<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period to .
Commission file number 0-13891.
NAC Re Corp.
(Exact name of registrant as specified in its charter)
Delaware 13-3297840
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Greenwich Plaza, Greenwich, CT 06836-2568
(Address of principal executive offices)
(203) 622-5200
(Registrant's telephone number, including area code)
Not Applicable
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
<PAGE>
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---
There were 18,179,188 shares outstanding of the Registrant's Common Stock,
$.10 par value, as of June 30, 1998.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
---------------------
PAGE NO.
--------
<S> <C>
Independent Accountants' Review Report
3
-
Consolidated Balance Sheet -
June 30, 1998 and December 31, 1997
4
-
Consolidated Statement of Income -
Three Months and Six Months Ended June 30, 1998 and 1997
5
-
Consolidated Statement of Stockholders' Equity -
Six Months Ended June 30, 1998 and 1997
6
-
Consolidated Statement of Cash Flows -
Three Months and Six Months Ended June 30, 1998 and 1997
7
-
Notes to Consolidated Financial Statements
8-9
---
Management's Discussion and Analysis
of Financial Condition and Results of Operations
10-16
-----
PART II. OTHER INFORMATION
- -------- -----------------
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
17
--
Item 6. Exhibits and Reports on Form 8-K
17
--
Signatures
18
--
Exhibit 10
19-29
-----
Exhibit 15
30
--
Exhibit 27
31-32
-----
</TABLE>
<PAGE>
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
- --------------------------------------
Board of Directors and Shareholders
- -----------------------------------
NAC Re Corporation
- ------------------
We have reviewed the accompanying consolidated balance sheet of NAC Re
Corporation and subsidiaries as of June 30, 1998, and the related
consolidated statements of income for the three-month and six-month periods
ended June 30, 1998 and 1997 and the consolidated statements of stockholders'
equity and cash flows for the six-month periods ended June 30, 1998 and 1997.
These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquires of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of NAC Re Corporation as of
December 31, 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended (not presented
herein) and in our report dated February 3, 1998, we expressed an unqualified
opinion on those consolidated financial statements.
<PAGE>
New York, New York ERNST & YOUNG LLP
- ------------------ -----------------
July 21, 1998
- -------------
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
1. General
The accompanying consolidated financial statements have been prepared
on the basis of generally accepted accounting principles and in the
opinion of management, reflect all adjustments necessary (consisting of
normal recurring accruals) for a fair presentation of results for such
periods. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and related
notes contained in the Company's Annual Report to Shareholders.
2. Per Share Data
Basic earnings per share is based on weighted average common shares and
excludes any dilutive effects of options and convertible securities.
Diluted earnings per share assumes the conversion of dilutive
convertible securities and the exercise of all dilutive stock options.
All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement No. 128
requirements. The following table is a reconciliation of the numerators
and denominators used in the basic and diluted earnings per share
calculations.
<TABLE>
<CAPTION>
(In Thousands)
--------------
Three Months Six Months
Ended Ended
June 30, June 30,
-------------------------- -----------------------
1998 1997 1998 1997
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Net income $22,004 $28,582 $45,010 $48,436
Weighted average shares 18,174 18,376 18,264 18,404
Basic earnings per share $1.21 $1.56 $2.46 $2.63
------- ------- ------- -------
Diluted Earnings Per Share:
Net income $22,004 $28,582 $45,010 $48,436
Add back after-tax interest on 876 876 1,752 1,752
Adjusted net income $22,880 $29,458 $46,762 $50,188
------- ------- ------- -------
Weighted average shares 18,174 18,376 18,264 18,404
Assumed exercise of dilutive stock options (1) 569 402 574 331
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Assumed conversion of convertible debentures (2) 2,020 2,020 2,020 2,020
------------ ----------- ---------- ----------
Weighted average shares and dilutive securities 20,763 20,798 20,858 20,755
Diluted earnings per share $1.10 $1.42 $2.24 $2.42
</TABLE>
(1) Computed utilizing the average market price of Common Stock for
the period.
(2) Reflects the assumed conversion of the Company's 5.25% Convertible
Subordinated Debentures due 2002.
<PAGE>
3. Retrocession
The Company's balance sheets as of June 30, 1998 and December 31, 1997
reflect reinsurance recoverable balances as assets, the components of
which are stated in the table below.
<TABLE>
<CAPTION>
(In Thousands)
Reinsurance Recoverable Balances,
Net
June 30, December
1998 31, 1997
------------- -------------
<S> <C> <C>
Paid Claims $10,867 $10,646
Unpaid Claims and Claims Expenses 221,250 196,836
Ceded Balances Payable (37,022) (34,305)
Funds Held Liability (981) (900)
------------- -------------
Net $194,114 $172,277
============= =============
</TABLE>
The effect of retrocessional activity on premiums written, premiums
earned and claims expenses is as follows:
<TABLE>
<CAPTION>
(In Thousands)
------------------------------------------------------
Three Six months
months ended
ended June 30,
June 30,
------------------------ -------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Ceded premiums written $33,706 $31,864 $62,884 $64,235
Ceded premiums earned $27,235 $28,767 $55,154 $58,693
Ceded claims and claims expenses $21,676 $17,503 $38,534 $36,266
</TABLE>
4. Comprehensive Income
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," which requires that a company classify items that meet the
definition of components of other comprehensive income in a financial
statement and display the accumulated balance of other comprehensive
income in the equity section of the statement of financial position.
For
<PAGE>
the quarter ended June 30, 1998, total comprehensive income totaled
$19.7 million compared to $45.1 million for the 1997 second quarter.
Total comprehensive income for the six months ended June 30, 1998
totaled $47.0 million compared to $45.8 million for the 1997 six month
period. Comprehensive income includes all changes in equity during a
period resulting from transactions and other events from nonowner
sources. After-tax unrealized appreciation of investments and currency
translation adjustments are the principal items that are added to net
income to derive comprehensive income. Accumulated other comprehensive
income, net of tax, for the Company includes unrealized appreciation of
investments of $60.0 million and foreign currency translation
adjustments of $3.0 million at June 30, 1998.
5. Accounting Pronouncement
- -- ------------------------
In June 1998, The Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted in years beginning after
June 15, 1999. The Company does not anticipate that the adoption of
this Statement will have a material effect on the Company's financial
position.
<PAGE>
Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
- ---------------------------------------------
NAC Re Corporation ("NAC Re") is the holding company for NAC Reinsurance
Corporation ("NAC") and its wholly owned insurance and reinsurance domestic
and foreign subsidiaries. NAC Re and its subsidiaries are collectively
referred to as the Company.
Results of Operations
- ---------------------
For the quarter ended June 30, 1998, operating earnings, excluding investment
gains, of $18.6 million or $1.02 per basic share ($.94 cents per diluted
share), increased 10.9% over the $.92 per basic share ($.86 per diluted
share) that was reported in the comparable quarter of 1997. For the six
months of 1998, operating earnings, excluding investment gains, of $36.5
million or $2.00 per basic share ($1.83 per diluted share), increased 10.5%
over the $1.81 per basic share ($1.69 per diluted share) that was reported in
the comparable quarter of 1997. Net income, including investment gains for
the second quarter of 1998, was $22.0 million or $1.21 per basic share ($1.10
per diluted share), representing a decrease of 22.4% over the $1.56 per basic
share ($1.42 per diluted share) that was reported for the 1997 second
quarter. Net income for the six months of 1998 was $45.0 million or $2.46 per
basic share ($2.24 per diluted share), compared to $48.4 million or $2.63 per
basic share ($2.42 per diluted share), for the comparable 1997 period.
Included in net income per share were realized investment gains, net of tax
of $.19 and $.46 per basic share ($.16 and $.41 per diluted share) for the
1998 second quarter and six month period, respectively, compared to $.64 and
$.82 per basic share ($.56 and $.73 per diluted share) for the same prior
year periods.
Premium Revenues
- ----------------
The Company's premium revenue from its domestic and international operations are
as follows:
<TABLE>
<CAPTION>
(In millions)
--------------------------------------------------------------------------
Net Premiums Written
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- ----------------------------------
1998 1997 % Chg 1998 1997 % Chg
---------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Casualty $63.2 $80.8 (21.8) % $130.5 $156.5 (16.7)%
Property 35.8 30.6 17.2 70.2 57.9 21.3
Specialty/Other 27.5 23.5 16.9 47.1 42.8 10.2
---------- --------- -------- --------- --------- --------
---------- --------- -------- --------- --------- --------
Subtotal 126.5 134.9 (6.2) 247.8 257.2 (3.6)
---------- --------- -------- --------- --------- --------
---------- --------- -------- --------- --------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
International:
Casualty 7.0 7.0 - 13.7 14.1 (2.9)
Property 5.2 6.7 (23.1) 11.1 13.5 (17.8)
Other 2.6 - N/A 4.9 - N/A
---------- --------- -------- --------- --------- --------
Subtotal 14.8 13.7 7.2 29.7 27.6 7.3
---------- --------- -------- --------- --------- --------
Total $141.3 $148.6 (5.0) % $277.5 $284.8 (2.6) %
---------- --------- -------- --------- --------- --------
---------- --------- -------- --------- --------- --------
</TABLE>
As shown in the table above, the Company's worldwide net premiums written for
the 1998 second quarter and six month period were $141.3 million and $277.5
million, respectively, compared to $148.6 million and $284.8 million for the
1997 second quarter and six month period, respectively. This represents a
decline of 5.0% and 2.6% from the comparable 1997 periods. Domestic net
premiums written for the 1998 second quarter and six month period were $126.5
million and $247.8 million, respectively, compared to $134.9 million and
$257.2 million for the 1997 second quarter and six month period.
<PAGE>
Domestic casualty net premiums written decreased 21.8% from the comparable 1997
period, primarily as a result of extremely competitive market conditions and NAC
Re's decision to non-renew accounts which do not meet the Company's
profitability standards. Property net premiums written for the 1998 second
quarter and six month period increased 17.2% and 21.3%, respectively. The
year-to-date increase is primarily attributable to growth in both our treaty and
facultative businesses, coupled with favorable ceded premium charges. Net
premiums written from the specialty lines which consist of fidelity/surety,
ocean marine, aviation business and certain primary program business totaled
$27.5 million and $47.1 million, respectively, an increase of 16.9% and 10.2%
over the 1997 second quarter and six month period, respectively.
The Company's international operation, NAC Reinsurance International Limited,
reported net premiums written of $14.8 million and $29.7 million for the 1998
second quarter and six month period, respectively, compared to $13.7 million and
$27.6 million, respectively, for the 1997 second quarter and six month period.
Net premiums written for the second quarter and six month period include the
results of a subsidiary, Stonebridge Underwriting Ltd., which is participating
at Lloyd's as a corporate capital vehicle on the Denham Syndicate commencing
with the 1998 underwriting year.
In January 1998, the Company announced an agreement in principle to acquire the
managing agency assets of Morgan, Fentiman & Barber (MFB), a Lloyd's managing
agency. MFB currently manages Denham Syndicate 990 which underwrites a
specialized book of business, including both direct and reinsurance business.
This acquisition is expected to close later this year upon the completion of due
diligence and regulatory approval. However, there are no assurances that this
acquisition will be consummated. The transaction is not expected to have a
material impact on the financial condition or results of operations of the
Company in 1998.
Operating Costs and Expenses
Generally, claims and claims expenses represent the Company's most significant
and uncertain costs. These expenses are only estimates at a given point in time
of what the insurer or reinsurer expects the ultimate settlement and
administration of claims to cost based on facts and circumstances then known.
The Company would generally expect to refine such estimates in subsequent
accounting periods with adjustments possible in either direction as additional
information becomes known.
One traditional means of measuring the underwriting performance of a
property/casualty insurer is the statutory composite ratio. The composite ratio,
based upon statutory accounting practices which differ from generally accepted
accounting principles in several respects, reflects underwriting experience, but
does not reflect income from investments. A composite ratio under 100% indicates
underwriting profitability while a composite ratio exceeding 100% indicates an
underwriting loss.
<PAGE>
The following chart sets forth statutory composite ratios and the relevant
components for the periods indicated for the Company's domestic reinsurance
subsidiary. The consolidated statutory composite ratio combines the results of
the Company's international subsidiary on a U.S. statutory basis:
<TABLE>
<CAPTION>
Three months ended Six months ended Year ended
June 30, June 30, December 31,
------------------------- ---------------------- ----------------
1998 1997 1998 1997 1997
---------- ----------- --------- --------- ----------------
<S> <C> <C> <C> <C> <C>
Claims and Claims Expenses % 66.0 % 66.0 % 66.0 % 65.9 % 65.9
Commissions and Brokerage 25.9 27.7 25.9 26.9 27.3
Other Underwriting Expenses 10.6 9.6 10.8 9.9 9.9
---------- ----------- --------- --------- ----------------
---------- ----------- --------- --------- ----------------
Domestic Statutory Composite Ratio %102.5 %103.3 %102.7 %102.7 %103.1
---------- ----------- --------- --------- ----------------
---------- ----------- --------- --------- ----------------
International Statutory Composite Ratio %108.8 %110.1 %108.8 %109.7 %108.9
---------- ----------- --------- --------- ----------------
---------- ----------- --------- --------- ----------------
Consolidated Statutory Composite Ratio %103.1 %103.9 %103.3 %103.4 %103.6
---------- ----------- --------- --------- ----------------
</TABLE>
The Company's domestic statutory composite ratios for the 1998 second quarter
and six month period were 102.5% and 102.7%, respectively, compared to 103.3%
and 102.7%, for the comparable 1997 periods.
<PAGE>
The Company experienced net favorable claim development for business written
since 1986. This favorable development is driven 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 social
and economic inflation. These actuarial assumptions are utilized to establish
the initial expected target loss ratio employed in the actuarial methodologies
from which the reserves for claims and claims expenses are derived. 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. The favorable development in more recent underwriting
years has offset certain unfavorable development on business written prior to
1986, including asbestos and environmental claims.
The pricing of the Company's reinsurance contracts contemplates many factors,
including exposure to claims and the expenses of both the client company and
broker. The Company's actuaries and underwriters evaluate the adequacy of
premium revenue net of these expenses, thereby mitigating the effect of
variations in these expenses to overall underwriting results. The Company's
commission and brokerage ratio for the 1998 second quarter and six month period
reflects a decrease compared to the 1997 comparable periods, principally due to
the effects of certain contractual provisions which adjust commission expense
based on claim experience.
The statutory underwriting expense ratios for the 1998 second quarter and six
month period were 10.6% and 10.8%, respectively, compared to 1997 ratios of 9.6%
and 9.9%. The increase in the underwriting expense ratios is reflective of the
continuing business expansion and investments in technology coupled with lower
premium volume. 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 at June 30, 1998 and December 31, 1997 were $2.4
billion and $2.3 billion, respectively, excluding net investment payables of
$4.1 million and $25.8 million for 1998 and 1997, respectively.
Net investment income for the 1998 second quarter and six month period was $32.6
million and $64.7 million, respectively, increases of 7.5% and 9.8%,
respectively, over the 1997 comparable periods. On an after-tax basis, net
investment income for the 1998 second quarter and six month period was $26.3
million and $51.9 million, or $1.44 and $2.84 per basic share ($1.27 and $2.49
per diluted share), increases of 8.3% and 11.4% over the comparable 1997
periods. The increase is primarily attributable to the higher invested asset
base. The Company's pretax investment yield was 5.7% for the 1998 six month
period, compared to 5.8% for the 1997 six month period. The after-tax investment
yields were 4.6% for both the 1998 and 1997 six month periods.
<PAGE>
Net investment gains, net of tax for the 1998 second quarter and six month
period were $3.4 million and $8.5 million, compared to net investment gains of
$11.6 million and $15.1 million for the comparable 1997 periods. Gains and
losses on the sale of investments are recognized as a component of operating
income, but the timing and recognition of such gains and losses are
unpredictable and are not indicative of future operating results.
The Company's investment strategy is focused principally on income
predictability and asset value stability. The Company's emphasis on high quality
fixed maturity investments reflects this strategy. Tactical shifts between
taxable and tax-exempt bonds may occur in order to maximize after-tax investment
returns without compromising balance sheet integrity. At June 30, 1998, our
fixed maturity investments amounted to $2.1 billion, which approximates 89% of
cash and invested assets, and 94% of such investments are rated investment grade
by Moody's Investor Services, Inc. or Standard & Poor's.
The balance of the Company's investment portfolio at June 30, 1998, consisting
of cash, short-term investments and equity securities, amounted to $258.4
million. As of June 30, 1998, the Company held $167.8 million or 7.0% of cash
and invested assets in equity securities which represented 24% of statutory
surplus.
<PAGE>
Uncertainties exist regarding interest rates and inflation and their potential
impact on the market values of the Company's fixed income securities. The
Company actively considers the risks and financial rewards associated with the
maturity distribution of its fixed income portfolio. In this regard, the Company
takes into consideration the pattern of expected claim payments and the
Company's future cash flow projections in evaluating its investment
opportunities.
Liquidity and Capital Resources
NAC Re is a holding company and has no revenue producing operations of its own.
Cash flow within NAC Re consists of investment income, operating and interest
expenses, dividends to stockholders, rental income, and dividends and tax
reimbursements from NAC. These dividends from NAC are subject to statutory
restrictions.
The statutory surplus of the reinsurance subsidiary, NAC Reinsurance Corporation
was $715.4 million at June 30, 1998 which ranks among the largest domestic
reinsurers measured on this basis.
Total assets exceeded $3.0 billion at June 30, 1998. Stockholders' equity
reached $693.5 million or $38.15 per share at June 30, 1998 compared to $657.1
million or $35.89 per share at December 31, 1997. The unrealized appreciation of
investments, net of tax, which is the principal component of accumulated other
comprehensive income, increased to $60.0 million at June 30, 1998 from $55.0
million at December 31, 1997.
Cash flow from operations for the 1998 six month period was $56.0 million,
compared to $220.6 million for the comparable 1997 period. The 1997 cash flow
from operations included approximately $180 million from the termination of two
retrocessional programs. Excluding the impact of the termination, cash flow from
operations would have increased approximately $15 million or 38% over the prior
year period.
NAC Re maintains a revolving credit facility under which it can borrow up to
$32.1 million. Outstanding borrowings as of June 30, 1998 were $12.9 million and
were principally used to finance the Company's periodic repurchases of Common
Stock. The facility is being reduced by $2.9 million on a quarterly basis as of
July 1998.
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 the first six months of 1998, the Company repurchased over 218,000 shares
of common stock at an average cost of $49.50 per share. From the inception of
the program, approximately 3.6 million shares have been repurchased at an
average cost of $27.24 per share. Approximately 438,000 shares remain authorized
for repurchase under the program.
<PAGE>
On June 10, 1998, the Board of Directors of NAC Re Corp. declared a dividend of
$.09 per share, which reflects a 20% increase in the Company's quarterly
dividend. The cash dividend was paid on July 8, 1998. The Board also adopted a
new Stockholder Rights Plan which replaced a stockholder rights plan that was
adopted in June 1988 and expired on June 21, 1998.
Accounting Pronouncement
In June 1998, The Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. The Company does
not anticipate that the adoption of this Statement will have a material effect
on the Company's financial position.
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 regulating the 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"), by
adopting a model risk-based capital act, intended to provide an additional tool
for regulators to evaluate the capital of property and casualty insurers and
reinsurers with respect to the risks assumed by them and determine whether there
is a perceived need for corrective action. The nature of the corrective action
depends upon the extent of the calculated risk-based capital deficiency and
ranges from requiring the Company to submit a comprehensive plan to placing the
insurer under regulatory control. While the model risk-based capital act has not
yet been adopted in New York, NAC's domicile, New York has issued a circular
letter requiring the filing of risk-based capital reports by property and
casualty insurers and reinsurers. The NAIC also adopted a proposal that requires
property and casualty insurers and reinsurers to report the results of their
risk-based capital calculations as part of the statutory annual statements filed
with state regulatory authorities. Surplus (as calculated for statutory annual
statement purposes) for each of the Company's domestic subsidiaries is well
above the risk-based capital thresholds that would require either company or
regulatory action.
Various other regulatory and legislative initiatives have been proposed from
time to time that
<PAGE>
could impact reinsurers. Generally, the thrust of regulatory efforts has been
to improve the solvency of reinsurers and create incentives for insurers to
do business with well capitalized, prompt paying reinsurers operating under
U.S. jurisdiction. While we cannot quantify the impact of these regulatory
efforts on the Company's operations, we believe the Company is adequately
positioned to compete in an environment of more stringent regulation.
Impact of the Year 2000 Issue
The Company began assessing the impact of the Year 2000 issue on its computer
hardware and software systems in 1995. Certain systems have been identified for
replacement before year-end 1999 due to normal business requirements. The
replacement systems will be assessed for Year 2000 compliance. Systems not
identified for replacement or upgrades are being assessed for Year 2000-related
problems, which will be remediated to reduce the likelihood that they will have
a material adverse effect on the Company's operations or financial condition.
Remediation is expected to continue through the end of the 1999 third quarter at
a cost that is not expected to be material to the Company. Currently, management
is conducting a review of all such systems. As of June 30, 1998, the Company's
historical Year 2000 remediation costs have not been material. As of this
disclosure date, management has not identified any hardware or software computer
system with a significant Year 2000 compliance problem that is expected to have
a materially adverse effect on the Company's financial condition or results of
operations.
The Company continues to assess the Year 2000 compliance of its critical
business operations and products that could potentially be affected by the Year
2000 problem. The purpose of this review is to determine what impact, if any,
the Year 2000 issue may have on the Company and its significant customers,
suppliers, and other constituents and whether that impact will be material to
the Company's financial condition or results of operations. The Company has also
contacted its critical customers, retrocessionaires, reinsurance intermediaries,
managing general agents, suppliers, and other constituents to determine the
nature and extent of their Year 2000 compliance efforts and to assess whether
their failure to resolve their own Year 2000 issues would have a material
adverse affect on the Company's financial condition or results of operations.
Based on these assessments, management will take such further action as they
deem appropriate including, but not limited to, the development of contingency
plans.
The extent to which the Company's financial condition or results of operations
may be materially affected by the Year 2000 problems of third parties depends on
a variety of factors including, but not limited to, whether these third parties
can resolve their own Year 2000 issues; whether their remediated systems remain
compatible with the Company's systems; and the nature and extent to which the
Company's systems may be affected by the third party's non compliant systems.
Significant failures of certain essential services including, but not limited
to, the telecommunications, utility, banking, securities, and transportation
industries, due to their own Year 2000 problems are generally beyond the
Company's control and could have an adverse material impact on the Company's
financial condition or results of operations.
<PAGE>
In addition, the Company may also have material exposure in its property and
casualty operations to claims related to the Year 2000 issue. It is not yet
possible to determine whether such claims might be made against insurance or
reinsurance contracts in which the Company participates or if such claims will
be held to have merit.
All predictions regarding the impact of the Year 2000 issue on the Company and
third parties and the attendant costs are inherently subject to risks and
uncertainties. The Company cautions that the factors and assumptions described
above, as well as unknown factors, may cause the Company's actual Year 2000
compliance costs, and the resultant impact on its business, operations, or
financial condition to differ materially from those discussed above.
Safe Harbor Disclosure for Forward-Looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "Act"), the Company sets forth below
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those which might be
projected, forecasted, or estimated or otherwise implied in the Company's
forward-looking statements, as defined in the Act, made by or on behalf of the
Company in press releases, written statements or documents filed with the
Securities and Exchange Commission, or in its communications and discussions
with investors and analysts in the normal course of business through meetings,
telephone calls and conference calls. Such statements may include, but are not
limited to, projections of premium revenue, investment income, other revenue,
losses, expenses, earnings (including earnings per share), cash flows, plans for
future operations, common shareholders' equity, financing needs, capital plans,
dividends, plans relating to products or services of the Company, and estimates
concerning the effects of litigation or other disputes, as well as assumptions
for any of the foregoing and are generally expressed with words such as
"believes," "estimates," "expects," "anticipates," "could have," "may have," and
similar expressions.
Forward-looking statements are inherently subject to risks and uncertainties.
The Company cautions that factors which may cause the Company's results to
differ materially from such forward-looking statements include, but are not
limited to, the following:
Changes in the level of competition in the reinsurance or primary
insurance markets that adversely affect the volume or profitability of
the Company's business. These changes include, but are not limited to,
the intensification of price competition, the entry of new competitors,
existing competitors exiting the market, and the development of new
products by new and existing competitors;
Changes in the demand for reinsurance, including changes in ceding
companies' retentions, and changes in the demand for primary and excess
and surplus lines insurance coverages;
The ability of the Company to execute its business strategies;
Changes in the frequency and severity of catastrophes which could
significantly impact the Company's business in terms of net income,
reinsurance costs, and cash flow;
Adverse development on claims and claims expense liabilities
related to business
<PAGE>
written in prior years, including, but not limited to, evolving case
law and its effect on environmental and other latent injury claims,
changing government regulations, newly identified toxins, newly
reported claims, inflation, new theories of liability, or new insurance
and reinsurance contract interpretations;
Changes in the Company's retrocessional arrangements;
<PAGE>
Lower than estimated retrocessional or reinsurance recoveries
on unpaid losses, including, but not limited to, losses due to a
decline in the creditworthiness of the Company's retrocessionnaires or
reinsurers;
Increases in interest rates, which cause a reduction in the market
value of the Company's interest rate sensitive investments, including,
but not limited to, its fixed income investment portfolio, and its
common shareholders' equity and decreases in interest rates causing a
reduction of income earned on new cash flow from operations and the
reinvestment of the proceeds from sales, calls or maturities of
existing investments;
Declines in the value of the Company's common equity investments
and credit losses on the Company's investment portfolio;
Gains or losses related to foreign currency exchange rate
fluctuations; and
Adverse results in litigation matters including, but not limited
to, litigation related to environmental, asbestos, other potential mass
tort claims, and claims related to the Year 2000.
In addition to the factors outlined above that are directly related
to the Company's business, the Company is also subject to general
business risks, including, but not limited to, adverse state, federal
or foreign legislation and regulation, adverse publicity or news
coverage, changes in general economic factors, and the loss of
key employees.
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1998 1997
--------------- ----------------
<S> <C> <C>
ASSETS
Investments:
Available for sale:
Fixed maturities (amortized cost: 1998, $2,050,525; 1997, $2,021,501) $2,122,516 $2,088,588
Equity securities (cost: 1998, $147,452; 1997, $124,999) 167,788 142,527
Short-term investments 74,259 108,489
--------------- ----------------
TOTAL INVESTMENTS 2,364,563 2,339,604
Cash 16,313 8,430
Accrued investment income 34,611 36,347
Premiums receivable 241,592 227,569
Reinsurance recoverable balances, net 194,114 172,277
Reinsurance recoverable on unearned premiums 39,574 31,297
Deferred policy acquisition costs 94,906 92,709
Excess of cost over net assets acquired 3,092 3,276
Deferred tax asset, net 42,399 42,646
Other assets 37,703 30,710
--------------- ----------------
--------------- ----------------
TOTAL ASSETS $3,068,867 $2,984,865
--------------- ----------------
LIABILITIES
Claims and claims expenses $1,646,922 $1,603,972
Unearned premiums 317,703 301,711
8% Notes due 1999 100,000 100,000
7.15% Notes due 2005 99,945 99,942
5.25% Convertible Subordinated Debentures due 2002 100,000 100,000
Investment accounts payable 4,119 26,108
Revolving credit agreement 12,924 12,924
Other liabilities 93,796 83,147
--------------- ----------------
--------------- ----------------
TOTAL LIABILITIES 2,375,409 2,327,804
--------------- ----------------
STOCKHOLDERS' EQUITY Preferred stock, $1.00 par value:
1,000 shares authorized, none issued
(Includes 277.5 shares of Series A Junior Preferred Stock) - -
Common stock, $.10 par value:
25,000 shares authorized (1998, 21,793; 1997, 21,707 shares issued) 2,180 2,171
Additional paid-in capital 258,551 255,424
Accumulated other comprehensive income 62,989 60,989
Retained earnings 468,302 426,309
Less treasury stock, at cost (1998, 3,614; 1997, 3,398 shares) (98,564) (87,832)
--------------- ----------------
--------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 693,458 657,061
--------------- ----------------
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,068,867 $2,984,865
--------------- ----------------
</TABLE>
See Notes to Consolidated Financial Statements
- 4 -
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
----------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
-------------------------------- ---------------------------------
1998 1997 1998 1997
-------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
PREMIUMS AND OTHER REVENUES
Net premiums written $ 141,269 $ 148,654 $ 277,459 $ 284,825
Increase in unearned premiums (5,178) (6,576) (8,014) (10,637)
--------- --------- --------- ---------
Premiums earned 136,091 142,078 269,445 274,188
Net investment income 32,578 30,308 64,663 58,880
Net investment gains 5,198 17,684 13,072 22,817
--------- --------- --------- ---------
Total revenues 173,867 190,070 347,180 355,885
OPERATING COSTS AND EXPENSES
Claims and claims expenses 90,396 93,553 179,088 181,084
Commissions and brokerage 34,351 38,276 67,794 71,162
Acquisition and operating expenses 16,912 15,324 34,038 30,501
Interest expense 5,427 5,408 10,853 10,882
--------- --------- --------- ---------
Total operating costs and expenses 147,086 152,561 291,773 293,629
INCOME
Operating income before income taxes 26,781 37,509 55,407 62,256
--------- --------- --------- ---------
Federal and foreign income taxes:
Current 4,597 12,454 11,281 23,311
Deferred 180 (3,527) (884) (9,491)
--------- --------- --------- ---------
--------- --------- --------- ---------
Income tax expense (benefit) 4,777 8,927 10,397 13,820
--------- --------- --------- ---------
--------- --------- --------- ---------
Operating income/net income $ 22,004 $ 28,582 $ 45,010 $ 48,436
--------- --------- --------- ---------
PER SHARE DATA*
Basic:
Average shares outstanding 18,174 18,376 18,264 18,404
Operating income/net income $ 1.21 $ 1.56 $ 2.46 $ 2.63
Diluted:
Average shares outstanding 20,763 20,798 20,858 20,755
Operating income/net income $ 1.10 $ 1.42 $ 2.24 $ 2.42
Cash dividends declared per share $ 0.09 $ 0.075 $ 0.165 $ 0.135
</TABLE>
* Prior year data restated per SFAS 128.
See Notes to Consolidated Financial Statements
- 5 -
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
-----------------------------------------------------------------------------------------------
Accumulated
Other Total
Common Paid-in Comprehensive Retained Treasury Comprehensive Stockholders'
Stock Capital Income Earnings Stock Income Equity
----- ------- ------ -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, At December 31, 1997 $2,171 $255,424 $426,309 $(87,832) $60,989 $657,061
Comprehensive income:
Net income $45,010 45,010 45,010
Other comprehensive income,
net of tax:
Unrealized appreciation of
investments 5,013 5,013
Currency translation adjustments (3,013) (3,013)
-------
Other comprehensive income 2,000 2,000
-------
Total comprehensive income $47,010
-------
-------
Issuance of shares 9 3,127 3,136
Dividends declared on common stock (3,017) (3,017)
Purchase of treasury shares (10,732) (10,732)
---------- ---------- ---------- ---------- -------------- ------------
Balance at June 30, 1998 $2,180 $258,551 $468,302 $(98,564) $62,989 $693,458
---------- ---------- ---------- ---------- -------------- ------------
---------- ---------- ---------- ---------- -------------- ------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Accumulated
Other Total
Common Paid-in Comprehensive Retained Treasury Comprehensive Stockholders'
Stock Capital Income Earnings Stock Income Equity
----- ------- ------ -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, At December 31, 1996 $2,146 $248,662 $335,868 $(73,484) $40,077 $553,269
Comprehensive income:
Net income $48,436 48,436 48,436
Other comprehensive income,
net of tax:
Unrealized depreciation of
investments (464) (464)
Currency translation adjustments (2,186) (2,186)
-------
Other comprehensive income (2,650) (2,650)
-------
Total comprehensive income $45,786
-------
-------
Issuance of shares 15 3,429 3,444
Dividends declared on common stock (2,486) (2,486)
Purchase of treasury shares (5,830) (5,830)
------ -------- -------- --------- --------- ---------
Balance at June 30, 1997 $2,161 $252,091 $381,818 $(79,314) $37,427 $594,183
------ -------- -------- --------- --------- ---------
------ -------- -------- --------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
Six months ended June 30,
--------------------------------------
1998 1997
-------------- --------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $45,010 $48,436
Adjustments to reconcile net income to net cash
provided by operating activities:
Reserve for claims and claims expenses, net 20,859 264,132
Unearned premiums, net 8,169 10,637
Premiums receivable (14,753) (33,178)
Accrued investment income 1,653 (5,229)
Reinsurance balances, net 10,265 (40,982)
Deferred policy acquisition costs (2,295) (4,076)
Net investment gains (13,072) (22,817)
Deferred tax asset, net (828) (9,589)
Other liabilities 2,630 12,245
Other items, net (1,599) 1,027
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 56,039 220,606
-------------- --------------
INVESTING ACTIVITIES
Sales of fixed maturity investments 573,998 756,696
Maturities of fixed maturity investments 4,498 15,564
Purchases of fixed maturity investments (628,494) (1,036,467)
Net sales (purchases) of short-term investments 33,359 (7,633)
Sales of equity securities 20,008 110,219
Purchases of equity securities (37,822) (51,266)
Purchases of furniture and equipment (2,596) (2,663)
-------------- --------------
NET CASH USED BY INVESTING ACTIVITIES (37,049) (215,550)
-------------- --------------
FINANCING ACTIVITIES
Issuance of shares 2,845 2,755
Purchase of treasury shares, net of reissuance (10,732) (5,830)
Cash dividends paid to stockholders (2,749) (2,213)
NET CASH USED BY FINANCING ACTIVITIES (10,636) (5,288)
-------------- --------------
Effects of exchange rate changes on cash (471) (40)
-------------- --------------
Increase (decrease) in cash 7,883 (272)
Cash - beginning of year 8,430 18,853
-------------- --------------
Cash - end of period $16,313 $18,581
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements
- 7 -
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 8, 1998. At such
meeting John P. Birkelund, C. W. Carson, Jr., Michael G. Fitt and Stephen Robert
were each reelected as a director for a term expiring in 2001. Mr. Birkelund was
reelected by an affirmative vote of 14,313,052 shares with 141,335 shares
withheld, Mr. Carson was reelected by an affirmative vote of 14,314,041 shares
with 140,346 shares withheld, Mr. Fitt was reelected by an affirmative vote of
14,314,041 shares with 140,346 shares withheld, and Mr. Robert was reelected by
an affirmative vote of 14,313,816 shares with 140,571 shares withheld.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index:
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
10 Material Contracts: Executive Compensation Plan or Arrangements 19
15 Letter Re Unaudited Interim Financial Information 30
27 Financial Data Schedule 31
</TABLE>
(b) A report on Form 8-K was filed June 19, 1998. The Form reported the
adoption of the Stockholder Rights Plan.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NAC Re CORP.
(Registrant)
Date: August 11, 1998 NICHOLAS M. BROWN, JR.
--------------------------- ------------------------------------------
Nicholas M. Brown, Jr.
President and Chief Operating Officer
Date: August 11, 1998 JEROME T. FADDEN
--------------------------- ------------------------------------------
Jerome T. Fadden
Vice President, Chief Financial Officer
and Treasurer
<PAGE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made as of the 10th day of June, 1998
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 New Canaan, Connecticut ("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, the Board of Directors of NAC Re Corp. has appointed
Executive to the position of Chief Executive Officer of NAC Re Corp.;
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 NAC Re Corp.
Amended and Restated Annual Incentive Plan as referred to in Exhibit
10.11 of the NAC Re Corp. 1997 Annual Report on Form 10-K ("Form 10-K").
(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 corrected within sixty (60) days
following written notice to Executive in respect thereof. For purposes of
this Section 1(c),
<PAGE>
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 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
(10(cent)) par value, of NAC Re Corp.
(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(b) hereof.
<PAGE>
(h) "Compensation Committee" shall mean the Compensation
Committee of the Board.
(i) "Disability" shall mean permanent and total disability
as such term is defined in the Employer's long term disability plan in
effect on the Effective Date. 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 June 10, 1998.
(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), (viii)
or (ix), 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 Employer to retain Executive as
Chief Executive Officer of NAC Re Corp. or to appoint Executive as
Chairman of the Board as set forth in sections 2 and 3 hereof;
(iii) a reduction in Executive's annual base salary
as in effect on the Effective Date, on January 1, 1999 or as the same may
be increased from time to time;
(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; for the purposes of
this provision, "independent reinsurance company" is deemed to mean that
a single shareholder or group, other than an investment advisor holding
shares for others, does not own 20% or more of the Company's stock;
<PAGE>
(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;
(viii) failure by Employer to offer to renew
Executive's employment contract, within eighteen (18) months preceding
its expiration, with terms which are at least as favorable as those set
forth herein; or
(ix) 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.
(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
<PAGE>
Common Stock (or a stock appreciation right) or the award of restricted
Common Stock to Executive.
(n) "Long-Term Incentive Plan" shall mean the NAC Re Corp.
Long-Term Incentive Plan as referred to in Exhibit 10.12 to the Form 10-K.
(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. Effective January 1, 1999, Executive shall also be
employed as the Chief Executive Officer of NAC Re Corp. Between the
Effective Date and January 1, 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.
3. Directorships. Executive has been appointed to, and shall
continue to serve on, the Boards of Directors of NAC Reinsurance
Corporation, Greenwich Insurance Company, and Indian Harbor Insurance
Company. In addition, Executive has been appointed to the Board of NAC Re
Corp. Employer agrees that 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 for so long
as the Executive shall be employed under the terms of this Agreement. Not
later than July 2000, Executive shall be considered for election as
Chairman of the Board of NAC Re Corp.
4. Term. The term of this Agreement shall commence on the Effective
Date and shall continue through June 30, 2003, 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
FIVE HUNDRED AND FIFTEEN THOUSAND DOLLARS ($515,000.00), and shall be SIX
HUNDRED AND TWENTY-FIVE THOUSAND DOLLARS ($625,000), effective January 1,
1999, and shall be reviewed annually commencing March 2000 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) 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 each year based on
corporate performance in accordance with
<PAGE>
the terms of the Annual Incentive Plan and the determination of the
Compensation Committee.
(c) 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 effective January 1, 1999
(applicable for the 1997-1999 measurement period).
(d) Special 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 November 11, 1998, ("SARs") with
respect to one hundred and twenty five thousand (125,000) 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) Nothing herein shall have the effect of
modifying or superseding the terms of any SARs or stock option grants or
restrictive stock grants to which the Executive may be entitled pursuant
to his prior employment contract.
(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.
(e) 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.
(f) Supplemental Retirement Benefit:
(i) If Executive retires from employment with
Employer on or after attaining age fifty (50), 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
<PAGE>
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 for each year prior to age sixty; e.g. at age 50 the benefit would
equal 25% of Executive's Final Average Compensation. The benefit will be
paid to 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. In the event of the Executive's death after age fifty (50)
but prior to retirement, a benefit shall be paid to the Executive's
surviving spouse, if any, for her lifetime equal to the benefit which
would have been payable to the spouse assuming Executive had retired the
day preceding the date of death and then died.
(ii) If Executive terminates employment with
Employer during the term of this contract but prior to attaining age
fifty (50), for the purpose of allowing Executive to vest in the
retirement benefit as set forth in (1) above, Employer shall provide
Executive with additional service credit, in addition to actual service
credit, for purposes of determining the eligibility for the retirement
benefit in subsection (i), above, equal to four (4) years service credit,
plus service credit equal to the greater of three (3) years credit or
credit for the balance of the contract term. In the event of Executive's
death during the term of this contract but prior to attaining age fifty
(50), a benefit shall be paid to the Executive's surviving spouse, if
any, assuming the Executive had terminated employment the day preceding
the date of his death and then died.
(iii) (1) If the Executive terminates employment with
Employer due to a Disability, a supplemental disability benefit shall be
payable under the terms of this Agreement. The amount of such
supplemental disability benefit shall equal the difference between (x)
fifty percent (50%) of Executive's Final Average Compensation and (y) the
benefit received by Executive under the long term disability plan of
Employer. Such supplemental benefit shall be payable at the same time and
under the same terms as the long term disability plan benefit. This
supplemental disability benefit shall cease when benefits under the long
term disability plan cease.
(iii) (2) Upon cessation of disability benefits at
age 65, the Executive will become eligible for a retirement benefit under
paragraph (i) of Section (f). In the event supplemental disability
benefits cease prior to age 65 and the Executive does not return to work
with the Company, for purposes of Section (f) the Executive shall be
considered to have terminated employment or died, as appropriate, as of
the date supplemental disability benefits ceased.
(iv) No benefit shall be payable pursuant to this
Section 5(f) if Executive's employment is terminated for Cause, if
Executive terminates employment prior to attaining age fifty (50) without
Good Reason, or if Executive shall materially violate any of the
provisions of Section 8 hereof.
(v) The calculation of the benefits payable
pursuant to this Section 5(f) shall be performed by the actuary for the
Employer's defined benefit pension plan, if any, otherwise by an
independent actuary selected by the Employer, whose calculation shall be
final and binding on all persons. The benefits payable pursuant to this
Section
<PAGE>
5(f) shall be unfunded and the Executive will not be considered to have
received a taxable economic benefit prior to the time at which benefits
are actually payable hereunder. Accordingly, the Employer shall not be
required to segregate any of its assets for the benefit of the Executive
and the Executive shall have only a contractual right against the
Employer for the benefits payable hereunder. Notwithstanding the
foregoing, the Employer shall establish a grantor ("rabbi") trust for the
purpose of providing the benefits payable pursuant to this Section 5(f).
(g) Relocation: Employer has relocated Executive to New
Canaan, Connecticut in accordance with Employer's relocation policy. As
such, Employer has agreed to pay to Executive a mortgage subsidy of
$20,260 per year through December 2002. 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.
(h) 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 (and on a basis no less favorable
than other senior executives), 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. Executive shall continue to receive
short-term and long-term disability coverage, life insurance, medical
insurance and dental insurance reasonably comparable to that in effect as
of the Effective Date.
<PAGE>
(i) 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.
(j) Vacation: During the Term, Executive shall be entitled
to no less than five weeks paid vacation per year.
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, paid
advisor or paid 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 non business 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 two (2) 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 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, which sum is multiplied by the greater of three (3) times, or the
number of years, including fractions thereof, remaining in the contract
term.
<PAGE>
(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) 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 or stock appreciation rights then held by
Executive. Provided, however, that if the termination is solely based on
Good Reason, as defined in section 1(l)(ii) or (iv) above, such severance
shall be no less than that to which Executive would have been entitled
pursuant to section 7(a), above. 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
<PAGE>
severance pay and benefits required under federal or state law to be paid
or provided to Executive.
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 twelve (12) 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 reinsurance
operations, 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 reinsurance business
where the Executive is only incidentally engaged in any activity which is
a material component of the operations of the NAC Re Group; and Executive
further agrees that during the Term; and if Executive's employment is
terminated by Executive other than for Good Reason, for a period of
twenty-four (24) months following the date of termination of this
Agreement, Executive shall not (ii) divert to any competitor of the NAC
Re Group any customer of the NAC Re Group; provided, however, that
Executive may invest in stocks, bonds, or other securities of any similar
business (but without otherwise participating in such similar business)
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 those designated herein in any
capacity.
(b) Executive also agrees that, during the Term, and if
Executive's employment is terminated by Executive other than for Good
Reason, for a period of twenty-four (24) months following the date of
termination of this Agreement, Executive shall not solicit any officer,
employee or consultant of the NAC Re Group to leave their employ for
other employment;
<PAGE>
(c) 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.
(d) If Executive materially 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
<PAGE>
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, "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.
<PAGE>
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.,
297 Smith Ridge Road
New Canaan, Connecticut 06840
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.
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,
<PAGE>
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 (coupled with other ancillary written
agreements to which Employer and Executive are a party such as stock
option and restricted stock agreements) 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: RONALD L. BORNHUETTER
Its Chairman and Chief Executive Officer
NAC Reinsurance Corporation
By: RONALD L. BORNHUETTER
Its Chairman
NICHOLAS M. BROWN, JR.
Nicholas M. Brown, Jr.
<PAGE>
EXHIBIT 15
Acknowledgment Letter
To the Stockholders and Board of Directors
NAC Re Corporation
We are aware of the incorporation by reference in the Registration Statements
(Form S-8 No. 33-25585, Form S-8 No. 33-77494 and Form S-8 No. 333-33873)
pertaining to the NAC Re Corp. Employee Stock Purchase Plan, in the Registration
Statement (Form S-8 No. 33-27745) pertaining to the NAC Re Corp. 1989 Stock
Option Plan, in the Registration Statement (Form S-8 No. 33-7813) pertaining to
the NAC Re Corp. 1985 and 1986 Stock Option Plans, in the Registration
Statements (Form S-8 No. 33-22841 and Form S-8 No. 333-03935) pertaining to the
NAC Re Corp. Employee Savings Plan, in the Registration Statement (Form S-8 No.
33-34516) pertaining to the NAC Re Corp. Director's Stock Option Plan, in the
Registration Statement (Form S-8 No. 33-77492) pertaining to the NAC Re Corp.
Director's Stock Option Plan, and in the Registration Statement (Form S-8 No.
33-77114) pertaining to the NAC Re Corp. 1993 Stock Option Plan, in the
Registration Statement (Form S-8 No. 333-33875) pertaining to the NAC Re Corp.
1997 Incentive and Capital Accumulation Plan, of our report dated July 21, 1998,
relating to the unaudited consolidated interim financial statements of NAC Re
Corporation that is included in its Form 10-Q for the quarter ended June 30,
1998.
ERNST & YOUNG LLP
New York, New York
July 21, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 2,122,516
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 167,788
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,364,563
<CASH> 16,313
<RECOVER-REINSURE> 10,867
<DEFERRED-ACQUISITION> 94,906
<TOTAL-ASSETS> 3,068,867
<POLICY-LOSSES> 1,646,922
<UNEARNED-PREMIUMS> 317,703
<POLICY-OTHER> 20,240
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 299,945
0
0
<COMMON> 2,180
<OTHER-SE> 691,278
<TOTAL-LIABILITY-AND-EQUITY> 3,068,867
269,445
<INVESTMENT-INCOME> 64,663
<INVESTMENT-GAINS> 13,072
<OTHER-INCOME> 0
<BENEFITS> 179,088
<UNDERWRITING-AMORTIZATION> 67,794
<UNDERWRITING-OTHER> 34,038
<INCOME-PRETAX> 55,407
<INCOME-TAX> 10,397
<INCOME-CONTINUING> 45,010
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,010
<EPS-PRIMARY> 2.46
<EPS-DILUTED> 2.24
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
