer hereunder shall not be subject to
any right of set-off that Employer may assert against Executive.
9. TAXES. Employer may withhold from any amounts payable under this
Agreement all federal, state, city, or other taxes as Employer is required to
withhold pursuant to any law,
<PAGE>
-7-
regulation or ruling. Executive shall bear all expense of, and be solely
responsible for, all federal, state, local or foreign taxes due with respect
to any payment received hereunder.
10. SUCCESSORS AND BINDING AGREEMENT.
(a) Employer will require any successor, whether direct or
indirect, by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of Employer, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that Employer is required to perform it. Failure of Employer to
obtain such assumption and agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle Executive to
compensation from Employer in the same amount and on the same terms as
Executive would be entitled hereunder if Executive had terminated his
employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the date on which Executive's employment with Employer was terminated.
As used in this Agreement, "Employer" shall include any successor to
Employer's business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of, and be
enforceable by, Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive dies while any amount is still payable hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms
of this Agreement to Executive's devisee, legatee or other designee or, if
there is no such designee, to Executive's estate.
11. NOTICES. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below, provided that all notices to Employer
shall be directed to the attention of the Office of the General Counsel of
NAC Re Corp., or to such other address as either party may have furnished to
the other in writing in accordance herewith, except that notice of change of
address shall be effective only upon receipt:
Employer:
NAC Re Corp.
Attn: General Counsel
One Greenwich Plaza
P.O. Box 2568
Greenwich, CT 06386-2568
Executive:
___________________________________
<PAGE>
-8-
___________________________________
___________________________________
12. GOVERNING LAW. The validity, interpretation, construction, and
performance of this Agreement shall be governed by and construed in
accordance with the substantive laws of the State of New York, without giving
effect to the principles of conflict of laws of such State, to the extent not
preempted by applicable federal law.
13. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
14. ARBITRATION. Any dispute arising out of or in any way relating to
this Agreement or Executive's employment with Employer, including, without
limitation, any claims Executive may assert under the Age Discrimination in
Employment Act of 1967, as amended (the "ADEA"), shall be resolved by
arbitration in Connecticut through the Stamford, Connecticut office of the
American Arbitration Association in accordance with the Model Employment
Arbitration Procedures of the American Arbitration Association except to the
extent such provisions are modified as hereinafter provided. The arbitration
proceeding shall be conducted by three (3) arbitrators. Executive and
Employer shall each designate one (1) arbitrator, each of whom shall be an
attorney admitted to practice in one or more states who has ten (10) or more
years of experience in employment matters, and the arbitrators so selected
shall thereafter designate a third arbitrator (who shall be a member of the
National Academy of Arbitrators) by mutual agreement. The arbitrators shall
have no authority to modify any provision of this Agreement or to award a
remedy for a dispute involving this Agreement other than a benefit
specifically provided under or by virtue of this Agreement; provided,
however, that with respect to a dispute covered by the ADEA, the arbitrators
shall have the authority to provide all remedies available under such
statute. The decision of the arbitrators shall be final and binding on
Employer and Executive. Employer and Executive shall each pay their own
legal fees associated with arbitration proceedings hereunder, but the fees of
the arbitrators and any other costs associated with such arbitration
proceedings shall be shared equally; provided, however, that the arbitrators
shall be authorized to award all such legal fees, arbitration fees and costs
to a prevailing party.
15. MERGER. With the exception of the Change in Control Agreement,
this Agreement expresses in full the understanding of Employer and Executive,
and all promises, representations, understandings, arrangements and prior
agreements with regard to Executive's employment by Employer are merged
herein.
16. WAIVER. Failure by either party hereto to insist upon strict
adherence to any one or more of the covenants or terms contained herein, on
one or more occasions, shall not be construed to be a waiver nor deprive such
party of the right to require strict compliance with the same thereafter.
<PAGE>
-9-
17. AMENDMENTS. No amendments hereto, or waivers or releases of
obligations or liabilities hereunder, shall be effective unless agreed to in
writing by all parties hereto.
18. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be executed effective as of the date first written above.
NAC Re Corp.
By:_____________________________
Its Chairman
NAC Reinsurance Corporation
By:_____________________________
Its Chairman
________________________________
________________________________
<PAGE>
EXHIBIT 11-1
NAC RE CORP. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRIMARY EARNINGS PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
<S> <C> <C> <C>
1996 1995 1994
------------- ------------ ------------
Net income applicable to common stock................................. $70,520 $62,824 $35,612
------------- ------------ ------------
------------- ------------ ------------
Average number of common shares outstanding........................... 18,854,789 17,708,733 17,603,372
Add:
Assumed exercise of dilutive stock options (1)........................ 239,925 385,729 291,335
------------- ------------ ------------
Common stock and common stock equivalents outstanding................. 19,094,714 18,094,462 17,894,707
------------- ------------ ------------
------------- ------------ ------------
Net income per share assuming dilution of common stock equivalents.... $3.69 $3.47 $1.99
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
- ------------------------
(1) Computed utilizing the average market price of the common stock for the
period.
NOTE: The 5.25% Convertible Subordinated Debentures due 2002 are not considered
to be common stock equivalents in the calculation of primary earnings per
share.
<PAGE>
EXHIBIT 11-2
NAC RE CORP. AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FULLY DILUTED EARNINGS PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1996 1995 1994
------------ ------------ ------------
Net income applicable to common stock................................... $70,520 $62,824 $35,612
After-tax add back of convertible debenture interest and amortization... 3,504 3,504 3,504
------------ ------------ ------------
Adjusted net income..................................................... $74,024 $66,328 $39,116
------------ ------------ ------------
------------ ------------ ------------
Average number of common shares outstanding............................. 18,854,789 17,708,733 17,603,372
Add:
Assumed exercise of dilutive stock options(1)........................... 242,125 424,524 429,897
Assumed conversion of convertible debentures(2)......................... 2,020,202 2,020,202 2,020,202
------------ ------------ ------------
Common stock and common stock equivalents outstanding................... 21,117,116 20,153,459 20,053,471
------------ ------------ ------------
------------ ------------ ------------
Fully diluted earnings per share........................................ $3.51 $3.29 $1.95
------------ ------------ ------------
------------ ------------ ------------
</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.
<PAGE>
EXHIBIT 12
NAC RE CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
---------- --------- --------- --------- ---------
Earnings:
Operating income before income taxes............................ $89,036 $78,821 $42,290 $49,497 $3,606
---------- --------- --------- --------- ---------
Add back fixed charges:
Interest expense................................................ 21,976 15,381 14,196 13,324 4,538
Amortization of related debt expenses........................... 346 267 258 258 68
Assumed interest component of rent expenses..................... 1,311 1,235 1,099 1,194 1,114
---------- --------- --------- --------- ---------
Total fixed charges........................................... 23,633 16,883 15,553 14,776 5,720
---------- --------- --------- --------- ---------
Adjusted earnings............................................... $112,669 $95,704 $57,843 $64,273 $9,326
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Ratio of earnings to fixed charges.............................. 4.8 to 1 5.7 to 1 3.7 to 1 4.3 to 1 1.6 to 1
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</TABLE>
<PAGE>
Exhibit 13
FINANCIAL HIGHLIGHTS
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In Thousands, except per share amounts 1996 1995 % change
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Year ended December 31,
Net premiums written $574,004 $521,489 10.1%
Total revenues 650,241 606,484 7.2
Domestic statutory composite ratio 101.1% 103.1% -
Consolidated statutory composite ratio 101.6% 103.7% -
Operating income (1) 57,812 45,855 26.1
Per primary share 3.03 2.53 19.8
Per fully diluted share 2.90 2.45 18.4
Net income 70,520 62,824 12.3
Per primary share 3.69 3.47 6.3
Per fully diluted share 3.51 3.29 6.7
Return on stockholders' equity (2) 13.8% 19.7% -
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At December 31,
Total assets $2,745,631 $2,462,131 11.5%
Claims reserves 1,513,345 1,292,415 17.1
Long-term debt 299,934 299,927 -
Stockholders' equity 553,269 511,756 8.1
Per primary share 30.06 26.65 12.8
Per fully diluted share 31.95 28.78 11.0
Statutory surplus 663,867 615,433 7.9
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(1) Excludes net realized investment gains, net of tax.
(2) Based on net income divided by stockholders' equity as reported at the
beginning of the year.
Table of Contents
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Financial Highlights 1
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Summary of Growth 2
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Letter to Our Shareholders 3
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Introducing Nicholas M. Brown, Jr. 9
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Executive Dialogue 10
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Financial Review
* Financial Reporting Responsibility 16
* Report of Independent Actuaries 18
* Report of Independent Auditors 19
* Management's Discussion and Analysis 20
* Eleven Year Financial Summary 30
* Consolidated Financial Statements 32
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General Information 61
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SUMMARY OF GROWTH
PERFORMANCE SINCE INCEPTION
<TABLE>
<CAPTION>
In Millions, except per share amounts
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Income Statement Data Balance Sheet Data
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Net Net Net Return on Premiums Stockholders'
premiums investment income (loss) stockholders' per Total equity Statutory
written income per share(1) equity(2)(6) employee(3) assets(4)(6) per share(1)(6) surplus
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<C> <C> <C> <C> <C> <C> <C> <C> <C>
Sept. 1985 - - - - - $141.2 $5.40 $26.3
Year Ended:
1985 $26.6 $8.3 $(.19) (4.7)% - 222.7 6.94 74.0
1986 122.7 15.1 .52 7.5 $3.3 443.5 8.41 152.5
1987 154.5 25.3 .68 8.1 2.1 591.5 9.10 163.2
1988 171.4 35.6 1.31 14.0 1.6 705.8 10.38 174.2
1989 192.3 45.5 1.62 15.8 1.7 869.8 11.92 189.0
1990 217.1 51.9 1.57 13.4 1.8 988.8 12.98 197.4
1991 233.0 58.7 2.20 17.2 1.7 1,016.6 15.70 230.0
1992 268.0 65.6 1.23(5) 9.3 2.0 1,596.2 17.35 384.0
1993 336.9 76.6 2.30 13.7 2.2 1,778.9 21.13 406.2
1994 438.2 80.5 1.99 9.5 2.6 1,916.8 18.23 407.0
1995 521.5 89.3 3.47 19.7 2.9 2,462.1 26.65 615.4
1996 574.0 104.3 3.69 13.8 2.8 2,745.6 30.06 663.9
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(1) Per share figures have been restated to reflect the three-for-two stock
splits effective in 1989 and 1991.
(2) Based on net income divided by stockholders' equity as reported at the
beginning of each year.
(3) Based on domestic gross premiums written divided by number of domestic
employees at the beginning of the year.
(4) Prior years reclassified to reflect the adoption of SFAS No. 113 in 1993.
(5) In January 1992, the Company's $51.8 million 6.25% Convertible Debentures
were converted into 2.4 million shares.
(6) The Company adopted SFAS No. 115 at December 31, 1993. As such, all of the
Company's fixed maturities and equity securities were classified as
"available for sale" and recorded at their fair value. Retroactive
application to prior periods is prohibited.
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LETTER TO OUR SHAREHOLDERS
We are pleased to report strong financial and strategic performance in 1996. We
achieved our objectives in a competitive and rapidly changing marketplace.
Underwriting conditions continued to be difficult in the reinsurance and
insurance markets, as capacity remained plentiful, causing some of our
competitors to relax their standards to gain market share. Further, the
reinsurance landscape changed in 1996 with significant mergers, sales of
operations and the entrance of new players in the facultative market. Our
seasoned franchise and the fruition of investments made over the last ten years
helped NAC Re to flourish despite these demanding conditions.
Operating Results
Our most gratifying financial achievement for 1996 was a 26% increase in
earnings. Operating income, excluding investment gains, reached nearly $58
million, compared with approximately $46 million in 1995. On a primary per share
basis, earnings were $3.03, compared with $2.53 per share for 1995. With
investment gains of nearly $13 million net of tax or $.66 per share, net income
for 1996 rose to more than $70 million or $3.69 per share.
While gross premium growth in 1996 was up approximately 5.3% worldwide, net
premium growth was strong, up just over 10% from 1995 to $574 million, with
contributions from all profit centers. Domestic net premiums written increased
9.6%, well above the average 5% growth achieved by the other domestic
property/casualty companies reporting to the Reinsurance Association of America
(RAA). Our international operation also had a net premium gain, up more than 14%
for the year. Both domestically and internationally, net premium growth was
favorably impacted by reductions in ceded premium, principally due to a more
cost effective retrocessional program. This helped to offset a $45 million
decline in premium from one large client, which resulted from a substantial
increase in its retentions.
The Company's statutory composite ratio continued to improve in 1996, at 101.1%
for domestic operations, compared with 103.1% for 1995 and 101.6% on a
consolidated basis, compared to 103.7% last year. This measure of underwriting
results has steadily improved in recent years and now outperforms the industry;
we expect the top 15 property/casualty companies reporting to the RAA to show an
average statutory composite ratio of 103.8%.
Stockholders' equity rose to $30.06 per share at the end of 1996, compared with
$26.65 per share a year earlier. However, fluctuations in the unrealized
appreciation of investments can make stockholders' equity an inconsistent
indicator of performance. For example, in 1996, changes in market interest rates
resulted in a decline in unrealized appreciation of approximately $.18 per
share, which in turn was more than offset by increases in net income.
Return on beginning stockholders' equity was 11.3% based on operating income
excluding realized gains, and 13.8% based on net income.
Profitable Growth
When market conditions are competitive, premium growth must be managed
cautiously. Our growth strategy emphasizes the quality of the business we write,
not the quantity of the premium produced. This requires our underwriters to be
discriminating in the clients they seek to reinsure and restrained in the
pricing and other terms and conditions they propose. We must also be diligent
and consistent in
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LETTER TO OUR SHAREHOLDERS
enhancing the value we provide to our clients in order to maintain relationships
and build new ones. Our success has been strongly influenced by our ability to
respond to the needs of our clients without compromising our underwriting
quality.
Underwriting Quality
We are extremely pleased with the sources of our growth in 1996 and the
persistence of our staff in adhering to our underwriting standards. We are
particularly proud of our high quality client roster, and note that the majority
of our domestic treaty and facultative automatic business is derived from our 30
largest clients. This concentration of premium from a relatively small number of
cedants has been a consistent and positive characteristic of our book of
business. However, we have derived considerable growth from smaller clients as
well. In addition, the sources of our revenue are now more balanced, reducing
the potential impact of changes in buying habits of any one client. The
contribution to our premium base from our 10 largest clients has declined, with
no one client responsible for as much as 5% of our business in 1996. Among our
top 30 clients, 20 clients each generate from 1% to 3% of our premium, double
the number contributing in that range just two years ago.
Our marketing effort aggressively seeks to expand business opportunities from
clients we know best. Approximately 75% of new business written in 1996 came
from existing clients. This success reflects the value derived from long-term
client relationships, our reputation for independence and stability, and our
proactive efforts to capitalize on changes in the marketplace. Increased
opportunities made it easier for us to remain selective while continuing to grow
in virtually all lines of business.
We have also sought to selectively build our client base, developing new
relationships from which large accounts may blossom over time, providing
additional diversity and profitability. Approximately 28% of our treaty and
facultative automatic growth was generated by new clients in 1996. In addition,
we developed many new facultative individual risk clients.
We also gain balance and diversity through continued globalization. The
commitment we have to a global strategy was fortified in 1996 when the NAC Re
Board of Directors convened in London. Board members met many important clients
from around the world, and reviewed the progress of our international operation,
which currently contributes approximately 10% to our revenue base.
Maintaining a selective roster of clients and generating new business
opportunities are only two facets of the underwriting quality equation. Without
discipline in underwriting analysis, long-term success is sacrificed for short
term gains. The discipline we apply to risk evaluation extends equally to new
opportunities or renewal business, and without regard to whether the source is a
new or a long-term client. The underwriting analysis process at NAC Re is a
careful, collaborative effort involving teams of actuaries, claims
professionals, attorneys, accountants and underwriting service staff. Their
assistance in risk assessment, pricing, and the evaluation of contract terms
helps ensure that the underwriting process addresses all facets of risk and
exposure.
The same rigorous standards for risk evaluation are applied regardless of the
size of the opportunity. We strive to take lead positions or co-lead positions
in most business we write, and have succeeded in
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maintaining that position with the majority of our contracts in 1996. However,
even where our participation on an account is expected to be relatively small,
we do not rely on the underwriting of other reinsurers. We devote the same
degree of diligence as we would for a lead position.
As a result of our disciplined underwriting process, we evaluate considerably
more business than we ultimately write, particularly in the facultative
individual risk area. This is illustrated by our "success ratio," which is the
measure of business actually written in relation to the business submitted to us
for review. For example, our success ratio for 1996 for facultative individual
risk business ranged from 20% to 30%, which was comparable to 1995 levels. This
is a further indication of our discipline and resolve in the face of difficult
market conditions.
Numerous other techniques contribute to our underwriting success. For example,
our underwriters have become specialists in particular lines of business and in
specific types of risks or perils. Specialization is beneficial as it improves
the quality of our underwriting and provides a valued resource to our clients.
We also maintain underwriting integrity through an internal underwriting audit
process. Teams of underwriters are assembled from treaty departments,
facultative offices and our international operation to audit the underwriting
efforts of different profit centers and branch locations. We have expanded this
effort by utilizing internal financial audit staff and external independent
auditors to assess our underwriting process in various locations. This
additional oversight helps to validate the integrity of our underwriting process
and ensure compliance with internal underwriting controls.
We expect our underwriting process and our tools for profitability analysis to
be greatly improved in 1997 with the implementation of the underwriting and
claims components of "Destiny," our powerful new comprehensive information
system. A cross-discipline team of professionals, in partnership with our
technology experts and premier outside consultants, has harnessed the latest
technology in the design of a system that will enable our staff to increase the
precision and efficiency of their risk and exposure analysis. We believe shared,
instantaneous access to information will result in even better underwriting
decisions and enhanced client service.
Customer Intimacy
Our profitable growth strategy clearly relies not only on the care with which we
underwrite business, but also the degree to which we can attract and retain
business. Our success in developing and maintaining relationships depends upon
providing a level of stability, innovation and service that will differentiate
us in a competitive market. We characterize this undertaking as our customer
intimacy strategy.
Stability may be measured by the duration of a reinsurer's existence and the
degree of its independence, both of which are indicators of long-term commitment
to the business, and both of which are, more and more, distinguishing factors
for NAC Re. Size is also viewed as a gauge of stability -- as long as it is
supported by a quality balance sheet. NAC Re's significant surplus size
facilitates access to high-grade cedants, who are increasingly selective when
choosing a reinsurer. Statutory surplus at NAC Reinsurance has grown to
approximately $665 million, an increase of nearly $50 million in 1996.
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LETTER TO OUR SHAREHOLDERS
Similarly, NAC Reinsurance International has gained access to the global
marketplace due, in part, to the dedication of approximately $140 million in
capital to that operation. The A.M. Best rating of "A+" (Superior) shared by all
members of the NAC Re group is a clear signal of financial strength and
stability, which also facilitates increasing acceptance of our international
operation throughout the world.
We are also extremely pleased with innovations in the products we offer and the
solutions we developed for our clients that distinguished NAC Re in 1996 and
paved the way for future growth. For example, we marketed a new property
reinsurance product that should assist our clients in simplifying proportional
transactions. In several instances, we were successful in cross-marketing treaty
and facultative solutions, working closely with our broker partners to meet our
clients' needs creatively and completely.
Our focus on continuous improvement in service can best be illustrated by
several domestic and global initiatives in 1996 to achieve greater proximity to
our clients. We moved our Greenwich branch office to New York City, better
utilizing our existing resources by locating in the midst of a large client
population. Additionally, the maturity of some existing facultative branches and
the level of business being generated allowed us to open new offices in
Philadelphia and Los Angeles. We launched a full operation in Sydney, which will
provide the proximity from which to develop the growing business in Australia
and New Zealand. Finally, by maximizing our technology resources, we were able
to initiate small, low-cost satellite locations in Dallas, Indianapolis and
Madrid. This will allow us to better service our clients and explore new
territories, without significant additional investment in infrastructure.
Financial Integrity
In the risk assumption business, a sound balance sheet and financial integrity
depend upon important interdependent factors for long-term success. These
include consideration for the aggregation of risk, the maintenance of a sound
retrocessional strategy, careful claims reserving, and effective asset
management.
Naturally, disciplined underwriting provides the critical first step in ensuring
financial integrity. While the assessment of risk in each transaction is
essential, the process would be incomplete and financial integrity potentially
compromised without careful management of the aggregation of risk. We
accomplished this through a variety of means, including sophisticated modeling,
particularly with respect to property exposures, where large or catastrophic
events could impact multiple contracts and products. In 1996, a cross-functional
team developed our expertise in aggregation analysis, establishing internally a
service that had previously been outsourced. This quantitative modeling
proficiency will also facilitate prospective analysis to target new underwriting
opportunities more proactively.
The quantification of risk also provides the basis for structuring an effective
retrocessional program. Ensuring adequate protection while maintaining
acceptable margins of profitability is a critical exercise for a strong
financial position. At each milestone in surplus growth, we have reevaluated our
risk appetite and our tolerance to potential volatility in earnings. In 1996, we
were able to expand our overall retrocessional protection, significantly reduce
our costs and only moderately increase our retention levels. We will continue to
devote resources and attention to the refinement and deployment of our
retrocessional strategy. Changes in our retrocessional program in 1997 should
enhance our overall profitability.
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Ensuring that the balance sheet adequately reflects our ability to make good on
our "promise to pay" is essential for the integrity of our financial position.
While we consider our claims reserving techniques to be among the best in the
industry, we continue to strive for greater certainty through the use of
additional improved analytical tools. For example, in 1996 we supplemented our
principal actuarial models with new reserving software that tests our
methodology with multiple additional models. Our reserving also relies on our
claims review process combined with actuarial analysis, and in 1996 we expanded
the number of claim audits to more than 100 in order to keep pace with our
increasingly diverse book of business. For an outside view, throughout our
history the Audit Committee of our Board of Directors has engaged an independent
actuarial consulting firm to perform an annual analysis of our reserve adequacy.
The independent actuarial opinion can be found on page 18 of this Annual Report.
The preservation of a strong balance sheet requires careful investing. Cash and
invested assets reached nearly $2 billion in 1996, generating more than $100
million in pretax net investment income, up from $89 million in 1995. Our
portfolio continues to be largely composed of fixed maturity securities, 98% of
which are investment grade. Through the use of several external investment
managers, including separate managers for our portfolio in the United Kingdom,
we are able to tap into the expertise and research capabilities of premier asset
management firms.
Shareholder Return
Improvement in shareholder return is our top priority. We were disappointed that
our strong financial performance and superior franchise value were not
adequately recognized by Wall Street during 1996. Nonetheless, we are encouraged
by the generally upward movement in our stock price in the first two months of
this year. In addition, we believe the recent upgrade in our A.M. Best Rating to
"A+" (Superior) serves to confirm our view of our financial strength. We remain
committed to building shareholder value and delivering strong financial results,
generated by continued profitable growth. In addition, we will continue to
explore and execute capital management strategies to enhance shareholder value.
In 1996 we repurchased nearly one million shares of NAC Re Common Stock, and we
anticipate that our repurchase authorization will be expanded this year.
Further, we plan to redesign aspects of our compensation program to even more
closely align management's interest with those of our shareholders. And finally,
we plan to more aggressively communicate our accomplishments and business
strategy to the investor community. We believe that these actions, executed by a
strong management team committed to delivering superior results, will increase
the likelihood of the returns that our shareholders deserve.
Preparation for the Future
While we have continued to build for the future by seeking profitable growth and
enhancing the integrity of our balance sheet, our most important long-term
investment in 1996 was made in our people. We expanded our worldwide
underwriting force by more than 15% in 1996. The individuals who joined our
talented staff bring many years of experience in the reinsurance and insurance
business, and, together with growing strength in supporting departments, will
help forge the new relationships, develop the new products and stimulate the
innovative thinking required to generate growth for years to come.
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LETTER TO OUR SHAREHOLDERS
We also broadened our skills and experience in financial management, expanding
the scope of our Finance Division and attracting new professionals with diverse
backgrounds and impressive credentials. With this additional leadership, we
believe our management depth throughout the organization is unparalleled for a
company of our size.
Finally, and perhaps most significantly, we began to secure our future by
selecting a highly-regarded, experienced and energetic leader to serve as the
President and Chief Operating Officer of NAC Re Corp. and Chief Executive
Officer of NAC Reinsurance Corporation. Nick Brown joined us in late 1996 with
more than 20 years of experience and accomplishments at two insurance industry
leaders. His broad perspective and ability to understand our business from our
clients' vantage point have already made important contributions to our efforts.
I look forward to working with Nick and our executive team as we lead the
Company and its outstanding people in seeking growth and prosperity for our
shareholders in the years to come.
/S/ Ronald L. Bornhuetter
Ronald L. Bornhuetter
Chairman and
Chief Executive Officer
March 1997
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INTRODUCING NICHOLAS M. BROWN, JR.
In late 1996 Nicholas M. Brown, Jr. became NAC Re's new President and Chief
Operating Officer, reporting directly to Chairman and Chief Executive Officer
Ronald L. Bornhuetter.
A seasoned insurance executive, Nick joined NAC Re from the St. Paul Companies,
where, as Executive Vice President and Chief Operating Officer of St. Paul Fire
and Marine Insurance Company, a $3.5 billion premium operation, he was
responsible for all U.S. underwriting business. Nick had previously been
President of St. Paul Specialty, a division of specialized commercial
operations, including medical liability, construction, surety and technology.
Nick's industry experience spans more than 20 years, with 17 of those in various
positions at Aetna Life and Casualty Companies. Beginning his career as an
actuarial trainee, Nick moved through the ranks, holding a variety of senior
positions covering almost all aspects of the property/casualty business.
A Delaware native, Nick has a B.A. summa cum laude in mathematics from the
University of Delaware and an M.A. in economics and finance from Trinity
College. He is a fellow of the Casualty Actuarial Society, and has, in his
career, served on a variety of industry and not-for-profit boards and
associations.
Commenting on his appointment at NAC Re, Nick said, "I am pleased and proud to
have been selected to join NAC Re at what I view as a time of great challenge
and opportunity. Our industry is in the midst of dramatic change, and thanks to
diligent past management by Ron and the NAC Re Board, this Company is extremely
well-positioned to thrive in the years to come. I look forward to contributing
to our future, while helping the Company grow in the global marketplace
carefully, intelligently and profitably."
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EXECUTIVE DIALOGUE
Ronald L. Bornhuetter, NAC Re's Chairman and CEO, and Nicholas M. Brown, Jr.,
NAC Re's new President and COO, discuss the state of the market and NAC Re's
opportunities for profitable growth. Ron and Nick take a close look at the
reasons for NAC Re's success and talk about leading the Company beyond its year
2000 goals and into the next millennium.
Current insurance and reinsurance market conditions
Ron Bornhuetter: During the past year competition and consolidation defined the
reinsurance marketplace. Domestic reinsurance premium growth slowed to 3.7% in
the first nine months, only slightly ahead of the primary market. Despite severe
price pressures, reported industry composite ratios and earnings improved over a
strong 1995 year. While many of the larger reinsurers enjoyed better than
average results, NAC Re significantly outperformed industry averages with nearly
double the premium growth, a lower combined ratio, and record earnings.
Rapid industry consolidation distinguished the reinsurance sector in 1996, with
five significant reinsurers leaving the industry in one year through mergers and
other transactions. We anticipate additional departures as the flight to quality
creates a clearer distinction between strong, independent reinsurers and the
rest of the pack. With each departure comes potential clients seeking more
stable partners and appropriate diversity among their approved reinsurers.
Insurers respond to consolidation by upgrading their reinsurer lists. NAC Re
leverages industry changes by attracting top notch people and seeking new
business.
Nick Brown: Primary insurers face competitive pricing conditions and
consolidation challenges similar to those for reinsurers. Loss costs in 1996
outgrew premium gains, with analysts predicting more of the same in 1997.
Reinsurers can be somewhat insulated by writing most business on an excess of
loss basis, so loss experience is not as correlated to their clients' results.
Typically, reinsurers suffer more from severity issues than the frequency of
events, such as the number of smaller catastrophes that plagued primary insurers
in 1996.
Premier insurers are managing these market pressures by tempering growth targets
and controlling expenses. Nearly all carriers are squeezing more productivity
out of their resources. Many companies are also carving out specialized niches,
where barriers to entry are high and premium dollars are comparatively stable.
These developments have major implications for reinsurers as they affect the
structure and stability of reinsurance programs, and the amount of reinsurance
purchased.
Selecting reinsurers
Ron Bornhuetter: Fundamental shifts in reinsurance purchases are underway in
response to changes in the insurance and reinsurance industry. Many large and
midsize insurers are raising their retentions or deductibles, shrinking their
traditional treaty programs while opting for more selective and less costly use
of facultative protections. In contrast, specialty and other insurers new to
their markets are securing more comprehensive reinsurance protection from
unexpected loss activity. The ongoing consolidation among reinsurers adds
another element of uncertainty for insurers, causing many to seek more stable
reinsurers in their restructured programs.
Reinsurers having the strengths of financial security, global treaty and
facultative capabilities, large limits capacity, superior underwriting skills,
and a value-added approach will thrive in this changing, competitive market. We
also increasingly see the reinsurance buyer factoring
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the independence of its reinsurer into the buying decision. These are the
reinsurers that will attract the best business and meet the needs of insurers
and their intermediaries searching for a few, good long-term partners.
Nick Brown: Only a handful of reinsurers demonstrate the financial strength and
varied capabilities Ron identified, and they alone benefit from this environment
of consolidation and competition. Reinsurers must have $500 million or more in
surplus, as well as proven capacity and reliability, to clear the first bar set
by most insurers.
Primary insurers are looking for substantially more from their reinsurers --
they need a reinsurer's expertise and value-added service to help them profit in
these difficult times. That something extra can be crucial insights on policy
forms, rapid quote turnarounds and claim payments, actuarial expertise, or
electronic submissions. Any service that helps the insurer compete more
effectively and efficiently has value. The reinsurer that delivers this value
will differentiate itself from other reinsurers in the top tier.
Ron Bornhuetter: What Nick just described is our client intimacy strategy and
why it has worked. The outcome of the strategy may be a new property product
structured for a core client, technical underwriting assistance on an emerging
casualty coverage, or a host of other services. The point is knowing the needs
of each client, one at a time, and then tailoring our product and service to
meet those needs. We are committed to working with our intermediary partners to
deliver the best product and service to each client, and we believe that client
intimacy is key to differentiation and success.
Nick Brown: A client intimate strategy will continue to make NAC Re a reinsurer
of choice. When reassessing their reinsurance needs, insurers look to their most
valuable partners first. The reinsurer who can bring solutions and security to
the table will grow with the client and share in its success.
Executing our long-term strategy
Ron Bornhuetter: In 1996 we made tremendous strides toward four strategic goals:
profitable growth, global expansion, prudent risk management and customer
intimacy. Focusing on profitable growth, we achieved greater depth and breadth
in our select client base, while maintaining our underwriting standards. NAC Re
underwriters developed more core relationships with intermediaries and ceding
companies, bolstering our foundation for future growth. Intensified marketing
efforts helped extend our client reach to more regional and specialty carriers.
By offering our brokers and clients easy access to our entire range of
reinsurance products and services, including our international and niche
insurance resources, we find new ways to grow with them and strengthen
relationships.
Typical of our innovative solutions for clients is a new strategic alliance in
the ocean marine business. Ocean marine is a highly specialized market in which
NAC Re stands out for its underwriting expertise. Our creative underwriters
found a way to partner with another reinsurer to give clients more NAC Re
support while satisfying their accumulation concerns. Such innovative thinking
should lead to many more years of profitable premium growth.
Nick Brown: It is precisely that innovative spirit that attracted me to NAC Re,
along with its success and drive. I am impressed to see NAC
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EXECUTIVE DIALOGUE
Re having grown from a startup to a major reinsurer with an impressive market
presence, diversified lines of business, a seasoned facultative network, and
expanding locations throughout the world. I had an opportunity to join NAC Re at
a key point in its history: while committed to consistent execution of a
long-term strategy to ensure further growth and expansion, we are in a position
to enjoy the harvest of our strategic investments of the past.
Profitable growth through diversification
Ron Bornhuetter: NAC Re's diversification strategy in which we seek to gain
market share by serving more needs of our current clients and consistently add
new clients, has worked well in the international marketplace. NAC Re
International attained 15% premium growth in 1996, generated from new clients
and from U.S. clients abroad. In 1996, we began writing facultative business
from our London base. We also launched operations in Australia and Spain. Our
cedants are now spread from the United Kingdom to Australasia to South America,
wherever growing markets need reinsurance.
Our international underwriters share the view that their worldwide marketplace
is as competitive as Nick and I see in the U.S., but I am bullish on profitable
growth. Our strategy of taking large shares and influencing contract terms has
started to pay off in the global arena as effectively as it has domestically.
The professional underwriting and service trademark of NAC Re has helped us
withstand competitive pressures. Casualty expertise, another NAC Re hallmark,
serves us well as foreign liability systems perceptibly evolve along U.S. lines
to create exposures that are new to some clients, but all too familiar to us.
Nick Brown: More international insurers and reinsurers seem to be reaching the
same conclusion as their U.S. counterparts: profitable growth will come by
finding the right niches among hundreds of opportunities, or by taking another
company's niche or market share. Our international and domestic success has come
from building rather than buying business. On the domestic front, several
facultative automatics represent successful entries into new business lines. The
worldwide insurance market offers nearly $800 billion in property and casualty
premium, less than half of that amount residing in the U.S. A single niche can
amount to significant and profitable growth.
A niche market strategy has worked well for the Greenwich Insurance Company and
Indian Harbor Insurance Company, two domestic NAC Re Group members operating in
a handful of specialty markets not generally served by our core reinsurance
clients. When needed, we step in to provide primary capacity for a core
reinsurance client. Future growth will remain similarly focused and specialized,
complementing NAC Re's broader strategy.
Finding superior, profitable opportunities in a competitive market
Ron Bornhuetter: Before I discuss future growth opportunities for NAC Re, I
would like to emphasize the word "profitable." Our underwriters do not have
written premium targets. In fact, we nonrenewed or walked away from several
sizable accounts due to unacceptable price and terms. We will continue to rely
on underwriting and claim audits, actuarial pricing analysis, security review,
and the other disciplines that helped us become the successful reinsurer we are
today. Our tools are more refined, but the fundamentals remain unchanged.
Our unwavering discipline may cost us growth, but not profit or opportunities.
More
12
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joint marketing efforts with our intermediaries will draw desirable business
away from direct reinsurers and generate more opportunities for us to work
together. Strategic affiliations providing entry into targeted specialty lines
of business, like a new alternative risk program, will enhance treaty growth.
NAC Re's facultative foundation now includes underwriters in our newest
locations -- Philadelphia, Los Angeles, Dallas and Indianapolis, all producing
more business because of that local presence. In 1996, our facultative forces
generated a 24% increase in individual risk and automatic premium, confirming
our belief that proximity to clients is a key component in profitable growth.
Nick Brown: Linking our people with our intermediaries and clients is a vital
part of our plan for success. Increased electronic client connections bring us
closer to our broker partners and ceding companies, and make it easier to
transact business, improving the productivity of all parties to the reinsurance
transaction. Deploying our specialist teams and a new research database to
deliver value-added expertise to more clients will further differentiate us from
competitors. Maximizing cross-selling efforts, so that each underwriter can
promote the full array of NAC Re products and capabilities, is furthered by
ongoing training and new marketing brochures. All of these initiatives, coupled
with technology leadership, puts our entire organization in front of our
intermediaries and clients.
Building the NAC Re franchise effectively and efficiently
Nick Brown: Coming from the primary market where productivity increasingly
impacts operational decisions, I was pleased to see NAC Re's heavy emphasis on
leveraging our existing resources for growth. Some new facultative offices
consist of an underwriter and a laptop linked to the Company's systems and
information databases. The new research database housing all of our legal,
claims and underwriting research provides NAC Re employees with instant access
to answers, eliminating duplicate activities and multiplying the benefits of
completed efforts.
Ron Bornhuetter: The best example of merging savings with better results is our
Destiny system. Many insurers and reinsurers have contracted out the development
of new systems and paid huge bills - some are still waiting to see results. In
contrast, our technology unit teamed up with business users from around the
Company to build the advanced system we all wanted, and they succeeded.
Implementation begins in 1997, a year after the first phase began, at a fraction
of the cost of outsourcing and with far greater productivity. In addition,
electronic data interchange initiatives will enhance productivity gains
throughout our organization.
Delivering shareholder value
Ron Bornhuetter: Nick and I have talked about success in our reinsurance market
and delivering value to our clients, but as I mention in the Letter to
Shareholders, increasing shareholder value is our paramount concern. In 1996,
stock price performance by both NAC Re and the reinsurance sector did not keep
pace with the booming insurance and stock market, despite, in the case of NAC
Re, strongest earnings ever.
Our number one priority is to raise NAC Re above its industry group and reward
our shareholders for their long-term commitment to us. We will continue to
execute a successful business strategy and build an outstanding franchise that
should deliver attractive returns.
13
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EXECUTIVE DIALOGUE
We will also employ the capital management tools necessary to achieve our
long-term goals. Our new financial management leadership channels a wealth of
investment banking and sophisticated corporate transactional experience to the
task. The alternatives at our disposal are varied, but I emphasize that capital
management strategies will be balanced with our continued adherence to a
pristine balance sheet and the reinsurance fundamentals that ultimately generate
future returns.
Nick Brown: Attention to those fundamentals is crucial to both the strength and
consistency of our earnings. Maintaining per occurrence limits on catastrophe
covers is one example. During 1996 and early 1997, our underwriters reduced
exposed limits on casualty facultative business and refined our retrocessional
program to lower cost while improving protection. By better guarding against
unwanted surprises, we stay on our course toward greater profitability and
improved shareholder returns.
Progress toward our year 2000 goals and beyond
Ron Bornhuetter: By staying the course, we have achieved success on all four
strategic objectives and made our greatest strides in profitability, certainly
our most important measure of progress. It is not easy, but the people and tools
- -- the NAC Re franchise -- are all in place to make it happen.
Nick Brown: I look forward to working with Ron to continue NAC Re's industry
leadership in all four targeted areas -- profitable growth, international
expansion, prudent risk management and customer intimacy. Our strategy is sound;
the tools for execution are here. I will help keep our focus on these goals and
our priorities in appropriate order.
Ron Bornhuetter: Critical to our success are our talented and loyal employees
and their motivation and innovative spirit. The collective underwriting,
actuarial, claims, contract, legal and financial expertise that is our hallmark,
improves our clients' profitability and strengthens the bonds that make core
relationships. With this expertise and a flexible and cutting-edge information
system, we have a combination of skills and tools that are unsurpassed. It is
all here, and our shareholders, members of our Board, clients, intermediaries,
and employees will enjoy the fruits of these efforts for years to come.
NAC Re [Logo]
Corporation
14
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FINANCIAL REVIEW
-----------------------------------
* Financial Reporting Responsibility
-----------------------------------
* Report of Independent Actuaries
-----------------------------------
* Report of Independent Auditors
-----------------------------------
* Management's Discussion and Analysis
-----------------------------------
* Eleven Year Financial Summary
-----------------------------------
* Consolidated Financial Statements
-----------------------------------
15
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FINANCIAL REPORTING RESPONSIBILITY
Management Letter
The management of NAC Re has primary responsibility for the integrity and
accuracy of the financial information presented in this Annual Report and for
making certain that such information presents fairly the financial position and
operating results of the Company. The financial statements included in this
Annual Report have been prepared in conformity with generally accepted
accounting principles, and all financial information presented within this
Report is consistent with these financial statements.
The accounting systems and internal controls of the Company are designed to
provide reasonable assurance that transactions are executed in accordance with
management's authorization, that the Company's financial records are reliable
for preparing financial statements and maintaining accountability for assets,
and that the assets of the Company are safeguarded against losses from
unauthorized use or disposition. Management believes that the Company's system
of internal control is adequate to accomplish these objectives.
Ernst & Young LLP, independent certified public accountants, have audited the
financial statements of the Company, and their report is included on page 19.
The independent auditors have full access to each member of the Company's
management in conducting their audit. Management believes that all
representations made to Ernst & Young LLP during the audit were valid and
appropriate.
The Audit Committee has engaged the services of Tillinghast - Towers Perrin, a
leading actuarial consulting firm, to provide an independent opinion as to
whether the Company's reserves for claims and claims expenses and assets for
reinsurance recoverable on those reserves are fairly stated and represent a
reasonable estimate of the Company's ultimate claims reserves and related
assets. The Tillinghast report is included on page 18.
The Audit Committee of the Board of Directors, composed of directors who are
neither officers nor employees of the Company, oversees management's discharge
of its financial reporting responsibilities. The activities of the Audit
Committee are discussed in the Audit Committee Chairman's letter.
Ronald L. Bornhuetter Jerome T. Fadden Thomas A. Weidman
Chief Executive Officer Chief Financial Officer Chief Actuarial Officer
16
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Audit Committee Chairman's Letter
In 1996 the Audit Committee of the Board of Directors was composed of five
independent directors: C. W. Carson, Jr., Chairman; Todd G. Cole; Michael G.
Fitt; Daniel J. McNamara; and Wendy J. Strothman. The Committee held four
meetings during 1996.
The Audit Committee oversees management's discharge of its financial reporting
responsibilities and the system of internal controls established by management.
In fulfilling its responsibility, the Committee recommended to the Board of
Directors the selection of the Company's independent certified public
accountants, Ernst & Young LLP. The Audit Committee also engaged the services of
independent actuarial consultants, Tillinghast - Towers Perrin.
The independent auditors are engaged for the purpose of auditing the Company's
year end financial statements and providing timely interim review reports on the
quarterly financial statements.
The Audit Committee met with the Company's internal auditors and representatives
of the independent auditors to review the overall scope and specific plans for
their respective audits. In addition, the Company's internal auditors and
independent auditors had free access to the Audit Committee throughout the year
and had the opportunity, without management present, to discuss the results of
their examinations, their evaluations of the Company's internal controls, and
the overall quality of the Company's financial reporting.
The Committee also reviewed the report of the independent actuarial consultants
which states that the Company's reserves for claims and claims expenses and
assets for reinsurance recoverable on those reserves are fairly stated and
represent a reasonable estimate of the Company's ultimate claims reserves and
related assets. The independent actuarial consultants met with the Committee,
without management present, to discuss the results of their examination and had,
at all times, free access to the Audit Committee.
The Committee also reviewed the consolidated financial statements of the Company
prior to their distribution to the shareholders.
C. W. Carson, Jr.
Chairman, Audit Committee
17
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REPORT OF INDEPENDENT ACTUARIES
To the Board of Directors of NAC Re Corporation:
We have examined the liability for claims and claims expenses of $1,513,345,000
and the asset for reinsurance recoverable on unpaid claims and claims expenses
of $406,128,000 recorded in the December 31, 1996 consolidated balance sheet of
NAC Re Corporation and subsidiaries (the "Company"). Our examination included a
review of assumptions and methods used by the Company and performance of
independent projections of the Company's claims and claims expenses and the
reinsurance recoverable on unpaid claims and claims expenses using internal and
external data and such other procedures as we consider necessary in the
circumstances. In making our examination, we relied upon the accuracy and
completeness of all loss data and other related information prepared by the
Company.
The Company uses tabular reserving for workers' compensation case losses that
are considered fixed and determinable, and discounts such reserves at a 7%
annual rate of return. The amount of discount estimated for December 31, 1996
case reserves are $22,694,000 gross of reinsurance recoverable and $20,765,000
net of reinsurance recoverable.
In estimating future loss emergence, we have assumed that historical loss
emergence patterns and judgments made are predictive of future developments. Due
to the inherent limitations of data and the uncertainty associated with
statistical estimates for property and casualty reinsurance, it is possible that
the actual payments of unpaid claims and claims expenses could prove to be
materially different from the estimated amount contained in the financial
statements. Our estimates make no provision for the extraordinary future
emergence of new classes of losses, types of loss not sufficiently represented
in the Company's historical data base, or losses which are not yet quantifiable.
We also have assumed that all reinsurance is valid and collectible, and have not
anticipated any contingent liabilities or diminution of asset value that may
exist in the event that any of the reinsuring companies might be unable to meet
their obligations to the Company under existing reinsurance agreements. With the
exception of reinsurance recoverable on unpaid claims and claims expenses, we
have not examined the Company's assets and have formed no opinion as to the
validity or value of the assets. We have presumed that all reserves are backed
by valid assets, which have suitably scheduled maturities and/or liquidity to
meet cash flow requirements.
In our opinion, the amounts recorded in the consolidated balance sheet as
estimated reserves for claims and claims expenses and the assets for reinsurance
recoverable on unpaid claims and claims expenses:
* are computed in accordance with commonly accepted actuarial methods and are
fairly stated in accordance with sound actuarial principles;
* are based upon actuarial assumptions which are relevant to policy
provisions; and
* make a reasonable provision in the aggregate for all unpaid claims and
claims expense obligations.
Boston, Massachusetts Tillinghast - Towers Perrin
February 14, 1997
18
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of NAC Re Corporation:
We have audited the consolidated balance sheet of NAC Re Corporation and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996 (presented on pages 32 to 60
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NAC Re Corporation
and subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
New York, New York Ernst & Young LLP
February 4, 1997
19
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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
The Company's operating income, excluding realized investment gains, was $57.8
million for 1996, $45.9 million for 1995 and $34.8 million for 1994. On a per
share basis, operating income, excluding realized investment gains, was $3.03,
$2.53, and $1.95 for 1996, 1995 and 1994, respectively.
Net income was $70.5 million for 1996, $62.8 million for 1995 and $35.6 million
for 1994. On a per share basis, net income was $3.69, $3.47 and $1.99 for 1996,
1995 and 1994, respectively. Net income for 1996 includes after-tax realized
investment gains of $12.7 million or $.66 per share compared to $17.0 million or
$.94 per share in 1995 and $.8 million or $.04 per share in 1994.
Premium Revenues
The Company's premium revenue growth for its domestic and international
operations are as follows:
Gross Premiums Written Percent Change
================================================================================
Dollars in Millions 1996 1995 1994 96/95 95/94
================================================================================
Domestic:
Casualty $ 364.1 $ 354.8 $ 293.4 2.6% 20.9%
Property 189.2 179.8 151.6 5.2 18.5
Specialty/other 102.1 92.3 100.2 10.7 (7.9)
- --------------------------------------------------------------------------------
Subtotal 655.4 626.9 545.2 4.6 15.0
================================================================================
International:
Casualty 22.8 19.2 14.8 18.1 30.3
Property 38.9 33.9 17.7 14.7 91.6
- --------------------------------------------------------------------------------
Subtotal 61.7 53.1 32.5 15.9 63.7
================================================================================
Intercompany transactions:
Casualty (.7) (.6) (.8) -- --
Property (2.3) (1.5) (1.9) -- --
- --------------------------------------------------------------------------------
Total $ 714.1 $ 677.9 $ 575.0 5.3% 17.9%
================================================================================
Net Premiums Written Percent Change
================================================================================
Dollars in Millions 1996 1995 1994 96/95 95/94
================================================================================
Domestic:
Casualty $ 328.9 $ 311.7 $ 250.1 5.5% 24.6%
Property 121.1 111.1 92.2 9.0 20.5
Specialty/other 71.9 53.3 70.1 35.0 (24.1)
- --------------------------------------------------------------------------------
Subtotal 521.9 476.1 412.4 9.6 15.4
================================================================================
International:
Casualty 22.1 18.7 14.5 18.4 29.0
Property 30.0 26.7 11.3 12.1 136.7
- --------------------------------------------------------------------------------
Subtotal 52.1 45.4 25.8 14.7 76.2
================================================================================
Total $ 574.0 $ 521.5 $ 438.2 10.1% 19.0%
================================================================================
20
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The property/casualty reinsurance marketplace remained competitive in 1996. Rate
pressure at the primary level and ample reinsurance capacity precluded
reinsurance rate improvements. In addition, larger primary companies increased
their retentions. This, in turn, may have pressured certain small to mid-sized
reinsurers to reduce prices in a fight for survival. Other reinsurers responded
by seeking merger opportunities or by raising capital in order to expand surplus
levels and remain attractive to increasingly selective reinsurance purchasers.
Mergers by primary companies have resulted, in certain instances, in much larger
companies, which has helped to exacerbate the need for increased size and
financial strength of reinsurance partners.
The dynamics of the marketplace have not only intensified competition but also
generated opportunities for growth. For example, the curtailment by some
companies of reinsurance operations and mergers among reinsurance companies has
dislodged business and created new opportunities for some reinsurers. In
addition, continued globalization by U.S. insurers and lingering uncertainty
about Lloyd's has generated expanded opportunity in the international
marketplace. The Company believes that while market conditions will continue to
be competitive in 1997 in all lines of business, opportunities for selective
profitable business growth are likely to continue.
Worldwide casualty gross premiums written in 1996 totaled $386.2 million, an
increase of 3.4% compared to increases of 21.5% in 1995 and 44.3% in 1994.
Domestic casualty gross premiums written increased 2.6% in 1996, 20.9% in 1995
and 37.8% in 1994. Growth in casualty business slowed in 1996 due principally to
the prolonged soft market conditions and the increased retentions of certain
clients, including one large account. Excluding the impact of this large
account, casualty gross premiums would have increased approximately 14% over
1995. Casualty growth in 1996 was attributed to increased opportunities from
existing facultative and treaty clients, which more than offset increased
retention levels. Casualty growth in 1995 came largely from increased
participations from existing treaty clients. Casualty growth in 1994 was
attributed to several new treaty programs written during the latter half of
1993, increases in participations from existing clients and, to a certain
extent, increases in the amount of underlying premium written by ceding company
clients. Casualty facultative gross premiums written increased 2.7% to $78.2
million in 1996 compared to $76.1 million in 1995 and $40.5 million in 1994.
Worldwide property gross premiums written were $225.8 million in 1996, compared
to $212.2 million in 1995 and $167.4 million in 1994. Domestic gross premiums
written increased 5.2% in 1996, 18.5% in 1995 and 1.7% in 1994 as a result of
the competitive market conditions and increased retentions at the primary level.
Property facultative growth contributed to the overall premium gains, including
the positive impact of facultative automatic programs, and expansion into
international facultative markets, with property facultative gross premiums
written increasing by 33.9% in 1996, 36.7% in 1995, and 39.3% in 1994.
The Company's focus on certain specialty lines of business, particularly
fidelity/surety, aviation and ocean marine business, has resulted in several
growth opportunities. Fidelity/surety bond treaty gross premiums were $45.9
million in 1996, $33.3 million in 1995 and $33.5 million in 1994. The growth in
1996 was primarily attributable to a significant new surety treaty. The 1996 and
1995 fidelity/surety premiums continue to be impacted by the weak market
conditions and increased retentions by primary companies.
The Company's specialization in aviation began in 1992, with the underwriting of
a large general aviation program, and expanded in 1994 with a participation in a
premier aviation underwriting pool. Due to adverse claim development in the
general aviation program, and unsuccessful efforts to adequately correct the
pricing, the treaty was not renewed effective July 1, 1994. The decline in
premium was somewhat
21
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MANAGEMENT'S DISCUSSION AND ANALYSIS
offset by premium from an increased participation in the aviation pool in 1995.
The Company's aviation business is managed and evaluated on a net basis to most
effectively monitor exposures after the "common account" reinsurance protection
the Company receives, as discussed below. Net premiums written from aviation
business totaled $8.3 million, $10.9 million and $34.3 million for 1996, 1995
and 1994, respectively. In addition to aviation business, the Company writes a
limited amount of other primary insurance business, principally through its
subsidiary, Greenwich Insurance Company. Primary insurance is expected to be a
source of growth in 1997, and currently represents approximately 6% of total net
premiums written. Expansion in this area will be focused on highly specialized
moderate duration casualty programs that are not competitive with business
written by the Company's insurance company clients. The Company expanded its
specialty lines to ocean marine business in 1994. Ocean marine gross premiums
written totaled $12.7 million in 1996 compared to $6.3 million in 1995.
The Company's most significant effort to expand its business production in
recent years has been the establishment of a fully licensed reinsurance
subsidiary in London, England. Although the international marketplace is
extremely competitive, the Company's international operation continues to report
steady growth. Gross premiums written were $61.6 million, $53.2 million and
$32.5 million for the years 1996, 1995 and 1994, respectively. The Company
expects its international business to continue to increase as its international
operation expands and matures.
Currently no single client generates more than 5% of premium volume. The Company
does not believe that the reduction of business assumed from any one client will
have a materially adverse effect on its future financial condition or results of
operations due to the Company's competitive position in the marketplace and the
continuing availability of other sources of business.
Ceded premiums recorded for retrocession agreements were $140.1 million, $156.4
million and $136.8 million in 1996, 1995 and 1994, respectively. The Company
continually evaluates its retrocessional programs based on market conditions,
pricing and its own risk tolerance. Ceded premiums were reduced in 1996 as a
result of the soft retrocessional market, coupled with the Company's favorable
claim experience and moderate increases in the Company's retention levels. The
principal factor increasing ceded premiums in 1995 was the Company's share of
the reinsurance protection purchased for the "common account" of all
participating companies in the aviation pool and to a lesser extent, the
expanded retrocessional protection obtained at marginally higher costs. The
Company expects ceded premiums as a percentage of gross premiums written to
decline further in 1997, principally due to a favorable pricing environment and
through the restructuring of its retrocessional program.
Operating Costs and Expenses
Claims and claims expenses represent the Company's most significant and
uncertain costs. This expense is only an estimate at a given point in time of
the amount the insurer or reinsurer expects to pay on the settlement of claims.
The Company would generally expect to refine such estimates in subsequent
accounting periods based upon facts and circumstances then known.
The fact that the Company's exposure to claims generally begins after its
clients absorb the first $1 million in claims contributes to the uncertainty of
its claims estimates. With this excess coverage, claims occur less frequently
than coverages which attach within the first $1 million of claims, thereby
providing less credible historical claim experience from which to estimate
ultimate claim costs. Further, the Company writes coverage in certain volatile
casualty lines of business, such as general liability, directors' and
22
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officers' liability and medical malpractice. Claim activity for these lines is
characterized by protracted litigation, the ultimate cost of which can be
influenced significantly by future court rulings.
Estimates of claims and claims expenses are based in part on a prediction of
future events, estimates of future trends in claim severity and frequency and
other variable factors. The Company's ability to predict future trends based
upon its own historical claim experience is inherently difficult because of its
substantial growth in premiums since 1985. Therefore, the Company has
supplemented its historical claim experience to a certain extent with claim
experience derived from external sources, such as reinsurance industry data, for
purposes of evaluating future trends and providing an estimate of ultimate claim
costs. As the Company's book of business continues to mature, its own historical
claim experience achieves greater credibility and enhances its ability to
evaluate future trends. Accordingly, the Company believes its reserving process
improves as additional claims experience emerges and could be expected to result
in more refined estimates of claims and claims expenses over time.
One traditional means of measuring the underwriting performance of a
property/casualty insurer is the statutory composite ratio. The composite ratio,
based upon statutory accounting practices (which differ from generally accepted
accounting principles in several respects) reflects underwriting experience, but
does not reflect income from investments. A composite ratio of under 100%
indicates underwriting profitability while a composite ratio exceeding 100%
indicates an underwriting loss.
The following chart sets forth statutory composite ratios for the Company's
domestic reinsurance subsidiary. It also provides an average of actual or
estimated composite ratios for the fifteen largest property/casualty reinsurers,
ranked by statutory surplus, based on data reported by the Reinsurance
Association of America (RAA):
1996 1995 1994
================================================================================
Domestic Composite Ratio:
Claims and claims expenses 63.7% 65.1% 66.6%
Commissions and brokerage 28.3 29.7 31.3
Other operating expenses 9.1 8.3 7.8
- --------------------------------------------------------------------------------
Total 101.1% 103.1% 105.7%
- --------------------------------------------------------------------------------
Composite ratios for 15 largest reinsurers 103.8% 113.1% 106.4%
================================================================================
The Company's domestic composite ratio for 1996 reflects significant
improvements in underwriting results compared to 1995 and 1994. Each year's
ratio reflects the net favorable claim development from prior years, as
discussed below.
Aided by a favorable catastrophe retrocessional market, the Company expects to
maintain its exposure to a single event to $5 million for 1997 at a lower cost
than 1996 and 1995. For 1997, the Company expects to obtain $115 million of
property catastrophe protection, of which $25 million of coverage, in excess of
the first $55 million of coverage, is available only if industry-wide claims
exceed certain minimum levels. The Company evaluates its potential accumulated
aggregate catastrophe exposure on both a gross claim basis and net of available
reinsurance protection to determine whether its exposure to claims is within
acceptable levels, and evaluates the catastrophe protection it offers to its
clients accordingly. Although the Company has attempted to limit its exposure to
acceptable levels, an extremely large catastrophic event,
23
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MANAGEMENT'S DISCUSSION AND ANALYSIS
or multiple catastrophic events could have a material adverse effect on the
financial condition and results of operations of the Company. The Company's
maximum retention on any one claim for non-catastrophe losses for 1997 and 1996
is $5.0 million, compared to $3.9 million in 1995.
In recognition of the Company's enhanced surplus position and financial
capacity, and the continued positive contribution of business written since
1986, the Company has reached agreements to terminate two retrocessional
programs effective January 1, 1997. As a result, the Company expects to receive
a total consideration of approximately $220 million, representing reinsurance
recoverable balances for unpaid claims and claims expenses, with total cash and
invested assets increasing by approximately $170 million. The termination of
these programs will result in an increase in retention levels for the years 1996
and prior. Particularly as the casualty book of business matures, the increase
in net retentions for these years may result in increased volatility in future
years to the extent the actual frequency and severity of claims differs from
management's current estimates. The Company believes its exposure to such
volatility is within acceptable levels. See Note 5 of the Notes to Consolidated
Financial Statements for the impact on 1996 and 1995 retention levels.
An important area of focus in the reinsurance and insurance industries is
exposure to asbestos and environmental claims. The Company's reserving process
includes a periodic evaluation of the potential impact on claim liabilities from
exposure to asbestos and environmental claims, including related loss adjustment
expenses. The Company recorded claims and claims expenses incurred relating to
asbestos and environmental claims of $10.7 million in 1996, $7.0 million in 1995
and $4.8 million in 1994, inclusive of paid claims of $4.2 million, $4.8
million, and $3.3 million, respectively. The Company's claims and claims expense
reserves for such exposures, net of reinsurance, as of December 31, 1996, 1995
and 1994 were $28.5 million, $22.0 million and $19.8 million, respectively. A
reconciliation of the Company's gross and net liabilities for such exposures for
the three years ending December 31, 1996 and a discussion of open claim files
are set forth in Note 3 of the Notes to Consolidated Financial Statements.
The Company believes it has made a reasonable provision for its asbestos and
environmental exposures and is unaware of any specific issues which would
materially affect its claims and claims expense estimate. The estimation of
claims and claims expense liabilities for asbestos and environmental exposures
is subject to a much greater uncertainty than would normally be associated with
the establishment of liabilities for other exposures due to several factors,
including: i) uncertain legal interpretation and application of insurance and
reinsurance coverage and liability; ii) the lack of reliability of available
historical claim data as an indicator of future claim development; iii) an
uncertain political climate which may impact, among other areas, the nature and
amount of costs for remediating waste sites; and iv) the potential of insurers
and policyholders to reach agreements in order to avoid further significant
legal costs. Due to the potential significance of these uncertainties, the
Company believes that no meaningful range of claims and claims expense
liabilities beyond recorded reserves can be established. As these uncertainties
are resolved, additional reserve provisions, which could be material in amount,
may be necessary.
The Company's total net claims and claims expenses for each year reflects
favorable claim development from prior years of $33.3 million in 1996, $19.6
million in 1995 and $43.5 million in 1994. The net favorable claim development
for business written since 1986 continued to emerge during 1996, 1995 and 1994.
This favorable development is impacted by several factors, some of which are
interdependent. A principal factor is the strength of the actuarial assumptions
underlying the business written, particularly
24
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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 comparisons of actuarially
computed expected claims to actual claims and claims expense development,
inflation and other considerations. This favorable development has offset
certain unfavorable development on business written prior to 1986, principally
related to asbestos and environmental claims, and in 1996 and 1995, includes the
Company's evaluation of the lengthening of loss emergence patterns for certain
lines of business included in the most recent Historical Loss Development Study
issued by the RAA. Claim payment activity increased to $190.4 million in 1996,
compared to $180.4 million in 1995 and $154.7 million in 1994, reflecting in
part, the Company's maturing casualty book of business.
Claims and claims expenses also include a charge for actual and potential
non-recoveries from retrocessionnaires that are unable to meet their obligation
under the retrocession agreement or do not satisfy the Company's financial
guidelines. Such charges amounted to $1.2 million, $1.4 million and $4.0 million
for 1996, 1995 and 1994, respectively, and reflect a provision for paid and
unpaid claims, inclusive of incurred but not reported (IBNR) claims.
Substantially all such charges relate to reinsurance purchased prior to 1986.
The Company's .7 to 1 ratio of reinsurance recoverables (including IBNR and
unearned premiums) to statutory surplus (a measure of exposure that continues to
receive attention from research analysts and state regulators) is equal to the
average ratio for the top 15 property/casualty reinsurers reporting to the RAA,
based on the most recent available data. In addition, approximately 62% of the
Company's reinsurance recoverables are collateralized by letters of credit,
trust accounts or funds withheld, which further reduces the Company's exposure
to uncollectible balances.
The Company is unaware of any specific, unusual and significant circumstances
affecting claim reserve estimates, except to the extent disclosed.
The 1996 statutory composite ratio for the Company's international reinsurance
subsidiary was 105.6% compared to 111.7% in 1995 and 114.7% in 1994. A principal
cause of these relatively high composite ratios was the contribution of the
operating expense ratios of 13.7%, 13.0% and 20.2% for the years ended December
31, 1996, 1995 and 1994, respectively. The Company generally expects a higher
expense ratio in the start-up years an operation. The expense ratio of the
international subsidiary is expected to decline over time as it leverages its
investment in infrastructure and marketing, broadens client relationships and
generates increases in premium revenues.
The pricing of the Company's reinsurance contracts contemplates many factors,
including exposure to claims and the expenses of the client and the broker.
Commissions and brokerage expenses as a percentage of premium revenues declined
moderately in 1996 compared to 1995 and 1994. This decrease is principally due
to the effects of certain contractual provisions which adjust commission expense
based upon claims experience, partially mitigated by increases in pro rata
contracts written in the Company's specialty lines of business, as these
contracts generally carry a higher commission rate. 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.
Operating expenses increased in 1996, 1995 and 1994, reflecting continued
business expansion, investments in technology, a continued investment in
facultative business and the start-up costs of the international operation. In
addition, the Company expanded staffing in 1996 and 1995 in order to
25
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
accommodate continuing growth opportunities. The Company continues to seek
measures to contain operating expenses that are not central to its underwriting
activities, and to better utilize its resources.
Investments
Cash and invested assets were $2.0 billion at December 31, 1996 and $1.8 billion
at December 31, 1995, excluding net investment payables of $24.9 million and
$50.5 million for 1996 and 1995, respectively.
Net investment income increased 16.8% in 1996 compared to 10.9% in 1995 and 5.1%
in 1994. The increase in 1996 is principally attributable to the growth in
invested assets, including the investment proceeds of approximately $147 million
from the Company's public debt and equity offerings in November 1995. The
Company's pretax investment yield was 5.7% in 1996, 5.9% in 1995 and 6.0% in
1994. On an after-tax basis, the investment yield was 4.4% in 1996, 4.6% in 1995
and 4.5% in 1994.
Realized investment gains, net of tax, were $.66 per share for 1996, $.94 per
share for 1995, and $.04 per share for 1994. 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.
While the Company continued to be impacted in 1996 from the declining interest
rate environment in 1995, the effect on investment yields was somewhat tempered
given the Company's fixed maturity duration of approximately 5 years. Also
affecting the comparison of 1996 and 1995 pretax and after-tax investment yields
was the Company's investment of available cash flow during 1996 of approximately
$117 million into tax-exempt securities to take advantage of the higher
after-tax yields for these securities. The Company expects continued growth in
investment income during 1997 due to a higher invested asset base, including the
expected cash consideration resulting from the termination of two retrocessional
programs in 1997. See Note 5 to the Notes to Consolidated Financial Statements.
The Company's investment strategy is focused principally on income
predictability and asset value stability. This strategy results in an emphasis
on high quality, fixed maturity investments. Tactical shifts between taxable and
tax-exempt bonds may occur in order to maximize after-tax investment returns. At
the end of 1996, the Company's fixed maturity investments amounted to $1.7
billion, which approximates 86% of cash and invested assets, and approximately
98% of such investments are rated investment grade by Moody's Investor Services,
Inc. or Standard & Poor's.
Changes in market interest rates during 1996 resulted in a slight decrease in
the market value of the Company's investment securities compared to 1995. Net
unrealized appreciation of investments, net of tax, was $31.7 million at
December 31, 1996 compared to $35.2 million at December 31, 1995. The unrealized
appreciation was primarily attributable to the market value fluctuations in the
Company's fixed income and equity securities, which are recorded at their fair
values.
While uncertainties exist regarding interest rate and inflation variability, the
Company attempts to minimize such risks and exposures by balancing the duration
of its assets with the duration of its liabilities. Consistent with the payment
profile of the Company's claims liabilities, as of the end of 1996 the Company's
investment portfolio had an average duration of 4.8 years. See Note 2 of the
Notes to Consolidated Financial Statements for a detailed discussion of the
fixed maturity investment portfolio.
26
<PAGE>
- --------------------------------------------------------------------------------
The balance of the Company's investment portfolio at December 31, 1996,
consisting of cash, short-term investments and equity securities, amounted to
$280.4 million. As of December 31, 1996, the Company held $179.6 million or 9.1%
of cash and invested assets in equity securities, representing 27% of statutory
surplus. This is compared to $127.0 million or 6.8% of invested assets in equity
securities at December 31, 1995, representing 21% of statutory surplus.
Since the initial capitalization of the Company's international reinsurance
operation (NAC Re International), with $75 million in 1993 and subsequent
contributions in 1994 and 1995, the stockholders' equity of NAC Re International
has grown to $138.5 million as of December 31, 1996. This capital, a component
of the invested assets described above, is being invested in accordance with the
Company's overall investment strategy. At December 31, 1996, NAC Re
International's investment portfolio, which was primarily invested in U.K.
Government securities, had an average duration of 4.2 years, a pretax investment
yield of 6.4% and an after-tax investment yield of 4.3%.
Income Taxes
The Company's effective tax rate increased to 20.8% in 1996 compared to 20.3% in
1995 and 15.8% in 1994. Excluding investment gains, the Company's 1996 effective
tax rate was 16.8% compared to 14.2% in 1995. This increase was principally due
to improved underwriting results and a slightly higher effective tax rate on
investment income. The Company's effective tax rate increased in 1995 over 1994
principally due to of the larger contribution of investment gains, taxed at a
marginal rate of 35%.
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. These dividends are subject to statutory restrictions
as described in Note 10 of the Notes to Consolidated Financial Statements.
In late 1995, the Company issued $100 million of 7.15% Notes due November 15,
2005, and raised approximately $49 million on the issuance of 1,530,000 shares
of Common Stock. In addition, the Company raised $200 million in 1992 through
the issuance of $100 million of 5.25% Convertible Subordinated Debentures due
December 2002 and $100 million of 8% Notes due June 1999. As a result of the
transactions and borrowings described below, pretax interest expense was $22.3
million in 1996, $15.6 million in 1995 and $14.5 million in 1994.
NAC Re maintains a revolving credit facility, under which it can borrow up to
$35 million. Outstanding borrowings as of December 31, 1996 and 1995 were $12.9
million and $17.8 million, respectively, and were principally used to finance
the Company's periodic repurchase of its Common Stock. In April 1996, the
Company modified its credit facility. The requirement for payment of outstanding
balances beginning in June 1996 was replaced with a scheduled reduction of the
credit facility beginning in July 1998 and ending July 2001. 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.
During 1996, the Company repurchased approximately 943,000 shares of NAC Re
Common Stock under its stock repurchase program. As of December 31, 1996,
approximately 150,000 shares remain authorized for repurchase and the Company
anticipates that the repurchase authorization will be expanded in the first
quarter of 1997.
27
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company's regular quarterly dividend was increased in June 1996 to $.06 per
share from $.05 per share. It is anticipated that the cash dividend level will
leave sufficient retained earnings to meet the Company's future financial needs.
Consolidated stockholders' equity totaled $553.3 million or $30.06 per share at
December 31, 1996, compared to $511.8 million or $26.65 per share, at December
31, 1995.
Statutory surplus of the reinsurance subsidiary was approximately $664 million
and $615 million at the end of 1996 and 1995, respectively. NAC ranks among the
largest domestic reinsurers measured on this basis. The Company believes its
surplus level enhances its ability to attract new business and retain its
existing client base.
The Company's insurance operations create liquidity in that premiums are
received substantially in advance of the time claims are paid. Over the most
recent three years, cash flow provided by operating activities totaled over $478
million, including 1996 cash flow of $166 million. The cash flow for 1996
declined from 1995 primarily due to an increase in paid claims coupled with the
timing of settlement of certain reinsurance balances. The Company expects its
1997 cash flow from operations to benefit from a nonrecurring receipt of
approximately $170 million related to the termination of certain retrocessional
agreements, described above.
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 adequacy of property and casualty
insurers and reinsurers with respect to the risks assumed by them and to
determine whether there is a perceived need for possible corrective action. The
nature of any corrective action depends upon the extent of the calculated
risk-based capital deficiency and ranges from requiring the company to submit a
comprehensive plan to placing the insurer under regulatory control. While the
model risk-based capital act 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.
28
<PAGE>
- --------------------------------------------------------------------------------
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 is to improve the solvency of reinsurers and create strong incentives
for insurers to do business with well capitalized, prompt paying reinsurers
operating under U.S. jurisdiction. These initiatives, and the overall focus on
solvency, may accelerate the restructuring of the reinsurance industry. While we
cannot quantify the impact of these regulatory efforts on the Company's
operations, we believe the Company is adequately positioned to compete in an
environment of more stringent regulation.
Other disclosure standards require regulatory approval of changes in control of
an insurer and of transactions between affiliates and subsidiaries. The Company
is also subject to periodic financial and market conduct examinations conducted
by various state Insurance Departments. Additionally, certain state regulators
require that prior to the acquisition of 10% of the outstanding shares of Common
Stock of the Company, stockholders may be required to file certain notices and
reports with regulatory agencies.
State insurance legislators and regulators and the NAIC are expected to continue
to fine-tune existing insurance laws and regulations, with a continued emphasis
on insurance company solvency. In 1996, the NAIC adopted new model laws entitled
"Investments of Insurers Model Act (Defined Limits)" and "Derivative Instruments
Model Regulation." Although no state has adopted these model laws, the Company's
domestic subsidiaries may be subject to additional investment regulation in the
future. Any new investment regulation is expected to have minimal, if any,
effect on the Company as its investment portfolios are currently subject to the
extensive statutory requirements of New York and California.
The federal Superfund program's taxing authority expired at the end of 1995.
While it is expected to be reenacted, it is not possible to predict when or in
what form given the current difficult federal environment and the varied
proposals. See Note 3 of the Notes to the Consolidated Financial Statements.
Congress enacted the Private Securities Litigation Reform Act of 1995. While one
of the objects of the Act may have been to reduce litigation costs, it is
unlikely to have that effect in the near term; the exact meaning of the various
provisions is likely to be litigated for some time to come. Product liability
and tort reform continue to appear on the Congress' agenda. It is not possible
to predict whether there will be any change in product liability or tort reform
or what the content or scope of any such change might be, and, accordingly, it
is not possible to assess the impact on the Company's operations. To the extent
that reform, if any, reduces litigation costs, it would be a favorable
development for the Company.
The Consolidated Financial Statements and related notes that follow should be
read in concert with this discussion and are integral to it.
29
<PAGE>
- --------------------------------------------------------------------------------
ELEVEN YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
============================================================================================================================
In Thousands, except per share amounts 1996 1995 1994 1993 1992(1) 1991
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data
Gross premiums written $714,080 $677,938 $575,037 $431,582 $366,292 $291,775
Net premiums written 574,004 521,489 438,201 336,941 268,023 233,044
Premiums earned 526,342 491,785 395,731 306,379 250,533 229,358
Net investment income 104,330 89,308 80,504 76,632 65,590 58,743
Net investment gains (losses) 19,569 25,391 2,155 19,095 9,081 5,533
Total revenues 650,241 606,484 478,390 402,106 325,204 293,634
Operating costs and expenses 561,205 527,663 436,100 352,609 321,598 251,916
Operating income 70,520 62,824 35,612 42,351 10,386 34,816
Net income 70,520 62,824 35,612 42,351 22,443 34,816
Return on stockholders' equity (3) (5) 13.8% 19.7% 9.5% 13.7% 9.3% 17.2%
- ----------------------------------------------------------------------------------------------------------------------------
Per Share Data (4)
Primary:
Average shares outstanding 19,095 18,094 17,895 18,420 18,313 15,813
Operating income $3.69 $3.47 $1.99 $2.30 $.57 $2.20
Net income 3.69 3.47 1.99 2.30 1.23 2.20
Fully diluted (assuming conversion of dilutive
convertible securities):
Average shares outstanding 21,117 20,153 20,053 20,445 18,536 18,393
Net income $3.51 $3.29 $1.95 $2.24 $1.21 $2.04
Cash dividends declared per share .23 .19 .16 .16 .16 .14
Stock prices:
High 40.63 39.00 34.00 44.75 42.00 31.50
Low 28.50 28.25 24.00 28.00 21.75 19.33
Close 33.88 36.00 33.50 29.75 40.50 31.50
- ----------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Total assets (5) (6) $2,745,631 $2,462,131 $1,916,768 $1,778,868 $1,596,209 $1,106,573
Cash and invested assets (5) 1,983,902 1,863,526 1,414,527 1,412,624 1,258,016 892,581
Claims and claims expense reserves, gross (6) 1,513,345 1,292,415 1,086,170 909,061 808,489 681,110
Net of reinsurance recoverable 1,107,217 953,669 808,433 697,221 626,090 528,521
Long-term debt 299,934 299,927 200,000 200,000 200,000 51,750
Unrealized appreciation (depreciation)
of investments, net of tax: (5)
Fixed maturities 14,526 27,102 (44,204) 30,865 2,402 2,374
Equity securities 17,174 8,085 (1,826) 6,521 3,786 3,452
Total reported 31,700 35,187 (46,030) 37,386 6,188 5,826
Stockholders' equity (5) 553,269 511,756 319,085 375,540 309,221 241,387
Stockholders' equity per share (4) (5) 30.06 26.65 18.23 21.13 17.35 15.70
- ----------------------------------------------------------------------------------------------------------------------------
Domestic Statutory Data
Statutory composite ratio 101.1% 103.1% 105.7% 110.9% 126.9% 108.2%
Statutory surplus $663,867 $615,433 $407,024 $406,163 $384,032 $230,041
============================================================================================================================
<CAPTION>
============================================================================================================================
In Thousands, except per share amounts 1990 1989 1988(2) 1987 1986 CAGR*
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data
Gross premiums written $261,099 $234,960 $206,761 $183,818 $131,717 18.4%
Net premiums written 217,106 192,323 171,430 154,510 122,689 16.7
Premiums earned 215,085 190,657 161,978 137,376 81,723 20.5
Net investment income 51,930 45,475 35,640 25,341 15,084 21.3
Net investment gains (losses) (1,121) 3,236 142 878 4,899 14.9
Total revenues 265,894 239,368 197,760 163,595 101,706 20.4
Operating costs and expenses 236,464 209,883 177,830 151,945 95,563 19.4
Operating income 24,961 25,626 17,732 11,113 6,143 27.6
Net income 24,961 25,626 20,827 11,113 6,143 27.6
Return on stockholders' equity (3) (5) 13.4% 15.8% 14.0% 8.1% 7.5% -
- ----------------------------------------------------------------------------------------------------------------------------
Per Share Data (4)
Primary:
Average shares outstanding 15,898 15,865 15,796 16,304 11,836 -
Operating income $1.57 $1.62 $1.12 $.68 $.52 21.6
Net income 1.57 1.62 1.31 .68 .52 21.6
Fully diluted (assuming conversion of dilutive
convertible securities):
Average shares outstanding 18,358 18,414 18,257 16,304 11,836 -
Net income $1.50 $1.53 $1.29 $.68 $.52 21.0
Cash dividends declared per share .13 .10 - - - -
Stock prices:
High 25.83 27.33 14.11 14.33 18.67 -
Low 17.00 13.78 8.22 7.78 11.22 -
Close 22.00 23.83 14.11 7.89 11.67 -
- ----------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Total assets (5) (6) $988,809 $869,810 $705,832 $591,474 $443,496 20.0
Cash and invested assets (5) 781,591 689,481 544,304 423,286 303,990 20.6
Claims and claims expense reserves, gross (6) 596,236 520,723 389,279 303,623 186,978 23.3
Net of reinsurance recoverable 468,637 387,767 291,531 201,051 118,422 25.0
Long-term debt 51,750 51,750 51,750 51,750 51,750 19.2
Unrealized appreciation (depreciation)
of investments, net of tax: (5)
Fixed maturities (2,588) - - - - -
Equity securities (2,958) (323) (158) - - -
Total reported (5,546) (323) (158) - - -
Stockholders' equity (5) 202,525 186,104 162,501 148,278 136,777 15.0
Stockholders' equity per share (4) (5) 12.98 11.92 10.38 9.10 8.41 13.6
- ----------------------------------------------------------------------------------------------------------------------------
Domestic Statutory Data
Statutory composite ratio 108.2% 108.5% 106.8% 107.8% 109.9% -
Statutory surplus $197,391 $189,018 $174,217 $163,233 $152,466 15.8
============================================================================================================================
</TABLE>
(1) In 1992, the Company adopted SFAS No. 109, "Accounting for Income Taxes."
The cumulative effect from prior years increased net income by $12.1
million or $.66 per share.
(2) In 1988, the Company adopted the practice of discounting workers'
compensation tabular case reserves. The cumulative effect from prior years
increased net income by $1.9 million or $.12 per share. In addition, 1988
income tax expense included a charge for the utilization of an operating
loss carry forward. The tax benefit of $1.2 million, or $.07 per share,
resulting from such utilization was recorded as an extraordinary item.
(3) Based on net income divided by stockholders' equity as reported at the
beginning of each year.
(4) Stock price and per share figures have been restated to reflect the
three-for-two stock splits effective in 1989 and 1991.
(5) The Company adopted SFAS No. 115 at December 31, 1993. As such, all of the
Company's fixed maturities and equity securities were classified as
"available for sale" and recorded at their fair values. The effect of
adopting SFAS No. 115 was to record in stockholders' equity unrealized
appreciation, net of deferred income taxes of $28.4 million, related to
fixed maturities that were previously recorded at amortized cost.
Retroactive application to prior periods is prohibited.
(6) Reclassified to reflect the adoption of SFAS No. 113 in 1993, which
requires reinsurance recoverables on claims and claims expenses (including
IBNR) and unearned premiums to be reported as assets.
* Compound annual growth rate.
30 & 31
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
In Thousands
================================================================================
December 31,
--------------------------
1996 1995
================================================================================
Assets
Investments:
Available for sale:
Fixed maturities (amortized cost:
1996, $1,681,190; 1995, $1,551,848) $ 1,703,537 $1,593,543
Equity securities (cost: 1996, $153,197;
1995, $114,818) 179,619 127,257
Short-term investments 81,893 132,406
- --------------------------------------------------------------------------------
Total investments 1,965,049 1,853,206
- --------------------------------------------------------------------------------
Cash 18,853 10,320
Accrued investment income 28,472 26,955
Premiums receivable 200,036 154,974
Reinsurance recoverable balances, net 336,324 257,136
Reinsurance recoverable on unearned premiums 20,320 28,111
Deferred policy acquisition costs 85,211 70,466
Excess of cost over net assets acquired 3,644 4,011
Deferred tax asset, net 30,390 27,688
Other assets 57,332 29,264
- --------------------------------------------------------------------------------
Total assets $ 2,745,631 $2,462,131
- --------------------------------------------------------------------------------
Liabilities
Claims and claims expenses $ 1,513,345 $1,292,415
Unearned premiums 271,898 230,738
8% Notes due 1999 100,000 100,000
7.15% Notes due 2005 99,934 99,927
5.25% Convertible Subordinated Debentures due 2002 100,000 100,000
Investment accounts payable 25,326 50,580
Revolving credit agreement 12,924 17,762
Other liabilities 68,935 58,953
- --------------------------------------------------------------------------------
Total liabilities 2,192,362 1,950,375
- --------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock, $1.00 par value:
1,000 shares authorized, none issued
(includes 90 shares of Series A Junior
Participating Preferred Stock) -- --
Common stock, $.10 par value:
25,000 shares authorized
(1996, 21,464; 1995, 21,341 shares issued) 2,146 2,134
Additional paid-in capital 248,662 246,356
Unrealized appreciation of investments, net of tax 31,700 35,187
Currency translation adjustments, net of tax 8,377 1,017
Retained earnings 335,868 269,660
Treasury stock, at cost (1996, 3,061;
1995, 2,137 shares) (73,484) (42,598)
- --------------------------------------------------------------------------------
Total stockholders' equity 553,269 511,576
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,745,631 $2,462,131
================================================================================
See Notes to Consolidated Financial Statements.
32
<PAGE>
================================================================================
CONSOLIDATED STATEMENT OF INCOME
In Thousands,
except per share amounts
================================================================================
Year ended December 31,
----------------------------------
1996 1995 1994
================================================================================
Premiums and Other Revenues
Net premiums written $ 574,004 $ 521,489 $ 438,201
Increase in unearned premiums (47,662) (29,704) (42,470)
- --------------------------------------------------------------------------------
Premiums earned 526,342 491,785 395,731
- --------------------------------------------------------------------------------
Net investment income 104,330 89,308 80,504
Net investment gains 19,569 25,391 2,155
- --------------------------------------------------------------------------------
Total revenues 650,241 606,484 478,390
- --------------------------------------------------------------------------------
Operating Costs and Expenses
Claims and claims expenses 338,953 326,148 265,753
Commissions and brokerage 143,324 139,063 117,592
Acquisition and operating expenses 56,606 46,804 38,301
Interest expense 22,322 15,648 14,454
- --------------------------------------------------------------------------------
Total operating costs and expenses 561,205 527,663 436,100
- --------------------------------------------------------------------------------
Income
Operating income before income taxes 89,036 78,821 42,290
Federal and foreign income taxes:
Current 23,310 18,779 10,885
Deferred (4,794) (2,782) (4,207)
- --------------------------------------------------------------------------------
Income tax expense (benefit) 18,516 15,997 6,678
- --------------------------------------------------------------------------------
Operating income/net income $ 70,520 $ 62,824 $ 35,612
- --------------------------------------------------------------------------------
Per Share Data
Primary:
Average shares outstanding 19,095 18,094 17,895
Operating income/net income $ 3.69 $ 3.47 $ 1.99
- --------------------------------------------------------------------------------
Fully diluted (assuming conversion
of dilutive convertible securities):
Average shares outstanding 21,117 20,153 20,053
Operating income/net income $ 3.51 $ 3.29 $ 1.95
- --------------------------------------------------------------------------------
Cash dividends declared per share $ .23 $ .19 $ .16
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
33
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
In Thousands
======================================================================================
Year ended December 31,
1996 1995 1994
======================================================================================
<S> <C> <C> <C>
Common Stock
Balance at beginning of year $ 2,134 $ 1,964 $ 1,935
Issuance of shares 12 170 29
- --------------------------------------------------------------------------------------
Balance at end of year 2,146 2,134 1,964
- --------------------------------------------------------------------------------------
Additional Paid-in Capital
Balance at beginning of year 246,356 194,231 188,289
Issuance of shares 2,306 52,125 5,942
- --------------------------------------------------------------------------------------
Balance at end of year 248,662 246,356 194,231
- --------------------------------------------------------------------------------------
Unrealized Appreciation (Depreciation) of
Investments, Net of Tax
Balance at beginning of year 35,187 (46,030) 37,386
Unrealized (depreciation) appreciation (3,487) 81,217 (83,416)
- --------------------------------------------------------------------------------------
Balance at end of year 31,700 35,187 (46,030)
- --------------------------------------------------------------------------------------
Currency Translation Adjustments, Net of Tax
Balance at beginning of year 1,017 1,059 (2,141)
Translation adjustments 7,360 (42) 3,200
- --------------------------------------------------------------------------------------
Balance at end of year 8,377 1,017 1,059
- --------------------------------------------------------------------------------------
Retained Earnings
Balance at beginning of year 269,660 210,255 177,459
Net income 70,520 62,824 35,612
Dividends (4,312) (3,419) (2,816)
- --------------------------------------------------------------------------------------
Balance at end of year 335,868 269,660 210,255
- --------------------------------------------------------------------------------------
Treasury Stock
Balance at beginning of year (42,598) (42,394) (27,388)
Purchase of treasury shares, net of reissuance (30,886) (204) (15,006)
- --------------------------------------------------------------------------------------
Balance at end of year (73,484) (42,598) (42,394)
- --------------------------------------------------------------------------------------
Total Stockholders' Equity
Balance at beginning of year 511,756 319,085 375,540
Issuance of shares 2,318 52,295 5,971
Unrealized (depreciation) appreciation (3,487) 81,217 (83,416)
Translation adjustments 7,360 (42) 3,200
Net income 70,520 62,824 35,612
Dividends (4,312) (3,419) (2,816)
Purchase of treasury shares, net of reissuance (30,886) (204) (15,006)
- --------------------------------------------------------------------------------------
Balance at end of year $ 553,269 $ 511,756 $ 319,085
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
34
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
In Thousands
=========================================================================================
Year ended December 31,
--------------------------------------
1996 1995 1994
=========================================================================================
<S> <C> <C> <C>
Operating Activities
Net income $ 70,520 $ 62,824 $ 35,612
Adjustments to reconcile net income to net cash
provided by operating activities:
Reserve for claims and claims expenses, net 147,927 145,404 111,072
Unearned premiums, net 47,703 29,584 42,533
Premiums receivable (43,512) (34,415) (44,973)
Accrued investment income (1,266) (6,916) (2,763)
Reinsurance balances, net (18,063) 6,976 (2,963)
Deferred policy acquisition costs (14,518) (10,523) (15,492)
Net investment gains (19,577) (25,386) (2,120)
Deferred tax asset, net (4,980) (2,781) (4,155)
Other liabilities 6,447 950 13,456
Other items, net (4,564) 8,194 7,822
- -----------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 166,117 173,911 138,029
- -----------------------------------------------------------------------------------------
Investing Activities
Sales of fixed maturity investments 1,336,125 1,479,415 690,286
Maturities of fixed maturity investments 31,094 31,099 37,300
Purchases of fixed maturity investments (1,508,258) (1,849,492) (846,379)
Net sales of short-term investments 53,646 3,072 13,168
Sales of equity securities 79,569 101,918 41,706
Purchases of equity securities (104,917) (84,910) (70,406)
Purchases of furniture and equipment (6,775) (2,365) (2,994)
- -----------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (119,516) (321,263) (137,319)
- -----------------------------------------------------------------------------------------
Financing Activities
Issuance of shares 1,951 52,056 5,278
Net proceeds from issuance of 7.15% Notes -- 99,214 --
Purchase of treasury shares, net of reissuance (30,886) (204) (15,006)
Cash dividends paid to stockholders (4,163) (3,260) (2,827)
Borrowings under revolving credit agreement 8,162 -- 13,857
Repayments under revolving credit agreement (13,000) -- --
- -----------------------------------------------------------------------------------------
Net Cash (Used) Provided By Financing Activities (37,936) 147,806 1,302
- -----------------------------------------------------------------------------------------
Effects of exchange rate changes on cash (132) 242 (18)
- -----------------------------------------------------------------------------------------
Increase in cash 8,533 696 1,994
Cash - beginning of year 10,320 9,624 7,630
- -----------------------------------------------------------------------------------------
Cash - end of year $ 18,853 $ 10,320 $ 9,624
=========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
35
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles (GAAP) and include the accounts of NAC
Re Corp. (NAC Re) and its insurance and reinsurance subsidiaries: NAC
Reinsurance Corporation (NAC), Greenwich Insurance Company, Indian Harbor
Insurance Company and NAC Re International Holdings Limited and its
subsidiaries. NAC Re and its subsidiaries are collectively referred to herein as
the Company. All intercompany transactions and balances have been eliminated in
consolidation.
The preparation of the financial statements in conformity with GAAP requires the
use of estimates and assumptions that affect amounts reported in the financial
statements and the accompanying notes. Actual results could differ from such
estimates.
Premium Revenues and Related Expenses
Property/casualty premiums are recognized as income over the terms of the
related reinsurance contracts and policies. Unearned premium reserves represent
the portion of premiums written that relate to the unexpired terms of contracts
and policies in force. Such reserves are computed by pro rata methods based on
statistical data or reports received from ceding companies. Certain of the
Company's assumed and retrocession agreements include provisions that adjust
premium payments based upon the experience under the contracts. Premiums are
recorded based upon the expected ultimate experience under the agreements.
Acquisition costs, consisting principally of commissions and brokerage expenses
incurred at the time a contract or policy is issued, are deferred and amortized
over the period in which the related premiums are earned. Deferred policy
acquisition costs are limited to their estimated realizable value based on the
related unearned premiums and take into account anticipated claims and claims
expenses, based on historical and current experience, and anticipated investment
income.
Investments
Fixed maturities, which include bonds, notes, and redeemable preferred stocks
and equity securities, including common and non-redeemable preferred stocks,
have been categorized as "available for sale" and recorded at their fair value.
The fair value of fixed maturities and equity securities is estimated using
quoted market prices or dealer quotes. Short-term investments, which have an
original maturity of one year or less, are carried at cost, which approximates
fair value.
The Company categorizes all of its fixed maturities and equity securities as
available for sale in order to provide the Company the flexibility to respond to
various factors, including changes in market conditions and tax planning
considerations. Unrealized appreciation or depreciation of the securities
available for sale, net of applicable deferred income taxes, is excluded from
income, and recorded as a separate component of stockholders' equity.
36
<PAGE>
- --------------------------------------------------------------------------------
Realized investment gains or losses on the sale or maturity of investments are
determined by the specific identification method. Net investment income,
consisting of dividends and interest, net of investment expenses, is recognized
when earned. The amortization of premium and accretion of discount for fixed
maturities is computed utilizing the interest method. The effective yield
utilized in the interest method is adjusted when sufficient information exists
to estimate the probability and timing of prepayments.
Claims and Claims Expenses
The reserves for claims and claims expenses are based on reports and individual
case estimates received from ceding companies. An amount is included for claims
and claims expenses incurred but not reported on the basis of past experience of
the Company and the reinsurance industry. These estimates are reviewed regularly
and, as claims develop and new information becomes known, the reserves are
adjusted as necessary. Such adjustments, if any, are reflected in results of
operations in the period in which they become known and are accounted for as
changes in estimates. Reserves are generally recorded without consideration of
potential salvage or subrogation recoveries which are estimated to be
immaterial; such recoveries, when realized, are reflected as a reduction of
claims incurred. Certain workers' compensation case reserves are considered
fixed and determinable and are subject to tabular reserving. Such tabular
reserves are discounted using an interest rate of 7%.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under
the liability method, deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A
valuation allowance is established for any portion of a deferred tax asset that
management believes will not be realized.
Stock Plans
The Company accounts for stock compensation plans in accordance with Accounting
Principals Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation expense for stock option grants and stock
appreciation rights (SARs) is recognized to the extent that the fair value of
the stock exceeds the exercise price of the option at the measurement date.
Per Share Data
Primary earnings per share data are based on the weighted average common shares
and common share equivalents outstanding during the period. Fully diluted
earnings per share data assume conversion of dilutive convertible securities and
the exercise of all dilutive stock options.
Furniture, Equipment and Leasehold Improvements
The costs of furniture and equipment are charged against income over their
estimated service lives. Leasehold improvements are amortized over the remaining
terms of the office leases. Depreciation and amortization are computed using the
straight-line method. Maintenance and repairs are charged to expense as
incurred. Depreciation and amortization expense was approximately $4.4 million,
$2.2 million and $1.8 million for the years ended December 31, 1996, 1995 and
1994, respectively.
37
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign Exchange
The assets and liabilities of foreign operations are translated at the rate of
exchange in effect at the balance sheet date. Revenues and expenses of foreign
operations are translated at the average exchange rates during the year. The
effect of the translation adjustments for foreign operations is recorded as a
cumulative translation adjustment in a separate component of stockholders'
equity, net of applicable deferred income taxes. Foreign currency transaction
gains and losses are included in net income and are not material.
Cost in Excess of Net Assets Acquired
The excess of cost over net assets acquired is amortized on a straight-line
basis over a period of twenty years. Amortization charged to operating expenses
was approximately $368,000 for each of the years ended December 31, 1996, 1995
and 1994.
2. Investment Information
Investment Income
The components of net investment income were as follows:
In Thousands
================================================================================
Year ended December 31,
----------------------------------
1996 1995 1994
================================================================================
Fixed maturities $ 97,048 $81,485 $74,861
Equity securities 5,228 4,371 5,019
Cash and short-term investments 7,271 8,341 5,119
- --------------------------------------------------------------------------------
Gross investment income 109,547 94,197 84,999
Interest expense 472 685 900
Investment expenses 4,745 4,204 3,595
- --------------------------------------------------------------------------------
Net investment income $104,330 $89,308 $80,504
================================================================================
Investment Gains (Losses)
Realized and unrealized investment gains (losses) were as follows:
In Thousands
================================================================================
Year ended December 31,
-------------------------------
Net realized investment gains (losses): 1996 1995 1994
================================================================================
Fixed maturities $ 7,243 $ 17,868 $ (2,535)
Equity securities 12,326 7,523 4,690
- --------------------------------------------------------------------------------
Subtotal 19,569 25,391 2,155
Tax expense 6,861 8,422 1,353
- --------------------------------------------------------------------------------
Net realized investment gains, net of tax $ 12,708 $ 16,969 $ 802
- --------------------------------------------------------------------------------
Change in unrealized (depreciation)
appreciation of investments:
Fixed maturities $(19,348) $ 85,899 $ (91,504)
Equity securities 13,983 14,265 (11,858)
- --------------------------------------------------------------------------------
Subtotal (5,365) 100,164 (103,362)
(Decrease) increase in deferred income
tax liability (1,878) 18,947 (19,946)
- --------------------------------------------------------------------------------
Net change reflected in stockholders' equity $ (3,487) $ 81,217 $ (83,416)
================================================================================
38
<PAGE>
- --------------------------------------------------------------------------------
The following tables reconcile amortized cost to the estimated fair value (which
equals carrying value) of fixed maturity securities and equity securities.
In Thousands
================================================================================
December 31, 1996
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
================================================================================
Available for Sale:
U.S. Treasury $ 71,354 $ 431 $ (1,177) $ 70,608
Tax-exempt 828,501 21,853 (1,964) 848,390
Foreign Government 160,490 2,452 (954) 161,988
Corporate 377,294 4,456 (4,924) 376,826
Mortgage-backed 191,467 734 (2,453) 189,748
Subordinated convertibles 52,084 5,030 (1,137) 55,977
- --------------------------------------------------------------------------------
Total fixed maturities 1,681,190 34,956 (12,609) 1,703,537
Equity securities 153,197 29,918 (3,496) 179,619
- --------------------------------------------------------------------------------
Total $1,834,387 $64,874 $(16,105) $1,883,156
================================================================================
In Thousands
================================================================================
December 31, 1995
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
================================================================================
Available for Sale:
U.S. Treasury $ 116,958 $ 3,040 $ (568) $ 119,430
Tax-exempt 714,326 28,947 (466) 742,807
Foreign Government 144,782 2,091 (656) 146,217
Corporate 341,290 9,352 (2,301) 348,341
Mortgage-backed 173,674 2,023 (885) 174,812
Subordinated convertibles 60,818 4,007 (2,889) 61,936
- --------------------------------------------------------------------------------
Total fixed maturities 1,551,848 49,460 (7,765) 1,593,543
Equity securities 114,818 19,123 (6,684) 127,257
- --------------------------------------------------------------------------------
Total $1,666,666 $68,583 $(14,449) $1,720,800
================================================================================
39
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contractual maturities of fixed maturity securities are shown below. Expected
maturities, which are best estimates, will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties
In Thousands
================================================================================
December 31, 1996
-----------------------------
Amortized Fair
Cost Value
================================================================================
Available for Sale:
Due in one year or less $ 28,074 $ 27,651
Due after one year through five years 328,554 331,626
Due after five years through ten years 789,284 803,914
Due after ten years 343,811 350,598
- --------------------------------------------------------------------------------
Subtotal 1,489,723 1,513,789
Mortage-backed securities 191,467 189,748
- --------------------------------------------------------------------------------
Total $1,681,190 $1,703,537
================================================================================
The weighted average contractual and expected maturities, based on fair value,
of the fixed maturity investments excluding convertible securities, as of
December 31, 1996 were 9.9 years and 6.6 years, respectively.
Proceeds from the sales of fixed maturity securities during 1996, 1995 and 1994
were $1,336.1 million, $1,479.4 million and $690.3 million, respectively. Gross
gains of $16.3 million, $25.3 million and $7.7 million were realized on those
sales during 1996, 1995 and 1994, respectively. Gross losses of $9.1 million,
$7.4 million and $10.3 million were realized during 1996, 1995 and 1994,
respectively.
Approximately 98% of all fixed maturity investments held at December 31, 1996
were considered investment grade by Standard and Poor's or Moody's Investor
Services, Inc.
Securities on Deposit
Securities with a face amount of $58.9 million at December 31, 1996, were on
deposit with various state or governmental insurance departments in order to
comply with insurance laws.
Assets Held in Escrow
Included in NAC Re's cash and invested assets at December 31, 1996 is
approximately $20.3 million of assets held in a "holding company" escrow account
arising from a tax allocation agreement between NAC Re and its domestic
subsidiaries. The agreement provides that each subsidiary must remit to NAC Re
its tax liability based upon its separate return. The excess of the taxes paid
by the subsidiaries to NAC Re over the consolidated group's tax liability are
restricted for current operating use, but may become available for unrestricted
use three years following the filing of the consolidated tax return that
generated the asset. Approximately $4.3 million of the escrow balance will
become available for use in 1997.
40
<PAGE>
- --------------------------------------------------------------------------------
3. Claims and Claims Expenses
The following table represents an analysis of paid and unpaid claims and claims
expenses and a reconciliation of beginning and ending reserve balances for the
years indicated.
<TABLE>
<CAPTION>
In Thousands
=============================================================================================================
Year ended December 31,
1996 1995 1994
=============================================================================================================
<S> <C> <C> <C>
Reserves for claims and claims expenses, at beginning of year $1,292,415 $1,086,170 $909,061
Reinsurance recoverables, at beginning of year 338,746 277,737 211,840
- -------------------------------------------------------------------------------------------------------------
Reserves for claims and claims expenses, net of reinsurance
recoverables, at beginning of year 953,669 808,433 697,221
- -------------------------------------------------------------------------------------------------------------
Provision for claims and claims expenses, net of reinsurance,
occurring in the current year 372,294 345,783 309,294
Decrease in estimated claims and claims expenses,
net of reinsurance, occurring in prior years (33,341) (19,635) (43,541)
- -------------------------------------------------------------------------------------------------------------
Total incurred claims and claims expenses, net of reinsurance 338,953 326,148 265,753
- -------------------------------------------------------------------------------------------------------------
Less payments for claims and claims expenses, net of reinsurance,
occurring during:
The current year 44,025 40,123 35,965
Prior years 146,399 140,263 118,686
- -------------------------------------------------------------------------------------------------------------
Total 190,424 180,386 154,651
- -------------------------------------------------------------------------------------------------------------
Effects of exchange rate changes on reserves 5,019 (526) 110
- -------------------------------------------------------------------------------------------------------------
Reserves for claims and claims expenses, net of reinsurance
recoverables, at end of year 1,107,217 953,669 808,433
Reinsurance recoverables, at end of year 406,128 338,746 277,737
- -------------------------------------------------------------------------------------------------------------
Reserves for claims and claims expenses, at end of year $1,513,345 $1,292,415 $1,086,170
=============================================================================================================
</TABLE>
Estimates of claims and claims expenses are based in part on a prediction of
future events, estimates of future trends in claim severity and frequency and
other variable factors. The Company's ability to predict future trends based
upon its own historical claim experience is inherently difficult because of its
substantial growth in premiums since 1985. Therefore, the Company has
supplemented its historical claim experience to a certain extent with claim
experience derived from external sources, such as reinsurance industry data, for
purposes of evaluating future trends and providing an estimate of ultimate claim
costs. As the Company's book of business continues to mature, its own historical
claim experience achieves greater credibility and enhances its ability to
evaluate future trends. Accordingly, the Company believes its reserving process
improves as additional claims experience emerges and could be expected to result
in more refined estimates of claims and claims expenses over time.
41
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Claims and claims expenses reflect favorable claim development from prior years.
The net favorable claim development for business written since 1986 continued to
emerge during 1996, 1995 and 1994. This favorable development is impacted by
several factors, some of which are interdependent. A principal factor is the
strength of the actuarial assumptions underlying the business written,
particularly with respect to the consideration given 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 comparisons of actuarially computed expected to actual
claims and claims expense development, inflation and other considerations. This
favorable development has offset certain unfavorable development for business
written prior to 1986, principally related to asbestos and environmental claims,
and in 1996 and 1995, includes the Company's evaluation of the lengthening of
loss emergence patterns for certain lines of business included in the most
recent Historical Loss Development Study issued by the Reinsurance Association
of America (RAA).
The Company's incurred claims and claims expenses include a provision of $1.2
million, $1.4 million and $4 million in 1996, 1995 and 1994, respectively, for
estimates of actual and potential non-recoveries from retrocessionnaires.
Included in claims and claims expense reserves at December 31, 1996, 1995 and
1994 is a reserve for potential non-recoveries from retrocessionnaires of $12.7
million, $10.7 million and $10.5 million, respectively. Such charges for
non-recoveries relate principally to retrocessional contracts for business
written prior to 1986.
See Note 5 - Retrocession Agreements.
Except for certain workers' compensation case reserves, the Company does not
discount its claims and claims expense reserves. The Company utilizes tabular
reserving for workers' compensation case reserves that are considered fixed and
determinable and discounts such reserves using an interest rate of 7% for
financial statements prepared in accordance with GAAP and a 5% interest rate for
statutory accounting purposes. Tabular reserving methology results in applying a
uniform and consistent criteria for establishing expected future indemnity and
medical payments (including an explicit factor for inflation) and the use of
mortality tables to determine expected payment periods.
Tabular reserves, net of reinsurance, reflected in the GAAP financial statements
for the years ending December 31, 1996, 1995 and 1994 were $35.8 million, $29
million and $27.7 million, respectively. The related discounted case reserves,
net of reinsurance, were $15 million as of December 31, 1996 and $10.6 million
as of December 31, 1995 and 1994.
Asbestos and Environmental Related Claims
The Company's reserving process includes a continuing evaluation of the
potential impact on claim liabilities from exposure to asbestos and
environmental claims, including related loss adjustment expenses. Liabilities
are established to cover both known and unasserted claims.
42
<PAGE>
- --------------------------------------------------------------------------------
A reconciliation of the beginning and ending reserves related to asbestos and
environmental exposure claims for the years indicated is as follows:
<TABLE>
<CAPTION>
In Thousands
=============================================================================================================
Year ended December 31,
------------------------------------
1996 1995 1994
=============================================================================================================
<S> <C> <C> <C>
Reserves for claims and claims expenses, net of reinsurance
recoverables, at beginning of year $22,029 $19,849 $18,379
Provisions for claims and claims expenses, net of reinsurance 10,683 6,989 4,810
Less payments for claims and claims expenses,
net of reinsurance 4,212 4,809 3,340
- -------------------------------------------------------------------------------------------------------------
Reserves for claims and claims expenses, net of reinsurance
recoverables, at end of year 28,500 22,029 19,849
Reinsurance recoverables, at end of year 32,584 35,135 34,141
- -------------------------------------------------------------------------------------------------------------
Reserves for claims and claims expenses, gross of reinsurance
recoverables, at year end $61,084 $57,164 $53,990
=============================================================================================================
</TABLE>
Incurred but not reported claims and claims expense reserves (IBNR), net of
reinsurance, included in the above table totaled $13.4 million in 1996, $10.3
million in 1995 and $9.4 million in 1994. Ceded liabilities reflect amounts
expected to be recoverable from retrocessionnaires, after reduction for
potential uncollectible amounts.
As of December 31, 1996 and 1995, the Company had approximately 300 open claim
files for potential asbestos exposures and 800 open claim files for potential
environmental exposures. Approximately 53% and 55% of the total open claim files
for 1996 and 1995, respectively, are due to precautionary claim notices.
Precautionary claim notices are submitted by the ceding company in order to
preserve their right to receive coverage under the reinsurance contract. Such
notices do not contain an incurred loss amount to the Company. The Company
actively evaluates potential exposure to asbestos and environmental claims and
records claims and claims expense reserves as appropriate.
The Company believes it has made a reasonable provision for its asbestos and
environmental exposures and is unaware of any specific issues which would
materially affect its claims and claims expense estimate. The estimation of
claims and claims expense liabilities for asbestos and environmental exposures
is subject to a much greater uncertainty than would normally be associated with
the establishment of liabilities for other exposures due to several factors,
including: i) uncertain legal interpretation and application of insurance and
reinsurance coverage and liability; ii) the lack of reliability of available
historical claim data as an indicator of future claim development; iii) an
uncertain political climate which may impact, among other areas, the nature and
amount of costs for remediating waste sites; and iv) the potential of insurers
and policyholders to reach agreements in order to avoid further significant
legal costs. Due to the potential significance of these uncertainties, the
Company believes that no meaningful range of claims and claims expense
liabilities beyond recorded reserves can be established. As these uncertainties
are resolved, additional reserve provisions, which could be material in amount,
may be necessary.
43
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Income Taxes
The provision for federal income taxes has been determined on the basis of a
consolidated tax return consisting of NAC Re and its subsidiaries.
The income tax provision in the consolidated statement of income gives effect to
permanent differences between financial and taxable income. Due to the
contribution of tax-exempt income and other factors as noted below, the
Company's effective income tax rate is less than the statutory rate on operating
income. An analysis of the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
In Thousands
=========================================================================================================
Year ended December 31,
-------------------------------------------------------------------
1996 1995 1994
=========================================================================================================
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
=========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Income taxes computed on pretax
operating income $ 31,163 35% $ 27,587 35% $ 14,801 35%
Increase (reduction) in taxes
resulting from:
Tax-exempt investment income (12,272) (14) (10,150) (13) (7,308) (17)
Dividend received deduction (895) (1) (822) (1) (713) (2)
Other, net 520 1 (618) (1) (102) --
- ---------------------------------------------------------------------------------------------------------
Tax expense on
operating income $ 18,516 21% $ 15,997 20% $ 6,678 16%
=========================================================================================================
</TABLE>
Significant components of the provision for income taxes attributable to
operations were as follows:
In Thousands
================================================================================
Year ended December 31,
---------------------------------------
1996 1995 1994
================================================================================
Current expense:
Federal $ 19,879 $ 17,809 $ 10,463
Foreign 3,431 970 422
- --------------------------------------------------------------------------------
Total current expense 23,310 18,779 10,885
- --------------------------------------------------------------------------------
Deferred expense (benefit):
Federal (4,845) (3,245) (3,761)
Foreign 51 463 (446)
- --------------------------------------------------------------------------------
Total deferred benefit (4,794) (2,782) (4,207)
- --------------------------------------------------------------------------------
Total tax expense $ 18,516 $ 15,997 $ 6,678
================================================================================
44
<PAGE>
- --------------------------------------------------------------------------------
The Company's current federal tax expense for the years 1996, 1995 and 1994 was
based on regular taxable income. Taxes paid in the years 1996, 1995 and 1994
were $17 million, $19 million and $10 million, respectively.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1996 and 1995 were as follows:
In Thousands
================================================================================
December 31,
-------------------------
1996 1995
================================================================================
Deferred tax asset:
Net claims reserve discount $62,629 $52,556
Net unearned premiums 17,524 13,307
Compensation liabilities 4,756 3,764
Other 2,129 2,951
- --------------------------------------------------------------------------------
Deferred tax asset 87,038 72,578
- --------------------------------------------------------------------------------
Deferred tax liability:
Deferred policy acquisition costs 29,766 23,855
Unrealized appreciation of investments 17,068 18,947
Currency translation adjustments 4,511 548
Foreign subsidiary income 3,615 116
Other 1,688 1,424
- --------------------------------------------------------------------------------
Deferred tax liability 56,648 44,890
- --------------------------------------------------------------------------------
Net deferred tax asset $30,390 $27,688
- --------------------------------------------------------------------------------
Stockholders' equity at December 31, 1996 and 1995 reflects tax benefits of $3.1
million and $3 million, respectively, related to compensation expense deductions
for stock options exercised.
As a result of the merger of its previously existing parent into NAC Re in
January 1987, $12 million of tax loss carryforwards are currently available for
use to offset future taxable income of NAC Re under the separate return
limitation year rules, with the following expiration dates: $1.8 million
expiring in 1998, $6.2 million expiring in 1999, $3.9 million expiring in 2000
and $.1 million expiring in 2001. A deferred tax asset was not recorded for
these loss carryforwards, as the Company does not expect to utilize these losses
in future years.
5. Retrocession Agreements
The Company utilizes retrocession agreements principally to increase aggregate
premium capacity and to reduce the risk of loss on reinsurance underwritten. In
addition, the Company maintains catastrophe reinsurance programs for the purpose
of limiting its exposure with respect to multiple claims arising from a single
occurrence or event. The Company's retrocession agreements provide for recovery
of a portion of claims and claims expenses from retrocessionnaires. Reinsurance
recoverables are recorded as assets, predicated on the retrocessionnaires'
ability to meet their obligations under the retrocession agreements. If the
retrocessionnaires are unable to satisfy their obligation under the agreements,
the Company would be liable for such defaulted amounts.
45
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's maximum retention on any one claim for non-catastrophe
property/casualty losses for 1997 and 1996 is $5 million, compared to $3.9
million for 1995. The Company's maximum retention for surety losses for 1997 and
1996 is $4 million per principal, compared to $3.9 million per principal for
1995. Further, the Company's retention level for property catastrophe claims in
1997 remains the same as 1996 and 1995 at $5 million per event. For 1997, the
Company expects to obtain $115 million of property catastrophe protection, of
which $25 million of protection, in excess of the first $55 million of
protection, is available only if industry-wide claims exceed certain minimum
levels.
The effect of retrocessional activity on premiums written and earned is set
forth below:
In Thousands
================================================================================
Premiums Written Premiums Earned
--------------------------------- -----------------------------------
Year ended December 31, Year ended December 31,
--------------------------------- -----------------------------------
1996 1995 1994 1996 1995 1994
================================================================================
Direct $ 72,810 $ 70,183 $ 46,005 $ 65,667 $ 58,475 $ 30,621
Assumed 641,270 607,755 529,032 608,542 583,764 487,961
Ceded (140,076) (156,449) (136,836) (147,867) (150,454) (122,851)
- --------------------------------------------------------------------------------
Net $ 574,004 $ 521,489 $ 438,201 $ 526,342 $ 491,785 $ 395,731
================================================================================
The Company's direct and ceded premiums written increased in 1994, 1995, and
1996 principally due to an agreement with a premier aviation underwriting pool
which also provides reinsurance protection for the common account of all the
direct writer participants.
The Company recorded ceded claims and claims expenses incurred of $123.2
million, $120.4 million and $105.6 million for the years ended December 31,
1996, 1995 and 1994, respectively.
The Company's balance sheet as of December 31, 1996 and 1995 reflects
reinsurance recoverables as assets, net of available offsets, as follows:
In Thousands
================================================================================
December 31,
------------------------
1996 1995
================================================================================
Reinsurance recoverable balances:
Paid claims $ 15,457 $ 19,051
Unpaid claims and claims expenses 406,128 338,746
Ceded balances payable (38,205) (56,792)
Funds held liability (47,056) (43,869)
- --------------------------------------------------------------------------------
Reinsurance recoverable balances, net $ 336,324 $ 257,136
================================================================================
Reinsurance recoverable on unearned premiums $ 20,320 $ 28,111
================================================================================
46
<PAGE>
- --------------------------------------------------------------------------------
The Company is the beneficiary of letters of credit, trust accounts and funds
withheld in the aggregate amount of $272 million at December 31, 1996,
collateralizing reinsurance recoverables with respect to certain
retrocessionnaires.
At December 31, 1996, the Company had reinsurance recoverables, exclusive of
available offsets in the form of letters of credit, trust accounts and funds
withheld, totaling $441.9 million, with approximately 178 domestic and 116
foreign retrocessionnaires. Of that amount, approximately 41% or $180 million
was due from one retrocessionnaire, Hannover Ruckversicherungs AG (80%), and its
affiliate, E&S Ruckversicherungs AG (20%), both of which are rated AA+ by
Standard & Poor's. Such amounts are fully collateralized by either ceded
balances payable, funds withheld or letters of credit. No other amounts
recoverable from a single entity or group of entities exceeded 10% of
stockholders' equity as of December 31, 1996.
In recognition of the Company's enhanced surplus position and financial
capacity, and the continued positive contribution of business written since
1986, the Company has reached agreements to terminate two retrocessional
programs effective January 1, 1997. As a result, the Company expects to receive
total consideration of approximately $220 million, representing reinsurance
recoverable balances for unpaid claims and claims expenses.
Also as a result of the termination, the Company's maximum retention on any one
claim for non-catastrophe property/casualty losses for 1996 and 1995 will
increase to $7.5 million. The Company's maximum retention for surety losses for
1996 and 1995 will increase to $12.5 million and $13 million per principal,
respectively. In addition, the Company's retention levels for property
catastrophe claims relating to 1996 and 1995 will increase to $15 million and
$25 million, respectively per event.
6. Lease and Service Agreements
Operating Lease Agreement
The Company leases office space under noncancellable, and in most instances
renewable, operating leases expiring at various dates through 2003. The
following is a schedule of future minimum rental payments, exclusive of
escalation clauses and rental income, as of December 31, 1996:
Year In Thousands
================================================================================
1997 $3,986
1998 3,995
1999 3,830
2000 3,672
2001 and thereafter 3,693
- --------------------------------------------------------------------------------
Total $19,176
================================================================================
Rental expense, net of sublease rental income, was approximately $3.9 million
for 1996, $3.5 million for 1995 and $3.3 million for 1994.
47
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Service Agreement
In 1995, the Company had consulting agreements with two investment banking firms
with which two Directors of the Company are associated, for a fee of $100,000
per firm. The Company has retained the services of these firms from time to time
since 1991. In addition, these firms acted as co-managing underwriters in
connection with the Company's 1995 Common Stock offering and co-lead
underwriters in connection with its concurrent debt offering and were paid total
underwriting commissions of $3 million related to such offerings. See Notes 7
and 12.
7. Long-term Debt and Financing Arrangements
The Company's $100 million of 7.15% Senior Notes due November 15, 2005, were
issued in November 1995 through a public offering at a price of $99.9 million.
The expenses incurred in the offering of approximately $.8 million were deferred
and are being amortized over the life of the Notes. Interest and amortization
costs were $7.2 million and $.8 million for 1996 and 1995, respectively. The
fair value of the Notes, estimated based on quoted market prices, was
approximately $99.7 million as of December 31, 1996. The Company contributed the
net proceeds of $99.1 million to NAC in 1995.
The Company's $100 million of 5.25% Convertible Subordinated Debentures due
December 15, 2002, were issued in December 1992 through a private offering. The
Debentures are callable as of January 15, 1996 and are convertible into
approximately 2 million shares of the Company's Common Stock at a conversion
price of $49.50 per share. The expenses incurred in the offering of
approximately $1.4 million were deferred and are being amortized over the life
of the Debentures. Interest and amortization costs were $5.4 million for 1996,
1995 and 1994. The fair value of the Debentures, estimated based on quoted
market prices, was approximately $96.5 million as of December 31, 1996. The
Company contributed $85 million of the net proceeds of the offering to NAC in
1992.
The Company's $100 million of 8% Senior Notes due June 15, 1999 were issued in
June 1992 through a public offering. The expenses incurred in the offering of
approximately $.8 million were deferred and are being amortized over the life of
the Notes. Interest and amortization costs were $8.1 milion for 1996, 1995 and
1994. The fair value of the Notes, estimated based on quoted market prices, was
approximately $103.6 million as of December 31, 1996. The Company contributed
$80 million of the net proceeds of the offering to NAC in 1992.
NAC Re has a revolving credit agreement and term loan bank facility under which
it can borrow up to $35 million. A commitment fee of 3/8 of 1% per year is paid
on the unused credit line. Borrowings of $12.9 million were outstanding at
December 31, 1996 and were principally used in connection with repurchases of
the Company's Common Stock. The Company modified its existing revolving credit
facility in April 1996. The requirement for payment of outstanding balances
beginning in June 1996 was replaced with a scheduled reduction of the credit
facility beginning in July 1998 and ending July 2001. NAC has a $15 million line
of credit which is available for catastrophe claim payments or working capital
purposes. A commitment fee of 1/4 of 1% per year is paid on the unused credit
line. There were no outstanding borrowings on this facility at December 31,
1996. Interest costs on borrowing facilities were approximately $1.6 million,
$1.4 million and $.9 million in 1996, 1995 and 1994, respectively.
48
<PAGE>
- --------------------------------------------------------------------------------
Total interest expense paid in connection with the Company's long-term debt and
financing arrangements was $22 million, $14.6 million and $14.1 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
8. Employee Benefits and Compensation Arrangements
Stock Plans
The Company accounts for stock compensation plans in accordance with Accounting
Principals Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation expense for stock option grants and stock
appreciation rights (SARs) is recognized to the extent that the fair value of
the stock exceeds the exercise price of the option at the measurement date.
The Company maintains stock option plans which provide for the granting of
options and SARs to purchase shares of Common Stock to certain officers of the
Company. Under such plans, the Company had the authority to grant up to
2,375,000 options at December 31, 1996. Options and SARs have generally been
granted with a five or six year vesting schedule. The majority of the options
expire ten years from the date of grant; the remainder of the options have no
expiration. Outstanding SARs are generally converted by the Company to options
prior to vesting.
The Company also maintains a stock option plan for non-employee directors that
provides for automatic annual grants of options to eligible directors. Under
such plan, the Company had the authority to grant up to 375,000 options at
December 31, 1996. Options expire ten years from the date of grant and are fully
exercisable six months after their grant date.
Information concerning stock options (including SARs) for all of the Company's
stock option plans is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
=====================================================================================================
1996 1995 1994
----------------------------------------------------------------
Average Average Average
Options Exercise Options Exercise Options Exercise
(000's) Price (000's) Price (000's) Price
=====================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 1,772 $28.27 1,548 $25.11 1,541 $24.40
Granted 713 35.93 412 38.02 293 26.49
Exercised (33) 19.79 (102) 17.97 (157) 15.59
Cancelled (72) 33.73 (86) 30.24 (129) 31.39
- -----------------------------------------------------------------------------------------------------
Outstanding, end of year 2,380 $30.51 1,772 $28.27 1,548 $25.11
- -----------------------------------------------------------------------------------------------------
Exercisable, end of year 931 $23.59 738 $21.66 700 $19.62
- -----------------------------------------------------------------------------------------------------
Available for grant, end of year 139 -- 784 -- 1,112 --
=====================================================================================================
</TABLE>
49
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about the Company's stock options
(including SARs) for options outstanding as of December 31, 1996:
Options Outstanding Options Exercisable
================================================================================
Average
Number of Remaining Number of
Range of Options Average Contractual Options Average
Exercise Prices (000's) Price Life (Years) (000's) Price
================================================================================
$11.22 - $18.83 342 $15.06 5.3 342 $15.06
$21.83 - $29.63 528 $24.96 7.3 330 $24.08
$30.13 - $40.38 1,510 $35.95 9.5 259 $34.21
- --------------------------------------------------------------------------------
$11.22 - $40.38 2,380 $30.51 8.4 931 $23.59
================================================================================
The Company has an Employee Stock Purchase Plan through which all employees have
the option, subject to certain limitations, to purchase NAC Re's Common Stock,
at the end of each offering period at a discounted price. The discounted price
is based on 85% of the lesser of the stock's market price at the beginning of
the period and the market price at the end of the period. During the 1996, 1995
and 1994 plan years, employees have purchased approximately 28,400, 21,200 and
18,500 shares of Common Stock. The Company's stock purchase plan qualifies as a
non-compensatory plan under APB 25.
The Company has a restricted stock plan, pursuant to which employees have been
granted approximately 57,600, 44,500 and 52,400 shares of Common Stock during
1996, 1995 and 1994, respectively. Vesting for such shares occurs over a
six-year period. In 1996, the Company also granted 20,000 shares of restricted
stock to an executive in connection with his employment contract. Vesting for
the majority of these shares is based upon future appreciation of NAC Re's
Common Stock while the remainder of the shares vest over a five year period. The
Company incurred compensation expense, under APB 25, for the years ended
December 31, 1996, 1995 and 1994 of approximately $974,000, $613,000 and
$473,000, respectively, in connection with such stock grants.
Supplemental and Pro Forma Disclosures
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." This Statement, if adopted, requires companies to recognize
compensation expense for grants of stock, stock options and other equity
instruments to employees based on their respective fair values on the date of
grant. Companies that choose not to adopt the new rules will continue to apply
the existing accounting rules contained in APB No. 25, but are required to
disclose the pro forma effects of net income and earnings per share, as if the
fair value based method of accounting had been applied.
The following pro forma information regarding net income and earnings per share
required by Statement No. 123 has been determined as if the Company had
accounted for its employee stock plans under the fair value method described in
that Statement. The fair value of options and other awards granted under
50
<PAGE>
- --------------------------------------------------------------------------------
the Company's stock-based compensation plans was estimated on the date of grant
using a Black-Scholes option valuation model. The Black-Scholes option model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
dividend yield, the expected life of the options, the expected stock price
volatility and the risk-free interest rate.
The weighted average dividend yield for stock option grants during 1996 and 1995
was .7% and .6%, respectively. The weighted average expected life for both 1996
and 1995 was 7.5 years. The weighted average volatility and risk-free interest
rate for both 1996 and 1995 were 28% and 6.3%, respectively. The weighted
average grant date fair values for options granted during 1996 and 1995 were
$15.32 per share and $16.24 per share, respectively.
The assumptions for the stock purchase plan for both 1996 and 1995 were as
follows: dividend yield of .7%; expected life of 1 year, volatility of 28% and
risk-free interest rate of 5.3%. The grant date fair values for the stock
purchase plan shares during 1996 and 1995 were $8.75 per share and $8.69 per
share, respectively.
For purposes of pro forma disclosures, the estimated fair value of each option
is amortized to expense over the option's vesting period and does not include
grants prior to January 1, 1995. As such, the pro forma net income and earnings
per share are not indicative of future years. The Company's pro forma
information is as follows:
In Thousands, except per share amounts
================================================================================
Year ended December 31,
----------------------------------------------------
1996 1995
--------------------- ------------------------
Reported Pro Forma Reported Pro Forma
================================================================================
Net income $70,520 $69,111 $62,824 $62,322
Earnings per share:
Primary $3.69 $3.62 $3.47 $3.44
Fully diluted $3.51 $3.44 $3.29 $3.27
================================================================================
Incentive Compensation Plans
The Company maintains two incentive compensation plans. The Long-term Incentive
Plan provides for cash awards to eligible officers based on achievement of
certain corporate goals over a three-year performance cycle. The Annual
Incentive Plan for all employees (which was amended in 1996 to incorporate a
previously separate plan for non-officers) provides for annual cash awards based
on individual and corporate performance. Based on estimated performance levels,
the Company expensed $8.5 million, $6.4 million and $4.6 million for the years
ended December 31, 1996, 1995 and 1994, respectively, related to these plans.
51
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Severance Program
The Company has severance agreements with officers and a severance program for
non-officers to provide for severance payments and continuation of benefits in
the event of employment termination resulting from a change in control. The
extent of the severance payments and when they are triggered vary depending upon
the position of the employee and, in the case of non-officers, the length of
tenure of the employee.
Employment Contracts
The Company has employment contracts with certain officers, the terms of which
expire at various times through December 31, 2001. Such agreements provide for
minimum salary levels, incentive bonuses payable in accordance with bonus plans
and, in two contracts, supplemental retirement benefits.
Retirement Plans
The Company maintains a qualified non-contributory defined benefit pension plan
covering substantially all U.S. employees. Pension benefits generally vest after
five years of service. Benefits are based on years of service and compensation,
as defined in the plan, during the highest consecutive three years of the
employee's last ten years of employment.
The Company's policy is to make annual contributions to the plan that are
deductible for federal income tax purposes and that meet the minimum funding
standards required by law. This contribution level is determined by utilizing
the entry age cost method and different actuarial assumptions than those used
for pension expense purposes.
The Company also maintains a non-qualified unfunded supplemental defined benefit
plan designed to compensate individuals to the extent their benefits under the
Company's qualified plan are curtailed due to Internal Revenue Code limitations.
52
<PAGE>
- --------------------------------------------------------------------------------
The following tables set forth the amounts recognized in the Company's financial
statements with respect to the qualified and non-qualified pension plans.
<TABLE>
<CAPTION>
In Thousands
=====================================================================================================================
December 31, 1996 December 31, 1995
------------------------------------------------------------------
Non- Non-
Qualified Qualified Qualified Qualified
Plan Plan Total Plan Plan Total
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested $ 3,676 $ 1,422 $ 5,098 $ 3,332 $ 1,263 $ 4,595
Nonvested 769 141 910 830 62 892
- ---------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 4,445 1,563 6,008 4,162 1,325 5,487
Effect of projected salary increases 3,174 1,330 4,504 3,351 1,671 5,022
- ---------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 7,619 2,893 10,512 7,513 2,996 10,509
Plan assets at market value 6,461 -- 6,461 5,169 -- 5,169
- ---------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess
of plan assets 1,158 2,893 4,051 2,344 2,996 5,340
Unrecognized net gain (loss) 1,866 608 2,474 175 (13) 162
Unrecognized net transition obligation (96) -- (96) (105) -- (105)
Unrecognized net prior service costs (72) (255) (327) (76) (267) (343)
- ---------------------------------------------------------------------------------------------------------------------
Pension liability, end of year 2,856 3,246 6,102 2,338 2,716 5,054
Pension liability, beginning of year (2,338) (2,716) (5,054) (1,901) (2,226) (4,127)
Company contributions 557 -- 557 519 -- 519
- ---------------------------------------------------------------------------------------------------------------------
Net pension cost $ 1,075 $ 530 $ 1,605 $ 956 $ 490 $ 1,446
=====================================================================================================================
</TABLE>
In Thousands
================================================================================
Year ended December 31,
----------------------------
1996 1995 1994
================================================================================
Net pension cost included the following components:
Service costs - benefits earned during the year $ 1,247 $ 1,111 $ 1,061
Interest cost on projected benefit obligations 741 660 539
Net amortization and deferral (807) 751 (264)
Actual return on plan assets 424 (1,076) (17)
- --------------------------------------------------------------------------------
Net pension cost $ 1,605 $ 1,446 $ 1,319
================================================================================
The discount rates used in determining the actuarial present value of benefit
obligations were 7.25% and 7% for 1996 and 1995, respectively. The rate of
increase for future compensation levels was 6% for 1996 and 1995. The assumed
rate of return on plan assets was 8.5% for 1996, 1995 and 1994. Assets of the
qualified plan are invested principally in equity securities and fixed
maturities. Plan assets include approximately $486,000 and $517,000 of NAC Re
Common Stock as of December 31, 1996 and 1995, respectively.
53
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company maintains a qualified contributory defined contribution plan for
substantially all U.S. employees. Under this plan, the Company makes a matching
contribution equal to 50% of each participant's eligible elective contributions,
which may be up to 6% of the participant's compensation. The Company may make an
additional annual discretionary matching contribution. The Company also
maintains a non-qualified unfunded supplemental defined contribution plan
designed to compensate individuals to the extent the Company's contributions
under the qualified plan are curtailed due to Internal Revenue Code limitations.
The Company expensed $2 million for 1996, $1.6 million for 1995 and $1 million
for 1994, related to these plans. Contributions to the qualified plan are
invested, at the election of the participant, in several funds, including a NAC
Re Common Stock fund. The fund held approximately 137,000 and 123,000 shares of
NAC Re Common Stock as of December 31, 1996 and 1995, respectively.
The Company maintains a qualified non-contributory defined contribution plan
covering substantially all U.K. employees. Contributions under this plan are
determined on the basis of salary, age and position within the organization. The
Company also maintains an unfunded supplemental defined contribution plan
designed to compensate individuals to the extent their benefits under the
qualified plan are curtailed due to U.K. Inland Revenue limitations. The Company
incurred expenses of $436,000, $375,000 and $363,000 for the years ended
December 31, 1996, 1995 and 1994, respectively, related to these plans.
9. Domestic and International Financial Information
The Company's principle business segment, for both its domestic and
international operations, is the reinsurance of property and casualty lines of
business, including general liability, automobile liability, aviation,
fidelity/surety and commercial and personal property. The Company's domestic
operation includes business written in the United States and Canada.
International property and casualty reinsurance is conducted through a
wholly-owned subsidiary, NAC Re International Holdings Limited, which
established a fully licensed property and casualty reinsurance subsidiary, NAC
Reinsurance International Limited, located in London, England in December 1993.
The subsidiary was initially capitalized with (pounds)50 million, or
approximately $75 million, and, subsequent to contributions by the Company in
1995 and 1994, its statutory surplus level was approximately (pounds)79.6
million or $135.1 million at December 31, 1996.
54
<PAGE>
- --------------------------------------------------------------------------------
The following is a summary of financial information related to the Company's
domestic and international operations:
In Thousands
================================================================================
Year ended December 31, 1996
------------------------------------
Domestic International Total
================================================================================
Net premiums written $ 521,876 $ 52,128 $ 574,004
- --------------------------------------------------------------------------------
Premiums earned 476,012 50,330 526,342
Net investment income 93,206 11,124 104,330
Realized gains (losses) 19,603 (34) 19,569
- --------------------------------------------------------------------------------
Total revenues 588,821 61,420 650,241
================================================================================
Claims and claims expense 302,535 36,418 338,953
Commissions and brokerage 133,423 9,901 143,324
Other acquisition costs and expenses 49,019 7,587 56,606
Interest expense 22,322 -- 22,322
- --------------------------------------------------------------------------------
Total expenses 507,299 53,906 561,205
================================================================================
Pretax operating income 81,522 7,514 89,036
- --------------------------------------------------------------------------------
Net income $ 65,566 $ 4,954 $ 70,520
================================================================================
Identifiable assets $2,640,727 $ 252,043 $2,745,631*
================================================================================
Statutory composite ratio 101.1% 105.6% 101.6%
================================================================================
* The total is net of intercompany transactions of $147.1 million.
In Thousands
================================================================================
Year ended December 31, 1995
------------------------------------
Domestic International Total
================================================================================
Net premiums written $ 476,048 $ 45,441 $ 521,489
- --------------------------------------------------------------------------------
Premiums earned 452,994 38,791 491,785
Net investment income 81,583 7,725 89,308
Realized gains 24,063 1,328 25,391
- --------------------------------------------------------------------------------
Total revenues 558,640 47,844 606,484
================================================================================
Claims and claims expense 295,038 31,110 326,148
Commissions and brokerage 132,049 7,014 139,063
Other acquisition costs and expenses 40,760 6,044 46,804
Interest expense 15,648 -- 15,648
- --------------------------------------------------------------------------------
Total expenses 483,495 44,168 527,663
================================================================================
Pretax operating income 75,145 3,676 78,821
- --------------------------------------------------------------------------------
Net income $ 60,449 $ 2,375 $ 62,824
================================================================================
Identifiable assets $2,405,051 $180,060 $2,462,131*
================================================================================
Statutory composite ratio 103.1% 111.7% 103.7%
================================================================================
* The total is net of intercompany transactions of $123 million.
55
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In Thousands
================================================================================
Year ended December 31, 1994
------------------------------------
Domestic International Total
================================================================================
Net premiums written $ 412,412 $ 25,789 $ 438,201
- --------------------------------------------------------------------------------
Premiums earned 375,870 19,861 395,731
Net investment income 75,783 4,721 80,504
Realized gains (losses) 4,209 (2,054) 2,155
- --------------------------------------------------------------------------------
Total revenues 455,862 22,528 478,390
================================================================================
Claims and claims expense 250,013 15,740 265,753
Commissions and brokerage 114,540 3,052 117,592
Other acquisition costs and expenses 33,091 5,210 38,301
Interest expense 14,454 -- 14,454
- --------------------------------------------------------------------------------
Total expenses 412,098 24,002 436,100
================================================================================
Pretax operating income (loss) 43,764 (1,474) 42,290
- --------------------------------------------------------------------------------
Net income (loss) $ 36,740 $ (1,128) $ 35,612
================================================================================
Identifiable assets $1,893,596 $ 115,300 $1,916,768*
================================================================================
Statutory composite ratio 105.7% 114.7% 106.1%
================================================================================
* The total is net of intercompany transactions of $92.1 million.
During 1996, two reinsurance brokers, AON Reinsurance Agency and Guy Carpenter
and Company, Inc., generated 23% and 13%, respectively, of the Company's
premiums assumed from client companies. These same reinsurance brokers generated
16% and 16%, respectively, during 1995, and 18% and 16%, respectively, during
1994, of the Company's assumed premiums. One client company, Chubb Group,
contributed approximately 2%, 9% and 10% of the Company's gross premiums written
during 1996, 1995 and 1994, respectively. This business is generated primarily
from the Company's domestic reinsurance operations. Gross premiums written from
this client declined in 1996 as a result of an increase in its retention levels.
The Company does not believe that the reduction of business assumed from any one
client or broker will have a materially adverse effect on the Company due to its
competitive position in the marketplace and the continuing availability of other
sources of business.
10. Statutory Financial Information
Consolidated statutory net income and surplus of NAC, as reported to the
insurance regulatory authorities, differs in certain respects from the amounts
as prepared in accordance with generally accepted accounting principles (GAAP).
The following schedules identify the significant reconciling differences:
56
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In Thousands
====================================================================================
Year ended December 31,
------------------------------------
Net Income: 1996 1995 1994
====================================================================================
<S> <C> <C> <C>
Domestic statutory net income $ 59,827 $ 57,670 $ 27,312
Domestic GAAP adjustments:
Deferred acquisition costs 14,211 9,128 14,577
Deferred income taxes 4,421 3,204 3,770
Other, net 401 (1,074) (370)
- ------------------------------------------------------------------------------------
Domestic GAAP net income 78,860 68,928 45,289
International operation 4,954 2,375 (1,128)
Parent company operations (13,294) (8,479) (8,549)
- ------------------------------------------------------------------------------------
Consolidated GAAP net income $ 70,520 $ 62,824 $ 35,612
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
In Thousands
====================================================================================
December 31,
------------------------------------
Stockholders' Equity: 1996 1995 1994
====================================================================================
<S> <C> <C> <C>
Consolidated statutory surplus $ 663,867 $ 615,433(1) $ 407,024
Consolidated GAAP adjustments:
Deferred acquisition costs 85,211 70,466 59,953
Deferred income tax asset, net 29,599 27,492 43,928
Excess of cost over net assets acquired 3,644 4,011 4,379
Unrealized appreciation (depreciation) 25,537 46,783 (40,321)
Unauthorized/authorized reinsurance charges 12,730 6,814 5,914
Other, net 4,695 4,101 4,137
- ------------------------------------------------------------------------------------
Investment in insurance subsidiaries, GAAP 825,283 775,100 485,014
Parent company:
Other net assets 27,920 36,583 34,071
Long-term debt (299,934) (299,927) (200,000)
- ------------------------------------------------------------------------------------
Consolidated stockholders' equity, GAAP $ 553,269 $ 511,756 $ 319,085
====================================================================================
</TABLE>
(1) The Company contributed approximately $146.6 million to the statutory
surplus of NAC from the proceeds of the public debt and equity offerings in
November 1995. See Notes 7 and 12.
Under the holding company structure, NAC Re is dependent upon the ability of its
principal operating subsidiary, NAC, for the transfer of funds in the form of
rental receipts, tax reimbursements and cash dividends. Such transactions,
including the payment of cash dividends, are subject to restrictions imposed by
New York insurance law. Generally, NAC may pay cash dividends only out of its
statutory earned surplus which was $155.9 million at December 31, 1996. However,
the maximum amount of dividends that may be paid in any twelve-month period
without the prior approval of the New York Insurance Department is the lesser of
net investment income or 10% of statutory surplus as such terms are defined in
the New York insurance law. The maximum amount of cash dividends that NAC could
pay without such regulatory approval, based on 10% of statutory surplus as of
December 31, 1996, is approximately $66.4 million. During 1996, 1995 and 1994,
NAC declared dividends of $38 million, $7.5 million and $15 million,
respectively, to NAC Re.
57
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 adequacy of property and casualty
insurers and reinsurers with respect to the risks assumed by them and to
determine whether there is a perceived need for possible corrective action. The
nature of any corrective action depends upon the extent of the calculated
risk-based capital deficiency and ranges from requiring the company to submit a
comprehensive plan to placing the insurer under regulatory control. While the
model risk-based capital act 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.
11. Quarterly Financial Information (Unaudited)
The following is a summary of quarterly financial data, in thousands, except per
share data and stock prices:
<TABLE>
<CAPTION>
Three months ended
==============================================================================================================
December 31, September 30, June 30, March 31,
------------------- ------------------ ------------------ ------------------
1996 1995 1996 1995 1996 1995 1996 1995
==============================================================================================================
Income Statement Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written $197,964 $174,267 $183,052 $186,637 $172,718 $166,144 $160,346 $150,890
Net premiums written 159,332 138,800 150,681 145,466 140,852 126,702 123,139 110,521
Premiums earned 140,060 133,409 139,115 133,344 130,346 119,554 116,821 105,478
Net investment income 26,831 22,401 26,140 22,270 25,616 22,427 25,743 22,210
Investment gains (losses) 4,915 9,314 2,122 8,502 2,715 4,433 9,817 3,142
Operating costs and expenses 149,668 140,572 147,432 141,766 138,676 128,301 125,429 117,024
Operating income/net income 17,296 19,256 16,038 17,599 16,414 14,594 20,772 11,375
- --------------------------------------------------------------------------------------------------------------
Per Share Data:
Primary:
Operating/net income $.92 $1.04 $.84 $.98 $.85 $.82 $1.06 $.64
Fully diluted:
Net income .87 .98 .80 .92 .81 .78 1.00 .62
Stockholders' equity per share 30.06 26.65 28.18 24.39 26.96 23.10 26.54 20.90
Cash dividends declared per share .06 .05 .06 .05 .06 .05 .05 .04
- --------------------------------------------------------------------------------------------------------------
Stock prices:
High $37.63 $38.38 $40.63 $39.00 $33.88 $35.25 $36.25 $34.00
Low 32.63 31.63 30.25 30.63 28.50 28.50 31.75 28.25
Close 33.88 36.00 36.00 36.25 33.50 31.13 32.63 30.25
- --------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
- --------------------------------------------------------------------------------
12. Capital Stock
Changes in Common Stock outstanding were as follows:
Year ended December 31,
================================================================================
1996 1995 1994
================================================================================
Common Stock:
Balance, beginning of year 21,341,053 19,638,865 19,348,739
Shares issued 122,929 1,702,188 290,126
- --------------------------------------------------------------------------------
Balance, end of year 21,463,982 21,341,053 19,638,865
- --------------------------------------------------------------------------------
Treasury Stock:
Balance, beginning of year 2,137,501 2,131,633 1,579,375
Purchases 943,042 5,868 552,258
Shares reissued (20,000) - -
- --------------------------------------------------------------------------------
Balance, end of year 3,060,543 2,137,501 2,131,633
- --------------------------------------------------------------------------------
Total Common Stock outstanding 18,403,439 19,203,552 17,507,232
================================================================================
Equity Offering
The Company issued 1,530,000 shares of Common Stock through a secondary public
offering in November 1995. Approximately $47.5 million of the net proceeds was
contributed to the statutory surplus of NAC.
Stock Repurchase
The Company maintains a stock repurchase program pursuant to which the Board of
Directors has authorized the repurchase of approximately 3,231,000 shares of
Common Stock. Since January 1, 1996, the Company repurchased approximately
943,000 shares of Common Stock, at an average cost of $33.23 per share. From its
inception through December 31, 1996, approximately 3,081,000 shares were
repurchased at a cost of approximately $73.9 million or an average price of
$24.00 per share. As of December 31, 1996, approximately 150,000 shares remain
authorized for repurchase under the program.
Rights Plan
In June 1988, the Company declared a dividend of one Preferred Stock Purchase
Right (a "Right") for each outstanding share of NAC Re Common Stock. Pursuant to
the related Rights Plan, as amended in 1990, the Rights will become exercisable
only in the event, with certain exceptions, a person or group becomes the
beneficial owner of 15% or more of NAC Re voting stock. The Rights Plan
provides, however, that the Rights will not become exercisable due to the
beneficial ownership by The Equitable Life Assurance Society of the United
States and its affiliates of up to 28.5% of such stock. Each Right currently
entitles the holder to purchase from the Company, for a price of $37.78 (the
"Exercise Price"), 1/225 of a share of Series A Junior Participating Preferred
Stock (the "Series A Stock") or that number of shares of Series A Stock having a
market value equal to two times the Exercise Price.
59
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, upon the occurrence of certain events, holders of the Rights will
be entitled to purchase the shares of Series A Stock or shares in an acquiring
entity, whichever is applicable, having a market value of two times the Exercise
Price.
NAC Re will generally be entitled to redeem the Rights at $.0222 per Right
following a public announcement that a person or group has become the beneficial
owner of 15% of the NAC Re voting stock. The Rights will expire on June 21,
1998.
At December 31, 1996, there were 18,403,439 Rights outstanding which, if
exercised, would result in the issuance of approximately 81,800 shares of Series
A Stock.
60
<PAGE>
- --------------------------------------------------------------------------------
GENERAL INFORMATION
-------------------------
* Corporate Information
-------------------------
* Reinsurance Terms
-------------------------
61
<PAGE>
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
NAC Re Corporation
NAC Re Corporation was established in 1985 and is the parent company of NAC
Reinsurance Corporation.
DIRECTORS
Robert A. Belfer
Private Investor
John P. Birkelund
Chairman, Dillon, Read
& Co., Inc.
Ronald L. Bornhuetter
Chairman of the Board
and Chief Executive Officer,
NAC Re Corporation
Nicholas M. Brown, Jr.
President and Chief Operating
Officer, NAC Re Corporation
C.W. Carson, Jr.
Independent Financial
Consultant; Vice Chairman,
retired, Chemical Bank and
Chemical Banking Corporation
Todd G. Cole
Chief Executive Officer, retired,
CIT Financial Corporation
Michael G. Fitt
Chairman and Chief Executive
Officer, retired, Employers
Reinsurance Corporation
Daniel J. McNamara
Of Counsel, former Chairman,
Insurance Group Practice,
Hughes, Hubbard & Reed LLP
Stephen Robert
Chairman and Chief Executive
Officer, Oppenheimer
& Co., Inc.
Wendy J. Strothman
Executive Vice President and
Publisher, Houghton Mifflin
Company
Herbert S. Winokur, Jr.
President, Winokur &
Associates, Inc.
OFFICERS
Martha G. Bannerman
Vice President and General
Counsel
Jerome T. Fadden
Vice President, Chief Financial
Officer and Treasurer
Celia R. Brown
Secretary
COMMITTEES OF THE BOARD
Audit
C.W. Carson, Jr.*
Todd G. Cole
Michael G. Fitt
Daniel J. McNamara
Wendy J. Strothman
Compensation
John P. Birkelund
C.W. Carson, Jr.
Daniel J. McNamara
Stephen Robert
Wendy J. Strothman
Herbert S. Winokur, Jr.*
Executive
Robert A. Belfer
John P. Birkelund
Ronald L. Bornhuetter*
Daniel J. McNamara
Stephen Robert
Herbert S. Winokur, Jr.
Finance and Investment
Robert A. Belfer
Ronald L. Bornhuetter*
Nicholas M. Brown, Jr.
C.W. Carson, Jr.
Todd G. Cole
Michael G. Fitt
Daniel J. McNamara
Herbert S. Winokur, Jr.
Nominating
Robert A. Belfer
John P. Birkelund
Ronald L. Bornhuetter
Stephen Robert*
* Committee Chairperson
62
<PAGE>
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
NAC REINSURANCE CORPORATION
NAC Reinsurance Corporation offers treaty and facultative reinsurance protection
to property and casualty insurers. It has an "A+" (Superior) rating from A.M.
Best and is licensed to write reinsurance throughout the United States and
Canada.
Ronald L. Bornhuetter
Chairman of the Board
Nicholas M. Brown, Jr.
President and Chief Executive
Officer
Martha G. Bannerman
Executive Vice President,
General Counsel and Secretary
Jerome T. Fadden
Executive Vice President,
Chief Financial Officer
and Treasurer
Stanley J. Kott
Executive Vice President
C. Fred Madsen
Executive Vice President
George F. Stoffel
Senior Vice President,
Casualty Clash
Brian M. Boornazian
Vice President,
Property
Celia R. Brown
Vice President,
Human Resources
Christopher F. Buse
Vice President,
Casualty Treaty
Gregory A. Douglas
Vice President,
Casualty Facultative
John C. Hodge
Vice President,
Information Systems
Richard H. Miller
Vice President and Controller
Thomas W. Muller
Vice President,
Property Field Operations
Mindy Pollack
Vice President,
Claims Management
Laura A. Shanahan
Vice President,
Surety/Fidelity
Thomas A. Weidman
Vice President and
Chief Actuarial Officer
GREENWICH INSURANCE COMPANY/INDIAN HARBOR INSURANCE COMPANY
Greenwich Insurance Company, a primary insurance company licensed to write
insurance throughout the United States, writes a limited number of specialized
products with an emphasis on domestic casualty products. Indian Harbor Insurance
Company, an excess and surplus lines carrier licensed in North Dakota writes a
limited amount of primary business on a non-admitted basis in selected states.
Both companies are subsidiaries of NAC Reinsurance Corporation and share its
"A+" (Superior) A.M. Best rating.
John A. Murad
President and Chief
Executive Officer
John N. Adimari
Vice President, Operations
C. William Cole
Vice President and
Chief Underwriter
NAC REINSURANCE INTERNATIONAL LIMITED
NAC Reinsurance International Limited, a subsidiary of NAC Reinsurance
Corporation, is an international reinsurer licensed in the United Kingdom that
writes property and casualty reinsurance throughout the world. It has an "A+"
(Superior) rating from A.M. Best.
Charles J. Catt
Manager Director
Martha G. Bannerman
Director
Ronald L. Bornhuetter
Chairman
Nicholas M. Brown, Jr.
Director
David J. Clark
Director and Chief
Underwriter, Property
Michael G. Fitt
Director
John W. Hume
Finance Director
John Lock
Director
Jeffrey R. Slocombe
Director
David J. Watson
Director and Chief
Underwriter, Casualty
63
<PAGE>
- --------------------------------------------------------------------------------
REINSURANCE TERMS
Automatic Facultative Agreements provide coverage on a blanket basis for risks
which would otherwise be reinsured on an individual basis. Eligible risks must
be underwritten by the insurer in accordance with agreement guidelines, which
are generally more restrictive than typical treaty arrangements.
Capacity is the ability to assume risk, generally measured by the ratio of net
premiums written to statutory surplus, and by the ratio of claims reserves to
statutory surplus.
Clash Agreements protect insurers from an accumulation of liability claims from
a single event.
Excess of Loss Reinsurance obligates the reinsurer to indemnify the insurer only
for claims in excess of an agreed amount, up to a maximum limit specified in the
agreement. Excess of loss reinsurance may be written on a treaty or on a
facultative basis.
Facultative Reinsurance is the reinsurance of individual risks, each offered at
the option of the primary company, and accepted at the option of the reinsurer.
Incurred But Not Reported Losses (IBNR) represent the liability for losses which
have already occurred, but which have not yet been reported to the reinsurer.
The monetary amount reserved for such liabilities is necessarily an estimate
based on the insurer's and reinsurer's judgment and experience.
Limits Capacity is the maximum amount the reinsurer may be obligated to pay as a
result of any one risk or occurrence.
Property Catastrophe Agreements protect insurers from an accumulation of
property claims arising out of a single event or occurrence.
Pro Rata Reinsurance (also known as quota share and surplus share) obligates the
reinsurer to share losses with the insurer in the same proportion it shares
premiums. With quota share reinsurance the percentage is fixed; with surplus
share reinsurance the percentage is variable.
Reinsurance is the assumption by a reinsurer of all or part of a risk or risks
originally undertaken by another insurer. The principal functions of reinsurance
are:
* to enable insurers to write coverages involving larger policy limits than
they could otherwise write;
* to protect insurers against the accumulation of individual claims arising
out of catastrophic occurrences;
* to reduce the financial burden attending the rapid growth of premium
income; and
* in general, to reduce an insurer's net exposure to claims activity to
amounts considered appropriate to its financial resources.
Retrocessions are a reinsurance company's own reinsurance, and a
retrocessionnaire is a company which provides such reinsurance.
Composite or Combined Ratio provides an overall indication of underwriting
profitability. The ratio is the sum of: the ratio of commissions and other
underwriting expenses to premiums written, and the ratio of claims and claims
expenses to premiums earned. A statutory composite ratio over 100% indicates
that for each dollar of premium received more than one dollar is expected to be
paid.
Statutory Surplus is the excess of total admitted assets over total liabilities,
determined according to statutory accounting practices.
Treaty Reinsurance is an agreement between a reinsurer and an insurance company,
often called the "primary" company, which provides for the reinsurance of an
entire class of risks.
64
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to 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 February 4, 1997,
with respect to the consolidated financial statements and schedules of NAC Re
Corporation and subsidiaries included and/or incorporated by reference in the
Annual Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
New York, New York
March 24, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Ronald L. Bornhuetter, Martha G. Bannerman, and Celia R. Brown and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/Nicholas M. Brown, Jr.
-----------------------------------
Nicholas M. Brown, Jr.
Director
Dated: March 11, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Nicholas M. Brown, Jr., Martha G. Bannerman, and Celia R. Brown and
each and any one of them, her true and lawful attorney-in-fact and agent, for
her and in her name, place and stead, to sign the name of the undersigned in the
Report of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set her hand.
/s/Wendy J. Strothman
-----------------------------------
Wendy J. Strothman
Director
Dated: March 11, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Nicholas M. Brown, Jr. Martha G. Bannerman and Celia R. Brown and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/Robert A. Belfer
-----------------------------------
Robert A. Belfer
Director
Dated: March 11, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Nicholas M. Brown, Jr., Martha G. Bannerman, and Celia R. Brown and
each and any one of them, his true and lawful attorney-in-fact and agent, for
him and in his name, place and stead, to sign the name of the undersigned in the
Report of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/Michael G. Fitt
-----------------------------------
Michael G. Fitt
Director
Dated: March 11, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Nicholas M. Brown, Jr., Martha G. Bannerman and Celia R. Brown and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any one of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/Ronald L. Bornhuetter
-----------------------------------
Ronald L. Bornhuetter
Director
Dated: March 11, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Nicholas M. Brown, Jr., Martha G. Bannerman and Celia R. Brown and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any one of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/ John P. Birkelund
-----------------------------------
John P. Birkelund
Director
Dated: March 11, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Nicholas M. Brown, Jr., Martha G. Bannerman and Celia R. Brown and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any one of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/C. W. Carson, Jr.
-----------------------------------
C. W. Carson, Jr.
Director
Dated: March 11, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Nicholas M. Brown, Jr., Martha G. Bannerman and Celia R. Brown and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any one of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/Todd G. Cole
-----------------------------------
Todd G. Cole
Director
Dated: March 11, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Nicholas M. Brown, Jr., Martha G. Bannerman and Celia R. Brown and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any one of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/Daniel J. McNamara
-----------------------------------
Daniel J. McNamara
Director
Dated: March 11, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Nicholas M. Brown, Jr., Martha G. Bannerman and Celia R. Brown and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any one of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/Stephen Robert
-----------------------------------
Stephen Robert
Director
Dated: March 11, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Nicholas M. Brown, Jr., Martha G. Bannerman and Celia R. Brown and each
and any one of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to sign the name of the undersigned in the Report
of NAC Re Corp. on Form 10-K for 1996 and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any one of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereto set his hand.
/s/Herbert S. Winokur, Jr.
-----------------------------------
Herbert S. Winokur, Jr.
Director
Dated: March 11, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 1,703,537
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 179,619
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,965,049
<CASH> 18,853
<RECOVER-REINSURE> 15,457
<DEFERRED-ACQUISITION> 85,211
<TOTAL-ASSETS> 2,745,631
<POLICY-LOSSES> 1,513,345
<UNEARNED-PREMIUMS> 271,898
<POLICY-OTHER> 8,271
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 299,934
0
0
<COMMON> 2,146
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<TOTAL-LIABILITY-AND-EQUITY> 2,745,631
526,342
<INVESTMENT-INCOME> 104,330
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<INCOME-TAX> 18,516
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<EPS-DILUTED> 3.51
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